<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 1, 1996
REGISTRATION NO. 333-10385
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
AMENDMENT NO. 1
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.
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<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; Summary
Registrant........................... Consolidated Financial and Other
Data; Risk Factors; The 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 1, 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."
Application has been made to list the Common Stock on the
Nasdaq National Market under the symbol "EDMC."
------------------
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>
<CAPTION>
Underwriting
Discounts Proceeds to
Price to and Proceeds to Selling
Public Commissions Company (1) Shareholders
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
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.
2
<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, 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
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 (the "NYRS Acquisition"), for $9.5 million in cash.
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 agreements 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 and 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, has 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
to six, and has added education program offerings in high growth fields
such as computer animation, multimedia and video production. The Company
also 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 49% of the Common Stock (on a fully
diluted basis, but excluding any additional shares purchased 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... 14,241,134 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 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 is 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 is derived from the pro
forma consolidated financial data included elsewhere in this Prospectus. The
summary pro forma financial data is 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(8) 1993 1994(9) 1995(10)(11) 1996(11) 1996(11)(12)
-------- -------- -------- -------- -------- ------------
(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 -
Income (loss) before extraordinary
item(3)......................... (7,073) (1,174) (1,702) 1,513 6,846 8,752
Net income (loss)................. (11,070) (1,174) (1,702) 1,513 5,920 7,826
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........... (1.35) (.49) (.57) (.11) .39 .60
Net income (loss)............... (1.93) (.49) (.57) (.11) .31 .53
Weighted average number of
shares of Common Stock
outstanding, in
thousands(5)................. 6,930 6,960 6,927 6,891 11,875 14,526
OTHER DATA:
EBITDA(6)......................... $ 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 18,202
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(7)........ 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(12)
---------- ---------------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
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(13)......................... 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.
With respect to the pro forma net income per share, a reduction of
approximately $107,000 is required in connection with the excess
consideration paid to holders of Series A Preferred Stock in the Redemption
(as defined below).
(5) 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.
(6) 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.
(7) Excludes students enrolled at colleges and universities having consulting
agreements with NCPD.
(8) 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.
(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, to account for non-cash compensation expense related to the
performance-based vesting of nonstatutory stock options.
(12) 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
borrowing will be made in connection with the ESOP Conversion (as defined
below). See "The Transactions" and "Pro Forma Consolidated Financial Data."
(13) 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 significant 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. One of The Art
Institutes, which accounted for approximately 8.0% 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, which is intended to correct data
previously provided to the U.S. Department of Education. Any such adjustment
will be made by the U.S. Department of Education prior to the time that final
rates are officially published. The previously referred to Art Institute has
submitted such corrections for its preliminary 1994 cohort default rate.) Five
of the Company's schools (including the school discussed above), which accounted
for approximately 55.1% in the aggregate, or between approximately 8.0% and
14.4% individually, of the Company's net revenues in fiscal 1996, 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. 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. 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."
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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, in fiscal 1996, those
schools 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 consolidated
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, the schools will have an opportunity again 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 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
agreeing to disburse those funds only on an "as-earned" basis. The U.S.
Department of Education has interpreted the surety provision 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 as one of the Company's schools.
Neither AII nor any Art Institute is a guarantor of the Company's indebtedness
and none of the revenues of AII or any Art Institute 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
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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 nature of the institution without regard to the location of the
institution, 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 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.
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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. 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. As The Art
Institute of Phoenix was opened in fiscal 1996, the Company believes that any
delay in reestablishing or failure to reestablish state authorization 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
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
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property. The Company amortizes goodwill over a period of 40 years and
intangible assets over a period of two to five years. 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,
however, 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 could involve additional
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 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 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
vote of the holders of two-thirds of the Common Stock for the amendment,
alteration or repeal of certain provisions of the New Articles and the New
By-Laws, and (iv) the authority 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."
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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."
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, the Company has
granted options to certain officers and employees of the Company to purchase up
to 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 9,456,909 shares of
Common Stock (approximately 9,055,518 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 2,600,092 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
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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 240,062 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."
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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 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 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 Company will adopt 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 (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 the exercise of 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 or 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 or
commissions). It is estimated that the amount of such 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 entire 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, should 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 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 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 as set forth under "Use
of Proceeds." 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;
1,842,802 shares of Class A Stock issued and
outstanding and 5,103,717 shares of Class B Stock
issued............................................ 1 1 -
Additional paid-in capital........................... 19,742 19,742 -
Warrants outstanding................................. 7,683 7,683 -
Treasury stock (28,500 shares)....................... (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 borrowing 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 and the Transactions. 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, 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 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 ACQUISITION(4) AND THE OFFERING
-------- ------ --------- -----------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net revenues............................. $147,863 $9,641 $157,504 $157,504
Costs and expenses:
Educational services................... 98,841 6,269 105,175 (5) 105,175
General and administrative............. 32,344 1,518 33,862 33,862
Management fees........................ - 1,050(3) - -
Amortization of intangibles............ 1,060 - 2,128 (6) 2,128
ESOP expense........................... 1,366 - 1,366 -(9)
-------- ------ -------- --------
133,611 8,837 142,531 141,165
-------- ------ -------- --------
Income before interest and taxes......... 14,252 804 14,973 16,339
Interest expense (income), net......... 3,371 (65) 4,002 (7) 1,114(10)(11)
-------- ------ -------- --------
Income before income taxes............... 10,881 869 10,971 15,225
Provision for income taxes............. 4,035 348 4,071 (8) 6,473(8)(9)
-------- ------ -------- --------
Income before extraordinary item......... 6,846 521 6,900 8,752
Extraordinary item....................... (926) - (926) (926)
-------- ------ -------- --------
Net income............................... 5,920 521 5,974 7,826
Dividends on Series A Preferred Stock.... 2,249 - 2,249 -
Redemption premium paid(1)............... - - - 107
-------- ------ -------- --------
Income available to common
shareholders........................... $ 3,671 $ 521 $ 3,725 $ 7,719
======== ====== ======== ========
PER SHARE, FULLY DILUTED(2):
Income before extraordinary item and
redemption premium paid............. $ .39 $ .60
Net income............................. $ .31 $ .53
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 ACQUISITION(4) AND THE OFFERING
-------- ------ ------------ ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Total cash and cash equivalents.......... $ 27,399 $ 606 $ 27,399 $ 27,399
Accounts receivable...................... 8,172 2,386 10,530 10,530
Other current assets..................... 4,287 97 4,313 4,313
-------- ------ -------- --------
Total current assets................... 39,858 3,089 42,242 42,242
Property and equipment, net.............. 41,174 1,227 44,884 44,884
Intangible and other long-term assets.... 5,837 131 7,457(6) 7,457
Goodwill................................. 14,543 - 18,485(6) 18,485
-------- ------ -------- --------
Total assets........................ $101,412 $4,447 $113,068 $113,068
======== ====== ======== ========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current liabilities including the current
portions of capitalized lease
obligations............................ $ 27,264 $1,022 $ 29,420 $ 29,420
Long-term debt........................... 62,029 - 71,529 34,136(10)(11)
Other long-term liabilities.............. 2,463 959 2,463 2,463
-------- ------ -------- --------
Total liabilities...................... 91,756 1,981 103,412 66,019
Shareholders' investment................. 9,656 2,466 9,656 47,049(10)(11)
-------- ------ -------- --------
Total liabilities and shareholders'
investment.......................... $101,412 $4,447 $113,068 $113,068
======== ====== ======== ========
</TABLE>
21
<PAGE> 24
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL DATA
(1) Reflects the premium paid in connection with the Redemption. See "The
Transactions."
(2) The weighted average number of shares of Common Stock outstanding used
to calculate pro forma income per share includes the effect of the
Transactions and the Offering, assumed to have occurred as of July 1,
1995.
(3) Management fees paid by NYRS to its former owners have been
discontinued. The management fees paid by NYRS to the previous owners
were payments made in connection with the annual amortization of
intangibles that were sold to those owners by NYRS. The Company's pro
forma income statement has been adjusted to reflect one full year of
amortization related to intangibles, assuming that the purchase of
NYRS occurred on July 1, 1995.
(4) Certain net assets of NYRS 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.
(5) The increase in educational services expense over the historical
amounts reflects the additional depreciation expense from the excess
of the appraised value of the property and equipment of NYRS acquired
over their historical cost.
(6) Subject to the finalization of an appraisal, the excess of the
purchase price over the value of NYRS'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. Those assets have estimated useful lives of 18
months, 5 years and 40 years, respectively.
(7) Additional interest expense is reflected for the fiscal year on the
borrowings to fund the $9.5 million acquisition cost 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.
(8) A 40% combined state and federal statutory rate is used to calculate
the income taxes on the pro forma and adjusted additional income.
(9) ESOP expense is not included because the ESOP Term Loan was paid in
full during fiscal 1996 and consummation of the Offering will
effectively eliminate the repurchase obligation of the Company with
respect to the securities held by the ESOP. In addition, as a result
of the ESOP Conversion, tax deductible dividends will no longer be
paid to the ESOP and are excluded in the calculation of income taxes
and earnings per share.
(10) 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.
(11) 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 is based on the additional assumption that no payment will be
made to the ESOP in connection with the ESOP Conversion. See "The
Transactions."
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 has 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 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 Company acquired NYRS for $9.5 million in cash, 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. The 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 in September 1996. 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
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<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 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.
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<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 business plan 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.
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<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 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 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, 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
August 1996, the Company acquired NYRS, a well-known culinary arts and
restaurant management school located in New York City, for $9.5 million in cash.
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 agreements 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 and fiscal 1997.
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<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, has 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
to six, and has added education program offerings in high growth fields
such as computer animation, multimedia and video production. The Company
also 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 49% of the Common Stock (on a fully
diluted basis, but excluding any additional shares purchased 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 1971, the Company's net revenues have
increased from approximately $3.5 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, accelerate the pace of
culinary program expansion, increase the rate at which new education programs
were developed, restructure certain education programs, and 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. EMC's schools are part of
the postsecondary education market, which accounts for approximately one-third
of
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<PAGE> 38
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 foreign student applicants learned of The Art Institutes from friends,
relatives, current students and alumni.
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<PAGE> 39
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, has 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.
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
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<PAGE> 40
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.
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,
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<PAGE> 41
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
Any 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
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.
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
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attendance during the first 60% of his or her first term, the applicable school
will refund institutional charges based on the number of weeks left 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 skills, 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 now 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.
Approximately 5% of The Art Institutes' average quarterly student
enrollments in fiscal 1996 were in specialized diploma programs. Academic
credits from nearly all of the specialized diploma programs are fully
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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>
PERCENT OF AVAILABLE GRADUATES
NUMBER OF WHO
AVAILABLE REPORTED THEY 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; 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 the following companies, among
others: American Greetings Corporation, Blockbuster Entertainment Group, The
Boeing Company, Eddie Bauer, Inc., Ethan Allen Interiors Inc., 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
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Sportswear, Inc., Take2 Interactive Software, Inc., Time Warner Inc., Turner
Broadcasting System, Inc., USAir Group, Inc., The Walt Disney Company and
numerous radio and television stations across the country.
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 2nd 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 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.
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
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had approximately 1,450 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.
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,
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<PAGE> 46
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.
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(3) 80,000
Ft. Lauderdale, FL(1) 118,500 Pittsburgh, PA 25,985
Atlanta, GA(2) 88,250 Pittsburgh, PA(4) 126,500
Atlanta, GA 14,570 Dallas, TX(5) 75,250
Chicago, IL 24,500 Houston, TX 79,345
Schaumburg, IL 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."
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<PAGE> 47
(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 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."
(4) This lease expires in the year 2000 with no renewal option.
(5) 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.
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<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 Ft. 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 (NCPT Accrediting Council for Independent Colleges
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. Three of
the Company's schools have been placed on reporting status by their accrediting
agency, based on that accrediting agency's concern about two schools' reported
student completion rates for certain programs and the other 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 during the prior academic
quarter, divided by the number of students enrolled in that program at the
beginning of that prior academic quarter.
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<PAGE> 49
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 two of those schools from reporting
status in early 1997 based on their improved student completion rates. The third
school, 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, 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
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<PAGE> 50
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 $8.5 billion for the
federal fiscal year ending September 30, 1994 to $10.1 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 from a revolving account, 75% of
which is capitalized by the U.S. Department of Education. Subsequent federal
capital contributions in the same 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
48
<PAGE> 51
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 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
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<PAGE> 52
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 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. (A provision of the appropriations bill for the U.S. Department of
Education for federal fiscal year 1996 also disqualifies such an institution
from further participation in the Pell program, but that law is only applicable
for one year and it is not clear that the United States Congress will enact a
similar provision in future 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. One of The Art Institutes,
which accounted for approximately 8% 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, which is intended to
correct data previously provided to the U.S. Department of Education. Any such
adjustment will be made by the U.S. Department of Education prior to the time
that final rates are officially published. The previously referred to Art
Institute has submitted such corrections for its preliminary 1994 cohort default
rate.) The Company understands that the U.S. Department of Education anticipates
issuing
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<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 significant
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 (including the school discussed in the preceding
paragraph), which accounted for approximately 55.1% in the aggregate, or between
approximately 8.0% and 14.4% individually, of the Company's net revenues in
fiscal 1996, 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. 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. Another one of those schools currently has an application
pending with the U.S. Department of Education for recertification to participate
in Title IV 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 comprehensive 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.
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<PAGE> 54
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. Two of the Company's schools currently have
recertification applications pending with the U.S. Department of Education. 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 ten percent of such prior year's funds and agreeing to
disburse those funds only on an as-earned basis. The U.S. Department of
Education has interpreted the surety provision 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 -- 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 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
consolidated 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 the schools will have an opportunity again 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 Art Institute is a
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<PAGE> 55
guarantor of the Company's debts and none of the revenues of AII or any Art
Institute 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.
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 significant 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
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
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<PAGE> 56
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.
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<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 indemnities following consummation of the Offering, and accordingly
has not been designated as a Class I, II or III director. The Company intends to
name two additional directors, Mr. Atwell and Mr. Campbell, who are not officers
or affiliates of the Company, following consummation of the Offering. 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.
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<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; 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.
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 that a non-employee
director is first elected to the Board of Directors), which option will vest 50%
on the first
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<PAGE> 59
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 $190,000. The
amount shown represents the salary earned from Mr. Webster's date of hire to
June 30, 1996.
(2) Bonuses are determined by the Compensation Committee.
(3) Such amounts represent the Company's contributions to the ESOP,
profit-sharing retirement plan and deferred compensation plan and the dollar
value of life insurance premiums paid by the Company with respect to term
life insurance for the benefit of certain executive officers of the Company.
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<PAGE> 60
OPTION GRANTS IN THE FISCAL YEAR ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
--------------------------- VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE OR FOR OPTION TERM
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ---------------------
NAME GRANTED (#) FISCAL YEAR ($/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
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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
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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."
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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.
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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 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 ($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.
In connection with the ESOP Conversion, the Company has agreed 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
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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(9)
------------------- ---------------- -------------------
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 24.6%
Merrill Lynch Entities(2)............ 1,615,188 14.4 457,139 1,158,049 8.0(10)
National Union Fire Insurance Company
of Pittsburgh, PA.................. 1,116,765 9.9 316,073 800,692 5.5
The Northwestern Mutual Life
Insurance Company.................. 1,861,274 16.5 526,788 1,334,486 9.2
Robert B. Knutson(3)(4).............. 2,079,889 18.5 - 2,079,889 14.4
James J. Burke, Jr................... - - - - --
Miryam L. Drucker(4)(5).............. 265,294 2.4 - 265,294 1.8
J. Thomas Christofferson............. - - - - --
Albert Greenstone.................... 31,007 * - 31,007 *
Harvey Sanford(3).................... 25,000 * - 25,000 *
Patrick T. DeCoursey................. 24,704 * - 24,704 *
William M. Webster, IV(6)............ 18,750 * - 18,750 *
Robert T. McDowell(7)................ 70,131 * - 70,131 *
All executive officers and directors
as a group(8)...................... 2,489,775 22.1 2,489,775 17.2
</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 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 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) 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.
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(7) 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.
(8) 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.
(9) 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 1,016,901 shares of Common Stock (7.0% of the
Common Stock taking into account currently exercisable options),
National Union Fire Insurance Company of Pittsburgh, PA will own
703,101 shares of Common Stock (4.9% of the Common Stock taking into
account currently exercisable options) and The Northwestern Mutual Life
Insurance Company will own 1,171,834 shares of Common Stock (8.1% of
the Common Stock taking into account currently exercisable options).
(10) 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 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.
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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 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
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<PAGE> 68
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 (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 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
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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
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
67
<PAGE> 70
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 options to purchase an additional 240,062 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.
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
68
<PAGE> 71
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 options to purchase an additional 240,062 shares of
Common Stock in the aggregate have agreed that they 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
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.
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 have reserved up to 225,000
shares of Common Stock for sale in the Offering to employees of the Company and
its subsidiaries pursuant to the Purchase Plan and, to the extent of the
remaining reserved shares after giving effect to such sales, to persons
identified by the Company, including consultants and legal counsel to, and
employees and affiliates of, the Company and its subsidiaries. See "Management
and Directors -- Benefit Plan -- 1996 Employee Stock Purchase Plan." All such
reserved shares will be sold at the initial offering price, except for shares
sold in the Offering pursuant to the Purchase Plan, which will be sold at the
initial offering price less the underwriting discount. The Company will
reimburse the Underwriters for the underwriting discount for shares sold in the
Offering pursuant to the Purchase Plan. The number of shares of Common Stock
available to the general public will be reduced to the extent these persons
purchase the reserved shares. Any reserved shares that are not so purchased by
such persons at the consummation of the Offering will be offered by the
Underwriters to the general public on the same terms as the other shares offered
by this Prospectus.
Application has been made to list the shares of Common Stock on the Nasdaq
National Market.
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.
69
<PAGE> 72
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 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.
70
<PAGE> 73
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.
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.
71
<PAGE> 74
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> 75
After the proposed conversion of the existing Common Stock, as discussed in
Note 13(d) of Notes to Consolidated Financial Statements, is effected, we expect
to be in a position to render the following audit report.
Arthur Andersen LLP
Pittsburgh, Pennsylvania
August 16, 1996
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 , 1996)
F-2
<PAGE> 76
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF JUNE 30,
----------------------------------------
1995 1996
-------- -------- PRO FORMA
AS ADJUSTED
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 7,980
Notes, advances and other................................ 2,505 2,492 2,550
Inventories................................................ 992 1,271 1,297
Deferred income taxes...................................... 181 381 381
Other current assets....................................... 1,452 2,635 2,635
-------- -------- --------
TOTAL CURRENT ASSETS......................................... 49,662 39,858 42,242
-------- -------- --------
Property and equipment, net.................................. 34,111 41,174 44,884
Other assets................................................. 4,560 5,837 7,457
Goodwill, net of amortization of $2,306, $2,713 and $2,713,
respectively............................................... 13,970 14,543 18,485
-------- -------- --------
$102,303 $101,412 $113,068
======== ======== ========
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 4,934
Accrued liabilities........................................ 8,370 7,355 7,574
Advance payments........................................... 13,164 11,243 13,022
-------- -------- --------
TOTAL CURRENT LIABILITIES.................................... 34,718 27,264 29,420
-------- -------- --------
Long-term debt, less current portion......................... 63,383 62,029 34,136
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:
Preferred Stock, Series A, at paid-in value.............. 22,075 22,075 -
Common Stock, Class A, par value $.0001 per share........ - - -
Common Stock, Class B, par value $.0001 per share........ 1 1 -
Common Stock, par value $.01 per share (Note 13)......... - - 143
Warrants outstanding....................................... 7,683 7,683 -
Additional paid-in capital................................. 19,118 19,742 86,751
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 47,049
-------- -------- --------
$102,303 $101,412 $113,068
======== ======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-3
<PAGE> 77
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
--------------------------------------------------
PRO FORMA
1994 1995 1996 AS ADJUSTED
-------- -------- -------- 1996
-----------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET REVENUES......................................... $122,549 $131,227 $147,863 $ 157,504
COSTS AND EXPENSES:
Educational services............................. 83,566 86,865 98,841 105,175
General and administrative....................... 26,174 28,841 32,344 33,862
Amortization of intangibles...................... 6,599 1,937 1,060 2,128
ESOP expense..................................... 4,759 7,086 1,366 -
-------- -------- -------- -----------
121,098 124,729 133,611 141,165
-------- -------- -------- -----------
INCOME BEFORE INTEREST AND TAXES..................... 1,451 6,498 14,252 16,339
Interest expense, net............................ 4,765 4,495 3,371 1,114
-------- -------- -------- -----------
INCOME (LOSS) BEFORE INCOME TAXES.................... (3,314) 2,003 10,881 15,225
Provision (credit) for income taxes.............. (1,612) 490 4,035 6,473
-------- -------- -------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM.............. (1,702) 1,513 6,846 8,752
Extraordinary loss on early extinguishment of
debt (Note 5)................................. - - 926 926
-------- -------- -------- -----------
NET INCOME (LOSS).................................... $ (1,702) $ 1,513 $ 5,920 $ 7,826
========= ========= ========= ===========
DIVIDENDS ON SERIES A PREFERRED STOCK................ (2,249) (2,249) (2,249) -
REDEMPTION PREMIUM PAID.............................. - - - (107)
INCOME (LOSS) APPLICABLE TO COMMON SHAREHOLDERS...... $ (3,951) $ (736) $ 3,671 $ 7,719
INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE:
PRIMARY:
Income (loss) before extraordinary item.......... $ (.57) $ (.11) $ .45 $ .60
Extraordinary loss on early extinguishment of
debt (Note 5)................................. - - (.09) (.06)
Redemption premium paid.......................... - - - (.01)
-------- -------- -------- -----------
Net income (loss)................................ $ (.57) $ (.11) $ .36 $ .53
========= ========= ========= ===========
FULLY DILUTED:
Income (loss) before extraordinary item.......... $ (.57) $ (.11) $ .39 $ .60
Extraordinary loss on early extinguishment of
debt (Note 5)................................. - - (.08) (.06)
Redemption premium paid.......................... - - - (.01)
-------- -------- -------- -----------
Net income (loss)................................ $ (.57) $ (.11) $ .31 $ .53
========= ========= ========= ===========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-4
<PAGE> 78
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> 79
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> 80
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 24 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 agreements 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> 81
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); (iii)
the exercise of all outstanding warrants for 2,978,039 shares of Class B Common
Stock, $.0001 par value (the "Class B Stock"); (iv) the acquisition of NYRS (as
discussed in Note 13); and (v) the initial public offering of 3,230,000 shares.
F-8
<PAGE> 82
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
The unaudited pro forma information presented in the accompanying
consolidated statement of income for the year ended June 30, 1996 reflects (i)
the redemption premium paid to the holder of 75,000 shares of Series A Preferred
Stock; (ii) the acquisition of NYRS (as discussed in Note 13); and (iii) the use
of the proceeds of the initial public offering to reduce outstanding borrowings
at a weighted average interest rate of 7.33%.
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 (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> 83
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. 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. 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> 84
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> 85
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
The Class A 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 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 2,978,040 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> 86
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> 87
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> 88
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> 89
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
U.S. 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> 90
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 2,978,040 shares of
Class B Stock.
(D) AMENDMENT TO ARTICLES OF INCORPORATION
On August 15, 1996, the Board of Directors authorized, subject to
shareholder approval, 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 in the accompanying consolidated financial statements and notes
to consolidated financial statements have been retroactively restated.
(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
(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> 91
- ------------------------------------------------------
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........................... 68
Notice to Canadian Residents........... 70
Legal Matters.......................... 70
Experts................................ 71
Additional Information................. 71
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> 92
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>
- ---------------
* To be provided by amendment.
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.
II-1
<PAGE> 93
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:
(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
II-2
<PAGE> 94
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.
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> 95
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed as part of this registration
statement:
<TABLE>
<S> <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> 96
<TABLE>
<S> <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> 97
<TABLE>
<S> <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.**
24.01 Power of Attorney*
27.01 Financial Data Schedule**
</TABLE>
- ------------------
* Previously filed.
** Filed herewith.
*** To be filed by amendment.
(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> 98
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 1, 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 1, 1996
- ----------------------------------- Chief Executive Officer
Robert B. Knutson
* Senior Vice President and October 1, 1996
- ----------------------------------- Chief Financial and
Robert T. McDowell Accounting Officer
* Vice Chairman and Director October 1, 1996
- -----------------------------------
Miryam L. Drucker
* Director October 1, 1996
- -----------------------------------
James J. Burke, Jr.
* Director October 1, 1996
- -----------------------------------
J. Thomas Christofferson
* Director October 1, 1996
- -----------------------------------
Albert Greenstone
* Director October 1, 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> 99
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> 100
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> 101
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> 102
<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> 103
<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**
24.01 Power of Attorney*
27.01 Financial Data Schedule**
</TABLE>
- ------------------
* Previously filed.
** Filed herewith.
*** To be filed by amendment.
<PAGE> 1
Exhibit 3.01(a)
RESTATED ARTICLES OF INCORPORATION
OF
EDUCATION MANAGEMENT CORPORATION
FIRST: The name of the corporation is Education Management Corporation
(hereinafter, the "Corporation").
SECOND: The address of its registered office in the Commonwealth of Pennsylvania
is 300 Sixth Avenue, Pittsburgh, Pennsylvania 15222.
THIRD: The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the Pennsylvania Business
Corporation Law of 1988 (as amended from time to time, the "BCL").
The purpose specified in the foregoing paragraph shall in
nowise be limited or restricted by reference to, or inference from, the terms of
any provision in these Restated Articles of Incorporation.
The Corporation shall possess and may exercise all powers and
privileges necessary or convenient to effect the foregoing purpose, including
the general powers now or hereafter conferred by the laws of the Commonwealth of
Pennsylvania upon corporations formed under the BCL.
FOURTH: The total number of shares of all classes of stock
that the Corporation shall have authority to issue is (i) 1,000,000 shares of
preferred stock, $0.0001 par value (the "Preferred
<PAGE> 2
Stock") and (ii) 42,000,000 shares of common stock, which are divided into two
classes as follows:
- 25,000,000 shares of Class A Common Stock, $0.0001
par value ("Class A Common Stock").
- 17,000,000 shares of Class B Common Stock, $0.0001
par value ("Class B Common Stock").
A. Preferred Stock.
The Board of Directors of the Corporation (the "Board of
Directors"), at any time and from time to time, is expressly vested with, and
shall have, the full authority, by resolution or resolutions, subject to
limitations prescribed by applicable law, to provide for the issuance of shares
of Preferred Stock in one or more series, to establish the number of shares to
be included in each such series and to fix any voting powers, designations,
preferences, options, conversion rights and relative, participating, optional or
other special rights, and qualifications, limitations or restrictions thereof.
The 250,000 shares of Series A 10.19% Convertible Preferred Stock, $0.0001 par
value, authorized by the Board of Directors on October 26, 1989, are and will
continue to be authorized, and the powers, preferences and rights, and the
qualifications, limitations or restrictions thereof, are as follows:
SERIES A 10.19% CONVERTIBLE PREFERRED STOCK
Section 1. Designation and Amount.
The shares of this series of Preferred Stock shall be
designated as "Series A 10.19% Convertible Preferred Stock" and
- 2 -
<PAGE> 3
the number of shares constituting such series shall be 250,000. The shares of
this series shall have $0.0001 par value.
Section 2. Dividends and Distributions.
(A) Subject to the provisions for adjustment hereinafter set
forth, the holders of shares of Series A Preferred Stock shall be entitled to
receive, when, as and if declared by the Board of Directors out of funds legally
available therefor, cash dividends ("Preferred Dividends") in an amount equal to
ten dollars and nineteen cents ($10.19) per share per annum, and no more,
payable semi-annually in arrears, five dollars and ten cents ($5.10) on the last
day of December and five dollars and nine cents ($5.09) on the last day of June
of each year (each a "Dividend Payment Date"), commencing on December 31, 1989,
to holders of record at the start of business on such Dividend Payment Date. In
the event that any Dividend Payment Date shall occur on any day other than a
"Business Day" (as defined in Section 8(G)(ii)), the dividend payment due on
such Dividend Payment Date shall be paid on the Business Day immediately
preceding such Dividend Payment Date to holders of record at the start of
business on such business day. Preferred Dividends shall begin to accrue on
outstanding shares of Series A Preferred Stock from the date of issuance.
Preferred Dividends shall accrue on a daily basis whether or not the Corporation
shall have earnings or surplus at the time. Preferred Dividends accrued after
the date of issuance for any period less than a full semi-annual period between
Dividend Payment Dates shall be computed on the basis of a 360-day year of
30-day months. The initial semi-annual dividend shall accrue for the period from
the date of initial issuance of shares of Series A Preferred Stock (the "Date of
Original Issuance") until December 31, 1989. Accumulated but unpaid Preferred
Dividends shall cumulate as of the Dividend Payment Date on which they first
become payable, but no interest, or sum of money in lieu of interest, shall
accrue on accumulated but unpaid Preferred Dividends.
(B) So long as any Series A Preferred Stock shall be
outstanding, no dividend shall be declared or paid or set apart for payment on
any other series of stock ranking on a parity with the Series A Preferred Stock
as to dividends ("Parity Stock"), unless there shall also be or have been
declared and paid or set apart for payment on the Series A Preferred Stock
dividends for all dividend payment periods of the Series A Preferred Stock
ending on or before the dividend payment date of such Parity Stock, ratably in
proportion to the respective amounts of dividends accumulated and unpaid through
such dividend payment date on the Series A Preferred Stock, and accumulated and
unpaid on such Parity Stock through the dividend payment period on such Parity
Stock next preceding such dividend payment date. So long as any Series A
Preferred Stock shall be outstanding, in the
- 3 -
<PAGE> 4
event that full cumulative dividends on the Series A Preferred Stock have not
been declared and paid or set apart for payment when due, the Corporation shall
not declare or pay or set apart for payment any dividends or make any other
distributions on, or make any payment on account of the purchases, redemption or
other retirement of any other class of stock or series thereof of the
Corporation ranking, as to dividends or as to distributions in the event of a
liquidation, dissolution or winding-up of the corporation, junior to the Series
A Preferred Stock ("Junior Stock") until full cumulative and unpaid dividends on
the Series A Preferred Stock shall have been paid or declared and set apart for
payment; provided, however, that the foregoing shall not apply to (i) any
dividend payable solely in any shares of any Junior Stock, or (ii) the
acquisition of shares of any Junior Stock either (1) pursuant to any employee or
director incentive or benefit plan or arrangement (including any employment,
severance or consulting agreement) of the Corporation or any subsidiary of the
Corporation heretofore or hereafter adopted or (2) in exchange solely for shares
of any other Junior Stock. Notwithstanding any of the provisions of this Section
2(B), the Corporation may purchase shares of Class A Common Stock from employees
and former employees as may be required by applicable law or the terms of the
Education Management Corporation Employee Stock Ownership Plan (formerly known
as the "EMC Holdings, Inc. Employee Stock Ownership Plan"), as in effect on the
Date of Original Issuance.
Section 3. Voting Rights.
The holders of shares of Series A Preferred Stock shall not
have any voting rights either general or special, except for such voting rights
as shall be required by law or granted by this Section 3 as follows:
(A) The Corporation shall not, without the consent of the
holders of at least 66-2/3% of all of the shares at the time outstanding of
Series A Preferred Stock, considered as a single class, given in person or by
proxy, either in writing or by a vote at a meeting called for that purpose,
authorize, create or increase the number of authorized shares of any class of
stock of the Corporation ranking prior to the shares of Series A Preferred Stock
as to dividend or liquidation or voting rights, or any securities convertible
into or exchangeable for any such class of stock.
(B) The Corporation shall not, without the consent of the
holders of at least 66-2/3% of all of the shares at the time outstanding of
Series A Preferred Stock, considered as a single class, given in person or by
proxy, either in writing or by a vote at a meeting called for that purpose,
amend, alter or repeal any of the preferences, rights, powers or privileges
given to
- 4 -
<PAGE> 5
shares of Series A Preferred Stock by the provisions of these Restated Articles
of Incorporation or by any certificate amendatory hereof or supplemental hereto
(including any certificate fixing the designation, preferences and rights of any
series of serial preferred stock or any similar document relating to any series
of serial preferred stock) or otherwise (excluding any such alteration,
amendment or repeal effected by any merger or consolidation in which the
Corporation is the surviving or resulting corporation or which complies with the
terms of Section 7 hereof), so as to affect materially and adversely the
preferences, rights, powers or privileges of the Series A Preferred Stock.
(C) If at the time of any annual meeting of shareholders of
the Corporation for the election of directors a Default in Preferred Dividends
(as hereinafter defined) shall exist, the number of directors constituting the
Board of Directors of the Corporation shall be increased by two, and the holders
of shares of Series A Preferred Stock shall have the right at such meeting,
voting separately as a single class, to the exclusion of the holders of Common
Stock (as defined in Section 8(G)(iii)), to elect by majority vote two directors
of the Corporation to fill such newly created directorships, but shall not be
entitled to vote in the election of any other directors of the Corporation. Each
director elected by the holders of shares of Series A Preferred Stock (herein
called a "Preferred Director") shall cease to serve as such director whenever a
Default in Preferred Dividends shall cease to exist, and the number of directors
constituting the Board of Directors of the Corporation shall be reduced by two,
subject to revesting in the event of each and every subsequent Default in
Preferred Dividends. Any Preferred Director may be removed by, and shall not be
removed except by, the vote of a majority of the holders of record of the
outstanding shares of Series A Preferred Stock, acting as a single class, at a
meeting of the shareholders called for that purpose. So long as a Default in
Preferred Dividends shall continue, (i) any vacancy in the office of a Preferred
Director may be filled (except as provided in the following clause (ii)) by an
instrument in writing signed by the remaining Preferred Director and filed with
the Corporation and (ii) in the case of the removal of any Preferred Director,
or in the event there is no remaining Preferred Director, the vacancy may be
filled by the majority vote of the holders of the outstanding shares of Series A
Preferred Stock, voting as a single class. Each director appointed as aforesaid
by the remaining Preferred Director shall be deemed, for all purposes hereof, to
be a Preferred Director. For the purposes hereof, a "Default in Preferred
Dividends" shall be deemed to exist whenever the amount of accrued dividends in
arrears upon shares of Series A Preferred Stock shall be equivalent to six
consecutive semi-annual dividends or more, and, having so occurred, such Default
in Preferred Dividends shall be deemed to exist thereafter until,
- 5 -
<PAGE> 6
but only until, all accrued dividends in arrears on all shares of Series A
Preferred Stock then outstanding shall have been paid.
(D) (i) If legislation substantially to the effect of Senator
Lloyd Bentson's bill introduced into the United States Senate on July 12, 1989
(S. 1303, 101st Cong., 1st. Sess.), which provides in part that a securities
acquisition loan for the purposes of Section 133 of the Internal Revenue Code of
1986, as amended (the "Code"), shall not be afforded the 50% exclusion for
interest treatment under Section 133 unless the stock has voting rights
equivalent to the stock into which it may be converted, is passed and applies or
may apply to the Series A Preferred Stock, and (ii) upon and after the vote of
at least a majority of the directors in office of the Corporation, the holders
of shares of Series A Preferred Stock shall be entitled to vote on all matters
submitted to a vote of the holders of Class A Common Stock of the Corporation,
voting together with the holders of Class A Common Stock as one class, with each
share of Series A Preferred Stock having the number of votes described in
Section 3(E) below.
(E) Each share of the Series A Preferred Stock shall be
entitled to one vote per share on all matters as to which holders of Series A
Preferred Stock have been granted voting rights by this Section 3 or as
otherwise required by law, except that in the event that the voting rights in
Section 3(D) come into being, at such time, and thereafter, each share of Series
A Preferred Stock shall be entitled to the number of votes equal to the number
of shares of Class A Common Stock into which such share of Series A Preferred
Stock could be converted on the record date for determining the shareholders
entitled to vote, rounded to the nearest one hundred-thousandth of a vote; it
being understood that whenever the "Conversion Ratio" (as defined in Section 5
hereof) is adjusted pursuant to Section 8 hereof, the voting rights of the
Series A Preferred Stock shall also be similarly adjusted.
(F) If the voting rights in Section 3(D) come into being,
holders of Series A Preferred Stock shall continue to have the separate and
special voting rights provided in Sections 3(A), 3(B) and 3(C) hereof.
Section 4. Liquidation, Dissolution or Winding-Up.
(A) Upon any voluntary or involuntary liquidation, dissolution
or winding-up of the Corporation, the holders of Series A Preferred Stock shall
be entitled to receive out of assets of the Corporation which remain after
satisfaction in full of all valid claims of creditors of the Corporation and
which are available for payment to shareholders, and subject to the rights of
the holders of any stock of the Corporation ranking senior to or on a parity
with the Series A Preferred Stock in respect of
- 6 -
<PAGE> 7
distributions upon liquidation, dissolution or winding-up of the Corporation,
before any amount shall be paid or distributed among the holders of Common Stock
or any other shares ranking junior to the Series A Preferred Stock in respect of
distributions upon liquidation, dissolution or winding-up of the Corporation,
liquidating distributions in the amount of one hundred dollars ($100.00) per
share (the "Liquidation Preference"), plus an amount equal to all accrued and
unpaid dividends thereon (whether or not earned or declared) to the date fixed
for distribution, and no more. If upon any liquidation, dissolution or
winding-up of the Corporation, the amounts payable with respect to the Series A
Preferred Stock and any other stock ranking as to any such distribution on a
parity with the Series A Preferred Stock are not paid in full, the holders of
the Series A Preferred Stock and such other stock shall share ratably in any
distribution of assets in proportion to the full respective preferential amounts
(including accrued and unpaid dividends) to which they are entitled. After
payment of the full amount to which they are entitled as provided by the
foregoing provisions of this Section 4(A), the holders of shares of Series A
Preferred Stock shall not be entitled to any further right or claim to any of
the remaining assets of the Corporation.
(B) Neither the merger, consolidation or combination of the
Corporation with or into any other corporation, nor the sale, lease, transfer or
other exchange of all or any portion of the assets of the Corporation, shall be
deemed to be a dissolution, liquidation or winding-up of the affairs of the
Corporation for purposes of this Section 4, but the holders of Series A
Preferred Stock shall nevertheless be entitled in the event of any such merger
or consolidation to the rights provided by Section 7 hereof.
(C) Written notice of any voluntary or involuntary
liquidation, dissolution or winding-up of the Corporation, stating the payment
date or dates when, and the place or places where, the amounts distributable to
holders of Series A Preferred Stock in such circumstances shall be payable,
shall be given by first-class mail, postage prepaid, mailed not less than twenty
(20) days prior to any payment date stated therein, to the holders of Series A
Preferred Stock, at the address shown on the books of the Corporation or any
transfer agent for the Series A Preferred Stock; provided, however, that a
failure to give notice as provided above or any defect therein shall not affect
the Corporation's ability to consummate a voluntary or involuntary liquidation,
dissolution or winding-up of the Corporation or the validity of any such
actions.
Section 5. Conversion into Class A Common Stock.
- 7 -
<PAGE> 8
(A) A holder of shares of Series A Preferred Stock shall be
entitled, at any time, to cause any or all of such shares to be converted into
shares of Class A Common Stock, initially at a conversion rate equal to the
ratio of fifteen and forty-three thousand seven hundred eight one
hundred-thousandths (15.43708) shares of Class A Common Stock for each one share
of Series A Preferred Stock, which rate shall be adjusted as hereinafter
provided (and, as so adjusted, rounded to the nearest one hundred-thousandth, is
hereinafter sometimes referred to as the "Conversion Ratio").
(B) Any holder of shares of Series A Preferred Stock desiring
to convert such shares into shares of Class A Common Stock shall surrender the
certificate or certificates representing the shares of Series A Preferred Stock
being converted, duly assigned or endorsed for transfer to the Corporation (or
accompanied by duly executed stock powers relating thereto), at the principal
executive office of the Corporation or the offices of the transfer agent for the
Class A Common Stock or such office or offices in the continental United States
of an agent for conversion as may from time to time be designated by notice to
the holders of Series A Preferred Stock, accompanied by written notice of
conversion. Such notice of conversion shall specify (i) the number of shares of
Series A Preferred Stock to be converted and the name or names in which such
holder wishes the certificate or certificates for Class A Common Stock and for
any shares of Series A Preferred Stock not to be so converted to be issued, and
(ii) the address to which such holder wishes delivery to be made of such new
certificates to be issued upon such conversion.
(C) Upon surrender of a certificate representing a share or
shares of Series A Preferred Stock for conversion, the Corporation or the
transfer agent for the Class A Common Stock shall issue and send by hand
delivery (with receipt to be acknowledged) or by first class mail, postage
prepaid, to the holder thereof or to such holder's designee, at the address
designated by such holder, a certificate or certificates for the number of
shares of Class A Common Stock to which such holder shall be entitled upon
conversion. In the event that there shall have been surrendered a certificate or
certificates representing shares of Series A Preferred Stock, only part of which
are to be converted, the Corporation or the transfer agent for the Class A
Common Stock shall issue and deliver to such holder or such holder's designee a
new certificate or certificates representing the number of shares of Series A
Preferred Stock which shall not have been converted.
(D) The issuance by the Corporation of shares of Class A
Common Stock upon a conversion of shares of Series A Preferred Stock into shares
of Class A Common Stock made at the option of the holder thereof shall be
effective as of the earlier of
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<PAGE> 9
(i) the delivery to such holder or such holder's designee of the certificates
representing the shares of Class A Common Stock issued upon conversion thereof
and (ii) the commencement of business on the second Business Day after the
surrender of the certificate or certificates for the shares of Series A
Preferred Stock to be converted, duly assigned or endorsed for transfer to the
Corporation (or accompanied by duly executed stock powers relating thereto) as
provided herein. On and after the effective day of conversion, the person or
persons entitled to receive the Class A Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder or holders of
such shares of Class A Common Stock, but no allowance or adjustment shall be
made in respect of any period prior to such effective date. The Corporation
shall not be obligated to pay any dividends which shall have been declared and
shall be payable to holders of shares of Series A Preferred Stock on a Dividend
Payment Date if such Dividend Payment Date for such dividend shall coincide with
or be on or subsequent to the effective date of conversion of such shares.
(E) The Corporation shall not be obligated to deliver to
holders of Series A Preferred Stock any fractional share or shares of Class A
Common Stock issuable upon any conversion of such shares of Series A Preferred
Stock, but in lieu thereof may make a cash payment in respect thereof in any
manner permitted by law.
(F) The Corporation shall at all times reserve and keep
available out of its authorized and unissued Class A Common Stock, solely for
issuance upon the conversion of shares of Series A Preferred Stock as herein
provided, free from any preemptive rights, such number of shares of Class A
Common Stock as shall from time to time be issuable upon the conversion of all
the shares of Series A Preferred Stock then outstanding. Nothing contained
herein shall preclude the Corporation from issuing shares of Class A Common
Stock held in its treasury upon the conversion of shares of Series A Preferred
Stock into Class A Common Stock pursuant to the terms hereof.
Section 6. Optional Redemption.
(A) At the option of the Corporation, shares of Series A
Preferred Stock may be redeemed as a whole or in part commencing on the third
anniversary of the Date of Original Issuance and from time to time thereafter,
out of funds legally available therefor, at a cash redemption price of:
(i) $105.72 per share if redeemed on the third
anniversary of the Date of Original Issuance through the day
immediately preceding the fourth anniversary of the Date of
Original Issuance;
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<PAGE> 10
(ii) $104.29 per share if redeemed on the fourth
anniversary of the Date of Original Issuance through the day
immediately preceding the fifth anniversary of the Date of
Original Issuance;
(iii) $102.86 per share if redeemed on the fifth
anniversary of the Date of Original Issuance through the day
immediately preceding the sixth anniversary of the Date of
Original Issuance;
(iv) $101.43 per share if redeemed on the sixth
anniversary of the Date of Original Issuance through the day
immediately preceding the seventh anniversary of the Date of
Original Issuance; and
(v) $100.00 per share if redeemed on the seventh
anniversary of the Date of Original Issuance and
thereafter;
plus, in each case, an amount equal to accrued and unpaid dividends thereon
(whether or not earned or declared) to the date fixed for redemption.
If fewer than all the outstanding shares of Series A Preferred
Stock are to be redeemed pursuant to this Section 6(A), the number of shares of
Series A Preferred Stock to be redeemed shall be determined by the Board of
Directors of the Corporation. If there is one holder of all shares of Series A
Preferred Stock, such holder shall determine which of its shares of Series A
Preferred Stock are to be redeemed in the case of a partial redemption. If there
is more than one holder for all shares of Series A Preferred Stock, then in the
case of a partial redemption, the shares to be redeemed shall be determined by
the Board of Directors among the then current holders by lot or such other
method deemed by the Board of Directors to be fair and equitable.
(B) At the option of the Corporation, in the event that the
Code is amended so that the Corporation cannot deduct all dividends paid on the
Series A Preferred Stock and used for the purpose of repaying the indebtedness
of the Education Management Corporation Employee Stock Ownership Plan from its
gross income for purposes of computing its income tax liability, shares of
Series A Preferred Stock may be redeemed, in whole or in part, within one
hundred twenty (120) days of when such change in the tax law is enacted or
becomes effective, whichever is later, out of funds legally available therefor,
at a cash redemption price of $100 per share, plus an amount equal to accrued
and unpaid dividends thereon (whether or not earned or declared), to the date
fixed for redemption.
(C) Notice of Redemption; Other Redemption Procedures.
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<PAGE> 11
(i) Whenever shares of Series A Preferred Stock are
to be redeemed pursuant to this Section 6, a notice of such
redemption shall be mailed, by first-class mail, postage
prepaid, or delivered to each holder of the shares to be
redeemed at such holder's address as the same appears on the
books of the Corporation or any stock transfer agent for the
Series A Preferred Stock. Such notice shall be mailed or
delivered not less than twenty (20) days and not more than
sixty (60) days prior to the date fixed for redemption. Each
such notice shall state: (1) the redemption date; (2) the
number of shares of Series A Preferred Stock to be redeemed;
(3) the redemption price; (4) the place or places where such
shares of Series A Preferred Stock are to be surrendered for
payment of the redemption price; and (5) that dividends on the
shares to be redeemed will cease to accrue on such redemption
date. If fewer than all shares of Series A Preferred Stock
held by a holder are to be redeemed, the notice mailed to such
holder shall specify the number of shares to be redeemed from
such holder. Except as required by applicable law, no defect
in the notice or redemption or in the mailing thereof shall
affect the validity of the redemption proceedings.
(ii) Notice having been mailed as aforesaid, from and
after the redemption date (unless default shall be made by the
Corporation in providing money for the payment of the
redemption price of the shares called for redemption)
dividends on the shares of Series A Preferred Stock so called
for redemption shall cease to accrue, and said shares shall no
longer be deemed to be outstanding and shall have the status
of authorized but unissued shares of Preferred Stock,
unclassified as to series, and shall not be reissued as shares
of Series A Preferred Stock, and all rights of the holders
thereof as shareholders of the Corporation (except the right
to receive from the Corporation the redemption price and any
accrued and unpaid dividends to the redemption date) shall
cease. Upon surrender in accordance with said notice of the
certificates for any shares so redeemed (properly endorsed or
assigned for transfer, if the Board of Directors of the
Corporation shall so require and the notice shall so state),
such shares shall be redeemed by the Corporation at the
redemption price aforesaid. In case fewer than all the shares
represented by any such certificate are redeemed, a new
certificate shall be issued representing the unredeemed shares
without cost to the holder thereof.
(iii) Notwithstanding any other provisions of
this Section 6 (other than the immediately following
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<PAGE> 12
sentence), at any time when any dividends on any share of
Series A Preferred Stock are in arrears, no (1) shares of
Series A Preferred Stock may be redeemed unless all
outstanding shares of Series A Preferred Stock are
simultaneously redeemed, nor (2) may any shares of Series A
Preferred be purchased or otherwise acquired by the
Corporation except in accordance with a purchase offer on the
same terms made by the Corporation for all outstanding shares
of Series A Preferred Stock. Nothing in this Section 6 shall
prohibit the Corporation from purchasing shares of Series A
Preferred Stock from employees and former employees as may be
required by applicable law or the terms of the Education
Management Corporation Employee Stock Ownership Plan, as in
effect on the Date of Original Issuance.
Section 7. Consolidation, Combination, Merger, etc.
(A) In the event that the Corporation shall consummate any
consolidation, combination, merger or similar business combination transaction,
pursuant to which the outstanding shares of Class A Common Stock are by
operation of law exchanged solely for or changed, reclassified or converted
solely into stock of any successor or resulting company (including the
Corporation) that constitutes "qualifying employer securities" with respect to a
holder of Series A Preferred Stock within the meaning of Section 409(1) of the
Code and Section 407(c)(5) of the Employee Retirement Income Security Act of
1974, as amended, or any successor provisions of law, and, if applicable, for a
cash payment in lieu of fractional shares, if any, the shares of Series A
Preferred Stock of such holder shall in connection therewith be assumed by and
shall become preferred stock of such successor or resulting company, having in
respect of such company insofar as possible the same powers, preferences and
relative, participating, optional or other special rights (including the
redemption rights provided by this Section 7), and the qualifications,
limitations or restrictions thereon, that the Series A Preferred Stock had
immediately prior to such transaction, except that after such transaction each
share of the Series A Preferred Stock shall be convertible, otherwise on the
terms and conditions provided by Section 5 hereof, into the number and kind of
qualifying employer securities so receivable by a holder of the number of shares
of Class A Common Stock into which such shares of Series A Preferred Stock could
have been converted immediately prior to such transaction; provided, however,
that if by virtue of the structure of such transaction, a holder of Class A
Common Stock is required to make an election with respect to the nature and kind
of consideration to be received in such transaction, which election cannot
practicably be made by holders of the Series A Preferred Stock, then the
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<PAGE> 13
shares of Series A Preferred Stock shall, by virtue of such transaction and on
the same terms as apply to the holders of Class A Common Stock, be converted
into or exchanged for the aggregate amount of stock, securities, cash or other
property (payable in kind) receivable by a holder of the number of shares of
Class A Common Stock into which such shares of Series A Preferred Stock could
have been converted immediately prior to such transaction if such holder of
Class A Common Stock failed to exercise any rights of election to receive any
kind or amount of stock, securities, cash or other property (other than such
qualifying employer securities and a cash payment, if applicable, in lieu of
fractional shares) receivable upon such transaction (provided that, if the kind
or amount of qualifying employer securities receivable upon such transaction is
not the same for each non-electing share, then the kind and amount of qualifying
employer securities receivable upon such transaction for each non-electing share
shall be the kind and amount so receivable per share by a plurality of the
non-electing shares). The rights of the Series A Preferred Stock as preferred
stock of such successor or resulting company shall successively be subject to
adjustments pursuant to Section 8 hereof after any such transaction as nearly
equivalent to the adjustments provided for by such section prior to such
transaction. The Corporation shall not consummate any such merger, consolidation
or similar transaction unless all then outstanding shares of the Series A
Preferred Stock shall be assumed and authorized by the successor or resulting
company as aforesaid.
(B) In the event that the Corporation shall consummate any
consolidation, combination, merger or similar business combination transaction,
pursuant to which the outstanding shares of Class A Common Stock are by
operation of law exchanged for or changed, reclassified or converted into other
stock or securities or cash or any other property, or any combination thereof,
other than any such consideration which is constituted solely of qualifying
employer securities (as referred to in Section 7(A)) and cash payments, if
applicable, in lieu of fractional shares (a "Nonqualifying Transaction"),
outstanding shares of Series A Preferred Stock shall, at the election of the
holder thereof, (i) be redeemed by the Corporation at a cash redemption price
of:
(a) $110 per share if the Nonqualifying
Transaction occurs prior to the first
anniversary of the date of Original
Issuance;
(b) $108.58 per share if the Nonqualifying
Transaction occurs on the first anniversary
of the date of Original Issuance through the
day immediately preceding the second
anniversary of the date of Original
Issuance;
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<PAGE> 14
(c) $107.15 per share if the Nonqualifying
Transaction occurs on the second anniversary
of the date of Original Issuance through the
day immediately preceding the third
anniversary of the date of Original
Issuance;
(d) $105.72 per share if the Nonqualifying
Transaction occurs on the third anniversary
of the date of Original Issuance through the
day immediately preceding the fourth
anniversary of the date of Original
Issuance;
(e) $104.29 per share if the Nonqualifying
Transaction occurs on the fourth anniversary
of the date of Original Issuance through the
day immediately preceding the fifth
anniversary of the date of Original
Issuance;
(f) $102.86 per share if the Nonqualifying
Transaction occurs on the fifth anniversary
of the date of Original Issuance through the
day immediately preceding the sixth
anniversary of the date of Original
Issuance;
(g) $101.43 per share if the Nonqualifying
Transaction occurs on the sixth anniversary
of the date of Original Issuance through the
day immediately preceding the seventh
anniversary of the date of Original
Issuance; and
(h) $100.00 per share if the Nonqualifying
Transaction occurs on the seventh anniver-
sary of the date of Original Issuance or
thereafter; or
(ii) be converted by virtue of such Nonqualifying Transaction immediately prior
to its consummation into the number of shares of Common Stock into which such
shares of Series A Preferred Stock could have been converted at such time, so
that each share of Series A Preferred Stock shall, by virtue of such transaction
and on the same terms as apply to the holders of Class A Common Stock, be
converted into or exchanged for the aggregate amount of stock, securities, cash
or other property (payable in like kind) receivable by a holder of the number of
shares of Class A Common Stock into which such shares of Series A Preferred
Stock could have been converted immediately prior to such transaction; provided,
however, that if by virtue of the structure of such transaction, a holder of
Class A Common Stock is required to make an election with respect to the nature
and kind of consideration to be received in such transaction, which election
cannot practicably be made by the holders of the Series A Preferred
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<PAGE> 15
Stock, then the shares of Series A Preferred Stock shall, by virtue of such
transaction and on the same terms as apply to the holders of Class A Common
Stock, be converted into or exchanged for the aggregate amount of stock,
securities, cash or other property (payable in kind) receivable by a holder of
the number of shares of Class A Common Stock into which such shares of Series A
Preferred Stock could have been converted immediately prior to such transaction
if such holder of Class A Common Stock failed to exercise any rights of election
as to the kind or amount of stock, securities, cash or other property receivable
upon such transaction (provided that, if the kind or amount of stock,
securities, cash or other property receivable upon such transaction is not the
same for each non-electing share, then the kind and amount of stock, securities,
cash or other property receivable upon such transaction for each non-electing
share shall be the kind and amount so receivable per share by a plurality of the
non-electing shares).
(C) Notwithstanding any other provisions of this Section 7,
the merger of EMC Holdings, Inc., a Delaware corporation, into the Corporation
and the simultaneous reclassification of shares of the Corporation pursuant to
that certain Plan and Agreement of Merger dated as of April __, 1991 (the
"Merger Agreement"), shall not affect the Series A Preferred Stock or trigger
the provisions of this Section 7; in such event the Series A Preferred Stock
shall continue to be convertible into Class A Common Stock at the Conversion
Ratio in effect immediately prior to the effective time of the merger and
reclassification pursuant to the Merger Agreement.
Section 8. Anti-dilution Adjustments.
(A) In the event the Corporation shall, at any time or from
time to time while any of the shares of the Series A Preferred Stock are
outstanding, (i) pay a dividend or make a distribution in respect of the Class A
Common Stock in shares of Class A Common Stock, (ii) subdivide the outstanding
shares of Class A Common Stock, or (iii) combine the outstanding shares of Class
A Common Stock into a smaller number of shares, in each case whether by
reclassification of shares, recapitalization of the Corporation (including a
recapitalization effected by a merger or consolidation to which Section 7 hereof
does not apply) or otherwise, the Conversion Ratio in effect immediately prior
to such action shall be adjusted by multiplying such Conversion Ratio by a
fraction, the numerator of which is the number of shares of Class A Common Stock
outstanding immediately after such event, and the denominator of which is the
number of shares of Common Stock outstanding immediately before such event. An
adjustment made pursuant to this Section 8(A) shall be given effect (on a
retroactive basis), upon payment of such a dividend or distribution, as of the
record date for the determination of
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<PAGE> 16
shareholders entitled to receive such dividend or distribution, and in the case
of a subdivision or combination shall become effective immediately as of the
effective date thereof.
(B) In the event the Corporation shall, at any time or from
time to time while any of the shares of Series A Preferred Stock are
outstanding, issue, sell or exchange shares of Class A Common Stock (other than
pursuant to (i) any management stock option plan for up to three percent (3%) of
the fully diluted Common Stock of the Corporation and (ii) any reissuance of
stock at the same price at which it was repurchased under the Equity Agreements
(as defined in Section 8(G)(vi))) for a consideration having a Fair Market Value
on the date of issuance, sale or exchange less than the Fair Market Value of
such shares on the date of issuance, sale or exchange, then, subject to the
provisions of paragraphs (D) and (E) of this Section 8, the Conversion Ratio in
effect immediately prior to such issuance, sale or exchange shall be adjusted by
multiplying such Conversion Ratio by a fraction, the numerator of which shall be
the product of (i) the Fair Market Value of a share of Class A Common Stock on
the day immediately preceding such issuance, sale or exchange and (ii) the sum
of the number of shares of Class A Common Stock outstanding on such day plus the
number of shares of Class A Common Stock so issued, sold or exchanged by the
Corporation, and the denominator of which shall be the sum of (i) the Fair
Market Value of all the shares of Class A Common Stock outstanding on the day
immediately preceding such issuance, sale or exchange and (ii) the Fair Market
Value of the consideration on the date received by the Corporation in respect of
such issuance, sale or exchange of shares of Class A Common Stock. In the event
the Corporation shall, at any time or from time to time, while any shares of
Series A Preferred Stock are outstanding issue, sell or exchange any right or
warrant to purchase or acquire shares of Class A Common Stock (including as such
a right or warrant any security convertible into or exchangeable for shares of
Class A Common Stock) (other than pursuant to any management stock option plan
for up to three percent (3%) of the fully diluted Common Stock of the
Corporation), for a consideration having a Fair Market Value on the date of such
issuance, sale or exchange less than the Non-Dilutive Amount (as defined in
Section 8(G)(viii)), then, subject to the provisions of paragraphs (D) and (E)
of this Section 8, the Conversion Ratio shall be adjusted by multiplying such
Conversion Ratio by a fraction, the numerator of which shall be the product of
(i) the Fair Market Value of a share of Class A Common Stock on the day
immediately preceding such issuance, sale or exchange and (ii) the sum of the
number of shares of Class A Common Stock outstanding on such day plus the
maximum number of shares of Class A Common Stock which could be acquired
pursuant to such right or warrant at the time of the issuance, sale or exchange
of such right or warrant (assuming shares of Class A Common Stock could be
acquired pursuant to such right or warrant at such time), and the denominator of
which shall be the sum of
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<PAGE> 17
(i) the Fair Market Value of all the shares of Class A Common Stock outstanding
on the day immediately preceding such issuance, sale or exchange, (ii) the Fair
Market Value of the consideration received by the Corporation in respect of such
issuance, sale or exchange of such right or warrant and (iii) the Fair Market
Value as of the time of such issuance of the consideration which the Corporation
would receive upon exercise in full of all such rights or warrants. For purposes
of this Section 8(B), the determination of the Fair Market Value of the Class A
Common Stock shall be made without giving effect to the issuance, sale or
exchange of Class A Common Stock or the right or warrant to purchase or acquire
shares of Class A Common Stock contemplated by this Section 8(B).
(C) In the event the Corporation shall, at any time or from
time to time while any of the shares of Series A Preferred Stock are
outstanding, make an Extraordinary Distribution (as defined in Section 8(G)(v))
in respect of the Class A Common Stock, whether by dividend, distribution,
reclassification of shares or recapitalization of the Corporation (including a
recapitalization or reclassification effected by a merger, combination or
consolidation to which Section 7 hereof does not apply) or effect a Pro Rata
Repurchase (as defined in Section 8(G)(ix)) of Class A Common Stock, the
Conversion Ratio in effect immediately prior to such Extraordinary Distribution
or Pro Rata Repurchase shall, subject to paragraphs (D) and (E) of this Section
8, be adjusted by multiplying such Conversion Ratio by a fraction, the numerator
of which shall be the product of (i) the number of shares of Class A Common
Stock outstanding immediately before such Extraordinary Distribution or Pro Rata
Repurchase minus, in the case of a Pro Rata Repurchase, the number of shares of
Class A Common Stock repurchased by the Corporation and (ii) the Fair Market
Value of a share of Class A Common Stock on the day preceding the record date
(or the day preceding the ex dividend date if the Corporation's securities are
publicly traded) with respect to an Extraordinary Distribution or on the
Effective Date (as defined in Section 8(G)(ix)) of a Pro Rata Repurchase, as the
case may be, and the denominator of which shall be (i) the product of (x) the
number of shares of Class A Common Stock outstanding immediately before such
Extraordinary Distribution or Pro Rata Repurchase and (y) the Fair Market Value
of a share of Class A Common Stock on the day preceding the record date (or the
day preceding the ex dividend date if the Corporation's securities are publicly
traded) with respect to an Extraordinary Distribution, or on the Effective Date
of a Pro Rata Repurchase, as the case may be, minus (ii) the Fair Market Value
of the Extraordinary Distribution or the aggregate purchase price of the Pro
Rata Repurchase, as the case may be; provided, however, that no Pro Rata
Repurchase shall cause an adjustment to the Conversion Ratio unless the amount
of all cash dividends and distributions made during the period of twelve (12)
months preceding the Effective
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<PAGE> 18
Date of such Pro Rata Repurchase, when combined with the aggregate amount of all
Pro Rata Repurchases including such Pro Rata Repurchase (for this purpose,
including only that portion of the aggregate purchase price of each Pro Rata
Repurchase which is in excess of the Fair Market Value of the Class A Common
Stock repurchased as determined on the Effective Date of each such Pro Rata
Repurchase), the Effective Dates of which fall within such twelve (12) month
period, exceeds twelve and one-half percent (12-1/2%) of the aggregate Fair
Market Value of all shares of Class A Common Stock outstanding on the Effective
Date of such Pro Rata Repurchase. The Corporation shall send each holder of
Series A Preferred Stock (i) notice of its intent to make any dividend or
distribution and (ii) notice of any offer by the Corporation to make a Pro Rata
Repurchase, in each case at the same time as, or as soon as practicable after,
such offer is first communicated to holders of Class A Common Stock. Such notice
shall indicate the intended record date and the amount and nature of such
dividend or distribution, or the number of shares subject to such offer for a
Pro Rata Repurchase and the purchase price payable by the Corporation pursuant
to such offer, and the Conversion Ratio in effect at such time.
(D) Notwithstanding any other provisions of this Section 8,
the Corporation shall not be required to make any adjustment of the Conversion
Ratio unless such adjustment would require an increase or decrease of at least
one percent (1%) in the Conversion Ratio. Any lesser adjustment shall be carried
forward and shall be made no later than the time of, and together with, the next
subsequent adjustment which, together with any adjustment or adjustments so
carried forward, shall amount to an increase or decrease of at least one percent
(1%) in the Conversion Ratio.
(E) If the Corporation shall make any dividend or distribution
on the Common Stock or issue any Common Stock, other capital stock or other
security of the Corporation or any rights or warrants to purchase or acquire any
such security, which transaction does not result in an adjustment to the
Conversion Ratio pursuant to the foregoing provisions of this Section 8, the
Board of Directors of the Corporation shall in its sole discretion consider
whether such action is of such nature that it adversely affects the holders of
the Series A Preferred Stock and that an adjustment to the Conversion Ratio
should equitably be made in respect of such transaction. If in such case the
Board of Directors of the Corporation determines that an adjustment to the
Conversion Ratio should be made, an adjustment shall be made effective as of
such date, as determined by the Board of Directors of the Corporation. The
determination of the Board of Directors of the Corporation as to whether an
adjustment to the Conversion Ratio should be made pursuant to the foregoing
provisions of this Section 8(E), and, if so, as to what adjustment should be
made and when, shall be final and binding on
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<PAGE> 19
the Corporation and all shareholders of the Corporation. The Corporation shall
be entitled to make such additional adjustments in the Conversion Ratio, in
addition to those required by the foregoing provisions of this Section 8, as
shall be necessary in order that any dividend or distribution in shares of
capital stock of the Corporation, subdivision, reclassification or combination
of shares of stock of the Corporation or any recapitalization of the Corporation
shall not be taxable to holders of the Common Stock.
(F) Notwithstanding any other provisions of this Section 8,
the Corporation shall not be required to make any adjustment to the Conversion
Ratio as the result of, or in connection with, the merger and reclassification
pursuant to the Merger Agreement.
(G) For purposes of Sections 1 through 10 of Paragraph A of
Article Fourth of these Restated Articles of Incorporation, the following
definitions shall apply:
(i) "Adjustment Period" shall mean the period of five
(5) consecutive trading days preceding, and including, the
date as of which the Fair Market Value of a security is to be
determined.
(ii) "Business Day" shall mean each day that is not a
Saturday, Sunday or a day on which state or federally
chartered banking institutions in Pittsburgh, Pennsylvania and
New York City, New York are not required to be open.
(iii) "Common Stock" shall include shares designated
as Common Stock, including Class A Common Stock, Class B
Common Stock and Class C Common Stock, as of the Date of
Original Issuance, or shares of any class or classes resulting
from any reclassification or reclassifications thereof;
provided that if at any time there shall be more than one such
resulting class, the shares of each such class then so
issuable shall be substantially in the proportion that the
total number of shares of such class resulting from all such
reclassifications bears to the total number of shares of all
such classes resulting from all such reclassifications.
(iv) "Current Market Price" of publicly traded
securities, if any, of the Corporation or any other issuer for
a day shall mean the last reported sales price, regular way,
or if no sale takes place on such day, the average of the
reported closing bid and asked prices, regular way, in either
case as reported on the principal national securities exchange
on which such
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<PAGE> 20
security is listed or admitted to trading or, if not listed or
admitted to trading on any national securities exchange, on
the NASDAQ Market System or, if such security is not quoted on
the NASDAQ Market System, the average of the closing bid and
asked prices on each such day in the over-the-counter market
as reported by NASDAQ or, if bid and asked prices for such
security on each such day shall not have been reported through
NASDAQ, the average of the bid and asked prices for such day
as furnished by any New York Stock Exchange member regularly
making a market in such security selected for such purpose by
the Board of Directors of the Corporation or committee thereof
during the Adjustment Period.
(v) "Extraordinary Distribution" shall mean any
dividend or other distribution (effected while any of the
shares of Series A Preferred Stock are outstanding) of (x)
cash, where the aggregate amount of such cash dividend or
distribution together with the amount of all cash dividends
and distributions made during the preceding period of twelve
(12) months, when combined with the aggregate amount of all
Pro Rata Repurchases (for this purpose, including only that
portion of the aggregate purchase price of each such Pro Rata
Repurchase which is in excess of the Fair Market Value of the
Class A Common Stock repurchased as determined on the
Effective Date of such Pro Rata Repurchase), the Effective
Dates of which fall within such twelve month period, exceeds
twelve and one-half percent (12-1/2%) of the aggregate Fair
Market Value of all shares of Class A Common Stock outstanding
on the record date for determining the shareholders entitled
to receive such Extraordinary Distribution and/or (y) any
shares of capital stock of the Corporation (other than shares
of Class A Common Stock), other securities of the Corporation,
evidences of indebtedness of the Corporation or any other
person or any other property (including shares of any
subsidiary of the Corporation), or any combination thereof.
The Fair Market Value of an Extraordinary Distribution for
purposes of Section 8(C) shall be equal to the sum of the Fair
Market Value of such Extraordinary Distribution as of the date
made plus the amount of any cash dividends which are not
Extraordinary Distributions made during such twelve (12) month
period and not previously included in the calculation of an
adjustment pursuant to Section 8(C).
(vi) "Equity Agreement" shall mean each of those
certain Redemption Agreements relating to the redemption of an
aggregate of three hundred thirty-six
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<PAGE> 21
thousand nine hundred forty-three (336,943) shares of Class A
Common Stock from certain employees of the Corporation.
(vii) "Fair Market Value" shall mean, as to shares of
Class A Common Stock or Series A Preferred Stock or any other
security which is not publicly traded or of any other property
the fair value thereof as determined by an independent
investment banking or appraisal firm experienced in the
valuation of such securities or property selected in good
faith by the Board of Directors of the Corporation or a
committee thereof, or, if no such investment banking or
appraisal firm is in the good faith judgment of the Board of
Directors or such committee available to make such
determination, as determined in good faith by the Board of
Directors of the Corporation or such committee. "Fair Market
Value" of any publicly traded security of the Corporation or
any other issuer shall mean the average of the Current Market
Prices of such security for each day of the Adjustment Period.
(viii) "Non-Dilutive Amount" in respect of an
issuance, sale or exchange by the Corporation of any right or
warrant to purchase or acquire shares of Class A Common Stock
(including any security convertible into or exchangeable for
shares of Class A Common Stock) shall mean the amount equal to
(x) the product of (I) (A) in the case of any security that is
not publicly traded, the Fair Market Value of a share of Class
A Common Stock on the day immediately preceding (and without
giving effect to) such issuance, sale or exchange, or (B) in
the case of any publicly traded security, the Fair Market
Value of a share of Class A Common Stock on the trading day
immediately preceding the first public announcement of such
issuance, sale or exchange and (II) the maximum number of
shares of Class A Common Stock which could be acquired on such
date upon the exercise in full of such rights and warranties
(including upon the conversion or exchange of all such
convertible or exchangeable securities), whether or not
exercisable (or convertible or exchangeable) at such date,
minus (y) the aggregate amount payable pursuant to such right
or warrant to purchase or acquire such maximum number of
shares of Class A Common Stock; provided, however, that in no
event shall the Non-Dilutive Amount be less than zero. For
purposes of the foregoing sentence, in the case of a security
convertible into or exchangeable for shares of Class A Common
Stock, the amount payable pursuant to a right or warrant to
purchase or acquire shares of Class A Common Stock shall be
the Fair Market Value of such security
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<PAGE> 22
on the date of the issuance, sale or exchange of such
security by the Corporation.
(ix) "Pro Rata Repurchase" shall mean any purchase of
shares of Class A Common Stock by the Corporation or any
subsidiary thereof, whether for cash, shares of capital stock
of the Corporation, other securities of the Corporation,
evidences of indebtedness of the Corporation or any other
person or any other property (including shares of a subsidiary
of the Corporation), or any combination thereof, effected
while any of the shares of Series A Preferred Stock are
outstanding, pursuant to any tender offer or exchange offer
subject to Section 13(e) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), or any successor
provision of law, or pursuant to any other offer available to
substantially all holders of Common Stock; provided, however,
that no purchase of shares by the Corporation or any
subsidiary thereof made in open market transactions shall be
deemed a Pro Rata Repurchase. For purposes of this Section
8(G), shares shall be deemed to have been purchased by the
Corporation or any subsidiary thereof "in open market
transactions" if they have been purchased substantially in
accordance with the requirements of Rule 10b-18 as such rule
is in effect under the Exchange Act, on the date shares of
Series A Preferred Stock are initially issued by the
Corporation or on such other terms and conditions as the Board
of Directors of the Corporation or a committee thereof shall
have determined are reasonably designed to prevent such
purchases from having a material effect on the trading market
for the Class A Common Stock. The "Effective Date" of a Pro
Rata Repurchase shall mean the applicable expiration date
(including all extensions thereof) of any tender offer which
is a Pro Rata Repurchase, or the date of purchase with respect
to any Pro Rata Repurchase which is not a tender offer.
(H) Whenever an adjustment to the Conversion Ratio of the
Series A Preferred Stock is required pursuant hereto, the Corporation shall
forthwith deliver to the transfer agent(s) for the Class A Common Stock and the
Series A Preferred Stock if there be one, and file with the Secretary of the
Corporation, a statement signed by two officers of the Corporation stating the
adjusted Conversion Ratio determined as provided herein, and the resulting
Conversion Ratio of the Series A Preferred Stock. Such statement shall set forth
in reasonable detail such facts as shall be necessary to show the reason and the
manner of computing such adjustment, including any determination of Fair Market
Value involved in such computation. Promptly after each adjustment to the
Conversion Ratio of the Series A Preferred Stock, the
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<PAGE> 23
Corporation shall mail a notice thereof and of the then prevailing Conversion
Ratio to each holder of Series A Preferred Stock.
Section 9. Ranking; Retirement of Shares.
(A) The Series A Preferred Stock shall rank senior to the
Common Stock, including the Class A Common Stock, the Class B Common Stock and
the Class C Common Stock, as to the payment of dividends and the distribution of
assets on liquidation, dissolution and winding-up of the Corporation, and,
unless otherwise provided in these Restated Articles of Incorporation, as the
same may be amended, or a Certificate of Designations relating to a subsequent
series of Preferred Stock, $0.0001 par value, of the Corporation, the Series A
Preferred Stock shall rank senior to all other series of the Corporation's
Preferred Stock, $0.0001 par value, as to payment of dividends and the
distribution of assets on liquidation dissolution or winding-up.
(B) Any shares of Series A Preferred Stock acquired by the
Corporation by reason of the conversion of such shares as provided hereby, or
otherwise so acquired, shall be cancelled as shares of Series A Preferred Stock
and resorted to the status of authorized but unissued shares of Preferred Stock,
$0.0001 par value, of the Corporation, undesignated as to series, and may
thereafter be reissued as part of a new series of such Preferred Stock as
permitted by law.
Section 10. Miscellaneous.
(A) Notwithstanding any other provisions of these Restated
Articles of Incorporation, holders of Series A Preferred Stock shall be given at
least ten (10) days' prior written notice of the record date for determining
holders of Class A Common Stock entitled to vote on any matter before the
Corporation, during which time holders of Series A Preferred Stock may convert
their shares of Series A Preferred Stock pursuant to Section 5.
(B) All notices referred to herein shall be in writing, and
all notices hereunder shall be deemed to have been given upon the earlier of
receipt thereof or three (3) Business Days after the mailing thereof if sent by
registered mail (unless first-class mail shall be specifically permitted for
such notice under the terms of these Restated Articles of Incorporation) with
postage prepaid, addressed: (i) if to the Corporation, to its office at 300
Sixth Street, Pittsburgh, Pennsylvania 15222 (Attention: Secretary) or to the
transfer agent for the Series A Preferred Stock, or other agent of the
Corporation designated as permitted by these Restated Articles of Incorporation
or (ii) if to any holder of the Series A Preferred Stock or Class A Common
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<PAGE> 24
Stock, as the case may be, to such holder at the address of such holder as
listed in the stock record books of the Corporation (which may include the
records of any transfer agent for the Series A Preferred Stock or Class A Common
Stock, as the case may be) or (iii) to such other address as the Corporation or
any such holder, as the case may be, shall have designated by notice similarly
given.
(C) In the event that, at any time as a result of an
adjustment made pursuant to Section 8, the holder of any share of the Series A
Preferred Stock upon thereafter surrendering such shares for conversion shall
become entitled to receive any shares or other securities of the Corporation
other than shares of Class A Common Stock, the Conversion Ratio in respect of
such other shares or securities so receivable upon conversion of shares of
Series A Preferred Stock shall thereafter be adjusted, and shall be subject to
further adjustment from time to time, in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to Class A Common Stock
contained in Section 8 hereof, and the provisions of each of the other Sections
hereof with respect to the Class A Common Stock shall apply on like or similar
terms to any such other shares or securities.
(D) The Corporation shall pay any and all stock transfer and
documentary stamp taxes that may be payable in respect of any issuance or
delivery of shares of Series A Preferred Stock or shares of Class A Common Stock
or other securities issued on account of Series A Preferred Stock pursuant
hereto or certificates representing such shares or securities. The Corporation
shall not, however, be required to pay any such tax which may be payable in
respect of any transfer involved in the issuance or delivery of shares of Series
A Preferred Stock or Class A Common Stock or other securities in a name other
than that in which the shares of Series A Preferred Stock with respect to which
such shares or other securities are issued or delivered were registered, or in
respect of any payment to any person with respect to any such shares or
securities other than a payment to the registered holder thereof, and shall not
be required to make any such issuance, delivery or payment unless and until the
person otherwise entitled to such issuance, delivery or payment has paid to the
Corporation the amount of any such tax or has established, to the satisfaction
of the Corporation, that such tax has been paid or is not payable.
(E) In the event that a holder of shares of Series A Preferred
Stock shall not by written notice designate the name in which shares of Class A
Common Stock to be issued upon conversion of such shares should be registered or
to whom payment upon redemption of shares of Series A Preferred Stock should be
made or the address to which the certificate or certificates
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<PAGE> 25
representing such shares, or such payment, should be sent, the Corporation shall
be entitled to register such shares, and make such payment, in the name of the
holder of such Series A Preferred Stock as shown on the records of the
Corporation and to send the certificate or certificates representing such
shares, or such payment, to the address of such holder shown on the records of
the Corporation.
(F) Unless otherwise provided in these Restated Articles of
Incorporation, as the same may be amended, all payments in the form of
dividends, distributions on voluntary or involuntary dissolution, liquidation or
winding up or otherwise made upon the shares of Series A Preferred Stock and any
other stock ranking on a parity with the Series A Preferred Stock with respect
to such dividend or distribution shall be made pro rata, so that amounts paid
per share on the Series A Preferred Stock and such other stock shall in all
cases bear to each other the same ratio that the required dividends,
distributions or payments, as the case may be, then payable per share on the
shares of the Series A Preferred Stock and such other stock bear to each other.
(G) The Corporation may appoint, and from time to time
discharge and change, a transfer agent for the Series A Preferred Stock. Upon
any such appointment or discharge of a transfer agent, the Corporation shall
send notice thereof by first-class mail, postage-prepaid, to each holder of
record of Series A Preferred Stock.
B. Common Stock.
The powers, preferences and rights, and the qualifications,
limitations or restrictions thereof, pertaining to the Class A Common Stock and
the Class B Common Stock (collectively, with any other shares of common stock of
the Corporation hereafter authorized for issuance, the "Common Stock") are as
follows:
(1) Voting Rights.
(a) Except as set forth herein, each outstanding
share of Class A Common Stock and Class B Common Stock shall be entitled to vote
together as a single class on each matter on which the shareholders of the
Corporation shall be entitled to
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<PAGE> 26
vote, and each holder of Class A Common Stock and Class B Common Stock shall be
entitled to one vote for each share of such stock held by such holder.
(b) A majority of the outstanding shares of Common
Stock entitled to vote, present in person or represented by proxy, shall
constitute a quorum at a meeting of shareholders, and the affirmative vote of
the majority of outstanding shares of Common Stock present in person or
represented by proxy at the meeting and entitled to vote on the subject matter
shall be the act of the shareholders.
(2) Conversion of Class B Common Stock into Class A
Common Stock.
(a) The Corporation shall have the right, at any time
and from time to time, by resolution adopted by the Board of Directors, to
convert any or all of the shares of Class B Common Stock held by any or all of
the holders of shares of Class B Common Stock into the same number of shares of
Class A Common Stock.
(b) The Corporation shall notify in writing the
holders of shares of Class B Common Stock whose shares have been converted into
shares of Class A Common Stock (the "Converting Shares") within sixty (60) days
following the adoption of the resolution referred to in Paragraph B(2)(a),
above. Each such holder of Converting Shares (a "Converting Shareholder") shall,
within ten (10) days of the receipt of such notice, surrender the certificate or
certificates representing the Converting Shares at
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<PAGE> 27
the principal office of the Corporation (or such other office or agency of the
Corporation as the Corporation may designate by notice in writing to the holders
of the Class B Common Stock). Promptly after such surrender of the certificate
or certificates evidencing the Converting Shares, the Corporation shall issue
and mail or otherwise deliver to the Converting Shareholder, at such
shareholders' address in the records of the Corporation (or to such other
address as is specified at the time of surrender of such certificate of
certificates), the certificate or certificates (which, if issued prior to the
date of a Public Offering of Common Stock, shall contain such legends as were
set forth on the surrendered certificate or certificates) evidencing the shares
of Class A Common Stock issuable upon such conversion, and the Corporation shall
also mail or otherwise deliver to the Converting Shareholder a certificate
(which shall contain such legends as were set forth on the surrendered
certificate or certificates) representing any shares of Class B Common Stock
which were represented by the certificate or certificates surrendered to the
Corporation in connection with such conversion but which were not Converting
Shares and, therefore, were not converted. Such conversion, to the extent
permitted by law, shall be deemed to have been effected as of the close of
business on the date on which the resolution described in Paragraph B (2)(a),
above, was adopted by the Board of Directors, and at such time the rights of the
holder of such Converting Shares as such holder shall cease, and such Converting
Shareholder shall be
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<PAGE> 28
deemed to have become the holder or holders of record of such shares of Class A
Common Stock. Upon issuance of any shares of Class A Common Stock upon
conversion of any Converting Shares in accordance with this Paragraph B(2), such
shares of Class A Common Stock shall be deemed to be duly authorized, validly
issued, fully paid and nonassessable. For the purposes of this Paragraph B(2)
the term "Public Offering" means a public offering of securities of the
Corporation pursuant to an effective registration statement under the Securities
Act of 1933, as amended.
(c) Reservation; Transfer Tax.
(i) The Corporation shall at all times reserve and
keep available out of its authorized but unissued shares of Class A Common
Stock, or its treasury shares, solely for the purpose of issue upon conversion
of the Class B Common Stock, as herein provided, such number of shares of Class
A Common Stock as shall then be issuable upon a conversion of all issued and
outstanding shares of Class B Common Stock.
(ii) The issue of certificates for shares of Class A
Common Stock upon conversion of shares of Class B Common Stock shall be made
without charge to the holders of such shares for any issue tax in respect
thereof, or other cost incurred by the Corporation in connection with such
conversion; provided, that the Corporation shall not be required to pay any tax
which may be payable in respect of any transfer involving the issue and
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<PAGE> 29
delivery of any certificate in a name other than that of the holder of the
Converting Shares.
(3) Dividends. The holders of Common Stock of the Corporation
shall be entitled to receive, to the extent permitted by law, such dividends as
may be declared from time to time by the Board of Directors.
FIFTH: The Corporation shall at all times reserve and keep available out of its
authorized but unissued Class B Common Stock 5,956,079 shares of Class B Common
Stock which may be purchased pursuant to certain Stock Subscription Warrants
issued by the Corporation.
Any and all shares of Class B Common Stock which may be
acquired upon the exercise of the aforesaid Stock Subscription Warrants shall,
upon receipt by the Corporation of the purchase price therefor, be deemed fully
paid shares and not liable to any further call or assessment.
SIXTH: The Corporation is to have perpetual existence.
SEVENTH: The private property of the shareholders of the Corporation shall not
be subject to the payment of corporate debts to any extent whatsoever.
EIGHTH: The following provisions are inserted for the management of the business
and for the conduct of the affairs of the Corporation, and for the further
definition, limitation and regulation of the powers of its directors and
shareholders:
(1) The number of directors of the Corporation
shall be such as from time to time shall be fixed by
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<PAGE> 30
the Restated By-Laws of the Corporation. Election of
the directors need not be by written ballot unless the
Restated By-Laws of the Corporation so provide.
(2) The Board of Directors shall have power without
the assent or vote of the shareholders:
(a) To determine the use and disposition of
any surplus or net profits; and to fix the times
for the declaration and payment of dividends; and
(b) To determine from time to time whether,
and to what extent, and at what times and places, and
under what conditions and regulations, the accounts
and books of the Corporation (other than the stock
ledger), or any of them, shall be open to the
inspection of the shareholders.
(3) In addition to the powers and authorities
hereinbefore or by statute expressly conferred upon them, the
directors are hereby empowered to exercise all such powers and
do all such acts and things as may be exercised or done by the
Corporation; subject, nevertheless, to the provisions of the
statutes of the Commonwealth of Pennsylvania, of these
Restated Articles of Incorporation, and to any by-law from
time to time made by the shareholders; provided, however, that
no by-law so made shall invalidate any prior act of the
directors which would have been valid if such by-law had not
been made.
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<PAGE> 31
NINTH: The Corporation may, to the full extent permitted by the BCL, indemnify
all persons whom it may indemnify pursuant thereto.
TENTH: The Corporation reserves the right to amend, alter, change or repeal any
provision contained in these Restated Articles of Incorporation, in the manner
now or hereafter prescribed by statute and in these Restated Articles of
Incorporation, and all rights conferred upon shareholders, directors and
officers herein are granted subject to this reservation.
ELEVENTH: To the fullest extent permitted by the BCL, a director of the
Corporation shall not be personally liable to the Corporation or its
shareholders for monetary damages for breaches of fiduciary duty as a director.
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<PAGE> 1
Exhibit 3.02(a)
- --------------------------------------------------------------------------------
RESTATED BY-LAWS
OF
EDUCATION MANAGEMENT CORPORATION
- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Article I -- Offices
Section 1.01. Registered Office ............................. 1
Section 1.02. Other Offices ................................. 1
Article II -- Meetings of Shareholders
Section 2.01. Annual Meetings ............................... 1
Section 2.02. Voting ........................................ 2
Section 2.03. Quorum ........................................ 3
Section 2.04. Special Meetings .............................. 4
Section 2.05. Notice of Meetings ............................ 4
Section 2.06. Action Without Meeting ........................ 4
Article III -- Directors
Section 3.01. Number and Term ............................... 5
Section 3.02. Resignations .................................. 5
Section 3.03. Vacancies ..................................... 5
Section 3.04. Removal ....................................... 6
Section 3.05. Powers ........................................ 6
Section 3.06. Committees of the Board of Directors .......... 6
Audit Committee .................... 6
Compensation Committee ............. 7
Other Committees ................... 8
Section 3.07. Meetings ...................................... 9
Special Meetings ................... 10
Regular Meetings ................... 10
Section 3.08. Quorum ........................................ 10
Section 3.09. Compensation .................................. 11
Section 3.10. Action Without Meeting; Presence
at Meetings ........................ 11
Section 3.11. Director's Duties and Obligations ............. 12
Standard of Care ................... 12
Consideration of Factors ........... 13
Presumption ........................ 13
Section 3.12. Limitation of Personal Liability of
Directors .......................... 14
Article IV -- Officers
Section 4.01. Officers ...................................... 14
Section 4.02. Other Officers and Agents ..................... 15
Section 4.03. Resignation; Removal .......................... 15
Section 4.04. Chairman ...................................... 15
</TABLE>
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<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Section 4.05. President ..................................... 16
Section 4.06. Executive, Senior and Other Vice
Presidents ......................... 16
Section 4.07. Treasurer ..................................... 17
Section 4.08. Secretary ..................................... 18
Section 4.09. Controller .................................... 18
Section 4.10. Assistant Secretaries ......................... 19
Section 4.11. Assistant Treasurers .......................... 19
Article V -- Miscellaneous
Section 5.01. Certificates of Stock ......................... 19
Section 5.02. Transfer Agents and Registrars ................ 20
Section 5.03. Lost Certificates ............................. 20
Section 5.04. Transfer of Shares ............................ 21
Section 5.05. Shareholders Record Date ...................... 22
Section 5.06. Dividends ..................................... 23
Section 5.07. Registered Shareholders ....................... 23
Section 5.08. Seal .......................................... 24
Section 5.09. Fiscal Year ................................... 24
Section 5.10. Checks ........................................ 24
Section 5.11. Execution of Proxies .......................... 24
Section 5.12. Notice and Waiver of Notice ................... 24
Section 5.13. Reference to Articles of
Incorporation ...................... 25
Article VI -- Amendments ................................................. 26
</TABLE>
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<PAGE> 4
RESTATED BY-LAWS
OF
EDUCATION MANAGEMENT CORPORATION
ARTICLE I
Offices
Section 1.01. Registered Office. The registered office of the
Corporation in the Commonwealth of Pennsylvania shall be established and
maintained at 300 Sixth Avenue, Pittsburgh, Pennsylvania, or such other location
as may be designated by the Board of Directors from time to time.
Section 1.02. Other Offices. The Corporation may have other
offices, either within or without the Commonwealth of Pennsylvania, at such
place or places as the Board of Directors may from time to time appoint or the
business of the Corporation may require.
ARTICLE II
Meetings of Shareholders
Section 2.01. Annual Meetings. Annual meetings of shareholders
for the election of directors and for the transaction of any proper business
shall be held at such place, either within or without the Commonwealth of
Pennsylvania. An annual meeting of the shareholders shall be held on the first
______ of ________ in each year; or, if that day shall fall upon a holiday,
<PAGE> 5
then on the next succeeding business day, at 10:00 A.M. If the annual meeting of
shareholders is not held on the date designated therefor, the Board of Directors
shall cause the meeting to be held as soon thereafter as convenient. At each
annual meeting the shareholders entitled to vote shall elect a Board of
Directors and they may transact such other corporate business as may properly be
brought before the meeting.
Section 2.02. Voting. Each shareholder entitled to vote in
accordance with the terms of the Articles of Incorporation and in accordance
with the provisions of these Restated By-Laws shall be entitled to one vote, in
person or by proxy, for each share of stock outstanding and entitled to vote
held by such shareholder, but no proxy shall be voted after three years from its
date unless such proxy provides for a longer period. Upon the demand of any
shareholder, the vote for directors and the vote upon any question before the
meeting shall be by written ballot. When a quorum is present at any meeting, the
vote of the holders of a majority of the shares of stock outstanding and having
voting power present in person or represented by proxy shall decide any question
brought before such meeting, unless the question is one upon which by express
provision of a statute or of the Articles of Incorporation a different vote is
required, in which case such express provision shall govern and control the
decision of such question.
The officer who has charge of the stock ledger of the
Corporation shall prepare and make, at least 10 days before every meeting of
shareholders, a complete list of the shareholders
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<PAGE> 6
entitled to vote at the meeting, arranged in alphabetical order, and showing the
address of each shareholder and the number of shares registered in the name of
each shareholder. Such list shall be open to the examination of any shareholder,
for any purpose germane to the meeting, during ordinary business hours, for a
period of at least 10 days prior to the meeting, either at a place within the
city or town where the meeting is to be held, which place shall be specified in
the notice of the meeting, or, if not so specified, at the place where the
meeting is to be held. The list shall also be produced and kept at the time and
place of the meeting during the whole time thereof and may be inspected by any
shareholder who is present.
Section 2.03. Quorum. At all meetings of shareholders, except
as otherwise required by statute or by the Articles of Incorporation, the
presence, in person or by proxy, of the holders of a majority of the shares of
stock outstanding and entitled to vote thereat shall be requisite for and shall
constitute a quorum for the transaction of business. In case a quorum shall not
be present at any meeting, a majority in interest of the shareholders entitled
to vote thereat, present in person or by proxy, shall have power to adjourn the
meeting from time to time, with prompt notice of the place, date and time of the
adjourned meeting given to all shareholders, until the requisite amount of
shares entitled to vote shall be present or represented. At any such adjourned
meeting at which the requisite amount of shares entitled to vote shall be
present or represented, any business may be transacted which might have been
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<PAGE> 7
transacted at the meeting as originally notified. If the adjournment is for more
than 30 days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
shareholder of record entitled to vote at the meeting.
Section 2.04. Special Meetings. Special meetings of the
shareholders for any purpose or purposes, unless otherwise prescribed by statute
or by the Articles of Incorporation, may be called by the Chairman, the
President or the Secretary and shall be called by the Chairman, the President or
the Secretary at the request of the Board of Directors or at the request in
writing of the holders of a majority of the shares of each class of stock
outstanding and having voting power. Such request shall state the purpose or
purposes of the proposed meeting. Special meetings may be held at such time and
place, within or without the Commonwealth of Pennsylvania, as shall be stated in
the notice of the meeting.
Section 2.05. Notice of Meetings. Written notice, stating the
place, date and time of any meeting, annual or special, and, if a special
meeting, the purpose or purposes for which the meeting is called, shall be given
to each shareholder entitled to vote thereat, not less than 20 nor more than 60
days before the date of the meeting.
Section 2.06. Action Without Meeting. Unless otherwise
provided in the Articles of Incorporation, any action required to be taken at
any annual or special meeting of shareholders, or any action which may be taken
at any annual or special meeting of the
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<PAGE> 8
shareholders, may be taken without a meeting, without prior notice and without a
vote, if a consent in writing, setting forth the action so taken, shall be
signed by the holders of 100% of the outstanding voting stock.
ARTICLE III
Directors
Section 3.01. Number and Term. The number of directors which
shall constitute the whole Board of Directors shall be seven. The directors
shall be elected at the annual meeting of the shareholders and each director
shall be elected to hold office until his successor shall be elected and
qualified. Directors need not be shareholders.
Section 3.02. Resignations. Any director or member of a
committee may resign at any time. Such resignation shall be made in writing and
shall take effect at the time specified therein or, if no time be specified, at
the time of its receipt by the President or the Secretary. The acceptance of a
resignation shall not be necessary to make it effective.
Section 3.03. Vacancies. Vacancies and newly created
directorships resulting from any increase in the authorized number of directors
shall be filled by a majority of the remaining members of the Board of Directors
though less than a quorum, and each person so elected shall be a director until
his successor is elected by the shareholders at the next annual
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<PAGE> 9
meeting of the shareholders or at any special meeting duly called for that
purpose and held prior thereto.
Section 3.04. Removal. Any director or directors may be
removed for cause at any time by the affirmative vote of the holders of a
majority of all the shares of stock outstanding and entitled to vote, at a
special meeting of the holders of such shares, and the vacancies thus created
may be filled, at such meeting or at any subsequent meeting, by the affirmative
vote of a majority in interest of the shareholders entitled to vote. For the
purpose of this by-law, "cause" with respect to a director's removal shall mean
such director's reckless disregard for his duties to the Corporation, bad faith,
gross negligence, willful misconduct or fraud.
Section 3.05. Powers. The business and affairs of the
Corporation shall be managed by the Board of Directors, which may exercise all
the powers of the Corporation and do all lawful acts and things which are not
conferred upon or reserved to the shareholders by law, by the Articles of
Incorporation or by these Restated By-Laws.
Section 3.06. Committees of the Board of Directors.
(a) Audit Committees. The Board of Directors may, by
resolution passed by the affirmative vote of 75% of the members of the
whole Board of Directors, designate an Audit Committee, to consist of
three directors, none of whom (but one) shall be employees or officers
of the Corporation. A majority of the members of the Audit Committee
shall constitute a quorum.
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<PAGE> 10
The Audit Committee shall from time to time review and make
recommendations to the Board of Directors with respect to the selection
of independent auditors, the fees to be paid such auditors, the
adequacy of the audit and accounting procedures of the Corporation, and
such other matters as may be specifically delegated to the Committee by
the Board of Directors. In this connection the Audit Committee shall,
at its request, meet with representatives of the independent auditors
and with the financial officers of the Corporation separately or
jointly.
(b) Compensation Committee. The Board of Directors may, by
resolution passed by the affirmative vote of 75% of the members of the
whole Board of Directors, designate a Compensation Committee, to
consist of three directors, none of whom (but one) shall be employees
or officers of the Corporation. A majority of the members of the
Compensation Committee shall constitute a quorum, except that no quorum
shall be present if the only members in attendance are directors who
are not employees or officers of the Corporation.
The Compensation Committee shall have the sole power to
recommend to the Board of Directors the management remuneration
policies of the Corporation including but not limited to increases in
salary rates and fringe benefits of elected officers, other
remuneration plans such as incentive compensation, deferred
compensation and stock option plans, directors' compensation and
benefits and such other matters
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<PAGE> 11
as may be specifically delegated to the Committee by the Board of
Directors. In addition, the Compensation Committee shall have power to
authorize or recommend transfers of shares of any class of stock which
may, under agreements that are exhibits to and made a part of the
Stockholders Agreement, be effected only upon the recommendation or
authorization, as the case may be, of the Compensation Committee.
(c) Other Committees. The Board of Directors may, by
resolution passed by the affirmative vote of 75% of the members of the
whole Board of Directors, designate one or more additional committees,
each committee to consist of three or more of the directors of the
Corporation at least one of whom shall not be an employee or officer of
the Corporation. The Board of Directors may designate one or more
directors as alternate members of any such committee, who may replace
any absent or disqualified member at any meeting of the committee. In
the absence or disqualification of a member of any such committee, the
members thereof present at any meeting and not disqualified from
voting, whether or not they constitute a quorum, may unanimously
appoint another member of the Board of Directors to act at the meeting
in the place of any such absent or disqualified member; provided, that
no quorum shall be present in such case if the only members in
attendance are directors who are employees or officers of the
Corporation. Any such committee, to the extent provided in the
resolution of the Board of Directors, shall have and may exercise all
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<PAGE> 12
the powers and authority of the Board of Directors in the management of
the business and affairs of the Corporation, and may authorize the seal
of the Corporation to be affixed to all papers which may require it;
but no such committee shall have the power or authority in reference to
amending the Articles of Incorporation, adopting an agreement of merger
or consolidation, recommending to the shareholders the sale, lease or
exchange of all or substantially all of the Corporation's property and
assets, recommending to the shareholders a dissolution of the
Corporation or a revocation of a dissolution, or amending these
Restated By-Laws or approving or recommending any other Significant
Transaction (as such term is defined in the Stockholders Agreement);
and, unless the resolution or the Articles of Incorporation expressly
so provides, no such committee shall have the power or authority to
declare a dividend or to authorize the issuance of stock. Such
committee or committees shall have such name or names as may be
determined from time to time by resolution adopted by the Board of
Directors. Each committee shall keep regular minutes of its meetings
and report the same to the Board of Directors when required.
Section 3.07. Meetings. Meetings of the Board of Directors
shall be held at such place, either within or without the Commonwealth of
Pennsylvania, as the Board of Directors shall from time to time designate or as
may be specified in the notice of such meeting.
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<PAGE> 13
Special Meetings of the Board of Directors may be held at any
time upon the call of the Chairman, the President or the Secretary by notice,
stating the place, date and time of such meeting, and the purpose or purposes
for which it is called, to each director given not less than 14 days, or not
less than 21 days in the case of notice given by mail, before such meeting.
Special meetings shall be called by the Chairman, the President or the Secretary
in like manner and on like notice on the written request of two directors.
Regular Meetings of the Board of Directors may be held without
notice at such time and at such place as shall from time to time be determined
by the Board of Directors. The first meeting of a newly elected Board of
Directors shall be held without notice as soon as practicable after each annual
meeting of the shareholders at the same place at which such meeting was held,
provided a quorum is present. If a quorum is not present, such first meeting may
be held at such time and at such place as shall be specified in a notice given
as herein provided for special meetings of the Board of Directors.
Section 3.08. Quorum. Except as hereinafter provided, not less
than 70% of the total number of directors shall constitute a quorum for the
transaction of business. If at any meeting of the Board of Directors there shall
be less than a quorum present, a majority of those present may adjourn the
meeting from time to time until a quorum is obtained, and notice of the time and
place of the adjourned meeting shall be given to each director not less than 10
days before such meeting. The vote of the majority of the directors present at a
meeting at
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<PAGE> 14
which a quorum is present shall be the act of the Board of Directors unless a
statute or the Articles of Incorporation shall require a vote of a greater
number; provided, however, that the following actions shall require the
affirmative vote of 75% of the members of the whole Board of Directors:
(a) adoption of incentive stock option plans;
(b) designation of a Committee pursuant to Section 3.06
of this Article III; and
(c) modification of these Restated By-Laws when such power is
conferred upon the Board of Directors by the Articles of Incorporation.
provided, further, that such other actions as require the affirmative vote of
more than the majority of the whole Board of Directors pursuant to the
Stockholders Agreement may only be validly approved by such greater number.
Section 3.09. Compensation. Unless otherwise restricted by the
Articles of Incorporation, the Board of Directors shall have the authority to
fix the compensation of directors. The directors shall be paid their reasonable
expenses, if any, of attendance at each meeting of the Board of Directors and
may be paid a fixed sum for attendance at each meeting of the Board of Directors
or a stated salary as directors. No such payment shall preclude any director
from serving the corporation in any other capacity and receiving compensation
therefor.
Section 3.10. Action Without Meeting; Presence at
Meetings. Unless otherwise restricted by the Articles of
Incorporation, any action required or permitted to be taken at
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<PAGE> 15
any meeting of the Board of Directors or of any committee thereof may be taken
without a meeting if all the members of the Board of Directors or the committee,
as the case may be, consent thereto in writing, and the writing or writings are
filed with the minutes of proceedings of the Board of Directors or committee.
Unless otherwise restricted by the Articles of Incorporation,
members of the Board of Directors, or any committee designated by such Board of
Directors, may participate in a meeting of such Board of Directors or committee
by means of conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other, and such
participation in a meeting shall constitute presence in person at such meeting.
Section 3.11. Director's Duties and Obligations.
(a) Standard of Care. A director of the Corporation
shall stand in a fiduciary relation to the Corporation and shall
perform his duties as a director, including his duties as a member of
any committee of the Board of Directors upon which he may serve, in
good faith, in a manner he reasonably believes to be in the best
interests of the Corporation, and with such care, including reasonable
inquiry, skill and diligence, as a person of ordinary prudence would
use under similar circumstances. In performing his duties, a director
shall be entitled to rely in good faith on information, opinions,
reports or statements, including financial statements and other
financial data, in each case prepared or presented by any of the
following:
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<PAGE> 16
(1) One or more officers or employees of the
Corporation whom the director reasonably believes to be
reliable and competent in the matters presented;
(2) Counsel, public accountants or other persons as
to matters which the director reasonably believes to be within
the professional or expert competence of such person; or
(3) A committee of the Board of Directors upon which
he does not serve, duly designated in accordance with law, as
to matters within its designated authority, which committee
the director reasonably believes to merit confidence.
A director shall not be considered to be acting in good faith
if he has knowledge concerning the matter in question that would cause
his reliance to be unwarranted.
(b) Consideration of Factors. In discharging the duties of
their respective positions, the Board of Directors, committees of the
Board of Directors and individual directors may, in considering the
best interests of the Corporation, consider the effects of any action
upon employees, upon suppliers and customers of the Corporation and
upon communities in which offices or other establishments of the
Corporation are located, and all other pertinent factors. The
consideration of those factors shall not constitute a violation of the
standard set forth in paragraph (a) of this Section.
(c) Presumption. Absent breach of fiduciary duty,
lack of good faith or self-dealing, actions taken as a
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<PAGE> 17
director or any failure to take any action shall be presumed
to be in the best interests of the Corporation.
Section 3.12. Limitation of Personal Liability of Directors. A
director of the Corporation shall not be personally liable to the Corporation or
its shareholders or to any other person for monetary damages as such for any
action taken, or for any failure to take any action, unless (i) the director has
breached or failed to perform the duties of his office under these Restated
By-Laws or applicable law and (ii) the breach or failure to perform constitutes
self-dealing, willful misconduct or recklessness. The limitation on liability
appearing in this Section 3.12 shall not apply, however, to the responsibility
or liability of a director pursuant to any criminal statute or the liability of
a director for the payment of taxes pursuant to local, state or federal law.
ARTICLE IV
Officers
Section 4.01. Officers. The officers of the Corporation shall
be the Chairman, a President, a Secretary and a Treasurer, all of whom shall be
elected by the Board of Directors, and who shall hold office until their
successors shall be elected and qualified. The Board of Directors also may elect
one or more Vice Presidents and one or more Assistant Secretaries and Assistant
Treasurers. Two or more offices, except the offices of President and Secretary,
may be held by the same person. The officers shall be elected annually by the
Board of
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<PAGE> 18
Directors at its first meeting following the annual meeting of shareholders and
shall hold office until their successors are chosen and qualify.
Section 4.02. Other Officers and Agents. The Board of
Directors may appoint such other officers and agents as may from time to time
appear to be necessary or advisable in the conduct of the affairs of the
Corporation, who shall hold their offices for such terms and shall exercise such
powers and perform such duties as shall be determined from time to time by the
Board of Directors.
Section 4.03. Resignation; Removal. Any officer may resign at
any time. Such resignation shall be made in writing and shall take effect at the
time specified therein, and if no time be specified, at the time of its receipt
by the Chairman, the President or the Secretary. The acceptance of a resignation
shall not be necessary to make it effective. Any officer may be removed, for or
without cause, at any time by the affirmative vote of a majority of the Board of
Directors, excluding, however, that officer if he also is a director. Any
vacancy occurring in any office shall be filled for the unexpired portion of the
term by the Board of Directors.
Section 4.04. Chairman. The Chairman shall be the chief
executive officer of the Corporation and shall have the general and active
management of the business of the Corporation and general and active supervision
and direction over the other officers, agents and employees and shall see that
their duties are properly performed. The Chairman shall, if present, preside at
each meeting of the shareholders and of the Board of Directors
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<PAGE> 19
and shall be a member of the Compensation Committee and of any other Committee
to which he may be appointed by the Board of Directors. The Chairman shall
perform all duties incident to the Office of Chairman and chief executive
officer and such other duties as may from time to time be assigned to him by the
Board of Directors. The offices of Chairman and President may be held by the
same individual.
Section 4.05. President. The President shall be the chief
operating officer of the Corporation and shall have general and active
supervision and direction over the business and affairs of the Corporation and
over its several officers, subject however, to the direction of the Chairman and
the control of the Board of Directors. He shall perform all duties incident to
the office of President and such other duties as from time to time may be
assigned to him by the Board of Directors, the Chairman, or these Restated
By-Laws. At the request of the Chairman, or in the case of his absence or
inability to act, the President shall perform the duties of the Chairman and
when so acting shall have all the powers of, and be subject to all the
restrictions upon, the Chairman.
Section 4.06. Executive, Senior and Other Vice Presidents. The
Vice Presidents (including Executive and Senior Vice Presidents), if any,
respectively shall have such powers and perform such duties as may be assigned
to them from time to time by the Board of Directors, the Chairman or the
President. In the absence of the Chairman and the President, or in the event of
the inability of the Chairman and the President to act, the Executive Vice
Presidents, if any, in the order of their annual election,
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<PAGE> 20
shall have authority to exercise the power and perform the duties of the
Chairman and of the President. In the absence of the Chairman, the President and
any Executive Vice President, or in the event of the inability of the Chairman,
the President and all of the Executive Vice Presidents to act, the Senior Vice
Presidents, if any, in the order of their annual election, shall have authority
to exercise the power and perform the duties of the Chairman and of the
President. In the absence of the Chairman, the President, any Executive Vice
President and any Senior Vice President, or in the event of the inability of the
Chairman, the President, all of the Executive Vice Presidents and all of the
Senior Vice Presidents to act, the Vice Presidents, if any, in the order of
their annual election, shall have authority to exercise the power and perform
the duties of the Chairman and of the President.
Section 4.07. Treasurer. The Treasurer shall have the care and
custody of all the funds of the Corporation and shall deposit the same in such
banks or other depositories as the Board of Directors, or any officer or
officers, or any officer and agent jointly, duly authorized by the Board of
Directors, shall, from time to time, direct or approve, he shall disburse the
funds of the Corporation under the direction of the Board of Directors, the
Chairman or the President. He shall keep a full and accurate account of all
moneys received and paid on account of the Corporation and shall render a
statement of his accounts whenever the Board of Directors shall require. He
shall perform all other necessary acts and duties in connection with the
administration of the financial affairs of the Corporation and shall generally
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<PAGE> 21
perform all the duties usually appertaining to the office of treasurer of a
corporation. When required by the Board of Directors, he shall give bonds for
the faithful discharge of his duties in such sums and with such sureties as the
Board of Directors shall approve.
Section 4.08. Secretary. The Secretary shall attend all
meetings of the Board of Directors and the shareholders and shall record all
votes and the minutes of all proceedings in a book to be kept for that purpose
and shall, when requested, perform like duties for all committees of the Board
of Directors. He shall attend to the giving of notice of all meetings of the
shareholders and, if notice is required, of meetings of the Board of Directors
and of committees thereof; he shall have custody of the corporate seal and, when
authorized by the Board of Directors, shall have authority to affix the same to
any instrument and, when so affixed, it shall be attested by his signature or by
the signature of the Treasurer or an Assistant Secretary or an Assistant
Treasurer. He shall keep and account for all books, documents, papers and
records of the Corporation, except those for which some other officer or agent
is properly accountable. He shall generally perform all the duties appertaining
to the office of secretary of a corporation. In the absence of the Secretary,
such person as shall be designated by the President shall perform his duties.
Section 4.09. Controller. The Controller shall perform such
duties as shall be assigned to him by the Chairman, the President or such Vice
President as may be responsible for financial matters. In the absence or
disability of the
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<PAGE> 22
Controller, his duties may be exercised by the Assistant Controller or the
Assistant Controllers, if any, in the order determined by the Board of Directors
or, failing such designation, in the order of their last elections to that
office.
Section 4.10. Assistant Secretaries. Each Assistant Secretary,
if any, shall perform such duties and have such powers as may, from time to
time, be assigned to him by the Board of Directors. In the absence or disability
of the Secretary, his duties shall be performed and his powers may be exercised
by the Assistant Secretary or the Assistant Secretaries, if any, in the order
determined by the Board of Directors or, failing such designation, in the order
of their last election to that office.
Section 4.11. Assistant Treasurers. Each Assistant Treasurer,
if any, shall perform such duties and have such powers as may, from time to
time, be assigned to him by the Board of Directors. In the absence or disability
of the Treasurer, his duties shall be performed and his powers may be exercised
by the Assistant Treasurer or the Assistant Treasurers, if any, in the order
determined by the Board of Directors or, failing such designation, in the order
of their last election to that office.
ARTICLE V
Miscellaneous
Section 5.01. Certificates of Stock. The shares of
stock of the Corporation shall be represented by certificates in
such form as shall be determined by the Board of Directors and
shall be signed by the Chairman or the President or a Vice
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<PAGE> 23
President and the Secretary or an Assistant Secretary or the Treasurer or an
Assistant Treasurer, and shall be sealed with the seal of the Corporation or a
facsimile thereof. The signatures of the officers upon a certificate may be
facsimiles. In case any officer who has signed or whose facsimile signature has
been placed upon a certificate shall have ceased to be such officer before such
certificate is issued, it may be issued by the Corporation with the same effect
as if he were such officer at the date of issue.
Section 5.02. Transfer Agents and Registrars. The Board of
Directors may, in its discretion, appoint one or more banks or trust companies
in such city or cities as the Board of Directors may deem advisable, from time
to time, to act as Transfer Agents and Registrars of the shares of stock of the
Corporation, and, upon such appointments being made, no certificate representing
shares shall be valid until countersigned by one of such Transfer Agents and
registered by one of such Registrars.
Section 5.03. Lost Certificates. In case any certificate
representing shares shall be lost, stolen or destroyed, the Board of Directors,
or any officer or officers authorized by the Board of Directors, may authorize
the issuance of a substitute certificate in place of the certificate so lost,
stolen or destroyed, and if the Corporation shall have a Transfer Agent and
Registrar, may cause or authorize such substitute certificate to be
countersigned by the appropriate Transfer Agent and registered by the
appropriate Registrar. In each such cases the applicant for a substitute
certificate shall furnish to the
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<PAGE> 24
Corporation, and to such of its Transfer Agents and Registrars as may require
the same, evidence to their satisfaction, in their discretion, of the loss,
theft or destruction of such certificate and of the ownership thereof, and also
such security or indemnity as may by them be required.
Section 5.04. Transfer of Shares. Transfers of shares shall be
made on the books of the Corporation only by the person named in the certificate
or by his attorney lawfully constituted in writing, and upon surrender and
cancellation of a certificate or certificates of a like number of shares, with
duly executed assignment and power of transfer endorsed thereon or attached
thereto, and with such proof of the authenticity of the signatures as the
Corporation or its agents may reasonably require. Prior to a Public
Distribution, all certificates evidencing shares of common stock of this
Corporation shall bear the following legend:
The securities represented by this certificate were issued in
a private placement, without registration under the Securities
Act of 1933 and any applicable state securities and "blue sky"
laws, and in reliance upon the holder's representation that
such securities were being acquired for investment and not for
resale. No transfer of such securities may be made on the
books of the issuer unless accompanied by an opinion of
counsel, satisfactory to the issuer, that such transfer may
properly be made without registration under the Securities Act
of 1933 or that such securities have been so registered under
a registration statement which is in effect at the date of
such transfer.
No shares of this Corporation shall be transferred except in compliance with the
above-described legend and the other restrictions on transfer contained in the
Stockholders Agreement and agreements that are exhibits thereto and made a part
thereof.
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<PAGE> 25
Further, prior to a Public Distribution, no transfer of any shares of common
stock to any person other than the Corporation may be effected unless the
Corporation shall have been furnished with an opinion of counsel, satisfactory
in form and substance to the Corporation, to the effect that such transfer may
properly be made without registration under the Securities Act of 1933 because
of the availability of an exemption from registration under that Act and the
rules and regulations promulgated thereunder and under any applicable state
securities or "blue sky" laws. The Board of Directors shall have the power to
waive the foregoing condition. For purposes of this by-law, the term "Public
Distribution" means a public offering of common stock of the Corporation
pursuant to an effective registration statement under the Securities Act of 1933
at the conclusion of which (i) the Corporation is required to register shares of
its common stock under Section 12(b) or (g) of the Securities Exchange Act of
1934 and (ii) 25% of the outstanding common stock of the Corporation shall have
been sold to the public pursuant to one or more effective registration
statements under the Securities Act of 1933.
Section 5.05. Shareholders Record Date. In order that the
Corporation may determine the shareholders entitled to notice of or to vote at
any meeting of shareholders or any adjournment thereof, or to express consent to
corporate action in writing without a meeting, or entitled to receive payment of
any dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action,
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<PAGE> 26
the Board of Directors may fix, in advance, a record date, which shall not be
more than 60 nor less than 10 days before the date of such meeting, nor more
than 60 days prior to any other action. A determination of shareholders of
record entitled to notice of or to vote at a meeting of shareholders shall apply
to any adjournment of the meeting; provided, however, that the Board of
Directors may fix a new record date for the adjourned meeting.
Section 5.06. Dividends. Subject to the provisions of the
Articles of Incorporation, the Board of Directors may, out of funds legally
available therefor, at any regular or special meeting declare dividends upon the
capital stock of the Corporation as and when they deem expedient. Before
declaring any dividend there may be set apart, out of any funds of the
Corporation available for dividends, such sum or sums as the directors, from
time to time, in their discretion deem proper for working capital or as a
reserve fund to meet contingencies or for equalizing dividends or for such other
purposes as the directors shall deem conducive to the interests of the
Corporation, and in its discretion the Board of Directors may decrease or
abolish any such reserve.
Section 5.07. Registered Shareholders. The Corporation shall
be entitled to recognize the exclusive right of a person registered on its books
as the owner of shares to receive dividends and other distributions, and to vote
as such owner, and to hold liable for calls and assessments the person
registered on its books as the owner of shares, and shall not be bound to
recognize any equitable or other claim to or interest in such shares on the part
of any other person, whether or not it
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<PAGE> 27
shall have express or other notice thereof, except as otherwise provided by law.
Section 5.08. Seal. The corporate seal shall be circular in
form and shall contain the name of the Corporation, the year of its organization
and the words "CORPORATE SEAL, PENNSYLVANIA." The seal may be used by causing it
or a facsimile thereof to be impressed or affixed or reproduced or otherwise.
Section 5.09. Fiscal Year. The fiscal year of the Corporation
shall commence on the first day of July and end on the last day of June.
Section 5.10. Checks. All checks, drafts or other orders for
the payment of money, notes or other evidences of indebtedness issued in the
name of the Corporation shall be signed by such officer or officers, agent or
agents of the Corporation and in such manner as shall be determined, from time
to time, by resolution of the Board of Directors.
Section 5.11. Execution of Proxies. The Chairman or the
President, or, in the absence or disability of the Chairman and the President, a
Vice President, may authorize, from time to time, the signature and issuance of
proxies to vote upon shares of stock of other corporations standing in the name
of the Corporation or authorize the execution of consents to action taken or to
be taken by such other corporation. All such proxies and consents shall be
signed in the name of the Corporation by the Chairman or the President or a Vice
President and by the Secretary or an Assistant Secretary.
Section 5.12. Notice and Waiver of Notice. Whenever
any notice is required to be given under the provisions of any
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<PAGE> 28
law, of the Articles of Incorporation or of these Restated By-Laws, personal
notice is not meant unless expressly so stated, and any notice so required shall
be deemed to be sufficient if given by depositing the same in the United States
mail, postage prepaid, addressed to the person entitled thereto at his address
as it appears on the records of the Corporation, and such notice shall be deemed
to have been given on the day of such mailing. Notice to directors may also be
given by telex, cable or telegram. Shareholders not entitled to vote shall not
be entitled to receive notice of any meetings except as otherwise provided by
statute.
Whenever any notice whatsoever is required to be given under
the provisions of any law or of the Articles of Incorporation or of these
Restated By-Laws, a waiver thereof in writing, signed by the person or persons
entitled to said notice, whether before or after the time stated therein, shall
be deemed equivalent thereto. Neither the business to be transacted at, nor the
purpose of, any regular or special meeting of the shareholders, directors or
members of a committee of directors need be specified in any written waiver of
notice unless so required by the Articles of Incorporation. Attendance of a
person at a meeting shall constitute a waiver of notice of such meeting, except
when the person attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened.
Section 5.13. Reference to Articles of Incorporation.
Any reference in these Restated By-Laws to the Articles of
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<PAGE> 29
Incorporation shall be a reference to the Corporation's Restated Articles of
Incorporation filed with the Department of State of the Commonwealth of
Pennsylvania, along with the Articles of Merger of the Corporation, effective as
of April 30, 1991, as the same may thereafter be amended or supplemented.
ARTICLE VI
Amendments
These Restated By-Laws may be altered, amended or repealed,
and new by-laws may be adopted, only by the affirmative vote of 67% of the
outstanding shares of common stock entitled to vote or, when such power is
conferred upon the Board of Directors by the Articles of Incorporation, by the
affirmative vote of 75% of the members of the whole Board of Directors, at any
regular meeting of the shareholders or of the Board of Directors or at any
special meeting of the shareholders or of the Board of Directors if notice of
the proposed alteration, amendment, repeal or adoption be contained in the
notice of such special meeting.
Approved by the Board of Directors
and Shareholders on April 24, 1991
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<PAGE> 1
Exhibit 4.02
EMC HOLDINGS, INC.
(a Delaware corporation)
STOCKHOLDERS AGREEMENT
among
the Stockholders
listed on the
Schedules of Stockholders hereto,
Merrill Lynch Interfunding Inc.,
EMC Holdings, Inc.
Employee Stock Ownership Trust
and
EMC Holdings, Inc.
Dated as of October 26, 1989
<PAGE> 2
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Article I. Interpretation
1.1 Certain Definitions............................................... 4
Article II. Management Agreements
2.1 General........................................................... 14
2.2 Conduct of Business............................................... 15
2.3 Restated Certificate of Incorporation
of Holdings................................................... 15
2.4 By-Laws of Holdings............................................... 15
2.5 Change of Circumstances........................................... 15
2.6 Significant Transactions.......................................... 16
Article III. Board of Directors
3.1.1 Election of Directors............................................. 22
3.1.2 Committees of the Board of Directors.............................. 24
3.1.3 Meetings of the Board of Directors
and Observer.................................................. 25
3.2 Removal Without Cause............................................. 26
3.3 Removal for Cause................................................. 27
3.4 Vacancies on the Board............................................ 27
3.5 Agreement to Cooperate............................................ 28
3.6 Conflicting Charter or By-Laws Provisions......................... 28
3.7 Board of EMC...................................................... 28
3.8 Application of Articles II and III................................ 28
Article IV. Reservation of Shares; Restrictions
on Transfer
4.1 Reserved Shares................................................... 29
4.2 Limitations as to Transferees..................................... 29
Article V. No Dilution; Reissuance of Shares
5.1 No Dilution....................................................... 31
5.2 Reissuance of Shares.............................................. 33
Article VI. Registration Rights
6.1.1 Registration Rights; Demand
Registration Rights........................................... 34
6.1.2 Limitation on Number of Filings................................... 38
6.1.3 Demand Registration Expenses...................................... 38
6.1.4 Securities Included............................................... 38
6.1.5 Priorities of Offering............................................ 39
6.2.1 Piggyback Registration............................................ 41
6.2.2 Piggyback Registration Expenses................................... 42
6.2.3 Priorities in Offering............................................ 42
6.2.4 Notice to Certain Holders......................................... 43
</TABLE>
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<PAGE> 3
Table of Contents (Continued)
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
6.3 Repayment of Indebtedness......................................... 43
6.4 Rule 144.......................................................... 43
6.5 Registration Procedures........................................... 44
Article VII. Rights of Inclusion and Rights of First Offer
7.1 Rights of Inclusion............................................... 50
7.2 Right of First Offer.............................................. 54
7.3 Application of Article VII........................................ 57
Article VIII. Certain Covenants of Holdings
8.1 No Transfers of Shares on Books................................... 58
8.2 Financial Statements.............................................. 58
8.3 Certain Prohibited Transferees.................................... 59
Article IX. Certain Additional Covenants
9.1 Transfers Generally............................................... 60
Article X. Term
10.1 Term.............................................................. 61
Article XI. Acknowledgement by EMC
11.1 Acknowledgement................................................... 62
Article XII. Puts and Calls
12.1 Calls............................................................. 62
12.2 Puts.............................................................. 63
12.3 No Interference with Put Option................................... 63
12.4 Certain Delays in the Exercise of
the Put Option.................................................... 65
Article XIII. Parties
13.1 Parties........................................................... 66
Article XIV. Miscellaneous
14.1 Amendment; Modification; Etc...................................... 67
14.2 Governing Law..................................................... 67
14.3 Execution in Counterparts......................................... 67
14.4 Notices........................................................... 68
14.5 Entire Agreement; Headings........................................ 68
14.6 Assignment........................................................ 69
14.7 Specific Enforcement; Other Remedies.............................. 69
</TABLE>
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Table of Contents (Continued)
Page
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Annex A Third Restated Certificate of Incorporation of
Holdings
Annex B By-Laws of Holdings
SCHEDULE 1: MANAGEMENT STOCKHOLDERS
SCHEDULE 2: MLCP INVESTORS
SCHEDULE 3: OTHER INVESTORS
ANNEXES AND SCHEDULES WILL BE AVAILABLE UPON REQUEST
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STOCKHOLDERS AGREEMENT
STOCKHOLDERS AGREEMENT, dated as of October 25, 1989, among the
persons listed on Schedule 1 hereto (the "Management Stockholders"), the various
partnerships and corporations listed on Schedule 2 hereto (the "MLCP
Investors"), MERRILL LYNCH INTERFUNDING INC., a Delaware corporation
("Interfunding"), the institutions listed on Schedule 3 hereto (the "Other
Investors"), EMC HOLDINGS, INC., a Delaware corporation ("Holdings"), and the
EMC HOLDINGS, INC. EMPLOYEE STOCK OWNERSHIP TRUST (the "ESOT"). The Other
Investors, Interfunding and the MLCP Investors are collectively referred to as
the "Institutional Investors."
W I T N E S S E T H
WHEREAS, as of the date hereof, Holdings is authorized by its
Third Amended and Restated Certificate of Incorporation to issue capital stock
consisting of 25,000,000 shares of Class A common stock, par value $.0001 (the
"Class A Shares"), 17,000,000 shares of Class B Common Stock, par value $.
("Class B Shares"), and 1,000,000 shares of blank check preferred stock, of
which 250,000 shares are authorized as 10.19% Convertible Preferred Stock
par value $.0001 ("Preferred Shares") (Class A Shares and Class B Shares being
hereinafter collectively referred to as "Common Shares"), all of such Common
Shares and Preferred Shares having the voting powers, designations, preferences
and relative, participating, optional and other special rights and the
qualifications, limitations and restrictions set forth in
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<PAGE> 6
Holdings' Third Amended and Restated Certificate of Incorporation;
WHEREAS, the parties hereto have entered into this Agreement and
related transactions in order to accomplish a recapitalization of Holdings and a
restructuring of the ownership of Holdings (collectively the "Recapitalization
and Restructuring"), following the consummation of which each of the parties
hereto (other than Holdings) will own the number and class of equity securities
of Holdings set forth opposite its respective name on Schedule 4 hereto;
WHEREAS, in connection with the Recapitalization and
Restructuring, each of the Management Stockholders has entered into a separate
Exchange and Repurchase Agreement, each dated as of October 25, 1989
(collectively, the "Management Subscription Agreements") with Holdings; the MLCP
Investors have each entered into a separate Merrill Lynch Common Stock
Subscription Agreement dated as of October 25, 1989 (the "Merrill Lynch
Subscription Agreements") with Holdings; the Other Investors in their capacity
as the purchasers under the Note and Warrant Purchase Agreements dated as of
October 25, 1989 (collectively the "Note and Warrant Agreements") between
Holdings and the Other Investors, acquired warrants to purchase up to 5,956,079
Class B Shares (the "Warrants"); interfunding has entered into a Stock Purchase
Agreement dated October 25, 1989 (the "Interfunding Subscription Agreement")
with Holdings; the ESOT has entered into a Preferred Stock Purchase Agreement
with Holdings and a separate Common Stock Purchase Agreement with certain
stockholders of Holdings, each dated as of October 25, 1989 (such agreements
being collectively the "ESOT Purchase Agreements"); and Holdings has
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<PAGE> 7
made a capital contribution to the ESOT of 50,000 Preferred Shares;
WHEREAS, Holdings is the sole record and beneficial owner of all
of the outstanding shares of common stock, without par value (the "EMC Shares"),
of Education Management Corporation, a Pennsylvania corporation ("EMC"); and
WHEREAS, the parties wish to define their respective rights,
duties and obligations in connection with the ownership and management of
Holdings.
NOW, THEREFORE, in consideration of the premises and of the
mutual covenants and agreements hereinafter set forth, the parties hereto agree,
intending to be legally bound, as follows:
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ARTICLE I
Interpretation
1.1 Certain Definitions. For the purposes of this Agreement, the
following terms have the following meanings, respectively:
"Act" means the Securities Act of 1933, as amended.
"Adjusted Purchase Price", as of any date with respect to any
Common Shares, means the purchase price, whether actual or imputed, per share as
set forth in the applicable Subscription Agreement, or any other agreement or
plan pursuant to which such Common Shares were issued, adjusted to account for
stock splits, stock dividends and reverse stock splits, if any.
"Affiliate", with respect to any Person, means any director or
officer of such Person, any corporation, association, firm or other entity of
which such Person (or any officer or director of such Person) is a member,
director or officer, the spouse of such Person (or of any officer or director of
such Person), either parent of such Person (or of any officer or director of
such Person) or of such Person's spouse (or of the spouse of any officer or
director of such Person), any descendant of any such parent, any relative of
such Person (or of any officer or director of such Person) who has the same home
as such Person (or as any officer or director of such Person), and any other
Person, directly or indirectly controlling, controlled by, or under common
control with, such Person. For the purpose of this definition, "control"
(including, with correlative meanings, the terms "controlling", "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
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<PAGE> 9
the possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities or by contract or otherwise.
"Agreement" means this Agreement, as amended from time to time.
"Bankruptcy Law" is Title 11, U.S. Code or any similar federal,
state or local law for the relief of debtors.
"Base Rate" is, for any period, a fluctuating interest rate per
annum, calculated for the actual number of days elapsed in a 365- or 366-day
year, as shall be in effect from time to time during such period, which rate per
annum shall at all times be equal to the rate of interest publicly announced by
Pittsburgh National Bank, in Pittsburgh, Pennsylvania, from time to time, as its
prime rate.
"Board" means the Board of Directors of Holdings. "Class A
Shares" is defined in the introduction to this Agreement.
"Class B Shares" is defined in the introduction to this
Agreement.
"Closing Date" means the last closing date to occur in connection
with the purchases and sales of Common Shares and securities convertible into or
exchangeable for Common Shares under the Subscription Agreements, the Note and
Warrant Agreements and the ESOT Purchase Agreements, but in no event later than
the closing date of the Note and Warrant Purchase Agreements.
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<PAGE> 10
"Code" means the Internal Revenue Code of 1986, as amended from
time to time.
"Commission" means the U.S. Securities and Exchange Commission
and any successor federal agency having similar powers.
"Common Shares" is defined in the introduction to this Agreement.
"Custodian" is any receiver, trustee, assignee, liquidator or
similar official under any Bankruptcy Law. "EMC" is defined in the introduction
to this Agreement.
"EMC Shares" is defined in the introduction to this Agreement.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended, and the rules and regulations promulgated thereunder.
"ESOP" is the EMC Holdings, Inc. Employee Stock Ownership Plan.
"ESOT" is defined in the introduction to this Agreement.
"ESOT Purchase Agreements" is defined in the introduction to this
Agreement.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Fair Market Value" of any Common Shares (other than Common
Shares owned by the ESOT) means the value ascribed to such shares by an
appraisal thereof performed promptly after the event giving rise to the need to
value Common Shares by a nationally-recognized investment banking firm selected
as
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<PAGE> 11
follows: first, the Institutional Investors shall select three
nationally-recognized investment banking firms (none of which may be an
Institutional Investor or an Affiliate of an Institutional Investor); and
second, Holdings shall then select one of such three investment banking firms
(the "Appraiser") to perform the appraisal with the cost of such appraisal being
borne by Holdings. With respect to Common Shares owned by the ESOT, "Fair Market
Value" shall be determined as set forth in the immediately preceding sentence;
provided, that the Appraiser shall be an independent appraiser as defined in
Code Section 401(a)(28)(C). In determining Fair Market Value of any Common
Shares, and solely for such purpose, the Appraiser shall treat the Preferred
Shares as debt or as the Common Shares into which they are convertible,
whichever shall yield the highest value to the Preferred Shares. "Holder" is any
Person who or which is a beneficial owner of Common Shares or Warrants.
"Holdings" is defined in the introduction to this Agreement.
"Initial Public Offering" means the first Public Offering.
"Institutional Investors" is defined in the introduction to this
Agreement.
"Interfunding" is defined in the introduction to this Agreement.
"Interfunding Subscription Agreement" is defined in the
introduction to this Agreement.
"Management Holder" means the Management Stockholders
and each of their successors, assigns and transferees
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<PAGE> 12
"Management Stockholder" is defined in the introduction to this
Agreement.
"Management Subscription Agreements" is defined in the
introduction to this Agreement.
"MLCP Holder" means the MLCP Investors and each of their
successors, assigns and transferees.
"MLCP Investors" is defined in the introduction to this
Agreement.
"MLCP Subscription Agreements" is defined in the introduction to
this Agreement.
"Note and Warrant Agreements" is defined in the introduction to
this Agreement.
"Other Investors" is defined in the introduction to this
Agreement.
"Permitted Transferees" has the meaning given to it in the
Subscription Agreements pursuant to which the Common Shares being transferred
were originally acquired and with respect to the Other Investors, shall mean (i)
any entity which is a subsidiary of any Other Investor, (ii) any entity of which
any Other Investor is a subsidiary, (iii) any entity which is a subsidiary of an
entity referred to in clause (i) or (ii) above or this clause (iii) and (iv) any
financial institution to which National Union Fire Insurance Company of
Pittsburgh, Pa. ("NUFIC") shall sell or otherwise transfer Common Shares or
Warrants during the six-month period commencing on the Closing Date; provided,
(i) that the aggregate number of Common Shares or Warrants sold or otherwise
transferred by NUFIC pursuant to subclause (iv) above shall not in the aggregate
exceed 744,436 Common
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<PAGE> 13
Shares or Warrants exercisable therefor and (ii) each such transfer shall be
made only after consultation with Holdings.
"Person" means an individual, a partnership, a joint venture, a
corporation, a trust, an unincorporated organization or a government or any
department or agency thereof.
"Public Distribution" means a Public Offering of Common Shares at
the conclusion of which (i) Holdings is required to register the Common Shares
under Section 12(b) or (g) of the Exchange Act and (ii) 25% of the outstanding
Common Shares shall have been sold to the public pursuant to one or more
effective registration statements under the Act.
"Public Offering" means a public offering of securities of
Holdings pursuant to an effective registration statement under the Act.
"Registrable Securities" means, subject to the provisions of
Section 6 hereof, (a) Common Shares issued on the Closing Date pursuant to the
Management Subscription Agreements or the MLCP Subscription Agreements, (b)
Common Shares now or hereafter held by the ESOT, (c) Common Shares issued or
issuable pursuant to the Warrants, (d) Common Shares issued or issuable pursuant
to stock options hereafter granted to employees of Holdings and (e) Common
Shares and other securities that may be issued or distributed in respect of (a),
(b), (c) or (d) above or this clause (e) by way of stock dividend or stock split
or other distribution, recapitalization or reclassification, or in a merger or
consolidation. As to any particular Registrable Securities, once issued such
securities shall cease to be Registrable Securities when (i) a registration
statement with
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<PAGE> 14
respect to the sale of such securities shall have become effective under the Act
and such securities shall have been disposed of in accordance with such
registration statement, (ii) they shall have been distributed to the public
pursuant to Rule 144 (or any successor provision under the Act), (iii) they
shall have been otherwise transferred, new certificates therefor not bearing a
legend restricting further transfer shall have been delivered by Holdings and
subsequent disposition of them shall not require their registration under the
Act or (iv) they shall have ceased to be outstanding (except that Registrable
Securities which are acquired by Holdings and reissued in accordance with the
By-Laws of Holdings and Section 5.2 hereof shall again become Registrable
Securities upon such reissuance).
"Registration Expenses" means all expenses incident to Holdings'
performance of or compliance with Section 6 hereof, including, without
limitation, all registration, filing and NASD fees, all fees and expenses of
complying with securities and blue sky laws, all word processing, duplicating
and printing expenses, all messenger and delivery expenses, the fees and
disbursements of counsel for Holdings and its independent public accountants,
including the expenses of any special audits or "cold comfort" letters required
by or incident to such performance and compliance, the premiums and other costs
of insurance policies against liabilities arising out of the Public Offering of
the Registrable Securities being registered, the reasonable fees and
disbursements of counsel (other than house counsel) for the Holders on whose
behalf Registrable Securities are being registered, and any fees and expenses of
underwriters customarily
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<PAGE> 15
paid by issuers, but excluding underwriting discounts and commissions and
applicable transfer and documentary stamp taxes, if any, which shall be borne by
the seller of the securities in all cases.
"Requesting Holder" means the Holder of Registrable Securities
requesting registration of such securities pursuant to Section 6.1.1 or 6.2.1
hereof.
"Restricted Payments" means dividends on or purchases,
redemptions or retirements for value, or the making of any payment or the
setting apart of any fund by Holdings or any of its Subsidiaries on the account
of the purchase, redemption or other acquisition or retirement for value of, any
capital stock of Holdings or any Affiliate of Holdings or any warrants, rights
or options to purchase or acquire any such capital stock other than (i) on
account of capital stock held by the ESOT, (ii) as permitted hereunder,
including without limitation any such dividend, purchase, redemption, retirement
or payment or setting apart expressly permitted under Sections 4.1, 4.2, 5.1,
5.2, 6.1.1, 7.1, 7.2, 12.1 and 12.2 hereof and under any Subscription Agreement
and (iii) repurchases, redemptions, and cancellations of options with respect to
Common Shares held by current or former employees of Holdings and its
Subsidiaries in accordance with the applicable Management Subscription
Agreements in the amounts permitted under the Senior Indebtedness and the
Subordinated Indebtedness, as such provisions may be amended from time to time.
"Senior Indebtedness" means the indebtedness of Holdings under
that certain Credit Agreement, dated as of
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<PAGE> 16
October 25, 1989, among Holdings, as borrower, the several banks (the "Banks")
who are or become party to such agreement and Pittsburgh National Bank, as agent
for the Banks (the "Credit Agreement"), as amended from time to time as provided
herein. "Significant Transaction" is defined in Section 2.6 hereof.
"Specified Defaults" means any of the following:
(i) the non-payment when due by Holdings or any of its
Subsidiaries of principal, interest or other monetary obligations on any
indebtedness in an amount in excess of $51.5 million, of Holdings or any
of its Subsidiaries; provided, however, that Holdings shall have 30 days
to cure a default under the Subordinated Indebtedness or any future
indebtedness of Holdings which is by its terms subordinated to the
Senior Indebtedness, if any, caused solely by the exercise of a right by
a lender under the Senior Indebtedness to prohibit payment of amounts
due under the Subordinated Indebtedness, which right arose by reason of
a default under a financial covenant contained in the Credit Agreement
other than a covenant relating to the maintenance by Holdings of a
specified net worth;
(ii) the acceleration of any indebtedness in an amount in excess
of $1.5 million, under any one or more debt instruments of Holdings or
any Subsidiary;
(iii) any failure by Holdings or any of its Subsidiaries to
maintain financial covenants relating to net worth under any applicable
debt instruments of Holdings or any of its Subsidiaries;
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<PAGE> 17
(iv) any breach by Holdings of Articles V, VI, or XII or Section
14.1 hereof, which breach remains uncured for a period of 15 days from
the date of the event, action or omission giving rise thereto;
(v) Holdings or any Subsidiary pursuant to or within the meaning
of any Bankruptcy Law:
(A) commences a voluntary case or proceeding,
(B) consents to the entry of an order for relief against it in
an involuntary case or proceeding,
(C) consents to the appointment of a Custodian of it or for
all or substantially all of its property, or
(D) makes a general assignment for the benefit of its
creditors; and
(vi) a court of competent jurisdiction enters an order or decree
under any Bankruptcy Law that:
(A) is for relief against Holdings or any Subsidiary in an
involuntary case or proceeding,
(B) appoints a Custodian of Holdings or any Subsidiary or for
all or substantially all of its property, or
(C) orders the liquidation of Holdings or any Subsidiary, and
in the case of (vi) above, the order or decree remains unstayed
and in effect for 120 days.
"Stockholder" is any party to this Agreement who or which is, or
at some future time becomes, a record and beneficial owner of Common Shares.
"Subordinated Indebtedness" means the indebtedness of Holdings
under those certain Note and Warrant Purchase Agreements, among Holdings and
each of the purchasers named in
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<PAGE> 18
the Schedule of Purchasers thereto, dated October 25, 1989, as amended from time
to time.
"Subscription Agreement" means any of the MLCP Subscription
Agreements, the Management Subscription Agreements and the Interfunding
Subscription Agreement.
"Subsidiary" with respect to any Person means any corporation of
which such Person owns or controls, directly or indirectly, more than 50% of the
outstanding stock, which stock by the terms thereof has ordinary voting power to
elect a majority of the board of directors.
"Warrants" is defined in the introduction to this Agreement.
"Whole Board of Directors" means the total number of directors of
Holdings prescribed by Holdings' certificate of incorporation, whether or not
there shall be any vacancies on the Board.
ARTICLE II
Management Agreements
2.1 General. The parties hereto confirm that it is their
intention that the business and affairs of Holdings and its Subsidiaries shall
be managed by its Board of Directors in the best interests of Holdings and its
Subsidiaries taken as a whole. In furtherance of the foregoing, the parties
hereto agree that, after the Closing Date, neither they nor any of their
Affiliates controlled by them will enter into any written or oral contract,
agreement or other arrangement to engage in business or enter into any
transaction, or will engage in business or enter into
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<PAGE> 19
any transaction, with Holdings or any of its Subsidiaries other than
transactions among Holdings and any of its Subsidiaries or among such
Subsidiaries unless the terms and provisions of such contract, agreement or
other arrangement or the terms on which such business or transaction is
conducted, as the case may be, are substantially equivalent to terms that would
have been obtained in an arm's-length relationship. Nothing contained in this
Section 2.1 shall in any manner affect the ability of Holdings or any of its
Subsidiaries to perform its obligations under existing contracts.
2.2 Conduct of Business. The parties hereto agree that, unless
otherwise authorized by a vote of at least 80% of the Whole Board of Directors,
Holdings will not materially change the fundamental nature of its business as
carried on immediately prior to the Closing Date.
2.3 Restated Certificate of Incorporation of Holdings. Attached
hereto as Annex A is a copy of the Third Restated Certificate of Incorporation
of Holdings which will be in effect after the Closing Date. The provisions of
Annex A are hereby approved by, and made a part of this Agreement among, the
parties hereto.
2.4 By-Laws of Holdings. The Stockholders agree that the By-Laws
attached hereto as Annex B will be adopted as the By-Laws of Holdings that will
be in effect immediately after the Closing Date. The provisions of Annex B are
hereby approved by, and made a part of this Agreement among the parties hereto.
2.5 Change of Circumstances. The parties hereto acknowledge that
the arrangements among themselves, including
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<PAGE> 20
this Agreement, and the provisions of other arrangements among any of the
parties hereto to be in effect immediately after the Closing Date, have been
entered into with the agreement of each holder of securities of Holdings (to the
extent known to such holders) and that, in the event of a Public Offering or in
the event of a public offering pursuant to an effective registration statement
under the Act of securities of any Subsidiary of Holdings, at the conclusion of
which Holdings or such Subsidiary will have security holders who are not parties
to this Agreement, it is expected that appropriate changes in this Agreement
(other than with respect to Article VI) may be necessary or advisable (subject
to agreement by such parties at such time) in order to accommodate such change
in such circumstances; the purpose of this Section 2.5 being to express the
parties' understanding that the public sale of securities of Holdings or any of
Holdings' Subsidiaries may require revisions to the management and ownership
structures set forth herein without committing any party to an alternative
structure at this time.
2.6 Significant Transactions. (a) Notwithstanding the fact that
no vote may be required or that a lesser percentage vote may be required by law,
by the Third Restated Certificate of Incorporation or By-Laws of Holdings, by
any agreement with any national securities exchange or otherwise, any
Significant Transaction, as defined in subsection (b) of this Section 2.6, shall
require the affirmative vote of a majority of the Whole Board of Directors,
provided, that any such majority vote must include the affirmative vote of at
least one of either (i) one of the two directors designated by the MLCP
Investors or (ii) the
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<PAGE> 21
director designated by Other Investors pursuant to Section 3.1.1.
hereof.
(b) The term "Significant Transaction," with respect to Holdings
or any of its Subsidiaries, shall mean any of the following actions:
(A) Any merger or consolidation involving Holdings or any of its
Subsidiaries (other than transactions involving the merger or
consolidation of a Subsidiary with or into Holdings or with or into a
wholly-owned subsidiary of Holdings);
(B) Any sale, lease, exchange, transfer or other disposition,
directly or indirectly, in a single transaction or series of related
transactions, of all or substantially all of the assets of Holdings, EMC
or any of their respective operating Subsidiaries, or the tangible
assets constituting 50% or more of the net worth of Holdings and its
Subsidiaries, taken as a whole, to or with any person other than
Holdings or a wholly-owned Subsidiary;
(C) Any purchase, lease, exchange or other acquisition of assets
(including securities) by Holdings or any of its Subsidiaries, in a
single transaction or a series of related transactions, if the amount of
consideration paid by Holdings for such assets whether cash, securities
or goods, is, or has a fair market value, in excess of $25 million,
except purchases of supplies and equipment made in the ordinary and
usual course of business;
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<PAGE> 22
(D) Any increase or reduction of Holdings' authorized capital or
the creation of any additional class of capital stock of Holdings;
(E) Any sale or issuance of shares of capital stock of Holdings
(or warrants, options or rights to acquire shares of capital stock of
Holdings or securities convertible into or exchangeable for capital
stock of Holdings) except (i) the sale or issuance of shares, or options
to purchase shares of capital stock as permitted hereunder, (ii) the
sale or issuance of shares of capital stock of a wholly-owned subsidiary
of Holdings to Holdings or another wholly-owned subsidiary of Holdings,
(iii) the sale or issuance of shares of capital stock of Holdings
pursuant to any option plan approved by the Board, but only upon the
specific recommendation of the Compensation Committee, including, where
required by Section 3.1.2, the affirmative vote of the director
nominated by the Other Investors, and (iv) the reissuance of Common
Shares purchased from Stockholders as permitted hereunder;
(F) Any amendment to or modification or repeal of any provision
of the Third Restated Certificate of Incorporation or By-Laws of
Holdings;
(G) The declaration or making of any Restricted Payment; and
(H) The dissolution of Holdings, EMC or any of their respective
operating Subsidiaries; the adoption of a plan of liquidation of
Holdings, EMC or any of their respective operating Subsidiaries; any
motion by Holdings, EMC or any
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<PAGE> 23
of their respective operating Subsidiaries to commence any case,
proceeding or other action (i) under any existing or future law of any
jurisdiction relating to bankruptcy, insolvency, reorganization or
relief of debtors seeking to have an order for relief entered with
respect to it, or seeking to adjudicate it a bankrupt or insolvent, or
seeking reorganization, arrangement, adjustment, winding-up,
liquidation, dissolution, composition or other relief with respect to
it, or (ii) seeking appointment of a receiver, trustee, custodian or
other similar official for it or for all or any substantial part of its
assets, or making a general assignment for the benefit of its creditors.
(c) If (i) the term of this Agreement shall continue through the
tenth anniversary hereof, as provided in Section 10.1 hereof, and (ii) on the
day immediately prior to such anniversary the Institutional Investors shall
beneficially own 25% or more of the Common Shares, on a fully diluted basis at
such time, then notwithstanding anything contained herein to the contrary,
including in particular such Section 10.1, the parties hereto agree that they
shall take any and all actions as may be necessary to cause the certificate of
incorporation of Holdings, as it may exist at that time, to be amended at the
earliest practicable date (the "Amendment Date") to provide that any Surviving
Significant Transaction, as defined in subsection (d) of this Section 2.6, shall
require the affirmative vote of the holders of at least two-thirds of the
outstanding Common Shares voting together as a single class. Such vote shall be
required notwithstanding the fact that no vote may be required or
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<PAGE> 24
that a lesser percentage vote may be required by law, by Holdings' By-Laws, by
any agreement with a national securities exchange or otherwise, and, in the
event this Section 2.6(c) shall come into effect, neither Holdings nor any of
its Subsidiaries shall engage in any Surviving Significant Transaction between
the tenth anniversary hereof and the Amendment Date.
(d) The term "Surviving Significant Transaction," with respect to
Holdings or any of the Subsidiaries shall mean any of the following actions:
(A) Any merger or consolidation involving Holdings or any of its
Subsidiaries (other than transactions involving the merger or
consolidation of a Subsidiary with or into Holdings or with or into a
wholly-owned Subsidiary of Holdings);
(B) Any sale, lease, exchange, transfer or other disposition,
directly or indirectly, in a single transaction or series of related
transactions, of all or substantially all of the assets of Holdings and
its Subsidiaries, taken as a whole, or tangible assets constituting 50%
or more of the net worth of Holdings and its Subsidiaries, taken as a
whole, to or with any person other than Holdings or a wholly-owned
Subsidiary of Holdings;
(C) Any sale or issuance of shares of capital stock of Holdings
(or warrants, options or rights to acquire shares of capital stock of
Holdings or securities convertible into or exchangeable for capital
stock of Holdings) (i) in excess of the number authorized by Holdings'
certificate of
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<PAGE> 25
incorporation at that time or (ii) at a price below (x) the price
determined in the most recent yearly ESOP appraisal of its Common
Shares, if there has not been an Initial Public Offering or (y) the
average closing price, or the average closing bid and ask price, as the
case may be, during the 10 trading days immediately preceding such sale
or issuance, if there has been an Initial Public Offering; except for
(i) the issuance of shares of capital stock of Holdings pursuant to
options or warrants granted or issued, as the case may be, prior to the
tenth anniversary hereof and in accordance with the terms hereof; (ii)
the reissuance of shares of Holdings' capital stock purchased from
Stockholders prior to the tenth anniversary hereof and in accordance
with the terms hereof; and (iii) the sale or issuance of shares of
capital stock of a wholly-owned Subsidiary of Holdings to Holdings or to
another wholly-owned Subsidiary of Holdings;
(D) Any amendment to or modification or repeal of any provision
of the certificate of incorporation or By-Laws of Holdings, provided,
Holdings may amend its certificate of incorporation as contemplated in
Section 2.6(c) hereof and may amend, modify or repeal its By-Laws so
long as the By-Laws do not conflict with any provision of Holdings'
certificate of incorporation included as a result of this Section 2.6;
(E) The declaration or making of any Restricted Payment, except
(i) if each class of Common Shares shall share equally in such
Restricted Payment, without any preferences of any kind to any class,
(ii) for any one or
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<PAGE> 26
series of Restricted Payments which, in the aggregate, constitute the
purchase, redemption or other acquisition by Holdings, EMC or any of
their respective Subsidiaries of not more than 10% of the then
outstanding Common Shares, on a fully diluted basis, and (iii) for any
one or more Restricted Payments made pursuant to contracts approved in
accordance with the terms hereof prior to the tenth anniversary hereof;
and
(F) The dissolution of Holdings, EMC or any of their respective
operating Subsidiaries or the adoption of a plan of liquidation of
Holdings, EMC or any of their respective operating Subsidiaries.
ARTICLE III
Board of Directors
3.1.1 Election of Directors. The parties (other than the ESOT)
agree that the number of directors on the Board of Directors of Holdings shall
be seven and that, from the date hereof until the earlier of (i) the Public
Distribution of at least 50% of the Common Shares, on a fully diluted basis, and
(ii) the seventh anniversary hereof, at any special or annual meeting of
Stockholders at which directors are to be elected to the Board, the parties
(other than the ESOT and Holdings) shall vote their Common Shares in favor of
the persons nominated for director as follows: (a) the MLCP Investors and their
Permitted Transferees, by a majority vote of the Common Shares owned by such
MLCP Investors and such transferees, shall nominate two individuals to serve as
directors (the "MLCP Directors") on the Board for one-year terms, (b) the
Management Stockholders and
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their Permitted Transferees, by a majority vote of the Common Shares owned by
such Management Stockholders and such transferees shall nominate four
individuals to serve as directors on the Board for one-year terms, and (c) the
Other Investors and their Permitted Transferees, by majority vote of the Common
Shares actually held and underlying unexercised Warrants owned by such Other
Investors and their Permitted Transferees, shall nominate one individual to
serve as a director on the Board for a one-year term; provided, however, that in
the event of any Specified Default, the parties (other than the ESOT and
Holdings) shall take all actions necessary to increase the size of the Board by
two directors and the MLCP Investors and their Permitted Transferees, by a
majority vote of the Common Shares owned by such MLCP Investors and such
transferees, shall designate two additional individuals to serve as directors on
the Board; provided, further, that in the event that any such default is (A)
cured pursuant to the terms of the applicable debt instrument or (B) waived by
any party entitled to waive such a default, the terms of office of the two
individuals designated to serve as directors pursuant to the preceding proviso
shall, in the case of a cure, automatically terminate 30 days thereafter and, in
the case of a waiver, terminate 180 days thereafter, and the two vacancies
created thereby shall thereupon be eliminated and the parties hereto (other than
the ESOT and Holdings) shall take all actions necessary at the annual meeting of
stockholders of Holdings next following such cure or waiver to reduce the size
of the Board by two directors. Each party hereto (other than the ESOT and
Holdings) hereby agrees, from and after the Closing
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Date, to use such party's best efforts and take all actions necessary to call,
or cause Holdings and the appropriate officers and directors of Holdings to
call, a special or annual meeting of stockholders of Holdings and to vote all
Common Shares owned or held of record by such party at any such annual or
special meeting in favor of, or to take all actions by written consent in lieu
of any such meeting necessary to cause, the election as members of the Board
those individuals so nominated in accordance with, and to otherwise effect the
intent of this Section 3.1.1.
3.1.2 Committees of the Board of Directors. The parties agree
that (i) the Board shall have at least two permanently sitting committees, a
compensation committee (the "Compensation Committee") and an audit committee
(the "Audit Committee"), (ii) each such committee shall have three members, with
the Compensation Committee consisting of the two MLCP Directors and the Chairman
of Holdings (who shall also be Chairman of the Compensation Committee) and
the Audit Committee consisting of the two MLCP Directors and one of the
directors nominated by the Management Stockholders pursuant to Section 3.1.1
hereof and (iii) any action taken by each such committee shall require a
majority vote of the members thereof; provided, that so long as Robert B.
Knutson is Chairman of the Compensation Committee any action taken by the
Compensation Committee shall require his affirmative vote. Each proposal
considered by the Compensation Committee shall be initiated by its Chairman and
the Compensation Committee shall review such proposals and make recommendations
to the Board concerning (i) any changes of the base salary, bonuses, benefits
and other compensation paid to
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officers of Holdings at or above the level of executive vice president, (ii) the
aggregate amount of incentive cash compensation to be paid to (a) all officers
of Holdings at or above the level of executive vice president and (b) all
officers of Subsidiaries of Holdings based upon the overall financial
performance of Holdings and its Subsidiaries, (iii) any and all grants by
Holdings to members of management or other employees of Holdings or any of its
Subsidiaries of any option or other right to acquire any security of Holdings;
provided, that the grant of any option or right to acquire any equity security
of Holdings, which grant together with all other grants of options or rights to
acquire equity Securities of Holdings (exclusive of the Warrant and the
Preferred Shares) from the date hereof shall exceed 3% of the outstanding Common
Shares, on a fully diluted basis, on the date hereof, shall require the
affirmative vote of the director designated by the Other Investors in addition
to the affirmative vote of the Compensation Committee specified above, and (iv)
the making of any loan, advance or other investment in or to any Management
Stockholder or employee of Holdings and any of its Subsidiaries, other than in
the ordinary course of business. The Board will take no action upon any matter
relating to (i), (ii) or (iii) in the immediately preceding sentence other than
as specifically recommended by the Compensation Committee. The Compensation
Committee shall have such other responsibilities and functions as the Board may
reasonably delegate to it.
3.1.3 Meetings of the Board of Directors and Observer.
The parties agree that the Board shall meet at least once during
each quarter of Holdings' fiscal year. So long as either Other
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Investor is the owner of any Warrants acquired under its respective Note and
Warrant Purchase Agreement (or the Common Shares issuable pursuant to such
Warrants) and does not have an employee, officer, director, or Affiliate who is
a member of the Board, it shall be entitled to have an observer at each special
and annual meeting of the Board of Holdings and to receive such notice of such
meetings and any materials distributed in advance thereof as shall be given to
the members of the Board.
3.2 Removal Without Cause. Notwithstanding the provisions of
Section 3.3 or any other Section hereof to the contrary, any director may be
removed without Cause as follows: (i) the party which nominated the director who
is to be removed without Cause (and only such party may seek such removal
without Cause) shall send written notice to each other party hereto (other than
the ESOT and Holdings) of its desire to remove such director; (ii) all such
parties shall then use their best efforts and take all actions necessary to
cause Holdings to call a special meeting of stockholders at the earliest
practicable date for the purpose of removing such director and electing a
director to fill the vacancy created by such removal; and (iii) at such special
meeting of stockholders the parties hereto (other than Holdings and the ESOT)
shall vote all of the securities of Holdings owned by them and entitled to vote
at such meeting and upon such matter (A) in favor of removal of the director
specified on the notice delivered pursuant to such clause (i) of this Section
3.2 and (B) in favor of the nominee of the party which originally nominated the
director being removed without Cause.
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3.3 Removal for Cause. The parties agree that (a) no director
shall be removed without Cause except as provided in Section 3.2 hereof and (b)
any director may be removed for Cause at any time by the affirmative vote of the
holders of a majority of all the outstanding Common Shares. For the purposes
hereof, "Cause" shall mean the commission by a director of an act involving the
reckless disregard of his duties to Holdings or any of its Subsidiaries, bad
faith, gross negligence, willful misconduct or fraud.
3.4 Vacancies on the Board. If as a result of death, disability,
retirement, resignation, removal (with or without Cause), or otherwise there
shall exist or occur any vacancy on the Board, each party other than Holdings
hereby agrees that the party and its respective transferees which nominated
(pursuant to Section 3.1.1 hereof) the director whose death, disability,
retirement, resignation or removal (with or without Cause) resulted in such
vacancy on the Board shall nominate (in the manner set forth in Section 3.1.1
hereof) another individual to fill such vacancy and to serve as a director;
provided that such nominee shall not previously have been a member of the Board
of Holdings who was removed for Cause. Each party (other than the ESOT and
Holdings) agrees to use its best efforts and take all actions necessary to call,
or cause Holdings and the appropriate officers and directors of Holdings to
call, a special or annual meeting of stockholders of Holdings and will vote all
Common Shares owned or held of record by it at any such special or annual
meeting in favor of, or take all actions by written consent in lieu of any such
meetings necessary to cause, the
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election of the individual nominated in accordance with this Section 3.4 to fill
such vacancy on the Board of Holdings.
3.5 Agreement to Cooperate. In order to effectuate the provisions
of this Article III, each party (other than Holdings) hereby agrees that when
any action or vote is required to be taken by it pursuant to this Agreement,
each such party shall use its best efforts and take all actions necessary to
call, or cause Holdings and the appropriate officers and directors of Holdings
to call, a special or annual meeting of Stockholders of Holdings, as the case
may be, or execute or cause to be executed a consent in writing in lieu of any
such meetings necessary to effectuate such stockholder action and each party
shall vote its Common Shares in accordance with, and for the purpose of
implementing the provisions of, this Agreement.
3.6 Conflicting Charter or By-Laws Provisions. Each party (other
than Holdings) shall vote its Common Shares, and shall take all actions
necessary to ensure that Holdings' Third Restated Certificate of Incorporation
and By-Laws do not, from time to time, conflict with the provisions of this
Agreement.
3.7 Board of EMC. The parties agree that the Board of Directors
of EMC and the committees thereof shall consist of the same persons who at the
time are members of the Board of Holdings and members of the corresponding
committees thereof, respectively.
3.8 Application of Articles II and III. Anything in this
Agreement to the contrary notwithstanding, the ESOT shall not be obligated to
comply with any of the terms of Articles II or III hereof to the extent that the
ESOP Trustee determines, in
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good faith, and with respect to legal matters upon the advice (which shall, if
Holdings so requests, be in the form of a written opinion of counsel) of its
outside legal counsel, that the ESOT's compliance with any of such terms would
result in (i) a breach by the ESOT Trustee of its fiduciary obligations under
ERISA or the Code, (ii) a violation by any party hereto of any provision of
ERISA or the Code, or (iii) a finding by the U.S. Department of Labor of a
"prohibited transaction" (as defined under ERISA).
ARTICLE IV
Reservation of Shares; Restrictions on Transfer
4.1 Reserved Shares. Prior to the Closing Date,
5,956,079 authorized but unissued Class B Shares (the "Warrant Shares") will
have been reserved for issuance pursuant to the Warrants.
4.2 Limitations as to Transferees. No transfer of Common Shares,
Preferred Shares or Warrants to any Person who is not a party to or has not
joined in and agreed to be bound by this Agreement shall be effective until any
such transferee has expressly agreed in writing to be bound by the terms and
conditions contained herein which defines or effects the rights, privileges and
obligations of the holder of the Common Shares, Preferred Shares or Warrants, as
the case may be, being transferred (other than in the case of a transferee
receiving Preferred Shares or Common Shares from the ESOT, who shall also be
subject to each provision from which the ESOT has been exempted as a result of
its legal status under ERISA; provided, further, that (i) in the event any party
(the "Potential
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Transferor") shall seek to transfer Common Shares, Preferred Shares or Warrants
to a Person who, in the reasonable opinion of the Board, is directly or
indirectly engaged in, or is an officer, director or affiliate of any other
Person engaged in a business competitive with that conducted by Holdings on the
date hereof (except that the endowment fund of a not-for-profit educational
institution shall not constitute such a competitor), Holdings shall have the
right (the "Right of First Refusal"), and the right to assign such right (except
that there shall be no such right of assignment with respect to Common Shares or
Preferred Shares owned by the ESOT), during the 14-day period following its
receipt of a written notice from the Potential Transferor setting forth the
terms of the proposed transfer and the name and background of the proposed
transferee, to purchase not less than all of the Common Shares, Preferred Shares
and Warrants proposed to be transferred at the price per share and upon the
terms set forth in such written notice and (ii) any potential transfer of Common
Shares, Preferred Shares or Warrants by any party other than the ESOT to a
Person whose specific ownership thereof, in the good faith determination of the
Board, is reasonably likely (other than due to any change in control of Holdings
or any of its Subsidiaries resulting from such ownership) to result in a
material adverse effect on any license, accreditation or regulatory approval of
Holdings or any of its Subsidiaries, or in the suspension of, or imposition of
any material restrictions on the availability of, any federal, state or local
financial or other similar benefits available to students enrolled in operating
Subsidiaries of Holdings
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immediately prior to such proposed transfer, shall be prohibited, and any such
transfer to any such Person shall be void, and any such transfer by the ESOT
shall be subject to a Right of First Refusal in favor of Holdings in accordance
with subclause (i) of this Section 4.2. The closing on any exercise of a Right
of First Refusal shall take place at the principal executive offices of Holdings
as soon as practicable following Holdings' exercise of such right and the
parties thereto shall use their best efforts that such closing occurs promptly
after such exercise. If Holdings does not exercise its Right of First Refusal
during such 14-day period, the transfer of the Common Shares by the Potential
Transferor to the potential transferee may occur at any time within the 90-day
period following the expiration of the 14-day period, at the price and upon the
principal terms set forth in the Notice provided to Holdings. If the Potential
Transferor does not make such transfer within such 90-day period, then the
Potential Transferor shall not transfer the Common Shares without again
complying with this Section 4.2. Any sale by the Potential Transferor pursuant
to this Section 4.2, whether to Holdings or a potential transferee, is subject
to the provisions of Article VII hereof. The provisions of this Section 4.2
shall not apply to any transfer in a Public Offering or in a distribution to the
public pursuant to Rule 144 under the Act, or any successor provision.
ARTICLE V
No Dilution; Reissuance of Shares
5.1 No Dilution. (a) Prior to any Initial Public Offering, the
parties hereto agree that Holdings shall not issue
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any shares of its capital stock, any options or warrants for any such shares or
any securities convertible into or exchangeable for any such shares (other than
as expressly permitted herein, in any Subscription Agreement, in the Note and
Warrant Agreements, and in the ESOT Purchase Agreements), unless Holdings shall
grant each other party hereto the option (a "Non-Dilution Option") to acquire
(on the same terms and conditions as in the issuance giving rise to such
Non-Dilution Option) such number of newly issued shares as shall be necessary to
maintain each party's respective percentage ownership interest in Holdings
(including with respect to the Holders of the Warrants the respective
percentages that would be owned by such Holders after full exercise of their
Warrants), on a fully diluted basis, as existed immediately prior to the
proposed issuance by Holdings of shares, options, warrants or other securities;
provided, however, (i) that no party shall be entitled to a Non-Dilution Option
in the event of an issuance by Holdings of equity securities along with debt
securities unless such party agrees to purchase a pro rata portion of the debt
securities being sold and (ii) that the Non-Dilution Option shall not apply to
(A) any options granted pursuant to a stock option plan adopted by the Board
following a favorable recommendation of the Compensation Committee including,
where required by Section 3.1.2, the affirmative vote of the director nominated
by the Other Investors and (B) the reissuance at no less than Fair Market Value
by the Company of any Common Shares, Preferred Shares and Warrants purchased by
the Company from any other party hereto in accordance with this Agreement or an
applicable Subscription Agreement, as the case may be.
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(b) In the event Holdings shall propose to issue any shares of
its capital stock or any options, warrants or other securities convertible into
or exchangeable for such shares and, pursuant to Section 5.1(a) hereof the
Non-Dilution Option shall apply to such issuance, Holdings shall deliver a
notice to such effect to each other party, which notice shall specify (i) the
number of shares, options, warrants or convertible or exchangeable securities
being issued (including, where appropriate, all conversion and exchange rates
and other similar features), (ii) the Person to whom or which they are to be
issued, and (iii) the price to be paid per share (and the method of calculation
thereof). Each Stockholder shall have 30 days from its receipt of such notice to
exercise its Non-Dilution Option with respect thereto, if at all.
5.2 Reissuance of Shares. Any Common Shares acquired by Holdings
pursuant to the provisions of Sections 9 and 10 of a Management Subscription
Agreement may be reissued by Holdings in accordance with its By-Laws at such
price as shall be determined by the Compensation Committee and only to a Person
who (i) is an individual who is another Management Stockholder or another member
of the management of Holdings or one of its Subsidiaries, (ii) is approved by a
majority of the members of the Compensation Committee, provided that (a) if the
Compensation Committee does not approve a reissuance hereunder within 180 days
following an acquisition by Holdings, a majority of the Board of Holdings may
recommend and approve such reissuance and (b) if the individual or individuals
approved by the Compensation Committee elects or elect not to purchase such
Common Shares, the Compensation
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Committee (or the Board if the Compensation Committee fails to act within 90
days) shall approve another individual or other individuals in accordance with
this Section 5.2, (iii) executes a counterpart of, and becomes a party to, this
Agreement pursuant to the provisions of Article XIII hereof and (iv) agrees to
be bound by all of the provisions (other than Sections 3, 4 and 5)
of the Management Subscription Agreements.
ARTICLE VI
Registration Rights
6.1.1 Registration Rights; Demand Registration Rights. Upon the
written request of any Holder or Holders of Registrable Securities requesting
that Holdings effect the registration (a "demand registration") under the
Securities Act of all or part of such Holder's or Holders' Registrable
Securities and specifying the number of Registrable Securities to be registered
by each such Holder and the intended method of disposition thereof (such notice
is hereinafter referred to as a "Holder's Request"), Holdings will promptly give
written notice of such requested demand registration to all other Holders of
Registrable Securities, and thereupon will, as expeditiously as possible, use
its best efforts to effect such demand registration under the Securities Act of
(i) the Registrable Securities which Holdings has been so requested to register
by such Holder or Holders and (ii) all other Registrable Securities which
Holdings has been requested to register by any other Holder thereof by written
request given to Holding within 20 days after the giving of such written notice
by Holdings (which request shall specify the intended method of disposition of
such Registrable Securities),
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all to the extent necessary to permit the disposition of the
Registrable Securities to be so registered. Holdings shall not,
however, be obligated to file a registration statement relating
to any Holder's Request unless
(A) at any time prior to the fifth anniversary hereof, Holdings
shall have received requests for such demand registration from the
Holders of an aggregate of the Registrable Securities consisting of at
least 51% of the Common Shares other than those underlying options
granted after the date hereof, on a fully diluted basis exclusive of
such option shares, (where each Holder counted toward such 51% threshold
shall have designated for sale no less than 20% of the total number of
Registrable Securities held by it); provided, however, that Holdings may
decline to act on any such demand registration request if the shares of
Holdings' Registrable Securities so offered have an aggregate offering
value of less than $10,000,000;
(B) at any time after the fifth anniversary of the Closing Date
or after an Initial Public Offering, Holdings shall have received
requests for such demand registration from the holders of an aggregate
of the Registrable Securities consisting of at least 13.0%, in the case
of the first such demand registration request under this subclause (B),
and 6.5%, in the case of each such subsequent demand registration
request under this subclause (B), of the Common Shares other than those
underlying options granted after the date hereof, on a fully diluted
basis exclusive of such option shares, (where each holder counted toward
such 13.0%
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or 6.5% threshold, as the case may be, shall have designated for sale no
less than 20% of the total number of Registrable Securities held by it);
provided, however, that (i) Holdings may decline to act on any such
demand registration request if the Registrable Securities so offered
have an aggregate offering value of less than $10,000,000 (unless such
demand registration is the last of the four demand registrations
permitted under this subsection (B) and under the next following
subsection (C)), and (ii) Holdings shall have the right, but not the
obligation, during the thirty-day period immediately following its
receipt of a demand for registration in accordance with this subclause
(B) to purchase no less than all of the Registrable Securities as to
which such demand for registration has been made at the Fair Market
Value, if there has been no Initial Public Offering, or at the average
closing price, or the average bid and ask price, as the case may be, for
the Registrable Securities during each of the ten trading days
immediately prior to such purchase, if there has been an Initial Public
Offering; or
(C) at any time after the fifth anniversary of the Closing Date
or after an Initial Public Offering, Holdings shall have received
requests for such demand registration from the holders of an aggregate
of at least 51% of the Registrable Securities held by the Institutional
Investors and their Permitted Transferees (where each holder counted
toward such 51% threshold shall have designated for sale no less than
20% of the total number of Registrable Securities
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held by it); provided, however, that (i) Holdings may decline to act on
any such demand registration request if the shares of Holdings'
Registrable Securities so offered shall not have an aggregate offering
value of less than $10,000,000 (unless such demand registration is the
last of the four demand registrations permitted under this subsection
(C) and under the immediately preceding subsection (B)), and (ii)
Holdings shall have the right, but not the obligation, during the
thirty-day period following its receipt of a demand for registration in
accordance with this subclause (C) to purchase no less than all of the
Registrable Securities as to which such demand for registration has been
made at the Fair Market Value, if there has been no Initial Public
Offering, or at the average closing price, or the average closing bid
and ask price, as the case may be, for the Common Shares during each of
the ten trading days immediately prior to such purchase, if there has
been a registration statement to effect an Initial Public Offering;
provided, that Holdings shall not be required to effect any demand
registration pursuant to this Article VI at any time during (x) the
45-day period immediately preceding Holdings' estimated date of filing
of a registration statement to effect an Initial Public Offering, and
(y) the 180-day period following the effective date of a registration
statement pertaining to an underwritten public offering of securities
for the account of Holdings, provided that Holdings is actively
employing in good faith all reasonable efforts to cause such
registration
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statement to become effective and that Holdings' estimate of the date of
filing such registration statement is made in good faith.
6.1.2 Limitation on Number of Filings. Notwithstanding the
foregoing, Holdings shall be obligated to file only that number of demand
registration statements as set forth in this Section 6.1.2, which are as
follows: (i) pursuant to subsection (A) above, an unlimited number during the
five-year period set forth in such subsection and none thereafter; (ii) pursuant
to subsection (B) above, two demand registration statements; and (iii) pursuant
to subsection (C) above, two demand registration statements. Holdings shall not,
however, be obligated to file any registration statement that would require the
inclusion of audited financial statements for a period other than Holdings'
fiscal year.
6.1.3 Demand Registration Expenses. Holdings will pay all
Registration Expenses in connection with each of the demand registrations of
Registrable Securities of the type described above effected by it and each
Person selling Registrable Securities shall pay all underwriting discounts and
commissions and transfer taxes and documentary stamp taxes, if any, relating to
the sale or disposition by such Person of Registrable Securities pursuant to a
registration statement effected in the manner contemplated above.
6.1.4 Securities Included. The only securities that
may be included in any such offering are (i) Registrable
Securities and (ii) Common Shares that Holdings elects to include
in such offering ("Company Securities"); provided, however, if,
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in the event of a demand registration which when filed is an Initial Public
Offering, the managing underwriter advises Holdings that, in its judgment, the
number of Company Securities necessary to be included in the registration
statement referred to above is equal to or greater than 50% of the number of
Common Shares, exclusive of those underlying options granted after the date
hereof, included in such registration statement, then the registration of
Registrable Securities shall be deemed to be made pursuant to the provisions set
forth below relating to piggyback registrations; and provided further, that
Holdings shall have the right, at its option, to require that any Warrants or
options constituting Registrable Securities be exercised into Common Shares
before they are included in any such offering.
6.1.5 Priorities of Offering. (a) If, in the case of a demand
registration which is an Initial Public Offering, the managing underwriter
advises Holdings that, in its judgment, a number of Company Securities should be
included in such an offering and, accordingly, the number of Common Shares
proposed to be included in such offering should be limited due to market
conditions, then Holdings will promptly so advise each Holder of Registrable
Securities that has requested such demand registration and will include in such
demand registration (i) first, the securities, if any, Holdings proposes to
sell, and (ii) second, the number of such Registrable Securities requested to be
included in such registration statement which, in the opinion of the managing
underwriter, can be sold, such number to be allocated among the selling Holders
of Registrable Securities pro rata in accordance with the number of shares of
Registrable
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Securities that each such holder has requested be included in such registration
statement.
(b) In the event of any demand registration other than (i) an
Initial Public Offering, as described in subsection (a) immediately above, and
(ii) the final demand registration, as described in subsection (c) immediately
below, Holdings shall be entitled to participate in a demand registration by
selling Company Securities in such registration but only on a pro rata basis
along with all the Holders selling Common Shares or Warrants in such
registration; provided that in any such registration Holdings shall not be
entitled to sell Company Securities which represent in excess of the number of
Registrable Securities being sold by the Requesting Holders in such
registration.
(c) Notwithstanding anything contained herein to the contrary,
the priorities in the final demand registration made pursuant to Section 6.1.1
hereof, as determined in accordance with Section 6.1.2 hereof, shall be as
follows: (i) first, the Registrable Securities the Institutional Investors and
their Permitted Transferees propose to sell, (ii) second, the securities
Holdings proposes to sell, and (iii) third, the number of additional Registrable
Securities requested to be included in such registration statement which, in the
opinion of the managing underwriter, can be sold, such number to be allocated
among the then remaining Holders of Registrable Securities pro rata in
accordance with the number of shares of Registrable Securities that each such
Holder has requested be included in such registration statement.
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6.2.1 Piggyback Registration. If Holdings at any time proposes to
register any of its equity securities under the Securities Act (other than
pursuant to a demand registration), whether or not for sale for its own account,
on a form and in a manner that would permit registration (a "Company
Registration") of Registrable Securities for sale to the public under the
Securities Act, it will give notice to the Holders of Registrable Securities 60
days prior to the anticipated filing of a registration of its intention to do
so, specifying the form and manner and the other relevant facts involved in such
proposed Company Registration. Upon the written request of any such Holder or
Holders delivered to Holdings within 20 days after the date such notice was
given by Holdings (which request shall specify the number of Registrable
Securities intended to be registered and the intended method of disposition
thereof), Holdings will use its best efforts to effect Holdings registration
under the Securities Act of all of the Registrable Securities that Holdings has
been so requested to register; provided, however, that: (i) if, at any time
after giving such written notice of its intention to register any securities and
prior to the effective date of the registration statement filed in connection
with such registration, Holdings shall determine for any reason not to register
such securities, Holdings may, at its election, give written notice of such
determination to each Holder of Registrable Securities who made a request as
hereinabove provided and thereupon shall be relieved of its obligation to
register any Registrable Securities in connection with such Company Registration
(but not from its obligation to
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pay the Registration Expenses in connection therewith), without prejudice,
however, to the rights, if any, of any one or more Holders to request that such
Company Registration be effected as a demand registration and (ii) all Holders
of Registrable Securities requesting to be included in such Company Registration
must sell their Registrable Securities to the underwriters selected by Holdings
on the same terms and conditions as apply to Holdings.
6.2.2 Piggyback Registration Expenses. Holdings will pay all
Registration Expenses in connection with each Company Registration of
Registrable Securities and each Person selling Registrable Securities shall pay
all underwriting discounts and commissions and transfer taxes and documentary
stamp taxes, if any, relating to the sale or disposition by such Person of
Registrable Securities pursuant to a Company Registration statement.
6.2.3 Priorities in Offering. If, in the case of a Company
Registration, the managing underwriter advises Holdings that, in its opinion,
the number of Common Shares proposed to be included in such Company Registration
should be limited due to market conditions, then Holdings will promptly so
advise each Holder of Registrable Securities that has requested registration and
will include in such Company Registration (i) first, the securities Holdings
proposes to sell, and (ii) second, the number of such Registrable Securities
requested to be included in such registration statement which, in the opinion of
the managing underwriter, can be sold, such number to be allocated among the
selling Holders of Registrable Securities pro rata in accordance
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with the number of shares of Registrable Securities that each such holder has
requested be included in such registration statement. Nothing contained in this
Section 6.2.3 shall in any manner affect the priorities established in Section
6.1.5(c) hereof in connection with the final demand registration made pursuant
to Section 6.1.1 hereof.
6.2.4 Notice to Certain Holders. Holdings shall not file any
registration statement under the Securities Act, unless it shall first have
given to each Stockholder at least 30 days' prior notice thereof.
6.3 Repayment of Indebtedness. If a Holder of Registrable
Securities acquired from Holdings or any of its subsidiaries purchased such
Registrable Securities from Holdings or such subsidiary with a note from, or
other form of indebtedness of, such Holder, such Holder shall not be entitled to
effect any transfer of such shares in connection with any demand registration or
Company Registration, unless such Holder shall have repaid in full the principal
of and the accrued and unpaid interest on any such note or indebtedness.
6.4 Rule 144. If Holdings shall have filed a registration
statement pursuant to the requirements of Section 12 of the Exchange Act or a
registration statement pursuant to the requirements of the Securities Act,
Holdings covenants that it will file the reports required to be filed by it
under the Securities Act and the Exchange Act and the rules and regulations
adopted by the Commission thereunder (or, if Holdings is not required to file
such reports, it will, upon the request of any Holder of Registrable Securities,
make publicly available other
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information), and it will take such further action as any Holder of Registrable
Securities may reasonably request, all to the extent required from time to time
to enable such Holder to sell shares of Registrable Securities without
registration under the Securities Act within the limitation of the exemptions
provided by (i) Rule 144 under the Securities Act, as such Rule may be amended
from time to time, or (ii) any similar rule or regulation hereafter adopted by
the Commission. Upon the request of any Holder of Registrable Securities,
Holdings will deliver to such Holder a written statement as to whether it has
complied with such requirements.
6.5 Registration Procedures. If and whenever Holdings is required
to effect the registration of any Registrable Securities under the Securities
Act as provided in Sections 6.1.1 and 6.2.1 hereof, Holdings will as
expeditiously as possible:
(i) prepare and (within 60 days after the end of the period
within which requests for registration may be given to Holdings) file
with the Commission the requisite registration statement to effect such
registration and thereafter use its best efforts to cause such
registration statement to become effective;
(ii) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective for a period of either (A) not less than 90 days or,
if such registration statement relates to an underwritten offering, such
longer period as in the opinion of counsel for the
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underwriters a prospectus is required by law to be delivered in
connection with sales of Registrable Securities by an underwriter or
dealer or (B) such shorter period as will terminate when all of the
securities covered by such registration statement have been disposed of
in accordance with the intended methods of disposition by the seller or
sellers thereof set forth in such registration statement (but in any
event not before the expiration of any longer period required under the
Securities Act), and to comply with the provisions of the Securities Act
with respect to the disposition of all securities covered by such
registration statement until such time as all of such securities have
been disposed of in accordance with the intended methods of disposition
by the seller or sellers thereof set forth in such registration
statement;
(iii) furnish to each seller of Registrable Securities covered by
such registration statement and each Requesting Holder such number of
conformed copies of such registration statement and of each such
amendment and supplement thereto (in each case including all exhibits),
such number of copies of the prospectus contained in such registration
statement (including each preliminary prospectus and any summary
prospectus) and any other prospectus filed under Rule 424 under the
Securities Act, in conformity with the requirements of the Securities
Act, and such other documents in order to facilitate the disposition of
the Registrable Securities owned by such seller, as such seller may
reasonably request;
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(iv) use its best efforts to register or qualify such Registrable
Securities and other securities covered by such registration statement
under such other securities or blue sky laws of such jurisdictions as
each seller thereof and each Requesting Holder shall reasonably request,
to keep such registration or qualification in effect for so long as such
registration statement remains in effect, and take any other action
which may be reasonably necessary or advisable to enable such seller to
consummate the disposition in such jurisdictions of the securities owned
by such seller, provided that Holdings shall not for any such purpose be
required to (A) qualify generally to do business as a foreign
corporation in any jurisdiction where it would not otherwise be required
to qualify but for the requirements of this subdivision (iv), (B)
consent to general service of process in any such jurisdiction or (C)
subject itself to taxation in such jurisdiction;
(v) use its best efforts to cause all Registrable Securities
covered by such registration statement to be registered with or approved
by such other governmental agencies or authorities as may be necessary
by virtue of the business and operations of Holdings to enable the
seller or sellers thereof to consummate the disposition of such
Registrable Securities;
(vi) furnish to each seller of Registrable Securities and each
Requesting Holder a signed counterpart, addressed to such seller of
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(x) the opinion of counsel for Holdings delivered to the
underwriter, if such registration includes an underwritten public
offering, dated the effective date of such registration statement
and the date of the closing under the underwriting agreement, or,
in the absence of an underwriter, in such form as may be
reasonably satisfactory to such seller, and
(y) the "comfort" letter, delivered to the underwriter, if
such registration includes an underwritten public offering, dated
the effective date of such registration statement and the date of
the closing under the underwriting agreement, or, in the absence
of an underwriter, in such form as may be reasonably satisfactory
to such seller, signed by the independent public accountants who
have certified Holdings' financial statements included in such
registration statement,
covering substantially the same matters with respect to such
registration statement (and the prospectus included therein) and, in the
case of the accountants' letter, with respect to events subsequent to
the date of such financial statements as are customarily covered in
opinions of issuer's counsel and in accountants' letters delivered to
the underwriters in underwritten public offerings of securities and, in
the case of the accountants' letter, such other financial matters, and,
in the case of the legal opinion, such other legal matters, as such
seller or such Requesting Holder (or the underwriters, if any) may
reasonably request;
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(vii) notify each seller of Registrable Securities covered by
such registration statement and each Requesting Holder, at any time when
a prospectus relating thereto is required to be delivered under the
Securities Act, upon discovery that, or upon the discovery of the
happening of any event as a result of which, the prospectus included in
such registration statement, as then in effect, includes an untrue
statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances under which
they were made, and at the request of any such seller or Requesting
Holder promptly prepare and furnish to such seller or Requesting Holder
a reasonable number of copies of a supplement to or an amendment of such
prospectus as may be necessary so that, as thereafter delivered to the
purchasers of such securities, such prospectus shall not include an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances under which
they were made;
(viii) otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make available
to its security holders, as soon as reasonably practicable, an earnings
statement covering a period of twelve months, beginning with a calendar
month commencing not more than three months after the effective date of
such registration statement, which earnings
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statement shall satisfy the provisions of Section 11(a) of the
Securities Act, and will furnish to each such seller and each Requesting
Holder at least five business days prior to the filing thereof a copy of
any amendment or supplement to such registration statement or prospectus
and shall not file any such amendment or supplement to which any such
seller or any Requesting Holder shall have reasonably objected on the
grounds that such amendment or supplement does not comply in all
material respects with the requirements of the Securities Act or of the
rules or regulations thereunder;
(ix) provide and cause to be maintained a transfer agent and
registrar for all Registrable Securities covered by such registration
statement from and after a date not later than the effective date of
such registration statement; and
(x) use its best efforts (A) to cause all such Registrable
Securities covered by such registration statement to be listed on a
national securities exchange (if such Registrable Securities are not
already so listed) and on each other securities exchange on which
similar securities issued by Holdings are then listed, if the listing of
such Registrable Securities is then permitted under the rules of such
exchange; or, at the option of Holdings, (B) to secure the designation
of all such Registrable Securities covered by such registration
statement as a NASDAQ "national market system security" within the
meaning of Rule 11Aa2-1 of the Commission or, failing that, to secure
NASDAQ authorization for such
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Registrable Securities and, without limiting the generality of the
foregoing, to arrange for at least two market makers to register as such
with respect to such Registrable Securities with the National
Association of Securities Dealers.
Holdings may require each seller of Registrable Securities as to
which any registration is being effected to furnish Holdings such information
regarding such seller and the distribution of such securities as Holdings may
from time to time reasonably request in writing.
Each holder of Registrable Securities agrees by acquisition of
such Registrable Securities that upon receipt of any notice from Holdings of the
happening of any event of the kind described in subdivision (vii) of this
Section 6.5, such holder will forthwith discontinue such holder's disposition of
Registrable Securities pursuant to the registration statement relating to such
Registrable Securities until such holder's receipt of the copies of the
supplemented or amended prospectus contemplated by subdivision (vii) of this
Section 6.5 and, if so directed by Holdings, such holder will use its best
efforts to deliver to Holdings (at Holdings' expense) all copies, other than
permanent file copies then in such holder's possession, of the prospectus
relating to such Registrable Securities current at the time of receipt of such
notice.
ARTICLE VII
Rights of Inclusion and Rights of First Offer
7.1 Rights of Inclusion. (a) Until the termination of
this Agreement, none of the parties (other than Holdings) and
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their respective Permitted Transferees shall sell or otherwise dispose of any
Common Shares or any right, option or warrant to purchase Common Shares pursuant
to an offer (a "Third Party Offer") by any Person (individually, a "Third Party"
and collectively, "Third Parties"), whether initiated by such Third Party or by
the party seeking to sell such Common Shares or such right, option or warrant
unless the terms and conditions of such sale or other disposition to such Third
Party shall include an offer to each of the other parties (other than Holdings)
and their respective Permitted Transferees (for purposes of this Section 7.1(a),
the "Offerees"), to include, at the sole option of each Offeree, in the sale or
other disposition to the Third Party a pro rata number of Common Shares owned by
each such Offeree determined in accordance with Section 7.1(b) hereof. The party
or its respective Permitted Transferee that receives the Third Party Offer (the
"Transferor") shall cause the Third Party Offer to be reduced to writing (which
writing shall include an offer to purchase or otherwise acquire Common Shares
from the Offerees on the same terms and subject to the same conditions as set
forth in such Third Party Offer) and shall send written notice of the Third
Party Offer (the "Notice") to each of the Offerees in the manner set forth in
Article XIV hereof. The Notice shall be accompanied by a true and correct copy
of the Third Party Offer. At any time within 30 days after the date of receipt
by the Offerees of the Notice, each of the Offerees may, at his or its sole
option, accept the offer included in the Notice for up to such number of Common
Shares as is determined in accordance with the provisions of Section 7.1(b)
hereof by
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furnishing written notice of such acceptance to the Transferor and delivering to
the Transferor the certificate or certificates representing the Common Shares to
be sold or otherwise disposed of pursuant to such offer by such Offeree,
together with a limited power-of-attorney authorizing the Transferor to sell or
otherwise dispose of such Common Shares pursuant to the terms of such Third
Party Offer and the Notice, both on forms provided for that purpose with the
Notice.
(b) Each Offeree shall have the right to sell pursuant to a Third
Party Offer a pro rata number of such Offeree's Common Shares equal to the
product obtained by multiplying (i) the number of Common Shares held by such
Offeree times (ii) a fraction, the numerator of which is the total number of
Common Shares covered by the Third Party Offer, and the denominator of which is
the total number of Common Shares, on a fully diluted basis, owned by the
Transferor and the Offerees. In all cases, the number of Common Shares sold by
the Transferor shall equal the number of Common Shares to be sold pursuant to
the Third Party Offer less the number of Common Shares the Offerees have elected
to sell.
(c) Promptly after the consummation of the sale or other
disposition of Common Shares of the Transferor and the Offerees to the Third
Party pursuant to the Third Party Offer, the Transferor shall notify the
Offerees thereof and shall remit to each of the Offerees a certified check
and/or notes, on a pro rata basis in accordance with the terms of the Third
Party Offer, for the total sales price of the Common Shares of such Offeree sold
or otherwise disposed of pursuant thereto, and shall furnish
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such other evidence of the completion and time of completion of such sale or
other disposition and the terms thereof as may be reasonably requested by any of
the Offerees.
(d) If within 30 days after the date of the Notice, any Offeree
has not accepted the offer contained in the Notice, the Transferor shall have 30
days in which to sell or otherwise dispose of not more than the amount of Common
Shares covered by the Third Party Offer to the Transferor as described in the
Notice, on terms including, without limitation, price and form of consideration
no more favorable to the Transferor than were set forth in the Notice; provided,
however, that such sale shall include such number of Common Shares of any
Offerees who did accept the offer contained in the Notice within 30 days of the
date thereof as determined in accordance with this Section 7.1. If, at the end
of 60 days following the date of the Notice, the Transferor has not completed
the sale or other disposition of Common Shares of the Transferor and the
Offerees in accordance with the terms of the Third Party Offer, the Transferor
shall return to the Offerees all certificates representing Common Shares which
the Offerees delivered for sale or other disposition pursuant to this Section
7.1 and all related documents including, but not limited, to stock powers and
the limited powers-of-attorney authorizing the Transferor to sell such Common
Shares and all the restrictions on sale or other disposition contained in this
Agreement with respect to Common Shares and options to purchase Common Shares
owned by the Transferor shall again be in effect.
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(e) Notwithstanding anything contained in this Section 7.1 to the
contrary, no Management Holder shall be entitled to be included in a sale by any
Transferor pursuant to this Section 7.1 during the five-year period commencing
on the date hereof, unless the holders of a majority of the Common Shares held
by the Management Holders shall agree otherwise.
7.2 Right of First Offer. (a) If any party (other than Holdings)
desires to sell any Common Shares or any right, option or warrant to acquire
Common Shares owned by it, such party (for purposes of this Section 7.2, the
"Prospective Seller") shall provide Holdings and each of the other parties
hereto written notice of such Offer (for purposes of this Section 7.2, an
"Offer Notice"). The Offer Notice shall identify the number of Common Shares
actually owned and underlying any options, warrants or other rights to acquire
Common Shares owned by the Prospective Seller which the Prospective Seller
wishes to sell (for purposes of this Section 7.2, the "Offered Shares"), the
cash price per Common Share at which a sale is proposed to be made (for purposes
of this Section 7.2, the "Offer Price"), and all the other material terms and
conditions of the offer.
(b) (i) The receipt of an Offer Notice by Holdings, each
Management Stockholder and the ESOT (collectively, the "Other Offerees") from a
Prospective Seller shall constitute an offer by such Prospective Seller to sell
to each Other Offeree the Offered Shares at the Offer Price in cash, except that
an Offer Notice delivered by the ESOT shall constitute an offer solely to
Holdings to purchase the Offered Shares at the Offer Price in cash. Such offer
shall be irrevocable for 30 days (14
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days in the case of an offer from the ESOT to Holdings) after receipt of such
Offer Notice by each Other Offeree. During such 30- or 14-day period, as the
case may be each Other Offeree shall, subject to the priorities set forth in the
next succeeding paragraph, have the right to accept such offer as to all or a
portion of the Offered Shares by giving a written notice of acceptance (for
purposes of this Section 7.2, the "Notice of Acceptance") to the Prospective
Seller prior to the expiration of such 30- or 14-day period, as the case may be
(for the purposes of this Section 7.2, any such Other Offeree or the Company so
accepting such offer, an "Accepting Party").
(ii) Each such Other Offeree shall be entitled to accept such
offer from the Prospective Seller in the following order of priority: first,
Holdings shall be entitled to accept such offer for any or all of the Offered
Shares; second, the ESOT shall be entitled to accept such offer for any or all
of the then remaining Offered Shares; and third, if neither Holdings nor the
ESOT shall have accepted such offer for all the Offered Shares, the Management
Stockholders, in such portions as they may agree among themselves, shall be
entitled to accept such offer for no fewer than all of the Offered Shares then
remaining unaccepted. No Other Offeree shall be entitled to purchase any of the
Offered Shares unless and until the Other Offerees have, in the aggregate,
agreed to purchase all of the Offered Shares. If any Other Offeree so accepts
the Prospective Seller's offer, such Person will purchase from the Prospective
Seller, and the Prospective Seller will sell to such Accepting Party, such
number of Offered Shares as to which such Accepting Party shall have
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accepted (and is entitled to accept) the Prospective Seller's offer. The price
per Common Share to be paid by such Accepting Party shall be the Offer Price
specified in the Offer Notice. The Notice of Acceptance shall specify (i) such
Accepting Party's acceptance of the Prospective Seller's offer and (ii) the
number of Offered Shares to be purchased by such Accepting Party.
(c) The consummation of any such purchase by and sale to any
Accepting Party shall take place as soon as practicable following termination of
the 30- or 14-day period, as the case may be, specified in subsection (b) above.
Upon the consummation of such purchase and sale, the Prospective Seller shall
(i) deliver to the Accepting Party certificates evidencing the Offered Shares
purchased and sold duly endorsed in blank or accompanied by written instruments
of transfer in form satisfactory to such Accepting Party duly executed by the
Prospective Seller, and (ii) shall assign all its rights under this Agreement
with respect to the Offered Shares purchased and sold pursuant to an instrument
of assignment reasonably satisfactory to such Accepting Party.
(d) In the event that (i) each Other Offeree and the Company
shall have received an Offer Notice from a Prospective Seller but the
Prospective Seller shall not have received therefrom Notices of Acceptance as to
all the Offered Shares prior to the expiration of the 30- or 14-day period, as
the case may be, following receipt of such Offer Notice or (ii) an Accepting
Party shall have given a Notice of Acceptance to the Prospective Seller but
shall have failed to consummate, other than as a result of the fault of the
Prospective Seller, a
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purchase of the Offered Shares with respect to which such Notice of Acceptance
was given within 60 days after receipt of the Notice of Acceptance by the
Prospective Seller, nothing in this Section 7.2 shall limit the right of the
Prospective Seller to make a sale of the Offered Shares not purchased by one or
more Accepting Parties so long as all the Offered Shares that are sold or
otherwise disposed of by the Prospective Seller (which number of Offered Shares
shall be not less than the number of Offered Shares specified in such Offer
Notice less any shares purchased by any Accepting Parties) are sold or otherwise
disposed of for cash (A) within 180 days after the date of receipt of such Offer
Notice by each Other Offeree and (B) at the Offer Price included in such Offer
Notice.
(e) Nothing contained in this Section 7.2 shall be deemed to
limit or affect the terms of Section 7.1 hereof. If the Prospective Seller does
not sell or otherwise dispose of the Offered Shares within the 180-day period
specified above and upon terms no less favorable to the Prospective Seller than
those contained in the Offer Notice, then the Prospective Seller shall no longer
be entitled to sell the Offered Shares without again complying with the
provisions of this Section 7.2.
7.3 Application of Article VII. Anything in this Article VII to
the contrary notwithstanding, the provisions of this Article VII shall not be
applicable to (i) sales or other dispositions of Common Shares (A) referred to
in, or made pursuant to and in compliance with, Articles VI or XII hereof or (B)
to any Permitted Transferee and (ii) the grant of options and
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the purchase of Common Shares pursuant thereto in accordance with subclause (ii)
of Section 9.1(a) hereof. In addition, the provisions of Section 7.1 hereof
shall not apply to the ESOT.
ARTICLE VIII
Certain Covenants of Holdings
8.1 No Transfers of Shares on Books. Holdings agrees
that it will not permit the transfer of any Common Shares to be registered on
its books unless it has reasonable grounds to believe and does believe that such
transfer is not in violation of any provision of any Subscription Agreement, the
Note and Warrant Agreements, the ESOT Purchase Agreements or this Agreement.
8.2 Financial Statements. Holdings agrees to furnish to each
other party (a) as soon as available but in no event more than 45 days after the
end of the first, second and third quarterly periods of each fiscal year,
consolidated balance sheets of Holdings and its Subsidiaries as of the close of
such period and consolidated statements of income and stockholders' equity and
statement of cash flows for such quarterly period and for the period from the
beginning of the then current fiscal year to the end of such quarterly period
setting forth in comparative form corresponding figures as at the corresponding
date in, and for the corresponding period of, the preceding fiscal year, all in
reasonable detail and certified by the Chief Financial Officer of Holdings; and
(b) as soon as available but in no event more than 120 days after the close of
each of Holdings' fiscal years, financial statements consisting of consolidated
balance sheets of Holdings and its Subsidiaries as at the end of such year and
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consolidated statements of income and stockholders' equity and statement of cash
flows of Holdings and its Subsidiaries for such year, and setting forth, when
available and appropriate under generally accepted accounting principles, in
each case in comparative form corresponding consolidated figures from the
preceding annual audit, together with the audit report thereon of Arthur
Andersen & Co. or such other independent public accountants of nationally
recognized standing selected by Holdings whose certification shall state that
their examination was performed in accordance with generally accepted accounting
principles.
8.3 Certain Prohibited Transferees. Each party hereto (other than
the ESOT and Holdings) agrees that it will not, and Holdings agrees that it will
not consent to, the transfer by any other party to this Agreement of any Common
Shares or right, option or warrants to acquire Common Shares, in each case,
covered hereby and owned by such other party to a Person whom such party or
Holdings knows, or believes or after reasonable inquiry should know, has been
convicted of a felony which, due to its nature or notoriety, reflects or would
reflect adversely upon Holdings or any Subsidiary thereof or which has resulted
in the incarceration of such Person for 30 days or more (unless such conviction
is reversed in any final appeal thereof), and any such transfer by the ESOT
shall be subject to a Right of First Refusal in favor of Holdings in accordance
with subclause (i) of Section 4.2 hereof.
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ARTICLE IX
Certain Additional Covenants
9.1 Transfers Generally. (a) Each Management Holder shall not,
directly or indirectly, transfer, sell, assign, grant options on or otherwise
dispose of such Holder's Common Shares during the five-year period commencing on
the date hereof except (i) if Holders of a majority of the Common Shares held by
Management Holders shall approve such disposition, (ii) with respect to granting
options, each Management Holder may grant options to acquire his Common Shares
to any employee of Holdings or any of its Subsidiaries, but only at an exercise
price at or above the price determined in the then most recent ESOP appraisal of
its Common Shares, if there has not been an Initial Public Offering, or the
average closing price, or the average closing bid and ask price, as the case may
be, for the Common Shares during the 10 trading days immediately preceding such
grant, if there has been an Initial Public Offering or (iii) to Permitted
Transferees of such Management Holder, and, in any of such cases, only in
accordance with the terms of this Agreement.
(b) From and after the Closing Date, each Management Holder shall
have and maintain sole beneficial ownership of such Holder's Common Shares, as
long as such shares are owned by such Holder, free and clear of any and all
liens, claims, encumbrances, security interests and rights and interests of
others of any kind (other than for options granted in accordance with Section
9.1(a) hereof), except that each Management Holder may, with the approval of the
Board, upon the favorable recommendation of the Compensation Committee, pledge
Common
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Shares, other than those owned and acquired by the Management Stockholders on
the Closing Date, to Holdings in connection with such Holder's acquisition of
such shares.
(c) Each Management Holder and its Permitted Transferees shall
have and maintain from and after the Closing Date sole voting power with respect
to such Holder's Common Shares, will not grant any proxy with respect to such
Common Shares which is irrevocable for longer than six months, enter into by
voting trust or other voting agreement or arrangement with respect to such
Common Shares or grant any other rights to vote such Common Shares, except as
specifically provided herein. Any proxy granted by any Management Holder shall
include an express provision requiring the holder of such proxy to vote the
Common Shares relating to such proxy strictly in accordance with the terms of
this Agreement.
ARTICLE X
Term
10.1 Term. This Agreement shall become effective (the "Effective
Date") upon the Closing Date and shall continue in effect until the earlier of
(i) the tenth anniversary of the Effective Date or (ii) the Public Distribution
of more than 50% of the outstanding Common Shares; provided, (A) that any
termination pursuant to subclause (i) of this Section 10.1 shall be subject to
the provisions of Section 2.6(c) and (d) hereof and shall not relieve Holdings
of its obligations, or the Institutional Investors of their rights, under
Sections 12.2 and 12.3 hereof in the event the Institutional Investors shall
exercise a Put Option on or prior to the tenth anniversary hereof
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and in such event such obligations and rights shall not terminate until all of
the Institutional Investors' Common Shares and Warrants have been sold pursuant
to the exercise of such Put Option or the exercise of a Put Option on a
succeeding anniversary, including an anniversary after the tenth anniversary,
and (B) any termination pursuant to subclause (i) or (ii) of this Section 10.1
shall not affect the obligations of the parties to each other under Article VI
hereof, which shall remain in full force and effect at all times until the
fifteenth anniversary hereof.
ARTICLE XI
Acknowledgment by EMC
11.1 Acknowledgment. EMC acknowledges and agrees to the terms and
provisions of this Agreement, the Subscription Agreements, the Note and Warrant
Agreements and the ESOT Purchase Agreements.
ARTICLE XII
Puts and Calls
12.1 Calls. Unless there has been an Initial Public Offering, on
each anniversary of this Agreement commencing with the seventh anniversary
hereof, Holdings shall have the right, but not the obligation (a "Call Option"),
to purchase from the Institutional Investors and their Permitted Transferees,
and the Institutional Investors and their Permitted Transferees shall be
obligated to sell to Holdings (a "Call"), no less than all of the Common Shares
and Warrants then owned by the Institutional Investors and their Permitted
Transferees at the Fair Market Value on such anniversary. Written notification
of any exercise
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of a Call Option must be delivered to the Institutional Investors and their
Permitted Transferees at least 10 days prior to the anniversary as to which such
exercise pertains, the closing on such Call shall take place at the principal
executive offices of Holdings, or such other place as the applicable parties
agree, as soon as practicable after such anniversary and each party thereto
shall use its respective best efforts to ensure that such closing occurs
promptly after such anniversary.
12.2 Puts. Unless there has been an Initial Public Offering, on
each anniversary of this Agreement commencing with the seventh anniversary
hereof, the Institutional Investors and their Permitted Transferees, upon the
affirmative vote of a majority of the Common Shares owned by them or issuable
pursuant to Warrants owned by them, shall have the right, but not the obligation
(a "Put Option"), to sell to Holdings, and Holdings shall be obligated to
purchase from the Institutional Investors and their Permitted Transferees (a
"Put") no less than all of the Institutional Investors' and their Permitted
Transferees' Common Shares and Warrants at the Fair Market Value on such
anniversary. Written notification of any exercise of a Put Option must be
delivered to Holdings at least 10 days prior to the anniversary as to which such
exercise pertains, the closing on such Put shall take place at the principal
executive offices of Holdings as soon as practicable after such anniversary, and
the parties thereto shall use their respective best efforts to ensure that such
closing takes place promptly after such anniversary.
12.3 No Interference with Put Option. Holdings hereby
covenants and agrees that it shall take no action, including,
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without limitation, the entering into of any agreement or the issuance of any
security, the result or terms of which would in any manner prohibit Holdings
from performing its obligations to the Institutional Investors in the event of
the exercise of a Put Option under Section 12.2 hereof. Anything contained in
Section 12.2 hereof or in the immediately preceding sentence of this Section
12.3 to the contrary notwithstanding, Holdings' performance under such Section
12.2 shall be subject to the (i) availability to Holdings of adequate financing
("Put Financing"), which financing Holdings shall use its best efforts to
procure, (ii) performance of such obligation by Holdings not resulting in a
default under the Senior Indebtedness, if then in effect and (iii) such
performance not being prohibited under then applicable law; provided, that in
the event then applicable law shall prohibit performance of Holdings'
obligations under Section 12.2 hereof, Holdings shall take such actions and do
all such things as the Institutional Investors and their Permitted Transferees
may reasonably request to fulfill the intent and purpose of such Section 12.2.
In the event the Management Stockholders believe, in their good faith judgment,
that the terms of any Put Financing as a whole are commercially unreasonable,
then Holdings shall not be obligated to enter into such Put Financing unless
each of the MLCP Directors and the director designated by the Other Investors
pursuant to Section 3.1.1 hereof (such three directors being collectively the
"Institutional Investor Directors") shall, in the exercise of their business
judgment subject to their fiduciary duties as directors of Holdings under
Delaware law, unanimously vote in favor of Holdings entering into the Put
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<PAGE> 69
Financing. Such vote of the Institutional Investor Directors shall be
determinative of such matter notwithstanding any vote of the Whole Board of
Directors, and in the event of such affirmative vote by the Institutional
Investor Directors Holdings shall have 12 months from the date of such vote to
consummate its acquisition of the Institutional Investors' Common Shares and
Warrants pursuant to the Put. If Holdings shall not perform its obligations
under Section 12.2 hereof pursuant to some provision of this Section 12.3 in the
event of an exercise of a Put Option, such failure to consummate such Put shall
not in any manner impair or adversely affect the Institutional Investors'
right thereafter to exercise a Put Option on each succeeding anniversary hereof
or in any manner relieve Holdings of its good faith obligation to obtain
adequate financing for each such succeeding Put, subject to the conditions set
forth in Section 12.2 hereof and this Section 12.3. In addition, any extension,
modification or restructuring of the Senior Indebtedness as existing on the date
hereof must be approved by a majority vote of the Board of Holdings, which vote
must include the affirmative vote of at least one of the MLCP Directors.
12.4 Certain Delays in the Exercise of the Put Option. (a) If,
during the twelve-month period commencing on the sixth anniversary of this
Agreement, Holdings shall seek to effect an Initial Public Offering, but shall
be prevented from effecting such offering by the negative vote of the MLCP
Directors and the director nominated by the Other Investors in accordance with
the provisions of Section 2.6 hereof, then, in such event, the Institutional
Investors shall not be entitled to exercise the Put
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<PAGE> 70
Option which would have otherwise arisen on the seventh anniversary hereof and,
subject to the next following subsection (b), the first time at which the
Institutional Investors shall be entitled to exercise a Put Option shall be on
the eighth anniversary hereof.
(b) If, during the twelve-month period commencing on the seventh
anniversary of this Agreement, Holdings shall seek to effect an Initial Public
Offering, but shall be prevented from effecting such offering by the negative
vote of the MLCP Directors and the director nominated by the Other Investors in
accordance with the provisions of Section 2.6 hereof, then, in such event, the
Institutional Investors shall not be entitled to exercise the Put Option which
would have otherwise arisen on the eighth anniversary hereof and the first time
at which the Institutional Investors shall be entitled to exercise a Put Option
shall be on the ninth anniversary hereof.
ARTICLE XIII
Parties
13.1 Parties. The parties hereto agree that any Person who is not
already a party hereto and who acquires Common Shares, Preferred Shares or
Warrants from a party (or his executor or administrator) or its Permitted
Transferee (other than in a Public Offering) shall, by execution of a
counterpart of this Agreement, become a party hereto, with all of the rights and
obligations with respect to such shares or Warrants hereunder of the party
hereto from whom such shares or Warrants were acquired (other than in the case
of a transferee (other than a distributee pursuant to the terms of the ESOP and
in accordance
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<PAGE> 71
with ERISA) receiving Preferred Shares or Common Shares from the ESOT, who shall
also be subject to each provision from which the ESOT has been exempted as a
result of its legal status under ERISA).
ARTICLE XIV
Miscellaneous
14.1 Amendment; Modification; Etc. This Agreement may be amended,
modified or terminated and any provision hereof may be waived only by a written
instrument duly executed by the holders of 80% or more of the Common Shares at
the time outstanding and Common Shares issuable upon the exercise of outstanding
Warrants and subject to this Agreement. Notwithstanding the foregoing, any
amendment, modification, termination or waiver to this Agreement which adversely
affects the rights of the MLCP Investors or the Other Investors, as the case may
be, under Article III, V, VI, VII, X, XII or this Section 14.1 shall have no
effect unless such amendment, modification, termination or waiver has been
consented to in writing by all of the MLCP Investors or by all of the Other
Investors, as the case may be.
14.2 Governing Law. This Agreement shall be governed
by and construed in accordance with the laws of the State of Delaware.
14.3 Execution in Counterparts. This Agreement may be signed in
one or more counterparts, each of which shall be an original, but all of which
together shall constitute one instrument.
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<PAGE> 72
14.4 Notices. All communications provided for herein shall be in
writing and delivered by hand or mailed via Federal Express overnight courier as
follows:
(i) if to a Stockholder, to such Stockholder at its address
specified in the Schedule of Stockholders (or an annex thereto, if such
Stockholder shall have become a party hereto pursuant to Article XIII
hereof), or
(ii) if to Holdings, addressed to it, at 300 Sixth Avenue - Suite
800, Pittsburgh, Pennsylvania 15222, Attention: Mr. Robert B. Knutson,
with a copy to Eckert Seamans Cherin & Mellott, 600 Grant Street - 42nd
Floor, Pittsburgh, Pennsylvania 15219, Attention: Robert C. McCartney,
Esq., or
(iii) if to the Other Investors, addressed to them at their
respective addresses set forth on Schedule 3 hereto; or
(iv) if to EMC, addressed to it at 300 Sixth Avenue - Suite 800,
Pittsburgh, Pennsylvania 15222, Attention: Mr. Robert B. Knutson, with a
copy to Eckert Seamans Cherin & Mellott, 600 Grant Street - 42nd Floor,
Pittsburgh, Pennsylvania 15219, Attention: Robert C. McCartney, Esq., or
(v) if to the ESOT, addressed to it at Marine Midland Bank, N.A.,
250 Park Avenue - 3rd Floor, New York, New York 10177, Attention:
Stephen J. Hartman, Jr., or to such other address as any party shall
furnish to the other parties in writing in accordance with this Section
14.4.
14.5 Entire Agreement; Headings. This Agreement and
the Agreements referred to herein embody the entire agreement and
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<PAGE> 73
understanding among the parties and supersede all prior agreements and
understandings relating to the subject matter hereof. The headings in and date
of this Agreement are for purposes of reference only and shall not limit or
otherwise affect the meaning hereof.
14.6 Assignment. Except as otherwise provided herein, no party to
this Agreement may assign any of its rights or obligations hereunder. This
Agreement shall be binding on, and inure to the benefit of and be enforceable
by, the parties hereto and their respective successors, executors or
administrators and permitted assigns.
14.7 Specific Enforcement; Other Remedies. Each party hereto
acknowledges and agrees that in the event of any breach of this Agreement, the
non-breaching party would be irreparably harmed and could not be made whole by
monetary damages. It is accordingly agreed that each party hereto, in addition
to any other remedy to which it may be entitled at law or in equity, shall be
entitled to compel specific performance of this Agreement.
IN WITNESS WHEREOF, the parties hereto have hereunto signed their
names or have caused this Agreement to be duly executed by their officers
thereunto duly authorized as of the date first above written.
EMC HOLDINGS, INC.
By_____________________________
Title
(Counterpart Signature Page to Stockholders Agreement)
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<PAGE> 74
14.7 Specific Enforcement; Other Remedies. Each party hereto
acknowledges and agrees that in the event of any breach of this Agreement, the
non-breaching party would be irreparably harmed and could not be made whole by
monetary damages. It is accordingly agreed that each party hereto, in addition
to any other remedy to which it may be entitled at law or in equity, shall be
entitled to compel specific performance of this Agreement.
IN WITNESS WHEREOF, the parties hereto have hereunto signed their
names or have caused this Agreement to be duly executed by their officers
thereunto duly authorized as of the date first above written.
ML EMPLOYEES LBO PARTNERSHIP
NO. I, L.P.
By ML Employees LBO Managers,
Inc., as General Partner
By__________________________________
(Counterpart Signature Page to Stockholders Agreement)
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<PAGE> 75
14.7 Specific Enforcement; Other Remedies. Each party hereto
acknowledges and agrees that in the event of any breach of this Agreement, the
non-breaching party would be irreparably harmed and could not be made whole by
monetary damages. It is accordingly agreed that each party hereto, in addition
to any other remedy to which it may be entitled at law or in equity, shall be
entitled to compel specific performance of this Agreement.
IN WITNESS WHEREOF, the parties hereto have hereunto signed their
names or have caused this Agreement to be duly executed by their officers
thereunto duly authorized as of the date first above written.
ML OFFSHORE LBO PARTNERSHIP
NO. IV
By Merrill Lynch LBO
Partners No. I, L.P., as
Investment General Partner
By Merrill Lynch Capital
Partners, Inc., as Managing
General Partner
By______________________________________
(Counterpart Signature Page to Stockholders Agreement)
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<PAGE> 76
14.7 Specific Enforcement; Other Remedies. Each party hereto
acknowledges and agrees that in the event of any breach of this Agreement, the
non-breaching party would be irreparably harmed and could not be made whole by
monetary damages. It is accordingly agreed that each party hereto, in addition
to any other remedy to which it may be entitled at law or in equity, shall be
entitled to compel specific performance of this Agreement.
IN WITNESS WHEREOF, the parties hereto have hereunto signed their
names or have caused this Agreement to be duly executed by their officers
thereunto duly authorized as of the date first above written.
MERRILL LYNCH INTERFUNDING INC.
By___________________________________________
(Counterpart Signature Page to Stockholders Agreement)
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<PAGE> 77
14.7 Specific Enforcement; Other Remedies. Each party hereto
acknowledges and agrees that in the event of any breach of this Agreement, the
non-breaching party would be irreparably harmed and could not be made whole by
monetary damages. It is accordingly agreed that each party hereto, in addition
to any other remedy to which it may be entitled at law or in equity, shall be
entitled to compel specific performance of this Agreement.
IN WITNESS WHEREOF, the parties hereto have hereunto signed their
names or have caused this Agreement to be duly executed by their officers
thereunto duly authorized as of the date first above written.
MERRILL LYNCH CAPITAL APPRECIATION
PARTNERSHIP NO. IV, L.P.
By Merrill Lynch LBO
Partners No. I, L.P.,
as General Partner
By Merrill Lynch Capital Partners,
Inc., as Managing General Partner
By___________________________________________
(Counterpart Signature Page to Stockholders Agreement)
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<PAGE> 78
14.7 Specific Enforcement; Other Remedies. Each party hereto
acknowledges and agrees that in the event of any breach of this Agreement, the
non-breaching party would be irreparably harmed and could not be made whole by
monetary damages. It is accordingly agreed that each party hereto, in addition
to any other remedy to which it may be entitled at law or in equity, shall be
entitled to compel specific performance of this Agreement.
IN WITNESS WHEREOF, the parties hereto have hereunto signed their
names or have caused this Agreement to be duly executed by their officers
thereunto duly authorized as of the date first above written.
MERRILL LYNCH KECALP, L.P. 1986
By___________________________________________
(Counterpart Signature Page to Stockholders Agreement)
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<PAGE> 79
14.7 Specific Enforcement; Other Remedies. Each party hereto
acknowledges and agrees that in the event of any breach of this Agreement, the
non-breaching party would be irreparably harmed and could not be made whole by
monetary damages. It is accordingly agreed that each party hereto, in addition
to any other remedy to which it may be entitled at law or in equity, shall be
entitled to compel specific performance of this Agreement.
IN WITNESS WHEREOF, the parties hereto have hereunto signed their
names or have caused this Agreement to be duly executed by their officers
thereunto duly authorized as of the date first above written.
EMC HOLDINGS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN
By Marine Midland Bank, N.A., solely
as Trustee and not in its
individual or corporate capacity
By___________________________________________
Title:
(Counterpart Signature Page to Stockholders Agreement)
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<PAGE> 80
14.7 Specific Enforcement; Other Remedies. Each party hereto
acknowledges and agrees that in the event of any breach of this Agreement, the
non-breaching party would be irreparably harmed and could not be made whole by
monetary damages. It is accordingly agreed that each party hereto, in addition
to any other remedy to which it may be entitled at law or in equity, shall be
entitled to compel specific performance of this Agreement.
IN WITNESS WHEREOF, the parties hereto have hereunto signed their
names or have caused this Agreement to be duly executed by their officers
thereunto duly authorized as of the date first above written.
THE NORTHWESTERN MUTUAL LIFE
INSURANCE COMPANY
By___________________________________________
Name:
Title:
(Counterpart Signature Page to Stockholders Agreement)
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<PAGE> 81
14.7 Specific Enforcement; Other Remedies. Each party hereto
acknowledges and agrees that in the event of any breach of this Agreement, the
non-breaching party would be irreparably harmed and could not be made whole by
monetary damages. It is accordingly agreed that each party hereto, in addition
to any other remedy to which it may be entitled at law or in equity, shall be
entitled to compel specific performance of this Agreement.
IN WITNESS WHEREOF, the parties hereto have hereunto signed their
names or have caused this Agreement to be duly executed by their officers
thereunto duly authorized as of the date first above written.
NATIONAL UNION FIRE INSURANCE
COMPANY OF PITTSBURGH, PA
By___________________________________________
Name:
Title:
(Counterpart Signature Page to Stockholders Agreement)
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<PAGE> 1
Exhibit 4.07
EMC HOLDINGS, INC.
RBK EXCHANGE AND REPURCHASE AGREEMENT
As of October 26, 1989
Mr. Robert B. Knutson, Trustee of the Trust
under that certain Revocable Trust Agreement
of Robert B. Knutson dated February 18, 1987
100 Quail Hill Road
Pittsburgh, Pennsylvania 15238
Dear Bob:
EMC Holdings, Inc., a Delaware corporation ("Holdings"), hereby agrees with
you in your capacity as Trustee of the Trust (as hereinafter defined) as
follows:
1. Certain Definitions and Conventions.
(a) For the purposes of this Agreement, unless otherwise defined herein or
the context in which any such term is used clearly requires otherwise, the
following terms have the following meanings, respectively:
"1986 Closing Date" means June 24, 1986, the date as of which the Original
Recapitalization occurred.
"Act" means the Securities Act of 1933, as amended.
"Additional Call Repurchase Proceeds" has the meaning set forth in Section
10(a)(ii) hereof.
"Adjusted Consolidated EBIT" means the Consolidated EBIT calculated as of
the end of Holdings' most recent fiscal year, adjusted by adding thereto any
amounts deducted from
<PAGE> 2
Holdings' revenues in determining such Consolidated EBIT in respect of (i)
amortization of the Original Recapitalization Premium and the Current
Recapitalization Premium and (ii) contributions by Holdings to the ESOP and/or
payment by Holdings of dividends on Shares held by the ESOP.
"Adjusted Purchase Price" of any Share owned by the Trust means (i)
$1.2899433 per Share with respect to all Shares owned by the Trust immediately
following the Closing or (ii) with respect to all Shares acquired by the Trust
thereafter, the original per share purchase price paid by the Trust for such
Share, as appropriately adjusted to reflect any stock dividends, stock splits,
reverse stock splits, recapitalizations or similar events occurring subsequent
to the date of this Agreement.
"Affiliate" with respect to any Person means a director or officer of such
Person, any corporation, association, firm or other entity of which such Person
(or an officer or director of such Person) is a member, director or officer,
the spouse of such Person (or of any officer or director of such Person),
either parent of such Person (or of any officer or director of such Person) or
of such Person's spouse (or of the spouse of any officer or director of such
Person), any descendent of any such parent, any relative of such Person (or of
any officer or director of such Person) who has the same home as such Person
(or as any officer or director of such Person), and any other Person, directly
or indirectly controlling, controlled by, or under common control with, such
Person. For the purpose of this
- 2 -
<PAGE> 3
definition, "control" (including, with correlative meanings, the terms
"controlling," "controlled by," and "under common control with"), as used with
respect to any Person, shall mean the possession, directly or indirectly, of
the power to direct or cause the direction of the management and policies of
such Person, whether through the ownership of voting securities or by contract
or otherwise.
"Amended Subscription Agreement" means the Amended and Restated Common Stock
Subscription and Repurchase Agreement between you and Holdings dated as of June
24, 1986 and amended September 20, 1988.
"Applicable Federal Rate" with respect to any loan made by Holdings to
Designated Officers pursuant to Section 14 hereof means the lowest applicable
Federal rate in effect under section 1274(d) of the Code as of the day such
loan was made, compounded semiannually.
"Appraisal" means an appraisal of the fair market value of all securities
and property described in clause (iii) of the definition of Value made by an
Appraiser.
"Appraiser" means the financial advisor selected by Holdings from a list,
prepared by the Trust and submitted to Holdings with any request for an
Appraisal hereunder, naming three nationally recognized investment banking
firms.
"Business Day" means any day other than a Saturday, Sunday or other day on
which banks are authorized to be closed in New York City or Pittsburgh,
Pennsylvania.
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<PAGE> 4
"Call Repurchase" has the meaning set forth in Section 10(a)(i) hereof.
"Call Repurchase Price" has the meaning set forth in Section 10(a)(i)
hereof.
"Cause," when used in connection with the termination of your employment
with Holdings and EMC, shall have the meaning set forth in Section 5 of the
Knutson Employment Agreement.
"Claims" is defined in Section 3(a)(x) hereof.
"Class A Shares" means Holdings' Class A Common Stock, par value $0.0001 per
share.
"Class B Shares" means Holdings' Class B Common Stock, par value $0.0001 per
share.
"Class C Shares" means Holdings' Class C Common Stock, par value $0.10 per
share.
"Closing" means the consummation of all transactions contemplated to occur
in connection with the Current Recapitalization on the Closing Date.
"Closing Date" means October 26, 1989.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the U.S. Securities and Exchange Commission and any
successor federal agency having similar powers.
"Compensation Committee" means the Compensation Committee of the Board of
Directors of Holdings.
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<PAGE> 5
"Consolidated" means the consolidation of the accounts of Holdings and its
subsidiaries in accordance with GAAP.
"Consolidated EBIT" means Holdings' Consolidated earnings before interest
and taxes determined with reference to Holdings' audited income statement for
the pertinent fiscal year.
"Consolidated Net Debt" means, for any period, on a Consolidated basis, the
difference between (a) Holdings' Indebtedness for Borrowed Money and (b) all
cash and cash equivalents held by Holdings and its subsidiaries, including any
amounts held in cash collateral or escrow accounts by another Person on behalf
of Holdings or any of its subsidiaries, but excluding any amounts held pursuant
to the Shareholders Contribution and Repayment Agreement.
"Convertible Preferred Stock" means Holdings' 10.19% Convertible Preferred
Stock as authorized by the Second Restated Certificate of Incorporation and the
action of Holdings' Board of Directors.
"Current Recapitalization" means the Exchange Offer, the merger of Holdings
and EMC Recapitalization, Inc. and the concurrent restructuring of Holdings'
capital stock and the other transactions to be accomplished as described in the
Information Statement.
"Current Recapitalization Premium" means the amount calculated by Holdings'
independent auditors which amount shall be determined by the application of
purchase accounting rules, without limitation, by reference to the amount equal
to the
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<PAGE> 6
excess of (a) the sum of (i) the aggregate amount of (x) cash paid by the ESOP
Trustee on the Closing Date for 170,750 shares of 10.19% Convertible Preferred
Stock of Holdings and 3,685,604 shares of Class A Common Stock of Holdings and
(y) cash and the value of the Class B Common Stock of Holdings distributed by
Holdings to the holders of such stock in connection with the Current
Recapitalization and (ii) the aggregate amount of expenses incurred by Holdings
which are directly attributable to the Current Recapitalization and related
transactions over (b) the amount of stockholders' equity and deferred taxes
appearing on the Consolidated balance sheet of Holdings at the time immediately
preceding the Closing Date.
"Date of Termination," when used in connection with the termination of your
employment with Holdings and EMC, (i) shall have the meaning set forth in
Section 5(e) of the Knutson Employment Agreement and (ii) if the Knutson
Employment Agreement shall lapse, shall be the date that your employment with
Holdings and EMC shall be terminated; provided, however, that if you are
Disabled, such date shall be the date Holdings and EMC are entitled to replace
you under Section 6 of the Knutson Employment Agreement or otherwise by reason
of a Disability regardless of whether or not the Knutson Employment Agreement
is in effect.
"Designated Officer" means any Pre-Designated Officer and any Subsequently
Designated Officer.
"Disability" and "Disabled" have the meaning specified in Section 6 of the
Knutson Employment Agreement. Any reference
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<PAGE> 7
herein to the date of Disability shall mean the date on which you are replaced
in your position with Holdings pursuant to Section 6 of the Knutson Employment
Agreement or otherwise replaced following the lapse of the Knutson Employment
Agreement.
"EMC" means Education Management Corporation, a Pennsylvania corporation.
"ESOP" means the EMC Holdings, Inc. Employee Stock Ownership Plan.
"ESOP Trustee" means Marine Midland Bank, N.A., in its capacity as Trustee
of the ESOP.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Offer" means the offer made by Holdings pursuant to the
Information Statement to issue certain Class C Shares in exchange for surrender
of certain Class A Shares held by the Management Stockholders.
"Fair Market Value" of any Share means (i) so long as the ESOP is in
existence and is required to obtain appraisals of its capital stock, the most
recent value of a Share as determined by the most recent such appraisal or (ii)
if there is no such appraisal of the Shares, a price equal to the quotient
obtained by dividing (a) the difference between (1) the product of (A) the
Adjusted Consolidated EBIT and (B) seven and (2) the Consolidated Net Debt
determined as of the end of Holdings' most recent fiscal year by (b) the number
of Shares (on a fully diluted basis) as of the date of determination.
- 7 -
<PAGE> 8
"GAAP" shall mean generally accepted accounting principles which shall
include, but not be limited to, the official interpretations thereof as defined
by the Financial Accounting Standards Board, its predecessors and its
successors.
"Good Reason" has the meaning specified in Section 5(c) of the Knutson
Employment Agreement.
"Holdings" has the meaning set forth in the introduction to this Agreement.
"Holdings Capital Stock" means the Class A Shares, the Class B Shares, the
Class C Shares, the Convertible Preferred Stock and any other shares of capital
stock of Holdings hereafter authorized.
"Holdings Common Stock" means the Class A Shares, the Class B Shares and the
Class C Shares and any other shares of capital stock of Holdings classified as
common stock hereafter authorized.
"Indebtedness for Borrowed Money" as applied to any Person means the
liabilities of such Person for money borrowed or credit received (other than
trade accounts payable incurred in the ordinary course of business), direct or
contingent, whether evidenced by a bond, note, debenture, capitalized lease
obligation, deferred purchase price arrangement, title retention device,
reimbursement agreement, guarantee, book entry or otherwise.
- 8 -
<PAGE> 9
"Information Statement" means Holdings' Proxy and Information Statement
dated September 20, 1989, as the same may be from time to time amended and/or
supplemented.
"Initial Put Notice" has the meaning set forth in Section 10(b)(i) hereof.
"Initial Put Repurchase" has the meaning set forth in Section 10(b)(i)
hereof.
"Initial Put Repurchase Price" means the Fair Market Value of the Initial
Put Shares as of the Date of Termination.
"Initial Put Shares" has the meaning set forth in Section 10(b)(i) hereof.
"Institutional Investors" means the parties to the Stockholders Agreement
other than the Management Stockholders, Holdings and the ESOP.
"Junior Subordinated Note" means the junior subordinated promissory note
issued by Holdings to the Trust or any Permitted Transferee for payment of
Initial Put Shares or Secondary Put Shares, as the case may be, in the
principal amount specified in Holdings' notice pursuant to Section 11(b)
hereof, bearing interest on the unpaid principal amount from the date of issue
of such note (the "issue date") until such note is paid in full, payable
quarterly on the first Business Day of each calendar quarter, at a fluctuating
interest rate per annum (based on a year of 365 or 366 calendar days, as the
case may be) equal to 1% per annum above the Prime Rate in effect from time to
time (each change, if any, in such fluctuating interest rate to take
- 9 -
<PAGE> 10
effect simultaneously with the corresponding change in the Prime Rate;
provided, that such fluctuating interest rate shall at no time exceed 12% per
annum), and the principal amount of which is payable in full on the date
occurring three months following the latest of payment in full of all notes or
other evidences of indebtedness issued pursuant to (i) the Senior Credit
Agreement, (ii) the Subordinated Credit Agreement and (iii) the Shareholders
Contribution and Repayment Agreement.
"Junior Subordinated Note Holder," when used in connection with the holding
or owning of a Junior Subordinated Note, means the Trust, any Permitted
Transferee or any other holder of a Junior Subordinated Note or any Person who
may make claims under or with respect to a Junior Subordinated Note.
"Key Man Insurance" has the meaning set forth in Section 2(c) hereof.
"Knutson Employment Agreement" means the Amended and Restated Employment
Agreement of Robert B. Knutson dated as of October 26, 1989 by and among you,
Holdings and EMC.
"Management Repurchase Agreement" means the form of Management Exchange and
Repurchase Agreement dated October 26, 1989 entered into between Holdings and
each of the Management Stockholders.
"Management Stockholders" is used herein as defined in the Stockholders
Agreement.
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<PAGE> 11
"Merger Agreement" means the Agreement of Merger and Plan of
Recapitalization dated October 26, 1989 between Holdings and EMC
Recapitalization, Inc.
"Merrill Lynch Investors" means the MLCP Investors and Merrill Lynch
Interfunding, Inc.
"MLCP Investors" is used herein as defined in the Stockholders Agreement.
"Net Sale Price" means the Sale Price for any Resale Event (i) net of any
taxes, underwriting discounts or commissions or related selling expenses
incurred by Holdings or such Selling Designated Officer and (ii) adjusted in
respect of any stock dividends, stock splits, reverse stock splits,
recapitalizations or similar events that may have occurred following a Call
Repurchase.
"Notice" has the meaning set forth in Section 14(b).
"Obligation" has the meaning set forth in Section 13 hereof.
"Original Recapitalization" means the purchase by Holdings of all the shares
of common stock of EMC and all related transactions.
"Original Recapitalization Premium" means the amount calculated by Holdings'
independent auditors which amount shall be determined by the application of
purchase accounting rules, without limitation, by reference to the amount
equal to the excess of (i) the sum of (A) the aggregate amount of cash and the
value of Class A Common Shares of Holdings paid by Holdings on
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<PAGE> 12
the 1986 Closing Date for all the shares of EMC common stock and (B) the
aggregate amount of expenses incurred by Holdings which are directly
attributable to the purchase by Holdings of such shares and related
transactions over (ii) the amount of stockholders' equity and deferred taxes
appearing on the Consolidated balance sheet of EMC and its consolidated
subsidiaries prepared in accordance with GAAP at the time immediately preceding
the 1986 Closing Date.
"Permitted Transferee" with respect to the Trust means (i) while you are
living, you, your spouse, parents or issue or a trust of which trust you shall
be a trustee and the beneficiaries of which are limited to you, your estate,
spouse, parents and/or issue and (ii) after your death, your executors,
administrators, testamentary trustees, legatees or beneficiaries.
"Person" means an individual, a partnership, a joint venture, a corporation,
a trust, an unincorporated organization or a government or any department or
agency thereof.
"PDO Offer" has the meaning set forth in Section 14(b).
"PDO Shares" has the meaning set forth in Section 14(b) hereof.
"Pre-Designated Officers" means those persons (i) who own Holdings Common
Stock on the day before the date of your death or Disability, (ii) who are the
elected officers of Holdings on the day before the date of your death or
Disability and (iii) whom the Compensation Committee, by resolution in effect
on the day before the date of your death or Disability,
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<PAGE> 13
shall have designated as eligible to purchase any Shares pursuant to Section 14
hereof; provided, that such designation shall require the affirmative vote of a
majority of the Compensation Committee, including your vote so long as you are
a member of the Compensation Committee; and provided, further, that you may
recommend changes to the list of such Pre-Designated Officers, and/or to the
portion of Shares to be acquired by such Pre-Designated Officers pursuant to
Section 14 hereof in the event of your death or Disability, from time to time
after the initial designation, subject to the approval of the Compensation
Committee.
"Prime Rate" means the rate of interest announced publicly by Citibank, N.A.
in New York from time to time as its prime rate, corporate base rate, or other
designation announced in replacement of the prime rate.
"Proportion" means, with reference to any Pre-Designated Officer, the
percentage of Pre-Designated Officer Shares required to be offered to such
Pre-Designated Officer pursuant to Section 14 hereof, as designated by the
Compensation Committee, by resolution in effect on the day before your death or
Disability; provided, that such designation shall require the affirmative vote
of a majority of the Compensation Committee, including your vote so long as you
are a member of the Compensation Committee.
"Public Distribution" means a Public Offering of Holdings Common Stock at
the conclusion of which (i) Holdings is
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<PAGE> 14
required to register shares of Holdings Common Stock under Section 12(b) or (g)
of the Exchange Act and (ii) at least 25% of the outstanding Holdings Common
Stock shall have been sold to the public pursuant to one or more effective
registration statements under the Act.
"Public Offering" means a public offering of securities of Holdings pursuant
to an effective registration statement under the Act.
"Put Repurchase" means an Initial Put Repurchase or a Second Put Repurchase.
"Repurchase" means any Call Repurchase or Put Repurchase.
"Repurchase Notice" means any Call Repurchase Notice, or notice delivered by
Holdings pursuant to the second paragraph of Section 11(b).
"Resale Event" has the meaning set forth in Section 10(a)(ii) hereof.
"Sale Price" means (i) if all issued and outstanding shares of Holdings
Common Stock are sold or transferred in connection with any Resale Event, the
Share Price obtained by Holdings or any Selling Designated Officer in
connection with such Resale Event or (ii) if fewer than all issued and
outstanding shares of Holdings Common Stock are sold or transferred in
connection with any Resale Event, the highest Share Price received during the
twelve-month period following any
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<PAGE> 15
Call Repurchase by Holdings and/or any Selling Designated Officer.
"Scheduled Expiration Date" has the meaning set forth in Section 1(b) of the
Knutson Employment Agreement.
"Second Put Repurchase" has the meaning set forth in Section 10(b)(ii)
hereof.
"Second Restated Certificate of Incorporation" means the amended and
restated certificate of incorporation of Holdings that will, among other
things, authorize the issuance of (i) one or more series of preferred stock
upon such terms as may be established by Holdings' Board of Directors from time
to time and (ii) a new class of common stock, designated as Class C Common
Stock.
"Secondary Put Repurchase Price" means the greater of (x) the Adjusted
Purchase Price of the Secondary Put Shares as of the date of the Second Put
Notice, plus interest thereon from the date of acquisition of such Shares by
you to the date of the Second Put Notice compounded annually at an interest
rate per annum (based on a year of 365 or 366 calendar days, as the case may
be) for each twelve-month period or portion thereof commencing July 1 of an
applicable calendar year, equal to the Prime Rate in effect on July 1 (or the
next succeeding Business Day if such day is not a Business Day) of such
calendar year, and (y) the Fair Market Value of the Secondary Put Shares as of
the date of the Second Put Notice.
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<PAGE> 16
"Selling Designated Officer" has the meaning set forth in Section 10(a)(ii)
hereof.
"Senior Credit Agreement" means the $52,500,000 Credit Agreement, dated as
of October 26, 1989, among Holdings, Pittsburgh National Bank and the other
banks party thereto.
"Senior Indebtedness" means (i) indebtedness for borrowed money (including,
without limitation, that incurred pursuant to the Senior Credit Agreement and
the Subordinated Credit Agreement), (ii) the current portion of any deferred
purchase price of property or services, (iii) the current portion of
obligations as lessee under leases which shall have been or should be, in
accordance with GAAP, recorded as capital leases, (iv) current obligations
under direct or indirect guaranties in respect of, and obligations (contingent
or otherwise) to purchase or otherwise acquire, or otherwise to assure a
creditor against loss in respect of, indebtedness or obligations of others of
the kinds referred to in clauses (i), (ii) or (iii) above, (v) obligations of
the types referred to in clauses (i), (ii), (iii) or (iv) above which are
secured by any lien, security interest or other charge or encumbrance upon or
in property (including, without limitation, accounts and contract rights) owned
by Holdings, even though Holdings has not assumed or become liable for the
payment of such Indebtedness, (vi) any rights granted pursuant to the
Shareholders Contribution and Repayment Agreement to Shareholders (as such term
is defined in the Shareholders Contribution and Repayment Agreement) and (vii)
any and all
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<PAGE> 17
extensions, renewals, refinancings or refundings in whole or in part of any of
the foregoing.
"Share Price" when used with reference to a share of Holdings Common Stock
means the cash price paid or to be paid for such share plus the Value of any
property delivered as payment for such share.
"Shareholders Contribution and Repayment Agreement" means that certain
Shareholders Contribution and Repayment Agreement dated as of October 26, 1989
and executed and delivered in connection with the Current Recapitalization.
"Shares" means, collectively, all shares of any class of Holdings Capital
Stock, including any shares of Holdings Capital Stock which may have been
issued or distributed in respect of any shares of any class of Holdings Capital
Stock by way of stock dividend or stock split or other distribution,
recapitalization or reclassification.
"Stockholders Agreement" means the Stockholders Agreement, dated as of
October 26, 1989, among Holdings, Merrill Lynch Interfunding, Inc., the ESOP
and the Persons listed on the Schedule of Stockholders attached thereto.
"Stockholder Designation" means the Stockholder Designation attached as
Exhibit A hereto.
"Subordinated Credit Agreement" means the Note and Warrant Purchase
Agreement, dated as of October 26, 1989, between Holdings, Northwestern Mutual
Life Insurance Company and National Union Fire Insurance Company of Pittsburgh,
Pennsylvania.
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<PAGE> 18
"SDO Offer" has the meaning set forth in Section 14(c) hereof.
"SDO Shares" has the meaning set forth in Section 14(c) hereof.
"Subsequently Designated Officers" shall include (x) the Pre-Designated
Officers, (y) those persons whom the Compensation Committee shall have
designated following the Closing Date but prior to your death or disability as
eligible to purchase Shares pursuant to Section 14 hereof and (z) those persons
(A) whom the Board of Directors of Holdings, within 90 calendar days following
the date of your death or Disability, shall elect to serve as officers of
Holdings and (B) whom the Compensation Committee, by resolution adopted prior
to such 90th day, shall have designated as eligible to purchase Shares pursuant
to Section 14 hereof.
"Third Restated Certificate of Incorporation" means the Third Amended and
Restated Certificate of Incorporation of Holdings which, on or prior to the
Closing Date, in connection with the Current Recapitalization, shall have been
approved and adopted by the Board of Directors of Holdings and the requisite
percentage of the holders of Holdings Capital Stock entitled to vote thereon
and filed with the Secretary of State of the State of Delaware.
"Transfer" has the meaning set forth in Section 8(b) hereof.
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<PAGE> 19
"Trust" means the Trust established under that certain revocable Trust
Agreement of Robert B. Knutson dated February 18, 1987.
"Trustee" means Robert B. Knutson, in his capacity as Trustee of the Trust.
"Value" when used with reference to any consideration other than cash
delivered as payment for any share of Holdings Common Stock means the value
determined in accordance with the following: (i) marketable securities listed
on a national securities exchange shall be valued at the last sales price on
the Business Day next preceding the date of the consummation of the event
giving rise to such valuation; (ii) marketable securities traded in the
over-the-counter market and reported in the National Association of Securities
Dealers' Automated Quotation System shall be valued at the closing bid price as
reported by such system on the Business Day next preceding the date of the
consummation of the event giving rise to such valuation; and (iii) all
securities other than marketable securities of the type referred to in clauses
(i) and (ii) above and all other property shall be valued (a) by Holdings or
(b) if requested by the Trust on its behalf and on behalf of its Permitted
Transferees (or your estate on its behalf and on behalf of the Trust's other
Permitted Transferees), by an Appraiser pursuant to an Appraisal, at the fair
market value or such other value as may be deemed by Holdings or the Appraiser,
as the case may be, to be appropriate and reasonable after considering all
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<PAGE> 20
factors which might reasonably affect the sales price of such securities or
other property, including, without limitation, if and as appropriate, the lack
of a market for such securities or other property, the anticipated impact of an
immediate sale of such securities or other property, the length of time before
any such sale may become possible and the cost and complexity of any such sale.
"Warrants" is used herein as defined in the Subordinated Credit Agreement.
"Whole Board of Directors" means that number of directors of Holdings
required in order to constitute the entire board of directors of Holdings in
accordance with its By-laws and applicable law without any vacancies,
irrespective of any vacancies that may exist from time to time.
(b) In addition, except as otherwise clearly indicated by the context in
which it appears, the use of "you" herein refers to Robert B. Knutson, in his
individual capacity and not as Trustee of the Trust, and "your" is used herein
as the correlative possessive.
2. Representations, Warranties and Covenants of Holdings. Holdings
represents, warrants and covenants that:
(a) Holdings is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware; and Holdings has all
requisite corporate power and authority to enter into and perform all of its
obligations under this Agreement.
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<PAGE> 21
(b) Neither Holdings, nor any Person acting on its behalf, has taken or
will take any action that would subject the Current Recapitalization or the
issuance or exchange on the Closing Date of any Shares in accordance therewith
to the registration provisions of Section 5 of the Act.
(c) During the term of your employment pursuant to the Knutson Employment
Agreement, Holdings shall maintain one or more key man life insurance policies
(the "Key Man Insurance"), with an aggregate face amount of $8.0 million,
naming you as the insured and Holdings as the beneficiary. The Key Man
Insurance and any proceeds therefrom shall be used by Holdings solely to fund
the obligations of Holdings under Section 10(b) hereof and shall not be pledged
or used for any other purpose without the prior written consent of you, the
trust or your estate, as the case may be, during such time that the trust or
your estate or any of the Trust's Permitted Transferees continues to own any
Shares.
3. Investment Representations; Other Representations and Warranties by You
and/or the Trustee.
(a) The Trustee represents and warrants that:
(i) The Trustee has received and read the Information Statement. There
has been made available to the Trustee a reasonable time prior to the Trustee's
execution and delivery hereof in order to provide an opportunity for the
Trustee to ask questions and receive answers concerning the terms and
conditions of the Trust's participation in the Current
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<PAGE> 22
Recapitalization and to obtain any additional information which Holdings or EMC
possesses or can acquire without unreasonable effort or expense. The Trustee
has received all additional information that was requested.
(ii) The Trustee has been advised that none of Holdings Common Stock has
been registered under the Act or any state securities or "blue sky" laws, and,
therefore, cannot be resold unless (A) such stock is registered under the Act
or under any applicable state securities or "blue sky" laws and/or (B) an
exemption from registration thereunder is available.
(iii) The Trust's acquisition of Shares in connection with the Current
Recapitalization is for its own account, for investment only, and not with a
view to or for resale in connection with, the distribution of any Holdings'
securities presently held or to be exchanged or acquired by the Trust in
connection with the Current Recapitalization, and the Trust has no present
intention of distributing or reselling any thereof, except as otherwise
provided herein and as described in the Information Statement. In making the
foregoing representation, the Trustee is aware that the Trust must bear the
economic risk of such investment for an indefinite period of time.
(iv) The Trustee is aware of and familiar with the prohibitions,
restrictions and limitations imposed on Holdings by the Senior Credit Agreement
and the Subordinated Credit Agreement, including, without limitation, those
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<PAGE> 23
prohibitions, restrictions and limitations which may prohibit, restrict or
limit Holdings' ability to repurchase any Shares, whether pursuant to this
Agreement or otherwise, or to waive, change, modify or discharge this
Agreement.
(v) The Trustee is aware of and familiar with the restrictions imposed on
the transfer by the Trust of any Shares, including, without limitation, the
restrictions contained in this Agreement and in the Stockholders Agreement, and
the rights of Holdings and others under this Agreement and under the
Stockholders Agreement in connection with transfers of Shares by the Trust.
(vi) The Trustee is aware of and familiar with the provisions of the
Stockholders Agreement and exhibits thereto relating to the management of
Holdings and EMC.
(vii) The Trustee acknowledges that Holdings is entering into this
Agreement in reliance upon the Trustee's representations and warranties made in
this Agreement, including, without limitation, those set forth in this Section.
(viii) The Trustee has full right, power and authority to execute and
deliver this Agreement on behalf of the Trust and any and all other documents
or instruments to be executed and delivered on its behalf in connection with
the Current Recapitalization and the Trust has full right, power and authority
to perform its obligations hereunder and thereunder and this Agreement and all
such other documents and instruments have been duly executed and delivered by
the Trust and are valid,
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<PAGE> 24
binding and enforceable against the Trust in accordance with their terms,
except that the enforceability thereof may be limited by bankruptcy, insolvency
or other similar laws relating to or affecting creditors' rights generally and
by general equitable principles, regardless of whether such enforceability is
considered in a proceeding in equity or at law.
(ix) The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated to occur pursuant hereto (i) do
not and will not violate or conflict with the governing instruments of the
Trust, (ii) do not and will not violate, conflict with, result in a breach or
default under, or give any person or entity any right to terminate or modify,
any contract or agreement applicable to the Trust, (iii) do not and will not
violate, conflict with, result in a breach or default under, or give any person
or entity any right to terminate or modify any governmental or court-issued
order, writ, judgment, decree, license, permit, approval or authorization of
any kind applicable to the Trust and (iv) do not and will not violate or
conflict with any law applicable to the Trust.
(x) The Trust has, and immediately prior to the Closing the Trust will
have, good and valid title to the Class A shares (i) to be delivered to
Holdings in exchange for Class C Shares and (ii) to be delivered to the ESOP at
the Closing, free and clear of all of the following (herein collectively called
"Claims"): claims, encumbrances, security interests, liens,
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<PAGE> 25
equities, options and pledges of every kind, and interests arising in
connection with so-called community property laws or other laws relating to the
rights of spouses; and, upon delivery of such Class A Shares to Holdings and
the ESOP and receipt by the Trust of Class C Shares and cash, respectively,
good and valid title to such Class A Shares, free and clear of any Claims, will
pass to Holdings and the ESOP, as the case may be.
(xi) The Trust qualifies as an "accredited investor," as such term as
defined in Regulation D promulgated under the Act.
(b) You represent and warrant that:
(i) You hereby confirm that the representations and warranties made by
you in your Common Stock Subscription and Repurchase Agreement were true and
correct as of the date on which they were made.
(ii) You are a director of Holdings, Chairman and Chief Executive Officer
of Holdings and an Executive Officer (as such term is defined in Regulation D
promulgated under the Act) of Holdings or otherwise qualify as an "accredited
investor," as such term is defined in Regulation D promulgated under the Act.
(iii) You acknowledge that Holdings is entering into this Agreement in
reliance upon your representations and warranties made in this Agreement,
including, without limitation, those made in this Section.
4. Sale and/or Exchange of Shares and/or Options. Pursuant to the Second
Restated Certificate of Incorporation, the
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<PAGE> 26
Information Statement, the Merger Agreement and the Third Restated Certificate
of Incorporation, all as described in the Information Statement, at the
Closing, the Trust will have:
(a) received, in exchange for a like number of the Class A Shares set
forth at Item 2 of the Stockholder Designation, the number of Class C Shares
set forth at Item 3 of the Stockholder Designation;
(b) sold the number of Class A Shares set forth at Item 4 of the
Stockholder Designation to the ESOP for the cash consideration set forth at
Item 5 of the Stockholder Designation; and
(c) converted all Class C Shares set forth at Item 3 of the Stockholder
Designation into the number of Class B Shares and the amount of cash set forth
at Items 6 and 7, respectively, of the Stockholder Designation.
5. Delivery of Documents. In connection with the Trust's participation in
the Current Recapitalization, on or prior to the Closing, the Trust shall have
executed and delivered the following:
(i) That certain Stock Purchase Agreement dated as of the Closing Date
among certain stockholders of Holdings, Holdings and the ESOP;
(ii) The Stockholders Agreement;
(iii) The RBK Employment Agreement;
(iv) That certain Escrow and Pledge Agreement dated as of the Closing
Date among all stockholders, option
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<PAGE> 27
holders and warrant holders of Holdings immediately prior to the Closing and
Pittsburgh National Bank;
(v) The Shareholders Contribution and Repayment Agreement;
(vi) This Agreement; and
(vii) All such other documents as Holdings reasonably may request.
In addition, the Trustee shall have voted all Shares held by the Trust in favor
of the Merger Agreement and the merger to be consummated pursuant thereto.
6. Conditions to Purchase and/or Exchange of Shares. Holdings' obligations
under the transactions described in Section 4 are subject to the fulfillment to
Holdings' satisfaction at or prior to the Closing of the following conditions:
(a) Your representations and warranties and those of the Trustee and the
Trust contained in this Agreement shall be true and correct when made and at
and as of the Closing Date.
(b) The Trust shall have performed and complied with all agreements and
conditions contained in this Agreement required to be performed or complied
with by the Trust prior to the Closing, including, without limitation, the
delivery of the documents and instruments described in Section 5 of this
Agreement.
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<PAGE> 28
(c) All of the conditions to the Closing under all agreements executed and
delivered in connection with the Current Recapitalization shall have been
satisfied or waived.
7. No Implied Right to Employment. Neither this Agreement nor any provision
hereof nor any action taken or omitted to be taken hereunder shall be deemed to
create or confer upon you any right to be retained in the employ of Holdings
and EMC or other Affiliate thereof, except as provided in the Knutson
Employment Agreement.
8. Transfer Restrictions.
(a) General. The Trust hereby agrees that any and all Shares held by it
after the Closing will be subject to the terms and conditions of this Agreement
and the Stockholders Agreement. Unless made in compliance with this Agreement
and the Stockholders Agreement, no Transfer of Shares shall be made or recorded
on the books of Holdings, and any such transfer shall be void and of no effect.
(b) Restrictions Prior to Public Distribution; Agreement to Hold. Neither
the Trust nor any Permitted Transferee will, prior to a Public Distribution,
directly or indirectly, offer, sell, pledge, hypothecate, transfer, assign or
otherwise dispose of or solicit any offers to purchase, or otherwise acquire or
take, or pledge (collectively for purposes of Sections 8 and 9 hereof only,
"Transfer") any Shares owned by the Trust or such Permitted Transferee to
anyone without the express written consent of Holdings (which consent shall be
given
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<PAGE> 29
pursuant to unanimous vote or consent of the Whole Board of Directors) or
otherwise than in accordance with the Stockholders Agreement except that the
Trust or such Permitted Transferee may Transfer Shares to Holdings or its
designee pursuant to Section 10 hereof. In addition, the Trust may at any time
Transfer any of its Shares to a Permitted Transferee. Each Permitted
Transferee may further Transfer any Shares acquired by such Permitted
Transferee to any of the Trust's other Permitted Transferees (including
transfers back to the Trust). No Transfer to any Permitted Transferee (or to
the Trust) hereunder (whether by the Trust or another Permitted Transferee)
shall be valid unless and until such Permitted Transferee (or the Trust, in the
event of Transfers back to the Trust) shall agree in writing, in form and
substance reasonably satisfactory to Holdings, to become bound, and becomes
bound, by the terms of this Agreement and the Stockholders Agreement.
(c) Restrictions Following Public Distribution. Subsequent to any Public
Distribution, any Shares owned by the Trust (or any of its Permitted
Transferees) may be Transferred without the consent of Holdings under Section
8(b) hereof, subject, however, to (i) all rights of Holdings hereunder and
under the Stockholders Agreement and (ii) compliance with Section 8(e) hereof.
(d) Legend. Prior to any Public Distribution, the certificate or
certificates representing any Shares held by the
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<PAGE> 30
Trust or any Permitted Transferee shall bear the following legend:
The securities represented by this certificate were issued without
registration under the Securities Act of 1933 and any applicable state
securities and "blue sky" laws, and in reliance upon the holder's
representation that such securities were being acquired for investment and
not for resale. No transfer of such securities may be made on the books of
the issuer unless accompanied by an opinion of counsel, satisfactory to the
issuer, that such transfer may properly be made without registration under
the Securities Act of 1933 or that such securities have been so registered
under a registration statement which is in effect at the date of such
transfer.
The securities represented by this certificate are also subject to the
restrictions on transfer contained in the RBK Exchange and Repurchase
Agreement, dated as of October 26, 1989, and in the Stockholders Agreement,
dated as of October 26, 1989, copies of each of which may be obtained from
the issuer, as well as the rights of the issuer and certain of its
stockholders under such Stockholders Agreement. No transfer of such
securities will be made on the books of the issuer unless accompanied by
evidence of compliance with the terms of each of such Agreements.
(e) Securities Law Compliance. Except for a Transfer effectuated pursuant
to a Public Offering of Holdings Common Stock in accordance with the provisions
of the Stockholders Agreement and anything to the contrary herein contained
notwithstanding, no Transfer of any Shares held by the Trust or any Permitted
Transferee to a Person other than Holdings or its designee pursuant to Sections
10, 11 and 12 hereof shall be effected unless such Transfer may properly be
made without
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<PAGE> 31
registration because of the availability of an exemption from registration
under the Act and the rules and regulations in effect thereunder and under any
applicable state securities or "blue sky" laws, and Holdings shall have been
furnished with an opinion of counsel, satisfactory in form and substance to
Holdings, to that effect.
9. [Intentionally Left Blank]
10. Death, Disability or Termination of Employment.
(a) Holdings' Call.
(i) Triggering Events and Consideration. Upon your death, Disability or
the termination of your employment by Holdings and EMC for Cause prior to the
earlier to occur of (A) a Public Distribution or (B) the later to occur of (1)
the Scheduled Expiration Date of the Knutson Employment Agreement or (2) the
fifth anniversary of the Closing Date, then, in such event, Holdings shall have
the right, upon delivery of notice to the Trust (or any of its Permitted
Transferees then holding Shares), for a period of 90 calendar days after the
Date of Termination, to repurchase (a "Call Repurchase") any or all Shares
owned by the Trust (or any of its Permitted Transferees); provided, however,
that Holdings may not purchase fewer than the minimum number of Shares
necessary so that the cash received by the Trust (or any of its Permitted
Transferees) in exchange therefor is not treated as a dividend under the Code.
If Holdings so notifies the Trust (or any of its Permitted Transferees) in
accordance with Section 11 hereof of its
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<PAGE> 32
determination to exercise such right, the Trust (or any of its Permitted
Transferees) shall have the obligation to sell the relevant number of Shares on
the terms and conditions set forth in Section 12 hereof to Holdings at a price
equal to the product of (i) the Fair Market Value of each such Share as of the
Date of Termination (the "Call Repurchase Price") and (ii) the number of Shares
so purchased.
In the event that (i) Holdings elects to repurchase some but fewer than all
Shares pursuant to a Call Repurchase as a consequence of your death and (ii)
such Shares are then held by one or more Permitted Transferees, then, in such
event, Holdings shall repurchase such Shares from such Permitted Transferees
and the Trust on a pro rata basis; provided, that the executor of your estate
within 10 calendar days of Holdings' notice pursuant to Section 11 shall have
the express authority to direct Holdings to repurchase such Shares on any other
basis, and Holdings shall be bound by such direction.
(ii) Additional Consideration. If, within the twelve-month period
commencing on the date of the purchase by Holdings of any Shares pursuant to a
Call Repurchase, (A) Holdings, or a Designated Officer to whom such Shares
subsequently are issued by Holdings under Section 14 hereof (a "Selling
Designated Officer"), shall (1) sell any Shares of Holdings Common Stock
pursuant to a Public Offering, (2) sell or Transfer any Shares of Holdings
Common Stock in a transaction (or series of related transactions) pursuant to
which all or
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<PAGE> 33
substantially all of the outstanding shares of Holdings Common Stock are
acquired by a Person (other than an Affiliate of Holdings) or exchanged for
securities issued by such Person (or an Affiliate of such Person) or (3) sell
any Shares of Holdings Common Stock to any purchaser (excluding sales to
Designated Officers under Section 14) (each a "Resale Event"), and (B) the Net
Sale Price exceeds the Call Repurchase Price, then, in such event, an amount
(the "Additional Call Repurchase Proceeds") equal to the product of such excess
and the number of Shares sold to Holdings pursuant to such Call Repurchase
shall forthwith be paid over to the Trust (and/or its Permitted Transferees).
Any Additional Call Repurchase Proceeds shall be payable in cash, securities
or such other property (or in any combination thereof) as may have been
received by Holdings or any Selling Designated Officer except that Holdings may
elect to substitute a cash payment for a payment in any such securities or
other property. Any Additional Call Repurchase Proceeds due to the Trust
(and/or any of its Permitted Transferees) shall be paid no later than 30
calendar days after the final determination of the amount of such payment. The
Additional Call Repurchase Proceeds payable to the Trust (and/or its Permitted
Transferees), if any, will be allocated among and paid by Holdings and/or any
Selling Designated Officers in proportion to the relative total Net Sale Prices
in excess of the Call Repurchase Price received by Holdings and/or such Selling
Designated Officers for subsequent
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<PAGE> 34
sales at higher prices during the twelve-month period following any Call
Repurchase.
Notwithstanding any other provision herein contained, in no event shall any
Permitted Transferee (other than the Trust, you or your estate) have the right
to request an Appraisal. Any Appraisal shall be conclusive and binding on
Holdings and the Trust (or your estate). The fees and expenses of an
Appraisal, if requested in connection with the determination of the Net Sale
Price, shall be borne by Holdings, unless the Appraisal is less than or equal
to Holdings' appraisal, in which case such fees and expenses shall be borne by
the Trust (or your estate).
(b) Your Put.
(i) Initial Put. In the event (A) of your death or Disability and the
failure of Holdings to exercise its right to repurchase all Shares owned by the
Trust or any Permitted Transferee pursuant to subsection (a) of this Section 10
within the period therein specified, (B) Holdings and EMC terminate your
employment without Cause or (C) you terminate your employment for Good Reason,
then, in such event, the Trust and each of its Permitted Transferees then
owning Shares shall have the right, upon delivery of notice to Holdings (the
"Initial Put Notice"), for a period of 90 calendar days (180 calendar days in
the case of your death) commencing on the 91st calendar day after the Date of
Termination, to require Holdings to repurchase (the "Initial Put Repurchase")
in accordance with Section 11 hereof all (but not fewer than all) Shares then
owned by the Trust (or by any
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<PAGE> 35
Permitted Transferee) (the "Initial Put Shares"). If the Trust (or any
Permitted Transferee) delivers the Initial Put Notice, it (or such Permitted
Transferee) shall have the obligation to sell to Holdings, and Holdings shall
have the obligation to purchase, subject to the limitations hereinafter set
forth, all of the Initial Put Shares then owned by the Trust (or by such
Permitted Transferee) on the terms and conditions set forth in Section 12
hereof at the Initial Put Repurchase Price; provided, that Holdings shall be
obligated to purchase only that number of Initial Put Shares from the Trust
(and its Permitted Transferees) as may be purchased, at the Initial Put
Repurchase Price, for an aggregate consideration equal to the following: (1)
during the period commencing after the Closing Date to, and including, the date
of the first anniversary of the Closing Date, $4.0 million; (2) during the
period commencing after the date of the first anniversary of the Closing Date
to, and including, the date of the second anniversary of the Closing Date, $5.0
million; (3) during the period commencing after the date of the second
anniversary of the Closing Date to, and including, the date of the third
anniversary of the Closing Date, $6.0 million; (4) during the period commencing
after the date of the third anniversary of the Closing Date to, and including,
the date of the fourth anniversary of the Closing Date, $7.0 million; and (5)
after the date of the fourth anniversary of the Closing Date, $8.0 million;
provided, further, that in the event of an Initial Put Repurchase triggered by
your death, Holdings' obligation to
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<PAGE> 36
purchase any Initial Put Shares shall be subject to proceeds being available
for such purpose under the Key Man Insurance.
In the event that Holdings is required to purchase fewer than all the Initial
Put Shares from the Trust and its Permitted Transferees by reason of any of the
limitations set forth in paragraph (i) of this subsection 10(b), Holdings shall
purchase such smaller number of Initial Put Shares from the Trust and those of
its Permitted Transferees having made an election hereunder on a pro rata
basis; provided, that you (or in the event of your death the executor of your
estate) shall have the express authority in your (or the executor of your
estate's) notice pursuant to Section 11 to direct Holdings to repurchase such
smaller number of Initial Put Shares on any other basis and Holdings shall be
bound by such direction.
(ii) Secondary Put Shares. If, because of any of the limitations set
forth in paragraph (i) of this subsection (b), Holdings shall have purchased
from the Trust and from its Permitted Transferees fewer than all of the Initial
Put Shares, then, in such event, the Trust and each such Permitted Transferee
shall have the right, upon delivery of notice to Holdings in accordance with
Section 11 hereof (the "Second Put Notice"), for a period of 90 calendar days
commencing on the later of (A) the date that is eighteen (18) months after the
date of purchase by Holdings of any Initial Put Shares from the Trust (or its
Permitted Transferees) and (B) the date of the fifth anniversary of the Closing
Date, to require Holdings to repurchase (a "Second
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<PAGE> 37
Put Repurchase") all (but not fewer than all) of the Shares then owned by the
Trust (or by such Permitted Transferee) (the "Secondary Put Shares"). If the
Trust (or such Permitted Transferee) delivers the Second Put Notice, then it
(or such Permitted Transferee) shall sell to Holdings, and Holdings shall
purchase, subject to the limitations hereinafter set forth, such Secondary Put
Shares on the terms and conditions set forth in Section 12 hereof at the
Secondary Put Repurchase Price; provided, that Holdings shall be obligated to
purchase only that number of Secondary Put Shares from the Trust (and/or its
Permitted Transferees) as may be purchased, at the Secondary Put Repurchase
Price, for an aggregate consideration equal to the excess of (1) $10,000,000
over (2) the aggregate purchase price paid by Holdings for the Initial Put
Shares purchased from the Trust (and/or any of its Permitted Transferees), if
any; provided, further, that in the event of a Put Repurchase triggered by your
death, Holdings' obligation to purchase any Secondary Put Shares from the Trust
(or any Permitted Transferee) shall be subject to proceeds being available for
such purpose under the Key Man Insurance. Holdings shall have no further
obligations under this Section 10(b)(ii) with respect to any Secondary Put
Shares not purchased by Holdings because of any of the foregoing limitations.
In the event Holdings is required to purchase fewer than all of the Secondary
Put Shares from the Trust and any of its Permitted Transferees by reason of any
of the limitations set
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<PAGE> 38
forth in paragraph (ii) of this subsection 10(b), Holdings shall purchase such
lesser amount of Secondary Put Shares from the Trust and those of its Permitted
Transferees having made an election hereunder on a pro rata basis; provided,
that you (or in the event of your death the executor of your estate) shall have
the express authority in your (or the executor of your estate's) notice
pursuant to Section 11 to direct Holdings to repurchase such smaller number of
Secondary Put Shares on any other basis, and Holdings shall be bound by such
direction.
(c) Notwithstanding anything herein contained to the contrary, Holdings
shall not be obligated to purchase any Shares from the Trust (or its Permitted
Transferees) pursuant to any Put Repurchase to the extent that, and so long as,
the purchase of such Shares would be in violation of, or result in a default
under, any agreement or instrument to which Holdings is a party (including,
without limitation, the Senior Credit Agreement, the Subordinated Credit
Agreement and the Shareholders Contribution and Repayment Agreement, but
excluding any agreement entered into in material part for the purpose of
avoiding Holdings' obligations hereunder), or violate Holdings' Certificate of
Incorporation or By-laws, as the same may be amended and/or restated or any
law, regulation or order applicable to Holdings.
In the event that Holdings is not obligated to consummate all or any portion
of any Second Put Repurchase as a result of the foregoing sentence and the
restrictions contained in any agreement or instrument to which Holdings is a
party referred to
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<PAGE> 39
in the foregoing sentence, Holdings shall endeavor to obtain the waiver of the
other parties to such agreements or instruments so as to enable Holdings to
consummate any Second Put Repurchase; provided, however, that it is understood
that Holdings is not guaranteeing to you or the Trust (or any Permitted
Transferee) that such waiver shall be obtained.
11. Election Procedures.
(a) The parties shall exercise their respective rights under Section 10
hereof by sending a written notice by United States certified or registered
mail, return receipt requested, postage prepaid, addressed:
(i) if to the Trust (or any Permitted Transferee) at the address
specified above (or to any Permitted Transferee at the address furnished by
such Permitted Transferee by written notice to Holdings), and
(ii) if to Holdings, to the attention of the Board of Directors of
Holdings, at the address specified in Section 19 hereof, with copies to Eckert
Seamans Cherin & Mellott and the Merrill Lynch Investors, at their addresses
specified in Section 19 hereof, or to such other address as either party has
furnished to the other in writing, except that notices of change of address
shall be effective only upon receipt. Other notices pursuant to this Agreement
shall be communicated in the manner provided in Section 19, unless otherwise
expressly provided herein.
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<PAGE> 40
(b) Holdings' notice of its determination to effect a Call Repurchase
shall be effective if deposited in the mail as specified in subsection (a) of
this Section 11 or hand delivered to the Trustee and/or any Permitted
Transferee within the applicable time period specified in Section 10(a)(i)
hereof and shall specify (i) the Call Repurchase Price and (ii) in reasonable
detail the basis on which such price was computed.
Any Initial Put Notice or Second Put Notice shall be effective if received by
the Board of Directors of Holdings within the applicable time period specified
in Section 10(b)(i) or Section 10(b)(ii); and, within 45 calendar days after
the receipt by Holdings of any such notice, Holdings shall notify the Trust
(and any Permitted Transferees) of (i) the number of Initial Put Shares or
Secondary Put Shares, as the case may be, to be purchased by Holdings, and (ii)
the applicable Put Repurchase Price (specifying in reasonable detail the basis
on which such price was computed).
(c) Any Repurchase Notice shall specify the place, time and date for the
delivery of and payment for such Shares, which shall be in the City of
Pittsburgh, and during normal business hours on a Business Day which shall not
be less than 10 nor more than 30 calendar days after the receipt of such notice
by the Trust (or by such Permitted Transferees).
12. Delivery and Payment Procedures.
(a) At the place, and at the time and date specified in any Repurchase
Notice, the Trust (and the pertinent Permitted
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<PAGE> 41
Transferee) shall deliver to Holdings or its designee, certificates for the
Shares purchased by Holdings pursuant to any Repurchase, duly endorsed, or
accompanied by written instruments of transfer, in form satisfactory to
Holdings or its designee, duly executed, on behalf of the Trust (or the
pertinent Permitted Transferee), free and clear of any and all Claims, against
payment of the purchase price for such shares as follows:
(i) If (A) the seller of such Shares is a Permitted Transferee or the
Trust, (B) such Shares are Initial Put Shares and (C) the event triggering the
Initial Put is your death, then, in such event, Holdings shall deliver to such
Permitted Transferee or the Trust, as the case may be, a certified or bank
cashier's check or checks, payable to such Permitted Transferee or the Trust or
upon the order of such Permitted Transferee or the Trust in an amount equal to
the aggregate Initial Put Repurchase Price, determined in accordance with
Section 10(b)(i), for such Shares;
(ii) if the seller of such Shares is a Permitted Transferee and such
Shares are Secondary Put Shares, Holdings shall issue its Junior Subordinated
Note in an amount equal to the aggregate Secondary Put Repurchase Price,
determined in accordance with Section 10(b)(ii), for such Shares to such
Permitted Transferee;
(iii) if (A) the seller of such Shares is a Permitted Transferee or the
Trust, (B) such Shares are Initial Put Shares and (C) the event triggering the
Initial Put is any
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<PAGE> 42
event other than your death, then, in such event, to the extent that there is
any amount of money available for the purchase of Holdings' capital stock under
Section 6.12 of the Senior Credit Agreement at the time of the Initial Put
Notice, Holdings shall use such available money to purchase such Initial Put
Shares, and shall deliver to such Permitted Transferee or the Trust, as the
case may be, a certified or bank cashier's check or checks, payable to such
Permitted Transferee or the Trust or upon the order of such Permitted
Transferee or the Trust in an amount equal to the lesser of (1) the amount of
such available money or (2) the aggregate Initial Put Repurchase Price,
determined in accordance with Section 10(b)(i), for such Shares; any of such
Initial Put Shares remaining unsold after payment in cash to any Permitted
Transferee or the Trust in accordance with this clause (iii) shall be purchased
by the issuance by Holdings of its Junior Subordinated Note in an amount equal
to the aggregate unpaid Initial Put Repurchase Price, determined in accordance
with Section 10(b)(i), for such Shares to such Permitted Transferee or the
Trust;
(iv) if the Trust is the seller of such Shares and such Shares are
Secondary Put Shares, Holdings shall issue its Junior Subordinated Note in an
amount equal to the aggregate Secondary Put Repurchase Price, determined in
accordance with Section 10(b)(ii), for such Shares to such Permitted Transferee
or the Trust; and
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<PAGE> 43
(v) if such Shares are purchased by Holdings pursuant to a Call
Repurchase, Holdings shall deliver to the Trust a certified or bank cashier's
check or checks payable to the Trust or upon its order in an amount equal to
the aggregate Call Repurchase Price for such Shares.
Notwithstanding anything to the contrary contained in this Section 12,
Holdings shall not pay for any Initial Put Shares or for any Secondary Put
Shares with its Junior Subordinated Notes (and shall, subject to Section 10(c)
hereof, pay for such Shares in cash) to the extent that, and as long as, the
payment of principal and interest on such Junior Subordinated Notes would, at
the time of issuance thereof, be in violation of, or result in a default under,
any agreement or instrument to which Holdings is a party (including, without
limitation, the Senior Credit Agreement, the Subordinated Credit Agreement and
the Shareholders Contribution and Repayment Agreement), or violate Holdings'
Certificate of Incorporation or By-laws, as the same may be amended and/or
restated, or any law, regulation or order applicable to Holdings.
(b) All transfer and documentary stamp taxes, if any, payable in respect
of the sale of Shares to Holdings shall be borne by the party exercising its
right to purchase or to sell Shares, as the case may be, under Section 10
hereof.
13. Agreement of Subordination. Holdings and each Junior Subordinated Note
Holder, by his or its acceptance of such Note, covenant and agree as follows:
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<PAGE> 44
(a) Each Junior Subordinated Note is and shall be subordinated, to the
extent and in the manner hereinafter set forth, in right of payment to the
prior payment in full of all obligations of Holdings with respect to any or all
Senior Indebtedness now or hereafter existing, whether for principal, interest
(including, without limitation, interest accrued after the filing of a petition
initiating any proceeding referred to in subsection (c) of this Section 13),
fees, expenses or otherwise (such obligations being the "Obligations"). For
the purposes of these provisions, the Obligations shall not be deemed to have
been paid in full until and unless the holders or owners of the Obligations
shall have indefeasibly received payment of the Obligations in cash.
(b) A Junior Subordinated Note Holder shall not ask, demand, sue for, take
or receive from Holdings, directly or indirectly, in cash or other property or
by setoff or in any other manner (including, without limitation, from or by way
of collateral), payment of all or any amounts payable by Holdings under a
Junior Subordinated Note unless and until the Obligations shall have been paid
in full; provided, however, that a Junior Subordinated Note Holder may receive,
and Holdings may make, payments of interest and principal on account of the
Junior Subordinated Note on the stated dates of payment thereof if, at the time
of making any of such payments and immediately after giving effect thereto, no
nonpayment of amounts due, or no event or events which with notice or lapse of
time, or both, would
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<PAGE> 45
constitute an event of default, or no other defaults (including, without
limitation, an Event of Default under Article VIII of the Senior Credit
Agreement or Section 13 of the Subordinated Credit Agreement) shall have
occurred and be continuing with respect to any Senior Indebtedness; provided,
further, that an Event of Default under Section 8.1, Section 8.2(c) (with
respect to compliance with Section 6.1) or Section 8.3 of the Senior Credit
Agreement or of the Subordinated Credit Agreement shall be deemed to continue
notwithstanding any waiver thereof or amendment of the agreement with respect
thereto until and unless Holdings is in compliance with each of such sections,
as originally set forth and without giving effect to any such waiver or
amendment.
(c) Upon any distribution of all or any of the assets of Holdings upon the
dissolution, winding up, liquidation, arrangement, reorganization, adjustment,
protection, relief or composition of Holdings or its debts, whether in any
bankruptcy, insolvency, arrangement, reorganization, receivership, relief or
similar proceedings or upon an assignment for the benefit of creditors or any
other marshalling of the assets and liabilities of Holdings or otherwise, any
payment or distribution of any kind (whether in cash, property or securities)
that otherwise would be payable or deliverable upon or with respect to a Junior
Subordinated Note shall be paid or delivered directly to the holders of Senior
Indebtedness for application (in the case of cash) to, or as collateral (in the
case of noncash property or securities) for, the payment or prepayment of the
Senior
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<PAGE> 46
Indebtedness until the Senior Indebtedness shall have been paid in full.
(d) If any proceeding referred to in subsection (c) of this Section 13 is
commenced by or against Holdings:
(i) the holders of the Obligations are hereby irrevocably authorized
and empowered (in their own name or in the name of the Junior Subordinated Note
Holders or otherwise), but shall have no obligation, to demand, sue for, collect
and receive every payment or distribution referred to in such subsection (c) and
give acquittance therefor and to file claims and proofs of claim and take such
other action (including, without limitation, voting the Junior Subordinated
Note) as they may deem necessary or advisable for the exercise or enforcement of
any of the rights or interests of the holders of the Obligations hereunder; and
(ii) each Junior Subordinated Note Holder shall duly and promptly take
such action as the holders of the Obligations may request (A) to collect any
amounts owing under his Junior Subordinated Note for account of the holders of
the Obligations and to file appropriate claims or proofs of claim in respect of
such Junior Subordinated Note, (B) to execute and deliver to the holders of the
Obligations such powers of attorney, assignments, or other instruments as they
may request in order to enable them to enforce any and all claims with respect
to, and any security interests and other liens securing payment of, such Junior
Subordinated Note, and (C) to collect and receive any and all payments or
distributions which may be
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<PAGE> 47
payable or deliverable upon or with respect to such Junior Subordinated Note.
(e) So long as any of the Obligations shall remain unpaid, a Junior
Subordinated Note Holder will not commence, join with any holder of the
Obligations in commencing directly or indirectly, or cause Holdings to commence
or assist Holdings in commencing, any proceeding referred to in subsection (c)
of this Section 13.
(f) The holders of the Obligations may, at any time and from time to time,
without any consent of or notice to any Junior Subordinated Note Holder and
without impairing or releasing the obligations of such holder under this
Section 13: (A) change the manner, place or terms of payment or change or
extend the time of payment of, or renew or alter, the Obligations (including
any change in the rate of interest thereon), or amend in any manner any
agreement under which any of the Obligations is outstanding; (B) sell,
exchange, release, not perfect and otherwise deal with any property at any time
pledged, assigned or mortgaged to secure the Obligations; (C) release anyone
liable in any manner under or in respect of the Obligations; (D) exercise or
refrain from exercising any rights against Holdings and others; and (E) apply
any sums from time to time received to the payment of the Obligations.
(g) Holdings will cause each Junior Subordinated Note to be endorsed with
the following legend:
The indebtedness evidenced by this instrument is subordinated,
pursuant to, and
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<PAGE> 48
to the extent provided in, Section 13 of the RBK Exchange and Repurchase
Agreement, dated as of October 26, 1989 (the "RBK Exchange and Repurchase
Agreement"), between the maker hereof and the Trust established under that
certain Revocable Trust Agreement of Robert B. Knutson dated February 18,
1987, Robert B. Knutson, Trustee, to the prior payment in full of the
Obligations (as defined in the RBK Exchange and Repurchase Agreement).
(h) All payments or distributions upon or with respect to the Junior
Subordinated Note that are received by a Junior Subordinated Note Holder
contrary to these provisions shall be received in trust for the benefit of the
holders of the Obligations, shall be segregated from other funds and property
held by such Junior Subordinated Note Holder and shall be forthwith paid over
to the holders of the Obligations in the same form as so received (with any
necessary endorsement) to be applied (in the case of cash) to or held as
collateral (in the case of noncash property or securities) for the payment of
the Obligations in accordance with the terms of the Senior Indebtedness.
(i) No Junior Subordinated Note Holder will:
(A) sell, assign, pledge, encumber or otherwise dispose of his
Junior Subordinated Note unless such sale, assignment, pledge, encumbrance or
disposition is made expressly subject to the provisions of this Section 13; or
(B) permit the terms of the Junior Subordinated Note to be
changed in such manner as to have an adverse effect
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<PAGE> 49
upon the right or interests of the holders of the Obligations pursuant to this
Section 13.
(j) Each Junior Subordinated Note Holder will, at any time and from time
to time, promptly execute and deliver all further instruments and documents,
and take all further action, that may be necessary or desirable, or that the
holders of the Obligations may request, in order to protect any right or
interest granted or purported to be granted by this Section 13 or to enable the
holders of the Obligations to exercise and enforce their rights and remedies
thereunder.
(k) The foregoing provisions regarding subordination are and are
intended solely for the purpose of defining the relative rights of the holders
of the Obligations on the one hand and the Junior Subordinated Note Holder (or
Junior Subordinated Note Holders) on the other hand. Such provisions are for
the benefit of the holders of the Obligations and shall be enforceable by them
directly against any Junior Subordinated Note Holder, and no holder of the
Obligations shall be prejudiced in its right to enforce subordination of a
Junior Subordinated Note by any act or failure to act by Holdings or anyone in
custody of its assets or property. Nothing contained in the foregoing
provisions is intended to or shall impair, as between Holdings and any Junior
Subordinated Note Holder, the obligations of Holdings to such holder.
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<PAGE> 50
14. Designated Officers' Right to Repurchase Shares.
(a) General. If, upon your death or Disability, Holdings shall have
purchased any Shares pursuant to a Repurchase and your death or Disability
shall have occurred on or after July 1, 1990, Holdings shall, as soon as
practicable after the date of such purchase, offer (i) at least 50% of such
Shares for sale to the Pre-Designated Officers, and (ii) the balance of such
Shares for sale to the Subsequently Designated Officers.
If your death or Disability shall have occurred prior to July 1, 1990,
Holdings shall, as soon as practicable after the date of such purchases, offer
(i) 80% of the first $2.0 million of such Shares (based upon the aggregate
purchase price paid by Holdings for such Shares) to the Subsequently Designated
Officers and 20% of such Shares to the Pre-Designated Officers and (ii) 40% of
any additional Shares to the Subsequently Designated Officers and 60% of such
additional Shares to the Pre-Designated Officers.
Except as otherwise expressly provided herein, the Compensation Committee
shall, in its sole discretion, determine the basis upon which Designated
Officers shall be selected and, in the case of Subsequently Designated
Officers, upon which Shares shall be allocated.
The Compensation Committee shall not be required to make any offer to any
Designated Officer pursuant to this paragraph (a) who is not an "accredited
investor" (as such term is defined in Rule 501 under the Act) if compliance
with the Act or the
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<PAGE> 51
securities or blue sky laws of any state is deemed by such Committee to be
unreasonably burdensome or costly or who otherwise fails to meet the
requirements set forth in Section 4.2 of the Stockholders Agreement.
(b) Offers to Pre-Designated Officers.
(i) With respect to any Shares required to be offered to
Pre-Designated Officers pursuant to paragraph (a) of this Section 14 (the "PDO
Shares"), the Compensation Committee shall deliver to each such Pre-Designated
Officer written notice (each, a "PDO Offer") offering each such Pre-Designated
Officer the right to purchase from Holdings any or all of a number of such
Shares obtained by multiplying the number of PDO Shares by such Pre-Designated
Officer's Proportion, at a price per Share equivalent to the purchase price paid
by Holdings for those Shares.
If any Pre-Designated Officer shall fail to (i) notify the Compensation
Committee of his acceptance of his PDO Offer within 90 calendar days following
receipt thereof or (ii) purchase all PDO Shares offered to him, Holdings shall
offer to sell all PDO Shares not then subject to any PDO Offers among all
Pre-Designated Officers who shall have agreed to purchase all PDO Shares
offered pursuant to their PDO Offers in accordance with their respective
Proportions. Such offer must be accepted by the delivery of notice thereof to
the Compensation Committee within 15 calendar days after delivery of such
offer.
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<PAGE> 52
If any PDO Shares remain unsold thereafter, the Compensation Committee shall
continue to offer such Shares in a similar manner until no Pre-Designated
Officer accepts any PDO Shares for purchase or until all PDO Shares are sold.
(ii) If the Pre-Designated Officers shall not have agreed to purchase all
of the PDO Shares, the Compensation Committee may offer any such PDO Shares not
purchased to any Subsequently Designated Officer or otherwise cause Holdings to
hold or dispose of such Shares as such Committee determines.
(c) Offers to Subsequently Designated Officers.
(i) With respect to any Shares required to be offered to Subsequently
Designated Officers pursuant to paragraph (a) of this Section 14 (the "SDO
Shares"), the Compensation Committee shall deliver to each such Subsequently
Designated Officer written notice offering (each an "SDO Offer") to each such
Subsequently Designated Officer the right to purchase any or all of the number
of SDO Shares allocated to him by such Committee, at a price per Share
equivalent to the purchase price paid by Holdings for those Shares.
If any Subsequently Designated Officer shall fail to (i) notify the
Compensation Committee of his acceptance of his SDO Offer within 120 calendar
days following receipt of such notice or (ii) purchase all SDO Shares offered
to him, such Committee shall offer to sell all unsold SDO Shares not then
subject to any SDO Offer among all Subsequently Designated Officers who shall
have agreed to purchase all SDO Shares offered
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<PAGE> 53
pursuant to their SDO Offers in proportion to the number of SDO Shares
originally allocated to such Subsequently Designated Officers by the
Compensation Committee. Such offer must be accepted by the delivery of notice
thereof to the Compensation Committee within 15 calendar days after delivery of
such offer.
If any SDO Shares remain unsold thereafter, the Compensation Committee shall
continue to offer such Shares in a similar manner until no Subsequently
Designated Officer accepts any SDO Shares for purchase or until all SDO Shares
are sold.
(ii) If the Subsequently Designated Officers shall not have purchased
all SDO Shares, the Compensation Committee shall cause Holdings to hold or
dispose of any such unsold SDO Shares as it determines.
(d) Procedure for Purchase. The purchase price for any Shares purchased
pursuant to this Section 14 shall be payable, at the option of each Designated
Officer, in cash and/or by the delivery to Holdings of a promissory note
bearing interest at a rate equal to the lowest Applicable Federal Rate for debt
instruments of like maturities, maturing on November 1, 1999, secured to the
reasonable satisfaction of the Compensation Committee, and containing such
other terms and conditions as the Compensation Committee may approve (all
subject to such changes or additional provisions, if any, as may be agreed upon
by the Compensation Committee and the particular Designated Officer).
Notwithstanding any other provision of this Section 14 to the contrary, (i)
Holdings shall not be required to accept promissory
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<PAGE> 54
notes in payment for such Shares to be sold to Designated Officers, as opposed
to cash payments, in an aggregate principal amount which exceeds 90% of the
aggregate amount of proceeds collected by Holdings under the Key Man Insurance
at such time; and (ii) no transfer of any Shares shall be made (A) to any
Designated Officer not already party to a Management Repurchase Agreement
unless and until such Designated Officer shall agree in writing, in form and
substance reasonably satisfactory to Holdings, to become bound, and becomes
bound, by the terms of a Management Repurchase Agreement and the Stockholders
Agreement, or (B) to a Designated Officer already a party to a Management
Repurchase Agreement unless and until such Designated Officer shall agree to
amend the definition of "Shares" contained in his or her Management Repurchase
Agreement to include in such definition the Shares so purchased by him or her
pursuant to this Section 14. In the event that the thresholds set forth in
clause (i) of the preceding sentence apply, the aggregate principal amount
referred to in the preceding sentence shall be allocated among the Designated
Officers on a pro rata basis.
(e) Contingent Obligation of Purchasers. Each Designated Officer
purchasing Shares under this Section 14 will receive them subject to the
contingent obligation to make payments of Additional Call Repurchase Proceeds
to the Trust (or its Permitted Transferees) if they sell any of such Shares
during the period of twelve months following the date of your death or
Disability under the provisions of Section 10(a)(ii) hereof.
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<PAGE> 55
Holdings will require each such Designated Officer to agree in writing to be
bound by those provisions as a precondition to the right to purchase such
Shares following your death or Disability.
(f) Modification of Agreement. The parties hereto acknowledge hereby
that the provisions of this Agreement may be amended at any time and from time
to time (in accordance with the provisions of Section 18 hereof) and that the
rights of Designated Officers under this Agreement, if any, shall be limited to
any such rights as may obtain under the then current version of this Agreement,
as so amended.
15. Survival; Assignment. All covenants, agreements, representations and
warranties contained in this Agreement shall survive the execution and delivery
of this Agreement, any investigation at any time made by or on behalf of a
party hereto, and the consummation of the transactions described in Section 4
hereof under this Agreement. Holdings' rights and obligations hereunder may be
assigned by Holdings in whole or in part. Except for any Transfer authorized
by Section 8(b) hereof, the Trust may not assign any of its rights hereunder.
Whenever in this Agreement any of the parties hereto is referred to, such
reference shall be deemed to include the successors, executors or
administrators and permitted assigns of such party; and all covenants, promises
and agreements made in this Agreement by or on behalf of Holdings, or by or on
behalf of the Trust, shall bind and inure to the benefit of and be enforceable
by the
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<PAGE> 56
respective successors, executors or administrators and permitted assigns of such
parties hereto, whether so expressed or not.
16. Governing Law. This Agreement shall be construed and enforced in
accordance with the laws of the Commonwealth of Pennsylvania.
17. Entire Agreement; Headings. This Agreement and the agreements
referred to herein embody the entire agreement and understanding between the
Trust and Holdings and supersede all prior agreements and understandings
relating to the subject matter hereof. The preceding sentence and any other
provision of this Agreement notwithstanding, this Agreement is not, and shall
not be construed to be, a novation of your Amended Subscription Agreement, and
(a) you and Holdings hereby confirm that you and Holdings shall remain obligated
to one another pursuant to such agreement to the extent that such agreement has
not been fully performed, and (b) the representations and warranties contained
in paragraph 3 of your Amended Subscription Agreement will survive the
execution and delivery hereof. The headings in and date of this Agreement are
for purposes of reference only and shall not limit or otherwise affect the
meaning hereof.
18. Amendments. This Agreement cannot be changed orally, and can be
changed only by an instrument in writing signed by the party against whom
enforcement of any waiver, change, modification or discharge is sought.
19. Notices. All communications provided for herein shall be in writing
and
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<PAGE> 57
(a) if addressed to the Trust or any Permitted Transferee, shall be
delivered or mailed addressed to the Trust or any Permitted Transferee at the
address specified above, or
(b) if addressed to Holdings, shall be delivered or mailed addressed to it
as follows:
EMC Holdings, Inc.
Suite 800
300 Sixth Avenue
Pittsburgh, Pennsylvania 15222
Attention: President
with a copy to:
Robert C. McCartney, Esquire
Eckert Seamans Cherin & Mellott
42nd Floor
600 Grant Street
Pittsburgh, Pennsylvania 15219, or
(c) if to the Merrill Lynch Investors, shall be delivered or mailed
addressed to it as follows:
c/o Merrill Lynch Capital Partners, Inc.
767 Fifth Avenue
48th Floor
New York, New York 10153
Attention: President, or
(d) to such other address as either party has furnished to the other in
writing.
20. Execution in Counterparts. This Agreement may be executed in
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
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<PAGE> 58
If you are in agreement with the foregoing, please sign each counterpart of
this Agreement.
Very truly yours,
EMC HOLDINGS, INC.
By:_________________________
C. Thomas Burkett,
Executive Vice President
The foregoing Agreement is hereby
agreed to as of the date first
above written, with the intent to
be legally bound thereby.
The Trust established under the
Revocable Trust Agreement of
Robert B. Knutson dated
February 18, 1987.
By:____________________________
Robert B. Knutson,
Trustee
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<PAGE> 59
Exhibit List
Exhibit A - Purchaser Designation
<PAGE> 60
EXHIBIT A
STOCKHOLDER DESIGNATION
1. Name and Address of Shareholder:
The Trust established pursuant to that certain Revocable Trust
Agreement of Robert B. Knutson dated February 18, 1987, Robert B.
Knutson, Trustee, 100 Quail Hill Road, Pittsburgh, Pennsylvania 15238.
2. Number of Class A Shares Currently Held:
4,386,700
3. Number of Class C Shares to be Received Pursuant to Exchange Offer:
1,676,200
4. Number of Class A Shares Remaining After Exchange Offer:
2,710,500
5. Cash Payable by ESOP for Class A Shares:
$14,046,692.79
6. Number of Class B Shares Into Which the Shares Described at Item 3 Will Be
Converted in the Merger:
5,059,778
7. Cash Portion of Merger Consideration in Respect of Class C Shares Described
at Items 3 and 8:
$2,159,788.95
<PAGE> 1
Exhibit 4.08
EMC HOLDINGS, INC.
EXCHANGE AND REPURCHASE AGREEMENT
As of _________________
To the Undersigned Holder of Shares
(as such term is hereinafter defined)
Dear Holder:
EMC Holdings, Inc., a Delaware corporation ("Holdings"), hereby agrees with
you as follows:
1. Certain Definitions and Conventions.
(a) For the purposes of this Agreement, unless otherwise defined herein or
the context in which any such term is used clearly requires otherwise, the
following terms have the following meanings, respectively:
"Act" means the Securities Act of 1933, as amended.
"Adjusted Consolidated EBIT" means the Consolidated EBIT calculated as of
the end of Holdings' most recent fiscal year, adjusted by adding thereto any
amounts deducted from Holdings' revenues in determining such Consolidated EBIT
in respect of (i) amortization of the Original Recapitalization Premium and the
Current Recapitalization Premium, (ii) contributions by Holdings to the ESOP
and/or payment by Holdings of dividends on Shares held by the ESOP and (iii)
stock options granted to any Holdings' employee under any Holdings
<PAGE> 2
employee Stock option or similar plan or to any member of the Compensation
Committee.
"Adjusted Purchase Price" of any Share owned by you means (i) $1.2899433 per
Share with respect to all Shares owned by you immediately following the Closing
or (ii) with respect to all Shares acquired by you thereafter, the original per
share purchase price paid by you for such Share, as appropriately adjusted to
reflect any stock dividends, stock splits, reverse stock splits,
recapitalizations or similar events occurring subsequent to the date of this
Agreement.
"Affiliate" with respect to any Person means any Person, directly or
indirectly controlling, controlled by, or under common control with, such
Person. For the purpose of this definition, "control" (including, with
correlative meanings, the term "controlling," "controlled by," and "under
common control with"), as used with respect to any Person, shall mean the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities or by contract or otherwise.
"Business Day" means any day other than a Saturday, Sunday or other day on
which banks are authorized to be closed in New York City or Pittsburgh,
Pennsylvania.
"Cause" when used in connection with the termination of your employment with
Holdings or any subsidiary thereof means (i) your willful failure substantially
to perform and discharge
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<PAGE> 3
your duties and responsibilities as an employee of Holdings or any subsidiary
thereof, other than by reason of your Incapacity or (ii) the engaging by you in
serious misconduct which is injurious to Holdings or any subsidiary thereof.
"Class A Shares" means Holdings' Class A Common Stock, without par value.
"Class B Shares" means Holdings' Class B Common Stock, without par value.
"Class C Shares" means Holdings' Class C Common Stock, par value $0.10 per
share.
"Closing" means the consummation of all transactions contemplated to occur
in connection with the Current Recapitalization.
"Closing Date" means October 26, 1989.
"Commission" means the U.S. Securities and Exchange Commission and any
successor federal agency having similar powers.
"Common Stock Subscription Agreement" means that Agreement, if any, pursuant
to which you subscribed for shares of Holdings in connection with the Original
Recapitalization.
"Compensation Committee" means the Compensation Committee of the Board of
Directors of Holdings.
"Compounded Adjusted Purchase Price" means, with respect to any Share, the
Adjusted Purchase Price of such Share as of the Date of Termination, plus
interest thereon from the date of acquisition of such shares by you to the Date
of
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<PAGE> 4
Termination compounded annually on each July 1st at an interest rate per annum
equal to the Prime Rate in effect on each July 1st (or the next succeeding
Business Day if such day is not a Business Day).
"Consolidated" means the consolidation of the accounts of Holdings and its
subsidiaries in accordance with GAAP.
"Consolidated EBIT" means Holdings' Consolidated earnings before interest
and taxes determined with reference to Holdings' audited income statement for
the pertinent fiscal year.
"Consolidated Net Debt" means, for any period, on a Consolidated basis, the
difference between (a) Holdings' Indebtedness for Borrowed Money and (b) all
cash and cash equivalents held by Holdings and its subsidiaries, including any
amounts held in cash collateral or escrow accounts by another Person on behalf
of Holdings or any of its subsidiaries.
"Convertible Preferred Stock" means Holdings' 10.19% Convertible Preferred
Stock as authorized by the Second Restated Certificate of Incorporation and the
action of Holdings' Board of Directors.
"Current Recapitalization" means the Exchange Offer, the merger of Holdings
and EMC Recapitalization, Inc. and the concurrent restructuring of Holdings'
capital stock and the other transactions to be accomplished as described in the
Information Statement.
"Current Recapitalization Premium" means the excess of (a) the sum of (i)
the aggregate amount of (x) cash paid by the
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<PAGE> 5
ESOP Trustee on the Closing Date for 170,075 shares of the Convertible
Preferred Stock and 3,685,604 Class A Shares, (y) cash and the value of the
Class B Shares distributed by Holdings to the holders of such stock in
connection with the Current Recapitalization and (z) cash paid by the
Institutional Investors for the Warrants and (ii) the aggregate amount of
expenses incurred by Holdings which are directly attributable to the Current
Recapitalization and related transactions over (b) the amount of stockholders'
equity and deferred taxes appearing on the Consolidated balance sheet of
Holdings at the time immediately preceding the Closing Date.
"Date of Termination," when used in connection with the termination of your
employment with Holdings or any subsidiary thereof, means, with respect to
termination of your employment (i) as a result of your death, the date of your
death, (ii) by Holdings or any subsidiary thereof, the date specified in a
written notice of termination to you or, if no date is specified therein, the
date on which such notice is given to you, (iii) by you, the date specified in
a written notice of termination to Holdings or any subsidiary thereof, or if no
date is specified therein, the date on which such notice is given to Holdings
or such subsidiary, (iv) as a result of your retirement at or after the Normal
Retirement Age, the date you cease your employment with Holdings or any
subsidiary thereof and (v) as a result of your Incapacity, on the date you
first become entitled to receive
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<PAGE> 6
benefits under any long-term disability plan maintained by Holdings or its
subsidiaries.
"EMC" means Education Management Corporation, a Pennsylvania corporation.
"ESOP" means the EMC Holdings, Inc. Employee Stock ownership Plan.
"ESOP Trustee" means Marine Midland Bank, N.A., in its capacity as Trustee
of the ESOP.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Offer" means the offer made by Holdings pursuant to the
Information Statement to issue certain Class C Shares in exchange for surrender
of certain Class A Shares held by the Management Stockholders.
"Executive Officer of Holdings" means the Chairman, the President, any
Executive Vice President, any Senior Vice President, or any Vice President in
charge of a principal business unit, division or function (such as sales,
administration or finance) of Holdings, or any other officer who performs a
policymaking function. Executive officers of subsidiaries of Holdings may be
deemed to be Executive Officers of Holdings if they perform such policymaking
functions for Holdings.
"Fair Market Value" of any Share means (i) so long as the ESOP is in
existence and is required to obtain appraisals of its capital stock, the most
recent value of the Shares as
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<PAGE> 7
determined by the most recent such appraisal or (ii) if there is no such
appraisal of the Shares, a price equal to the quotient obtained by dividing (a)
the difference between (1) the product of (A) the Adjusted Consolidated EBIT
and (B) seven and (2) the Consolidated Net Debt determined as of the end of
Holdings' most recent fiscal year by (b) the number of Shares (on a fully
diluted basis) as of the date of determination.
"GAAP" shall mean generally accepted accounting principles which shall
include, but not be limited to, the official interpretations thereof as defined
by the Financial Accounting Standards Board, its predecessors and its
successors.
"Holdings" has the meaning set forth in the introduction to this Agreement.
"Holdings Capital Stock" means the Class A Shares, the Class B Shares, the
Class C Shares, the Convertible Preferred Stock and any other shares of capital
stock of Holdings hereafter authorized.
"Holdings Common Stock" means the Class A Shares, the Class B Shares and the
Class C Shares and any other shares of capital stock of Holdings classified as
common stock hereafter authorized.
"Incapacity" as used herein refers to any disability that you may experience
that entitles you to benefits under any long-term disability plan maintained by
Holdings or any of its subsidiaries.
- 7 -
<PAGE> 8
"Indebtedness for Borrowed Money" as applied to any Person means the
liabilities of such Person for money borrowed or credit received (other than
trade accounts payable incurred in the ordinary course of business), direct or
contingent, whether evidenced by a bond, note, debenture, capitalized lease
obligation, deferred purchase price arrangement, title retention device,
reimbursement agreement, guarantee, book entry or otherwise.
"Information Statement" means Holdings' Proxy and Information Statement
delivered in connection with the Current Recapitalization.
"Management Holders" means the Management Stockholders and each of their
successors, assigns and transferees.
"Management Incentive Stock Option Agreement" means that Agreement, if any,
pursuant to which you were granted options with respect to certain capital
stock of Holdings in connection with the Original Recapitalization.
"Management Stockholders" is used herein as defined in the Stockholders
Agreement.
"Merger Agreement" means the Agreement of Merger and Plan of
Recapitalization between Holdings and EMC Recapitalization, Inc.
"Normal Retirement Age" means the attainment of age 65 while in the employ
of Holdings or any subsidiary thereof.
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<PAGE> 9
"Original Recapitalization" means the purchase by Holdings of all the shares
of common stock of EMC and all related transactions.
"Original Recapitalization Premium" means the excess of (a) the total cash
and other consideration paid by Holdings for all of the shares of EMC common
stock, plus the total expenses incurred by Holdings in connection with the
Original Recapitalization, over (b) the net book value of the assets acquired,
as determined by procedures in accordance with GAAP consistently applied for
the application of "purchase accounting" to the Original Recapitalization.
"Permitted Transferee" with respect to you means (i) while you are living,
your spouse, parents or issue or a trust the beneficiaries of which are limited
to you, your estate, spouse, parents and/or issue and (ii) after your death,
your executors, administrators, testamentary trustees, legatees or
beneficiaries.
"Person" means an individual, a partnership, a joint venture, a corporation,
a trust, an unincorporated organization or a government or any department or
agency thereof.
"Prime Rate" means the rate of interest announced publicly by Pittsburgh
National Bank in Pittsburgh from time to time as its prime rate, corporate base
rate, or other designation announced in replacement of such rate.
"Public Distribution" means a Public Offering of Holdings Common Stock at
the conclusion of which (i) Holdings is
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<PAGE> 10
required to register shares of Holdings Common Stock under Section 12(b) or (g)
of the Exchange Act and (ii) at least 25% of the outstanding Holdings Common
Stock shall have been sold to the public pursuant to one or more effective
registration statements under the Act.
"Public Offering" means a public offering of securities of Holdings pursuant
to an effective registration statement under the Act.
"Repurchase" means any repurchase of Shares by Holdings pursuant to Section
10 hereof.
"Second Restated Certificate of Incorporation" means the amended and
restated certificate of incorporation of Holdings that will, among other
things, authorize the issuance of (i) one or more series of preferred stock
upon such terms as may be established by Holding's Board of Directors from time
to time and (ii) a new class of common stock, designated as Class C Common
Stock.
"Senior Credit Agreement" means the $52,500,000 Credit Agreement among
Holdings, Pittsburgh National Bank and the other banks party thereto.
"Senior Indebtedness" means (i) indebtedness for borrowed money (including,
without limitation, that incurred pursuant to the Senior Credit Agreement and
the Subordinated Credit Agreement), (ii) the current portion of any deferred
purchase price of property or services, (iii) the current portion of
obligations for the payment of rent as lessee under leases
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<PAGE> 11
which are or should be, in accordance with GAAP, recorded as capital leases,
(iv) current matured, non-contingent obligations under direct or indirect
guaranties in respect of, and obligations (contingent or otherwise) to purchase
or otherwise acquire, or otherwise to assure a creditor against loss in respect
of, indebtedness or obligations of others of the kinds referred to in clauses
(i), (ii) or (iii) above, and (v) obligations of the types referred to in
clauses (i), (ii), (iii) or (iv) above which are secured by any lien, security
interest or Other charge or encumbrance upon or in-property (including, Without
limitation, accounts and contract rights) owned by Holdings, even though
Holdings has not assumed or become liable for the payment of such Indebtedness.
"Shares" means, collectively, all shares of any class of Holdings Capital
Stock, including any shares of Holdings capital Stock which may have been
issued or distributed in respect of any shares of any class of Holdings Capital
Stock by way of stock dividend or stock split or other distribution,
recapitalization or reclassification.
"Stockholders Agreement" means the Stockholders Agreement among Holdings,
Merrill Lynch Interfunding, Inc., the ESOP and the Persons listed on the
Schedule of Stockholders attached thereto.
"Stockholder Designation" means the Stockholder Designation attached as
Exhibit A hereto.
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<PAGE> 12
"Subordinated Credit Agreement" means the Note and Warrant Purchase
Agreement between Holdings, Northwestern Mutual Life Insurance Company and AIG
Global Investors, Inc.
"Third Party" means any Person other than (i) any party to this Agreement or
any Affiliate of any such party and (ii) any Permitted Transferee.
"Third Party Offer" has the meaning set forth in Section 9 hereof.
"Third Restated Certificate of Incorporation" means the Third Amended and
Restated Certificate of Incorporation of Holdings which, on or prior to the
Closing Date, in connection with the Current Recapitalization, shall have been
approved and adopted by the Board of Directors of Holdings and the requisite
percentage of the holders of Holdings' Capital Stock entitled to vote thereon
and filed with the Secretary of State of the State of Delaware.
"Transfer" has the meaning set forth in Section 8(b) hereof.
"Warrants" is used herein as defined in the subordinated Credit Agreement.
(b) Pursuant to the last sentence of Section 8(b) hereof, following any
valid Transfer to any Permitted Transferee, the terms "you" and "your", as used
herein, shall include or refer only to, as the case may be, such Permitted
Transferee.
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<PAGE> 13
2. Representations, Warranties and Covenants of Holdings. Holdings
represents, warrants and covenants that:
(a) Holdings is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware; and Holdings has all
requisite corporate power and authority to enter into and perform all of its
obligations under this Agreement.
(b) Neither Holdings, nor any Person acting on its behalf, has taken or
will take any action that would make unavailable such exemptions from
registration under the Act on which Holdings is relying in connection with the
Current Recapitalization or the issuance or exchange on the Closing Date of any
Shares.
3. Investment Representations; Other Representations and Warranties by You.
You represent and warrant that:
(a) You have received and read the Information Statement. There has been
made available to you a reasonable time prior to your execution and delivery
hereof in order to provide an opportunity for you to ask questions and receive
answers concerning the terms and conditions of your participation in the
Current Recapitalization and to obtain any additional information which
Holdings or EMC possesses or can acquire without unreasonable effort or
expense. You have received all additional information that was requested.
(b) You have been advised that none of Holdings Common Stock has been
registered under the Act or any state securities
- 13 -
<PAGE> 14
or "blue sky" laws, and, therefore, cannot be resold unless (A) such stock is
registered under the Act or under any applicable state securities or "blue sky"
laws and/or (B) an exemption from registration thereunder is available.
(c) Your acquisition of Shares in connection with the Current
Recapitalization is for your own account, for investment only, and not with a
view to or for resale of any Holdings securities presently held or to be
exchanged or acquired by you in connection with the Current Recapitalization,
and you have no present intention of distributing or reselling any thereof,
except as otherwise provided herein and as described in the Information
Statement. In making the foregoing representation, you are aware that you must
bear the economic risk of such investment for an indefinite period of time.
(d) You have such knowledge and experience in financial and business
matters that you are capable of evaluating the merits and risks of your
participation in the Current Recapitalization.
(e) You are aware of and familiar with the prohibitions, restrictions and
limitations imposed on Holdings by the Senior Credit Agreement and the
Subordinated Credit Agreement, including, without limitation, those
prohibitions, restrictions and limitations which may prohibit, restrict or
limit Holdings' ability to repurchase any Shares, whether pursuant to this
Agreement or otherwise, or to waive, change, modify or discharge this
Agreement.
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<PAGE> 15
(f) You are aware of and familiar with the restrictions imposed on the
transfer by you of any Shares, including, without limitation, the restrictions
contained in this Agreement and in the Stockholders Agreement, and the rights
of Holdings and others under this Agreement and under the Stockholders
Agreement in connection with transfers of Shares by you.
(g) You are aware of and familiar with the provisions of the Stockholders
Agreement and exhibits thereto relating to the management of Holdings and EMC.
(h) You acknowledge that Holdings is entering into this Agreement in
reliance upon your representations and warranties made in this Agreement,
including, without limitation, those set forth in this Section.
(i) You have full right, power and authority to execute and deliver this
Agreement and any and all other documents or instruments to be executed and
delivered by you in connection with the Current Recapitalization and this
Agreement and all such other documents and instruments are valid, binding and
enforceable against you in accordance with their terms, except that the
enforceability thereof may be limited by applicable bankruptcy, insolvency or
other similar laws relating to or affecting creditors' rights generally and by
general equitable principles, regardless of whether such enforceability is
considered in a proceeding in equity or at law.
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<PAGE> 16
(j) You hereby confirm that the representations and warranties made by you
in your Common Stock Subscription and Repurchase Agreement, if any, and/or
Management Incentive Stock Option Agreement, if any, were true and correct as
of the date on which they were made.
4. Sale and/or Exchange of Shares and/or Options. Pursuant to the Second
Restated Certificate of Incorporation, the Information Statement, the Merger
Agreement and the Third Restated Certificate of Incorporation, all as described
in the Information Statement, at the Closing, you will have:
(a) received, in exchange for a like number of the Class A Shares set
forth at Item 2 of the Stockholder Designation, the number of Class C Shares
set forth at Item 3 of the Stockholder Designation;
(b) sold the number of Class A Shares set forth at Item 4 of the
Stockholder Designation to (i) Holdings for the cash consideration set forth at
Item 5 of the Stockholder Designation and (ii) the ESOP for the cash
consideration set forth at Item 6 of the Stockholder Designation;
(c) relinquished your rights to all or a portion of your options, if any,
to purchase Class B Shares to Holdings in exchange for the payment by Holdings
of the consideration set forth at Item 7 of the Stockholder Designation;
(d) (i) converted your options to purchase Class B Shares, if any, not
relinquished to Holdings as described in Section 4(c) into options to purchase
Class C Shares,
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<PAGE> 17
(ii) exercised such options to purchase Class C Shares and (iii) received the
number of Class C Shares set forth at Item 8 of the Stockholder Designation;
and
(e) converted all Class C Shares set forth at Items 3 and 8 of the
Stockholder Designation into the number of Class B Shares and the amount of
cash set forth at Items 9 and 10, respectively, of the Stockholder Designation.
In consideration of payments to be received by you in connection with the
Current Recapitalization, and for other good and valuable consideration, you,
on behalf of yourself and your representatives, successors and assigns, do
hereby unconditionally release and discharge Holdings and each of its
Affiliates, stockholders, officers, employees and agents, of and from any and
all claims (whether for money, stock or otherwise), actions, demands, payments,
penalties, debts, damages or any other amounts arising out of or relating in
any way to your benefits under the EMC Holdings, Inc. Management Stock Option
Plan (adopted effective as of July 1, 1988).
5. Delivery of Documents. In connection with your participation in the
Current Recapitalization, on or prior to the Closing, you shall have delivered
all documents required to be delivered under the Information Statement in order
for you to accept the Exchange Offer and such other documents as Holdings
reasonably may request.
6. Conditions to Purchase and/or Exchange of Shares. Holdings' obligations
under the transactions described in
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<PAGE> 18
Section 4 are subject to the fulfillment to Holdings' satisfaction at or prior
to the Closing of the following conditions:
(a) Your representations and warranties contained in this Agreement shall
be true and correct when made and at and as of the Closing Date.
(b) You shall have performed and complied with all agreements and
conditions contained in this Agreement required to be performed or complied
with by you on or prior to the Closing, including, without limitation, the
delivery of the documents and instruments described in Section S of this
Agreement.
(c) All of the conditions to the Closing under all agreements executed and
delivered in connection with the Current Recapitalization shall have been
satisfied or waived.
7. No Implied Right to Employment. Neither this Agreement nor any
provision hereof nor any action taken or omitted to be taken hereunder shall be
deemed to create or confer upon you any right to be retained in the employ of
Holdings or any subsidiary or other Affiliate thereof.
8. Transfer Restrictions.
(a) General. You hereby agree that any and all Shares held by you after
the Closing will be subject to the terms and conditions of this Agreement and
the Stockholders Agreement. You will not, directly or indirectly, offer, sell,
pledge, hypothecate, transfer, assign or otherwise dispose of or solicit any
offers to purchase, or otherwise acquire or take, or pledge
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<PAGE> 19
(collectively for purposes of Sections 8 and 9 hereof only, "Transfer") any
Shares owned by you to any Person whom you know, or after reasonable inquiry
should know, has been convicted of a felony which, due to its nature or
notoriety, reflects or would reflect adversely upon Holdings or any subsidiary
thereof or which has resulted in the incarceration of such Person for 30 days
or more (unless such conviction is reversed in any final appeal thereof).
(b) Restrictions Prior to Public Distribution. Prior to a Public
Distribution, you may Transfer any Shares owned by you to Holdings or, if such
right is assigned to the ESOP pursuant to the Stockholders Agreement, to the
ESOP. In addition, you may at any time Transfer any of your Shares to a
Permitted Transferee, or otherwise in accordance with the provisions of the
Stockholders Agreement. Each Permitted Transferee may further Transfer any
Shares acquired by such Permitted Transferee to any other Permitted Transferee.
No Transfer to any Permitted Transferee hereunder shall be valid unless and
until such Permitted Transferee shall agree in writing, in form and substance
reasonably satisfactory to Holdings, to become bound, and becomes bound, by the
terms of this Agreement and the Stockholders Agreement applicable to you.
Following any Transfer to a Permitted Transferee, except as otherwise expressly
provided herein, such Permitted Transferee shall have all rights accorded to
and shall be subject to all obligations applicable to you
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<PAGE> 20
hereunder, including without limitation rights and obligations attendant with
any Repurchase.
(c) Restrictions following Public Distribution. Subsequent to any Public
Distribution, any Shares owned by you may be Transferred subject, however, to
(i) all rights of Holdings hereunder and under the Stockholders Agreement and
(ii) compliance with Section 8(e) hereof.
(d) Legend. You agree that prior to any Public Distribution, the
certificate or certificates representing any Shares held by you shall bear the
following legend (with any blanks therein appropriately completed):
The securities represented by this certificate were issued without
registration under the Securities Act of 1933 and any applicable state
securities and "blue sky" laws, and in reliance upon the holder's
representation that such securities were being acquired for investment and
not for resale. No transfer of such securities may be made on the books of
the issuer unless accompanied by an opinion of counsel, satisfactory to the
issuer, that such transfer may properly be made without registration under
the Securities Act of 1933 or that such securities have been so registered
under a registration statement which is in effect at the date of such
transfer.
The securities represented by this certificate are also subject to the
restrictions on transfer contained in the Exchange and Repurchase Agreement,
dated as of , 1989, and in the Stockholders Agreement, dated as of
, 1989, copies of each of which may be obtained from the issuer, as well as
the rights of the issuer and certain of its stockholders under such
Stockholders Agreement. No transfer of such securities will be made on the
books of the issuer unless accompanied by evidence reasonably satisfactory
to the issuer of compliance with the terms of each of such Agreements.
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<PAGE> 21
(e) Securities Law Compliance. Except for a Transfer effected pursuant to
a Public Offering of Holdings' Common Stock in accordance with the provisions
of the Stockholders Agreement and anything to the contrary herein contained
notwithstanding, no Transfer of any Shares held by you to a Person other than
Holdings or its designee pursuant to any Repurchase shall be effected unless
such Transfer may properly be made without registration because of the
availability of an exemption from registration under the Act and the rules and
regulations in effect thereunder and under any applicable state securities or
"blue sky" laws, and Holdings shall have been furnished with an opinion of
counsel, satisfactory in form and substance to Holdings, to that effect.
9. Right of Inclusion; Right of First Offer. Prior to the earlier to occur
of (i) the tenth anniversary of the Closing Date and (ii) a Public
Distribution, in the event that you (a) shall have received a bona fide offer
in writing from a third party (the "Third Party Offer") to purchase any Shares
owned by you, which offer you desire to accept, and (b) are otherwise permitted
to sell such Shares under applicable laws and contracts, then, in such event,
(unless such Transfer shall be in a Public Offering in accordance with Section
6 of the Stockholders Agreement) your right to accept the Third Party Offer and
to Transfer the Shares pursuant thereto shall be subject to the provisions of
Section 7 of the Stockholders Agreement regarding rights of inclusion and
rights of first
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<PAGE> 22
offer; provided, that you may not Transfer any Shares to a Third Party pursuant
to Section 7 of the Stockholders Agreement other than in exchange for cash or
promissory notes or a combination of cash and promissory notes.
10. Rights with Respect to Shares Following Termination of Your
Employment.
(a) Termination Upon Death, Incapacity or Retirement.
(i) Holdings' Call. Upon your death, Incapacity or the termination of
your employment as a result of your retirement having attained Normal
Retirement Age, prior to a Public Distribution, then, in any such event,
Holdings shall have the right, upon delivery of notice to you, for a period of
90 calendar days after the Date of Termination, to repurchase any or all Shares
owned by you. If Holdings so notifies you in accordance with Section 11 hereof
of its determination to exercise such right, you shall have the obligation to
sell the relevant number of Shares on the terms and conditions set forth in
Section 12 hereof to Holdings at a price equal to the product of (i) the Fair
Market Value of each such Share as of the Date of Termination and (ii) the
number of Shares so purchased.
(ii) Your Put. In the event of the failure of Holdings to exercise its
right to repurchase all Shares owned by you pursuant to Section 10(a)(i) within
the period therein specified, then, in such event, you shall have the right,
upon delivery of notice to Holdings for a period of 90 calendar days (180
calendar days in the case of your death) commencing on the
- 22 -
<PAGE> 23
91st calendar day after the Date of Termination, to require Holdings to
repurchase in accordance with Section 11 hereof all (but not fewer than all)
Shares then owned by you. If you deliver such notice, you shall have the
obligation to sell to Holdings, and Holdings shall have the obligation to
purchase all of such Shares on the terms and conditions set forth in Section 12
hereof at the price set forth in Section 10(a)(i).
(b) Termination Upon Resignation of Employment; Holdings' Call. Upon
termination by you prior to a Public Distribution of your employment with
Holdings or any subsidiary thereof for any reason other than (i) your death,
(ii) Incapacity or (iii) retirement having attained Normal Retirement Age,
then, in such event, Holdings shall have the right, upon delivery of notice to
you, for a period of 90 calendar days after the Date of Termination, to
repurchase any and all Shares owned by you. If Holdings notifies you in
accordance with Section 11 hereof of its determination to exercise such right,
you shall have the obligation to sell the relevant number of Shares on the
terms and conditions set forth in Section 12 hereof to Holdings at a price
equal to the product of (i) the lesser of (A) the Fair Market Value of each
such Share on the Date of Termination and (B) the Compounded Adjusted Purchase
Price of each such Share and (ii) the number of Shares so purchased.
(c) Termination for Cause; Holdings' Call. Upon termination prior to a
Public Distribution of your employment with Holdings or any subsidiary thereof
for Cause, Holdings shall
- 23 -
<PAGE> 24
have the right, upon delivery of notice to you, for a period of 90 calendar
days after the Date of Termination, to repurchase any or all Shares owned by
you. If Holdings so notifies you in accordance with Section 11 hereof of its
determination to exercise such right, you shall have the obligation to sell the
relevant number of Shares on the terms and conditions set forth in Section 12
hereof to Holdings at a price equal to the product of (i) the lesser of (A) the
Fair Market Value of each such Share as of the Date of Termination or (B) the
Adjusted Purchase Price of such Share and (ii) the number of Shares so
purchased.
(d) Termination For Reason Other than Cause.
(i) Holdings' Call. Upon termination, prior to a Public Distribution, of
your employment with Holdings or any subsidiary thereof for any reason other
than as a result of (A) your death, (B) Incapacity, (C) retirement having
attained Normal Retirement Age, (D) your resignation or (E) a termination for
Cause, then, in such event, Holdings shall have the right, upon delivery of
notice to you, for a period of 90 calendar days after the Date of Termination,
to repurchase any or all Shares owned by you. If Holdings so notifies you in
accordance with Section 11 hereof of its determination to exercise such right,
you shall have the obligation to sell the relevant number of Shares on the
terms and conditions set forth in Section 12 hereof to Holdings at a price
equal to the product of (i) the lesser of (A) the Fair Market Value of each
such Share as of the Date of
- 24 -
<PAGE> 25
Termination or (B) the Compound Adjusted Purchase Price and (ii) the number of
Shares so purchased.
(ii) Your Put. In the event of the failure of Holdings to exercise its
right to repurchase all Shares owned by you pursuant to Section 10(d)(i) within
the period therein specified, then, in such event, you shall have the right,
upon delivery of notice to Holdings, for a period of 90 calendar days,
commencing on the 91st calendar day after the Date of Termination, to require
Holdings to repurchase in accordance with Section 11 hereof all (but not fewer
than all) Shares then owned by you. If you deliver such notice, you shall have
the obligation to sell to Holdings, and Holdings shall have the obligation to
purchase, all of such Shares on the terms and conditions set forth in Section
12 hereof at the price set forth in Section 10(d)(i).
11. Election Procedures.
(a) The parties shall exercise their respective rights under Section 10
hereof by sending a written notice by United States certified or registered
mail, return receipt requested, postage prepaid, addressed as follows:
(i) if to you at the address specified on the Stockholder Designation;
(ii) if to Holdings, to the attention of the President of Holdings, at
the address specified in Section 17 hereof, with copies to Eckert Seamans
Cherin & Mellott, at the address specified in Section 17 hereof; or
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<PAGE> 26
(iii) to such other address as either party has furnished to the other in
writing, except that notices of change of address shall be effective only upon
receipt. Other notices pursuant to this Agreement shall be communicated in
the manner provided in Section 17, unless otherwise expressly provided herein.
(b) Holdings' notice of its determination to effect a call pursuant to
Section 10 shall be effective if deposited in the mail as specified in
subsection (a) of this Section 11, or hand delivered to you and/or any
Permitted Transferee within the applicable time period specified in Section 10
hereof and shall specify (i) the call repurchase price and (ii) the basis on
which such price was computed.
Any notice delivered by you to effect a put pursuant to Section 10 hereof
shall be effective if received by the President of Holdings within the
applicable time period specified in Section 10; and, within 45 calendar days
after the receipt by Holdings of any such notice, Holdings shall notify you of
(i) the number of Shares to be purchased by Holdings, and (ii) the applicable
put repurchase price (specifying in reasonable detail the basis on which such
price was computed).
(c) Any notice delivered in accordance with Section 10 and 11 hereof shall
specify the place, time and date for the delivery of and payment for Shares,
which shall be in the City of Pittsburgh, and during normal business hours on a
Business Day
- 26 -
<PAGE> 27
which shall not be less than 10 nor more than 30 calendar days after the
receipt of such notice.
12. Delivery and Payment Procedures.
(a) At the place, and at the time and date specified in any notice
delivered under Sections 10 and 11 hereof, you shall deliver to Holdings or its
designee, certificates for the Shares purchased by Holdings pursuant to any
Repurchase, duly endorsed, or accompanied by written instruments of transfer,
in form satisfactory to Holdings or its designee, duly executed on behalf of
such party, free and clear of any and all claims and encumbrances, against
payment of the aggregate purchase price for such Shares, which will be made by
the delivery of a certified or bank cashier's check or checks, payable to you
or upon your order, in an amount equal to such aggregate repurchase price.
(b) All transfer and documentary stamp taxes, if any, payable in respect
of the sale of Shares to Holdings pursuant to this Agreement shall be borne by
the party exercising its right to purchase or to sell Shares, as the case may
be, under Section 10 hereof.
(c) Notwithstanding anything herein contained to the contrary, if, in
connection with any purchase of Shares pursuant to Section 10(a)(ii) or Section
10(d)(ii), the purchase of such Shares would be in violation of, or result in a
default under, any agreement or instrument to which Holdings is a party or by
which it is bound (including, without limitation, the Senior Credit Agreement
and the Subordinated Credit Agreement, but
- 27 -
<PAGE> 28
excluding any agreement entered into in material part for the purpose of
avoiding Holdings' obligations hereunder), or violate Holdings' Certificate of
Incorporation or By-laws, as the same may be amended and/or restated (but
excluding any such amendment as may be effected in material part for the
purpose of avoiding Holdings' obligations hereunder) or any law, regulation or
order applicable to Holdings (each a "governing provision"), then Holdings may
issue a junior subordinated note in lieu of the cash consideration required by
subsection (a) of this Section 12. If Holdings does not have sufficient funds
legally available under each governing provision to make the cash payment
required by subsection (a) of this Section 12 and if Holdings is further
precluded by any governing provision from issuing a junior subordinated note,
Holdings shall not purchase any Shares, and Holdings shall have no further
obligations under any Repurchase with respect to any Shares not purchased by
Holdings because it does not have sufficient funds legally available therefor
under each governing provision, and in such event, the Compensation Committee
shall, within 180 days, recommend to you one or more of the then current
Management Stockholders or other persons who at such times are Executive
Officers of Holdings (collectively, the "Alternative Buyers") who are willing
to purchase, and who shall be entitled to purchase, from you at the applicable
purchase price specified in Section 10, any or all of the Shares which Holdings
was unable to purchase from you because of the foregoing restrictions. Any
Shares not purchased within 90 days from the
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<PAGE> 29
date of the Compensation Committee's offer to the Alternative Buyers pursuant
to the preceding sentence shall be offered for sale and sold by you to the
Management Holders in the manner set forth in subsection (d) of this Section
12.
(d) Any offer to sell Shares to the Management Holders pursuant to
subsection (c) of this Section 12 shall be made by giving to each such
Management Holder written notice of your offer to sell those Shares to the
Management Holders at the purchase price which Holdings would have been
required to pay therefor pursuant to Sections 10. For a period of 90 calendar
days after the date of his or her receipt of such notice, each of the
Management Holders shall have the right to notify you in accordance with
Section 7.2 of the Stockholders Agreement that such Management Holder has
determined to accept such offer, and if one or more of the Management Holders
so notifies you of such Management Holder(s) acceptance, he or each of them may
purchase any of the Shares so offered which such Management Holder(s) is
entitled to purchase at the price specified in your notice. The number of
Shares which each Management Holder would be entitled to purchase is the
product of (x) the total number of Shares so offered for sale times (y) a
fraction, the numerator of which is the number of Shares held by such
Management Holder and the denominator of which is the total number of
outstanding Shares held by all of the Management Holders (other than by you).
Notwithstanding the foregoing, your notice shall also be deemed to constitute
an offer to sell to each Management Holder the
- 29 -
<PAGE> 30
Shares subject to your offer which any other Management Holder is entitled to
purchase and does not purchase. The additional number of shares which each
Management Holder would be entitled to purchase pursuant to the preceding
sentence is the product of (x) the total number of Shares so offered times (y)
a fraction, the numerator of which is the number of Shares held by such
Management Holder and the denominator of which is the total number of
outstanding Shares held by all of the Management Holders who have accepted the
Offer deemed to be made pursuant to the preceding sentence. In order for a
Management Holder to accept the offer to sell such additional number of Shares,
such Management Holder shall indicate his or her acceptance thereof in his or
her notice to you referred to above, and if a Management Holder so indicates
his or her acceptance, he or she may purchase any of the additional Shares
which he or she would be entitled to purchase at the price specified in your
notice.
(e) Any obligation of Holdings to purchase Shares pursuant to Section 10
hereof shall be subject to compliance with all applicable legal requirements.
13. Survival; Assignment. All covenants, agreements, representations and
warranties contained in this Agreement shall survive the execution and delivery
of this Agreement, any investigation at any time made by or on behalf of a
party hereto. Holdings' rights and obligations hereunder may be assigned by
Holdings in whole or in part. Except as otherwise provided herein, you may not
assign any of your rights hereunder other
- 30 -
<PAGE> 31
than to Permitted Transferees. Whenever in this Agreement reference is made to
any of the parties hereto, such reference shall be deemed to include the
successors, executors or administrators and permitted assigns of such party;
and all covenants, promises and agreements made in this Agreement by or on
behalf of Holdings, or by you, shall bind and inure to the benefit of and be
enforceable by the respective successors, executors or administrators and
permitted assigns of such parties hereto, whether so expressed or not.
14. Governing Law. This Agreement shall be construed and enforced in
accordance with the laws of the Commonwealth of Pennsylvania.
15. Entire Agreement; Headings. This Agreement and the agreements
referred to herein embody the entire agreement and understanding between you
and Holdings and supersede all prior agreements and understandings relating to
the subject matter hereof. The preceding sentence and any other provision of
this Agreement notwithstanding, this Agreement is not, and shall not be
construed to be, a novation of your Management Common Stock Subscription and
Repurchase Agreement, if any, and/or your Management Incentive Stock Option
Agreement, if any, and (a) you and Holdings shall remain liable for any breach
of such agreement(s) prior to the date hereof, and (b) the representations and
warranties contained in paragraph 3 of your Management Common Stock
Subscription and Repurchase Agreement, if any, will survive the execution and
delivery hereof. The
- 31 -
<PAGE> 32
headings in and date of this Agreement are for purposes of reference only and
shall not limit or otherwise affect the meaning hereof.
16. Amendments. This Agreement cannot be changed orally, and can be
changed only by an instrument in writing signed by the party against whom
enforcement of any waiver, change, modification or discharge is sought.
17. Notices. All communications provided for herein shall be in writing
and:
(a) if addressed to you, shall be delivered or mailed addressed to you at
your address specified in the books and records of Holdings, or
(b) if addressed to Holdings, shall be delivered or mailed addressed to it
as follows:
EMC Holdings, Inc.
Suite 800
300 Sixth Avenue
Pittsburgh, Pennsylvania 15222
Attention: President
with a copy to:
Robert C. McCartney, Esquire
Eckert Seamans Cherin & Mellott
42nd Floor
600 Grant Street
Pittsburgh, Pennsylvania 15219
18. Execution in Counterparts. This Agreement may be executed in
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
If you are in agreement with the foregoing, please sign each counterpart of
this Agreement.
Very truly yours,
EMC HOLDINGS, INC.
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<PAGE> 33
By:
-------------------------
Executive Vice President
The foregoing Agreement is hereby
agreed to as of the date first
above written, with the intent to
be legally bound thereby.
By:
-------------------------------
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<PAGE> 34
Exchange and Repurchase Agreements & Amendments
each dated as of October 21, 1989
as amended January 19, 1995
R. Margaret Barber
C. Thomas Burkett
Miryam L. Drucker
Alan R. Freedman
James R. Graft
Albert Greenstone
Steve R. Gregg, Jr.
Nancy L. Gruber
Gary C. Grysiak
Ronald G. Guida
Mark C. Hodges
Dennis R. Harkins
Daniel J. Lafferty
Ellis J. Matthews
William J. Mazur
Eileen C. Northrop
Robert S. Peterson
George L. Pry
Saundra M. VanDyke
<PAGE> 1
Exhibit 4.09
AMENDMENT NO. 1
TO
EXCHANGE AND REPURCHASE AGREEMENT
THIS AMENDMENT NO. 1 TO EXCHANGE AND REPURCHASE AGREEMENT ("Amendment") is
made and entered into as of ____________ by and between EDUCATION MANAGEMENT
CORPORATION, a Pennsylvania corporation ("EMC"), and _____________________ (the
"Management Stockholder").
WITNESSETH:
WHEREAS, EMC Holdings, Inc. (as predecessor-by-merger to EMC) and the
Management Stockholder entered into that certain Exchange and Repurchase
Agreement dated as of __________________ (the "Agreement"); and
WHEREAS, EMC and the Management Stockholder desire to amend the Agreement in
order to modify the put and call prices if the Management Stockholder's
employment is terminated by EMC without Cause (as defined in the Agreement).
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto, intending to
be legally bound hereby, agree as follows:
1. Definition of Senior Credit Agreement. The definition of "Senior Credit
Agreement" in Section 1 of the Agreement is hereby amended and restated in its
entirety as follows:
"'Senior Credit Agreement' means the Amended and Restated Credit Agreement
dated as of March 16, 1995 among EMC, PNC Bank, National Association, and
the other banks party thereto."
2. Amendment of Section 10(d)(i). Section 10(d)(i) of the Agreement is
hereby amended and restated in its entirety as follows:
"(i) EMC's Call. Upon termination, prior to a Public Distribution, of
your employment with EMC or any subsidiary thereof for any reason other than
as a result of (A) your death, (B) Incapacity, (C) retirement having
attained Normal Retirement Age, (D) your resignation or (E) a termination
for Cause, then, in such event, EMC shall have the right, upon delivery of
notice
<PAGE> 2
to you, for a period of 90 calendar days after the Date of Termination, to
repurchase any or all Shares owned by you. If EMC so notifies you in
accordance with Section 11 hereof of its determination to exercise such
right, you shall have the obligation to sell the relevant number of Shares on
the terms and conditions set forth in Section 12 hereof to EMC at a price
equal to:
(x) in the case of Shares acquired by you within the three-year period
immediately preceding the Date of Termination, the product of (i) the
lesser of (A) the Fair Market Value of each such Share as of the Date of
Termination or (B) the Compound Adjusted Purchase Price and (ii) the
number of such Shares so purchased; and
(y) in the case of all other Shares owned by you, the product of (i)
the Fair Market Value of each such Share as of the Date of Termination and
(ii) the number of such Shares so purchased."
3. Amendment of Section 12. Section 12 of the Agreement is hereby amended
by adding, at the end thereof, new subsections (f) and (g) as follows:
"(f) Notwithstanding anything herein contained to the contrary, in
connection with the purchase of your Shares pursuant to Section 10(d)(ii) at
the price specified in clause (y) of Section 10(d)(i), if the Fair Market
Value of each such Share as of the Date of Termination exceeds the Compound
Adjusted Purchase Price, then EMC may issue a Junior Subordinated Note (as
defined below), in lieu of the cash consideration required by subsection (a)
of this Section 12, for the portion of the purchase price for such Shares
equal to the product of (i) the difference between (A) the Fair Market Value
of each such Share as of the Date of Termination and (B) the Compound
Adjusted Purchase Price and (ii) the number of Shares so purchased. As used
in this subsection (f), "Junior Subordinated Note" means the junior
subordinated promissory note issued by EMC for payment of a portion of the
purchase price for Shares pursuant to this subsection (f), in the principal
amount specified above, bearing interest on the unpaid principal amount from
the date of issue of such note until such note is paid in full, payable
quarterly on the first Business Day of each calendar quarter, at a
fluctuating interest rate per annum (based on a year of 365 or 366 calendar
days, as the case may be) equal to 1% per annum above the Prime Rate in
effect from time to time (each change, if any, in such fluctuating interest
rate to take effect simultaneously with the corresponding change in the
Prime Rate; provided, that such fluctuating interest rate shall at no time
exceed 12% per annum), and the principal amount of which is payable on the
date occurring three months following the latest of payment in full of all
notes or other evidences of indebtedness issued pursuant to the existing
Senior Credit Agreement or the existing Subordinated Credit Agreement (but
not refinancings or extensions thereof).
- 2 -
<PAGE> 3
(g) EMC and each holder of a Junior Subordinated Note, by acceptance of
such Junior Subordinated Note, covenant and agree that each such Junior
Subordinated Note is and shall be subordinated in right of payment to the
prior payment in full of all notes or other evidences of indebtedness issued
pursuant to the existing Senior Credit Agreement and the existing
Subordinated Credit Agreement (but not refinancings or extensions thereof)."
4. References to Holdings. The parties hereby confirm that, unless the
context clearly requires otherwise, all references to "Holdings" in the
Agreement shall, by operation of law pursuant to the merger of EMC Holdings,
Inc. with and into EMC on April 30, 1991, be deemed to be references to "EMC."
5. No Other Amendments. Except as expressly amended by this Amendment, the
Agreement, and each and every representation, warranty, covenant, term and
condition therein, are hereby specifically ratified and confirmed.
6. Counterparts. This Amendment may be executed in counterparts, each of
which shall be an original, but all of which together shall constitute one
instrument.
7. Governing Law. This Amendment shall be construed and enforced in
accordance with the laws of the Commonwealth of Pennsylvania.
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed as
of the date first above written.
EDUCATION MANAGEMENT CORPORATION
By: _________________________________
Senior Vice President &
Chief Financial Officer
WITNESS: Management Stockholder:
________________________________ _____________________________________
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<PAGE> 1
Exhibit 4.10
AMENDMENT NO. 2
TO
EXCHANGE AND REPURCHASE AGREEMENT
THIS AMENDMENT NO. 2 TO EXCHANGE AND REPURCHASE AGREEMENT ("Amendment") is
made and entered into as of January 1, 1996, by and between EDUCATION
MANAGEMENT CORPORATION, a Pennsylvania corporation ("EMC"), and
__________________ ("Management Stockholder").
WITNESSETH:
WHEREAS, EMC Holdings, Inc. (as predecessor-by-merger to EMC) and the
Management Stockholder entered into that certain Exchange and Repurchase
Agreement dated as of October 26, 1989, as amended as of January 19, 1995 (the
"Agreement"); and
WHEREAS, EMC and the Management Stockholder desire to amend the Agreement in
order to provide that certain repurchases thereunder that are at a purchase
price equal to the lesser of Fair Market Value and the Compounded Adjusted
Purchase Price (as those terms are defined in the Agreement) will instead be at
Fair Market Value;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto, intending to
be legally bound hereby, agree as follows:
1. Amendment of Section 10(b). Section 10(b) of the Agreement is hereby
amended and restated in its entirety as follows:
"(b) Termination Upon Resignation of Employment; EMC's Call.
Upon termination, prior to a Public Distribution, of your employment
with EMC or any subsidiary thereof as a result of your resignation,
then, in such event, EMC shall have the right, upon delivery of
notice to you, for a period of 90 calendar days after the Date of
Termination, to repurchase any and all Shares owned by you. If EMC
notifies you in accordance with Section 11 hereof of its
determination to exercise such right, you shall have the obligation
to sell the relevant number of Shares on the terms and conditions set
forth in Section 12 hereof to EMC at a price equal to the product of
(i) the Fair Market Value of each such Share on the Date of
Termination and (ii) the number of Shares so purchased."
<PAGE> 2
2. Amendment of Section 10(d)(i). Section 10(d)(i) of the Agreement is
hereby amended and restated in its entirety as follows:
"(i) EMC's Call. Upon termination, prior to a Public
Distribution, of your employment with EMC or any subsidiary thereof
for any reason other than as a result of (A) your death, (B)
Incapacity, (C) retirement having attained Normal Retirement Age, (D)
your resignation or (E) a termination for Cause, then, in such event,
EMC shall have the right, upon delivery of notice to you, for a
period of 90 calendar days after the Date of Termination, to
repurchase any or all Shares owned by you. If EMC so notifies you in
accordance with Section 11 hereof of its determination to exercise
such right, you shall have the obligation to sell the relevant number
of Shares on the terms and conditions set forth in Section 12 hereof
to EMC at a price equal to the product of (i) the Fair Market Value
of each Share as of the Date of Termination and (ii) the number of
such Shares so purchased."
3. No Other Amendments. Except as expressly amended by this Amendment, the
Agreement and each and every representation, warranty, covenant, term and
condition therein, are hereby specifically ratified and confirmed.
4. Counterparts. This Amendment may be executed in counterparts, each of
which shall be an original, but all of which together shall constitute one
instrument.
5. Governing Law. This Amendment shall be construed and enforced in
accordance with the laws of the Commonwealth of Pennsylvania.
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed as
of the date first above written.
EDUCATION MANAGEMENT CORPORATION
By:
-------------------------------
CHAIRMAN AND CHIEF EXECUTIVE
OFFICER
WITNESS: MANAGEMENT STOCKHOLDER:
- --------------------------- ----------------------------------
Signature
<PAGE> 1
Exhibit 4.11
EDUCATION MANAGEMENT CORPORATION
COMMON STOCK SUBSCRIPTION AND REPURCHASE AGREEMENT
As of July 17, 1995
To: ("Purchaser")
Dear Purchaser:
Education Management Corporation, a Pennsylvania corporation ("EMC"), hereby
agrees with you as follows:
1. Certain Definitions. For the purposes of this
Agreement, the following terms have the following meanings, respectively:
"1986 Recapitalization" means the transaction consummated in
1986 pursuant to which Holdings acquired all of the shares of EMC.
"1986 Recapitalization Premium" means the excess of (a) the
total cash and other consideration paid by Holdings for all of the shares of
EMC common stock, plus the total expenses incurred by Holdings in connection
with the 1986 Recapitalization, over (b) the net book value of the assets
acquired, as determined by procedures in conformity with GAAP for the
application of "purchase accounting" to the 1986 Recapitalization.
"1989 Recapitalization" means the transaction consummated in
1989 pursuant to which the capital stock of Holdings was reclassified, Holdings
merged with EMC Recapitalization, Inc. and the concurrent restructuring of
Holdings' capital stock and certain
<PAGE> 2
other transactions were accomplished, all as described in Holdings' Proxy and
Information Statement dated September 20, 1989 as amended.
"1989 Recapitalization Premium" means the excess of (a) the
total cash and other consideration paid by the ESOP, Holdings and all other
investors, plus the total expenses incurred by Holdings in connection with the
1989 Recapitalization, over (b) the net book value of the assets acquired, as
determined by procedures in conformity with GAAP for the application of
"purchase accounting" to the 1989 Recapitalization.
"Adjusted Consolidated EBIT" means the Consolidated EBIT
calculated as of the end of EMC's most recent fiscal year, adjusted by adding
thereto any amounts deducted from EMC's revenues in determining such
Consolidated EBIT in respect of (a) amortization of the 1986 Recapitalization
Premium and the 1989 Recapitalization Premium, (b) contributions by EMC to the
ESOP and/or payment by EMC of dividends on Shares held by the ESOP and (c)
stock options granted to any EMC employee under any EMC employee stock option
or similar plan or to any member of the Compensation Committee.
"Adjusted Purchase Price" of any Share owned by you means (a)
$1.2899433 per Share with respect to all Shares owned by you immediately
following the closing of the 1989 Recapitalization and (b) with respect to all
Shares acquired by you thereafter, the original per share purchase price paid
by you for such Share, as appropriately adjusted to reflect any stock
dividends, stock splits, reverse stock splits, recapitalizations or similar
events occurring subsequent to the date of purchase of such Share.
"Affiliate" with respect to any Person means a director or
officer of such Person, any corporation, association, firm or other entity of
which such Person (or an officer
- 2 -
<PAGE> 3
or director of such Person) is a member, director or officer, the spouse of
such Person (or of any officer or director of such Person), either parent of
such Person (or of any officer or director of such Person) or of such Person's
spouse (or of the spouse of any officer or director of such Person), any
descendent of any such parent, any relative of such Person (or of any officer
or director of such Person) who has the same home as such Person (or of any
officer or director of such Person), and any other Person, directly or
indirectly controlling, controlled by, or under common control with, such
Person. For the purpose of this definition, "control" (including, with
correlative meanings, the term "controlling," "controlled by," and "under
common control with"), as used with respect to any Person, shall mean the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities or by contract or otherwise.
"Agreement" means this Common Stock Subscription and
Repurchase Agreement, as amended from time to time.
"Alternative Buyers" is defined in Section 12(b) hereof.
"Business Day" means any day other than a Saturday, Sunday or
other day on which banks are authorized to be closed in New York City or
Pittsburgh, Pennsylvania.
"Cause," when used in connection with the termination of your
employment with EMC or any subsidiary thereof, means (a) your willful failure
substantially to perform and discharge your duties and responsibilities as an
employee of EMC or any subsidiary thereof, other than by reason of your
Incapacity or (b) the engaging by you in serious misconduct which is injurious
to EMC or any subsidiary thereof.
- 3 -
<PAGE> 4
"Class A Shares" means EMC Class A Common Stock, par value
$0.0001 per share.
"Class B Shares" means EMC Class B Common Stock, par value
$0.0001 per share.
"Closing" is defined in Section 5 hereof.
"Closing Date" is defined in Section 5 hereof.
"Commission" means the U.S. Securities and Exchange Commission
and any successor federal agency having similar powers.
"Compensation Committee" means the Compensation Committee of
the Board of Directors of EMC.
"Compounded Adjusted Purchase Price" means, with respect to
any Share, the Adjusted Purchase Price of such Share as of the Date of
Termination, plus interest thereon from the date of acquisition of such Share
by you to the Date of Termination compounded annually on each July 1st at an
interest rate per annum equal to the Prime Rate in effect on each July 1st (or
the next succeeding Business Day if such day is not a Business Day).
"Consolidated" means the consolidation of the accounts of EMC
and its subsidiaries in accordance with GAAP.
"Consolidated EBIT" means EMC's Consolidated earnings before
interest and taxes determined with reference to EMC's audited income statement
for the pertinent fiscal year.
"Consolidated Net Debt" means, for any period, on a
Consolidated basis, the difference between (a) EMC's Indebtedness for Borrowed
Money and (b) all cash and cash
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<PAGE> 5
equivalents held by EMC and its subsidiaries, including any amounts held in
cash collateral or escrow accounts by another Person on behalf of EMC or any of
its subsidiaries.
"Convertible Preferred Shares" means shares of EMC's class of
convertible preferred stock issued to the ESOP.
"Counterpart Signature Page" means the counterpart signature
page to Stockholders Agreement by which you become a party to and bound by the
Stockholders Agreement.
"Date of Termination," when used in connection with the
termination of your employment with EMC or any subsidiary thereof, means if
your employment is terminated (a) by death, the date of your death, (b) by EMC
or any subsidiary thereof, the date specified in a written notice of
termination to you or, if no date is specified therein, the date on which such
notice is given to you, (c) by you, the date specified in a written notice of
termination to EMC or any subsidiary thereof, or if no date is specified
therein, the date on which such notice is given to EMC or such subsidiary, (d)
by retirement at or after the Normal Retirement Age, the date you cease your
employment with EMC or any subsidiary thereof, and (e) as a result of your
Incapacity, on the date you become entitled to receive benefits under any
long-term disability plan maintained by EMC or its subsidiaries.
"EMC" is defined in the introduction to this Agreement.
"EMC Capital Stock" means the Class A Shares, the Class B
Shares, the Convertible Preferred Shares and any other shares of capital stock
of EMC hereafter authorized.
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<PAGE> 6
"EMC Common Stock" means the Class A Shares, the Class B
Shares and any other shares of capital stock of EMC classified as common stock
hereafter authorized.
"Escrow Agent" is defined in Section 5 hereof.
"ESOP" means the Education Management Corporation Employee
Stock Ownership Plan.
"Estate" is defined in Section 8(a) hereof.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Executive Officer of EMC" means the Chairman, the President,
any Executive Vice President, any Senior Vice President, or any Vice President
in charge of a principal business unit, division or function (such as sales,
administration or finance) of EMC, any other officer who performs a
policy-making function, or any other person who performs similar policy-making
functions for EMC. Executive officers of subsidiaries of EMC may be deemed
Executive Officers of EMC if they perform such policy-making functions for EMC.
"Fair Market Value" of any Share means (a) so long as EMC has
an ESOP and is required to obtain appraisals of its capital stock for the
purposes of such ESOP, the most recent value of the Shares as determined by the
most recent such appraisal, or (b) if there is no such appraisal of the Shares,
a price equal to the quotient obtained by dividing (i) the difference between
(A) seven times Adjusted Consolidated EBIT and (B) the Consolidated Net Debt
determined as of the end of EMC's most recent fiscal year by (ii) the number of
Shares (on a fully diluted basis) as of the date of determination.
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<PAGE> 7
"GAAP" means generally accepted accounting principles,
consistently applied, including without limitation the official interpretations
therein as defined by the Financial Accounting Standards Board, its
predecessors and successors.
"Holdings" means EMC Holdings, Inc., a Delaware corporation to
which EMC is successor by merger.
"Incapacity" means your gaining entitlement to receive
benefits under any long-term disability plan maintained by EMC or its
subsidiaries.
"Indebtedness for Borrowed Money" as applied to any Person
means the liabilities of such Person for money borrowed or credit received
(other than trade accounts payable incurred in the ordinary course of
business), direct or contingent, whether evidenced by a bond, note, debenture,
capitalized lease obligation, deferred purchase price arrangement, title
retention device, reimbursement agreement, guarantee, book entry or otherwise.
"Junior Subordinated Note" is defined in Section 12(e) hereof.
"Management Holders" means the Management Stockholders (as
defined in the Stockholders Agreement) and each of their successors and
Permitted Transferees.
"Non-Recourse Note" is defined in Section 4 hereof.
"Normal Retirement Age" means the attainment of age 65 while
you are in the employ of EMC or any subsidiary thereof.
"Other Agreements" is defined in Section 4 hereof.
"Permitted Transferee" is defined in Section 8(a) hereof.
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<PAGE> 8
"Person" means an individual, a partnership, a joint venture,
a corporation, a trust, an unincorporated organization or a government or any
department or agency thereof
"Pledge Agreement" is defined in Section 4 hereof.
"Prime Rate" means the rate of interest announced publicly by
PNC Bank, National Association in Pittsburgh from time to time as its prime
rate, corporate base rate, or other designation announced in replacement of the
prime rate.
"Public Distribution" means a Public Offering of EMC Common
Stock at the conclusion of which (a) EMC is required to register shares of EMC
Common Stock under Section 12(b) or (g) of the Exchange Act and (b) 25% of the
outstanding EMC Common Stock shall have been sold to the public pursuant to one
or more effective registration statements under the Securities Act.
"Public Offering" means a public offering of securities of EMC
pursuant to an effective registration statement under the Securities Act.
"Purchaser" is defined on the first page of this Agreement.
"Purchaser Designation" means the Purchaser Designation
attached as Exhibit A hereto.
"Securities Act" means the Securities Act of 1933, as amended.
"Selling Transferees" is defined in Section 12(a) hereof.
"Senior Credit Agreement" means the Amended and Restated
Credit Agreement dated as of March 16, 1995 among EMC, PNC Bank, National
Association, and the other banks named therein, as amended from time to time.
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<PAGE> 9
"Shares" means, collectively, all shares of any class of EMC
Capital Stock, including any shares of EMC Capital Stock which may have been
issued or distributed in respect of any of the foregoing by way of stock
dividend or stock split or other distribution, recapitalization or
reclassification.
"Stockholders Agreement" means the Stockholders Agreement
dated as of October 26, 1989 among EMC, Merrill Lynch Interfunding, Inc., the
ESOP and the Persons listed on the Schedule of Stockholders attached thereto,
as amended from time to time.
"Subordinated Credit Agreement" means the Note and Warrant
Purchase Agreement dated as of October 25, 1989 among EMC, The Northwestern
Mutual Life Insurance Company and National Union Fire Insurance Company of
Pittsburgh, PA, as amended from time to time.
"Subscription Shares" is defined in Section 4 hereof.
"Third Party" has the meaning specified in the Stockholders
Agreement.
"Third Party Offer" is defined in Section 9 hereof.
2. Representations and Warranties of EMC. EMC
represents and warrants that:
(a) EMC is a corporation duly organized, validly existing
and in good standing under the laws of the Commonwealth of Pennsylvania. EMC
has all requisite corporate power and authority to enter into and perform all
of its obligations under this Agreement.
(b) Neither EMC, nor any Person acting on its behalf, has
offered the Subscription Shares or any part thereof or any similar securities
to, or solicited any offers to
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<PAGE> 10
buy any thereof from, or otherwise approached or negotiated with respect
thereto with, any Person or Persons other than you. Neither EMC, nor any
Person acting on its behalf, has taken or will take any action which would
subject the offering which has been made or the issuance on the Closing Date of
any EMC Capital Stock under this Agreement, or any of the Other Agreements, to
the registration provisions of Section 5 of the Securities Act.
3. Purchase for Investment; Other Representations and
Warranties by You. You represent and warrant that:
(a) There has been made available to you a reasonable
time prior to your execution hereof an opportunity to ask questions and receive
answers concerning the terms and conditions of your investment in the
Subscription Shares and to obtain any additional information which EMC
possesses or can acquire without unreasonable effort or expense. You have
received all additional information which you have reasonably requested.
(b) You have been advised that the Subscription Shares
have not been registered under the Securities Act or any state securities or
"blue sky" laws, and, therefore, cannot be resold unless they are registered
under the Securities Act or under any applicable state securities or "blue sky"
laws or unless an exemption from registration thereunder is available. You are
purchasing the Subscription Shares for your own account for investment, and not
with a view to, or for resale in connection with, the distribution thereof, and
you have no present intention of distributing or reselling any thereof. In
making the foregoing representation, you are aware that you must bear the
economic risk of such investment for an indefinite period of time since, in the
view of the Commission, the statutory basis for exemption from registration
under the Securities Act would not be present if such
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<PAGE> 11
representation meant merely that your present intention is to hold these
securities only for the long-term capital gains period of the Internal Revenue
Code of 1986, as amended, for a deferred sale, or for any fixed period in the
future.
(c) You, either individually or together with your
purchaser representative, have such knowledge and experience in financial and
business matters that you are capable of evaluating the merits and risks of
your investment in the Subscription Shares.
(d) You are aware of and familiar with the prohibitions,
restrictions and limitations imposed on EMC by the Senior Credit Agreement and
the Subordinated Credit Agreement, including without limitation those
prohibitions, restrictions and limitations which may prohibit, restrict or
limit EMC's ability to repurchase any Shares, whether pursuant to this
Agreement or otherwise, or to waive, change, modify or discharge this
Agreement.
(e) You are aware of and familiar with the restrictions
imposed on the transfer by you of any Shares, including without limitation the
restrictions contained in this Agreement and in the Stockholders Agreement, and
the rights of EMC and others under this Agreement and under the Stockholders
Agreement in connection with transfers of Shares by you.
(f) You are aware of and familiar with the provisions of
the Stockholders Agreement and exhibits thereto relating to the management of
EMC.
(g) You acknowledge that EMC is entering into this
Agreement in reliance upon your representations and warranties in this
Agreement, including without limitation those set forth in this Section 3.
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<PAGE> 12
(h) The Non-Recourse Note to be issued by you will, when
issued and delivered in accordance with the terms hereof, be duly and validly
issued and be your valid and binding obligation, enforceable against you in
accordance with its terms, except that the enforceability thereof may be
limited by bankruptcy, insolvency or other similar laws relating to or
affecting creditors' rights generally and by general equitable principles,
regardless of whether such enforceability is considered in a proceeding in
equity or at law.
(i) You have full right, power and authority to execute
and deliver this Agreement and the Pledge Agreement and to perform your
obligations hereunder and thereunder and this Agreement and the Pledge
Agreement have been duly executed and delivered by you and are valid, binding
and enforceable against you in accordance with their terms, except that the
enforceability thereof may be limited by bankruptcy, insolvency or other
similar laws relating to or affecting creditors' rights generally and by
general equitable principles, regardless of whether such enforceability is
considered in a proceeding in equity or at law.
4. Purchase of Subscription Shares. Subject to the
terms and conditions herein set forth, EMC will issue and sell to you, and you
will subscribe for and purchase from EMC for investment, at a purchase price of
$3.60 per share, the number of Class B Shares (the "Subscription Shares") set
forth in the Purchaser Designation payable in one or more of the following
items, as set forth in the Purchaser Designation: (i) cash and (ii) a
non-recourse secured promissory note (the "Non-Recourse Note") substantially in
the form of Exhibit B hereto. As collateral security for your obligation to
pay the principal of and
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<PAGE> 13
interest on your Non-Recourse Note, you hereby agree that the Subscription
Shares will be pledged to EMC pursuant to the terms of the Stock Pledge
Agreement made by you in favor of EMC (the "Pledge Agreement") substantially in
the form of Exhibit C hereto. Contemporaneously with entering into this
Agreement, EMC may be entering into separate Common Stock Subscription and
Repurchase Agreements (the "Other Agreements") substantially similar to this
Agreement with certain other purchasers. The sales of Class B Shares to you
and to each of such other purchasers are to be separate sales, and this
Agreement and the Other Agreements are to be separate agreements.
5. Subscription. In connection with your subscription
to the Subscription Shares, you have delivered the following: (i) two executed
copies of this Agreement; (ii) two executed copies of the Counterpart Signature
Page (unless you are currently a party to the Stockholders Agreement); (iii) a
duly executed Non-Recourse Note in the principal amount set forth in the
Purchaser Designation; (iv) two executed copies of the Pledge Agreement; (v)
stock transfer powers duly endorsed in blank covering the Subscription Shares;
and (vi) your check, payable to the order of "Education Management
Corporation," in the amount set forth in the Purchaser Designation. The
documents described above are to be sent by Express Mail or other means of
overnight delivery to Eckert Seamans Cherin & Mellott (the "Escrow Agent"), at
the following address: 42nd Floor, 600 Grant Street, Pittsburgh, Pennsylvania
15219, Attn: Mark C. Coulson, Esq. Such documents will not become effective
and binding unless your subscription is accepted by EMC, and a closing occurs
on or prior to July 31, 1995 (the "Closing"). If your subscription is accepted
and a Closing occurs, the documents described above will be delivered by the
Escrow Agent to
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<PAGE> 14
EMC, and will become effective and binding on you on the date of such Closing
(the "Closing Date"). If your subscription is rejected or if a Closing does
not occur, the documents described above will be returned promptly to you,
without interest or deduction, and those documents shall not become effective,
and this Agreement will be void and of no further effect.
6. Conditions to Issuance and Sale of Subscription
Shares. EMC's obligation to issue and sell the Subscription Shares to you
shall be subject to the fulfillment to EMC's satisfaction at or prior to the
Closing of the following conditions:
(a) Your representations and warranties contained in this
Agreement shall be true and correct when made and at and as of the Closing
Date.
(b) You shall have performed and complied with all
agreements and conditions contained in this Agreement required to be performed
or complied with by you prior to the Closing.
7. No Implied Right to Employment. Neither this
Agreement nor any provision hereof nor any action taken or omitted to be taken
hereunder shall be deemed to create or confer upon you any right to be retained
in the employ of EMC or any subsidiary or other Affiliate thereof.
8. Transfer Restrictions.
(a) You hereby agree that any and all Shares held by you
will be subject to the terms and conditions of this Agreement and the
Stockholders Agreement and that you will not violate the transfer restrictions
contained in the Stockholders Agreement. In addition, you may at any time and
without EMC's consent transfer any Shares owned by you (i) to
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<PAGE> 15
your estate, spouse, parents or issue, or to a trust the beneficiaries of which
include only yourself and your spouse, parents or issue or (ii) upon your
death, to your executors, administrators, testamentary trustees, legatees or
beneficiaries (your "Estate"); provided, that each such transferee (a
"Permitted Transferee") shall agree in writing, in form and substance
reasonably satisfactory to EMC, to become bound, and becomes bound, by the
terms of this Agreement, the Stockholders Agreement and the Pledge Agreement.
Each Permitted Transferee may further transfer any Shares acquired by such
Permitted Transferee to any of your other Permitted Transferees (including
transfers back to you); provided, that no transfer shall be made to a Permitted
Transferee (or to you) hereunder (whether by you or another Permitted
Transferee) unless and until such Permitted Transferee (or you, in the event of
transfers back to you) shall agree in writing, in form and substance reasonably
satisfactory to EMC, to become bound, and becomes bound, by the terms of this
Agreement, the Stockholders Agreement and the Pledge Agreement. Subsequent to
any Public Distribution, any Shares owned by you (or any of your Permitted
Transferees) may be transferred without the consent of EMC under this Section
8(a), subject, however, to all rights of EMC hereunder, under the Stockholders
Agreement, the Pledge Agreement, the Non-Recourse Note and to compliance with
Sections 8(c) and 8(d) hereof. No transfer pursuant to this Agreement shall
release you from your liability with respect to the payment and performance of
your obligations contained in the Non-Recourse Note. Unless made in
compliance with this Agreement and the Stockholders Agreement, no transfer of
Shares shall be made or recorded, and any such transfer shall be void and of
no effect.
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<PAGE> 16
(b) You may at any time transfer your Shares to EMC or,
if such right is assigned by EMC to the ESOP, to the ESOP.
(c) You agree that prior to any Public Distribution the
certificate or certificates representing any Shares held by you shall bear the
following legend:
The securities represented by this certificate were
issued in a private placement, without registration under the
Securities Act of 1933 and any applicable state securities and
"blue sky" laws, and in reliance upon the holder's
representation that such securities were being acquired for
investment and not for resale. No transfer of such securities
may be made on the books of the issuer unless accompanied by
an opinion of counsel, satisfactory to the issuer, that such
transfer may properly be made without registration under the
Securities Act of 1933 or that such securities have been so
registered under a registration statement which is in effect
at the date of such transfer.
The securities represented by this certificate are
also subject to the restrictions on transfer contained in the
Common Stock Subscription and Repurchase Agreement, dated as
of July 17, 1995, and in the Stockholders Agreement, dated as
of October 26, 1989, copies of each of which may be obtained
from the issuer or from the holder of this certificate, as
well as the rights of the issuer and certain of its
stockholders under such Stockholders Agreement. No transfer
of such securities will be made on the books of the issuer
unless accompanied by evidence of compliance with the terms of
each of such Agreements.
(d) Except for the transfer effected pursuant to a Public
Offering of EMC Common Stock in accordance with the provisions of the
Stockholders Agreement and anything to the contrary herein contained
notwithstanding, no transfer of any Shares held by you to a Person other than
EMC or its designee pursuant to Section 10 hereof shall be effected unless such
transfer may properly be made without registration because of the availability
of an exemption from registration under the Securities Act and the rules and
regulations in effect thereunder and under any applicable state securities or
"blue sky" laws,
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<PAGE> 17
and EMC shall have been furnished with an opinion of counsel, satisfactory in
form and substance to EMC, to that effect.
9. Right of Inclusion: Right of First Refusal. Prior
to the earlier of (a) the tenth anniversary of the Closing Date or (b) a Public
Distribution, notwithstanding any written consent of EMC required pursuant to
Section 8(a) hereof, if you (or any of your Permitted Transferees) shall have
received a bona fide offer in writing from a Third Party (the "Third Party
Offer") to purchase any Shares owned by you (or any of your Permitted
Transferees), which offer you (or any of your Permitted Transferees) desire (or
desires) to accept, and you (or any of your Permitted Transferees) are
otherwise permitted to sell such shares, then (unless such transfer shall be in
a Public Offering in accordance with Section 6 of the Stockholders Agreement)
your (or any of your Permitted Transferees') right to accept the Third Party
Offer and to sell the shares covered thereby shall be subject to the rights of
inclusion and rights of first refusal contained in Section 7 of the
Stockholders Agreement; provided, that you (or any of your Permitted
Transferees) may not transfer any Shares owned by you (or any of your Permitted
Transferees) to a Third Party pursuant to Section 7 of the Stockholders
Agreement other than for cash or promissory notes or both cash and promissory
notes. You agree that you will not transfer, or seek EMC's consent to permit
you to transfer, any Shares owned by you to a Person whom you know, or after
reasonable inquiry should know, has been convicted of a felony which, due to
its nature or notoriety, reflects or would reflect adversely upon EMC or any
subsidiary thereof or which has resulted in the incarceration of such Person
for 30 days or more (unless such conviction is reversed in any final appeal
thereof). Notwithstanding anything herein contained to the contrary, you (or
any
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<PAGE> 18
of your Permitted Transferees) may not transfer any Shares owned by you (or any
of your Permitted Transferees) to a Third Party unless and until you shall have
repaid in full the principal of and the accrued and unpaid interest on the
Non-Recourse Note.
10. Rights with Respect to Shares Following Termination
of Your Employment.
(a) Termination Upon Death, Incapacity or Retirement.
(i) EMC's Call. Upon your death, Incapacity or
the termination of your employment as a result of your
retirement having attained Normal Retirement Age, prior to a
Public Distribution, then, in any such event, EMC shall have
the right, upon delivery of notice to you, for a period of 90
calendar days after the Date of Termination, to repurchase any
or all Shares owned by you. If EMC so notifies you in
accordance with Section 11 hereof of its determination to
exercise such right, you shall have the obligation to sell the
relevant number of Shares on the terms and conditions set
forth in Section 12 hereof to EMC at a price equal to the
product of (A) the Fair Market Value of each such Share as of
the Date of Termination and (B) the number of Shares so
purchased.
(ii) Your Put. In the event of the failure of EMC
to exercise its right to repurchase all Shares owned by you
pursuant to Section 10(a)(i) hereof within the period therein
specified, then, in such event, you shall have the right, upon
delivery of notice to EMC, for a period of 90 calendar days
(180 calendar days in the case of your death) commencing on
the 91st calendar day
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<PAGE> 19
after the Date of Termination, to require EMC to repurchase in
accordance with Section 11 hereof all (but not fewer than all)
Shares then owned by you. If you deliver such notice, you
shall have the obligation to sell to EMC, and EMC shall have
the obligation to purchase, all of such Shares on the terms
and conditions set forth in Section 12 hereof at the price set
forth in Section 10(a)(i) hereof.
(b) Termination Upon Resignation of Employment: EMC's
Call. Upon termination by you prior to a Public Distribution of your
employment with EMC or any subsidiary thereof for any reason other than (i)
your death, (ii) Incapacity or (iii) retirement having attained Normal
Retirement Age, then, in such event, EMC shall have the right, upon delivery of
notice to you, for a period of 90 calendar days after the Date of Termination,
to repurchase any and all Shares owned by you. If EMC notifies you in
accordance with Section 11 hereof of its determination to exercise such right,
you shall have the obligation to sell the relevant number of Shares on the
terms and conditions set forth in Section 12 hereof to EMC at a price equal to
the product of (i) the lessor of (A) the Fair Market Value of each such Share
on the Date of Termination and (B) the Compounded Adjusted Purchase Price of
each such Share and (ii) the number of Shares so purchased.
(c) Termination for Cause; EMC's Call. Upon termination
prior to a Public Distribution of your employment with EMC or any subsidiary
thereof for Cause, EMC shall have the right, upon delivery of notice to you,
for a period of 90 calendar days after the Date of Termination, to repurchase
any or all Shares owned by you. If EMC so notifies you in accordance with
Section 11 hereof of its determination to exercise such right,
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<PAGE> 20
you shall have the obligation to sell the relevant number of Shares on the
terms and conditions set forth in Section 12 hereof to EMC at a price equal to
the product of (i) the lesser of (A) the Fair Market Value of each such Share
as of the Date of Termination or (B) the Adjusted Purchase Price of each such
Share and (ii) the number of Shares so purchased.
(d) Termination for Other Reasons.
(i) EMC's Call. Upon termination, prior to a
Public Distribution, of your employment with EMC or any
subsidiary thereof for any reason other than as a result of
(A) your death, (B) Incapacity, (C) retirement having attained
Normal Retirement Age, (D) your resignation or (E) a
termination for Cause, then, in such event, EMC shall have the
right, upon delivery of notice to you, for a period of 90
calendar days after the Date of Termination, to repurchase any
or all Shares owned by you. If EMC so notifies you in
accordance with Section 11 hereof of its determination to
exercise such right, you shall have the obligation to sell the
relevant number of Shares on the terms and conditions set
forth in Section 12 hereof to EMC at a price equal to:
(x) in the case of Shares acquired by you within
the three-year period immediately preceding the Date of
Termination, the product of (i) the lesser of (A) the Fair
Market Value of each such Share as of the Date of Termination
or (B) the Compounded Adjusted Purchase Price of each such
Share and (ii) the number of such Shares so purchased; and
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<PAGE> 21
(y) in the case of all other Shares
owned by you, the product of (i) the Fair Market
Value of each such Share as of the Date of
Termination and (ii) the number of such Shares so
purchased.
(ii) Your Put. In the event of the failure of EMC
to exercise its right to repurchase all Shares owned by you
pursuant to Section 10(d)(i) hereof within the period therein
specified, then, in such event, you shall have the right, upon
delivery of notice to EMC, for a period of 90 calendar days
commencing on the 91st calendar day after the Date of
Termination, to require EMC to repurchase in accordance with
Section 11 hereof all (but not fewer than all) Shares then
owned by you. If you deliver such notice, you shall have the
obligation to sell to EMC, and EMC shall have the obligation
to purchase, all of such Shares on the terms and conditions
set forth in Section 12 hereof at the price set forth in
Section 10(d)(i) hereof.
11. Election Procedures.
(a) The parties shall exercise their respective rights
under Section 10 hereof by sending a written notice by United States certified
or registered mail, return receipt requested, postage prepaid, addressed:
(i) if to you (or any of your Permitted
Transferees), to your attention at your address specified in
the Purchaser Designation (or to any of your Permitted
Transferees at the address furnished by such Permitted
Transferee by written notice to EMC); and
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<PAGE> 22
(ii) if to EMC, to the attention of the President
of EMC at the address specified in Section 17 hereof with a
copy to Eckert Seamans Cherin & Mellott at their address
specified in Section 17 hereof, or to such other address as
either party has furnished to the other in writing, except
that notices of change of address shall be effective only upon
receipt. Other notices pursuant to this Agreement shall be
communicated in the manner provided in Section 17 hereof,
unless otherwise expressly provided herein.
(b) EMC'S notice of its determination to repurchase
Shares owned by you (or any of your Permitted Transferees) pursuant to Section
10 hereof shall be effective if deposited in the mail as specified in Section
11(a) hereof, or hand delivered to you (or any of your Permitted Transferees),
within the applicable time period specified in Section 10 hereof and shall
specify the applicable purchase price determined in accordance with Section 10
hereof and shall specify in reasonable detail the basis on which such price was
computed. Your notice of your determination to sell Shares to EMC pursuant to
Section 10 hereof (or your Estate's determination to sell Shares to EMC
pursuant to Section 10 hereof) shall be effective if received by the President
of EMC within the applicable time period specified in such Section 10 hereof;
and within 45 calendar days after the receipt by EMC of such notice, EMC shall
notify you (or your Estate) of the applicable purchase price determined in
accordance with Section 10 hereof and shall specify in reasonable detail the
basis on which such price was computed.
(c) Any notice specifying an affirmative determination by
EMC to repurchase Shares pursuant to Section 10 hereof, or specifying the
applicable purchase price
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<PAGE> 23
in response to an affirmative determination by you (or your Estate) to sell
Shares to EMC pursuant to Section 10 hereof, shall specify the place, time and
date for the delivery of and payment for such Shares, which shall be in the
City of Pittsburgh, and during normal business hours on a Business Day which
shall not be less than 10 nor more than 30 calendar days after the receipt by
you (or your Permitted Transferees) of the notice.
12. Delivery and Payment Procedures.
(a) At the place, and at the time and date (the "delivery
date"), specified pursuant to Section 11 hereof for any sale of Shares pursuant
to Section 10 hereof, you (or such of your Permitted Transferees as is or as
are obligated or permitted to sell any Shares to EMC pursuant to Section 10
hereof (collectively, the "Selling Transferees")) shall deliver to EMC or its
designee certificates for such Shares duly endorsed, or accompanied by written
instruments of transfer, in form satisfactory to EMC or its designee, duly
executed by you (or the Selling Transferees), free and clear of all claims,
encumbrances, security interests, liens, equities, options and pledges of every
kind and interests arising in connection with so-called community property
laws or other laws relating to rights of spouses, against payment of the
purchase price therefor which will be payable as follows: (i) all or any part
of such purchase price shall be set off against the indebtedness outstanding
under the Non-Recourse Note at the delivery date, in accordance with the terms
of such Non-Recourse Note, and (ii) any excess of such purchase price over such
indebtedness shall be paid in cash by delivering to you (or to the Selling
Transferees) a certified or bank cashier's check or checks, payable to you or
upon your order (or to the Selling Transferees or upon the order of the Selling
Transferees) in an amount equal to such excess. All transfer and documentary
- 23 -
<PAGE> 24
stamp taxes, if any, payable in respect of the sale of such Shares to EMC shall
be borne by the party exercising its right to purchase or to sell Shares, as
the case may be, under Section 10 hereof.
(b) Notwithstanding the provisions of Section 12(a)
hereof, if on the delivery date EMC does not have sufficient funds legally
available under law or pursuant to its Certificate of Incorporation or By-laws
or any agreement or instrument to which it is a party or by which it is bound
(including without limitation the Senior Credit Agreement and the Subordinated
Credit Agreement, but excluding any agreement entered into in material part for
the purpose of avoiding EMC's obligations hereunder) (each a "governing
provision) to make the cash payment required by Section 12(a) hereof, then EMC
may issue a Junior Subordinated Note in lieu of the cash consideration required
by Section 12(a) hereof. If EMC does not have sufficient funds legally
available under each governing provision to make the cash payment required by
Section 12(a) hereof and if EMC is further precluded by any governing provision
from issuing a Junior Subordinated Note, EMC shall not purchase any Shares, and
EMC shall have no further obligation under Section 10 hereof with respect to
any Shares not purchased by EMC because it does not have sufficient funds
legally available therefor under each governing provision, and in such event
the Compensation Committee shall, within 180 days, recommend, to you (or your
Estate) one or more of the then current Management Holders or other persons who
at such time are Executive Officers of EMC (collectively, the "Alternative
Buyers") who are willing to purchase, and who shall be entitled to purchase,
from you (or your Estate) at the purchase price specified in Section 10 hereof
any or all of the Shares which EMC was unable to purchase from you (or
- 24 -
<PAGE> 25
your Estate) because of the foregoing restrictions. Any Shares not purchased
within 90 days from the date of the Compensation Committee's offer to the
Alternative Buyers pursuant to the preceding sentence shall be offered for sale
and sold by you (or your Estate) to the Management Holders in the manner set
forth in Section 12(c) hereof.
(c) Any offer to sell Shares to the Management Holders
pursuant to Section 12(b) hereof shall be made by giving to each such
stockholder written notice of your offer to sell those Shares to the Management
Holders at the purchase price which EMC would have been required to pay
therefor pursuant to Section 10 hereof. For a period of 90 calendar days after
the date of his receipt of such notice, each of the Management Holders shall
have the right to notify you (or your Estate) in accordance with Section 7.2 of
the Stockholders Agreement that he or she has determined to accept such offer,
and if one or more of the Management Holders so notifies you (or your Estate)
of his, her or their acceptance, he, she or each of them may purchase any of
the Shares so offered which he or she is entitled to purchase at the price
specified on your (or your Estate's) notice. The number of Shares which each
Management Holder would be entitled to purchase is the product of (i) the total
number of Shares so offered for sale times (ii) a fraction, the numerator of
which is the number of Shares held by such Management Holder and the
denominator of which is the total number of outstanding Shares held by all of
the Management Holders (other than by you or your Estate). Notwithstanding the
foregoing, your (or your Estate's) notice shall also be deemed to constitute an
offer to sell to each Management Holder the Shares subject to your (or your
Estate's) offer which any other Management Holder is entitled to purchase and
does not purchase. The additional number of
- 25 -
<PAGE> 26
shares which each Management Holder would be entitled to purchase pursuant to
the preceding sentence is the product of (i) the total number of Shares so
offered for sale times (ii) a fraction, the numerator of which is the number of
Shares held by such Management Holder and the denominator of which is the total
number of outstanding Shares held by all of the Management Holders who have
accepted the offer deemed to be made pursuant to the preceding sentence. In
order for a Management Holder to accept the offer to sell such additional
number of Shares, such Management Holder shall indicate his acceptance thereof
in his notice to you (or your Estate) referred to above, and if a Management
Holder so indicates his acceptance, he or she may purchase any of the
additional Shares which he or she would be entitled to purchase at the price
specified in your (or your Estate's) notice.
(d) Any obligation of EMC to purchase Shares pursuant to
Section 10 hereof shall he subject to compliance with all applicable legal
requirements.
(e) Notwithstanding anything herein contained to the
contrary, in connection with the purchase of your Shares pursuant to Section
10(d)(ii) hereof at the price specified in clause (y) of Section 10(d)(i)
hereof, if the Fair Market Value of each such Share as of the Date of
Termination exceeds the Compounded Adjusted Purchase Price, then EMC may issue
a Junior Subordinated Note, in lieu of the cash consideration required by
Section 12(a) hereof, for the portion of the purchase price for such Shares
equal to the product of (i) the difference between (A) the Fair Market Value of
each such Share as of the Date of Termination and (B) the Compounded Adjusted
Purchase Price and (ii) the number of Shares so purchased. As used in this
Section 12, "Junior Subordinated Note" means the junior subordinated promissory
note issued by EMC for payment of a portion of the purchase
- 26 -
<PAGE> 27
price for Shares pursuant to this Section 12(e), in the principal amount
specified above, bearing interest on the unpaid principal amount from the date
of issue of such note until such note is paid in full, payable quarterly on the
first Business Day of each calendar quarter, at a fluctuating interest rate per
annum (based on a year of 365 or 366 calendar days, as the case may be) equal
to 1% per annum above the Prime Rate in effect from time to time (each change,
if any, in such fluctuating interest rate to take effect simultaneously with
the corresponding change in the Prime Rate; provided, that such fluctuating
interest rate shall at no time exceed 12% per annum), and the principal amount
of which is payable on the date occurring three months following the latest of
payment in full of all notes or other evidences of indebtedness issued pursuant
to the existing Senior Credit Agreement or the existing Subordinated Credit
Agreement (but not refinancings or extensions thereof).
(f) EMC and each holder of a Junior Subordinated Note, by
acceptance of such Junior Subordinated Note, covenant and agree that each such
Junior Subordinated Note is and shall be subordinated in right of payment to
the prior payment in full of all notes or other evidences of indebtedness
issued pursuant to the existing Senior Credit Agreement and the existing
Subordinated Credit Agreement (but not refinancings or extensions thereof).
13. Survival; Assignment. All covenants, agreements,
representations and warranties contained in this Agreement shall survive the
execution and delivery of this Agreement, any investigation at any time made by
or on behalf of a party hereto, and the purchase of the Subscription Shares by
you under this Agreement. EMC's rights and obligations hereunder may be
assigned by EMC in whole or in part. You may not assign any of your rights
hereunder. Whenever in this Agreement any of the parties hereto is
- 27 -
<PAGE> 28
referred to, such reference shall be deemed to include the successors,
executors or administrators and permitted assigns of such party; and all
covenants, promises and agreements made in this Agreement by or on behalf of
EMC, or by or on your behalf, shall bind and inure to the benefit of and be
enforceable by the respective successors, executors or administrators and
permitted assigns of such parties hereto, whether so expressed or not.
14. Governing Law. This Agreement shall be construed and
enforced in accordance with the laws of the Commonwealth of Pennsylvania.
15. Entire Agreement; Headings. This Agreement and the
agreements referred to herein embody the entire agreement and understanding
between you and EMC and supersede all prior agreements and understandings
relating to the subject matter hereof. The headings in and date of this
Agreement are for purposes of reference only and shall not limit or otherwise
affect the meaning hereof.
16. Amendments. This Agreement cannot be changed orally,
and can be changed only by an instrument in writing signed by the party against
whom enforcement of any waiver, change, modification or discharge is sought.
17. Notices. All communications provided for herein
shall be in writing and:
(a) if addressed to you, shall be delivered or
mailed addressed to you at your address specified in the
Purchaser Designation; or
(b) if addressed to EMC, shall be delivered or
mailed addressed to it, at Suite 800, 300 Sixth Avenue,
Pittsburgh, Pennsylvania 15222, Attention: President, with a
copy to Eckert Seamans Cherin & Mellott, 600 Grant Street,
- 28 -
<PAGE> 29
42nd Floor, Pittsburgh, Pennsylvania 15219, Attention: Mark
C. Coulson, Esq., or to such other address as either party has furnished to the
other in writing.
18. Execution in Counterparts. This Agreement may be
executed in counterparts, each of which shall be an original, but all of which
together shall constitute one instrument.
If you are in agreement with the foregoing, please sign each
counterpart of this Agreement.
Very truly yours,
EDUCATION MANAGEMENT CORPORATION
By:
-------------------------------
Title:
----------------------------
The foregoing Agreement is hereby
agreed to as of the date first
above written, with the intent
to be legally bound thereby.
__________________________________
- 29 -
<PAGE> 30
COMMON STOCK SUBSCRIPTION AND
REPURCHASE AGREEMENT AND AMENDMENTS
<TABLE>
<CAPTION>
DATE OF AGREEMENT NAME RECOURSE/NON-
RECOURSE
<S> <C> <C>
October 13, 1995 Leslie E. Prichard Recourse
July 31, 1995 R. Margaret Barber Nonrecourse
Robert S. Peterson
July 17, 1995 Patrick T. DeCoursey
Robert T. McDowell Nonrecourse
February 13, 1992 R. Margaret Barber Nonrecourse
Nancy L. Gruber
Mark C. Hodges
Robert T. McDowell
Robert S. Peterson
George L. Pry
Saundra M. VanDyke
September 13, 1991 Miryam L. Drucker Nonrecourse
Mark C. Hodges
Robert T. McDowell
George L. Pry
Saundra M. VanDyke
June 1, 1990 Miryam L. Drucker Nonrecourse
</TABLE>
<PAGE> 1
Exhibit 4.12
Date__________
AMENDMENT NO. 1
TO
COMMON STOCK SUBSCRIPTION AND REPURCHASE AGREEMENT
THIS AMENDMENT NO. 1 TO COMMON STOCK SUBSCRIPTION AND REPURCHASE AGREEMENT
("Amendment") is made and entered into as of _______________, by and between
EDUCATION MANAGEMENT CORPORATION, a Pennsylvania corporation ("EMC"), and
______________ ("Management Stockholder").
WITNESSETH:
WHEREAS, EMC and Management Stockholder entered into that certain Common
Stock Subscription and Repurchase Agreement dated as of _____________ (the
"Agreement"); and
WHEREAS, EMC and Management Stockholder desire to amend the Agreement in
order to provide that certain repurchases thereunder that are at a purchase
price equal to the lesser of Fair Market Value and the Compounded Adjusted
Purchase Price (as those terms are defined in the Agreement) will instead be at
Fair Market Value;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto, intending to
be legally bound hereby, agree as follows:
1. Amendment of Section 10(b). Section 10(b) of the Agreement is hereby
amended and restated in its entirety as follows:
"(b) Termination Upon Resignation of Employment; EMC's Call. Upon
termination, prior to a Public Distribution, of your employment with EMC or
any subsidiary thereof as a result of your resignation, then, in such event,
EMC shall have the right, upon delivery of notice to you, for a period of 90
calendar days after the Date of Termination, to repurchase any and all Shares
owned by you. If EMC notifies you in accordance with Section 11 hereof of
its determination to exercise such right, you shall have the obligation to
sell the relevant number of Shares on the terms and conditions set forth in
Section 12 hereof to EMC at a price equal to the product of (i) the Fair
Market Value of each such Share on the Date of Termination and (ii) the
number of Shares so purchased."
<PAGE> 2
2. Amendment of Section 10(d)(i). Section 10(d)(i) of the Agreement is
hereby amended and restated in its entirety as follows:
"(i) EMC's Call. Upon termination, prior to a Public Distribution, of
your employment with EMC or any subsidiary thereof for any reason other than
as a result of (A) your death, (B) Incapacity, (C) retirement having attained
Normal Retirement Age, (D) your resignation or (E) a termination for Cause,
then, in such event, EMC shall have the right, upon delivery of notice to
you, for a period of 90 calendar days after the Date of Termination, to
repurchase any or all Shares owned by you. If EMC so notifies you in
accordance with Section 11 hereof of its determination to exercise such
right, you shall have the obligation to sell the relevant number of Shares on
the terms and conditions set forth in Section 12 hereof to EMC at a price
equal to the product of (i) the Fair Market Value of each such Share as of
the Date of Termination and (ii) the number of such Shares so purchased."
3. No Other Amendments. Except as expressly amended by this Amendment, the
Agreement and each and every representation, warranty, covenant, term and
condition therein, are hereby specifically ratified and confirmed.
4. Counterparts. This Amendment may be executed in counterparts, each of
which shall be an original, but all of which together shall constitute one
instrument.
5. Governing Law. This Amendment shall be construed and enforced in
accordance with the laws of the Commonwealth of Pennsylvania.
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed as
of the date first above written.
EDUCATION MANAGEMENT CORPORATION
By:___________________________________
CHAIRMAN AND CHIEF EXECUTIVE
OFFICER
WITNESS: MANAGEMENT STOCKHOLDER:
_______________________________ _____________________________________
<PAGE> 1
Exhibit 4.13
EDUCATION MANAGEMENT CORPORATION
COMMON STOCK SUBSCRIPTION AND
REPURCHASE AGREEMENT
As of _________
To:_________________ ("Purchaser")
Dear Purchaser:
Education Management Corporation, a Pennsylvania corporation ("EMC"), hereby
agrees with you as follows:
1. Certain Definitions and Conventions.
(a) For the purposes of this Agreement, unless otherwise defined herein or
the context in which any such term is used clearly requires otherwise, the
following terms have the following meanings, respectively:
"Act" means the Securities Act of 1933, as amended.
"Class B Shares" means Holdings' Class B Common Stock, par value $0.0001 per
share.
"Closing" is defined in Section 5 hereof.
"Closing Date" is defined in Section 5 hereof.
"EMC" has the meaning set forth in the introduction to this Agreement.
"ESOP" means the Education Management Corporation Employee Stock Ownership
Plan.
"Exchange and Repurchase Agreement" means the Exchange and Repurchase
Agreement dated as of October 26, 1989 between Holdings and you.
<PAGE> 2
"Holdings" means EMC Holdings, Inc., a Delaware corporation, to which EMC is
successor by merger.
"Non-Recourse Note" is defined in Section 4 hereof.
"Permitted Transferee" with respect to you means (i) while you are living,
your spouse, parents or issue or a trust the beneficiaries of which are limited
to you, your estate, spouse, parents and/or issue, and (ii) after your death,
your executors, administrators, testamentary trustees, legatees or
beneficiaries.
"Pledge Agreement" is defined in Section 4 hereof.
"Pledged Shares" are the Subscription Shares subject to the Pledge
Agreement.
"Senior Credit Agreement" means the $52,500,000 Credit Agreement dated as of
October 25, 1989 among Holdings, Pittsburgh National Bank and the other banks
party thereto.
"Shares" means, collectively, all shares of any class of EMC Capital Stock,
including any shares of EMC Capital Stock which may have been issued or
distributed in respect of any shares of any class of EMC Capital Stock by way
of stock dividend or stock split or other distribution, recapitalization or
reclassification.
"Stockholders Agreement" means the Stockholders Agreement dated as of
October 26, 1989 among Holdings, Merrill Lynch Interfunding, Inc., the ESOP and
the Persons listed on the Schedule of Stockholders attached thereto.
"Subordinated Credit Agreement" means the Note and Warrant Purchase
Agreement dated as of October 25, 1989 between
- 2 -
<PAGE> 3
Holdings, Northwestern Mutual Life Insurance Company and National Union Fire
Insurance Company of Pittsburgh, PA.
"Subscription Shares" is defined in Section 4 hereof.
(b) Capitalized terms used herein but not defined herein shall have the
meaning ascribed to such terms in Section 1 of the Exchange and Repurchase
Agreement.
2. Representations, Warranties and Covenants of EMC. EMC represents,
warrants and covenants that:
(a) EMC is a corporation duly organized, validly existing and in good
standing under the laws of the Commonwealth of Pennsylvania; and EMC has all
requisite corporate power and authority to enter into and perform all of its
obligations under this Agreement.
(b) Neither EMC, nor any Person acting on its behalf, has taken or will
take any action that would make unavailable such exemptions from registration
under the Act on which EMC is relying in connection with the offering which has
been made or the issuance on the Closing Date of any Shares.
3. Investment Representations; Other Representations and Warranties by You.
You represent and warrant that:
(a) There has been made available to you a reasonable time prior to your
execution and delivery hereof in order to provide an opportunity for you to ask
questions and receive answers concerning the terms and conditions of your
investment in the Subscription Shares and to obtain any additional information
which EMC possesses or can acquire without unreasonable effort or expense. You
have received all additional information that was requested.
- 3 -
<PAGE> 4
(b) You have been advised that the Class B Shares have not been registered
under the Act or any state securities or "blue sky" laws, and, therefore,
cannot be resold unless (A) such stock is registered under the Act or under any
applicable state securities or "blue sky" laws, and/or (B) an exemption from
registration thereunder is available.
(c) Your acquisition of the Subscription Shares is for your own account,
for investment only, and not with a view to, or for resale in connection with,
the distribution thereof, and you have no present intention of distributing or
reselling any thereof. In making the foregoing representation, you are aware
that you must bear the economic risk of such investment for an indefinite
period of time.
(d) You have such knowledge and experience in financial and business
matters that you are capable of evaluating the merits and risks of your
investment in the Subscription Shares.
(e) You are aware of and familiar with the prohibitions, restrictions and
limitations imposed on EMC by the Senior Credit Agreement and the Subordinated
Credit Agreement, including, without limitation, those prohibitions,
restrictions and limitations which may prohibit, restrict or limit EMC's
ability to repurchase any Shares, whether pursuant to this Agreement or
otherwise, or to waive, change, modify or discharge this Agreement.
(f) You are aware of and familiar with the restrictions imposed on the
transfer by you of any Shares, including, without limitation, the restrictions
contained in this
- 4 -
<PAGE> 5
Agreement and in the Stockholders Agreement, and the rights of EMC and others
under this Agreement and under the Stockholders Agreement in connection with
transfers of Shares by you.
(g) As a party to the Stockholders Agreement, you are aware of and
familiar with the provisions of the Stockholders Agreement and exhibits thereto
relating to the management of EMC.
(h) You acknowledge that EMC is entering into this Agreement in reliance
upon your representations and warranties made in this Agreement, including,
without limitation, those set forth in this Section.
(i) You have full right, power and authority to execute and deliver this
Agreement and the Pledge Agreement and to perform your obligations hereunder
and thereunder. This Agreement and the Pledge Agreement have been duly
executed and delivered by you and are valid, binding and enforceable against
you in accordance with their terms, except that the enforceability thereof may
be limited by applicable bankruptcy, insolvency or other similar laws relating
to or affecting creditors' rights generally and by general equitable
principles, regardless of whether such enforceability is considered in a
proceeding in equity or at law.
(j) The Non-Recourse Note to be issued by you will, when issued and
delivered in accordance with the terms hereof, be duly and validly issued and
be your valid and binding obligation, enforceable against you in accordance
with its terms, except that the enforceability thereof may be limited by
applicable bankruptcy, insolvency or other similar laws relating to or
affecting creditors' rights generally and by general equitable
- 5 -
<PAGE> 6
principles, regardless of whether such enforceability is considered in a
proceeding in equity or of law.
4. Purchase of Subscription Shares. Subject to the terms and conditions
herein set forth, EMC will issue and sell to you, and you will subscribe for
and purchase from EMC for investment, at a purchase price of $1.59 per share,
5,000 Class B Shares (the "Subscription Shares") payable in the following
items: (i) cash, and (ii) a non-recourse secured promissory note (the
"Non-Recourse Note") substantially in the form of Exhibit A hereto. As
collateral security for your obligation to pay the principal of and interest on
your Non-Recourse Note, you hereby agree that the Subscription Shares will be
pledged to EMC pursuant to the terms of the Stock Pledge Agreement with EMC
(the "Pledge Agreement") substantially in the form of Exhibit B hereto.
5. Subscription. In connection with your subscription to the Subscription
Shares, you have delivered the following: (i) four executed copies of this
Agreement; (ii) a duly executed Non-Recourse Note in the principal amount of
$6,360; (ii) four executed copies of the Pledge Agreement; (iv) a stock
transfer power duly endorsed in blank covering the Subscription Shares; and (v)
your check, payable to the order of "Education Management Corporation" in the
amount of $1,590. The documents described above are to be delivered to Eckert
Seamans Cherin & Mellott (the "Escrow Agent"), at the following address: 600
Grant Street, 42nd Floor, Pittsburgh, PA 15219, Attn: Mark C. Coulson, Esq.
Such documents will not become effective and binding unless your subscription
is accepted by EMC, and a
- 6 -
<PAGE> 7
closing occurs on or prior to September 30, 1991 (the "Closing"). If your
subscription is accepted and a Closing occurs, the documents described above
will be delivered by the Escrow Agent to EMC, and will become effective and
binding on you as of September 13, 1991 (the "Closing Date"). If your
subscription is rejected or if a Closing does not occur, the documents
described above will be returned promptly to you, without interest or
deduction, and those documents shall not become effective, and this Agreement
will be void and of no further effect.
6. Conditions to Issuance and Sale of Shares. EMC's obligation to issue
and sell the Subscription Shares to you shall be subject to the fulfillment of
EMC's satisfaction at or prior to the Closing of the following conditions:
(a) Your representations and warranties contained in this Agreement shall
be true and correct when made and at and as of the Closing Date.
(b) You shall have performed and complied with all agreements and
conditions contained in this Agreement required to be performed or complied
with by you on or prior to the Closing, including, without limitation, the
delivery of the documents and instruments described in Section 5 of this
Agreement.
7. No Implied Right to Employment. Neither this Agreement nor any
provision hereof nor any action taken or omitted to be taken hereunder shall be
deemed to create or confer upon you any right to be retained in the employ of
EMC or any subsidiary or other Affiliate thereof.
8. Incorporation of Terms of Exchange and Repurchase Agreement. In
accordance with the terms of the Exchange and
- 7 -
<PAGE> 8
Repurchase Agreement, you, with respect to the Subscription Shares, (a) shall
be subject to the transfer restrictions contained in Section 8 of the Exchange
and Repurchase Agreement, (b) shall have the right of inclusion and right of
first offer contained in Section 9 of the Exchange and Repurchase Agreement,
and (c) shall have the rights and obligations following termination of your
employment contained in Section 10 of the Exchange and Repurchase Agreement.
In addition, the election procedures and the delivery and payment procedures
contained in Sections 11 and 12, respectively, of the Exchange and Repurchase
Agreement shall apply to your rights and obligations specified in clause (c)
above.
9. Survival; Assignment. All covenants, agreements, representations and
warranties contained in this Agreement shall survive the execution and delivery
of this Agreement, any investigation at any time made by or on behalf of a
party hereto. EMC's rights and obligations hereunder may be assigned by EMC in
whole or in part. Except as otherwise provided herein, you may not assign any
of your rights hereunder other than to Permitted Transferees. Whenever in this
Agreement reference is made to any of the parties hereto, such reference shall
be deemed to include the successors, executors or administrators and permitted
assigns of such party; and all covenants, promises and agreements made in this
Agreement by or on behalf of EMC, or by you, shall bind and inure to the
benefit of and be enforceable by the respective successors, executors or
administrators and permitted assigns of such parties hereto, whether so
expressed or not.
- 8 -
<PAGE> 9
10. Governing Law. This Agreement shall be construed and enforced in
accordance with the laws of the Commonwealth of Pennsylvania.
11. Entire Agreement; Headings. This Agreement and the agreements
referred to herein embody the entire agreement and understanding between you
and EMC relating to the subject matter hereof. The preceding sentence and any
other provision of this Agreement notwithstanding, this Agreement is not, and
shall not be construed to be, a novation of your Exchange and Repurchase
Agreement, and (a) you and EMC shall remain liable for any breach of such
agreement prior to the date hereof, and (b) the representations and warranties
contained in paragraph 3 of your Exchange and Repurchase Agreement will survive
the execution and delivery hereof. The headings in and date of this Agreement
are for purposes of reference only and shall not limit or otherwise affect the
meaning hereof.
12. Amendments. This Agreement cannot be changed orally, and can be
changed only by an instrument in writing signed by the party against whom
enforcement of any waiver, change, modification or discharge is sought.
13. Notices. All communications provided for herein shall be in writing
and:
(a) if addressed to you, shall be delivered or mailed addressed to you at
your address specified in the books and records of EMC, or
(b) if addressed to EMC, shall be delivered or mailed addressed to it as
follows:
Education Management Corporation
- 9 -
<PAGE> 10
Suite 800
300 Sixth Avenue
Pittsburgh, Pennsylvania 15222
Attention: President
with a copy to:
14. Execution in Counterparts. This Agreement may be executed in
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
If you are in agreement with the foregoing, please sign each counterpart of
this Agreement.
Very truly yours,
EDUCATION MANAGEMENT
CORPORATION
By:
---------------------------
President
The foregoing Agreement is hereby
agreed to as of the date first
above written, with the intent
to be legally bound thereby.
- ------------------------------
Purchaser
- 10 -
<PAGE> 1
Exhibit 4.14
AMENDMENT NO. 1 TO
COMMON STOCK SUBSCRIPTION AND REPURCHASE AGREEMENT
THIS AMENDMENT NO. 1 TO COMMON STOCK SUBSCRIPTION AND REPURCHASE AGREEMENT
("Amendment") is made and entered into as of ____________, by and between
EDUCATION MANAGEMENT CORPORATION, a Pennsylvania corporation ("EMC"), and
_____________ ("Management Stockholder").
WITNESSETH:
WHEREAS, EMC and Management Stockholder entered into that certain Common
Stock Subscription and Repurchase Agreement dated as of September 13, 1991 (the
"Agreement"); and
WHEREAS, EMC and Management Stockholder desire to amend the Agreement in
order to modify the Put and Call prices if the Management Stockholder's
employment is terminated by EMC without cause (as defined in the Agreement).
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto, intending to
be legally bound hereby, agree as follows:
1. Definition of Senior Credit Agreement. The definition of "Senior Credit
Agreement" in Section 1 of the Agreement is hereby amended and restated in its
entirety as follows:
"'Senior Credit Agreement' means the Amended and Restated Credit
Agreement dated as of March 16, 1995 among EMC, PNC Bank, National Association,
and the other banks party thereto."
2. Amendment of Section 10(d)(i). Section 10(d)(i) of the Agreement is
hereby amended and restated in its entirety as follows:
"(i) EMC's Call. Upon termination, prior to a Public Distribution, of
your employment with EMC or any subsidiary thereof for any reason other than
as a result of (A) your death, (B) Incapacity, (C) retirement having attained
Normal Retirement Age, (D) your resignation or (E) a termination for Cause,
then, in such event, EMC shall have the right, upon delivery of notice to
you, for a period of 90 calendar days after the Date of Termination, to
repurchase any
<PAGE> 2
or all Shares owned by you. If EMC so notifies you in accordance with
Section 11 hereof of its determination to exercise such right, you shall have
the obligation to sell the relevant number of Shares on the terms and
conditions set forth in Section 12 hereof to EMC at a price equal to:
(x) in the case of Shares acquired by you within the three-year period
immediately preceding the Date of Termination, the product of (i) the lesser
of (A) the Fair Market Value of each such Share as of the Date of Termination
or (B) the Compound Adjusted Purchase Price and (ii) the number of such
Shares so purchased; and
(y) in the case of all other Shares owned by you, the product of (i) the
Fair Market Value of each such Share as of the Date of Termination and (ii)
the number of such Shares so purchased."
3. Amendment of Section 12. Section 12 of the Amendment is hereby amended
by adding, at the end thereof, new subsections (f) and (g) as follows:
"(f) Notwithstanding anything herein contained to the contrary, in
connection with the purchase of your Shares pursuant to Section 10(d)(ii) at
the price specified in clause (y) of Section 10(d)(i), if the Fair Market
Value of each such Share as of the Date of Termination exceeds the Compound
Adjusted Purchase Price, then EMC may issue a Junior Subordinated Note (as
defined below), in lieu of the cash consideration required by subsection (a)
of this Section 12, for the portion of the purchase price for such Shares
equal to the product of (i) the difference between (A) the Fair Market Value
of each such Share as of the Date of Termination and (B) the Compound
Adjusted Purchase Price and (ii) the number of Shares so purchased. As used
in this subsection (f), "Junior Subordinated Note" means the junior
subordinated promissory note issued by EMC for payment of a portion of the
purchase price for Shares pursuant to this subsection (f), in the principal
amount specified above, bearing interest on the unpaid principal amount from
the date of issue of such note until such note is paid in full, payable
quarterly on the first Business Day of each calendar quarter, at a
fluctuating interest rate per annum (based on a year of 365 or 366 calendar
days, as the case may be) equal to 1% per annum above the Prime Rate in
effect from time to time (each change, if any, in such fluctuating interest
rate to take effect simultaneously with the corresponding change in the
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<PAGE> 3
Prime Rate; provided, that such fluctuating interest rate shall at no time
exceed 12% per annum), and the principal amount of which is payable on the
date occurring three months following the latest of payment in full of all
notes or other evidences of indebtedness issued pursuant to the existing
Senior Credit Agreement or the existing Subordinated Credit Agreement (but
not refinancings or extensions thereof).
(g) EMC and each holder of a Junior Subordinated Note, by acceptance of
such Junior Subordinated Note, covenant and agree that each such Junior
Subordinated Note is and shall be subordinated in right of payment to the
prior payment in full of all notes or other evidences of indebtedness issued
pursuant to the existing Senior Credit Agreement and the existing
Subordinated Credit Agreement (but not refinancings or extensions thereof)."
4. No Other Amendments. Except as expressly amended by this Amendment, the
Agreement, and each and every representation, warranty, covenant, term and
condition therein, are hereby specifically ratified and confirmed.
5. Counterparts. This Amendment may be executed in counterparts, each of
which shall be an original, but all of which together shall constitute one
instrument.
6. Governing Law. This Amendment shall be construed and enforced in
accordance with the laws of the Commonwealth of Pennsylvania.
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed as
of the date first above written.
EDUCATION MANAGEMENT CORPORATION
By: ___________________________________
Robert T. McDowell,
Senior Vice President &
Chief Financial Officer
WITNESS: Management Stockholder:
_____________________________ _______________________________________
Signature
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<PAGE> 1
Exhibit 4.15
AMENDMENT NO. 2 TO
COMMON STOCK SUBSCRIPTION AND REPURCHASE AGREEMENT
THIS AMENDMENT NO. 2 TO COMMON STOCK SUBSCRIPTION AND REPURCHASE AGREEMENT
("Amendment") is made and entered into as of _____________, by and between
EDUCATION MANAGEMENT CORPORATION, a Pennsylvania corporation ("EMC"), and
______________ ("Management Stockholder").
WITNESSETH:
WHEREAS, EMC and Management Stockholder entered into that certain Common
Stock Subscription and Repurchase Agreement dated as of September 13, 1991, as
amended as of January 19, 1995 (the "Agreement");
WHEREAS, as of the date hereof, Section 10 of the Exchange and Repurchase
Agreement dated as of October 26, 1989, as amended as of January 19, 1995 (the
"Exchange and Repurchase Agreement") to which EMC and Management Stockholder
are parties is being amended in order to provide that certain repurchases
thereunder that are at a purchase price equal to the lesser of Fair Market
Value and the Compounded Adjusted Purchase Price (as those terms are defined in
the Exchange and Repurchase Agreement) will instead be at Fair Market Value;
and
WHEREAS, EMC and Management Stockholder desire to amend the agreement in
order to provide that the foregoing amendment to the Exchange and Repurchase
Agreement will be incorporated by reference in the Agreement so that
repurchases of stock under the Agreement will be on the same terms as under the
Exchange and Repurchase Agreement, as amended;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto, intending to
be legally bound hereby, agree as follows:
1. Amendment of Section 1. The definition of "Exchange and Repurchase
Agreement" set forth in Section 1 of the Agreement is hereby amended and
restated as follows:
"'Exchange and Repurchase Agreement' means the Exchange and Repurchase
Agreement dated as of October 26, 1989, as amended January 19, 1995, and as
amended January 1, 1996, between EMC and you, as the same may thereafter be
amended from time to time."
2. No Other Amendments. Except as expressly amended by this Amendment, the
Agreement and each and every
<PAGE> 2
representation, warranty, covenant, term and condition therein, are hereby
specifically ratified and confirmed.
3. Counterparts. This Amendment may be executed in counterparts, each of
which shall be an original, but all of which together shall constitute one
instrument.
4. Governing Law. This Amendment shall be construed and enforced in
accordance with the laws of the Commonwealth of Pennsylvania.
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed as
of the date first above written.
EDUCATION MANAGEMENT CORPORATION
By: _____________________________________
ROBERT B. KNUTSON
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
WITNESS: MANAGEMENT STOCKHOLDER:
______________________________ _________________________________________
Signature
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<PAGE> 1
Exhibit 4.16
AMENDED AND RESTATED
CREDIT AGREEMENT
by and among
EDUCATION MANAGEMENT CORPORATION
as the Borrower
THE BANKS PARTY HERETO
as the Banks
and
PNC BANK, NATIONAL ASSOCIATION
as the Agent
March 16, 1995
BF 22789.22
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
INDEX OF EXHIBITS .......................................................... v
INDEX OF SCHEDULES ......................................................... vi
ARTICLE I. DEFINITIONS ................................................. 1
1.1 Defined Terms ............................................... 1
1.2 GAAP Definitions ............................................ 23
1.3 Other Definitional Conventions .............................. 23
1.4 Headings .................................................... 23
ARTICLE II. THE CREDIT .................................................. 24
2.1 The Term Loan ............................................... 24
2.2 Revolving Credit Loans ...................................... 27
2.3 Letters of Credit ........................................... 30
2.4 Certain Provisions Relating to Interest Rates ............... 35
2.5 Yield Protection and Reimbursement .......................... 42
2.6 Capital Adequacy ............................................ 44
2.7 Closing Fee ................................................. 45
2.8 Lending Offices ............................................. 45
2.9 Time, Place and Manner of Payments .......................... 45
2.10 Payment from Accounts Maintained by the Borrower ............ 45
2.11 Substitution of a Bank ...................................... 46
ARTICLE III. SET-OFF AND SECURITY INTERESTS .............................. 46
3.1 Set-Off...................................................... 46
3.2 Security Agreements ......................................... 46
3.3 Pledge Agreements ........................................... 46
ARTICLE IV. REPRESENTATIONS AND WARRANTIES .............................. 47
4.1 Existence ................................................... 47
4.2 Authority ................................................... 47
4.3 Capitalization .............................................. 48
4.4 Existence of ESOP ........................................... 48
4.5 Validity and Enforceability ................................. 48
4.6 No Conflict ................................................. 48
4.7 Consents .................................................... 49
</TABLE>
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<TABLE>
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4.8 Litigation .................................................. 49
4.9 Compliance with Applicable Laws, etc. ....................... 49
4.10 Financial Statements ........................................ 49
4.11 Environmental Matters ....................................... 49
4.12 Deferred Compensation Plans ................................. 50
4.13 Title to Properties ......................................... 50
4.14 Intellectual Property ....................................... 50
4.15 Tax Returns and Payments .................................... 51
4.16 Material Adverse Change ..................................... 51
4.17 Solvency .................................................... 51
4.18 Leveraged Securities ........................................ 51
4.19 Securities Acquisition Loans ................................ 51
4.20 Senior Debt Status .......................................... 51
4.21 Escrow Agreement and Stockholders Contribution and
Repayment Agreement ....................................... 51
4.22 Investment Company Act ...................................... 52
4.23 Public Utility Holding Company Act .......................... 52
4.24 Disclosure .................................................. 52
ARTICLE V. AFFIRMATIVE COVENANTS ....................................... 52
5.1 Use of Proceeds ............................................. 52
5.2 Furnishing Information ...................................... 52
5.3 Preservation of Existence ................................... 56
5.4 Payment of Taxes and Fees ................................... 57
5.5 Notice of Change of Business ................................ 57
5.6 Intentionally Omitted ....................................... 57
5.7 Preservation of Existence and Qualification of ESOP ......... 57
5.8 Hazard and Casualty Insurance ............................... 57
5.9 Good Repair ................................................. 57
5.10 Corporate Records ........................................... 58
5.11 Inspection of Records and Properties ........................ 58
5.12 Continued Ownership of Borrower and Subsidiaries ............ 58
5.13 Compliance with Laws ........................................ 58
5.14 Further Assurances .......................................... 59
ARTICLE VI. NEGATIVE COVENANTS .......................................... 59
6.1 Maintenance of Consolidated Net Worth ....................... 59
6.2 Maintenance of Interest Coverage Ratio ...................... 60
6.3 Intentionally Omitted ....................................... 60
6.4 Maintenance of Leverage Ratio ............................... 60
6.5 Disposal of Assets .......................................... 60
</TABLE>
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<PAGE> 4
<TABLE>
<S> <C> <C>
6.6 Permitted Capital Expenditures ............................ 61
6.7 Intentionally Omitted ..................................... 61
6.8 Permitted Indebtedness .................................... 61
6.9 Permitted Encumbrances .................................... 63
6.10 Restriction of Operating Leases ........................... 64
6.11 Advance of Funds and Investments .......................... 64
6.12 Dividend and Redemption Restrictions ...................... 65
6.13 Merger .................................................... 66
6.14 Regulations G, X, T and U Compliance ...................... 67
6.15 Subordination ............................................. 67
6.16 Alteration of Various Agreements .......................... 67
6.17 Cohort Default Rates ...................................... 68
6.18 Permitted Acquisitions .................................... 68
6.19 Change Fiscal Year ........................................ 68
6.20 Change of Business ........................................ 68
ARTICLE VII. CONDITIONS PRECEDENT ...................................... 68
7.1 All Revolving Credit Disbursements and all
Letters of Credit ......................................... 68
7.2 Conditions Precedent to the Term Loans, the Initial
Revolving Credit Disbursement and the Issuance of the
Initial Letter of Credit .................................. 69
ARTICLE VIII. EVENTS OF DEFAULT ......................................... 72
8.1 Payment Default ........................................... 72
8.2 Cross Defaults ............................................ 72
8.3 Insolvency ................................................ 72
8.4 Dissolution ............................................... 73
8.5 Adverse Judgments ......................................... 73
8.6 Failure to Comply with Certain Covenants .................. 73
8.7 Failure to Comply With Other Covenants .................... 73
8.8 Misrepresentation ......................................... 73
8.9 Consequences of an Event of Default ....................... 74
ARTICLE IX. AGREEMENT AMONG BANKS ..................................... 74
9.1 Appointment and Grant of Authority ........................ 74
9.2 Non-Reliance on Agent ..................................... 75
9.3 Responsibility of Agent and Other Matter .................. 75
9.4 Action on Instructions .................................... 76
9.5 Action in Event of Default ................................ 76
9.6 Indemnification ........................................... 76
</TABLE>
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<TABLE>
<S> <C> <C>
9.7 Agent's Rights as a Bank .................................. 77
9.8 Advances by Agent.......................................... 77
9.9 Payment to Banks .......................................... 78
9.10 Pro Rata Sharing .......................................... 78
9.11 Successor Agent ........................................... 78
ARTICLE X. MISCELLANEOUS ............................................. 79
10.1 Amendments and Waivers .................................... 79
10.2 Notices ................................................... 80
10.3 Holiday Payments .......................................... 81
10.4 Tax Withholding ........................................... 81
10.5 Survival .................................................. 82
10.6 Costs ..................................................... 82
10.7 Certain Taxes ............................................. 83
10.8 Successors, Assigns and Participations .................... 83
10.9 Confidentiality ........................................... 85
10.10 Indemnification ........................................... 85
10.11 Integration ............................................... 86
10.12 Severability .............................................. 86
10.13 APPLICABLE LAW ............................................ 87
10.14 CONSENT TO JURISDICTION ................................... 87
10.15 Counterparts .............................................. 87
10.16 Amendment and Restatement ................................. 88
</TABLE>
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INDEX OF EXHIBITS
<TABLE>
<CAPTION>
PRINCIPAL
EXHIBIT DESIGNATION EXHIBIT NAME SECTION REFERENCE
- ------------------- ------------ --------------------
<S> <C> <C>
Exhibit "A" Form of Amended and Restated Term Note 2.1
Exhibit "B" Form of Revolving Credit Note 2.2
Exhibit "C" Form of Request for Revolving Credit Loan 2.2
Exhibit "D" Form of Amended and Restated Security Agreement 3.2
Exhibit "E" Form of Amended and Restated 3.2
Subsidiary Security Agreement
Exhibit "F" Form of Amended and Restated Pledge Agreement 3.3
Exhibit "G-1" Form of Amended and Restated 3.3
Subsidiary Pledge Agreement - (AII)
Exhibit "G-2" Form of Amended and Restated 3.3
Subsidiary Pledge Agreement - (NCG)
Exhibit "G-3" Form of Subsidiary Pledge 3.3
Agreement (New Active Subsidiaries)
Exhibit "H" Form of Compliance Certificate 5.2d
Exhibit "I" Form of Opinion of Counsel to Borrower 7.2r
Exhibit "J" Form of Assignment and Assumption Agreement 10.8
</TABLE>
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<PAGE> 7
INDEX OF SCHEDULES
<TABLE>
<S> <C>
1.1 Management Stockholders
4.1 Active Subsidiaries
4.3 Ownership of Stock; Rights or Options
4.8 Litigation
4.11 Environmental Matters
4.12 Deferred Compensation Plans
4.14 Intellectual Property
5.12 Subsidiaries
6.8a Permitted Existing Indebtedness of the Borrower
6.8b Permitted Existing Indebtedness of Subsidiaries
6.9 Permitted Existing Encumbrances
6.10 Existing Operating Leases
6.16 Proposed Amendments to Management Repurchase Agreements
</TABLE>
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<PAGE> 8
AMENDED AND RESTATED
CREDIT AGREEMENT
This Amended and Restated Credit Agreement dated as of March 16, 1995 by
and among EDUCATION MANAGEMENT CORPORATION, as the borrower (the "Borrower"),
the FINANCIAL INSTITUTIONS listed on the signature pages hereto and each other
financial institution which, from time to time, becomes a party hereto in
accordance with Section 10.8 (individually, a "Bank" and collectively the
"Banks"), PNC BANK, NATIONAL ASSOCIATION, as the Issuing Bank (the "Issuing
Bank") and PNC BANK, NATIONAL ASSOCIATION, as the Agent for the Banks and the
Issuing Bank (the "Agent"), amends and restates in its entirety the 1989 Credit
Agreement.
WITNESSETH:
WHEREAS, EMC Holdings, Inc. (the predecessor by merger to the Borrower),
the 1989 Banks and Pittsburgh National Bank (now known as PNC Bank, National
Association) entered into the 1989 Credit Agreement pursuant to which the 1989
Banks made available a credit facility consisting of a revolving credit
commitment in an aggregate principal amount not to exceed $16,000,000 and term
loans in an aggregate principal amount not to exceed $36,175,000;
WHEREAS, the Borrower has requested that the Banks, the Issuing Bank and
the Agent amend and restate the 1989 Credit Agreement (i) to increase the
aggregate principal amount of the revolving credit commitment to $50,000,000
from $16,000,000; (ii) to provide the issuance on behalf of the Borrower of
letters of credit in the aggregate stated amount not to exceed $8,000,000; and
(iii) to revise certain other covenants and conditions set forth in the 1989
Credit Agreement;
WHEREAS, the Term Loan Banks are willing to purchase from the 1989 Banks
the term loans outstanding under the 1989 Credit Agreement; and
WHEREAS, the Banks, the Issuing Bank and the Agent are willing to amend
and restate the 1989 Credit Agreement and to make available to the Borrower the
aforementioned credit facilities, all upon the terms and conditions hereinafter
set forth.
NOW, THEREFORE, in consideration of mutual promises contained herein and
other valuable consideration and with the intent to be legally bound hereby,
the parties hereto agree as follows:
ARTICLE I. DEFINITIONS.
1.1 Defined Terms. As used herein, the following terms shall have the meaning
specified unless the context otherwise requires:
<PAGE> 9
"Account" shall mean any account, as that term is defined in the UCC, of
any Person, whether now owned or hereafter created or acquired.
"Account Debtor" shall mean any Person who is or may become obligated to
any second Person under, with respect to, or on account of, an Account.
"Accredited Subsidiary" means each Subsidiary which is accredited or
approved, as applicable, by the Accrediting Commission of Career Schools and
Colleges of Technology, the National Association of Trade and Technical
Schools, the American Bar Association, the Southern Association of Colleges and
Schools or any other similar Person which accredits, certifies, or otherwise
approves secondary, proprietary post-secondary vocational or career training
schools.
"Active Subsidiary" means (i) each Subsidiary of the Borrower shown on
Schedule 4.1 hereof as being an Active Subsidiary as of the Closing Date and
(ii) each other Subsidiary of the Borrower which at any time in the future (A)
becomes an Accredited Subsidiary and (B) has either (1) assets of $50,000 or
more or (2) revenues of $100,000 or more in any Fiscal Year.
"Adjusted ESOP Tax-Exempt Factor" shall have the meaning ascribed to it in
Subsection 2.4d hereof.
"Adjustment" shall have the meaning ascribed to it in Subsection 2.4d
hereof.
"Affiliate" means, as to any Person, any second Person which, directly or
indirectly through one or more intermediaries, controls, is controlled by, or
is under common control with, such Person. For purposes of this definition,
the terms "control", "controlled by", and "under common control with" shall
mean the possession of the power to direct or cause the direction of the
management and policies of any Person, whether through the ownership of shares,
by contract or otherwise.
"Agent" means PNC Bank, National Association, or any successor agent, in
its capacity as the administrative agent for the Banks and the Issuing Bank
under this Credit Agreement and the other Loan Documents.
"Agent's Fee" means the fee payable to the Agent, for its own account, as
described in that certain letter dated December 7, 1994 between the Borrower
and the Agent.
"AII" means Art Institutes International, Inc., a corporation organized
and existing under the laws of the Commonwealth of Pennsylvania.
"Allocated Shares" means the shares of Employer Securities which have been
acquired with the proceeds of the ESOP Pass Through Loan and have been
allocated by the Trustee to individual accounts of the participants under the
ESOP.
"Amended and Restated Pledge Agreement" means the pledge agreement
executed by the Borrower substantially in the form of Exhibit "F" hereto
pursuant to which
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<PAGE> 10
the Borrower grants to the Agent, for the benefit of the Banks and the Issuing
Bank, a first lien and prior security interest in all of the issued and
outstanding capital stock of all Active Subsidiaries owned directly by the
Borrower and all extensions, renewals, amendments, modifications, replacements
and restatements thereof and thereto.
"Amended and Restated Security Agreement" means the security agreement
executed by the Borrower substantially in the form of Exhibit "D" hereto
pursuant to which the Borrower grants to the Agent, for the benefit of the
Banks and the Issuing Bank, a first lien and prior security interest (except
for Permitted Encumbrances) in the Collateral owned by the Borrower and all
extensions, renewals, amendments, modifications, substitutions, replacements
and restatements thereto and thereof.
"Amended and Restated Subsidiary Pledge Agreement" means a pledge
agreement executed by either AII or NCG substantially in the form of either
Exhibit "G-1" or Exhibit "G-2" hereto pursuant to which such Active Subsidiary
grants to the Agent, for the benefit of the Banks and the Issuing Bank, a first
lien and prior security interest in all of the issued and outstanding capital
stock of its Active Subsidiaries and all extensions, renewals, amendments,
modifications, substitutions, replacements and restatements thereof and
thereto.
"Amended and Restated Subsidiary Security Agreement" means the security
agreement executed by AII substantially in the form of Exhibit "E" hereto
pursuant to which AII grants to the Agent, for the benefit of the Banks and the
Issuing Bank, a first lien and priority security interest (except for Permitted
Encumbrances) in the Collateral owned by AII and all extensions, renewals,
amendments, modifications, replacements and restatements thereof and thereto.
"Amended and Restated Term Note" means any one or all of the promissory
notes of the Borrower evidencing Bank Indebtedness of the Borrower hereunder
with respect to the Term Loans, which notes shall be substantially in the form
of Exhibit "A" to this Credit Agreement, and all extensions, renewals,
amendments, modifications, substitutions, replacements and restatements thereto
or thereof.
"Annual Report" means the annual report/return filed by the Borrower with
respect to the ESOP in accordance with the provisions of Section 103 of ERISA.
"Applicable Base Rate Margin" shall have the meaning ascribed to it in
Subsection 2.4b hereof.
"Applicable Eurodollar Rate Margin" shall have the meaning ascribed to it
in Subsection 2.4b hereof.
"Art Institute" means any of the following Persons: Art Institute of
Pittsburgh (a division of AII), Art Institute of Atlanta, Inc., Art Institute
of Dallas, Inc., Art Institute of Fort Lauderdale, Inc., Art Institute of
Houston, Inc., Art Institute of Philadelphia, Inc., Art Institute of
Seattle, Inc., The Colorado Institute of Art, Inc. and any other Active
Subsidiary operating an art institute.
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<PAGE> 11
"Article" means an article of this Credit Agreement unless another
document is specifically referenced.
"Assignment and Assumption Agreement" means an Assignment and Assumption
Agreement substantially in the form of Exhibit "J" hereto by and among a
Purchasing Bank, a Transferor Bank and the Agent, on behalf of itself and the
remaining Banks, and consented to by the Borrower.
"Authorized Officer" means Chairman, Chief Executive Officer, President,
Chief Financial Officer or Treasurer of any Person. The Agent, the Banks and
the Issuing Bank shall be entitled to rely on the incumbency certificates
delivered pursuant to Section 7.2 for the initial designation of each
Authorized Officer of the Borrower or any other Loan Party. Additions or
deletions to the list of Authorized Officers may be made by the Borrower or any
other Loan Party, at any time, by delivering to the Agent, for redelivery to
the Banks and the Issuing Bank, a revised fully-executed incumbency certificate
for the Borrower or such other Loan Party.
"Availability Period" shall mean the period from and including the Closing
Date to but excluding the Repayment Date.
"Bank" means any Revolving Credit Bank, Term Loan Bank or, unless the
context clearly requires otherwise, the Issuing Bank, together with their
respective successors and assigns.
"Bank Indebtedness" means the liability of the Borrower, as of any date of
determination, without duplication, to pay the Commitment Fee, the Agent's Fee,
the Letter of Credit Fees, the Issuance Fee, the outstanding principal amount
of the Revolving Credit Loans and the Term Loans, any draws upon any Letter of
Credit, interest thereon, any other amounts due pursuant to Article II hereof
and all reasonable out-of-pocket expenses incurred by the Banks or the Agent in
connection with the preparation, negotiation, administration, enforcement of
this Credit Agreement, the Revolving Credit Notes, the Amended and Restated
Term Notes, the other Loan Documents, the transactions contemplated thereby, or
the protection of the Agents', the Banks' or the Issuing Bank's rights under
any of the foregoing described instruments (including but not limited to the
reasonable fees and expenses of counsel) to the extent such expenses are the
responsibility of the Borrower pursuant to this Credit Agreement.
"Base Rate" means, as of any date of determination, a rate of interest per
annum equal to the higher of (i) the Agent's Prime Rate, as of such date of
determination, or (ii) the sum of (A) the Federal Funds Rate, as of such date
of determination, plus (B) one-half of one percent (1/2%). Such interest rate
shall change automatically from time to time, effective as of the effective
date of each change in the Prime Rate or the Federal Funds Rate.
"Base Rate Loan" means any Loan which bears, or is to bear, interest under
the Base Rate Option.
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<PAGE> 12
"Base Rate Option" means the interest rate option described in item (i) of
Subsection 2.4b hereof.
"Benefit Arrangement" means an "employee benefit plan" within the meaning
of Section 3(3) of ERISA, which is not a Plan or a Multiemployer Plan and which
is mentioned, or otherwise contributed to, by any Person for the benefit of
employees of such Person or an ERISA Affiliate thereof.
"Borrower" means Education Management Corporation, a corporation organized
and existing under the laws of the Commonwealth of Pennsylvania and having its
principal office at 300 Sixth Avenue, Suite 800, Pittsburgh, Pennsylvania
15222.
"Business Day" means (i) with respect to any borrowing or payment on,
renewal of or conversion to a Eurodollar Rate Loan, any day other than (a) a
Saturday or Sunday, (b) a day on which commercial banks in Pittsburgh,
Pennsylvania and Cleveland, Ohio are required or authorized by law to close and
(c) a day on which dealings are not carried on in the London interbank market
and (ii) for all other purposes, any day other than (a) a Saturday or Sunday or
(b) a day on which commercial banks in Pittsburgh, Pennsylvania and Cleveland,
Ohio are required or authorized by law to close.
"Capital Expenditures" means, for any period, on a Consolidated basis, all
amounts debited to the fixed asset accounts on the balance sheet of any Person
during such period (or required to be so debited in accordance with GAAP) in
respect to the acquisition, construction, improvement, replacement or
betterment of land, buildings, machinery, equipment or any other fixed asset
that has a useful life of more than one year.
"Capitalized Lease" means, as to any Person, any lease of tangible or
intangible property (whether real, personal or mixed) by such Person as the
lessee under which the obligations of the lessee would be included in
determining total liabilities as shown on the liability side of a balance sheet
of such Person in accordance with GAAP.
"Capitalized Lease Expenditures" means, as to any Person and for any
period, on a Consolidated basis, such amounts debited to the fixed asset
accounts on the balance sheet of such Person during such period in question (or
required to be so debited in accordance with GAAP) in respect of the
Capitalized Leased Obligations.
"Capitalized Lease Obligations" means, as to any Person and as of any date
of determination, the principal amount of liability of such Person reflecting
the aggregate discounted value of all future payments due under all Capitalized
Leases calculated in accordance with GAAP including, but not limited to
Statement of Financial Accounting Standards No. 13.
"Cash Flow from Operations" means, for any period, on a Consolidated basis,
(i) the sum of (A) Consolidated Net Income, (B) all non-cash charges deducted in
arriving at Consolidated Net Income, (C) interest expense of the Borrower and
its Subsidiaries, (D) income tax expense (current and deferred) of the Borrower
and its Subsidiaries, (E) ESOP contributions made by the Borrower, (F) purchase
price premium amortization and (G) any
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<PAGE> 13
extraordinary items deducted in arriving at Consolidated Net Income minus (ii)
the sum of (A) non-cash credits to Consolidated Net Income and (B) the proceeds
paid to the Borrower from life insurance policies maintained on the life of any
employee of the Borrower or any of its Subsidiaries.
"Chattel Paper" shall mean chattel paper, as that term is defined in the
UCC, of any Person whether now owned or existing or hereafter created or
acquired.
"Closing" means the execution of this Credit Agreement and the issuance of
the Revolving Credit Notes and the Amended and Restated Term Notes, all to be
held at the offices of Tucker Arensberg, P.C. in Pittsburgh, Pennsylvania.
"Closing Date" means March 16, 1995 or such later date as is mutually
agreeable to the parties hereto.
"Closing Fee" means the fees described in Section 2.7 hereof.
"Code" means the Internal Revenue Code of 1986, as the same may be amended
from time to time and the regulations and rulings promulgated thereunder,
together with any successor legislation thereto.
"Cohort Default Rate" shall have the meaning ascribed thereto by the DOE
in Title 34, Chapter VI, Part 668, Subpart B, Section 17 of the Code of Federal
Regulations (34 C.F.R. Section 668.17), as the same may be amended from time
to time.
"Collateral" means the Accounts, Chattel Paper, Documents, Equipment,
Fixtures, General Intangibles, Goods, Instruments, Inventory and Money of the
Borrower and AII (excluding the Accounts, Chattel Paper, Documents, Equipment,
Fixtures, General Intangibles, Goods, Instruments, Inventory and Money owned or
used by the Art Institute of Pittsburgh) whether now owned or hereafter
acquired or created, and all rights, titles and interests in and to and
relating to all such property, and all products thereof and proceeds derived
therefrom including, without limitation, proceeds of casualty insurance on such
Collateral.
"Commitment Amount" means, with respect to each Revolving Credit Bank, the
dollar amount set forth for such Revolving Credit Bank under the caption
"Revolving Credit Commitment" on the signature page to this Credit Agreement
signed by such Revolving Credit Bank or in any Assignment and Assumption
Agreement executed by such Revolving Credit Bank, whether in the capacity as a
Purchasing Bank or a Transferor Bank.
"Commitment Fee" means the commitment fee described in Subsection 2.2h of
this Credit Agreement.
"Commitment Percentage" means, with respect to each Revolving Credit Bank,
the percentage amount set forth for such Revolving Credit Bank under the
caption "Percentage Amount" on the signature page to this Credit Agreement
signed by such
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<PAGE> 14
Revolving Credit Bank or in any Assignment and Assumption Agreement executed by
such Revolving Credit Bank, whether in the capacity as a Purchasing Bank or a
Transferor Bank.
"Compliance Certificate" means a compliance certificate substantially in
the form of Exhibit "H" hereto which shall be delivered by the Borrower to the
Agent and to each Bank in accordance with Subsection 5.2d hereof.
"Consolidated" means the consolidation of the accounts of any two or more
Persons in accordance with GAAP.
"Consolidated Cash Interest" means, as to any Person and for any period,
on a Consolidated basis, the sum of all cash interest due and payable with
regard to Indebtedness for Borrowed Money for such period.
"Consolidated HEBIT" means, for any period the HEBIT of the Borrower and
its Subsidiaries, on a Consolidated basis.
"Consolidated Net Income" means, for any period, on a Consolidated basis,
the net income of the Borrower and its Subsidiaries determined in accordance
with GAAP consistently applied.
"Consolidated Net Worth" means, as at any date of determination, on a
Consolidated basis, an amount equal to the stockholders' equity (without giving
effect to any repurchases made or Indebtedness for Borrowed Money incurred in
connection with satisfying the Borrower's Repurchase Obligations and excluding
any non-cash extraordinary items) in the Borrower and its Subsidiaries,
determined in accordance with GAAP consistently applied.
"Contamination" means the presence in soil, groundwater or surface water
of Hazardous Substances in sufficient quantity or concentration to require
investigation, corrective action or remediation under any Environmental Law.
"Controlled Group" means, as to any Person, (i) a controlled group of
corporations as defined in Section 1563 of the Code or (ii) a group of trades
or businesses under common control as defined in Section 414(c) of the Code of
which such Person is a part or may become a part.
"Corporate Tax Rate" means the maximum statutory rate in effect under the
first sentence of Section 11(b) of the Code.
"Credit Agreement" means this Amended and Restated Credit Agreement
together with the exhibits and schedules hereto and hereof and all extensions,
renewals, amendments, modifications, restatements and replacements hereof and
hereto.
"Credit Facility" means the credit facility consisting of the Revolving
Credit Commitment in the aggregate amount of $50,000,000.00 and the Term Loans
in the original aggregate principal amount of $9,205,650.00.
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<PAGE> 15
"Default" means an event, condition, act or omission to act which
constitutes a default in the performance or observance of any covenant,
agreement or provision of any Loan Document, which event, condition, act or
omission to act would become or constitute an Event of Default with the passage
of time, the giving of notice or both, and without subsequent cure within any
applicable period of time.
"Disbursement" means the one or more advances of proceeds to the Borrower
made pursuant to Sections 2.1 and 2.2 hereof.
"Document" means any document, as that term is defined in the UCC, of any
Person, whether now owned or hereafter acquired or created.
"DOE" means the United States Department of Education or as the context may
require, the United States Secretary of Education, or any successor thereto.
"DOL" means the United States Department of Labor or as the context may
require, the United States Secretary of Labor, or any successor thereto.
"Dollars" or "$" means the legal tender of the United States of America.
"Employer Securities" means common stock or convertible preferred stock of
the Borrower which constitutes "qualifying employer securities" under Section
409(l) of the Code.
"Encumbrance" means any encumbrance, mortgage, lien (statutory or other),
charge, pledge, hypothecation, security interest, assignment, preference,
priority or other security agreement or preferential arrangement of any kind or
nature whatsoever (including, without limitation, any conditional sale or other
title retention agreement and any Capitalized Lease having substantially the
same economic effect as any of the foregoing) in, upon or against any asset of
any Person, whether or not voluntarily given.
"Environmental Claim" means any claim, suit, notice, order, demand or
other communication made by any Person, including the Borrower, with respect to
the Borrower, any of its Subsidiaries or any of their respective properties,
whether owned or leased, that: (i) asserts a violation of any Environmental
Law; (ii) asserts a liability under any Environmental Law; (iii) orders an
investigation, corrective action, remediation or other response under any
Environmental Law; (iv) alleges personal injury or property damage resulting
from Hazardous Substances; or (v) alleges that there is or may be
Contamination.
"Environmental Law" means any and all statutes, laws, regulations,
ordinances, rules, judgments, orders, decrees, permits, concessions, grants,
franchises, licenses, agreements or other governmental restrictions issued,
promulgated or granted by any Governmental Person relating to the environment
or the release of any materials into the environment.
"Equipment" shall mean all equipment, as that term is defined in the UCC,
of any Person whether now owned or hereafter acquired.
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<PAGE> 16
"ERISA" means the Employee Retirement Income Security Act of 1974, as the
same may be amended, from time to time, and the rulings and regulations
promulgated thereunder, together with any successor legislation thereto.
"ERISA Affiliate" means, as of any date of determination and as to any
Person, any member of a Controlled Group of which such Person is a member, and
any trade or business (whether or not incorporated) under common control with
such Person, and all other entities which, together with such Person, are or
were treated as a single employer under Section 414 of the Code (which shall
include any Subsidiary of such Person).
"Escrow Agreement" means the Escrow and Pledge Agreement dated as of
October 25, 1989 by and among the Borrower, those stockholders of the Borrower
signatory thereto, Knutson and C. Thomas Burkett as stockholder agents, the
Agent, on behalf of the 1989 Banks, and PNC Bank, National Association
(formerly Pittsburgh National Bank) as escrow agent thereunder.
"ESOP" means the Education Management Corporation Employee Stock Ownership
Plan.
"ESOP Pass Through Loan" means the proceeds of the Term Loans which are
reloaned by the Borrower to the ESOP Trust.
"ESOP Tax-Exempt Factor" means eighty-four and six-tenths percent (84.6%).
"ESOP Trust Note" means the promissory note of the Trustee in the original
principal amount of $36,175,000 and all extensions, renewals, amendments,
modifications, substitutions and replacements thereof or thereto.
"ESOP Trust" means the Education Management Corporation Employee Stock
Ownership Trust established pursuant to the Agreement of Trust dated as of July
10, 1989 by and between the Borrower and Marine Midland Bank, N.A., as Trustee,
as the same may be amended.
"Eurodollar Rate" means, with respect to each Eurodollar Rate Loan, the
rate of interest per annum with respect to any Interest Period obtained by the
Agent by dividing (the resulting quotient rounded upward to the nearest 1/100th
of 1% per annum) (i) the rate of interest determined by the Agent in accordance
with its usual procedures (which determination shall be conclusive, absent
manifest error) to be the average of the London interbank offered rates listed
on the "LIBO" page of the Reuters Monitor Money Rate Service (or an appropriate
successor thereto or, if Reuters or its successor ceases to provide such
quotes, a comparable replacement as determined by the Agent) at 11:00 A.M.
(London, England time) two (2) Business Days prior to the first day of each
Interest Period for an amount comparable to the Eurodollar Rate Loan for such
Interest Period and having a borrowing date and a maturity comparable to such
Interest Period by (ii) a number (expressed as a decimal) equal to (A) 1.00
minus (B) the Eurodollar Reserve Percentage, if any. The Eurodollar Rate
described above may also be expressed by the following formula:
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<PAGE> 17
<TABLE>
<S> <C> <C>
Average of London interbank offered rates listed on
Eurodollar Rate = "LIBO" page of Reuters Monitor Money Rate Service
---------------------------------------------------
[ 1.00 - Eurodollar Reserve Percentage ]
</TABLE>
"Eurodollar Rate Loans" means any of the Loans bearing interest at a rate
determined on the basis of the Eurodollar Rate.
"Eurodollar Rate Option" means the interest rate option described in item
(ii) of Subsection 2.4b hereof.
"Eurodollar Reserve Percentage" means, for any Interest Period, that
percentage (expressed as a decimal), as calculated by the Agent, which is in
effect on the first day of such Interest Period, as prescribed by the Board of
Governors of the Federal Reserve System (or any successor) for determining the
maximum reserve requirements (including without limitation supplemental,
marginal or emergency reserve requirements) with respect to eurocurrency
funding (currently referred to as "Eurocurrency Liabilities") of a member bank
in such system in an amount comparable to the Eurodollar Rate Loan for such
Interest Period and for a duration comparable to such Interest Period.
"Exclusion Percentage" means, as of any time, the percentage of interest
(expressed as a decimal) received by a "qualified lender" with respect to the
Term Notes that would be excludable from the gross income of such "qualified
lender" pursuant to Section 133 of the Code.
"Event of Default" means any event described in Article VIII of this
Credit Agreement.
"Exempt Loan" means a loan which satisfies the requirements set forth in
Section 4975(d)(3) of the Code and Section 408(b)(3) of ERISA.
"Existing Letter of Credit" means that certain Irrevocable Standby Letter
of Credit No. A-301813 dated December 27, 1990 in the original stated amount of
$1,500,000, issued by PNC Bank under the 1989 Credit Agreement, as the same is
from time to time in effect. As of the Closing Date, the stated amount of the
Existing Letter of Credit is $300,000.
"Extension Request" shall have the meaning ascribed to it in Subsection
2.2f hereof.
"FDIC" means the Federal Deposit Insurance Corporation or any Person
succeeding to its functions.
"Federal Funds Rate" means, for any day, a fluctuating interest rate per
annum equal to the weighted average of the rates on overnight Federal funds
transactions with members of the Federal Reserve System arranged by Federal
funds brokers, as published for such day (or, if such day is not a Business
Day, for the preceding Business Day) by the Federal Reserve Bank
of New York, or, if such rate is not so published for any
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<PAGE> 18
day which is a Business Day, the average of the quotations at approximately
10:00 A.M. (Pittsburgh, Pennsylvania time) on such day on such transactions
received by the Agent from three (3) Federal funds brokers of recognized
standing selected by the Agent in its sole discretion.
"Fiscal Quarter" shall mean each three-month fiscal period of the Borrower
beginning respectively on each successive January 1, April 1, July 1 and
October 1 during the term hereof and ending on the immediately succeeding March
31, June 30, September 30 and December 31.
"Fiscal Year" shall mean each annual fiscal period of the Borrower
beginning July 1 and ending on the immediately succeeding June 30.
"Fixtures" means any fixture, as that term is defined in the UCC, of any
Person, located on or attached to any real property, whether now owned or
hereafter acquired.
"GAAP" shall mean generally accepted United States accounting principles
which shall include, but not be limited to, the official interpretations
thereof as defined by the Financial Accounting Standards Board, its
predecessors and its successors.
"General Intangible" means any general intangible, as that term is defined
in the UCC, of any Person, whether now owned or hereafter acquired, together
with any intangible personal property of the Person of every kind and nature
(other than accounts receivable, Chattel Paper, Documents and Instruments)
including, without limitation, choses in action, causes in action, corporate or
other business records, inventions, designs, patent applications, trademarks,
trade names, trade secrets, goodwill, copyrights, registrations, licenses,
franchises, tax refund claims, computer programs, insurance payments and any
guarantee claims.
"Goods" means all goods, as that term is defined in the UCC, of any
Person, whether now owned or hereafter acquired.
"Government Acts" shall have the meaning ascribed to it in Subsection 2.3g
hereof.
"Governmental Person" means the government of the United States or the
government of any state or locality therein, any political subdivision or any
governmental, quasi-governmental, judicial, public or statutory
instrumentality, authority, body or entity, or other regulatory bureau,
authority, body or entity of the United States or any state or locality
therein, including the FDIC, the Comptroller of the Currency or the Board of
Governors of the Federal Reserve System, any central bank or any comparable
authority.
"Governmental Rule" means any law, statute, rule, regulation, ordinance,
order, judgment, guideline or decision of any Governmental Person (including,
without limitation, Governmental Acts).
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<PAGE> 19
"Guarantee" means, as to any Person, any obligation, direct or indirect,
by which such Person undertakes to guaranty, assume or remain liable for the
payment or performance of another Person's obligations, including but not
limited to (i) endorsements of negotiable instruments, (ii) discounts with
recourse, (iii) agreements to pay or perform upon a second Person's failure to
pay or perform, (iv) remaining liable on obligations assumed by a second
Person, (v) agreements to maintain the capital, working capital, solvency or
general financial condition of a second Person and (vi) agreements for the
purchase or other acquisition of products, materials, supplies or services, if
in any case payment therefor is to be made regardless of the non-delivery of
such products, materials or supplies or the non-furnishing of such services.
"Hazardous Substances" means any (i) hazardous, toxic or polluting
substances or wastes as defined by any Environmental Law; (ii) petroleum
products; or (iii) other substances determined to be hazardous in any law
currently in effect or hereafter enacted.
"Indebtedness for Borrowed Money" as applied to any Person means the
liabilities of such Person for money borrowed or credit received (other than
trade accounts payable incurred in the ordinary course of business), direct or
contingent, whether evidenced by a bond, note, debenture, Capitalized Lease
Obligation, deferred purchase price arrangement, title retention device,
reimbursement agreement, Guarantee (including the amount of any guarantee
obligations arising under any student loan programs), book entry or otherwise.
"Indemnified Party" shall have the meaning ascribed to it in Section 10.10
hereof.
"Instrument" means any instrument, as that term is defined in the UCC, of
any Person, whether now owned or existing or hereafter created or acquired.
"Intercreditor Agreement" means the Intercreditor Agreement dated as of
October 25, 1989 by and among the 1989 Banks, PNC Bank, National Association
(formerly Pittsburgh National Bank), in its capacity as agent under the 1989
Credit Agreement, NML and NUFICP, as amended by that certain First Amendment to
Intercreditor Agreement to be executed contemporaneously with this Credit
Agreement.
"Interest Coverage Ratio" means the ratio of (a) Cash Flow from Operations
for the four (4) most recently completed Fiscal Quarters to (b) Consolidated
Cash Interest for the same fiscal period.
"Interest Income Exclusion" shall have the meaning ascribed to it in
Subsection 2.4d.
"Interest Period" means any individual Interest Period of one (1), two
(2), three (3), six (6) months or nine (9) months (if available) selected by
the Borrower pursuant to the terms and conditions of Subsection 2.4d(i) hereof,
commencing on the borrowing date, conversion date or renewal date of a
Eurodollar Rate Loan to which such period shall apply.
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<PAGE> 20
"Inventory" means any inventory, as that term is defined in the UCC, of
any Person, whether now owned or existing or hereafter created or acquired.
"IRS" means the United States Internal Revenue Service or, as the context
may require, the United States Department of Treasury, or any successor
thereto.
"Issuance Fee" means the fee described in item (ii) of Subsection 2.3e
hereof.
"Issuing Bank" means PNC Bank, in its capacity as the issuer of the
Letters of Credit hereunder for the account of the Borrower.
"Key Man Life Insurance" means life insurance naming the Borrower as the
beneficiary on the life of Knutson.
"Knutson" means Robert B. Knutson.
"Lending Office" means, as to any Bank, its office located at the address
set forth in its administrative questionnaire as its "Lending Office" or such
other office as such Bank may thereafter designate as its "Lending Office" by
notice to the Borrower and the Agent.
"Letter of Credit" means any stand-by letter of credit issued by the
Issuing Bank pursuant to Section 2.3 hereof and the other terms and provisions
hereof, for the account of the Borrower (including but not limited to the
Existing Letter of Credit), as any such letter of credit may from time to time
be amended, modified, renewed, extended, supplemented or replaced.
"Letter of Credit Exposure" means, at any date of determination, with
respect to each Revolving Credit Bank, such Revolving Credit Bank's pro rata
share of the Stated Amount of any Letter of Credit then in effect.
"Letter of Credit Fees" means the fees described in item (i) of Subsection
2.3e hereof.
"Leverage Ratio" means the ratio of (i) Total Indebtedness to (ii) Cash
Flow from Operations for the four (4) most recently completed Fiscal Quarters.
"Leveraged Securities" means the Employer Securities purchased with the
proceeds of the ESOP Pass Through Loan.
"Loan" means any Revolving Credit Loan or Term Loan.
"Loan Documents" means this Credit Agreement, the Notes, each of the
Security Documents and each Compliance Certificate, each Request for Revolving
Credit Loan and any application or agreement for Letter of Credit.
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<PAGE> 21
"Loan Party" means the Borrower or any Active Subsidiary party to any of
the Loan Documents.
"Management Exchange Agreement" means any of the separate Exchange and
Repurchase Agreements dated October 25, 1989 by and between certain of the
Management Stockholders and the Borrower, together with each amendment or
modification thereof permitted pursuant to Section 6.16 hereof.
"Management Repurchase Agreement" means any of the Management Exchange
Agreements, the RBK Exchange and Repurchase Agreement or the Subscription and
Repurchase Agreements.
"Management Stockholders" means the persons listed on Schedule 1.1
attached hereto.
"Margin Stock" shall mean "margin stock" as defined in Regulation U.
"Marginal Rate" means, with respect to any Term Loan Bank, the maximum
incremental percentage federal tax rate (expressed as a decimal) applicable to
the taxable income of such Term Loan Bank.
"Material Adverse Change" means any circumstance or event which (i) has,
or could reasonably be expected to have, a material adverse effect upon the
validity or enforceability of this Credit Agreement or any of the other Loan
Documents, (ii) is, or could reasonably be expected to be, adverse to the
business, properties, assets, financial condition or results of operations of
the Borrower and its Subsidiaries, taken as a whole, and which impairs
materially, or could reasonably be expected to impair materially, the ability
of the Loan Parties to duly and punctually pay or perform their respective
obligations under the Loan Documents or (iii) impairs materially, or could
reasonably be expected to impair materially, the ability of the Agent or the
Banks, to the extent permitted, to enforce the Agent's or the Banks' legal
remedies pursuant to this Credit Agreement and the other Loan Documents.
"Material Adverse Effect" means an effect that results in or causes or has
a reasonable likelihood of resulting in or causing a Material Adverse Change.
"Maturity Date" means September 30, 1996.
"Merrill Lynch Interfunding, Inc." means Merrill Lynch Interfunding, Inc.,
a corporation organized and existing under the laws of the State of Delaware.
"Money" means all money, as that term is defined in the UCC, of any
Person, whether now owned or hereafter acquired.
"Multiemployer Plan" means a "multiemployer plan" as defined in Section
4001(a)(3) of ERISA to which any Person is making or accruing an obligation to
make
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<PAGE> 22
contributions or has within any of the preceding five (5) plan years made or
accrued an obligation to make contributions.
"NCG" means The National Center Group, Inc., a corporation organized and
existing under the laws of the State of Georgia.
"Net Offering Proceeds" means, with respect to any equity offerings by the
Borrower, the proceeds of any such offering actually received by the Borrower
after deducting therefrom any reasonable costs and fees payable in connection
therewith.
"Net Proceeds" means, with respect to the sale, assignment, lease,
sublease, transfer or other disposition of any of the assets of the Borrower or
its Subsidiaries, in any transaction or series of coordinated transactions, the
net after-tax proceeds of any such transaction after (i) taking into account
any adjustments for basis, gain or other adjustment recognized under the Code
and (ii) deducting therefrom any reasonable closing costs paid by the Borrower
or such Subsidiary in connection therewith.
"Net Purchase Price" means, with respect to the redemption of shares from
a Management Stockholder pursuant to any Management Repurchase Agreement, the
price paid for such purchase.
"NML" means Northwestern Mutual Life Insurance Company, an insurance
company organized and existing under the laws of the State of Delaware.
"Note" means any or all of the Revolving Credit Notes and the Amended and
Restated Term Notes.
"NUFICP" means National Union Fire Insurance Company of Pittsburgh, PA, a
corporation organized and existing under the laws of the Commonwealth of
Pennsylvania.
"Operating HEBIT" means, as to any Art Institute as of any date of
determination, the sum of such Art Institute's (i) net revenue minus (ii) its
operating expenses (exclusive of any ESOP contribution expense, interest
expense, income tax expense, purchase price premium amortization and central
services staff expense), all for the four (4) most recently completed Fiscal
Quarters, as determined in accordance with GAAP, consistently applied.
"Option" means either the Base Rate Option or the Eurodollar Rate Option.
"Participant" shall mean (i) any financial institution or other Person
which is listed in Section 133(a) of the Code and which purchases an individual
interest in all or any part of the Term Loans, any particular segment of any
Portion thereof or (ii) any financial institution or other Person which
purchases an individual interest in all or any part of the Revolving Credit
Loans or any particular segment of any Portion thereof.
"Participation" means any sale, made in accordance with the provisions of
Subsection 10.8d, by any Bank to any Participant of an undivided interest in
all or a part of,
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<PAGE> 23
such Bank's Revolving Credit Commitment and Revolving Credit Loans, if any, or
such Bank's Term Loans.
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions.
"Permitted Acquisitions" means any acquisition by the Borrower or any of
its Subsidiaries of the assets or stock of a second Person which complies with
each of the following conditions: (i) such second Person is engaged in the
education or training business (whether profit or non-profit); (ii) such
acquisition will result in voting control of such second Person; (iii) such
acquisition is not hostile in nature (as determined in the sole discretion of
the Banks); (iv) the Borrower shall demonstrate, on a pro forma basis and to
the reasonable satisfaction of the Banks, that no Default or Event of Default
shall occur as a result of such acquisition; and (v) following the acquisition,
the Revolving Credit Commitment in effect as of such date exceeds the Revolving
Credit Loans and Letters of Credit outstanding as of such date by an amount
greater than or equal to $20,000,000 and the Borrower can borrow such amount
without violating any covenant set forth in Section 6.1, 6.2 or 6.4 hereof;
provided, however, at any time during the period from and including June 25 to
and including July 7, the requirement that the Borrower maintain availability
under the Revolving Credit Commitment of greater than or equal to $20,000,000
shall be reduced by any amount borrowed by the Borrower and held in general
operating accounts of the Borrower or any Active Subsidiary.
"Permitted Capital Expenditures" shall mean those Capital Expenditures
allowed pursuant to Section 6.6 hereof.
"Permitted Encumbrances" shall mean those Encumbrances allowed pursuant to
Section 6.9 hereof.
"Permitted Owners" means with respect to the RBK Exchange and Repurchase
Agreement, (i) during Knutson's life; Knutson, his spouse, parents, issue or a
trust the beneficiaries of which are Knutson, his estate, spouse, parents
and/or his issue and (ii) after Knutson's death; his executors, administrators,
testamentary trustees, legatees or beneficiaries.
"Person" means any individual, partnership, corporation, trust, joint
venture or unincorporated organization and any government or any agency,
political subdivision or department thereof.
"Plan" shall mean any "single employer plan" within the meaning of Section
4001(a)(15) of ERISA established and maintained by the Borrower or any ERISA
Affiliate.
"Plan Documents" means the written evidence of the establishment and
maintenance of the ESOP and the ESOP Trust.
"PNC Bank" means PNC Bank, National Association together with its
successors and assigns.
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<PAGE> 24
"Portion" means, at any time, the aggregate principal amount of the
Revolving Credit Loans or the Term Loans outstanding hereunder which bears
interest at a specific interest rate for a specific Interest Period pursuant to
a request for borrowing or a notice of interest rate election.
"Prime Rate" means the interest rate per annum publicly announced from
time to time by the Agent as its prime rate, which rate may not be the lowest
interest rate then being charged commercial borrowers by the Agent.
"Prohibited ESOP Payment" means any prepayment of the Term Loans, in whole
or in part, under Subsections 2.1f(ii)(A) or (B) with respect to which the
Borrower may not make a corresponding payment or contribution to or other
funding of the ESOP without (x) adversely affecting the right of any Term Loan
Bank to exclude from federal gross income any interest paid or to be received
on any Term Loan; (y) resulting in the imposition of an excise tax on the
Borrower pursuant to Section 4972 of the Code; or (z) resulting in the
disqualification of the ESOP.
"Prohibited Transaction" shall mean any one or more of the prohibited
transactions defined under Section 406 of ERISA or Section 4975 of the Code and
which is not exempt as a statutory, individual or class exemption under Section
408 of ERISA or Section 4975 of the Code.
"Proprietary Information" means all non-public information about the
Borrower or any of its Subsidiaries which has been furnished by the Borrower or
any of its Subsidiaries, whether furnished before or after the Closing Date,
and regardless of the manner in which it is furnished.
"Purchasing Bank" means a Bank which becomes a party to this Credit
Agreement by executing an Assignment and Assumption Agreement.
"RBK Exchange and Repurchase Agreement" means the Exchange and Repurchase
Agreement dated October 25, 1989 by and between Knutson and the Borrower
together with each amendment or modification thereof permitted pursuant to
Section 6.16 hereof.
"Register" shall have the meaning ascribed to it in Subsection 10.8c
hereof.
"Regulation D" means Regulation D promulgated by the Board of Governors of
the Federal Reserve System (12 C.F.R. Part 204 et seq.), from time to time in
effect and as may hereafter be amended and shall include any successor or other
regulation or official interpretation thereof issued by said Board of
Governors.
"Regulation G" means Regulation G promulgated by the Board of Governors of
the Federal Reserve System (12 C.F.R. Part 207 et seq.), from time to time in
effect and as may hereafter be amended and shall include any successor or other
regulation or official interpretation thereof issued by said Board of Governors.
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<PAGE> 25
"Regulation T" means Regulation T promulgated by the Board of Governors of
the Federal Reserve System (12 C.F.R. Part 220 et seq.), from time to time in
effect and as may hereafter be amended and shall include any successor or other
regulation or official interpretation thereof issued by said Board of
Governors.
"Regulation U" means Regulation U promulgated by the Board of Governors of
the Federal Reserve System (12 C.F.R. Part 221 et seq.), from time to time in
effect and as may hereafter be amended and shall include any successor or other
regulation or official interpretation thereof issued by said Board of
Governors.
"Regulation X" means Regulation X promulgated by the Board of Governors
of the Federal Reserve System (12 C.F.R. Part 224 et seq.), from time to time
in effect and as may hereafter be amended and shall include any successor or
other regulation or official interpretation thereof issued by said Board of
Governors.
"Release" means any spilling, leaking, pumping, pouring, emitting,
emptying, discharging, injecting, escaping, leaching, dumping or disposing of
Hazardous Substances into the environment.
"Repayment Date" means March 16, 2000 or such later date as is ultimately
determined in accordance with Subsection 2.2f hereof.
"Reportable Event" means any one or more events defined in Section 4043(b)
of ERISA for which the thirty (30) day notice period has not been waived by the
PBGC.
"Repurchase Obligation" means (i) an obligation of the Borrower, under
applicable law and/or the ESOP, to repurchase shares from, or otherwise
compensate a beneficiary or participant employee of the ESOP in relation to the
shares beneficially owned by such beneficiary or participant employee as a
result of the death, disability, retirement or termination of employment of
such person and (ii) any diversification requirement imposed by applicable law,
relating to any participant employee.
"Request for Revolving Credit Loan" means any written request for a
revolving credit loan executed by the Borrower and delivered to the Agent
substantially in the form of Exhibit "C" to this Credit Agreement.
"Required Banks" means, as of any date of determination, the holders of at
least sixty-six and two-thirds percent (66-2/3%) of the (x) aggregate principal
amount of the Term Loans and (y) the aggregate Revolving Credit Commitment.
"Revolving Credit Bank" means any financial institution listed on the
signature pages to this Credit Agreement as having a Commitment Amount and each
other financial institution which, from time to time, becomes a party to this
Credit Agreement in accordance with Subsection 10.8b hereof and purchases a
Commitment Amount.
"Revolving Credit Commitment" shall have the meaning assigned to it in
Subsection 2.2a as the same may be reduced pursuant to Subsection 2.2e hereof.
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<PAGE> 26
"Revolving Credit Disbursement" means the several Revolving Credit Loans
made simultaneously by each Revolving Credit Bank under the Revolving Credit
Commitment.
"Revolving Credit Loan" means each loan of funds by a Revolving Credit
Bank of its Commitment Percentage as described in Section 2.2 hereof.
"Revolving Credit Loan Account" means the bookkeeping account established
by each Revolving Credit Bank in the name of the Borrower pursuant to
Subsection 2.2j hereof.
"Revolving Credit Note" means any one or all of the promissory notes of
the Borrower evidencing Bank Indebtedness of the Borrower hereunder with
respect to the Revolving Credit Loans, which Revolving Credit Notes shall be
substantially in the form of Exhibit "B" to this Credit Agreement, and all
extensions, renewals, amendments, modifications, restatements or replacements
thereto or thereof.
"Section" means a numbered section of this Credit Agreement, unless
another document is specifically referenced.
"Securities Acquisition Loan" means a securities acquisition loan within
the meaning of Section 133(b)(1) of the Code.
"Security Documents" means the Amended and Restated Security Agreement,
the Amended and Restated Pledge Agreement, the Amended and Restated Subsidiary
Security Agreement, each Amended and Restated Subsidiary Pledge Agreement, each
Subsidiary Pledge Agreement, the Intercreditor Agreement, and all extensions,
renewals, amendments, modifications, restatements and replacements thereto and
thereof.
"Senior Subordinated Collateral Documents" means the Senior Subordinated
Pledge Agreement and the Senior Subordinated Subsidiary Pledge Agreements and
all extensions, renewals, amendments, modifications, restatements and
replacements thereto and thereof.
"Senior Subordinated Debt" means all Indebtedness for Borrowed Money
outstanding from time to time pursuant to the Senior Subordinated Note Purchase
Agreements, the Senior Subordinated Notes and the Senior Subordinated
Collateral Documents.
"Senior Subordinated Notes" means the 13.25% Senior Subordinated Notes due
December 30, 1999 in an aggregate principal amount of $25,000,000 issued
pursuant to the Senior Subordinated Note Purchase Agreements, and all
extensions, renewals, amendments, modifications, substitutions or replacements
thereto or thereof.
"Senior Subordinated Note Purchase Agreements" means the separate Note
Purchase Agreements dated as of October 25, 1989 between the Borrower and each
of NML
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<PAGE> 27
and NUFICP and all extensions, renewals, amendments, modifications,
restatements or replacements thereto or thereof.
"Senior Subordinated Pledge Agreement" means the pledge agreement dated as
of October 25, 1989 by and among the Borrower, NML and NUFICP and all
extensions, renewals, amendments, modifications, restatements or replacements
thereto or thereof.
"Senior Subordinated Subsidiary Pledge Agreement" means a subsidiary
pledge agreement substantially in the form of Exhibit "E-2" to the Senior
Subordinated Note Purchase Agreements by and among an Active Subsidiary, the
holders of the Senior Subordinated Debt and all extensions, renewals,
amendments, modifications, substitutions or replacements thereto or thereof.
"Stated Amount" means the amount available to the beneficiary of any
Letter of Credit for drawing thereunder as such amount is reduced in accordance
with the provisions of such Letter of Credit.
"Stockholder Agreement" means the Stockholder Agreement dated as of
October 25, 1989 by and among the Management Stockholders, the Borrower, the
Trustee, Merrill Lynch Interfunding, Inc. and the other parties specified
therein.
"Stockholders Contribution and Repayment Agreement" means the Stockholders
Contribution and Repayment Agreement dated as of October 25, 1989 among the
Borrower, Knutson and C. Thomas Burkett as stockholders' agents and the
stockholders signatory thereto and all extensions, renewals, amendments,
modifications, substitutions or replacements thereto or thereof.
"Subscription and Repurchase Agreement" means any of the separate
Subscription and Repurchase Agreements dated as of various dates by and between
certain of the Management Stockholders and the Borrower together with each
amendment or modification thereof permitted pursuant to Section 6.16 hereof.
"Subsection" means a numbered subsection of this Credit Agreement, unless
another document is specifically referenced.
"Subsidiary" means any corporation of which at least a majority of the
outstanding stock having by the terms thereof ordinary voting power to elect a
majority of the Board of Directors of such corporation is at the time directly
or indirectly owned or controlled by the Borrower or by one or more of its
Subsidiaries.
"Subsidiary Pledge Agreement" means a pledge agreement executed by any
Subsidiary (other than AII or NCG) who owns any capital stock of an Active
Subsidiary substantially in the form of Exhibit "G-3" hereto pursuant to which
such Subsidiary grants to the Agent, for the benefit of the Banks and the
Issuing Bank, a first lien and prior security interest in all of the issued and
outstanding capital stock of any such Active Subsidiary and all extensions,
renewals, amendments, modifications, substitutions, replacements and
restatements thereof and thereto.
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<PAGE> 28
"Tax Assumptions" shall have the meaning ascribed to it in Subsection 2.4d
hereof.
"Teach-Out Obligations" means those certain obligations of any Person
under various state laws to provide for the completion of any enrolled
student's education in the event of the closing of a school.
"Term Loan" means a term loan described in Section 2.1 hereof.
"Term Loan Account" means the bookkeeping account established by each Term
Loan Bank in the name of the Borrower pursuant to Subsection 2.1g hereof.
"Term Loan Amount" means, as to each Term Loan Bank, the dollar amount set
forth for such Term Loan Bank, opposite such Term Loan Bank's name under the
caption "Term Loan Amount" on the signature page to this Credit Agreement
signed by such Term Loan Bank or in the most recent Assignment and Assumption
Agreement executed by such Term Loan Bank, whether in the capacity as a
Purchasing Bank or a Transferor Bank.
"Term Loan Bank" means any financial institution listed on the signature
pages to this Credit Agreement as having a Term Loan Amount and each other
financial institution which, from time to time, becomes a party to this Credit
Agreement in accordance with Subsection 10.8b hereof and purchases a Term Loan
Amount.
"Term Loan Percentage" means, with respect to each Term Loan Bank, the
percentage set forth for such Term Loan Bank, opposite such Term Loan Bank's
name under the caption "Term Loan Percentage" on the signature page to this
Credit Agreement signed by such Bank or in any Assignment and Assumption
Agreement executed by such Term Loan Bank, whether in the capacity as a
Purchasing Bank or a Transferor Bank.
"Termination Event" means (i) a Reportable Event with respect to a Plan or
an event described in Section 4062(e) of ERISA with respect to a Plan, (ii) the
withdrawal of the Borrower or any ERISA Affiliate from a Plan during a plan
year in which the Borrower or any such ERISA Affiliate was a "substantial
employer" as such term is defined in Section 4001(a)(2) of ERISA and the
incurrence of liability to the PBGC under Section 4063 of ERISA, (iii) the
incurrence of liability by the Borrower or any such ERISA Affiliate under
Section 4064 of ERISA upon the termination of a Plan, (iv) the distribution of
a notice of intent to terminate a Plan pursuant to Section 4041(a)(2) of ERISA
or the treatment of a Plan amendment as a termination under Section 4041 of
ERISA, or (v) the institution of proceedings to terminate a Plan by the PBGC
under Section 4042 of ERISA.
"Termination Proceeding" means, with respect to any Plan, any termination
proceeding under Section 4042 of ERISA or any successor section of ERISA.
"Total Indebtedness" means, as of the end of any Fiscal Quarter, on a
Consolidated basis without duplication (including but not limited to any
duplication reflecting Guarantees of the Borrower or any Subsidiary permitted by
Subsection 6.8a(v) or Subsection 6.8b(ii) hereof), the difference between (a)
Indebtedness for Borrowed Money of the
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<PAGE> 29
Borrower and its Subsidiaries, as of such date, and (b) all cash and cash
equivalents held by the Borrower and its Subsidiaries including without
limitation the cash balance as at the end of such Fiscal Quarter held by the
Agent in cash collateral, escrow, direct loan, reserve, electronic funds
transfer, trust or other restricted accounts (exclusive of any such accounts
which do not appear on the Borrower's or such Subsidiary's balance sheet) on
behalf of the Borrower or any of its Subsidiaries.
"Transfer Effective Date" means for each Assignment and Assumption
Agreement, the date upon which such Assignment and Assumption Agreement is
effective.
"Transferor Bank" means a selling Bank pursuant to an Assignment and
Assumption Agreement.
"Trustee" means Marine Midland Bank, as Trustee of the Education
Management Corporation Employee Stock Ownership Plan and Trust and any
successor thereto.
"UCC" means the Uniform Commercial Code as now adopted and from time to
time amended in the Commonwealth of Pennsylvania or any other jurisdiction
which controls the perfection of a security interest in favor of the Agent, for
the benefit of the Banks, in any of the Collateral.
"Unallocated Shares" means those shares of Employer Securities (and any
stock dividends or stock splits related thereto) which have been acquired with
the proceeds of the ESOP Pass Through Loan and which have not been allocated by
the Trustee to individual accounts of participants under the ESOP.
"Unfunded Benefit Liabilities" means with respect to any Plan, the amounts
described in Section 4001(a)(18) of ERISA.
"Unreimbursed Amount" shall have the meaning assigned to it in Subsection
2.3c hereof.
"Warrants" means the common stock purchase warrants to purchase an
aggregate of 5,956,079 shares of the Borrower's Class B common stock, $.0001
par value, issued pursuant to the Senior Subordinated Note Purchase Agreements.
"Withdrawal Liability" means "withdrawal liability" as defined by the
provisions of Part 1 of Subtitle E to Title IV of ERISA.
"1989 Banks" means PNC Bank, National Association (formerly Pittsburgh
National Bank), National Westminster Bank and National City Bank.
"1989 Closing Date" means October 25, 1989.
"1989 Credit Agreement" means that certain Credit Agreement dated as of
October 25, 1989 by and among EMC Holdings, Inc. (as the predecessor-by-merger
to the
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<PAGE> 30
Borrower), the several banks party thereto and Pittsburgh National Bank (now
known as PNC Bank, National Association), in its capacity as agent thereunder,
as amended or modified by that certain First Amendment to Credit Agreement
dated as of April 14, 1990, that certain Second Amendment to Credit Agreement
dated as of December 27, 1990, that certain Third Amendment to Credit
Agreement, Assumption Agreement and Partial Release dated as of April 30, 1993,
that certain letter agreement dated June 29, 1992 and that certain Fourth
Amendment to Credit Agreement dated as of December 30, 1993.
"1989 Term Notes" means those certain promissory notes which evidence the
1989 Term Loans.
"1989 Term Loans" means the term loans made to EMC Holdings, Inc. by the
1989 Banks pursuant to the 1989 Credit Agreement in the aggregate original
principal amount of $36,175,000.00.
1.2 GAAP Definitions. Accounting terms used in this Credit Agreement but not
defined herein shall have the meanings ascribed to them under GAAP in effect at
the time of the execution of this Credit Agreement and shall not include the
cumulative effect of accounting changes or accounting principles.
1.3 Other Definitional Conventions.
(i) All terms defined in this Credit Agreement shall have the
above-defined meanings when used in this Credit Agreement, the Revolving Credit
Notes, the Term Notes, the other Loan Documents, exhibits, schedules,
appendices or any other document or certificate executed or delivered in
connection with this Credit Agreement, unless the context thereof shall
otherwise clearly require.
(ii) The words "hereof", "herein" and "hereunder" and words of similar
import when used in this Credit Agreement shall refer to this Credit Agreement
as a whole and not to any particular provision of this Credit Agreement, and
Section and Subsection references are to this Credit Agreement unless otherwise
specified.
(iii) All terms defined in this Credit Agreement in the singular shall
have comparable meanings when used in plural, and vice versa, unless otherwise
specified.
(iv) The word "or" as used herein shall mean and connote non-exclusive
alternative, unless expressly stated or the context clearly requires otherwise.
1.4 Headings. The headings of the Sections and Subsections of this Credit
Agreement are inserted for convenience only and shall not be deemed to
constitute a part hereof.
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<PAGE> 31
ARTICLE II. THE CREDIT.
2.1 The Term Loan.
2.1a Amount of the Term Loan. Pursuant to the terms and conditions of the 1989
Credit Agreement, the 1989 Banks made available to the Borrower on the 1989
Closing Date the 1989 Term Loans in the aggregate principal amount of
THIRTY-SIX MILLION ONE HUNDRED SEVENTY-FIVE THOUSAND and NO/100 DOLLARS
($36,175,000). As of the Closing Date, the aggregate outstanding principal
amount of the 1989 Term Loans is $9,205,650.00. Subject to the terms and
conditions hereof and relying upon the representations and warranties herein
set forth, each of the Term Loan Banks, severally, agrees to purchase from the
1989 Banks the 1989 Term Loans and the 1989 Term Notes evidencing the
indebtedness thereunder.
2.1b Term Notes. The obligation of the Borrower to repay the Term Loans
hereunder shall be evidenced by the Amended and Restated Term Notes
substantially in the form of Exhibit "A" attached hereto dated as of the
Closing Date with one such Amended and Restated Term Note being made payable to
each Term Loan Bank which is an initial signatory hereto in the amount of that
Bank's Term Loan Amount. The Amended and Restated Term Notes are an amendment
and restatement, and not a novation, of the 1989 Term Notes and are executed
and delivered, inter alia, in connection with the sale and assignment by the
1989 Banks of the 1989 Term Loans to the Term Loan Banks hereunder. Promptly
following the completion of such sale and assignment by the 1989 Banks and the
execution and delivery of the Amended and Restated Term Notes, the 1989 Term
Notes shall be marked "Cancelled by Substitution" and delivered by the Agent to
the Borrower.
2.1c Purchase of the 1989 Term Loans. The sale and assignment of the 1989 Term
Loans shall occur simultaneously with the execution of this Credit Agreement.
If the Borrower elects to have all or any Portion of the Term Loans initially
bear interest at the Eurodollar Rate Option, the Borrower shall provide the
Agent with irrevocable written notice thereof two (2) Business Days prior to
the Closing Date otherwise the Term Loans shall initially bear interest at the
Base Rate Option. Each Bank shall make its Term Loan Amount available to the
Agent in immediately available funds at the principal office of the Agent prior
to 12:00 Noon (Pittsburgh, Pennsylvania time) on the Closing Date. The
aggregate Term Loan Amounts shall be utilized by the Agent to purchase, on
behalf of the Term Loan Banks, the 1989 Term Loans from the 1989 Banks.
2.1d Repayment of the Term Loans. The Term Loans shall be repaid in seven (7)
quarterly installments of principal, all in accordance with the following
schedule:
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<PAGE> 32
<TABLE>
<CAPTION>
Aggregate Quarterly
Payment Numbers Principal Payment
- --------------- -------------------
<S> <C>
1-3 $1,750,000
4-6 $1,181,250
7 $411,900
</TABLE>
Installments 1 through 6 shall be payable on the last day of each March, June,
September and December during the term hereof with the first (1st) such
installment being due and payable on March 31, 1995 and the sixth (6th) such
installment being due and payable on June 30, 1996. The seventh (7th) and
final installment shall be due and payable on September 30, 1996 in an amount
equal to the then outstanding aggregate principal balance of the Amended and
Restated Term Notes.
2.1e Interest. The Amended and Restated Term Notes shall bear interest from
the date thereof until payment in full as set forth in Section 2.4 hereof.
2.1f Prepayment of Term Loans.
(i) Voluntary Prepayments. The Borrower shall have the right at its
option to prepay any Portion of the Term Loans, in whole or in part, at any
time. Each such prepayment shall be applied to the principal installments of
the Term Loans in the order of their stated maturities. Each partial
prepayment shall be in the aggregate amount of $1,000,000 or more. The
Borrower shall give the Agent not less than three (3) Business Days' prior
written notice of each voluntary prepayment specifying the aggregate principal
amount to be prepaid and the date of prepayment. Notice of prepayment having
been given as aforesaid, the principal amount specified in such notice shall
become due and payable on the prepayment date.
(ii) Mandatory Prepayments.
(A) Mandatory Prepayments By Reason of a Prohibited Transaction. In the
event that the purchase of Employer Securities by the ESOP Trust from the
Borrower or any shareholder is held to be a Prohibited Transaction by the IRS,
the DOL or a court of competent jurisdiction, the Borrower shall prepay the
Term Loans by an amount which equals the amount the Borrower or such selling
shareholder is required to repay with respect to the Unallocated Shares to the
ESOP Trust in order that the sale of Employer Securities is no longer deemed to
be a Prohibited Transaction; provided, however, that nothing in this Subsection
2.1f(ii)(A) shall prevent the Borrower or such selling shareholder, at its
election, from appealing in good faith any holding that the purchase of
Employer Securities is a Prohibited Transaction and, provided that the Borrower
proceeds within a reasonable time to prosecute such appeal, no mandatory
prepayment shall be required hereunder until the earlier of (I) receipt of a
final adverse determination as to a Prohibited Transaction from which no appeal
may be taken or (II) abandonment of such appeal by the Borrower or such selling
shareholder. Any mandatory prepayment pursuant to this Subsection 2.1f(ii)(A)
shall be due
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<PAGE> 33
and payable within thirty (30) days of the repayment to the ESOP Trust by the
Borrower or such selling shareholder and shall be applied to the principal
installments of the Term Loans in the inverse order of their stated maturities.
(B) Mandatory Prepayments by Reason of the Sale of Leveraged Securities.
The Borrower shall make mandatory prepayments of the total outstanding
aggregate principal amount of the Term Loans upon a sale of all or
substantially all of the Leveraged Securities. Any mandatory prepayments
pursuant to this Subsection 2.1f(ii)(B) shall be due and payable within five
(5) days of the receipt of the proceeds of such sale and accompanied by any
amounts due pursuant to Subsection 2.5(ii) hereof.
(C) Mandatory Prepayments Exceeding Contribution Amounts. All mandatory
prepayments pursuant to Subsection 2.1f(ii)(A) and (B) hereof shall be applied
as stated therein; provided, however, that any mandatory prepayments which
would constitute a Prohibited ESOP Payment shall not be prepaid at that time,
but shall be held by the Agent in escrow for the benefit of the Term Loan Banks
and the Borrower. The determination of the existence of a Prohibited ESOP
Payment shall be made initially by the Borrower and, upon the request of any
Bank, shall be accompanied by an opinion of counsel to the Borrower, which
opinion of counsel shall be reasonably acceptable to the Banks. Interest on
all amounts held in escrow will accrue at a market rate. Such funds held in
escrow (except for any interest earned thereon) shall be applied by the Agent
in prepayment of the outstanding aggregate principal amount of the Term Loans,
in accord with their classification under Subsections 2.1f(ii)(A) or (B)
hereof, as soon as such prepayment would not result in a Prohibited ESOP
Payment. At such time, the Agent shall credit the Borrower's account with the
Agent in an amount equal to the interest earned on such funds held in escrow.
(D) Application of Mandatory Prepayments. All mandatory prepayments
pursuant to this Subsection 2.1f(ii) shall be applied, first, to the principal
installments of the Term Loans which are Base Rate Loans; and second, to the
principal installments of the Term Loans which are Eurodollar Rate Loans;
provided, however, that mandatory prepayments of Eurodollar Rate Loans prior to
the end of the then applicable Interest Periods shall be held in escrow by the
Agent, for the benefit of the Term Loan Banks and the Borrower. Interest on
all amounts held in escrow will accrue at a market rate. Such funds held in
escrow (except for any interest earned thereon) shall be applied by the Agent
in prepayment of the Term Loans with interest to such date which are Eurodollar
Rate Loans at the end of each Interest Period. At such time, the Agent shall
credit the Borrower's account with the Agent in an amount equal to the interest
earned on such funds held in escrow.
2.1g Term Loan Account. Each Term Loan Bank shall open and maintain on its
books a Term Loan Account in the Borrower's name with respect to such Bank's
Term Loan Amount, prepayments thereon, the computation and payment of interest
and the computation of other amounts due and sums paid to the Agent, on behalf
of such Term Loan Bank, pursuant to this Section 2.1. Except in the case of
manifest error, the Term Loan Accounts shall be conclusive and binding on the
Borrower as to the amount at any time due such Term Loan Bank from the Borrower
pursuant to this Section 2.1.
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<PAGE> 34
2.2 Revolving Credit Loans.
2.2a Revolving Credit Commitment. The Revolving Credit Banks severally agree,
subject to the terms and conditions hereof and relying upon the representations
and warranties herein set forth, that the Borrower shall have the right to
borrow, repay and reborrow during the Availability Period an aggregate
principal amount not to exceed FIFTY MILLION AND NO/100 DOLLARS ($50,000,000)
at any one time outstanding (the "Revolving Credit Commitment"); provided,
however, the amount otherwise available for borrowing under the Revolving
Credit Commitment as of any time of determination shall be reduced by the sum
of (i) the aggregate Stated Amounts of all Letters of Credit issued and
outstanding, as of such date of determination plus (ii) the aggregate
unreimbursed draws of any Letter of Credit.
2.2b Individual Bank Commitment Amount. Each of the Revolving Credit Banks
shall be severally liable for advancing its respective Commitment Percentage
set forth opposite such Revolving Credit Bank's name on its signature pages
hereof; provided, however, that no such Revolving Credit Bank shall be required
to make a Revolving Credit Loan if such loan would cause that Revolving Credit
Bank's Revolving Credit Loans then outstanding to exceed the Commitment Amount
set forth opposite each such Revolving Credit Bank's name on its signature
pages hereto or on the most recent Assignment and Assumption Agreement to which
such Bank is a party.
2.2c Revolving Credit Disbursements.
(i) Each Revolving Credit Disbursement under Subsection 2.2a shall be in
the aggregate amount of $500,000 or more, provided that each increment in
excess of $500,000 shall be $100,000 or an integral multiple thereof. The
obligation of the Borrower to repay, on or before the Repayment Date, the
aggregate unpaid principal amount of all Revolving Credit Disbursements made by
the Revolving Credit Banks shall be evidenced by Revolving Credit Notes
substantially in the form of Exhibit "B" hereto, one made by the Borrower to
the order of each Revolving Credit Bank in the Commitment Amount of such
Revolving Credit Bank and delivered to each such Revolving Credit Bank. The
principal amount actually due and owing each Revolving Credit Bank under the
Revolving Credit Loans shall be the aggregate unpaid principal amount of all
Revolving Credit Loans made by such Revolving Credit Bank, all as shown on the
Revolving Credit Loan Accounts established pursuant to Subsection 2.2j hereof.
(ii) Each request for a Revolving Credit Disbursement under Subsection 2.2a
shall be made by 10:00 A.M. (Pittsburgh, Pennsylvania time) to the Agent orally
or in writing, by an Authorized Officer, (A) in the case of Base Rate Loans, at
least one (1) Business Day prior to the proposed Revolving Credit Disbursement
and (B) in the case of Eurodollar Rate Loans, at least three (3) Business Days
prior to the proposed Revolving Credit Disbursement, in each case specifying the
date on which such Revolving Credit Disbursement is to be made, the amount
thereof, selecting the interest rate therefor pursuant to Subsection 2.4b hereof
and, if appropriate, selecting the Interest Period therefor. Each written
request for a Revolving Credit Disbursement shall be evidenced by, and each oral
request for a Revolving Credit Disbursement hereunder shall be followed by, a
Request for
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<PAGE> 35
Revolving Credit Loan substantially in the form of Exhibit "C" hereto, duly
executed by an Authorized Officer of the Borrower. Promptly upon receipt of
such notice, the Agent shall notify each Revolving Credit Bank of the
Borrower's request and the amount of such requested Revolving Credit
Disbursement which is to be advanced by such Revolving Credit Bank. Each such
Revolving Credit Bank shall make its pro rata share of such Revolving Credit
Disbursement available at the Agent's principal office in immediately available
funds no later than 11:00 A.M. (Pittsburgh, Pennsylvania time) on the date of
the requested Revolving Credit Disbursement. Each Revolving Credit
Disbursement shall be credited by the Agent to a demand deposit account of the
Borrower at the Agent's principal office no later than 11:00 A.M. (Pittsburgh,
Pennsylvania time) on the date of such Revolving Credit Disbursement.
2.2d Interest. The Revolving Credit Notes shall bear interest on the actual
unpaid principal amount thereof from time to time outstanding from the date
thereof until payment in full as set forth in Section 2.4 hereof.
2.2e Voluntary Permanent Reduction of the Revolving Credit Commitment. The
Borrower, upon three (3) Business Days' written notice to the Agent, may
permanently reduce the Revolving Credit Commitment; provided, however, that if
such reduction would require repayment of then outstanding amounts of the
Revolving Credit Loans, such repayment must occur on or before the date on
which the voluntary permanent reduction becomes effective.
2.2f Extension of the Term of the Revolving Credit Commitment. The Borrower
may request, by written notice executed by an Authorized Officer and delivered
to the Agent (an "Extension Request") on or before sixty (60) days prior to
each of the first and second anniversaries of the Closing Date, an extension or
further extension of the Revolving Credit Commitment for an additional one-year
period and a corresponding alteration of the Repayment Date. The Agent, upon
receiving any such Extension Request, shall immediately forward a copy thereof
to each of the Banks. If the Banks agree in writing to the Extension Request
and the alteration of the Repayment Date, the Agent shall communicate this
information to the Borrower in writing no later than thirty (30) days prior to
the applicable anniversary of the Closing Date. Upon the receipt of such
consents from the Banks, the Revolving Credit Commitment shall be deemed to be
extended for an additional one-year period and the Repayment Date
correspondingly altered. The failure of the Borrower to request the extension
of the Revolving Credit Commitment in any one year shall automatically
eliminate the Borrower's privilege to request an extension of the Revolving
Credit Commitment in that year.
2.2g Mandatory Reductions following Extensions of Repayment Date. If the
Revolving Credit Banks agree to any Extension Request and the corresponding
alteration of the Repayment Date for an additional one-year period pursuant to
Subsection 2.2f above, the Revolving Credit Commitment shall automatically and
permanently be reduced by $2,500,000 in each Fiscal Quarter occurring during
each such additional one-year period of such extension. For example, if the
Revolving Credit Banks agree in 1996 to extend the Repayment Date from March
16, 2000 to March 16, 2001, the Revolving Credit Commitment shall be reduced
from $50,000,000 to $47,500,000 on March 31, 2000, to
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<PAGE> 36
$45,000,000 on June 30, 2000, to $42,500,000 on September 30, 2000 and to
$40,000,000 on December 31, 2000 and if the Revolving Credit Banks agree in
1997 to extend the Repayment Date from March 16, 2001 to March 16, 2002, the
Revolving Credit Commitment shall be reduced from $40,000,000 to $37,500,000 on
March 31, 2001, to $35,000,000 on June 30, 2001 to $32,500,000 on September 30,
2001 and $30,000,000 on December 31, 2001.
2.2h Commitment Fee. The Borrower agrees to pay to the Agent, for the benefit
of the Revolving Credit Banks, on March 31, 1995, and quarterly in arrears
thereafter on the last day of each succeeding June, September, December and
March during the term of the Revolving Credit Commitment to and including the
Repayment Date, a commitment fee calculated on the basis of the actual number
of days elapsed equal to the product of (i) the average daily (computed at the
opening of business) unused amount of the Revolving Credit Commitment (as
reduced by any loss of availability due to the issuance of Letters of Credit)
for the period then ending times (ii) the applicable percentage per annum set
forth in the chart below:
<TABLE>
<CAPTION>
Leverage Ratio Commitment Fee
-------------- --------------
<S> <C>
Greater than 1.50 to 1.0 3/8%
Less than or equal to 1.5 to 1.0 1/4%
</TABLE>
; provided, however, the first payment under this Subsection 2.2h shall be for
the total number of days elapsed between the Closing Date and March 31, 1995
and the last payment under this Subsection 2.2h shall be for the total number
of days elapsed between the last quarter for which payment was received and the
Repayment Date. The Commitment Fee due hereunder shall be calculated on the
basis of a 365-366 day year and the actual number of days elapsed. Upon
receipt by the Agent of the quarterly financial statements delivered pursuant
to Subsection 5.2a hereof, the applicable percentage shall be adjusted, if
necessary, effective on the date such quarterly financial statements are due in
accordance with Subsection 5.2a hereof regardless of the actual date of
delivery thereof.
2.2i Repayment. On the Repayment Date, the Borrower shall repay in full all of
the then unpaid and outstanding Revolving Credit Loans, together with all
interest thereon to the date of such repayment and all other fees and costs due
hereunder.
2.2j Revolving Credit Loan Account. Each Revolving Credit Bank shall open and
maintain on its books a Revolving Credit Loan Account in the name of the
Borrower with respect to such Revolving Credit Bank's Revolving Credit Loans,
repayments, prepayments, the computation and payment of interest and the
computation of other amounts due and sums paid to the Agent, on behalf of such
Revolving Credit Bank, pursuant to this Section 2.2. Except in the case of
manifest error in computation, such Revolving Credit Loan Account shall be
conclusive and binding on the Borrower as to the amount at any time due to such
Revolving Credit Bank from the Borrower pursuant to this Section 2.2.
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<PAGE> 37
2.3 Letters of Credit.
2.3a Issuance of Letter of Credit. The Issuing Bank has previously provided
for the benefit of the Borrower the Existing Letter of Credit under the 1989
Credit Agreement. For all purposes of this Credit Agreement, the Existing
Letter of Credit shall be deemed to be issued pursuant to this Credit
Agreement. Subject to the further terms and conditions of this Credit
Agreement and in reliance upon the representations and warranties of the
Borrower set forth herein, the Issuing Bank agrees to issue further Letters of
Credit, upon the request of the Borrower during the Availability Period, for
the account of the Borrower in an aggregate Stated Amount not to exceed EIGHT
MILLION AND NO/100 DOLLARS ($8,000,000). The issuance of any Letter of Credit
in accordance with the provisions of this Subsection 2.3a shall be in
accordance with the Issuing Bank's then current practices relating to the
issuance by the Issuing Bank of stand-by letters of credit as well as subject
to the satisfaction of each condition set forth in Section 7.1 hereof.
2.3b Risk Participations. (i) Participations. Immediately upon the issuance
of any Letter of Credit, and thereafter, immediately upon each increase or
decrease in the Stated Amount thereof, each Revolving Credit Bank hereby agrees
to irrevocably purchase and shall be deemed to have irrevocably purchased from
the Issuing Bank an undivided, full risk, non-recourse participation in each
such Letter of Credit (including any such increase or decrease in the Stated
Amount of each such Letter of Credit) and draw thereunder in an amount equal to
such Revolving Credit Bank's Commitment Percentage of the maximum Stated Amount
thereof which is or at any time may become available to be drawn thereunder.
(ii) Restrictions. In the event that the Issuing Bank is required for any
reason to refund or repay to the Borrower, any guarantor or any other Person
(other than a Revolving Credit Bank hereunder) all or any portion of any amount
remitted to the Issuing Bank pursuant to this Credit Agreement, the Revolving
Credit Banks shall promptly remit to the Issuing Bank, within three (3)
Business Days following demand therefor, their respective Commitment
Percentages of the amount which is so refunded or repaid. In the event any
restrictions are imposed upon the Issuing Bank or any of the Revolving Credit
Banks by any Governmental Rule of any Governmental Person having jurisdiction
over the banking activities of the Issuing Bank or any other Revolving Credit
Bank, which would prevent the Issuing Bank from issuing the Letter of Credit or
amending the Letter of Credit or would prevent any Revolving Credit Bank from
honoring its obligations under this Section 2.3, the commitment of the Issuing
Bank to issue the Letter of Credit or enter into any amendment with respect
thereto shall be immediately suspended.
(iii) Notice of Restrictions. If any Revolving Credit Bank believes any
such restriction would prevent such Revolving Credit Bank from honoring its
obligations under this Section 2.3, it shall promptly notify the Agent. The
Agent shall promptly notify the Borrower, the Issuing Bank and the other
Revolving Credit Banks of the existence and nature of (A) any restriction which
would cause the suspension of the commitment of the Issuing Bank to issue the
Letter of Credit or to enter into amendments with respect thereto and (B) any
restriction which would prevent any Revolving Credit Bank from honoring its
obligations under this Section 2.3.
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<PAGE> 38
(iv) Effect of Restrictions. Upon receipt of any notice pursuant to item
(iii) above, the Borrower will thereupon undertake reasonable efforts to obtain
the cancellation of each Letter of Credit; provided, however, that the refusal
of any beneficiary of any Letter of Credit to surrender such Letter of Credit
will not be an Event of Default hereunder and the Borrower shall undertake good
faith efforts to obtain a substitute letter of credit for such Letter of
Credit. Nothing contained in this Subsection 2.3b shall be deemed a
termination of the Revolving Credit Commitment and, in the event of a
suspension of the commitment of the Issuing Bank to issue Letters of Credit or
to enter into amendments with respect thereto as set forth above, the Borrower
may continue to borrow under the Revolving Credit Commitment provided the
requirements of Section 7.1 hereof are complied with.
2.3c Payment of Amounts Drawn Under Letters of Credit. Upon each request for a
draw under any Letter of Credit by the beneficiary thereof, the Issuing Bank
shall immediately notify the Borrower and the Agent, and the Borrower shall
reimburse, or cause the reimbursement of, the Issuing Bank on demand in an
amount in same day funds equal to the amount of such draw; provided, however,
unless the Borrower shall have notified the Agent and the Issuing Bank prior to
such time that the Borrower intends to reimburse the Issuing Bank for all or a
portion of the amount of such draw with funds other than the proceeds of
Revolving Credit Loans, the Borrower shall conclusively be deemed to have given
a request for a Disbursement under Subsection 2.2c hereof to the Agent
requesting the Revolving Credit Banks to make Revolving Credit Loans at the
Base Rate Option on the first Business Day immediately following the date on
which such draw is honored in an aggregate amount equal to the excess of the
amount of such drawing over the amount theretofore received by the Issuing Bank
in reimbursement thereof (the "Unreimbursed Amount"), plus accrued interest on
such amount at the rate set forth in Subsection 2.3e(iii) hereof. If the
Borrower shall be deemed to have given a request for a Disbursement under
Subsection 2.2c hereof to the Agent pursuant to this Subsection 2.3c, then,
(notwithstanding the satisfaction or waiver of the conditions specified in
Section 7.1 hereof), the Revolving Credit Banks shall, on the first Business
Day immediately following the date of such draw, make Revolving Credit Loans at
the Base Rate Option in the aggregate amount of the Unreimbursed Amount plus
accrued interest on such amount at the rate set forth in Subsection 2.3e(iii)
hereof. The proceeds of any such Revolving Credit Loans shall be applied
directly by the Agent, upon receipt thereof from the Banks, to reimburse the
Issuing Bank for the Unreimbursed Amount plus accrued interest on such amount.
The foregoing shall not limit or impair the obligation of the Borrower to
reimburse the Issuing Bank on demand.
2.3d Payment by the Banks. In the event that the Borrower shall fail to
reimburse the Issuing Bank on demand as provided in Subsection 2.3c above in an
amount equal to the amount of any draw honored by the Issuing Bank under any
Letter of Credit, the Issuing Bank shall promptly notify the Agent and each
Revolving Credit Bank of the Unreimbursed Amount plus the accrued interest on
such amount and of such Bank's respective participation therein. Each
Revolving Credit Bank shall make available to the Issuing Bank an amount equal
to its respective participation in same day funds, at the office of the Issuing
Bank specified in such notice, not later than 12:00 Noon (Pittsburgh,
Pennsylvania time) on the Business Day specified in such notice by the Issuing
Bank. In the event that any Revolving Credit Bank fails to make available to
the Issuing Bank the amount of such Revolving Credit
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<PAGE> 39
Bank's participation in such Letter of Credit as provided in this Subsection
2.3d, the Issuing Bank shall be entitled to recover such amount on demand from
such Revolving Credit Bank together with interest at the customary rate set by
the Issuing Bank for the correction of errors among banks for a period of three
(3) Business Days after demand and thereafter, at the Base Rate. Nothing in
this Subsection 2.3d shall be deemed to prejudice the right of any Revolving
Credit Bank to recover from the Issuing Bank any amounts made available by such
Revolving Credit Bank to the Issuing Bank pursuant to this Subsection 2.3d in
the event that it is determined by a court of competent jurisdiction that
payment of such amounts with respect to any Letter of Credit by the Issuing
Bank constituted gross negligence or willful misconduct on the part of the
Issuing Bank. The Issuing Bank shall distribute to each other Revolving Credit
Bank which has paid all amounts payable by it under this Subsection 2.3d with
respect to such Letter of Credit, such other Revolving Credit Bank's pro rata
share of all payments received by the Issuing Bank from the Borrower in
reimbursement of a draw honored by the Issuing Bank under such Letter of Credit
when such payments are received.
2.3e Compensation.
(i) Letter of Credit Fees. Upon (A) the issuance of any Letter of Credit,
(B) each anniversary thereof during the term of any such Letter of Credit and
(C) the issuance of any subsequent amendment, renewal, or extension thereof,
the Borrower agrees to pay to the Agent, on behalf of each Revolving Credit
Bank, to be shared by the Revolving Credit Banks on a pro rata basis in
accordance with each Revolving Credit Bank's risk participation in such Letter
of Credit pursuant to Subsection 2.3b hereof, a fee equal to the product of (A)
the Stated Amount of each Letter of Credit times (B) the applicable percentage
per annum as determined below:
<TABLE>
<CAPTION>
APPLICABLE LETTER
OF CREDIT
LEVERAGE RATIO PERCENTAGE
-------------- -----------------
<S> <C>
Greater than 3.00 to 1.0 2.00%
Less than or equal to 3.00 to
1.0, but greater than 2.25 to
1.0 1.50%
Less than or equal to 2.25 to
1.0, but greater than 1.50 to
1.0 1.25%
Less than or equal to 1.50 to 1.0 1.00%
</TABLE>
Upon receipt by the Agent of the quarterly financial statements delivered
pursuant to Subsection 5.2a hereof, the Applicable Letter of Credit Percentage
shall be adjusted, if necessary, effective on the date such quarterly financial
statements are due in accordance with Subsection 5.2a hereof regardless of the
actual date of delivery thereof.
(ii) Issuance Fee. In addition to the Letter of Credit Fees set forth in
Subsection 2.3e(i) above, the Borrower shall pay to the Issuing Bank, for its
sole account, an
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<PAGE> 40
Issuance Fee equal to one-eighth of one percent (1/8%) of the Stated Amount of
each Letter of Credit, upon the issuance of each such Letter of Credit.
(iii) Interest and Other Fees. (a) With respect to any draw made under
any Letter of Credit, the Borrower shall pay interest, payable on demand, on
the amount paid by the Issuing Bank in respect of such draw from the Business
Day of the draw through the date such amount is reimbursed by the Borrower
(including any such reimbursement out of the proceeds of Revolving Credit Loans
pursuant to Subsection 2.2c hereof) at a rate which is at all times equal to
(A) if no Event of Default shall have occurred and be continuing, the Base Rate
or (B) if any Event of Default shall have occurred and be continuing, two
percent (2.00%) per annum in excess of the Base Rate; and
(b) With respect to the issuance, amendment or transfer of any Letter of
Credit and a draw made thereunder, the Borrower shall pay documentary and
processing charges in accordance with the Issuing Bank's standard schedule for
such charges in effect at the time of such issuance, amendment, transfer or
draw, as the case may be.
2.3f Duty to Review Demands; Obligation Absolute. The obligation of the
Borrower to reimburse the Issuing Bank for draws made under any Letter of
Credit and the obligations of the Revolving Credit Banks under Subsection 2.3d
hereof shall be absolute, unconditional and irrevocable and shall be paid
directly in accordance with the terms of this Credit Agreement under all
circumstances, including, without limitation, the following circumstances:
(i) any lack of validity or enforceability of such Letter of Credit;
(ii) the existence of any claim, set-off, defense or other right which the
Borrower may have at any time against a beneficiary or any transferee of such
Letter of Credit (or any Persons for whom any such transferee may be acting),
the Issuing Bank, any Revolving Credit Bank or any other Person, whether in
connection with this Credit Agreement, the transactions contemplated herein or
any unrelated transaction (including any underlying transaction between the
Borrower or one of its Subsidiaries and the beneficiary of such Letter of
Credit);
(iii) any draft, demand, certificate or any other document presented under
such Letter of Credit proving to be forged, fraudulent, invalid or insufficient
in any respect or any statement therein being untrue or inaccurate in any
respect provided that any act or failure to act on the part of the Issuing Bank
does not constitute gross negligence or willful misconduct on the part of the
Issuing Bank;
(iv) payment by the Issuing Bank under such Letter of Credit against
presentation of a demand, draft or certificate or other document which does not
comply with the terms of such Letter of Credit; provided that such payment does
not constitute gross negligence or willful misconduct on the part of the
Issuing Bank;
(v) any other circumstance or happening whatsoever, which is substantially
similar to any of the foregoing; and
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<PAGE> 41
(vi) the fact that an Event of Default shall have occurred and be
continuing.
2.3g Indemnification; Nature of the Issuing Bank's Duties. In addition to
amounts payable as elsewhere provided in this Section 2.3, the Borrower hereby
agrees to protect, indemnify, pay and save each Revolving Credit Bank
(including, without limitation, the Issuing Bank) harmless from and against any
and all claims, demands, liabilities, damages, losses, costs, charges and
expenses (including reasonable attorneys' fees) which such Revolving Credit
Bank may incur or be subject to as a consequence, direct or indirect, of (i)
the issuance of the Letter of Credit or any amendment thereto, other than as a
result of the gross negligence or willful misconduct of the Issuing Bank as
determined by a court of competent jurisdiction, (ii) the failure of the
Issuing Bank to honor a draw under any Letter of Credit if the Issuing Bank in
good faith and upon advice of counsel believes that it is prohibited from
making such payment as a result of any act or omission, whether rightful or
wrongful, of any present or future de jure or de facto Governmental Person (all
such acts or omissions herein called "Government Acts"), or (iii) any material
breach by the Borrower of any representation, warranty, covenant, term or
condition in, or the occurrence of any default under, any document related to
the issuance or any amendment of any Letter of Credit. If any proceeding shall
be brought or threatened against any Revolving Credit Bank by reason of or in
connection with any event described in clauses (i) through (iii) above, such
Revolving Credit Bank shall promptly notify the Borrower in writing, and the
Borrower shall assume the defense thereof, including the employment of counsel
and payment of all costs of litigation. Notwithstanding the preceding
sentence, each Revolving Credit Bank shall have the right to employ its own
counsel and to determine its own defense of such action in any such case, but
the fees and expenses of such counsel shall be at the expense of such Revolving
Credit Bank unless (x) the employment of such counsel shall have been
authorized in writing by the Borrower or (y) the Borrower, after the
aforementioned notice of the action, shall not have employed counsel to have
charge of such defense, in either of which events the reasonable fees and
expenses of counsel for such Revolving Credit Bank shall be borne by the
Borrower. The Borrower shall not be liable for any settlement of any such
action affected without its consent.
As between the Borrower and the Issuing Bank, the Borrower assumes all
risks of the acts and omissions of, or misuse of any Letter of Credit by, the
beneficiary of any Letter of Credit. In furtherance and not in limitation of
the foregoing, the Issuing Bank shall not be responsible: (i) for the form,
validity, sufficiency, accuracy, genuineness or legal effect of any document
submitted by any party in connection with the application for or the issuance
or amendment of any Letter of Credit, even if it should in fact prove to be in
any or all respects invalid, insufficient, inaccurate, fraudulent or forged;
(ii) for the validity or sufficiency of any instrument transferring or
assigning or purporting to transfer or assign any Letter of Credit or the
rights or benefits thereunder or proceeds thereof, in whole or in part, which
may prove to be invalid or ineffective for any reason; (iii) for failure of a
beneficiary of any Letter of Credit to comply fully with conditions required in
order to draw upon any Letter of Credit; (iv) for errors, omissions,
interruptions or delays in transmission or delivery of any messages, by mail,
cable, telegraph, telecopy, telex or otherwise, whether or not they be in
cipher; (v) for errors in interpretation of technical terms; (vi) for any loss
or delay in the transmission or otherwise of any document required in order to
make a draw under any Letter of Credit or of the proceeds thereof; (vii) for
the misapplication by a
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<PAGE> 42
beneficiary of any Letter of Credit of the proceeds of any drawing under any
Letter of Credit; (viii) for any consequences arising from causes beyond the
control of the Issuing Bank, including, without limitation, any Government
Acts; and (ix) for any other circumstances whatsoever in making or failing to
make payment under any Letter of Credit; except that the Borrower shall have a
claim against the Issuing Bank, and the Issuing Bank shall be liable to the
Borrower, to the extent, but only to the extent, of any direct, as opposed to
consequential, damages suffered by the Borrower, as determined by a court of
competent jurisdiction to be the result of (i) the Issuing Bank's willful
misconduct or gross negligence in determining whether documents presented under
any Letter of Credit comply with the terms of any Letter of Credit, (ii) the
Issuing Bank's payment on a draw under any Letter of Credit to any Person other
than the beneficiary of any Letter of Credit or its lawful successor,
representative or assign or (iii) the Issuing Bank's willful failure to pay
under any Letter of Credit after the presentation to it by the beneficiary of
any Letter of Credit or its lawful successor, representative or assign of a
sight draft and certificate or other documents strictly complying with the
terms and conditions of any Letter of Credit, unless the Issuing Bank in good
faith and upon advice of counsel believes that it is prohibited by law or other
legal authority from making such payment. None of the above shall affect,
impair, or prevent the vesting of any of the Issuing Bank's rights or powers
hereunder.
Except for the Issuing Bank's obligations under any Letter of Credit, the
Issuing Bank shall have no liability to the Borrower or to any other Person
resulting from a reduction of the credit rating of the Issuing Bank or any
deterioration in the Issuing Bank's financial condition.
In furtherance and extension and not in limitation of the specific
provisions hereinabove set forth, any action taken or omitted by the Issuing
Bank under or in connection with the Letter of Credit or the related sight
drafts or certificates or documents, if taken or omitted in good faith, shall
not put the Issuing Bank under any resulting liability to the Borrower.
2.3h Construction of Application and Agreement for Letter of Credit. This
Credit Agreement is intended to supplement any application or agreement
executed and delivered in connection with the issuance of any Letter of Credit
hereunder. Whenever possible, this Credit Agreement is to be construed as
consistent with any such application or agreement and, to the extent that the
provisions of this Credit Agreement and such application or agreement conflict,
the terms of this Credit Agreement shall control.
2.4 Certain Provisions Relating to Interest Rates. The Notes shall bear
interest, on the actual unpaid principal amount thereof from time to time
outstanding, from the date thereof until payment in full, at one or more of the
rates of interest set forth in this Section 2.4.
2.4a Interest Payments. The Borrower shall pay accrued interest on the unpaid
aggregate principal balance of the Notes in arrears (A) with respect to each
Base Rate Loan (i) on the last Business Day of each March, June, September and
December of each year during the term hereof, (ii) at maturity, whether by
acceleration or otherwise, of the Notes, and (iii) thereafter on demand until
all amounts outstanding under the Notes are paid in full;
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<PAGE> 43
and (B) with respect to each Eurodollar Rate Loan (i) on the last day of each
Interest Period (provided, however, if the Interest Period chosen for any
Eurodollar Rate Loan exceeds three (3) months, interest on that Eurodollar Rate
Loan shall be due and payable on the last day of every three (3) month period
during such Interest Period and on the last day of such Interest Period), (ii)
at maturity, whether by acceleration or otherwise, of the Notes, and (iii)
thereafter on demand until all amounts outstanding under the Notes are paid in
full.
2.4b Interest Rates. The unpaid principal amount of the Loans shall bear
interest (except as to the Term Loans as provided in Subsection 2.4c below) for
each day until due at one or more rates selected by the Borrower from among the
Options set forth below; it being understood that, subject to the provisions of
this Credit Agreement, the Borrower may select different Options to apply
simultaneously to different Portions of the Loans and may select no more than
six (6) different Interest Periods to apply to Eurodollar Rate Loans.
(i) Base Rate Option. Interest under the Base Rate Option shall
accrue at a rate per annum (computed upon the basis of a year of 365 or
366 days, as the case may be, and the actual number of days elapsed) for
each day equal to the sum of (A) the Base Rate plus (B) the Applicable
Base Rate Margin as determined below.
<TABLE>
<CAPTION>
APPLICABLE BASE
LEVERAGE RATIO RATE MARGIN
-------------- ---------------
<S> <C>
Greater than 3.0 to 1.0 .50%
Less than or equal to 3.0 to 1.0 0%
</TABLE>
Upon receipt by the Agent of the quarterly financial statements delivered
pursuant to Subsection 5.2a hereof, the Applicable Base Rate Margin shall
be adjusted, if necessary, effective on the date such quarterly financial
statements are due in accordance with Subsection 5.2a hereof regardless
of the actual date of delivery thereof.
(ii) Eurodollar Rate Option. Interest under the Eurodollar Rate
Option shall accrue at a rate per annum (computed upon the basis of a
year of 360 days and the actual number of days elapsed) for each day
equal to the sum of (A) the Eurodollar Rate for each Interest Period plus
(B) the Applicable Eurodollar Rate Margin as determined below.
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<PAGE> 44
<TABLE>
<CAPTION>
APPLICABLE
EURODOLLAR RATE
LEVERAGE RATIO MARGIN
-------------- ---------------
<S> <C>
Greater than 3.00 to 1.0 2.00%
Less than or equal to 3.00 to
1.0, but greater than 2.25 to
1.0 1.50%
Less than or equal to 2.25 to
1.0, but greater than 1.50 to
1.0 1.25%
Less than or equal to 1.50 to 1.0 1.00%
</TABLE>
Upon receipt by the Agent of the quarterly financial statements delivered
pursuant to Subsection 5.2a hereof, the Applicable Eurodollar Rate Margin
shall be adjusted, if necessary, effective on the date such quarterly
financial statements are due in accordance with Subsection 5.2a hereof
regardless of the actual date of delivery thereof.
(iii) Payment Default Rate. Upon the expiration of any cure period
relating to an Event of Default pursuant to Section 8.1 hereof, and
during the period in which such Event of Default continues, (A) the
principal amount of the Base Rate Loans, whether or not the same have
become due and payable by maturity, acceleration, declaration or
otherwise shall bear interest at a rate per annum which shall be two
hundred (200) basis points (2%) above the rate otherwise in effect for
the Base Rate Loans and (B) the principal amount of all of the Eurodollar
Rate Loans, whether or not the same have become due and payable by
maturity, acceleration, declaration or otherwise, shall bear interest,
until the end of the current Interest Period, at a rate per annum which
shall be two hundred (200) basis points (2%) above the rate otherwise in
effect for the Eurodollar Rate Loans. At the end of each then current
Interest Period, such Eurodollar Rate Loans shall automatically be
converted to Base Rate Loans, and thereafter the interest rate shall be
calculated in accordance with item (A) of this Subsection 2.4b(iii).
2.4c Tax-Exempt Rate. Subject to the provisions of Subsection 2.4d hereof, the
Term Loans shall bear interest at a tax-exempt rate equal to the applicable
Option (as set forth in Subsection 2.4b above) multiplied by the ESOP
Tax-Exempt Factor.
2.4d Adjustment to Tax-Exempt Rate.
(i) Tax Assumptions. The Term Loan Banks have agreed to charge
interest on the Term Loans at the tax-exempt rate set forth in Subsection
2.4c hereof under the assumptions ("Tax Assumptions") that, (i) pursuant
to Section 133 of the Code, each Term Loan Bank will at all times be able
to exclude from its gross income for federal income tax purposes
(regardless of whether the Term Loan Banks have any gross income for
federal income tax purposes for any tax period) an amount equal to fifty
percent (50%) of the interest received by such Term Loan Bank with
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<PAGE> 45
respect to the Term Loans, (ii) the amount of interest on indebtedness
incurred or continued by such Term Loan Bank to purchase or carry the
funds loaned to the Borrower pursuant to the Term Loans shall be one
hundred percent (100%) deductible by such Term Loan Bank for federal
income tax purposes and shall not be subject to disallowance or reduction
in any manner pursuant to Sections 291(a)(3) and 265 of the Code, or any
other provision of the Code which are successors thereto, (iii) the
Corporate Tax Rate will not be changed during the term of the Term Loans
and (iv) the interest received with respect to the Term Loans is not
subject to any minimum tax including but not limited to the alternate
minimum tax imposed pursuant to Section 55 of the Code. With respect to
the interest income exclusion provided by Section 133 of the Code (the
"Interest Income Exclusion"), the Term Loan Banks have further assumed
that (i) the entire amount of the Term Loans will be used to finance an
Exempt Loan, and (ii) the entire amount of the Term Loans shall at all
times constitute a Securities Acquisition Loan.
(ii) Adjustment to Tax-Exempt Rate. Notwithstanding the tax-exempt
rate of interest described in Subsection 2.4c, in the event that, at any
time either:
(A) the Interest Income Exclusion is not available, in whole or
in part, as a result of either (1) an amendment to Section
133 of the Code or (2) the Term Loans failing, through no
fault of any Term Loan Bank, to qualify as a Securities
Acquisition Loan;
(B) there occurs a change in the Corporate Tax Rate;
an Adjusted ESOP Tax-Exempt Factor shall be calculated pursuant to the
following formula:
F X
Adjusted ESOP Tax Exempt Factor = 1.00 - .15 ( n n)
---------
FX
Where
F = then applicable Marginal Rate
n
X = then applicable Exclusion Percentage
n
F = original Marginal Rate
X = original Exclusion Percentage
As of the effective date of any event set forth in items (A) and (B)
above, the Term Loans shall bear interest per annum at a tax-exempt rate
equal to the applicable Option multiplied by the Adjusted ESOP Tax-Exempt
Factor.
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<PAGE> 46
(iii) Adjustment for Alternative Minimum Tax. Notwithstanding the
tax-exempt rate of interest described in Subsection 2.4c, in the event
that at any time, (A) there is deemed applicable or inapplicable to the
Term Loans any alternative minimum tax pursuant to Section 55 of the Code
which tax is or was based upon the interest income from any obligation
the interest of which would otherwise be excludable from income pursuant
to Section 133 of the Code or (B) there is enacted after the Closing
Date, any change in the Code which subjects any Term Loan Bank to or
removes from any Term Loan Bank a minimum tax which tax is based solely
upon the interest paid to such Bank hereunder which otherwise would be
excludable from income pursuant to Section 133 of the Code, then the
Borrower shall pay to the Agent, on behalf of such Term Loan Bank, or the
Term Loan Bank shall credit to future interest payments of the Borrower,
as the case may be, an amount equal to the Borrower's pro rata share of
the affected Term Loan Bank's actual total increase in alternative
minimum tax or other minimum tax liability attributable to such change or
imposition.
(iv) Adjustment for Interest on Tax-Exempt Obligations.
Notwithstanding the tax-exempt rate of interest described in Subsection
2.4c, in the event that, at any time, pursuant to a change of law
relating to Sections 265 or 291(a)(3) of the Code or any provisions of
the Code which are successors thereto, which reduces or disallows in
whole or in part, or increases or allows, the amount allowable as a
deduction with respect to interest on any indebtedness incurred by any
Term Loan Bank to purchase or carry the funds loaned to the Borrower
pursuant to the Term Loans, then with respect to any loss or reduction of
deduction, or gain or increases of deduction, the applicable interest
rate shall be adjusted by a percentage which will maintain, after
deduction of any and all taxes required to be paid by the Term Loan Banks
as a result of the receipt of the interest received from the Borrower
based on the adjusted rate, each Term Loan Bank's overall net after-tax
income with respect to the Term Loans at a level which is equal to the
level that would have been available if such event had not occurred.
(v) Notice of Adjustments. Following the occurrence of any event
set forth above in Subsections 2.4d(ii), (iii), and (iv) above, the Agent
shall promptly submit to the Borrower a certificate of an appropriate
officer of any affected Term Loan Bank, which certificate sets forth in
reasonable detail the adjustment to the interest rate and/or the amount
of demand payment due pursuant to this Subsection 2.4d and the
calculations in reasonable detail related thereto. The Borrower agrees
that such certificate shall be prima facie evidence of such amounts due
pursuant to this Subsection 2.4d.
(vi) Payment. The Borrower shall pay to the Agent, on behalf of the
Term Loan Banks, within thirty (30) days of the receipt of the notice
thereof, or the Agent shall credit future interest payments of the
Borrower, as the case may be, the amount determined for the period
affected by the application of any Adjustment plus an amount which shall
be equal to the amount of any and all interest, penalties or additions to
tax specifically related to the Term Loans which is required to be paid
by any taxing authority in connection with any such Adjustment.
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(vii) Obligations to Survive. The obligations of the Borrower under
this Subsection 2.4d shall survive (A) the expiration or termination of
this Credit Agreement and the Amended and Restated Term Notes or (B) the
purchase of the Amended and Restated Term Notes by any other Person and
shall continue in full force and effect until the affected Person's
federal tax liability with respect to this transaction for the last year
in which the Tax Assumptions are applicable is finally settled by the IRS
or, if later, the period within which the IRS may bring an action to
recover any tax it alleges to be due with respect to this transaction for
such final year is exhausted. This indemnification obligation is
expressly for the benefit of, and enforceable by, the Term Loan Banks,
their successors and assigns.
2.4e Interest Periods; Limitations on Elections. At any time when the Borrower
shall select, convert to or renew the Eurodollar Rate Option to apply to all or
any Portion of the outstanding Loans, it may fix one or more Interest Periods
to apply to Eurodollar Rate Loans. All the foregoing, however, is subject to
the following:
(i) the nine (9) month Interest Period is subject to such Interest
Period being available to each Bank on a commercially reasonable basis
(as determined by each Bank in its sole discretion);
(ii) any Interest Period which would otherwise end on a day which is
not a Business Day shall be extended to the next Business Day unless such
Business Day falls in the succeeding calendar month in which case such
Interest Period shall end on the next preceding Business Day;
(iii) any Interest Period which begins on the last day of a calendar
month or on a day for which there is no numerically corresponding day in
the subsequent calendar month during which such Interest Period is to end
shall end on the last Business Day of such subsequent month;
(iv) the Eurodollar Rate Loan for each Interest Period shall be in
an aggregate principal amount of $1,000,000 or more; provided, however,
that each incremental unit in excess of $1,000,000 shall be $500,000 or
an integral multiple thereof; and
(v) no Interest Period may be elected in respect of the Term Loans
which would end after the Maturity Date or in respect of the Revolving
Credit Loans which would end after the Repayment Date.
2.4f Elections, Conversions or Renewals of Interest Rate Options. Elections of
or conversions to the Base Rate Option shall continue in effect until converted
as hereinafter provided. Elections of, conversions to or renewals of the
Eurodollar Rate Option shall expire as to each Eurodollar Rate Loan at the
expiration of the applicable Interest Period.
At any time with respect to any Base Rate Loan or at the expiration of the
applicable Interest Period with respect to any Eurodollar Rate Loan, the
Borrower (subject to Subsection 2.4e) may cause all or any part of the
principal amount of such Loan to be
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converted to and/or (in the case of Eurodollar Rate Loans) to be renewed under
the Eurodollar Rate Option by notice to the Agent as hereinafter provided.
Such notice (i) may be oral or in writing and if oral immediately confirmed in
writing to the Agent, (ii) shall be irrevocable, (iii) shall be given not later
than 11:00 a.m. (Pittsburgh, Pennsylvania time) not less than two (2) Business
Days prior to the proposed effective date for conversion to or renewal of,
either in whole or in part, the Eurodollar Rate Option and (iv) shall set
forth:
(A) the effective date, which shall be a Business Day;
(B) the new Interest Period or Interest Periods selected; and
(C) with respect to each such Interest Period, the aggregate
principal amount of the corresponding Eurodollar Rate Loan.
At the expiration of each Interest Period, any part (including the whole)
of the principal amount of the corresponding Eurodollar Rate Loan, as to which
no notice of conversion or renewal has been received as provided above, shall
automatically be converted to a Base Rate Loan. The Agent shall promptly
notify the Borrower of any such automatic conversion.
2.4g Eurodollar Rate Unascertainable. In the event that, on any date on which
the Eurodollar Rate would otherwise be set, the Agent shall have determined
(which determination shall be prima facie evidence of the unascertainability of
the Eurodollar Rate) that, by reason of circumstances affecting the eurodollar
market, adequate and reasonable means do not exist for ascertaining the
Eurodollar Rate, the Agent shall give prompt notice of such determination to
the Borrower, and, until the Agent notifies the Borrower that the circumstances
giving rise to such determination no longer exist, the right of the Borrower to
borrow under, convert to or renew the Eurodollar Rate Option shall be
suspended. Any notice of borrowing under, conversion to or renewal of a
Eurodollar Rate Loan which was to become effective during the period of such
suspension shall be treated as a request to borrow under, convert to or renew a
Base Rate Loan with respect to the principal amount therein specified.
2.4h Illegality. If the Agent shall determine in good faith (which
determination shall be final and conclusive) that compliance by any Bank or its
Lending Office with any applicable law, treaty or governmental rule,
regulation, guideline, order, request or directive (whether or not having the
force of law), or the interpretation or application thereof by any governmental
authority, has made it unlawful or commercially impractical for any such Bank
to make or maintain Eurodollar Rate Loans (including but not limited to
acquiring eurodollar liabilities to fund Eurodollar Rate Loans), the Agent
shall give notice of such determination to the Borrower; provided, however,
that before the giving of such notice pursuant to this Subsection 2.4h, such
Bank shall designate a different Lending Office, if such designation will avoid
the need for such notice and will not in the judgment of such Bank be otherwise
disadvantageous to such Bank. Notwithstanding any provision of this Credit
Agreement to the contrary, unless and until the Agent shall have given notice
that the circumstances giving rise to such determination no longer apply:
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(A) with respect to any Interest Periods thereafter commencing,
interest on any Eurodollar Rate Loan shall be computed and payable under
the Base Rate Option; and
(B) on such date, if any, as shall be required by law, any Eurodollar
Rate Loans then outstanding shall be automatically converted to Base Rate
Loans and the Borrower shall pay to the Agent, for the account of the
Banks, the accrued and unpaid interest on such Eurodollar Rate Loans to
(but not including) the date of such conversion.
The Agent shall furnish to the Borrower a certificate as to the amount
necessary to compensate the Banks for the costs associated with any prepayment
pursuant to Subsection 2.4h(B) above (which certificate shall be prima facie
evidence of the amount owed by the Borrower to the Banks), and the Borrower
shall pay such amount to the Agent for the account of the Banks, as additional
consideration hereunder, within fifteen (15) days of the Borrower's receipt of
such certificate.
2.5 Yield Protection and Reimbursement.
(i) Yield Protection. Except for changes addressed in Subsection 2.4d,
if any Governmental Rule issued after the Closing Date or if any change on or
after the Closing Date in any Governmental Rule (including, without limitation,
Regulation D) or the interpretation or application thereof by any Governmental
Person charged with the administration thereof (whether or not having the force
of law):
(A) subjects any Bank, its Lending Office or the Issuing Bank to any
tax, duty, levy, impost, charge, fee, deduction or withholding of any kind
hereunder (other than (x) a tax, including, without limitation, a branch
tax, imposed or based upon the income of such Bank, its Lending Office or
the Issuing Bank and (y) any franchise tax imposed on such Bank, its
Lending Office or the Issuing Bank by the laws of the jurisdiction under
which such Bank, such Lending Office or the Issuing Bank is organized or
any political subdivision thereof) or changes the basis of taxation of any
Bank, its Lending Office or the Issuing Bank with respect to the payments
by the Borrower of principal or interest due hereunder (other than any
change which affects, and to the extent that it affects, the taxation by
the United States or any state thereof of the total net income of such Bank
or the Issuing Bank);
(B) imposes, modifies or deems applicable any reserve, special
deposit or similar requirements against assets of, deposits with or for the
account of, or credit extended, commitments to lend or any Letters of
Credit issued or participations purchased therein by any Bank, its Lending
Office, the Issuing Bank or any corporation controlling such Bank or the
Issuing Bank (other than such requirements which are included in
determining the applicable rate or rates of interest hereunder); or
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(C) imposes upon any Bank, its Lending Office or the Issuing Bank any
other obligation or condition with respect to this Credit Agreement,
and the result of all of the foregoing is to increase the cost to such Bank,
its Lending Office, the Issuing Bank or any corporation controlling such Bank
or the Issuing Bank, of making the Loans, extending the Revolving Credit
Commitment, issuing any Letter of Credit or making or maintaining any
participation in any Letter of Credit, reduce the net after-tax income
receivable by such Bank, its Lending Office or the Issuing Bank from payments
under this Credit Agreement or impose any expense upon any Bank, its Lending
Office, the Issuing Bank or any corporation controlling such Bank, reduce the
rate of return on the capital of such Bank, its Lending Office, the Issuing
Bank or any corporation controlling such Bank by an amount which such Bank or
the Issuing Bank in good faith deems material,
(A) the Bank or the Issuing Bank so affected shall promptly notify the
Borrower and the Agent of the happening of such event; and of the amount
determined by such Bank, its Lending Office or the Issuing Bank (which
determination shall be prima facie evidence of the amount owed by the
Borrower to such Bank) to be necessary to compensate such Bank or the
Issuing Bank for such increase in cost, reduction in net after tax income
or additional expense;
(B) the Borrower shall pay to the affected Bank or the Issuing Bank,
on demand, as additional interest on the Loans or draws under any Letter of
Credit, such amount as will compensate such Bank or the Issuing Bank for
such additional cost or expense or reduced amount, calculated from the date
of the notification by such Bank or the Issuing Bank; and
(C) the Borrower may pay to such affected Bank or the Issuing Bank the
affected Loan or draw under any Letter of Credit in full without the
payment of any additional amount other than on account of such Bank's or
the Issuing Bank's out-of-pocket losses (including funding losses, if any,
as provided in paragraph (ii) below) not otherwise provided for in
subparagraph (B) immediately above.
A certificate as to the increased cost or reduced amount as a result of any of
the foregoing events shall be promptly submitted by such Bank or the Issuing
Bank to the Borrower and the Agent in accordance with the provisions of Section
10.2 hereof. Such certificate shall, in the absence of manifest error, be
conclusive and binding as to the amount thereof.
(ii) Reimbursement of Costs and Losses.
(A) Voluntary Breakage. The Borrower hereby agrees to indemnify each Bank
against any loss or expense which such Bank may sustain or incur as a
consequence of the Borrower (x) failing to make any borrowing, conversion or
renewal of a Eurodollar Rate Loan on the scheduled date, (y) failing to make
when due (whether by declaration, acceleration or otherwise); any payment or
prepayment of any amount due hereunder or in voluntarily making any payment or
prepayment of any Eurodollar Rate Loan or any part thereof on any day other
than the last day of its Interest Period, or (z) failing to make any mandatory
prepayment under Subsection 2.1f(ii), including, but not limited to, any
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loss of profit, premium or penalty incurred by such Bank in respect of funds
borrowed by it for the purpose of making or maintaining any Eurodollar Rate
Loan or any part thereof as determined by such Bank in the exercise of its sole
but reasonable discretion.
(B) Involuntary Breakage. The Borrower hereby agrees to indemnify each
Bank against any loss or expense which such Bank may sustain or incur as a
consequence of the Borrower (x) failing, through no fault of its own,
including, without limitation, the circumstances specified in Subsection 2.4h,
to make any borrowing, conversion or renewal of a Eurodollar Rate Loan on the
scheduled date, (y) failing to make when due (whether by declaration,
acceleration or otherwise) any payment or prepayment of any amount due
hereunder or (z) making any payment or prepayment of any Eurodollar Rate Loans
or any part thereof on any day other than the last day of its Interest Period,
including, but not limited to, any premium or penalty incurred by such Bank in
respect of funds borrowed by it for the purpose of making or maintaining any
Eurodollar Rate Loan or any part thereof as determined by such Bank in the
exercise of its sole but reasonable discretion.
(iii) Notice of Costs and Losses. Each Bank will promptly notify the
Borrower and the Agent of any event of which it has knowledge which will
entitle such Bank to compensation pursuant to this Section 2.5 and will
designate a different Lending Office if such designation will avoid the need
for, or reduce the amount of, such compensation and will not, in the judgment
of such Bank, be otherwise disadvantageous to such Bank. Any Bank incurring
such loss or expense pursuant to this Section 2.5 shall furnish to the Borrower
(through the Agent) a certificate signed by an appropriate officer of such Bank
as to the amount of any such loss or expense showing the related calculations
in reasonable detail (which certificate shall be prima facie evidence of the
amount owed by the Borrower to such Bank), and the Borrower shall pay such
amount to such Bank within thirty (30) days of the Borrower's receipt of such
certificate). Notwithstanding the foregoing provisions of this Section 2.5,
the Borrower shall only be obligated to compensate any Bank for any amount
arising or accruing during (x) any time or period commencing not more than
ninety (90) days prior to the date on which such Bank notifies the Agent and
the Borrower that it proposes to demand such compensation and identifies to the
Agent and the Borrower the statute, regulation or other basis upon which the
claimed compensation is or will be based and (y) any time or period during
which, because of the retroactive application of such statute, regulation or
other basis, such Bank did not know that such amount would arise or accrue.
2.6 Capital Adequacy. If, after the Closing Date, any adoption of, any change
to or any change in the interpretation of any Governmental Rule by any
Governmental Person exercising control over banks or financial institutions
generally or any court (whether or not having the force of law) affects or
would affect the amount of capital required or expected to be maintained by any
Bank or any corporation controlling such Bank (a "Capital Adequacy Event"), and
the result of such Capital Adequacy Event is to reduce the rate of return on
capital of such Bank or the capital of any corporation controlling such Bank as
a consequence thereof to a level below that which such Bank could have achieved
but for such Capital Adequacy Event (taking into consideration such Bank's
policies with respect to capital adequacy) by an amount which such Bank deems
to be material,
such Bank shall promptly deliver to the Borrower and the Agent a statement of
the amount necessary to compensate such Bank for the reduction in the rate of
return on its capital attributable to its Loans and
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the commitments under this Credit Agreement (the "Capital Compensation
Amount"). Each Bank shall determine the Capital Compensation Amount in good
faith, using reasonable attribution and averaging methods. Each Bank shall,
from time to time, furnish to the Borrower and the Agent a certificate as to
the amount so determined. Such certificate shall, in the absence of manifest
error, be conclusive and binding as to the amount thereof. Such amount shall
be due and payable by the Borrower to such Bank ten (10) days after such notice
is given. As soon as practicable after any Capital Adequacy Event, such Bank
shall submit to the Borrower and the Agent estimates of the Capital
Compensation Amounts that would be payable as a function of such Bank's
commitments hereunder.
2.7 Closing Fee. The Borrower agrees to pay to the Agent, for the benefit of
the Banks, a Closing Fee equal to $203,322.00. The Agent shall distribute to
each Bank a portion of such Closing Fee (a) equal to one-quarter of one percent
(1/4%) of each Bank's (which is also a 1989 Bank) existing commitments (whether
a revolving credit commitment or term loan commitment) under the 1989 Credit
Agreement and (b) equal to three-eighths of one percent (3/8%) of each Bank's
Commitment Amount less such Bank's existing commitments (whether a revolving
credit commitment or term loan commitment) under the 1989 Credit Agreement.
2.8 Lending Offices. Each Bank may book its Loans at any Lending Office
selected by such Bank and may change its Lending Office from time to time. All
terms of this Credit Agreement shall apply to any such Lending Office and the
Notes shall be deemed held by each Bank for the benefit of such Lending Office.
Each Bank may, by written notice to the Agent and the Borrower, designate a
Lending Office through which its Loans will be made by it and for whose account
payments are to be made.
2.9 Time, Place and Manner of Payments. All payments to be made by the
Borrower under the Revolving Credit Notes or the Amended and Restated Term
Notes or of the Commitment Fee, the Agent's Fee, the Facility Fee and all other
amounts due the Agent, whether for its own account or for the benefit of the
Banks, hereunder shall be made at the principal office of the Agent set forth
in Article X. All payments to be made by the Borrower under this Credit
Agreement shall be paid in Dollars in immediately available funds no later than
1:30 P.M. (Pittsburgh, Pennsylvania time) on the date such payment is due.
Except as specified elsewhere, if the date on which any payment is due is not a
Business Day such payment shall be due and payable on the next succeeding day
which is a Business Day and such extension of time shall be included in
computing any interest in respect of such payment.
2.10 Payment from Accounts Maintained by the Borrower. In the event that any
payment of principal, interest, Commitment Fee, Agent's Fee, Facility Fee, or
any other amount due the Agent, whether for its own account or for the benefit
of the Banks, under the Loan Documents is not paid when due, the Agent is
hereby authorized to effect such payment by debiting any demand deposit account
of the Borrower maintained with the Agent. This right of debiting accounts of
the Borrower is in addition to any right of set-off accorded the Agent
hereunder or by operation of law.
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2.11 Substitution of a Bank. If (i) the obligation of any Bank to fulfill its
obligations in relation to the issuance of any Letter of Credit or the purchase
of any risk participations therein under Section 2.3 has been suspended
pursuant to Subsection 2.3(b)(ii) hereof, (ii) the obligation of any Bank to
make Eurodollar Rate Loans has been suspended pursuant to Subsection 2.4h
hereof or (iii) any Bank has demanded compensation under Section 2.5 or Section
2.6 hereof, the Agent shall, at the request of the Borrower and with the
assistance of the Borrower, use commercially reasonable efforts to obtain a
mutually satisfactory substitute lending institution or lending institutions
(which may be one or more of the Banks) to purchase the Revolving Credit Note
or the Amended and Restated Term Note, as the case may be, and assume the
Revolving Credit Loans or the Term Loans and Revolving Credit Commitment of
such Bank, as the case may be.
ARTICLE III. SET-OFF AND SECURITY INTERESTS.
To secure the repayment of the Bank Indebtedness:
3.1 Set-Off. The Borrower hereby gives to the Banks a lien and security
interest for the amount of any Bank Indebtedness upon and in any property,
credits, securities or Monies (whether matured or unmatured) of the Borrower
which may at any time be delivered to, or be in the possession of, or owed by
any Bank in any capacity whatever, including the balance of any deposit account
but excluding any trust, fiduciary, reserve, electronic funds transfer or
direct loan accounts, in each case maintained by the Borrower with such Bank.
The Borrower hereby authorizes each Bank in case of an Event of Default, at
such Bank's option, at any time and from time to time, to apply, at the
discretion of such Bank, to the payment of Bank Indebtedness, any and all such
property, credits, securities or Monies now or hereafter in the hands of such
Bank belonging or owed to the Borrower.
3.2 Security Agreements. The Borrower shall grant, and shall cause AII to
grant, to the Agent, on behalf of the Banks and the Issuing Bank, a lien and
security interest in the Collateral for the amount of the Bank Indebtedness
which security interest, assuming the filing of the appropriate financing
statements, shall be a first priority perfected lien and security interest
except for Permitted Encumbrances. Prior to the initial Disbursements
hereunder, the Borrower and/or AII shall execute and deliver to the Agent, on
behalf of the Banks and the Issuing Bank, (i) an Amended and Restated Security
Agreement substantially in the form of Exhibit "D" hereto, (ii) an Amended and
Restated Subsidiary Security Agreement substantially in the form of Exhibit "E"
hereto and (iii) all financing statements reasonably requested by the Agent.
3.3 Pledge Agreements. The Borrower shall grant and shall cause to be granted
to the Agent, on behalf of the Banks and the Issuing Bank, a lien and security
interest in all of the issued and outstanding capital stock of each Active
Subsidiary, whether such capital stock is in existence as of the date hereof or
is hereafter created, as collateral security for the payment when due of the
Bank Indebtedness, which security interest shall be a first priority perfected
lien and security interest. To evidence the grant of the pledge and security
interest referred to above, the Borrower shall execute and deliver to the
Agent, on behalf of the Banks and the Issuing Bank, an Amended and Restated
Pledge Agreement substantially in the
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form of Exhibit "F" hereto and shall cause to be executed and delivered to the
Agent, Amended and Restated Subsidiary Pledge Agreements substantially in the
form of either Exhibit "G-1" or Exhibit "G-2" hereto, or Subsidiary Pledge
Agreements substantially in the form of Exhibit "G-3" hereto, together with all
requisite stock certificates and the associated stock transfer powers
previously not delivered to the Agent in connection with the 1989 Credit
Agreement.
ARTICLE IV. REPRESENTATIONS AND WARRANTIES.
To induce the Banks, the Issuing Bank and the Agent to enter into this
Credit Agreement, to induce the Revolving Credit Banks to make the Revolving
Credit Loans herein provided for, to induce the Term Loan Banks to purchase the
1989 Term Loans as herein described and to induce the Issuing Bank to issue the
Letters of Credit herein provided for, the Borrower represents and warrants to
the Agent, the Banks and the Issuing Bank that:
4.1 Existence.
4.1a Borrower's Existence. The Borrower is a corporation duly organized,
validly existing and in good standing under the laws of the Commonwealth of
Pennsylvania and is duly qualified and in good standing as a foreign
corporation, authorized to do business in each jurisdiction where, because of
the nature of its activities or properties, such qualification is required,
except for those foreign jurisdictions where the Borrower's non-qualification
would not have a Material Adverse Effect.
4.1b Active Subsidiary's Existence. Schedule 4.1 attached hereto sets forth
each Active Subsidiary of the Borrower in existence as of the Closing Date.
Each of the Borrower's Active Subsidiaries is duly organized, validly existing
and in good standing under the laws of the state of its incorporation and is
duly qualified and in good standing as a foreign corporation, authorized to do
business in each jurisdiction where, because of the nature of its activities or
properties, such qualification is required, except for those foreign
jurisdictions where such Active Subsidiary's non-qualification would not have a
Material Adverse Effect.
4.2 Authority.
4.2a Borrower's Authority. The Borrower has full power, authority and legal
right to engage in the activities conducted or proposed to be conducted by it
and, with respect to the Loans, to execute, deliver and perform its obligations
under this Credit Agreement, the Notes, the Amended and Restated Security
Agreement and the Amended and Restated Pledge Agreement. The Borrower has
taken all corporate actions necessary or appropriate to authorize the
execution, delivery and performance of this Credit Agreement, the Notes, the
Amended and Restated Security Agreement and the Amended and Restated Pledge
Agreement.
4.2b Active Subsidiaries' Authority. Each Active Subsidiary has full power,
authority and legal right to engage in the activities conducted or proposed to
be conducted by
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it, and with respect to the Loans, to execute, deliver and perform its
obligations under the Amended and Restated Subsidiary Pledge Agreement to be
signed by it. Each Active Subsidiary has taken all corporate actions necessary
or appropriate to authorize the execution, delivery and performance of the
Amended and Restated Subsidiary Pledge Agreement to be signed by it.
4.3 Capitalization. On and after the Closing Date, the authorized capital
stock of the Borrower will consist of 30,000,000 shares of Class A common
stock, $.0001 par value, 22,000,000 shares of Class B common stock, $.0001 par
value, and 1,000,000 shares of 10.19% convertible preferred stock, $.0001 par
value, of which 3,685,604 shares of Class A common stock, 10,064,024 shares of
Class B common stock and 220,750 shares of Series A 10.19% convertible
preferred stock will be outstanding on the Closing Date. The outstanding
shares of the Class A and Class B common stock and Series A 10.19% convertible
preferred stock have been duly authorized and validly issued and are fully paid
and nonassessable. As of the Closing Date, all of the Borrower's capital stock
is owned by the Management Stockholders, the ESOP and other Persons as more
fully set forth on Schedule 4.3. As of the Closing Date, the Borrower will not
have outstanding any stock or securities (except for the Series A 10.19%
convertible preferred stock and the Warrants) convertible or exchangeable for
any shares of its common stock, nor, except as set forth on Schedule 4.3, will
it have outstanding any rights or options to subscribe for or to purchase any
of the Borrower's capital stock or any stock or securities convertible into or
exchangeable for the Borrower's common stock.
4.4 Existence of ESOP. The ESOP is an employee stock ownership plan and trust
duly authorized, adopted by proper legal action, established and validly
existing under the laws of the Commonwealth of Pennsylvania and duly qualified,
subject to such modifications as are requested by the IRS as a condition
precedent to the issuance of a favorable determination letter, as a qualified
employee stock ownership plan and exempt trust under Sections 401(a), 501(a)
and 4975(e)(7) of the Code.
4.5 Validity and Enforceability. This Credit Agreement constitutes a legal,
valid and binding obligation of the Borrower, enforceable in accordance with
its terms, subject to the effect of any applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and to general principles of equity (regardless of
whether considered in a proceeding in equity or at law). The Notes, and each
other Loan Documents, when duly executed by the Borrower or any other Active
Subsidiary, as the case may be, and delivered in accordance with this Credit
Agreement, will constitute legal, valid and binding obligations of the Borrower
and/or each other Active Subsidiary which is a signatory thereto, enforceable
in accordance with their respective terms, subject to the effect of any
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting the enforcement of creditors' rights generally and to general
principles of equity (regardless of whether considered in a proceeding in
equity or at law).
4.6 No Conflict. The execution and delivery of this Credit Agreement, the
Notes, the Amended and Restated Security Agreement and
the Amended and Restated Pledge Agreement by the Borrower, and the execution
and delivery of the Amended and Restated
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Subsidiary Security Agreement and each Amended and Restated Subsidiary Pledge
Agreement to be executed by an Active Subsidiary and the compliance with the
provisions hereof and thereof by the relevant signatory, do not conflict with
or constitute on the part of the Borrower or any other Active Subsidiary, as
the case may be, a violation of, breach of, or default under (i) its respective
Certificate/Articles of Incorporation or By-Laws, (ii) any indenture, mortgage,
deed of trust, lease, note agreement or other agreement or instrument to which
the Borrower or any other Active Subsidiary is a party or by which the Borrower
or any other Active Subsidiary is bound, (iii) any Governmental Rule of any
Governmental Person having jurisdiction over the Borrower or any other Active
Subsidiary or any of their respective activities or property, (iv) any
provision of the ESOP or (v) any provision of ERISA or the Code.
4.7 Consents. All consents, approvals, authorizations and orders of
governmental or regulatory authorities which are required for the consummation
of the transactions contemplated by this Credit Agreement, the Notes and the
other Loan Documents, or which, in any way, would materially adversely affect
the validity or enforceability of any such Loan Document, if not obtained, have
been obtained.
4.8 Litigation. Except as set forth on Schedule 4.8, there are no actions,
suits, investigations, litigation or governmental proceedings pending, or to
the knowledge of the Borrower threatened, against it or any Subsidiary with
respect to the Borrower or such Subsidiary, the results of which would have a
material and adverse effect on the Consolidated financial condition or
operations of the Borrower and its Subsidiaries.
4.9 Compliance with Applicable Laws, etc. Neither the Borrower nor any of its
Subsidiaries is in default with respect to any order, writ, injunction or
decree (i) of any court or (ii) of any Governmental Person and the Borrower and
its Subsidiaries are each substantially complying with all applicable statutes
and regulations of each Governmental Person having jurisdiction over their
respective activities; provided, however, the Borrower shall not be deemed in
violation of this Section 4.9 as a result of any non-compliance if (A) such
order, writ, injunction or decree is being contested by the Borrower or any
Subsidiary in good faith and by proper proceedings appropriately conducted or
(B) the non-compliance with such order, writ, injunction or decree would not
materially and adversely affect the business operations or financial condition
of the Borrower or its Subsidiaries or the ability of the Borrower and its
Subsidiaries, taken as a whole, to perform their respective obligations under
the Loan Documents.
4.10 Financial Statements. Copies of the Borrower's (i) audited Consolidated
financial statements for the Fiscal Year ended June 30, 1994 and (ii) unaudited
Consolidated financial statements for the Fiscal Quarter ended September 30,
1994, each prepared on a basis not inconsistent with that of the preceding
Fiscal Year, have been furnished to the Agent, and each such statement presents
fairly the Consolidated financial condition of the Borrower as of such date and
the results of its operations.
4.11 Environmental Matters. (i) Except as set forth on Schedule 4.11 hereto,
to the best of the Borrower's knowledge:
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(A) the Borrower and each of its Subsidiaries is in
compliance with all applicable Environmental Laws except where
non-compliance with any such Environmental Law has not, or could
not reasonably be expected to, result in a Material Adverse
Effect;
(B) other than materials used or produced, held, transported
and disposed of in accordance with all Environmental Laws, neither
the Borrower nor any Subsidiary has used in its operations, and
the property of the Borrower or such Subsidiary is not now and has
never been used by the Borrower or such Subsidiary (or, to the
best knowledge of the Borrower after due inquiry, by any
predecessor in possession or other Person) for treatment,
generation, storage, recycling, or disposal of Hazardous
Substances in violation of any Environmental Laws;
(C) no Hazardous Substances are present at any property owned
or leased by the Borrower or any Subsidiary, nor will any
Hazardous Substances be present upon any such property or in the
operation thereof by the Borrower or any Subsidiary, except which
are handled in accordance with all Environmental Laws, in proper
storage containers; and
(D) the Borrower and its Subsidiaries have all necessary and
appropriate environmental permits, including but not limited to
those for air emissions, water discharges, and treatment, storage
and disposal of the Hazardous Substances.
(ii) There are no past, pending or, to the best of the Borrower's
knowledge, threatened Environmental Claims by or against the Borrower or any
Subsidiary or with respect to any property of the Borrower or such Subsidiary
that, individually or in the aggregate, could have a Material Adverse Effect on
the Borrower and its Subsidiaries, taken as a whole.
4.12 Deferred Compensation Plans. Except as listed on Schedule 4.12 attached
hereto, neither the Borrower nor any of its Active Subsidiaries has any
employee pension benefit plan (as that term is defined in Section 3(2)(A) of
ERISA) other than the ESOP.
4.13 Title to Properties. The Borrower and each Subsidiary has good title to
all of its properties and assets except for (i) defects in title which, taken
as a whole, are not material to the Borrower or such Subsidiary and (ii) other
Permitted Encumbrances.
4.14 Intellectual Property. The Borrower and each Subsidiary owns or licenses
all patents, patent applications, trademarks, trademark applications, permits,
service marks, trade names, copyrights, copyright applications, licenses,
franchises, authorizations and other intellectual property rights that are
necessary for the operations of its business, without infringement upon or
conflict with the rights of any other Person with respect thereto, except where
the consequences in the aggregate have no Material Adverse Effect. To the best
knowledge of the Borrower, (i) no device, product, process, method, substance,
part or component or other material now employed, or now contemplated to be
employed, by the
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Borrower or any Subsidiary infringes upon or conflicts with any rights owned by
any other Person and (ii) no claim or litigation regarding any of the foregoing
is pending or threatened. No patent, invention, device, application, principle
and no Governmental Rule, standard or code involving the Borrower's or any
Subsidiary's intellectual property is pending or, to the knowledge of the
Borrower, proposed, except where the consequences in the aggregate have no
Material Adverse Effect. All of the Borrower's and each Subsidiary's material
patents, trademarks, permits, service marks, trade names, copyrights, licenses,
franchises and authorizations are listed on Schedule 4.14 hereto.
4.15 Tax Returns and Payments. The Borrower and each of its Subsidiaries have
filed all United States Federal tax returns and the Borrower and each
Subsidiary has filed all other material tax returns which, to the knowledge of
the Borrower, are required by law to be filed by them (except where the failure
to file such tax returns would not materially adversely affect the business,
Consolidated financial conditions or the Consolidated results of operations of
the Borrower and its Subsidiaries as a whole) and have paid all taxes due
pursuant to such returns or pursuant to any assessments levied upon the
Borrower, the Subsidiaries or any of their respective properties, assets or
income which are due and payable, (other than those assessments, taxes, fees or
other charges, the amount or validity of which is currently being contested in
good faith by appropriate proceedings and with respect to which reserves in
conformity with GAAP have been provided on the books of the Borrower or such
Subsidiary). The charges, accruals and reserves on the books of the Borrower
and its Subsidiaries, in respect of federal and state income taxes for all
fiscal periods to date, are adequate in accordance with GAAP.
4.16 Material Adverse Change. Since June 30, 1994, there has been no material
adverse change in operations or financial condition of the Borrower,
individually, or the Borrower and its Subsidiaries taken as a whole.
4.17 Solvency. The Borrower is, and after giving effect to the transactions
contemplated pursuant to this Credit Agreement and the other Loan Documents
will be, solvent.
4.18 Leveraged Securities. The Leveraged Securities constitute Employer
Securities.
4.19 Securities Acquisition Loans. The Term Loans continue to constitute
Securities Acquisition Loans.
4.20 Senior Debt Status. From and after the Closing Date, all Bank
Indebtedness outstanding under this Credit Agreement will constitute "senior
indebtedness" of the Borrower and will rank senior to all other Indebtedness
for Borrowed Money of the Borrower, from time to time outstanding (except for
Indebtedness for Borrowed Money which is secured by Permitted Encumbrances).
4.21 Escrow Agreement and Stockholders Contribution and Repayment Agreement.
The Escrow Agreement and the Stockholders Contribution and Repayment Agreement
have been terminated and are of no further force or effect.
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4.22 Investment Company Act. The Borrower is not an "investment company"
registered or required to be registered under the Investment Company Act of
1940, as amended from time to time, or a company under the "control" of an
"investment company", as those terms are defined in such Act, and shall not
become such an "investment company" or under such "control."
4.23 Public Utility Holding Company Act. The Borrower is not a "holding
company," or a "subsidiary company" of a "holding company," or an "affiliate"
of a "holding company" or an "affiliate" of a "subsidiary company" of a
"holding company" within the meaning of the Public Utility Holding Company Act
of 1935, as amended from time to time.
4.24 Disclosure. Neither this Credit Agreement nor any other document,
statement, certificate or other instrument delivered to the Agent or the Banks
by or on behalf of the Borrower pursuant to this Credit Agreement or any other
Loan Document contains any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements contained
herein and therein, in light of the circumstances under which they were made,
not misleading. There is no fact known to the Borrower which materially and
adversely affects or, so far as the Borrower now foresees, will in the future
materially and adversely affect the business, operations, affairs, condition,
properties, assets, financial condition or results of operations of the
Borrower and its Subsidiaries which has not been set forth in this Credit
Agreement or in the other documents, instruments, certificates or statements
(financial or otherwise) furnished to the Agent or the Banks by or on behalf of
the Borrower prior to or on the Closing Date.
ARTICLE V. AFFIRMATIVE COVENANTS.
From the date hereof and for so much longer thereafter as the Revolving
Credit Commitment is in effect or any of the Bank Indebtedness remains unpaid,
the Borrower agrees, for the benefit of the Banks, the Issuing Bank and the
Agent, that:
5.1 Use of Proceeds. Proceeds of the Term Loans hereunder will be used to
purchase the 1989 Term Loans from the 1989 Banks. Proceeds of the Revolving
Credit Loans shall be used by the Borrower (a) to refinance the revolving
credit loans, if any, outstanding under the 1989 Credit Agreement, (b) for
general working capital purposes of the Borrower and its Active Subsidiaries,
including but not limited to capital expenditures, the acquisition and
development of additional schools, draws to meet DOE regulatory requirements
and Permitted Acquisitions, and (c) for financing of loans to the ESOP.
5.2 Furnishing Information. The Borrower will maintain a system of accounting
established and administered in accordance with GAAP consistently applied, and
will maintain its books in a manner so as to enable it to produce GAAP
statements. Further, the Borrower will:
5.2a Quarterly Reports of Borrower. Beginning with the period ending March 31,
1995, furnish to the Agent, for redelivery to each Bank, as soon as practicable
but in any
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event within forty-five (45) days after the end of each Fiscal Quarter, copies
of (i) internally prepared Consolidated balance sheets of the Borrower as at
the close of each such Fiscal Quarter and (ii) internally prepared Consolidated
statements of profit and loss, of retained earnings and cash flows of the
Borrower for the quarter then ended and for the period from the beginning of
the Fiscal Year to the date of such balance sheet, together with figures in
comparative form for the corresponding date or period, as the case may be, one
year prior thereto, all prepared in accordance with GAAP, consistently applied,
except for the absence of notes thereon and subject to year-end adjustments,
and in such reasonable detail as the Agent may request.
5.2b Annual Reports of Borrower. Furnish to the Agent, for redelivery to each
Bank, as soon as practicable but in any event within one hundred twenty (120)
days after the end of each Fiscal Year beginning on or after July 1, 1994,
copies of the annual audited Consolidated financial statements of the Borrower
which shall include, among other things, (A) the Consolidated balance sheet and
Consolidated statement of income of the Borrower as at the end of such Fiscal
Year, (B) a Consolidated statement of profit and loss and (C) a summary of
transactions in the stockholders' equity account of the Borrower, all in
reasonable detail, all prepared in accordance with GAAP and all certified
without qualification by an independent public accountant selected by the
Borrower and satisfactory to the Agent.
5.2c Annual Reports of the Active Subsidiaries. Furnish to the Agent, for
redelivery to each Bank, as soon as practicable but in any event within one
hundred twenty (120) days after the end of each Fiscal Year beginning on or
after July 1, 1994, copies of the internally prepared or audited balance sheet
and statement of income of each Active Subsidiary as at the end of such Fiscal
Year, and in such reasonable detail as the Agent may request.
5.2d Compliance Certificate. Together with each delivery of financial
statements pursuant to Subsections 5.2a, 5.2b and 5.2c above, a Compliance
Certificate substantially in the form of Exhibit "H" attached hereto, signed by
the Chief Financial Officer, or in his absence, the Treasurer of the Borrower,
stating that he has caused the terms of this Credit Agreement and of the Notes
to be reviewed and has made, or caused to be made under his supervision, a
review of the transactions and condition of the Borrower and its Subsidiaries
during the accounting period covered by such financial statements and that
nothing has come to his attention to lead him to believe that any Event of
Default hereunder or any condition or event which, after notice or lapse of
time or both, would constitute an Event of Default exists. If any such Event
of Default, condition or event existed or exists, such certificate shall
specify the nature and period of existence thereof and what action the Borrower
or such Subsidiary has taken or is taking or proposes to take with respect
thereto. Each such certificate shall also contain, for the period to which the
same relates, calculations in reasonable detail manifesting compliance as of
the close of such accounting period with the covenants contained in Sections
6.1 through 6.6 inclusive and Section 6.12 hereof. Such certificate shall in
all respects be in form and substance satisfactory to Agent.
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5.2e ESOP Annual Report. Furnish to the Agent, for redelivery to each Bank, as
soon as the same becomes available, but in no event later than thirty (30) days
following the date on which the filing with the IRS occurs, a copy of the
Annual Report.
5.2f Notification of Defaults. Furnish to the Agent, for redelivery to each
Bank, prompt notice upon the occurrence of any event of default or of any event
which, with the giving of notice or the lapse of time, or both, would
constitute an event of default under the Senior Subordinated Note Purchase
Agreements or the Senior Subordinated Notes.
5.2g Information re: Subordinated Debt. Furnish to the Agent, for redelivery
to each Bank, upon request by the Agent at any time a true, correct and
complete statement of the outstanding amount of Senior Subordinated Debt and
provide written notice to the Agent with respect to any change in the holders
of the Senior Subordinated Debt and with respect to all payments made on the
Senior Subordinated Debt, within five (5) days after any such change or such
payment.
5.2h Other Reports, Information and Notices. The Borrower will deliver or
cause to be delivered to the Agent, for redelivery to each Bank, within the
time periods set forth below, the following other reports, information and
notices:
(i) Auditor's Reports. As soon as practicable after they have
become available, copies of all other reports and management letters
which identify any material weakness or material changes in the
accounting practices of the Borrower submitted to the Borrower by its
accountants in connection with any annual or interim audit of the books
of the Borrower made by such accountants.
(ii) Notice of Events of Default and Material Adverse Changes.
Promptly after any Authorized Officer of the Borrower has learned of the
occurrence or existence of an Event of Default or a Material Adverse
Change, telephonic notice thereof specifying the details thereof, the
anticipated effect thereof and the action which the Borrower or the
affected Loan Party has taken, is taking or proposes to take with respect
thereto, which notice shall be promptly confirmed in writing within five
(5) days by an Authorized Officer of the Borrower.
(iii) Notice of Breach of Material Contract. Promptly after any
Authorized Officer of the Borrower has learned of the occurrence or
existence of a default by any party to any material contract to which the
Borrower or any Subsidiary is a party which default has had or which may
reasonably be expected to have a Material Adverse Effect, telephonic
notice thereof specifying the details thereof, the anticipated effect
thereof and the action which the Borrower or the affected Loan Party has
taken, is taking or proposes to take with respect thereto, which notice
shall be promptly confirmed in writing within five (5) days by an
Authorized Officer of the Borrower.
(iv) Notice of Litigation. (A) Promptly after the commencement
thereof, written notice of any action, suit, proceeding or investigation
before any Governmental Person affecting the Borrower or any Subsidiary,
except for actions, suits, proceedings and investigations which, if
adversely determined, would not and
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could not, individually or in the aggregate, reasonably be expected to
result in a Material Adverse Change and (B) promptly after any Authorized
Officer of the Borrower has notice thereof, written notice of any
decision, ruling, judgment which has had or which could reasonably be
expected to have a Material Adverse Effect and any appeal, reversal or
other significant action in connection with any such action, suit,
proceeding or investigation before any Governmental Person affecting the
Borrower or any Subsidiary.
(v) Orders, Etc. Promptly after receipt thereof, a copy of any
order, writ, decree, judgment, decision or injunction issued by any
Governmental Person in any proceeding, action, suit or investigation to
which the Borrower or any Subsidiary is a party which would or could
reasonably be expected to result in a Material Adverse Change.
(vi) ERISA Reports.
(A) As soon as possible, and in any event not later than the
date notice is sent to the PBGC, notice of any Reportable Event
regarding any Plan or Benefit Arrangement of the Borrower, any
Loan Party or any ERISA Affiliate and an explanation of any action
which has been or which is proposed to be taken with respect
thereto;
(B) concurrent with the filing thereof, a copy of any request
to the United States Secretary of the Treasury for a waiver or
variance of the minimum funding standards of Section 302 of ERISA
and Section 412 of the Code with respect to any Plan or Benefit
Arrangement of the Borrower, any Loan Party or any ERISA
Affiliate;
(C) as soon as possible, but in no event later than sixty
(60) days after an officer of the Borrower becomes aware of
unfunded accumulated benefit obligations for any Plan of the
Borrower or any ERISA Affiliate, as determined in accordance with
the Financial Accounting Standards Board Statement of Financial
Accounting Standards No. 87, Employer's Accounting for Pensions
(or any superseding statement thereto), written notice of the
occurrence of such event;
(D) upon the request of the Agent, copies of each annual
report (Form 5500 Series) with accompanying schedules filed with
respect to any Plan or Benefit Arrangement of the Borrower or any
ERISA Affiliate;
(E) promptly after receipt thereof, a copy of any notice
which the Borrower or any ERISA Affiliate may receive from the
PBGC relating to the intention of the PBGC to terminate any Plan
or Benefit Arrangement, or to appoint a trustee to administer any
Plan or Benefit Arrangement, or to assert any liability under
Title IV of ERISA against the Borrower or any ERISA Affiliate;
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(F) a copy of any notice of assessment of Withdrawal
Liability received by the Borrower or any ERISA Affiliate in
relation to any Multiemployer Plan;
(G) as soon as possible, and in no event later than the date
notification is sent to the PBGC, notice of the failure by the
Borrower or any ERISA Affiliate to make a required installment or
other payment under Section 302 of ERISA and Section 412 of the
Code;
(H) concurrent with the filing thereof, a copy of any Notice
of Intent to Terminate any Plan of the Borrower or any ERISA
Affiliate filed under Section 4041(c) of ERISA; and
(I) promptly after receipt thereof, but without any
obligation or responsibility to secure the same, copies of any
calculations of estimated Unfunded Benefit Liabilities (or, if
applicable, the portions of any estimated Unfunded Benefit
Liabilities that would be allocated to the Borrower or any ERISA
Affiliate under Sections 4063 and 4064 or Section 4062(e) of
ERISA) for any Plans of the Borrower, any Loan Party or any ERISA
Affiliate.
(vii) Notice of Environmental Claims. Promptly after receipt
thereof, the Borrower shall deliver to the Agent, for redelivery to the
Banks, notice of any material Environmental Claim.
(viii) Tax Returns. The Borrower shall deliver to the Agent, for
redelivery to the Banks, promptly upon request, copies of all Federal tax
returns and reports filed by the Borrower or any Subsidiary in respect of
taxes measured by income (excluding sales, use and like taxes).
(ix) Notices of Tax Audits. Promptly, and in any event within ten
(10) days after receipt thereof by the Borrower or any Subsidiary, the
Borrower shall furnish to the Agent, for redelivery to the Banks, a copy
of each notice from any Governmental Person received by the Borrower or
any Subsidiary of such Governmental Person's intention to audit any
Federal tax return of the Borrower or any Subsidiary and a copy of each
subsequent notice with respect thereto from any such Governmental Person.
5.2i Updates to Schedules. Together with each delivery of the Borrower's
annual financial statements pursuant to Subsection 5.2b hereof, the Borrower
shall provide the Agent, for redelivery to the Banks, with written revisions or
updates to Schedule 4.1, 4.8, 4.11 and 5.12; provided, however, that no
schedule shall be deemed to have been amended, modified or superseded by any
such correction or update, nor shall any breach of warranty or representation
resulting from the inaccuracy or incompleteness of any such schedule be deemed
to have been cured thereby, unless and until the Agent, in its sole and
absolute discretion, shall have accepted in writing such revisions or updates
to such schedule.
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5.3 Preservation of Existence. Except as otherwise permitted pursuant to
Section 6.13, at its own cost and expense, the Borrower will, and will cause
each Active Subsidiary to, do all things necessary to preserve and keep in full
force and effect its corporate existence and its qualification under the laws
of the state of its incorporation. Further, the Borrower will, and will cause
each Active Subsidiary, other than Active Subsidiaries which no longer exist as
a result of a transaction permitted pursuant to Section 6.13, to maintain,
preserve and renew all rights, powers and privileges which are material to the
Consolidated operation of the Borrower's business, including the accreditation
of its Accredited Subsidiaries (the loss of which accreditation shall be deemed
for purposes of this Credit Agreement to be material).
5.4 Payment of Taxes and Fees. The Borrower will, and will cause each of its
Subsidiaries to, promptly pay and discharge all taxes, assessments, and
governmental charges and levies upon it or upon its income, profits or property
except for taxes, assessments and governmental charges or levies (a) the
payment of which is being contested in good faith by appropriate proceedings,
or (b) the non-payment of which would not have a material adverse effect on the
Borrower and its Subsidiaries taken as a whole, and as to which it shall have
set aside on its books reserves for such claims as are determined to be
adequate by the application of GAAP consistently applied.
5.5 Notice of Change of Business. The Borrower will promptly give written
notice to the Agent if the Borrower or any of its Active Subsidiaries which is
a Person primarily engaged in proprietary education or other related fields
ceases to be so primarily engaged.
5.6 Intentionally Omitted.
5.7 Preservation of Existence and Qualification of ESOP. At its own cost and
expense, except to the extent that such costs and expenses are paid by the
Trustee out of the assets of the ESOP, the Borrower will do all things
reasonably necessary to maintain the ESOP as a plan and trust, qualified under
Code Sections 401(a) and 501(a) designed to invest primarily in Employer
Securities.
5.8 Hazard and Casualty Insurance. The Borrower will, and will cause each
Subsidiary to, keep and maintain insurance with responsible insurance companies
on such of the properties of the Borrower and its Subsidiaries, in such amounts
and against such risks as is customarily maintained by similar businesses
similarly situated and owning, leasing or operating similar properties. The
Borrower will furnish to the Agent, on the date hereof and thereafter
concurrently with the delivery of the Borrower's annual financial statements
referred to in Section 5.2b hereof, certificates of insurers setting forth,
inter alia, the names of the insurance companies and the dates of expiration of
the policies and risks covered thereby, showing the Agent, for the benefit of
the Banks, as loss payee as its interest may appear together with a long-form
lender endorsement therefor and granting to the Agent thirty (30) days' prior
written notice of the cancellation of the policies and risks covered hereby.
The foregoing notwithstanding, provided no Event of Default, or no event which,
with the giving of notice or lapse of time or both would become such an Event of
Default, shall have occurred and be continuing: (i) proceeds of insurance of
less than $2,000,000 will be released to the Borrower and (ii) proceeds of
insurance in excess of $2,000,000 shall be
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promptly released, with the consent of the Required Banks, to the Borrower
after a written request from the Borrower to the Agent, such consent not to be
unreasonably withheld.
5.9 Good Repair. The Borrower will, and will cause each Subsidiary to, do all
things necessary to maintain, preserve, protect and keep its respective
property in good repair, working order and condition, ordinary wear and tear
excepted, and make all necessary and proper repairs, renewals and replacements
so that its respective business carried on in connection therewith may be
conducted at all times as presently conducted.
5.10 Corporate Records. The Borrower will, and will cause each Subsidiary to,
maintain proper books of record and account in accordance with sound accounting
practice in which full, true and correct entries shall be made of all its
respective property and assets and its respective dealings and business
affairs.
5.11 Inspection of Records and Properties. The Borrower will, and will cause
each Subsidiary and the Trustee to, permit, on reasonable prior notice from the
Agent or any Bank or their respective agents or representatives to visit during
regular office hours any of their respective properties, to examine their
respective physical assets, books of account and other records, and to discuss
their respective affairs and accounts with, and be advised about them by the
management of the Borrower, any Subsidiary or the ESOP, and as often as the
Agent or such Bank may reasonably request.
5.12 Continued Ownership of Borrower and Subsidiaries.
5.12a Continued Ownership of Borrower. At all times during the term hereof, on
a fully diluted basis as if all outstanding securities convertible into common
stock had been converted and all outstanding warrants, options or other rights
to acquire common stock had been exercised, and except as otherwise permitted
by Section 6.13 hereof, (i) the ESOP and the Management Stockholders will own
at least fifty percent (50%) of the total value of the outstanding stock of the
Borrower, (ii) the Permitted Owners will own at least twelve percent (12%) of
the total value of the outstanding common stock of the Borrower, and (iii)
until such time as the Term Loans are repaid in full, the ESOP will own at
least thirty percent (30%) of the total value of outstanding stock of the
Borrower. The foregoing notwithstanding, it shall not be considered a
violation of item (iii) above if the ESOP fails to own at least thirty percent
(30%) of the total value of outstanding stock of the Borrower by reason of (a)
the purchase by the Borrower of stock pursuant to any Repurchase Obligation and
(b) any distribution to or retention of stock by former ESOP participants or
their beneficiaries.
5.12b Continued Ownership of Subsidiaries. Except as set forth on Schedule
5.12 and as otherwise permitted under Section 6.13 hereof, the Borrower shall
own, directly or indirectly, one hundred percent (100%) of each Subsidiary.
5.13 Compliance with Laws. The Borrower will, and will cause each Subsidiary
to, perform and promptly comply in all material respects, and cause all
property of the Borrower and each Subsidiary to be maintained, used and
operated in all material respects in accordance with all Governmental Rules
(including, without limitation, zoning ordinances,
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building codes and Environmental Laws) of every duly constituted Governmental
Person applicable to the Borrower, each Subsidiary or any of their respective
properties) except for those alleged violations which are being contested in
good faith and by appropriate proceedings promptly initiated and diligently
conducted and if an appropriate provision, as shall be required by GAAP, shall
have been made therefor. The foregoing notwithstanding, the Borrower shall not
be deemed to be in violation of this Section 5.13 as the result of any failure
to comply with such Governmental Rule if (A) the applicability of such
Governmental Rule is being contested by the Borrower or any Subsidiary in good
faith and by proper proceedings appropriately conducted or (B) the
non-compliance with such Governmental Rule would not materially and adversely
affect the business operations or financial condition of the Borrower or its
Subsidiaries or the ability of the Borrower and its Subsidiaries, taken as a
whole, to perform their respective obligations under the Loan Documents.
5.14 Further Assurances. At any time and from time to time, upon the Agent's
request, the Borrower shall, and shall cause each Active Subsidiary to, make,
execute and deliver, or cause to be made, executed and delivered, to the Agent
and where appropriate shall cause to be recorded or filed, and from time to
time thereafter to be re-recorded and refiled at such time and in such offices
and places as shall be deemed reasonably desirable by the Banks, any and all
such further certificates and other documents as the Banks may consider
necessary or desirable in order to effectuate, complete, or perfect the
security interest of the Agent, for the benefit of the Banks, in the collateral
or to continue and preserve the obligations of the Borrower or each Active
Subsidiary, as the case may be, under the Notes, the Security Documents and the
Encumbrances created thereby including but not limited to (i) any additional
capital stock issued by any Active Subsidiary and (ii) all of the issued and
outstanding capital stock of any Subsidiary which after the Closing Date
becomes an Active Subsidiary. Further, at any time and from time to time, the
Borrower shall make, execute and deliver or cause to be made, executed and
delivered, to the Agent upon the purchase or lease of any real property by the
Borrower mortgages or deeds of trust in recordable form in order to perfect in
the Agent for the benefit of the Banks a security interest, in such real
property or leasehold interest. Upon any failure by the Borrower and any Active
Subsidiary to do so, the Agent may make, execute, record, file, re-record or
refile any and each such Security Document, instrument, certificate and
document for and in the name of the Borrower and each Active Subsidiary.
ARTICLE VI. NEGATIVE COVENANTS.
From the date hereof and for so much longer thereafter as the Revolving
Credit Commitment is in effect or any of the Bank Indebtedness remains unpaid,
the Borrower agrees, for the benefit of the Banks, the Issuing Bank and the
Agent, that:
6.1 Maintenance of Consolidated Net Worth. The Borrower will not permit or
suffer to exist, as of the end of each Fiscal Year set forth below, its
Consolidated Net Worth to be less than the amount set forth below for such
Fiscal Year:
(i) as of June 30, 1994, $34,000,000;
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(ii) as of June 30, 1995 and June 30, 1996, the sum of (A) the
amount of the minimum Consolidated Net Worth required as of the preceding
Fiscal Year (whether pursuant to clause (i) above or as the cumulative
result of this clause (ii)) plus (B) one hundred percent (100%) of the
Net Offering Proceeds completed during the preceding Fiscal Year plus (C)
seventy-five percent (75%) of Net Income for the preceding Fiscal Year
(to the extent this is a positive number); and
(iii) as of the end of each Fiscal Year ended after July 1, 1996,
the sum of (A) the amount of the minimum Consolidated Net Worth required
for the preceding Fiscal Year (whether pursuant to (ii) above or as the
cumulative result of this clause (iii)) plus (B) one hundred percent
(100%) of the Net Offering Proceeds completed during the preceding Fiscal
Year plus (C) fifty percent (50%) of Net Income for the preceding Fiscal
Year (to the extent this is a positive number).
6.2 Maintenance of Interest Coverage Ratio. The Borrower will not permit or
suffer to exist, as of the end of each Fiscal Quarter set forth below, its
Interest Coverage Ratio for any such Fiscal Quarter to be less than the ratio
set forth opposite such Fiscal Quarter below:
<TABLE>
<CAPTION>
Fiscal Quarter Ending Ratio
- --------------------- -----
<S> <C>
March 31, 1995 through June 30,
1996, inclusive 3.0 to 1.0
September 30, 1996 and thereafter 3.5 to 1.0
</TABLE>
6.3 Intentionally Omitted.
6.4 Maintenance of Leverage Ratio. The Borrower will not permit or suffer to
exist, as of the end of each Fiscal Quarter set forth below, its Leverage Ratio
for any such Fiscal Quarter to be greater than the ratio set forth opposite
such Fiscal Quarter below:
<TABLE>
<CAPTION>
Fiscal Quarter Ending Ratio
- --------------------- -----
<S> <C>
March 31, 1995 through June 30,
1996, inclusive 3.5 to 1.0
September 30, 1996 and thereafter 3.0 to 1.0
</TABLE>
6.5 Disposal of Assets. The Borrower will not, nor will it permit any of its
Subsidiaries to, sell, lease or otherwise dispose of, in any one Fiscal Year
during the term hereof, assets having an aggregate fair market value in excess
of $1,000,000 or directly or indirectly enter into an agreement or arrangement
whereby the Borrower shall sell or transfer assets having an aggregate fair
market value in excess of $1,000,000; provided, however, that the amount by
which the actual disposition of assets in any Fiscal Year does not exceed the
amount permitted to be sold, leased or otherwise disposed of in such Fiscal Year
shall be
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added to the aggregate fair market value of assets permitted to be sold, leased
or otherwise disposed of in the next succeeding Fiscal Year so long as in no
event shall the aggregate fair market value of assets sold, leased or otherwise
disposed of exceed $2,000,000 in any Fiscal Year, and provided, further that
nothing contained in this Section 6.5 shall prohibit the sale, lease or other
disposition of the assets associated with (i) the sale of assets owned by or
used in connection with Ocean World Inc. (formerly the Institute for Marine
Technology, Inc.), (ii) the sale of assets associated with a sale-leaseback
transaction which occurs within one (1) year of the acquisition of such asset,
(iii) the sale of inventory in the ordinary course of business or (iv) merger
or consolidation otherwise permitted pursuant to Section 6.13 of this Credit
Agreement.
6.6 Permitted Capital Expenditures. The Borrower will not, nor will it permit
its Subsidiaries to, expend amounts for Capital Expenditures including
Capitalized Lease Expenditures in excess of $15,000,000 in the aggregate during
any single Fiscal Year during the term hereof; provided, however, that amounts
permitted to be expended as Capital Expenditures in the immediately preceding
Fiscal Year, but not so expended, may be expended in the next succeeding Fiscal
Year and provided, further that in no event shall more than $18,750,000 be
expended in any single Fiscal Year. The foregoing notwithstanding, amounts
debited to the fixed asset account of the Borrower or any Subsidiary thereof
relating to any fixed assets acquired in connection with any acquisition
permitted pursuant to items (i) and (ii) of Section 6.18 hereof shall not
constitute Capital Expenditures for purposes of this Section 6.6.
6.7 Intentionally Omitted.
6.8 Permitted Indebtedness.
6.8a Permitted Indebtedness of Borrower. The Borrower will not guarantee or
incur any Indebtedness for Borrowed Money except as otherwise permitted by
Subsection 6.8c hereof and except:
(i) the Bank Indebtedness;
(ii) Indebtedness for Borrowed Money outstanding pursuant to the
Senior Subordinated Note Purchase Agreements or any refinancings
thereof permitted pursuant to Subsection 6.15(i) hereof;
(iii) Indebtedness for Borrowed Money secured by Permitted
Encumbrances;
(iv) Indebtedness for Borrowed Money incurred in connection with
Permitted Capital Expenditures or guarantees of amounts thereunder;
(v) Guarantees of the Indebtedness for Borrowed Money of any
Subsidiary to the extent such Indebtedness for Borrowed Money is
permitted by either Subsection 6.8b or 6.8c below;
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(vi) Indebtedness for Borrowed Money related to letters of credit
issued by any Person during any period when the commitment of the
Issuing Bank to issue Letters of Credit hereunder has been
suspended pursuant to Section 2.3 hereof; provided, however, that
at no time shall the aggregate amount of Letters of Credit issued
and outstanding under this Credit Agreement and other letters of
credit permitted pursuant to this Subsection 6.8a(vii) exceed
$8,000,000;
(vii) Indebtedness for Borrowed Money pursuant to junior
subordinated notes due any selling Management Stockholders in
connection with the redemption of shares pursuant to a Management
Repurchase Agreement;
(viii) Indebtedness for Borrowed Money due the selling
stockholders, the former ESOP participants or the ESOP in
connection with the redemption of shares pursuant to any Repurchase
Obligations or diversification requirement relating to the ESOP;
and
(ix) Indebtedness for Borrowed Money not specifically enumerated in
items (i) through (viii) above outstanding on the Closing Date as
more fully set forth on Schedule 6.8a, as the same may be extended
or renewed.
6.8b Permitted Indebtedness of Subsidiaries. The Borrower will not permit any
Subsidiary to guarantee or incur any Indebtedness for Borrowed Money except as
otherwise permitted by Subsection 6.8c hereof and except:
(i) Indebtedness for Borrowed Money incurred by any Active
Subsidiary and due to the Borrower;
(ii) Guarantees of the Indebtedness for Borrowed Money of any
Subsidiary to the extent such Indebtedness for Borrowed Money is
permitted by either this Subsection 6.8b or Subsection 6.8c below;
(iii) Indebtedness for Borrowed Money incurred by any Subsidiary
for Capital Expenditures which is secured by an Encumbrance on the
property of such Subsidiary in an aggregate amount not to exceed
$5,000,000 per Fiscal Year; and
(iv) Indebtedness for Borrowed Money not specifically enumerated in
items (i) through (iii) above outstanding on the Closing Date as
more fully set forth on Schedule 6.8b, as the same may be extended
or renewed.
6.8c Permitted Indebtedness of Borrower or Subsidiaries. The Borrower will
not, and will not permit any Subsidiary to, guarantee or incur any Indebtedness
for Borrowed Money except as permitted by Subsections 6.8a and 6.8b hereof and
except:
(i) Guarantees of Teach-Out Obligations and other education-related
obligations of the Borrower or its Active Subsidiaries;
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(ii) Education related bonds issued by the Borrower or any of its
Active Subsidiaries and Guarantees related thereto;
(iii) Guarantees of any student loan programs of the Borrower or
its Active Subsidiaries; and
(iv) Indebtedness for Borrowed Money incurred by the Borrower or
its Subsidiaries with respect to indemnification of outside
directors or officers which indemnification is consistent with
authority under law and the by-laws of the Borrower or such
Subsidiary.
6.9 Permitted Encumbrances. The Borrower will not create, assume, incur or
suffer to exist, or allow any Subsidiary to create, assume, incur or suffer to
exist, any Encumbrance upon any of its assets, whether now owned or hereafter
acquired, nor acquire nor agree to acquire any asset subject to an Encumbrance,
except:
(i) Encumbrances in favor of the Agent and/or the Banks granted
hereunder;
(ii) Encumbrances in favor of the holders of the Senior
Subordinated Debt which Encumbrances are junior to the Encumbrances
in favor of the Agent;
(iii) Encumbrances to secure Indebtedness for Borrowed Money
permitted under Subsections 6.8a(vii) and (viii) hereof to the
extent such Encumbrances are limited solely to the stock of the
Borrower;
(iv) Encumbrances to secure Indebtedness for Borrowed Money
permitted under Subsection 6.8a(vi) hereof;
(v) Encumbrances for taxes or assessments or governmental charges
or levies which are not due or remain payable, without penalty, or
which are being contested in good faith by appropriate proceedings
and with respect to which the Borrower or the affected Subsidiary
has created reserves which are determined by the Borrower to be
adequate by the application of GAAP consistently applied;
(vi) Encumbrances to secure the obligations of the Borrower or any
Subsidiary under workmen's compensation laws, unemployment
insurance laws, social security laws or other similar legislation;
(vii) Encumbrances in connection with bids, tenders, performance
bonds, contracts or leases (including, without limitation,
equipment leases) to which the Borrower or any Subsidiary is a
party, or to secure public or statutory obligations;
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(viii) Encumbrances for landlords', mechanics', carriers',
workmen's, warehousemen's, materialmen's or repairmen's liens or
other like Encumbrances in the ordinary course of business;
(ix) Encumbrances to secure surety, replevin, attachment or appeal
bonds relating to legal proceedings to which the Borrower or any
Subsidiary is a party;
(x) Encumbrances arising out of judgments or awards against the
Borrower or any Subsidiary with respect to which the Borrower is
currently engaged in proceedings for review or appeal and with
respect to which the Borrower shall have secured a stay of
execution pending such proceedings for review or appeal;
(xi) minor survey exceptions, minor Encumbrances, easements or
reservations of, or rights of others for, rights of way, sewers,
electric lines, telegraph and telephone lines and other similar
purposes, or zoning or other restrictions as to the use of real
properties or Encumbrances incidental to the conduct of the
business of the Borrower or its Subsidiaries or to the ownership of
their properties which were not incurred in connection with
Indebtedness for Borrowed Money or other extensions of credit and
which do not in the aggregate materially adversely affect the value
of said properties or materially impair their use in the operation
of the business of the Borrower or such Subsidiaries;
(xii) Encumbrances to secure any extension, renewal or replacement
(or successive extensions, renewals or replacements) as a whole, or
in part, of any obligations secured by any Encumbrances referred to
in the foregoing clauses (i) through (xi) and clause (xiii),
provided that (y) such extended, renewed or replaced Encumbrances
shall be limited to all or a part of the same property that secured
the Encumbrances extended, renewed or replaced (plus improvements
on such property) and (z) the obligations secured by such
Encumbrances at such time are not increased except in accordance
with the terms thereof; and
(xiii) Encumbrances not specifically enumerated in items (i)
through (xii) above which were in existence on the date hereof and
described on Schedule 6.9 hereto.
6.10 Restriction of Operating Leases. As of the Closing Date, the Borrower and
its Subsidiaries have in force as lessees the operating leases set forth on
Schedule 6.10 hereto. The Borrower will not, and will not permit any
Subsidiary to, incur or assume any new operating leases during any Fiscal Year
commencing after the Closing Date having aggregate payments, on a Consolidated
basis in such Fiscal Year, (i) in excess of $1,000,000 for each Fiscal Year
ending on or before June 30, 1996 and (ii) in excess of $1,250,000 for each
Fiscal Year ending after July 1, 1996; provided, however, that the foregoing
shall not
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prohibit the replacement, substitution, extension or renewal of any operating
lease in force prior to the Closing Date.
6.11 Advance of Funds and Investments.
6.11a Advance of Funds. The Borrower will not, nor will it permit any
Subsidiary to, make any advance, loan or extension of credit to any Person,
except: (a) extension of trade credit and student loans in the ordinary course
of business; (b) Indebtedness for Borrowed Money permitted by Subsection 6.8b
hereof; and (c) other loans and advances made in the ordinary course of
business not to exceed $1,000,000 in the aggregate at any one time outstanding.
6.11b Investments. The Borrower will not, nor will it permit any Subsidiary
to, make any capital contribution to, purchase any stocks, bonds, notes,
debentures or other securities of, or make any other investment in any other
Person, except (a) existing Subsidiaries; (b) investments in prime commercial
paper and certificates of deposit in United States commercial banks (having
capital resources in excess of $500,000,000), in each case due within one (1)
year from the date of purchase and payable in the United States in Dollars;
obligations issued or unconditionally guaranteed by the United States
Government or any agency thereof, and repurchase agreements of such banks for
terms of less than one year in respect of the foregoing certificates and
obligations; and (c) acquisitions permitted by Section 6.18 hereof.
6.12 Dividend and Redemption Restrictions.
6.12a Dividend Restrictions. The Borrower shall not declare or pay cash
dividends or distributions on its capital stock while the Credit Facility is
outstanding, except for (i) the payment of dividends on the (A) Series A 10.19%
preferred stock of the Borrower held by the ESOP or (B) Class A common stock of
the Borrower to the extent that in excess of ninety percent (90%) of said
common stock dividend is used to repay the Term Loans and (ii) dividends on any
class of stock of the Borrower in an amount not to exceed the following: (A)
the difference between (1) $1,000,000 in the earlier to occur of (x) any Fiscal
Year ended after July 1, 1996 or (y) any Fiscal Year during which the
Borrower's Consolidated Net Worth is greater than or equal to $50,000,000 minus
(2) any stock redemptions made during such period and permitted pursuant to
clause (A) of Subsection 6.12b below or (B) the difference between (1)
$1,500,000 in any Fiscal Year during which the Borrower's Consolidated Net
Worth is greater than or equal to $75,000,000 minus (2) any stock redemptions
made during such period and permitted pursuant to clause (A) of Subsection
6.12b below.
6.12b Redemption Restrictions. The Borrower shall not, nor shall it permit any
Subsidiary to, purchase the Borrower's capital stock while the Credit Facility
is outstanding, except for (i) the redemption of any such capital stock held by
the ESOP in connection with the termination of service of employees of the
Borrower or its Subsidiaries and (ii) the redemption of any such capital stock
by the Borrower from Management Shareholders as more fully set forth below.
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(A) Upon the death, incapacity, retirement or termination of a
Management Stockholder (other than Knutson, except as provided below),
the Borrower may purchase such Management Stockholder's capital stock
upon the terms and conditions set forth in the applicable Management
Repurchase Agreement, provided that after giving effect to such purchase
no Event of Default has occurred and is continuing and provided, further
that the aggregate Net Purchase Price of all such purchases does not
exceed in any Fiscal Year beginning on and after July 1, 1994, the sum
of:
(1) the applicable amount from among the following
amounts: (a) $500,000, (b) the difference between (i)
$1,000,000 in the earlier to occur of (A) any Fiscal
Year ended after July 1, 1996 or (B) any Fiscal Year
during which the Borrower's Consolidated Net Worth is
greater than or equal to $50,000,000 minus (ii) any
dividends paid during such period and permitted
pursuant to item (ii) of Subsection 6.12a above or (c)
the difference between (i) $1,500,000 in any Fiscal
Year during which the Borrower's Consolidated Net
Worth is greater than or equal to $75,000,000 minus
(ii) any dividends paid during such period and
permitted pursuant to item (ii) of Subsection 6.12a
above, plus
(2) the proceeds paid to the Borrower during such
Fiscal Year pursuant to life insurance policies on its
employees, plus
(3) the Net Proceeds paid to the Borrower during such
Fiscal Year upon the resale or reissuance of the
treasury stock related to repurchased capital stock.
(B) Upon the death, incapacity, retirement or termination of
Knutson, the Borrower may purchase his capital stock upon the terms and
conditions set forth in the RBK Exchange and Repurchase Agreement,
provided that after giving effect to such purchase no Event of Default
has occurred or is continuing, and if such purchase is pursuant to the
Initial Put and the Secondary Put (as such terms are defined in the RBK
Exchange and Repurchase Agreement) (1) such purchases do not exceed the
amounts set forth in Section 10(b) of the RBK Exchange and Repurchase
Agreement, and (2) any purchases of capital stock owned by any Permitted
Owner for cash may not exceed the proceeds available for such purposes
under Key Man Life Insurance; provided, however, to the extent that such
Key Man Life Insurance is unavailable or insufficient, the Borrower may
purchase capital stock owned by any Permitted Owner subject to the
limitations set forth in item (A) of this Subsection 6.12b.
The foregoing notwithstanding, amount permitted to be expended to redeem the
capital stock of the Borrower in the immediate Fiscal Year, but not so
expended, may be expended in the next succeeding Fiscal Year.
6.13 Merger. (a) The Borrower shall not merge or consolidate with any other
Person unless (i) the Borrower is the
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surviving corporation or, if the Borrower is not the surviving corporation, the
surviving corporation is a domestic corporation of the United States which will
expressly assume the obligations under the Credit Facility, (ii) no Event of
Default occurs as a result of such a merger or consolidation, and (iii) the
surviving corporation's net worth is not less than the Borrower's net worth
immediately prior to such merger or consolidation.
(b) The Borrower shall not permit any Subsidiary to merge or consolidate
with any Person (other than the Borrower or another Subsidiary) unless (i) such
Subsidiary is the surviving corporation or, if such Subsidiary is not the
surviving corporation, the surviving corporation is a domestic corporation of
the United States which continues the security interests in its assets in favor
of the Agent, on behalf of the Banks and the Issuing Bank, as well as having
its parent corporation pledge the capital stock of the surviving corporation to
the Agent, on behalf of the Banks and the Issuing Bank, and (ii) no Event of
Default occurs as a result of such merger or consolidation.
6.14 Regulations G, X, T and U Compliance. The Borrower will not, nor shall it
permit any of its Subsidiaries to, use, or permit the use of, the proceeds of
any borrowings hereunder to purchase or carry Margin Stock or otherwise act so
as to cause the Banks, in extending credit hereunder, to be in contravention of
Regulations G, X, T and U.
6.15 Subordination. The Borrower will not, nor shall it permit any of its
Subsidiaries to, directly or indirectly:
(i) make any payment of principal or interest or any prepayment or
any other payment pursuant to an acceleration or claim of breach or
otherwise in respect of any Senior Subordinated Debt, except regularly
scheduled payments of interest which commenced December 30, 1989 and
required scheduled prepayments which will commence December 30, 1997 (but
not including any optional prepayments or required prepayments upon a
change of control) as provided under the Senior Subordinated Note
Purchase Agreements subject to the provisions of Section 10 thereof;
provided, however, that the Borrower may prepay the Senior Subordinated
Debt with the proceeds of (A) other subordinated indebtedness of the
Borrower on terms no less favorable to the Banks (as determined in the
sole but reasonable discretion of the Banks) and the Borrower than the
Senior Subordinated Indebtedness or (B) any equity offerings by the
Borrower or other available cash if and only if the Borrower shall, both
before and after giving effect to such prepayment, be in compliance with
all terms, conditions and covenants contained in this Credit Agreement;
(ii) grant to the holders of the Senior Subordinated Debt any
additional collateral or guarantees for any Senior Subordinated Debt;
(iii) make any loan, gift or distribution of assets to the holders of
the Senior Subordinated Debt in violation of Subsection 6.15(i) hereof or
Section 10 of the Senior Subordinated Note Purchase Agreements; or
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(iv) convert any of the Senior Subordinated Debt into capital stock
except as permitted pursuant to Section 10 of the Senior Subordinated
Note Purchase Agreement.
6.16 Alteration of Various Agreements. Except for (i) amendments and
modifications to the Plan Documents necessary to obtain determination letters
from the IRS or to continue to be a qualified plan and trust under Code
Sections 401(a) and 501(a), (ii) amendments to the documents listed below,
which do not alter the provisions regarding redemption of the capital stock of
the Borrower or any Subsidiary, and (iii) amendments to the documents listed
below, which would not materially adversely affect the Banks, the Borrower
shall not, nor shall it permit any Subsidiary to, amend or modify any of the
following documents:
(A) until such time as the Term Loans are paid in
full, the ESOP and the ESOP Trust;
(B) Management Repurchase Agreements (except as
otherwise set forth on Schedule 6.16 hereto); and
(C) Stockholder Agreements.
In addition, the Borrower shall not, nor shall it permit any Subsidiary to,
amend or modify in any material respect the Senior Subordinated Note Purchase
Agreements, the Senior Subordinated Notes, the Senior Subordinated Collateral
Documents and the Warrants.
6.17 Cohort Default Rates. The Borrower will not permit any Art Institute
whose Operating HEBIT for the most recently completed Fiscal Year equals or
exceeds seven and one-half percent (7-1/2%) of the aggregate Operating HEBIT of
all Art Institutes for the same fiscal period to have a Cohort Default Rate in
excess of twenty-five percent (25%) per year for the two (2) previous years.
6.18 Permitted Acquisitions. The Borrower will not, nor will it permit any
Subsidiary to acquire all or substantially all of the assets of any second
Person or acquire the stock of any second Person or make any other investment
in any second Person other than (i) Permitted Acquisitions, (ii) other
acquisitions of any such assets or stock of any second Person the use or
business of which is related to the education or training businesses (whether
profit or non-profit) not to exceed $1,000,000 in the aggregate in any Fiscal
Year and (iii) as otherwise permitted by Section 6.11 hereof.
6.19 Change Fiscal Year. The Borrower will not, nor shall it permit any of its
Subsidiaries to, change its Fiscal Year.
6.20 Change of Business. The Borrower shall not engage, and shall cause each
Active Subsidiaries to refrain from engaging, in
any business other than its primary presently conducted businesses and other
related ancillary businesses.
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ARTICLE VII. CONDITIONS PRECEDENT.
7.1 All Revolving Credit Disbursements and all Letters of Credit. The
obligation of the Revolving Credit Banks to make each Revolving Credit
Disbursement pursuant to Section 2.2 hereof and of the Issuing Bank to issue
each Letter of Credit pursuant to Section 2.3 hereof is subject to the
performance by the Borrower of its obligations under this Credit Agreement and
to the satisfaction of the following further conditions:
7.1a Request for Revolving Credit Loan or Issuance of Letter of Credit. (i)
Except for a Revolving Credit Disbursement made simultaneously with the
execution of this Credit Agreement, receipt by the Agent, on behalf of the
Revolving Credit Banks, of a Request for Revolving Credit Loan satisfying the
requirements of Subsection 2.2c or (ii) receipt by the Agent, on behalf of the
Issuing Bank, of a fully-executed and completed Application and Agreement for
Letter of Credit.
7.1b No Default or Event of Default. The fact that, at the time of each
Revolving Credit Disbursement or issuance of each Letter of Credit, no Default
or Event of Default, shall have occurred and be continuing.
7.1c No Material Adverse Change. There shall not have occurred, since the most
recent prior date upon which a Revolving Credit Loan was made or a Letter of
Credit was issued, and be continuing (i) any Material Adverse Change or (ii)
any event which has had, or could reasonably be expected to have, a Material
Adverse Effect.
7.1d Compliance with Covenants. The fact that, at the time of each Revolving
Credit Loan or issuance of each Letter of Credit (after giving effect to such
Loan or Letter of Credit), the Borrower shall be in compliance with the
covenants contained in Sections 6.1, 6.2 and 6.4 hereof.
7.1e Representations Correct. The fact that the representations and warranties
contained in this Credit Agreement and the other Loan Documents are true and
correct in all material respects on and as of the date of borrowing, except to
the extent that such representations and warranties relate solely to an earlier
date (in which case, such representations and warranties shall have been true
and correct on and as of such earlier date).
Each request for a Revolving Credit Disbursement and each request for the
issuance of a Letter of Credit, whether made orally or in writing, by the
Borrower shall be deemed to be, as of the date of such request, a
representation and warranty by the Borrower as to the facts specified in
Subsections 7.1b, 7.1c, 7.1d and 7.1e.
7.2 Conditions Precedent to the Term Loans, the Initial Revolving Credit
Disbursement and the Issuance of the Initial Letter of Credit. The
obligation of the Term Loan Banks to make the Term Loans, of the
Revolving Credit Banks to make the initial Revolving Credit Disbursement
and of the Issuing Bank to issue the initial Letters of Credit are
subject to the satisfaction of each of the following conditions
precedent in addition to the applicable conditions precedent set forth
in Section 7.1 above:
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7.2a Credit Agreement. Receipt by the Agent of a counterpart original of this
Credit Agreement duly executed by each initial Bank, the Issuing Bank, the
Borrower and the Agent.
7.2b Revolving Credit Notes. Receipt by the Agent, for redelivery to each
Revolving Credit Bank, of a duly executed Revolving Credit Note made payable to
such Revolving Credit Bank in an amount equal to its respective Commitment
Amount.
7.2c Amended and Restated Term Notes. Receipt by the Agent, for redelivery to
each Term Loan Bank, of a duly executed Amended and Restated Term Note made
payable to such Term Loan Bank in an amount equal to its respective Term Loan
Amount.
7.2d Security Agreements and Financing Statements. Receipt by the Agent, on
behalf of the Banks, of counterpart originals of the Amended and Restated
Security Agreement and the Amended and Restated Subsidiary Security Agreement
duly executed by the Borrower or AII, as the case may be, and the Agent,
together with all requisite executed financing statements.
7.2e Pledge Agreements. Receipt by the Agent, on behalf of the Banks, of
counterpart originals of the Amended and Restated Pledge Agreement duly
executed by the Borrower and the Agent and each Amended and Restated Subsidiary
Pledge Agreement or Subsidiary Pledge Agreement duly executed by the Active
Subsidiary party thereto and the Agent, together with all of the outstanding
shares of capital stock of each Active Subsidiary pledged pursuant thereto and
executed blank stock powers relating thereto previously not delivered to the
Agent.
7.2f Amendment to Intercreditor Agreement and Amendment to Senior Subordinated
Note Purchase Agreement. Receipt by the Agent, on behalf of the Banks, of (i)
counterpart originals of the First Amendment to Intercreditor Agreement duly
executed by NML and NUFICP and (ii) amendments to the Senior Subordinated Note
Purchase Agreements which shall contain the consent of NML and NUFICP to the
incurrence of this Credit Agreement and the consummation of the transactions
contemplated herein, in form and substance satisfactory to the Agent and the
Banks.
7.2g Corporate Documents of the Borrower. Receipt by the Agent, on behalf of
the Banks, of a copy, duly certified as of the Closing Date by the secretary or
assistant secretary of the Borrower of (i) the By-Laws of the Borrower, (ii)
the resolutions of the Borrower's Board of Directors authorizing the borrowings
hereunder and the execution and delivery of this Credit Agreement, the Notes,
the Amended and Restated Security Agreement and the Amended and Restated Pledge
Agreement to be executed by it, (iii) all documents evidencing all other
necessary corporate action and (iv) all approvals or consents, if any, with
respect to this Credit Agreement, the Notes, the Amended and Restated Security
Agreement and Amended and Restated Pledge Agreement to be executed by it.
7.2h Corporate Documents of AII. Receipt by the Agent, on behalf of the Banks,
of a copy, duly certified as of the Closing Date by the secretary or assistant
secretary of AII of (i) the By-Laws of AII, (ii) the resolutions of AII's Board
of Directors authorizing the
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execution and delivery of the Amended and Restated Subsidiary Security
Agreement and the Amended and Restated Subsidiary Pledge Agreement to be
executed by it, (iii) all documents evidencing all other necessary corporate
action and (iv) all approvals or consents, if any, with respect to such Amended
and Restated Subsidiary Security Agreement and Amended and Restated Subsidiary
Pledge Agreement.
7.2i Corporate Documents of other Active Subsidiaries Party to any Loan
Documents. Receipt by the Agent, on behalf of the Banks, of a copy, duly
certified as of the Closing Date by the secretary or assistant secretary of
each Active Subsidiary (other than AII) executing an Amended and Restated
Subsidiary Pledge Agreement or Subsidiary Pledge Agreement of (i) the By-Laws
of each such Active Subsidiary, (ii) the resolutions of the Board of Directors
of each such Active Subsidiary authorizing the execution and delivery of the
Amended and Restated Subsidiary Pledge Agreement or Subsidiary Pledge Agreement
to be executed by it, (iii) all documents evidencing other necessary corporate
action and (iv) all approvals or consents, if any, with respect to the Amended
and Restated Subsidiary Pledge Agreement or the Subsidiary Pledge Agreement to
be executed by it.
7.2j Incumbency Certificate of the Borrower. Receipt by the Agent, on behalf
of the Banks, of a certificate of the secretary or assistant secretary of the
Borrower, certifying the names and offices of the officers of the Borrower
authorized to sign this Credit Agreement, the Notes, the Amended and Restated
Security Agreement, the Amended and Restated Pledge Agreement and all other
documents or certificates to be delivered hereunder, together with the true
signatures of such officers.
7.2k Incumbency Certificate of AII. Receipt by the Agent, on behalf of the
Banks, of a certificate of the secretary or assistant secretary of AII,
certifying the names and offices of the officers of AII authorized to sign the
Amended and Restated Subsidiary Security Agreement and the Amended and Restated
Subsidiary Pledge Agreement to be executed by it and all other documents or
certificates to be delivered hereunder, together with the true signatures of
such officers.
7.2l Incumbency Certificate of other Active Subsidiaries Party to any Loan
Documents. Receipt by the Agent, on behalf of the Banks, of a certificate of
the secretary or assistant secretary of each Active Subsidiary (other than AII)
executing an Amended and Restated Subsidiary Pledge Agreement or a Subsidiary
Pledge Agreement certifying the names and offices of the officers authorized to
sign such Amended and Restated Subsidiary Pledge Agreement or a Subsidiary
Pledge Agreement and all other documents or certificates to be delivered
hereunder, together with the true signatures of such officers.
7.2m Good Standing Certificates. Receipt by the Agent, on behalf of the Banks,
of a certificate of good standing (i) for the Borrower, AII, NCG and each other
Active Subsidiary issued by the Secretary of State of their respective states
of incorporation and (ii) for the Borrower, AII, NCG and each other Active
Subsidiary issued by the Secretary of State for each state in which the
Borrower or each such Active Subsidiary is authorized to do business, in each
case issued no more than thirty (30) days prior to the Closing Date.
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7.2n Certificates of Incorporation. Receipt by the Agent, on behalf of the
Banks, of a copy, duly certified by the appropriate governmental official, of
the Articles/Certificates of Incorporation of the Borrower, AII, NCG and each
other Active Subsidiary party to any Loan Document.
7.2o Insurance Certificates. Receipt by the Agent, on behalf of the Banks, of
the insurance certificates required pursuant to Section 5.8.
7.2p Closing Certificate. Receipt by the Agent, on behalf of the Banks, of a
certificate duly executed by an Authorized Officer of the Borrower certifying
that the conditions precedent set forth in Subsection 7.1b, 7.1c, 7.1d and 7.1e
above have been satisfied as of the Closing Date.
7.2q Closing Fees. Receipt by the Agent, on behalf of the Banks, of the
Closing Fees.
7.2r Opinion of Borrower's Counsel. Receipt by the Agent, on behalf of the
Banks, of a signed favorable opinion of Eckert Seamans Cherin & Mellott,
counsel to the Borrower and its Subsidiaries, substantially in the form of
Exhibit "I" attached hereto.
7.2s Proceedings Satisfactory. Receipt by the Agent, on behalf of the Banks,
of evidence that all proceedings taken in connection herewith and the
consummation of the transactions contemplated hereby and all documents and
papers relating hereto have been completed or duly executed, and receipt by the
Agent, on behalf of the Banks, of such documents and papers, all in form and
substance reasonably satisfactory to the Agent and the Agent's special counsel,
as the Agent or its special counsel may reasonably request in connection
therewith.
ARTICLE VIII. EVENTS OF DEFAULT.
8.1 Payment Default. (i) Default in the payment of principal of any of the
Notes. (ii) Default in the payment of any interest on or the payment of the
Commitment Fee or the Agent's Fee or any other amount due under the Bank
Indebtedness and continuance of any such nonpayment for ten (10) days after due
date.
8.2 Cross Defaults.
8.2a Nonpayment of Other Indebtedness. Except as provided in Subsection 8.2b,
any Indebtedness for Borrowed Money (other than the Bank Indebtedness) of the
Borrower or any Subsidiary in an amount in excess of $1,000,000 is not paid at
maturity or becomes or is declared to be due and payable prior to its expressed
maturity by reason of any default by the Borrower or the Subsidiary in the
performance or observance of any obligation or condition.
8.2b Failure to Comply with Covenants. Default in the performance of any of
the agreements and covenants made by the Borrower or any Subsidiary in
connection with the incurrence of Indebtedness for Borrowed Money (other than
the Bank Indebtedness) in an
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amount in excess of $1,000,000, following the expiration of any cure period
granted thereunder if the effect of such default is to cause or permit the
acceleration of the principal amount of such Indebtedness for Borrowed Money.
8.3 Insolvency.
8.3a Involuntary Proceedings. A proceeding shall have been instituted in a
court having jurisdiction seeking a decree or order for relief in respect of
the Borrower or any Subsidiary in an involuntary case under the Federal
bankruptcy laws, or any other similar applicable Federal or state law, now or
hereafter in effect, or for the appointment of a receiver, liquidator, trustee,
sequestrator or similar official for the Borrower or any Subsidiary or for a
substantial part of its property, or for the winding up or liquidation of its
affairs, and such shall remain undismissed or unstayed and in effect for a
period of sixty (60) days.
8.3b Voluntary Proceedings. The Borrower or any Subsidiary shall institute
proceedings to be adjudicated a voluntary bankrupt, or shall consent to the
filing of a bankruptcy proceeding against it, or shall file a petition or
answer or consent seeking reorganization under the Federal bankruptcy laws, or
any other similar applicable Federal or state law now or hereinafter in effect,
or shall consent or acquiesce in or to the filing of any such petition or shall
consent to or acquiesce in the appointment of a receiver, liquidator, trustee,
sequestrator or similar official for the Borrower or any Subsidiary or for a
substantial part of its property, or shall make an assignment for the benefit
of creditors, or shall admit in writing its inability to pay its debts
generally as they become due, or action shall be taken by the Borrower or any
Subsidiary in furtherance of any of the aforesaid purposes.
8.4 Dissolution. Except as permitted by Section 6.13 hereof, the existence of
the Borrower or any Subsidiary is terminated or the Borrower terminates the
existence of the ESOP.
8.5 Adverse Judgments. Any court shall render a final judgment or judgments
against the Borrower or any Subsidiary in an aggregate amount of $1,000,000 or
more in excess of any insurance protecting against such liability and such
judgment or judgments shall not be satisfactorily appealed, stayed, discharged,
vacated or set aside within thirty (30) days after entry; or any property of
the Borrower or any Subsidiary shall be attached under a claim or claims in an
aggregate amount of $1,000,000 or more in excess of any insurance protecting
against the liabilities on which such attachments are based and such
attachments shall not be released or provided for to the satisfaction of the
Banks within thirty (30) days.
8.6 Failure to Comply with Certain Covenants. Default in the performance of
any of the agreements and covenants set forth in Article III or in Article VI
hereof, except for Sections 6.8 and 6.9 hereof.
8.7 Failure to Comply With Other Covenants. Default by the Borrower or any Loan
Party in the performance of any of the agreements and covenants set forth in
Article V hereof or in Sections 6.8 or 6.9 hereof or in any of the Security
Documents and not
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constituting an Event of Default enumerated above and continuance thereof for
thirty (30) days after notice thereof to the Borrower from the Agent.
8.8 Misrepresentation. Any representation or warranty made by the Borrower or
any Loan Party in (i) this Credit Agreement or (ii) any of the other Loan
Documents is untrue in any material respect, or any schedule, statement,
report, notice or writing furnished by the Borrower or any other Loan Party or
on behalf of the Borrower or any other Loan Party to the Agent or the Banks is
untrue in any material respect on the date as of which the facts set forth are
stated or certified and is not corrected to the Banks' satisfaction (either by
the Borrower with respect to this Credit Agreement or the Borrower or any other
Person executing the relevant Security Document) within thirty (30) days after
notice of such misstatement to the Borrower from the Agent.
8.9 Consequences of an Event of Default.
8.9a Consequence of an Event of Default Set Forth in Sections 8.3 and 8.4.
Upon the occurrence of an Event of Default set forth in Section 8.3 or 8.4
hereof, the Revolving Credit Commitment shall automatically terminate and the
Notes then outstanding shall become immediately due and payable, without
necessity of demand, presentation, protest, notice of dishonor or notice of
default. Thereafter, the Banks shall have no further obligation to make any
additional Loans hereunder. Upon the occurrence of an Event of Default set
forth in Section 8.3 or Section 8.4, the Banks shall have the full panoply of
rights and remedies granted to them under this Credit Agreement and the other
Loan Documents and all those rights and remedies granted by law to creditors.
No exercise of one right or remedy shall be deemed a waiver of other rights or
remedies.
8.9b Consequences of Remaining Events of Default. During the continuance of
any Event of Default set forth in Sections 8.1, 8.2, 8.5, 8.6, 8.7 or 8.8
hereof (unless remedied, waived or cured to the satisfaction of the Banks
required pursuant to Section 10.1), the Banks shall have no further obligation
to make any additional Loans hereunder; and the Agent may, and at the request
of the Required Banks shall, by written or telegraphic notice to the Borrower,
declare the Revolving Credit Commitment terminated and the Notes then
outstanding and interest accrued thereon and all other liabilities of the
Borrower hereunder to the Banks to be forthwith due and payable. Thereupon the
Revolving Credit Commitment shall be terminated and all amounts due hereunder
and under any Notes outstanding shall be due and payable without presentment,
demand, protest or other notice of any kind to the Borrower, all of which are
hereby expressly waived. Upon the occurrence of an Event of Default set forth
in Sections 8.1, 8.2, 8.5, 8.6, 8.7 or 8.8 hereof, the Banks shall have the
full panoply of rights and remedies granted to them under this Credit Agreement
and the other Loan Documents and all those rights and remedies granted by law
to creditors. No exercise of one right or remedy shall be deemed a waiver of
other rights or remedies.
ARTICLE IX. AGREEMENT AMONG BANKS.
9.1 Appointment and Grant of Authority. Each of the Banks hereby appoints and
designates PNC Bank, and PNC Bank hereby agrees to act as, the initial Agent
under this
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Credit Agreement and the other Loan Documents. As such Agent, PNC shall have
and may exercise such powers under this Credit Agreement and the other Loan
Documents as are specifically delegated to the Agent, by the terms hereof or
thereof, together with such other powers as are incidental thereto. Without
limiting the foregoing, each Bank, and each holder of a Note by its acceptance
of such Note, hereby authorizes the Agent, on behalf of the Banks, to execute
all of the Loan Documents (other than this Credit Agreement) and to accept all
of the Loan Documents and all other agreements, documents or instruments
reasonably required to carry out the intent of the parties to this Credit
Agreement. The Agent may perform any of its duties hereunder or under the Loan
Documents by and through its officers, directors, agents, employees or
affiliates.
9.2 Non-Reliance on Agent. Each Bank agrees that it has, independently and
without reliance on the Agent, based on such documents and information as it
has deemed appropriate, made its own credit analysis and evaluation (including
but not limited to an environmental review) of the Borrower and its operations,
and decision to enter into this Credit Agreement. Further, each Bank agrees
that it will, independently and without reliance upon the Agent, and based on
such documents and information as it shall deem reasonable and appropriate at
the time, continue to make its own analysis and decisions in taking or not
taking action under this Credit Agreement and the other Loan Documents. Each
Bank acknowledges that a copy of this Credit Agreement and the exhibits and
schedules hereto have been made available to it and to its independent legal
counsel for review and each Bank acknowledges that it is satisfied with the
form and substance of this Credit Agreement and the exhibits and schedules
hereto. Except as otherwise provided herein, the Agent shall have no duty or
responsibility, either initially or on a continuing basis, to keep any Bank or
any holder of a Note informed as to the performance or observance by any Loan
Party of this Credit Agreement or any other document or instrument referred to
or provided for herein or to inspect the properties or books of the Borrower.
The Agent, in the absence of gross negligence or willful misconduct, shall not
be liable to any Bank for its failure to relay or furnish to the Bank any
information. The preceding provisions of this Section 9.2 to the contrary
notwithstanding, the Agent shall use its best efforts to relay to each Bank any
information pertaining to the Borrower or to any other Loan Party which comes
into the possession of the Agent's Select Industries Department.
9.3 Responsibility of Agent and Other Matters.
9.3a Ministerial Nature of Duties. As between the Banks and themselves, the
Agent shall have no duties or responsibilities except those expressly set forth
in this Credit Agreement or in the other Loan Documents, and those duties and
responsibilities shall be subject to the limitations and qualifications set
forth in this Article IX. The duties of the Agent shall be ministerial and
administrative in nature.
9.3b Limitation of Liability. As between the Banks and themselves, neither the
Agent nor any of its directors, officers, employees, agents or affiliates shall
be liable for any action taken or omitted (whether or not such action taken or
omitted is within or without the Agent's
responsibilities and duties expressly set forth in this Credit Agreement) under
or in connection with this Credit Agreement or any other instrument or document
executed or delivered in connection herewith except for gross negligence or
willful misconduct. Without
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limiting the foregoing, neither the Agent nor any of its directors, officers,
employees, agents or affiliates shall be responsible for, or have any duty to
examine (i) the genuineness, execution, validity, effectiveness,
enforceability, collectibility, value or sufficiency of (A) this Credit
Agreement or any of the other Loan Documents or (B) any other document or
instrument furnished pursuant to or in connection with this Credit Agreement,
(ii) the collectibility of any amounts owed by the Borrower to the Banks, (iii)
the truthfulness of any recitals, statements, representations or warranties
made to the Agent or the Banks in connection with this Credit Agreement or any
other Loan Documents, (iv) any failure of any party to this Credit Agreement to
receive any communication sent, including any telegram, telex, teletype,
facsimile transmission or telephone message or any writing, application,
notice, report, statement, certificate, resolution, request, order, consent
letter or other instrument or paper or communication entrusted to the mails or
to a delivery service, or (v) the assets, liabilities, financial condition,
results of operations or business, or creditworthiness of the Borrower or any
other Loan Party.
9.3c Reliance. The Agent shall be entitled to act, and shall be fully
protected in acting upon, any telegram, facsimile transmission or any writing,
application, notice, report, statement, certificate, resolution, request,
order, consent, letter or other instrument, paper or communication believed by
the Agent in good faith to be genuine and correct and to have been signed or
sent or made by a proper Person. The Agent may consult counsel (including
counsel of the Borrower or any other Loan Party), independent public
accountants and other experts selected by it and shall be entitled to act, and
shall be fully protected in any action taken in good faith, in accordance with
advice given by such counsel, independent public accountants and other experts.
The Agent may employ agents and attorneys-in-fact and shall not be liable for
the default or misconduct of any such agents or attorneys-in-fact selected by
the Agent with reasonable care. The Agent shall not be bound to ascertain or
inquire as to the performance or observance of any of the terms, provisions or
conditions of this Credit Agreement or any of the other Loan Documents on the
part of the Borrower, the other Loan Parties or any other party thereto.
9.4 Action on Instructions. The Agent shall be required to act and shall be
fully protected in so acting and shall be entitled to refrain from acting, and
shall be fully protected in refraining from so acting, under this Credit
Agreement, the other Loan Documents or any other instrument or document
executed or delivered in connection herewith or therewith, in accordance with
written instructions from the Required Banks or, in the case of the matters set
forth in items (A) through (G) of Section 10.1, from all of the Banks.
9.5 Action in Event of Default. If an Event of Default has occurred and is
continuing, the Banks shall immediately consult with one another in an attempt
to agree upon a mutually acceptable course of conduct. Failing unanimous
agreement upon a course of conduct and if the Banks wish to exercise any of
their rights and remedies under the Credit Agreement or under any other Loan
Document, the Agent will exercise the rights of the Banks hereunder or
thereunder as directed by the Required Banks.
9.6 Indemnification. To the extent the Borrower does not reimburse and save
harmless the Agent according to the terms of this Credit Agreement for and from
all costs, expenses and disbursements in connection herewith, such costs,
expenses and disbursements
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shall be borne by the Banks ratably. Each Bank hereby agrees on such basis (i)
to reimburse and indemnify the Agent for such Bank's pro rata share of all such
reasonable costs, expenses and disbursements on request and (ii) to the extent
of each such Bank's pro rata share, to indemnify and save harmless the Agent
against and from any and all liabilities, losses, obligations, damages,
penalties, claims, actions, judgments and suits and other costs, expenses and
disbursements of any kind or nature whatsoever which may be imposed on,
incurred by or asserted against the Agent, arising out of or in connection with
this Credit Agreement, the other Loan Documents or any other agreement,
instrument or document executed or delivered in connection herewith or
therewith, or any request of the Required Banks or all of the Banks, as the
case may be, including without limitation the reasonable costs, expenses and
disbursements in connection with defending themselves against any claim or
liability, or answering any subpoena or other process related to the exercise
or performance of any of its powers or duties under this Credit Agreement, the
other Loan Documents, or any of the other agreements, instruments or documents
executed or delivered in connection herewith. The foregoing notwithstanding,
no Bank shall be liable for any portion of such losses, obligations, damages,
penalties, claims, actions, judgments and suits, and other costs, expense and
disbursements resulting from or as a consequence of (A) the Agent's gross
negligence or willful misconduct, (B) a claim against the Agent or the Banks
with respect to which each Bank was not given notice and the opportunity to
participate (at its own expense) in the defense thereof or (C) a compromise and
settlement agreement entered into without the consent of all of the Banks.
9.7 Agent's Rights as a Bank. With respect to the commitment of the Agent as a
Bank hereunder, the other Loan Documents and any other agreements, instruments
and documents delivered pursuant hereto and any Loans of the Agent under this
Credit Agreement, and any other amounts due to the Agent under this Credit
Agreement or the other Loan Documents, the Agent shall have the same rights and
powers, duties and obligations under this Credit Agreement, the other Loan
Documents or other agreement, instrument or document as any Bank and may
exercise such rights and powers and shall perform such duties and fulfill such
obligations as though it were not the Agent. The terms "Banks", "Required
Banks", "holder" or any similar term shall, unless the context clearly
indicates otherwise, include the Agent in its individual capacity. The Agent
may accept deposits from, lend money to, and generally engage, and continue to
engage, in any kind of banking, trust or other business with the Borrower, any
other Loan Party or any Affiliate thereof as if it were not the Agent hereunder
and may accept fees and other consideration from the Borrower, any other Loan
Party or any Affiliate thereof for services in connection with the Credit
Agreement or otherwise without having to account for the same to the Banks.
9.8 Advances by Agent. Unless the officers of the Agent responsible for
administering this Credit Agreement shall have been notified in writing by a
Bank prior to the date of any Disbursement that such Bank will not make the
amount which would constitute its pro rata share of such Disbursement available
to the Agent on the date of such Loan, the Agent may (but shall not be required
to) assume that such Bank has made such amount available to the Agent on the
date of such Loan and the Agent, in reliance upon such assumption, may make
available to the Borrower a corresponding amount. If such pro rata share is
made available to the Agent on a date after the date of such Disbursement,
such Bank shall pay to the Agent on demand an amount equal to the product of
(i) during each day
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included in the period referred to in (iii) below, the Federal Funds Rate
during each day included in such period, multiplied by (ii) the amount of such
Bank's pro rata share of such Disbursement, multiplied by (iii) a fraction, the
numerator of which is the number of days that elapse from and including the
date of such Loan to the date on which such pro rata share of such Disbursement
shall become immediately available to the Agent and the denominator of which is
360. A statement of the Agent submitted to such Bank with respect to any
amounts owing under this Section 9.8 shall be prima facie evidence as to the
amount owed by such Bank to the Agent. If such Bank's pro rata share is not in
fact made available to the Agent by such Bank within three (3) Business Days of
such borrowing date, the Agent shall be entitled to recover such amount with
interest thereon at the rate per annum equal to the Base Rate during such
period, on demand, from such Bank.
9.9 Payment to Banks. Promptly after receipt by the Agent from the Borrower of
any principal repayment of the Loans, interest due on the Loans, any fees or
other amounts due under any Loan Document (except for such amounts which are
payable for the sole account of any Bank or the Agent), the Agent shall
distribute to each Bank that Bank's pro rata share of the funds so received.
9.10 Pro Rata Sharing. All interest and principal payments on the Loans, all
Commitment Fees, the Closing Fee and any other Fees are to be divided pro rata
among the Banks. Any sums obtained from the Borrower by any Bank by reason of
the exercise of its rights of setoff, banker's lien or in collection shall be
shared (net of costs) pro rata among the Banks. Nothing in this Section 9.10
shall be deemed to require the sharing among the Banks of collections
specifically relating to, or of the proceeds of any collateral securing, any
other Indebtedness of the Borrower to any Bank.
9.11 Successor Agent.
9.11a Resignation of the Agent. Subject to a successor Agent being appointed
and such Person accepting the duties and obligations of the Agent hereunder and
under the Loan Documents, the Agent may resign from the performance of its
functions and duties hereunder and under the other Loan Documents at any time
by giving at least sixty (60) days prior written notice to the Banks and the
Borrower. In the event that the Agent gives notice of its desire to resign
from the performance of its functions and duties hereunder and under the Loan
Documents, then the Borrower and the Agent shall use all reasonable commercial
efforts to identify, and the Required Banks shall appoint, a successor who
shall be reasonably satisfactory to the Required Banks and the Borrower
(provided that such approval of the Borrower shall not be unreasonably withheld
and that no such approval of the Borrower shall be required after the
occurrence and during the continuance of an Event of Default). If a successor
Agent shall not have been appointed within said sixty (60) day period, the
Required Banks shall, after consultation with the Borrower, appoint a successor
Agent from among the Banks. Any such successor agent shall succeed to the
rights, powers and duties of the Agent. The foregoing notwithstanding, any
retiring agent shall continue to hold as custodian any Collateral in its
possession until such time as it can deliver such Collateral to the successor
agent.
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9.11b Rights of the Former Agent. Upon the appointment of such successor
agent, the former Agent's rights, powers and duties as Agent shall be
terminated, without any other or further act or deed on the part of such former
Agent or any of the parties to this Credit Agreement. After any retiring
Agent's resignation hereunder as administrative agent for the Banks hereunder,
the provisions of this Article IX shall inure to the benefit of such retiring
Agent as to any actions taken or omitted to be taken by it while it was Agent
under this Credit Agreement.
ARTICLE X. MISCELLANEOUS.
10.1 Amendments and Waivers.
10.1a Amendments to Credit Agreement or any Loan Document. Subject to the
remaining provisions of this Section 10.1, the Agent, the Banks, the Issuing
Bank, the Borrower and the other Loan Parties may, from time to time, enter
into amendments, modifications, extensions, supplements and replacements to and
of this Credit Agreement or any other Loan Document and the Banks or the
Required Banks, as the case may be, may, from time to time, waive compliance
with a provision hereof or thereof. No amendment or waiver of any provision of
this Credit Agreement, the Amended and Restated Term Notes, the Revolving
Credit Notes or any other Loan Document, nor any consent to any departure
therefrom by the Borrower shall be effective unless the same shall be in
writing and signed by the Borrower or other Person, whichever is the obligor of
the document to be amended or the provisions of which are being waived, and the
Agent and the Required Banks, and then such amendment, waiver or consent shall
be effective only in the specific instance and for the specific purpose for
which given.
The foregoing notwithstanding, no amendment, waiver or consent shall do
any of the following unless in writing and signed by all of the Banks (or the
Agent with the consent of all of the Banks):
(A) increase the Revolving Credit Commitment or the maximum
aggregate principal amount of the Revolving Credit Notes or the
Amended and Restated Term Notes,
(B) except as contemplated in this Credit Agreement, reduce the
interest rate on the Revolving Credit Loans or any fees in connection
therewith,
(C) postpone the Repayment Date (other than as contemplated in this
Credit Agreement) or the date any payment of interest or fees are due in
connection with the Revolving Credit Commitment,
(D) postpone the Maturity Date or the date any payment of interest
or fees are due in connection with the Term Loans,
(E) release any security for the Bank Indebtedness except in
accordance with the terms of the Security Document creating such
interest,
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(F) amend Article III or this Section 10.1 or
(G) amend the definition of "Required Banks".
In the case of any waiver or consent relating to any provision of this Credit
Agreement, the parties shall be restored to their former positions and rights
hereunder, and the Event of Default so waived or consented to shall be deemed
to be cured and not continuing; but no such waiver or consent shall extend to
any subsequent or other Event of Default or impair any right consequent
thereon. The foregoing notwithstanding, an Assignment and Assumption Agreement
(i) executed by (A) the Transferor Bank, (B) the Purchasing Bank and (C) the
Agent in its own right and as agent for the remaining Banks and (ii) consented
to by the Borrower shall constitute an amendment of this Credit Agreement
solely for the purposes of adjusting the Term Loan Amount, Term Loan
Percentage, Commitment Amount and Commitment Percentage as set forth therein
and as admitting the Purchasing Bank as a Bank hereunder.
Any such supplemental agreement shall apply equally to the Borrower, the
affected Loan Party, if any, and each of the Banks and shall be binding upon
the Borrower, the Banks, the Agent and all future holders of the Notes.
10.1b Waivers. No delay on the part of the Banks in the exercise of any power
or right shall operate as a waiver thereof, nor shall any single or partial
exercise of any power or right preclude other or further exercise thereof, or
the exercise of any other power or right. In the case of any waiver, the
Borrower, the Banks and the Agent shall be restored to their former positions
and rights, and any Event of Default waived shall be deemed to be cured and not
continuing, but no such waiver shall extend to any subsequent or other Event of
Default, or impair any right consequent thereon.
10.2 Notices.
10.2a Notice to the Borrower. All notices required to be sent to the Borrower
shall be sent to the following address, by hand delivery, by recognized
national overnight courier service, by facsimile transmission or other means of
electronic data communication, or by the United States Mail, first class,
postage prepaid:
<TABLE>
<S> <C>
If by United States Mail: If by other means:
Education Management Corporation Education Management Corporation
300 Sixth Avenue 300 Sixth Avenue
Suite 800 Suite 800
Pittsburgh, Pennsylvania 15222 Pittsburgh, Pennsylvania 15222
Attention: Chief Financial Officer Attention: Chief Financial Officer
Telecopier: (412) 562-0598
Telephone: (412) 562-0900
</TABLE>
10.2b Notice to the Agent. All notices required to be sent to the Agent shall
be sent to the following address, by hand delivery, by recognized national
overnight courier service,
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by facsimile transmission or other means of electronic data communication, or
by the United States Mail, first class, postage prepaid:
<TABLE>
<S> <C>
If by United States Mail: If by other means:
PNC Bank, National Association PNC Bank, National Association
Multi-Bank Loan Administration Multi-Bank Loan Administration
One PNC Plaza - 19th Floor One PNC Plaza - 19th Floor
Pittsburgh, Pennsylvania 15265 Pittsburgh, Pennsylvania 15222
Attention: Arlene M. Ohler Attention: Arlene M. Ohler
Assistant Vice President Assistant Vice President
Telephone: (412) 762-3627
Telecopier: (412) 762-8672
with a copy to:
PNC Bank, National Association PNC Bank, National Association
Two PNC Plaza - 2nd Floor Two PNC Plaza - 2nd Floor
Pittsburgh, Pennsylvania 15265 Fifth Avenue and Wood Street
Attention: Select Industries Pittsburgh, Pennsylvania 15222
Department Attention: Select Industries Department
Telecopier: (412) 762-4039
Telephone: (412) 762-7570
</TABLE>
10.2c Notice to the Banks. All notices required to be delivered to the Banks
pursuant to this Credit Agreement and the other Loan Documents shall be in
writing and shall be sent to the address set forth on the signature pages of
the Credit Agreement, by hand delivery, by recognized national overnight
courier service, by facsimile transmission or other means of electronic data
communication, or by the United States mail, first class, postage prepaid.
10.2d Receipt of Notices. All such notices shall be effective three (3) days
after mailing, one (1) day after deposit with the courier service, the date of
electronic transmission or when received, whichever is earlier. The Borrower,
the Banks and the Agent may each change the address for service of notice upon
it by a notice in writing to the other parties hereto.
10.3 Holiday Payments. If any payments to be made by the Borrower hereunder
shall become due on a date not a Business Day, such payments shall be made on
the next succeeding Business Day.
10.4 Tax Withholding. At least five (5) Business Days prior to the first date
on which interest or fees are payable hereunder for the account of each Bank,
each Bank that is not incorporated under the laws of the United States of
America or a state thereof agrees that it will deliver to the Agent and the
Borrower two (2) duly completed copies of either (i) IRS Form W-9, 1001 or 4224
or such other applicable form prescribed by the IRS, certifying in each case
that such Bank is entitled to receive payments
under this Credit Agreement or its
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Revolving Credit Note or Amended and Restated Term Note, as the case may be,
without deduction or withholding of United States federal income taxes, or is
subject to such tax at a reduced rate under an applicable tax treaty or (ii)
IRS Form W-8 or such other applicable form prescribed by the IRS or a
certificate of such Bank indicating that no such exemption or reduced rate of
taxation is allowable with respect to such payments. Each Bank which delivers
an IRS Form W-8, W-9, 4224 or 1001 further undertakes to deliver to the Agent
and the Borrower two (2) additional copies of any such form (or any successor
form) on or before the date on which that form expires or becomes obsolete or
after the occurrence of any event requiring a change in the most recent form so
delivered by it, and such amendments thereto or extensions or renewals thereof
as may be reasonably requested by the Borrower or the Agent, either certifying
that such Bank is entitled to receive payments under this Credit Agreement or
its Revolving Credit Note or Amended and Restated Term Note, as the case may
be, without deduction or withholding of any United States federal income taxes
or is subject to such tax at a reduced rate under an applicable tax treaty or
stating the date on which that no such exemption or reduced rate is allowable.
The Agent shall be entitled to withhold, from each payment made to such Bank
hereunder or under the Revolving Credit Note or Amended and Restated Term Note
payable to it, United States federal income taxes at the full withholding rate
unless each Bank referred to in the first sentence of this Section 10.4
establishes an exemption or at the applicable reduced rate established pursuant
to the above provisions.
10.5 Survival. Until payment in full of the Bank Indebtedness and the
termination of the Revolving Credit Commitment, all covenants, agreements,
warranties and representations made herein and in all certificates or other
documents delivered in connection with this Credit Agreement by or on behalf of
the Borrower, shall survive the advances of money made by the Banks to the
Borrower hereunder and the delivery of the Revolving Credit Notes and the
Amended and Restated Term Notes, and all such covenants, agreements, warranties
and representations shall inure to the benefit of the successors and assigns of
the Banks and the Agent whether or not so expressed.
10.6 Costs. The Borrower shall pay:
(i) All reasonable costs and expenses of the Agent (including
without limitation the reasonable fees and disbursements of the Agent's
special counsel, Tucker Arensberg, P.C.), incurred in connection with the
preparation, negotiation, execution and delivery of this Credit Agreement
and the other Loan Documents and any and all other documents and
instruments prepared in connection herewith, including but not limited to
all amendments, extensions, modifications, waivers, consents and other
documents and instruments prepared or entered into from time to time,
including after the Closing Date;
(ii) All reasonable costs and expenses of the Agent and the Banks
(including without limitation the reasonable fees and disbursements of
the Agent's and each of the Bank's counsel) in connection with (A) the
enforcement of this Credit Agreement and the other Loan Documents
(whether through negotiations, legal proceedings or otherwise) arising
pursuant to a breach by any Loan Party of any of the terms, conditions,
representations, warranties or covenants of any Loan Document
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to which it is a party, and (B) defending or prosecuting any actions,
suits or proceedings relating to any of the Loan Documents.
All of such costs and expenses shall be payable by the Borrower to the Banks or
the Agent, as the case may be, upon demand or as otherwise agreed upon by the
Banks or the Agent and the Borrower, and shall constitute Bank Indebtedness
under this Credit Agreement. The Borrower's obligation to pay such costs and
expenses shall survive the termination of this Credit Agreement and the
satisfaction of all of the Borrower's obligations hereunder.
10.7 Certain Taxes. The Borrower agrees to pay, and save the Banks harmless
from, all liability for any stamp or other taxes which may be payable with
respect to the execution or delivery of this Credit Agreement or the Loan
Documents or the issuance of the Notes, which obligation of the Borrower shall
survive the termination of this Credit Agreement.
10.8 Successors, Assigns and Participations.
10.8a Benefit of Agreement. Subject to the remaining provisions of this
Section 10.8, this Credit Agreement shall be binding upon the Borrower, the
Agent and the Banks and their respective successors and assigns, and shall
inure to the benefit of the Borrower, the Agent and the Banks and the
successors and assigns of the Agent and the Banks; provided, however that the
Borrower may not assign its rights or duties hereunder or under any other Loan
Document without the prior written consent of the Banks and the Agent.
10.8b Assignments. Subject to the remaining provisions of this Subsection
10.8b, any Bank, at any time, in the ordinary course of its commercial banking
business and in accordance with applicable law, may sell to one or more
Purchasing Banks (which Purchasing Banks may be Affiliates of the Transferor
Bank), a portion or all of its rights and obligations under this Credit
Agreement and the Revolving Credit Note or Amended and Restated Term Note then
held by it pursuant to as Assignment and Assumption Agreement substantially in
the form of Exhibit "J" and executed by the Transferor Bank and such Purchasing
Bank and consented to by the Agent and the Borrower; subject, however to the
following requirements:
(i) The Borrower and the Agent must give their prior consent to any
such assignment (other than an assignment made by a Bank to an Affiliate
of such Bank) which consent shall not be unreasonably withheld;
(ii) Each such assignment must be in a minimum amount of
$10,000,000, or, if in excess thereof, in integral multiples of
$1,000,000, unless otherwise agreed by the Borrower and the Agent;
(iii) No Purchasing Bank which purchases a Revolving Credit
Commitment of less than or equal to $10,000,000 may sell Participations;
(iv) No Purchasing Bank may make assignments unless otherwise agreed
by the Borrower; and
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(v) On the date such assignment is made, the Transferor Bank shall
pay to the Agent a $2,000 service fee for each assignment;
provided, however the restrictions set forth in Subsection 10.8a(i), (ii),
(iii) and (iv) above shall not apply in the case of any assignment by any
Transferor Bank upon the occurrence and during the continuation of an Event of
Default.
Upon the execution, delivery, acceptance and recording of any such
Assignment and Assumption Agreement, from and after the Transfer Effective Date
set forth in such Assignment and Assumption Agreement, (a) the Purchasing Bank
thereunder shall be a party hereto as a Bank and, to the extent provided in
such Assignment and Assumption Agreement, shall have the rights and obligations
of a Bank hereunder with a Commitment Amount, Commitment Percentage, Term Loan
Amount or Term Loan Percentage as set forth therein and (b) the Transferor Bank
thereunder shall be released from its obligations as a Bank under this Credit
Agreement to the extent provided in such Assignment and Assumption Agreement.
Such Assignment and Assumption Agreement shall be deemed to amend this Credit
Agreement to the extent, and only to the extent, necessary to reflect the
addition of such Purchasing Bank as a Bank and the resulting adjustment of
Commitment Percentages or Term Loan Percentages arising from the purchase by
such Purchasing Bank of all or a portion of the rights and obligations of such
Transferor Bank under this Credit Agreement and its Revolving Credit Note or
Amended and Restated Term Note, as the case may be. On or prior to the
Transfer Effective Date, the Borrower shall execute and deliver to the Agent,
in exchange for the surrendered Revolving Credit Note or Amended and Restated
Term Note held by the Transferor Bank, a new Revolving Credit Note or Amended
and Restated Term Note, as the case may be, to the order of such Purchasing
Bank in an amount equal to the Commitment Amount or Term Loan Amount assumed by
it and purchased by it pursuant to such Assignment and Assumption Agreement,
and a new Revolving Credit Note or Amended and Restated Term Note, as the case
may be, to the order of the Transferor Bank in an amount equal to the
Commitment Amount or Term Loan Amount retained by it hereunder, if any.
10.8c Assignment Register. The Agent shall maintain, at its address referred
to in Subsection 10.2b hereof, a copy of each Assignment and Assumption
Agreement delivered to it and a register (the "Register") for the recordation
of the names and addresses of the Banks, and the amount of the Commitment
Amount and/or Term Loan Amount of each Bank, if any, then in effect, and the
amount of the Loans owing to each Bank, from time to time. The entries in the
Register shall be conclusive, in the absence of manifest error, and the
Borrower, the Agent and the Banks may treat each Person whose name is recorded
in the Register as the owner of the Loans for all purposes of this Credit
Agreement. The Register shall be available at the office of the Agent set
forth in Subsection 10.2b hereof for inspection by the Borrower or any Bank at
any reasonable time and from time to time upon reasonable prior notice.
10.8d Participations. Any Bank, in the ordinary course of its commercial
banking business and in accordance with applicable law, may sell to one or more
Participants a Participation in any Loan owing to such Bank, the interest of
such Bank in (i) any Revolving Credit Note or Amended and Restated Term Note or
(ii) the Commitment Amount or Term
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Loan Amount of such Bank. In the event of any such sale by a Bank of a
Participation to a Participant, such Bank's obligations under this Credit
Agreement to the other parties to this Credit Agreement shall remain unchanged,
such Bank shall remain solely responsible for the performance thereof, such
Bank shall remain the holder of its Revolving Credit Note or Amended and
Restated Term Note for all purposes under this Credit Agreement (including
voting rights hereunder), and the Borrower, the other Banks and the Agent shall
continue to deal solely and directly with such Bank in connection with such
Bank's rights and obligations under this Credit Agreement or the other Loan
Documents; provided, however, that no Bank shall transfer or grant any
Participation under which the Participant shall have rights to approve any
amendment, modification or waiver of this Credit Agreement or any other Loan
Document except to the extent such amendment, modification or waiver would (i)
reduce or increase the principal amount of such Participant's Participation
over the amount then in effect, (ii) decrease the interest rate relating to the
Loans, (iii) reduce the Commitment Fee as any other Fee payable to the
Participant, (iv) postpone any date fixed for any payment of principal of or
interest on the Loans, the Commitment Fee or any other Fees or obligations of
the Borrower set forth in Article II or (v) release any collateral granted to
the Agent, on behalf of the Bank, by any Loan Party to secure the Bank
Indebtedness.
10.8e Other Assignments. Notwithstanding the foregoing provisions of this
Section 10.8, any Bank may, at any time and from time to time, assign all or
any portion of its rights under this Credit Agreement and its Revolving Credit
Note or Amended and Restated Term Note to a Federal Reserve Bank in support of
borrowings made by such Bank from such Federal Reserve Bank. No such
assignment shall release any assigning Bank from its obligations hereunder.
10.8f Disclosure. The Borrower authorizes each Bank to disclose to any
Participant or Purchasing Bank and any prospective Participant or Purchasing
Bank any and all financial information in such Bank's possession concerning the
Borrower and its Subsidiaries which has been delivered to such Bank by or on
behalf of the Borrower pursuant to this Credit Agreement or in connection with
such Bank's credit evaluation of the Borrower prior to becoming a party to this
Credit Agreement.
10.9 Confidentiality. Unless otherwise agreed to in writing by the Borrower,
the Agent and the Banks hereby agree to keep all Proprietary Information
confidential and not to disclose or reveal any Proprietary Information to any
Person other than the Agent's or the Banks' directors, officers, employees,
Affiliates and agents and to actual or potential Purchasing Banks and
Participants, and then only on a confidential basis; provided, however, that
the Agent or the Banks may disclose Proprietary Information (i) as required by
any Governmental Rule, (ii) to their respective attorneys and accountants or
(iii) as requested or required by any state, federal or foreign authority or
examiner regulating banks or banking; and further, provided, that the Agent or
the Banks may not disclose any confidential information concerning identified
students before giving the Borrower notice of such proposed disclosure and
affording it a reasonable opportunity to obtain a judicial protective order
from a court of competent jurisdiction.
10.10 Indemnification. The Borrower will indemnify and hold harmless the Agent
and the Banks, any of their respective directors, officers or employees and
each Person, if
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any, who controls the Agent or the Banks within the meaning of the Securities
Act of 1933 or the Securities and Exchange Act of 1934 (any and all of whom are
referred to as an "Indemnified Party") from and against any and all losses,
claims, damages and liabilities (including but not limited to any Environmental
Claim or the liability of any Bank thereon), joint or several (including but
not limited to all legal fees or other expenses reasonably incurred by any
Indemnified Party in connection with the preparation for or defense of any
pending or threatened claim, action or proceeding, whether or not resulting in
any liability), to which such Indemnified Party may become subject (whether or
not such Indemnified Party is a party thereto) under any applicable federal or
state law or otherwise caused by or arising out of, or allegedly caused by or
arising out of, this Credit Agreement or any transaction contemplated hereby,
other than losses, claims, damages or liabilities resulting from the transfer
of any of the Notes in violation of any applicable law or regulation; provided,
the Borrower shall not be liable where any action or failure to act was due to
the gross negligence or willful misconduct of the Indemnified Party.
Promptly after receipt by an Indemnified Party of notice of any claim, action
or proceeding with respect to which an Indemnified Party is entitled to
indemnity hereunder, such Indemnified Party will notify the Borrower of such
claim or the commencement of such action or proceeding, provided that the
failure of an Indemnified Party to give notice as provided herein shall not
relieve the Borrower of its obligations under this Section 10.10 with respect
to such Indemnified Party, except to the extent that the Borrower is actually
prejudiced by such failure. The Borrower will assume the defense of such
claim, action or proceeding and will assume the defense of such claim, action
or proceeding and will employ counsel satisfactory to the Indemnified Party and
will pay the fees and expenses of such counsel. Notwithstanding the preceding
sentence, the Indemnified Party will be entitled, at the expense of the
Borrower, to employ counsel separate from counsel for the Borrower and for any
other party in such action if the Indemnified Party reasonably determines that
a conflict of interest or other reasonable basis exists which makes
representation by counsel chosen by the Borrower not advisable, provided that
the Borrower shall not be obligated to pay for the fees and expenses of more
than one counsel for all Indemnified Parties. In the event an Indemnified
Party appears as a witness in any action or proceeding brought against the
Borrower (or any of its officers, directors or employees) in which an
Indemnified Party is not named as a defendant, the Borrower agrees to reimburse
such Indemnified Party for all expenses incurred by it (including fees and
expenses of counsel) in connection with its appearing as a witness.
The Borrower's obligations under this Section 10.10 shall survive the
termination of this Credit Agreement and repayment of the Bank Indebtedness.
10.11 Integration. This Credit Agreement together with the other Loan
Documents constitutes the entire agreement between the parties relating to this
financing transaction and its supersedes all prior understandings and
agreements, whether written or oral between the parties hereto concerning the
transactions provided for herein.
10.12 Severability. Any provision of this Credit Agreement which is prohibited
or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of
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such prohibition or unenforceability without invalidating the remaining
provisions hereof or affecting the validity or enforceability of such provision
in any other jurisdiction.
10.13 APPLICABLE LAW. THIS CREDIT AGREEMENT, THE REVOLVING CREDIT NOTES, THE
AMENDED AND RESTATED TERM NOTES, THE AMENDED AND RESTATED SECURITY AGREEMENT,
THE AMENDED AND RESTATED PLEDGE AGREEMENT, AND THE AMENDED AND RESTATED
SUBSIDIARY PLEDGE AGREEMENT SHALL BE CONTRACTS MADE UNDER AND GOVERNED BY THE
LAWS OF THE COMMONWEALTH OF PENNSYLVANIA WITHOUT REFERENCE TO THE PROVISIONS
THEREOF REGARDING CONFLICTS OF LAW.
10.14 CONSENT TO JURISDICTION. THE PARTIES HERETO AGREE THAT ANY ACTION OR
PROCEEDING ARISING OUT OF OR RELATING TO THIS CREDIT AGREEMENT, THE NOTES OR
THE OTHER LOAN DOCUMENTS SHALL BE COMMENCED IN THE COURT OF COMMON PLEAS OF
ALLEGHENY COUNTY, PENNSYLVANIA OR IN THE DISTRICT COURT OF THE UNITED STATES
FOR THE WESTERN DISTRICT OF PENNSYLVANIA AND EACH PARTY AGREES THAT A SUMMONS
AND COMPLAINT COMMENCING AN ACTION OR PROCEEDING IN EITHER OF SUCH COURTS SHALL
BE PROPERLY SERVED AND SHALL CONFER PERSONAL JURISDICTION IF SERVED PERSONALLY
OR BY CERTIFIED MAIL TO THE PARTY IN RESPECT OF THE BORROWER OR THE AGENT, AT
ITS ADDRESS SET FORTH IN SECTION 10.2 HEREOF AND IN RESPECT OF ANY BANK, AT ITS
ADDRESS SET FORTH ON ITS SIGNATURE PAGE TO THIS CREDIT AGREEMENT OR ON THE
ASSIGNMENT AND ASSUMPTION AGREEMENT TO WHICH SUCH BANK IS A PARTY, OR AS
OTHERWISE PROVIDED UNDER THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA.
FURTHER, THE BORROWER, THE AGENT AND THE BANKS HEREBY SPECIFICALLY CONSENT TO
THE PERSONAL JURISDICTION OF THE COURT OF COMMON PLEAS OF ALLEGHENY COUNTY,
PENNSYLVANIA AND THE DISTRICT COURT OF THE UNITED STATES FOR THE WESTERN
DISTRICT OF PENNSYLVANIA AND WAIVE AND HEREBY ACKNOWLEDGE THAT THE BORROWER,
THE AGENT AND THE BANKS ARE ESTOPPED FROM RAISING ANY CLAIM THAT EITHER SUCH
COURT LACKS PERSONAL JURISDICTION OVER THE BORROWER, THE AGENT OR THE BANKS SO
AS TO PROHIBIT EITHER SUCH COURT FROM ADJUDICATING ANY ISSUES RAISED IN A
COMPLAINT FILED WITH EITHER SUCH COURT CONCERNING THIS CREDIT AGREEMENT OR THE
NOTES.
10.15 Counterparts. This Credit Agreement may be executed in as many identical
counterparts as may be convenient and by the different parties hereto on
separate counterparts. This Credit Agreement shall become binding when the
Agent, the Banks and the Borrower have executed at least one counterpart.
Immediately after the execution of counterparts and solely for the convenience
of the parties hereto, the Borrower and the Banks will execute sufficient
counterparts so that Borrower shall have counterparts executed by it, and the
Banks shall have counterparts executed by it and the Borrower. All
counterparts shall constitute but one and the same instrument.
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10.16 Amendment and Restatement. This Credit Agreement amends and restates in
its entirety the 1989 Credit Agreement except to the extent of certain
provisions contained in the 1989 Credit Agreement which by their terms are
intended to survive the expiration or termination of the 1989 Credit Agreement.
The Bank Indebtedness as evidenced by the Notes and as described herein is a
continuation, in part, of the indebtedness provided under the 1989 Credit
Agreement, and it is the express intention of the parties that no novation
shall occur.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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Executed as of the day and year first above written.
EDUCATION MANAGEMENT CORPORATION
By ___________________________________
Name _________________________________
Title ________________________________
PNC BANK, NATIONAL ASSOCIATION,
in its capacity as the Agent
By ___________________________________
Name _________________________________
Title ________________________________
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IN WITNESS WHEREOF, intending to be legally bound hereby, the undersigned
Bank has caused this Credit Agreement by and among EDUCATION MANAGEMENT
CORPORATION, the FINANCIAL INSTITUTIONS PARTY HERETO and PNC BANK, NATIONAL
ASSOCIATION, as the Agent, to be executed by its duly authorized officer as of
the date first above written.
<TABLE>
<S> <C>
Revolving Credit Commitment: PNC BANK, NATIONAL ASSOCIATION, in its
$27,000,000.00 capacity as a Bank and the Issuing Bank
Commitment Percentage: 54.00%
By ____________________________________
Term Loan Amount: Name: Erin H. Knoll
$2,602,825.00 Title: Assistant Vice President
Term Loan Percentage: 28.2742%
Addresses for notice purposes:
If by United States Mail: If by other means:
PNC Bank, National Association PNC Bank, National Association
Multi-Bank Loan Administration Multi-Bank Loan Administration
One PNC Plaza - 19th Floor One PNC Plaza - 19th Floor
Pittsburgh, Pennsylvania 15265 Pittsburgh, Pennsylvania 15222
Attention: Arlene M. Ohler Attention: Arlene M. Ohler
Assistant Vice President Assistant Vice President
Telephone: (412) 762-3627
Telecopier: (412) 762-8672
With a copy to:
PNC Bank, National Association
Select Industries Department
Two PNC Plaza - 2nd Floor
Pittsburgh, Pennsylvania 15265
Attention: Erin H. Knoll
Assistant Vice President
Telephone: (412) 762-7570
Telecopier: (412) 762-4039
</TABLE>
Address for Eurodollar Rate Loan funding if different from above:
______________________________________
______________________________________
______________________________________
Telephone: ___________________________
Telecopier: __________________________
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<PAGE> 98
IN WITNESS WHEREOF, intending to be legally bound hereby, the undersigned
Bank has caused this Credit Agreement by and among EDUCATION MANAGEMENT
CORPORATION, the FINANCIAL INSTITUTIONS PARTY HERETO and PNC BANK, NATIONAL
ASSOCIATION, as the Agent, to be executed by its duly authorized officer as of
the date first above written.
<TABLE>
<S> <C>
Revolving Credit Commitment: NATIONAL CITY BANK,
$15,000,000.00 in its capacity as a Bank
Commitment Percentage: 30.00%
By _____________________________________
Term Loan Amount: Name: __________________________________
$4,602,825.00 Title: _________________________________
Term Loan Percentage: 50.00%
Addresses for notice purposes:
If by United States Mail: If by other means:
National City Bank National City Bank
1900 East Ninth Street 1900 East Ninth Street
LOC 3032 LOC 3032
Cleveland, Ohio 44114 Cleveland, Ohio 44114
Attention: Wendy Pollarine Attention: Wendy Pollarine
Commercial Loan Commercial Loan Operations
Operations Telephone: (216) 575-2156
Telecopier: (216) 575-3207
with a copy to:
National City Bank
1900 East Ninth Street
LOC 2102
Cleveland, Ohio 44114
Attention: David A. Burns
Vice President
Telephone: (216) 575-3061
Telecopier: (216) 575-9396
</TABLE>
Address for Eurodollar Rate Loan funding if different from above:
___________________________________
___________________________________
___________________________________
Telephone: ________________________
Telecopier: _______________________
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<PAGE> 99
IN WITNESS WHEREOF, intending to be legally bound hereby, the undersigned
Bank has caused this Credit Agreement by and among EDUCATION MANAGEMENT
CORPORATION, the FINANCIAL INSTITUTIONS PARTY HERETO and PNC BANK, NATIONAL
ASSOCIATION, as the Agent, to be executed by its duly authorized officer as of
the date first above written.
<TABLE>
<S> <C>
Revolving Credit Commitment: SOCIETY NATIONAL BANK,
$8,000,000.00 in its capacity as a Bank
Commitment Percentage: 16.00%
By ___________________________________
Term Loan Amount: Name: ________________________________
$2,000,000.00 Title: _______________________________
Term Loan Percentage: 21.7258%
Addresses for notice purposes:
If by United States Mail: If by other means:
Society National Bank Society National Bank
127 Public Square 127 Public Square
OH-01-27-0606 OH-01-27-0606
Cleveland, Ohio 44114 Cleveland, Ohio 44114
Attention: Terri Zalewaki Attention: Terri Zalewaki
Telephone: (216) 689-3518
Telecopier: (216) 689-4981
with a copy to:
Society National Bank
127 Public Square
OH-01-27-0606
Cleveland, Ohio 44114
Attention: David Dannemiller
Assistant Vice President
Telephone: (216) 689-4451
Telecopier: (216) 689-4981
</TABLE>
Address for Eurodollar Rate Loan funding if different from above:
______________________________________
______________________________________
______________________________________
Telephone: ___________________________
Telecopier: __________________________
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<PAGE> 1
Exhibit 4.18
SECOND AMENDMENT TO
AMENDED AND RESTATED CREDIT AGREEMENT
THIS SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT is made as
of the 31st day of July, 1996 (the "Second Amendment") to that certain Amended
and Restated Credit Agreement dated as of March 16, 1995, as previously amended
by the First Amendment to Amended and Restated Credit Agreement dated as of
October 13, 1995 (the Amended and Restated Credit Agreement as previously
amended, together with all exhibits and schedules thereto, the "Original
Agreement") (the Original Agreement as amended by the Second Amendment,
together with all extensions, substitutions, replacements, restatements and
other amendments or modifications thereof or thereto, the "Credit Agreement")
by and among EDUCATION MANAGEMENT CORPORATION, a corporation organized and
existing under the laws of the Commonwealth of Pennsylvania (the "Borrower"),
the FINANCIAL INSTITUTIONS listed on the signature pages to this Second
Amendment (individually a "Bank" and collectively the "Banks"), PNC BANK,
NATIONAL ASSOCIATION as the issuer of letters of credit under the Credit
Agreement (in such capacity the "Issuing Bank") and PNC BANK, NATIONAL
ASSOCIATION, a national banking association as the agent for the Banks (in such
capacity the "Agent").
WITNESSETH:
WHEREAS, the Borrower and the Banks, the Issuing Bank and the Agent
desire to amend the Original Agreement as set forth herein.
NOW, THEREFORE, in consideration of the terms and conditions contained
herein, and other good and valuable consideration, the parties hereto,
intending to be legally bound, hereby agree as follows:
ARTICLE I
AMENDMENTS TO ORIGINAL AGREEMENT
FIRST: Section 1.1 of the Original Agreement is hereby amended in the
following particulars:
1. The definition of "Bank Indebtedness" is amended and restated in its
entirety to read as follows:
"Bank Indebtedness" means the liability of the Borrower, as of any
date of determination, without duplication, to pay the Commitment Fee,
the Agent's Fee,
<PAGE> 2
the Letter of Credit Fees, the Issuance Fee, the outstanding principal
amount of the Revolving Credit Loans, the Term Loans and the Additional
Term Loans, any draws upon any Letter of Credit, interest thereon, any
other amounts due pursuant to Article II hereof and all reasonable
out-of-pocket expenses incurred by the Banks or the Agent in connection
with the preparation, negotiation, administration, enforcement of this
Credit Agreement, the Revolving Credit Notes, the Amended and Restated
Term Notes, the Additional Term Notes, the other Loan Documents, the
transactions contemplated thereby, or the protection of the Agent's, the
Banks' or the Issuing Bank's rights under any of the foregoing described
instruments (including but not limited to the reasonable fees and expenses
of counsel) to the extent such expenses are the responsibility of the
Borrower pursuant to this Credit Agreement.
2. The definition of "Eurodollar Rate" is amended and restated in its
entirety to read as follows:
"Eurodollar Rate" means, with respect to each Eurodollar Rate Loan,
the rate of interest per annum with respect to any Interest Period
obtained by the Agent by dividing (i) the rate of interest determined by
the Agent in accordance with its usual procedures (which determination
shall be conclusive, absent manifest error) to be equal to the offered
rates for deposits in Dollars for the applicable Eurodollar Interest
Period which appear on Page 3750 of the TELERATE rate reporting system,
or a comparable replacement as determined by the Agent approximately
11:00 a.m., Greenwich Mean Time two (2) Business Days prior to the first
day of each Interest Period for an amount comparable to the Eurodollar
Rate Loan for such Interest Period and having a borrowing date and a
maturity comparable to such Interest Period by (ii) a number (expressed
as a decimal) equal to (A) 1.00 minus (B) the Eurodollar Reserve
Percentage, if any. The Eurodollar Rate described above may also be
expressed by the following formula:
<TABLE>
<S> <C> <C>
Eurodollar Rate = Offered Rate on TELERATE Page 3750
------------------------------------
1.00 - Eurodollar Reserve Percentage
</TABLE>
If more than one offered rate appears on Page 3750 of the TELERATE rate
reporting system or similar system, the rate will be the arithmetic mean
of such offered rates.
3. The definition of "Loan" is amended and restated in its entirety to
read as follows:
"Loan" means any Revolving Credit Loan, Term Loan or Additional Term
Loan.
4. The definition of "Note" is amended and restated in its entirety to
read as follows:
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<PAGE> 3
"Note" means any or all of the Revolving Credit Notes, the Amended
and Restated Term Notes and the Additional Term Notes.
5. The definition of "Term Loan" is amended and restated in its entirety
to read as follows:
"Term Loan" means a term loan described in Subsections 2.1a through
2.1g hereof.
6. A definition of "Additional Term Loan" is added which shall read as
follows:
"Additional Term Loan" means a term loan described in Subsections
2.1h through 2.1n hereof.
7. A definition of Additional Term Loan Fee is added which shall read as
follows:
"Additional Term Loan Fee" means the fee described in Section 2.1n
hereof.
8. A definition of "Additional Term Loan Account" is added which shall
read as follows:
"Additional Term Loan Account" means a bookkeeping account
established at each Revolving Credit Bank in the name of the Borrower
pursuant to Subsection 2.1m hereof.
9. A definition of "Additional Term Loan Amount" is added which shall read
as follows:
"Additional Term Loan Amount" means the amount of the Preferred
Stock Repurchase Draw which is converted on March 31, 1997 into the
Additional Term Loan.
10. A definition of "Additional Term Loan Note" is added which shall read
as follows:
"Additional Term Loan Note" means an Additional Term Loan Note
substantially in the form of Exhibit "K."
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<PAGE> 4
11. A definition of "IPO" is added which shall read as follows:
"IPO" means the initial public offering of the Borrower's common
stock.
12. A definition of "Preferred Stock Redemption Agreement" is added which
shall read as follows:
"Preferred Stock Redemption Agreement" means (i) the agreement
between the Borrower and the ESOP pursuant to which the Borrower agrees
to redeem up to approximately 98,000 shares of the Borrower's issued and
outstanding Series A 10.19% convertible preferred stock at a price of
$101.43 per share together with accrued and unpaid dividends thereon
together with (ii) any and all other agreements related thereto and
executed in connection therewith.
13. A definition of "Preferred Stock Redemption Draw" is added which shall
read:
"Preferred Stock Redemption Draw" means the single Disbursement
under Section 2.2 of the Agreement for the purpose and under the
conditions set forth in item (e) of Section 5.1 hereof.
14. A definition of "Second Amendment" is added which shall read:
"Second Amendment" means the Second Amendment to Amended and
Restated Credit Agreement dated as of July 31, 1996.
SECOND: Section 1.3 of the Original Agreement is hereby amended to add to
the end thereof the following items (v) and (vi) which shall read as follows:
(v) On and after the date of the Second Amendment each reference to
Society National Bank in each of the Loan Documents shall be deemed to
mean KeyBank, National Association.
(vi) On and after the date of the Second Amendment each reference
to Integra Bank or National City Bank shall be deemed to mean National
City Bank of Pennsylvania.
THIRD: Section 2.1 of the Original Agreement is hereby amended (i) to
change its title to "The Term Loans" and (ii) to add to the end thereof
Subsections 2.1h through 2.1n inclusive, which shall read as follows:
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<PAGE> 5
2.1h Additional Term Loan. On March 31, 1997 the unpaid amount of
the Preferred Stock Redemption Draw shall be converted into the
Additional Term Loans with each Revolving Credit Bank receiving an
Additional Term Loan in an amount determined by multiplying the aggregate
Additional Term Loan Amount by such Revolving Credit Bank's Commitment
Percentage.
2.1i Additional Term Notes. The obligation of the Borrower to repay
the Additional Term Loans shall be evidenced by Additional Term Notes
each substantially in the form of Exhibit "K" hereto dated March 31,
1997, one made payable to each Bank in the amount of each Revolving
Credit Bank's share of the Additional Term Loan determined in accordance
with Subsection 2.1h above.
2.1j Repayment of Additional Term Loans. The Additional Term Loans
shall be repaid in twenty consecutive equal quarterly payments of
principal with the first such payment due on July 1, 1997 and continuing
thereafter on each succeeding October 1, January 1, April 1 and July 1
until payment in full. The foregoing notwithstanding, the remaining
outstanding principal balance of the Additional Term Loans shall be due
and payable on the Repayment Date.
2.1k Interest. The Additional Term Loan Notes shall bear interest
from the date thereof until payment in full as set forth in Section 2.4
hereof.
2.1l Prepayment.
(i) Mandatory Prepayment. Net Offering Proceeds shall be
immediately applied by the Borrower as and when received to prepay in
full the Additional Term Loan.
(ii) Voluntary Prepayment. The Additional Term Loans may be prepaid
in whole or in part at any time by the Borrower; provided, however (i)
each partial prepayment shall be in the aggregate principal amount of
$1,000,000 or more; (ii) the Borrower shall have given the Agent not less
than three (3) Business Days' prior written notice of each voluntary
prepayment, the aggregate principal amount to be prepaid and the date of
such prepayment and (iii) the Borrower shall have complied with the
provisions of Section 2.5 hereof. Notice of prepayment having been
given, the principal amount specified in such notice shall become due and
payable on such date.
2.1m Additional Term Loan Account. Each Revolving Credit Bank shall
open and maintain on its books an Additional Term Loan Account in the
Borrower's name with respect to such Bank's Additional Term Loan Amount,
prepayments thereon, the computation and payment of interest and the
computation of other amounts due and sums paid to the Agent, on behalf of
such Revolving Credit
-5-
<PAGE> 6
Bank, pursuant to this Section 2.1. Except in the case of manifest error,
the Additional Term Loan Accounts shall be conclusive and binding on the
Borrower as to the amount at any time due such Revolving Credit Bank from
the Borrower pursuant to this Section 2.1.
2.1n Additional Term Loan Fee. On the earlier to occur of (i) the
date on which the Credit Agreement is terminated and all amounts
thereunder are paid in full by reason of the Borrower obtaining
replacement debt financing or (ii) March 31, 1997, if between the date of
the Second Amendment and March 31, 1997 the Borrower has not received Net
Offering Proceeds of at least $10,000,000, the Borrower shall pay to
Agent a fee in the amount of $87,500, for the pro rata benefit of the
Revolving Credit Banks in accordance with their respective Commitment
Percentages.
FOURTH: Subsection 2.2g of the Original Agreement is hereby amended and
restated in its entirety to read as follows:
2.2a Revolving Credit Commitment. The Revolving Credit Commitment
shall be automatically and permanently reduced by $5,000,000 annually
beginning October 13, 1997 in accordance with the following schedule.
<TABLE>
<CAPTION>
REDUCED REVOLVING
DATE OF REDUCTION CREDIT COMMITMENT
<S> <C>
October 13, 1997 $65,000,000
October 13, 1998 $60,000,000
October 13, 1999 $55,000,000
October 13, 2000 $50,000,000
(assuming one or
both of the
extensions of the
Repayment Date have
been agreed to by
the Banks)
</TABLE>
The foregoing automatic permanent reductions are in addition to any
voluntary permanent reductions provided for in Subsection 2.2e. If no
extension of the original Repayment Date is granted pursuant to
Subsection 2.2f, the entire outstanding amount of the Revolving Credit
Loans, interest thereon and costs related thereto shall be due and
payable in full on October 13, 2000. Further, in addition to the
foregoing, there will occur on the date of funding of the Additional Term
Loan a mandatory reduction of the Revolving Credit Commitment in the
amount of the Additional Term Loan, and each of the Reduced Revolving
Credit Commitments set forth in the preceding
-6-
<PAGE> 7
schedule shall also be reduced by the initial principal amount of the
Additional Term Loan.
FIFTH: Subsection 2.2 of the Original Agreement is hereby amended by
adding to the end thereof a new Subsection 2.2k which shall read as follows:
2.2k Mandatory Repayment. Net Offering Proceeds received on or
before March 31, 1997 must be immediately applied by the Borrower to
repay the Preferred Stock Redemption Draw. In the event that Net
Offering Proceeds received after the date of the Second Amendment but
prior to March 31, 1997 are insufficient to repay in full the Preferred
Stock Draw on or before March 31, 1997, the unpaid portion of Preferred
Stock Redemption Draw shall be converted into the Additional Term Loan as
set forth in Subsections 2.1h through 2.1m inclusive on March 31, 1997.
SIXTH: Section 4.3 of the Original Agreement is amended and restated in
its entirety to read as follows:
4.3 Capitalization. The outstanding shares of the Class A and Class
B common stock and Series A 10.19% convertible preferred stock have been
duly authorized and validly issued and are fully paid and nonassessable.
As of the Closing Date, all of the Borrower's capital stock is owned by
the Management Stockholders, the ESOP and other Persons as more fully set
forth on Schedule 4.3. As of the Closing Date, the Borrower will not
have outstanding any stock or securities (except for the Series A 10.19%
convertible preferred stock, the Class B common stock, and the Warrants)
convertible or exchangeable for any shares of its common stock, nor,
except as set forth on Schedule 4.3, will it have outstanding any rights
or options to subscribe for or to purchase any of the Borrower's capital
stock or any stock or securities convertible into or exchangeable for the
Borrower's common stock.
SEVENTH: Section 5.1 of the Original Agreement is hereby amended and
restated in its entirety to read as follows:
5.1 Use of Proceeds. Proceeds of the Term Loans hereunder will be
used to purchase the 1989 Term Loans from the 1989 Banks. Proceeds of
the Revolving Credit Loans shall be used by the Borrower (a) to refinance
the revolving credit loans, if any, outstanding under the 1989 Credit
Agreement, (b) for general working capital purposes of the Borrower and
its Active Subsidiaries, including but not limited to capital
expenditures, the acquisition and development of additional schools,
draws to meet DOE regulatory requirements and Permitted Acquisitions, (c)
to refinance the existing Senior Subordinated Notes; provided, however,
such proceeds must be used to repay existing Senior Subordinated Notes in
full not later than October 13, 1995 or the Borrower shall lose the
ability to use proceeds of the
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<PAGE> 8
Revolving Credit Loans for this purpose, (d) for financing of loans to the
ESOP, and (e) provided the provisions of Section 7.3 have been satisfied,
to acquire and hold as treasury shares up to approximately 98,000 shares
of the Borrower's Series A 10.19% convertible preferred stock; provided,
however, proceeds used for such purchase may not exceed $10,000,000 and
must be disbursed in a single Disbursement; and provided, further this
Preferred Stock Repurchase Draw may only be repaid with Net Offering
Proceeds or by the issuance of Additional Term Loan Notes.
EIGHTH: Subsection 5.12a of the Original Agreement is hereby amended and
restated in its entirety to read as follows:
5.12a Continued Ownership of Borrower. At all times during the term
hereof, prior to the IPO being completed, on a fully diluted basis as if
all outstanding securities convertible into common stock had been
converted and all outstanding warrants, options or other rights to
acquire common stock had been exercised, and except as otherwise
permitted by Section 6.13 hereof, (i) the ESOP and the Management
Stockholders will own at least fifty percent (50%) of the total value of
the outstanding stock of the Borrower, (ii) the Permitted Owners will own
at least twelve percent (12%) of the total value of the outstanding
common stock of the Borrower, and (iii) until such time as the Term Loans
are repaid in full, the ESOP will own at least thirty percent (30%) of
the total value of outstanding stock of the Borrower. The foregoing
notwithstanding, it shall not be considered a violation of item (iii)
above if the ESOP fails to own at least thirty percent (30%) of the total
value of outstanding stock of the Borrower by reason of (a) the purchase
by the Borrower of stock pursuant to any Repurchase Obligation, (b) any
distribution to or retention of stock by former ESOP participants or
their beneficiaries or (c) the grant of any options to certain Management
shareholders as additional compensation.
NINTH: A new Section 5.15 shall be added to the Agreement which shall
read:
5.15 Performance under Preferred Stock Redemption Agreement. The
Borrower shall comply with all material provisions of the Preferred Stock
Redemption Agreement and shall purchase not more than approximately
98,000 shares of its Series A 10.19% convertible preferred stock
thereunder.
TENTH: Section 6.1 of the Original Agreement is hereby amended and
restated in its entirety to read as follows:
6.1 Maintenance of Consolidated Net Worth. The Borrower will not permit
or suffer to exist, as of the end of each Fiscal Year set forth below,
its Consolidated Net Worth to be less than the amount set forth below for
such Fiscal Year:
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<PAGE> 9
(i) as of June 30, 1995, $100,000;
(ii) as of June 30, 1996, the sum of (A) the amount of the
minimum Consolidated Net Worth required as of the preceding Fiscal
Year plus (B) one hundred percent (100%) of the Net Offering
Proceeds completed during the preceding Fiscal Year plus (C)
seventy-five percent (75%) of Net Income for the preceding Fiscal
Year (to the extent this is a positive number);
(iii) as of June 30, 1997, the sum of (A) the amount of the
minimum Consolidated Net Worth as of the preceding Fiscal Year, plus
(B) one hundred percent (100%) of the Net Offering Proceeds
completed during the preceding Fiscal Year plus (C) fifty percent
(50%) of Net Income for the preceding Fiscal Year (to the extent
this is a positive number minus the amount of the Preferred Stock
Redemption Draw; and
(iv) as of the end of each Fiscal Year ended after July 1,
1997, the sum of (A) the amount of the minimum Consolidated Net
Worth required for the preceding Fiscal Year (whether pursuant to
(ii) above or as the cumulative result of this clause (iii)) plus
(B) one hundred percent (100%) of the Net Offering Proceeds
completed during the preceding Fiscal Year plus (C) fifty percent
(50%) of Net Income for the preceding Fiscal Year (to the extent
this is a positive number).
ELEVENTH: Section 6.10 of the Original Agreement is amended and restated
to read as follows:
6.10 Restriction of Operating Leases. As of the Closing Date, the
Borrower and its Subsidiaries have in force as lessees the operating
leases set forth on Schedule 6.10 hereto. The Borrower will not, and
will not permit any Subsidiary to, incur to assume any new operating
leases during any Fiscal Year commencing after the Closing Date having
aggregate payments, on a Consolidated basis in such Fiscal Year, (i) in
excess of $1,000,000 for each Fiscal Year ending on or before June 30,
1996 and (ii) in excess of $1,250,000 for each Fiscal Year ending after
July 1, 1996; provided, however, that the foregoing shall not prohibit
(x) the replacement, substitution, extension or renewal of any operating
lease in force prior to the Closing Date or (y) the assumption of any
operating lease as an integral part of a Permitted Acquisition and any
replacement, substitution extension or renewal of any such assumed
operating lease.
TWELFTH: Section 6.12 of the Original Agreement is hereby amended and
restated in its entirety to read as follows:
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<PAGE> 10
6.12a Dividend Restrictions. The Borrower shall not declare or pay
cash dividends or distributions on its capital stock while the Credit
Facility is outstanding, except for (i) the payment of dividends on the
(A) Series A 10.19% preferred stock of the Borrower held by the ESOP or
(B) Class A common Stock of the Borrower to the extent that in excess of
ninety percent (90%) of said common stock dividend is used to repay the
Term Loans and (ii) dividends on any class of stock of the Borrower in an
amount not to exceed the following: (A) the difference between (1)
$1,000,000 in the earlier to occur of (x) any Fiscal Year ended after
July 1, 1996 or (y) any Fiscal Year during which the Borrower's
Consolidated Net Worth is greater than or equal to $20,000,000 minus (2)
any stock redemptions made during such period and permitted pursuant to
clause (A) of Subsection 6.12b below or (B) the difference between (1)
$1,500,000 in any Fiscal Year during which the Borrower's Consolidated
Net Worth is greater than or equal to $45,000,000 minus (2) any stock
redemptions made during such period and permitted pursuant to clause (A)
of Subsection 6.12b below.
6.12b Redemption Restrictions. The Borrower shall not, nor shall it
permit any Subsidiary to, purchase the Borrower's capital stock while the
Credit Facility is outstanding, except for (i) the redemption of any such
capital stock held by the ESOP (x) in connection with the termination of
service of employees of the Borrower or its Subsidiaries or (y) pursuant
to the Preferred Stock Redemption Agreement and (ii) the redemption of any
such capital stock by the Borrower from Management Shareholders as more
fully set forth below.
(A) Upon the death, incapacity, retirement or termination of a
Management Stockholder (other than Knutson, except as provided below),
the Borrower may purchase such Management Stockholder's capital stock
upon the terms and conditions set forth in the applicable Management
Repurchase Agreement, provided that after giving effect to such purchase
no Event of Default has occurred and is continuing and provided, further
that the aggregate Net Purchase Price of all such purchases does not
exceed in any Fiscal Year beginning on and after July 1, 1994, the sum
of:
(1) the applicable amount from among the following amounts:
(a) $500,000, (b) the difference between (i) $1,000,000 in the earlier to
occur of (A) any Fiscal Year ended after July 1, 1996 or (B) any Fiscal
Year during which the Borrower's Consolidated Net Worth is greater than or
equal to $15,000,000 minus (ii) any dividends paid during such period and
permitted pursuant to item (ii) of Subsection 6.12a above or (c) the
difference between (i) $1,500,000 in any Fiscal Year during which the
Borrower's Consolidated Net Worth is
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<PAGE> 11
greater than or equal to $40,000,000 minus (ii) any dividends paid during
such period and permitted pursuant to item (ii) of Subsection 6.12a above,
plus
(2) the proceeds paid to the Borrower during such Fiscal Year
pursuant to life insurance policies on its employees, plus
(3) the Net Proceeds paid to the Borrower during such Fiscal
Year upon, without duplication (x) the resale or reissuance of the
treasury stock related to repurchased capital stock, or (y) the issuance
stock upon the exercise of stock options.
(B) Upon the death, incapacity, retirement or termination of
Knutson, the Borrower may purchase his capital stock upon the terms and
conditions set forth in the RBK Exchange and Repurchase Agreement,
provided that after giving effect to such purchase no Event of Default
has occurred or is continuing, and if such purchase is pursuant to the
Initial Put and the Secondary Put (as such terms are defined in the RBK
Exchange and Repurchase Agreement) (1) such purchases do not exceed the
amounts set forth in Section 10(b) of the RBK Exchange and Repurchase
Agreement, and (2) any purchases of capital stock owned by any Permitted
Owner for cash may not exceed the proceeds available for such purposes
under Key Man Life Insurance; provided, however, to the extent that such
Key Man Life Insurance is unavailable or insufficient, the Borrower may
purchase capital stock owned by any Permitted Owner subject to the
limitations set forth in item (A) of this Subsection 6.12b.
The foregoing notwithstanding, the amount permitted to be expended to
redeem the capital stock of the Borrower pursuant to items (A) and (B) of
clause (ii) above only in the immediate Fiscal Year, but not so expended,
may be expended in the next succeeding Fiscal Year for such purposes.
THIRTEENTH: Subsection 6.16 of the Original Agreement is hereby amended
and restated in its entirety to read as follows:
6.16 Alteration of Various Agreements. Except for (i) amendments
and modifications to the Plan Documents necessary to obtain determination
letters from the IRS or to continue to be a qualified plan and trust
under Code Sections 401(a) and 501(a), (ii) amendments to the documents
listed below, which do not alter the provisions regarding redemption of
the capital stock of the Borrower or any Subsidiary, and (iii) amendments
to the documents listed below, which would not
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<PAGE> 12
materially adversely affect the Banks, the Borrower, prior to the IPO
shall not, nor shall it permit any Subsidiary to, amend or modify any of
the following documents:
(A) until such time as the Term Loans are paid in full, the ESOP and
the ESOP Trust;
(B) Management Repurchase Agreements (except as otherwise set forth
on Schedule 6.16 hereto);
(C) Stockholder Agreements; and
(D) Preferred Stock Redemption Agreement.
In addition prior to the IPO, the Borrower shall not, nor shall it permit
any Subsidiary to, amend or modify the Warrants in any material respect.
FOURTEENTH: A new Section 7.3 is hereby added to the Agreement and shall
read as follows:
7.3 Preferred Stock Redemption Draw. The obligation of the
Revolving Credit Banks to make the Revolving Credit Disbursement
constituting the Preferred Stock Redemption Draw is subject, in addition
to being subject to the conditions of Section 7.1, to the following
conditions:
7.3a Preferred Stock Redemption Agreement. Delivery to the Agent of
a fully executed copy of the Preferred Stock Redemption Agreement in form
and substance satisfactory to the Agent and Banks.
7.3b Fairness Opinion. Delivery to the Agent of true and correct
copies of the fairness opinions or valuations addressed to the Trustee by
its financial advisors regarding the redemption of the Series A 10.19%
convertible preferred stock, which opinion shall be in form and substance
satisfactory to the Agent and Banks.
7.3c Legal Opinion. Receipt by the Agent on behalf of the Banks of
a signed favorable opinion of legal counsel to the Borrower as to the
redemption by the Borrower of certain Series A 10.19% convertible
preferred stock pursuant to the Preferred Stock Redemption Agreement
which opinion shall be in form and substance satisfactory to the Agent.
7.3d Proceedings Satisfactory. Receipt by the Agent of evidence
that all proceedings taken in connection with the redemption by the
Borrower of certain of its Series A 10.19% convertible preferred stock
and any other transactions in
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<PAGE> 13
connection therewith has been or, immediately after the Preferred Stock
Redemption Draw, will be duly completed and receipt by the Agent of such
documents and papers, all in form and substance reasonably satisfactory to
the Agent and the Agent's counsel, as the Agent or its special counsel may
reasonably request in connection therewith.
ARTICLE II
CONDITIONS PRECEDENT
This Second Amendment shall become operative as of the date hereof when
each of the following conditions precedent are satisfied in the judgment of the
Agent or have been waived in writing by the Agent:
(a) Second Amendment. Receipt by the Agent on behalf of the Banks and the
Issuing Bank of duly executed counterparts of this Second Amendment from the
Borrower and the Banks and the Issuing Bank.
(b) Closing Certificate. Receipt by the Agent on behalf of the Banks of a
certificate signed by an Authorized Officer of the Borrower dated as of even
date herewith certifying that the representations and warranties set forth in
the Original Agreement are true and correct in all material respects on and as
of the date of this Second Amendment as though made on and as of such date,
except to the extent that such representations and warranties relate solely to
an earlier date (in which case, such representations and warranties shall have
been true and correct on and as of such earlier date).
(c) Second Amendment Closing Fee. Receipt by the Agent of the closing fee
in the amount of $87,500 for the pro rata benefit of the Revolving Credit Banks
in accordance with their respective Commitment Percentages.
(d) Corporate Documents of the Borrower. Receipt by the Agent on behalf
of the Banks of (i) a copy, duly certified as of the date hereof by the
secretary or assistant secretary of the Borrower, of the resolution of the
Borrower's Board of Directors authorizing the execution and delivery of this
Second Amendment and (ii) an incumbency certificate of the Borrower dated as of
the date hereof.
(e) Opinion of Borrower's Counsel. Receipt by the Agent on behalf of the
Banks of a signed favorable opinion of counsel to the Borrower as to the
authority of the Borrower to execute and deliver this Second Amendment, as to
the validity and enforceability thereof and as to such other matters as
reasonably requested by the Agent, all in form and substance satisfactory to
the Agent.
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<PAGE> 14
(f) Consolidated Note. Receipt by National City Bank of Pennsylvania of a
Revolving Credit Note in the maximum amount of $25,000,000 which will also
evidence interest and fees, if any, due under the Revolving Credit Note dated
October 13, 1995 made payable to National City Bank and the Revolving Credit
Note dated October 13, 1995 made payable to Integra Bank.
(g) Proceedings Satisfactory. Receipt by the Agent on behalf of the Banks
of evidence that all proceedings taken in connection with this Second Amendment
and the consummation of the transactions contemplated hereby and all documents
and papers relating hereto have been completed or duly executed, and receipt by
the Agent on behalf of the Banks of such documents and papers, all in form and
substance reasonably satisfactory to the Agent and Agent's special counsel, as
the Agent or its special counsel may reasonably request in connection
therewith.
ARTICLE III
MISCELLANEOUS
FIRST: With the merger of Integra Financial Corporation with and into
National City Corporation, National City Bank and National City Bank of
Pennsylvania (formerly Integra Bank) became Affiliates. With the consent of
the Borrower, the Agent and the Banks, National City Bank hereby transfers and
assigns all of its rights and obligations under the Credit Agreement and the
other Loan Documents to National City Bank of Pennsylvania and National City
Bank of Pennsylvania hereby assumes all of such rights and obligations.
SECOND: Except as expressly amended by this Second Amendment, the
Original Agreement and each and every representation, warranty, covenant, term
and condition contained therein is specifically ratified and confirmed.
THIRD: Except for proper nouns and as otherwise defined or amended
herein, capitalized terms used herein which are not defined herein, but which
are defined in the Original Agreement, shall have the meaning given them in the
Original Agreement.
FOURTH: This Second Amendment shall be binding upon and inure to the
benefit of the Borrower, the Banks, the Issuing Bank, the Agent and their
respective successors and assigns.
FIFTH: Nothing in this Second Amendment shall be deemed or construed to
be a waiver, release or limitation upon the Agent's or any Bank's exercise of
any of their respective rights and remedies under the Original Agreement or the
other Loan Documents,
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<PAGE> 15
whether arising as a consequence of any Events of Default which may now exist,
hereafter arise or otherwise, and all such rights and remedies are hereby
expressly reserved.
SIXTH: This Second Amendment may be executed in as many different
counterparts as shall be convenient and by the different parties hereto on
separate counterparts, each of which when executed by the Borrower, a Bank, the
Issuing Bank and the Agent shall be regarded as an original. All such
counterparts shall constitute but one and the same instrument.
SEVENTH: This Second Amendment shall be a contract made under and
governed by the laws of the Commonwealth of Pennsylvania without regard to the
principles thereof regarding conflict of laws.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE> 16
Executed as of the day and year first above written.
EDUCATION MANAGEMENT CORPORATION
By
Name
Title
PNC BANK, NATIONAL ASSOCIATION,
in its capacity as the Agent
By
Name:
Title:
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<PAGE> 17
IN WITNESS WHEREOF, intending to be legally bound hereby, the undersigned
Bank has caused this Second Amendment to Amended and Restated Credit Agreement
by and among EDUCATION MANAGEMENT CORPORATION, the FINANCIAL INSTITUTIONS PARTY
HERETO and PNC BANK, NATIONAL ASSOCIATION, as the Agent, to be executed by its
duly authorized officer as of the date first above written.
<TABLE>
<S> <C>
Revolving Credit Commitment: PNC BANK, NATIONAL ASSOCIATION, in its
$30,000,000 capacity as a Bank and the Issuing Bank
Commitment Percentage: 42.8571%
By ____________________________________
Name: _________________________________
Title: ________________________________
</TABLE>
Addresses for notice purposes:
<TABLE>
<S> <C>
If by United States Mail: If by other means:
PNC Bank, National Association PNC Bank, National Association
Multi-Bank Loan Administration Multi-Bank Loan Administration
One PNC Plaza - 19th Floor One PNC Plaza - 19th Floor
Pittsburgh, Pennsylvania 15265 Pittsburgh, Pennsylvania 15222
Attention: Arlene M. Ohler Attention: Arlene M. Ohler
Assistant Vice President Assistant Vice President
Telephone: (412) 762-3627
Telecopier: (412) 762-8672
With a copy to:
PNC Bank, National Association
Select Industries Department
Two PNC Plaza - 2nd Floor
Pittsburgh, Pennsylvania 15265
Attention: Jonathan C. Ritz
Vice President
Telephone: (412) 762-2579
Telecopier: (412) 762-2784
</TABLE>
Address for Eurodollar Rate Loan funding if different from above:
_______________________________
_______________________________
_______________________________
Telephone: ____________________
Telecopier: ___________________
-17-
<PAGE> 18
IN WITNESS WHEREOF, intending to be legally bound hereby, the undersigned
Bank has caused this Second Amendment to Amended and Restated Credit Agreement
by and among EDUCATION MANAGEMENT CORPORATION, the FINANCIAL INSTITUTIONS PARTY
HERETO and PNC BANK, NATIONAL ASSOCIATION, as the Agent, to be executed by its
duly authorized officer as of the date first above written.
<TABLE>
<S> <C>
Revolving Credit Commitment: KEYBANK, NATIONAL ASSOCIATION,
$15,000,000 formerly known as Society National
Bank, in its capacity as a Bank
Commitment Percentage: 21.4286%
By _______________________________
Name: ____________________________
Title: ___________________________
Addresses for notice purposes:
If by United States Mail: If by other means:
KeyBank, National Association KeyBank, National Association
127 Public Square 127 Public Square
OH-01-27-0606 OH-01-27-0606
Cleveland, Ohio 44114 Cleveland, Ohio 44114
Attention: Terri Zalewski Attention: Terri Zalewski
Telephone: (216) 689-3518
Telecopier: (216) 689-4981
with a copy to:
KeyBank, National Association
127 Public Square
OH-01-27-0606
Cleveland, Ohio 44114
Attention: Lawrence A. Mack
Vice President
Telephone: (216) 689-4330
Telecopier: (216) 689-4981
</TABLE>
Address for Eurodollar Rate Loan funding if different from above:
_____________________________
_____________________________
_____________________________
Telephone: __________________
Telecopier: _________________
-18-
<PAGE> 19
IN WITNESS WHEREOF, intending to be legally bound hereby, the undersigned
Bank has caused this Second Amendment to Amended and Restated Credit Agreement
by and among EDUCATION MANAGEMENT CORPORATION, the FINANCIAL INSTITUTIONS PARTY
HERETO and PNC BANK, NATIONAL ASSOCIATION, as the Agent, to be executed by its
duly authorized officer as of the date first above written.
<TABLE>
<S> <C>
Revolving Credit Commitment: NATIONAL CITY BANK OF PENNSYLVANIA,
$25,000,000 formerly INTEGRA BANK,
in its capacity as a Bank
</TABLE>
Commitment Percentage: 35.7143%
By ________________________________
Name: _____________________________
Title: ____________________________
Addresses for notice purposes:
<TABLE>
<S> <C>
If by United States Mail: If by other means:
National City Bank of Pennsylvania National City Bank of Pennsylvania
300 Fourth Avenue 300 Fourth Avenue
IDC 01-151 IDC 01-151
Pittsburgh, Pennsylvania 15278-5000 Pittsburgh, Pennsylvania 15222
Attention: Vincent J. Delie, Jr. Attention: Vincent J. Delie, Jr.
Telephone: (412) 644-7751
Telecopier: (412) 471-4883
</TABLE>
with a copy to:
___________________________________
___________________________________
___________________________________
___________________________________
Attention: ________________________
________________________
Telephone: ________________________
Telecopier: _______________________
Address for Eurodollar Rate Loan funding if different from above:
___________________________________
___________________________________
___________________________________
Telephone: ________________________
Telecopier: _______________________
-19-
<PAGE> 20
IN WITNESS WHEREOF, intending to be legally bound hereby, National City
Bank has caused this Second Amendment to Amended and Restated Credit Agreement
by and among EDUCATION MANAGEMENT CORPORATION, the FINANCIAL INSTITUTIONS PARTY
THERETO and PNC BANK, NATIONAL ASSOCIATION, as the Agent to be executed by its
duly authorized officer as of the date first above written solely for the
purpose set forth in paragraph FIRST of ARTICLE III hereof.
NATIONAL CITY BANK
By ____________________________
Name: _________________________
Title: ________________________
-20-
<PAGE> 1
Exhibit 4.20
AMENDMENT NO. 1 TO LOAN DOCUMENTS;
ASSUMPTION AGREEMENT; AND PARTIAL RELEASE
THIS AMENDMENT NO. 1 TO LOAN DOCUMENTS; ASSUMPTION AGREEMENT;
AND PARTIAL RELEASE ("Amendment") is made and entered into as of April 30, 1991
by and among EMC HOLDINGS, INC., a Delaware corporation ("Holdings"), EDUCATION
MANAGEMENT CORPORATION, a Pennsylvania corporation ("EMC"), THE NORTHWESTERN
MUTUAL LIFE INSURANCE COMPANY ("NML") and NATIONAL UNION FIRE INSURANCE COMPANY
OF PITTSBURGH, PA ("AIG").
WITNESSETH:
WHEREAS, Holdings, NML and AIG are parties to that certain
Note and Warrant Purchase Agreement dated as of October 25, 1989 (the
"Agreement"); and
WHEREAS, Holdings, through its representatives, has informed
NML and AIG of the proposed merger of Holdings with and into EMC, with EMC being
the surviving corporation (the "Merger"); and
WHEREAS, Holdings, and EMC have requested that NML and AIG (i)
acknowledge the Merger upon the condition that EMC expressly assumes all of
Holdings' obligations under the Agreement, the Notes, the Warrants and the
Pledge Agreements (collectively, the "Loan Documents"); (ii) amend certain
provisions of the Loan Documents to reflect the Merger; and (iii) release
certain collateral held by Agent on behalf of NML and AIG under the Pledge
Agreement; and
WHEREAS, NML and AIG are willing to amend the Loan Documents
subject to the terms and conditions of this Amendment.
NOW, THEREFORE, in consideration of the mutual premises herein
contained and other valuable consideration, the parties hereto agree to amend
the Loan Documents as follows:
1. Assumption Agreement. Effective upon the effective date of
the Merger, EMC shall, by operation of law, assume all of the obligations of
Holdings under the Loan Documents. EMC hereby expressly confirms its assumption
of the obligations of Holdings under the Loan Documents, and hereby expressly
agrees to be bound by each and every term, condition, representation, warranty
and covenant contained in the Loan Documents.
2. Amendment to Loan Documents. The name "EMC Holdings, Inc."
is hereby deleted from each of the Loan Documents and the name "Education
Management Corporation" is inserted in lieu thereof wherever it appears;
provided, however, that, for
<PAGE> 2
purposes of Sections 3, 4 and 5 of the Agreement, the term "Company" shall
continue to mean Holdings.
3. Partial Release. NML and AIG hereby release and discharge
from the lien and security interest of the Pledge Agreement and from the pledge
to NML and AIG, as collateral security for the Secured Indebtedness (as defined
in the Pledge Agreement), the 630,426 shares of Common Stock, no par value, of
EMC representing the Pledged Stock held by the Agent on behalf of NML and AIG
pursuant to the Pledge Agreement. The Pledge Agreement is, and each party's
rights and obligations thereunder are, hereby terminated.
4. Miscellaneous.
(a) Except as expressly amended by this Amendment,
the Agreement and each other Loan Document (other than the
Pledge Agreement), and each and every representation,
warranty, covenant, term and condition contained therein, are
specifically ratified and confirmed.
(b) Except for proper nouns and as otherwise defined
herein, capitalized terms used herein shall have the meanings
ascribed to them in the Agreement.
(c) This Amendment shall be governed by and construed
in accordance with the laws of the State of New York.
(d) This Amendment may be executed in as many
identical counterparts as may be convenient and by the
different parties hereto on separate counterparts. This
Amendment shall become binding when Holdings and/or EMC has
delivered the items required pursuant to paragraph 4(e) below
and when Holdings, EMC, NML and AIG have executed and
delivered at least one counterpart. All counterparts shall
constitute one and the same instrument.
(e) As a condition to the amendment of the Loan
Documents pursuant to this Amendment, Holdings and/or EMC
shall provide to NML and AIG, contemporaneously with the
execution hereof, the following:
(i) A certified copy of the corporate action
of Holdings and EMC authorizing the Merger and
execution of and performance under this Amendment by
EMC;
(ii) A certified copy of the Articles of
Merger as filed with the Secretary of State of the
Commonwealth of Pennsylvania;
<PAGE> 3
(iii) A signed favorable opinion of Eckert
Seamans Cherin & Mellott, counsel to Holdings and
EMC, to the effect that this Amendment is a legal,
valid and binding obligation of EMC, and that the
Merger does not adversely affect the enforceability
or availability of any remedy of the Loan Documents;
and
(iv) An Amended and Restated Warrant issued
to each of NML and AIG, which (x) shall be
substantially identical to the Warrants, except to
reflect that the Amended and Restated Warrants are
for the purchase of common stock of EMC rather than
Holdings, and (y) shall be delivered to NML and AIG
upon their delivery to EMC of the original Warrants,
which shall be cancelled.
IN WITNESS WHEREOF, the parties hereto, intending to be
legally bound hereby, have caused this Amendment to be duly executed as of the
date and year first above written.
EMC HOLDINGS, INC.
By:
--------------------------------
Title:
-----------------------------
EDUCATION MANAGEMENT CORPORATION
By:
--------------------------------
Title:
-----------------------------
THE NORTHWESTERN MUTUAL LIFE
INSURANCE COMPANY
By:
--------------------------------
Title:
-----------------------------
NATIONAL UNION FIRE INSURANCE
COMPANY OF PITTSBURGH, PA
By:
--------------------------------
Title:
-----------------------------
<PAGE> 1
Exhibit 4.23
August 9, 1996
Education Management Corporation
300 Sixth Avenue
Pittsburgh, PA 15222
Ladies and Gentlemen:
This letter agreement (this "Agreement") confirms the agreement between
the Education Management Corporation Employee Stock Ownership Trust (the
"Trust") and Education Management Corporation, a Pennsylvania corporation (the
"Company"), as contemplated by Section 2(e) of the Waiver and Modification
Agreement, dated as of July 26, 1996, by and among the Company, the Trust, and
the other parties named therein, with respect to, among other things, the
Trust's acquisition of an aggregate of 1,188,470 shares of Class B Common Stock
of the Company, par value $0.0001 per share (the "Shares"), from several
management stockholders of the Company. The Trust, intending to be legally
bound, hereby covenants to the Company that:
(i) it will not, within the three-year period beginning on the date
hereof, "dispose" (as that term is used in Section 4978(a) of the Internal
Revenue Code of 1986, as amended (the "Code")), of any of the Shares if
such disposition would result in the imposition of an excise tax on the
Company under Section 4978 of the Code, unless (i) the Trust reasonably
determines, upon the written advice of its outside legal counsel, that such
disposition is necessary for the Trust to comply with any fiduciary duty
imposed on the Trust by the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or the Code, or (ii) such disposition is made
as part of an acquisition in one or more transactions by any individual,
entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")), of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under
the Exchange Act) of Shares or other securities (as defined in Section
3(a)(10) of the Exchange Act) representing 50% or more of either (A) the
shares of common stock of the Company or (B) the combined voting power of
the securities of the Company entitled to vote generally in the election of
directors, in each case calculated on a fully diluted basis in accordance
with generally accepted accounting principles after giving effect to the
acquisition, other than any acquisition by any shareholder of the Company
as of the date of such acquisition or any group that consists solely of
such shareholders; and
<PAGE> 2
(ii) it will, if the Company exercises its right of optional
redemption under Article Fourth, Section A(6) of the Restated Articles of
Incorporation of Education Management Corporation (the "Articles") with
respect to the shares of Series A 10.19% Preferred Stock of the Company,
par value $0.0001 per share ("Preferred Stock") then held by the Trust, and
at the request of the Company, exercise its right under Article Fourth,
Section A(5) of the Articles to convert such Preferred Stock into shares of
Class A Common Stock of the Company, par value $0.0001 per share, and waive
its right to all but two days' prior notice of redemption under Article
Fourth, Section C of the Articles; provided, however, that (i) the
obligation to make such conversion shall be contingent upon the
consummation of an initial public offering of common stock by the Company,
(2) the offering price per share (before underwriting discounts or
commissions) sold in the initial public offering must equal or exceed (A)
$6.57 plus accrued and unpaid dividends, if the offering is consummated
prior to October 26, 1996 or (B) $6.48 plus accrued and unpaid dividends,
if the offering is consummated thereafter (with such amounts in this clause
(A) and (B) to be appropriately adjusted to take into account any stock
splits, reverse stock splits or similar events with respect to the
Company's capital stock as may occur after the date of this letter), and
(3) the Trust shall not be required to convert such Preferred Stock or
waive such notice if the Trust reasonably determines, upon the written
advice of its outside legal counsel, that such conversion or waiver would
cause the Trust to violate any fiduciary duty imposed on the Trust by
ERISA or the Code.
If the foregoing terms correctly reflect the understanding and
agreement between the parties, please indicate your acceptance of these terms
by executing this Agreement where indicated below.
Very truly yours,
MARINE MIDLAND BANK, not in its
corporate capacity, but solely in its
capacity as trustee, and on behalf, of the
Education Management Corporation
Employee Stock Ownership Trust
By:
--------------------------------------
Title:
-----------------------------------
AGREED TO AND ACCEPTED:
EDUCATION MANAGEMENT CORPORATION
By:
--------------------------------------
Title:
-----------------------------------
<PAGE> 1
Exhibit 4.24
September 27, 1996
Marine Midland Bank
250 Park Avenue, 4th Floor
New York, NY 10177
Attn: Stephen J. Hartman
Ladies and Gentlemen:
In connection with the proposed initial public offering (the "IPO") of
common stock, par value $.01 per share (the "Common Stock"), of Education
Management Corporation, a Pennsylvania corporation (the "Company"), this will
confirm that the Company and Marine Midland Bank, not in its corporate
capacity, but solely in its capacity as trustee (the "Trustee"), and on behalf,
of the Education Management Corporation Employee Stock Ownership Trust (the
"Trust"), which forms a part of the Education Management Corporation Employee
Stock Ownership Plan, have agreed as follows:
The Trust will, if the Company exercises its right of optional redemption
under Article Fourth, Section A(6) of the Restated Articles of Incorporation of
Education Management Corporation (the "Articles") with respect to the shares of
Series A 10.19% Preferred Stock of the Company, par value $0.0001 per share
("Preferred Stock") then held by the Trust, and at the request of the Company,
exercise its right under Article Fourth, Section A(5) of the Articles to
convert such Preferred Stock into shares of Class A Common Stock of the
Company, par value $0.0001 per share ("Class A Common Stock"), and waive its
right to all but two days' prior notice of redemption under Article Fourth,
Section C of the Articles; provided, however, that such obligation to convert
shall be subject to the following conditions:
(A) The Trustee shall have received assurances satisfactory to it and its
legal counsel that the IPO will be consummated immediately following such
conversion; and
(B) If the initial offering price per share of Common Stock (calculated before
underwriting discounts or commissions) in the IPO is less than the
Specified Amount (as hereinafter defined), the Company shall pay to the
Trust, concurrently with the conversion, an amount equal to (i) the
difference between the Specified Amount and such initial offering price
per share, multiplied by (ii) the number of shares of Common Stock into
which the shares of Class A Common Stock to be received by the Trust upon
the conversion of the Preferred Stock are to be reclassified. The
"Specified Amount" with respect to a share of Common Stock is (i) the
implied conversion price of $12.96 per
<PAGE> 2
share (or $13.14 per share if the IPO is consummated prior to October 26,
1996), plus (ii) the amount of accrued and unpaid dividends through the
closing of the IPO (estimated to be an implied amount of $.44 per share of
Common Stock, assuming the IPO is consummated on October 31, 1996); provided,
however, that the Specified Amount has been calculated assuming the
reclassification of each share of Class A Common Stock into one-half share of
Common Stock and will be subject to appropriate adjustment if such
reclassification is made on any other basis.
Notwithstanding the foregoing, the Trust shall not be required to convert
such Preferred Stock or waive such notice if the Trust reasonably determines,
upon the written advice of its outside legal counsel, that such conversion or
waiver would cause the Trust to violate any fiduciary duty imposed on the Trust
by the Employee Retirement Income Security Act of 1974, as amended, or the
Internal Revenue Code of 1986, as amended.
This letter agreement supersedes all prior understandings on the subject
matter hereof, including, without limitation, paragraph (ii) of the Letter
Agreement dated August 9, 1996 between the Company and the Trust.
If the foregoing terms correctly reflect our agreement, please so indicate
by executing and returning the enclosed counterpart of this letter.
Very truly yours,
EDUCATION MANAGEMENT CORPORATION
By:___________________________
Robert T. McDowell
Senior Vice President,
Chief Financial Officer
and Treasurer
AGREED TO AND ACCEPTED:
MARINE MIDLAND BANK, not in
its corporate capacity, but solely in
its capacity as trustee, and on behalf,
of the Education Management
Corporation Employee Stock
Ownership Trust
By:_________________________
Stephen J. Hartman
Senior Vice President
<PAGE> 1
Exhibit 10.02
RESOLUTION
Re: First Amendment to the EMC Retirement Plan and EMC Employee Stock
Ownership Plan as Restated December 1, 1994
WHEREAS, Education Management Corporation (the "Employer") amended and
restated the Education Management Corporation Retirement Plan (the "401(k)
Plan") and Education Management Corporation Employee Stock Ownership Plan (the
"ESOP") on December 1, 1994 to comply with the Tax Reform Act of 1986 and
subsequent laws and regulations; and
WHEREAS, for each plan the Employer thereafter timely submitted to the
Internal Revenue Service an application for determination with respect to the
qualification of each plan and its accompanying trust under sections 401(a) and
501(a), respectively, of the Internal Revenue Code of 1986, as amended (the
"Code"); and
WHEREAS, in considering those applications, the Internal Revenue Service has
noted the same typographical error in section 12.05 of the 401(k) Plan and
section 13.05 of the ESOP (which is erroneously numbered 12.05); and
WHEREAS, the Employer has also become aware of a discrepancy between a lawful
administrative practice and the terms of the plans with regard to crediting
hours of service; and
WHEREAS, the Employer has reserved to itself the authority to amend each Plan
and wishes to exercise that authority to correct these problems.
NOW, THEREFORE, IT IS RESOLVED, that the 401(k) Plan and ESOP are amended as
follows, effective as though included in the restatement of each Plan on
December 1, 1994:
1. The ESOP is amended by re-numbering the fifth section of Article XIII
(Top-Heavy Plan Provisions) as section 13.05, rather than 12.05.
2. Section 12.05 of the 401(k) Plan and section 13.05 of the ESOP are amended
by replacing the word "415(b)(1) (B)" with the word "415(b)(1)(A)."
3. Section 1.28(b) of the 401(k) Plan and section 2.28(b) of the ESOP are
amended by replacing the first sentence thereof with the following new
sentence:
<PAGE> 2
In recognition of the required preparation for classroom time, any
part-time faculty Employee shall be credited with one and eighty-eight
hundredths (1.88) Hours of Service equivalency for each one (1) hour for
which the Employee is paid or entitled to payment for the performance of
duties (including hours for which back pay, irrespective of mitigation
of damages, is either awarded or agreed to by the Employer to the extent
that such award or agreement is intended to compensate the Employee for
periods during which the employee would have been engaged in the
performance of duties for the Employer).
Mr. Steinberg then described to the Board of Directors the background of a
proposed Second Amendment to the Corporation's Employee Stock Ownership Plan.
As proposed, the Second Amendment would permit employees transferred to AIPX
and AIIL to enjoy full allocations to their ESOP account. But for this
Amendment, the service of those employees at the Phoenix and Illinois schools
would not be counted towards sharing in allocations under the ESOP. Upon
motion by Mr. Sanford, seconded by Mrs. Drucker, the Board of Directors
unanimously approved the following resolution:
RESOLUTION
Re: Second Amendment to the EMC Employee Stock Ownership Plan
as Restated December 1, 1994
WHEREAS, Education Management Corporation (the "Employer") amended and
restated the Education Management Corporation Employee Stock Ownership Plan
(the "ESOP") on December 1, 1994 to comply with the Tax Reform Act of 1986 and
subsequent laws and regulations; and
WHEREAS, the Employer thereafter adopted the First Amendment for the purpose
of obtaining a favorable determination letter from the Internal Revenue Service
with respect to the qualification of the ESOP and its accompanying trust under
sections 401(a) and 501(a), respectively, of the Internal Revenue Code of 1986,
as amended (the "Code"); and
WHEREAS, the Employer has recently acquired or opened schools in Phoenix,
Arizona, and Chicago, Illinois, which are separate corporate entities; and
WHEREAS, given the limited time frame of the ESOP, it has been decided that
the new schools in Phoenix and Chicago will not become participating employers
under the ESOP; and
<PAGE> 3
WHEREAS, by reason of transfers, a few participants in the ESOP (who are
employees of employers that participate under the ESOP) are expected to have
significant compensation from the Phoenix and Chicago schools which, but for an
amendment of the ESOP, would not be counted toward sharing in allocations under
the ESOP; and
WHEREAS, the Employer desires that current Participants in the ESOP who
receive compensation from the Phoenix and Chicago schools remain eligible for
allocations based on their combined compensation from all employers which are
members of the controlled group, including those (Phoenix and Chicago) that do
not participate in the ESOP; and
WHEREAS, the composition of the group of transferred employees shows that
there would be no prohibited discrimination in favor of highly compensated
employees in amending the ESOP to provide that transferred Participants remain
eligible for allocations based on total compensation from all members of the
controlled group; and
WHEREAS, this Second Amendment is conditional upon its not adversely
affecting the qualification of the ESOP under section 401(a) of the Code or its
accompanying trust under section 501(a) of the Code.
NOW, THEREFORE, IT IS RESOLVED, that effective January 1, 1996, section
6.02(b) of the ESOP is amended by adding at the end thereof the following new
sentence:
For the purpose of the fraction set forth in this subsection, compensation
received from an Affiliate that has not adopted the Plan shall nevertheless
be considered Compensation to the extent that it otherwise meets the
definition of Compensation.
<PAGE> 1
Exhibit 10.04
THIRD AMENDMENT TO
AMENDED AND RESTATED
EDUCATION MANAGEMENT CORPORATION
EMPLOYEE STOCK OWNERSHIP PLAN
Pursuant to Section 12.01 of the Education Management Employee Stock
Ownership Plan, as amended and restated effective January 1, 1989 (the "Plan"),
the Plan is hereby amended as follows, effective as of June 30, 1996:
1. Section 3.01 is hereby amended by inserting the following at the end
thereof:
Notwithstanding the foregoing, each Eligible Employee of the Employer who is
an Eligible Employee on June 30, 1996 and who has completed at least 450
Hours of Service during the first twelve (12) months of his or her
employment beginning after January 1, 1995 will become a Participant as of
June 30, 1996, without further action on his or her part.
2. Section 5.04(c) of the Plan is hereby amended by inserting the following
at the end thereof:
Notwithstanding the foregoing, the Employer Securities which were acquired
by the Trust with the proceeds of the Exempt Loan to the Trust on October
26, 1989 and which remain in the Suspense Account as of June 28, 1996, shall
be released from the Suspense Account as of June 30, 1996, pursuant to the
final payment by the Trust with respect to such Exempt Loan.
3. Section 6.01(b) of the Plan is hereby amended by inserting the following
at the end thereof:
Notwithstanding the foregoing, shares of Company Stock which were acquired
by the Trust with the proceeds of the Exempt Loan to the Trust on October
26, 1989, and which are released as provided for in Section 5.04 pursuant to
the final payment by the Trust with respect to such Exempt Loan on June 28
1996, shall be allocated to the Company Stock Accounts of Participants on
June 30, 1996.
4. Section 6.02(b) of the Plan is hereby amended by inserting the following
at the end thereof:
With respect to the allocation of shares of Company Stock which were
acquired with the proceeds of the Exempt Loan to
<PAGE> 2
the Trust on October 26, 1989, and which are released and allocated pursuant
to Sections 5.04 and 6.01(b) in connection with the final payment by the
Trust with respect to such Exempt Loan on June 28, 1996, Compensation taken
into account for purposes of this Section 6.02(b) shall be Compensation
earned during the six-month period beginning January 1, 1996 and ending
June 30, 1996.
5. Section 6.02(c) of the Plan is hereby amended by inserting the following
at the end thereof:
Notwithstanding the foregoing, with respect to the allocation of shares of
Company Stock which were acquired with the proceeds of the Exempt Loan to
the Trust on October 26, 1989, and which are released and allocated pursuant
to Sections 5.04 and 6.01(b) in connection with the final payment by the
Trust with respect to such Exempt Loan on June 28, 1996, a Participant will
be entitled to such an allocation if, but only if, (i) the Participant (A)
has completed four hundred and fifty (450) Hours of Service during the
period beginning January 1, 1996 and ending on June 30, 1996, and (B) is
employed by the Employer on June 30, 1996, or is on an authorized leave of
absence or is receiving periodic severance payments on such date, or (ii)
the Participant has Retired, died or become Permanently disabled during the
period beginning January 1, 1996 and ending on June 30, 1996.
EXECUTION OF THIRD AMENDMENT TO THE PLAN
To record the adoption of this Third Amendment to the Plan, the Company has
caused its appropriate officers to affix the Company's corporate name and seal
hereto this _____ day of _________ 1996.
EDUCATION MANAGEMENT CORPORATION
By:__________________________________
Title:________________________________
- 2 -
<PAGE> 1
Exhibit 10.06
EMC HOLDINGS, INC.
MANAGEMENT INCENTIVE STOCK OPTION PLAN
(Adopted Effective as of July 1, 1990)
WHEREAS, EMC HOLDINGS, INC., a Delaware corporation
(the "Company") wishes to adopt a stock option plan to be designated the
"Management Incentive Stock Option Plan" (the "Plan") effective as of July 1,
1990, which Plan was approved by the Company's Board of Directors on August 3,
1990; and
WHEREAS, the Plan is intended to be a nonstatutory
stock option plan for purposes of the Internal Revenue Code of 1986 (the
"Code").
NOW, THEREFORE, the Plan hereby is established as
follows:
1. Purpose.
The Plan is intended and is being adopted (a)
to stimulate good management of the Company for the benefit of all Company
shareholders; (b) to facilitate stock ownership and a proprietary interest on
the part of certain officers and other key executive and management employees of
the Company and its subsidiary corporations (the "Subsidiaries"), (c) to
encourage management employees of the Company to meet or exceed the goals
established by the Company in its financial plan; and (d) to provide additional
incentives for management efforts in promoting the continued growth and success
of the Company.
<PAGE> 2
2. Shares and Option Rights Covered by the Plan;
Timing of Grants.
Options may be granted under this Plan, from
time to time, in the manner set forth in paragraph 8 hereof, during the period
from the date of the adoption hereof to and including June 30, 1995 in an
aggregate amount of not more than 719,284 shares of Class B Common Stock of the
Company (the "Shares"), representing 3% of the fully diluted equity interest in
the Company, including stock issued pursuant to this Plan, or such additional
shares as the Board of Directors of the Company shall approve. Each option
granted under the Plan shall represent the right to acquire one Share. Options
for up to 239,762 Shares (representing 1% of the fully diluted equity of the
Company) may be granted as of any date on or following July 1, 1990 and up to an
equal number of options as of any date on or following each July 1 thereafter
until all available options have been granted. The stock to be issued under this
Plan may be either treasury stock and/or authorized but unissued stock, as may
be determined by the Board of Directors from time to time in its sole discretion
in accordance with the provisions hereof. If any option for any reason ceases to
be exercisable in whole or in part, the Shares which were subject to such
option, but as to which the option had not been exercised, may be made available
under this Plan in the sole discretion of the Committee (as hereinafter
defined).
- 2 -
<PAGE> 3
3. Administration.
The Plan will be administered by the Committee,
in accordance with the following provisions:
(a) The Committee will consist of such members
of the Board of Directors (not less than three (3)), as may be designated for
that purpose by the Board of Directors from time to time; provided, however,
that no member of the Committee will be eligible to receive any option under
this Plan. The Board of Directors may remove members from or add members to the
Committee at any time. Vacancies on the Committee, however caused, will be
filled by the Board of Directors. The Board will elect one of the members as
Chairman. The Committee will hold meetings at such times and places as it may
determine. The acts of a majority of the Committee, either taken at a meeting or
approved in writing by a majority of the members of the Committee, will be the
valid acts of the Committee. Unless the Board of Directors otherwise determines,
the Compensation Committee of the Board of Directors will serve as the Committee
under this Plan.
(b) Except as may be otherwise determined by the
Committee, the following procedures will be followed with respect to the
granting of all stock options under the Plan:
(i) All stock options will be granted in
writing and on a form of "Stock Option
Agreement" approved for that purpose by the
Committee.
- 3 -
<PAGE> 4
(ii) All stock options will be granted by
the action of at least a majority of the members
of the Committee (and will be confirmed in
writing in a Stock Option Agreement signed by
the Chairman of the Committee) effective as of
the date(s) specified in the grant.
(iii) Except as may be otherwise expressly
stated in the pertinent Stock Option Agreement,
all stock options will be granted at a price
equal to the fair market value of the Shares on
the effective date of the Stock Option
Agreement, as determined in Paragraph 4, below.
(iv) The Company and the Optionee will also
enter into the Stock Option Agreement, in such
form or forms as may be approved by at least a
majority of the members of the Committee, which
will incorporate such other provisions as may be
included pursuant to Paragraph 15, below, and
which may be a different agreement with respect
to different participants. Moreover, if the
Optionee is not then a party to the Stockholders
- 4 -
<PAGE> 5
Agreement dated October 26, 1990 among the
Stockholders listed on the Schedule of
Stockholders thereto, Merrill Lynch Interfunding
Inc., EMC Holdings, Inc. Employee Stock
Ownership Trust and the Company, he or she will
execute and deliver a counterpart thereof to the
Secretary of the Company.
(v) Each Stock Option Agreement, or a copy
thereof, will be filed by the Chairman of the
Committee with the Secretary of the Company.
(vi) Reports on the granting of stock
options under the Plan will be made periodically
to the Board of Directors, which will be deemed
to have concurred in the pertinent actions as of
the date of the Stock Option Agreement.
(c) The interpretation and construction by the
Committee of any of the provisions of the Plan or of any option granted under
it, together with the actions of the Committee in the granting of options as
herein provided, will be final and conclusive unless otherwise specifically
provided by a resolution duly adopted by the Board of Directors.
- 5 -
<PAGE> 6
4. Option Prices.
Each Stock Option Agreement will state the
pertinent option price(s), which will equal the fair market value of the Shares
on the effective date of the grant of the option, as conclusively determined by
the Board of Directors upon the recommendation of the Committee. In the absence
of clear and convincing evidence to the contrary, the Committee and the Board of
Directors will be entitled, but will not be required, to rely upon the per share
price established for the Company's Class A Common Stock by the most recent
appraisal of the stock owned by the EMC Holdings, Inc. Employee Stock Option
Plan ("ESOP"), and to determine that the fair market value of the Shares are
equal to such appraised value. For options granted effective as of July 1, 1990,
the option price will be $1.27 per Share.
5. Option Period.
Each option granted hereunder will be exercisable,
if then vested, for a period of three (3) years commencing on the date five (5)
years after the grant of such Option.
6. Vesting of Options.
Only vested Options will be exercisable.
(a) The number of shares determined by
multiplying the percentages in the following sentence by the full number of
shares originally subject to such option will vest annually, as of June 30 of
each year, provided that the vesting requirements imposed by subparagraph (b) of
this paragraph 6 (the "Vesting Requirements") are determined to have been
satisfied,
- 6 -
<PAGE> 7
based upon the Company's audited financial statements or other
information satisfactory to the Committee. The percentages are:
<TABLE>
<CAPTION>
Percentage Year After Grant
---------- ----------------
<S> <C> <C>
25% 1st Year
25% 2nd Year
25% 3rd Year
25% 4th Year
</TABLE>
In the event that the Vesting Requirements are
not satisfied in any one year, the options that were not vested in that year
will vest in the next subsequent or later years if the Vesting Requirements are
met in the next subsequent or later years.
(b) Options will vest annually as described
above provided that the sum of (i) seven times the Company's consolidated
earnings before marketing expense capitalization, interest and taxes before
giving effect to charges resulting from (a) the amortization of the purchase
price premium associated with the 1986 and 1989 recapitalizations of the
Company; (b) contributions to the Company's ESOP; and (c) options granted under
this Plan, or any similar plan adopted by the Company in the future; ("Adjusted
EBIT"), less (ii) the consolidated total interest bearing debt of the Company,
including all current maturities, short-term interest bearing debt and
capitalized leases, but with such debt being reduced by the amount of cash and
equivalents ("Net Debt") exceeds the following amounts at the close of the then
most recent fiscal year:
- 7 -
<PAGE> 8
<TABLE>
<S> <C> <C>
Fiscal Year 1991 $ 41 million
Fiscal Year 1992 $ 64 million
Fiscal Year 1993 $ 88 million
Fiscal Year 1994 $114 million
Fiscal Year 1995 $142 million
Fiscal Year 1996 $174 million
Fiscal Year 1997 $200 million
Fiscal Year 1998 $217 million
Fiscal Year 1999 $234 million
</TABLE>
The sale or other disposition of any significant asset(s) will impact the above
calculation because of the effect on Adjusted EBIT, Net Debt and other factors.
The amounts described above will be appropriately revised upon any such sale or
other disposition.
(c) An option will terminate immediately and may
no longer be exercised if the optionee ceases to be an employee of the Company
or its Subsidiaries, except that:
(i) If the optionee's employment is terminated
involuntarily for any reason other than theft or
dishonesty, he or she may at any time within a
period of thirty (30) days after such
termination exercise such option regardless of
the extent that the option was exercisable by
him or her on the date of the termination of his
or her employment; provided, however, that an
option may not be exercised after the date of
expiration specified in the option.
- 8 -
<PAGE> 9
(ii) If the optionee dies or becomes permanently
disabled while in the employ of the Company or
of any of its Subsidiaries or retires after
attainment of age 65, options held by that
optionee on the date of his or her termination
may be exercised at any time within ninety (90)
days after that date, by the optionee, the
personal representative of the deceased optionee
or by the person or persons to whom the
optionee's rights under such options shall pass
by will or by the applicable laws of descent and
distribution, regardless of the extent to which
such options otherwise would have been
exercisable on that date under Paragraphs 6(a)
and 6(b) of the Plan or under the applicable
Stock Option Agreement in the absence of such
death or other event; provided, however, that no
option may be exercised by any person after the
date of expiration specified in that option.
(iii) The Committee may grant further exceptions
in other cases where
- 9 -
<PAGE> 10
it is in, or not opposed to, the best interest
of the Company to do so.
(d) Subject to the provisions of Subparagraphs
6(a) and 6(b) and other pertinent provisions of this Plan, an option may be
exercised to the extent that the Shares have become purchasable thereunder, in
whole or in part, from time to time, and at any time prior to expiration or
termination of the option, by making full payment of the option price to the
Company in any one or more of the following ways: in cash, by check, bank draft,
or money order.
7. Acceleration of Vesting and Exercisability.
Notwithstanding anything herein to the contrary, options will become immediately
exercisable and 100% vested prior to the date otherwise determined in accordance
with this Plan, in the event of a Public Distribution (as defined below), or a
Change in Control (as defined below), in which Public Distribution or Change of
Control either:
(a) Any of the Institutional Investors, as such
term is defined in the Stockholders Agreement dated October 26, 1989, realize
value on their shares in the Company in excess of the following amounts:
05/01/90 - 07/31/90 $1.58 per share
08/01/90 - 10/31/91 $1.69 per share
11/01/90 - 01/31/91 $1.81 per share
02/01/91 - 04/30/91 $1.93 per share
05/01/91 - 07/31/91 $2.07 per share
08/01/91 - 10/31/91 $2.21 per share
- 10 -
<PAGE> 11
11/01/91 - 01/31/92 $ 2.37 per share
02/01/92 - 04/30/92 $ 2.54 per share
05/01/92 - 07/31/92 $ 2.72 per share
08/01/92 - 10/31/92 $ 2.91 per share
11/01/92 - 01/31/93 $ 3.11 per share
02/01/93 - 04/30/93 $ 3.33 per share
05/01/93 - 07/31/93 $ 3.56 per share
08/01/93 - 10/31/93 $ 3.81 per share
11/01/93 - 01/31/94 $ 4.07 per share
02/01/94 - 04/30/94 $ 4.36 per share
05/01/94 - 07/31/94 $ 4.67 per share
08/01/94 - 10/31/94 $ 4.99 per share
11/01/94 - 01/31/95 $ 5.34 per share
02/01/95 - 04/30/95 $ 5.72 per share
05/01/95 - 07/31/95 $ 6.12 per share
08/01/95 - 10/31/95 $ 6.54 per share
11/01/95 - 01/31/96 $ 7.00 per share
02/01/96 - 04/30/96 $ 7.49 per share
05/01/96 - 07/31/96 $ 8.02 per share
08/01/96 - 10/31/96 $ 8.58 per share
11/01/96 - 01/31/97 $ 9.18 per share
02/01/97 - 04/30/97 $ 9.82 per share
05/01/97 - 07/31/97 $10.51 per share
08/01/97 - 10/31/97 $11.24 per share
11/01/97 - 01/31/98 $12.03 per share
02/01/98 - 04/30/98 $12.87 per share
05/01/98 - 07/31/98 $13.77 per share
08/01/98 - 10/31/98 $14.74 per share
11/01/98 - 01/31/99 $15.77 per share
02/01/99 - 04/30/99 $16.87 per share
05/01/99 - 07/31/99 $18.05 per share
; or
(b) The Company's Adjusted EBIT less Net Debt
equals or exceeds the amount set forth below in the fiscal year preceding the
fiscal year in which such event occurs:
<TABLE>
<S> <C> <C>
Fiscal Year 1991 $ 41 Million
Fiscal Year 1992 $ 64 Million
Fiscal Year 1993 $ 88 Million
Fiscal Year 1994 $114 Million
Fiscal Year 1995 $142 Million
</TABLE>
- 11 -
<PAGE> 12
<TABLE>
<S> <C> <C>
Fiscal Year 1996 $174 Million
Fiscal Year 1997 $200 Million
Fiscal Year 1998 $217 Million
Fiscal Year 1999 $234 Million
</TABLE>
"Public Distribution" will mean a public
offering of common stock of the Company pursuant
to an effective registration statement under the
Securities Act of 1933, as amended, (the "Act")
at the conclusion of which (i) the Company is
required to register shares of its common stock
under Section 12(b) or (g) of the Securities
Exchange Act of 1934, as amended, and (ii) at
least 25% of the outstanding common stock of the
Company has been sold to the public pursuant to
one or more effective registration statements
under the Act. "Change in Control" will mean a
transaction or series of transactions at the
conclusion of which any person, firm, or entity,
and its affiliates, becomes the record or
beneficial owner of, and/or obtains the right to
purchase more than 50% of the stock of the
Company, or obtains the power to elect a
majority of the Board of Directors of the
Company; provided however that the
- 12 -
<PAGE> 13
issuance or transfer of shares, stock options
and/or other contract rights to acquire shares
(a) to the EMC Holdings, Inc. Employee Stock
Ownership Plan or any other Employee Stock
Ownership Plan hereinafter adopted ("ESOP") or
(b) to one or more individuals who are employees
of Holdings or its subsidiaries and hold options
previously granted under this Plan will not be
considered in determining whether a "Change of
Control" has occurred at the time of such
issuance unless the Committee then determines
(in its discretion) that it should be considered
for that purpose.
8. Termination of Options.
Any other provision of this Plan to the contrary
notwithstanding, in the event of a Change in Control, any Options which are not
vested prior to or as a result of such event will automatically terminate and
will thereafter not be exercisable.
9. Repurchase by Company.
In the event of a Public Distribution or a
Change of Control, any or all of the Options not terminated in accordance with
Paragraph 8, above, and whether or not vested, may, at the option of the Board
of Directors, be repurchased by
- 13 -
<PAGE> 14
the Company at a price and on the terms determined in good faith by the Board of
Directors to be the fair market value of such options. In the absence of clear
and convincing evidence to the contrary, the Board of Directors will be entitled
to assume that the fair market value of each option is equivalent to the per
share price which other shareholders (or a material group of them) are to
receive for such shareholder's shares, reduced by an amount equivalent to the
exercise price on such Options (or, if such price is not payable immediately in
cash, reduced to account for the exercise price as determined in good faith by
the Board of Directors).
10.Eligibility to Participate.
Officers of the Company or its subsidiaries with
the title of Vice President and above (excluding the Chairman) and key executive
and management employees (the "Eligible Employees") will be eligible for
participation in the Plan. The Chairman, with the approval of the majority of
members of the Committee, (i) will designate the number of Options (if any) to
be available for grant, commencing July 1, 1990, until all Options have been
granted; (ii) will select the Eligible Employees (the "Participants") to receive
Options, and (iii) will designate the number of Options to be allocated to each
such Eligible Employee. The grant of options for up to 239,762 Shares (1% of the
fully diluted equity of the Company) has been approved by the Committee for
grant as of July 1, 1990.
- 14 -
<PAGE> 15
11. Nontransferability of Options.
An option granted under the Plan may not be
transferred and may be exercised during the optionee's lifetime only by the
optionee.
12. Stock Ownership Limitation.
No option will be granted under the Plan to a
person if the exercise of such option by that person will result in that
optionee's owning more than five percent (5%) of the total combined voting power
of all classes of stock of the Company or of any of its Subsidiaries.
13. Rights as a Stockholder.
An optionee or a permitted transferee of an
option will have no rights as a stockholder with respect to any Shares covered
by his or her option until the date on which payment is made, and accepted by
the Company, for such Shares. No adjustment will be made for cash dividends or
distributions for which the record date is prior to the date such payment is
made and accepted.
14. Restriction on Resale of Shares; Repurchase by
the Company.
(a) (1) Shares acquired upon the exercise of any
option granted pursuant to the Plan will not be sold or otherwise transferred
prior to the expiration of the repurchase period described in subparagraph (b)
of this Paragraph 14.
(a) (2) The Company is authorized to (i) retain
the certificate(s) representing Shares encumbered by such
- 15 -
<PAGE> 16
restriction on resale or place such
certificate(s) in the custody of its agent, (ii) place a restrictive legend
thereon, and/or (iii) issue a stop transfer order to its stock transfer agent
with respect thereto in connection with the enforcement of this provision.
(b) (1) If the employment of the optionee by the
Company and/or its subsidiaries terminates for any reason and such employee or
his or her personal representative has exercised or thereafter exercises any
option granted to him or her under this Plan, then, in that event, the Company
will have the right, in its discretion, for a period of ninety (90) days
following the termination of employment or exercise of such option, whichever
may last occur, to repurchase any and all Shares acquired by such optionee
pursuant to the exercise of options granted under this Plan at the price set
forth in subparagraph (c) of this Paragraph 14.
(b) (2) If the employment of the optionee by the
Company and/or its subsidiaries terminates and the Committee determines that
such termination was as a result of death, disability, retirement after
attainment of age 65 or termination by the Company or Subsidiary without cause,
then if such optionee (or his or her personal representative) has exercised or
thereafter exercises any option granted to him or her under this Plan, in that
event the optionee (or his or her personal representative) will have the right
for a period of 90 days following the termination of employment or exercise of
such
- 16 -
<PAGE> 17
option, whichever may last occur, to sell to the Company any and all Shares
acquired by such optionee pursuant to the exercise of options granted under this
Plan at the price equal to that set forth in subparagraph (c) of this Paragraph
14.
(c) The value to be paid per Share by the
Company under Paragraph 14(b)(1) or 14(b)(2), above will be the difference
between (i)(A) so long as the Company has an ESOP and is required to obtain
appraisals of its common stock for the purposes of such ESOP, the most recent
value of such stock as determined by such appraisal or; (B) if there is no
appraisal of the Company's Stock which meets the requirements of this
subparagraph, 7 times the Company's Adjusted EBIT minus the Net Debt of the
Company for the immediately preceding year, divided by the number of shares (on
a fully diluted basis) as of the end of such year less (ii) the Exercise Price
per Share of the options. For the purposes of the foregoing calculation, the
Preferred Stock of the Company (currently owned by the ESOP) will be treated
either (i) as an addition to Net Debt in an amount obtained by multiplying the
number of shares of Preferred Stock outstanding times $100.00, in which event
such shares will not be taken into account in determining the number of shares
of stock outstanding; or (ii) as the number of shares of common stock of the
Company into which such shares of Preferred Stock are convertible, in which
event such shares will not be taken into account in determining Net Debt,
whichever produces the lesser value.
- 17 -
<PAGE> 18
(d) The Committee may grant waivers of the
restriction imposed by this Paragraph 14 in such cases as it may deem to be in,
or not opposed to, the best interest of the Company.
(e) Notwithstanding anything herein to the
contrary, the rights granted by subparagraphs (b)(1) and (b)(2) of this
Paragraph 14 will terminate upon a Public Distribution (as defined in Paragraph
7) which results in the Shares being freely tradeable in a public market. The
Committee will determine when and if Shares are so freely tradeable and shall
notify all affected Participants.
15. Adjustments Upon Changes in Stock.
In the event that a dividend will be declared
upon the Class B Common Stock of the Company payable in shares of Class B Common
Stock of the Company, the number of Shares then subject to any such option and
the number of Shares reserved for issuance pursuant to the Plan shall be
adjusted by adding to each such Share the number of Shares which would have been
distributable thereon if such Share had been outstanding on the date fixed for
determining the stockholders entitled to receive such stock dividend. In the
event that the outstanding shares of the Class B Common Stock of the Company
shall be changed into or exchanged for a different number or kind of shares of
stock or other securities of the Company or of another corporation, whether
through reorganization, recapitalization, stock split, combination of shares,
merger, consolidation, sale of assets or
- 18 -
<PAGE> 19
otherwise, then there shall be substituted for each Share subject to any such
option and for each Share reserved for issuance pursuant to the Plan but not yet
covered by an option, the number and kind of shares of stock or other securities
into which each outstanding share of Class B Common Stock are so changed or for
which each such share may be exchanged. In the case of any such substitution or
adjustment as provided for in this Paragraph, the option price in each Stock
Option Agreement for each Share covered thereby prior to such substitution
or adjustment will be the option price for all shares of stock or other
securities which have been substituted for such Share or to which such Share has
been adjusted pursuant to this Paragraph.
No adjustment or substitution provided for in
this Paragraph will require the Company in any Stock Option Agreement to sell a
fractional Share, and the total substitution or adjustment with respect to each
Stock Option Agreement will be limited to whole Shares.
16. Use of Proceeds.
Proceeds from the sale of stock pursuant to
options granted under the Plan constitute general funds of the Company.
17. Other Provisions.
The Stock Option Agreements to be issued under
the Plan will incorporate the provisions of the Plan by reference. Any stock
options granted under the Plan may be subjected to or include additional
restrictions upon the exercise thereof and/or
- 19 -
<PAGE> 20
such other provisions (whether or not the same as or different from the
provisions of other stock options granted under this Plan), if any, as the
Committee and/or the Board of Directors may deem advisable and cause to be
specified in the Stock Option Agreement entered into pursuant thereto.
18. Amendment
The Board of Directors of the Company may from
time to time amend the Plan. An amendment of the Plan will not, without the
consent of the optionee, reduce or impair any rights or obligations under any
option theretofore granted under the Plan.
19. Suspension or Termination of Plan.
The Board of Directors of the Company may from
time to time suspend or at any time terminate the Plan. Unless the Plan shall
theretofore have been terminated by the Board of Directors, the Plan shall
terminate on June 30, 1995. No option may be granted during any such suspension
or after such termination. The termination of the Plan will not, without the
consent of the optionee, reduce or impair any rights or obligations under any
option theretofore granted under the Plan.
20. Indemnification.
In addition to such other rights of
indemnification as they may have as directors or as members of the Committee,
the members of the Committee will be indemnified by the Company against the
reasonable expenses, including attorneys' fees, actually and necessarily
incurred in connection
- 20 -
<PAGE> 21
with the defense of any action, suit or proceeding, or in connection with any
appeal therein, to which they or any of them may be a party by reason of any
action taken or failure to act under or in connection with the Plan or any
option granted thereunder, and against all amounts paid by them in settlement
thereof (provided such settlement is approved by independent legal counsel
selected by the Company) or paid by them in satisfaction of a judgment in any
such action, suit or proceeding, except in relation to matters as to which it
shall be adjudged in such action, suit or proceeding that such Committee member
is liable for negligence or misconduct in the performance of his duties;
provided that within sixty (60) days after institution of any such action, suit
or proceeding a Committee member in writing offers the Company the opportunity,
at its own expense, to handle and defend the same.
21. Disclaimer of Employment Rights.
Neither this Plan nor any option granted
hereunder will create any employment right in any person.
ATTEST: EMC HOLDINGS, INC.
By_______________________ By___________________________
Secretary Chairman
- 21 -
<PAGE> 1
Exhibit 10.07
EMC HOLDINGS, INC.
MANAGEMENT INCENTIVE STOCK OPTION AGREEMENT
THIS AGREEMENT is entered into as of July 1, 1990, between EMC HOLDINGS,
INC., a Delaware corporation (the "Company") and ______________, an officer or
manager of the Company (the "Optionee").
Recitals:
WHEREAS, the Company has adopted and the shareholders have approved the
Management Incentive Stock Option Plan, as amended from time to time (the
"Plan");
WHEREAS, the Company is willing to offer and grant certain options under the
Plan to the Optionee under the terms and conditions set forth below; and
WHEREAS, the Optionee is interested in accepting the stock options provided
for in this Agreement and is willing to abide by the obligations imposed on him
or her under this Agreement in consideration for those stock options.
Provisions:
NOW, THEREFORE, in consideration of the mutual benefits hereinafter
provided, and each intending to be legally bound, the Company and the Optionee
hereby agree as follows:
<PAGE> 2
1. Acknowledgment of Optionee. The stock options to be granted under this
Agreement are intended to provide to the Optionee an opportunity to purchase
stock of the Company. The Optionee acknowledges that the stock options to be
granted under this Agreement are being conferred upon the Optionee only because
of and on the condition of the willingness of the Optionee to commit his or her
best efforts and loyalty to the Company in the performance of his or her
duties.
2. Effect of the Plan. The stock options to be granted under this
Agreement will be subject to all of the terms and conditions of the Plan, which
are incorporated by reference and made a part of this Agreement. The Optionee
will abide by, and all of the stock options granted to the Optionee will be
subject to, all of the provisions of the Plan and of this Agreement, together
with all rules and determinations from time to time issued by the Committee
appointed pursuant to the Plan (the "Committee").
3. Option Grant and Time for Exercise. Effective as of July 1, 1990, the
Company grants to the Optionee under this Agreement the right and option to
purchase up to an aggregate of 9,700 shares of the Class B Common Stock of the
Company, par value $.0001 per share, at an exercise price of $1.27 per share.
4. Vesting; Exercise of Options. The option rights of the Optionee will be
exercisable for a three year period, beginning July 1, 1995 and ending on July
1, 1998 (the "Expiration Date"), provided that they have vested. Vesting will
- 2 -
<PAGE> 3
occur with respect to the number of shares and on the date set forth below;
provided that the vesting requirements set forth in the following sentence (the
"Vesting Requirements") are determined to have been satisfied, based upon the
Company's audited financial statements or other information satisfactory to the
Committee.
<TABLE>
<CAPTION>
Number of Shares Vesting Date
- ---------------- ------------
<S> <C>
- - The first 2,425 Shares: July 1, 1991
(25% of total grant)
- - An additional 2,425 Shares: July 1, 1992
(25% of total grant)
- - An additional 2,425 Shares: July 1, 1993
(25% of total grant)
- - An additional 2,425 Shares: July 1, 1994
(25% of total grant)
</TABLE>
Options will vest annually as provided in the foregoing sentence, provided that
the sum of (i) seven times the Company's consolidated earnings before marketing
expense capitalization, interest and taxes, before giving effect to charges
resulting from (a) the amortization of the purchase price premium associated
with the 1986 and 1989 recapitalizations of the Company; (b) contributions to
the Company's Employee Stock Ownership Plan ("ESOP"); and (c) options granted
under the Plan, or any similar plan adopted by the Company in the future;
("Adjusted EBIT") less (ii) the consolidated total interest bearing debt of the
Company, including all current maturities, short-term interest bearing debt and
capitalized leases, but with such debt being reduced by the amount of cash and
equivalents
- 3 -
<PAGE> 4
("Net Debt"), exceeds the following amounts at the close of the then most
recent fiscal year:
<TABLE>
<S> <C>
Fiscal Year 1991 $ 41 Million
Fiscal Year 1992 $ 64 Million
Fiscal Year 1993 $ 88 Million
Fiscal Year 1994 $114 Million
Fiscal Year 1995 $142 Million
Fiscal Year 1996 $174 Million
Fiscal year 1997 $200 Million
Fiscal Year 1998 $217 Million
Fiscal Year 1999 $234 Million
</TABLE>
The sale or other disposition of any significant asset(s) will impact the above
calculation because of the effect on Adjusted EBIT, Net Debt and other factors.
The amounts described above will be appropriately revised upon any such sale or
other disposition.
In the event that the vesting requirements are not satisfied in any one
year, the options that were not vested in that year will vest in the next
subsequent or later years if the vesting requirements are met in the next
subsequent or later years.
Notwithstanding the foregoing, the date on which options granted under this
Agreement may be exercised: (i) may be accelerated by the Committee, in its
sole discretion; and (ii) will be accelerated and all options will be
immediately vested and exercisable in the event of a Public Distribution, (as
defined below) or a Change in Control (as defined below), in which Public
Distribution or Change in Control either:
- 4 -
<PAGE> 5
(a) Any of the Institutional Investors, as such term is defined in the
Stockholders Agreement dated October 26, 1989, realize value on their
shares in the Company in excess of the following amounts:
05/01/90 - 07/31/90 $ 1.58 per share
08/01/90 - 10/31/91 $ 1.69 per share
11/01/90 - 01/31/91 $ 1.81 per share
02/01/91 - 04/30/91 $ 1.93 per share
05/01/91 - 07/31/91 $ 2.07 per share
08/01/91 - 10/31/91 $ 2.21 per share
11/01/91 - 01/31/92 $ 2.37 per share
02/01/92 - 04/30/92 $ 2.54 per share
05/01/92 - 07/31/92 $ 2.72 per share
08/01/92 - 10/31/92 $ 2.91 per share
11/01/92 - 01/31/93 $ 3.11 per share
02/01/93 - 04/30/93 $ 3.33 per share
05/01/93 - 07/31/93 $ 3.56 per share
08/01/93 - 10/31/93 $ 3.81 per share
11/01/93 - 01/31/94 $ 4.07 per share
02/01/94 - 04/30/94 $ 4.36 per share
05/01/94 - 07/31/94 $ 4.67 per share
08/01/94 - 10/31/94 $ 4.99 per share
11/01/94 - 01/31/95 $ 5.34 per share
02/01/95 - 04/30/95 $ 5.72 per share
05/01/95 - 07/31/95 $ 6.12 per share
08/01/95 - 10/31/95 $ 6.54 per share
11/01/95 - 01/31/96 $ 7.00 per share
02/01/96 - 04/30/96 $ 7.49 per share
05/01/96 - 07/31/96 $ 8.02 per share
08/01/96 - 10/31/96 $ 8.58 per share
11/01/96 - 01/31/97 $ 9.18 per share
02/01/97 - 04/30/97 $ 9.82 per share
05/01/97 - 07/31/97 $10.51 per share
08/01/97 - 10/31/97 $11.24 per share
11/01/97 - 01/31/98 $12.03 per share
02/01/98 - 04/30/98 $12.87 per share
05/01/98 - 07/31/98 $13.77 per share
08/01/98 - 10/31/98 $14.74 per share
11/01/98 - 01/31/99 $15.77 per share
02/01/99 - 04/30/99 $16.87 per share
05/01/99 - 07/31/99 $18.05 per share
; or
- 5 -
<PAGE> 6
(b) The Company's Adjusted EBIT less Net Debt equals or exceeds the
amount set forth below in the fiscal year preceding the fiscal year in
which such event-occurs:
<TABLE>
<S> <C>
Fiscal Year 1991 $ 41 Million
Fiscal Year 1992 $ 64 Million
Fiscal Year 1993 $ 88 Million
Fiscal Year 1994 $114 Million
Fiscal Year 1995 $142 Million
Fiscal Year 1996 $174 Million
Fiscal Year 1997 $200 Million
Fiscal Year 1998 $217 Million
Fiscal Year 1999 $234 Million
</TABLE>
For the purposes of this Agreement, "Public Distribution" will mean a
public offering of common stock of the Company pursuant to an effective
registration statement under the Securities Act of 1933, as amended, (the
"Act") at the conclusion of which (i) the Company is required to register
shares of its common stock under Section 12(b) or (g) of the Securities
Exchange Act of 1934, as amended, and (ii) at least 25% of the outstanding
common stock of the Company shall have been sold to the public pursuant to
one or more effective registration statements under the Act. For the
purposes of this Agreement, "Change in Control" will mean a
- 6 -
<PAGE> 7
transaction or series of transactions at the conclusion of which any person,
firm or entity, and its Affiliates (as such term is defined in the Exchange
and Repurchase Agreements dated October 26, 1990), becomes the record or
beneficial owner of, and/or obtains the right to purchase, more than 50% of
the stock of the Company, or obtains the power to elect a majority of the
Board of Directors of the Company; provided, however, that the issuance or
transfer of shares, stock options and/or other contract rights to acquire
shares to (a) the EMC Holdings, Inc. Employee Stock Ownership Plan or any
other Employee Stock Ownership Plan hereinafter adopted ("ESOP") or (b) to
one or more individuals who are employees of Holdings and hold options
previously granted under this Plan will not be considered in determining
whether a "Change of Control" has occurred at the time of such issuance or
transfer unless the Compensation Committee of Holdings then determines (in
its discretion) that
- 7 -
<PAGE> 8
it should be considered for that purpose.
5. Termination of Options.
Any other provision of this plan to the contrary notwithstanding, in the
event of a Change in Control, any Options which are not vested prior to or as a
result of such event will automatically terminate and will thereafter not be
exercisable.
6. Repurchase by Company.
In the event of a Public Distribution or a Change of Control, any or all
of the Options not terminated in accordance with Paragraph 5, above, and
whether or not vested, may, at the option of the Board of Directors, be
repurchased by the Company at a price and on the terms determined in good faith
by the Board of Directors to be the fair market value of such options. In the
absence of clear and convincing evidence to the contrary, the Board of
Directors will be entitled, but will not be required, to rely upon the per
share price which other shareholders (or a material group of them) are to
receive for such shareholder's shares in connection with such Public
Distribution or Change of Control as the fair market value of such shares and
to determine that the fair market value of each option is equivalent to (i)
such per share price received by such other shareholders, reduced by (ii) an
amount equivalent to the exercise price on such Options (or, if such price is
not payable immediately in cash, reduced to account for the exercise price as
determined in good faith by the Board of Directors).
- 8 -
<PAGE> 9
7. Who May Exercise. During the Optionee's lifetime, the option rights may
be exercised only by him or her. Neither this Agreement nor any right
hereunder will be subject to attachment, execution or other similar process, or
will be transferable or assignable, except only by will or by the laws of
descent and distribution, and then only as provided in Paragraph 12 hereof.
8. Manner of Exercise. The option rights may be exercised with respect to
all or any lesser number of whole shares then vested and subject to such
exercise (but only in accordance with the provisions of this Agreement and such
rules as the Committee may adopt) by the delivery of written notice from the
Optionee to the Company, accompanied by the full payment of the exercise price
per share specified in Paragraph 3 above, in any one or more of the following
ways: in cash, or by check, bank draft or money order.
Upon compliance with all provisions of this Agreement, including, without
limitation, the restrictions on resale set forth in Paragraph 12 of this
Agreement, the Company will deliver to the Optionee a certificate for such
shares with all requisite transfer stamps (if any) attached.
9. Federal Income Tax Consequences of Exercise. Under current law, no
federal income tax consequences will result upon receipt, or vesting, of an
option. Under current law, upon exercise of an option acquired under the Plan,
no federal income tax consequences generally will result unless the Optionee
makes
- 9 -
<PAGE> 10
a valid election under section 83(b) ("83(b) Election") of the Internal Revenue
Code of 1986, as amended, (the "Code") to recognize ordinary income, if any, in
an amount equal to the difference between the fair market value of the stock
acquired on the date of exercise of such option and the option price of such
stock. A form that may be utilized to effect an 83(b) Election is attached to
this Agreement as Exhibit A. The 83(b) Election is made by filing not later
than thirty (30) days after the date the Optionee exercises such option rights
one copy of the form attached as Exhibit A (i) with the Internal Revenue
Service Center where the Optionee files his or her federal income tax return
and (ii) with the Company pursuant to the procedures prescribed in Paragraph 14
of this Agreement. In addition, one copy of such 83(b) Election form must be
submitted with the Optionee's federal income tax return for the Optionee's
taxable year in which such option was exercised. The ordinary income
recognized as a result of the 83(b) Election will be treated as additional
compensation to the Optionee subject to federal income and certain employment
tax withholdings, which the Optionee must pay, as provided in Paragraph 15.
The Company will notify the Optionee of the amount and the manner of payment of
such withholdings within a reasonable period after receipt of such Optionee's
83(b) Election.
If the Optionee makes a valid 83(b) Election upon exercise of an option,
subsequent appreciation (or depreciation) in the fair market value of the stock
so acquired generally will
- 10 -
<PAGE> 11
be characterized as capital gain (or loss) and recognized for federal income
tax purposes when the Optionee sells such stock. It is important to note,
however, that the Tax Reform Act of 1986 repealed the deduction of 60% of net
capital gain (defined as the excess of net long-term capital gain over net
short-term capital loss) from a taxpayer's gross income for federal income tax
purposes for taxable years beginning after December 31, 1986. As a result, all
of a taxpayer's income, including net capital gain, will be taxed at ordinary
income rates.
If the stock so acquired is repurchased by the Company under Paragraph
12(b) of this Agreement, the Optionee will recognize either (i) a capital gain
equal to the excess of the amount paid by the Company to repurchase such stock,
over the fair market value on the date of exercise or (ii) a capital loss equal
to the excess of the fair market value of such stock on the date of exercise,
over the amount paid by the Company to the Optionee on the repurchase of such
stock. A capital loss may only offset up to $3,000 of ordinary income of a
taxpayer ($1,500 in the case of a married individual filing separately) in any
one taxable year. Both net short-term capital losses and net long-term capital
losses may be used to offset-up to $3,000 of a taxpayer's ordinary income.
If the Optionee does not make a valid 83(b) Election with respect to such
stock, no federal income tax consequences generally will occur until the
restriction on resale prescribed with respect to such stock under Paragraph
12(a)(1)
- 11 -
<PAGE> 12
hereof lapses, at which time the Optionee will recognize ordinary income in an
amount equal to the excess, if any, of the fair market value of the stock on
the date such restriction lapses over the exercise price. The ordinary income,
if any, recognized by the Optionee upon the lapse of such resale restriction
will be treated as additional compensation to the Optionee subject to federal
income and certain employment tax withholdings, which the Optionee must pay, as
provided in Paragraph 15. The Company will notify the Optionee of the amount
and the manner of payment of such withholdings within a reasonable period of
time after the lapse of such resale restriction.
The Optionee's federal income tax basis for stock acquired pursuant to the
exercise of such option rights will be equal to the fair market value of such
stock (i) on the date of exercise if a valid 83(b) Election is made, or (ii) on
the date the resale restriction lapses. Upon the subsequent sale of stock so
acquired after the expiration of the resale restriction noted above, the
Optionee will determine gain or loss based on the difference between the amount
realized by the Optionee and the Optionee's federal income tax basis.
The foregoing general discussion of the possible federal income tax
consequences of the exercise of option rights acquired under the Plan (i) is
designed only to alert the Optionee to the various federal income tax
alternatives which are available with respect to the exercise of such option
rights and (ii) is based on the Code as amended through July 1, 1990. The
- 12 -
<PAGE> 13
Code, as well as the Internal Revenue Service's interpretation of the Code, is
subject to change. Further, the impact of various Code provisions may differ
for the Optionee due to such Optionee's particular tax situation. Accordingly,
the Optionee is urged to consult with his or her tax advisor regarding the
federal income tax consequences of the exercise of option rights acquired under
the Plan.
10. Restrictions on Exercise. This option:
(a) may be exercised only with respect to whole shares;
(b) may not be exercised in whole or in part if such exercise or the
delivery of certificates representing shares purchased pursuant to this
option would constitute a violation of any applicable federal or state
statute or regulation; and
(c) may not be exercised in whole or in part, and no certificates
representing shares purchased pursuant to this option will be
delivered, if any requisite approval of any governmental authority
having jurisdiction over the exercise of such options or over the
issuance of shares pursuant to such options has not been secured, and
the Company covenants
- 13 -
<PAGE> 14
to use reasonable diligence to obtain all such requisite approvals or
consents.
11. Termination of Options. These options, and all rights hereunder, to
the extent not previously exercised, will terminate immediately and may no
longer be exercised if and when the Optionee ceases to be an employee of the
Company or its subsidiaries, except that:
(i) If his or her employment shall have been terminated involuntarily for
any reason other than theft or dishonesty, the Optionee may at any time within
a period of thirty (30) days after such termination exercise these options
regardless of the extent that such options were exercisable by him or her on
the date of the termination of his or her employment; provided, however, that
an option may not be exercised after the Expiration Date specified in Paragraph
4 hereof.
(ii) If the Optionee dies or becomes permanently disabled while in the
employ of the Company or of any of its subsidiaries or retires after attainment
of age 65, all options held by that Optionee on the date of his or her
termination may be exercised at any time within ninety (90) days after that
date, by the Optionee, the personal representative of the deceased Optionee or
by the person or persons to whom the Optionee's rights under such options shall
pass by will or by the applicable laws of descent and distribution, regardless
of the extent that
- 14 -
<PAGE> 15
such options otherwise would have been exercisable on that date; provided,
however that an option may not be exercised by any person after the Expiration
Date specified in Paragraph 4 hereof.
(iii) The Committee may grant further exceptions with respect to
exercise of options upon termination of employment in other cases where it may
be in, or not opposed to, the best interest of the Company to do so.
12. Restriction on Resale of Shares; Repurchase by the Company.
(a)(1) The Optionee may not sell or otherwise transfer any share
acquired pursuant to this option prior to the expiration of the
repurchase period described in subparagraph (b) below.
(a)(2) To enforce the restriction on resale set forth in Paragraph
12(a)(1) above, and during such time as said restriction may be in
effect, the Company will have the right to (i) retain the certificate or
certificates representing the shares acquired pursuant to this option or
place them in the custody of its agent, (ii) place a restrictive legend
on the certificate(s) representing such shares, and/or (iii) issue a
stop transfer order to its stock transfer agent with respect to such
shares.
(b)(1) If the employment of the Optionee by the Company and/or its
subsidiaries terminates for any reason and the Optionee has exercised or
thereafter
- 15 -
<PAGE> 16
exercises any option granted to him or her under the Plan, then, in such
event, the Company will have the option for a period of ninety (90) days
following the termination of employment or exercise of such option, whichever
may last occur, in its discretion, to repurchase any and all shares acquired
by the Optionee pursuant to the exercise of options granted under this Plan
at the price set forth in the following sentence. The value to be paid per
Share by the Company under this Paragraph 12(b)(1) or under 12(b)(2), below
will be the difference between (i)(A) so long as the Company has an ESOP and
is required to obtain appraisals of its stock for the purposes of such ESOP,
the most recent value of its common stock as determined by such appraisal; or
(B) if there is no appraisal of the Company's stock which meets the
requirements of this subparagraph, an amount equal to 7 times the Company's
Adjusted EBIT minus the Net Debt of the Company for the then current or
immediately preceding year, whichever is greater, divided by the number of
shares (on a fully diluted basis) as of the end of such year less (ii) the
exercise price per Share of the options. For the purposes of the foregoing
calculation, the Preferred Stock of the Company (currently owned by the ESOP)
will be treated either (i) as an addition to Net Debt in an amount obtained
by multiplying the number of shares of
- 16 -
<PAGE> 17
Preferred Stock outstanding times $100.00, in which event such shares will not
be taken into account in determining the number of shares of stock outstanding;
or (ii) as the number of shares of common stock of the Company into which such
shares of Preferred Stock are convertible, in which event such shares will not
be taken into account in determining Net Debt, whichever produces the lower
value. The Company may exercise its option to repurchase such shares by
delivery of written notice thereof to the Optionee within such ninety (90) day
period, and a closing will be held within fifteen (15) days of delivery of such
notice, on the date and at the time and place set forth in such notice.
(b)(2) If the employment of the Optionee by the Company and/or its
subsidiaries terminates and the Committee determines that such termination
was as a result of death, disability, retirement after attainment of age 65
or termination by the Company or subsidiary without cause, then if such
Optionee (or his or her personal representative) has exercised or thereafter
exercises any option granted to him or her under this Plan, in that event
the Optionee (or his or her personal representative) shall have the right,
for a period of 90 days following the termination of employment or exercise
of such option, whichever may last occur, to sell to the Company any and all
Shares
- 17 -
<PAGE> 18
acquired by such Optionee pursuant to the exercise of options granted under
this Plan at the price equal to, and under the procedure, set forth in
subparagraph (b)(l) of this Paragraph 12.
(c) The Optionee hereby irrevocably appoints the Secretary of the Company
as his or her attorney-in-fact, with full power of substitution, to endorse
over to the Company on behalf of the Optionee the certificate(s)
representing the shares subject to the Company's repurchase option set forth
above.
(d) The Company may grant waivers of the restriction imposed by this
Paragraph 12 in such cases as it may deem to be in, or not opposed to, the
best interest of the Company.
(e) Notwithstanding the foregoing, the rights granted by subparagraphs
(b)(l) and (b)(2) shall terminate upon a Public Distribution (as defined in
Paragraph 4) which results in the common stock of the Company being freely
tradeable in a public market. The Committee shall determine if such stock
is so freely tradeable and will notify the Optionee.
(f) During such time as the restriction on resale contained in Paragraph
12(a)(1) may be in effect, the Optionee will be entitled to enjoy all rights
and privileges otherwise granted to a shareholder of the Company relating to
the shares subject to such
- 18 -
<PAGE> 19
restriction including, but not limited to the right to vote and to receive
dividends with respect to such shares.
13. Adjustments Upon Changes in Stock. In the event of a change in the
Company's capital stock structure, the adjustments provided for in Paragraph 15
of the Plan will be made.
14. Notices. All notices to the Company must be in writing, addressed and
delivered or mailed to EMC Holdings, Inc., 300 Sixth Avenue, Pittsburgh,
Pennsylvania 15222, Attention: Treasurer, and all notices to the Optionee
must be in writing addressed and delivered or mailed to him or her at the
address shown on the records of the Company.
15. Withholding. Upon notification by the Company of the amount of any
withholding liability arising as a result of this Agreement or the Plan with
regard to the Optionee, the Optionee hereby agrees (i) to remit to the Company
within the time period specified by the Company an amount equal to any taxes
required to be withheld by the Company under federal, state or local law with
regard to the Optionee, or (ii) that the Company is authorized to withhold in
accordance with applicable law from any wages, salary, bonus or other
compensation payable to the Optionee any taxes required to be withheld by the
Company under federal, state or local law with regard to the Optionee, as the
Company, in its sole discretion, chooses.
16. Governing Law. This Agreement will be governed under the laws of the
Commonwealth of Pennsylvania.
- 19 -
<PAGE> 20
17. Time of the Essence. For the purposes of this Agreement, time is of
the essence.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the date first above written.
ATTEST: EMC HOLDINGS, INC.
- --------------------------- ----------------------------
Secretary Vice President and Treasurer
WITNESS: EMC HOLDINGS, INC. COMPENSATION
COMMITTEE
By
- --------------------------- -------------------------
Chairman
WITNESS: OPTIONEE
___________________________ ____________________________
Signature
- 20 -
<PAGE> 21
Exhibit A
(Election form must be filed not later
than 30 days after the date of exercise
of an option granted under the
Management Incentive Stock Option Plan
and a copy must be attached to the
Optionee's next federal income tax
return.)
ELECTION UNDER SECTION 83(b) OF
THE INTERNAL REVENUE CODE
____________________________, the undersigned taxpayer, hereby
makes an election pursuant to Section 83(b) of the Internal Revenue Code with
respect to the property described below and supplies the following information
in accordance with the regulations promulgated under Section 83(b):
1. The name, address and taxpayer identification number
of the undersigned is:
2. Description of the property with respect to which the
election is being made:
This election relates to ____ shares of Class
B common stock of EMC Holdings, Inc. (the
"Company").
3. The date or dates on which the property was transferred
and the taxable year for which such election was made:
The stock was transferred to the taxpayer on
____________ pursuant to the exercise of
nonqualified stock options granted to the
taxpayer by the Company, and this election is
being made with respect to the calendar year
____________.
4. The restriction or restrictions to which the stock was
subject:
The Management Incentive Stock Option Agreement (the
"Agreement") entered into by and between the Company and the
taxpayer provides that stock acquired pursuant
- 21 -
<PAGE> 22
to the exercise of options granted under the Agreement is subject to
the restriction that stock may not be sold or otherwise transferred
prior to the expiration of ninety days after the later of (i) the last
exercise of options or (ii) termination of employment.
5. The fair market value of the stock at the time of the exercise of the
nonqualified stock options determined without regard to any lapse restrictions
was _______ per share.
6. The amount paid by the taxpayer for such stock was _____ per share.
7. Copies of this election have been made available to the Company.
- ---------------------- ----------------------------
Date (Electing Taxpayer)
- 22 -
<PAGE> 23
SCHEDULE
TO
EMC STOCK OPTIONS
as of January 29, 1996
Date Granted TOTAL GRANTED
Exercise Price
Barber, R.M. 41,700
Covaleskie, F.T. 2,000
Cypher, R.A. 76,600
DeCoursey, P.T. 150,000
Drucker, M.L. 291,522
Gioella, R.P. 15,000
Gregg, S.R. 10,000
Griffith, H.R. 14,100
Grysiak, G.C. 5,600
Hauser, T.M. 10,000
Hodges, M.C. 54,000
Josephs, N.W. 2,000
Keriotis, L.A. 2,675
Lafferty, D.J. 5,000
Lewis, W.W. 2,000
Maki, M.B. 2,000
McDonough, J.C. 2,675
McDowell, R.T. 69,262
Mazur, W.J. 12,000
Nelson, J.E. 21,000
O'Day, D.K. 10,600
Pauldine, D.J. 71,000
Peterson, R.P. 41,700
Pry, G.L. 24,700
Scott, D.C. 2,675
Steinberg, F.W. 33,100
Stroede, T.L. 13,600
Sutton, K.E. 8,000
Termnick, N.G. 15,000
Wahler, J.R. 2,675
VanDyke, S.M. 41,000
---------
TOTAL: 1,076,284
<PAGE> 1
Exhibit 10.08
AMENDMENT
TO
MANAGEMENT INCENTIVE STOCK OPTION AGREEMENT
THIS AMENDMENT TO MANAGEMENT INCENTIVE STOCK OPTION AGREEMENT
("Amendment") is made and entered into as of January 19, 1995 by and between
EDUCATION MANAGEMENT CORPORATION, a Pennsylvania corporation (the "Company"),
and ________________, an officer or manager of the Company (the "Optionee").
WITNESSETH:
WHEREAS, EMC Holdings, Inc. (as predecessor-by-merger to the Company)
and the Optionee entered into that certain Management Incentive Stock Option
Agreement dated as of July 1, 1990 (the "Agreement") in connection with a grant
of stock options pursuant to the Company's Management Incentive Stock Option
Plan adopted effective as of July 1, 1990 (the "Plan"); and
WHEREAS, the Company has amended the Plan effective as of the date
hereof; and
WHEREAS, the Company and the Optionee desire to amend the Agreement in
order to adopt the modifications made to the Plan as of the date hereof, all of
which changes are beneficial to the Optionee.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto, intending to
be legally bound hereby, agree as follows:
1. Amendment of Paragraph 4. Paragraph 4 of the Agreement is hereby
amended and restated in its entirety as follows:
4. Vesting: Exercise of Options.
(a) The option rights of the Optionee will be exercisable for a
five-year period, beginning on July 1, 1995 and ending on July 1, 2000
(the "Expiration Date"), provided that they have vested. Vesting will
occur with respect to the number of shares and on the date set forth
below; provided that the vesting requirements set forth in the following
sentence (the "Vesting Requirements") are determined to have been
satisfied, based upon the
<PAGE> 2
Company's audited financial statements or other information satisfactory
to the Committee.
Number of Shares Vesting Date
---------------- ------------
The first 2,425 Shares: July 1, 1991
(25% of total grant)
An additional 2,425 Shares: July 1, 1992
(25% of total grant)
An additional 2,425 Shares: July 1, 1993
(25% of total grant)
An additional 2,425 Shares: July 1, 1994
(25% of total grant)
(b) Options will vest annually as provided in Paragraph 4(a)
above, provided that the sum of (i) seven (7) times the Company's
consolidated earnings before marketing expense capitalization ("MEC"),
interest and taxes before giving effect to charges resulting from (A)
the amortization of the purchase price premium associated with the 1986
and 1989 recapitalizations of the Company; (B) contributions to the
Company's Employee Stock Ownership Plan ("ESOP"); (C) special non-cash
charges; and (D) options granted under the Plan, or any similar plan
adopted by the Company in the future ("HEBIT before MEC"), less (ii) the
consolidated total interest-bearing debt of the Company, including all
current maturities, short-term interest-bearing debt and capitalized
leases, but with such debt being reduced by the amount of cash and
equivalents ("Net Debt"), exceeds the following amounts at the close of
the then most recent fiscal year:
Fiscal Year 1991 $41 million
Fiscal Year 1992 $64 million
Fiscal Year 1993 $88 million
Fiscal Year 1994 $114 million
Fiscal Year 1995 $60.4 million
Fiscal Year 1996 $76.6 million
Fiscal Year 1997 $103.7 million
Fiscal Year 1998 $145.8 million
Fiscal Year 1999 $214.9 million
The sale or other disposition of any significant asset(s) will impact
the above calculation because of the effect on HEBIT before MEC, Net
Debt and other
- 2 -
<PAGE> 3
factors. The amounts described above will be appropriately revised upon
any such sale or other disposition.
(c) In the event that the vesting requirements are not
satisfied in any one year, the options that were not vested in that year
will vest in the next subsequent or later years if the vesting
requirements are met in the next subsequent or later years.
(d) Notwithstanding anything herein to the contrary, the date
on which options granted under this Agreement may be exercised (i) may
be accelerated by the Committee, in its sole discretion, and (ii) will
be accelerated and all options will be immediately vested and
exercisable, in the event of (A) a Change in Control (as defined below)
or (B) a Public Distribution (as defined below); provided, that, in the
case of a Public Distribution only, either:
(x) the per share value of the shares held by any of the
Institutional Investors, as such term is defined in the Stockholders
Agreement dated October 26, 1989, equals or exceeds the amount set
forth below at the time of the Public Distribution:
12/14/94 - 12/13/95 $3.50 per share
12/14/95 - 12/13/96 $4.20 per share
12/14/96 - 12/13/97 $5.04 per share
12/14/97 - 12/13/98 $6.05 per share
12/14/98 - 12/13/99 $7.26 per share
12/14/99 - 12/13/2000 $8.71 per share
(For purposes of this subparagraph (x), the per share value shall be
equal to the public offering price per share before underwriting
discounts and commissions); or
(y) the Company's HEBIT before MEC less Net Debt equals or
exceeds the amount set forth below in the fiscal year preceding the
fiscal year in which such Public Distribution occurs:
Fiscal Year 1995 $60.4 million
Fiscal Year 1996 $76.6 million
Fiscal Year 1997 $103.7 million
Fiscal Year 1998 $145.8 million
Fiscal Year 1999 $214.9 million
(e) For the purposes of this Agreement, "Public Distribution"
will mean a public offering of common stock of the Company pursuant to
an effective registration statement under the Securities Act of 1933, as
amended
- 3 -
<PAGE> 4
(the ("Act"), at the conclusion of which (i) the Company is required to
register shares of its common stock under Section 12(b) or (g) of the
Securities Exchange Act of 1934, as amended, and (ii) at least 25% of
the outstanding common stock of the Company shall have been sold to the
public pursuant to one or more effective registration statements under
the Act.
(f) For the purposes of this Agreement, "Change in Control"
will mean a transaction or series of transactions at the conclusion of
which any person, firm or entity, and its Affiliates (as such term is
defined in the Exchange and Repurchase Agreements dated October 26,
1989), becomes the record or beneficial owner of, and/or obtains the
right to purchase, more than 50% of the stock of the Company, or obtains
the power to elect a majority of the Board of Directors of the Company;
provided, however, that the issuance or transfer of shares, stock
options and/or other contract rights to acquire shares to (i) the ESOP
or (ii) one or more individuals who are employees of the Company and
hold options previously granted under the Plan will not be considered in
determining whether a "Change in Control" has occurred at the time of
such issuance or transfer unless the Compensation Committee of the
Company then determines (in its discretion) that it should be considered
for that purpose."
2. Amendment of Paragraph 12(b)(1). The second sentence of Paragraph
12(b)(1) of the Agreement is hereby amended and restated in its entirety as
follows:
"The purchase price to be paid per Share by the Company under this
Paragraph 12(b)(1) or Paragraph 12(b)(2) below will be (i) so long as the
Company has an ESOP and is required to obtain appraisals of its common
stock for the purposes of such ESOP, the most recent value of such stock as
determined by such appraisal; or (ii) if there is no appraisal of the
Company's stock which meets the requirements of this subparagraph, seven
(7) times the Company's HEBIT before MEC minus the Net Debt of the Company
for the immediately preceding year, divided by the number of shares (on a
fully diluted basis) as of the end of such year."
3. No Other Amendments. Except as expressly amended by this
Amendment, the Agreement, and each and every representation, warranty,
covenant, term and condition therein, are hereby specifically ratified and
confirmed.
4. Counterparts. This Amendment may be executed in counterparts, each
of which shall be an original, but all of which together shall constitute one
instrument.
5. Governing Law. This Amendment shall be construed and enforced in
accordance with the laws of the Commonwealth of Pennsylvania.
- 4 -
<PAGE> 5
IN WITNESS WHEREOF, the parties have caused this Amendment to be
executed on the date first above written.
EDUCATION MANAGEMENT CORPORATION
By:
-----------------------------
Senior Vice President
and Chief Financial Officer
EDUCATION MANAGEMENT CORPORATION
COMPENSATION COMMITTEE
By:
-----------------------------
--------------------------------
Signature
- 5 -
<PAGE> 1
Exhibit 10.09
EDUCATION MANAGEMENT CORPORATION RETIREMENT PLAN
As Amended and Restated
Effective January 1, 1989
Plan No. 001
<PAGE> 2
EDUCATION MANAGEMENT CORPORATION RETIREMENT PLAN
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
INTRODUCTION AND PURPOSE..................................................................................... 1
ARTICLE I ........................................................................................... 2
DEFINITIONS
1.01 Adjustment................................................................................. 2
1.02 Administrator.............................................................................. 2
1.03 Affiliate.................................................................................. 2
1.04 After-Tax Contribution..................................................................... 2
1.05 After-Tax Contribution Account............................................................. 2
1.06 Annual Additions........................................................................... 2
1.07 Before-Tax Savings......................................................................... 2
1.08 Before-Tax Savings Account................................................................. 3
1.09 Beneficiary................................................................................ 3
1.10 Board...................................................................................... 3
1.11 Code....................................................................................... 3
1.12 Compensation............................................................................... 3
1.13 Current Balance............................................................................ 4
1.14 Defined Benefit Plan....................................................................... 4
1.15 Defined Contribution Plan.................................................................. 4
1.16 Early Retirement Age....................................................................... 4
1.17 Early Retirement Date...................................................................... 4
1.18 Effective Date............................................................................. 4
1.19 Employee................................................................................... 4
1.20 Employer................................................................................... 4
1.21 Employer Discretionary Contributions....................................................... 4
1.22 Employer Discretionary Contribution Account................................................ 5
1.23 Employer Matching Contributions............................................................ 5
1.24 Employer Matching Contribution Account..................................................... 5
1.25 ERISA or Act............................................................................... 5
1.26 Former Participant......................................................................... 5
1.27 Highly Compensated Employee................................................................ 5
1.28 Hour of Service............................................................................ 7
1.29 Individual Account......................................................................... 9
1.30 Named Fiduciary............................................................................ 9
1.31 Normal Retirement Age...................................................................... 9
1.32 Normal Retirement Date..................................................................... 9
1.33 Participant................................................................................ 9
1.34 Plan....................................................................................... 9
1.35 Plan Year.................................................................................. 9
1.36 Rollover Account........................................................................... 9
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
1.37 Service.................................................................................... 9
1.38 Sponsor.................................................................................... 11
1.39 Spouse..................................................................................... 11
1.40 Total and Permanent Disability or Disability or Disabled................................... 11
1.41 Trust Agreement............................................................................ 11
1.42 Trust Fund................................................................................. 11
1.43 Trustee.................................................................................... 11
1.44 Valuation Date............................................................................. 11
ARTICLE II ........................................................................................... 12
PARTICIPATION
2.01 Participation.............................................................................. 12
2.02 Plan Binding............................................................................... 12
2.03 Reemployment............................................................................... 12
2.04 Beneficiary Designation.................................................................... 13
2.05 Notification of Individual Account Balance................................................. 13
ARTICLE III ........................................................................................... 14
CONTRIBUTIONS
3.01 Before-Tax Savings......................................................................... 14
3.02 Special Test for Before-Tax Savings........................................................ 15
3.03 Employer Matching Contributions............................................................ 17
3.04 After-Tax Contributions.................................................................... 17
3.05 Special Testing of Employer Matching Contributions and
After-Tax Contributions.................................................................... 18
3.06 Combined Limitations on the Contribution Percentages
and Actual Deferral Percentages............................................................ 19
3.07 Employer Discretionary Contributions....................................................... 21
3.08 Rollover Contributions..................................................................... 21
3.09 Restrictions and Conditions on Employer Discretionary
Contributions, Employer Matching Contributions and
Before-Tax Savings......................................................................... 24
3.10 Investment of Individual Accounts.......................................................... 25
ARTICLE IV ........................................................................................... 28
ALLOCATIONS TO INDIVIDUAL ACCOUNTS
4.01 Individual Accounts........................................................................ 28
4.02 Allocation of Employer Discretionary Contributions......................................... 28
4.03 Allocation of Employer Matching Contributions.............................................. 29
4.04 Allocation of Forfeitures.................................................................. 29
4.05 Valuation of Accounts...................................................................... 29
4.06 Maximum Additions.......................................................................... 30
4.07 Corrective Adjustments..................................................................... 31
4.08 Defined Contribution and Defined Benefit Plan Fraction..................................... 32
ARTICLE V ........................................................................................... 33
DISTRIBUTIONS
5.01 Normal Retirement.......................................................................... 33
</TABLE>
<PAGE> 4
<TABLE>
<S> <C>
5.02 Early Retirement........................................................................... 33
5.03 Disability Retirement...................................................................... 33
5.04 Death...................................................................................... 33
5.05 Termination of Employment.................................................................. 34
5.06 Distribution Upon Retirement or Termination of Employment.................................. 35
5.07 Distribution Due to Death.................................................................. 38
5.08 Cash Out of Small Benefits................................................................. 39
5.09 Commencement of Benefits and Required Distributions........................................ 40
5.10 Benefits to Minors and Incompetents........................................................ 41
5.11 Unclaimed Benefits......................................................................... 42
5.12 Direct Rollover of Eligible Rollover Distributions......................................... 42
5.13 In-Service Distributions................................................................... 43
ARTICLE VI ........................................................................................... 44
WITHDRAWALS
6.01 Withdrawals Generally...................................................................... 44
6.02 Withdrawals of After-Tax Contributions..................................................... 44
6.03 Withdrawal upon Attainment of Age Fifty-Nine and
One-Half (59 1/2).......................................................................... 44
6.04 Loans...................................................................................... 44
6.05 Hardship Withdrawals....................................................................... 45
ARTICLE VII.................................................................................................. 47
FUNDING
7.01 Contributions.............................................................................. 47
7.02 Trustee.................................................................................... 47
ARTICLE VIII................................................................................................. 48
8.01 Administrator.............................................................................. 48
8.02 Claims Procedures.......................................................................... 49
8.03 Records.................................................................................... 50
ARTICLE IX ........................................................................................... 51
AMENDMENT AND TERMINATION OF THE PLAN
9.01 Amendment of the Plan...................................................................... 51
9.02 Termination of the Plan.................................................................... 51
ARTICLE X ........................................................................................... 52
PROVISIONS RELATIVE TO EMPLOYERS INCLUDED IN PLAN
10.01 Method of Participation.................................................................... 52
10.02 Withdrawal................................................................................. 52
ARTICLE XI ........................................................................................... 54
MISCELLANEOUS
11.01 Governing Law.............................................................................. 54
11.02 Construction............................................................................... 54
11.03 Administration Expenses.................................................................... 54
11.04 Participants' Rights....................................................................... 54
</TABLE>
<PAGE> 5
<TABLE>
<S> <C>
11.05 Spendthrift Clause......................................................................... 54
11.06 Merger, Consolidation or Transfer.......................................................... 55
11.07 Counterparts............................................................................... 55
ARTICLE XII.................................................................................................. 56
TOP-HEAVY PLAN PROVISIONS
12.01 Application................................................................................ 56
12.02 Special Vesting Rule....................................................................... 56
12.03 Special Minimum Contribution............................................................... 57
12.04 Special Maximum Combined Plans Limit....................................................... 57
12.05 Key Employee and Non-Key Employee Defined.................................................. 57
ARTICLE XIII................................................................................................. 58
ADOPTION OF THE PLAN
</TABLE>
<PAGE> 6
INTRODUCTION AND PURPOSE
Effective January 1, 1979, Education Management Corporation (the "Sponsor")
adopted the Education Management Corporation Retirement Plan (the "Plan") for
the purpose of providing retirement income and other benefits for its eligible
employees. The Plan was amended from time to time thereafter.
Effective January 1, 1989, the Sponsor has amended and restated the Plan in its
entirety, the terms of which are hereinafter set forth. Further amendments
effective after January 1, 1989, and through July 28, 1994 are also contained in
this document. This document shall continue to be known as the Education
Management Corporation Retirement Plan. The purpose of this Plan continues to be
to provide retirement income for the benefit of its eligible employees and their
beneficiaries, but limited to those who qualify in accordance with the terms and
conditions of the Plan as set forth herein.
The Sponsor intends that this Plan, together with the Trust Agreement, shall be
a profit sharing plan qualified under Section 401(a) of the Internal Revenue
Code of 1986, as amended (the "Code"), with a cash or deferred arrangement
described in Section 401(k) of the Code, meeting all the pertinent requirements
for qualification under the Code, and any other requirements under the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and the Plan shall
be interpreted, wherever possible, to comply with the terms of the Code and
ERISA and all formal regulations and rulings issued thereunder pertinent to the
Plan and Trust Agreement.
The provisions of this Plan shall apply only to an Employee who is credited with
an Hour of Service on or after December 31, 1988, except to the extent otherwise
stated in this document.
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<PAGE> 7
ARTICLE I
DEFINITIONS
1.01 Adjustment means the net increases and decreases in the market value of
the Trust Fund during each calendar quarter or other period exclusive
of any contribution during such calendar quarter or other period.
Effective May 1, 1992, the Adjustments shall be determined each
business day. Such increases and decreases shall include such items as
realized or unrealized investment gains and losses and investment
income, and may include expenses of administering the Plan and the
Trust Fund. The Adjustment shall not include Employer Discretionary
Contributions, Before-Tax Savings, After-Tax Contributions, rollover
contributions, distributions and, effective May 1, 1992, Employer
Matching Contributions.
1.02 Administrator means the Retirement Committee appointed by the Board to
administer the Plan in accordance with Article VIII hereof.
1.03 Affiliate means any corporation which is included in a controlled group
of corporations (within the meaning of Section 414(b) of the Code)
which group includes the Employer, any trade or business which is under
common control with the Employer (within the meaning of Section 414(c)
of the Code), any service organization or other organization which is a
member of an affiliated service group which group includes the Employer
(within the meaning of Section 414(m) of the Code), and any other
entity required to be aggregated with the Employer by regulations under
Section 414(o) of the Code, where such corporation, trade or business,
or organization is not an Employer hereunder.
1.04 After-Tax Contribution means contributions made to the Plan by the
Participant pursuant to Section 3.04 of Article III.
1.05 After-Tax Contribution Account means that portion of a Participant's
Individual Account attributable to (a) the Participant's After-Tax
Contributions, and (b) the Participant's proportionate share of the
Adjustments attributable to his After-Tax Contribution Account.
1.06 Annual Additions means for any Employee in any Plan Year, the sum of:
(a) Employer Discretionary Contributions, (b) Before-Tax Savings, (c)
After-Tax Contributions, (d) forfeitures, (e) for purposes of the
$30,000 limitation of Section 4.06(a) (but not the percent of
compensation limitation of Section 4.06(b)), any Employer contributions
to any individual medical account that is part of any pension or
annuity plan and any amount attributable to post-retirement medical
benefits allocated under a welfare benefit fund to a Key Employee (as
defined in Section 12.05 of this Plan) and (f) effective May 1, 1992,
Employer Matching Contributions allocated to Participant accounts.
1.07 Before-Tax Savings means contributions made to the Plan by the Employer
on behalf of Employees pursuant to Section 3.01 of Article III.
- 2 -
<PAGE> 8
1.08 Before-Tax Savings Account means that portion of a Participant's
Individual Account attributable to (a) Before-Tax Savings amounts
allocated to such Participant pursuant to Section 3.01 of Article III
and (b) the Participant's proportionate share of Adjustments
attributable to the Participant's Before-Tax Savings Account.
1.09 Beneficiary means any person designated by a Participant to receive
such benefits as may become payable hereunder after the death of such
Participant, provided such designation has been made in accordance with
the spousal consent provisions of Section 2.04.
1.10 Board means the Board of Directors of Education Management Corporation.
1.11 Code means the Internal Revenue Code of 1986, as amended from time to
time, and all formal rules and regulations issued thereunder pertinent
to the qualification of this Plan and the tax exempt status of the
Trust Fund.
1.12 Compensation means, for any Participant, earned income, wages,
salaries, and fees for professional services and other amounts for
services rendered, all as reported on Form W-2, plus any amounts
deferred pursuant to an arrangement maintained pursuant to Sections 125
or 401(k) of the Code. Earnings for the entire Plan Year shall be used
in determining the Employee's Compensation regardless of when the
Employee becomes a Participant in the Plan.
Notwithstanding the foregoing, the Compensation of any Employee which
is in excess of the Compensation Limit for any Plan Year beginning on
or after January 1, 1989 shall not be recognized by the Plan. For this
purpose, the Compensation Limit for years beginning on or after January
1, 1989 but before January 1, 1994 is $200,000, and the Compensation
Limit for years beginning on or after January 1, 1994 is $150,000, as
each of such amounts is adjusted from time to time pursuant to Section
401(a)(17) of the Code. If Compensation is being determined for a
period, not exceeding 12 months, that is not a Plan Year, the adjusted
annual Compensation Limit for the Plan Year in which that determination
period begins will apply to that determination period. If the
determination period consists of fewer than 12 months, the adjusted
annual Compensation Limit will be multiplied by a fraction, the
numerator of which is the number of months in the determination period,
and the denominator of which is 12. If a Participant's benefit accruing
in any current Plan Year depends on Compensation for an earlier
determination period, the adjusted annual Compensation Limit for that
earlier determination period will apply to that Compensation. For that
purpose, the compensation limit for earlier determination periods
relating to benefits accruing in Plan Years from 1989 through 1993,
inclusive, shall be $200,000 and the Compensation Limit for earlier
determination periods relating to benefits accruing in Plan Years after
1994 shall be $150,000. For purposes of applying the Compensation
Limit, a Highly Compensated Employee's family unit, composed of the
Highly Compensated Employee, his spouse and lineal descendants under
the age of nineteen (19), shall be treated as a single Employee with
one Compensation Limit, and the Compensation Limit shall be allocated
among the members of the family unit in proportion to each member's
Compensation as determined without regard to the Compensation Limit.
- 3 -
<PAGE> 9
1.13 Current Balance as used in regard to a Participant's or Former
Participant's Individual Account or stipulated portion thereof means,
as of any date, the account balance as of the Valuation Date coincident
with such date.
1.14 Defined Benefit Plan means a plan established and qualified under
Section 401 of the Code, except to the extent it is, or is treated as,
a Defined Contribution Plan.
1.15 Defined Contribution Plan means a plan which is established and
qualified under Section 401 of the Code, which provides for an
individual account for each participant therein and for benefits based
solely on the amount contributed to each participant's account and any
income and expenses or gains or losses (both realized and unrealized)
which may be allocated to such accounts.
1.16 Early Retirement Age means the date prior to the Employee's Normal
Retirement Age when the Employee attains age fifty-five (55) or
greater, having completed at least seven (7) years of Service.
1.17 Early Retirement Date means the first day of the month immediately
following the date on which the Employee attained Early Retirement Age.
1.18 Effective Date for this Plan, as amended and restated, means January 1,
1989, except as otherwise provided herein. The Effective Date for the
Plan, as originally adopted, means January 1, 1979.
1.19 Employee means any person employed by the Employer as a salaried,
clerical, or hourly employee, excluding individuals matriculated in a
participating Employer with an enrollment agreement or covered under a
collective bargaining agreement unless such bargaining agreement
provides for coverage under the Plan. The term "Employee" shall not
include any individual performing services pursuant to a contract
arrangement or any individual who is a leased employee as defined in
Section 414(n) of the Code, meaning a person who is not an employee of
the Employer and who provides services to the Employer where such
services are: (i) performed pursuant to an agreement between the
Employer and any other person, (ii) such person has performed such
services for the Employer on a substantially full-time basis for a
period of at least one (1) year and (iii) such services are of the type
historically performed in the business field of the Employer by
employees (or such other test as may be substituted for (iii) in Code
Section 414(n)(2).
1.20 Employer means the Sponsor and any Affiliate which adopts this Plan,
with the consent of the Board and pursuant to action of its own board
of directors authorizing Plan adoption and execution of the Trust
Agreement with the Trustee, or any successor to one or more of such
entities. Attached to this Plan as Appendix A is the current list of
participating Employers.
1.21 Employer Discretionary Contributions means contributions made to the
Plan by the Employer pursuant to Section 3.07 of Article III.
- 4 -
<PAGE> 10
1.22 Employer Discretionary Contribution Account means that portion of a
Participant's Individual Account attributable to (a) Employer
Discretionary Contributions allocated to such Participant pursuant to
Section 4.02 of Article IV, and (b) the Participant's proportionate
share of the Adjustments attributable to his Employer Discretionary
Contribution Account.
1.23 Employer Matching Contributions means contributions made to the Plan by
the Employer pursuant to Section 3.03 of Article III.
1.24 Employer Matching Contribution Account means that portion of a
Participant's Individual Account attributable to (a) Employer Matching
Contributions allocated to such Participant pursuant to Section 4.03 of
Article IV, and (b) the Participant's proportionate share of the
Adjustments attributable to his Employer Matching Contribution Account.
1.25 ERISA or Act means the Employee Retirement Income Security Act of 1974,
as amended from time to time.
1.26 Former Participant means a Participant whose participation in the Plan
has terminated but who has not received payment in full of the balance
in his Individual Account to which he is entitled.
1.27 Highly Compensated Employee means:
(a) any employee of the Employer or an Affiliate who, during the
Look Back Year or the Determination Year
(i) was at any time a five percent (5%) owner of the
Employer or an Affiliate within the meaning of
Section 416(i) of the Code;
(ii) received compensation from the Employer or an
Affiliate in excess of seventy-five thousand dollars
($75,000), or such higher amount as may be provided
under Section 414(q) of the Code;
(iii) received compensation from the Employer or an
Affiliate in excess of fifty thousand dollars
($50,000), or such higher amount as may be provided
under Section 414(q) of the Code, and was in the
top-paid twenty percent (20%) of employees; or
(iv) was at any time an officer and received compensation
greater than fifty percent (50%) of the amount in
effect under Section 415(b)(1)(A) of the Code for
such Plan Year.
The Employer may elect to apply a simplified test under which
the amount stated in (ii) above shall be replaced with fifty
thousand dollars ($50,000) and (iii) above shall not apply.
This simplified rule shall only be available in any years in
which the Employer or an Affiliate maintains significant
business activities in at least two (2) locations.
- 5 -
<PAGE> 11
(b) If the employee was not a Highly Compensated Employee for the
Look Back Year, then he shall not be considered a Highly
Compensated Employee for the Determination Year unless he is a
five percent (5%) owner of the Employer or an Affiliate; or
one of the highest paid one hundred employees and meets the
criteria of clauses (ii), (iii) or (iv) of Section 1.27(a).
(c) If the Highly Compensated Employee is a five percent (5%)
owner or one of the ten (10) most highly compensated
employees, then the compensation and contributions of
employees who are spouses, lineal descendants, ascendants or
spouses of lineal descendants or ascendants of such Highly
Compensated Employees shall be attributed to the Highly
Compensated Employees and the employees who are such relatives
shall not be considered as separate employees.
(d) For purposes of determining Highly Compensated Employees,
compensation shall mean compensation paid by the Employer or
an Affiliate for purposes of Code Section 415(c)(3) and shall
include amounts deferred pursuant to Code Sections 125,
402(a)(8) and 402(h)(1)(8).
(e) For purposes of determining the top twenty percent (20%) of
employees, or the number of officers taken into account in
subsection 1.27(a)(iv) above, the following employees shall be
excluded:
(i) employees who have not completed six (6) months of
service;
(ii) employees who normally work less than seventeen and
one-half (17 1/2) hours per week;
(iii) employees who normally work during not more than six
(6) months during the Plan Year;
(iv) employees who have not attained age twenty-one (21);
and
(v) employees who are non-resident aliens and who receive
no earned income from the Employer or an Affiliate
within the meaning of Code Section 911(d)(2).
Employees who are covered by a collective bargaining agreement
with the Employer shall be included in the determination of
the top twenty percent (20%) of employees unless specifically
excluded under regulations issued pursuant to Section 414(q)
of the Code.
(f) Except as otherwise provided in this Section, the term "Look
Back Year" shall mean the twelve (12) month period immediately
preceding the Determination Year.
(g) Except as otherwise provided in this Section, the term
"Determination Year" shall mean the current Plan Year.
- 6 -
<PAGE> 12
(h) To the extent permitted by regulations under Code Section
414(q), the Employer may elect to make the Look Back Year
calculation on the basis of the calendar year ending with or
within the applicable Determination Year (or, in the case of a
Determination Year that is shorter than twelve (12) months,
the calendar year ending with or within the twelve (12) month
period ending with the end of the Determination Year). In such
case, the Employer or an Affiliate must make the Determination
Year calculation on the basis of the period (if any) by which
the applicable Determination Year extends beyond such calendar
year. If the Employer makes the election provided for in this
subsection, such election must be made with respect to all
plans, entities and arrangements of the Employer and any
Affiliate.
(i) The determination of Highly Compensated Employees shall be
determined by the Employer on a controlled group basis and
shall not be determined on a plan-by-plan basis.
(j) The determination of Highly Compensated Employees shall be
governed by Code Section 414(q) and the regulations issued
thereunder.
1.28 Hour of Service means any hour for which an Employee is credited or
entitled to be credited with Service in accordance with Department of
Labor Regulation 2530-200b. Under this Section 1.28, an Hour of Service
shall be credited as follows:
(a) Any full-time Employee shall be credited with forty-five (45)
Hours of Service during each week in which he receives credit
for one (1) Hour of Service for performing services for the
Employer regardless of the number of Hours of Service which
would otherwise be credited to him pursuant to this Section. A
full-time Employee is any Employee who works the regularly
scheduled full workweek as established by normal office hours
for the location where the Employee is employed.
(b) Any part-time faculty Employee shall be credited with one and
eighty-eight hundredths (1.88) Hours of Service equivalency
for each one (1) hour of actual classroom time in recognition
of the required preparation for such classroom time. Any
faculty Employee who is assigned to teach less than a full
workweek shall be considered a part-time faculty Employee.
(c) Any individual who does not have Hours of Service credited
under paragraphs (a) or (b) above shall only be credited with
each Hour of Service credited to him pursuant to subsection
(d) of this Section; provided, however, such individual shall
receive a maximum of eight (8) Hours of Service for each day
during which he is entitled to an Hour of Service pursuant to
subparagraph (iii) or (iv) of paragraph (d).
(d) An Hour of Service shall also be credited for:
- 7 -
<PAGE> 13
(i) Each hour for which an Employee is directly or
indirectly paid or entitled to payment by an Employer
for the performance of duties during the
applicable computation period. Said Hours of Service
shall be credited to the Employee during the Plan
Year in which the duties were performed.
(ii) To the extent that an Hour of Service is not credited
to an Employee under subparagraph (i) of this
paragraph (d), an Hour of Service shall be credited
to the Employee for each hour for which back-pay to
the Employee, irrespective of mitigation of damages,
has been either awarded or agreed by an Employer;
provided, however, only five hundred one (501) Hours
of Service shall be credited under this subparagraph
on account of any single continuous period during
which an Employee performs no duties. Hours of
Service awarded for back-pay shall be credited to the
Employee for the Plan Year to which the award or
agreement pertains, rather than when such back-pay is
actually paid or such agreement is made.
(iii) To the extent that an Hour of Service is not credited
to an Employee under subparagraphs (i) or (ii), each
hour for which the Employee is directly or indirectly
paid (including payments from a trust fund to which
an Employer contributes or pays premiums) or entitled
to payment by an Employer on account of a period of
time during which no duties are performed due to
vacation, holiday, illness, incapacity (including
disability), layoff, jury duty, military leave,
severance, or leave of absence; provided, however,
only five hundred one (501) Hours of Service shall be
credited under his subparagraph for a reason other
than severance on account of any single continuous
period during which an Employee performs no duties
and no Hours of Service shall be credited if the
payments are made or due either (A) under a plan
maintained solely for the purpose of complying with
applicable workers' compensation, unemployment
compensation or disability laws; or (B) to reimburse
an Employee solely for medical or medically related
expenses incurred by such Employee.
(iv) To the extent that an Hour of Service is not credited
to a Participant under subparagraphs (i) through
(iii), where an Employee, after having left the
Service of an Employer to become engaged in military
service or other service to the United States of
America, or any State, Territory, or subdivision of
any of them, is reemployed by the Employer during the
period his reemployment rights are preserved by law,
or where an absence is approved by the Employer, each
hour during the period of such absence.
(e) Hours worked while classified as a leased employee shall be
considered to be Hours of Service in accordance with this
Section 1.28 when the status of such leased employee is
changed to that of Employee under the terms of this Plan.
Hours of Service with an Affiliate shall be considered Hours
of Service for
- 8 -
<PAGE> 14
purposes of this Plan. Hours performed for an employer before
the employer became an Affiliate shall not be counted as Hours
of Service.
1.29 Individual Account means the detailed record kept of the amounts
credited or charged to each Participant in accordance with the terms
hereof. Such Individual Account is comprised of whichever of the
following are applicable to a particular Participant: Employer
Discretionary Contribution Account, Before-Tax Savings Account,
Rollover Account, After-Tax Contribution Account, Employer Matching
Contribution Account (effective May 1, 1992), and/or Adjustments on
such accounts.
1.30 Named Fiduciary means the Administrator which is responsible for the
day-to-day management and control of the Plan.
1.31 Normal Retirement Age means the date on which the Participant attains
age sixty-five (65).
1.32 Normal Retirement Date means the first day of the month coincident with
or immediately following the date the Participant reaches Normal
Retirement Age.
1.33 Participant means any Employee who becomes a Participant as provided in
Article II hereof.
1.34 Plan means the Education Management Corporation Retirement Plan.
1.35 Plan Year means a twelve (12) consecutive month period beginning on
January 1 and ending on December 31 of the same calendar year.
1.36 Rollover Account means that portion of a Participant's Individual
Account attributable to (a) rollover contributions of the Participant
to the Plan pursuant to Section 3.08 of Article III and (b) the
Participant's proportionate share of Adjustments attributable to his
Rollover Account.
1.37 Service means a Participant's period of employment with the Employer
for which a Participant is given credit in determining eligibility for
and nonforfeitability of benefits under the Plan. Service shall be
determined as set forth in subsection (a) and (b), subject to the
provisions of subsections (c), (d), (e), and (f) hereof. Service shall
also be counted during absence from employment under the following
circumstances: (i) leave of absence as authorized by an Employer
pursuant to uniform rules applicable to all Employees and (ii) military
leave while the Employee's reemployment rights are protected by law
provided he returns to active employment within ninety (90) days after
release from active duty.
(a) Past Service. For periods of employment prior to January 1,
1989, past Service means the number of years of Service earned
under the Plan on or before December 31, 1988, as such term
was defined under the Plan as in effect on that date.
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<PAGE> 15
(b) Service. For periods of employment from and after January 1,
1989, Service means the total number of Plan Years during
which an Employee has been credited with at least nine hundred
(900) Hours of Service measured from the date on which he is
first credited with an Hour of Service. If subsection (d) is
applicable, Service shall be calculated as of the first day of
the Plan Year coincident with or immediately preceding the
appropriate reemployment date.
(c) Break-in-Service means the end of a Plan Year during which an
Employee has completed less than one hundred (100) Hours of
Service.
Solely for the purpose of determining whether an Employee had
a Break-in-Service, an Employee who is absent from work for
maternity or paternity reasons shall receive credit for Hours
of Service, to the extent not already credited, which
otherwise would have been credited to such Employee but for
such absence. An absence from work for maternity or paternity
reasons means an absence due to: (i) pregnancy of the
Employee, (ii) birth of a child of the Employee, (iii)
placement of the child with the Employee through adoption by
the Employee, or (iv) for purposes of caring for such child
immediately following such birth or placement. Hours of
Service credited under this paragraph shall be credited (i) in
the Plan Year in which the absence begins if crediting is
necessary to prevent a Break-in-Service in that period, or
(ii) in all other cases, in the following Plan Year or other
applicable computation period. Further, the Administrator may
request that the Employee furnish any information the
Administrator may require to establish that the absence is for
the reasons hereinbefore provided and the number of days for
which there was such an absence. In the event such information
is not submitted in a timely manner, no Hours of Service shall
be credited pursuant to this paragraph.
(d) Reemployment. If an Employee incurs five (5) or more
consecutive Breaks-in-Service and is reemployed, his Service
prior to reemployment shall be disregarded if:
(i) the Employee did not have a vested interest in his
Individual Account under Section 5.05 as of the date
his Break-in-Service commenced, and
(ii) the number of consecutive Breaks-in-Service as of his
Reemployment Date equals or exceeds his years of
Service earned prior to his Break-in-Service.
If an Employee has not had Service disregarded in accordance
with the preceding, his Service upon reemployment shall
include all years of Service earned prior to his reemployment.
(e) Service with an Affiliate or Non-Affiliated Employer. Credit
for Service may, by action of the Board, be recognized for
periods in which an individual was an employee of an employer
prior to the time the employer became an Affiliate with the
Employer. In the event such Service is granted, Service shall
be determined
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<PAGE> 16
as if the employee has been employed by an
Employer during all such periods of employment with the
Affiliate (including periods prior to the time the employer
became an Affiliate) in accordance with the preceding
paragraphs of this Section.
Service with a non-affiliated employer prior to the time such
employer is acquired by or merged into the Employer shall not
be counted as Service under the terms of this Section 1.37
unless the joinder agreement adding such employer as an
Employer under this Plan so provides.
(f) Transfers. In the case of an Employee who is transferred to
employment with an Affiliate or who is changed to an
employment classification with an Employer where he is not an
Employee covered under this Plan, such transfer or
reclassification shall not constitute a termination of
employment for purposes of the Plan. Service shall continue to
be credited under this Section 1.37 until his actual
termination of employment with the Affiliate or Employer.
1.38 Sponsor means Education Management Corporation.
1.39 Spouse means the legally married spouse of a Participant or Former
Participant at the earlier of the Participant's date of death or the
date the Participant's benefits commence under the Plan.
1.40 Total and Permanent Disability or Disability or Disabled means total
and permanent disability of a Participant so as to be unable to engage
in any substantially gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to
result in death or to be of long, continued and indefinite duration, if
there is filed with the Administrator a written opinion of a physician
selected by the Administrator that the Participant is so Disabled.
1.41 Trust Agreement means the agreement entered into between the Employer
and the Trustee pursuant to Article VII hereof.
1.42 Trust Fund means all monies, securities, and properties of whatsoever
character held by the Trustee pursuant to the Trust Agreement with the
Employer.
1.43 Trustee means such individual(s) or financial institution as shall be
designated in the Trust Agreement to hold in trust any assets of the
Plan for the purpose of providing benefits under the Plan, and shall
include any successor to the trustee initially designated thereunder.
1.44 Valuation Date means, for the purposes of valuation of the Trust Fund
and distribution of the accrued vested benefit of each Participant, the
date upon which a Participant's Individual Account may be valued for
purposes of investment direction and distribution of accrued vested
benefits. The Valuation Date shall be the last day of each quarter of
the Plan Year and any other date on which the Administrator deems it
necessary to have a valuation of the Trust Fund. Effective May 1, 1992,
each business day of the Plan Year shall be considered a Valuation
Date.
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<PAGE> 17
ARTICLE II
PARTICIPATION
2.01 Participation
Participation in the Plan shall be governed by the following
provisions:
(a) Each Employee employed by the Employer on January 1, 1989 who
was a Participant covered under the Plan as in effect on
December 31, 1988 shall continue as a Participant hereunder as
of January 1, 1989, without further action on his part.
(b) Each other Employee shall become a Participant hereunder on
the January 1 or July 1 coincident with or immediately
following the date on which he has completed nine hundred
(900) Hours of Service on or before the first anniversary date
of his employment with the Employer. If the Employee does not
complete nine hundred (900) Hours of Service by his first
anniversary date, he shall become a Participant in this Plan
on the first entry date following the completion of nine
hundred (900) Hours of Service in a Plan Year.
Each Employee shall be furnished a summary of the Plan when he becomes
a Participant.
2.02 Plan Binding
Upon becoming a Participant, a Participant shall be bound then and
thereafter by the terms of this Plan and the Trust Agreement including
all amendments to the Plan and the Trust Agreement made in the manner
herein authorized.
2.03 Reemployment
A terminated Employee who had previously participated in the Plan and
who is reemployed by his Employer shall become eligible to participate
as of his first day of the month following his reemployment with the
Employer. If such terminated Employee had not previously participated
in the Plan, he shall be treated as a new Employee upon reemployment
and shall become a Participant in the Plan when the requirements of
Section 2.01 are met.
In the event a Participant is reemployed after a termination of
employment when he was less than one hundred percent (100%) vested in
his Individual Account and forfeited all or a portion of such
Individual Account, such Participant shall be given the opportunity to
repay any amounts which were distributed to him in order to restore any
forfeited amounts. In the event of such repayment, the Employer shall
contribute such additional funds to the Plan necessary to restore any
forfeiture.
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<PAGE> 18
A terminated Participant who is reemployed and again becomes a
Participant after incurring a separation from service of longer than
five (5) consecutive years shall not be allowed to repay any amount
distributed to him and shall not have any amount forfeited pursuant to
the terms of the Plan restored to his Individual Account.
2.04 Beneficiary Designation
Upon commencing participation, each Participant shall designate a
Beneficiary and contingent Beneficiary on forms furnished by the
Administrator.
Except as otherwise provided in the next paragraph, a married
Participant may not name as his Beneficiary someone other than his
Spouse, unless such Spouse consents in writing to such designation.
Such spousal consent shall acknowledge the effect of the Participant's
designation of a Beneficiary other than his Spouse and shall be
witnessed by a notary public. Any such spousal consent shall be
automatically revoked upon the remarriage of a Participant prior to his
death or commencement of benefits hereunder. Notwithstanding this
consent requirement, if the Participant establishes to the satisfaction
of the Administrator that such written consent may not be obtained
because there is no Spouse or the Spouse cannot be located, the
Participant's designation of a Beneficiary other than his Spouse shall
be deemed to be a valid designation.
A Participant may at any time and from time to time revoke his
designation of a Beneficiary or change his Beneficiary by filing
written notice of such revocation or change with the Administrator,
and, upon such change, the rights of all previously designated
Beneficiaries to receive any benefits under this Plan shall cease. The
consent of the Participant's Spouse to each Beneficiary designated will
be required unless the Spouse is named as Beneficiary. If, at the time
of a Participant's death while benefits are still outstanding, his
named Beneficiary does not survive him, the benefits shall be paid to
his named contingent Beneficiary. If a deceased Participant is not
survived by either a named Beneficiary or contingent Beneficiary (or if
no Beneficiary was effectively named), the benefits shall be paid in a
single sum to the person or persons in the first of the following
classes of successive preference beneficiaries then surviving: the
Participant's (a) widow or widower, if living; (b) children, if any,
per stirpes; (c) parents in equal shares if both are living or if but
one is living to such survivor; (d) brothers and sisters, if living, in
equal shares; or (e) estate. If the Beneficiary or contingent
Beneficiary is living at the death of the Participant, but such person
dies prior to receiving the entire death benefit, the remaining portion
of such death benefit shall be paid in a single sum to the estate of
such deceased Beneficiary or contingent Beneficiary.
2.05 Notification of Individual Account Balance
After the conclusion of each Plan Year, or more frequently as
determined by the Administrator, the Administrator shall notify each
Participant of the amount of his share in the Adjustments, Employer
Discretionary Contribution, Employer Matching Contribution (effective
May 1, 1992), Before-Tax Savings, After-Tax Contributions and rollover
contributions for the Plan Year just completed, and the new balance of
his Individual Account.
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<PAGE> 19
ARTICLE III
CONTRIBUTIONS
3.01 Before-Tax Savings
A Participant may elect to have Before-Tax Savings made on such
Participant's behalf, commencing on the later of January 1, 1989 or the
date such individual becomes a Participant, by entering into a
Before-Tax Savings agreement with the Employer in which it is agreed
that the Participant's Employer will redirect a portion of the
Participant's Compensation otherwise payable during each regular pay
period, in an amount not less than one percent (1%) nor more than ten
percent (10%) of such Participant's Compensation during each such pay
period, expressed as a whole percentage of Compensation within the
percentage minimum and maximum, and contribute that designated
percentage to the Plan on behalf of the Participant. The Participant's
election shall take effect with the first pay period following notice
to the Administrator.
Notwithstanding the foregoing, no more than the maximum amount
permitted for elective deferrals under Section 402(g)(1) of the Code
[nine thousand two hundred forty dollars ($9,240) in 1994] may be
contributed to an Individual Account of a Participant as Before-Tax
Savings in any calendar year with such deferral limit to be adjusted
for cost-of-living increases at the same time and in the same manner as
under Section 415(d) of the Code. To the extent that the Before-Tax
Savings for any Participant exceeds the annual limitation under Code
Section 402(g), such excess deferral (and any income allocable to such
excess deferral as determined pursuant to Section 1.402(g)-l(e)(5)(iii)
of the regulations excluding gap period interest) shall be returned to
the Participant. This corrective distribution may be made during the
calendar year in which it arose as long as: (i) the Participant
designates the distribution as an excess deferral; (ii) the corrective
distribution is made after the date on which the Plan received the
excess deferral; and (iii) the Plan designates the distribution as the
return of an excess deferral. The return of the excess deferral shall
occur no later than April 15 following the year in which the excess
deferral arose.
A Participant who has incurred a Break-in-Service or otherwise ceased
to be an Employee who again becomes an Employee may elect to have
Before-Tax Savings made on his behalf, with such election taking effect
on the first pay period following such election, provided he has
furnished the Administrator with appropriate instructions as to the
level of contributions and investments.
In the event an Employee does not elect to participate when initially
eligible, either because such Employee chooses not to elect or fails to
timely deliver a Before-Tax Savings agreement to the Administrator,
such Employee may subsequently elect to have Before-Tax Savings made on
his behalf, effective as of the first pay period after receipt of the
Before-Tax Savings agreement by the Administrator.
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<PAGE> 20
In the event a terminated Participant or former Participant who ceased
to be an Employee who again becomes an Employee does not re-enter the
Plan when initially eligible, such Participant shall be permitted to
enter the Plan effective as of the first pay period after notice to the
Administrator.
The Before-Tax Savings agreement shall be on a form provided by the
Administrator. Such agreement shall authorize the Employer to reduce
Compensation otherwise payable to the Employee during each regular pay
period by the amount of Before-Tax Savings elected. Such amount will be
contributed by the Employer to the Plan on behalf of the Participant
and designated as such Participant's Before-Tax Savings.
An eligible Participant electing to have Before-Tax Savings made to the
Plan on his behalf pursuant to this Section 3.01, may, on an
appropriate form provided by and submitted to the Administrator,
increase or decrease his Before-Tax Savings percentage (up to the
appropriate maximum) as of the first pay period after notice to the
Administrator on the appropriate form requesting such change stating
the amount of Before-Tax Savings he desires to make.
An eligible Participant may elect to cease future Before-Tax Savings to
the Plan at any time to take effect on the first pay period following
such election. In the event any such Participant desires to thereafter
recommence Before-Tax Savings, he shall be allowed to do so on the
first pay period following prior written notice to the Administrator on
the appropriate form.
Once contributed to the Trust Fund, the Before-Tax Savings shall be
allocated to the Participant's Before-Tax Savings Account on the
Valuation Date to which they pertain and shall not be subject to
withdrawal, except as provided in Article VI.
The Employer shall pay to the Trustee any Before-Tax Savings made on
behalf of any Participant during a Plan Year as soon as reasonably
practicable after the end of the payroll period to which they pertain
but not later than ninety (90) days after the end of such payroll
period nor later than thirty (30) days after the Plan Year to which
they pertain with respect to Before-Tax Savings attributable to the
last payroll period of the Plan Year.
3.02 Special Test for Before-Tax Savings
The provisions of this Section 3.02 shall apply only to the extent that
testing is required under the provisions of Section 401(k) of the Code
and the applicable regulations due to the eligibility of any Highly
Compensated Employee to contribute to a Before-Tax Savings Account.
For each such Plan Year, the Administrator shall check the actual
deferral percentages against the tests identified below. In the event
that neither test is met and as soon as is administratively possible,
the Administrator may reduce or cease future Before-Tax Savings of
Highly Compensated Employees, to the extent necessary to meet either
test, by first reducing the deferral percentage of those Highly
Compensated Employees
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<PAGE> 21
electing the highest deferral percentage of compensation as Before-Tax
Savings to the level of the next highest deferral percentage and
repeating such procedure for all Highly Compensated Employees at that
level until the test is met. The determination of which test shall be
met shall be based upon the test which requires the least reduction in
percentage of Before-Tax Savings.
For purposes of this testing, all eligible Employees shall be separated
into two groups: Highly Compensated Employees and those who are not
Highly Compensated Employees. The testing shall be performed in the
manner prescribed or permitted by regulations under Section 401(k)(3)
of the Code.
Eligible Employees, for purposes of this Section 3.02, shall mean all
Employees who are eligible to participate in the Plan during the Plan
Year for which the tests are being made.
Only one of the following two tests need be satisfied for there not to
be a reduction in the percentage of Before-Tax Savings for Highly
Compensated Employees.
Test I - The actual deferral percentage for the group of Highly
Compensated Employees is not more than the actual deferral
percentage of all other eligible Employees multiplied by one
and one-fourth (1.25).
Test II - The excess of the actual deferral percentage for the group of
Highly Compensated Employees over the actual deferral
percentage for all other eligible Employees is not more than
two (2) percentage points, and the actual deferral percentage
for the group of Highly Compensated Employees is not more
than the actual deferral percentage for all other eligible
Employees multiplied by two (2.0).
The actual deferral percentage for a specified group of eligible
Employees for a Plan Year shall be the average of the ratios
(calculated separately) for each eligible Employee in such group of the
amount of Before-Tax Savings actually paid to the Plan or elective
contributions to any other plan which is aggregated with this Plan for
purposes of Code Section 410(b) (other than in performing the average
benefit test), on behalf of each such eligible Employee to such
eligible Employee's compensation for such Plan Year. For purposes of
this Section 3.02, the actual deferral percentage of a Highly
Compensated Employee will be determined by treating all plans subject
to Section 401(k) of the Code under which the Highly Compensated
Employee is eligible, as a single plan.
In the case of a Highly Compensated Employee who is subject to the
family aggregation rules of Code Section 414(q)(6), the actual deferral
ratio for the family group (which is treated as one Highly Compensated
Employee) shall be determined by combining the Before-Tax Savings and
Compensation of all eligible family members. In all other instances,
the Before-Tax Savings and Compensation of all family members are
disregarded for purposes of determining the actual deferral percentage
for the group of Highly Compensated Employees and the group of
non-Highly Compensated Employees.
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<PAGE> 22
All rules of application with reference to Tests I and II shall be
governed by Code Section 401(k) and any rules and regulations issued
pursuant thereto.
The maximum amount of Before-Tax Savings for Highly Compensated
Employees may be reduced as described in this Section 3.02, on a
nondiscriminatory basis, from time to time during a Plan Year by the
Administrator so as to permit the Plan to satisfy the tests described
in this Section. Notwithstanding the preceding sentence, if at the end
of the Plan Year the tests are not satisfied, the Administrator shall
direct the distribution to certain Highly Compensated Employees of the
amounts by which Before-Tax Savings actually contributed on behalf of
said Highly Compensated Employees exceed the maximum amount of such
contributions permitted under the tests (increased by the amount of any
gain and reduced by the amount of any loss allocable to such excess for
the Plan Year to which such excess applies, but not for the period
between the last day of the Plan Year and the date of distribution of
the excess). Such distribution shall be determined in the manner
described in this Section 3.02 for prospective reduction of deferral
percentages and made to such Highly Compensated Employees no later than
two and one-half (2 1/2) months following the end of the Plan Year. The
amount of the excess Before-Tax Contribution to be returned pursuant to
this Section 3.02 with respect to a Participant for a Plan Year is
reduced by any excess deferral previously distributed to the
Participant for the Participant's taxable year ending with or within
the Plan Year pursuant to Section 3.01.
3.03 Employer Matching Contributions
Effective May 1, 1992, each month the Employer shall make an Employer
Matching Contribution to the Plan in an amount equal to fifty cents
($.50) for each one dollar ($1.00) of Before-Tax Savings contributed by
Participants for the first three percent (3%) of Compensation
contributed. The maximum Employer Matching Contribution is one and
one-half percent (1 1/2%) of a Participant's Compensation. All
Participants who make a Before-Tax Savings Contribution during the Plan
Year shall be eligible to receive an Employer Matching Contribution.
Employer Matching Contributions are discretionary on the part of the
Employer and the amount of such match or the percentage of Compensation
contributed to which it applies may be modified, reduced or eliminated
by action of the Board of Directors of the respective Employer or
adjusted as described in Section 3.05 below.
3.04 After-Tax Contributions
A Participant may elect, no more often than once during any Plan Year,
in a written election filed with the Administrator, to contribute to
the Trust from one percent (1%) to ten percent (10%) of his
Compensation during a Plan Year to take effect on the first day of the
month following such election. Any Participant who has filed such an
election may, no more often than once during any Plan Year, increase
[including increases above ten percent (10%) of Compensation as long as
the total amount per Plan Year does not exceed ten percent (10%)] or
decrease the percentage of his Compensation being contributed subject
to the restriction that such percentage be no more than ten percent
(10%) of his Compensation during such Plan Year, by filing an election
with the
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<PAGE> 23
Administrator to take effect on the first day of the month following
such election. Unless a Participant changes his election pursuant to
this Section or cancels or suspends his election, such election shall
continue in effect.
A Participant may cancel his payroll deduction order for After-Tax
Contributions once during every Plan Year by filing a written election
with the Administrator. Such cancellation shall be effective on the
date specified on such notice, with date must be at least fifteen (15)
days after such notice is filed with the Administrator.
On the effective date of such cancellation, the Participant shall have
the option of receiving all of his After-Tax Contribution Account in
cash. Any Participant who has canceled his After-Tax Contributions may
elect to resume After-Tax Contributions under this Plan by filing a new
election form with the Administrator to take effect on the first day of
the payroll period following such filing.
Effective May 1, 1992, no further After-Tax Contributions shall be
permitted under the Plan.
3.05 Special Testing of Employer Matching Contributions and After-Tax
Contributions
The provisions of this Section shall apply to testing of After-Tax
Contributions for Plan Years through 1991, testing of After-Tax
Contributions and Employer Matching Contributions for the 1992 Plan
Year, and testing of Employer Matching Contributions for Plan Years
beginning in 1993 and thereafter.
For each Plan Year, the Employer shall check the actual contribution
percentages for Employer Matching Contributions and/or After-Tax
Contributions against the tests outlined below. For purposes of this
testing, all eligible Employees shall be separated into two groups:
Highly Compensated Employees and those who are not Highly Compensated
Employees. The testing shall be performed in the manner prescribed or
permitted by regulations under Section 401(m) of the Code.
Eligible Employees for purposes of this Section 3.05 shall mean all
Employees who are eligible to participate in the Plan during the Plan
Year for which the tests are being made.
Only one of the following two tests need be satisfied for there not to
be a reduction in the percentage of Employer Matching Contributions
and/or After-Tax Contributions for the group of Highly Compensated
Employees.
Test I - The actual contribution percentage for the group of Highly
Compensated Employees is not more than the actual
contribution percentage of all other eligible Employees
multiplied by one and one-fourth (1.25).
Test II - The excess of the actual contribution percentage for the
group of Highly Compensated Employees over the actual
contribution percentage for all other eligible Employees is
not more than two (2) percentage points, and
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<PAGE> 24
the actual contribution percentage for the group of Highly
Compensated Employees is not more than the actual contribution
percentage for all other eligible Employees multiplied by two
(2.0).
The contribution percentage for a specified group of eligible Employees
for a Plan Year shall be the average of the ratios (calculated
separately) for each eligible Employee in such group of the amount of
Employer Matching Contributions and/or After-Tax Contributions actually
paid to this Plan and contributions to any other plan which is
aggregated with this Plan for purposes of Code Section 410(b) (other
that in conducting the average benefits test), on behalf of each such
eligible Employee to such eligible Employee's Compensation for the Plan
Year. For purposes of this Section 3.05, the actual contribution ratio
of a Highly Compensated Employee will be determined by treating all
plans subject to Code Section 401(m) under which the Highly Compensated
Employee is eligible, as a single plan.
In the case of a Highly Compensated Employee who is subject to the
family aggregation rules of Code Section 414(q)(6), the actual
contribution ratio for the family group (which is treated as one Highly
Compensated Employee) shall be determined by combining the Employer
Matching Contributions and After-Tax Contributions in this or any other
Defined Contribution Plan maintained by the Employer and Compensation
of all eligible family members. In all other cases, the Employer
Matching Contributions and After-Tax Contributions in this or any other
Defined Contribution Plan maintained by the Employer and Compensation
of all family members are disregarded for purposes of determining the
actual contribution percentage for the group of Highly Compensated
Employees and the group of non-Highly Compensated Employees.
In computing the actual contribution percentage for each group, only
Employer Matching Contributions and/or After-Tax Contributions shall be
considered in calculating the applicable ratios. All rules of
application with reference to Tests I and II shall be governed by Code
Section 401(m) and any rules and regulations issued pursuant thereto.
If at the end of the Plan Year, the tests are not satisfied, the
Administrator shall direct the distribution to certain Highly
Compensated Employees of the amounts by which Employer Matching
Contributions or After-Tax Contributions actually paid on behalf of
such Highly Compensated Employees exceed the maximum amount of such
contributions permitted under the tests (increased by the amount of any
gain and reduced by the amount of any loss allocable to such excess for
the Plan Year to which such excess applies, but not for the period
between the last day of the Plan Year and the date of distribution of
the excess). Such distribution shall be made to such Highly Compensated
Employees in order of their contribution percentages beginning with the
highest of such percentages, no later than two and one-half (2 1/2)
months following the end of the Plan Year.
3.06 Combined Limitations on the Contribution Percentages and Actual
Deferral Percentages
For any period during which Section 1.401(m)-2 of the regulations
issued pursuant to Section 401(m) of the Code is in effect, if neither
the actual deferral percentage (the
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<PAGE> 25
"ADP") nor the contribution percentage (the "ACP") meets the limitation
contained in Sections 3.02 or 3.05, respectively, under which the ADP
or ACP of Highly Compensated Employees does not exceed one and
one-fourth (1.25) times the ADP or ACP of all other eligible Employees,
the combined limit is the greater of subsections (a) or (b) as follows:
(a) The sum of the ADP and the ACP for Highly Compensated
Employees shall not exceed the sum of:
(i) one hundred twenty-five percent (125%) of the greater
of:
(A) the ADP of the group of eligible Employees
who are not Highly Compensated Employees; or
(B) the ACP of the group of eligible Employees
who are not Highly Compensated Employees;
plus
(ii) the lesser of:
(A) two hundred percent (200%) multiplied by the
lesser of the ADP for the group of eligible
Employees who are not Highly Compensated
Employees or the ACP for the group of
eligible Employees who are not Highly
Compensated Employees; or
(B) two (2) percentage points plus the lesser of
the ADP for the group of eligible Employees
who are not Highly Compensated Employees and
the ACP for the group of eligible Employees
who are not Highly Compensated Employees.
(b) The sum of the ADP and the ACP for Highly Compensated
Employees shall not exceed the sum of:
(i) one hundred twenty-five percent (125%) of the lesser
of:
(A) the actual deferral percentage of the group
of non-Highly Compensated Employees
eligible under the arrangement subject to
Section 401(k) of the Code for the Plan
Year; or
(B) the actual contribution percentage of the
group of non-Highly Compensated Employees
eligible under the Plan subject to Section
401(m) of the Code for the Plan Year
beginning with or within the Plan Year of
the arrangement subject to Section 401(k) of
the Code; and
(ii) two (2) percentage points plus the greater of (A) or
(B) above, however, in no event shall this amount
exceed two hundred percent (200%) of the greater of
(A) or (B) above.
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<PAGE> 26
In the event that the test cannot be passed, the Administrator shall
instruct the Trustee as to the sequence of contributions to be returned
in order to pass the test.
3.07 Employer Discretionary Contributions
Each Plan Year, the Board of Directors of the Employer may, at the sole
discretion of the Board, make a contribution to the Plan in an amount
as determined by the Board. The Employer Discretionary Contribution may
vary by Employer or by location. If an Employer Discretionary
Contribution is to be made by an Employer, it will be made for each
Participant (at the specified location, if applicable) who is employed
by the Employer on the last day of the Plan Year and has completed nine
hundred (900) Hours of Service during the Plan Year, or on an
authorized leave of absence or receiving periodic severance payments on
the last day of the Plan Year, or is disabled, dies or retires during
the Plan Year.
Such contribution shall be allocated among Participants in accordance
with Section 4.02 herein.
3.08 Rollover Contributions
The Plan shall accept Rollover Contributions effective May 1, 1992. The
terms on which Rollover Contributions are accepted depend on when the
Rollover Contribution is made.
(a) For periods before January 1, 1993, the Plan shall accept
Rollover Contributions under the following terms:
Except as otherwise provided below, a Participant who has had
distributed to him his entire interest from a plan (other than
this Plan) which meets the requirements of Section 401(a) of
the Code as a result of: (i) termination of employment, (ii)
plan termination, or (iii) attaining age fifty-nine and
one-half (59 1/2), may, in accordance with procedures approved
by the Administrator, transfer the distribution received from
such other plan to the Trustee provided the following
conditions are met:
(i) the transfer occurs on or before the sixtieth (60th)
day following his receipt of the distribution from
the other plan;
(ii) the amount transferred is in the form of cash;
(iii) the distribution from the other plan is on account of
termination of such plan or in the case of a
profit-sharing or stock-bonus plan, on account of a
complete discontinuance of contributions under such
plan, or the distribution from the other plan
qualifies as a lump sum distribution within the
meaning of Section 402(e)(4)(A) of the Code, or
constitutes a distribution of accumulated deductible
employee contributions within the meaning of Section
72(o)(5) of the Code; and
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<PAGE> 27
(iv) the amount transferred does not exceed an amount
equal to the total distribution he received from the
other plan less the amount, if any, considered
after-tax employee contributions in accordance with
Section 402(a)(5)(B) of the Code, plus earnings on
such sum accrued during the period following the
receipt of the distribution, if any.
The Administrator shall develop such procedures, and may
require such information from the Employee desiring to make
such a transfer, as it deems necessary or desirable to
determine that the proposed transfer will meet the
requirements of this Section 3.08. Upon approval by the
Administrator, the amount transferred shall be deposited in
the Plan and shall be credited to the Employee's Rollover
Account.
(i) If a Participant transfers assets as provided in this
Section 3.08, a Rollover Account shall be established
for him hereunder, equal to the value of the assets
transferred to the Plan. A separate Rollover Account
shall be established for that part of the transferred
amount which is attributable to a lump sum
distribution within the meaning of Section
402(e)(4)(A) of the Code, and for that part which is
a distribution of accumulated deductible employee
contributions within the meaning of Section 72(o)(5)
of the Code. Such Account shall be one hundred
percent (100%) vested at all times. His Rollover
Account shall be invested as a part of the entire
Plan and shall not be segregated as separate assets
thereof.
(ii) After the Rollover Account becomes a part of the Plan
pursuant to this Section 3.08, it shall share in the
Adjustments, in accordance with the terms of Section
4.04 of Article IV.
(iii) When the Participant terminates employment for any
reason he shall be entitled to the Current Balance of
his Rollover Account. Such value shall be provided
under the form of payment in accordance with Section
5.04 of Article V.
(iv) If the Participant dies while an Employee of the
Employer, his Beneficiary shall be entitled to the
Current Balance of his Rollover Account. Such value
shall be applied to provide a death benefit in
accordance with the applicable provision of Article
V.
(v) Any Former Participant entitled to a distribution
under the terms of this Plan may request (and the
Administrator shall agree to) a lump sum distribution
of his Rollover Account, as soon as reasonably
possible. If the amount of such distribution would
qualify as a partial distribution under Section
402(a)(5)(D) of the Code, such distribution may be:
(i) transferred to an individual retirement account
described in Section 408(a) of the Code, as amended,
(ii) applied to purchase an individual retirement
annuity described in Section 408(b) of the Code, or
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<PAGE> 28
a retirement bond described in Section 409 of the
Code, or (iii) transferred to an employees' trust
described in Section 401(a) of the Code which is
exempt from tax under Section 501(a) of the Code.
(b) Effective January 1, 1993, the following provisions shall
apply to Rollover Contributions to the Plan on or after
January 1, 1993.
Except as otherwise provided below, a Participant who has had
distributed to him all or part of his interest from a plan
(other than this Plan) which meets the requirements of
Section 401(a) of the Code in an eligible rollover
distribution, may, in accordance with procedures approved by
the Administrator, transfer the distribution received from
such other plan to the Trustee provided the following
conditions are met:
(i) the transfer occurs on or before the sixtieth (60th)
day following his receipt of the distribution from
the other plan or is in the form of a direct transfer
as described in Section 401(a)(31) of the Code;
(ii) the amount transferred is in the form of cash;
(iii) the distribution is not one of a series of equal
periodic payments made over the life (or life
expectancy) of the Employee or the joint lives (or
joint life expectancies) of the Employee and the
Employee's Beneficiary, or for a period of ten (10)
years or more and is not a required distribution as
defined in Section 5.06(c); and
(iv) the amount transferred does not exceed an amount
equal to the total distribution he received from the
other plan less the amount, if any, considered
after-tax employee contributions in accordance with
Section 402(a)(5)(B) of the Code, plus earnings on
such sum accrued during the period following the
receipt of the distribution, if any.
The Administrator shall develop such procedures, and may
require such information from the Employee desiring to make
such a transfer, as it deems necessary or desirable to
determine that the proposed transfer will meet the
requirements of this Section 3.08. Upon approval by the
Administrator, the amount transferred shall be deposited in
the Plan and shall be credited to the Employee's Rollover
Account.
(i) If a Participant transfers assets as provided in this
Section 3.08, a Rollover Account shall be established
for him hereunder, equal to the value of the assets
transferred to the Plan. A separate Rollover Account
shall be established for that part of the transferred
amount which is attributable to a lump sum
distribution within the meaning of Section
402(d)(4)(A) of the Code, and for that part which is
a distribution of accumulated deductible employee
contributions within the meaning of Section 72(o)(5)
of the Code. Such Account shall be one hundred
percent
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<PAGE> 29
(100%) vested at all times. His Rollover Account
shall be invested as a part of the entire Plan and
shall not be segregated as separate assets thereof.
(ii) After the Rollover Account becomes a part of the Plan
pursuant to this Section 3.08, it shall share in the
Adjustments, in accordance with the terms of Section
4.04 of Article IV.
(iii) When the Participant terminates employment for any
reason he shall be entitled to the Current Balance of
his Rollover Account. Such value shall be provided
under the form of payment in accordance with Section
5.04 of Article V.
(iv) If the Participant dies while an Employee of the
Employer, his Beneficiary shall be entitled to the
Current Balance of his Rollover Account. Such value
shall be applied to provide a death benefit in
accordance with the applicable provision of Article
V.
(v) Any Former Participant entitled to a distribution
under the terms of this Plan may request (and the
Administrator shall agree to) a lump sum distribution
of his Rollover Account, as soon as reasonably
possible. Such distribution may be: (i) transferred
to an individual retirement account described in
Section 408(a) of the Code, as amended, (ii) applied
to purchase an individual retirement annuity
described in Section 408(b) of the Code, or a
retirement bond described in Section 409 of the
Code, or (iii) transferred to an employees' trust
described in Section 401(a) of the Code which is
exempt from tax under Section 501(a) of the Code.
3.09 Restrictions and Conditions on Employer Discretionary Contributions,
Employer Matching Contributions and Before-Tax Savings
Employer Discretionary Contributions, Employer Matching Contributions
and Before-Tax Savings shall be subject to the following restrictions
and conditions:
(a) In no event shall the Employer be obligated to make an
Employer Discretionary Contribution, Employer Matching
Contribution and/or Before-Tax Savings for a given Plan Year
in excess of the maximum amount deductible under Section
404(a)(3)(A) of the Code, or any statute or rule of similar
import. Employer Discretionary Contributions, Employer
Matching Contributions and Before-Tax Savings are expressly
conditioned on their current deductibility for Federal income
tax purposes. To the extent deductibility of any such
contributions is disallowed, the portion of such contribution
determined not to be deductible shall be returned to the
Employer within one (1) year following such disallowance,
subject to the limitations described in Section 3.09(b) with
respect to the amount that may be returned to the Employer.
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<PAGE> 30
(b) If due to a mistake of fact, the Employer Discretionary
Contribution, Employer Matching Contribution, or Before-Tax
Savings made to the Trust Fund by the Employer for any Plan
Year exceeds the amount intended to be contributed, the
Employer, as soon as such mistake of fact is discovered, shall
notify the Trustee. The Administrator shall direct that the
Trustee return such excess to the Employer, provided such
return is made within one (1) year of the date on which the
Employer made the contribution. The Employer may direct that
the funds be held by the Trustee and applied to the next
Employer Discretionary Contribution, Employer Matching
Contribution or Before-Tax Savings. However, earnings
attributable to the excess contribution shall not be returned
to the Employer, but losses attributable thereto must reduce
the amount to be so returned.
(c) Employer Discretionary Contributions, Employer Matching
Contributions and Before-Tax Savings contributions are
expressly conditioned on the initial qualification of the Plan
under Section 401(a) of the Code. If the Plan is submitted to
the Internal Revenue Service within the period prescribed by
Section 401(b) of the Code for a determination as to its
initial qualification, and the Internal Revenue Service
determines that the Plan is not so qualified, all such
contributions, together will all earnings thereon, shall be
returned to the Employer within one (1) year following such
determination by the Internal Revenue Service.
3.10 Investment of Individual Accounts
The Trustee shall make available to Participants information concerning
the various investment options available for the funds in the
Participants' Individual Accounts.
A Participant shall direct the investment of his Individual Account in
accordance with the following:
(a) Each Employee who becomes a Participant shall specify the
percentage of his Employer Discretionary Contribution Account,
Before-Tax Savings Account, Rollover Account, After-Tax
Contributions Account, and (effective May 1, 1992) Employer
Matching Contribution Account which shall be invested in
and/or among the investment options, in increments of ten
percent (10%) as elected by the Participant, the sum of which
shall equal one hundred percent (100%) of such accounts. The
Participant may specify differing percentages for existing
Individual Account balances and future contributions, if
desired. Any investment election made by a Participant will
continue in effect until changed by the Participant.
(b) For periods beginning before July 1, 1992, a Participant may
change his investment election with regard to his entire
Individual Account at any time during a calendar quarter with
the change to be effective following the next Valuation Date.
For periods beginning on and after June 30, 1992, a
Participant may change his investment election as to existing
and/or future contributions in
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<PAGE> 31
increments of ten percent (10%) on any business day of the
month. A Participant may invest existing contributions and
future contributions differently.
(c) For the period beginning May 1, 1992 and ending June 30, 1992,
the current investments of Participants shall be changed from
the funds in place as of April 30, 1992 to investment funds of
the same type of the new Trustee.
(d) To the extent that the Participant does not make a valid
election, the Participant will be deemed to have elected to
invest his Individual Account in the Mellon Short Term Fund
chosen by the Administrator. Effective July 1, 1992, to the
extent that the Participant does make a valid election, the
Participant will be deemed to have elected to invest his
Individual Account in the Guaranteed Investment Contract Fund
chosen by the Administrator.
(e) For Plan Years beginning before January 1, 1992, Participants
shall have the right to direct the Administrator, by filing an
effective investment direction no more often than once during
any Plan Year, at any time between his sixtieth (60th) through
sixty-fifth (65th) birthdays, to notify the Trustee to invest
any multiple of twenty percent (20%) of the then current
vested account balance, in a federally insured certificate of
deposit, to mature at the date such Participant attains his
sixty-fifth (65th) birthday. Unless the Participant elects a
non-proportional withdrawal in a written election filed with
the Administrator, such amount shall be withdrawn
proportionately from such Participant's managed account in the
Trust Fund and from such Participant's funds in any short term
investment fund. Any income from such certificate of deposit
shall be reinvested in such certificate of deposit. Such
certificates of deposit shall be distributed to the
Participant's Beneficiary at the Participant's death.
Each Participant shall also have the right to direct the
Administrator, by filing an effective investment direction no
more often than once during any Plan Year, at any time between
his sixty-fifth (65th) and seventieth (70th) birthdays, to
notify the Trustee to invest all of his current vested account
balance in a federally insured certificate of deposit to
mature one year from the date purchased.
Any investment direction made pursuant to this subsection may
not be revoked or revised by the Participant.
The proceeds of or income derived from any investments in
certificates of deposit pursuant to this subsection which
mature on and after January 1, 1992 shall not be reinvested in
certificates of deposit but shall instead be invested in a
cash equivalent fund maintained by the Trustee. These funds
shall remain in the cash equivalent fund pending the May 1,
1992 transfer of funds to the successor Trustee. At such time,
the funds which had been invested in cash equivalent funds and
the proceeds of any certificates of deposit maturing after
such date shall be invested in the Guaranteed Investment
Contract (GIC) fund of the successor Trustee or such other
investment elected by the Participant in accordance with this
Section 3.10.
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<PAGE> 32
The Plan funds from which the Participant may elect to invest his
Individual Account are described in Appendix C attached hereto. To the
extent that a Participant over the age of sixty (60) had elected to
purchase Certificates of Deposit prior to January 1, 1992, no new
Certificates of Deposit shall be purchased and, as existing amounts
mature, they shall be invested in the GIC Fund.
The Plan is intended to be a Plan as described in Section 404(c) of
ERISA and regulations thereunder. Notwithstanding Section 7.02 of the
Plan or the Trust Agreement, the Trustee shall have no authority or
discretion to decline to implement an investment direction of a
Participant or Beneficiary among one or more of the investment options
pursuant to this Section unless such direction would result in a
prohibited transaction described in Section 406 of ERISA or Section
4975 of the Code or would generate income that would be taxable to the
Trust. Neither the Employer, the Administrator, or the Trustee shall be
liable for any loss to the Plan or the Trust that is the direct and
necessary result of such investment directions, nor be responsible to
provide investment advice to a Participant or Beneficiary regarding
investment direction under the Plan.
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<PAGE> 33
ARTICLE IV
ALLOCATIONS TO INDIVIDUAL ACCOUNTS
4.01 Individual Accounts
The Administrator shall establish and maintain an Individual Account in
the name of each Participant to which the Administrator shall credit
all amounts allocated to each such Participant pursuant to Article III
and the following Sections of this Article IV. Each Individual Account
shall be comprised of whichever of the following are applicable to a
particular Participant: Employer Discretionary Contribution Account,
Before-Tax Savings Account, After-Tax Contribution Account, and,
effective May 1, 1992, Rollover Account and/or Employer Matching
Contribution Account.
4.02 Allocation of Employer Discretionary Contributions
The Administrator, as of the end of each Plan Year, shall determine for
each eligible Participant his share of Employer Discretionary
Contributions contributed in accordance with Section 3.07 of Article
III and in accordance with the applicable Board resolutions authorizing
the Employer Discretionary Contributions. To the extent such Employer
Discretionary Contributions are restricted by location, the allocation
shall be limited to the Participants at that location.
An "eligible" Participant is a Participant who has completed nine
hundred (900) Hours of Service during the Plan Year and is employed by
the Employer on the last day of the Plan Year for which the
contribution is being made, or is on an authorized leave of absence or
is receiving periodic severance payments on the last day of the Plan
Year, or who has retired, died or become disabled during the Plan Year.
Each Participant's share of the Employer Discretionary Contributions
shall be allocated to his Employer Discretionary Contribution Account.
The manner of allocation of the Employer Discretionary Contribution to
each Participant will be as follows:
(a) First, determine the proportion of each Participant's
Compensation from the Employer during the Plan Year to which
the contribution applies, to the total Compensation from the
Employer to all Participants during the Plan Year; and
(b) Second, allocate to each Participant the same proportion of
the contribution made by the Employer for the Plan Year to
which the contribution applies.
The amount determined for such Plan Year for each respective
Participant shall be credited to his Employer Discretionary
Contribution Account on the records of the Trustee.
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<PAGE> 34
4.03 Allocation of Employer Matching Contributions
Effective May 1, 1992, the Administrator, for each Plan Year, shall
determine for each eligible Participant his share of Employer Matching
Contributions contributed in accordance with Section 3.03 of Article
III and in accordance with the applicable board resolutions authorizing
the Employer Matching Contributions and shall allocate the Employer
Matching Contributions in proportion to the Before-Tax Savings elected
by the Participants. Each Participant's share of the Employer Matching
Contributions shall be allocated to his Employer Matching Contribution
Account.
An "eligible" Participant is a Participant who has elected to have
Before-Tax Savings made on his behalf during the Plan Year.
4.04 Allocation of Forfeitures
After a terminated Participant has had a one-year Break-in-Service, any
forfeitures of non-vested Employer Discretionary Contributions shall be
reallocated to Participants who have completed nine hundred (900) Hours
of Service during the Plan Year and are employed on the last day of the
Plan Year, or on an authorized leave of absence or receiving periodic
severance payments on the last day of the Plan Year, or who have
retired, died or become disabled during the Plan Year. The allocation
is based on the ratio of each Participant's Compensation to the total
of all Participants' Compensation.
Any forfeiture of non-vested Employer Matching Contributions shall be
applied to reduce current or future Employer Matching Contributions.
If a terminated Participant is reemployed before incurring five (5)
one-year Breaks-in-Service, his forfeited balance may be restored to
him if he repays the amount of any distribution in accordance with
Section 5.05.
4.05 Valuation of Accounts
For periods prior to May 1, 1992, the valuation of Trust Fund assets
for all purposes of the Plan shall be determined as follows: stocks,
bonds, and mutual fund shares shall be valued according to the normal
valuation procedures used by the Trustee in the ordinary course of
business. Real estate shall be valued at its fair market value. The
Valuation Date for such purposes shall be the last day of each quarter
of the Plan Year and any other date on which the Administrator deems it
necessary to have a valuation of the Trust Fund.
Effective May 1, 1992, the Trustees shall, following the end of each
business day, value all assets of the Trust Fund as of that business
day in the following manner:
(a) The Trustee shall first compute the fair market value of
securities and/or the other assets in each investment fund,
designated by the Administrator for direction of investment by
the Participants. This market value shall be equal to the
market
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<PAGE> 35
price of the fund on the prior business day applied to the
balance of the fund as of the close of business on the current
business day.
(b) The Trustee shall, following the computation of the fair
market value, compute each Participant's share in the fund and
assign a gain or loss to each Participant's account.
(c) The Trustee shall then account for any requests for additions
or withdrawals made to or from a specific designated
investment fund by any Participant, including allocations of
Rollover Accounts or Before-Tax Savings by the next business
day.
In completing the valuation procedure described above, such adjustments
in the amounts credited to such accounts shall be deemed to have been
made on the business day to which the investment activity relates.
Employer Discretionary Contributions, Employer Matching Contributions,
Before-Tax Savings, After-Tax Contributions and Rollover contributions
pursuant to this Plan shall not be taken into account until the
allocation date coinciding with or next following the date any such
contribution was both actually paid to the Trustee by the Employer and
allocated among the accounts of Participants. It is intended that this
Section operate to distribute among each Participant's Investment
Account in the Trust Fund, all income of the Trust Fund and changes in
the value of the Trust Fund's assets.
4.06 Maximum Additions
Anything herein to the contrary notwithstanding, the total Annual
Additions made to the Individual Account of a Participant for any Plan
Year, when combined with any similar annual additions credited to the
Participant for the same period from another qualified Defined
Contribution Plan maintained by the Employer or an Affiliate, shall not
exceed the lesser of:
(a) Thirty thousand dollars ($30,000) or, if greater, one-fourth
(1/4) of the specific dollar amount set forth in Section
415(b)(1)(A) of the Code as such amount may be adjusted for
inflation pursuant to Section 415(d)(1) of the Code, with
respect to the first day of the limitation year for which the
annual benefit is being calculated; or
(b) Twenty-five percent (25%) of the Participant's total
non-deferred compensation received from the Employer or an
Affiliate for such Plan Year.
For purposes of this Section 4.06, the Plan Year shall be the
"limitation year," as defined in Section 415 of the Code and applicable
regulations thereunder.
Compensation for purposes of this Section 4.06 only, means a
Participant's wages, salaries, fees for professional service and other
amounts received for personal services actually rendered in the course
of employment with the Employer including, but not limited to,
commissions paid to salesmen, tips and bonuses. Compensation does not
include: (i) contributions made to a plan of deferred compensation to
the extent that
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<PAGE> 36
before this Section 4.05 is applied, such contributions are not
included in the gross income of the Participant for the taxable year in
which they are made; (ii) amounts realized from the exercise of a
non-qualified stock option, or when restricted stock (or property) held
by an employee either becomes freely transferable or is no longer
subject to a substantial risk of forfeiture; (iii) amounts realized
from the sale, exchange or other disposition of stock acquired under a
qualified stock option; or (iv) other amounts which receive special tax
benefits, such as premiums for group term life insurance (but only to
the extent that the premiums are not includable in the gross income of
the employee).
In the event a Participant is covered by one or more other Defined
Contribution Plans maintained by the Employer, the maximum Annual
Additions as noted above shall be decreased as determined necessary by
the Employer, prior to the reduction of such other Defined Contribution
Plans, to ensure that all such plans will remain qualified under the
Code.
4.07 Corrective Adjustments
In the event that, as of any Valuation Date, corrective adjustments in
the Annual Additions to any Participant's Individual Account are
required as the result of a reasonable error in estimating a
Participant's total non-deferred compensation (as defined in Section
415 of the Code), the following corrective adjustments shall be made in
the following order of precedence:
(a) First, if applicable, any After-Tax Contributions shall be
returned to the Participant to the extent such return will
reduce such excess amount.
(b) Next, the Participant's share of forfeitures which have been
allocated to his Individual Account shall be reduced as
necessary and reallocated to the Individual Accounts of other
eligible Participants.
(c) Next, the Participant's share of Employer Discretionary
Contributions allocated to his Individual Account shall be
reduced to ensure compliance with Section 4.06 and shall be
segregated into a suspense account and shall be applied as
rapidly as possible to reduce applicable Employer
Discretionary Contributions for the current Plan Year or
succeeding Plan Years.
(d) To the extent further corrective adjustments are required, the
same procedure is to be followed with Employer Matching
Contributions and with Before-Tax Savings.
Notwithstanding the preceding, no Employer shall contribute any amount
that would cause the limit in Section 4.06 to be exceeded as of the
date the contribution is allocated. If the contribution is made prior
to the date as of which it is to be allocated, then such contribution
shall not exceed an amount that would cause the limit in Section 4.06
to be exceeded if the date of contribution were a Valuation Date. As a
failsafe, any correction permitted under Treas. Reg. Section
1.415-6(b)(6) shall be permitted.
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<PAGE> 37
4.08 Defined Contribution and Defined Benefit Plan Fraction
If a Participant is a participant in a Defined Benefit Plan maintained
by the Employer or an Affiliate, the sum of his defined benefit plan
fraction and his defined contribution plan fraction for any Limitation
Year may not exceed 1.0. Limitation Year shall mean the Plan Year.
For purposes of this Section 4.08, the term "defined contribution plan
fraction" shall mean a fraction, the numerator of which is the sum of
all of the annual additions to the Participant's individual account
under this Plan and any other Defined Contribution Plans of the
Employer as of the close of the Plan Year and the denominator of which
is the sum of the lesser of the following amounts determined for such
Plan Year and for each prior Plan Year of employment with the Employer:
(a) the product of 1.25 multiplied by the dollar limitation
calculated pursuant to Section 4.06(a) in effect for such year
determined without regard to Section 415(c)(6) of the Code; or
(b) the product of 1.4 multiplied by the amount calculated
pursuant to Section 4.06(b) with respect to such individual
under the Plan for such Plan Year.
For purposes of this Section 4.08, the term "defined benefit plan
fraction" shall mean a fraction, the numerator of which is the
Participant's projected annual benefit (as defined in the said Defined
Benefit Plan) determined as of the close of the Plan Year and the
denominator of which is the lesser of:
(a) the product of 1.25 multiplied by the dollar limitation in
effect pursuant to Section 415(b)(1)(A) of the Code for such
Plan Year; or
(b) the product of 1.4 multiplied by the amount which may be taken
into account pursuant to Section 415(b)(1)(B) of the Code with
respect to such individual under the Plan for such Plan Year.
For purposes of this Section 4.08 and Section 4.06, all Defined
Contribution Plans of the Employer or an Affiliate (whether or not
terminated) shall be treated as one Defined Contribution Plan and all
Defined Benefit Plans of the Employer or an Affiliate (whether or not
terminated) shall be treated as one Defined Benefit Plan.
The limitation on aggregate benefits from a Defined Benefit Plan and a
Defined Contribution Plan which is contained in Section 2004 of ERISA
and Section 415(e) of the Code shall be complied with by a reduction
(if necessary) in the Participant's benefits under that Defined Benefit
Plan (in accordance with the provisions of the said plan) and his
benefits herein shall not be affected by such aggregate limitation.
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<PAGE> 38
ARTICLE V
DISTRIBUTIONS
5.01 Normal Retirement
Upon attainment of Normal Retirement Age a Participant shall have a one
hundred percent (100%) vested interest in his Individual Account. Upon
the retirement of a Participant on or after his Normal Retirement Date,
the Administrator shall thereupon direct the Trustee to distribute to
such Participant or his Spouse or Beneficiary, whichever is applicable,
such amount in accordance with Section 5.06 hereof.
5.02 Early Retirement
The Early Retirement Date of a Participant shall be the date a
Participant terminates employment after attainment of Early Retirement
Age.
Upon retirement in accordance with the provisions of this Section 5.02,
the Participant shall be one hundred percent (100%) vested in his
Individual Account. Upon the retirement of a Participant on his Early
Retirement Date, the Administrator shall thereupon direct the Trustee
to distribute to such Participant or his Spouse or Beneficiary,
whichever is applicable, the Current Balance of his Individual Account,
determined as of the date of distribution, in accordance with Section
5.06 hereof.
5.03 Disability Retirement
Upon determination that a Participant is Disabled, he shall be one
hundred percent (100%) vested in the balance of his Individual Account.
A Participant may retire from the employment of the Employer on the
first day of any month coincident with or next following a
determination that such Participant is Disabled. For purposes of this
Section, the Plan Administrator's determination of whether a
Participant is a Participant is "Disabled" shall conform to the
determination made under the Employer's long term disability plan for
purposes of that plan.
Upon retirement in accordance with the provisions of this Section 5.03,
the Participant shall be eligible to receive the Current Balance of his
Individual Account, determined as of the date of distribution, as soon
as practicable following determination of Disability. The Administrator
shall thereupon direct the Trustee to distribute to such Participant or
his Spouse or Beneficiary, whichever is applicable, such amount in
accordance with Section 5.06 hereof.
5.04 Death
When a Participant dies while in the employ of an Employer, he shall
have a one hundred percent (100%) vested interest in his Individual
Account. The Current Balance of such Participant's Individual Account,
determined as of the date of distribution, shall
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<PAGE> 39
become payable to his Spouse, unless the Spouse has consented in
writing to the Participant's designation of a Beneficiary other than
his Spouse in accordance with Section 2.04.
The Administrator shall thereupon direct the Trustee to distribute to
such Participant's Spouse or Beneficiary, whichever is applicable, such
amount in accordance with Section 5.07 hereof.
5.05 Termination of Employment
Upon the termination of employment for any reason (other than
retirement, death or Disability), a Participant (a "Terminated
Participant") or his Beneficiary shall be eligible to receive the
vested portion (as determined in this Section 5.05) of his Individual
Account, valued as of the date of distribution, in accordance with the
following provisions:
(a) A Participant shall always have a one hundred percent (100%)
vested interest in his balance attributable to his Before-Tax
Savings Account, his After-Tax Contribution Account and his
Rollover Account. The Participant is eligible to receive a
distribution of these Accounts as soon as practicable
following his termination of employment.
(b) A Participant shall have a vested interest in the balance
attributable to his Employer Discretionary Contribution
Account and Employer Matching Contribution Account based on
his years of Service as of his date of termination of
employment, in accordance with the following schedule:
<TABLE>
<CAPTION>
Vested
Years of Service Percentage
---------------- ----------
<S> <C>
Less than 3 years 0%
3 years 20%
4 years 40%
5 years 60%
6 years 80%
7 years or more 100%
</TABLE>
The Administrator shall thereupon direct the Trustee to distribute to
such Participant or Beneficiary the vested amount of his Employer
Discretionary Contribution Account and Employer Matching Contribution
Account in accordance with Section 5.06 or 5.07 within sixty (60) days
after the end of the Plan Year in which his one-year Break in Service
ended.
The non-vested portion of the Participant's Employer Matching
Contribution Account or Employer Discretionary Contribution Account
will become a forfeiture on the Valuation Date following the date the
Participant has incurred a one-year Break-in-Service. Forfeitures of
Employer Discretionary Contribution amounts are reallocated to the
- 34 -
<PAGE> 40
accounts of remaining Participants after a one-year Break-in-Service.
Forfeitures of Employer Matching Contribution amounts are applied to
reduce current or future Employer Matching Contributions.
A Terminated Participant who terminated with less than a one hundred
percent (100%) vested interest in his Employer Discretionary
Contribution Account and/or Employer Matching Contribution Account, who
received a distribution of his vested interest, and who resumes
employment with the Employer may repay such distribution before the
earlier of five (5) years after the first date on which the Participant
is subsequently reemployed by the Employer or the close of the first
period of five (5) consecutive one-year Breaks-in-Service commencing
after the distribution and have any amounts forfeited pursuant to this
Section 5.05 restored to his Employer Discretionary Contribution
Account and/or Employer Matching Contribution Account upon such
repayment and receive the value of his Employer Discretionary
Contribution Account and/or Employer Matching Contribution Account
based on his total years of Service when he again terminates
employment. The Employer shall either contribute such additional funds
to the Plan necessary to restore any forfeited amount or apply
unallocated forfeitures to restore the Employer Discretionary
Contribution Account and/or Employer Matching Contribution Account.
A Terminated Participant who terminated employment with less than a one
hundred percent (100%) vested interest in his Employer Discretionary
Contribution Account and/or Employer Matching Contribution Account who
did not receive a distribution of his vested interest and who is
reemployed prior to incurring five (5) consecutive one-year
Breaks-in-Service shall, to the extent such non-vested amounts have
been deemed to have been forfeited, have such amounts restored to his
Employer Discretionary Contribution Account and/or Employer Matching
Contribution Account. The Employer shall either contribute such
additional funds to the Plan necessary to restore the amount deemed to
have been forfeited or apply unallocated forfeitures to restore the
Participant's Employer Discretionary Contribution Account and/or
Employer Matching Contribution Account.
A Terminated Participant who is reemployed and again becomes a
Participant after incurring five (5) or more consecutive one-year
Breaks-in-Service shall not be allowed to repay any amount distributed
to him and shall not have any amount forfeited pursuant to this Section
5.05 restored to his Employer Discretionary Contribution Account and/or
Employer Matching Contribution Account.
5.06 Distribution Upon Retirement or Termination of Employment
(a) Employer Discretionary Contributions and Employer Matching
Contributions for Employees who are Participants as of May 1,
1992
In the case of retirement, Disability or termination of
employment, a Participant may request distribution of any
benefits derived from Employer Discretionary Contributions and
Employer Matching Contributions under the Plan as provided
hereinafter. The request by the Participant shall be in
writing and shall be filed with the Administrator at least
thirty (30) days before distribution is to be made.
- 35 -
<PAGE> 41
The amount shall be distributed as soon as practicable
following a request for distribution.
Each Participant (including a Former Participant) may, prior
to his date of benefit commencement, elect, in a written
application provided by the Administrator, to receive his
distribution of benefits in the form of a single, lump sum
payment or in one of the alternative forms listed below. Each
of the alternative forms shall commence in accordance with
this Section 5.06.
(i) Forms of Payment. A Participant shall make an
election by written notification to the Administrator
on forms provided by the Administrator to indicate
the form of payment elected. An election by a
Participant to receive his benefit under Section
5.06(a)(ii) may be revoked by such Participant in
writing to the Committee at any time prior to the
annuity starting date. In the absence of the election
of an optional method of payment under Section
5.06(a)(ii) below, benefit payments shall be payable
in a single lump sum.
(ii) Optional Forms. In lieu of receiving payment in
accordance with Section 5.06(a)(i) above, a
Participant may elect in writing, that his Current
Balance or any portion thereof be utilized to
purchase a non-transferable annuity contract from an
insurance company. Such annuity contract for a
married Participant shall be in the form of a fifty
percent (50%) joint and survivor annuity with the
spouse designated as contingent annuitant, unless
such spouse consents to a life annuity payment or
another type of annuity payment as provided below.
Such annuity contract for an unmarried Participant
shall be in the form of a single life annuity or such
other type of annuity elected by the Participant and
available through the Insurer selected by the
Administrator.
(iii) Election and Notice. If a Participant elects
distribution in an annuity form pursuant to
subsection (ii) above, then no less than thirty (30)
days and no more than ninety (90) days prior to the
annuity starting date the Participant and his spouse
shall be given a written notice to the effect that in
the event an annuity is elected pursuant to this
Section 5.06, benefits shall be payable in the form
of an immediate fifty percent (50%) joint and
survivor annuity as therein specified unless: (i) the
Participant elects to the contrary and (ii) the
spouse consents in writing to waive such annuity form
of benefit, consents to a specified form of benefit
and to a specified Beneficiary and acknowledges the
effect of such consent in the ninety (90) day period
prior to the annuity starting date. Such consent must
be witnessed by a representative of the Administrator
or a notary public. For purposes of this Section,
annuity starting date means: (i) the first day of the
first period for which an amount is payable as an
annuity, (ii) in the case of a benefit not payable in
the form of an annuity, the first day on which all
events have occurred which entitle the Participant to
such
- 36 -
<PAGE> 42
benefit, or (iii) the first day of the first period
for which a benefit is to be received by reason of
disability.
The notice shall describe, in a manner intended to be
understood by the Participant and his spouse, the
terms and conditions of the joint and survivor
annuity, a general explanation of the financial
effect of the election or absence of election, the
rights of the Participant's spouse, the relative
values of the optional forms available under the
Plan, and the right to make and the effect of a
revocation of a previous election to waive the joint
and survivor annuity.
In the event a Participant or his spouse requests
additional information, as permitted under the terms
of the notice, commencement of benefits for any
purpose hereunder shall not begin until at least
ninety (90) days following the Participant's receipt
of such additional information unless the Participant
specifically elects earlier commencement.
(iv) Limitation. In no event may the length of time over
which any form of payment provided above exceed the
greater of: (i) the life of the Participant; (ii) the
life of the Participant and his Spouse or
Beneficiary, whichever is applicable; (iii) a period
certain not exceeding the Participant's life
expectancy; or (iv) a period certain not exceeding
the joint life expectancy of the Participant and his
Spouse or Beneficiary, whichever is applicable. Such
life expectancy or joint life expectancy shall be
determined in accordance with regulations promulgated
by the Secretary of the Treasury pursuant to Code
Section 401(a)(9). Further, if a Participant's
Beneficiary is other than his Spouse, the present
value of the benefits payable to the Participant
shall not be less than the amount required under such
Code Section and regulations issued thereunder based
upon the relative ages of the Participant and the
non-Spouse Beneficiary.
(b) Before-Tax Savings, After-Tax Contributions and Rollover
Contributions for Employees who are Participants as of May 1,
1992
If the Participant has not accrued an Employer Discretionary
Contribution or an Employer Matching Contribution for the Plan
Year, all Before-Tax Savings, After-Tax Contributions and
Rollover Contributions shall be distributed to such
Participant in cash within sixty (60) days of the end of the
Plan Year in which occurred his termination, retirement, or
Disability. Such Individual Account balances shall be
distributed to such Participant in cash within sixty (60) days
of the end of the Plan Year in which his death occurred
regardless of any subsequent Employer Discretionary
Contribution or Employer Matching Contribution. If the
Participant has accrued an Employer Discretionary Contribution
and/or Employer Matching Contribution in the Plan Year in
which his termination, retirement or Disability occurs, he
shall have the option of receiving the distribution of his
benefits either within sixty (60) days after the close of the
Plan Year in which such event occurs, or within sixty (60)
days after
- 37 -
<PAGE> 43
the close of the Plan Year following the Plan Year in which
such event occurs, but in no event later than sixty (60) days
after the close of the Plan Year of the final Employer
Discretionary Contribution and/or Employer Matching
Contribution attributable to him after such event occurs. The
Participant shall exercise such option by filing a written
election with the Retirement Committee stating the time at
which distributions to him shall commence; if no election is
filed within thirty (30) days of the close of the Plan Year in
which such event occurs, such Participant shall be deemed to
have elected distributions to commence within sixty (60) days
of the close of the Plan Year in which such event occurs.
(c) Distribution of Individual Accounts for Employees who become
Participants on or after May 1, 1992
The portion of a Terminated Participant's Individual Account
attributable to Before-Tax Savings and/or After-Tax Savings
shall be distributed to the Participant as soon as reasonably
possible following a request for distribution.
A Terminated Participant's Individual Account shall be
distributed to him in cash within sixty (60) days of the end
of the Plan Year in which his termination, retirement,
Disability, or death occurs. If the Participant has accrued an
Employer Discretionary Contribution and/or Employer Matching
Contribution in the Plan Year in which his termination,
retirement, or disability occurs, he shall have the option of
receiving the distribution of his benefits either within sixty
(60) days after the close of the Plan Year in which such event
occurs, or within sixty (60) days after the close of the Plan
Year following the Plan Year in which such event occurs, but
in no event later than sixty (60) days after the close of the
Plan Year of the final Employer Discretionary Contribution
and/or Employer Matching Contribution attributable to him
after such event occurs. The Participant shall exercise such
option by filing a written election with the Retirement
Committee stating the time at which distributions to him shall
commence; if no election is filed within thirty (30) days of
the close of the Plan Year in which such event occurs, such
Participant shall be deemed to have elected distributions to
commence within sixty (60) days of the close of the Plan Year
in which such event occurs.
In the event of retirement, disability, or death, a
Participant's entire Individual Account will be distributed as
soon as reasonable possible following a request for
distribution.
5.07 Distribution Due to Death
In the case of any Participant or Former Participant who dies prior to
commencement of benefits when he is vested in any portion of his
Individual Account, there shall be a Death Benefit paid in accordance
with the following provisions:
- 38 -
<PAGE> 44
(a) If such Participant was a Participant in the Plan as of May 1,
1992 and is survived by a Spouse, the following shall apply:
(i) The Administrator shall purchase an annuity contract
from an insurance company with fifty percent (50%) of
the balance of his Individual Account determined as
of the Valuation Date coincident with or immediately
preceding his date of death, plus any Before-Tax
Savings, After-Tax Contributions, Employer Matching
Contributions and Employer Discretionary
Contributions made since such Valuation Date. Such
contract shall provide a monthly income payable for
the life of the Spouse, with immediate or deferred
commencement, as elected by the Spouse, provided that
benefits commence in accordance with Section 5.09.
Alternatively, the Spouse may elect to receive
distribution of benefits in a lump sum, payable as
soon as reasonable possible following the date of the
Participant's death.
(ii) The remainder of the Participant's Individual Account
shall be paid to the Participant's Beneficiary (who
may or may not be his Spouse) in a lump sum.
Notwithstanding the provisions of Section 2.04, no
spousal consent shall be required for designation of
a Beneficiary under this subparagraph (ii).
(b) If death occurs and such Participant who was a Participant as
of May 1, 1992 is not survived by a Spouse, the balance of his
individual Account determined as of the Valuation Date
coincident with or immediately preceding his date of death,
plus any Before-Tax Savings, After-Tax Contributions, Employer
Discretionary Contributions or Employer Matching Contributions
made since such Valuation Date, shall be paid in a lump sum to
his Beneficiary.
(c) Upon the death of a Participant who became a Participant on or
after May 1, 1992, the balance of his Individual Account
determined as of the Valuation Date coincident with or
immediately preceding the date of death, plus any Before-Tax
Savings, After-Tax Contributions, Employer Discretionary
Contributions or Employer Matching Contributions made since
that Valuation Date, shall be paid in a lump sum to his Spouse
or, if no Spouse exists or a proper Beneficiary designation
has been filed pursuant to Section 2.04, his Beneficiary.
5.08 Cash Out of Small Benefits
(a) Except for corrective distributions under Sections 3.01, 3.02,
3.05, 3.06, or 4.07(a) of the Plan and as expressly stated to
the contrary in section (b) hereof and elsewhere in the plan
with regard to required distributions, no distribution of
benefits prior to Normal Retirement Age shall be made unless
the Participant has received notice of his right to defer
commencement of benefits and has consented to the immediate
distribution of his benefits, as required by 411(a)(11) of the
Code. If the spousal consent requirements of Section
5.06(a)(iii) are applicable, the Participant's spouse must
also consent to an immediate distribution of
- 39 -
<PAGE> 45
benefits, except that only the consent of the Participant is
required for an immediate distribution of benefits in the form
of a qualified joint and survivor annuity. The failure of a
Participant, or, if applicable, the Participant's spouse, to
consent to an immediate distribution shall be deemed an
election to defer commencement of benefits.
(b) Notwithstanding any other provisions of the Plan to the
contrary, if the value of a terminated, deceased or retired
Participant's Individual Account determined as of the
Valuation Date coincident with or immediately following his
date of retirement, death or termination of employment does
not exceed or ever exceeded three thousand five hundred
dollars ($3,500), the Administrator shall direct that the
value of such Individual Account shall be paid in a lump sum
to the Participant (or Spouse or Beneficiary, if applicable)
without his written consent (or that of the Spouse or
Beneficiary, if applicable). No benefits of any other type
shall then be payable to such former Participant or his Spouse
or Beneficiaries. To the extent a terminated Participant is
reemployed by the Employer, the repayment and restoration
provisions of Section 5.05 may apply.
5.09 Commencement of Benefits and Required Distributions
Distribution of benefits shall be governed by the following:
(a) Any benefits payable under this Article V shall commence as
soon as reasonably possible after actual date of severance and
in accordance with the other provisions of this Article V. In
no event, however, unless the Participant elects otherwise (or
is deemed to have elected otherwise by failure to demand
payment), shall such postponement be beyond sixty (60) days
after the last day of the Plan Year in which occurs the latest
of: (i) the Participant's reaching age sixty-five (65); (ii)
the tenth (10th) anniversary of the date the Employee became a
Participant; or (iii) termination of the Participant's
employment.
(b) Notwithstanding any other provisions of the Plan to the
contrary, the Plan must begin to distribute a Participant's
entire interest in the Plan no later than his "Required
Beginning Date." A Participant's Required Beginning Date shall
be the April 1 of the calendar year following the calendar
year in which the Participant attains age seventy and one-half
(70 1/2), regardless of whether his employment has terminated.
However, a Participant who is not a five percent (5%) owner of
the Employer (as defined in Section 416(i)(1) of the Code) and
who attains age seventy and one-half (70 1/2) prior to January
1, 1988 shall have a Required Beginning Date of the April 1 of
the calendar year following the calendar year in which he
retires, provided such Participant was not a five percent (5%)
owner during the Plan Year in which he attained age sixty-six
and one-half (66 1/2) or in any subsequent Plan Year.
In the event the provisions of this Section 5.09(b) become
applicable to a Participant, a "Minimum Required Distribution"
shall be paid as of his Required Beginning Date. Such Minimum
Required Distribution shall be an amount equal
- 40 -
<PAGE> 46
to the Participant's Individual Account determined as of the
December 31 of the calendar year immediately prior to the
Required Beginning Date divided by the Participant's life
expectancy or the joint life expectancy of the Participant and
his Spouse or Beneficiary, whichever is applicable, determined
in accordance with the provisions of Regulations under Section
401(a)(9) of the Code, including the minimum incidental death
benefit requirements of Section 401(a)(9)(G) of the Code. For
purposes of this subsection only, the consent of the
Participant or his Spouse, if any, shall not be required prior
to the commencement of any Minimum Required Distribution
hereunder. The distribution under this provision shall
override any other provisions of this plan which are
inconsistent and all such distributions shall be in compliance
with the joint and survivor annuity requirement set forth in
Section 5.06(a)(iii).
(c) In the event any Participant becomes entitled to a
distribution hereunder (i) prior to becoming disabled (within
the meaning of Section 72(m)(7) of the Code), (ii) prior to
reaching age fifty-nine and one-half (59 1/2), (iii) on
account of his separation from service prior to attainment of
age fifty-five (55) or (iv) which is not a distribution listed
as an exception in Section 72(t)(2) of the Code and
regulations issued thereunder, the Participant shall be
notified in writing that receipt of any such payment may
invoke an additional income tax on the taxable portion of such
distribution imposed by the Federal government, in addition to
any income taxes which might otherwise be due.
(d) If any Participant dies before distribution commences, the
Participant's entire interest will be distributed no later
than five (5) years after his date of death, with the
following exceptions:
(i) If any portion of the Participant's interest is
payable to a designated Beneficiary, distribution may
be made in a lump sum in accordance with Section 5.04
commencing no later than one (1) year after the
Participant's death;
(ii) If the designated Beneficiary is the Participant's
surviving Spouse, the date distributions are required
to begin in accordance with (i) above shall not be
earlier than the date on which the Participant would
have attained age seventy and one-half (70 1/2), and,
if the Spouse dies before payments begin, subsequent
distributions shall be made as if the Spouse had been
the Participant.
5.10 Benefits to Minors and Incompetents
In case any person entitled to receive payment under the Plan shall be
a minor, the Administrator, in its discretion, may dispose of such
amount in any one or more of the following ways:
(a) By payment thereof directly to such minor;
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<PAGE> 47
(b) By application thereof for the benefit of such minor;
(c) By payment thereof to either parent of such minor or to any
adult person with whom such minor may at the time be living or
to any person who shall be legally qualified and shall be
acting as guardian of the person or the property of such
minor; provided only that the parent or adult person to whom
any amount shall be paid shall have advised the Administrator
in writing that he will hold or use such amount for the
benefit of such minor.
In the event that it shall be found that a person entitled to receive
payment under the Plan is physically or mentally incapable of
personally receiving and giving a valid receipt for any payment due
(unless prior claim therefor shall have been made by a duly qualified
committee or other legal representative), such payment may be made to
the spouse, son, daughter, parent, brother, sister or other person
deemed by the Administrator to have incurred expense for such person
otherwise entitled to payment.
5.11 Unclaimed Benefits
If the Administrator is unable to ascertain the whereabouts or identity
of a Participant, Spouse, Beneficiary or legal representative thereof,
who is entitled to a distribution which is due or required to commence
under this Article V, after having sent proper notification by
registered mail to such person's last known address and when no claim
for such benefits has been filed with the Administrator before the end
of five (5) years following the date distribution is due or required to
commence, then, unless otherwise prohibited by law, the distribution
otherwise payable shall be forfeited and such forfeiture shall be used
to reduce the next applicable Employer contribution. In the event that
the Participant (or Spouse or Beneficiary, if applicable) requests a
distribution after a forfeiture has occurred, the amount of such
forfeiture shall be restored to his Individual Account through a
special Employer contribution.
5.12 Direct Rollover of Eligible Rollover Distributions. This Section
applies to distributions made on or after January 1, 1993.
Notwithstanding any provision of the plan to the contrary that would
otherwise limit a distributee's election under this Section, a
distributee may elect, at the time and in the manner prescribed by the
Plan Administrator, to have any portion of an eligible rollover
distribution paid directly to an eligible retirement plan specified by
the distributee in a direct rollover.
(a) Eligible rollover distribution: An eligible rollover
distribution is any distribution of all or any portion of the
balance to the credit of the distributee, except that an
eligible rollover distribution does not include: any
distribution that is one of a series of substantially equal
periodic payments (not less frequently than annually) made for
the life (or life expectancy) of the distributee or the joint
lives (or joint life expectancies) of the distributee and the
distributee's designated beneficiary, or for a specified
period of ten (10) years or more; any distribution to the
extent such distribution is required under section 401(a)(9)
of the Code; and the portion of any distribution that is not
includible in gross income (determined without
- 42 -
<PAGE> 48
regard to the exclusion for net unrealized appreciation with
respect to employer securities).
(b) Eligible retirement plan: An eligible retirement plan is an
individual retirement account described in section 408(a) of
the Code, an individual retirement annuity described in
section 408(b) of the Code, an annuity plan described in
section 403(a) of the Code, or a qualified trust described in
section 401(a) of the Code, that accepts the distributee's
eligible rollover distribution. However, in the case of an
eligible rollover distribution to the surviving spouse, an
eligible retirement plan is an individual retirement account
or individual retirement annuity.
(c) Distributee: A distributee includes an Employee or former
Employee. In addition, the Employee's or former Employee's
surviving Spouse and the Employee's or former Employee's
Spouse or former Spouse who is the alternate payee under a
qualified domestic relations order, as defined in section
414(p) of the Code, are distributees with regard to the
interest of the Spouse or former Spouse.
(d) Direct rollover: A direct rollover is a payment by the plan to
the eligible retirement plan specified by the distributee.
5.13 In-Service Distributions
Effective July 28, 1994, a Participant shall be entitled to a total
distribution of his Individual Account on or after the date the
Participant attains age 70 1/2, without regard to whether that
Participant has yet retired. Upon request by the Participant, the
Administrator shall direct the Trustee to distribute to the Participant
such amount in accordance with Section 5.06.
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<PAGE> 49
ARTICLE VI
WITHDRAWALS
6.01 Withdrawals Generally
A Participant may make written application to the Administrator for
withdrawals of all or a portion of those of his accounts specified in
this Article VI without terminating his employment with his Employer
but only in such amounts and under such conditions as specified in this
Article VI.
6.02 Withdrawals of After-Tax Contributions
A Participant may elect to withdraw from his After-Tax Contribution
Account an amount which is equal to any whole percentage [not exceeding
one hundred percent (100%)] of the lesser of the amounts specified in
(a) or (b) below, where:
(a) is equal to the aggregate of his After-Tax Contributions which
are at the time credited to his After-Tax Contribution
Account; and
(b) is equal to the value of that portion of the Participant's
Individual Account attributable to such After-Tax
Contributions.
Such an election shall take effect on or as soon as administratively
feasible after the date specified in the notice, which date must be at
least fifteen (15) days after such notice is filed with the
Administrator.
6.03 Withdrawal upon Attainment of Age Fifty-Nine and One-Half (59 1/2)
Upon proper written application of a Participant in such form as the
Administrator may specify, a Participant who has attained at least age
fifty-nine and one-half (59 1/2) shall be permitted, no more than once
in any Plan Year, to withdraw in a lump sum a portion or all of the
balance of his Before-Tax Savings Account at the Valuation Date
immediately preceding such request. The minimum amount which may be
withdrawn pursuant to this Section is five hundred dollars ($500).
6.04 Loans
The Administrator may offer loans to Plan Participants who are Parties
in Interest, as that term is defined in Section 3(14) of ERISA, in
accordance with the Loan Procedures established in Appendix B to this
document.
6.05 Hardship Withdrawals
The Administrator, according to uniform rules non-discriminatorily
applied, may authorize the Trustee to make an in-service distribution
to a Participant from his
- 44 -
<PAGE> 50
Before-Tax Savings Account of amounts not previously withdrawn but not
more than the current value thereof, and in the case of a Participant's
Before-Tax Savings Account not more than the amount of his Before-Tax
Savings exclusive of earnings and appreciation credited thereon after
December 31, 1988, by submitting a request to the Administrator. This
request must describe in detail the hardship which has created an
immediate and heavy financial need and which cannot be met through
other sources.
(a) The determination of whether there is an immediate and heavy
financial need is to be made by the Administrator on the basis
of the facts and circumstances of the particular situation.
However, an immediate and heavy financial need will be deemed
to be present when a distribution is requested for any of the
following reasons:
(i) medical expenses for the Participant, spouse or
dependents not covered by any other employee benefit
plan;
(ii) purchase (but not mortgage payments) of the
Participant's principal residence;
(iii) payment of tuition and related educational fees for
the next twelve (12) months of post-secondary
education for the Employee, or the Employee's spouse,
children, or dependents (as defined in Code Section
152); or
(iv) the need to prevent the eviction of the Participant
from his principal residence or to prevent
foreclosure.
(b) The distribution is deemed necessary to satisfy an immediate
and heavy financial need of an Employee if all of the
following requirements are satisfied:
(i) The distribution is not in excess of the amount of
the immediate and heavy financial need of the
Employee. The amount of an immediate and heavy
financial need may include any amounts necessary to
pay any federal, state, or local income taxes or
penalties reasonably anticipated to result from the
distribution.
(ii) The Employee has obtained all distributions, other
than hardship distributions, and all nontaxable (at
the time of the loan) loans currently available under
all plans maintained by the Employer.
(iii) The Plan and all other plans maintained by the
Employer limit the Employee's elective contributions
for the next taxable year to the applicable limit
under Code Section 402(g) for that year minus the
Employee's Before-Tax Savings for the year of the
hardship distribution.
- 45 -
<PAGE> 51
(iv) The Employee is prohibited from making Before-Tax
Savings or After-Tax Contributions to the Plan and
all other qualified or nonqualified plans of deferred
compensation maintained by the Employer for at least
twelve (12) months after receipt of the hardship
distribution.
- 46 -
<PAGE> 52
ARTICLE VII
FUNDING
7.01 Contributions
Contributions by the Employer and by Participants as provided for in
Article III shall be paid over to the Trustee. All contributions by the
Employer shall be irrevocable, except as herein provided, and may be
used only for the exclusive benefit of the Participants, Former
Participants and their Beneficiaries or for purposes of defraying
reasonable expenses under Section 11.03.
7.02 Trustee
The Employer has entered into a Trust Agreement with the Trustee
whereunder the Trustee will receive and invest contributions made under
such Trust Agreement. A separate trust arrangement is in place for
certain assets of the Plan prior to January 1, 1989 pending liquidation
of investments. The Trust Agreement may specifically provide, among
other things, for the investment and reinvestment of the Trust Fund and
the income thereof, the management of the Trust Fund, the
responsibilities and immunities of the Trustee, removal of the Trustee
and appointment of a successor, accounting by the Trustee and the
disbursement of the Trust Fund.
Such Trust Agreement is incorporated by reference as a part of the
Plan, and the rights of all persons hereunder are subject to the terms
of the Trust Agreement.
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<PAGE> 53
ARTICLE VIII
ADMINISTRATION
8.01 Administrator
The Administrator shall have all rights, duties and powers necessary or
appropriate for the administration of the plan.
The Administrator shall establish rules and procedures to be followed
by the Participants, Former Participants, and Beneficiaries in filing
applications for benefits and for furnishing and verifying proofs
necessary to establish age, service and any other matters required in
order to establish their rights to benefits in accordance with the
Plan. Additionally, the Administrator shall establish, or direct the
Trustee to establish, accounting procedures for the purpose of making
the allocations, valuations and adjustments to Participant's accounts.
The Administrator shall be responsible for complying with the reporting
and disclosure requirements of ERISA. The Administrator shall also be
responsible for monitoring compliance with the special tests for
Before-Tax Savings, After-Tax Savings and Matching Contributions in
Sections 3.02 and 3.05 of the Plan, as well as the combined limitations
in Section 3.06 of the Plan. In this regard, the Administrator shall
maintain adequate records to demonstrate compliance with these special
tests. In addition, the Administrator shall be responsible for
monitoring compliance with the limitation in Section 3.01 of the Plan
relating to the maximum amount permitted for elective deferrals under
Section 402(g)(1) of the Code, as well as the limitation under Section
4.06 of the Plan relating to Maximum Additions and the top-heavy
provisions of Article XII of the Plan. It shall be the responsibility
of the Administrator to take whatever action is required by those
Sections.
The Administrator shall ensure that all "plan officials" who are
required by ERISA to be covered by a fidelity bond are so covered.
The Administrator may employ such counsel, accountants, and other
agents as it shall deem advisable for purposes of carrying out its
responsibilities under the Plan. In addition, the Administrator may
delegate any of its duties under the Plan by designating in writing one
or more persons to carry out any of its duties under the Plan. Expenses
incurred by the Administrator in the administration of the Plan, such
as the compensation of counsel, accountants and other agents employed
by the Administrator, shall be paid in accordance with Section 11.03.
No compensation will be paid to the Administrator from the Trust Fund
for service as such, but any reasonable expenses incurred pursuant to
service as Administrator will be reimbursed in accordance with Section
11.03.
The Administrator shall have no authority or responsibility to perform
any function which is a function of the Employer or Sponsor.
Specifically, the Administrator shall be entitled to rely upon, and
must accept as a fact, the employment information furnished
- 48 -
<PAGE> 54
by each Employer. The Administrator has no authority or responsibility
with regard to the employment relationship, and any disputes over
employment history or employment status are strictly between the
Employer and the Employee. To the extent possible, the Administrator
shall give effect under the Plan to any new or corrected employment
information furnished to it by the Employer. Further, the Administrator
shall have no authority or responsibility for collecting contributions
under the Plan.
The Employer shall indemnify the Administrator against any and all
claims, loss, damage, expense and liability arising from any act or
failure to act relating to the Administrator's duties and powers unless
the same is judicially determined to be the result of the
Administrator's gross negligence or willful misconduct.
The Board may change the Administrator or any member thereof at any
time with or without cause and may designate a successor Administrator
in its sole discretion.
8.02 Claims Procedures
The Administrator shall receive all applications for benefits. Upon
receipt by the Administrator of such an application, it shall determine
all facts which are necessary to establish the right of an applicant to
benefits under the provisions of the Plan and the amount thereof as
herein provided. The applicant shall be notified in writing of any
adverse decision with respect to his claim within ninety (90) days
after its submission. The notice shall be written in a manner
calculated to be understood by the applicant and shall include:
(a) The specific reason or reasons for the denial;
(b) Specific references to the pertinent Plan provisions on which
the denial is based;
(c) A description of any additional material or information
necessary for the applicant to perfect the claim and an
explanation why such material or information is necessary; and
(d) An explanation of the Plan's claim review procedures.
If special circumstances require an extension of time for processing
the initial claim, a written notice of the extension and the reason
therefor shall be furnished to the claimant before the end of the
initial ninety (90) day period. In no event shall such extension exceed
ninety (90) days.
In the event a claim for benefits is denied or if the applicant has had
no response to such claim within ninety (90) days of its submission (in
which case the claim for benefits shall be deemed to have been denied),
the applicant or his duly authorized representative, at the applicant's
sole expense, may appeal the denial to the Administrator within ninety
(90) days of the receipt of written notice of the denial or sixty (60)
days from the date such claim is deemed to be denied. Upon request, the
Administrator will afford the applicant the right of a hearing with
respect to any finding of fact or determination within
- 49 -
<PAGE> 55
thirty (30) days of receipt of the notice of appeal. In pursuing such
appeal the applicant or his duly authorized representative:
(a) may request in writing that the Administrator review the
denial;
(b) may review pertinent documents; and
(c) may submit issues and comments in writing.
The decision on review shall be made within sixty (60) days of receipt
of the request for review or thirty (30) days following the hearing,
unless special circumstances require an extension of time for
processing, in which case a decision shall be rendered as soon as
possible, but not later than one hundred and twenty (120) days after
receipt of a request for review. If such an extension of time is
required, written notice of the extension shall be furnished to the
claimant before the end of the original sixty (60) day period. The
decision on review shall be made in writing, shall be written in a
manner calculated to be understood by the claimant, and shall include
specific references to the provisions of the Plan on which such denial
is based. If the decision on review is not furnished within the time
specified above, the claim shall be deemed denied on review.
The Administrator shall have and shall exercise complete discretionary
authority to construe, interpret and apply all of the terms of the
Plan, including all matters relating to eligibility for benefits,
amount, time or form of benefits, and any disputed or allegedly
doubtful terms. In exercising such discretion, the Administrator shall
give controlling weight to the intent of the Sponsor. All decisions of
the Administrator in the exercise of its authority under the Plan shall
be final and binding on the Plan, the Sponsor, each Employer, and all
Participants and Beneficiaries.
8.03 Records
All acts and determinations of the Administrator shall be duly recorded
and all such records together with such other documents as may be
necessary in exercising its duties under the Plan shall be preserved.
Such records and documents shall at all times be open for inspection
and for the purpose of making copies by any person designated by the
Employer. The Administrator shall provide such timely information,
resulting from the application of its responsibilities under the Plan,
as needed by the Employer for the effective discharge of its duties.
- 50 -
<PAGE> 56
ARTICLE IX
AMENDMENT AND TERMINATION OF THE PLAN
9.01 Amendment of the Plan
The Sponsor shall have the right at any time, with prospective or
retroactive effect, by duly adopted resolution of the Board or its
delegate, to modify, alter or amend the Plan in whole or in part;
provided, however, that:
(a) the duties, powers and liability of the Trustee hereunder
shall not be increased without its written consent;
(b) the amount of benefits which, at the time of any such
modification, alteration or amendment, shall appear as a
credit in the Individual Account of any Participant, Former
Participant or Beneficiary hereunder shall not be adversely
affected thereby;
(c) except as permitted by regulations under Section 411(d)(6) of
the Code, the amendment shall not eliminate or reduce any
benefit described in Section 411(d)(6)(A) of the Code or any
early retirement benefit or retirement-type subsidy or
optional form of benefit or add or adversely modify conditions
relating to such benefits; unless such protected benefits are
preserved with respect to benefits accrued as of the later of
the adoption date or effective date of the amendment; and
(d) no such amendment shall have the effect of reverting to the
Employer any part of the principal or income of the Trust
Fund.
9.02 Termination of the Plan
The Sponsor expects to continue the Plan indefinitely, but continuance
is not assumed as a contractual obligation of the Sponsor. The Sponsor
reserves the right at any time, with prospective or retroactive effect,
by duly adopted resolution of the Board, to terminate the Plan in whole
or in part. In the event of termination or partial termination of the
Plan under Code Section 411(d)(3)(A) or a complete discontinuance of
contributions to the Plan under Code Section 411(d)(3)(B), each
Participant affected thereby shall be fully vested in the amount to the
credit of his Individual Account.
- 51 -
<PAGE> 57
ARTICLE X
PROVISIONS RELATIVE TO EMPLOYERS INCLUDED IN PLAN
10.01 Method of Participation
Any Affiliate, with the approval of the Board, by taking appropriate
board action may become a party to the Plan, by adopting the Plan for
its Employees. With respect to any such Affiliate which becomes a party
to the Plan as an Employer, the Employer shall thereafter promptly
deliver to the Trustee provided for in Article VII hereof a certified
copy of the resolutions or other instrument showing the Board's
approval of such Affiliate becoming a party to the Plan, with any
variations agreed to by the Board. Any such Employer will thereby
deemed to have appointed the Sponsor to do all acts and things on its
behalf respecting the Plan to the end that the Trustee, Participants,
Beneficiaries, and all other persons may deal with the Sponsor as if it
were the only Employer under the Plan.
10.02 Withdrawal
Any one or more of the Employers included in the Plan may withdraw from
the Plan at any time by giving six (6) months advance notice in writing
of its or their intention to withdraw to the Board and the
Administrator (unless a shorter notice shall be agreed to by the
Board).
Upon receipt of notice of any such withdrawal, the Administrator shall
certify to the Trustee the equitable share of such withdrawing Employer
in the Trust Fund, as applicable, to be determined by the
Administrator. If the Plan is to be terminated with respect to such
Employer, the Administrator shall direct the Trustee to compute the
value of the Trust Fund as of the date of termination. That portion of
the Plan assets applicable to any Employer for which the Plan has not
been terminated shall be unaffected. If the Plan is not to be
terminated with respect to such Employer, that portion of the Trust
Fund attributable to such withdrawing Employer, shall, in the
discretion and in the manner determined by the Employer: (i) if a
qualified retirement plan is being established by the withdrawing
Employer, the Employer shall direct the Trustee to turn over such
amount to such trustee or insurer as may be designated by such
withdrawing Employer, and such property shall thereafter be held and
invested as a separate trust or under a separate group annuity or other
insurance contract, and shall be used and applied according to the
terms of a new agreement and declaration of trust or group annuity or
other insurance contract between the Employer so withdrawing and the
trustee or insurer so designated; or (ii) such amounts may be retained
in the Trust Fund with affected Individual Accounts being distributed
in accordance with the terms of the Plan in effect at the time of such
Employer's withdrawal.
Neither the segregation of the Trust Fund upon the withdrawal of an
Employer, nor the execution of a new agreement and declaration of trust
or group annuity or other insurance contract pursuant to any of the
provisions of this Section 10.02, shall operate
- 52 -
<PAGE> 58
to permit any part of the corpus or income of the Plan assets to be
used for or diverted to purposes other than for the exclusive benefit
of Participants, Former Participants and Beneficiaries.
- 53 -
<PAGE> 59
ARTICLE XI
MISCELLANEOUS
11.01 Governing Law
The Plan shall be construed, regulated and administered according to
the laws of the Commonwealth of Pennsylvania, except in those areas
preempted by the laws of the United States of America.
11.02 Construction
The headings and subheadings in the Plan have been inserted for
convenience of reference only and shall not affect the construction of
the provisions hereof. In any necessary construction the masculine
shall include the feminine and the singular the plural, and vice versa.
11.03 Administration Expenses
The expenses of administering this Plan and the Trust Fund shall be
charged against the Trust Fund except to the extent they are
specifically paid by the Employer.
11.04 Participants' Rights
No Participant in the Plan shall acquire any right to be retained in
the Employer's employ by virtue of the Plan, nor, upon his dismissal,
or upon his voluntary termination of employment, shall he have any
right or interest in and to the Trust Fund other than as specifically
provided herein. The Employer shall not be liable for the payment of
any benefit provided for herein; all benefits hereunder shall be
payable only from the Trust Fund.
11.05 Spendthrift Clause
None of the benefits, payments, proceeds, distributions or interests
therein under this Plan shall be subject to the claim of any creditor
of the Participant or Former Participant or to the claim of any
creditor of any Beneficiary hereunder or to any legal process by any
creditor of such Participant, Former Participant or any such
Beneficiary; and neither such Participant, Former Participant or any
such Beneficiary shall have any right to alienate, commute, anticipate,
or assign any of the benefits, payments, proceeds or distributions
under this Plan, except as specifically provided therein. The preceding
sentence shall not apply with respect to a domestic relations order
which is determined to be a Qualified Domestic Relations Order as
defined in Section 414(p) of the Code, or to interests under the Plan
pledged as security for loans under the loan program of this Plan
authorized by Section 6.04.
- 54 -
<PAGE> 60
A domestic relations order is a judgment, decree or order of a court
(including approval of a property settlement) made pursuant to state
domestic relations law (including a community property law) that
provides child support, alimony payments, or marital property rights to
a spouse, former spouse, child or other dependent. A Qualified Domestic
Relations Order is a domestic relations order which creates or
recognizes the existence of an alternate payee's right to, or assigns
to an alternate payee the right to, receive all or a portion of the
benefits payable with respect to a participant under a plan. Such order
must clearly specify: (i) the name and last known mailing address of
the participant and each alternate payee covered by the order; (ii) the
amount or percentage of the participant's benefits to be paid by the
plan to each such alternate payee, or the manner in which such amount
or percentage is to be determined; (iii) the number of payments or
period to which such order applies; and (iv) each plan to which it
applies. Such order cannot require the plan to provide any type or form
of benefit, or any option, not otherwise provided under the plan,
cannot require the plan to provide increased benefits, and cannot
require the payment of benefits to an alternate payee which are
required to be paid to another alternate payee pursuant to another
order previously determined to be a Qualified Domestic Relations Order.
In the event that the Plan receives a domestic relations order, the
Administrator shall follow the procedures set forth in paragraph (6) of
Section 414(p) of the Code. For any period during which it is being
determined whether a domestic relations order is qualified, the
Administrator shall follow the procedures set forth in paragraph (7) of
Section 414(p) of the Code.
11.06 Merger, Consolidation or Transfer
The Board may direct a merger or consolidation of the Plan with another
plan or a transfer of assets or liabilities from the Plan to another
plan, in the same manner and subject to the same conditions as an
amendment to the Plan under Section 9.01. In the event of the merger or
consolidation of the Plan with another plan or transfer of assets or
liabilities from the Plan to another plan, each then Participant,
Former Participant or Beneficiary shall not, as a result of such event,
be entitled on the day following such merger, consolidation or transfer
under the termination of the Plan provisions to a lesser benefit than
the benefit he was entitled to on the date prior to the merger,
consolidation or transfer if the Plan had then terminated.
11.07 Counterparts
The Plan and the Trust Agreement may be executed in any number of
counterparts, each of which shall constitute but one and the same
instrument and may be sufficiently evidenced by any one counterpart.
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<PAGE> 61
ARTICLE XII
TOP-HEAVY PLAN PROVISIONS
12.01 Application
The provisions of this Article XII shall apply only if the Plan becomes
"top-heavy" (as defined in Section 416(g) of the Code), aggregating
this Plan and any other qualified plan sponsored by the Employer or an
Affiliate in which a key employee is a Participant and each other plan
of the Employer or an Affiliate (including any terminated Plan that
covered a key employee and was maintained within the five (5) year
period ending on the determination date) which enables this Plan or any
plan in which a key employee participates to meet the requirements of
Sections 401(a)(4) or 410(b) of the Code ("required aggregation
group"). In addition, the Administrator may elect to include with the
required aggregation group any other plan or plans of the Employer or
an Affiliate not required to be included in the required aggregation
group so long as their inclusion as a part of the group would not cause
such group to fail to meet the requirements of Section 401(a) and 410
of the Code ("permissive aggregation group").
A plan is top-heavy, generally, if more than sixty percent (60%) of the
value of the Individual Accounts of Participants in this Plan
(disregarding the Individual Accounts of those Participants who have
performed no service for the Employer during the five (5) year period
ending on the determination date) and the accrued benefit of any member
in any defined benefit plan maintained by his Employer or an Affiliate
as of any "determination date" (the last day of the prior Plan Year),
is attributable to key employees. Computation of the top-heavy ratio
shall be determined in accordance with Section 416(g) of the Code. The
present value of accrued benefits in any Employer or Affiliate
sponsored defined benefit plan shall be determined on the valuation
date used for computing Plan costs under Section 412 of the Code and
shall be determined on the basis of the actuarial assumptions specified
in such defined benefit plan for purposes of making the top-heavy
determination. If the Plan becomes top-heavy as of any determination
date, then effective in the next succeeding Plan Year, the provisions
of this Article XII shall apply.
12.02 Special Vesting Rule
Notwithstanding the provisions of Article V hereof to the contrary, a
Participant shall be fully vested in the balance of his Individual
Account upon the completion of six (6) rather than seven (7) years of
Service as determined in accordance with the following schedule:
<TABLE>
<CAPTION>
Years of Service Vested Percentage
---------------- -----------------
<S> <C>
Less than 2 years 0%
2 years 20%
3 years 40%
4 years 60%
</TABLE>
- 56 -
<PAGE> 62
<TABLE>
<S> <C>
5 years 80%
6 or more years 100%
</TABLE>
If the Plan becomes a top-heavy plan and subsequently ceases to be
such:
(i) any balance of the Participant's Individual Account which was
vested before the Plan ceased to be top-heavy shall remain
vested; and
(ii) any Participant with three (3) or more years of Service shall
be given the option to remain under the top-heavy vesting
schedule contained in this Section 12.02, in lieu of the
vesting schedule contained in Article V.
12.03 Special Minimum Contribution
Notwithstanding the provisions of the Plan hereof to the contrary, each
Participant of this Plan who is not a key employee who is employed by
the Employer on the last day of the Plan Year (without regard to the
number of Hours of Service earned in such Plan Year) shall be entitled
to a minimum contribution equal to the lesser of: (a) three percent
(3%) of the Participant's total non-deferred compensation (as defined
in Section 4.06 of the Plan and Section 415 of the Code) received from
the Employer for the year and (b) the highest percentage of total
non-deferred compensation (as defined above) contributed on behalf of a
key employee under this Plan. However, where any Participant who is
entitled to the minimum contribution provided by this Section 12.03
also is a participant (and not a key employee) in a top-heavy defined
contribution plan of the Employer ("other plan"), and the required
top-heavy minimum contribution is provided under such other plan, no
minimum contribution shall be required under this Plan.
12.04 Special Maximum Combined Plans Limit
Notwithstanding the provisions of Section 4.08 of Article IV to the
contrary, the denominator of the defined contribution plan fraction and
defined benefit plan fraction shall, if the Plan becomes top-heavy, be
amended to read 1.0 rather than 1.25.
12.05 Key Employee and Non-Key Employee Defined
The term key employee shall have the same meaning as is specified in
Section 416(i)(1) of the Code, i.e.: (i) certain officers of the
Employer having an annual compensation greater than fifty percent (50%)
of the defined benefit plan dollar limitation in effect under Section
415(b)(1)(B) of the Code for any such Plan Year, (ii) the ten (10)
Employees owning (or considered as owning under Code Section 318) more
than a one half percent (1/2%) interest and one of the tenth largest
equity interests of the Employer whose annual compensation is greater
than the defined contribution dollar limitation in effect under Code
Section 415 of any such Plan Year, (iii) any five percent (5%) owner of
the Employer and (iv) any one percent (1%) owner of the Employer whose
annual compensation in any Plan Year is more than one hundred and fifty
thousand dollars ($150,000). The term key employee as of any
determination date shall be applied to any Employee, former Employee,
Participant, Former Participant or retired Participant (or
- 57 -
<PAGE> 63
his Spouse or Beneficiary) who was a key employee during the Plan Year
(ending with the determination date) or in any of the four (4)
preceding Plan Years. Any Employee who is not a key employee shall be a
non-key employee and shall include an Employee who was formerly a key
employee.
- 58 -
<PAGE> 64
ARTICLE XIII
ADOPTION OF THE PLAN
As evidenced of its adoption of the Plan as amended and restated, the Sponsor
and Employer have caused this instrument to be executed by their officer and
their corporate seals affixed hereto this _________ day of
________________________, 1994.
ATTEST: (SEAL) EDUCATION MANAGEMENT CORPORATION
By:__________________________ By:_____________________________
Secretary
- 59 -
<PAGE> 65
APPENDIX A
PARTICIPATING EMPLOYERS
Art Institute of Atlanta
Art Institute of Dallas
Art Institute of Ft. Lauderdale
Art Institute of Houston
Art Institute of Pittsburgh
Art Institute of Philadelphia
Art Institute of Seattle
Colorado Institute of Art
National Center for Paralegal Training - Atlanta
National Center for Paralegal Training - New York
Ocean World (prior to November 1, 1994)
Central Services Staff
<PAGE> 66
APPENDIX B
LOAN PROCEDURES
The following procedures shall be followed by the Administrator in approving and
administering loans to Plan Participants. Loans shall only be available to
Participants who are Parties in Interest, as that term is defined in Section
3(14) of ERISA.
(a) Administrator directed loans.
The Administrator may, upon the application of any Participant
who is a Party in Interest in the Plan, direct the Trustee to
make a loan [minimum value of one thousand dollars ($1,000)]
to such Participant. The amount of such loan shall not exceed
fifty percent (50%) of the balance of the Participant's
Before-Tax Savings Account, Rollover Account or After-Tax
Contribution Account at the time of the loan application.
Loans shall be made available to all Participants who are
Parties in Interest in a uniform nondiscriminatory manner and
on a reasonably equivalent basis and loans shall not be made
available to Highly Compensated Employees, officers or
shareholders in an amount (percentage of vested interest)
greater than the amount made available to other Participants.
When the loan is made, a loan note and loan agreement shall be
entered into specifying the interest rate, repayment schedule
and security for the loan. In the event that the amount of
such repayment and/or distributions is not sufficient to repay
the remaining balance of any such loans, such Participant
shall be liable for and continue to make payments on any
balance still due from him.
(b) Interest rate to be charged.
Interest shall be charged on loans at a rate commensurate with
the rate that would be charged by a commercial lender for
loans of type being provided. The rate of interest shall be
comparable to the rate used by a bank used by the Employer as
of the first day of the month that the loan is approved for
comparable loans. This rate shall remain in force for the term
of the loan, but shall be revised if the loan is renegotiated
or extended.
(c) Security for the Loan.
Any loans made under this paragraph must be adequately
secured. The loan shall be secured by using no more than fifty
percent (50%) of the balance of the Participant's Employer
Discretionary Contribution Account, Employer Matching
Contribution Account, Before-Tax Savings Account, Rollover
Account and After-Tax Contribution Account as security for the
loan.
(d) Term of the loan.
Loans shall provide for periodic repayment over a period not
to exceed five (5) years. Except, however, any loan used to
acquire any dwelling unit which within
<PAGE> 67
a reasonable time shall be used as the principal residence of
the Participant may be repaid over a period of time that may
not exceed twenty (20) years. The loan must provide for
substantially level amortization (with payments not less
frequently than quarterly) over its term.
(e) Further limits on amount of loan.
A loan may not be granted to the extent that the total
outstanding balance of loans made pursuant to this Plan and
all Plans of the Employer and any affiliate would exceed the
lesser of:
(i) $50,000 reduced by the excess (if any) of:
(A) the highest outstanding balance (or
balances) of all such loans during the one
(1) year period ending on the day before the
date on which such loan was made, over
(B) the outstanding balance of all such loans on
the date on which such loan is made; or
(ii) one-half (1/2) of the present value of the portion of
such Participant's Individual Account available for a
loan.
(f) Method of repayment.
For all active Participants, the method of repayment shall be
payroll deduction unless other arrangements are made with the
Administrator. For any other Participants, the method of
repayment shall be payment via check or money order by the
last day of each month to the Administrator.
(g) Default.
A default shall occur upon the failure to make any required
payment. If the defaulting Participant is currently eligible
to receive a distribution of his account balance, the
Administrator may immediately execute upon the collateral. If
the defaulting Participant is not currently eligible to
receive a distribution but is currently employed, the
Administrator shall institute or continue payroll deductions
until the balance is repaid or the Participant is eligible for
a distribution, whichever occurs first.
(h) A Participant may have only one (1) home loan and one (1)
other loan outstanding at any time.
(i) Loan repayments are invested in the same manner as
Before-Tax Savings.
- 2 -
<PAGE> 68
APPENDIX C
INVESTMENT FUNDS
Effective May 1, 1992, the investment funds from which a Participant may elect
to invest his Individual Account are:
- - Fidelity Managed Income Portfolio
- - Fidelity Intermediate Bond Fund
- - Fidelity Balanced Fund
- - Fidelity Magellan Fund
- - Fidelity Growth Company Fund
<PAGE> 1
Exhibit 10.12
EDUCATION MANAGEMENT CORPORATION
1996 EMPLOYEE STOCK PURCHASE PLAN
SEPTEMBER 30, 1996
ARTICLE I - PURPOSE
1.01. Purpose
The Education Management Corporation 1996 Employee Stock Purchase Plan (the
"Plan") is intended to provide a method whereby employees of Education
Management Corporation (the "Company") and its subsidiaries will have an
opportunity to acquire a proprietary interest in the Company through the
purchase of shares of the Common Stock of the Company. It is the intention of
the Company that the Plan qualify as an "employee stock purchase plan" under
Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"). The
provisions of the Plan shall be construed so as to comply in all respects with
the requirements of the Code applicable to employee stock purchase plans. The
Plan was originally approved by the Board of Directors of the Company on August
15, 1996. This is an amendment and restatement of the Plan reflecting changes
made after August 15, 1996 but prior to the effective date of the Plan.
ARTICLE II - DEFINITIONS
2.01. "Account" shall mean a bookkeeping account to which a Participant's
payroll deductions are credited in accordance with Section 4.02.
2.02. "Adjustment Transaction" shall have the meaning given to that term in
Section 10.04.
2.03. "Base Pay" shall mean regular straight-time earnings excluding payments
for overtime, shift premium, bonuses and other special payments, commissions
and other marketing incentive payments.
2.04. "Board" shall mean the Board of Directors of the Company.
2.05. "Closing Date" shall mean the date of closing of the initial public
offering of the Company's Common Stock.
2.06. "Committee" shall mean the committee described in Article IX.
2.07. "Common Stock" shall mean the common stock, par value $.01 per share, of
the Company.
<PAGE> 2
2.08. "Employee" shall mean any person who is employed on a full-time or
part-time basis by the Company or any of its subsidiaries and is customarily
scheduled to work at the rate of 300 or more hours per year; provided, however,
that no person shall be excluded from participation in the Plan who is required
to be included pursuant to Section 423 of the Code.
2.09. "Fair Market Value" shall mean, as of any applicable date: (i) if the
Common Stock is listed on a national securities exchange or is authorized for
quotation on The Nasdaq Stock Market's National Market ("NNM"), the closing
price, regular way, of the Common Stock on such exchange or NNM, as the case
may be, or if no such reported sale of the Common Stock shall have occurred on
such date, on the next preceding date on which there was such a reported sale;
or (ii) if the Common Stock is not listed for trading on a national securities
exchange or authorized for quotation on NNM, the closing bid price as reported
by The Nasdaq Stock Market or The Nasdaq SmallCap Market (if applicable), or if
no such prices shall have been so reported for such date, on the next preceding
date for which such prices were so reported; or (iii) if the Common Stock is
not listed for trading on a national securities exchange or authorized for
quotation on NNM, The Nasdaq Stock Market or The Nasdaq SmallCap Market (if
applicable), the last reported bid price published in the "pink sheets" or
displayed on the National Association of Securities Dealers, Inc. ("NASD")
Electronic Bulletin Board, as the case may be; or (iv) if the Common Stock is
not listed for trading on a national securities exchange, or is not authorized
for quotation on NNM, The Nasdaq Stock Market or The Nasdaq SmallCap Market, or
is not published in the "pink sheets" or displayed on the NASD Electronic
Bulletin Board, the Fair Market Value of the Common Stock as determined in good
faith by the Committee.
2.10. "Maximum Contribution" shall mean the maximum amount of Base Pay which
each Employee may deduct for the purpose of purchasing shares of Common Stock
under the Plan. The Maximum Contribution, which shall be five percent (5%) or
such other percentage (in whole percentages) of Base Pay as may from time to
time be determined from time to time by the Committee on a uniform basis with
respect to all Participants; provided, however, that such maximum shall not
apply with respect to the first Offering Period and the first Offering Period
shall be disregarded in determining the Maximum Contribution for all subsequent
Offering Periods.
2.11. "Offering Commencement Date" shall mean each January 1, April 1, July 1
and October 1 during the term of the Plan; provided, however, that the Offering
Commencement Date with respect to the first Offering Period shall be the
Closing Date and the Offering Commencement Date with respect to the second
Offering Period shall be a date designated by the Committee.
2.12. "Offering Period" shall mean each three-month period beginning on an
Offering Commencement Date; provided, however, that the first Offering Period
shall be the Closing Date and the second Offering Period shall be the period
beginning on the first Offering Commencement Date applicable thereto and ending
on such date as the Committee shall determine.
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2.13. "Offering Termination Date" shall mean the last day of each Offering
Period.
2.14. "Option" shall mean an option to acquire shares of Common Stock deemed
to have been granted to a Participant as described in Section 5.02.
2.15. "Option Price" shall mean the purchase price of shares of Common Stock
subject to an Option as described in Section 5.03.
2.16. "Participant" shall mean an Employee who elects to participate in the
Plan in accordance with Article III.
ARTICLE III - ELIGIBILITY AND PARTICIPATION
3.01. Initial Eligibility
Any Employee is eligible to participate in the Plan for each Offering Period
commencing after such Employee's first day of employment with the Company or
any of its subsidiaries.
3.02. Restrictions on Participation
Notwithstanding any provisions of the Plan to the contrary, no Employee
shall be permitted to participate in the Plan or shall be deemed to have been
granted an Option under the Plan:
(a) if, immediately after the grant of such Option, such Employee would
own stock, and/or hold outstanding Options to purchase stock, possessing in the
aggregate 5% or more of the total combined voting power or value of all classes
of stock of the Company (for purposes of this paragraph, the rules of Section
424(d) of the Code shall apply in determining stock ownership of any Employee);
or
(b) which permits his or her rights to purchase stock under all employee
stock purchase plans (as described in Section 423 of the Code) of the Company
to accrue at a rate which exceeds $25,000 in Fair Market Value of the stock
(determined at the time such Option is granted) for each calendar year in which
such Option is outstanding.
3.03. Commencement of Participation
An eligible Employee may become a Participant by completing an authorization
for a payroll deduction on the form provided by the Company and filing it with
the Company on or before the Offering Commencement Date for the applicable
Offering Period; provided, however, that for the first and second Offering
Periods under the Plan, such authorization may be filed on or before such date
as is set by the Committee. Except in the case of the first Offering Period,
payroll deductions for a Participant, as elected in accordance with
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Article IV, shall commence in the calendar month in which the Offering
Commencement Date for the applicable Offering Period occurs and shall remain in
effect throughout that Offering Period and each subsequent Offering Period
until modified or terminated as provided in Section 4.03 and Article VII. With
respect to the first Offering Period, a Participant shall pay the Option Price
by check or by such other means as the Committee may approve.
ARTICLE IV - PAYROLL DEDUCTIONS
4.01. Amount of Deduction
At the time a Participant files his or her authorization for payroll
deduction, he or she shall elect to have deductions made from his or her Base
Pay on each payday during the time he or she is a Participant in an amount not
in excess of the Maximum Contribution; provided, however, that there shall be
no payroll deductions with respect to the first Offering Period.
4.02. Participant's Account
All payroll deductions made for a Participant shall be credited to his or
her Account under the Plan. A Participant may not make any separate cash
payment into such Account. Interest shall be credited monthly on the amount
allocated to each Participant's Account at the rate of five percent (5%) per
annum or such other rate as may be established by the Committee from time to
time.
4.03. Changes in Payroll Deductions
A Participant may discontinue participation in the Plan as provided in
Article VII, but no other change can be made during an Offering Period and,
specifically, a Participant may not alter the amount of Base Pay to be taken as
a payroll deduction for that Offering Period. A Participant may elect to
change or terminate his or her payroll deductions for a subsequent Offering
Period by providing written notice to the Committee on or before the Offering
Commencement Date for such Offering Period.
ARTICLE V - OFFERING PERIODS AND GRANTING OF OPTIONS
5.01. Offering Periods
Except as otherwise provided in this Plan or as otherwise determined by the
Committee, in each calendar year during the term of the Plan there shall be
four Offering Periods, beginning on each Offering Commencement Date and ending
on the next following Offering Termination Date.
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5.02. Number of Option Shares
Subject to Section 3.02, on the Offering Commencement Date for each Offering
Period, a Participant shall be deemed to have been granted an Option to
purchase the number of whole shares of Common Stock as can be purchased at the
Option Price with the amount credited to such Participant's Account as of the
Offering Termination Date with respect to that Offering Period; provided,
however, that if the number of shares of Common Stock remaining available for
issuance under the Plan, and, in the case of the first Offering Period, the
number of shares of Common Stock available for purchase in such Offering
Period, is less than the number of shares to be purchased as of an Offering
Termination Date, a pro rata allocation of the available shares shall be made
based upon the respective amounts then credited to Participants' Accounts, and
the cash balance credited to each such Account shall be returned to the
Participant whose Account has been so credited. No fractional shares will be
issued under the Plan.
5.03. Option Price
The Option Price with respect to an Offering Period shall be 85%, or such
higher percentage (not in excess of 100%) as may be established by the
Committee prior to the Offering Commencement Date of such Offering Period, of
the lower of:
(a) the Fair Market Value of the Common Stock on the Offering
Commencement Date; or
(b) the Fair Market Value of the Common Stock on the Offering
Termination Date.
Notwithstanding the foregoing, in the case of the first Offering Period, the
Option Price shall equal the public offering price less the underwriting
discount and commissions in connection with the public offering of the
Company's Common Stock.
ARTICLE VI - EXERCISE OF OPTION
6.01. Automatic Exercise
Unless a Participant gives written notice of withdrawal from the Plan to the
Company as provided in Article VII prior to the Offering Termination Date of an
Offering Period, the Option deemed to have been granted to such Participant
under Section 5.02 hereof will be deemed to have been exercised in full
automatically on the Offering Termination Date applicable to such Offering
Period, and any excess amount credited to such Participant's Account at that
time (due to the fact that fractional shares will not be issued under the Plan)
will be carried over into the Participant's Account for the subsequent Offering
Period, or refunded if the Participant is not participating in the subsequent
Offering Period.
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6.02. Delivery of Common Stock
Following the Offering Termination Date of each Offering Period, the Company
will deliver to each Participant, as appropriate, one or more stock
certificates representing the shares of Common Stock purchased upon exercise of
the Option deemed to have been granted to such Participant in such Offering
Period.
ARTICLE VII - WITHDRAWAL
7.01. In General
A Participant may withdraw payroll deductions credited to his or her Account
during an Offering Period at any time prior to the Offering Termination Date of
such Offering Period by giving written notice to the Company. All of the
Participant's payroll deductions credited to his or her Account for such
Offering Period, without interest, will be paid to such Participant after
receipt of his or her notice of withdrawal, and no further payroll deductions
will be made with respect to such Participant during such Offering Period or
any subsequent Offering Period unless such Participant again commences
participation in accordance with Section 3.03.
7.02. Effect on Subsequent Participation
A Participant who withdraws from the Plan shall be eligible to participate
again in the Plan beginning with the first Offering Period which commences
after the first anniversary of the date of withdrawal.
7.03. Termination of Employment
Upon termination of the Participant's employment for any reason other than
death while in the employ of the Company, the payroll deductions credited to
such Participant's Account for the Offering Period during which such
termination occurs will be returned to him or her, or, in the case of the death
of such Participant subsequent to the termination of his or her employment, to
the person or persons entitled thereto under Section 10.01.
7.04. Termination of Employment Due to Death
Upon termination of the Participant's employment because of death, the
Participant's beneficiary (as defined in Section 10.01) shall have the right to
elect, by written notice given to the Company prior to the earlier of the
Offering Termination Date for the Offering Period during which the Participant
died or the date which is 60 days following the date of the Participant's
death, either:
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(a) to withdraw all of the payroll deductions credited to the Participant's
Account, or
(b) to exercise the Participant's Option on such Offering Termination Date
for the number of full shares of stock which the accumulated payroll deductions
credited to the Participant's Account at the date of the Participant's death
will purchase at the applicable Option Price, and any excess in such Account
will be returned to said beneficiary, without interest.
In the event that no such written notice of election shall be duly received
by the Company, the beneficiary shall automatically be deemed to have elected,
pursuant to paragraph (a), to withdraw the Participant's payroll deductions.
ARTICLE VIII - STOCK
8.01. Maximum Shares
The maximum number of shares of Common Stock which shall be issued under the
Plan (subject to adjustment pursuant to Section 10.04) during the term hereof
shall be 750,000 shares plus 175,000 shares to be made available only in the
first Offering Period. The Committee shall have the authority and discretion
to establish an annual limitation on the number of shares of Common Stock
issuable under the Plan; provided, however, that for the first year of the
Plan's operation, no more than 150,000 shares of Common Stock shall be issuable
under the Plan, plus such number of shares as are issued in the first Offering
Period. Such shares may be authorized but unissued shares or treasury shares,
as the Committee may determine. If an Option shall expire or terminate without
being exercised in full, any shares not purchased pursuant to such Option shall
again be available for granting Options hereunder.
8.02. Participant's Interest in Option Stock
The Participant will have no interest in the shares of Common Stock covered
by an Option deemed to have been granted hereunder until such Option has been
exercised under Section 6.01 or Section 7.04(b).
8.03. Registered Ownership of Common Stock
Shares of Common Stock to be delivered to a Participant under the Plan will
be registered in the name of the Participant, or, if the Participant so directs
by written notice to the Company prior to the Offering Termination Date
applicable thereto, in the names of the Participant and one such other person
as may be designated by the Participant, as joint tenants with rights of
survivorship or as tenants by the entireties, to the extent permitted by
applicable law.
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8.04. Restrictions on Exercise
The Board may, in its discretion, require as conditions to the exercise of
any Option that the shares of Common Stock reserved for issuance upon the
exercise of the Option shall have been duly listed, upon official notice of
issuance, on a stock exchange or NNM, and that either:
(a) a Registration Statement under the Securities Act of 1933, as amended,
with respect to said shares shall be effective, or
(b) the Participant shall have represented at the time of purchase, in
form and substance satisfactory to the Company, that it is his or her intention
to purchase the shares for investment and not for resale or distribution.
ARTICLE IX - ADMINISTRATION
9.01. Appointment of Committee
The Board shall appoint a Committee to administer the Plan, which shall
consist of no fewer than two members of the Board. No member of the Committee
shall be eligible to purchase Common Stock under the Plan.
9.02. Authority of Committee
Subject to the express provisions of the Plan, the Committee shall have
plenary authority in its sole and absolute discretion to interpret and construe
any and all provisions of the Plan, to adopt rules and regulations for
administering the Plan, and to make all other determinations deemed necessary
or advisable for administering the Plan. The Committee's determination on the
foregoing matters shall be conclusive.
ARTICLE X - MISCELLANEOUS
10.01. Designation of Beneficiary
A Participant may file a written designation of a beneficiary for purposes
of the Plan. Such designation of beneficiary may be changed by the Participant
at any time by written notice to the Company. In the event of the death of a
Participant and in the absence of a beneficiary validly designated under the
Plan who is living at the time of such Participant's death, the beneficiary
shall be the executor or administrator of the estate of the Participant, of if
no such executor or administrator has been appointed (to the knowledge of the
Company), the beneficiary shall be, in the sole and absolute discretion of the
Company, the spouse or any one or more dependents of the Participant. No
beneficiary shall, prior to the death of the Participant by whom he or she has
been designated, acquire any interest under the Plan.
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10.02. Transferability
Neither payroll deductions credited to a Participant's Account nor any
rights with regard to the exercise of an Option or to receive Common Stock
under the Plan may be assigned, transferred, pledged, or otherwise disposed of
in any way by the Participant other than by will or the laws of descent and
distribution. Any such attempted assignment, transfer, pledge or other
disposition shall be without effect, except that the Company may, in its sole
discretion, treat such act as an election to withdraw funds in accordance with
Section 7.01.
10.03. Use of Funds
All payroll deductions received or held by the Company under the Plan may be
used by the Company for any corporate purpose and the Company shall not be
obligated to segregate such payroll deductions or any Accounts.
10.04. Equitable Adjustment
If, while any Options are outstanding, the outstanding shares of Common
Stock of the Company have increased, decreased, changed into, or been exchanged
for a different number or kind of shares or securities of the Company or any
other entity through reorganization, merger, recapitalization,
reclassification, stock split, reverse stock split or other transaction (an
"Adjustment Transaction"), appropriate and proportionate adjustments may be
made by the Committee in the number and/or kind of shares which are subject to
purchase under outstanding Options, and/or the Option Price applicable to such
outstanding Options or the Committee, if it deems it appropriate, may convert
Options into the right to receive cash or other property pursuant to the
Adjustment Transaction. In addition, in any such event, the number and/or kind
of shares which may be offered for purchase under the Plan may also be
proportionately adjusted if deemed appropriate by the Committee.
10.05. Amendment and Termination
The Board shall have complete power and authority to terminate or amend the
Plan. No termination, modification, or amendment of the Plan may, without the
consent of a Participant then having an unexercised Option under the Plan,
adversely affect the rights of such Participant with respect to such Option.
The Plan shall terminate automatically on the tenth (10th) anniversary of its
effective date unless sooner terminated by action of the Board.
10.06. Effective Date
The Plan shall become effective immediately prior to the closing of the
initial public offering of the Company's Common Stock but is subject to the
approval of the stockholders of the Company.
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10.07. Costs and Expenses
No brokerage commissions or fees shall be charged by the Company in
connection with the purchase of shares of Common Stock by Participants under
the Plan. All costs and expenses incurred in administering the Plan shall be
borne by the Company. Any amounts credited to Accounts shall constitute
general assets of the Company and nothing in the Plan shall be construed to
create a trust or fiduciary relationship with respect to such Accounts.
10.08. No Employment Rights
The Plan does not, directly or indirectly, create any right for the benefit
of any Employee or class of Employees to purchase any shares under the Plan, or
create in any Employee or class of Employees any right with respect to
continuation of employment by the Company and it shall not be deemed to
interfere in any way with the Company's right to terminate, or otherwise
modify, an Employee's employment at any time.
10.09. Governing Law
The law of the Commonwealth of Pennsylvania, other than the conflict of laws
provisions of such law, will govern all matters relating to the Plan.
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Exhibit 10.13
EDUCATION MANAGEMENT CORPORATION
1996 STOCK INCENTIVE PLAN
ARTICLE I
PURPOSE AND ADOPTION OF THE PLAN
1.01 PURPOSE. The purpose of the Education Management Corporation 1996 Stock
Incentive Plan (hereinafter referred to as the "Plan") is to assist in
attracting and retaining highly competent employees and directors and to act as
an incentive in motivating selected officers and other key employees and
directors of Education Management Corporation and its Subsidiaries to achieve
long-term corporate objectives.
1.02 ADOPTION AND TERM. The Plan has been approved by the Board of Directors
of Education Management Corporation, to be effective as of the closing date of
the initial public offering of equity securities by the Company (the "Effective
Date"), but is subject to the approval of the stockholders of the Company. The
Plan shall remain in effect until terminated by action of the Board; provided,
however, that no Incentive Stock Option may be granted hereunder after the
tenth anniversary of the Effective Date and the provisions of Articles VII and
VIII with respect to performance-based awards to "covered employees" under
Section 162(m) of the Code) shall expire as of the fifth anniversary of the
Effective Date.
ARTICLE II
DEFINITIONS
For the purpose of this Plan, capitalized terms shall have the following
meanings:
2.01 AWARD means (a) any grant to a Participant of one or a combination of
Non-Qualified Stock Options or Incentive Stock Options described in Article VI,
Stock Appreciation Rights described in Article VI, Restricted Shares described
in Article VII and Performance Awards described in Article VIII and (b) any
grant to a Non-Employee Director of a Non-Employee Director Award described in
Article IX.
<PAGE> 2
2.02 AWARD AGREEMENT means a written agreement between the Company and a
Participant or a written acknowledgment from the Company to a Participant
specifically setting forth the terms and conditions of an Award granted under
the Plan.
2.03 AWARD PERIOD means, with respect to an Award, the period of time set
forth in the Award Agreement during which specified target performance goals
must be achieved or other conditions set forth in the Award Agreement must be
satisfied.
2.04 BENEFICIARY means an individual, trust or estate who or which, by a
written designation of the Participant filed with the Company or by operation
of law, succeeds to the rights and obligations of the Participant under the
Plan and the Award Agreement upon the Participant's death.
2.05 BOARD means the Board of Directors of the Company.
2.06 CHANGE IN CONTROL means, and shall be deemed to have occurred upon the
occurrence of, any one of the following events:
(a) The acquisition in one or more transactions by any individual, entity
(including any employee benefit plan or any trust for an employee benefit
plan) or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a
"Person") of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of shares or other securities (as defined
in Section 3(a)(10) of the Exchange Act) representing 50% or more of either
(A) the shares of common stock of the Company (the "Company Common Stock") or
(B) the combined voting power of the securities of the Company entitled to
vote generally in the election of directors (the "Company Voting
Securities"), in each case calculated on a fully-diluted basis in accordance
with generally accepted accounting principles after giving effect to the
acquisition; provided, however, that none of the following acquisitions shall
constitute a Change in Control as defined in this clause (i): (x) any
acquisition by any shareholder of the Company immediately prior to the
Effective Date (a "Current Shareholder") or any Permitted Transferee (as
defined in the Stockholders Agreement among the Company and certain of its
shareholders as in effect immediately prior to the Effective Date (the
"Stockholders Agreement")) or any group that consists solely of Current
Shareholders and Permitted Transferees (a "Permitted Group") or (y) any
acquisition by the Company so long as such acquisition does not result in any
Person (other than any Current Shareholder, Permitted Transferee or Permitted
Group) beneficially owning shares or securities representing 50% or more of
either the Company Common Stock or Company Voting Securities; or
(b) Any election has occurred of persons to the Board that causes
two-thirds of the Board to consist of persons other than (i) persons who were
members of the Board on the Effective Date and (ii) persons who were
nominated for elections as
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members of the Board at a time when two-thirds of the Board consisted of
persons who were members of the Board on the Effective Date; provided,
however, that any person nominated for election by a Board at least
two-thirds of whom constituted persons described in clauses (i) and/or (ii)
or by persons who were themselves nominated by such Board shall, for this
purpose, be deemed to have been nominated by a Board composed of persons
described in clause (i);
(c) The shareholder rights plan of the Company is triggered and the Board
fails to redeem the rights within the time provided for in the rights
agreement;
(d) Approval by the shareholders of the Company of a reorganization,
merger, consolidation or similar transaction (a "Reorganization
Transaction"), in each case, unless, immediately following such
Reorganization Transaction, more than 50% of, respectively, the outstanding
shares of common stock (or similar equity security) of the corporation or
other entity resulting from or surviving such Reorganization Transaction and
the combined voting power of the securities of such corporation or other
entity entitled to vote generally in the election of directors, in each case
calculated on a fully-diluted basis in accordance with generally accepted
accounting principles after giving effect to such Reorganization Transaction,
is then beneficially owned, directly or indirectly, by the Current
Shareholders and Permitted Transferees; or
(e) Approval by the shareholders of the Company of (A) a complete
liquidation or dissolution of the Company or (B) the sale or other
disposition of all or substantially all of the assets of the Company, other
than to a corporation or other entity, with respect to which immediately
following such sale or other disposition more than 50% of, respectively, the
shares of common stock (or similar equity security) of such corporation or
other entity and the combined voting power of the securities of such
corporation or other entity entitled to vote generally in the election of
directors, in each case calculated on a fully-diluted basis in accordance
with generally accepted accounting principles after giving effect to such
sale or other disposition, is then beneficially owned, directly or
indirectly, by the Current Shareholders and Permitted Transferees.
2.07 CODE means the Internal Revenue Code of 1986, as amended. References to
a section of the Code shall include that section and any comparable section or
sections of any future legislation that amends, supplements or supersedes said
section.
2.08 COMMITTEE means the Committee defined in Section 3.01.
2.09 COMPANY means Education Management Corporation, a Pennsylvania
corporation, and its successors.
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2.10 COMMON STOCK means Common Stock of the Company, par value $.01 per
share.
2.11 COMPANY VOTING SECURITIES means the combined voting power of all
outstanding voting securities of the Company entitled to vote generally in the
election of directors to the Board.
2.12 DATE OF GRANT means the date designated by the Committee as the date as
of which it grants an Award, which shall not be earlier than the date on which
the Committee approves the granting of such Award.
2.13 EXCHANGE ACT means the Securities Exchange Act of 1934, as amended.
2.14 EXERCISE PRICE means, with respect to a Stock Appreciation Right, the
amount established by the Committee in the Award Agreement which is to be
subtracted from the Fair Market Value on the date of exercise in order to
determine the amount of the payment to be made to the Participant, as further
described in Section 6.02(b).
2.15 FAIR MARKET VALUE means, as of any applicable date: (i) if the Common
Stock is listed on a national securities exchange or is authorized for
quotation on The Nasdaq Stock Market's national Market ("NNM"), the closing
price, regular way, of the Common Stock on such exchange or NNM, as the case
may be, or if no such reported sale of the Common Stock shall have occurred on
such date, on the next preceding date on which there was such a reported sale;
or (ii) if the Common Stock is not listed for trading on a national securities
exchange or authorized for quotation on NNM, the closing bid price as reported
by The Nasdaq Stock Market or The Nasdaq SmallCap Market (if applicable), or if
no such prices shall have been so reported for such date, on the next preceding
date for which such prices were so reported; or (iii) if the Common Stock is
not listed for trading on a national securities exchange or authorized for
quotation on NNM, The Nasdaq Stock Market or The Nasdaq SmallCap Market (if
applicable), the last reported bid price published in the "pink sheets" or
displayed on the National Association of Securities Dealers, Inc. ("NASD")
Electronic Bulletin Board, as the case may be; or (iv) if the Common Stock is
not listed for trading on a national securities exchange, or is not authorized
for quotation on NNM, The Nasdaq Stock Market or The Nasdaq SmallCap Market, or
is not published in the "pink sheets" or displayed on the NASD Electronic
Bulletin Board, the Fair Market Value of the Common Stock as determined in good
faith by the Committee.
2.16 INCENTIVE STOCK OPTION means a stock option within the meaning of
Section 422 of the Code.
2.17 LIMITED STOCK APPRECIATION RIGHT means an Award granted in accordance
with Section 6.06.
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2.18 MERGER means any merger, reorganization, consolidation, exchange,
transfer of assets or other transaction having similar effect involving the
Company.
2.19 NON-EMPLOYEE DIRECTOR means each member of the Board who is not an
employee of the Company.
2.20 NON-EMPLOYEE DIRECTOR AWARDS means Awards granted in accordance with
Article IX.
2.21 NON-QUALIFIED STOCK OPTION means a stock option which is not an
Incentive Stock Option.
2.22 OPTIONS means all Non-Qualified Stock Options and Incentive Stock Options
granted at any time under the Plan.
2.23 OUTSTANDING COMMON STOCK means, at any time, the issued and outstanding
shares of Common Stock.
2.24 PARTICIPANT means a person designated to receive an Award under the Plan
in accordance with Section 5.01 and, solely to the extent provided in Article
IX of the Plan, any Non-Employee Directors of the Company.
2.25 PERFORMANCE AWARDS means Awards granted in accordance with Article VIII.
2.26 PLAN means the Education Management Corporation 1996 Stock Incentive
Plan as described herein, as the same may be amended from time to time.
2.27 PURCHASE PRICE, with respect to Options, shall have the meaning set
forth in Section 6.01(b).
2.28 RESTRICTED SHARES means Common Stock subject to restrictions imposed in
connection with Awards granted under Article VII.
2.29 RETIREMENT means early or normal retirement under a pension plan or
arrangement of the Company or one of its Subsidiaries in which the Participant
participates.
2.30 STOCK APPRECIATION RIGHTS means Awards granted in accordance with
Article VI.
2.31 SUBSIDIARY means a subsidiary of the Company within the meaning of
Section 424(f) of the Code.
2.32 TERMINATION OF EMPLOYMENT means the voluntary or involuntary termination
of a Participant's employment with the Company or a Subsidiary for any reason,
including death, disability, retirement or as the result of the divestiture of
the Participant's employer or any
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similar transaction in which the Participant's employer ceases to be the
Company or one of its Subsidiaries. Whether entering military or other
government service shall constitute Termination of Employment, or whether a
Termination of Employment shall occur as a result of disability, shall be
determined in each case by the Committee in its sole discretion.
ARTICLE III
ADMINISTRATION
3.01 COMMITTEE. The Plan shall be administered by a committee of the Board
("Committee") comprised of at least two persons. The Committee shall have
exclusive and final authority in each determination, interpretation or other
action affecting the Plan and its Participants. The Committee shall have the
sole discretionary authority to interpret the Plan, to establish and modify
administrative rules for the Plan, to impose such conditions and restrictions
on Awards as it determines appropriate, and to take such steps in connection
with the Plan and Awards granted hereunder as it may deem necessary or
advisable. The Committee may, subject to compliance with applicable legal
requirements, with respect to Participants who are not subject to Section 16(b)
of the Exchange Act, delegate such of its powers and authority under the Plan
as it deems appropriate to designated officers or employees of the Company. In
addition, the Board may exercise any of the authority conferred upon the
Committee hereunder. In the event of such delegation of authority or exercise
of authority by the Board, references in the Plan to the Committee shall be
deemed to refer to the delegate of the Committee or the Board, as the case may
be.
ARTICLE IV
SHARES
4.01 NUMBER OF SHARES ISSUABLE. The total number of shares initially
authorized to be issued under the Plan shall be 1,250,000 shares of Common
Stock. The number of shares available for issuance under the Plan shall be
further subject to adjustment in accordance with Section 10.07. The shares to
be offered under the Plan shall be authorized and unissued Common Stock, or
issued Common Stock which shall have been reacquired by the Company.
4.02 SHARES SUBJECT TO TERMINATED AWARDS. Common Stock covered by any
unexercised portions of terminated Options (including canceled Options) granted
under Article VI, Common Stock forfeited as provided in Section 7.02(a) and
Common Stock subject to any Awards which are otherwise surrendered by the
Participant may again be subject to new Awards under the Plan. Common Stock
subject to Options, or portions thereof, which have been surrendered in
connection with the exercise of Stock Appreciation Rights shall not be
available for subsequent Awards under the Plan, but Common Stock
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issued in payment of such Stock Appreciation Rights shall not be charged
against the number of shares of Common Stock available for the grant of Awards
hereunder.
ARTICLE V
PARTICIPATION
5.01 ELIGIBLE PARTICIPANTS. Participants in the Plan shall be such officers
and other key employees of the Company and its Subsidiaries, whether or not
members of the Board, as the Committee, in its sole discretion, may designate
from time to time. The Committee's designation of a Participant in any year
shall not require the Committee to designate such person to receive Awards or
grants in any other year. The designation of a Participant to receive awards
or grants under one portion of the Plan does not require the Committee to
include such Participant under other portions of the Plan. The Committee shall
consider such factors as it deems pertinent in selecting Participants and in
determining the type and amount of their respective Awards. Subject to
adjustment in accordance with Section 10.07, during the term of this Plan, no
Participant shall be granted Awards in respect of more than 200,000 shares of
Common Stock (whether through grants of Options or Stock Appreciation Rights or
other grants of Common Stock or rights with respect thereto) in any calendar
year. Non-Employee Directors shall receive Non-Employee Director Awards in
accordance with Article IX of the Plan, the provisions of which are automatic
and non-discretionary in operation. Non-Employee Directors shall not be
eligible to receive any other Awards under the Plan.
ARTICLE VI
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
6.01 OPTION AWARDS.
(a) The Committee may grant, to such Participants as the Committee may
select, Options entitling the Participant to purchase shares of Common Stock
from the Company in such number, at such price, and on such terms and subject
to such conditions, not inconsistent with the terms of this Plan, as may be
established by the Committee. The terms of any Option granted under this Plan
shall be set forth in an Award Agreement.
(B) PURCHASE PRICE OF OPTIONS. The Purchase Price of each share of Common
Stock which may be purchased upon exercise of any Option granted under the Plan
shall be determined by the Committee; provided, however, that the Purchase
Price shall in all cases be equal to or greater than the Fair Market Value on
the Date of Grant as required under Section 422 of the Code.
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(C) DESIGNATION OF OPTIONS. Except as otherwise expressly provided in the
Plan, the Committee may designate, at the time of the grant of each Option, the
Option as an Incentive Stock Option or a Non-Qualified Stock Option.
(D) INCENTIVE STOCK OPTION SHARE LIMITATION. No Participant may be granted
Incentive Stock Options under the Plan (or any other plans of the Company and
its Subsidiaries) which would result in shares with an aggregate Fair Market
Value (measured on the Date of Grant) of more than $100,000 first becoming
exercisable in any one calendar year.
(E) RIGHTS AS A SHAREHOLDER. A Participant or a transferee of an Option
pursuant to Section 10.04 shall have no rights as a shareholder with respect to
Common Stock covered by an Option until the Participant or transferee shall
have become the holder of record of any such shares, and no adjustment shall be
made for dividends in cash or other property or distributions or other rights
with respect to any such Common Stock for which the record date is prior to the
date on which the Participant or a transferee of the Option shall have become
the holder of record of any such shares covered by the Option; provided,
however, that Participants are entitled to share adjustments to reflect capital
changes under Section 10.07.
6.02 STOCK APPRECIATION RIGHTS.
(A) STOCK APPRECIATION RIGHT AWARDS. The Committee is authorized to grant to
any Participant one or more Stock Appreciation Rights. Such Stock Appreciation
Rights may be granted either independent of or in tandem with Options granted
to the same Participant. Stock Appreciation Rights granted in tandem with
Options may be granted simultaneously with, or, in the case of Non-Qualified
Stock Options, subsequent to, the grant to such Participant of the related
Option; provided, however, that: (i) any Option covering any share of Common
Stock shall expire and not be exercisable upon the exercise of any Stock
Appreciation Right with respect to the same share, (ii) any Stock Appreciation
Right covering any share of Common Stock shall expire and not be exercisable
upon the exercise of any related Option with respect to the same share, and
(iii) an Option and Stock Appreciation Right covering the same share of Common
Stock may not be exercised simultaneously. Upon exercise of a Stock
Appreciation Right with respect to a share of Common Stock, the Participant
shall be entitled to receive an amount equal to the excess, if any, of (A) the
Fair Market Value of a share of Common Stock on the date of exercise over (B)
the Exercise Price of such Stock Appreciation Right established in the Award
Agreement, which amount shall be payable as provided in Section 6.02(c).
(B) EXERCISE PRICE. The Exercise Price established under any Stock
Appreciation Right granted under this Plan shall be determined by the
Committee, but in the case of Stock Appreciation Rights granted in tandem with
Options shall not be less than the Purchase Price of the related Option. Upon
exercise of Stock Appreciation Rights, the number of shares subject to exercise
under any related Option shall automatically be reduced by the number of
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shares of Common Stock represented by the Option or portion thereof which are
surrendered as a result of the exercise of such Stock Appreciation Rights.
(C) PAYMENT OF INCREMENTAL VALUE. Any payment which may become due from the
Company by reason of a Participant's exercise of a Stock Appreciation Right may
be paid to the Participant as determined by the Committee (i) all in cash, (ii)
all in Common Stock, or (iii) in any combination of cash and Common Stock. In
the event that all or a portion of the payment is made in Common Stock, the
number of shares of Common Stock delivered in satisfaction of such payment
shall be determined by dividing the amount of such payment or portion thereof
by the Fair Market Value on the Exercise Date. No fractional share of Common
Stock shall be issued to make any payment in respect of Stock Appreciation
Rights; if any fractional share would be issuable, the combination of cash and
Common Stock payable to the Participant shall be adjusted as directed by the
Committee to avoid the issuance of any fractional share.
6.03 TERMS OF STOCK OPTIONS AND STOCK APPRECIATION RIGHTS.
(A) CONDITIONS ON EXERCISE. An Award Agreement with respect to Options
and/or Stock Appreciation Rights may contain such waiting periods, exercise
dates and restrictions on exercise (including, but not limited to, periodic
installments) as may be determined by the Committee at the time of grant.
(B) DURATION OF OPTIONS AND STOCK APPRECIATION RIGHTS. Options and Stock
Appreciation Rights shall terminate after the first to occur of the following
events:
(i) Expiration of the Option or Stock Appreciation Right as provided in the
Award Agreement; or
(ii) Termination of the Award as provided in Section 6.03(e), following the
Participant's Termination of Employment; or
(iii) In the case of an Incentive Stock Option, ten years from the Date of
Grant; or
(iv) Solely in the case of a Stock Appreciation Right granted in tandem with
an Option, upon the expiration of the related Option.
(C) ACCELERATION OF EXERCISE TIME. The Committee, in its sole discretion,
shall have the right (but shall not in any case be obligated), exercisable at
any time after the Date of Grant, to permit the exercise of any Option or Stock
Appreciation Right prior to the time such Option or Stock Appreciation Right
would otherwise become exercisable under the terms of the Award Agreement.
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<PAGE> 10
(D) EXTENSION OF EXERCISE TIME. In addition to the extensions permitted
under Section 6.03(e) in the event of Termination of Employment, the Committee,
in its sole discretion, shall have the right (but shall not in any case be
obligated), exercisable on or at any time after the Date of Grant, to permit
any Option or Stock Appreciation Right granted under this Plan to be exercised
after its expiration date described in Section 6.03(e), subject, however, to
the limitations described in Section 6.03(b)(i), (iii), and (iv).
(E) EXERCISE OF OPTIONS OR STOCK APPRECIATION RIGHTS UPON TERMINATION OF
EMPLOYMENT.
(I) TERMINATION OF VESTED OPTIONS AND STOCK APPRECIATION RIGHTS UPON
TERMINATION OF EMPLOYMENT.
(A) TERMINATION. In the event of Termination of Employment of a
Participant other than by reason of death, disability or Retirement, the
right of the Participant to exercise the Option or Stock Appreciation Right
under the Plan shall terminate on the date of such Termination of
Employment, unless the exercise period is extended by the Committee in
accordance with Section 6.03(d).
(B) DISABILITY OR RETIREMENT. In the event of a Participant's Termination
of Employment by reason of disability or Retirement, the right of the
Participant to exercise the Options or Stock Appreciation Rights which he or
she was entitled to exercise upon Termination of Employment (or which became
exercisable at a later date pursuant to Section 6.03(e)(ii)) shall terminate
one year after the date of such Termination of Employment, unless the
exercise period is extended by the Committee in accordance with Section
6.03(d). In no event, however, may any Option or Stock Appreciation Right
be exercised later than the date of expiration of the Option determined
pursuant to Section 6.03(b)(i), (iii) or (iv).
(C) DEATH. In the event of the death of a Participant while employed by
the Company or a Subsidiary or within the additional period of time from the
date of the Participant's Termination of Employment and prior to the
expiration of the Option or Stock Appreciation Right as may be permitted in
Section 6.03(e)(i)(B) or Section 6.03(d) above, to the extent the right to
exercise the Option or Stock Appreciation Right accrued as of the date of
such Termination of Employment and did not expire during such additional
period and prior to the Participant's death, the right of the Participant's
Beneficiary to exercise the Option or Stock Appreciation Right under the
Plan shall terminate upon the expiration of one year from the date of the
Participant's death (but in no event more than one year from the date of the
Participant's Termination of Employment by reason of disability or
retirement), unless the exercise period is extended by the Committee in
accordance with Section 6.03(d). In no
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event, however, may any Option or Stock Appreciation Right be exercised later
than the date of expiration of the Option determined pursuant to Section
6.03(b)(i), (iii) or (iv).
(II) TERMINATION OF UNVESTED OPTIONS OR STOCK APPRECIATION RIGHTS UPON
TERMINATION OF EMPLOYMENT. Subject to Section 6.03(c), to the extent the
right to exercise an Option or a Stock Appreciation Right, or any portion
thereof, has not accrued as of the date of Termination of Employment, such
right shall expire at the date of such Termination of Employment.
Notwithstanding the foregoing, the Committee, within its discretion and under
such terms as it deems appropriate, may permit a Participant who terminates
employment by reason of Retirement and who will continue to render
significant services to the Company or one of its Subsidiaries after his or
her Termination of Employment, to continue vesting in his or her Options and
Stock Appreciation Rights during the period in which the individual continues
to render such services.
6.04 EXERCISE PROCEDURES. Each Option and Stock Appreciation Right granted
under the Plan shall be exercised by written notice to the Company which must
be received by the officer or employee of the Company designated in the Award
Agreement on or before the close of business on the expiration date of the
Award. The Purchase Price of shares purchased upon exercise of an Option
granted under the Plan shall be paid in full in cash by the Participant
pursuant to the Award Agreement; provided, however, that the Committee may (but
shall not be required to) permit payment to be made by delivery to the Company
of either (a) Common Stock (which may include Restricted Shares or shares
otherwise issuable in connection with the exercise of the Option, subject to
such rules as the Committee deems appropriate) or (b) any combination of cash
and Common Stock, or (c) such other consideration as the Committee deems
appropriate and in compliance with applicable law (including payment in
accordance with a cashless exercise program under which, if so instructed by
the Participant, Common Stock may be issued directly to the Participant's
broker or dealer upon receipt of an irrevocable written notice of exercise from
the Participant). In the event that any Common Stock shall be transferred to
the Company to satisfy all or any part of the Purchase Price, the part of the
Purchase Price deemed to have been satisfied by such transfer of Common Stock
shall be equal to the product derived by multiplying the Fair Market Value as
of the date of exercise times the number of shares of Common Stock transferred
to the Company. The Participant may not transfer to the Company in
satisfaction of the Purchase Price any fractional share of Common Stock. Any
part of the Purchase Price paid in cash upon the exercise of any Option shall
be added to the general funds of the Company and may be used for any proper
corporate purpose. Unless the Committee shall otherwise determine, any Common
Stock transferred to the Company as payment of all or part of the Purchase
Price upon the exercise of any Option shall be held as treasury shares.
6.05 CHANGE IN CONTROL. Unless otherwise provided by the Committee in the
applicable Award Agreement, in the event of a Change in Control, all Options
outstanding on
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the date of such Change in Control, and all Stock Appreciation Rights shall
become immediately and fully exercisable. The provisions of this Section 6.05
shall not be applicable to any Options or Stock Appreciation Rights granted to
a Participant if any Change in Control results from such Participant's
beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act)
of Common Stock or Company Voting Securities.
6.06 LIMITED STOCK APPRECIATION RIGHTS. Limited Stock Appreciation Rights
may be granted independent of or in tandem with Options and shall be
exercisable by the Participant for a period of sixty (60) days following the
occurrence of a Change in Control. Upon the exercise of a Limited Stock
Appreciation Right, the Participant shall be entitled to receive from the
Company in exchange therefor cash in the amount equal to the excess of the
value on the date of exercise of the number of shares of Common Stock subject
to the Limited Stock Appreciation Rights being exercised over the Exercise
Price of such Limited Stock Appreciation Right. For this purpose, the value of
Common Stock shall be the highest Fair Market Value of the Common Stock during
the period beginning on the 90th day prior to the date on which the Limited
Stock Appreciation Rights are exercised and ending on such date. The date of
exercise of Limited Stock Appreciation Rights shall be determined under
procedures established by the Committee, and payment under this Section 6.06
shall be made by the Company as soon as practicable after the date of exercise.
To the extent that any Option in tandem with which the Limited Stock
Appreciation Rights shall have been granted is exercised, cancelled, terminates
or expires, the Limited Stock Appreciation Rights shall be cancelled. Subject
to the foregoing provisions of this Section 6.06 and the other provisions of
the Plan, Limited Stock Appreciation Rights granted under the Plan shall be
subject to such other terms and conditions as shall be determined by the
Committee, in its discretion, and set forth in the applicable Award Agreement.
ARTICLE VII
RESTRICTED SHARES
7.01 RESTRICTED SHARE AWARDS. The Committee may grant to any Participant an
Award of Common Stock in such number of shares, and on such terms, conditions
and restrictions, whether based on performance standards, periods of service,
retention by the Participant of ownership of purchased or designated shares of
Common Stock or other criteria, as the Committee shall establish. With respect
to performance-based Awards of Restricted Shares intended to qualify for
deductibility under Section 162(m) of the Code, performance targets will
include specified levels of one or more of earnings before interest, taxes and
amortization of intangibles and/or earnings per share. The terms of any
Restricted Share Award granted under this Plan shall be set forth in an Award
Agreement which shall contain provisions determined by the Committee and not
inconsistent with this Plan.
(a) ISSUANCE OF RESTRICTED SHARES. As soon as practicable after the Date of
Grant of a Restricted Share Award by the Committee, the Company shall cause
to be
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transferred on the books of the Company, or its agent, Common Stock,
registered on behalf of the Participant, evidencing the Restricted shares
covered by the Award, but subject to forfeiture to the Company as of the Date
of Grant if an Award Agreement with respect to the Restricted Shares covered
by the Award is not duly executed by the Participant and timely returned to
the Company. All Common Stock covered by Awards under this Article VII shall
be subject to the restrictions, terms and conditions contained in the Plan
and the Award Agreement entered into by the Participant. Until the lapse or
release of all restrictions applicable to an Award of Restricted Shares the
share certificates representing such Restricted Shares may be held in custody
by the Company, its designee, or, if the certificates bear a restrictive
legend, by the Participant. Upon the lapse or release of all restrictions
with respect to an Award as described in Section 7.01(d), one or more share
certificates, registered in the name of the Participant, for an appropriate
number of shares as provided in Section 7.01(d), free of any restrictions set
forth in the Plan and the Award Agreement shall be delivered to the
Participant.
(b) SHAREHOLDER RIGHTS. Beginning on the Date of Grant of the Restricted
Share Award and subject to execution of the Award Agreement as provided in
Section 7.01(a), the Participant shall become a shareholder of the Company
with respect to all shares subject to the Award Agreement and shall have all
of the rights of a shareholder, including, but not limited to, the right to
vote such shares and the right to receive dividends; provided, however, that
any Common Stock distributed as a dividend or otherwise with respect to any
Restricted Shares as to which the restrictions have not yet lapsed, shall be
subject to the same restrictions as such Restricted Shares and held or
restricted as provided in Section 7.01(a).
(c) RESTRICTION ON TRANSFERABILITY. None of the Restricted Shares may be
assigned or transferred (other than by will or the laws of descent and
distribution, or to an inter vivos trust with respect to which the
Participant is treated as the owner under Sections 671 through 677 of the
Code), pledged or sold prior to lapse of the restrictions applicable thereto.
(d) DELIVERY OF SHARES UPON VESTING. Upon expiration or earlier termination
of the forfeiture period without a forfeiture and the satisfaction of or
release from any other conditions prescribed by the Committee, or at such
earlier time as provided under the provisions of Section 7.03, the
restrictions applicable to the Restricted Shares shall lapse. As promptly as
administratively feasible thereafter, subject to the requirements of Section
10.05, the Company shall deliver to the Participant or, in case of the
Participant's death, to the Participant's Beneficiary, one or more share
certificates for the appropriate number of shares of Common Stock, free of
all such restrictions, except for any restrictions that may be imposed by
law.
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<PAGE> 14
7.02 TERMS OF RESTRICTED SHARES.
(a) FORFEITURE OF RESTRICTED SHARES. Subject to Sections 7.02(b) and 7.03,
all Restricted Shares shall be forfeited and returned to the Company and all
rights of the Participant with respect to such Restricted Shares shall
terminate unless the Participant continues in the service of the Company or a
Subsidiary as an employee until the expiration of the forfeiture period for
such Restricted Shares and satisfies any and all other conditions set forth
in the Award Agreement. The Committee shall determine the forfeiture period
(which may, but need not, lapse in installments) and any other terms and
conditions applicable with respect to any Restricted Share Award.
(b) WAIVER OF FORFEITURE PERIOD. Notwithstanding anything contained in this
Article VII to the contrary, the Committee may, in its sole discretion, waive
the forfeiture period and any other conditions set forth in any Award
Agreement under appropriate circumstances (including the death, disability or
Retirement of the Participant or a material change in circumstances arising
after the date of an Award) and subject to such terms and conditions
(including forfeiture of a proportionate number of the Restricted Shares) as
the Committee shall deem appropriate.
7.03 CHANGE IN CONTROL. Unless otherwise provided by the Committee in the
applicable Award Agreement, in the event of a Change in Control, all
restrictions applicable to the Restricted Share Award shall terminate fully and
the Participant shall immediately have the right to the delivery of share
certificate or certificates for such shares in accordance with Section 7.01(d).
ARTICLE VIII
PERFORMANCE AWARDS
8.01 PERFORMANCE AWARDS.
(a) AWARD PERIODS AND CALCULATIONS OF POTENTIAL INCENTIVE AMOUNTS. The
Committee may grant Performance Awards to Participants. A Performance Award
shall consist of the right to receive a payment (measured by the Fair Market
Value of a specified number of shares of Common Stock, increases in such Fair
Market Value during the Award Period and/or a fixed cash amount) contingent
upon the extent to which certain predetermined performance targets have been
met during an Award Period. Performance Awards may be made in conjunction
with, or in addition to, Restricted Share Awards made under Article VII. The
Award Period shall be two or more fiscal or calendar years as determined by
the Committee. The Committee, in its discretion and under such terms as it
deems appropriate, may permit newly eligible employees, such as those who are
promoted or newly hired, to receive Performance Awards after an Award Period
has commenced.
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<PAGE> 15
(b) PERFORMANCE TARGETS. The performance targets may include such goals
related to the performance of the Company and/or the performance of a
Participant as may be established by the Committee in its discretion. In the
case of Performance Awards intended to qualify for deductibility under
Section 162(m) of the Code, the targets will include specified levels of one
or more of earnings before interest, taxes and amortization of intangibles
and/or earnings per share. The performance targets established by the
Committee may vary for different Award Periods and need not be the same for
each Participant receiving a Performance Award in an Award Period. Except to
the extent inconsistent with the performance-based compensation exception
under Section 162(m) of the Code, in the case of Performance Awards granted
to employees to whom such section is applicable, the Committee, in its
discretion, but only under extraordinary circumstances as determined by the
Committee, may change any prior determination of performance targets for any
Award Period at any time prior to the final determination of the Award when
events or transactions occur to cause the performance targets to be an
inappropriate measure of achievement.
(c) EARNING PERFORMANCE AWARDS. The Committee, at or as soon as practicable
after the Date of Grant, shall prescribe a formula to determine the
percentage of the Performance Award to be earned based upon the degree of
attainment of performance targets.
(d) PAYMENT OF EARNED PERFORMANCE AWARDS. Payments of earned Performance
Awards shall be made in cash or Common Stock, or a combination of cash and
Common Stock, in the discretion of the Committee. The Committee, in its sole
discretion, may define such terms and conditions with respect to the payment
of earned Performance Awards as it may deem desirable.
8.02 TERMS OF PERFORMANCE AWARDS.
(a) TERMINATION OF EMPLOYMENT. Unless otherwise provided below or in
Section 8.03, in the case of a Participant's Termination of Employment prior
to the end of an Award Period, the Participant will not have earned any
Performance Awards
(b) RETIREMENT. If a Participant's Termination of Employment is because of
Retirement prior to the end of an Award Period, the Participant will not be
paid any Performance Awards, unless the Committee, in its sole and exclusive
discretion, determines that an Award should be paid. In such a case, the
Participant shall be entitled to receive a pro-rata portion of his or her
Award as determined under Subsection (d).
(c) DEATH OR DISABILITY. If a Participant's Termination of Employment is
due to death or disability (as determined in the sole and exclusive
discretion of the Committee) prior to the end of an Award Period, the
Participant or the Participant's
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personal representative shall be entitled to receive a pro-rata share of his
or her Award as determined under Subsection (d).
(d) PRO-RATA PAYMENT. The amount of any payment made to a Participant whose
employment is terminated by retirement, death or disability (under
circumstances described in Subsections (b) and (c)) will be the amount
determined by multiplying the amount of the Performance Award which would
have been earned, determined at the end of the Award Period, had such
employment not been terminated, by a fraction, the numerator of which is the
number of whole months such Participant was employed during the Award Period,
and the denominator of which is the total number of months of the Award
Period. Any such payment made to a Participant whose employment is
terminated prior to the end of an Award Period under this Section 8.02 shall
be made at the end of the respective Award Period, unless otherwise
determined by the Committee in its sole discretion. Any partial payment
previously made or credited to a deferred account for the benefit of a
Participant as provided under Section 8.01(d) of the Plan shall be subtracted
from the amount otherwise determined as payable as provided in this Section.
(e) OTHER EVENTS. Notwithstanding anything to the contrary in this Article
VIII, the Committee may, in its sole and exclusive discretion, determine to
pay all or any portion of a Performance Award to a Participant who has
terminated employment prior to the end of an Award Period under certain
circumstances (including the death, disability or retirement of the
Participant or a material change in circumstances arising after the Date of
Grant) and subject to such terms and conditions as the Committee shall deem
appropriate.
8.03 CHANGE IN CONTROL. Unless otherwise provided by the Committee in the
applicable Award Agreement, in the event of a Change in Control, all
Performance Awards for all Award Periods shall immediately become fully payable
to all Participants and shall be paid to Participants within 30 days after such
Change in Control.
ARTICLE IX
NON-EMPLOYEE DIRECTOR AWARDS
9.01 GRANT OF NON-EMPLOYEE DIRECTOR AWARDS. Each person who is a
Non-Employee Director as of the Effective Date shall be granted as of the
Effective Date an Option to purchase 7,500 shares of Common Stock. Each person
whose initial election or appointment as a Director occurs after the Effective
Date shall be granted as of the date of such election or appointment an Option
to purchase 7,500 shares of Common Stock. Each person whose term as a Director
continues after the date of each annual meeting of shareholders of the Company,
commencing with the initial annual meeting after the Effective Date and
continuing until the date this Plan terminates, shall as of the date of each
such annual meeting of shareholders be granted an Option to purchase 2,500
shares of Common
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Stock. The exercise price for such Options shall be the Fair Market Value on
the Date of Grant of the shares subject to the Option. All such Options shall
be designated as Non-Qualified Stock Options and shall have a ten year term.
Such Options shall vest and become exercisable in equal installments on the
first and second anniversaries of the Date of Grant, except that, in the event
of a Change in Control, all outstanding Non-Employee Director Awards shall be
immediately vested and exercisable.
9.02 TERMINATION OF SERVICE AND OTHER TERMS. If a Non-Employee Director's
service with the Company terminates by reason of death or disability, any Award
held by such Non-Employee Director may be exercised for a period of one year
from the date of such termination or until the expiration of the Award,
whichever is shorter. If a Non-Employee Director's service with the Company
terminates other than by reason of death or disability, under mutually
satisfactory conditions, any Award held by such Non-Employee Director shall
expire on the date of such termination. All applicable provisions of the Plan
not inconsistent with this Article IX shall apply to Awards granted to
Non-Employee Directors; provided, however, that the Committee may not exercise
discretion under any provision of the Plan with respect to Awards granted under
this Article IX except to the extent expressly provided herein.
ARTICLE X
TERMS APPLICABLE TO ALL AWARDS GRANTED UNDER THE PLAN
10.01 PLAN PROVISIONS CONTROL AWARD TERMS. The terms of the Plan shall
govern all Awards granted under the Plan, and in no event shall the Committee
have the power to grant any Award under the Plan which is contrary to any of
the provisions of the Plan. In the event any provision of any Award granted
under the Plan shall conflict with any term in the Plan as constituted on the
Date of Grant of such Award, the term in the Plan as constituted on the Date of
Grant of such Award shall control. Except as provided in Section 10.03 and
Section 10.07, the terms of any Award granted under the Plan may not be changed
after the Date of Grant of such Award so as to materially decrease the value of
the Award without the express written approval of the holder.
10.02 AWARD AGREEMENT. No person shall have any rights under any Award
granted under the Plan unless and until the Company and the Participant to whom
such Award shall have been granted shall have executed and delivered an Award
Agreement or received any other Award acknowledgment authorized by the
Committee expressly granting the Award to such person and containing provisions
setting forth the terms of the Award.
10.03 MODIFICATION OF AWARD AFTER GRANT. No Award granted under the Plan to
a Participant may be modified (unless such modification does not materially
decrease the value of the Award) after the Date of Grant except by express
written agreement between the Company and the Participant, provided that any
such change (a) shall not be inconsistent with the terms of the Plan, and (b)
shall be approved by the Committee.
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10.04 LIMITATION ON TRANSFER. Except as provided in Section 7.01(c) in the
case of Restricted Shares, a Participant's rights and interest under the Plan
may not be assigned or transferred other than by will or the laws of descent
and distribution, and during the lifetime of a Participant, only the
Participant personally (or the Participant's personal representative) may
exercise rights under the Plan. The Participant's Beneficiary may exercise the
Participant's rights to the extent they are exercisable under the Plan
following the death of the Participant. Notwithstanding the foregoing, the
Committee may grant Non-Qualified Stock Options that are transferable, without
payment of consideration, to immediate family members of the Participant or to
trusts or partnerships for such family members, and the Committee may also
amend outstanding Non-Qualified Stock Options to provide for such
transferability.
10.05 TAXES. The Company shall be entitled, if the Committee deems it
necessary or desirable, to withhold (or secure payment from the Participant in
lieu of withholding) the amount of any withholding or other tax required by law
to be withheld or paid by the Company with respect to any amount payable and/or
shares issuable under such Participant's Award, or with respect to any income
recognized upon a disqualifying disposition of shares received pursuant to the
exercise of an Incentive Stock Option, and the Company may defer payment or
issuance of the cash or shares upon exercise or vesting of an Award unless
indemnified to its satisfaction against any liability for any such tax. The
amount of such withholding or tax payment shall be determined by the Committee
and shall be payable by the Participant at such time as the Committee
determines in accordance with the following rules:
(a) The Participant shall have the right to elect to meet his or her
withholding requirement (i) by having withheld from such Award at the
appropriate time that number of shares of Common Stock, rounded up to the
next whole share, whose Fair Market Value is equal to the amount of
withholding taxes due, (ii) by direct payment to the Company in cash of the
amount of any taxes required to be withheld with respect to such Award or
(iii) by a combination of shares and cash.
(b) The Committee shall have the discretion as to any Award, to cause the
Company to pay to tax authorities for the benefit of any Participant, or to
reimburse such Participant for the individual taxes which are due on the
grant, exercise or vesting of any share Award, or the lapse of any
restriction on any share Award (whether by reason of a Participant's filing
of an election under Section 83(b) of the Code or otherwise), including, but
not limited to, Federal income tax, state income tax, local income tax and
excise tax under Section 4999 of the Code, as well as for any such taxes as
may be imposed upon such tax payment or reimbursement.
(c) In the case of Participants who are subject to Section 16 of the
Exchange Act, the Committee may impose such limitations and restrictions as
it deems necessary or appropriate with respect to the delivery or withholding
of shares of Common Stock to meet tax withholding obligations.
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<PAGE> 19
10.06 SURRENDER OF AWARDS. Any Award granted under the Plan may be
surrendered to the Company for cancellation on such terms as the Committee and
the holder approve.
10.07 ADJUSTMENTS TO REFLECT CAPITAL CHANGES.
(A) RECAPITALIZATION. The number and kind of shares subject to outstanding
Awards, the Purchase Price or Exercise Price for such shares, the number and
kind of shares available for Awards subsequently granted under the Plan and
the maximum number of shares in respect of which Awards can be made to any
Participant in any calendar year shall be appropriately adjusted to reflect
any stock dividend, stock split, combination or exchange of shares, merger,
consolidation or other change in capitalization with a similar substantive
effect upon the Plan or the Awards granted under the Plan. The Committee
shall have the power and sole discretion to determine the amount of the
adjustment to be made in each case.
(B) MERGER. After any Merger in which the Company is the surviving
corporation, each Participant shall, at no additional cost, be entitled upon
any exercise of all Option or receipt of other Award to receive (subject to
any required action by shareholders, in lieu of the number of shares of
Common Stock receivable or exercisable pursuant to such Award, the number and
class of shares or other securities to which such Participant would have been
entitled pursuant to the terms of the Merger if, at the time of the Merger,
such Participant had been the holder of record of a number of shares equal to
the number of shares receivable or exercisable pursuant to such Award.
Comparable rights shall accrue to each Participant in the event of successive
Mergers of the character described above. In the event of a Merger in which
the Company is not the surviving corporation, the surviving, continuing,
successor, or purchasing corporation, as the case may be (the "Acquiring
Corporation"), shall either assume the Company's rights and obligations under
outstanding Award Agreements or substitute awards in respect of the Acquiring
Corporation's stock for such outstanding Awards. In the event the Acquiring
Corporation elects not to assume or substitute for such outstanding Awards,
the Board shall provide that any unexercisable and/or unvested portion of the
outstanding Awards shall be immediately exercisable and vested as of a date
prior to such merger or consolidation, as the Board so determines. The
exercise and/or vesting of any Award that was permissible solely by reason of
this Section 10.07(b) shall be conditioned upon the consummation of the
merger or consolidation. Any Options which are neither assumed by the
Acquiring Corporation not exercised as of the date of the Merger shall
terminate effective as of the effective date of the Merger.
(C) OPTIONS TO PURCHASE SHARES OR STOCK OF ACQUIRED COMPANIES. After any
merger in which the Company or a Subsidiary shall be a surviving corporation,
the Committee may grant substituted options under the provisions of the Plan,
pursuant to Section 424 of the Code, replacing old options granted under a
plan of another party to the merger whose shares or stock subject to the old
options may no longer be
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<PAGE> 20
issued following the merger. The foregoing adjustments and manner of
application of the foregoing provisions shall be determined by the Committee
in its sole discretion. Any such adjustments may provide for the elimination
of any fractional shares which might otherwise become subject to any Options.
10.08 NO RIGHT TO EMPLOYMENT. No employee or other person shall have any
claim of right to be granted an Award under this Plan. Neither the Plan nor
any action taken hereunder shall be construed as giving any employee any right
to be retained in the employ of the Company or any of its Subsidiaries.
10.09 AWARDS NOT INCLUDABLE FOR BENEFIT PURPOSES. Payments received by a
Participant pursuant to the provisions of the Plan shall not be included in the
determination of benefits under any pension, group insurance or other benefit
plan applicable to the Participant which is maintained by the Company or any of
its Subsidiaries, except as may be provided under the terms of such plans or
determined by the Board.
10.10 GOVERNING LAW. All determinations made and actions taken pursuant to
the Plan shall be governed by the laws of the State of Delaware and construed
in accordance therewith.
10.11 NO STRICT CONSTRUCTION. No rule of strict construction shall be
implied against the Company, the Committee, or any other person in the
interpretation of any of the terms of the Plan, any Award granted under the
Plan or any rule or procedure established by the Committee.
10.12 CAPTIONS. The captions (i.e., all Section headings) used in the Plan
are for convenience only, do not constitute a part of the Plan, and shall not
be deemed to limit, characterize or affect in any way any provisions of the
Plan, and all provisions of the Plan shall be construed as if no captions have
been used in the Plan.
10.13 SEVERABILITY. Whenever possible, each provision in the Plan and every
Award at any time granted under the Plan shall be interpreted in such manner as
to be effective and valid under applicable law, but if any provision of the
Plan or any Award at any time granted under the Plan shall be held to be
prohibited by or invalid under applicable law, then (a) such provision shall be
deemed amended to accomplish the objectives of the provision as originally
written to the fullest extent permitted by law and (b) all other provisions of
the Plan and every other Award at any time granted under the Plan shall remain
in full force and effect.
10.14 AMENDMENT AND TERMINATION.
(A) AMENDMENT. The Board shall have complete power and authority to amend
the Plan at any time. No termination or amendment of the Plan may, without
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<PAGE> 21
the consent of the Participant to whom any Award shall theretofore have been
granted under the Plan, adversely affect the right of such individual under
such Award.
(B) TERMINATION. The Board shall have the right and the power to terminate
the Plan at any time. No Award shall be granted under the Plan after the
termination of the Plan, but the termination of the Plan shall not have any
other effect and any Award outstanding at the time of the termination of the
Plan may be exercised after termination of the Plan at any time prior to the
expiration date of such Award to the same extent such Award would have been
exercisable had the Plan not terminated.
* * *
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<PAGE> 1
EXHIBIT 10.18
AGREEMENT AND LEASE
(Jackman Building)
THIS AGREEMENT AND LEASE is entered into as of this 1st day of September,
1978 between STABILE & ASSOCIATES, a Pennsylvania limited partnership (the
"Landlord"), and EDUCATION MANAGEMENT CORPORATION, a Pennsylvania corporation
(the "Tenant").
FOR and in consideration of the mutual benefits hereinafter provided, and
each intending to be legally bound, the said Landlord and Tenant do hereby
covenant and agree as follows:
1. LEASING CLAUSE
The Landlord does hereby lease and grant to the Tenant, and the Tenant does
hereby hire and take as Tenant from the Landlord, the Premises as defined in
Paragraph 2, subject to and in accordance with all the terms and conditions of
this Lease.
2. DESCRIPTION OF THE PREMISES
The Premises consist of the following portions of the building known as the
Jackman Building, 526 Penn Avenue, Pittsburgh, Pennsylvania 15222: (i) the
space in the Basement presently occupied by Tenant and containing approximately
2,750 sq. ft. of space, (ii) the street level gallery area (consisting of
approximately 2,756 sq. ft.), and (iii) the entire 2nd, 3rd, 4th, 5th, 6th,
7th, 8th, 9th, and 1Oth Floors, which together contain approximately 65,700 sq.
ft. of space. (The aforesaid
<PAGE> 2
square footage figures are intended to be exclusive of stairwells and elevator
shafts.)
3. PURPOSES
The Premises may be used and enjoyed for the operation of an art school
and/or for any other lawful purpose.
4. TERM OF THE LEASE
The initial term of this Lease will begin at 12:01 A.M. on September 1, 1978
and will end at midnight on August 31, 1990, except as that period may be
extended by the renewal options provided for in Paragraph 5 of this Lease or
otherwise by the mutual agreement of the parties.
5. RIGHTS OF RENEWAL
The Tenant will have the right, at its option, to renew and to extend this
Lease for a term of five (5) years beginning September 1, 1990, and ending
August 31, 1995. If that first right to renew this Lease is exercised, the
Tenant will have a further right, at its option, to renew this Lease for an
additional term of five (5) years beginning September 1, 1995, and ending
August 31, 2000. The Tenant may exercise those renewal options by giving
written notice to the Landlord at least twelve (12) full months before the
expiration of the then-current term. However, notwithstanding the foregoing,
the Tenant's purported exercise of a renewal option will be null and void if,
prior to the exercise of the renewal option by the Tenant, the Landlord has
entered into a bona fide and legally binding
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<PAGE> 3
agreement to sell all of the Jackman Building and the adjacent garage building
owned by Landlord (known as the Penn-Sixth-Liberty Garage Building) to a third
party purchaser as part of the assembly by that purchaser of all the properties
within the block bounded by Penn Avenue, Sixth Avenue, Liberty Avenue and Fifth
Avenue Extension, and then only if the agreement between the Landlord and the
third party purchaser calls for a closing on or before the last day of the
then-current term of this Lease. In the event that the exercise of a renewal
option by the Tenant is null and void under the preceding sentence, the Tenant
will have the right at its option to reinstate the effectiveness of the
exercise of a renewal option if and when the Landlord's said agreement to sell
to a third party purchaser is terminated or is not, or cannot be, effectively
closed for any reason before the end of the then-current term of this Lease.
In the event of the effective exercise of the renewal options, all of the terms
and conditions of this Lease will continue in effect during the period(s) of
renewal, except as is otherwise specifically provided in Paragraph 6 of this
Lease with respect to rental payments.
6. RENT
(a) GENERAL.
The Tenant will make monthly Rental Payments to the Landlord during the
term of this Lease and any extension thereof. All Rental Payments will be made
by delivery of a check payable to "Realty Growth Corporation" as agent for the
Landlord,
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<PAGE> 4
at the address specified in subparagraph 29(a) of this Lease. Rental Payments
will be paid in advance and without demand, on or before the tenth day of each
month. Any late payment or portion thereof will bear simple interest at the
annual rate of 12% until paid. The amount of each Rental Payment will be the
sum of (1) the Base Rental Payment and (2) the Escalation Rental Payment.
(b) BASE RENTAL PAYMENTS.
The Base Rental Payment payable by the Tenant during the initial
term of this Lease will be:
Monthly Base
Dates Rental Payment
----- --------------
September 1, 1978 to April 30, 1979 $34,903.53
May 1, 1979 to April 30, 1980 $32,503.53
May 1, 1980 to May 31, 1980 $33,336.86
June 1, 1980 to April 30, 1981 $33,327.87
May 1, 1981 to August 31, 1990 $34,094.54
If the Tenant exercises its renewal options under paragraph 5 of this
Lease, the Tenant's Base Rental Payments during the renewal periods will be:
Monthly Base
Dates Rental Payment
----- --------------
September 1, 1990 to August 31, 1995 $44,616.67
September 1, 1995 to August 31, 2000 $53,225.00
(c) ESCALATION RENTAL PAYMENTS.
In addition to the Base Rental Payments set forth in Paragraph 6(b),
beginning with the rental payment due for the month of March 1979 and continuing
thereafter during the term of
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<PAGE> 5
this Lease and any renewal thereof, the Tenant will pay Escalation Rental
Payments to the Landlord equal to one-twelfth (1/12th) of the net aggregate of
the following amounts (provided, however, that, for the months March through
August of the year during which the final expiration of the term of this Lease
[as extended by the exercise of any renewal options by Tenant] occurs,
Escalation Rental Payments shall equal one-sixth (1/6th) of the net aggregate
of the following amounts):
(i) 97.9% of increases or decreases (if any) in real estate taxes
on the Jackman Building paid by the Landlord to the City of Pittsburgh, the
Pittsburgh School District and Allegheny County during the preceding
calendar year as compared to the real estate taxes paid by Landlord for the
calendar year 1977 (Landlord and Tenant agree that said taxes totaled
$28,382.00 for calendar year 1977);
(ii) 100% of increases or decreases (if any) in the portion of the
all risks insurance cost incurred by Landlord during the preceding calendar
year in connection with Jackman Building which is properly allocable to the
Premises occupied by Tenant in said building as compared to such cost as
incurred by Landlord for calendar year 1977 (Landlord and Tenant agree that
said cost totaled $6,572.00 for calendar year 1977);
(iii) 100% of increases or decreases (if any) in the costs of the
security services furnished to the Premises by the Landlord during the
preceding calendar year
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<PAGE> 6
as compared to such costs as incurred by Landlord for calendar year 1977
(Landlord and Tenant agree that said costs totaled $1,267.00 for calendar
year 1977);
(iv) 100% of increases or decreases (if any) in the water and
sewer charges which are separately metered to the Premises occupied by the
Tenant in the Jackman Building during the preceding calendar year as
compared to said charges for calendar year 1977 (Landlord and Tenant agree
that said charges totaled $3,109.00 for calendar year 1977);
(v) 100% of increases or decreases (if any) in the actual net
cost to the Landlord during the preceding calendar year of furnishing those
portions of work required for the proper inspection, servicing, repair,
maintenance and improvement of the elevators in the Jackman Building which
are specifically listed in Appendix "D" to this Lease (but not the cost of
any work not specifically listed in Appendix "D") as compared to $6,197.00
(the actual net cost shall exclude (1) costs incurred by Landlord for which
it was reimbursed by insurance, the Tenant or third parties and (2) costs
which were incurred by Landlord primarily because of negligent or
intentional acts or omission of or attributable to Landlord); and
(vi) 100% of increases or decreases (if any) in wages and benefit
costs during the preceding year for the full-time Heavy Duty Cleaners, the
full-time Maintenance
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<PAGE> 7
Employees, the full-time Elevator Operators and the part-time employees in
these job categories provided by the Landlord to perform work at the
Premises under the terms of collective bargaining agreements with
Pittsburgh Local 29 of the Service Employees' International Union as
compared to said wages and benefit costs for calendar year 1977 (Landlord
and Tenant agree that these costs totaled $58,757.00 for calendar year
1977).
On or before March 1, 1979 and on or before March 1 of each succeeding year
during the term of this Lease and any renewal thereof, the Landlord will
calculate the Escalation Rental Payments, if any, which the Tenant will pay for
March and during the succeeding twelve (12) months, or until termination of the
Lease, and notify Tenant in writing of the amount of those payments and the
basis of calculation. Upon request of the Tenant, the Landlord will provide
copies of receipts or other reasonably satisfactory documentation of the costs
incurred during the preceding calendar year which were used by the Landlord to
determine the Escalation Rental Payments. With the exception of the Escalation
Rental Payments provided for in this subparagraph, the Landlord will not be
entitled to any increase in Rental Payments on account of any cost increases
incurred by it in connection with the performance of its duties and obligations
under the terms of this Lease. Any special assessment levied against the
Premises for the Purpose of improvements to or for the benefit of the Premises
will be paid
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<PAGE> 8
by the Landlord and will not be taken into account in establishing Escalation
Rental Payments.
The parties hereto understand and agree that the Landlord shall not be
entitled to Escalation Rental Payments on account of, nor to any other
reimbursement for, any costs or expenses (or increases therein) which it incurs
in connection with the six categories of costs and expenses listed in Clauses
(i) through (vi) of this Subparagraph 6(c) insofar as such costs and expenses
(and increases therein) are incurred during or are attributable to the months
January through August of the year during which the final expiration of the term
of this Lease (as extended by the exercise of any renewal options by Tenant)
occurs.
7. ALTERATIONS, ADDITIONS AND IMPROVEMENTS
(a) INITIAL IMPROVEMENTS.
The Landlord agrees to make, at its own expense, the improvements
listed in Appendix "A" to this Lease (insofar as they apply to these Premises),
in accordance with plans and specifications prepared by Klaus Associates (which
plans and specifications have been approved by Landlord) and to pay for the work
promptly upon the presentation of the contractor's invoices accompanied by
certifications by the architect and the Tenant (or other evidence reasonably
acceptable to the Landlord) that such items have been incorporated in the
Premises.
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<PAGE> 9
(b) ADDITIONAL IMPROVEMENTS.
In addition to the Landlord's improvements referred to in subparagraph
7(a), the Landlord promptly will take care of all of the maintenance items and
other responsibilities identified in Appendix "B" to this Lease (insofar as they
apply to these Premises). All costs relating to said work will be borne by the
Landlord. All of the improvements provided for in this subparagraph will be
made in accordance with the plans and specifications prepared by Klaus
Associates (which plans and specifications have been approved by Landlord).
(c) FUTURE TENANT IMPROVEMENTS.
The Tenant will have the right, at its own expense, from time to time
during the term of this Lease to make such nonstructural alterations, additions
and changes in and to the Premises as it finds necessary or convenient to its
purposes. The Tenant may, at its own expense, from time to time during the term
of this Lease, make such structural alterations, additions and changes as it
finds necessary or convenient to its purposes, provided the Tenant shall have
first submitted to the Landlord plans and reasonably detailed specifications
covering such alterations, additions and changes, the names of the architect and
contractor who will carry out the work, and copies of its agreements with them,
and the Landlord shall have given its consent in writing to the alterations,
additions and changes and approved the architect and contractor. Such consent
and approval shall not be withheld unreasonably. Any alteration, addition or
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<PAGE> 10
change will be made in a good and workmanlike manner, and in compliance with
all applicable permits and authorizations and building and zoning laws and with
all other laws and ordinances. The alterations, additions and improvements
listed in Appendix "F" to this Lease (insofar as they apply to the Premises)
will be made by the Tenant in accordance with plans and specifications prepared
by Klaus Associates (which plans and specifications have been approved by
Landlord), will be paid for by the Tenant, and are hereby deemed to be Tenant
improvements. (The improvements listed in Appendices "A," "B," and "F" are as
shown on a set of 14 drawings which are listed in Appendix "E" to this Lease,
copies of said drawings having been signed by the parties hereto in connection
with the execution of this Lease.) Any and all alterations, additions and
improvements (together with fixtures and other personal property) placed in the
Premises at any time by the Tenant will be Tenant improvements and will remain
the personal property of the Tenant unless otherwise determined by the mutual
agreement of the parties in writing. Such alterations, additions, improvements
and any personal property of the Tenant may be removed by it at any time during
the term of this Lease, provided only that the Tenant will be responsible for
the restoration of any structural damage or other material damage which may be
caused by such removal so that the Premises are in such condition that they
could be rented for a normal use of premises of this type and at a rental rate
consistent with that prevailing at the time for similar premises.
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<PAGE> 11
8. UTILITIES AND OTHER SERVICES
The Tenant will pay the costs of steam, gas, electricity and rubbish
removal during the term of this Lease as soon as the same may be payable. The
Landlord will pay the costs of water and sewer. The Landlord will also provide,
at its expense, a central office alarm security system for the Premises,
consisting of the existing system or equivalent, and other security services for
the Premises as required.
9. REAL ESTATE TAXES
The Landlord will, during the term of this Lease, pay and discharge
when due all real estate taxes assessed against the Premises.
10. MAINTENANCE
Except as is otherwise provided in Paragraph 12 respecting damage
caused by, or attributable to, the Tenant, and except as is otherwise provided
in Paragraph 14 respecting destruction of the Premises, the respective
responsibilities of the Landlord and the Tenant regarding maintenance of the
Premises will be as follows:
(a) THE TENANT'S RESPONSIBILITIES.
The Tenant, at its expense, will be responsible for repair and maintenance
of the Premises as follows:
(i) All janitorial services and customary and ordinary
maintenance to the interior of the Premises (other than as provided in
subparagraph 10(b)), including
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<PAGE> 12
the replacement of fluorescent and other light bulbs and ballasts;
(ii) Repair and maintenance of the individual heat exchangers,
heat valves, air conditioning compressors and air handling units located on
the various floors and exposed lateral heating and cooling pipes;
(iii) Repair, maintenance and replacement of the following
portions of the Cooling Tower installation:
(a) Circulation System: the valves, the pump, the
controls and the motor; and
(b) Water Tower: the fan, the fan motor, the fan drive
gear box, the fan control and the gate valve.
(iv) Tenant will also provide, at its own cost (either with its
own employees or by a service contract, if Tenant so elects), the services
for maintaining the Cooling Tower installation which are listed in Appendix
"C" to this Lease;
(v) Repair and maintenance of exhaust fans;
(vi) Repair and maintenance of all toilet facilities and
fixtures, including sinks, urinals, water closets, soap dispensers, faucets
and valves associated therewith;
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<PAGE> 13
(vii) Repair and maintenance of the electrical system from the main
distribution panels on each floor to the points of electrical usage;
(viii) Repair, maintenance and replacement of all floor coverings,
interior wall coatings, interior wall coverings, ceiling suspension systems
and ceiling tiles and coatings; provided, however, that, if damage to such
items is caused by water seepage from outside windows, outside walls or the
roof, Landlord shall reimburse Tenant for the cost of repairing or
replacing such items;
(ix) Control of day-to-day operations of the steam system;
(x) Repair, maintenance, cleaning and replacing doors; and
(xi) Repair, maintenance, cleaning and replacing ground level windows
and interior windows and cleaning exterior windows above ground level.
(b) THE LANDLORD'S RESPONSIBILITIES.
The Landlord, at its expense, will be responsible for all repairs and
maintenance of the Premises not specifically made the responsibility of the
Tenant under subparagraph 10(a) including, without limitation, the following
items:
(i) Repair and maintenance of the roof and of all structural
portions of the Premises (including, without limitation, all stairways,
floors, ceiling and walls, but not the coverings on floors, walls or
ceiling);
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<PAGE> 14
(ii) Cleaning, inspecting, servicing, repairing and maintaining the
elevators so that they remain in a clean, safe and operable condition at
all times, including but not limited to oiling and greasing twice monthly
and including, but not limited to, the items listed in Appendix "D" to this
Lease;
(iii) Repair and maintenance of all plumbing including, but not
limited to, the water and sanitary sewer lines, but not the items listed as
item (vi) in subparagraph 10(a);
(iv) Repair and maintenance of all portions of the heating, air
conditioning and air handling systems other than the items to be maintained
by the Tenant under items (ii), (iii), (iv) and (v) in subparagraph 10(a),
including, but not limited to, the main vertical heating distribution pipes
system and concealed lateral heating pipes and the main steam valve;
(v) Repair and maintenance of the electrical system up to the
main distribution panels on each floor;
(vi) Repair and maintenance of the exterior of the Jackman Building;
(vii) Transporting rubbish from the floors to the loading dock;
(viii) Cleaning the sidewalk and removing snow and ice during the
winter;
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<PAGE> 15
(ix) Cleaning the outside area of the loading dock and the land and
the alley area at the rear of the Jackman Building;
(x) Cleaning the facilities, including the basement restroom,
used by Landlord's employees;
(xi) Locking and unlocking the building at scheduled times and arming
and disarming the security system;
(xii) Turning the electricity on and off; and
(xiii) Repair and maintenance (but not cleaning) of all exterior
windows above the ground level; provided, however, that, if damage to such
windows is caused by Tenant or Tenant's students, Tenant shall reimburse
Landlord for the cost of repairing such windows.
11. INSURANCE
(a) FIRE AND CASUALTY AND OTHER INSURANCE.
The Landlord will keep the building of which the Premises are a part
insured against loss or damage by those risks now covered by the all risks
insurance policy presently owned by Landlord in connection with the Premises.
Such insurance at all times will be in an amount sufficient to cover 90% of the
cost of replacement of the building in substantially the same condition as it
was when the loss occurred. The Landlord shall also provide insurance against
flood damage up to the limit of $100,000.00. The Tenant will reimburse the
Landlord for the
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<PAGE> 16
increases in costs of such insurance insofar as that is provided for in
subparagraph 6(c) of this Lease. If and to the extent to which the Landlord
has a restoration obligation under Paragraph 14 of this Lease or the Premises
are otherwise restored, all proceeds of such insurance will be used first to
restore the Premises. The Landlord will also obtain and maintain liability
insurance in the single limit of $1,000,000.00 per occurrence for bodily injury
and property damage, or the loss of use thereof, to protect itself against any
liability or claim which may arise on account of Landlord's activities in
connection with the Premises. The all risk policy will provide that Landlord
may waive its subrogation rights against the Tenant and the Landlord hereby
waives subrogation rights against Tenant on that policy. Both the all risk
policy and the liability insurance policy shall provide that the same may not
be cancelled or materially changed by the insurer except after twenty (20) days
prior written notice by the insurer to the Tenant. The Landlord will furnish
certificates of insurance for these policies to the Tenant within a reasonable
time after they are secured. In connection with those employees of Landlord or
Landlord's agent who work at the Premises, Landlord will obtain and maintain,
or cause its agent to obtain and maintain, Workmen's Compensation Insurance and
employer's liability insurance.
The Tenant may, at its option, insure (in amounts and under terms which are
satisfactory to it) its personal property and the Tenant improvements located on
the Premises to the extent
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<PAGE> 17
that such contents and Tenant improvements are the personal property of the
Tenant and are not covered by the Landlord's insurance. Any such policies will
provide that the Tenant may waive its subrogation rights against the Landlord
and the Tenant hereby waives subrogation rights against Landlord on any such
policies.
(b) LIABILITY INSURANCE.
The Tenant will obtain and maintain at its own expense liability insurance
for the Premises to protect itself against any liability or claim which may
arise on account of any actionable injury on account of Tenant's activities in
connection with the Premises in the single limit of $1,000,000.00 per occurrence
for personal injury and property damage. The Tenant will also obtain and
maintain at its own expense Workmen's Compensation Insurance in accordance with
the Workmen's Compensation Act of the Commonwealth of Pennsylvania and
employer's liability insurance with the limit of $100,000.00 per occurrence.
All such policies shall provide that the same may not be cancelled or materially
changed by the insurer except after twenty (20) days prior written notice to the
Landlord. The Tenant shall furnish certificates of insurance for these policies
to Landlord within a reasonable time after they are secured.
12. LIABILITY FOR DAMAGES
The parties agree that each will indemnify the other for, and save the
other harmless against, any and all losses, expenses, claims and/or liability
for damages of any kind
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<PAGE> 18
which may arise at any time (1) from any failure of the indemnifying party to
fulfill the maintenance obligations imposed on it under Paragraph 10 of this
Lease, (2) from any negligent act or omission of or attributable to the
indemnifying party, and/or (3) from use of the Premises by the indemnifying
party. The parties also agree that each will indemnify the other for, and save
the other harmless against, any claims or liability for compensation under the
Workmen's Compensation Act arising out of injuries sustained by any employee of
the indemnifying party and/or of any licensees, contractors or subcontractors
of the indemnifying party. However, except as otherwise specifically provided
in Paragraphs 11 and 14 of this Lease, neither party will be liable to the
other for any damage of any kind which may arise at any time from any negligent
act or omission of any co-tenant, subtenant, assignor or other occupant of the
building, or of any person whomsoever other than such party or those for whom
it is responsible, or from any act beyond the control of such party. All
subleases will require the subtenant to indemnify, defend and save the Tenant
and the Landlord harmless from any and all losses, expenses, claims and/or
liability for damages of any kind which may arise at any time (1) from any
negligent act or omission of or attributable to the subtenant or any officer,
employee, agent, contractor or invitee of the subtenant, and/or (2) use of the
Premises by the subtenant, except as the Landlord may otherwise approve.
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13. COMPLIANCE WITH LEGAL REQUIREMENTS
(a) GENERAL.
Each of the parties will comply with all applicable statutes, ordinances,
rules, orders, regulations and requirements of the federal, state, county and/or
city governments, insofar as they may be properly applied to the respective
obligations of the parties in connection with the Premises or the conduct of the
parties therein. The Landlord shall be responsible for keeping the Premises in
compliance at all times with all city, county, state and federal building
requirements which may apply to the Premises insofar as such building
requirements shall require that capital improvements be made to the Premises;
provided, however, that, insofar as any such building requirement (a) shall be
applicable to the Premises solely because of the use of the Premises as a school
by Tenant and (b) shall require capital improvements which improve the Premises
solely for use as a school (such building requirements hereinafter shall be
referred to as "School Requirements"), Tenant shall be responsible for keeping
the Premises in compliance with such School Requirements, subject, however, to
the terms and conditions set forth below in Subparagraph (b) of this Paragraph
13.
(b) SCHOOL REQUIREMENTS.
(i) Tenant shall have the right, at its sole discretion, to
contest any School Requirements and to decide if, when, and to what extent
it will make any capital
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improvements to the Premises in order to comply with any School
Requirements, and this Paragraph 13 shall not in any event create any
contractual obligations to Landlord on the part of Tenant to make, or to
cause to be made, any capital improvement to the Premises on account of any
School Requirement; provided, however, that failure of the Tenant to make
said capital improvements will not release the Tenant of its contractual
obligations to pay rent and abide by the other terms and conditions of this
Lease.
(ii) If, during the initial term or any renewal period of this
Lease, Tenant makes capital improvements to the Premises on account of any
School Requirements and if, upon the completion of such capital
improvements, the remaining portion of the then current term of the Lease
(as it may have been extended at the time by the exercise of any renewal
option by Tenant) will not allow Tenant sufficient time to amortize the
costs of those capital improvements at a rate of $2,000 per month beginning
on such completion date and continuing during such remaining term of the
Lease, then Tenant shall have the right (but not the obligation) to extend
the term of the Lease (and, if it so desires, also to extend the term of
the Lease for the Mezzanine space in the Penn-Sixth-Liberty Garage
Building) beyond the termination date of such remaining term for as many
one (1) year periods as may be required to permit such costs to be fully
amortized at that rate with complete
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amortization occurring during the final year of the term of the Lease as so
extended. Tenant agrees that estimates for the capital improvements will
be submitted to the Landlord prior to the Tenant undertaking any such
capital improvements. If the total estimated cost of the capital
improvements is such that the Tenant could not amortize the cost over a
period extending more than two (2) years beyond the expiration of the
second renewal period, then Landlord shall have the option of terminating
this Lease upon not less than ninety (90) days written notice to the Tenant
unless Tenant agrees within twenty (20) days thereafter to increase its
amortization schedule so as to permit complete amortization within a period
not extending more than two (2) years beyond the expiration date of the
second renewal period.
(iii) If any one or more School Requirements shall require Tenant to
make capital improvements to the Premises costing in the aggregate in
excess of $240,000 during the initial term of this Lease or $120,000 during
the first renewal period or $60,000 during the second renewal period, then
Tenant shall have the option of terminating this Lease upon not less than
ninety (90) days written notice to Landlord, rather than making such
capital improvements. However, Landlord shall have the right (by written
notice to Tenant within twenty (20) days after receipt by Landlord of a
notice from Tenant of its intention
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to terminate this Lease under the terms of the preceding sentence) to elect
to continue the Lease in full force and effect during such remaining term,
in which event Landlord shall share the costs of such capital improvements
so that Tenant's aggregate costs for such capital improvements do not
exceed $240,000 during the initial term of this Lease or $120,000 during
the first renewal period or $60,000 during the second renewal period.
(iv) If, during the initial term of this Lease, any one or more
School Requirement shall require Tenant to make capital improvements to the
Premises costing in the aggregate in excess of $120,000, Landlord will, at
Tenant's request, pay any costs in excess of $120,000 (but Landlord shall
not be required to pay more than $120,000 of excess costs) and Tenant will
thereafter pay Landlord equal monthly additional rental payments over the
remaining term of the Lease. Such payments shall equal the amount expended
by Landlord for such excess costs divided by the number of months in the
remaining term of the Lease plus interest floating at the rate of 2% above
the Prime Rate.
(v) If any School Requirement shall require Tenant to make
capital improvements to the Premises which will be completed less than two
(2) years prior to the termination date of the then current term of the
Lease (as it may have been extended at the time by the exercise of any
renewal option by Tenant) and the cost of such capital
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improvements cannot be fully amortized at the rate of $2,000 per month
beginning on the completion date of the capital improvements and continuing
during such remaining term, then Tenant shall have the option of
terminating this Lease effective as of a termination date to be specified
in that notice (which date shall not be less than ninety (90) days after
the date of the written notice to Landlord), rather than making such
capital improvements. However, Landlord shall have the right (by written
notice to Tenant within twenty (20) days after receipt by Landlord of a
notice from Tenant of its intention to terminate this Lease under the terms
of the preceding sentence) to elect to continue the Lease in full force and
effect during such remaining term, in which event Landlord shall contribute
to the costs of such capital improvements to the extent necessary so that
Tenant is able to amortize Tenant's total aggregate costs for such capital
improvements at a rate of $2,000 per month beginning on the completion date
thereof and continuing over the then remaining term of the lease, or any
extensions thereof.
(vi) If Tenant is required to and does make any capital improvement
to the Premises by reason of School Requirements during the initial term of
this Lease or during the first renewal option period without exercising its
rights under this paragraph to extend the term of the Lease on account of
such capital improvement and thereafter
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Landlord terminates any renewal options available to Tenant under Paragraph
5 of this Lease for the reason and in the manner set forth in that
Paragraph, then Landlord shall pay to Tenant, at the time the then current
term of the Lease expires, the portion of the costs of such capital
improvements which actually remain unamortized by Tenant on such expiration
date, it being understood that Tenant shall have begun to amortize such
costs upon completion of such capital improvements at a rate of $2,000 per
month. (The term "amortization", as used in this Subparagraph (b) of
Paragraph 13, is not intended to refer or relate in any way to the way in
which such capital improvements are treated for tax or accounting purposes
by either Landlord or Tenant.)
(vii) If Tenant exercises its rights to extend the term of the Lease
pursuant to the terms of this paragraph, the Monthly Basic Rental Payments
due during such extension period shall be the Monthly Basic Rental Payments
for the time period applicable to such extension period which are set forth
in Paragraph 6 of this Lease; however, in the event that the term of the
Lease is extended beyond August 31, 2000, the Monthly Basic Rental Payments
for the extension period beyond that date shall be 110% of the Monthly
Basic Rental Payments applicable for the period from September 1, 1995 to
August 31, 2000, plus Escalation Rentals Payments.
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(viii) Insofar as the term "Premises" is used in this Subparagraph
(b) of Paragraph 13, such term shall include the space leased by the Tenant
from the Landlord in the Penn-Sixth-Liberty Garage Building and the cost of
any capital improvements required to be undertaken by the Tenant pursuant
to this Paragraph 13 on account of School Requirements shall be deemed to
include the total aggregate cost of such improvements in both the Jackman
Building and the Penn-Sixth-Liberty Garage Building.
14. DESTRUCTION OF OR DAMAGE TO THE PREMISES
If, at any time after execution hereof, the Premises are destroyed or
damaged by fire or the elements or by any other cause whatsoever, the Landlord,
at its expense, will restore or rebuild them promptly as nearly as practicable
to the condition existing just prior to such destruction or damage and under
arrangements reasonably satisfactory to the Tenant, except as is otherwise
provided in the following two sentences. The Landlord shall have no obligation
to restore and rebuild the Premises if the Premises are totally or substantially
destroyed by a cause or event (1) which was outside the control of Landlord, (2)
which is outside the usual scope of coverage of a first class fire and casualty
insurance policy with extended coverage, (3) which, in fact, is outside the
scope of Landlord's fire and casualty insurance policy, and (4) which results in
Landlord not otherwise being able to recover its losses as a result of such
destruction of the Premises from some third party or parties. If the
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Premises are destroyed or severely damaged as to interfere materially with the
normal use of the Premises by the Tenant during the last two years of the term
of this Lease (including any renewal period if the renewal option under this
Lease has been exercised), then either party may terminate this Lease as of the
date of such damage or destruction by giving written notice to the other party
within thirty (30) days thereafter of its election to do so, unless within such
thirty (30) days the Tenant gives notice of its intention to extend the term or
to renew the Lease in accordance with a renewal option provided for in
Paragraph 5 of this Lease (in which case this Lease will not be terminated
although notice of termination previously may have been given by the Landlord).
If and to the extent to which such destruction or damage materially interferes
with the normal use of the Premises by the Tenant (a) the Tenant will be
entitled to a pro rata abatement of rentals and other monetary obligations of
the Tenant under this Lease until the completion of the restoration and/or
repair work, and (b) the Tenant will have the right at its option to terminate
this Lease by the giving of written notice to the Landlord unless the parties
mutually determine by their reasonable and in good faith agreement that all
necessary restoration and repair work can be substantially completed within One
Hundred and Eighty (180) days after the occurrence of the destruction and/or
damage, and unless the Landlord proceeds diligently with and completes such
restoration and repair work within One Hundred and Eighty (180) days after
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the occurrence of the destruction and/or damage. If the Landlord is unable to
complete such restoration or repairs within 180 days because of strikes,
lockouts, unavailability of materials or other conditions beyond the reasonable
fault and control of the Landlord and of its contractors and agents, the time
for completion will be extended by a period of time equal to the period that
such condition existed, but it will not in any event be extended beyond a date
which is 270 days after the occurrence of the destruction and/or damage.
15. CONDEMNATION
If the Premises or any substantial part thereof are condemned and taken by
right of eminent domain or for public or quasi public use, or if without taking,
substantial consequential damage to the Premises or this Leasehold is caused by
a taking of other property, the Tenant may, at its option, cancel and terminate
this Lease by the giving of written notice to the Landlord at any time within
the period of ninety (90) days following the filing of a declaration of taking,
in which case all unearned rent and all other charges paid by the Tenant in
advance pursuant to this Lease, if any, shall be refunded to the Tenant.
16. DEFAULT BY THE TENANT
(a) DEFINITION OF DEFAULT.
The Tenant will be deemed to be in default under this Lease if and when any
one or more of the following events
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shall occur: (i) the Tenant fails to make payment of any rent, or other charges
required to be paid by the Tenant under this Lease, when due, if such default
continues for a period of five (5) days after written notice by the Landlord to
the Tenant specifying such default; or (ii) the Tenant fails to perform or to
observe any of the other covenants or conditions of this Lease to be kept,
observed or performed by the Tenant, if such default continues for a period of
thirty (30) days after written notice by the Landlord to the Tenant specifying
such default and if the Tenant has not begun diligent and good faith efforts to
remedy such default within the thirty (30) day period and diligently continued
the same thereafter; or (iii) the Tenant is adjudicated as bankrupt or makes an
assignment for the benefit of creditors or has a receiver appointed for its
assets, all whether voluntary or involuntary. A "material default" within the
meaning of subparagraph 16(b) will be any default described in clauses (i) and
(iii) of this subparagraph, or any default described in clause (ii) of this
subparagraph which may have a substantial adverse effect on the property or
interest of the Landlord.
(b) REMEDIES OF THE LANDLORD.
Upon the occurrence of any default by the Tenant, as defined in
subparagraph 16(a), the Landlord may, at its election, (i) take appropriate
corrective actions on behalf of the Tenant to remedy the default (and the Tenant
hereby authorizes the Landlord to enter the Premises to remedy such default),
and thereafter recover from the Tenant all costs
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reasonably incurred in connection therewith as additional rent; and (ii)
recover, in an action at law, such damages as may reasonably have been
foreseeable as a consequence of such default, including reasonable attorney's
fees.
In the event of any material default, as defined in subparagraph 16(a), the
Landlord may, in lieu of the remedies provided for in the foregoing clauses (i)
and (ii) of this subparagraph, at its election, terminate this Lease upon the
giving to the Tenant of an additional ten (10) days written notice of its
intention to do so. In that event, and unless the Tenant shall have cured the
material default complained of within that ten (10) day notice period, this
Lease will terminate upon the expiration of that period, and the Tenant
forthwith will surrender the Premises, but will remain liable as hereinafter
provided.
Upon the termination of this Lease under this subparagraph the Landlord
may, at any time thereafter, reenter and resume possession of the Premises and
remove all persons and property therefrom by summary proceedings or by any
suitable action at law or in equity, or by force or otherwise, without being
liable for damages therefor. Reentry by the Landlord will not be deemed an
acceptance or a surrender of this Lease or the Premises. The Tenant will remain
liable for all rent, additional rent and other charges to be paid by the Tenant
as such rent and other charges become due according to the terms of this Lease;
provided however, that the Landlord agrees to use the best
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efforts, in good faith, to relet the Premises on reasonable terms to another
tenant. If and to the extent to which the Landlord relets the Premises, or
uses the same for its own purposes, at any time during the period for which the
Tenant is liable under this Lease, the Tenant will be entitled to a credit
against the amounts due under this Lease equal to (a) the rent and other
charges paid by such other tenants reduced by the commissions and other costs
reasonably incurred by the Landlord in reletting or, (b) if the Landlord is
using the Premises for its own purposes, the net fair rental value of that use.
In the event that this Lease is terminated under the provision of this
subparagraph, the Tenant agrees that any sublease between the Tenant and any
other person which then is in effect will automatically be assigned to the
Landlord as of the effective date of such termination, unless, within five (5)
days following such termination date, the Landlord notifies the Tenant of its
election to refuse such assignments, or any of them; provided, however, that any
rents or other charges paid to Landlord by such sublessee in accordance with the
subleases then in effect will be considered as credits against the Tenant's
obligation in the same manner as if they were payments by a new tenant under the
preceding provision in this subparagraph.
The remedies provided for in this paragraph will be the exclusive remedies
of the Landlord for any default by the Tenant, except as may be expressly
provided elsewhere in this Lease.
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17. DEFAULT BY THE LANDLORD
(a) DEFINITION OF DEFAULT.
The Landlord will be deemed to be in default under this Lease if and when
it shall have failed to perform or to observe any covenant or condition of this
Lease to be kept, observed and performed by the Landlord. A "material default"
is any default which has a substantial adverse effect on the property or
interests of the Tenant. Such a default will not be deemed material for
purposes of this paragraph if, within thirty (30) days after receiving notice
thereof, the Landlord shall have taken appropriate and diligent corrective
actions, or shall have commenced such actions and thereafter diligently pursued
them.
(b) REMEDIES OF THE TENANT.
In addition to the remedies provided for specifically in Paragraph 18 of
this Lease, in the event of any default by the Landlord which is not material,
as defined in subparagraph 17(a), the Tenant will have the right (i) after ten
(10) days notice to Landlord of its intention to do so, to take reasonable and
appropriate corrective actions on behalf of the Landlord to remedy the default,
and thereafter to deduct all costs reasonably incurred in connection therewith
from the rental payments otherwise to be made by it under this Lease, provided,
however, that no notice to Landlord shall be required if circumstances compel
immediate action by Tenant; (ii) to recover such damages in action at law as may
reasonably have been foreseeable as a consequence of such default by the
Landlord; and
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(iii) to sue for specific performance or other appropriate relief, including
costs and reasonable attorney's fees. In the event of any material default by
the Landlord, the Tenant, in addition to the remedies provided for above, shall
have the right at its option to terminate this Lease, upon giving the Landlord
an additional ten (10) days written notice of its intention to do so. In that
event, and unless the Landlord shall have cured the material default complained
of within that ten (10) day notice period, this Lease will terminate upon the
expiration of said period, and the Tenant forthwith shall surrender the
Premises.
18. THE TENANT'S RIGHT TO MAKE PAYMENTS ON BEHALF OF LANDLORD
In addition to any remedies provided for in Paragraph 17 of this Lease, if
the Landlord fails to pay within ten (10) days after due, any installment of
principal or interest on any mortgage paramount to this Lease, or any
installment of taxes or assessments affecting the Premises, or fails promptly to
remove any other lien or charge which reasonably could be expected to jeopardize
the Tenant's immediate right to possession as hereby granted, the Tenant may
after the giving of ten (10) days' prior written notice to the Landlord make
such payment or effect such removal. Any such payment or removal will entitle
the Tenant to be subrogated to the lien or charge of the item so paid in
addition to the rights given the Tenant under this paragraph. If the Tenant
makes any payment or advance or incurs any expense for the account of the
Landlord, pursuant to this Paragraph 18 or to
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any other provision of this Lease, the Tenant will be entitled to receive
prompt reimbursement thereof from the Landlord, together with interest at the
rate of twelve percent (12%) per annum. The Tenant, in addition to its
remedies at law, may apply such claim against any subsequent installment of
rent and, if not reimbursed at the expiration of the term hereby granted or any
extensions thereof, may remain in possession of the Premises until completely
reimbursed.
19. SURRENDER OF PREMISES
Upon the termination of this Lease, the Tenant will vacate and surrender
the Premises to the Landlord in good order and condition, subject only to
reasonable wear and tear, and to fire and casualty damage in accordance with
Paragraph 14, and to the maintenance and other obligations of the Landlord under
the applicable provisions of this Lease.
20. ATTORNMENT
The Tenant agrees that it will attorn to any and all successors in interest
to the Landlord, regardless of the manner in which such succession may arise,
whether by operation of law or by voluntary or involuntary act of the Landlord
or otherwise, provided only that such successors simultaneously agree to accept
and to observe the obligations of the Landlord under this Lease and to assure
the nondisturbance of the Tenant hereunder.
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21. QUIET ENJOYMENT
Upon the payment of the rentals provided for in this Lease and the
compliance by the Tenant with all other terms and conditions hereof, the Tenant
will be entitled to the peaceable and quiet enjoyment of the Premises and of all
the rights and privileges granted to it under this Lease.
22. NAME OF THE BUILDING
Throughout the term of this Lease, the Premises will be known and commonly
identified as the "Art Institute of Pittsburgh" or by such other name as may be
selected for the purposes of the Tenant from time to time with the approval of
the Landlord; such approval shall not be withheld unreasonably.
23. RIGHT OF FIRST REFUSAL TO PURCHASE THE PREMISES
If at any time during the term of this Lease, the Landlord receives (1) a
bona fide offer from any person to purchase the Jackman Building or any portion
thereof, which the Landlord intends to accept, or (2) a bona fide offer from any
person to purchase as a package the Jackman Building and the Penn-Sixth-Liberty
Garage Building, which the Landlord intends to accept, the Landlord will send
the Tenant a copy of the proposed contract and will notify the Tenant of the
intention of the Landlord to accept it. The Tenant will have the right, within
thirty (30) days after the delivery of that notice, to accept the terms of the
said contract in its own name or in the name of a nominee, for the gross
purchase price and under the terms
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specified in such bona fide offer, or under other terms and conditions not less
advantageous to the Landlord. If the Tenant does not so elect within that
thirty (30) day period, the Landlord within forty-five (45) days, may enter
into a contract to sell the Premises to the proposed purchaser, provided that
the sale is on terms and conditions and for a price which are essentially the
same as (and are not more favorable to the Purchaser than) the terms,
conditions and price set forth in the proposed contract sent to the Tenant.
24. ASSIGNMENT AND SUBLETTING
(a) ASSIGNMENT OF LEASE.
The Tenant may assign the Lease only if the consent of the Landlord is
first obtained (which consent will not be unreasonably withheld), provided that
(i) the assignee under said assignment assumes all of the obligations of this
Lease, (ii) the Landlord is given a signed copy of the assignment together with
a signed assumption agreement by the new tenant, and (iii) the Tenant will
remain liable under this Lease despite the assignment, unless Tenant
satisfactorily proves to Landlord that the assignee's net worth at the time of
the assignment is equal to or greater than Tenant's net worth.
(b) SUBLETTING.
The Tenant may sublet all or any portion of the Premises if the written
consent of the Landlord is first obtained (which consent will not be
unreasonably withheld), provided that any such subletting will be subject to all
of the terms and
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conditions hereof. Such sublettings will not release the Tenant from any of
its obligations under this Lease.
(c) LANDLORD'S CONSENT TO ASSIGNMENTS OR SUBLETTINGS.
The Landlord may not unreasonably withhold its consent to assignments or
sublettings of this Lease. The Landlord agrees that it would not be reasonable
for it to withhold its consent to any assignment or subletting in order to
prevent the Tenant from realizing an appreciation in the value of Tenant's
interest in the Lease. Further, the Landlord agrees that it would not be
reasonable for it to withhold its consent to any assignment or subletting in
order to extract additional money from the Tenant as the price for obtaining the
Landlord's consent, and the Landlord specifically covenants and agrees that it
will not do so. Further, the Landlord agrees that it would not be reasonable
for it to withhold its consent to any assignment or subletting to prevent any of
the following: (1) an assignment or subletting as part of a concession
arrangement between Tenant and a third party for services intended primarily for
the use and benefit of Tenant's students such as, but not limited to, the sale
of books and school supplies or food and beverage services; (2) an assignment or
subletting to any affiliated corporation of the Tenant; (3) an assignment or
subletting of space to any person for professional or business office purposes;
and (4) an assignment or subletting of space for appropriate and lawful types of
wholesale or retail businesses, provided that such businesses are not in
competition with the
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business of another existing tenant of Landlord on the Penn Avenue and Sixth
Street sides of the Penn-Sixth-Liberty Garage Building.
(d) NO ASSIGNMENT OF SUBLEASES.
The Tenant will not assign, pledge or otherwise encumber any interest of
the Tenant in any sublease of any of the Premises or in any rentals due
thereunder.
25. CERTAIN REPRESENTATIONS
(a) REPRESENTATIONS BY THE TENANT.
The Tenant represents and warrants to the Landlord that (i) it is a
corporation duly organized and validly existing in good standing under the laws
of Pennsylvania, (ii) this Lease has been duly authorized by all necessary
corporate action on the part of the Tenant, and (iii) the execution and delivery
of this Lease and the performance by the Tenant of its obligations hereunder
will not conflict with any term of its articles of incorporation or by-laws.
(b) REPRESENTATION BY THE LANDLORD.
The Landlord represents and warrants to the Tenant that (i) the Landlord is
a duly organized and validly existing Pennsylvania limited partnership, (ii) the
Landlord is the sole owner of the building of which the Premises are a part and
has an unrestricted right and power to lease the premises to the Tenant under
this Lease, (iii) this Lease has been duly authorized by all necessary action on
the part of the Landlord, and (iv) the execution and delivery of this Lease and
the performance by the
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Landlord of its obligations hereunder will not conflict with any term of its
partnership agreement or of any other contract or obligation of the Landlord.
26. ELEVATOR SERVICE
Landlord agrees to provide elevator service except on Legal Holidays and
Sundays, as follows:
Freight 1 Elevator Monday through Friday,
7:00 A.M. to 5:00 P.M.
Passenger 2 Elevators Monday through Friday, 7:00 A.M.
to 5:00 P.M. (or to 6:30 P.M. if and when Tenant
adjusts its class schedules to require such service).
1 Elevator Monday through Friday, 5:00 P.M. (or
6:30 P.M. if and when required as indicated above) to
11:00 P.M.
1 Elevator Saturday, 8:00 A.M. to 1:00 P.M.
In addition, upon not less than 24 hours notice from Tenant, Landlord shall
furnish elevator service at other hours provided Tenant shall pay the cost of
furnishing operators for such additional hours.
27. EMERGENCY EXITS
Throughout the term of this Lease, the Landlord at all times will prevent
the emergency exits from the Premises and from the building of which the
Premises is a part and from the adjacent Garage Building from being locked,
chained, or otherwise obstructed in any manner which may prevent the free
passage of persons from the Premises through those exits. Tenant agrees
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that it will endeavor to prevent such emergency exits from being locked,
chained, or otherwise obstructed in any manner.
28. GENERAL PROVISIONS
(a) NOTICES.
Any notice or communication required or contemplated in connection with
this Lease will be in writing and will be conclusively deemed to have been
effectively given if and when delivered or tendered in person or by certified
mail return receipt requested to the appropriate party at the address set forth
below (or at such other address, if any, as may be designated by such party in
writing for that purpose from time to time hereafter). Neither party shall
refuse delivery of any notice.
Landlord: Stabile & Associates
c/o Realty Growth Corporation
The Roosevelt Building
Sixth and Penn Avenue
Pittsburgh, Pennsylvania 15222
Tenant: Education Management Corporation
300 Sixth Avenue
Pittsburgh, Pennsylvania 15222
Attn: Robert B. Knutson
(b) CAPTIONS.
The captions of this Lease are used only for convenience of reference and
will not in any way control or affect the interpretation of any of the
provisions hereof.
(c) INTEGRATION.
This Lease contains the entire agreement of the parties with respect to the
subject matter hereof and supersedes
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any and all prior agreements, understandings or representations of any kind.
It is understood, however, that there is a separate Lease between the parties
of even date with this Lease of a portion of the Building known as the
Penn-Sixth-Liberty Garage Building, which is adjacent to the Jackman Building
and which connects directly with these Premises in the Jackman Building.
(d) WAIVERS.
The failure of the Landlord or the Tenant to insist, in any one or more
instances, upon a strict performance of any of the covenants or conditions of
this Lease, or to exercise any option herein contained, will not be construed or
deemed to be a waiver or relinquishment for the future of such covenant,
condition or option, but the same will continue and remain in full force and
effect. No waiver by the Landlord or the Tenant of any provision hereof will be
deemed to have been made, unless expressed in writing and signed by the Landlord
or the Tenant.
(e) TIME OF THE ESSENCE.
Time is of the essence of this Lease.
(f) ASSIGNMENT AND BINDING EFFECT.
In the event of any proper assignment hereunder, the rights, privileges and
obligations of the respective parties will inure to the benefit of and will be
binding upon the parties and their respective successors and assigns, as the
case may be.
- 40 -
<PAGE> 41
(g) HOLDING OVER.
If the Tenant remains in possession after the expiration of the term of the
Lease, with the Lessor's acquiescence and without any distinct agreement of the
parties with respect to a future extension of this Lease or its replacement by
another lease, the Tenant will be a tenant-at-will, in which event there will be
no renewal of this Lease by operation of law.
(h) APPENDICES.
The appendices to this Lease are as follows:
Appendix A - 8 pages
Appendix B - 1 page
Appendix C - 2 pages
Appendix D - 2 pages
Appendix E - 1 page
Appendix F - 1 page
IN WITNESS WHEREOF, the parties hereto have duly executed this Lease as of
the day and year first above written.
LANDLORD:
WITNESS: STABILE & ASSOCIATES
By
- ------------------------------- -------------------------------
TENANT
ATTEST: EDUCATION MANAGEMENT CORPORATION
By
- ------------------------------- -------------------------------
- 41 -
<PAGE> 42
APPENDIX A
TO LEASE BETWEEN STABILE & ASSOCIATES
AND EDUCATION MANAGEMENT CORPORATION
DATED SEPTEMBER 1, 1978
PART I
1. Replace fire stairwell doors and door frames as required
throughout the Jackman Building. New panic hardware to be installed throughout.
2. Replace restroom doors and door frames leading into one men's room
and one women's room, to make them wide enough to accommodate wheelchairs of
handicapped persons.
3. Install facilities for handicapped persons in the one men's room
and the one women's room referred to in Paragraph 2, above, including the
installation of one wide stall, one appropriate toilet, and one suitable wash
basin to serve handicapped persons in each of those two restrooms.
4. Replace 27 deteriorated wash basins in toilet rooms of the Jackman
Building.
5. Install 30 vacuum breakers on toilets in the Jackman Building, so
as to comply with all applicable health regulations.
6. Replace two water closets with two urinals.
7. Install an emergency generator and associated emergency lighting
facilities and exit signs throughout the Jackman Building, to comply with
applicable fire regulations.
APPENDIX A
- 1 -
<PAGE> 43
8. Install a concrete pad for generator, natural gas line, exhaust
and ventilation system.
9. Install emergency lighting facilities and exit signs for first
floor lobby, mezzanine and second floor to comply with applicable fire
regulations.
10. Install panic hardware and door closer on existing B-rated fire
door separating the Jackman Building and the mezzanine.
11. Install B-rated fire door in the lower lobby ahead of the two
elevator doors and at stairway entrance to the basement. Doors will be equipped
with panic hardware and door closer.
12. Extend the front stairwell down from the second to the first
floor. It will be an open stairway with a B-rated fire door added at the second
floor level into a reception area. The B-rated fire door will be complete with
panic hardware and closer. This contract excludes any structural steel
supports, if required.
13. Remove existing front stairway between the first and second
floors. Close the resulting opening with a steel and concrete floor system.
14. The toilets on floors two, three, five, six, seven, eight, nine
and ten will have seamless epoxy covering added.
APPENDIX A
- 2 -
<PAGE> 44
15. An electrical holdback system will be added to each of the B-rated
fire doors described in Items 9, 10 and 11, with the exception of the door
leading to the basement. This electromagnetic system will be deactivated by the
current central fire alarm system.
16. Install rubber stair treads on the rear stairs from the first
through the tenth floors.
17. Replace the rubber stair treads on the front stairwell from the
fifth floor down and add rubber to the intermediate platforms on floors one
through five.
18. Exhaust fans will be added to each of the restrooms that do not
have one and the existing exhaust fans will be placed in good operating order.
19. Seal off through the installation of B-rated fire doors and
two-hour fire rated walls, the entranceways to each of the freight elevator
entrances on floors two through ten.
20. Replace all sprinkler heads that are over 50 years old.
21. Replace 32 wooden framed windows in the front of the building.
22. Install flow alarms in the sprinkler system and electrically wire
it into the central alarm system.
23. Resurface the fourth floor men's and women's rooms with new
material selected by the tenant.
APPENDIX A
- 3 -
<PAGE> 45
24. Add one fire alarm bell in the mezzanine to the Jackman Building
system to meet current fire codes.
25. Recover all steam pipes in classrooms and offices which are
readily accessible to staff and students.
PART II
1. Patch all unnecessary openings in the rear and front stairwells.
2. Install additional lights in the front and rear stairwells.
3. Remove the electric water heater from the rear stairway.
4. Remove water chiller from the rear stairway.
5. Move the fan ventilation units out of the rear stairway and
install per contract documents.
6. Paint all walls and floors of the front stairwell. Deck paint is
to be added to each of the floors.
7. Install lighting in the first floor lobby and elevator lobby.
8. Paint the walls of the first floor lobby in accordance with the
contract documents.
9. Remove terrazzo flooring in first floor lobby as per contract
documents.
10. Install a new ceiling in the first floor lobby as per contract
documents.
APPENDIX A
- 4 -
<PAGE> 46
11. Install new corridor lights, floors seven and eight, inclusive.
Existing third floor suspended ceiling system will be repaired and lighting
fixtures relocated as per blueprint detail.
12. Paint all walls and ceilings of the corridors and both sides of
the corridor doors and frames with accent colors.
13. Add wall mounted ash receptacles throughout the facility, six per
floor.
14. Move fire alarm station to within 15 feet of the rear stair
entrance on the eighth floor.
15. Reinstall conduit of the alarm on the eighth floor.
16. Paint the ceilings in accordance with the blueprint detail.
17. Renovate mezzanine in accordance with the blueprint detail.
18. Add outlets on the eighth and ninth floors so that there are two
operating outlets in each classroom.
19. Move the sprinkler heads that are in the way of partitions and
sprinkler lines as necessary on the eighth floor.
20. Move the sprinkler heads below the ceiling as required on the
third and fourth floors in accordance with the blueprint detail.
APPENDIX A
- 5 -
<PAGE> 47
21. On the eighth floor, add partitions and extend the partitions to
the ceiling in accordance with the blueprint detail.
22. On the ninth floor, add partitions as per the blueprint detail.
23. Move the light fixtures on the ninth floor in accordance with
blueprint detail.
24. Move the airbrush lines from the fourth to the fifth floor.
25. Change lay-out of the third and fourth floor classrooms as per
blueprint detail.
26. Change plumbing lines on the fourth floor as per blueprint detail.
27. Change electrical distribution on the third and fourth floors as
per blueprint detail.
28. Change the air distribution system on the third and fourth floors
as per blueprint detail.
29. Paint and highlight classrooms on the eighth and ninth floors in
accordance with blueprint detail. Paint all corridors three through ten.
30. Plaster all wall openings of painted surfaces on floors two
through ten.
31. Plaster all ceiling openings larger than 1/2" diameter on floors
three through nine.
APPENDIX A
- 6 -
<PAGE> 48
32. Repair eighth floor acoustical ceiling with tile removed from the
second floor ceiling.
33. Add Armstrong Seagate floor covering to Rooms 908 and 909.
34. Add built-ins for the third and fourth floors in accordance with
blueprint detail.
35. Remove all sprinkler pipes on second floor and install new in
accordance with the reflected ceiling plan in blueprint detail.
36. Remove existing second floor partitions and install new in
accordance with blueprint detail. Modify air distribution system in accordance
with blueprint detail.
37. Paint the walls of the second floor.
38. Replace the ceiling tile throughout the second floor, in
accordance with the reflected ceiling plan in the blueprint detail.
39. Install lighting on the second floor in accordance with the
reflected ceiling plan in the blueprint detail.
40. Install electrical outlets and switches in locations shown in the
blueprint detail.
41. Renovate gallery and marketing offices in accordance with the
blueprint detail.
APPENDIX A
- 7 -
<PAGE> 49
APPENDIX B
TO LEASE BETWEEN STABILE & ASSOCIATES
AND EDUCATION MANAGEMENT CORPORATION
DATED SEPTEMBER 1, 1978
1. Insulate suspended ceiling of mezzanine; insulate duct work; and
modify duct work in accordance with plans supplied by Klaus Associates.
One-third of the expense is to be paid by the tenant.
2. Seal roof (parking ramp) of mezzanine area to stop water seepage.
3. Seal windows of mezzanine area to stop water seepage.
4. Replace defective compressor in mezzanine air conditioning with a
Carrier unit.
5. Purchase back-up motor for water circulation pump to cooling tower
on roof.
6. Repair circulation pump referred to in Item 5.
7. Install by-pass and flow-control valves on the cooling tower
system.
8. Add a steam coil in place of the resistive heating unit on the
mezzanine.
9. Install automatic steam valve in basement of Jackman Building.
10. Provide lounge for elevator operators in basement.
11. Purchase back-up gear box for the cooling tower.
APPENDIX B
- 1 -
<PAGE> 50
APPENDIX C
TO LEASE BETWEEN STABILE & ASSOCIATES
AND EDUCATION MANAGEMENT CORPORATION
DATED SEPTEMBER 1, 1978
The services which Tenant will provide for maintaining the Cooling Tower
installation are as follows:
1. Total start up of the cooling tower system at the start of the air
conditioning season. This includes, but is not limited to, cleaning the tower
and its reservoir, flushing the entire circulation system, repacking the moving
parts, and adding the necessary chemicals to the system.
2. Monthly check out of the system, including cleaning those items
which show an unusual collection of debris and dirt, and lubricating all moving
parts.
3. Draining, flushing, hosing down and refilling the system with
water and chemicals twice during the cooling season.
4. Adding chemicals as required, and sending samples of the solution
to a lab for verification of the proper balance at start up, after each refill,
and once between each refill for a total of six tests during a season.
Additionally, in-house chemical balance checks will be made five days per week
during the air-conditioning season.
5. Changing the gear box oil twice a season.
6. Packing the pump at the start of the season and as required during
the season.
APPENDIX C
- 1 -
<PAGE> 51
7. Total shutdown of the system at the end of the season. This
includes, but is not limited to, draining and flushing the system, draining all
supply lines, and disabling the automatic control device to prohibit false
operation of the system.
Tenant's maintenance responsibilities for the Cooling Tower installation
will not cover the cost of any parts nor the labor to install such parts beyond
the items specifically described above.
APPENDIX C
- 2 -
<PAGE> 52
APPENDIX D
TO LEASE BETWEEN STABILE & ASSOCIATES
AND EDUCATION MANAGEMENT CORPORATION
DATED SEPTEMBER 1, 1978
The costs with respect to the elevators which will be taken into account in
calculating Escalation Rental Payments are limited to:
A. The Actual cost of the inspection, adjustment and lubrication of
the elevators as required, including periodical examination of all safety
devices and governors, checking and equalizing tensions of all hoisting ropes,
lubricating guide rails properly (except where roller guides are used) and
maintaining accessory equipment.
B. The actual cost, if required, of repairing, renewing or replacing
the following:
1. Elevator Machine
2. Elevator Motor
3. Generator
4. Controller Parts
5. Gears
6. Worms
7. Bearings
8. Rotating Elements
9. Thrusts
10. Brake Magnet Coils
11. Brake Magnet Stators
APPENDIX D
- 1 -
<PAGE> 53
12. Brake Shoes and Linings
13. Commutators and Brushes
14. Windings and Coils
15. Contacts and Magnet Frames
16. Resistance for Motor and Operator Circuits
17. Renewing Ropes
18. Conductor Cables
19. Renewing Guide Shoe Gibs or Rollers (when necessary for smooth
and quiet operation)
20. Damage to the Doors and Cabs of the Elevators if caused by
Tenant or Tenant's students.
APPENDIX D
- 2 -
<PAGE> 54
APPENDIX E
TO LEASE BETWEEN STABILE & ASSOCIATES
AND EDUCATION MANAGEMENT CORPORATION
DATED SEPTEMBER 1, 1978
The following drawings prepared by Klaus Associates show
substantially all of the work listed in Appendices A, B and F to this Lease.
All drawings show the number "78-6" and are dated "7-5-78." When the drawings
have been revised, those revisions are indicated.
A1 Revised 11-17-78
A2A Revised 8-23-78, 8-25-78, 9-14-78
A2 Revised 10-9-78, 2-22-79
A2E Revised 8-8-78, 8-22-78, 8-25-78
A3 Revised 8-9-78, 10-23-78
A4 Revised 8-9-78, 9-14-78
A5 Revised 9-14-78
A6 Revised 9-14-78
A7 Revised 9-14-78
A8 Revised 9-14-78
A9 Revised 8-25-78, 9-14-78, 10-6-78
A10 Revised 10-26-78
A11
A12 Revised 8-9-78
APPENDIX E
- 1 -
<PAGE> 55
APPENDIX F
TO LEASE BETWEEN STABILE & ASSOCIATES
AND EDUCATION MANAGEMENT CORPORATION
DATED SEPTEMBER 1, 1978
1. Install new corridor lights, floors four, five, six and nine.
2. Remove all wooded baseboards in corridors, third floor through tenth
floor, and install carpet and rubber base. (Also includes mezzanine
halls.)
3. Install new lighting fixtures with individual room switches in eighth
floor classrooms.
4. Install 4'x 5' homasote boards covered with material and framed in
locations shown in drawing details.
5. Install tack strips in each of the rooms in the locations and
quantities shown in the drawing details.
6. Furnish air conditioning for computer room in accordance with drawing
detail.
7. Install new carpeting throughout second floor.
8. Install rolling screen counter doors for security purposes in the
accounting office and photo supply store.
APPENDIX F
- 1 -
<PAGE> 1
EXHIBIT 10.19
AMENDMENT TO AGREEMENT AND LEASE
(Jackman Building)
THIS AMENDMENT to AGREEMENT AND LEASE is entered into as of the 1st day of
March, 1980 between STABILE & ASSOCIATES, a Pennsylvania limited partnership,
(the "Landlord") and EDUCATION MANAGEMENT CORPORATION, a Pennsylvania
corporation, (the "Tenant").
W I T N E S S T H:
WHEREAS, the Landlord and the Tenant entered into an Agreement and Lease,
dated as of September 1, 1978, (the "Lease") in which Landlord leased to Tenant
the building known as the Jackman Building (the "Building") located at 526 Penn
Avenue in the City of Pittsburgh, Allegheny County, Pennsylvania, except for a
portion of the first floor of the Building and associated space in the basement
of the Building, such areas having been commonly referred to by the parties as
the "restaurant space;" and
WHEREAS, the Landlord now desires to Lease the remainder of the space in
the Building to Tenant, and the Tenant desires to hire and take such additional
space as Tenant from Landlord.
NOW, THEREFORE, in consideration of the mutual benefits hereinafter
provided, and each intending to be legally bound hereby, the Landlord and the
Tenant hereby agree to supplement, amend and change the Lease as follows:
<PAGE> 2
1. The Landlord does hereby lease and grant to Tenant, and the Tenant does
hereby hire and take as Tenant from Landlord, those portions of the first floor
and basement of the Building not previously leased to Tenant pursuant to the
terms of the Lease (the "Additional Premises"), subject to the terms and
conditions of the Lease, as supplemented, amended and changed by this Amendment
to the Lease (the "Amendment"), so that, as of the date of this Amendment, the
entire Building is leased to Tenant. Hereafter, the term "Premises," when used
in the Lease, shall be deemed to refer to the entire Building including the
Additional Premises. Tenant agrees to continue to make the following spaces in
the Building available to Landlord and to Landlord's agents and employees in
connection with the performance of maintenance activities and operation of the
elevators by Landlord: (a) the office and restroom spaces in the basement
presently occupied by Landlord, and (b) the lounge area on the sixth floor
presently occupied by Landlord (or such equivalent space elsewhere in the
building as the Tenant may hereafter designate).
2. Subparagraph 6(b) of the Lease is hereby amended so that, as amended,
Subparagraph 6(b) reads as follows:
(b) Base Rental Payments.
The Base Rental Payment payable by the Tenant during the initial term of
this Lease will be:
- 2 -
<PAGE> 3
Monthly Base
Dates Rental Payment
----- --------------
September 1, 1978 to April 30, 1979 $34,903.53
May 1, 1979 to February 29, 1980 $32,503.53
March 1, 1980 to April 30, 1980 $33,753.53
May 1, 1980 to May 31, 1980 $34,586.86
June 1, 1980 to August 31, 1980 $34,577.87
September 1, 1980 to April 30, 1981 $35,869.54
May 1, 1981 to August 31, 1985 $36,636.21
September 1, 1985 to August 31, 1990 $36,886.21
If the Tenant exercises its renewal options under Paragraph 5 of this
Lease, the Tenant's Base Rental Payments during the renewal periods will be:
Monthly Base
Dates Rental Payment
----- --------------
September 1, 1990 to August 31, 1995 $47,241.67
September 1, 1995 to August 31, 2000 $56,350.00
All of the Monthly Base Rental Payments set forth above are the Monthly
Base Rental Payments for the entire Building including the Additional
Premises.
3. Clauses (i) and (ii) of Subparagraph 6(c) are hereby amended so that,
as amended, they read as follows:
(i) 100% of increases or decreases (if any) in real estate taxes on
the Jackman Building paid by the Landlord to the City of Pittsburgh, the
Pittsburgh School District and Allegheny County during the preceding calendar
year as compared to $28,718.00.
- 3 -
<PAGE> 4
(ii) 100% of increases or decreases (if any) in the portion of the all
risks insurance cost incurred by Landlord during the preceding calendar year
in connection with Jackman Building as compared to such cost as incurred by
Landlord for calendar year 1977 (Landlord and Tenant agree that said cost
totaled $6,572.00 for calendar year 1977);
4. A new subparagraph, Subparagraph 6(d), is hereby added as follows:
6(d) Special Rental Payments.
In addition to the Base Rental Payments set forth in Subparagraph 6(b)
and the Escalation Rental Payments set forth in Subparagraph 6(c), beginning
with the rental payment due for the month of September 1980 and continuing
thereafter through the rental payment due for the month of August 1990, the
Tenant will pay Special Rental Payments to the Landlord. The Special Rental
Payments will be calculated by using the following formula:
A x (R+2)
---------
100x12
Where: A = The Amount for the appropriate month as shown on Schedule 1
to this Amendment; and R = The "Prime Rate" (expressed as an
annual percentage). As used herein, the term "Prime Rate"
shall mean the highest rate of interest which is announced and
charged by Mellon Bank N.A. during the preceding calendar month
to corporate
- 4 -
<PAGE> 5
borrowers in the United States of the highest credit standing
for 90-day unsecured loans.
5. The Landlord agrees that, prior to August 31, 1980, it will make, at
its own expense, the alterations, additions and improvements listed in Schedule
2 to this Amendment in the Additional Premises area, in accordance with plans
and specifications prepared by Klaus Associates (which plans and specifications
have been approved by Landlord) and pay for the work promptly upon the
presentation of the contractor's invoices accompanied by certifications by the
architect and the Tenant (or other evidence reasonably acceptable to the
Landlord) that such items have been incorporated in the Premises.
6. The Tenant intends to make the alterations, additions and improvements
listed in Schedule 3 to this Amendment in the Additional Premises area and on
the Second Floor. Such alterations, additions and improvements will be made in
accordance with plans and specifications prepared by Klaus Associates (which
plans and specifications have been approved by Landlord), will be paid for by
the Tenant and are hereby deemed to be Tenant improvements. (The alterations,
additions and improvements listed in Schedules 2 and 3 are as shown on a set of
six (6) drawings which are listed in Schedule 4 to this Amendment, copies of
said drawings having been signed by the parties hereto in connection with the
execution of this Amendment.)
- 5 -
<PAGE> 6
7. Except as supplemented, amended and changed by this Amendment, all the
terms, conditions and covenants contained in the Lease shall remain in full
force and effect and shall apply to the entire Jackman Building including the
Additional Premises.
8. This Amendment has four (4) Schedules as follows:
Schedule 1 - 1 page
Schedule 2 - 2 pages
Schedule 3 - 1 page
Schedule 4 - 1 page
IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment to
Agreement and Lease as of the date and year first above written.
WITNESS: LANDLORD:
STABILE & ASSOCIATES
By
- ------------------------------ -----------------------------
TENANT:
ATTEST: EDUCATION MANAGEMENT CORPORATION
By
- ------------------------------ -----------------------------
- 6 -
<PAGE> 7
SCHEDULE 1 OF AMENDMENT TO AGREEMENT AND LEASE
BETWEEN STABILE & ASSOCIATES AND EDUCATION MANAGEMENT CORPORATION
DATED MARCH 1, 1980
<TABLE>
<CAPTION>
Mo Amount Mo Amount Mo Amount
- -- ------ -- ------ -- ------
<S> <C> <C>
1 - 79,666.67 41 - 52,999.87 81 - 26,333.07
2 - 79,000.00 42 - 52,333.20 82 - 25,666.40
3 - 78,333.33 43 - 51,666.53 83 - 24,999.73
4 - 77,666.66 44 - 50,999.86 84 - 24,333.06
5 - 76,999.99 45 - 50,333.19 85 - 23,666.39
6 - 76,333.32 46 - 49,666.52 86 - 22,999.72
7 - 75,666.65 47 - 48,999.85 87 - 22,333.05
8 - 74,999.98 48 - 48,333.18 88 - 21,666.38
9 - 74,333.31 49 - 47,666.51 89 - 20,999.71
10 - 73,666.64 50 - 46,999.84 90 - 20,333.04
11 - 72,999.97 51 - 46,333.17 91 - 19,666.37
12 - 72,333.30 52 - 45,666.50 92 - 18,999.70
13 - 71,666.63 53 - 44,999.83 93 - 18,333.03
14 - 70,999.96 54 - 44,333.16 94 - 17,666.36
15 - 70,333.29 55 - 43,666.49 95 - 16,999.69
16 - 69,666.62 56 - 42,999.82 96 - 16,333.02
17 - 68,999.95 57 - 42,333.15 97 - 15,666.35
18 - 68,333.28 58 - 41,666.48 98 - 14,999.68
19 - 67,666.61 59 - 40,999.81 99 - 14,333.01
20 - 66,999.94 60 - 40,333.14 100 - 13,666.34
21 - 66,333.27 61 - 39,666.47 101 - 12,999.67
22 - 65,666.60 62 - 38,999.80 102 - 12,333.00
23 - 64,999.93 63 - 38,333.13 103 - 11,666.33
24 - 64,333.26 64 - 37,666.46 104 - 10,999.66
25 - 63,666.59 65 - 36,999.79 105 - 10,332.99
26 - 62,999.92 66 - 36,333.12 106 - 9,666.32
27 - 62,333.25 67 - 35,666.45 107 - 8,999.65
28 - 61,666.58 68 - 34,999.78 108 - 8,332.98
29 - 60,999.91 69 - 34,333.11 109 - 7,666.31
30 - 60,333.24 70 - 33,666.44 110 - 6,999.64
31 - 59,666.57 71 - 32,999.77 111 - 6,332.97
32 - 58,999.90 72 - 32,333.10 112 - 5,666.30
33 - 58,333.23 73 - 31,666.43 113 - 4,999.53
34 - 57,666.56 74 - 30,999.76 114 - 4,332.96
35 - 56,999.89 75 - 30,333.09 115 - 3,666.29
36 - 56,333.22 76 - 29,666.42 116 - 2,999.62
37 - 55,666.55 77 - 28,999.75 117 - 2,332.95
38 - 54,999.88 78 - 28,333.08 118 - 1,666.28
39 - 54,333.21 79 - 27,666.41 119 - 999.61
40 - 53,666.54 80 - 26,999.74 120 - 332.94
</TABLE>
SCHEDULE 1
<PAGE> 8
SCHEDULE 2 OF AMENDMENT TO AGREEMENT AND LEASE
BETWEEN STABILE & ASSOCIATES AND EDUCATION MANAGEMENT CORPORATION
DATED MARCH 31, 1980
I. DEMOLITION
Removal of drop-ceiling, existing wall, wood shelving, wall coverings, carpet,
plaster ceiling in the kitchen, quarry tile in the kitchen, refrigerator room,
low-level partition, bulkhead and kitchen hood, existing duct work, bulk-head
at the rear of the facility, marble floor in front of the elevators, counter
and display case on the second floor and the removal of the restaurant store
front on outside of building. The preparation of terrazzo flooring, the
installation of a barrier to permit construction work, patching of holes in the
cement floor and leveling of floors as required.
II. SPECIAL DEMOLITION
The removal of two masonry walls, providing an opening to the elevator and an
opening to the existing Gallery.
III. MASONRY
Patching around two doorways in the basement and one on the first floor plus
installing a block wall in the basement.
IV. MISCELLANEOUS METALS AND MILLWORK
The lintels above the doors, the furnishing and erection of numerals and
letters on the front of the building. The formica counter on the second floor,
all doors and frames, the borrowed light frames, shelving and picture molding
for the Gallery.
V. CAULKING-SEALANTS
The ceiling of the outside bulk-heads at each of the two entrances of the
building.
VI. GLASS AND GLAZING
All of the new glass lights on the first and second floor as detailed on the
blueprints.
VII. FINISHED HARDWARE
Includes nine (9) hollow metal doors, six (6) regular door frames, three (3)
special frames, twenty-three (23) sets of hardware, two (2) sets of special
door closers, the re-keying of
SCHEDULE 2
- 1 -
<PAGE> 9
six (6) openings and new cylinder locks for the three (3) doors at the front
entrance to the store area.
VIII. SPRINKLERS
Move sprinklers as required on the first floor restaurant space, the second
floor Registrar's Office, replacement of old heads in the loading dock, and the
repair of the sprinkler pipe in the restaurant stairwell.
IX. H.V.A.C.
This includes sheet-metal work, diffusers, new grills at the front windows,
connecting the duct work of the existing Gallery to the existing
air-conditioning unit in the restaurant area, but does not include any work in
repairing or making operative the existing air-conditioning units.
X. ELECTRICAL - INSIDE
Wiring of the exit lights, emergency lights, panel lights and track lighting,
receptacles and the demolition of existing wiring as required to permit new
doorways and entrances. Includes all fixtures, plates, etc. Changing of
lighting arrangement in the Registrar's Office on the second floor.
XI. CLEANING OF THE REAR ROOMS
This includes the cleaning of the restrooms, the mechanical room and the
storage closet on the first floor.
XII. ARCHITECTURAL FEE
Includes the general architectural services throughout the project including
biding, periodic inspections and compliance reporting. Also including
obtaining of the necessary work permits, the preparation of all blueprints and
drawings as required by the tenant, landlord, City and general contractor.
SCHEDULE 2
- 2 -
<PAGE> 10
SCHEDULE 3 OF AMENDMENT TO AGREEMENT AND LEASE
BETWEEN STABILE & ASSOCIATES AND EDUCATION MANAGEMENT CORPORATION
DATED MARCH 31, 1980
I. CARPENTRY
The labor of installing the picture molding, doors, frames and borrowed light
frames, counter on the second floor, and the capping of old plumbing lines.
II. ACOUSTICAL CEILING, DRYWALL, AND PLASTERING
Scratch and brown coat the face of the building, acoustical tile ceilings and
drywall/plaster all walls as detailed on blueprints.
III. CARPETING AND RUBBER BASE
Install carpeting and rubber base throughout the existing restaurant area as
detailed on blueprints.
IV. CERAMIC TILE
Install ceramic tile on the face of the building in the restaurant area, cost
also includes scaffolding as required, etc.
V. WALL COVERINGS
Covering Gallery and offices with a vinyl wall covering. All other areas
drywall finish. Drywalls will be sized for installation of vinyl. Painting
ceramic tile on the face of the building.
VI. TOILET ROOM ACCESSORIES
Various toilet room accessories to restore the facility.
VII. ELECTRICAL OUTSIDE LIGHTING
Lighting of the sign "Art Institute of Pittsburgh" on the front of the building
and the three (3) banners.
VIII. COCO MATT
Coco Matt will be placed in front of the elevators in the entrance way to the
Gallery.
SCHEDULE 3
<PAGE> 11
SCHEDULE 4 OF AMENDMENT TO AGREEMENT AND LEASE
BETWEEN STABILE & ASSOCIATES AND EDUCATION MANAGEMENT CORPORATION
DATED MARCH 1, 1980
The following drawings prepared by Klaus Associates show substantially all
of the work listed in Schedules 2 and 3 to this Amendment. All drawings are
originally dated "2-20-80" and have been revised as indicated.
A-B (Basement Floor Plan, Elevation and Door Schedule) Revised 6-1-80
A-1 (First Floor Plan) Revised 2-22-80, 6-1-80
A-2 (Second Floor Plan and Elevation) Revised 3-21-80 4-21-80, 6-1-80
A-3 (Reflected Ceiling Plan and Lighting Fixture Schedule) Revised 6-1-80
A-4 (Details) Revised 6-1-80
A-5 (Penn Avenue Elevation and Details) Revised 6-1-80
SCHEDULE 4
<PAGE> 1
EXHIBIT 10.20
EDUCATION MANAGEMENT CORPORATION
ROBERT B. KNUTSON
President
November 21, 1984
Stabile & Associates
c/o Realty Growth Corporation
The Roosevelt Building
Sixth and Penn Avenues
Pittsburgh, PA 15222
Gentlemen:
Re: Jackman Building Lease Dated September 1, 1978
-- Exercise of Renewal Options
Education Management Corporation hereby exercises both renewal options
provided for it as Tenant under Paragraph 5 of the "AGREEMENT AND LEASE (Jackman
Building)" entered into by our Corporation with Stabile & Associates, a
Pennsylvania limited partnership as of September 1, 1978. The effects of these
actions are to extend the term of the lease for two additional periods of five
(5) years each, through August 31, 2000 A.D.
Please acknowledge the receipt of this notice in the space provided below
on the enclosed extra copy and return it to me by mail. Thank you for your
cooperation.
Sincerely,
EDUCATION MANAGEMENT CORPORATION
By
-----------------------------
Robert B. Knutson, President
Acknowledgement
Stabile & Associates, a Pennsylvania limited partnership, acknowledges the
receipt of this notice letter on December ___, 1984.
STABILE & ASSOCIATES
By
-----------------------------
<PAGE> 1
Exhibit 21.01
SUBSIDIARIES
<TABLE>
<CAPTION>
Name of Subsidiary Jurisdiction of Incorporation
<S> <C>
Education Management Corporation Pennsylvania
Art Institutes International, Inc. Pennsylvania
Art Institute of Atlanta, Inc. Georgia
Art Institute of Dallas, Inc. Texas
Art Institute of Fort Lauderdale, Inc. Florida
Art Institute of Houston, Inc. Texas
Illinois Institute of Art, Inc. Illinois
Illinois Institute of Art at Schaumburg, Inc. Illinois
Art Institute of Philadelphia, Inc. Pennsylvania
Art Institute of Phoenix, Inc. Arizona
Art Institute of Seattle, Inc. Washington
Colorado Institute of Art, Inc. Colorado
Art-Photo Supply Corp. Florida
Education Housing Services, Inc. Pennsylvania
Eisenhower Boulevard Associates, Inc. Florida
EMC Management Services, Inc. Pennsylvania
EMC Marketing & Advertising, Inc. Georgia
Ocean World, Inc. Florida
The National Center for Professional Development, Inc. Georgia
The National Center for Educational Testing, Inc. New York
The National Center for Financial Services Training, Inc. Georgia
The National Center for Paralegal Training Delaware
The National Center for Paralegal Training Illinois
The National Center for Paralegal Training New York
NCPT, Inc. Georgia
NCPT, Inc. California
NCPT-AZ, Inc. Arizona
Art Institutes International - Twin Cities, Inc. Minnesota
Art Institute of Charleston, Inc. South Carolina
Art Institute of Honolulu, Inc. Hawaii
Art Institute of Indianapolis, Inc. Indiana
Art Institute of Las Vegas, Inc. Nevada
Art Institute of Los Angeles, Inc. California
Art Institute of Minneapolis, Inc. Minnesota
Art Institute of Minnesota, Inc. Minnesota
Art Institute of New Orleans, Inc. Louisiana
</TABLE>
P11-636099.1
<PAGE> 2
<TABLE>
<S> <C>
Art Institute of Orlando, Inc. Florida
Art Institute of Washington, Inc. District of Columbia
AII Placement Services, Inc. New York
Chicago Institute of Art and Design, Inc. Illinois
Education Management Corporation New York
Music Business Institute, Inc. Tennessee
New York Institute of Art, Inc. New York
San Francisco Institute of Design, Inc. California
The Design Schools Pennsylvania
The National Center for Credit Training, Inc. New York
The National Center for Financial Services Training, Inc. Illinois
The National Center for Legal Training, Inc. Georgia
The National Center for Professional Fund Raising Training, Inc. New York
The National Center for Professional Placement, Inc. New York
</TABLE>
- 2 -
<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.
/s/ Arthur Andersen LLP
Pittsburgh, Pennsylvania
October 1, 1996
<PAGE> 1
Exhibit 23.02
[Letterhead of Dow, Lohnes & Albertson, PLLC]
September 30, 1996
Education Management Corporation
300 Sixth Avenue, Suite 800
Pittsburgh, Pennsylvania 15222-2598
Attention: Frederick W. Steinberg, Esq.
Senior Vice President, General Counsel and Secretary
Ladies and Gentlemen:
In conjunction with our serving as higher education special regulatory counsel
to Education Management Corporation, a Pennsylvania corporation (the "Company"),
in connection with its Registration Statement on Form S-1 (File No. 333-10385),
as amended (the "Registration Statement"), filed with the Securities and
Exchange Commission, relating to the proposed initial public offering of shares
of the Common Stock of the Company, our firm hereby consents to the reference to
our firm in the discussion in the Registration Statement under the heading "Risk
Factors -- Regulatory Consequences of a Change of Ownership or Control." In
giving this consent, we do not thereby admit that we are in the category of
persons whose consent is required under Section 7 of the Securities Act of 1993,
as amended, or the rules and regulations of the Securities and Exchange
Commission promulgated thereunder.
Sincerely,
DOW, LOHNES & ALBERTSON, PLLC
By: /s/ MICHAEL B. GOLDSTEIN
------------------------
Michael B. Goldstein
Member
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
DATA FOR THE YEARS ENDED JUNE 30, 1995 AND 1996 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> JUN-30-1995 JUN-30-1996
<PERIOD-START> JUL-01-1994 JUL-01-1995
<PERIOD-END> JUN-30-1995 JUN-30-1996
<CASH> 39,623 27,399
<SECURITIES> 0 0
<RECEIVABLES> 6,438 8,618
<ALLOWANCES> 1,529 2,938
<INVENTORY> 992 1,271
<CURRENT-ASSETS> 49,662 39,858
<PP&E> 62,711 77,692
<DEPRECIATION> 28,600 36,518
<TOTAL-ASSETS> 102,303 101,412
<CURRENT-LIABILITIES> 34,718 27,264
<BONDS> 69,810 65,919
0 0
22,075 22,075
<COMMON> 1 1
<OTHER-SE> (20,221) (12,420)
<TOTAL-LIABILITY-AND-EQUITY> 102,303 101,412
<SALES> 131,227 147,863
<TOTAL-REVENUES> 131,227 147,863
<CGS> 86,865 98,841
<TOTAL-COSTS> 124,729 133,611
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 4,495 3,371
<INCOME-PRETAX> 2,003 10,881
<INCOME-TAX> 490 4,035
<INCOME-CONTINUING> 1,513 6,846
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 (926)
<CHANGES> 0 0
<NET-INCOME> 1,513 5,920
<EPS-PRIMARY> (.11) .36
<EPS-DILUTED> (.11) .31
</TABLE>
