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REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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EDUCATION MANAGEMENT CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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PENNSYLVANIA 8200 25-1119571
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(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
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300 SIXTH AVENUE
PITTSBURGH, PENNSYLVANIA 15222
(412) 562-0900
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(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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FREDERICK W. STEINBERG
VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
EDUCATION MANAGEMENT CORPORATION
300 SIXTH AVENUE
PITTSBURGH, PENNSYLVANIA 15222
(412) 562-0900
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(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
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Copies to:
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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
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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. / /
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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. / /
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If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED PRICE(1) FEE
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Common Stock, $.01 par value $86,250,000 $29,741.38
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Preferred Share Purchase Rights (2) NA
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(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933, as amended.
(2) To be issued pro rata to holders of the registrant's Common Stock for no
consideration.
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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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CROSS-REFERENCE TABLE
LOCATION IN PROSPECTUS
OF INFORMATION REQUIRED BY PART I
OF FORM S-1
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ITEM NO. CAPTION LOCATION IN PROSPECTUS
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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
Registered........................... Description of Capital Stock
10. Interests of Named Experts and
Counsel.............................. Not applicable
11. Information with Respect to the Prospectus Summary; Risk Factors; The
Registrant........................... Company; Dividend Policy;
Capitalization; Selected Consolidated
Financial Data; Management's
Discussion and Analysis of Financial
Condition and Results of Operations;
Business; Management and Directors;
Certain Transactions; Principal and
Selling Shareholders; Shares Eligible
for Future Sale; Index to Financial
Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.......................... Not applicable
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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 , 1996
Shares
Education Management Corporation
Common Stock
($.01 par value)
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Of the shares of the Common Stock, $.01 par value (the "Common
Stock"), of Education Management Corporation ("EMC" or the "Company") offered
hereby (the "Offering"), shares are being offered by the
Company and 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 $
and $
per share. For information relating to the factors
considered in determining
the initial offering price to the public, see
"Underwriting."
Application will be made to list the Shares on the Nasdaq National Market under
the symbol "EDMC."
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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 .
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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.
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Underwriting
Discounts Proceeds to
Price to and Proceeds to Selling
Public Commissions Company (1) Shareholders
----------- ----------- ----------- -----------
Per Share................................... $ $ $ $
Total (2)................................... $ $ $ $
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(1) Before deduction of expenses payable by the Company estimated at
$ .
(2) The Selling Shareholders have granted the Underwriters an option,
exercisable for 30 days from the date of this Prospectus, to purchase a
maximum of 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 $ .
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The Shares 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 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.
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[INSERT GRAPHICS AND/OR PHOTOGRAPHS]
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
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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 the information discussed 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," "Description of
Capital Stock" and "Underwriting." 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" refers to the pro forma effects of the NYRS
Acquisition.
THE COMPANY
Education Management Corporation ("EMC" or the "Company") is one of 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 and hospitality 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.
The Company's main operating unit, The Art Institutes, consists of 11
schools in 10 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. Art Institute programs
typically are completed within 18 to 24 months and culminate in an associate's
degree. Four Art Institutes currently offer bachelor's degree programs, and EMC
expects to continue to introduce these programs where permitted.
The Company offers a culinary curriculum at six Art Institutes and NYRS, a
well-known culinary arts and restaurant management school in New York City. NYRS
was acquired (subject to certain regulatory approvals) on August 2, 1996 for
$9.5 million in cash (the "NYRS Acquisition"), which was borrowed under the
Revolving Credit Agreement (as defined below). NYRS offers an associate's degree
program and various certificate programs. On a pro forma basis, NYRS accounted
for approximately 6% of the Company's net revenues in fiscal 1996.
The Company also offers paralegal training at NCPT in Atlanta; NCPT's
advanced certificate programs take four to nine months to complete. NCPD has
consulting affiliations 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.
The Company's objective is to provide career-focused education which
maximizes employment opportunities for its students upon graduation. EMC's
graduates are employed by a broad range of employers nationwide, including major
corporations such as American Greetings Corporation, Blockbuster Entertainment
Group, The Walt Disney Company, LucasArts Entertainment Company and Marriott
International, Inc. For calendar year 1995, approximately 87.4% of Art Institute
associate's degree graduates who were available for employment obtained
positions in fields related to their program of study within six months of
graduation.
The Company believes that demand for postsecondary education will increase
principally due to (i) a projected 20% increase in the number of high school
graduates from approximately 2.5 million in 1994 to 3.0 million in 2001, (ii)
the growing interest of working adults in enhancing their marketable skills,
(iii) the income premium attributable to higher education degrees, and (iv) the
demand from employers for entry-level workers with technical skills.
3
<PAGE> 6
EMC intends to continue to capitalize on the favorable trends in the
postsecondary education market by building on the results of the Company's
strategic plan implemented in 1994. Key elements of this plan and its results to
date include:
- Enhancing Growth at Current Schools: The total number of students
attending The Art Institutes rose approximately 8% from the fall quarter
of 1993 to the fall quarter of 1995, despite a decline in the number of
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 1997.
- Improving Student Outcomes: At The Art Institutes, the average quarterly
net persistence rate, which measures the number of students that remain
enrolled during an academic quarter, has improved from 88.4% in 1994 to
90.1% for the first three quarters of 1996. From calendar year 1993 to
1995, the placement rate for 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 1995, the Company has opened or
acquired four new 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 fiscal 1994, the Company has
established new culinary arts programs at three additional schools (in
addition to acquiring NYRS) and has added education program offerings in
high growth fields such as computer animation, multimedia and video
production. In addition, the Company intends to offer degree programs in
interactive multimedia programming and web site development in fiscal
1997.
- Improving Operating Efficiencies: The Company has invested approximately
$9.1 million to establish an integrated, proprietary information system
that assists managers and employees in maximizing internal efficiency.
The Company believes that its investment in information systems
technology significantly enhances its ability to integrate acquisitions
and newly-established schools into the Company's operations.
The Company believes a significant factor in its success is the experience
and stability of its management team and the substantial equity ownership of its
employees. EMC's senior management has an average of nine years with the Company
and 18 years of experience in the education industry. Upon completion of the
Offering, approximately % of the Common Stock 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."
THE OFFERING
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Common Stock offered by:
The Company.............................................. shares
Selling Shareholders..................................... shares
Total................................................. shares
Common Stock to be outstanding after the Offering.......... shares(1)
Use of proceeds............................................ For repayment of certain
indebtedness. 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>
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(1) Excludes shares reserved for issuance under the Company's
stock-based compensation plans. See "Management and Directors -- Benefit
Plans -- 1996 Stock Incentive Plan," "-- Current Management Incentive Stock
Option Plans" and "-- 1996 Employee Stock Purchase Plan."
4
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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 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 has been derived from the
Company's consolidated financial statements which have been 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. The summary
consolidated pro forma financial data set forth below have been derived from the
pro forma consolidated financial data included elsewhere in this Prospectus. The
summary pro forma financial data do not necessarily reflect the results of
operations or the financial position of the Company that actually would have
occurred had the Transactions and the Offering been consummated as of the date
indicated.
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<CAPTION>
YEAR ENDED JUNE 30,
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Pro Forma
as Adjusted
1992 1993 1994(8) 1995(9) 1996 1996(10)
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(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 2,160
Income (loss) before ESOP expense,
interest and taxes............... (2,469) 8,707 6,210 13,584 15,618 16,247
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 8,697
Net income (loss)(4)............... (11,070) (1,174) (1,702) 1,513 5,920 7,771
Dividends on preferred stock....... 2,249 2,249 2,249 2,249 2,249 -
PER SHARE, FULLY DILUTED(5):
Income (loss) from continuing
operations before
extraordinary item............ (.66) (.24) (.28) (.05) .19
Net income (loss)................ (.95) (.24) (.28) (.05) .15
Weighted average number of common
shares outstanding, in
thousands(6).................. 14,043 14,043 14,043 14,043 23,960
OTHER DATA:
EBITDA(7).......................... $ 22,922 $ 23,340 $ 18,629 $ 21,089 $ 24,148 $ 26,390
Capital expenditures............... 6,466 8,448 6,289 11,640 14,981 15,052
Enrollments at beginning of fall
quarter during period............ 12,548 12,708 12,592 12,749 13,407 13,922
</TABLE>
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AT JUNE 30, 1996
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PRO FORMA AS
HISTORICAL ADJUSTED(10)
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(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Total cash and cash equivalents.................................... $ 27,399 $ 27,399
Working capital.................................................... 12,594 14,083
Total assets....................................................... 101,412 111,749
Long-term debt (including the current portions of capitalized lease
obligations)..................................................... 65,919 38,026
Redeemable shareholders' investment(11)............................ 9,656 -
Shareholders' investment........................................... - 47,049
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(1) Includes the amortization of goodwill and intangibles which resulted from
the application of purchase accounting to the establishment and financing
in 1989 of the ESOP and the related leveraged recapitalization of EMC. The
majority of the intangible assets were related to student enrollments and
applications, accreditation and contracts with colleges and universities
which were written off over two-year to five-year periods. The balance of
the consideration was assigned to goodwill and is being amortized over 40
years.
(2) ESOP expense equals the sum of the payments on the senior term loan related
to the ESOP's acquisition of the employer securities, plus repurchases of
stock from participants in the ESOP, less dividends paid on the Series A
10.19% Convertible Preferred Stock, par value $.0001 (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 senior term loan. In
fiscal 1996, the senior term loan was paid in full, including a voluntary
prepayment of $0.4 million that would have become due on September 30,
1996. There will be no future ESOP expense resulting from the repayment of
that debt.
(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 tax.
(4) In May 1992, the Company determined that the Ocean World theme park
operations would be discontinued. The loss of $4.0 million on the
discontinuation included the write-down of assets to estimated net
realizable value and the estimated losses of the subsidiary through the
expiration of its lease. The loss was recorded net of tax.
(5) Dividends on preferred stock are netted against net income (loss) to
calculate net income (loss) per common share.
(6) The weighted average number of common shares used to calculate income
(loss) per share includes, where dilutive, common equivalent shares
calculated under the treasury stock method and the assumed 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
service and incur debt. EBITDA should not be considered (i) as an
alternative to net income or any other GAAP measure of performance; (ii) as
an indication of operating performance or cash flows generated by
operating, investing or financing activities, or (iii) as a measure of
liquidity.
(8) A special charge of $3.0 million was recorded in fiscal 1994 for unusual
items, including the early write-off of equipment, various expense accruals
and program termination expenses. The charge was included in educational
services and general and administrative expenses.
(9) Results for 1995 include a $1.1 million nonrecurring credit for the refund
of state and local business and occupational taxes.
(10) 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 data and as of June 30,
1996 for balance sheet data. See "The Transactions" and "Pro Forma
Consolidated Financial Data."
(11) 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 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. These rights will expire upon consummation of the
Offering.
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RISK FACTORS
In addition to the other information 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
The Company and its schools are subject to extensive regulation by federal
and state governmental agencies and accrediting agencies. In particular, the
United States 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 from Title IV sources, typically
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
were derived from Title IV Programs. For the year ended June 30, 1996,
approximately 68% of the Company's revenues was derived from Title IV Programs.
See "Business -- Student Financial Assistance -- Federal Oversight of Title IV
Programs -- The '85/15 Rule'."
Each institution must also be authorized to offer its programs of
instruction by the relevant agency of the state in which it is located and, to
participate in Title IV Programs, be accredited by an accrediting agency
recognized by the U.S. Department of Education. The states and accrediting
agencies with jurisdiction over the Company's schools have promulgated
standards, which vary substantially, relating to institutional programs,
locations, financial responsibility and other operational matters. Each of the
Company's schools is licensed and approved in the state where it operates and is
accredited by at least one recognized accrediting agency. See "Business --
Accreditation" and "-- State Authorization."
Based upon independent and governmental reviews and audits, the Company's
schools have been found to have been in substantial compliance with the
requirements governing participation 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 and changes its interpretation of existing laws and
regulations, there can be no assurance that the U.S. Department of Education
will agree in the future with the Company's interpretation of each such
requirement.
In the event of a determination that one of the Company's schools has
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 need, 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 the
Company to sanctions under the United States 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."
7
<PAGE> 10
Title IV Programs are subject to significant political and budgetary
pressures. The next reauthorization of the HEA by the United States 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 result in 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.
Significant regulatory factors that could adversely affect the Company
include the following:
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," formerly the Guaranteed Student Loan) 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 any
federal award year, that institution may be placed on "provisional
certification" status for up to four years, subjecting that institution to
closer review by the U.S. Department of Education and possible summary action
for significant violations of Title IV Program requirements.
None of the Company's schools has a published FFEL cohort default rate of
25% or greater for three consecutive federal fiscal years. One of The Art
Institutes, which accounted for less than 5% of the Company's income before ESOP
expense, interest and taxes 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. The Company has appealed this published 1993 rate,
and preliminary rates for 1994 are subject to adjustment prior to final
publication. The remainder of The Art Institutes had published 1993 and
preliminary 1994 FFEL cohort default rates below 25%. Five of the Company's
schools (including the school referenced above) have Perkins cohort default
rates in excess of 15% for the 1995/1996 federal award year and thus could be
placed on provisional certification status. None of those schools has been
placed on that status. The loss of eligibility to participate in Title IV
Programs by any of the Company's schools due to high FFEL cohort default rates
could have a material adverse effect on the Company. See "Business -- Student
Financial Assistance -- Federal Oversight of Title IV Programs -- Cohort Default
Rates."
FINANCIAL RESPONSIBILITY STANDARDS
The HEA and its implementing regulations establish specific standards of
financial responsibility that institutions must satisfy in order to qualify for
participation in Title IV Programs. Under those 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 any two
consecutive 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, at the time
of its acquisition in fiscal 1996, the Ray College of Design (renamed as The
Illinois Institute of Art at Chicago and The Illinois Institute of Art at
Schaumburg) satisfied those standards by relying on the financial statements of
its parent corporation, the Art Institutes International, Inc. ("AII"). All of
the other Art Institutes individually, as well as on a consolidated basis at the
level of AII, have met the standards described above for the relevant periods.
8
<PAGE> 11
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 the financial responsibility standards to
the Company on the basis of pro forma consolidated financial statements adjusted
for the consummation of the Offering, the Company believes that it would be
found to be in compliance with the requisite 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. 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 unless the indebtedness of that entity are guaranteed 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. The application of the financial responsibility
standards on a consolidated basis at the Company level prior to consummation of
the Offering could have a material adverse effect on the Company. See "Business
- -- Student Financial Assistance -- Federal Oversight of Title IV Programs --
Financial Responsibility Standards."
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 the applicable regulations, that institution
becomes ineligible to participate in Title IV Programs. In such event, an
institution may only receive and disburse 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 its 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 U.S.
Department of Education is not required by the HEA or any regulations to process
such an application within a particular time frame. In practice, the time taken
to act on 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 its 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 if any
person acquires ownership or control of more than 50% of its total outstanding
voting stock or if a person who has had such a position ceases to hold or
control more than 50% of its total outstanding stock. With respect to a publicly
traded corporation, which will be the Company's status 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 the states and accrediting agencies with jurisdiction over
the Company's schools vary widely in this regard.
If the Offering were determined to constitute a change of ownership
resulting in a change in control, EMC would be required to reestablish the state
authorization and accreditation of each of its schools and apply to the U.S.
Department of Education to reestablish the certification of each of its schools
to participate in Title IV Programs. A significant delay in reobtaining or the
failure to reobtain state authorization, accreditation or Title IV Program
certification for any or all of the Company's schools could have a material
adverse effect on the Company. Based upon its review of the HEA, applicable
federal regulations and applicable state and accrediting agency standards and
upon the advice of its regulatory legal counsel, 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. Once the Company is deemed to be
"publicly traded," as that term is used by the U.S. Department of Education, 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
9
<PAGE> 12
of the Company's capital stock. However, the Company believes that any such
future transaction that would have an adverse effect on the 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," "Management and
Directors," "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 enrollments during the summer months and expenses
incurred in preparation for the peak in enrollment in the fall period. 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 technology-related skills.
Education programs at The Art Institutes, particularly programs for advertising
artists, computer animators, graphic designers and multimedia technicians, must
keep pace with those shifting requirements. The Company believes its management
processes and information systems should permit the Company to plan for and
implement changes in curriculum content and supporting technology in response to
market needs. 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 NYRS and the Ray
College of Design (renamed as The Illinois Institute of Art at Chicago and The
Illinois Institute of Art at Schaumburg). 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. There can be no assurance
that suitable expansion or acquisition opportunities will be identified or that
any new or acquired institutions (including the schools described above) can be
operated profitably or successfully integrated into the Company's operations.
Growth through expansion or acquisition could involve certain additional risks
and problems, 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. 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 will collectively own approximately %
of the outstanding shares of Common Stock (approximately % if the
over-allotment option is exercised in full). In particular, the largest
shareholders, the ESOP, Mr. Knutson and the Selling Shareholders will own
approximately %, %, %, % and %, respectively
(approximately %, %, %, % and %, respectively, if the
over-allotment option is exercised in full). As a result of this 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 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
10
<PAGE> 13
also affect the price that investors might be willing to pay in the future for
shares of Common Stock. See "Management and Directors," "Principal and Selling
Shareholders" and "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. The public institutions may charge lower tuition, due in part to
government subsidies, government and foundation grants, tax-deductible
contributions and other financial sources not available to proprietary schools.
Tuition at private non-profit institutions is, on average, higher than the
tuition at The Art Institutes. See "Business -- Competition."
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. The initial public offering price of 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 consummation of the Offering. See
"Underwriting." There can be no assurance that the market price of the Common
Stock will not decline below the initial public offering price. After
consummation of the Offering, the market price of the Common Stock may 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
economic, political and market conditions, which may adversely affect the market
price of the Common Stock.
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of shares of Common Stock in the Offering will experience
immediate and substantial dilution of $ 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 of the Company to purchase up to
shares of Common Stock at prices ranging from $2.54 to $11.00. See
"Dilution," "Management and Directors -- Benefit Plans" and "Principal and
Selling Shareholders."
SHARES ELIGIBLE FOR FUTURE SALE
After consummation of the Offering, approximately shares of
Common Stock (approximately 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 United States
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 will own an aggregate of
shares of Common Stock ( shares if the over-allotment option
is exercised in full) following consummation of the Offering. In addition, the
Company intends to register shares of Common Stock reserved for
issuance pursuant to the Company's stock-based compensation plans, of which
shares of Common Stock are subject to options that are fully vested.
See "Management and Directors -- Benefit Plans." 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 shares of Common Stock and vested options to purchase
an additional shares of Common Stock in the aggregate, have agreed
that they will not offer, sell, contract to sell, announce an intention 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,
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 shares of Common Stock, or the
availability of 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
11
<PAGE> 14
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."
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
two-thirds vote requirement 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 the shareholders. See "Description of Capital Stock."
THE TRANSACTIONS
The Company's outstanding capital stock currently 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 was financed by $7.6 million of borrowings under the Revolving Credit
Agreement (the "Redemption"). See "Certain Transactions."
Prior to the completion of the Offering, (i) all outstanding warrants to
purchase Class B Stock held by two Selling Shareholders (the "Warrants") will be
exercised 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) (the
"Warrant Exercise"); (ii) the ESOP will, subject to the satisfaction of certain
conditions, elect to convert all shares of Series A Preferred Stock into
2,249,954 shares of Class A Stock (which 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."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered by the Company hereby, after deduction of the estimated underwriting
discount and estimated offering expenses payable by the Company, are estimated
to be approximately $ (assuming an initial public offering price of
$
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
substantially all of its net proceeds from the Offering to repay the outstanding
indebtedness under the Company's Amended and Restated Credit Agreement, dated
March 16, 1995, as amended (the "Revolving Credit Agreement.") The balance of
the net proceeds, if any, will be used for general corporate purposes. For the
year ended June 30, 1996, the weighted average interest rate on the obligations
under the Revolving Credit Agreement was 7.33%, which indebtedness has a final
12
<PAGE> 15
maturity of October 13, 2000. Indebtedness incurred thereunder after ,
1995 was used to refinance the Subordinated Notes, to finance recent
acquisitions by the Company, to finance the Redemption and for general corporate
purposes.
DIVIDEND POLICY
EMC has not declared or paid any cash dividends on its capital stock during
the last 10 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 the Company is, and will
continue to be, subject to certain restrictions under the terms of the Revolving
Credit Agreement.
13
<PAGE> 16
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 $
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 included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
AT 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
Revolving credit debt(1)....................... 55,000 64,500 27,107
Redeemable shareholders' investment(2):
Preferred Stock, $.0001 par value, 1,000,000
shares authorized; 220,750 shares of Series
A Preferred Stock issued and outstanding.... 22,075 22,075 -
Common Stock, $.0001 par value, 42,000,000
shares authorized; including 25,000,000
shares of Class A Stock and 17,000,000
shares of Class B Stock; 3,685,604 shares of
Class A Stock issued and outstanding and
10,207,433 shares of Class B Stock issued
and outstanding............................. 1 1 -
Additional paid-in capital..................... 19,742 19,742 -
Warrants outstanding........................... 7,683 7,683 -
Treasury stock................................. (99) (99) -
Stock subscriptions receivable................. (442) (442) -
Accumulated deficit............................ (39,304) (39,304) -
------- --------
Total redeemable shareholders' investment... 9,656 9,656 -
------- ---------
Shareholders' investment:
Common Stock, $.01 par value, 60,000,000 shares
authorized; shares of Common Stock
issued and outstanding(3)................... - - 291
Additional paid-in capital..................... - - 86,603
Treasury stock................................. - - (99)
Stock subscriptions receivable................. - - (442)
Accumulated deficit............................ - - (39,304)
---------
Total shareholders' investment.............. - - 47,049
---------
Total capitalization...................... $75,575 $ 85,075 $ 85,075
======= ========= =========
</TABLE>
- ---------------
(1) Average borrowing under the Revolving Credit Agreement during fiscal 1996
was approximately $16.8 million at a weighted average interest rate of
7.33%.
(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 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. These rights will expire upon consummation of the
Offering.
(3) Excludes shares reserved for issuance under the Company's
stock-based compensation plans. See "Management and Directors -- Benefit
Plans -- 1996 Stock Incentive Plan," "-- Current Management Incentive Stock
Option Plans" and "-- 1996 Employee Stock Purchase Plan."
14
<PAGE> 17
DILUTION
The pro forma net tangible book value of the Company as of June 30, 1996
was $ , or $ per share of Common Stock, giving effect to the
NYRS Acquisition and the Transactions. Pro forma net tangible book value per
share represents the amount of the Company's net tangible assets less total
liabilities divided by the number of shares of Common Stock outstanding, as
adjusted. After giving effect to the sale of shares of Common Stock
offered hereby by the Company (at an assumed initial public offering price of
$ 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 net tangible book value as
of June 30, 1996 would have been $ , or $ per share. This
represents an immediate increase in pro forma net tangible book value of
$ per share for existing shareholders and an immediate dilution of
$ per share to new investors purchasing shares of Common Stock in the
Offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share...................... $
--------
Pro forma net tangible book value per share before the Offering.... $
--------
Increase per share attributable to the Offering....................
--------
Pro forma net tangible book value per share after the Offering.......
--------
Dilution per share to new investors(1)............................... $
========
</TABLE>
- ---------------
(1) Dilution is determined by subtracting pro forma 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 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 $
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 PERCENT PER SHARE
---------- ------- -------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders(1)............. % $ (2) % $ (2)
New investors(1)..................... % % $
Total.............................. 100.0% $ 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 ,
or approximately % of the total shares of Common Stock outstanding after
the Offering ( shares, or approximately %, if the over-allotment
option is exercised in full), and will increase the number of shares held by
new investors to , or approximately % of the total shares of
Common Stock outstanding after the Offering ( shares, or
approximately %, if the over-allotment option is exercised in full). See
"Principal and Selling Shareholders."
(2) [To be supplied.]
The foregoing tables assume no exercise of outstanding options. As of June
30, 1996, there were outstanding options to purchase shares at
exercise prices ranging from $ to $ at a weighted average exercise price
of $ per share. If all such options had been exercised as of June 30, 1996,
the dilution per share to new investors would have been $ per share.
See "Management and Directors -- Benefit Plans -- Management Incentive Stock
Option Plans," and Notes of Notes to Consolidated Financial
Statements.
15
<PAGE> 18
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 the results
that actually would have occurred had the NYRS Acquisition, the Transactions and
the Offering been consummated on the dates indicated or the results that may
occur or be obtained 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 and, accordingly, is based
on estimated purchase accounting adjustments that are subject to further
revision depending upon the results of any appraisals or other studies of the
fair value of NYRS's assets and liabilities.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE TWELVE MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
AS ADJUSTED
PRO FORMA FOR THE
HISTORICAL FOR THE TRANSACTIONS
------------------- NYRS AND THE
EMC NYRS ACQUISITION(1) OFFERING
-------- ------ --------- ------------
<S> <C> <C> <C> <C>
Net revenues.................................. $147,863 $9,641 $157,504 $157,504
Costs and expenses:
Educational services........................ 98,841 6,269 105,235 105,235
General and administrative.................. 32,344 1,518 33,862 33,862
Management fees............................. - 1,050(2) - -
Amortization of intangibles................. 1,060 - 2,160 (3) 2,160
-------- ------ -------- --------
132,245 8,837 141,257 141,257
Income before ESOP expense, interest and
taxes....................................... 15,618 804 16,247 16,247
ESOP expense................................ 1,366 - 1,366 -(6)
-------- ------ -------- --------
Income before interest and taxes.............. 14,252 804 14,881 16,247
Interest expense (income), net.............. 3,371 (65) 4,002 (4) 1,114(7)(8)
-------- ------ -------- --------
Income before income taxes.................... 10,881 869 10,879 15,133
Provision for income taxes.................. 4,035 348 4,034 (5) 6,436(5)(6)
-------- ------ -------- --------
Income before extraordinary item.............. $ 6,846 $ 521 $ 6,845 $ 8,697
======== ====== ======== ========
PER SHARE, FULLY DILUTED:
Income before extraordinary item............ $ .19 $
======== ========
Weighted average number of common shares
outstanding, in thousands................... 23,960 []
</TABLE>
16
<PAGE> 19
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
AS ADJUSTED
HISTORICAL PRO FORMA FOR THE
------------------- FOR THE NYRS TRANSACTIONS
EMC NYRS ACQUISITION(1) AND THE OFFERING
-------- ------ ------------ ----------------
<S> <C> <C> <C> <C>
ASSETS
Total cash and cash equivalents.......... $ 27,399 $ 606 $ 27,399 $ 27,399
Accounts receivable...................... 8,172 2,386 10,472 10,472
Other current assets..................... 4,287 97 4,313 4,313
-------- ------ -------- --------
Total current assets................... 39,858 3,089 42,184 42,184
Net fixed assets......................... 41,174 1,227 45,424 45,424
Intangible and other long-term assets.... 5,837 131 7,598(3) 7,598
Goodwill................................. 14,543 - 16,543(3) 16,543
-------- ------ -------- --------
Total assets........................ $101,412 $4,447 $111,749 $111,749
======== ====== ======== ========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current liabilities including current
portion of long-term debt.............. $ 27,264 $1,022 $ 28,101 $ 28,101
Long-term debt........................... 62,029 - 71,529 34,136(7)(8)
Other long-term liabilities.............. 2,463 959 2,463 2,463
-------- ------ -------- --------
Total liabilities...................... 91,756 1,981 102,093 64,700
Shareholders' investment................. 9,656 2,466 9,656 47,049(7)(8)
-------- ------ -------- --------
Total liabilities and shareholders'
investment.......................... $101,412 $4,447 $111,749 $111,749
======== ====== ======== ========
</TABLE>
- ---------------
(1) Certain net assets of NYRS were acquired on August 2, 1996 for $9.5 million
in cash. The Company funded the NYRS Acquisition through borrowings under
the Revolving Credit Agreement.
(2) Management fees paid by NYRS to its former owners are eliminated.
(3) Subject to the completion of an appraisal, the excess of the purchase price
over the value of NYRS's tangible assets has been assigned to intangible
assets, including student enrollments, curricula and goodwill. Those assets
have estimated useful lives of 2, 5 and 40 years, respectively.
(4) 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
7.33%, the weighted average interest rate paid by the Company on its
borrowings under the Revolving Credit Agreement during 1996.
(5) Income statement pro forma adjustments are tax-effected at a 40% combined
state and federal statutory rate.
(6) ESOP expense has been eliminated because the senior term loan related to the
ESOP's acquisition of employer securities was paid in full during 1996 and
the Offering removes any repurchase obligation of the Company with respect
to the securities held by the ESOP. In addition, as a result of the
conversion of the Series A Preferred Stock prior to the Offering, the tax
deductible dividends will no longer be paid to the ESOP and are excluded in
the calculation of the tax provision.
(7) In connection with the redemption of 75,000 shares of Series A Preferred
Stock, the Company borrowed $7.6 million under the Revolving Credit
Agreement. Additional interest expense is reflected for the fiscal year on
that amount at an interest rate of 7.33%, the weighted average interest rate
paid by the Company on its borrowing under the Revolving Credit Agreement
during 1996.
(8) Proceeds of the Offering, assumed to be $45 million net of expenses and
fees, will be applied to reduce the Company's borrowings under the Revolving
Credit Agreement. Interest expense savings are $3.4 million.
17
<PAGE> 20
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following selected consolidated financial 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 which have been 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(6) 1995(9) 1996
-------- -------- -------- -------- --------
(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
-------- -------- -------- -------- --------
115,002 108,527 116,339 117,643 132,245
-------- -------- -------- -------- --------
Income (loss) before ESOP expense,
interest and taxes................... (2,469) 8,707 6,210 13,584 15,618
ESOP expense(2)........................ 2,653 4,791 4,759 7,086 1,366
-------- -------- -------- -------- --------
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 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................................. $ (.66) $ (.24) $ (.28) $ (.05) $ .22
Net income (loss)...................... $ (.95) $ (.24) $ (.28) $ (.05) $ .18
Weighted average number of common
shares outstanding, in thousands
(7).................................. 14,043 14,043 14,043 14,043 20,552
Fully diluted:
Income (loss) from continuing
operations before extraordinary
item................................. $ (.66) $ (.24) $ (.28) $ (.05) $ .19
Net income (loss)...................... $ (.95) $ (.24) $ (.28) $ (.05) $ .15
Weighted average number of common
shares outstanding, in thousands
(7).................................. 14,043 14,043 14,043 14,043 23,960
</TABLE>
18
<PAGE> 21
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------------------
1992 1993 1994(6) 1995 1996
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(8).............................. $ 22,922 $ 23,340 $ 18,629 $ 21,089 $ 24,148
Capital expenditures................... 6,466 8,448 6,289 11,640 14,981
Enrollments at beginning of fall
quarter during period................ 12,548 12,708 12,592 12,749 13,407
</TABLE>
<TABLE>
<CAPTION>
AT 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 capital 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 which resulted from
the application of purchase accounting to the establishment and financing in
1989 of the ESOP and the related leveraged recapitalization of EMC. The
majority of the intangible assets were related to student enrollments and
applications, accreditation and contracts with colleges and universities,
which were written off over two-year to five-year periods. The balance of
the consideration was assigned to goodwill and is being amortized over 40
years.
(2) ESOP expense equals the sum of the payments on the ESOP senior term loan,
plus repurchases of stock 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 senior term loan.
In fiscal 1996, the senior term loan was paid in full by means of a
voluntary prepayment of $0.4 million that would have been due on September
30, 1996. There will be no future ESOP expense resulting from the repayment
of that debt.
(3) In fiscal 1996, the $25.0 million aggregate principal amount of the
Company's 13.25% subordinated debt was prepaid in full. The resulting $1.5
million prepayment penalty is classified as an extraordinary item, net of
tax.
(4) In May 1992, the Company determined that the Ocean World theme park
operations would be discontinued. The loss of $4.0 million on the
discontinuation included the write-down of assets to estimated net
realizable value and the estimated losses of the subsidiary through the
expiration of its lease. The loss was recorded net of tax.
(5) Dividends on preferred stock are netted against net income (loss) to
calculate net income (loss) per common share.
(6) A special charge of $3.0 million was recorded in fiscal 1994 for unusual
items including the early write-off of equipment, various expense accruals
and program termination expenses. The charge was included in educational
services and general and administrative expenses.
(7) The weighted average number of common shares used to calculate income (loss)
per share includes, where dilutive, common stock equivalent shares
calculated under the treasury stock method and the assumed conversion of
Series A Preferred Stock.
(8) 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
service and incur debt. EBITDA should not be considered (i) as an
alternative to net income or any other GAAP measure of performance; (ii) as
an indication of operating performance or cash flows generated by operating,
investing or financing activities, or (iii) as a measure of liquidity.
(9) Results for 1995 include a $1.1 million nonrecurring credit for the refund
of state and local business and occupational taxes.
19
<PAGE> 22
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
Education Management Corporation is one of 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), 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 and hospitality 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 10 cities throughout the United
States and accounted for approximately 98% of the Company's net revenue in
fiscal 1996.
Net revenues, income before ESOP expense, interest and taxes, and net
income increased in each of the last three years. Net revenues are presented
after deducting refunds, scholarships and other adjustments. Net revenues grew
20.7% to $147.9 million in 1996 from $122.5 million in 1994. Income before ESOP
expense, interest and taxes increased 151.5% to $15.6 million in 1996 from $6.2
million in 1994. Net income improved to $5.9 million in 1996 from ($1.7) million
in 1994. Average quarterly student enrollments were 11,996 in 1996 compared to
11,062 in 1994.
The Company's revenues consist of tuition and fees, student housing fees
and 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 increases have been implemented in varying amounts in each of the past
several years. Historically, the Company has been able to pass along
inflationary 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. Many
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.
Consequently, a significant portion of the Company's revenue is indirectly
derived from Title IV Programs.
Tuition revenue generally varies based on the average tuition charge per
credit hour and the average student population. 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 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 program offerings, the effectiveness of marketing, the
strength of employment markets, the student persistence, 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 acquisitions or start-up schools) have been and will
continue to be important factors influencing the average student population.
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 for departments
that provide services directly to students, costs of educational materials used,
facility leases and school occupancy costs, information systems costs, bad debt
expense and depreciation and amortization of property and equipment. During
fiscal 1996 the Art Institutes' faculty was approximately 45% full-time and
approximately 55% part-time employees.
20
<PAGE> 23
Information systems costs increased significantly over the last several
years as the Company installed a new integrated information network which
supports education, payroll and human resources, accounting, student financial
services, marketing and student admissions and employment assistance. As of June
30, 1996, that system was installed at all Art Institutes and its integration
and implementation was substantially completed. Management believes the
investment in that system has improved the services provided to students and
will facilitate the integration of new schools.
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 those services to gain consistency in management reporting, efficiency
of administrative effort and control of costs. All marketing and student
admissions expenses 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, arising from the application of the purchase
accounting method to the establishment and financing of the ESOP and the related
leveraged recapitalization of the Company in October 1989.
ESOP expense equals the sum of the payments on the senior term loan related
to the ESOP's acquisition of the employer securities, plus repurchases of stock
from participants in the ESOP, less the dividends paid on the Series A Preferred
Stock of EMC held by the ESOP. As of June 30, 1996, the entire ESOP senior term
loan was repaid. There will be no future ESOP expense resulting from the
repayment of that debt.
In fiscal 1996, the Company established The Art Institute of Phoenix with
classes commencing 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,
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.
In November 1995, the Company purchased the assets of a school with two
locations in the Chicago metropolitan area for $1.1 million and the assumption
of specified liabilities. The Company acquired accounts receivable, property and
equipment, goodwill and certain other assets. The acquisition was accounted for
as a purchase. The schools, which are eligible to participate in the Title IV
Programs, have been renamed The Illinois Institute of Art at Chicago and The
Illinois Institute of Art at Schaumburg.
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 the year ended June 30, 1996.
In August 1996, the Company acquired NYRS for $9.5 million. 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 purchase,
NYRS currently is not eligible to participate in Title IV Program funding, but
Title IV funding committed to its students prior to the sale is still being
received. The Company plans to file in September 1996 an application to continue
the eligibility of NYRS to participate in Title IV Program funding. If the
Company is not successful in obtaining that approval in a timely fashion, the
Company may need to provide additional short-term financing to NYRS students.
The Company does not anticipate that this will have a significant effect on its
liquidity. The purchase price is being held in escrow pending recertification of
NYRS. In the event that recertification is denied, EMC has the right to rescind
the acquisition of NYRS.
21
<PAGE> 24
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
----- ----- -----
94.9 89.6 89.4
----- ----- -----
Income before ESOP expense, interest and taxes.............. 5.1 10.4 10.6
ESOP expense................................................ 3.9 5.4 0.9
----- ----- -----
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) 1.5 7.4
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 and an average 6.0% tuition price increase at The Art Institutes
owned by EMC prior to fiscal 1996, and the addition of three new schools. The
average academic year (three quarter) tuition rate for a student attending
classes at an Art Institute on a recommended full credit hour schedule increased
to $9,345 in 1996 from $8,820 in 1995. In November 1995, a Chicago art and
design school with two locations was acquired and renamed The Illinois Institute
of Art. A new school, The Art Institute of Phoenix, commenced classes in January
1996. The three new schools contributed approximately $2.0 million of net
revenue in 1996.
Net housing revenues in 1996 increased by 7.7% to $9.2 million, primarily
resulting from inflationary increases. Revenues from the sale of educational
materials in 1996 increased by 6.5% to $6.5 million.
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 incremental
education expenses related to higher student enrollment at the schools owned by
EMC prior to fiscal 1996, education expenses at the three new schools, and
additional depreciation expense resulting from expanded capital spending for
classroom technology, culinary arts and other new programs. The Company also
made significant investments in initiatives to improve student completion rates
and to increase graduates' starting salaries. These initiatives included
additional student remediation, instructor development, and expanded employment
assistance services. A $1.1 million refund of state and local business and
occupation taxes reduced educational services expense in 1995.
22
<PAGE> 25
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 which resulted
in higher student enrollment at the schools owned by EMC prior to fiscal 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
resulted because certain intangible assets identified in conjunction with the
1989 ESOP transaction became fully amortized during 1994 and 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 senior term loan. As of June 30, 1996,
the entire ESOP senior term loan had been repaid. There will be no future ESOP
expense resulting from the repayment of that debt.
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 $37 million
in 1996 from $47 million in 1995 as a result of principal payments on the ESOP
senior term loan and capitalized leases; and (ii) the retirement of the
Subordinated Notes through borrowings under the Revolving Credit Agreement in
1996. Borrowings under the Revolving Credit Agreement were at a weighted average
interest rate of 7.33% during 1996.
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 is due to the tax
deductibility of $1.6 million of dividends on the Series A Preferred Stock which
was paid to the ESOP and used for senior term loan repayment. The favorable
effect of the dividends is partly offset by $0.4 million of non-deductible
goodwill amortization and other items. In 1995, tax deductible dividends were
$1.7 million which offset approximately 60% of income before taxes,
substantially reducing the Company's 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.
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, partially offset by a higher provision for income taxes.
EXTRAORDINARY ITEM
The $25 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 tax.
23
<PAGE> 26
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
at The Art Institutes and a 5.5% average tuition price increase. The average
academic year (three quarter) tuition rate for a student attending classes at an
Art Institute on a recommended full credit hour schedule increased to $8,820 in
1995 from $8,360 in 1994.
Net housing revenues in 1995 increased 17.7% to $8.6 million, a result of
increased student occupancy and inflation. Revenues from the sale of educational
materials in 1995 increased by 5.3% to $6.1 million.
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 enrollment, 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 revenue. 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 occupational 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 expense related to increased student enrollment and an
increase in administrative expense at corporate headquarters. Administrative
expense increased as a result of the development of corporate infrastructure to
support anticipated growth in the number of schools, the increased cost of
regulatory compliance and education program development.
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 identified in conjunction
with the 1989 ESOP transaction became fully amortized during 1994 and 1995.
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 senior term
loan.
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 $47 million during 1995 from approximately $52 million during
1994, and because of a $0.3 million year-to-year increase in interest income. In
1995 the Company incurred about $0.3 million of additional interest expense on
its senior term loan due to slightly increased interest rates partially
offsetting the reductions in net interest expense that resulted from the lower
average debt outstanding and the improved interest income.
24
<PAGE> 27
PROVISION (CREDIT) FOR INCOME TAX
The Company's effective tax rate decreased 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%. The variance from the statutory rate was due to the tax deductibility of
a large portion of the Series A Preferred Stock dividends paid to the ESOP trust
and used for senior term loan repayment. The favorable effect of the dividends
was partly offset by nondeductible goodwill amortization and other items. In
1994, the income statement tax benefit of the Series A Preferred Stock dividends
did not include dividends on unallocated ESOP shares, because the tax benefit of
dividends paid on such shares is required to be credited directly to the
retained earnings account in accordance with Statement of Financial Accounting
Standards No. 109. In 1995, a greater number of preferred shares held by the
ESOP were allocated and the related income tax benefit is reflected in the tax
provision included in the income statement. 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 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, smaller 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 revenue 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),
traditionally when the largest number of new high school graduates begin
postsecondary education. As a result, total student enrollment at the Company's
schools is 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 ended September 30 due to
lower revenue combined with expenses incurred in preparation for the peak
enrollment in the fall quarter. The Company anticipates that this seasonal
pattern will continue in the future.
The following table sets forth the Company's revenue in each fiscal
quarter.
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 19.6% $ 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 flows from operations were $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.
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The Company had $12.6 million of working capital at June 30, 1996 as
compared to $14.9 million of working capital at June 30, 1995. The decrease in
working capital is primarily due to an increase in capital spending.
DEBT SERVICE
Effective October 13, 1995, the Company and its lenders amended the
Company's Revolving Credit Agreement in order to increase the amount of the
facility to $70 million and to extend its term to October 13, 2000. The facility
bears interest at one of three rates set forth in that agreement, at the
election of the Company. The facility contains financial and other covenants. At
June 30, 1996, the Company had $14.75 million additional borrowings available
under its Revolving Credit Agreement.
The Revolving Credit Agreement is 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 from which cash payments are collected
reaches a peak immediately after the billing of tuition and fees at the
beginning of each academic quarter. Collections of these receivables are
heaviest at the start of each academic quarter.
The Revolving Credit Agreement was 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 ($0.9 million after tax) prepayment penalty upon early
payoff of the Subordinated Notes. In August 1996, the Company also used the
Revolving Credit Agreement to fund the NYRS Acquisition and the Redemption.
In June 1995, the Company made a voluntary prepayment of $2.1 million on
the ESOP senior term loan. In June 1996, the Company made another voluntary
prepayment of $0.4 million on the ESOP senior term loan, at which time it was
completely repaid.
Following the consummation of the Offering in October, 1996, $ of
the net proceeds will be used to repay the Revolving Credit Agreement.
Thereafter, the Company expects to have outstanding approximately $10 million of
indebtedness, consisting entirely 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 such Revolving
Credit Agreement.
CAPITAL EXPENDITURES
Capital expenditures in fiscal 1995 and 1996 have, in substantial part,
resulted from the implementation of the Company's business plan emphasizing new
schools and programs (particularly culinary programs), investment in classroom
technology and the completion of the management information system. The
Company's capital expenditures were $6.3 million, $11.6 million and $15.0
million for the years ended June 30, 1994, 1995 and 1996, respectively. The
Company anticipates increased capital spending for 1997, particularly related to
the introduction of culinary programs at additional Art Institutes, 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 over two-thirds of its net revenues from the
Title IV Programs in fiscal 1996. U.S. Department of Education regulations
prescribe the timing of disbursements of funds under the Title IV Programs.
Students must apply for a new loan for each academic year. Loan funds are
generally
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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, 10 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 students at that time are, with the students'
permission, maintained in a restricted cash account until students are billed
for the portion of their educational 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 on cash have not significantly affected the Company's ability to
fund daily operations.
The 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
the restricted cash referred to in the preceding paragraph), cash equivalents
and current accounts receivable to total current liabilities. If an institution
fails to meet the acid test ratio, it may be deemed not financially responsible
by the U.S. Department of Education, which could result in a loss of its
eligibility to participate in the Title IV Programs. These requirements apply to
the separate audited financial statements of the individual institutions, but
historically have not been applied to the Company's consolidated financial
statements. The acid test ratios for the Company's schools ranged from 1.07:1 to
3.47:1 at June 30, 1995 and from 1.13:1 to 8.82:1 at June 30, 1996.
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 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 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 APB 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 the 1997 financial statements.
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<PAGE> 30
BUSINESS
THE COMPANY
Education Management Corporation is one of 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 and hospitality
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.
The Company's main operating unit, The Art Institutes, consists of 11
schools in 10 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. Art Institute programs
typically are completed within 18 to 24 months and culminate in an associate's
degree. Four Art Institutes currently offer bachelor's degree programs, and EMC
expects to continue to introduce these programs where permitted.
The Company offers a culinary curriculum at six Art Institutes and NYRS, a
well-known culinary arts and restaurant management school in New York City. NYRS
offers an associate's degree program and various certificate programs. On a pro
forma basis, NYRS accounted for approximately 6% of the Company's net revenues
in fiscal 1996.
The Company also offers paralegal training at NCPT in Atlanta; and NCPT's
advanced certificate programs take four to nine months to complete. NCPD has
consulting affiliations 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.
The Company's objective is to provide career-focused education which
maximizes employment opportunities for its students upon graduation. EMC's
graduates are employed by a broad range of employers nationwide, including major
corporations such as American Greetings Corporation, Blockbuster Entertainment
Group, The Walt Disney Company, LucasArts Entertainment Company and Marriott
International, Inc. For calendar year 1995, approximately 87.4% of Art Institute
associate's degree graduates who were available for employment obtained
positions in fields related to their program of study within six months of
graduation.
The Company believes that demand for postsecondary education will increase
principally due to (i) a projected 20% increase in the number of high school
graduates from approximately 2.5 million in 1994 to 3.0 million in 2001, (ii)
the growing interest of working adults in enhancing their marketable skills,
(iii) the income premium attributable to higher education degrees, and (iv) the
demand from employers for entry-level workers with technical skills.
EMC intends to continue to capitalize on the favorable trends in the
postsecondary education market by building on the results of the Company's
strategic plan implemented in 1994. Key elements of this plan and its results to
date include:
- Enhancing Growth at Current Schools: The total number of students
attending The Art Institutes rose approximately 8% from the fall quarter
of 1993 to the fall quarter of 1995, despite a decline in the number of
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 1997.
- Improving Student Outcomes: At The Art Institutes, the average quarterly
net persistence rate, which measures the number of students that remain
enrolled during an academic quarter, has improved from 88.4% in 1994 to
90.1% for the first three quarters of 1996. From calendar year 1993 to
1995, the
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placement rate for 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 1995, the Company has opened or
acquired four new 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 fiscal 1994, the Company has
established new culinary arts programs at three additional schools (in
addition to acquiring NYRS) and has added education program offerings in
high growth fields such as computer animation, multimedia and video
production. In addition, the Company intends to offer degree programs in
interactive multimedia programming and web site development in fiscal
1997.
- Improving Operating Efficiencies: The Company has invested approximately
$9.1 million to establish an integrated, proprietary information system
that assists managers and employees in maximizing internal efficiency.
The Company believes that its investment in information systems
technology significantly enhances its ability to integrate acquisitions
and newly-established schools into the Company's operations.
The Company believes a significant factor in its success is the experience
and stability of its management team and the substantial equity ownership of its
employees. EMC's senior management has an average of nine years with the Company
and 18 years of experience in the education industry. Upon completion of the
Offering, approximately % of the Common Stock will be held by management
and the ESOP.
COMPANY HISTORY
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, all of which were subsequently reorganized and greatly expanded.
In 1986, the Company effected a leveraged recapitalization to permit a founding
shareholder to retire. In 1989, the Company underwent a second recapitalization
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 million of
indebtedness. During that same period, the Company invested $68.0 million in
facilities and equipment.
In 1994, EMC determined that certain strategic changes were required to
position it for growth over the next 10 years. EMC began to install a
company-wide information system, increase its expenditures for classroom
technology, add culinary programs in appropriate markets, increase the rate at
which new education programs were developed, eliminate or restructure certain
education programs and establish or acquire schools in attractive markets.
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 the total sector, or $200 billion. Of the approximately 6,000 postsecondary
schools that are eligible to participate in federal student funding 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
high school graduates. According to the U.S. Department of Education, the number
of high school graduates is expected to increase by approximately 20%, from 2.5
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<PAGE> 32
million graduates in 1994 to 3.0 million graduates in 2005. 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
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 in this
trend. The Census Bureau has reported that, in 1993, a full time male worker
with an associate's degree earned an average of 29% 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
professional and technical occupations is expected to increase over the next
several years as the demand for technically skilled labor grows.
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) opening or acquiring schools
in attractive markets, (iii) expanding its program offerings, and (iv)
continuing to improve operating efficiencies.
ENHANCING GROWTH AT CURRENT SCHOOLS
Increasing Pool of Potential Students. The Company 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
specialized 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 and 1997) were 23%
greater than in fiscal 1995. The Company believes it can penetrate the growing
working adult market by introducing and augmenting evening and weekend degree
programs. Since the first introduction of such programs at The Art Institute of
Dallas in fiscal 1993, the Company has expanded its offerings of evening and
weekend degree programs to substantially all of The Art Institutes. 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,
compared to 410 students in the spring quarter of fiscal 1995.
In addition, the Company actively recruits 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 about The Art Institutes from friends,
relatives, current students and alumni. To accommodate the special needs of
international students, staff members are assigned to act as international
student advisors. Although international students currently are less than 5% of
the total enrollment at The Art Institutes, new international student enrollment
in fiscal 1996 was 26% greater than in fiscal 1995.
Improving Student Outcomes. The Company intends to continue to improve
student retention and graduate starting salaries in order to enhance the
reputation of its schools and their education programs, thus
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increasing its student enrollment. Measures implemented by the Company include
higher admissions standards, more comprehensive programs to help new students
adjust to college life, academic placement testing, remediation courses,
improved faculty training and the dedication of administrative resources to
placement assistance. The average net quarterly persistence rate at The Art
Institutes have increased from 88.4% in 1994 to 90.1% for the first three
quarters of 1996.
TARGETING EXPANSION OPPORTUNITIES IN A FRAGMENTED MARKET
To further its national presence and to take advantage of the highly
fragmented postsecondary education market, the Company 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, concentration of likely employers, level of competition, facility costs,
availability of management talent to operate a school and ease of obtaining
regulatory approval.
Start-ups. 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 which it uses to analyze start-up investments. The model takes
into consideration, among other things, prospective enrollment projections,
pre-opening expenditures and marketing expenses necessary to build interest in
the school, as well as a risk/return profile.
Acquisitions. The Company also believes that significant opportunities
exist for growth through acquisitions in the highly fragmented postsecondary
education market. In particular, many smaller institutions may have inadequate
resources to manage the increasingly complex regulatory environment or to fund
the high costs of developing 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 two schools in the Chicago metropolitan area (renamed as The Illinois
Institute of Art at Chicago and The Illinois Institute of Art at Schaumburg). In
August 1996, the Company acquired (subject to certain regulatory approvals)
NYRS, a well-recognized culinary school 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. For
example, within two years of its development and introduction, the computer
animation curriculum had a fall 1995 enrollment of 1,700 students and generated
tuition revenues during fiscal 1996 of approximately $18.7 million. The Company
also has identified culinary arts as a significant market. In addition to the
NYRS Acquisition, culinary arts programs have been introduced at four Art
Institutes within the last four years, with plans to start one additional
program in 1997.
The Company also offers bachelor's degrees 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 a two-year associate's degree program.
The Company will seek to introduce additional bachelor's degree programs where
permitted. For fiscal 1997, the Company intends to introduce the following
bachelor's degree programs in some of its schools: 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, the Company 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 services include: accounting, marketing, finance,
real estate, student financial aid,
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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
human resources to establish an integrated, proprietary information system that
assists managers and employees in maximizing internal efficiency. The Company
believes that the system has improved EMC's ability to recruit new students,
administer student financial aid, prepare and track student academic schedules,
track part-time and full-time employment opportunities for its students and
graduates, and perform general and student accounting and human resources
management. 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
The Company's mission is to maximize student outcomes by providing students
with the education 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 in placement upon graduation.
STUDENT RECRUITMENT AND MARKETING
The Company seeks to attract students with both the motivation and ability
to complete the employment-oriented education 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 their programs
of study.
The general reputation of The Art Institutes, as well as 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. The Company's internal
advertising agency creates publications, television commercials, videos and
other promotional materials. 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 Company carefully monitors
the effectiveness of its marketing efforts to analyze their impact on student
enrollments. 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 Art Institutes' marketing efforts generated inquiries from
approximately 179,000 qualified prospective students in fiscal 1996. The
inquiry-to-application conversion ratio has increased from 6.6% in fiscal 1992
to 9.0% in fiscal 1996, and the applicant-to-new student ratio has increased
from 55.8% in fiscal 1992 to 66.7% in fiscal 1996 at The Art Institutes.
NYRS relies primarily on local television and referrals as its primary
marketing tools. NCPT uses direct mail, local newspaper and print, 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, an extensive recruitment program at colleges is held by
NCPT, 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 assistant/associate directors is
responsible for a different potential applicant pool. Several schools have
assistant/associate directors who seek to attract foreign students. Institutes
that have culinary programs have assistant/associate directors who recruit
solely for those programs. Other directors focus exclusively on high school
seniors. Independent representatives abroad recruit international students for
The Art Institutes. Recruitment policies and procedures are coordinated
centrally, but implemented at each school.
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To capitalize on the growing numbers of high school graduates, the Company
utilizes a variety of strategies. The Company employs approximately 50 high
school representatives who made presentations at approximately 6,900 high
schools in fiscal 1996. Representatives promote The Art Institutes and obtain
information about students who may be interested in attending one of the
schools. During high school visits, student artwork, videos and a multimedia
presentation are shown to students and educators. 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 teen and teacher workshops are held to inform students and educators of
the education programs offered by The Art Institutes. The Company has also
developed a marketing plan to reach young adults and working adults who may be
attracted to the evening and weekend degree programs. Local newspaper
advertising, direct mail campaigns and broadcast advertising are utilized for
this purpose.
STUDENT ADMISSION AND RETENTION
Applicants for admission to an Art Institute are 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, interest in
the career programs offered by the Art Institute and commitment to their
education. In addition, 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 an admissions
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
19 and 21 years of age, 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. At The Art Institutes
the average net quarterly persistence rate, which measures the number of
students that remain enrolled during an academic quarter, has improved from
88.4% in 1994 to 90.1% for the first three quarters of 1996. The Company
believes that it has been able to improve this rate because of its investment in
its academic programs, student academic testing and placement, remediation
programs, its faculty training initiatives, the increased availability of
supplemental student financing, and its orientation and socialization programs
designed to provide transition assistance to incoming students.
Art Institute faculty and staff strive to assist students in completing
their programs of study. The Company believes that early academic intervention
is crucial for improving student persistence and graduate completion rates. 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 in the case of students
experiencing academic difficulties. As is the case at other postsecondary
institutions, however, many students fail to complete their programs for a
variety of personal, financial or academic reasons.
PROGRAMS OF STUDY
The Company'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 year-round 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 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. Faculty, employment
assistance specialists, curricula
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advisory boards, industry experts, industry literature and employers are the
most common sources for new education program ideas. 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 that process, an independent contractor, or internal
analyst where appropriate, may be retained to utilize employers to develop and
compile data for the purpose of identifying both the potential student interest
in a program and the skills required of a graduate upon program completion. That
research is then used to produce a curricular model for final review. The goals
of the curriculum development process are to provide new program opportunities
and to revise existing curricula 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' total enrollment in fiscal 1996 was
in specialized diploma programs. Academic credits from those specialized diploma
programs are fully transferable into associate's and bachelor's degree programs
at The Art Institutes. The diploma programs are designed for working adults who
seek to supplement their education or are interested in enhancing their
marketable skills.
In Pennsylvania, where there are two Art Institutes, bachelor's degree
programs may not be offered by private postsecondary institutions, such as the
Company's schools. For several other Art Institutes, the determination has been
made not to offer such programs at this time because of possible interference
with the current accreditation process for those schools.
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<PAGE> 37
GRADUATE EMPLOYMENT
The Art Institutes have graduated over 100,000 students. The Company
believes that the 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) "Available Graduates" are all graduates except those pursuing further
education, those deceased, those in active military service, those who have
medical conditions that prevent them from working or those 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 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.
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.
Employers of Art Institute graduates include the following companies, among
others: American Greetings Corporation, Blockbuster Entertainment Group, The
Boeing Company, The Walt Disney 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 Sportswear, Inc., Take2
Interactive Software, Inc., Time Warner Inc., Turner Broadcasting System, Inc.,
USAir Group, Inc. and numerous radio and television stations across the country.
GOVERNANCE OF THE ART INSTITUTES
The Company believes that the governance structure for its schools is
different from those employed by other proprietary school systems and possesses
several advantages. EMC's three-tier governance structure is modeled on the
structure found in 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 as a free-standing,
degree-granting institution, thereby enabling the school to be accredited in its
geographic region.
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<PAGE> 38
The AII Board of Directors is responsible for annual and long-range
system-wide operating plans, composite budget development, and appointment of
the members of both the AII System Coordinating Board and the local Boards of
Trustees, The AII System Coordinating Board is responsible for planning,
coordination, oversight and support services system-wide as well as for
standards of quality and services, and the formulation of policies and
procedures.
At most of The Art Institutes, a Board of Trustees is vested with the
management of its business and affairs. Thus, each Art Institute puts its own
imprint on the design and operation of its academic programs, consistent with
applicable state laws, regulations and licensure requirements and regional
accreditation standards, while maintaining compatibility among The Art
Institutes. The 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 1994, AII organized its International Advisory Board. The
board is comprised of nationally known and world renowned artists, designers,
chefs and entertainment professionals who provide advice and support to AII. The
members of the board also review curricula as requested and provide other
services as agreed upon by the individual board member.
TECHNOLOGY
The Company is committed to providing its students sufficient access to the
computers and technology necessary for developing required skills. To help
fulfill this commitment, at June 30, 1996, The Art Institutes 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 labs 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 work on
integrating 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 designers use computer-aided
drafting and visualization as a design and sales tool.
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, which are 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
The Company is led by a senior management team with 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 have ownership interests
in the Company through direct holdings of shares or 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. The Company believes that
their practical experience and guidance is important in promoting student
success.
NATIONAL CENTER FOR PARALEGAL TRAINING
NCPT is one of the leading sources of paralegals in the southeast. NCPT
offers advanced certificate programs in paralegal studies to recent college
graduates, employer-sponsored students and adults interested in changing
careers. The programs include: business transactions, estates, trusts and wills,
litigation, real estate and mortgages, employee benefit plans and general
practice. NCPT also offers an advanced certificate
36
<PAGE> 39
program in nurse legal consulting. NCPT paralegal graduates are employed as
paralegals in law firms as well as small, medium and large corporations. Nurse
legal consultants are usually employed on a project basis and are trained to be
independent contractors. NCPT had total enrollments in the fall of 1995 of 326
students.
NATIONAL CENTER FOR PROFESSIONAL DEVELOPMENT
NCPD administers consulting relationships with seven colleges and
universities. NCPD provides a varying range of services for the benefit of its
college and university clients including: assistance with curriculum
development, the formulation and execution of marketing strategies associated
with program offerings, training for admissions staff and program directors,
preparation of annual program budgets, establishment of instructor evaluation
guidelines, development of strategies for employment assistance and consultation
on other academic issues as requested by the client institution. Advanced
certificate programs, developed by NCPD and offered by its client institutions,
are paralegal studies, nurse legal consultant training and financial planner
training. In the fall of 1995, 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. The public institutions may charge lower tuition, due in part to
government subsidies, government and foundation grants, tax-deductible
contributions and other financial sources not available to proprietary schools.
Tuition at private non-profit institutions is, on average, higher than the
tuition at The Art Institutes.
The Company believes its students are well served by its student-centered
education environment, career-oriented curricula developed with regular employer
input, the demonstrated effectiveness of the employment assistance activities
and its national brand name and market presence. In addition, students should
benefit from the Company's 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 the Company's schools also
include the ability to address evolving regulatory and accreditation
requirements.
FACILITIES
The Company's schools are located in major metropolitan areas in nine
states. Typically, the schools occupy an entire building, several floors in a
building 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. These leases generally have terms ranging
from less than 3 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 their educational and
administrative facilities.
New leases entered into by the Company, typically are for 10 to 15 years,
with two to four five-year renewal options. Consistent with current practice,
the Company may 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, the lease
typically provides for expansion rights within a building in order to
accommodate increases in student enrollment.
Most of the Company's schools lease facilities for student parking and
housing. These arrangements generally are intended to assist only a portion 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 range from approximately $80,000 to $1.3
million at each 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
37
<PAGE> 40
prior to the relevant school's use or occupancy, and (ii) the school is
generally responsible for any environmental conditions caused by its occupancy.
The Company has no knowledge of any environmental conditions for which it could
be liable at any of its school locations.
The following table sets forth certain information as of ,
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) A portion of this property is owned by a limited partnership that includes
one current member of EMC's management among its limited partners. See
"Certain Transactions."
(2) The lease for a portion of this property permits the landlord to cancel the
lease's five-year renewal option in 1997. If the landlord exercises this
cancellation right, the lease will expire in 1999.
(3) This property is owned indirectly by a limited partnership that includes one
current and one retired member of EMC's management and one current director
of EMC among its limited partners. See "Certain Transactions."
(4) Expires in 2000 with no option to renew.
(5) Expires in 1999 with no option to renew.
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 the 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 an institution's educational
programs qualify it to participate in Title IV Programs. The HEA specifies
certain standards that all recognized accrediting agencies must adopt in
connection with their review of postsecondary institutions. The U.S. Department
of Education reviews accrediting agencies and those that meet its standards are
recognized as reliable arbiters of educational quality. All of the Company'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 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> 41
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
NCPT, Inc. (The National Center for Accrediting Council for Independent Colleges
Paralegal Training) and Schools
The New York Restaurant School ACCSCT
New York State Board of Regents
</TABLE>
The HEA requires each recognized accrediting agency to submit periodically
to a 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 that 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 area. Three of
the Company's schools have been placed on reporting status by their accrediting
agency allowing such agency to monitor those schools' student completion rates.
While on reporting status, those institutions may not open an additional
location without receiving a waiver from that accrediting agency. The Company
plans to request that such 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. The Company's
expansion plans do not depend on any of those schools opening additional
locations while on reporting status with the applicable accrediting agency.
STUDENT FINANCIAL ASSISTANCE
As with most other postsecondary institutions, many students enrolled at
one of the Company's schools must rely, at least in part, on financial
assistance to finance 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
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<PAGE> 42
sources of funds include other federal grant programs, state grant and loan
programs, private loan programs, and institutional grants and scholarships.
To provide its 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."
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 regulatory 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. Pending review and
recertification for participation in Title IV Programs, NYRS is not currently
participating in such programs. NYRS plans to apply in September 1996 for
continued participation in Title IV Programs, and the Company believes that the
U.S. Department of Education will approve that participation. If the U.S.
Department of Education were to reject NYRS's application, the Company would
have the right to rescind the NYRS Acquisition. See "Risk Factors -- Potential
Adverse Effects of Regulation." "-- Regulatory Consequences of a Change of
Ownership or Control."
NATURE OF FEDERAL SUPPORT FOR POSTSECONDARY EDUCATION
While public colleges and universities are supported 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 during that period the scope and size of those programs
has steadily increased. Since 1972, Congress has expanded the scope of the HEA
to provide for the needs of the changing national student population, including
providing that students at proprietary schools are eligible for assistance under
Title IV Programs, establishing a program for loans to parents of eligible
students, opening Title IV Programs to part-time students, increasing maximum
loan limits and eliminating the requirement that students demonstrate financial
need to obtain federally guaranteed student loans. Most recently, the FDSL
program was enacted, enabling students to obtain loans from the federal
government rather than from commercial lenders. In recent years, federal funds
appropriated for Title IV Programs have increased from $8.5 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 the Company's schools receive grants and loans to fund their
education under several Title IV Programs, of which the two largest are the 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 and the amounts received by students in the Company's schools
in fiscal 1996 equalled approximately 6% of the Company's revenues.
40
<PAGE> 43
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. The
amounts received by students in the Company's schools under the FSEOG program in
fiscal 1996 equalled less than 2% of the Company's 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 ("Stafford") 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 their grace periods. Students who are classified as
independent can increase their borrowing limits and receive additional
unsubsidized Stafford loans. Such a student also can obtain an additional $4,000
for each of the first and second academic years and, depending upon his or her
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. The amounts received by students in the Company's schools
under the Stafford program in fiscal 1996 equalled approximately 42% of the
Company's 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. The amounts received by students in the Company's schools
under the PLUS loan program in fiscal 1996 equalled approximately 13% of the
Company's 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 Perkins loan payments from its
former students and reloans those funds to currently enrolled students.
Collection and disbursement of Perkins loans is the responsibility of each
participating institution. During fiscal 1996, the Company collected
approximately $2,200,000 from its former students. In fiscal 1996, the Company's
required matching contribution was approximately $224,000. The Perkins loans
disbursed to students in the Company's schools in fiscal 1996 equalled
approximately 2% of the Company's 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 accounted for less than 1% of
the Company's 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 thirteen schools have been selected by the U.S. Department of
Education to participate in the FDSL program, but none have elected to
participate at this time, since their students' loan needs continue to be
satisfied under the FFEL program.
AVAILABILITY OF LENDERS
Four lending institutions 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 those loans were no longer available from any
of its current
41
<PAGE> 44
lenders, there can be no assurance in this regard. The HEA also 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 AID PROGRAMS
Students at several of the Company's schools participate in state grant
programs. In fiscal 1996, approximately 2% of the Company's 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 those federal programs represented less than 1% of the
Company's revenues. The Art Institutes also provide institutional scholarships
to qualified students. In fiscal 1996, those institutional scholarships had a
value equal to approximately 3% of the Company's revenues. In September 1995,
the Company negotiated access to a supplemental loan program with a commercial
bank that allows students to repay loans over 10 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 educational programs that
are eligible to participate in that loan program. The primary objective of that
loan program is to lower the monthly payments required of students. The 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. The Office of the Inspector General of the U.S. Department of
Education also 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 of the
Company's schools, 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."
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 the required levels,
more than 300 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
42
<PAGE> 45
implementing aggressive student loan default management programs aimed at
reducing the likelihood of students failing to repay their loans in a timely
manner. See "Risk Factors -- Potential Adverse Effects of Regulations -- Student
Loan Defaults" and "Business -- The Business of Education."
Cohort default rates under the FFEL program are calculated on an annual
basis as a ratio between the number of student borrowers whose obligation to
begin repaying their loans starts in one federal fiscal year and the number of
those borrowers who default on their 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.) Furthermore, 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 may take any action against an institution based on its
FFEL cohort default rates.
None of the Company's schools has a FFEL cohort default rate equal to or in
excess of 25% for three consecutive federal fiscal years. One of The Art
Institutes, which accounted for less than 5% of the Company's income before ESOP
expense, interest and taxes 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. The Company has appealed this published 1993 rate,
and preliminary rates for 1994 are subject to adjustment prior to final
publication. The remainder of The Art Institutes 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 18.8% and the individual schools' rates ranged from 10.3% to 25.8%.
The average FFEL cohort default rate for all proprietary institutions for that
year was 23.9%. The combined preliminary FFEL cohort default rate for all
borrowers at the Company's schools is 18.4% and the individual schools' rates
range from 9.0% to 28.6% for federal fiscal year 1994. The Company understands
that the U.S. Department of Education anticipates issuing official 1995 FFEL
cohort default rates in the fall of 1996, and the Company expects 1995 FFEL
cohort default rates to be issued in the summer of 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 participation in Title IV Programs; 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 the
knowledge of EMC, the U.S. Department of Education reviews an institution's
compliance with these cohort default rate thresholds 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 above) have Perkins
cohort default rates in excess of 15% for the 1995/1996 federal award year and
are subject to the risk of being placed on provisional certification 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 for recertification to participate in Title IV Programs pending with
the U.S. Department of Education.
All of the Company's schools have adopted student loan default management
plans. 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.
43
<PAGE> 46
Increased Regulatory Scrutiny. The 1992 reauthorization of the HEA
contained a three-part initiative, referred to as the Program Integrity Triad,
that was intended to increase the regulatory scrutiny of postsecondary education
institutions. The first part 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 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 the SPRE authority.
The second part 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 their reviews and have
expanded their examinations in such areas as financial responsibility and
timeliness of student refunds. The Program Integrity Triad provisions also
required each accrediting agency recognized by the U.S. Department of Education
to undergo a comprehensive periodic review by the U.S. Department of Education
to ascertain that such accrediting agency is adhering to the 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, which is 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.
The third part 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 charged the U.S. Department of Education with
periodically reviewing 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 an 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 an institution have a positive tangible net worth at the end of
each fiscal year. A third standard prohibits an institution from having a
cumulative net operating loss during any two consecutive 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 does
not meet each of such financial responsibility standards may be required to post
an irrevocable letter of credit in favor of the U.S. Department of Education
with a value of at least one half of total Title IV Program assistance received
by its students during the preceding year, or, alternatively, post such a letter
of credit with a value of at least 10% of that assistance and satisfy other
performance criteria. 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 about The Art Institutes on a consolidated
basis at the level of their parent company, AII. All 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 their parent company, AII, have met the
standards described above for
44
<PAGE> 47
the relevant periods. At the time of its acquisition, The Illinois Institute of
Art at Chicago and The Illinois Institute of Art at Schaumburg satisfied those
standards by relying on the financial statements of AII in its application to
the U.S. Department of Education. That school may be required to post an
irrevocable letter of credit in favor of the U.S. Department of Education with a
value equal to one-half of the total Title IV Program assistance received in the
previous year by students at that school, or alternatively, post such a letter
of credit with a value equal to 10% of that assistance and satisfy other
performance criteria. That school generated approximately 1.1% of the Company's
fiscal 1996 revenue and the required letter of credit 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 knowledge of the Company,
the U.S. Department of Education has only sought to consider the financial
status of a third-tier entity (such as the Company) 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 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 consummation of 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 obtaining eligibility 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 that additional location satisfies all
other applicable requirements. In addition, a school which undergoes a change of
ownership and control must be reviewed and recertified for participation in
Title IV Programs under its new ownership. See "Risk Factors -- Potential
Adverse Effects of Regulation -- Regulatory Consequences of a Change of
Ownership or Control." Pending that recertification, the U.S. Department of
Education suspends Title IV Program funding to that school's students. If that
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.
Two of the Company's schools are provisionally certified by the U.S.
Department of Education due to their recent acquisition by the Company. Another
school, NYRS, plans to file an application for participation in Title IV
Programs with the U.S. Department of Education in September 1996 following its
acquisition by the Company in August 1996. If that 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.
Some 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 the Company's schools,
would not be eligible to participate in Title IV Programs if, on a cash
accounting basis, more than 85% of its revenue 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 its next fiscal year. The Company's
independent auditors have confirmed 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 for fiscal 1996 the
range for the Company's schools was 42% to 76%. In order to minimize the risk
that any of the Company's schools would derive more than 85% of its revenue from
Title IV Programs for any fiscal year, the Company regularly monitors compliance
and if a school appeared likely to approach the 85% threshold, the Company would
evaluate the appropriateness of making changes in student funding and financing
to ensure compliance.
45
<PAGE> 48
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. The Company believes
that its current compensation plans are in compliance with that standard,
although the regulations of the U.S. Department of Education do not establish
clear standards for compliance with that requirement.
STATE AUTHORIZATION
Each of the Company'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. All of
the Company's schools are in substantial compliance with state authorizing and
licensure laws.
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. No material payment
has been made by the Company in connection with any settlement reached or
judgment rendered in any such proceeding.
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.
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<PAGE> 49
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, each class to be as nearly equal
in 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. and are Class I directors
with their terms of office expiring in 1997; and are Class
II directors with their terms of office expiring in 1998; and and
are Class III directors with their terms of office expiring in 1999.
Set forth below is certain information as of June 30, 1996 concerning the
Company's directors and executive officers.
<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 and Chief Financial
Officer
James J. Burke, Jr............ 44 Director
J. Thomas Christofferson...... 58 Director
Albert Greenstone............. 69 Director
Harvey Sanford................ 70 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 (DC) 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 Company's schools, marketing, admissions and education; 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, The Art Institutes, 1993 to 1994; President and Chief
Operating Officer, The Art Institutes, 1995 to 1996.
WILLIAM M. WEBSTER, IV is an Executive Vice President of the Company
responsible for corporate development, systems, legal, human resources,
government relations and NCPD; 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, 1986 to 1992; White House Fellow, 1991 to 1992;
Chief of Staff, U.S. Department of Education, 1992 to 1994; Assistant to the
President and Director of Scheduling and Advance, The White House, 1994 to 1995;
joined EMC in 1996.
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<PAGE> 50
ROBERT T. MCDOWELL is the Senior Vice President and Chief Financial Officer
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, Senior Vice President and Chief Financial Officer, 1993 to present.
JAMES J. BURKE, JR. is the 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,
Northwestern Mutual Life Insurance Company; 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 (1946-1948) 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 the Company
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.
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 to be
paid for each Board of Directors' meeting attended; (iii) a $500 fee to be paid
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, 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) and will vest 50% on the first
anniversary and 50% on the second anniversary thereof; and (v) pursuant to the
Incentive Plan, a grant of an option to purchase 2,500 shares of Common Stock,
such grant to be made on the date of the annual meeting of the Company's
shareholders and 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 has six members. The Board of Directors has four
principal committees: (1) an Audit Committee comprised of Mr. Burke (Chairman),
Ms. Drucker and Mr. Sanford, (2) a Compensation Committee comprised of Mr.
Knutson (Chairman), Mr. Burke and Mr. Sanford, (3) a Stock Compensation
Committee comprised of Mr. Burke and Mr. Sanford, and (4) a Nominating Committee
comprised of Ms. Drucker (Chairman), Mr. Burke and Mr. Sanford. Mr.
Christofferson has notified the Company that he intends to resign following
consummation of the Offering.
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<PAGE> 51
COMPENSATION OF EXECUTIVE OFFICERS
The following tables sets forth information concerning the compensation of,
option grants to, and aggregate options held by, the Company's Chairman and
Chief Executive Officer and the four other most highly compensated executive
officers of the Company.
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 $190,000. The
amount shown represents the salary earned from the date of hire until June
30, 1996.
(2) Bonuses are determined by the Compensation Committee.
(3) These amounts represent the Company's contributions to its ESOP and
profit-sharing retirement plans and deferred compensation plan and the
dollar value of life insurance premiums paid by the Company with respect to
term life insurance for the benefit of certain executive officers of the
Company.
OPTION GRANTS IN THE FISCAL YEAR ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
--------------------------- VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE OR FOR OPTION TERM
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ---------------------
NAME GRANTED (#) FISCAL YEAR ($/SH) 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 $1,314,838
Robert T. McDowell...... - - - - - -
</TABLE>
49
<PAGE> 52
AGGREGATED OPTIONS HELD AT JUNE 30, 1996
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
SECURITIES VALUE OF SECURITIES VALUE OF
UNDERLYING UNEXERCISED, UNDERLYING UNEXERCISED,
UNEXERCISED AND EXERCISABLE UNEXERCISED AND UNEXERCISABLE
EXERCISABLE IN-THE-MONEY UNEXERCISABLE IN-THE-MONEY
OPTIONS AT OPTIONS OPTIONS AT OPTIONS AT
JUNE 30, AT JUNE 30, JUNE 30, JUNE 30,
NAME 1996(#)(1) 1996($)(2) 1996(#)(1) 1996($)(2)
- ------------------------------- --------------- ------------ --------------- ----------------
<S> <C> <C> <C> <C>
Robert B. Knutson.............. - - - -
Miryam L. Drucker.............. 124,880 $1,195,866 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 the vesting of the
approximately 10% of the outstanding options that had not previously vested
in accordance with their terms.
(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 that is qualified
under Section 401(a) of 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 $36.2 million from certain
lending institutions and then loaned the funds to the ESOP to allow it to
purchase the Company's securities. 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. Since 1989, the ESOP has released to the
accounts of eligible employees of the Company and its subsidiaries shares of
Class A Stock and Series A Preferred Stock upon making such loan payments to the
Company. As of June 30, 1996, the ESOP's debt 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. All shares that have been
distributed to the participants in the ESOP are subject to a right of first
refusal by the ESOP and the Company. In addition, each participant has a right
to "put" distributed shares back to the Company or the ESOP. After the
Transactions, the ESOP will hold only shares of 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 10
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 10 years of
participation.
1996 STOCK INCENTIVE PLAN
The Board of Directors 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
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"Incentive Plan") to attract and retain key personnel and non-employee
directors. The Incentive Plan is administered by the Stock Compensation
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. The Stock
Compensation Committee intends to grant initial stock option grants in respect
of approximately 500,000 shares, but the identity of the grantees and the terms
of the grants have not yet been determined.
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 exercisable not later than five years from the date of grant of
the option. All other options granted under the Incentive Plan must be exercised
within a period fixed by the Stock Compensation Committee, which may not exceed
10 years from the date of the grant of the option. 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 and its
subsidiaries 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;
otherwise the exercise price must be not less than the fair market value at the
date of grant as determined by the methods and procedures established by the
Stock Compensation Committee. The Stock Compensation 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 equal to the appreciation in value of the
Company's stock from the date of grant to the date of exercise. Limited 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 Compensation 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
Compensation Committee. In addition, the Stock Compensation Committee is
authorized to grant shares of restricted stock subject to restrictions on
transferability and other restrictions it may impose, including time-based and
performance-based forfeiture restrictions. 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. 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 Compensation
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 the 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 Compensation 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
Compensation 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.
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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.
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
nonstatutory 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 150,000 shares of
Common Stock. The exercise price of an option is the fair market value of the
subject shares determined as of the date of the grant of the option. 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 or any of its subsidiaries. In August 1996, the Board of Directors
provided for the vesting of the approximately 10% of the outstanding options
that had 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 granted options are fully
vested.
1996 EMPLOYEE STOCK PURCHASE PLAN
The Board of Directors adopted and, prior to the 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 allows eligible employees of the Company and its subsidiaries
to purchase shares of Common Stock at quarterly intervals through periodic
payroll deductions. Interest is paid on such payroll deduction amounts at 5% per
annum or such other interest rate as may be set from time to time. The Board of
Directors has reserved 750,000 shares of Common Stock for this purpose. Limits
may be imposed on the number of shares issuable under the Purchase Plan in any
year. No more than 150,000 such shares are issuable in the first year of the
Purchase Plan.
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 the
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).
However, no participant may purchase more than $25,000 worth of Common Stock
annually.
The purchase rights 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
Internal Revenue Code of 1986, as amended, that is designed to permit certain
"highly compensated" officers of the Company to defer current compensation.
Officers of the Company earning at least $118,000 each year and the presidents
of operating units (as defined in the Deferred Plan) 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,
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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 those 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 $49,436.67; Ms. Drucker $43,854.72; Mr. DeCoursey $35,560.64; Mr.
McDowell $10,453.16; 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.
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 Employment Agreement, Mr. Knutson is to 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 that are granted
to Mr. Knutson after the effective date of the Employment Agreement are to
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 for 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
his 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 Limited Partnership. The Art Institute of Fort Lauderdale rents
a portion of its facilities from Ocean World Associates Limited Partnership for
an annual rental amount of approximately $1.3 million.
Messrs. Knutson and 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
rents its facility from The Art Institute of Philadelphia Limited Partnership
for an annual rental amount of approximately $516,000.
In connection with acquiring shares of Class B Stock, Messrs. DeCoursey and
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
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$133,400, in the case of Mr. DeCoursey, and $158,000, in the case of Mr.
McDowell. The interest rates on such indebtedness were 6.28% for Mr. DeCoursey
and 9%, 6.28% and 6.75% for Mr. McDowell. Prior to the date of this Prospectus,
Mr. DeCoursey prepaid in full his indebtedness and Mr. McDowell 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), plus accrued and unpaid dividends thereon. The Company financed
this 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 Internal Revenue Code of 1986, as
amended. No management shareholder sold more than 20% of the total number of
fully diluted shares he or she beneficially owned.
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 August
16, 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) each director of the
Company; (iii) each executive officer; and (iv) 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(2)
------------------- ---------------- -------------------
NAME AND ADDRESS(1) NUMBER PERCENT NUMBER NUMBER PERCENT
- ------------------------------------- -------- ------- ---------------- -------- -------
<S> <C> <C> <C> <C> <C>
Education Management Corporation
Employee Stock Ownership Trust..... 3,563,014 30.8%
Merrill Lynch Entities(3)............ 1,615,188 14.0
National Union Fire Insurance Company
of Pittsburgh, PA.................. 1,116,765 9.7
The Northwestern Mutual Life
Insurance Company.................. 1,861,274 16.1
Robert B. Knutson(4)(5).............. 2,079,889 18.0
James J. Burke, Jr................... -0 - -
Miryam L. Drucker(5)................. 286,174 2.5
J. Thomas Christofferson............. -0 - -
Albert Greenstone.................... 31,007 *
Harvey Sanford(4).................... 25,000 *
Patrick T. DeCoursey................. 99,704 *
William M. Webster, IV............... 18,750 *
Robert T. McDowell................... 84,631 *
All executive officers and directors
as a group......................... 2,600,155 22.5
</TABLE>
- ---------------
* Less than 1%
(1) The address of each of the listed shareholders, unless noted otherwise, is
c/o Education Management Corporation, 300 Sixth Avenue, Pittsburgh,
Pennsylvania 15222.
(2) [To be provided.]
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(3) Shares of Common Stock beneficially owned by the ML Entities are owned of
record as follows: 1,054,060 shares by Merrill Lynch Capital Appreciation
Partnership No. IV, L.P., 26,798 shares by ML Offshore LBO Partnership No.
IV, 45,112 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.
(4) Mr. Knutson has granted to Mr. Sanford an option to purchase up to 25,000
shares of Common Stock.
(5) Mr. Knutson and Ms. Drucker, who are husband and wife, disclaim beneficial
ownership of each other's shares.
DESCRIPTION OF CAPITAL STOCK
The following descriptions do not purport to be complete and are qualified
in their entirety by reference to applicable Pennsylvania law and to the
provisions of the New Articles, the New By-Laws and the Rights Agreement. 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 that 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 the 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 present intention to issue any shares of Preferred Stock.
PROVISIONS OF THE NEW ARTICLES AND THE NEW BY-LAWS
The New Articles and the New By-Laws contain a number of provisions
relating to corporate governance and the rights of shareholders. Certain of
those provisions may be deemed to have a potential "anti-takeover" effect in
that those provisions may delay, defer or prevent a change of control of the
Company, including among others, 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,
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nor more than 90, days in advance of that meeting; provided, that if the date of
that 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 that meeting. The New
By-Laws provide that special meetings of shareholders may be called only by the
Company's specified officers 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 that
director has breached or failed to perform the duties of his 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 these 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, among other provisions, those 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") to become effective upon the consummation of the Offering.
Pursuant to the Rights Plan, each share of Common Stock outstanding as of the
date the New Articles are adopted and each share of Common Stock issued and
outstanding thereafter (unless and until the Rights expire or are redeemed or a
Distribution Date (as described below) occurs) will be accompanied by one
preferred share purchase right (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 $ (the "Purchase Price"),
subject to adjustment. The description and terms of the Rights Plan are set
forth in a Rights Agreement dated as of , 1996 (the "Rights
Agreement"), between the Company and , 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
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<PAGE> 59
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 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 .
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, shares of Common Stock will be
outstanding ( shares if the over-allotment option is exercised in
full). Of these shares, the shares of
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Common Stock sold in the Offering ( 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
shares of Common Stock ( 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 stockholder, 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 those 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 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."
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
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 shares of
Common Stock and vested options to purchase an additional shares of
Common Stock in the aggregate have agreed that they will not offer, sell,
contract to sell, announce an intention 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, 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.
58
<PAGE> 61
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........................................................................
=========
</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 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 additional shares at the initial public
offering price, less the underwriting discount and commissions, all as set forth
on the cover page of this Prospectus. Such option may be exercised only to cover
over-allotments in the sale of the shares of Common Stock offered hereby. To the
extent such option is exercised, each Underwriter will become obligated, subject
to certain conditions, to purchase approximately the same percentage of such
additional shares of Common Stock as it was obligated to purchase pursuant to
the Underwriting Agreement.
The Company and the Selling Shareholders have been advised by the
Representatives that the Underwriters propose to offer the Shares 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) have agreed that they will not
offer, sell, contract to sell, announce an intention 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, 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.
59
<PAGE> 62
Application will be 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.
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
60
<PAGE> 63
ten days of the sale of any shares of Common Stock acquired by that purchaser
pursuant to the Offering. That report must be in the form attached to British
Columbia Securities Commission Blanket Order BOR #95/17, a copy of which may be
obtained from the Company. One such report must be filed in respect of shares
acquired on the same date and under the same prospectus exemption.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby and certain other
legal matters relating to the Offering will be passed upon for the Company and
for the Selling Shareholders by Kirkpatrick & Lockhart LLP, Pittsburgh,
Pennsylvania. Certain legal matters relating to the Offering will be passed upon
for the Underwriters by Dewey Ballantine, New York, New York.
EXPERTS
The consolidated financial statements and schedule of the Company as of
June 30, 1996 and 1995 and for each of the three fiscal years in the period
ended June 30, 1996 included in this Prospectus have been so included in
reliance on the report of Arthur Andersen LLP, independent accountants, given on
the authority of said firm as experts in auditing and accounting.
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.
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.
61
<PAGE> 64
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> 65
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
F-2
<PAGE> 66
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
AS OF JUNE 30,
---------------------
1995 1996
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................................... $ 32,120 $ 26,268
Restricted cash.................................................... 7,503 1,131
-------- --------
Total cash and cash equivalents................................. 39,623 27,399
Receivables--
Trade, net of allowances of $1,529 and $2,938, respectively..... 4,909 5,680
Notes, advances and other....................................... 2,505 2,492
Inventories........................................................ 992 1,271
Deferred income taxes.............................................. 181 381
Other current assets............................................... 1,452 2,635
-------- --------
TOTAL CURRENT ASSETS................................................. 49,662 39,858
-------- --------
Property and equipment, net.......................................... 34,111 41,174
Other assets......................................................... 4,560 5,837
Goodwill, net of amortization of $2,306 and $2,713, respectively..... 13,970 14,543
-------- --------
$102,303 $101,412
======== ========
LIABILITIES AND REDEEMABLE SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Current portion of long-term debt.................................. $ 6,427 $ 3,890
Accounts payable................................................... 6,757 4,776
Accrued liabilities................................................ 8,370 7,355
Advance payments................................................... 13,164 11,243
-------- --------
TOTAL CURRENT LIABILITIES............................................ 34,718 27,264
-------- --------
Long-term debt, less current portion................................. 63,383 62,029
Deferred income taxes and other long-term liabilities................ 2,347 2,463
Commitments and contingencies (Note 6)
Redeemable shareholders' investment (Note 4):
Capital stock--
Preferred Stock 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
Warrants outstanding............................................... 7,683 7,683
Additional paid-in capital......................................... 19,118 19,742
Deferred compensation related to ESOP.............................. (3,587) -
Treasury stock..................................................... (248) (99)
Stock subscriptions receivable..................................... (212) (442)
Accumulated deficit................................................ (42,975) (39,304)
-------- --------
TOTAL REDEEMABLE SHAREHOLDERS' INVESTMENT............................ 1,855 9,656
-------- --------
$102,303 $101,412
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-3
<PAGE> 67
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
--------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
NET REVENUES................................................ $122,549 $131,227 $147,863
COSTS AND EXPENSES:
Educational services................................... 83,566 86,865 98,841
General and administrative............................. 26,174 28,841 32,344
Amortization of intangibles............................ 6,599 1,937 1,060
-------- -------- --------
116,339 117,643 132,245
-------- -------- --------
INCOME BEFORE ESOP EXPENSE, INTEREST AND TAXES.............. 6,210 13,584 15,618
ESOP expense........................................... 4,759 7,086 1,366
-------- -------- --------
INCOME BEFORE INTEREST AND TAXES............................ 1,451 6,498 14,252
Interest expense, net.................................. 4,765 4,495 3,371
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES........................... (3,314) 2,003 10,881
Provision (credit) for income taxes.................... (1,612) 490 4,035
-------- -------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM..................... (1,702) 1,513 6,846
Extraordinary loss on early extinguishment of debt
(Note 5)............................................. - - 926
-------- -------- --------
NET INCOME (LOSS)........................................... $ (1,702) $ 1,513 $ 5,920
======== ======== ========
INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE:
PRIMARY:
Income (loss) before extraordinary item................ $ (.28) $ (.05) $ .22
Extraordinary loss on early extinguishment of debt
(Note 5)............................................. - - (.04)
-------- -------- --------
Net income (loss)...................................... $ (.28) $ (.05) $ .18
======== ======== ========
FULLY DILUTED:
Income (loss) before extraordinary item................ $ (.28) $ (.05) $ .19
Extraordinary loss on early extinguishment of debt
(Note 5)............................................. - - (.04)
-------- -------- --------
Net income (loss)...................................... $ (.28) $ (.05) $ .15
======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-4
<PAGE> 68
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE SHAREHOLDERS' INVESTMENT
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
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 preferred
stock................... - - - - - - - -
Purchase of 131,876 Class
B shares................ - - - - - - (227) -
Payment on stock
subscriptions receivable
for purchase of stock... - - - - - - - 50
Payments received on ESOP
debt.................... - - - - - 6,986 - -
Tax effect of dividends on
unallocated ESOP
shares.................. - - - - - - - -
------- -------- -------- -------- -------- ---------- ------- ------
Balance, June 30, 1994.... 22,075 - 1 7,683 17,972 (12,706) (227) (225)
Net income................ - - - - - - - -
Dividends on preferred
stock................... - - - - - - - -
Purchase of 11,534 Class B
shares.................. - - - - - - (21) -
Payment on stock
subscriptions receivable
for purchase of stock... - - - - - - - 13
Payments received on ESOP
debt.................... - - - - - 9,119 - -
Tax effect of dividends on
unallocated ESOP
shares.................. - - - - - - - -
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 preferred
stock................... - - - - - - - -
Sale of 86,410 Class B
shares.................. - - - - 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 preferred
stock................... (2,249) (2,249)
Purchase of 131,876 Class
B shares................ - (227)
Payment on stock
subscriptions receivable
for purchase of stock... - 50
Payments received on ESOP
debt.................... - 6,986
Tax effect of dividends on
unallocated ESOP
shares.................. 208 208
---------- -----------
Balance, June 30, 1994.... (42,297) (7,724)
Net income................ 1,513 1,513
Dividends on preferred
stock................... (2,249) (2,249)
Purchase of 11,534 Class B
shares.................. - (21)
Payment on stock
subscriptions receivable
for purchase of stock... - 13
Payments received on ESOP
debt.................... - 9,119
Tax effect of dividends on
unallocated ESOP
shares.................. 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 preferred
stock................... (2,249) (2,249)
Sale of 86,410 Class B
shares.................. - 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> 69
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 ESOP shares..... 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--
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................................. 10,872 23,114 4,128
-------- -------- --------
Net cash flows from operating activities.......... 9,170 24,627 10,048
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment, net........... (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.................. (3,677) 19,136 (12,224)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR............. 24,164 20,487 39,623
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR................... $ 20,487 $ 39,623 $ 27,399
======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-6
<PAGE> 70
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. OWNERSHIP AND OPERATIONS:
Education Management Corporation ("EMC" or the "Company") is one of the
largest providers of proprietary postsecondary education in the United States
based on student enrollments and revenues. Through its operating units, The Art
Institutes International ("AII"), the New York Restaurant School ("NYRS") (see
Note 12), 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 and hospitality arts, fashion, and paralegal studies. The Company
has provided career-oriented education programs for nearly 35 years.
The Company's main operating unit, AII consists of 11 schools "the Art
Institutes") in 10 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. Art Institute programs typically
are completed within 18 to 24 months and culminate in an associate's degree.
Four Art Institutes currently offer bachelor's degree programs.
The Company offers a culinary curriculum at six Art Institutes and NYRS; a
well-known culinary arts and restaurant management school in New York City. NYRS
offers an associate's degree program and various certificate programs.
The Company also offers paralegal training at NCPT in Atlanta; NCPT's
advanced certificate programs take four to nine months to complete. NCPD has
consulting affiliations 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 under Title IV of the Higher Education Act of 1965 ("Title IV
Programs"), as amended. Approximately 68% of the Company's 1996 net revenues was
indirectly derived from funds distributed under these programs to students at
The Art Institutes.
F-7
<PAGE> 71
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 maintain in separate bank accounts certain Title IV Program loan
proceeds in excess of charges currently applied to students' accounts. Such
funds are reported as restricted cash in the accompanying consolidated balance
sheets.
The Company is required to administer Title IV Program funds in accordance
with the Higher Education Act and U.S. Department of Education regulations and
must use due diligence in approving and disbursing funds and servicing loans. In
the event the Company does not comply with federal requirements or if student
loan default rates are at a level considered excessive by the federal
government, the Company could lose its eligibility to participate in the Title
IV Programs or could be required to repay funds determined to have been
improperly disbursed. Management believes that it is in substantial compliance
with the federal requirements and that student loan default rates are not at a
level considered to be excessive.
The Company 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. The Company 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 capital lease. The remaining lease obligations 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.
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.
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.
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.
F-8
<PAGE> 72
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
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 through disclosure only. The Company anticipates continuing to
account for its stock option plans under APB 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 ("ESOP") for its
employees. In connection with establishing the ESOP, the borrowings under the
senior term loan financing were loaned to the ESOP under 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 the debt was repaid, shares were released from pledge and allocated to
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 debt and interest repayment on the senior term loan. The
dividends paid to the ESOP on the convertible preferred stock were used by the
ESOP Trustee to repay 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.
REVENUE RECOGNITION AND RECEIVABLES
The Company's revenue consists of tuition and fees, student housing fees
and bookstore and restaurant sales. In 1996, the Company derived 87% of its net
revenue from tuition and fees paid by, or on behalf of, its students.
The Company recognizes revenue on a monthly pro rata basis over the term of
instruction. Advance payments represent that portion of tuition 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 educational programs. Major cost
components are faculty compensation, administrative salaries for departments
that provide services directly to students, costs of educational materials used,
facility leases and school occupancy costs, information 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 expenses are expensed in the year incurred.
Amortization of intangibles relates principally to the values assigned to
student enrollments and applications for enrollment, accreditation, contracts
with colleges and universities, and goodwill, arising from the application of
the purchase accounting method to the establishment and financing of the ESOP
and the related leveraged recapitalization of the Company in October 1989.
F-9
<PAGE> 73
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
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 preferred stock is assumed to be converted for fully
diluted EPS. When the effect is dilutive, the common equivalent shares are
assumed to be exercised and the preferred stock converted as of the beginning of
the period.
The net income allocable to common shareholders has been reduced by
dividends paid on preferred stock in both computations of EPS. In the event that
the preferred shares were converted to common stock, the Company would no longer
have paid dividends; however, ESOP contribution expense in the accompanying
consolidated statements of income would have increased proportionately.
The weighted average number of common and common equivalent shares
outstanding were as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------
1994 1995 1996
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Primary.................................................... 14,043 14,043 20,552
Fully diluted.............................................. 14,043 14,043 23,960
</TABLE>
<TABLE>
<CAPTION>
1994 1995 1996
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash paid during the period for--
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>
1995 1996
------- -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Assets (asset lives)
Land......................................................... $ 300 $ 300
Buildings and improvements (20 years)........................ 1,841 1,841
Furniture and equipment (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>
F-10
<PAGE> 74
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
4. REDEEMABLE SHAREHOLDERS' INVESTMENT:
Shareholders' investment is described as redeemable because prior to the
closing date of an initial public offering, all of the Company's equity
securities can be put to the Company by their holders under certain
circumstances. In addition, the Company can call the preferred stock and Class B
common stock under certain circumstances. Coincident with an initial public
offering (Note 12), all of the puts and calls will expire, and accordingly, the
"redeemable" caption will be removed.
The preferred voting 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 preferred shares are 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. Upon
liquidation of the Company, the preferred shareholders are entitled to a
preference of $100 plus accrued dividends. Each preferred share is convertible
into 15.43708 shares of Class A common stock under defined circumstances.
Shareholders may require the Company to repurchase the Class A common stock at
fair market value during specified time periods.
The Class A and Class B common stock both have features that allow for
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 preferred
stock, Class A and Class B common stock were as reflected below:
<TABLE>
<CAPTION>
AUTHORIZED ISSUED
---------- ----------
<S> <C> <C>
Preferred.......................................... 1,000,000 220,750
Class A Common..................................... 30,000,000 3,685,604
Class B Common..................................... 22,000,000 10,207,433
</TABLE>
Warrants to purchase up to 5,956,079 shares of Class B common stock were
issued to the holders of the subordinated notes payable. These warrants provide
for an exercise price of $.0001 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 719,284 and 357,000 Class B common shares have been
granted to management employees. The second plan requires that any options
granted in excess of 300,000 must have shares reserved in the treasury for as
long as such options can be exercised. As of June 30, 1996, the 57,000 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 $1.27 to $3.60 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
150,000 Class B common shares at $5.50 per share. The agreement provides for
time-based vesting over four years. Vesting and exercisability are accelerated
under defined circumstances.
Class B common stock held in the treasury has from time to time been sold
to key management under stock subscription agreements providing for annual
principal 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 9 to 10 years.
F-11
<PAGE> 75
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
5. LONG-TERM DEBT:
The Company and its subsidiaries were indebted under the following
obligations:
<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
Senior 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>
The revolving credit agreement allows for maximum borrowings of
$70,000,000, annually reduced by $5,000,000 on October 13, 1997 through its
expiration on October 13, 2000. This agreement requires, among other things, the
Company to maintain a specified level of consolidated net worth, to meet
interest and leverage ratio requirements, and to restrict capital expenditures,
declaration or payment of dividends on common stocks and the incurrence of
additional indebtedness, as defined. 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 on 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.
The second amendment to the agreement referred to above restricts the
redemption of equity securities other than the shares held by the ESOP (Note
12).
Relevant information regarding borrowings under the revolving credit
agreement is reflected below:
<TABLE>
<CAPTION>
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 throughout the
period.............................................. $15,600 $40,000 $55,000
Weighted average interest rate for the period......... 7.61% 8.46% 7.33%
======= ======= =======
</TABLE>
The senior 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
$1,500,000 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.
F-12
<PAGE> 76
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
Capitalized leases and equipment installment notes for furniture and
equipment expire at various dates through June 2000. The following is a schedule
of approximate future minimum payments under capital 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 equipment
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.
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 common 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 the initial public offering (Note 12).
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, each individually and in the aggregate, will
not have a material adverse effect on the consolidated financial position or
results of operations of the Company.
7. RELATED PARTY TRANSACTIONS:
The Art Institute of Philadelphia, Inc., a wholly owned subsidiary of AII,
leases its facility from a partnership in which the subsidiary serves as a 1%
general partner and an officer and a director of EMC are minority limited
partners. The Art Institute of Fort Lauderdale, Inc., another wholly owned
subsidiary of AII, leases its facility from a partnership in which the
subsidiary and an officer of EMC are minority limited
F-13
<PAGE> 77
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
partners. These leases expire on various dates through 2014. 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 preferred stock held by the
ESOP, sufficient to service the interest and principal obligations on the ESOP
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 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:
<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:
<TABLE>
<CAPTION>
1995 1996
------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Payroll taxes and payroll related............................... $3,626 $2,622
Professional fees............................................... 1,370 1,347
Income and other taxes.......................................... 642 347
Other........................................................... 2,732 3,039
------ ------
$8,370 $7,355
====== ======
</TABLE>
F-14
<PAGE> 78
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
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>
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........ (21.1) (34.9) (6.4)
Non-deductible expenses.................................... 3.0 4.9 1.1
All other, net............................................. 4.6 6.4 .9
----- ----- ----
Income tax provision (credit).............................. (48.6)% 24.5% 37.1%
===== ===== ====
</TABLE>
Net deferred income tax assets (liabilities) are composed of the following:
<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 $ 1,795
Bad debt.............................................. 620 612 1,175
Assigned asset values in excess of tax basis.......... (2,670) (2,369) (2,126)
Depreciation.......................................... (50) (588) (2,609)
------- ------- -------
$(1,839) $(1,628) $(1,765)
======= ======= =======
</TABLE>
12. 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
On August 2, 1996, the Company acquired certain net assets of the New York
Restaurant School (NYRS) for $9.5 million 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
F-15
<PAGE> 79
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
recertification of NYRS by the U.S. Department of Education. In the event that
U.S. Department of Education recertification is denied, the Company has the
right to rescind the acquisition of NYRS.
(B) PREFERRED STOCK REDEMPTION
On August 9, 1996 the Company redeemed 75,000 shares of its 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 Company's Revolving Credit Agreement.
(C) CONVERSION OF PREFERRED STOCK AND EXERCISE OF STOCK WARRANTS
Prior to the completion of the initial public offering, subject to the
satisfaction of certain conditions, the ESOP will convert the remaining Series A
Preferred Stock into Class A common stock as described in Note 4. The conversion
will result in 145,750 shares of preferred stock being converted into 2,249,954
shares of common stock, and the payment of the final accrued dividend.
Prior to the completion of the initial public offering, all outstanding
warrants will be exercised for an aggregate of 5,956,079 shares of Class B
common stock.
(D) AMENDMENT TO ARTICLES OF INCORPORATION
On August 15, 1996, the Board of Directors authorized, subject to
shareholder approval, the Restated Articles of Incorporation providing for,
among other things, only two classes of capital stock consisting of the Common
Stock, $.01 par value (Common Stock) and Preferred Stock, $.01 par value and
effecting the immediate conversion of all shares of the existing Class A and
Class B common stock (Existing Common Stock) into Common Stock at the rate of
one share of Common Stock for each two shares of Existing Common Stock. These
transactions have not been reflected in the accompanying consolidated financial
statements.
(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
("Right") is associated with each outstanding share of common stock. Each Right
entitles the shareholder to buy 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 plan is 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 Company's common stock. If any person acquires 17.5% or
more of the Company's 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 Company's common stock, each
Right will entitle the 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-16
<PAGE> 80
- -------------------------------------------------------------------------------
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....................... 12
Use of Proceeds........................ 12
Dividend Policy........................ 13
Capitalization......................... 14
Dilution............................... 15
Pro Forma Consolidated Financial
Data................................. 16
Selected Consolidated Financial and
Other Data........................... 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 20
Business............................... 28
Management and Directors............... 47
Certain Transactions................... 53
Principal and Selling Shareholders..... 54
Description of Capital Stock........... 55
Shares Eligible For Future Sale........ 57
Underwriting........................... 59
Notice to Canadian Residents........... 60
Legal Matters.......................... 61
Experts................................ 61
Additional Information................. 61
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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
[LOGO]
Education Management
Corporation
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> 81
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the fees payable to the Securities and
Exchange Commission and the National Association of Securities Dealers, Inc. and
other estimated expenses expected to be incurred in connection with the issuance
and distribution of the securities being registered.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee............ $29,741
NASD Fee....................................................... *
National Market Listing Fee.................................... *
Printing and Engraving Expenses................................ *
Accounting Fees and Expenses................................... *
Legal Fees and Expenses........................................ *
Blue Sky Qualification Fees and Expenses....................... *
Transfer Agent Fees and Expenses............................... *
Miscellaneous.................................................. *
-------
Total..................................................... $ *
=======
</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> 82
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> 83
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. [To be provided by amendment].
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed as part of this registration
statement:
<TABLE>
<S> <C> <C>
1.01 Form of Underwriting Agreement*
3.01(a) Current Restated Articles of Incorporation of Education Management
Corporation*
3.01(b) Amended and Restated Articles of Incorporation (to be in effect on
the effective date)
3.02(a) Current Restated By-laws of Education Management Corporation*
3.02(b) Restated By-laws (to be in effect on the effective date)
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*
</TABLE>
II-3
<PAGE> 84
<TABLE>
<S> <C> <C>
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 Education Management Corporation 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*
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 Amendment No. 1 to Amended and Restated Credit Agreement, dated
October 13, 1995, among Education Management Corporation, certain
banks and PNC Bank, National Association
4.18 Amendment No. 2 to Amended and Restated Credit Agreement, dated
, 1996, among Education Management Corporation, certain
banks and PNC Bank, National Association*
</TABLE>
II-4
<PAGE> 85
<TABLE>
<S> <C> <C>
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 the Note and Warrant Purchase Agreement, dated
March 30, 1991, between EMC Holdings, Inc. 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
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 Amendment No. 1 to Education Management Corporation Employee Stock
Ownership Plan*
10.03 Amendment No. 2 to Education Management Corporation Employee Stock
Ownership Plan
10.04 Amendment No. 3 to Education Management Corporation Employee Stock
Ownership Plan*
10.05 Management Incentive Stock Option Plan, effective November 11, 1993
10.06 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 No. 1 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 1996 Management 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 Restated and Amended Employment Agreement, 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
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
24.01 Power of Attorney (included on signature page of this registration
statement)
27.01 Financial Data Schedule*
</TABLE>
- ------------------
* to be filed by amendment
(b) Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts
II-5
<PAGE> 86
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> 87
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Pittsburgh, Commonwealth
of Pennsylvania, on August , 1996
EDUCATION MANAGEMENT CORPORATION
By: /s/ Robert B. Knutson
------------------------------------
Robert B. Knutson
Chairman and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints William M. Webster, IV, Robert T. McDowell and
Frederick W. Steinberg, and each of them, his or her true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments to this registration
statement, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
or she might or could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents, or their substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
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>
/s/ Robert B. Knutson Chairman and Chief Executive Officer August 15, 1996
- -------------------------------------
Robert B. Knutson
/s/ Robert T. McDowell Senior Vice President and August 15, 1996
- ------------------------------------- Chief Financial and Accounting
Robert T. McDowell Officer
/s/ Miryam L. Drucker Vice Chairman and Director August 15, 1996
- -------------------------------------
Miryam L. Drucker
/s/ James J. Burke, Jr. Director August 15, 1996
- -------------------------------------
James J. Burke, Jr.
/s/ J. Thomas Christofferson Director August 16, 1996
- -------------------------------------
J. Thomas Christofferson
/s/ Albert Greenstone Director August 15, 1996
- -------------------------------------
Albert Greenstone
/s/ Harvey Sanford Director August 14, 1996
- -------------------------------------
Harvey Sanford
</TABLE>
II-7
<PAGE> 88
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> 89
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> 90
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 (to be in effect on
the effective date)
3.02(a) Current Restated By-laws of Education Management Corporation*
3.02(b) Restated By-laws (to be in effect on the effective date)
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 Education Management Corporation 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> 91
<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 Amendment No. 1 to Amended and Restated Credit Agreement, dated
October 13, 1995, among Education Management Corporation, certain
banks and PNC Bank, National Association
4.18 Amendment No. 2 to Amended and Restated Credit Agreement, dated
, 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 the Note and Warrant Purchase Agreement, dated
March 30, 1991, between EMC Holdings, Inc. 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
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 Amendment No. 1 to Education Management Corporation Employee Stock
Ownership Plan*
10.03 Amendment No. 2 to Education Management Corporation Employee Stock
Ownership Plan
10.04 Amendment No. 3 to Education Management Corporation Employee Stock
Ownership Plan*
10.05 Management Incentive Stock Option Plan, effective November 11, 1993
10.06 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 No. 1 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>
<PAGE> 92
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER EXHIBIT NUMBER PAGE
- -------- ------------------------------------------------------------------- -------------
<S> <C> <C>
10.13 1996 Management 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 Restated and Amended Employment Agreement, 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
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
24.01 Power of Attorney (included on signature page of this registration
statement)
27.01 Financial Data Schedule*
</TABLE>
- ------------------
* to be filed by amendment
(b) Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts
<PAGE> 1
Exhibit 3.01(b)
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
EDUCATION MANAGEMENT CORPORATION
FIRST: The name of the Corporation is:
EDUCATION MANAGEMENT CORPORATION.
SECOND: The location and post office address of the registered office of the
Corporation in this Commonwealth is 300 Sixth Avenue, Pittsburgh, PA 15222,
Allegheny County.
THIRD: The Corporation is incorporated under the Business Corporation Law of
1988.
FOURTH: The term for which the Corporation is to exist is perpetual.
FIFTH: A. Authorized Shares
The aggregate number of shares which the Corporation shall have
authority to issue is Seventy Million (70,000,000) shares, as follows:
1. Sixty Million (60,000,000) shares of Common Stock, with a par
value of one cent ($.01) per share.
Except for and subject to those rights as may be expressly granted
to the holders of Preferred Stock pursuant to the authority vested by
these Articles of Incorporation in the Board of Directors of the
Corporation, or except as may be provided by the laws of the
Commonwealth of Pennsylvania, the holders of Common Stock shall have
exclusively all rights of shareholders.
2. Ten Million (10,000,000) shares of Preferred Stock, with a par
value of one cent ($.01) per share.
B. Authority is hereby expressly vested in the Board of Directors of
the Corporation at any time and from time to time by resolution to divide
into and issue the Preferred Stock in one or more classes or series, or
both, and to
<PAGE> 2
determine for any such class or series its designation and the number
of shares of the class or series and the voting rights, preferences,
limitations and special rights, if any, of the shares of the class
or series.
SIXTH: The directors of the Corporation shall be divided into three classes:
Class I, Class II and Class III. Each class shall consist, as nearly as may be
possible, of one-third of the whole number of the Board of Directors. The
initial Class I, II and III directors shall be those elected and designated to
serve as such directors at the meeting of shareholders to hereby approve the
Articles of Amendment dated as of _________ __, 1996 (the "Shareholders
Meeting"), such Class I directors shall hold office for a term to expire at the
first annual meeting of the shareholders after the Shareholders Meeting; such
Class II directors shall hold office for a term to expire at the second annual
meeting of the shareholders after the Shareholders Meeting; and such Class III
directors shall hold office for a term to expire at the third annual meeting of
the shareholders after the Shareholders Meeting, and in the case of each class,
until their respective successors are duly elected and qualified. At each
annual election the directors elected to succeed those whose terms expire shall
be identified as being of the same class as the directors they succeed and
shall be elected to hold office for a term to expire at the third annual
meeting of the shareholders after their election, and until their respective
successors are duly elected and qualified. If the number of directors is
changed, any increase or decrease in directors shall be apportioned among the
classes so as to maintain all classes as equal in number as possible, and any
additional director elected to any class shall hold office for a term which
shall coincide with the terms of the other directors in such class and until
his successor is duly elected and qualified.
Subject to the rights of holders of any series of Preferred Stock then
outstanding, in the case of any increase in the number of directors of the
Corporation the additional director or directors shall be elected by the Board
of Directors. No decrease in the number of directors of the Corporation shall
shorten the term of any incumbent director.
The entire Board of Directors, or any class of the Board of Directors, or
any individual director may be removed from office by vote of the shareholders
entitled to vote thereon only for cause. In case the Board of Directors or a
class of the Board of Directors or any one or more directors are so removed,
new directors may be elected at the same meeting. The repeal of a provision of
these Articles or the Bylaws of the Corporation prohibiting, or the addition of
a provision to these Articles or
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<PAGE> 3
the ByLaws of the Corporation permitting, the removal by the shareholders of
the Board of Directors, a class of the Board of Directors or a director without
assigning any cause shall not apply to any incumbent director during the
balance of the term for which he was elected.
SEVENTH: The shareholders of the Corporation shall not have the right to
cumulate their votes for the election of directors of the Corporation.
EIGHTH: Subchapters E, F, G and H of Chapter 25 of the Business Corporation
Law of 1988 shall not be applicable to the Corporation.
NINTH: The Board of Directors is authorized to adopt, amend or repeal any
term or provision of the Bylaws of the Corporation by a vote of a majority of
its members, subject always to the power of the shareholders to adopt, amend or
repeal the Bylaws of the Corporation by the affirmative vote of the holders of
at least two-thirds of the outstanding shares of Common Stock of the
Corporation.
TENTH: In addition to the requirements of (i) law, and (ii) the other
provisions of these Articles of Incorporation, as amended, the affirmative vote
of the holders of at least two-thirds of the outstanding shares of Common Stock
of the Corporation entitled to vote shall be required to delete, amend or
supplement any term or provision of this Article Ten, Articles Four, Six,
Seven, Eight or Nine, or Subparagraph B of Article Five hereof.
ELEVENTH: Immediately effective upon the filing of the Articles of Amendment
dated as of ______ __, 1996 in the Department of State of the Commonwealth of
Pennsylvania (the "Effective Time"), each share of Class A Common Stock, par
value $.0001 per share, and of Class B Common Stock, par value $.0001 per
share, outstanding immediately prior to the Effective Time, and each share of
Class B Common Stock which immediately prior to the Effective Time is held by
the Corporation as treasury stock, automatically and without any action on the
part of the holder thereof shall be reclassified as and converted into one-half
of a share of Common Stock, par value $.01 per share, subject to the treatment
of fractional share interests as described below. Each holder of a certificate
or certificates that immediately prior to the Effective Time represented
outstanding shares of Class A and
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<PAGE> 4
Class B Common Stock (the "Old Certificates") will be entitled to receive, upon
surrender of such Old Certificates to the Corporation for cancellation, a
certificate or certificates (the "New Certificate", whether one or more)
representing the number of whole shares of the Common Stock into which and for
which the shares of the Class A and Class B Common Stock formerly represented
by such Old Certificates so surrendered are reclassified under the terms
hereof. From and after the Effective Time, Old Certificates shall represent
only the right to receive New Certificates (and, where applicable, cash in lieu
of fractional shares, as provided below) pursuant to the provisions hereof. No
certificates or scrip representing fractional share interests in Common Stock
will be issued, and no such fractional share interest will entitle the holder
thereof to vote, or to any rights of a shareholder of the Corporation. In lieu
of any such fractional shares of Common Stock, each shareholder with a
fractional share will be entitled to receive, upon surrender of Old
Certificates to the Corporation for cancellation, an amount in cash equal to
the fair market value thereof as determined in good faith by the Board of
Directors to be the fair value of one share of Common Stock as of the Effective
Time multiplied by such fraction. If more than one Old Certificate shall be
surrendered at one time for the account of the same shareholder, the number of
full shares of Common Stock for which New Certificates shall be issued shall
be computed on the basis of the aggregate number of shares represented by the
Old Certificates so surrendered. In the event that the Corporation determines
that a holder of Old Certificates has not tendered all his certificates for
exchange, the Corporation shall carry forward any fractional share until all
certificates of that holder have been presented for exchange such that payment
for fractional shares to any one person shall not exceed the value of
four-fifths of one share of Common Stock. The Old Certificates surrendered for
exchange shall be properly endorsed and otherwise in proper form for transfer,
and the person or persons requesting such exchange shall affix any requisite
stock transfer tax stamps to the Old Certificates surrendered, or provide funds
for their purchase, or establish to the satisfaction of the Corporation that
such taxes are not payable. From and after the Effective Time the amount of
capital represented by the shares of the Common Stock into which and for which
the shares of the Old Common Stock are reclassified under the terms hereof
shall be an amount equal to the product of the number of issued and outstanding
shares of Common Stock and the One Cent ($.01) par value of each such share.
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<PAGE> 1
Exhibit 3.02(b)
RESTATED BYLAWS
OF
EDUCATION MANAGEMENT CORPORATION
Adopted: August 15, 1996
<PAGE> 2
RESTATED BY-LAWS
OF
EDUCATION MANAGEMENT CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE I MEETING OF SHAREHOLDERS PAGE
- --------- ----------------------- ----
<S> <C> <C>
Section 1.1 Annual Meeting 1
Section 1.2 Special Meetings 1
Section 1.3 Place of Meetings 1
Section 1.4 Notice of Meetings 1
Section 1.5 Quorum; Adjournments 1
Section 1.6 Advance Notice of Shareholder Proposals 2
Section 1.7 Advance Notice of Shareholder Nominations 3
Section 1.8 Voting 4
Section 1.9 Informal Action 4
Section 1.10 Presence at Meetings 5
ARTICLE II DIRECTORS
- ---------- ---------
Section 2.1 Number, Qualifications, Election
and Term of Office 5
Section 2.2 Vacancies 6
Section 2.3 Removal of Directors 6
Section 2.4 Annual Meeting; Other Regular Meetings 6
Section 2.5 Special Meetings 7
Section 2.6 Quorum 7
Section 2.7 Powers of Directors 7
Section 2.8 Informal Action 7
Section 2.9 Telephone Participation in Meetings 7
Section 2.10 Compensation of Directors 7
ARTICLE III COMMITTEES OF DIRECTORS
- ----------- -----------------------
Section 3.1 Appointment and Powers 8
Section 3.2 Appointment by Committees of
Substitute Members 8
Section 3.3 Procedure 8
Section 3.4 Telephone Participation in Meetings 9
Section 3.5 Informal Action 9
ARTICLE IV OFFICERS
- ---------- --------
Section 4.1 Enumeration 9
Section 4.2 Chairman 9
</TABLE>
PI1-631972.1
<PAGE> 3
TABLE OF CONTENTS (CONT'D)
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Section 4.3 Chief Executive Officer
Section 4.4 President 9
Section 4.5 Vice President 10
Section 4.6 Secretary 10
Section 4.7 Treasurer 10
Section 4.8 Other Officers 11
Section 4.9 Compensation 11
Section 4.10 Additional Duties of Officers 11
ARTICLE V STOCK
- --------- -----
Section 5.1 Issuance of Stock 11
Section 5.2 Certificate of Stock 11
Section 5.3 Transfer of Stock 12
Section 5.4 Lost, Stolen, Destroyed or
Mutilated Certificates 12
Section 5.5 Regulations 12
Section 5.6 Holders of Record 12
Section 5.7 Record Date 12
Section 5.8 Restriction on Transfer Rights 13
ARTICLE VI LIABILITY OF DIRECTORS
- ---------- ----------------------
Section 6.1 Directors' Personal Liability 13
Section 6.2 Preservation of Rights 13
ARTICLE VII INDEMNIFICATION OF DIRECTORS AND OFFICERS
- ----------- -----------------------------------------
Section 7.1 Mandatory Indemnification of
Directors and Officers 14
Section 7.2 Mandatory Advancement of Expenses
to Directors and Officers 15
Section 7.3 Permissive Indemnification and
Advancement of Expenses 16
Section 7.4 Enforcement 16
Section 7.5 General 17
Section 7.6 Definition of Corporation 17
Section 7.7 Definition of Authorized Representative 17
Section 7.8 Savings Clause 18
Section 7.9 Insurance 18
Section 7.10 Funding to Meet Indemnification Obligations 18
</TABLE>
<PAGE> 4
TABLE OF CONTENTS (CONT'D)
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE VIII GENERAL PROVISIONS
- ------------ ------------------
Section 8.1 Corporate Seal 18
Section 8.2 Fiscal Year 18
Section 8.3 Authorization 19
Section 8.4 Inapplicability of Subchapter 25E 19
Section 8.5 Inapplicability of Subchapter 25F 19
Section 8.6 Inapplicability of Subchapter 25G 19
Section 8.7 Inapplicability of Subchapter 25H 19
ARTICLE IX AMENDMENTS 19
- ---------- ----------
</TABLE>
PI1-631972.1
<PAGE> 5
RESTATED BYLAWS
OF
EDUCATION MANAGEMENT CORPORATION
ARTICLE I
MEETING OF SHAREHOLDERS
Section 1.1 Annual Meeting. An annual meeting of the
shareholders for the election of directors and the transaction of such other
business as may properly come before the same shall be held on the ____ day of
November of each year, at 10:00 a.m., prevailing time, or at such other date
and time as shall be designated by the Board of Directors. If the day fixed
for the meeting falls on a Saturday or Sunday, or is a legal holiday, the
meeting shall be held at the same hour on the next succeeding full business day
or as soon thereafter as practicable.
Section 1.2 Special Meetings. Special meetings may be called
only by the Chairman, the Chief Executive Officer, the President, or a majority
of the directors in office. The only business to be transacted at a special
meeting of shareholders shall be the business stated in the notice provided
pursuant to Section 1.4 of these Bylaws.
Section 1.3 Place of Meetings. Meetings of the shareholders
shall be held at the registered office of the Corporation, or at such other
place within or without the Commonwealth of Pennsylvania as shall be fixed by
the Board of Directors or the person or persons calling the meeting.
Section 1.4 Notice of Meetings. A written notice stating the
place, day and hour of any meeting and, in the case of a special meeting, the
purpose or purposes for which the meeting is called shall be given by, or at
the direction of, the Secretary, to each shareholder of record entitled to vote
at such meeting, at such address as appears upon the records of the
Corporation, at least twenty (20) days before the day named for the meeting if
written notice is given by bulk mail or five (5) days before the day named for
the meeting if written notice is given by first class or express mail, postage
prepaid, or by telegram, telex or TWX (with answerback received), unless a
greater period of time is required by law in a particular case.
<PAGE> 6
Section 1.5 Quorum; Adjournments. The presence, in person or
by proxy, of the majority of the outstanding shares entitled to vote shall
constitute a quorum. The shareholders present at a duly authorized meeting can
continue to do business until adjournment, notwithstanding the withdrawal of
enough shareholders to leave less than a quorum. If a meeting cannot be
organized because a quorum has not attended, those present may, except as
otherwise provided by statute, adjourn the meeting to such time and place as
they may determine, but in the case of any meeting called for the election of
directors, those who attend the second of such adjourned meetings, although
less than a quorum, shall nevertheless constitute a quorum for the purpose of
electing the directors. When a meeting is adjourned, it shall not be necessary
to give any notice of the adjourned meeting or of the business to be transacted
at an adjourned meeting other than the announcement at the meeting at which
such adjournment is taken. 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 1.6 Advance Notice of Shareholder Proposals. At any
annual meeting of shareholders, only such business shall be conducted as shall
have been brought before the meeting (i) by or at the direction of the Board of
Directors or (ii) by any shareholder of the Corporation who complies with the
notice procedure set forth in this Section 1.6. For business to be properly
brought before any annual meeting of the shareholders by a shareholder, the
shareholder must be entitled by Pennsylvania law to present such business and
such shareholder must have given timely notice of such shareholder's intent to
make such presentation. To be timely, a shareholder's notice must have been
received by the Secretary of the Corporation not less than 60 nor more than 90
days in advance of the first anniversary of the previous year's annual meeting;
provided, however, that in the event that the date of the annual meeting is
changed by more than 30 days from such anniversary date, notice by the
shareholder to be timely must have been received no later than the close of
business on the 5th day following the day on which public announcement of the
date of such meeting is first made. Each such notice shall set forth: (i) a
brief description of each item of business desired to be brought before the
meeting and the reasons for conducting such business at the meeting; (ii) the
name and address, as they appear on the Corporation's books, of the shareholder
proposing such business; (iii) a representation by the shareholder proposing
such business that such shareholder will be a holder of record of shares of the
Corporation entitled to vote at such meeting and intends to appear in person or
by proxy at the meeting; (iv) the class and number of shares of the
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<PAGE> 7
Corporation that are beneficially owned by the shareholder; and (v) as to each
item of business the shareholder proposes to bring before the meeting, any
material interest of the shareholder in such business. In addition, the
shareholder making such proposal shall promptly provide any other information
reasonably requested by the Corporation.
Only such business shall be conducted at any annual meeting of
shareholders as shall have been brought before such meeting in accordance with
the requirements set forth in these Bylaws. Notwithstanding the foregoing
provisions of this Section 1.6, a shareholder shall also comply with all
applicable requirements of the Securities Exchange Act of 1934, as amended, and
the rules and regulations thereunder with respect to the matters set forth in
these Bylaws. Nothing in these Bylaws shall be deemed to affect any rights of
any shareholder to request inclusion of a proposal in the Corporation's proxy
statement pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Except as otherwise required by law, the
chairman of any annual meeting of shareholders shall have the power and duty
(x) to determine whether any business proposed to be brought before the meeting
was brought in accordance with the requirements set forth in these Bylaws and
(y) if any proposed business was not brought in compliance with these Bylaws to
declare that such defective proposal shall be disregarded. For purposes of
Sections 1.6 and 1.7 of these Bylaws, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, the
Associated Press or any comparable national news service or in a document
publicly filed by the Corporation with the Securities and Exchange Commission
pursuant to Section 13, 14 or 15(d) of the Exchange Act.
Section 1.7 Advance Notice of Shareholder Nominations.
Nominations for the election of directors may be made by the Board of Directors
or by any shareholder entitled to vote generally in the election of directors;
provided, however, that a shareholder may nominate a person for election as a
director at a meeting only if timely notice of such shareholder's intent to
make such nomination has been given to the Secretary of the Corporation. To be
timely, a shareholder's notice must have been received by the Secretary of the
Corporation (a) in the case of an annual meeting, not less than 60 nor more
than 90 days in advance of the first anniversary of the previous year's annual
meeting; provided, however, that in the event that the date of the annual
meeting is changed by more than 30 days from such anniversary date, notice by
the shareholder to be timely must have been received no later than the close of
business on the fifth day following the date on which public announcement of
the
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<PAGE> 8
date of such meeting is first made; and (b) in the case of a special meeting at
which directors are to be elected, not later than the close of business on the
fifth day following such public announcement. Each such notice shall set
forth: (i) the name and address, as they appear on the Corporation's books, of
the shareholder who intends to make the nomination and the name(s) and address
list of the person or persons to be nominated; (ii) a representation that the
holder will be a holder of record of shares of the Corporation entitled to vote
at such meeting and intends to appear in person or by proxy at the meeting and
nominate the person or persons specified in the notice; (iii) the class and
number of shares of the Corporation that are beneficially owned by the
shareholder; (iv) a description of all arrangements or understandings between
the shareholder and each nominee and any other person or persons (naming such
person or persons) pursuant to which the nomination or nominations are to be
made by the shareholder; (v) such other information regarding each nominee
proposed by such shareholder as would be required to be included in a proxy
statement filed pursuant to the proxy rules of the Securities and Exchange
Commission had the nominee been nominated, or intended to be nominated, by the
Board of Directors; and (vi) the consent of each nominee to serve as a director
of the Corporation, if so elected. In addition, the shareholder making such
nomination shall promptly provide any other information reasonably requested by
the Corporation. Notwithstanding anything in these Bylaws to the contrary, no
person shall be eligible for election as a director of the Corporation unless
nominated in accordance with the procedures set forth in this Section 1.7.
Notwithstanding the foregoing provisions of these Bylaws, a shareholder shall
also comply with all applicable requirements of the Securities Exchange Act of
1934, as amended, and the rules and regulations thereunder with respect to the
matters set forth in these Bylaws.
Except as otherwise required by law, the chairman of any
meeting of shareholders shall have the power and duty (x) to determine whether
a nomination was made in accordance with the requirements set forth in these
Bylaws and (y) if any proposed nomination was not made in compliance with these
Bylaws, to declare that such defective nomination shall be disregarded.
Section 1.8 Voting. Except as otherwise provided by law or
the Articles of Incorporation, every shareholder of record shall have the right
at every shareholders' meeting to one (1) vote for every share standing in his
or her name on the books of the Corporation. A majority of the votes cast
shall decide every question or matter submitted to the shareholders unless
otherwise provided by law or the Articles of Incorporation. The vote upon any
matter submitted to the shareholders may be taken
- 4 -
<PAGE> 9
viva voce; provided, however, that the vote upon any question shall be by
ballot if demand for the same is made by any shareholder or is directed by the
chairman of the meeting.
Section 1.9 Informal Action. Whenever the vote of the
shareholders at a meeting thereof is required or permitted to be taken in
connection with any corporate action by any provision of law or of the Articles
of Incorporation, the meeting, notice and vote of shareholders may be dispensed
with, if a consent in writing, setting forth the action so taken, shall be
signed by the holders of all the outstanding shares, prior or subsequent to
such corporate action, and filed with the Secretary of the Corporation.
Section 1.10 Presence at Meetings. A shareholder may
participate in a meeting of the shareholders only if the shareholder or the
shareholder's duly authorized proxy is physically present in person at the
meeting. A shareholder or a proxy may not participate in a meeting of the
shareholders by means of conference telephone or similar communications
equipment.
ARTICLE II
DIRECTORS
Section 2.1 Number, Qualifications, Election and Term of
Office. The number of directors to manage and control the affairs of the
Corporation shall be as determined by the Board of Directors from time to time,
but shall not be less than three (3). Directors need not be shareholders of
the Corporation or residents of the Commonwealth of Pennsylvania. Directors
shall be elected by the shareholders at the annual meeting or any special
meeting called for such purpose. Each director shall be elected to serve until
the next annual meeting of the shareholders and until his or her successor is
duly elected and qualified.
The directors of the Corporation shall be divided into three
classes: Class I, Class II and Class III. Each class shall consist, as nearly
as may be possible, of one-third of the whole number of the Board of Directors.
The initial Class I, II and III directors shall be those elected and designated
to serve as such directors at the meeting of shareholders held to approve the
Articles of Amendment dated as of ___________ __, 1996 (the "Shareholders
Meeting"), such Class I directors shall hold office for a term to expire at the
first annual meeting of the
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<PAGE> 10
shareholders after the Shareholders Meeting; such Class II directors shall hold
office for a term to expire at the second annual meeting of the shareholders
after the Shareholders Meeting; and such Class III directors shall hold office
for a term to expire at the third annual meeting of the shareholders after the
Shareholders Meeting, and in the case of each class, until their respective
successors are duly elected and qualified. At each annual election the
directors elected to succeed those whose terms expire shall be identified as
being of the same class as the directors they succeed and shall be elected to
hold office for a term to expire at the third annual meeting of the
shareholders after their election, and until their respective successors are
duly elected and qualified. If the number of directors is changed, any
increase or decrease in directors shall be apportioned among the classes so as
to maintain all classes as equal in number as possible, and any additional
director elected to any class shall hold office for a term which shall coincide
with the terms of the other directors in such class and until his or her
successor is duly elected and qualified.
Subject to the rights of holders of any series of Preferred
Stock then outstanding, in the case of any increase in the number of directors
of the Corporation the additional director or directors shall be elected by the
Board of Directors. No decrease in the number of directors of the Corporation
shall shorten the term of any incumbent director.
Section 2.2 Vacancies. Vacancies in the Board of Directors
caused by death, resignation, increase in the number of directors or otherwise
shall be filled by a majority vote of the remaining member or members of the
Board; and each director so elected shall hold office until the next selection
of the class for which such director has been chosen and until his or her
successor is duly elected and qualified.
Section 2.3 Removal of Directors. The entire Board of
Directors, or any class of the Board, or any individual director may be removed
from office by vote of the shareholders entitled to vote thereon only for
cause. In case the Board or a class of the Board or any one or more directors
are so removed, new directors may be elected at the same meeting. The repeal
of a provision of the Articles of Incorporation or these Bylaws prohibiting, or
the addition of a provision to the Articles of Incorporation or these Bylaws
permitting, the removal by the shareholders of the Board, a class of the Board
or a director without assigning any cause shall not apply to any incumbent
director during the balance of the term for which he was elected.
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<PAGE> 11
Section 2.4 Annual Meeting; Other Regular Meetings. An
annual meeting of the Board of Directors shall be held each year as soon as
practicable after the annual meeting of shareholders, at the place where such
meeting of shareholders was held or at such other place as the Board of
Directors may determine, for the purposes of organization, election or
appointment of officers and the transaction of such other business as shall
come before the annual meeting. No notice of the annual meeting need be given.
Other regular meetings of the Board of Directors shall be held at such times
and places as the Board of Directors may from time to time by resolution
appoint; and no notice shall be required to be given of any such regular
meeting. No minimum number of regular meetings and no more than one annual
meeting of the Board of Directors need be called in any year.
Section 2.5 Special Meetings. Special meetings of the Board
of Directors may be called by the Chairman, the Chief Executive Officer, the
President or a majority of the directors in office, to be held at such time (as
will permit the giving of notice as provided in this Section) and at such place
in the Commonwealth of Pennsylvania or elsewhere as may be designated by the
person or persons calling the meeting. Notice of the place, day and hour of
such special meeting shall be given to each director by the Secretary (i) by
written notice deposited in the United States mail not later than during the
third full business day immediately preceding the day for such meeting, or (ii)
by telephone, telex, facsimile transmission or other oral, written or
electronic means received not later than 24 hours before the meeting. The
notice need not refer to the business to be transacted at the meeting except
action under Article VII of the Bylaws. No minimum number of special meetings
of the Board of Directors need be called in any year.
Section 2.6 Quorum. A majority of the directors in office
shall constitute a quorum for the transaction of business, and actions may be
taken by a majority of the members present at any meeting at which a quorum is
present.
Section 2.7 Powers of Directors. Except as otherwise
provided by statute or the Articles of Incorporation, all powers vested by law
in the Corporation shall be exercised by or under the authority of, and the
business and affairs of the Corporation shall be managed under the direction
of, the Board of Directors.
Section 2.8 Informal Action. Any action which may be taken
at a meeting of the directors may be taken without a
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<PAGE> 12
meeting, if a consent or consents in writing setting forth the action so taken
shall be signed by all of the directors in office and filed with the Secretary
of the Corporation.
Section 2.9 Telephone Participation in Meetings. Any one or
more directors may participate in a meeting of the Board of Directors by means
of a conference telephone or similar communications equipment by means of which
all persons participating in the meeting can hear each other.
Section 2.10 Compensation of Directors. Each director of the
Corporation who is not a salaried officer or employee of the Corporation or of
a subsidiary of the Corporation, shall receive such compensation (whether in
cash or otherwise) and reimbursement of expenses for serving as a director and
for attendance at meetings of the Board of Directors or any committee appointed
by the Board of Directors as the Board of Directors may from time to time
determine.
ARTICLE III
COMMITTEES OF DIRECTORS
Section 3.1 Appointment and Powers. The Board of Directors
may, by resolution adopted by a majority of the directors in office, establish
one or more committees, each of which shall consist of one or more of the
directors of the Corporation. To the extent provided in the resolution
establishing any committee, such committee shall have and may exercise all of
the powers and authority of the Board of Directors; provided, however, that no
such committee shall have any power or authority as to the following:
(i) the submission to the shareholders of the Corporation
of any action requiring approval of the shareholders under the Pennsylvania
Business Corporation Law of 1988 as amended;
(ii) the creation or filling of vacancies in the Board of
Directors;
(iii) the adoption, amendment or repeal of the By-laws;
(iv) the amendment or repeal of any resolution of the Board
that by its terms is amendable or repealable only by the Board; or
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<PAGE> 13
(v) action on matters committed by the By-laws or
resolution of the Board of Directors to another committee of the Board.
Section 3.2 Appointment by Committees of Substitute Members.
In the absence or disqualification of any member of any such committee, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may by unanimous action
appoint another director to act at the meeting in the place of any such absent
or disqualify member.
Section 3.3 Procedure. The Board of Directors may establish
reasonable rules and regulations for the conduct of the proceedings of any such
committee and may appoint a chairman of the committee who shall be a member
thereof and a secretary of the committee who need not be a member thereof. To
the extent that the Board of Directors shall not exercise such powers, they may
be exercised by the Committee.
Section 3.4 Telephone Participation in Meetings. Any one or
more committee members may participate in a meeting of a committee of the Board
of Directors by means of a conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other.
Section 3.5 Informal Action. Any action which may be
taken at a meeting of any such committee may be taken without a meeting, if a
consent or consents in writing setting forth the action so taken shall be
signed by all the members of any such committee and filed with the Secretary of
the Corporation.
ARTICLE IV
OFFICERS
Section 4.1 Enumeration. The officers of the Corporation
shall be elected by the Board of Directors and shall consist of a Chairman, a
Chief Executive Officer, a President, one or more Vice-Presidents, a Secretary,
a Chief Financial Officer, a Treasurer and, in the discretion of the Board of
Directors, such other officers as shall from time to time be chosen and
appointed by the Board of Directors. Any two (2) or more offices may be held
by one (1) person. Every officer of the
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<PAGE> 14
Corporation shall hold his or her position at the will of the Board of
Directors.
Section 4.2 Chairman. The Chairman shall preside at meetings
of the Board of Directors and meetings of the shareholders, and he shall
perform such other duties and exercise such other powers as the Board of
Directors may from time to time prescribe.
Section 4.3 Chief Executive Officer. The Chief Executive
Officer shall have general charge and control over the affairs of the
Corporation, subject to the Board of Directors. The Chief Executive Officer
shall sign certificates for shares of capital stock of the Corporation and may,
together with the Secretary, execute on behalf of the Corporation any contract
which has been authorized by the Board of Directors. In the absence of the
Chairman, the Chief Executive Officer shall preside at meetings of the
shareholders. In the absence of the President or if the Board of Directors has
not appointed a person holding the title of "President," the Chief Executive
Officer shall also perform the duties and exercise the powers of president
within the meaning of the Business Corporation Law of 1988.
Section 4.4 President. In the absence of the Chief
Executive Officer or if the Board of Directors has not appointed a person
holding the title of "Chief Executive Officer," the President shall perform the
duties and exercise the powers of chief executive officer, and shall report to
the Board of Directors. The President shall perform such other duties and have
such other powers as the Board of Directors may from time to time prescribe.
Section 4.5 Vice President. The Vice President, or, if there
shall be more than one, the Vice Presidents, in the order determined by the
Board of Directors, shall, in the absence or disability of the President,
perform the duties and exercise the powers of the President and shall perform
such other duties and have such other powers as the Board of Directors may from
time to time prescribe.
Section 4.6 Secretary. The Secretary shall keep a record of
the minutes of the proceedings of meetings of shareholders and directors and
shall give notice as required by statute or these Bylaws of all such meetings.
The Secretary
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<PAGE> 15
shall have custody of the seal of the Corporation and of all the books, records
and papers of the Corporation, except such as shall be in the charge of the
Treasurer or of some other person authorized to have custody and be in
possession thereof by resolution of the Board of Directors. The Secretary
shall sign certificates for shares of the capital stock of the Corporation.
The Secretary may, together with the Chief Executive Officer, execute on behalf
of the Corporation any contract which has been authorized by the Board of
Directors.
Section 4.7 Treasurer. The Treasurer shall keep accounts of
all moneys of the Corporation received and disbursed, and shall deposit all
moneys and valuables of this Corporation in its name and to its credit in such
banks and depositories as the Board of Directors shall designate. In the
absence of the Treasurer or if the Board of Directors has not appointed a
person holding the title of "Treasurer," the chief financial officer of the
Corporation shall perform the duties and exercise the powers of treasurer
within the meaning of the Business Corporation Law of 1988. The Treasurer
shall perform such other duties and have such other powers as the Board of
Directors may from time to time prescribe.
Section 4.8 Other Officers. The duties and powers of other
officers who may from time to time be chosen by the Board of Directors shall be
as specified by the Board of Directors at the time of the appointment of such
other officers.
Section 4.9 Compensation. The salaries and other
compensation (whether cash or otherwise) of all officers listed in Sections 4.2
through 4.8 of this Article shall be fixed by, or pursuant to authority
delegated by, the Board of Directors.
Section 4.10 Additional Duties of Officers. The Board of
Directors may from time to time by resolution increase or decrease the duties
and powers of the Chairman, the Chief Executive Officer, the President, one or
more Vice-Presidents, the Secretary, the Chief Financial Officer, the
Treasurer, or any other officer.
ARTICLE V
STOCK
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<PAGE> 16
Section 5.1 Issuance of Stock. Shares of capital stock of
any class now or hereafter authorized, securities convertible into such shares
or options or other rights to purchase such shares or securities may be issued
or granted only in accordance with the authority granted by the Board of
Directors.
Section 5.2 Certificate of Stock. Certificates for shares of
the capital stock of the Corporation shall be in the form adopted by the Board
of Directors, shall be signed by the Chief Executive Officer or the President
and the Secretary or an Assistant Secretary, and shall be sealed with the seal
of the Corporation. Where any such certificate is signed by a registrar other
than the Corporation or its employee, the signatures thereon of any officer of
the Corporation and, where authorized by the Board of Directors, any transfer
agent, may be facsimiles. All such certificates shall be numbered
consecutively; and the name of the person owning the shares and the date of
issue shall be stated on each certificate and entered on the books of the
Corporation. In case any officer, transfer agent or registrar who has
executed, by facsimile or otherwise, any share certificate shall have ceased to
be such officer, transfer agent or registrar by reason of death, resignation or
otherwise, before the certificate is issued, it may be issued by the
Corporation with the same effect as if the officer, transfer agent or registrar
had not ceased to be such at the date of its issue.
Section 5.3 Transfer of Stock. Shares of capital stock of
the Corporation shall be transferred only on the books of the Corporation by
the holder thereof in person or by his or her duly authorized attorney. All
stock certificates transferred by endorsement thereon shall be surrendered for
cancellation and new certificates issued to the transferee.
Section 5.4 Lost, Stolen, Destroyed or Mutilated
Certificates. New certificates of stock may be issued to replace certificates
of stock lost, stolen, destroyed or mutilated, upon such terms and conditions,
including proof of loss or destruction, and, if appropriate, the giving of a
satisfactory bond of indemnity, as the Board of Directors or as one or more of
the officers of the Corporation, as delegated to by the Board of Directors, may
determine from time to time.
Section 5.5 Regulations. The Board of Directors shall have
power and authority to make all such rules and regulations not inconsistent
with these Bylaws as it may deem expedient
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<PAGE> 17
concerning the issue, transfer and registration of certificates of stock of the
Corporation. The Board of Directors may appoint one or more transfer agents or
assistant transfer agents and one or more registrars of transfers, and may
require all stock certificates to bear the signature of a transfer agent or
assistant transfer agent and a registrar of transfers. The Board of Directors
may at any time terminate the appointment of any transfer agent or any
assistant transfer agent or any registrar of transfers.
Section 5.6 Holders of Record. The Corporation shall be
entitled to treat the holder of record of any stock of the Corporation as the
holder and owner in fact thereof for all purposes and shall not be bound to
recognize any equitable or other claim to, or right, title or interest in, such
stock on the part of any other person, whether or not it shall have express or
other notice thereof, except as otherwise provided by law.
Section 5.7 Record Date. The Board of Directors may fix a
time prior to the date of any meeting of shareholders as a record date for the
determination of the shareholders entitled to notice of, or to vote at, the
meeting, which time, except in the case of an adjourned meeting, shall be not
more than 90 days prior to the date of the meeting of shareholders. Only
shareholders of record on the date fixed shall be so entitled notwithstanding
any transfer of shares on the books of the Company after any record date fixed
as provided herein. The Board of Directors may similarly fix a record date for
the determination of shareholders of record for any other purpose. When a
determination of shareholders of record has been made as provided herein for
purposes of a meeting, the determination shall apply to any adjournment thereof
unless the Board fixes a new record date for the adjourned meeting. If a
record date is not fixed by the Board of Directors: (i) the record date for
determining shareholders entitled to notice of or to vote at a meeting of the
shareholders shall be at the close of business on the day next preceding the
day on which notice is given or, if notice is waived, at the close of business
on the day immediately preceding the day on which the meeting is held; and (ii)
the record date for determining shareholders entitled to express consent or
dissent to corporate action in writing without a meeting, when prior action by
the Board of Directors is not necessary, shall be the close of business on the
day on which the first written consent or dissent is filed with the Secretary
of the Corporation.
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<PAGE> 18
Section 5.8 Restriction on Transfer Rights. Rights
issued pursuant to the Rights Agreement, dated ______ __ 1996, between the
Corporation and the [Rights Agent], as the same may be amended from time to
time (the "Rights Agreement") may be transferred by an Acquiring Person or an
Associate or Affiliate of any such Person (as such terms are defined in the
Rights Agreement) only in accordance with the terms of, and subject to the
restrictions contained in, the Rights Agreement.
ARTICLE VI
LIABILITY OF DIRECTORS
Section 6.1 Directors' Personal Liability. A director of the
Corporation shall not be personally liable for monetary damages for any action
taken, or any failure to take any action; provided, however, that this
provision shall not eliminate or limit the liability of a director to the
extent that such elimination or limitation of liability is expressly prohibited
by the Business Corporation Law of 1988 or any successor statute as in effect
at the time of the alleged action or failure to take action by such director.
Section 6.2 Preservation of Rights. Any repeal or
modification of this Article shall not adversely affect any right or protection
existing at the time of such repeal or modification to which any director or
former director may be entitled under this Article. The rights conferred by
this Article shall continue as to any person who has ceased to be a director of
the Corporation and shall inure to the benefit of the heirs, executors and
administrators of such person.
ARTICLE VII
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 7.1 Mandatory Indemnification of Directors and
Officers.
(A) The Corporation shall promptly indemnify, to the
fullest extent now or hereafter permitted by law and by Section 7.1(B) hereof,
each director or officer (including each former director or officer) (an
"indemnitee") of the Corporation 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,
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<PAGE> 19
administrative or investigative and whether external or internal to the
Corporation (a "proceeding"), by reason of the fact that the indemnitee is or
was an authorized representative of the Corporation, 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 the indemnitee in connection with such proceeding.
(B) Indemnification pursuant to this Section 7.1 shall
include but shall not be limited to cases in which indemnification is permitted
pursuant to the provisions of Chapter 17, Subchapter D, of the Business
Corporation Law of 1988. Indemnification pursuant to this Section 7.1 shall be
made in every case described in Section 7.1(A) hereof except:
(i) in connection with a proceeding (or any claim, issue
or matter therein or any part thereof) initiated by the indemnitee,
unless such initiation was authorized by the Board of Directors of the
Corporation; or
(ii) with respect to any act that is established, by a
final, unappealable adjudication adverse to the indemnitee, as having
been material to the cause of action so adjudicated and as having
constituted either willful misconduct or recklessness; or
(iii) with respect to any benefit or advantage gained by the
indemnitee to which the indemnitee was not legally entitled; or
(iv) in connection with a proceeding by or for the benefit
of the Corporation to recover any profit pursuant to the provisions of
section 16(b) of the Securities Exchange Act of 1934 and regulations
thereunder or similar provisions of any applicable state law; or
(v) to the extent that the indemnitee actually receives
payment under any policy of insurance or is otherwise reimbursed.
(C) Notwithstanding the foregoing provisions of this
Section 7.1, to the extent that an indemnitee is successful on the merits or
otherwise in defense of any proceeding or any part thereof or in defense of any
claim, issue or matter therein, including but not limited to obtaining a
dismissal without prejudice or a settlement without admission of liability, the
indemnitee shall be promptly indemnified by the Corporation against expenses
(including attorneys' fees, disbursements and
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<PAGE> 20
other charges) actually and reasonably incurred by the indemnitee in connection
therewith.
(D) The right of indemnification pursuant to this Section
7.1 is conferred in order to attract and retain the services of highly
qualified directors and officers and to encourage them to make corporate
decisions without fear of strike suits and legal harassment. Indemnification
pursuant to this Section 7.1 is therefore declared to be consistent with the
fiduciary duty of the Corporation's Board of Directors. Except as specifically
provided in this Section 7.1, such indemnification shall be made by the
Corporation without any requirement that any determination be made or any
action be taken by the Board of Directors, shareholders, or legal counsel. A
failure of the Board of Directors, shareholders, or legal counsel to make a
determination or take action favorable to the claim of an indemnitee for
indemnification pursuant to this Section 7.1, or the making of a determination
or taking of action adverse to such a claim, shall not preclude indemnification
under this Article or create any presumption that the indemnitee is not
entitled to such indemnification.
Section 7.2 Mandatory Advancement of Expenses to Directors
and Officers. The Corporation shall promptly pay all expenses (including
attorneys' fees, disbursements and other charges) actually and reasonably
incurred by an indemnitee in defending or appearing in any proceeding described
in Section 7.1(A) hereof in advance of the final disposition of such proceeding
upon receipt of (i) an undertaking by or on behalf of the indemnitee to repay
all amounts advanced if it is ultimately specifically determined by a final,
unappealable adjudication that the indemnitee is not entitled to be indemnified
by the Corporation and (ii) an irrevocable assignment to the Corporation of all
payments to which the indemnitee may be or become entitled, under any policy of
insurance or otherwise, in reimbursement of any such expenses paid by the
Corporation pursuant to this Section 7.2. Notwithstanding the foregoing, no
advance payment shall be made by the Corporation pursuant to this Section 7.2
if the Board of Directors reasonably and promptly determines by a majority vote
of the directors who are not parties to the proceeding that, based upon the
facts known to the Board at the time the determination is made, the matter is
of the kind described in Section 7.1(B)(i) or (iv) hereof or the indemnitee's
actions were of the kind described in Section 7.1(B)(ii) or (iii) hereof.
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<PAGE> 21
Section 7.3 Permissive Indemnification and Advancement of
Expenses. The Corporation may, as determined by the Board of Directors from
time to time:
(A) indemnify, to the fullest extent permitted by Section
7.1 hereof, any other person who was or is made a party to or required
to appear in, or is threatened to be made a party to or required to
appear in, or was or is otherwise involved in, any threatened, pending
or completed proceeding by reason of the fact that such person is or
was an authorized representative of the Corporation, both as to action
in such person's official capacity and as to action in another
capacity while holding such office or position, 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 such person in
connection with such action or proceeding, with the same effect as
though such person were an "indemnitee" as defined in Section 7.1
hereof; and
(B) pay expenses incurred by any such other person by
reason of his or her participation in any such proceeding in advance
of the final disposition of such proceeding upon receipt of an
undertaking by or on behalf of such person to repay such amount if it
shall ultimately be determined that he or she is not entitled to be
indemnified by the Corporation and to repay all amounts advanced for
which he or she is reimbursed under any policy of insurance or
otherwise, with the same effect as though such person were an
"indemnitee" as defined in Section 7.1 hereof.
Section 7.4 Enforcement. If the Corporation refuses or fails
to make any payment to an indemnitee required by this Article, the indemnitee
shall be promptly indemnified by the Corporation against expenses (including
attorneys' fees, disbursements and other charges) actually and reasonably
incurred by the indemnitee in connection with the successful establishment of
his or her right to indemnification or advancement of expenses, in whole or in
part, in an action in a court of competent jurisdiction.
Section 7.5 General. Each director or officer of the
Corporation shall be deemed to act in such capacity in reliance upon such
rights of indemnification and advancement of expenses as are provided in this
Article. The rights of indemnification and advancement of expenses provided by
this Article shall not be deemed exclusive of any other rights to which any
person seeking
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<PAGE> 22
indemnification or advancement of expenses may be entitled under any agreement,
vote of shareholders or disinterested directors, statute or otherwise, both as
to action in such person's official capacity and as to action in another
capacity while holding such office or position, and shall continue as to a
person who has ceased to be an authorized representative of the Corporation and
shall inure to the benefit of the heirs and personal representatives of such
person. Indemnification and advancement of expenses under this Article shall
be provided whether or not the indemnified liability arises or arose from any
threatened, pending or completed action by or in the right of the Corporation.
Any repeal or modification of this Article shall not adversely affect any right
or protection existing at the time of such repeal or modification to which any
person may be entitled under this Article.
Section 7.6 Definition of Corporation. For the purposes of
this Article, references to "the Corporation" shall include all constituent
corporations absorbed in a consolidation, merger or division, as well as the
surviving or new corporations surviving or resulting therefrom, so that (i) any
person who is or was an authorized representative of a constituent, surviving
or new corporation shall stand in the same position under the provisions of
this Article with respect to the surviving or new corporation as such person
would if he or she had served the surviving or new corporation in the same
capacity and (ii) any person who is or was an authorized representative of the
Corporation shall stand in the same position under the provisions of this
Article with respect to the surviving or new corporation as such person would
with respect to the Corporation if its separate existence had continued.
Section 7.7 Definition of Authorized Representative. For the
purposes of this Article, the term "authorized representative" shall mean a
director, officer, employee or agent of the Corporation or of any subsidiary of
the Corporation, or a trustee, custodian, administrator, committeeman or
fiduciary of any employee benefit plan established and maintained by the
Corporation or by any direct or indirect subsidiary of the Corporation, or a
person serving another corporation, partnership, joint venture, trust or other
enterprise in any of the foregoing capacities at the request of the
Corporation.
Section 7.8 Savings Clause. If a court of competent
jurisdiction determines that any provision of this Article requires the
Corporation to take an action that would violate applicable law, such provision
shall be limited or modified in
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<PAGE> 23
its application to such action to the minimum extent necessary to avoid such
violation of law, and, as so limited or modified, such provision and the
balance of this Article shall be enforceable in accordance with their terms to
the fullest extent permitted by applicable law, including but not limited to
the Business Corporation Law of 1988.
Section 7.9 Insurance. The Corporation may purchase and
maintain insurance on behalf of any person who is or was a director or officer
of the Corporation, or is or was an authorized representative of the
Corporation, against any liability asserted against or incurred by such person
in any such capacity, or arising out of the status of such person as such,
whether or not the Corporation would have the power to indemnify such person
against such liability under the provisions of this Article.
Section 7.10 Funding to Meet Indemnification Obligations.
The Board of Directors, without approval of the shareholders, shall have the
power to borrow money on behalf of the Corporation, including the power to
pledge the assets of the Corporation, from time to time to discharge the
Corporation's obligations with respect to indemnification, the advancement and
reimbursement of expenses, and the purchase and maintenance of insurance
referred to in this Article. The Corporation may, in lieu of or in addition to
the purchase and maintenance of insurance referred to in Section 7.9 hereof,
establish and maintain a fund of any nature or otherwise secure or insure in
any manner its indemnification obligations, whether arising under or pursuant
to this Article or otherwise.
ARTICLE VIII
GENERAL PROVISIONS
Section 8.1 Corporate Seal. The Corporate seal of the
Corporation shall be a circular seal with the name of the Corporation and state
of incorporation around the border or a seal in such form as the Board of
Directors shall from time to time determine.
Section 8.2 Fiscal Year. The fiscal year of the Corporation
shall be as designated by the Board of Directors.
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<PAGE> 24
Section 8.3 Authorization. All checks, notes, vouchers,
warrants, drafts, acceptances and other orders for the payment of moneys of the
Corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
Section 8.4 Inapplicability of Subchapter 25E. Subchapter E
of Chapter 25 of the Pennsylvania Business Corporation Law of 1988, as amended
(former Section 910 of the Pennsylvania Business Corporation Law of 1933, as
amended), shall not be applicable to the Corporation.
Section 8.5 Inapplicability of Subchapter 25F. Subchapter F
of Chapter 25 of the Pennsylvania Business Corporation Law of 1988, as amended
(former Section 911 of the Pennsylvania Business Corporation Law of 1933, as
amended), shall not be applicable to the Corporation.
Section 8.6 Inapplicability of Subchapter 25G. Subchapter G
of Chapter 25 of the Pennsylvania Business Corporation Law of 1988, as amended,
shall not be applicable to the Corporation.
Section 8.7 Inapplicability of Subchapter 25H. Subchapter H
of Chapter 25 of the Pennsylvania Business Corporation Law of 1988, as amended,
shall not be applicable to the Corporation.
ARTICLE IX
AMENDMENTS
The authority to adopt, amend or repeal the Bylaws of the
Corporation is expressly conferred upon the Board of Directors, which may take
such action by the affirmative vote of a majority of the whole Board of
Directors at any annual, regular or special meeting duly convened after notice
of that purpose, subject always to the power of the shareholders to adopt,
amend or repeal the Bylaws of the Corporation by the affirmative vote of the
holders of two-thirds of the outstanding shares of common stock of the
Corporation. Any change in the Bylaws shall take effect when adopted unless
otherwise provided in the resolution effecting the change.
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<PAGE> 1
Exhibit 4.03
AMENDMENT No. 1 TO STOCKHOLDERS AGREEMENT
THIS AMENDMENT NO. 1 TO STOCKHOLDERS AGREEMENT ("Amendment")
is made and entered into as of April 30, 1991 by and among the EDUCATION
MANAGEMENT CORPORATION EMPLOYEE STOCK OWNERSHIP PLAN (the "ESOT"), MERRILL LYNCH
INTERFUNDING INC., a Delaware corporation ("Interfunding"), EMC HOLDINGS, INC.,
a Delaware corporation ("Holdings"), EDUCATION MANAGEMENT CORPORATION, a
Pennsylvania corporation ("EMC"), the stockholders listed on the signature pages
hereto (collectively, the "Stockholders"), the option holders listed on the
signature pages hereto (collectively, the "Option Holders") and the warrant
holders listed on the signature pages hereto (the "Warrant Holders").
WITNESSETH:
WHEREAS, the ESOT, Interfunding, Holdings, the Stockholders,
the Option Holders and the Warrant Holders are parties to that certain
Stockholders Agreement dated as of October 25, 1989 (the "Agreement"); and
WHEREAS, effective as of the date hereof, Holdings has merged
with and into EMC, with EMC being the surviving corporation (the "Merger"); and
WHEREAS, the parties desire to amend certain provisions of the
Agreement to reflect the Merger.
NOW, THEREFORE, in consideration of the mutual premises herein
contained and other valuable consideration, the parties hereto agree to amend
the Agreement 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 Agreement. EMC hereby expressly confirms its assumption of
the obligations of Holdings under the Agreement, and hereby expressly agrees to
be bound by each and every term contained in the Agreement.
2. Amendment of Agreement. From and after the date hereof, the
Agreement shall be amended as follows:
(a) All references to "Education Management
Corporation" and "EMC" are hereby amended to refer to "Art
Institutes International, Inc." and "AII", respectively.
(b) All references to "EMC Holdings, Inc." and
"Holdings" are hereby amended to refer to "Education
Management Corporation" and "EMC", respectively.
(c) All references to the "Third Restated Certificate
of Incorporation" shall mean the
<PAGE> 2
Restated Articles of Incorporation of EMC, in the form
attached as Exhibit A to the Plan and Agreement of Merger
dated April 24, 1991 between Holdings and EMC (the "Plan and
Agreement of Merger").
(d) All references to the "By-laws" shall mean the
Restated By-laws of EMC, in the form attached as Exhibit B to
the Plan and Agreement of Merger.
(e) Section 3.7 of the Agreement (entitled "Board of
EMC"), is hereby deleted in its entirety.
(f) Section 14.2 of the Agreement is hereby amended
and restated in its entirety to read as follows:
"14.2 Governing Law. This Agreement shall be
governed by and construed in accordance with the laws of the
Commonwealth of Pennsylvania."
3. Miscellaneous.
(a) Except as expressly amended by this Amendment,
the Agreement, and each and every term 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 Commonwealth of
Pennsylvania.
(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 the Holders of 80% or more
of the Common Shares (including those issuable upon the
exercise of outstanding Warrants) have executed and delivered
at least one counterpart. All counterparts shall constitute
one and the same instrument.
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.
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<PAGE> 3
EDUCATION MANAGEMENT CORPORATION
EMPLOYEE STOCK OWNERSHIP PLAN
By: Marine Midland Bank, N.A., not
in its individual or corporate
capacity but solely as trustee
By: /s/ Stephen Hartman
----------------------------------------
Title: Admin. V.P
--------------------------------------
MERRILL LYNCH INTERFUNDING INC.
By:
-----------------------------------------
Title:
--------------------------------------
EMC HOLDINGS, INC.
By:
----------------------------------------
Title:
--------------------------------------
EDUCATION MANAGEMENT CORPORATION
By:
-----------------------------------------
Title:
--------------------------------------
THE STOCKHOLDERS:
---------------------------------------------
R. Margaret Barber
[signatures continued on next page]
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<PAGE> 1
Exhibit 4.04
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
RIGHTS AGREEMENT
Dated as of ______ __, 1996
Between
EDUCATION MANAGEMENT CORPORATION
AND
[TRUST COMPANY]
Rights Agent
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Section 1. Certain Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 2. Appointment of Rights Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
Section 3. Issue of Right Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 4. Form of Right Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 5. Countersignature and Registration . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 6. Transfer, Split Up, Combination and
Exchange of Right Certificates;
Mutilated, Destroyed, Lost or
Stolen Right Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 7. Exercise of Rights; Purchase Price;
Expiration Date of Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 8. Cancellation and Destruction of Right
Certificates . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 9. Availability of Preferred Shares . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 10. Preferred Shares Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 11. Adjustment of Purchase Price, Number of
Shares or Number of Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 12. Certificate of Adjusted Purchase Price
or Number of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 13. Consolidation, Merger or Sale or Transfer
of Assets or Earning Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 14. Fractional Rights and Fractional Shares . . . . . . . . . . . . . . . . . . . . . . 22
Section 15. Rights of Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 16. Agreement of Right Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 17. Right Certificate Holder Not Deemed a
Stockholder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 18. Concerning the Rights Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
</TABLE>
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<PAGE> 3
<TABLE>
<CAPTION>
Page
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<S> <C>
Section 19. Merger or Consolidation or Change of
Name of Rights Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 20. Duties of Rights Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Section 21. Change of Rights Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 22. Issuance of New Right Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Section 23. Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Section 24. Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Section 25. Notice of Certain Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Section 26. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Section 27. Supplements and Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Section 28. Successors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Section 29. Benefits of This Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Section 30. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Section 31. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Section 32. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Section 33. Descriptive Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Section 34. Effective Date of This Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Exhibit A - Form of Certificate of Designations
- ---------
Exhibit B - Form of Right Certificate
- ---------
Exhibit C - Summary of Rights to Purchase Preferred Shares
- ---------
</TABLE>
- ii -
<PAGE> 4
This Rights Agreement (the "Agreement"), dated as of _______ __, 1996,
between Education Management Corporation, a Pennsylvania corporation (the
"Company"), and [Trust Company],(1) a national banking association as Rights
Agent (the "Rights Agent").
The board of directors of the Company (the "Board of Directors") has
authorized and declared a dividend of one preferred share purchase right (a
"Right") for each Common Share (as hereinafter defined) of the Company
outstanding at the Close of Business (as defined hereinafter) on _______ __,
1996 (the "Record Date"), each Right representing the right to purchase one
one-hundredth of a Preferred Share (as hereinafter defined), upon the terms and
subject to the conditions herein set forth, and has further authorized and
directed the issuance of one Right with respect to each Common Share that shall
become outstanding between the Record Date and the earliest of the Distribution
Date, the Redemption Date and the Final Expiration Date (as such terms are
hereinafter defined), including any Common Shares issued in connection with the
initial public offering of the Common Shares.
Accordingly, in consideration of the premises and the mutual agreements
herein set forth, and intending to be legally bound, the parties hereby agree
as follows:
Section 1. Certain Definitions. For purposes of this Agreement, the
following terms have the meanings indicated:
(a) "Acquiring Person" shall mean any Person (as hereinafter defined) who or
which, together with all Affiliates and Associates (as such terms are
hereinafter defined) of such Person, shall be the Beneficial Owner (as
hereinafter defined) of 17.5% or more of the Common Shares of the Company then
outstanding, but shall not include (i) the Company, (ii) any Subsidiary (as
hereinafter defined) of the Company, (iii) any employee benefit plan of the
Company or of any Subsidiary of the Company, or any entity holding Common
Shares for or pursuant to the terms of any such plan, or (iv) a Person who or
which shall become the Beneficial Owner of 17.5% or more of the Common Shares
then outstanding, if the transaction in which such Person became the Beneficial
Owner of 17.5% or more of the Common Shares then outstanding had received prior
approval of a majority of the Board of Directors. Notwithstanding anything in
this definition of Acquiring Person to the contrary, no Person shall become an
Acquiring Person as the result of an acquisition of Common Shares by the
Company which, by reducing the number of shares outstanding, increases the
proportionate number of shares beneficially owned by such Person to 17.5% or
more of the Common
__________________
(1) The Rights Agent is generally the same entity as the Transfer Agent.
<PAGE> 5
Shares of the Company then outstanding; provided, however, that if a Person
shall become the Beneficial Owner of 17.5% or more of the Common Shares of the
Company then outstanding by reason of share purchases by the Company and shall,
after such share purchases by the Company, become the Beneficial Owner of any
additional Common Shares of the Company (other than through the acquisition of
Employee Stock (as hereinafter defined)), then such Person shall be deemed to
be an Acquiring Person. Notwithstanding anything in this definition of
Acquiring Person to the contrary, no Person shall become an Acquiring Person as
the result of his acquisition of Employee Stock that increases the number of
shares beneficially owned by such Person to 17.5% or more of the Common Shares
of the Company then outstanding; provided, however, that if a Person shall
become the Beneficial Owner of 17.5% or more of the Common Shares of the
Company then outstanding by reason of the acquisition of Employee Stock and
shall, after such acquisition of Employee Stock, become the Beneficial Owner of
any additional Common Shares of the Company by reason other than the
acquisition of Employee Stock, then such Person shall be deemed to be an
Acquiring Person. Notwithstanding anything in this definition of Acquiring
Person to the contrary, if the Board of Directors determines in good faith that
a Person who would otherwise be an Acquiring Person, as defined pursuant to the
foregoing provisions of this paragraph (a), has become such inadvertently, and
such Person divests as promptly as practicable a sufficient number of Common
Shares so that such Person would no longer be an Acquiring Person, as defined
pursuant to the foregoing provisions of this paragraph (a), then such Person
shall not be deemed to be an Acquiring Person for any purposes of this
Agreement.
(b) "Affiliate" shall have the meaning ascribed to such term in Rule 12b-2
of the General Rules and Regulations under the Exchange Act (as hereinafter
defined) as in effect on the date of this Agreement.
(c) "Associate" shall have the meaning ascribed to such term in Rule 12b-2
of the General Rules and Regulations under the Exchange Act as in effect on the
date of this Agreement.
(d) A Person shall be deemed the "Beneficial Owner" of and shall be deemed
to "beneficially own" any securities:
(i) which such Person or any of such Person's Affiliates or Associates
beneficially owns, directly or indirectly;
(ii) which such Person or any of such Person's Affiliates or Associates
has (A) the right to acquire (whether such right is exercisable immediately or
only after the passage of time) pursuant to any agreement, arrangement or
understanding
- 2 -
<PAGE> 6
(other than customary agreements with and between underwriters and selling
group members with respect to a bona fide public offering of securities),
whether or not in writing, or upon the exercise of conversion rights, exchange
rights, rights (other than the Rights), warrants or options, or otherwise;
provided, however, that a Person shall not be deemed the Beneficial Owner of,
or to beneficially own, securities tendered pursuant to a tender or exchange
offer made by or on behalf of such Person or any of such Person's Affiliates or
Associates until such tendered securities are accepted for purchase or
exchange; and provided, further, that a Person shall not be deemed to be the
Beneficial Owner of, or to beneficially own, securities which such Person has
the right to acquire (whether such right is exercisable immediately or only
after the passage of time) upon the exercise of conversion rights conferred in
any class or series of Preference Stock of the Company issued prior to the
Distribution Date (as hereinafter defined) if the resolutions of the Board
providing for the issuance of such class or series of Preference Stock shall
specifically refer to this Rights Agreement and provide that the right to
acquire securities upon the exercise of conversion rights so conferred shall
not be deemed to constitute beneficial ownership of such securities; or (B) the
right to vote, or the right to direct the vote, or dispose of, or has
"beneficial ownership" (as determined pursuant to Rule 13d-3 of the General
Rules and Regulations under the Exchange Act, as in effect on the Record Date)
of, (including pursuant to any agreement, arrangement or understanding, whether
or not in writing); provided, further, that a Person shall not be deemed the
Beneficial Owner of, or to beneficially own, any security, if the agreement,
arrangement or understanding to vote, or direct the vote of, such security (1)
arises solely from a revocable proxy or consent given to such Person in
response to a public proxy or consent solicitation made pursuant to, and in
accordance with, the applicable rules and regulations promulgated under the
Exchange Act and (2) is not also then reportable on Schedule 13D under the
Exchange Act (or any comparable or successor report); or
(iii) which are beneficially owned, directly or indirectly, by any other
Person with which such Person or any of such Person's Affiliates or Associates
has any agreement, arrangement or understanding, whether or not in writing,
(other than customary agreements with and between underwriters and selling
group members with respect to a bona fide public offering of securities) for
the purpose of acquiring, holding, voting (except to the extent contemplated by
the proviso to Section 1(c)(ii)(B)) or disposing of any securities of the
Company.
Notwithstanding anything in this definition of Beneficial Ownership to the
contrary, no Person (and no Affiliate or Associate of any Person) shall at any
time prior to the commencement of the Company's initial public offering be
deemed
- 3 -
<PAGE> 7
to be the "Beneficial Owner" of or to "beneficially own" any securities if such
Person is the Beneficial Owner of or "beneficially owns" such securities as a
result of one or more agreements, arrangements or understandings with any
Person described in Sections 1(a)(iv) and (v) (whether or not the Company or
any other Person is a party thereto) and if such Person would not be the
Beneficial Owner of or "beneficially own" such securities if such agreements,
arrangements or understandings were not then in effect. Notwithstanding
anything in this definition of Beneficial Ownership to the contrary, the phrase
"then outstanding", when used with reference to a Person's Beneficial Ownership
of securities of the Company, shall mean the number of such securities then
issued and outstanding together with the number of such securities not then
actually issued and outstanding which such Person would be deemed to own
beneficially hereunder.
(e) "Board of Directors" shall have the meaning set forth in the preamble
hereof.
(f) "Business Day" shall mean any day other than a Saturday, a Sunday, or a
day on which banking institutions in Pittsburgh, Pennsylvania are authorized or
obligated by law or executive order to close.
(g) "Close of Business" on any given date shall mean 5:00 P.M., Pittsburgh,
Pennsylvania time, on such date; provided, however, that, if such date is not a
Business Day, it shall mean 5:00 P.M., Pittsburgh, Pennsylvania time, on the
next succeeding Business Day.
(h) "Common Shares" when used with reference to the Company shall mean the
shares of common stock, par value $.01 per share, of the Company. "Common
Shares," when used with reference to any Person other than the Company, shall
mean the capital stock (or equity interest) with the greatest voting power of
such Person or, if such Person is a Subsidiary of another Person, the Person or
Persons which ultimately control such first-mentioned Person.
(i) "Company" shall have the meaning set forth in the preamble hereof.
(j) "Current Per Share Market Price" shall have the meaning set forth in
Section 11(d)(i) hereof.
(k) "Distribution Date" shall have the meaning set forth in Section 3
hereof.
(l) "Equivalent preferred shares" shall have the meaning set forth in
Section 11(b) hereof.
- 4 -
<PAGE> 8
(m) "Employee Stock" shall mean, with respect to any Person who is a current
or former officer or director of the Company, any Common Shares acquired after
the effective date of this Agreement, as set forth in Section 34 hereof, by
that Person pursuant to any employee benefit plan, employee stock purchase
plan, stock incentive plan or any other similar right, plan or arrangement of
the Company that provided or provides one or more officers or directors of the
Company with the right to acquire Common Shares.
(n) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(o) "Exchange Ratio" shall have the meaning set forth in Section 24(a)
hereof.
(p) "Final Expiration Date" shall have the meaning set forth in Section 7(a)
hereof.
(q) "Person" shall mean any individual, firm, corporation, partnership or
other entity, and shall include any successor (by merger or otherwise) of such
entity.
(r) "Preferred Shares" shall mean shares of Series A Junior Participating
Preferred Stock, par value $.01 per share, of the Company having the rights and
preferences set forth in the Form of Certificate of Designations attached to
this Agreement as Exhibit A.
(s) "Purchase Price" shall have the meaning set forth in Section 4 hereof.
(t) "Record Date" shall have the meaning set forth in the preamble hereof.
(u) "Redemption Date" shall have the meaning set forth in Section 7(a)
hereof.
(v) "Redemption Price" shall have the meaning set forth in Section 23(a)
hereof.
(w) "Right" shall have the meaning set forth in the preamble hereof.
(x) "Right Certificate" shall have the meaning set forth in Section 3(a)
hereof.
(y) "Rights Agent" shall have the meaning set forth in the preamble hereof.
(z) "Securities Act" shall have the meaning set forth in Section 9(d)
hereof.
- 5 -
<PAGE> 9
(aa) "Security" shall have the meaning set forth in Section 11(d) hereof.
(bb) "Shares Acquisition Date" shall mean the first date of public
announcement by the Company or an Acquiring Person that an Acquiring Person has
become such.
(cc) "Subsidiary" of any Person shall mean any corporation or other entity
of which a majority of the voting power of the voting equity securities or
equity interest is owned, directly or indirectly, by such Person or otherwise
controlled by such Person.
(dd) "Summary of Rights" shall have the meaning set forth in Section 3(b)
hereof.
(ee) "Trading Day" shall have the meaning set forth in Section 11(d)
hereof.
Section 2. Appointment of Rights Agent. The Company hereby appoints the
Rights Agent to act as agent for the Company and the holders of the Rights
(who, in accordance with Section 3 hereof, shall prior to the Distribution Date
also be the holders of the Common Shares) in accordance with the terms and
conditions hereof, and the Rights Agent hereby accepts such appointment and
agrees to act as Rights Agent under this Agreement. The Company may from time
to time appoint such co-Rights Agents as it may deem necessary or desirable.
Section 3. Issue of Right Certificates.
(a) Until the earlier of (i) the Close of Business on the tenth Business Day
after the Shares Acquisition Date or (ii) the Close of Business on 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) after
the date of the commencement by any Person (other than the Company, any
Subsidiary of the Company, any employee benefit plan of the Company or of any
Subsidiary of the Company, or any entity holding Common Shares for or pursuant
to the terms of any such plan of, or of the first public announcement of the
intention of any Person (other than the Company, any Subsidiary of the Company,
any employee benefit plan of the Company or of any Subsidiary of the Company,
any entity holding Common Shares for or pursuant to the terms of any such plan
to commence, a tender or exchange offer the consummation of which would result
in any Person becoming the Beneficial Owner of Common Shares aggregating to
17.5% or more of the then outstanding Common Shares (the earlier of such dates
being herein referred to as the "Distribution Date"), (x) the Rights will be
evidenced (subject
- 6 -
<PAGE> 10
to the provisions of Section 3(b) hereof) by the certificates for Common Shares
registered in the names of the holders thereof (which certificates shall also
be deemed to be Right Certificates) and not by separate Right Certificates, and
(y) the right to receive Right Certificates will be transferable only in
connection with the transfer of Common Shares. As soon as practicable after
the Distribution Date, the Company will prepare and execute, the Rights Agent
will countersign, and the Company will send or cause to be sent (and the Rights
Agent will, if requested, send) by first-class, insured, postage-prepaid mail,
to each record holder of Common Shares as of the Close of Business on the
Distribution Date, at the address of such holder shown on the records of the
Company, a Right Certificate, in substantially the form of Exhibit B hereto (a
"Right Certificate"), evidencing one Right for each Common Share so held. From
and after the Distribution Date, the Rights will be evidenced solely by such
Right Certificates.
(b) On the Record Date, or as soon as practicable thereafter, the Company
will send a copy of a Summary of Rights to Purchase Preferred Shares, in
substantially the form of Exhibit C hereto (the "Summary of Rights"), by
first-class, postage-prepaid mail, to each record holder of Common Shares as of
the Close of Business on the Record Date, at the address of such holder shown
on the records of the Company. With respect to certificates for Common Shares
outstanding as of the Record Date, until the Distribution Date, the Rights will
be evidenced by such certificates registered in the names of the holders
thereof together with a copy of the Summary of Rights attached thereto. Until
the Distribution Date (or the earlier of the Redemption Date or the Final
Expiration Date), the surrender for transfer of any certificate for Common
Shares outstanding on the Record Date, with or without a copy of the Summary of
Rights attached thereto, shall also constitute the transfer of the Rights
associated with the Common Shares represented thereby.
(c) Certificates for Common Shares which become outstanding (including,
without limitation, reacquired Common Shares referred to in the last sentence
of this paragraph (c)) after the Record Date but prior to the earliest of the
Distribution Date, the Redemption Date or the Final Expiration Date, shall have
impressed on, printed on, written on or otherwise affixed to them the following
legend:
This certificate also evidences and entitles the holder hereof to certain
Rights as set forth in a Rights Agreement between Education Management
Corporation and [Trust Company] dated as of ______ __, 1996 (the "Rights
Agreement"), the terms of which are hereby incorporated herein by reference
and a copy of which is on file at the principal executive offices of
Education
- 7 -
<PAGE> 11
Management Corporation. Under certain circumstances, as set forth in the
Rights Agreement, such Rights will be evidenced by separate certificates and
will no longer be evidenced by this certificate. Education Management
Corporation will mail to the holder of this certificate a copy of the Rights
Agreement without charge after receipt of a written request therefor. Under
certain circumstances, as set forth in the Rights Agreement, Rights issued to
any Person who becomes an Acquiring Person or any Affiliate or Associate
thereof (as such terms are defined in the Rights Agreement), whether currently
held by or on behalf of such Person or by any subsequent holder, may become
null and void.
With respect to such certificates containing the foregoing legend, until the
Distribution Date, the Rights associated with the Common Shares represented by
such certificates shall be evidenced by such certificates alone, and the
surrender for transfer of any such certificate shall also constitute the
transfer of the Rights associated with the Common Shares represented thereby.
In the event that the Company purchases or acquires any Common Shares after the
Record Date but prior to the Distribution Date, any Rights associated with such
Common Shares shall be deemed cancelled and retired so that the Company shall
not be entitled to exercise any Rights associated with the Common Shares which
are no longer outstanding.
Section 4. Form of Right Certificates.
(a) The Right Certificates (and the forms of election to purchase Preferred
Shares and of assignment to be printed on the reverse thereof) shall be
substantially the same as Exhibit B hereto and may have such marks of
identification or designation and such legends, summaries or endorsements
printed thereon as the Company may deem appropriate and as are not inconsistent
with the provisions of this Agreement, or as may be required to comply with any
applicable law or with any rule or regulation made pursuant thereto or with any
rule or regulation of any stock exchange or automated quotation system on which
the Rights may from time to time be listed, or to conform to usage. Subject to
the provisions of Section 22 hereof, the Right Certificates shall entitle the
holders thereof to purchase such number of one one-hundredths of a Preferred
Share as shall be set forth therein at the price per one one-hundredth of a
Preferred Share set forth therein (the "Purchase Price"), but the number of
such one one-hundredths of a Preferred Share and the Purchase Price shall be
subject to adjustment as provided herein.
- 8 -
<PAGE> 12
Section 5. Countersignature and Registration. The Right Certificates shall
be executed on behalf of the Company by its Chairman of the Board, its
President, any of its Vice Presidents, or its Treasurer, either manually or by
facsimile signature, shall have affixed thereto the Company's seal or a
facsimile thereof, and shall be attested by the Secretary or an Assistant
Secretary of the Company, either manually or by facsimile signature. The Right
Certificates shall be manually countersigned by the Rights Agent and shall not
be valid for any purpose unless countersigned. In case any officer of the
Company who shall have signed any of the Right Certificates shall cease to be
such officer of the Company before countersignature by the Rights Agent and
issuance and delivery by the Company, such Right Certificates, nevertheless,
may be countersigned by the Rights Agent and issued and delivered by the
Company with the same force and effect as though the individual who signed such
Right Certificates had not ceased to be such officer of the Company; and any
Right Certificate may be signed on behalf of the Company by any individual who,
at the actual date of the execution of such Right Certificate, shall be a
proper officer of the Company to sign such Right Certificate although at the
date of the execution of this Agreement any such individual was not such an
officer.
Following the Distribution Date, the Rights Agent will keep or cause to be
kept, at its principal office, books for registration and transfer of the Right
Certificates issued hereunder. Such books shall show the names and addresses
of the respective holders of the Right Certificates, the number of Rights
evidenced on its face by each of the Right Certificates and the date of each of
the Right Certificates.
Section 6. Transfer, Split Up, Combination and Exchange of Right
Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates. Subject
to the provisions of Section 14 hereof, at any time after the Close of Business
on the Distribution Date, and at or prior to the Close of Business on the
earlier of the Redemption Date or the Final Expiration Date, any Right
Certificate or Right Certificates (other than Right Certificates representing
Rights that have become void pursuant to Section 11(a)(ii) hereof or that have
been exchanged pursuant to Section 24 hereof) may be transferred, split up,
combined, or exchanged for another Right Certificate or other Right
Certificates entitling the registered holder to purchase a like number of one
one-hundredths of a Preferred Share as the Right Certificate or Right
Certificates surrendered then entitled such holder to purchase. Any registered
holder desiring to transfer, split up, combine or exchange any Right
Certificate or Right Certificates shall make such request in writing delivered
to the Rights Agent, and shall surrender the Right Certificate or Right
Certificates to be transferred, split up, combined or exchanged
- 9 -
<PAGE> 13
at the principal office of the Rights Agent. Neither the Rights Agent nor the
Company shall be obligated to take any action whatsoever with respect to the
transfer of any such surrendered Right Certificate until the registered holder
shall have provided such additional evidence of the identity of this Beneficial
Owner (or former Beneficial Owner) Affiliates or Associates thereof as the
Company shall reasonably request. Thereupon the Rights Agent shall countersign
and deliver to the Person entitled thereto a Right Certificate or Right
Certificates, as the case may be, as so requested. The Company may require
payment of a sum sufficient to cover any tax or governmental charge that may be
imposed in connection with any transfer, split up, combination or exchange of
Right Certificates.
Upon receipt by the Company and the Rights Agent of evidence reasonably
satisfactory to them of the loss, theft, destruction or mutilation of a Right
Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to them, and, at the Company's request,
reimbursement to the Company and the Rights Agent of all reasonable expenses
incidental thereto, and upon surrender to the Rights Agent and cancellation of
the Right Certificate if mutilated, the Company will make and deliver a new
Right Certificate of like tenor to the Rights Agent for delivery to the
registered holder in lieu of the Right Certificate so lost, stolen, destroyed
or mutilated.
Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights.
(a) The registered holder of any Right Certificate may exercise the Rights
evidenced thereby (except as otherwise provided herein), in whole or in part,
at any time after the Distribution Date, upon surrender of the Right
Certificate, with the form of election to purchase on the reverse side thereof
duly executed, to the Rights Agent at the principal office of the Rights Agent,
together with payment of the Purchase Price for each one one-hundredth of a
Preferred Share as to which the Rights are exercised, at or prior to the
earliest of (i) the Close of Business on _______ __, 2006 (the "Final
Expiration Date"), (ii) the time at which the Rights are redeemed as provided
in Section 23 hereof (the "Redemption Date"), or (iii) the time at which such
Rights are exchanged as provided in Section 24 hereof.
(b) The Purchase Price for each one one-hundredth of a Preferred Share
purchasable pursuant to the exercise of a Right
- 10 -
<PAGE> 14
shall initially be $__,(2) and shall be subject to adjustment from time to time
as provided in Section 11 or 13 hereof and shall be payable in lawful money of
the United States of America in accordance with paragraph (c) below.
(c) Upon receipt of a Right Certificate representing exercisable Rights,
with the form of election to purchase duly executed, accompanied by payment of
the Purchase Price for the shares to be purchased and an amount equal to any
applicable transfer tax required to be paid by the holder of such Right
Certificate in accordance with Section 9 hereof by certified check, cashier's
check or money order payable to the order of the Company, the Rights Agent
shall thereupon promptly (i) (A) requisition from any transfer agent of the
Preferred Shares certificates for the number of Preferred Shares to be
purchased and the Company hereby irrevocably authorizes any such transfer agent
to comply with all such requests, or (B) requisition from the depositary agent
depositary receipts representing such number of one one-hundredths of a
Preferred Share as are to be purchased (in which case certificates for the
Preferred Shares represented by such receipts shall be deposited by the
transfer agent of the Preferred Shares with such depositary agent) and the
Company hereby directs such depositary agent to comply with such request; (ii)
when appropriate, requisition from the Company the amount of cash to be paid in
lieu of issuance of fractional shares in accordance with Section 14 hereof;
(iii) promptly after receipt of such certificates or depositary receipts, cause
the same to be delivered to or upon the order of the registered holder of such
Right Certificate, registered in such name or names as may be designated by
such holder; and (iv) when appropriate, after receipt, promptly deliver such
cash to or upon the order of the registered holder of such Right Certificate.
(d) In case the registered holder of any Right Certificate shall exercise
less than all the Rights evidenced thereby, a new Right Certificate evidencing
Rights equivalent to the Rights remaining unexercised shall be issued by the
Rights Agent to the registered holder of such Right Certificate or to his duly
authorized assigns, subject to the provisions of Section 14 hereof.
Section 8. Cancellation and Destruction of Right Certificates. All Right
Certificates surrendered for the purpose of exercise, transfer, split up,
combination or exchange shall, if surrendered to the Company or to any of its
agents, be delivered to the Rights Agent for cancellation or in cancelled form,
or, if surrendered to the Rights Agent, shall be cancelled
______________________
(2) The Purchase Price shall be set by the Company after consultation with its
advisers.
- 11 -
<PAGE> 15
by it, and no Right Certificates shall be issued in lieu thereof except as
expressly permitted by any of the provisions of this Agreement. The Company
shall deliver to the Rights Agent for cancellation and retirement, and the
Rights Agent shall so cancel and retire, any other Right Certificate purchased
or acquired by the Company otherwise than upon the exercise thereof. The
Rights Agent shall deliver all cancelled Right Certificates to the Company, or
shall, at the written request of the Company, destroy such cancelled Right
Certificates, and, in such case, shall deliver a certificate of destruction
thereof to the Company.
Section 9. Availability of Preferred Shares; Registration.
(a) The Company covenants and agrees that it will cause to be reserved and
kept available out of its authorized and unissued Preferred Shares or any
Preferred Shares held in its treasury, the number of Preferred Shares that will
be sufficient to permit the exercise in full of all outstanding Rights in
accordance with Section 7. The Company covenants and agrees that it will take
all such action as may be necessary to ensure that all Preferred Shares
delivered upon exercise of Rights shall, at the time of delivery of the
certificates for such Preferred Shares (subject to payment of the Purchase
Price), be duly and validly authorized and issued and fully paid and
nonassessable shares.
(b) The Company further covenants and agrees that it will pay when due and
payable any and all federal and state transfer taxes and charges which may be
payable in respect of the issuance or delivery of the Right Certificates or of
any Preferred Shares upon the exercise of Rights. The Company shall not,
however, be required to pay any transfer tax which may be payable in respect of
any transfer or delivery of Right Certificates to a Person other than, or the
issuance or delivery of certificates or depositary receipts for the Preferred
Shares in a name other than that of, the registered holder of the Right
Certificate evidencing Rights surrendered for exercise or to issue or to
deliver any certificates or depositary receipts for Preferred Shares upon the
exercise of any Rights until any such tax shall have been paid (any such tax
being payable by the holder of such Right Certificate at the time of surrender)
or until it has been established to the Company's reasonable satisfaction that
no such tax is due.
(c) The Company shall use all reasonable efforts to cause, from and after
such time as the Rights become exercisable, all Preferred Shares, Common Shares
and/or other securities issued or reserved for issuance in accordance with this
Rights Agreement to be listed, upon official notice of issuance, upon a
national securities exchange, or to be eligible for quotation in
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<PAGE> 16
the National Association of Securities Dealers, Inc. Automated Quotation System
("NASDAQ") or any successor thereto or other comparable quotation system.
(d) The Company shall use its best efforts to (i) file, as soon as
practicable following the earliest date after the occurrence of an event under
Section 11(a)(ii) hereof in which the consideration to be delivered by the
Company upon exercise of the Rights has been determined in accordance with
Section 11(a)(iii) hereof, or as soon as it is required by law following the
Distribution Date, as the case may be, a registration statement under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
securities purchasable upon exercise of the Rights of an appropriate form, (ii)
cause such registration statement to become effective as soon as practicable
after such filing, and (iii) cause such registration statement to remain
effective (with a prospectus at all times meeting the requirements of the
Securities Act) until the earlier of (A) the date as of which the Rights are no
longer exercisable for such securities, and (B) the date of the expiration of
the Rights. The company will also take such action as may be appropriate
under, or to ensure compliance with, the securities or "blue sky" laws of the
various states in connection with the exercisability of the Rights. The
Company may temporarily suspend, for a period of time not to exceed 90 days
after the date set forth in clause (i) of the first sentence of this Section
9(c), the exercisability of the Rights in order to prepare and file such
registration statement. Upon any such suspension, the Company shall issue a
public announcement stating, and notify the Rights Agent, that the
exercisability of the Rights has been temporarily suspended, as well as a
public announcement at such time as the suspension is no longer in effect.
Notwithstanding any provisions of this Agreement to the contrary, the Rights
shall not be exercisable in any jurisdiction unless the requisite qualification
in such jurisdiction shall have been obtained.
Section 10. Preferred Shares Record Date. Each Person in whose name any
certificate for Preferred Shares is issued upon the exercise of Rights shall
for all purposes be deemed to have become the holder of record of the Preferred
Shares represented thereby on, and such certificate shall be dated, the date
upon which the Right Certificate evidencing such Rights was duly surrendered
and payment of the Purchase Price (and any applicable transfer taxes) was made;
provided, however, that if the date of such surrender and payment is a date
upon which the Preferred Shares transfer books of the Company are closed, such
Person shall be deemed to have become the record holder of such shares on, and
such certificate shall be dated, the next succeeding Business Day on which the
Preferred Shares transfer books of the Company are open. Prior to the exercise
of the Rights evidenced
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<PAGE> 17
thereby, the holder of a Right Certificate shall not be entitled to any rights
of a holder of Preferred Shares for which the Rights shall be exercisable,
including, without limitation, the right to vote, to receive dividends or other
distributions or to exercise any preemptive rights, and shall not be entitled
to receive any notice of any proceedings of the Company, except as provided
herein.
Section 11. Adjustment of Purchase Price, Number of Shares or Number of
Rights. The Purchase Price, the number of Preferred Shares covered by each
Right and the number of Rights outstanding are subject to adjustment from time
to time as provided in this Section 11.
(a) (i) In the event the Company shall at any time after the date of this
Agreement (A) declare a dividend on the Preferred Shares payable in Preferred
Shares, (B) subdivide the outstanding Preferred Shares, (C) combine the
outstanding Preferred Shares into a smaller number of Preferred Shares or (D)
issue any shares of its capital stock in a reclassification of the Preferred
Shares (including any such reclassification in connection with a consolidation
or merger in which the Company is the continuing or surviving corporation),
except as otherwise provided in this Section 11(a), the Purchase Price in
effect at the time of the record date for such dividend or of the effective
date of such subdivision, combination or reclassification, and the number and
kind of shares of capital stock issuable on such date, shall be proportionately
adjusted so that the holder of any Right exercised after such time shall be
entitled to receive the aggregate number and kind of shares of capital stock
which, if such Right had been exercised immediately prior to such date and at a
time when the Preferred Shares transfer books of the Company were open, he
would have owned upon such exercise and been entitled to receive by virtue of
such dividend, subdivision, combination or reclassification; provided, however,
that in no event shall the consideration to be paid upon the exercise of one
Right be less than the aggregate par value of the shares of capital stock of
the Company issuable upon exercise of one Right.
(ii) Subject to Section 24 of this Agreement, in the event any Person
becomes an Acquiring Person, each holder of a Right shall thereafter have a
right to receive, upon exercise thereof at a price equal to the then current
Purchase Price multiplied by the number of one one-hundredths of a Preferred
Share for which a Right is then exercisable, in accordance with the terms of
this Agreement and in lieu of Preferred Shares, such number of Common Shares of
the Company as shall equal the result obtained by (A) multiplying the then
current Purchase Price by the number of one one-hundredths of a Preferred Share
for which a Right is then exercisable and dividing that product by (B) 50% of
the then Current Per Share Market Price of the Company's Common
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<PAGE> 18
Shares (determined pursuant to Section 11(d)(i) hereof) on the date of the
occurrence of such event. In the event that any Person shall become an
Acquiring Person and the Rights shall then be outstanding, the Company shall
not take any action which would eliminate or diminish the benefits intended to
be afforded by the Rights.
From and after the occurrence of such event, any Rights that are or were
acquired or beneficially owned by any Acquiring Person (or any Associate or
Affiliate of such Acquiring Person) shall be void and any holder of such Rights
shall thereafter have no right to exercise such Rights under any provision of
this Agreement. No Right Certificate shall be issued pursuant to Section 3
that represents Rights beneficially owned by an Acquiring Person whose Rights
would be void pursuant to the preceding sentence, or any Associate or Affiliate
thereof; no Right Certificate shall be issued at any time upon the transfer of
any Rights to an Acquiring Person whose Rights would be void pursuant to the
preceding sentence or any Associate or Affiliate thereof or to any nominee of
such Acquiring Person, Associate or Affiliate; and any Right Certificate
delivered to the Rights Agent for transfer to an Acquiring Person whose Rights
would be void pursuant to the preceding sentence shall be cancelled.
(iii) In the event that there shall not be sufficient Common Shares issued
but not outstanding or authorized but unissued to permit the exercise in full
of the Rights in accordance with the foregoing subparagraph (ii), the Company
shall take all such action as may be necessary to authorize additional Common
Shares for issuance upon exercise of the Rights. In the event the Company
shall, after good faith effort, be unable to take all such action as may be
necessary to authorize such additional Common Shares, the Company shall
substitute, for each Common Share that would otherwise be issuable upon
exercise of a Right, a number of Preferred Shares or fraction thereof such that
the Current Per Share Market Price of one Preferred Share multiplied by such
number or fraction is equal to the Current Per Share Market Price of one Common
Share as of the date of issuance of such Preferred Shares or fraction thereof.
(b) In case the Company shall fix a record date for the issuance of rights,
options or warrants to all holders of Preferred Shares entitling them (for a
period expiring within 45 calendar days after such record date) to subscribe
for or purchase Preferred Shares (or shares having the same rights, privileges
and preferences as the Preferred Shares ("equivalent preferred shares")) or
securities convertible into Preferred Shares or equivalent preferred shares at
a price per Preferred Share or equivalent preferred share (or having a
conversion price per share, if a security convertible into Preferred Shares or
equivalent preferred shares) less than the then Current Per Share
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<PAGE> 19
Market Price of the Preferred Shares) on such record date, the Purchase Price
to be in effect after such record date shall be determined by multiplying the
Purchase Price in effect immediately prior to such record date by a fraction,
the numerator of which shall be the number of Preferred Shares outstanding on
such record date plus the number of Preferred Shares which the aggregate
offering price of the total number of Preferred Shares and/or equivalent
preferred shares so to be offered (and/or the aggregate initial conversion
price of the convertible securities so to be offered) would purchase at such
current market price and the denominator of which shall be the number of
Preferred Shares outstanding on such record date plus the number of additional
Preferred Shares and/or equivalent preferred shares to be offered for
subscription or purchase (or into which the convertible securities so to be
offered are initially convertible); provided, however, that in no event shall
the consideration to be paid upon the exercise of one Right be less than the
aggregate par value of the shares of capital stock of the Company issuable upon
exercise of one Right. In case such subscription price may be paid in a
consideration part or all of which shall be in a form other than cash, the
value of such consideration shall be as determined in good faith by the Board
of Directors, whose determination shall be described in a statement filed with
the Rights Agent and shall be binding on the Rights Agent and holders of the
Rights. Preferred Shares owned by or held for the account of the Company shall
not be deemed outstanding for the purpose of any such computation. Such
adjustment shall be made successively whenever such a record date is fixed; and
in the event that such rights, options or warrants are not so issued, the
Purchase Price shall be adjusted to be the Purchase Price which would then be
in effect if such record date had not been fixed.
(c) In case the Company shall fix a record date for the making of a
distribution to all holders of the Preferred Shares (including any such
distribution made in connection with a consolidation or merger in which the
Company is the continuing or surviving corporation) of evidences of
indebtedness or assets (other than a regular quarterly cash dividend or a
dividend payable in Preferred Shares) or subscription rights or warrants
(excluding those referred to in Section 11(b) hereof), the Purchase Price to be
in effect after such record date shall be determined by multiplying the
Purchase Price in effect immediately prior to such record date by a fraction,
the numerator of which shall be the then Current Per Share Market Price of the
Preferred Shares on such record date, less the fair market value (as determined
in good faith by the Board of Directors, whose determination shall be described
in a statement filed with the Rights Agent and shall be binding on the Rights
Agent and holders of the Rights) of the portion of the assets or evidences of
indebtedness so to be distributed or of such subscription rights or warrants
applicable to one Preferred Share
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<PAGE> 20
and the denominator of which shall be such Current Per Share Market Price of
the Preferred Shares; provided, however, that in no event shall the
consideration to be paid upon the exercise of one Right be less than the
aggregate par value of the shares of capital stock of the Company to be issued
upon exercise of one Right. Such adjustments shall be made successively
whenever such a record date is fixed; and in the event that such distribution
is not so made, the Purchase Price shall again be adjusted to be the Purchase
Price which would then be in effect if such record date had not been fixed.
(d) (i) For the purpose of any computation hereunder, the "Current Per Share
Market Price" of any security (a "Security" for the purpose of this Section
11(d)(i)) on any date shall be deemed to be the average of the daily closing
prices per share of such Security for the 30 consecutive Trading Days
immediately prior to such date; provided, however, that in the event that the
Current Per Share Market Price of the Security is determined during a period
following the announcement by the issuer of such Security of (A) a dividend or
distribution on such Security payable in shares of such Security or securities
convertible into such shares, or (B) any subdivision, combination or
reclassification of such Security and prior to the expiration of [30] Trading
Days after the ex-dividend date for such dividend or distribution, or the
record date for such subdivision, combination or reclassification, then, and in
each such case, the Current Per Share Market Price shall be appropriately
adjusted to reflect the current market price per share equivalent of such
Security. The closing price for each day shall be the last sale price, regular
way, or, in case no such sale takes place on such day, the average of the
closing bid and asked prices, regular way, in either case, as reported in the
principal consolidated transaction reporting system with respect to securities
listed or admitted to trading on the New York Stock Exchange or, if the
Security is not listed or admitted to trading on the New York Stock Exchange,
as reported in the principal consolidated transaction reporting system with
respect to securities listed on the principal national securities exchange on
which the Security is listed or admitted to trading or, if the Security is not
listed or admitted to trading on any national securities exchange, the last
quoted price or, if not so quoted, the average of the high bid and low asked
prices in the over-the-counter market, as reported on the Nasdaq National
Market or such other system then in use, or, if on any such date the Security
is not quoted by any such organization, the average of the closing bid and
asked prices as furnished by a professional market maker making a market in the
Security selected by the Board of Directors. The term "Trading Day" shall mean
a day on which the principal national securities exchange on which the Security
is listed or admitted to trading is open for the transaction of business or, if
the Security is not listed or admitted to trading on any national securities
exchange, a Business Day.
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<PAGE> 21
(ii) For the purpose of any computation hereunder, the "Current Per Share
Market Price" of the Preferred Shares shall be determined in accordance with
the method set forth in Section 11(d)(i). If the Preferred Shares are not
publicly traded, the "Current Per Share Market Price" of the Preferred Shares
shall be conclusively deemed to be the Current Per Share Market Price of the
Common Shares as determined pursuant to Section 11(d)(i) (appropriately
adjusted to reflect any stock split, stock dividend or similar transaction
occurring after the date hereof), multiplied by one hundred. If neither the
Common Shares nor the Preferred Shares are publicly held or so listed or
traded, "Current Per Share Market Price" shall mean the fair value per share as
determined in good faith by the Board of Directors, whose determination shall
be described in a statement filed with the Rights Agent and shall be binding on
the Rights Agent and the holders of the Rights.
(e) No adjustment in the Purchase Price shall be required unless such
adjustment would require an increase or decrease of at least 1% in the Purchase
Price; provided, however, that any adjustments which by reason of this Section
11(e) are not required to be made shall be carried forward and taken into
account in any subsequent adjustment. All calculations under this Section 11
shall be made to the nearest cent or to the nearest one one-millionth of a
Preferred Share or one ten-thousandth of any other share or security as the
case may be. Notwithstanding the first sentence of this Section 11(e), any
adjustment required by this Section 11 shall be made no later than the earlier
of (i) three years from the date of the transaction which requires such
adjustment or (ii) the date of the expiration of the right to exercise any
Rights.
(f) If as a result of an adjustment made pursuant to Section 11(a) hereof,
the holder of any Right thereafter exercised shall become entitled to receive
any shares of capital stock of the Company other than Preferred Shares,
thereafter the number of such other shares so receivable upon exercise of any
Right shall be subject to adjustment from time to time in a manner and on terms
as nearly equivalent as practicable to the provisions with respect to the
Preferred Shares contained in Section 11(a) through (c), inclusive, and the
provisions of Sections 7, 9, 10 and 13 with respect to the Preferred Shares
shall apply on like terms to any such other shares.
(g) All Rights originally issued by the Company subsequent to any adjustment
made to the Purchase Price hereunder shall evidence the right to purchase, at
the adjusted Purchase Price, the number of one one-hundredths of a Preferred
Share purchasable from time to time hereunder upon exercise of the Rights, all
subject to further adjustment as provided herein.
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<PAGE> 22
(h) Unless the Company shall have exercised its election as provided in
Section 11(i), upon each adjustment of the Purchase Price as a result of the
calculations made in Sections 11(b) and (c), each Right outstanding immediately
prior to the making of such adjustment shall thereafter evidence the right to
purchase, at the adjusted Purchase Price, that number of one one-hundredths of
a Preferred Share (calculated to the nearest one one-millionth of a Preferred
Share) obtained by (A) multiplying (x) the number of one one-hundredths of a
share covered by a Right immediately prior to this adjustment by (y) the
Purchase Price in effect immediately prior to such adjustment of the Purchase
Price and (B) dividing the product so obtained by the Purchase Price in effect
immediately after such adjustment of the Purchase Price.
(i) The Company may elect on or after the date of any adjustment of the
Purchase Price to adjust the number of Rights in substitution for any
adjustment in the number of one one-hundredths of a Preferred Share purchasable
upon the exercise of a Right. Each of the Rights outstanding after such
adjustment of the number of Rights shall be exercisable for the number of one
one-hundredths of a Preferred Share for which a Right was exercisable
immediately prior to such adjustment. Each Right held of record prior to such
adjustment of the number of Rights shall become that number of Rights
(calculated to the nearest one ten-thousandth) obtained by dividing the
Purchase Price in effect immediately prior to adjustment of the Purchase Price
by the Purchase Price in effect immediately after adjustment of the Purchase
Price. The Company shall make a public announcement of its election to adjust
the number of Rights, indicating the record date for the adjustment, and, if
known at the time, the amount of the adjustment to be made. This record date
may be the date on which the Purchase Price is adjusted or any day thereafter,
but, if the Right Certificates have been issued, shall be at least 10 days
later than the date of the public announcement. If Right Certificates have
been issued, upon each adjustment of the number of Rights pursuant to this
Section 11(i), the Company shall, as promptly as practicable, cause to be
distributed to holders of record of Right Certificates on such record date
Right Certificates evidencing, subject to Section 14 hereof, the additional
Rights to which such holders shall be entitled as a result of such adjustment,
or, at the option of the Company, shall cause to be distributed to such holders
of record in substitution and replacement for the Right Certificates held by
such holders prior to the date of adjustment, and upon surrender thereof, if
required by the Company, new Right Certificates evidencing all the Rights to
which such holders shall be entitled after such adjustment. Right Certificates
so to be distributed shall be issued, executed and countersigned in the manner
provided for herein and shall be registered in the names of the holders of
record of Right Certificates on the record date specified in the public
announcement.
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<PAGE> 23
(j) Irrespective of any adjustment or change in the Purchase Price or the
number of one one-hundredths of a Preferred Share issuable upon the exercise of
the Rights, the Right Certificates theretofore and thereafter issued may
continue to express the Purchase Price and the number of one one-hundredths of
a Preferred Share which were expressed in the initial Right Certificates issued
hereunder.
(k) Before taking any action that would cause an adjustment reducing the
Purchase Price below one one-hundredth of the then par value, if any, of the
Preferred Shares issuable upon exercise of the Rights, the Company shall take
any corporate action which may, in the opinion of its counsel, be necessary in
order that the Company may validly and legally issue fully paid and
nonassessable Preferred Shares at such adjusted Purchase Price.
(l) In any case in which this Section 11 shall require that an adjustment in
the Purchase Price be made effective as of a record date for a specified event,
the Company may elect to defer until the occurrence of such event the issuing
to the holder of any Right exercised after such record date of the Preferred
Shares and other capital stock or securities of the Company, if any, issuable
upon such exercise over and above the Preferred Shares and other capital stock
or securities of the Company, if any, issuable upon such exercise on the basis
of the Purchase Price in effect prior to such adjustment; provided, however,
that the Company shall deliver to such holder a due bill or other appropriate
instrument evidencing such holder's right to receive such additional shares
upon the occurrence of the event requiring such adjustment.
(m) Anything in this Section 11 to the contrary notwithstanding, the Company
shall be entitled to make such reductions in the Purchase Price, in addition to
those adjustments expressly required by this Section 11, as and to the extent
that it, in its sole discretion, shall determine to be advisable in order that
(i) any consolidation or subdivision of the Preferred Shares, (ii) issuance
wholly for cash of any Preferred Shares at less than the current market price,
(iii) issuance wholly for cash of Preferred Shares or securities which by their
terms are convertible into or exchangeable for Preferred Shares, (iv) dividends
on Preferred Shares payable in Preferred Shares or (v) issuance of rights,
options or warrants referred to hereinabove in Section 11(b), hereafter made by
the Company to holders of its Preferred Shares shall not be taxable to such
shareholders.
(n) In the event that at any time after the date of this Agreement and prior
to the Distribution Date, the Company shall (i) declare or pay any dividend on
the Common Shares payable in Common Shares, or (ii) effect a subdivision,
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<PAGE> 24
combination or consolidation of the Common Shares (by reclassification or
otherwise than by payment of dividends in Common Shares) into a greater or
lesser number of Common Shares, then in any such case (A) the number of one
one-hundredths of a Preferred Share purchasable after such event upon proper
exercise of each Right shall be determined by multiplying the number of one
one-hundredths of a Preferred Share so purchasable immediately prior to such
event by a fraction, the numerator of which is the number of Common Shares
outstanding immediately before such event and the denominator of which is the
number of Common Shares outstanding immediately after such event, and (B) each
Common Share outstanding immediately after such event shall have issued with
respect to it that number of Rights which each Common Share outstanding
immediately prior to such event had issued with respect to it. The adjustments
provided for in this Section 11(n) shall be made successively whenever such a
dividend is declared or paid or such a subdivision, combination or
consolidation is effected.
Section 12. Certificate of Adjusted Purchase Price or Number of Shares.
Whenever an adjustment is made as provided in Section 11 or 13 hereof, the
Company shall promptly (a) prepare a certificate setting forth such adjustment,
and a brief statement of the facts accounting for such adjustment, (b) file
with the Rights Agent and with each transfer agent for the Common Shares or the
Preferred Shares a copy of such certificate and (c) mail a brief summary
thereof to each holder of a Right Certificate in accordance with Section 25
hereof. The Rights Agent shall be fully protected in relying on any such
certificate and on any adjustment therein contained.
Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning
Power. In the event, directly or indirectly, at any time after a Person has
become an Acquiring Person, (a) the Company shall consolidate with, or merge
with and into, any other Person, and the Company shall not be the continuing or
surviving corporation of such consolidation or merger, (b) any Person shall
consolidate with the Company, or merge with and into the Company and the
Company shall be the continuing or surviving corporation of such merger and, in
connection with such merger, all or part of the Common Shares shall be changed
into or exchanged for stock or other securities of any other Person (or the
Company) or cash or any other property, or (c) the Company shall sell or
otherwise transfer (or one or more of its Subsidiaries shall sell or otherwise
transfer), in one or more transactions, assets or earning power aggregating 50%
or more of the assets or earning power of the Company and its Subsidiaries
(taken as a whole) to any other Person, or group of related Persons, other than
the Company or one or more of its wholly owned Subsidiaries, then, and in each
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<PAGE> 25
such case, proper provision shall be made so that (i) each holder of a Right
(except as otherwise provided herein) shall thereafter have the right to
receive, upon the exercise thereof at a price equal to the then current
Purchase Price multiplied by the number of one one-hundredths of a Preferred
Share for which a Right is then exercisable, in accordance with the terms of
this Agreement and in lieu of Preferred Shares, such number of Common Shares of
such other Person (including the Company as successor thereto or as the
surviving corporation) as shall equal the result obtained by (A) multiplying
the then current Purchase Price by the number of one one-hundredths of a
Preferred Share for which a Right is then exercisable and dividing that product
by (B) 50% of the then Current Per Share Market Price of the Common Shares of
such other Person (determined pursuant to Section 11(d) hereof) on the date of
consummation of such consolidation, merger, sale or transfer; (ii) the issuer
of such Common Shares shall thereafter be liable for, and shall assume, by
virtue of such consolidation, merger, sale or transfer, all the obligations and
duties of the Company pursuant to this Agreement; (iii) the term "Company"
shall thereafter be deemed to refer to such issuer; and (iv) such issuer shall
take such steps (including, but not limited to, the reservation of a sufficient
number of its Common Shares in accordance with Section 9 hereof) in connection
with such consummation as may be necessary to assure that the provisions hereof
shall thereafter be applicable, as nearly as reasonably may be, in relation to
the Common Shares thereafter deliverable upon the exercise of the Rights. The
Company shall not consummate any such consolidation, merger, sale or transfer
unless prior thereto the Company and such issuer shall have executed and
delivered to the Rights Agent a supplemental agreement so providing. The
Company shall not enter into any transaction of the kind referred to in this
Section 13 if at the time of such transaction there are any rights, warrants,
instruments or securities outstanding or any agreements or arrangements which,
as a result of the consummation of such transaction, would eliminate or
substantially diminish the benefits intended to be afforded by the Rights. The
provisions of this Section 13 shall similarly apply to successive mergers or
consolidations or sales or other transfers.
Section 14. Fractional Rights and Fractional Shares.
(a) The Company shall not be required to issue fractions of Rights or to
distribute Right Certificates which evidence fractional Rights. In lieu of
such fractional Rights, there shall be paid to the registered holders of the
Right Certificates with regard to which such fractional Rights would otherwise
be issuable, an amount in cash equal to the same fraction of the current market
value of a whole Right. For the purposes of this Section 14(a), the current
market value of a whole Right shall be the closing price of the Rights for the
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<PAGE> 26
Trading Day immediately prior to the date on which such fractional Rights would
have been otherwise issuable. The closing price for any day shall be the last
sale price, regular way, or, in case no such sale takes place on such day, the
average of the closing bid and asked prices, regular way, in either case, as
reported in the principal consolidated transaction reporting system with
respect to securities listed on the principal national securities exchange on
which the Rights are listed or admitted to trading or, if the Rights are not
listed or admitted to trading on any national securities exchange, the last
quoted price or, if not so quoted, the average of the high bid and low asked
prices in the over-the-counter market, as reported on the Nasdaq National
Market or such other system then in use or, if on any such date the Rights are
not quoted by any such organization, the average of the closing bid and asked
prices as furnished by a professional market maker making a market in the
Rights selected by the Board of Directors. If on any such date no such market
maker is making a market in the Rights, the fair value of the Rights on such
date as determined in good faith by the Board of Directors shall be used.
(b) The Company shall not be required to issue fractions of Preferred Shares
(other than fractions which are integral multiples of one one-hundredth of a
Preferred Share) upon exercise of the Rights or to distribute certificates
which evidence fractional Preferred Shares (other than fractions which are
integral multiples of one one-hundredth of a Preferred Share). Fractions of
Preferred Shares in integral multiples of one one-hundredth of a Preferred
Share may, at the election of the Company, be evidenced by depositary receipts,
pursuant to an appropriate agreement between the Company and a depositary
selected by it; provided that such agreement shall provide that the holders of
such depositary receipts shall have all the rights, privileges and preferences
to which they are entitled as beneficial owners of the Preferred Shares
represented by such depositary receipts. In lieu of fractional Preferred
Shares that are not integral multiples of one one-hundredth of a Preferred
Share, the Company shall pay to the registered holders of Right Certificates at
the time such Rights are exercised as herein provided an amount in cash equal
to the same fraction of the current market value of one Preferred Share. For
the purposes of this Section 14(b), the current market value of a Preferred
Share shall be the closing price of a Preferred Share (as determined pursuant
to the second sentence of Section 11(d)(i) hereof) for the Trading Day
immediately prior to the date of such exercise.
(c) The holder of a Right by the acceptance of the Right expressly waives
his right to receive any fractional Rights or any fractional shares upon
exercise of a Right (except as provided above).
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<PAGE> 27
Section 15. Rights of Action. All rights of action in respect of this
Agreement, excepting the rights of action given to the Rights Agent under
Section 18 hereof, are vested in the respective registered holders of the Right
Certificates (and, prior to the Distribution Date, the registered holders of
the Common Shares) and any registered holder of any Right Certificate (or,
prior to the Distribution Date, of the Common Shares), without the consent of
the Rights Agent or of the holder of any other Right Certificate (or, prior to
the Distribution Date, of the Common Shares), may, in his own behalf and for
his own benefit, enforce, and may institute and maintain any suit, action or
proceeding against the Company to enforce, or otherwise act in respect of, his
right to exercise the Rights evidenced by such Right Certificate in the manner
provided in such Right Certificate and in this Agreement. Without limiting the
foregoing or any remedies available to the holders of Rights, it is
specifically acknowledged that the holders of Rights would not have an adequate
remedy at law for any breach of this Agreement and will be entitled to specific
performance of the obligations under, and injunctive relief against actual or
threatened violations of the obligations of any Person subject to, this
Agreement.
Section 16. Agreement of Right Holders. Every holder of a Right, by
accepting the same, consents and agrees with the Company and the Rights Agent
and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be transferable only in
connection with the transfer of the Common Shares;
(b) after the Distribution Date, the Right Certificates are transferable
only on the registry books of the Rights Agent if surrendered at the principal
office of the Rights Agent, duly endorsed or accompanied by a proper instrument
of transfer deed with appropriate forms and certificates fully executed;
(c) the Company and the Rights Agent may deem and treat the person in whose
name the Right Certificate (or, prior to the Distribution Date, the associated
Common Shares certificate) is registered as the absolute owner thereof and of
the Rights evidenced thereby (notwithstanding any notations of ownership or
writing on the Right Certificate or the associated Common Shares certificate
made by anyone other than the Company or the Rights Agent) for all purposes
whatsoever, and neither the Company nor the Rights Agent shall be affected by
any notice to the contrary; and
- 24 -
<PAGE> 28
(d) notwithstanding anything in this Agreement to the contrary, neither the
Company nor the Rights Agent shall have any liability to any holder of a Right
or other Person as a result of its inability to perform any of its obligations
under this Agreement by reason of any preliminary or permanent injunction or
other order, decree or ruling issued by a court of competent jurisdiction or by
a governmental, regulatory or administrative agency or commission, or any
statute, rule, regulation or executive order promulgated or enacted by any
governmental authority prohibiting or otherwise restraining performance of such
obligation.
Section 17. Right Certificate Holder Not Deemed a Stockholder. No holder,
as such, of any Right Certificate shall be entitled to vote, receive dividends
or be deemed for any purpose the holder of the Preferred Shares or any other
securities of the Company which may at any time be issuable on the exercise of
the Rights represented thereby, nor shall anything contained herein or in any
Right Certificate be construed to confer upon the holder of any Right
Certificate, as such, any of the rights of a stockholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
shareholders at any meeting thereof, or to give or withhold consent to any
corporate action, or to receive notice of meetings or other actions affecting
shareholders (except as provided in Section 25 hereof), or to receive dividends
or subscription rights, or otherwise, until the Right or Rights evidenced by
such Right Certificate shall have been exercised in accordance with the
provisions hereof.
Section 18. Concerning the Rights Agent. The Company agrees to pay to the
Rights Agent reasonable compensation for all services rendered by it hereunder
and, from time to time, on demand of the Rights Agent, its reasonable expenses
and counsel fees and other disbursements incurred in the administration and
execution of this Agreement and the exercise and performance of its duties
hereunder. The Company also agrees to indemnify the Rights Agent for, and to
hold it harmless against, any loss, liability, or expense incurred without
negligence, bad faith or willful misconduct on the part of the Rights Agent,
for anything done or omitted by the Rights Agent in connection with the
acceptance and administration of this Agreement, including the costs and
expenses of defending against any claim of liability in the premises.
The Rights Agent shall be protected and shall incur no liability for, or in
respect of any action taken, suffered or omitted by it in connection with, its
administration of this Agreement in reliance upon any Right Certificate or
certificate for the Preferred Shares or Common Shares or for other securities
- 25 -
<PAGE> 29
of the Company, instrument of assignment or transfer, power of attorney,
endorsement, affidavit, letter, notice, direction, consent, certificate,
statement, or other paper or document believed by it to be genuine and to be
signed, executed and, where necessary, verified or acknowledged, by the proper
person or persons, or otherwise upon the advice of counsel as set forth in
Section 20 hereof.
Section 19. Merger or Consolidation or Change of Name of Rights Agent. Any
corporation into which the Rights Agent or any successor Rights Agent may be
merged or with which it may be consolidated, or any corporation resulting from
any merger or consolidation to which the Rights Agent or any successor Rights
Agent shall be a party, or any corporation succeeding to the stock transfer or
corporate trust powers of the Rights Agent or any successor Rights Agent, shall
be the successor to the Rights Agent under this Agreement without the execution
or filing of any paper or any further act on the part of any of the parties
hereto; provided, however, that such corporation would be eligible for
appointment as a successor Rights Agent under the provisions of Section 21
hereof. In case at the time such successor Rights Agent shall succeed to the
agency created by this Agreement, any of the Right Certificates shall have been
countersigned but not delivered, any such successor Rights Agent may adopt the
countersignature of the predecessor Rights Agent and deliver such Right
Certificates so countersigned; and, in case at that time any of the Right
Certificates shall not have been countersigned, any successor Rights Agent may
countersign such Right Certificates either in the name of the predecessor
Rights Agent or in the name of the successor Rights Agent; and in all such
cases such Right Certificates shall have the full force provided in the Right
Certificates and in this Agreement.
In case at any time the name of the Rights Agent shall be changed and at
such time any of the Right Certificates shall have been countersigned but not
delivered, the Rights Agent may adopt the countersignature under its prior name
and deliver Right Certificates so countersigned; and in case at that time any
of the Right Certificates shall not have been countersigned, the Rights Agent
may countersign such Right Certificates either in its prior name or in its
changed name; and in all such cases such Right Certificates shall have the full
force provided in the Right Certificates and in this Agreement.
Section 20. Duties of Rights Agent. The Rights Agent undertakes the duties
and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of Right Certificates,
by their acceptance thereof, shall be bound:
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<PAGE> 30
(a) The Rights Agent may consult with legal counsel (who may be legal
counsel for the Company), and the opinion of such counsel shall be full and
complete authorization and protection to the Rights Agent as to any action
taken or omitted by it in good faith and in accordance with such opinion.
(b) Whenever in the performance of its duties under this Agreement the
Rights Agent shall deem it necessary or desirable that any fact or matter be
proved or established by the Company prior to taking or suffering any action
hereunder, such fact or matter (unless other evidence in respect thereof be
herein specifically prescribed) may be deemed to be conclusively proved and
established by a certificate signed by any one of the Chairman, the Chief
Executive Officer, the President, any Vice President, the Treasurer or the
Secretary of the Company and delivered to the Rights Agent; and such
certificate shall be full authorization to the Rights Agent for any action
taken or suffered in good faith by it under the provisions of this Agreement in
reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder to the Company and any other
Person only for its own negligence, bad faith or willful misconduct.
(d) The Rights Agent shall not be liable for or by reason of any of the
statements of fact or recitals contained in this Agreement or in the Right
Certificates (except its countersignature thereof) or be required to verify the
same, but all such statements and recitals are and shall be deemed to have been
made by the Company only.
(e) The Rights Agent shall not be under any responsibility in respect of the
validity of this Agreement or the execution and delivery hereof (except the due
execution hereof by the Rights Agent) or in respect of the validity or
execution of any Right Certificate (except its countersignature thereof); nor
shall it be responsible for any breach by the Company of any covenant or
condition contained in this Agreement or in any Right Certificate; nor shall it
be responsible for any change in the exercisability of the Rights (including
the Rights becoming void pursuant to Section 11(a)(ii) hereof) or any
adjustment in the terms of the Rights (including the manner, method or amount
thereof) provided for in Section 3, 11, 13, 23 or 24, or the ascertaining of
the existence of facts that would require any such change or adjustment (except
with respect to the exercise of Rights evidenced by Right Certificates after
actual notice that such change or adjustment is required); nor shall it by any
act hereunder be deemed to make any representation or warranty as to the
authorization or reservation of any Preferred Shares to be issued pursuant to
this Agreement or any Right Certificate or as to whether any Preferred Shares
will, when
- 27 -
<PAGE> 31
issued, be validly authorized and issued, fully paid and nonassessable.
(f) The Company agrees that it will perform, execute, acknowledge and
deliver or cause to be performed, executed, acknowledged and delivered all such
further and other acts, instruments and assurances as may reasonably be
required by the Rights Agent for the carrying out or performing by the Rights
Agent of the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from any
one of the Chairman, the Chief Executive Officer, the President, any Vice
President, the Secretary or the Treasurer of the Company, and to apply to such
officers for advice or instructions in connection with its duties, and it shall
not be liable for any action taken or suffered by it in good faith in
accordance with instructions of any such officer or for any delay in acting
while waiting for those instructions.
(h) The Rights Agent and any shareholder, director, officer or employee of
the Rights Agent may buy, sell or deal in any of the Rights or other securities
of the Company or become pecuniarily interested in any transaction in which the
Company may be interested, or contract with or lend money to the Company or
otherwise act as fully and freely as though it were not Rights Agent under this
Agreement. Nothing herein shall preclude the Rights Agent from acting in any
other capacity for the Company or for any other legal entity.
(i) The Rights Agent may execute and exercise any of the rights or powers
hereby vested in it or perform any duty hereunder either itself or by or
through its attorneys or agents, and the Rights Agent shall not be answerable
or accountable for any act, default, neglect or misconduct of any such
attorneys or agents or for any loss to the Company resulting from any such act,
default, neglect or misconduct, provided reasonable care was exercised in the
selection and continued employment thereof.
(j) No provision of this Agreement shall require the Rights Agent to expend
or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder or in the exercise of its rights if
there shall be reasonable grounds for believing that repayment of such funds or
adequate indemnification against such risk or liability is not reasonably
assured to it.
(k) If, with respect to any Right Certificate surrendered to the Rights
Agent for exercise or transfer, the certificate attached to the form of
assignment or form of election to purchase, as the case may be, has either not
been
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<PAGE> 32
completed or indicates an affirmative response to clause 1 and/or 2 on such
certificate attached to the form of assignment or form of election to purchase,
the Rights Agent shall not take any further action with respect to such
requested exercise or transfer without first consulting with the Company.
Section 21. Change of Rights Agent. The Rights Agent or any successor
Rights Agent may resign and be discharged from its duties under this Agreement
upon 30 days' notice in writing mailed to the Company and to each transfer
agent of the Common Shares or Preferred Shares by registered or certified mail,
and to the holders of the Right Certificates by first-class mail. The Company
may remove the Rights Agent or any successor Rights Agent upon 30 days' notice
in writing, mailed to the Rights Agent or successor Rights Agent, as the case
may be, and to each transfer agent of the Common Shares or Preferred Shares by
registered or certified mail, and to the holders of the Right Certificates by
first-class mail. If the Rights Agent shall resign or be removed or shall
otherwise become incapable of acting, the Company shall appoint a successor to
the Rights Agent. If the Company shall fail to make such appointment within a
period of 30 days after giving notice of such removal or after it has been
notified in writing of such resignation or incapacity by the resigning or
incapacitated Rights Agent or by the holder of a Right Certificate (who shall,
with such notice, submit his Right Certificate for inspection by the Company),
then the registered holder of any Right Certificate may apply to any court of
competent jurisdiction for the appointment of a new Rights Agent. Any
successor Rights Agent, whether appointed by the Company or by such a court,
shall be a corporation organized and doing business under the laws of the
United States or of the Commonwealth of Pennsylvania (or of any other state of
the United States so long as such corporation is authorized to do business as a
banking institution in the Commonwealth of Pennsylvania, in good standing,
having an office in the Commonwealth of Pennsylvania, which is authorized under
such laws to exercise corporate trust or stock transfer powers and is subject
to supervision or examination by federal or state authority and which has at
the time of its appointment as Rights Agent a combined capital and surplus of
at least $50 million. After appointment, the successor Rights Agent shall be
vested with the same powers, rights, duties and responsibilities as if it had
been originally named as Rights Agent without further act or deed; but the
predecessor Rights Agent shall deliver and transfer to the successor Rights
Agent any property at the time held by it hereunder, and execute and deliver
any further assurance, conveyance, act or deed necessary for the purpose. Not
later than the effective date of any such appointment, the Company shall file
notice thereof in writing with the predecessor Rights Agent and each transfer
agent of the Common Shares or Preferred Shares, and mail a notice thereof in
writing to the registered
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<PAGE> 33
holders of the Right Certificates. Failure to give any notice provided for in
this Section 21, however, or any defect therein, shall not affect the legality
or validity of the resignation or removal of the Rights Agent or the
appointment of the successor Rights Agent, as the case may be.
Section 22. Issuance of New Right Certificates. Notwithstanding any of the
provisions of this Agreement or of the Rights to the contrary, the Company may,
at its option, issue new Right Certificates evidencing Rights in such form as
may be approved by the Board of Directors to reflect any adjustment or change
in the Purchase Price and the number or kind or class of shares or other
securities or property purchasable under the Right Certificates made in
accordance with the provisions of this Agreement.
Section 23. Redemption.
(a) The Board of Directors may, at its option, at any time prior to such
time as any Person becomes an Acquiring Person, redeem all but not less than
all the then outstanding Rights at a redemption price of $.01 per Right,
appropriately adjusted to reflect any stock split, stock dividend or similar
transaction occurring after the date hereof (such redemption price being
hereinafter referred to as the "Redemption Price"). The redemption of the
Rights by the Board of Directors may be made effective at such time, on such
basis and with such conditions as the Board of Directors, in its sole
discretion, may establish.
(b) Immediately upon the action of the Board of Directors ordering the
redemption of the Rights pursuant to paragraph (a) of this Section 23, and
without any further action and without any notice, the right to exercise the
Rights will terminate and the only right thereafter of the holders of Rights
shall be to receive the Redemption Price. The Company shall promptly give
public notice of any such redemption; provided, however, that the failure to
give, or any defect in, any such notice shall not affect the validity of such
redemption. Within 10 days after such action of the Board of Directors
ordering the redemption of the Rights, the Company shall mail a notice of
redemption to all the holders of the then outstanding Rights at their last
addresses as they appear upon the registry books of the Rights Agent or, prior
to the Distribution Date, on the registry books of the transfer agent for the
Common Shares. Any notice which is mailed in the manner herein provided shall
be deemed given, whether or not the holder receives the notice. Each such
notice of redemption will state the method by which the payment of the
Redemption Price will be made. Neither the Company nor any of its Affiliates
or Associates may redeem,
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<PAGE> 34
acquire or purchase for value any Rights at any time in any manner other than
that specifically set forth in this Section 23 or in Section 24 hereof, and
other than in connection with the purchase of Common Shares prior to the
Distribution Date.
Section 24. Exchange.
(a) The Board of Directors may, at its option (but subject to the provisions
of Chapter 15 of the Pennsylvania Business Corporation Law of 1988, or any
successor provision thereto, relating to the consideration to be paid for
shares with a par value), at any time after any Person becomes an Acquiring
Person, exchange all or part of the then outstanding and exercisable Rights
(which shall not include Rights that have become void pursuant to the
provisions of Section 11(a)(ii) hereof) for Common Shares at an exchange ratio
of one Common Share per Right, appropriately adjusted to reflect any stock
split, stock dividend or similar transaction occurring after the date hereof
(such exchange ratio being hereinafter referred to as the "Exchange Ratio").
Notwithstanding the foregoing, the Board of Directors shall not be empowered to
effect such exchange at any time after any Person (other than the Company, any
Subsidiary of the Company, any employee benefit plan of the Company or of any
Subsidiary of the Company or any entity holding Common Shares for or pursuant
to the terms of any such plan, together with all Affiliates and Associates of
such Person, becomes the Beneficial Owner of 50% or more of the Common Shares
then outstanding.
(b) Immediately upon the action of the Board of Directors ordering the
exchange of any Rights pursuant to paragraph (a) of this Section 24 and without
any further action and without any notice, the right to exercise such Rights
shall terminate and the only right thereafter of a holder of such Rights shall
be to receive that number of Common Shares equal to the number of such Rights
held by such holder multiplied by the Exchange Ratio. The Company shall
promptly give public notice of any such exchange; provided, however, that the
failure to give, or any defect in, such notice shall not affect the validity of
such exchange. The Company promptly shall mail a notice of any such exchange
to all of the holders of such Rights at their last addresses as they appear
upon the registry books of the Rights Agent. Any notice which is mailed in the
manner herein provided shall be deemed given, whether or not the holder
receives the notice. Each such notice of exchange will state the method by
which the exchange of the Common Shares for Rights will be effected and, in the
event of any partial exchange, the number of Rights which will be exchanged.
Any partial exchange shall be effected pro rata based on the number of Rights
(other than Rights which have become void pursuant to the provisions of Section
11(a)(ii) hereof) held by each holder of Rights.
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<PAGE> 35
(c) In the event that there shall not be sufficient Common Shares issued but
not outstanding or authorized but unissued to permit any exchange of Rights as
contemplated in accordance with this Section 24, the Company shall take all
such action as may be necessary to authorize additional Common Shares for
issuance upon exchange of the Rights. In the event the Company shall, after
good faith effort, be unable to take all such action as may be necessary to
authorize such additional Common Shares, the Company shall substitute, for each
Common Share that would otherwise be issuable upon exchange of a Right, a
number of Preferred Shares or fraction thereof such that the Current Per Share
Market Price of one Preferred Share multiplied by such number or fraction is
equal to the Current Per Share Market Price of one Common Share as of the date
of issuance of such Preferred Shares or fraction thereof.
(d) The Company shall not be required to issue fractions of Common Shares or
to distribute certificates which evidence fractional Common Shares. In lieu of
such fractional Common Shares, the Company shall pay to the registered holders
of the Right Certificates with regard to which such fractional Common Shares
would otherwise be issuable an amount in cash equal to the same fraction of the
current market value of a whole Common Share. For the purposes of this
paragraph (d), the current market value of a whole Common Share shall be the
closing price of a Common Share (as determined pursuant to the second sentence
of Section 11(d)(i) hereof) for the Trading Day immediately prior to the date
of exchange pursuant to this Section 24.
Section 25. Notice of Certain Events.
(a) In case the Company shall propose, at any time after the Distribution
Date, (i) to pay any dividend payable in stock of any class to the holders of
its Preferred Shares or to make any other distribution to the holders of its
Preferred Shares (other than a regular quarterly cash dividend), (ii) to offer
to the holders of its Preferred Shares rights or warrants to subscribe for or
to purchase any additional Preferred Shares or shares of stock of any class or
any other securities, rights or options, (iii) to effect any reclassification
of its Preferred Shares (other than a reclassification involving only the
subdivision of outstanding Preferred Shares), (iv) to effect any consolidation
or merger into or with, or to effect any sale or other transfer (or to permit
one or more of its Subsidiaries to effect any sale or other transfer), in one
or more transactions, of 50% or more of the assets or earning power of the
Company and its Subsidiaries (taken as a whole) to, any other Person, (v) to
effect the liquidation, dissolution or winding up of the Company, or (vi) to
declare or pay any dividend on the Common Shares payable in Common Shares or to
effect a subdivision, combination
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<PAGE> 36
or consolidation of the Common Shares (by reclassification or otherwise than by
payment of dividends in Common Shares), then, in each such case, the Company
shall give to each holder of a Right Certificate, in accordance with Section 26
hereof, a notice of such proposed action, which shall specify the record date
for the purposes of such stock dividend, or distribution of rights or warrants,
or the date on which such reclassification, consolidation, merger, sale,
transfer, liquidation, dissolution, or winding up is to take place and the date
of participation therein by the holders of the Common Shares and/or Preferred
Shares, if any such date is to be fixed, and such notice shall be so given in
the case of any action covered by clause (i) or (ii) above at least 10 days
prior to the record date for determining holders of the Preferred Shares for
purposes of such action, and in the case of any such other action, at least 10
days prior to the date of the taking of such proposed action or the date of
participation therein by the holders of the Common Shares and/or Preferred
Shares, whichever shall be the earlier.
(b) In case any event set forth in Section 11(a)(ii) hereof shall occur,
then the Company shall as soon as practicable thereafter give to each holder of
a Right Certificate, in accordance with Section 26 hereof, a notice of the
occurrence of such event, which notice shall describe such event and the
consequences of such event to holders of Rights under Section 11(a)(ii) hereof.
Section 26. Notices. Notices or demands authorized by this Agreement to be
given or made by the Rights Agent or by the holder of any Right Certificate to
or on the Company shall be sufficiently given or made if sent by first-class
mail, postage prepaid, addressed (until another address is filed in writing
with the Rights Agent) as follows:
Education Management Corporation
300 Sixth Avenue
Pittsburgh, Pennsylvania 15222
Attention: Corporate Secretary
Subject to the provisions of Section 21 hereof, any notice or demand authorized
by this Agreement to be given or made by the Company or by the holder of any
Right Certificate to or on the Rights Agent shall be sufficiently given or made
if sent by first-class mail, postage prepaid, addressed (until another address
is filed in writing with the Company) as follows:
[Trust Company]
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any
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<PAGE> 37
Right Certificate shall be sufficiently given or made if sent by first-class
mail, postage prepaid, addressed to such holder at the address of such holder
as shown on the registry books of the Rights Agent.
Section 27. Supplements and Amendments. The Company may from time to time
supplement or amend this Agreement without the approval of any holders of Right
Certificates in order to cure any ambiguity, to correct or supplement any
provision contained herein which may be defective or inconsistent with any
other provisions herein, or to make any other provisions with respect to the
Rights which the Company may deem necessary or desirable, any such supplement
or amendment to be evidenced by a writing signed by the Company and the Rights
Agent; provided, however, that from and after such time as any Person becomes
an Acquiring Person, this Agreement shall not be amended in any manner which
would adversely affect the interests of the holders of Rights. Upon the
delivery of a certificate from an appropriate officer of the Company, which
states that the proposed supplement or amendment is in compliance with the
terms of this Section 27, the Rights Agent shall execute such supplement or
amendment.
Section 28. Successors. All the covenants and provisions of this Agreement
by or for the benefit of the Company or the Rights Agent shall bind and inure
to the benefit of their respective successors and assigns hereunder.
Section 29. Benefits of This Agreement. Nothing in this Agreement shall be
construed to give to any Person other than the Company, the Rights Agent and
the registered holders of the Right Certificates (and, prior to the
Distribution Date, the Common Shares) any legal or equitable right, remedy or
claim under this Agreement; but this Agreement shall be for the sole and
exclusive benefit of the Company, the Rights Agent and the registered holders
of the Right Certificates (and, prior to the Distribution Date, the Common
Shares).
Section 30. Severability. If any term, provision, covenant or restriction
of this Agreement is held by a court of competent jurisdiction or other
authority to be invalid, void or unenforceable, the remainder of the terms,
provisions, covenants and restrictions of this Agreement shall remain in full
force and effect and shall in no way be affected, impaired or invalidated.
Section 31. Governing Law. This Agreement and each Right Certificate
issued hereunder shall be deemed to be a
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<PAGE> 38
contract made under the laws of the Commonwealth of Pennsylvania and for all
purposes shall be governed by and construed in accordance with the laws of such
Commonwealth applicable to contracts to be made and performed entirely within
such Commonwealth.
Section 32. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and all such counterparts shall together constitute but one and
the same instrument.
Section 33. Descriptive Headings. Descriptive headings of the several
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
Section 34. Effective Date of This Agreement. This Agreement shall be
effective upon and subject to the consummation of the Company's initial public
offering.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE> 39
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed and attested, all as of the day and year first above written.
Attest: EDUCATION MANAGEMENT CORPORATION
By By
------------------------------ ---------------------------------
Name: Name:
Title: Title:
[TRUST COMPANY]
Attest:
By By
------------------------------ ---------------------------------
Name: Name:
Title: Title:
<PAGE> 1
Exhibit 4.05
COMMON STOCK
REGISTRATION RIGHTS AGREEMENT
as of August ___, 1996
The parties to this Common Stock Registration Rights Agreement ("Agreement")
are Education Management Corporation, a Pennsylvania corporation (the
"Company"); Marine Midland Bank, not in its corporate capacity, but solely as
trustee (the "ESOP Trustee") of the Education Management Corporation Employee
Stock Ownership Trust; The Northwestern Mutual Life Insurance Company
("Northwestern Mutual"); National Union Fire Insurance Company of Pittsburgh,
PA ("National Union"); ML Employees LBO Partnership No. I, L.P., ML IBK
Positions, Inc., Merrill Lynch KECALP L.P. 1986, ML Offshore LBO Partnership
No. IV, Merrill Lynch Capital Corporation and Merrill Lynch Capital
Appreciation Partnership IV, L.P. (collectively, the "ML Holders"); Robert B.
Knutson, as trustee ("Knutson"); and those other persons who are signatories to
this Agreement.
This Agreement shall become effective subject to and automatically upon the
occurrence of the date (the "Effective Date") on which the Company first
becomes subject to the periodic reporting requirements of Section 13 of the
Exchange Act by virtue of its registration under Section 12 of the Exchange Act
of Common Stock.
The parties to this Agreement, intending to be legally bound hereby, agree
as follows:
1. Definitions. As used in this Agreement, the following terms shall have
the following meanings:
"affiliate" has the meaning ascribed to that term in Rule 1-02 of Regulation
S-X promulgated under the Securities Act.
"Common Stock" means the Common Stock, par value $.01 per share, of the
Company.
"Demand" has the meaning ascribed to that term in Section 3.1.
"Effective Date" has the meaning ascribed to that term in the recitals to
this Agreement.
"Exchange Act" means the Securities Exchange Act of 1934, as amended from
time to time.
<PAGE> 2
"Incidental Registration" has the meaning ascribed to that term in Section
3.2.
"Initiating Holder" means any of (i) the ESOP Trustee, (ii) Northwestern
Mutual, (iii) National Union, (iv) any of the ML Holders, and (v) Knutson.
"person" means an individual, partnership, corporation, trust or
unincorporated organization, or a government or agency or political subdivision
thereof.
"Prospectus" means the prospectus included in any Registration Statement, as
amended or supplemented by any prospectus supplement and by all other
amendments, and supplements to such prospectus, including post-effective
amendments, and all information incorporated by reference in such prospectus.
"Registrable Securities" means any shares of Common Stock (i) owned as of
the Effective Date by a party to this Agreement (other than any shares that are
sold by any parties hereto in the initial public offering by the Company), (ii)
underlying the option held on the Effective Date by one such party identified
as an "Option Holder" in the signature page to this Agreement, or (iii)
acquired after the Effective Date by a party to this Agreement by virtue of any
stock split or combination, stock dividend or similar event in respect of any
of the shares referred to in clause (i) or clause (ii) of this definition;
provided, however, that shares of Common Stock that are Registrable Securities
shall cease to be Registrable Securities upon the sale thereof pursuant to an
effective Registration Statement or pursuant to Rule 144 (or successor rule)
under the Securities Act or upon, in the case of any holder thereof, shares of
Common Stock that have become saleable pursuant to Rule 144 without volume or
other restrictions; and provided further that shares of Common Stock that are
Registrable Securities shall continue to be Registrable Securities upon their
transfer in a private transaction exempt from the registration requirements of
the Securities Act to a person who is already a party to this Agreement (or an
affiliate of any party to this Agreement) or who becomes a party to this
Agreement by agreeing in writing to be bound by the terms of this Agreement,
such agreement to be in form and substance reasonably satisfactory to the
Company.
"Registration Expenses" means all registration and filing fees, fees with
respect to filings required to be made with the National Association of
Securities Dealers, Inc. (the "NASD"), the fees and expenses of any "qualified
independent underwriter" (and its counsel), if any, that is required to be
retained by any holder of Registrable Securities in accordance with the rules
and regulations of the NASD, fees and expenses of compliance with securities or
blue sky laws (including reasonable fees and disbursements of one counsel for
the underwriters or
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<PAGE> 3
sellers of Registrable Securities in connection with blue sky qualifications of
the Registrable Securities and determination of their eligibility for investment
under the laws of such jurisdictions as the managing underwriters or holders of
a majority of the Registrable Securities being sold may designate), printing
expenses, messenger, telephone and distribution expenses associated with the
preparation and distribution of any Registration Statement, any Prospectus, and
amendments or supplements thereto, any underwriting agreements, securities sales
agreements and other documents relating to the performance of and compliance
with this Agreement, all fees and expenses associated with the listing of any
Registrable Securities on any securities exchange or exchanges, and fees and
disbursements of counsel for the Company and its independent certified public
accountants, any fees and expenses of underwriters customarily paid by issuers
(but specifically excluding any Selling Expenses), the fees and expenses of
other persons retained by the Company, and the reasonable fees and disbursements
of one counsel to the holders of the Registrable Securities that are being sold,
which counsel shall be reasonably satisfactory to the Company.
"Registration Statement" means any registration statement of the Company
filed under the Securities Act, including the Prospectus forming a part
thereof, amendments and supplements to such Registration Statement, including
post-effective amendments, and all exhibits to and all information incorporated
by reference in such Registration Statement.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended from time to
time.
"Selling Expenses" means, with respect to any holder of Registrable
Securities, all underwriting discounts, selling commissions and stock transfer
or documentary stamp taxes, if any, applicable to any Registrable Securities
registered and sold by such holder, and all fees and disbursements of any
counsel for such holder (other than any counsel fees expressly constituting a
Registration Expense as defined in this Agreement).
"Selling Holders" has the meaning ascribed to that term in Section 3.1.
"underwritten offering" means an offering registered under the Securities
Act in which securities are sold to an underwriter, whether on a "firm
commitment", "best efforts" or other basis, for reoffering to the public.
2. Securities Subject to this Agreement. The only securities entitled to the
benefits of this Agreement are the Registrable Securities.
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<PAGE> 4
3. Registration of Registrable Securities.
3.1 Demand Registration.
(a) Demand. At any time after the first anniversary of the Effective
Date and subject to the other provisions of this Agreement, any Initiating
Holder or Holders shall have the right, exercisable by making a written request
to the Company (with each such request being referred to hereinafter as a
"Demand"), to require that the Company effect the registration in accordance
with the provisions of the Securities Act of the offering and sale of any of
the Registrable Securities held by such Initiating Holder or Holders, but in no
event fewer than 500,000 shares per Initiating Holder (with such number to be
adjusted, as appropriate, by the Company to reflect any stock splits, reverse
stock splits, stock combinations or the like occurring after the Effective
Date). Upon receipt of one or more Demands, the Company shall promptly give
written notice of the Demand to all other holders of Registrable Securities,
and the Company shall use all reasonable efforts to effect, at the earliest
practicable date, the registration under the Securities Act on Form S-3 (or a
successor form thereto), including by means of a shelf registration on Form S-3
(or a successor form thereto) pursuant to Rule 415 under the Securities Act if
so requested in such Demand (in any case only if Form S-3 (or such successor
form) is then available to the Company and only if the Company is then eligible
to use such a shelf registration), of (i) the offering and sale of the
Registrable Securities that the Company has been so required to register by
such Initiating Holder or Holders, and (ii) the offering and sale of all other
Registrable Securities that the Company has been requested to register by the
holders thereof (such holders together with the Initiating Holders being
hereinafter referred to as the "Selling Holders") by written request given to
the Company within 20 days after the giving of such written notice by the
Company.
(b) Effective Registration Statement. A registration requested pursuant
to this Section 3.1 shall not be deemed to have been effected (i) unless a
Registration Statement with respect thereto has become effective and remained
effective in compliance with the provisions of the Securities Act with respect
to the disposition of all Registrable Securities covered by such Registration
Statement until such time as all of such Registrable Securities have been
disposed of in accordance with the intended methods of disposition by the
Selling Holders thereof set forth in such registration statement, unless the
failure to so dispose of such Registrable Securities shall be caused solely by
reason of a failure on the part of the Selling Holders); provided, that with
respect to any registration statement filed pursuant to Rule 415 under the
Securities Act, such period need not exceed 180 days, and that with respect to
any other such registration statement, such period need not exceed 135 days,
(ii) if, after it has become effective, such registration is interfered with
by any stop order, injunction or other order or requirement of the SEC or
other governmental agency or court for any reason not attributable to the
Selling
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<PAGE> 5
Holders and has not thereafter become effective, or (iii) if the conditions to
closing specified in the underwriting agreement, if any, entered into in
connection with such registration are not satisfied or waived, other than by
reason of a failure on the part of the Selling Holders.
(c) Selection of Underwriters. The underwriter or underwriters of each
underwritten offering of the Registrable Securities so to be registered shall
be selected by the Selling Holders of more than 50% of the Registrable
Securities to be included in such registration and shall be reasonably
acceptable to the Company.
(d) Priority in Requested Registration. If the managing underwriter of
any underwritten offering of Registrable Securities shall advise the Company in
writing (and the Company shall so advise each Selling Holder of Registrable
Securities requesting registration of such advice) that, in its opinion, the
number of Registrable Securities requested to be included in such registration
exceeds the number which can be sold in such offering within a price range
acceptable to the Selling Holders of 66 2/3% of the Registrable Securities
requested to be included in such registration, the Company, except as provided
in the following sentence, shall include in such registration, to the extent of
the number which the Company is so advised can be sold in such offering,
Registrable Securities requested to be included in such registration allocated
first to the Registrable Securities requested to be included in such
registration by the Initiating Holder or the Initiating Holders exercising one
or more Demands, and then, to the extent of the remainder of the number which
the Company is so advised can be sold in the offering, pro rata among the other
Selling Holders requesting such registration on the basis of the estimated
gross proceeds from the sale thereof. If the total number of Registrable
Securities requested by a Selling Holder to be included in such registration
cannot be included as provided in the preceding sentence, a Selling Holder
shall have the right to withdraw such Selling Holder's request for registration
by giving written notice to the Company within 10 days after receipt of such
notice by the Company and, in the event of such withdrawal, such request shall
not be counted for purposes of the number of Demands an Initiating Holder is
entitled pursuant to Section 3.1(e).
(e) Limitations on Demand Registrations. No Initiating Holder may
exercise more than two Demands during the term of this Agreement; provided,
however, that for purposes of this sentence only the ML Holders shall be
considered as a single group and accordingly the ML Holders may not exercise
more than two Demands in the aggregate regardless of which ML Holder exercises a
Demand. Following a registration pursuant to this Section 3.1, the Company
shall not be required to effect another registration pursuant to this Section
3.1 for the six-month period immediately subsequent to the effectiveness (within
the meaning of Section 3.1(b)) of the Registration Statement filed
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<PAGE> 6
with respect to such first registration. In addition, the Company may delay the
filing of any Registration Statement pursuant to this Section 3.1 for a
reasonable period of time if, in the good faith judgment of the Board of
Directors of the Company, the Company would be required to include in such
registration statement material information which at that time could not be
publicly disclosed without materially interfering with any financing,
acquisition, corporate reorganization or other material development or
transaction then pending or in progress and without other material adverse
consequences; provided, however, that the duration of any such delay shall not
exceed 90 days from the date the Company's Board of Directors actually becomes
aware of such material development or transaction; and, provided, further, that
the Company shall make such filing no later than the earlier of (i) the date on
which the conditions that permitted it to delay such filing no longer pertain
and (ii) the end of such 90-day period. In the event of any such delay, any
Selling Holder shall have the right to withdraw his or its request for
registration, and any such withdrawn request that would otherwise have been
considered a Demand shall not be considered for purposes of the determining the
maximum number of Demands provided for in the first sentence of this Section
3.1(e).
3.2 Incidental Registration.
(a) Right to Include Registrable Securities. If the Company at any time
proposes to register the offering and sale of shares of Common Stock under the
Securities Act by registration on any form other than forms S-4 or S-8 (or any
successors thereto) whether or not for sale for its own account, it shall each
such time give prompt written notice to all holders of Registrable Securities
of its intention to do so and of such holders' rights under this Section 3.2.
Upon the written request of any such holder (a "Requesting Holder") made as
promptly as practicable and in any event within 20 days after the receipt of
any such notice (which request shall specify the Registrable Securities
intended to be disposed of by such Requesting Holder and the intended methods
of such disposition), the Company shall use all reasonable efforts to effect
the registration under the Securities Act of all Registrable Securities which
the Company has been so requested to register by the Requesting Holders thereof
to the extent requisite to permit the disposition (in accordance with such
intended methods thereof) of the Registrable Securities so to be registered;
provided that (i) if such registration involves an underwritten public
offering, all holders of Registrable Securities requesting to be included in
the Company's registration must sell their Registrable Securities to the
underwriters selected by the Company on the same terms and conditions as apply
to the Company; and (ii) if, at any time after giving notice of its intention
to register any securities pursuant to this Section 3.2(a) and prior to the
effective date of the registration statement filed in connection with such
registration, the Company shall determine for any reason not to
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<PAGE> 7
register such securities, the Company shall give written notice to all
holders of Registrable Securities and, thereupon, shall be relieved of its
obligation to register any Registrable Securities in connection with such
registration (but not from any obligation of the Company to pay the
Registration Expenses in connection therewith), without prejudice, however, to
the rights of holders under Section 3.1. If a registration pursuant to this
Section 3.2(a) involves an underwritten public offering, any holder of
Registrable Securities requesting to be included in such registration may
elect, in writing prior to the effective date of the registration statement
filed in connection with such registration, not to register such securities in
connection with such registration. No registration effected under this Section
3.2 shall relieve the Company of its obligations to effect registrations upon
request under Section 3.1.
(b) Priority in Incidental Registrations. If the managing underwriter of
the underwritten offering shall inform the Company by letter of its opinion
that the number of Registrable Securities requested to be included in such
registration would, in its opinion, materially adversely affect such offering,
including the price at which such securities can be sold, and the Company has
so advised the Requesting Holders in writing, then the Company shall include in
such registration, to the extent of the number which the Company is so advised
can be sold in (or during the time of) such offering, first, all securities
proposed by the Company as so advised can be sold for its own account, second,
to the extent that the number of shares of Common Stock which the Company
proposes to sell for its own account pursuant to Section 3.2(a) is less than
the number of shares of Common Stock which the Company has been advised can be
sold in such offering without having the material adverse effect referred to
above, such Registrable Securities requested to be included in such
registration pursuant to this Section 3.2, allocated pro rata among such
Requesting Holders on the basis of the estimated gross proceeds from the sale
thereof.
4. Hold-Back Agreements. Each holder of Registrable Securities whose
Registrable Securities are covered by a Registration Statement filed pursuant
to Section 3 shall, if requested by the managing underwriter or underwriters in
an underwritten offering, agree not to effect any public sale or distribution
of securities of the Company of the same class as the securities included in
such Registration Statement, including a sale pursuant to Rule 144 under the
Securities Act, except as part of such underwritten registration, during the
15-day period prior to, and during a period of up to 120 days beginning on, the
closing date of each underwritten offering made pursuant to such Registration
Statement, to the extent timely notified in writing by the Company or the
managing underwriter or underwriters.
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<PAGE> 8
5. Registration Procedures.
In connection with the Company's obligations under Section 3, the Company
shall use all reasonable efforts to effect such registration to permit the sale
of such Registrable Securities in accordance with the intended method or
methods of distribution thereof, and pursuant thereto the Company shall as
expeditiously as practicable:
(a) prepare and file with the SEC, as soon as practicable, a Registration
Statement on an appropriate registration form, which Registration Statement
shall comply as to form in all material respects with the requirements of the
applicable form and include or incorporate by reference all financial
statements required by the SEC to be filed therewith or incorporated by
reference therein, and in either case use all reasonable efforts to cause such
Registration Statement to become effective and remain effective in accordance
with Section 3.1(b); provided, however, that before filing a Registration
Statement or Prospectus or any amendment or supplement thereto, including
information incorporated by reference after the initial filing of the
Registration Statement, the Company shall furnish to the holders of the
Registrable Securities covered by such Registration Statement and the managing
underwriter or underwriters, if any, copies of all such documents proposed to
be filed (including, upon request, any and all exhibits thereto), which
documents shall be subject to the reasonable and prompt review of such holders
and underwriters, and the Company shall not file any Registration Statement or
amendment thereto or any Prospectus or any supplement thereto to which the
holders of at least 50% of the Registrable Securities covered by such
Registration Statement, or the managing underwriter or underwriters, if any,
shall reasonably object;
(b) prepare and file with the SEC such amendments and post-effective
amendments to such Registration Statement as may be necessary to keep the
Registration Statement effective for the applicable period, or such shorter
period which shall terminate when all Registrable Securities covered by such
Registration Statement have been sold; cause the Prospectus to be supplemented
by any required Prospectus supplement, and to be filed pursuant to Rule 424
under the Securities Act; and comply with the provisions of the Securities Act
with respect to the disposition of all securities covered by such Registration
Statement during the applicable period in accordance with the intended method
or methods of distribution by the Selling Holders set forth in such
Registration Statement or supplement to the Prospectus;
(c) notify the Selling Holders of Registrable Securities and the managing
underwriter or underwriters, if any, promptly, and (if requested by any such
person) confirm such advice in writing promptly, (1) when the Prospectus or any
Prospectus supplement or post-effective amendment to the Registration Statement
has been filed, and, with respect to such Registration Statement or any
post-effective amendment thereto, when the same has become effective,
(2) of any comments of the
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<PAGE> 9
SEC or any state securities authority with regard to the Registration Statement
and of any request by the SEC or any state securities authority for amendments
or supplements to the Registration Statement or the Prospectus or for additional
information, (3) of the issuance by the SEC or any state securities authority of
any stop order suspending the effectiveness of the Registration Statement or the
initiation of any proceedings for that purpose, (4) of the receipt by the
Company of any notification with respect to the suspension of the qualification
of the Registrable Securities for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose, (5) in the case of any shelf
Registration Statement, if between the effective date of a Registration
Statement and the closing of any sale of Registrable Securities covered thereby,
the representations and warranties of the Company contained in any underwriting
agreement, securities sale agreement or other similar agreement, relating to the
offering cease to be true and correct in all material respects and (6) of the
happening of any event or the discovery of any facts that makes any statement
made in the Registration Statement, the Prospectus or any document incorporated
therein by reference untrue in any material respect or which requires the making
of any changes in the Registration Statement, the Prospectus or any document
incorporated therein by reference in order to make the statements therein not
contain an untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein not misleading;
(d) make every reasonable effort to obtain the withdrawal of any order
suspending the effectiveness of the Registration Statement at the earliest
possible time;
(e) if requested by the managing underwriter or underwriters or a Holder
of Registrable Securities being offered for sale in connection with an
underwritten offering, promptly incorporate in a Prospectus supplement or
post-effective amendment such information as the managing underwriter or
underwriters or such holder of Registrable Securities being offered for sale
consider should be included therein relating to the plan of distribution with
respect to such Registrable Securities, including, without limitation,
information with respect to the number of Registrable Securities being offered
for sale, the purchase price being paid therefor and with respect to any other
terms of the offering of the Registrable Securities to be sold in such
offering; and make all required filings of such Prospectus supplement or
post-effective amendment as soon as practicable after being notified of the
matters to be incorporated in such Prospectus supplement or post-effective
amendment;
(f) furnish to each selling holder of Registrable Securities and each
managing underwriter, without charge, at least one signed copy of the
Registration Statement, any amendment (including any post-effective amendment)
thereto,
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<PAGE> 10
including financial statements and schedules, all documents incorporated therein
by reference and all exhibits (including those incorporated by reference);
(g) deliver to each selling holder of Registrable Securities and the
underwriters, if any, without charge, as many copies of the Prospectus
(including each preliminary prospectus) and any amendment or supplement thereto
as such persons may reasonably request;
(h) prior to any public offering of Registrable Securities, register or
qualify or cooperate with the selling holders of Registrable Securities, the
underwriters, if any, and their respective counsel in connection with the
registration or qualification of such Registrable Securities for offer and sale
under the state securities or blue sky laws of such jurisdictions as any seller
or underwriter reasonably requests in writing and do any and all other acts or
things necessary or advisable to enable the disposition in such jurisdictions
of the Registrable Securities covered by the Registration Statement; provided
that the Company shall not be required to qualify generally to do business in
any jurisdiction where it is not then so qualified or to take any action which
would subject it to general service of process in any such jurisdiction where
it is not then so subject;
(i) cooperate with the selling holders of Registrable Securities and the
managing underwriter or underwriters, if any, to facilitate the timely
preparation and delivery of certificates representing Registrable Securities to
be sold without any restrictive legends; and enable such Registrable Securities
to be in such denominations and registered in such names as the managing
underwriter or underwriters may request at least two business days prior to any
sale of Registrable Securities to underwriters;
(j) upon the occurrence of any event contemplated by clause (6) of
paragraph (c) above, prepare a supplement or post-effective amendment to the
Registration Statement or the related Prospectus or any document incorporated
therein by reference or file any other required document so that, as thereafter
delivered to purchasers of the Registrable Securities, the Prospectus shall not
contain an untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein not misleading;
(k) use all reasonable efforts to cause all Registrable Securities covered
by the Registration Statement to be listed on each securities exchange or on
the Nasdaq National Market, if any, on which the Common Stock is then listed;
(l) enter into such agreements (including an underwriting agreement) and
take all such other actions in connection therewith in order to expedite or
facilitate the disposition of Registrable Securities covered by a Registration
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<PAGE> 11
Statement and in such connection, whether or not an underwriting agreement is
entered into and whether or not the registration is an underwritten
registration (1) make such representations and warranties to the holders of
such Registrable Securities and the underwriters, if any, in form, substance
and scope as are customarily made by issuers to underwriters in primary
underwritten offerings; (2) obtain opinions of counsel to the Company and
updates thereof (which counsel and opinions (in form, scope and substance)
shall be reasonably satisfactory to the managing underwriter or underwriters,
if any, and the holders of at least 50% of the Registrable Securities being
sold, addressed to each selling holder and the underwriters, if any, covering
the matters customarily covered in opinions requested in underwritten offerings
and such other matters as may be reasonably requested by such holders and
underwriters; and (3) obtain "comfort" letters and updates thereof from the
Company's independent certified public accountants addressed to the selling
holders of Registrable Securities and the underwriters, if any, such letters to
be in customary form and covering matters of the type customarily covered in
"comfort" letters by underwriters in connection with primary underwritten
offerings;
(m) make available for inspection by a representative of the holders of at
least a majority of the Registrable Securities, any underwriter participating
in any disposition pursuant to Registration Statement and any attorney or
accountant retained by any selling holder or holders of Registrable Securities
or any underwriter, all financial and other records and all pertinent corporate
documents and properties of the Company, and cause the Company's officers,
directors and employees to be available for discussions with and to supply all
information reasonably requested by any such representative, underwriter,
attorney or accountant in connection with such Registration Statement;
provided, that any records, information or documents that are designated by the
Company in writing as confidential shall be kept confidential by such persons
unless disclosure of such records, information or documents is required by
court or administrative order or becomes publicly available;
(n) use all reasonable best efforts to comply with all applicable rules
and regulations of the SEC and make generally available to its security
holders, as provided in Rule 158 or otherwise, earnings statements satisfying
the provisions of Section 11(a) of the Securities Act;
(o) promptly prior to the filing of any document which is to be
incorporated by reference into Registration Statement or Prospectus (after
initial filing of the Registration Statement), provide copies of such document
to counsel to the selling holders of Registrable Securities and to the managing
underwriter or underwriters, if any, make the Company's representatives
available for discussion of such document and make such changes in such
document prior to the filing thereof as counsel for such selling holders or
underwriters may reasonably request; and
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<PAGE> 12
(p) otherwise reasonably cooperate with the Selling Holders to carry out
the intent of this Agreement.
The Company may require each seller of Registrable Securities as to which
any registration is being effected to furnish to the Company such information
regarding the distribution of such securities as the Company may from time to
time reasonably request in writing; provided, however, that such information
shall be used by the Company only to the extent necessary for and in connection
with, such registration.
Each holder of Registrable Securities agrees that, upon receipt of any
notice from the Company of the happening of any event of the kind described in
Section 5(c)(6) hereof, such holder shall forthwith discontinue disposition of
such Registrable Securities until such holder's receipt of the copies of the
supplemented or amended Prospectus contemplated by Section 5(j), or until it is
advised in writing (the "Advice") by the Company that the use of the Prospectus
may be resumed, and has received copies of any additional or supplemental
filings which are incorporated by reference in the Prospectus, and, if so
directed by the Company, such holder shall deliver to the Company (at the
Company's expense) all copies, other than permanent file copies then in such
holder's possession, of the Prospectus covering such Registrable Securities
current at the time of receipt of such notice. In the event the Company shall
give any such notice, the time periods regarding the maintenance of the
Registration Statement in Section 3 shall be extended by the number of days
during the period from and including the date of the giving of such notice
pursuant to Section 5(c)(6) to and including the date when each seller of
Registrable Securities covered by such Registration Statement shall have
received the copies of the supplemented or amended prospectus contemplated by
Section 5(j) or the Advice.
6. Expenses of Registration. All Registration Expenses incurred in
connection with any registration commenced in accordance with Section 3 or 4
(even if subsequently terminated or withdrawn) shall be borne by the Company.
All Selling Expenses relating to Registrable Shares registered on behalf of any
person shall be borne by such person.
7. Indemnification.
(a) Indemnification by Company. The Company shall indemnify and hold
harmless, to the full extent permitted by law, each holder of Registrable
Securities, its officers, directors and employees and each person who controls
such holder (within the meaning of the Securities Act) against all losses,
claims, damages, liabilities and expenses arising out of any untrue or alleged
untrue statement of a material fact contained in any Registration Statement (or
amendment (including any post-effective amendment) or supplement thereto),
Prospectus or
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<PAGE> 13
preliminary Prospectus) or any amendment or supplement thereto, including all
documents incorporated therein by reference, or any omission or alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, except insofar as the same are
caused by or contained in any information furnished in writing to the Company by
such holder expressly for use therein or by such holder's failure to deliver a
copy of the Registration Statement or Prospectus after the Company has furnished
such holder with a sufficient number of copies of the same; provided, however,
that in the event of an underwritten offering, no holder shall be deemed to have
failed to make any such delivery. The Company shall also indemnify
underwriters, selling brokers, dealer managers and similar securities industry
professionals participating in the distribution, their officers and directors
and each person who controls such persons (within the meaning of the Securities
Act) to the same extent as provided above with respect to the indemnification of
the holders of Registrable Securities, if requested.
(b) Indemnification by Holder of Registrable Securities. In connection
with a Registration Statement, each holder of Registrable Securities covered
thereby shall furnish to the Company in writing such information as the Company
reasonably requests for use in connection with any Registration Statement (or
amendment (including any post-effective amendment) or supplement thereto) or
Prospectus (or any amendment or supplement thereto) and shall indemnify and
hold harmless, to the full extent permitted by law, the Company, its directors
and officers and each person who controls the Company (within the meaning of
the Securities Act) against any losses, claims, damages, liabilities and
expenses arising out of any untrue or alleged untrue statement of a material
fact or any omission or alleged omission of a material fact required to be
stated in the Registration Statement (or amendment (including any
post-effective amendment) or supplement thereto) or Prospectus or preliminary
Prospectus (or any amendment or supplement thereto), including all documents
incorporated therein by reference or necessary to make the statements therein
not misleading, to the extent, but only to the extent, that such untrue
statement is contained or omission is required to be in any information so
furnished in writing by such holder to the Company specifically for inclusion
in such Registration Statement (or amendment (including any post-effective
amendment) or supplement thereto) or Prospectus (or any amendment or supplement
thereto). The liability of any selling holder of Registrable Securities
hereunder shall not exceed the dollar amount of the proceeds received by such
holder upon the sale of the Registrable Securities giving rise to such
indemnification obligation. The Company shall be entitled to receive
indemnities from underwriters, selling brokers, dealer managers and similar
securities industry professionals participating in the distribution, to the same
extent as provided above with respect to information so furnished in writing by
such persons
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<PAGE> 14
specifically for inclusion in any Prospectus or Registration Statement (or
amendment (including any post-effective amendment) or supplement thereto).
(c) Conduct of Indemnification Proceedings. Any person entitled to
indemnification hereunder shall (i) give prompt notice to the indemnifying
party of any claim with respect to which it seeks indemnification and (ii)
permit such indemnifying party to assume the defense of such claim with counsel
reasonably satisfactory to the indemnified party, provided, however, that any
person entitled to indemnification hereunder shall have the right to employ
separate counsel and to participate in the defense of such claim, but the fees
and expenses of such counsel shall be at the expense of such person unless (a)
the indemnifying party has agreed to pay such fees or expenses, or (b) the
indemnifying party shall have failed to assume the defense of such claim and
employ counsel reasonably satisfactory to such person, or (c) in the reasonable
judgment of any such person, based upon advice of its counsel, a conflict of
interest may exist between such person and the indemnifying party with respect
to such claims or there may exist legal defenses for such person that are
materially different from or in addition to those available to the indemnifying
party (in which case, if the person notifies the indemnifying party in writing
that such person elects to employ separate counsel at the expense of the
indemnifying party, the indemnifying party shall not have the right to assume
the defense of such claim on behalf of such person). If such defense is not
assumed by the indemnifying party, the indemnifying party shall not be subject
to any liability for any settlement or consent to judgment made without its
consent (but if such consent is requested, such consent shall not be
unreasonably withheld). No indemnifying party shall be required to consent to
entry of any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
indemnified party of a release from all liability in respect to such claim or
litigation. An indemnifying party who is not entitled to, or elects not to,
assume the defense of a claim shall not be obligated to pay the fees and
expenses of more than one counsel for all parties indemnified by such
indemnifying party with respect to such claim, unless in the reasonable
judgment of any indemnified party, after consultation with counsel, a conflict
of interest may exist between such indemnified party and any other of such
indemnified parties or there may exist legal defenses for such indemnified
party that are materially different from or in addition to those available to
the other indemnified parties with respect to such claim, in which event the
indemnifying party shall be obligated to pay the fees and expenses of such
additional counsel or counsels.
(d) Contribution. If for any reason the indemnification provided for in
the preceding clauses (a) and (b) is unavailable to an indemnified party or
insufficient to hold it harmless as contemplated by the preceding clauses (a)
and (b),
14
<PAGE> 15
then the indemnifying party shall contribute to the amount paid or
payable by the indemnified party as a result of such loss, claim, damage or
liability (i) in such proportion as is appropriate to reflect the relative
fault of the indemnified party and the indemnifying party, or (ii) if the
allocation provided by clause (i) is not permitted by applicable law, in such
proportion as is appropriate to reflect the relative benefits received by the
indemnified party and the indemnifying party as well as their relative fault,
as well as any other relevant equitable considerations. The relative fault of
the indemnified party and the indemnifying party shall be determined by
reference to, among other things, whether any such untrue or alleged untrue
statement of a material fact or omission or alleged omission to state a
material fact relates to information supplied by the indemnified party or the
indemnifying party and each party's relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission,
provided that no holder of Registrable Securities shall be required to
contribute in an amount greater than the dollar amount of the proceeds received
by such holder with respect to the sale of any Registrable Securities. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
8. Current Public Information. For so long as the Company is subject to the
reporting requirements of Section 13 or 15 of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), the Company covenants that it will file
the reports required to be filed by it under the Securities Act and Section
13(a) or 15 (d) of the Exchange Act and the rules and regulations adopted by the
SEC thereunder, that if it ceases to be so required to file such reports, it
will upon the request of any holder of Registrable Securities (a) make publicly
available such information as is necessary to permit sales pursuant to Rule 144
under the Securities Act, (b) deliver such information to a prospective
purchaser as is necessary to permit sales pursuant to Rule 144A under the
Securities Act and it will take such further action as any holder of Registrable
Securities may reasonably request, and (c) take such further action that is
reasonable in the circumstances, in each case, to the extent required from time
to time to enable such holder to sell its 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, (ii) Rule 144A under the Securities Act, as such Rule may be
amended from time to time, or (iii) any similar rules or regulations hereafter
adopted by the SEC. Upon the request of any holder of Registrable Securities,
the Company will deliver to such holder a written statement as to whether it has
complied with such requirements.
15
<PAGE> 16
9. Miscellaneous.
(a) Amendments and Waivers. The provisions of this Agreement, including
the provisions of this sentence, may not be amended, modified or supplemented,
and waivers or consents to departures from the provisions hereof may not be
given unless the Company has obtained the written consent of holders of at
least 80% of the Registrable Securities; provided, however, that with respect
to a particular Registration Statement filed pursuant to Section 3, a waiver or
consent to departure from the provisions of this Agreement regarding only such
Registration Statement and the offering covered thereby may be given by the
holders of not less than 66-2/3% of the Registrable Securities covered by such
Registration Statement, except that no such waiver or consent shall operate to
affect adversely the rights hereunder of any other holder of Registrable
Securities.
(b) Notices. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand-delivery, registered
first-class mail, telex, telecopier, or courier guaranteeing overnight
delivery:
(i) if to a holder of Registrable Securities, at the most current address
given by such holder to the Company in accordance with the provisions of this
Section 9(b); and
(ii) if to the Company, initially at 300 Sixth Avenue, Pittsburgh, PA
15222, Telecopy: (412) 562-0934, Attention: Chief Executive Officer and
General Counsel, and thereafter at such other address, notice of which is
given in accordance with the provisions of this Section 9(b).
All such notices and communications shall be deemed to have been duly given:
at the time delivered by hand, if personally delivered; three days after being
deposited in the mail, postage prepaid, if mailed; when answered back, if
telexed; when receipt acknowledged, if telecopied; and on the next business day
if timely delivered to a courier guaranteeing overnight delivery.
(c) Successors and Assigns. This Agreement shall inure to the benefit of
and be binding upon the successors and assigns of each of the parties.
(d) Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(e) Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania applicable to
agreements made and to be performed in Pennsylvania without regard to
principles of conflicts of laws.
16
<PAGE> 17
(f) Severability. Each provision of this Agreement shall be considered
severable, and if for any reason any provision that is not essential to the
effectuation of the basic purposes of the Agreement is determined by a court of
competent jurisdiction to be invalid or unenforceable under existing or future
applicable law, such invalidity shall not impair the operation of or affect
those provisions of this Agreement that are valid. In that case, this
Agreement shall be construed so as to limit any term or provision so as to make
it enforceable or valid within the requirements of any applicable law, and in
the event such term or provision cannot be so limited, this Agreement shall be
construed to omit such invalid or unenforceable provisions.
(g) Entire Agreement. This Agreement is intended by the parties as a
final expression of their agreement and intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto in respect
of the subject matter contained herein. There are no representations,
promises, warranties or undertakings, other than those set forth or referred to
herein with respect to the registration rights granted by the Company hereby.
Upon the Effective Date, this Agreement supersedes all prior agreements and
understandings between the parties with respect to such subject matter, and
cannot be changed or terminated orally; provided, however, that nothing
contained in this Agreement shall be deemed to modify the provisions a letter
agreement dated as of August 9, 1996, between the Company and the ESOP Trustee,
with respect to the disposition of shares of the Company's capital stock held
by the ESOP Trustee.
(h) Term. This Agreement shall terminate and cease to be of any further
force or effect on the earlier of (i) the tenth anniversary of the Effective
Date and (i) the first date on which both (A) the total number of shares of
Registrable Securities subject to this Agreement is less than 1,750,000 and
(B) no Initiating Holder (with the ML Holders being treated as a single
Initiating Holder) holds 500,000 or more shares (such numbers in clause (A) and
(B) to be adjusted, as appropriate, by the Company to reflect any stock splits,
reverse stock split, stock combinations or the like occurring after the
Effective Date); provided, however, that with respect to any particular party
to this Agreement, this Agreement shall terminate and cease to be of any
further force or effect on the first date which that party ceases to hold any
Registrable Securities.
(i) Construction. As used in this Agreement, unless the context otherwise
requires (i) references to "Sections" are to sections of this Agreement, (ii)
"hereof", "herein", "hereunder" and comparable terms refer to this Agreement in
its entirety and not to any particular part of this Agreement, (iii) the
singular includes the plural and the masculine, feminine and neutral gender
includes the other, (iv) "including" or "includes" shall be deemed to be
followed by the phrase "without
17
<PAGE> 18
limitation", and (v) headings of the various Sections and subsections are for
convenience of reference only and shall not be given any effect for purposes of
interpreting this Agreement.
(j) Termination of Stockholders Agreement. Subject to and automatically
upon the effectiveness of this Agreement, the Stockholders Agreement dated as
of October 26, 1989, as amended, among the Company, the Initiating Holders and
the other parties named therein shall terminate and be of no further force or
effect, except that the provisions of section 6.1.3 thereof [Demand
Registration Expenses], insofar as they relate to the registration of shares of
Common Stock in the Company's initial public offering, shall survive such
termination.
Witness the due execution hereof, as of this date first above written, on
behalf of the undersigned thereunto duly authorized.
EDUCATION MANAGEMENT MERRILL LYNCH CAPITAL
CORPORATION APPRECIATION PARTNERSHIP IV, L.P.
By:__________________________ By: Merrill Lynch LBO
Partners, No. I, L.P.,
General Partner
Title:________________________
By: Merrill Lynch Capital
Partners, Inc.,
General Partner
By:___________________________
Title:________________________
THE NORTHWESTERN MUTUAL ML EMPLOYEES
LIFE INSURANCE COMPANY LBO PARTNERSHIP NO. I, L.P.
By: ML Employees LBO
Managers, Inc.,
General Partner
By:__________________________ By:__________________________
Title:________________________ Title:________________________
NATIONAL UNION FIRE INSURANCE ML IBK POSITIONS, INC.
COMPANY OF PITTSBURGH, PA
18
<PAGE> 19
By:__________________________ By:__________________________
Title:________________________ Title:________________________
19
<PAGE> 20
MERRILL LYNCH CAPITAL MERRILL LYNCH KECALP L.P. 1986
CORPORATION
By: KECALP Inc., General Partner
By:__________________________ By:__________________________
Title:_______________________ Title:_______________________
ML OFFSHORE LBO
PARTNERSHIP NO. IV
By: Merrill Lynch LBO Partners,
No. I, L.P. Investment,
General Partner
By: Merrill Lynch Capital Partners, Inc.
General Partners
By:___________________________
Title:________________________
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:________________________
ROBERT B. KNUTSON, not in his
individual capacity, but solely
in his capacity as trustee of
the Revocable Trust Agreement
of Robert B. Knutson dated 3/4/93
By:__________________________
Title:_________________________
20
<PAGE> 21
- ----------------------------- -----------------------------
R. Margaret Barber C. Thomas Burkett
- ----------------------------- -----------------------------
Gary C. Grysiak Patrick T. DeCoursey
- ----------------------------- -----------------------------
Ronald G. Guida Miryam L. Drucker
- ----------------------------- -----------------------------
Dennis R. Harkins Alan R. Freedman
- ----------------------------- -----------------------------
Mark C. Hodges James R. Graft
- ----------------------------- -----------------------------
Albert Greenstone Steve R. Gregg, Jr.
21
<PAGE> 22
- ----------------------------- -----------------------------
Daniel J. Lafferty Robert S. Peterson
- ----------------------------- -----------------------------
Ellis Mathews Leslie E. Pritchard, III
- ----------------------------- -----------------------------
William J. Mazur George L. Pry
- ----------------------------- -----------------------------
Robert T. McDowell Saundra M. VanDyke
- -----------------------------
- -----------------------------
Harvey Sanford
[Option Holder]
22
<PAGE> 1
Exhibit 4.17
FIRST AMENDMENT TO
AMENDED AND RESTATED CREDIT AGREEMENT
AND JOINDER
Dated as of October 13, 1995
By and Among
EDUCATION MANAGEMENT CORPORATION
as the Borrower
THE BANKS PARTY THERETO
as the Banks
PNC BANK, NATIONAL ASSOCIATION
as the Issuing Bank
and
PNC BANK, NATIONAL ASSOCIATION
as the Agent
<PAGE> 2
FIRST AMENDMENT TO
AMENDED AND RESTATED CREDIT AGREEMENT AND JOINDER
THIS FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT AND JOINDER
is made as of the 13th day of October, 1995 (the "First Amendment") to that
certain Amended and Restated Credit Agreement dated as of March 16, 1995 (the
Amended and Restated Credit Agreement together with all exhibits and schedules
thereto, the "Original Agreement") (the Original Agreement as amended by the
First Amendment, together with all extensions, substitutions, replacements,
restatements and other amendments or modifications thereof or thereto, the
"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
First Amendment (individually a "Bank" and collectively the "Banks"), PNC BANK,
NATIONAL ASSOCIATION as the issuer of letters of credit under the 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 "Agent's Fee" is amended and restated in its entirety
to read as follows:
"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
<PAGE> 3
the Agent, as modified by that certain letter dated September 6, 1995
between the Borrower and the Agent's Affiliate.
2. The definition of "Applicable Base Rate Margin" is deleted.
3. The definition of "Art Institute" is amended and restated in its
entirety to read as follows:
"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 Phoenix, Inc., Art Institute of Seattle, Inc., The Colorado
Institute of Art, Inc. and any other Active Subsidiary operating an art
institute.
4. The definition of "Availability Period" is amended and restated in its
entirety to read as follows:
"Availability Period" means the period from and including the First
Amendment Closing Date to but excluding the Repayment Date.
5. The definition of "Commitment Amount" is amended and restated in its
entirety to read as follows:
"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 the
First Amendment 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.
6. The definition of "Commitment Percentage" is amended and restated in
its entirety to read as follows:
"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 the First
Amendment 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.
7. The definition of "Credit Facility" is amended and restated in its
entirety to read as follows:
-2-
<PAGE> 4
"Credit Facility" means the credit facility consisting of the
Revolving Credit Commitment in the aggregate amount of $70,000,000.00 and
the Term Loans in the original aggregate principal amount of
$9,205,650.00.
8. 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 (the resulting quotient rounded upward
to the nearest 1/16 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 "ask" eurodollar
rate evidenced by Telerate page 314 as quoted by Noonan, Astley & Pierce
(or an appropriate successor thereto or, if Noonan, Astley & Pierce or its
successor ceases to provide such quotes, a comparable replacement as
determined by the Agent) 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:
[Telerate page 314 as quoted by Noonan, Astley &]
[Pierce or appropriate successor as determined by]
Eurodollar Rate = [the Agent pursuant to item (i) of this definition]
---------------------------------------------------
[ 1.00 - Eurodollar Reserve Percentage ]
9. The definition of "Interest Period" is amended and restated in its
entirety to read as follows:
"Interest Period" means an individual Cost of Funds Interest Period
or Eurodollar Interest Period selected by the Borrower pursuant to the
terms and conditions hereof commencing on the borrowing date, conversion
date or renewal date of a Loan to which such period shall apply.
10. The definition of "Option" is amended and restated in its entirety to
read as follows:
"Option" means any of the Base Rate Option, the Eurodollar Rate
Option or the Cost of Funds Option.
11. The definition of "Repayment Date" is amended and restated in its
entirety to read as follows:
-3-
<PAGE> 5
"Repayment Date" means October 13, 2000, or such later date as is
ultimately determined in accordance with Subsection 2.2f hereof.
12. The definition of "Revolving Credit Bank" is amended and restated in
its entirety to read as follows:
"Revolving Credit Bank" means any financial institution listed on
the signature pages to the First Amendment 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.
13. The definition of "Revolving Credit Commitment" is amended and
restated in its entirety to read as follows:
"Revolving Credit Commitment" has the meaning assigned to it in
Subsection 2.2a, as the amount thereof may be reduced pursuant to
Subsections 2.2e and 2.2g hereof.
14. The definition of "Revolving Credit Note" is amended and restated in
its entirety to read as follows:
"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-1" to this Credit
Agreement, and all extensions, renewals, amendments, modifications,
restatements or replacements thereto or thereof.
15. A definition of "Applicable Cost of Funds Rate Margin" is added which
shall read as follows:
"Applicable Cost of Funds Rate Margin" shall have the meaning
ascribed to it in Subsection 2.4b hereof.
16. A definition of "Cost of Funds Interest Period" is added which shall
read as follows:
"Cost of Funds Interest Period" means any individual interest
period, applicable only to Revolving Credit Loans in an aggregate amount
not to exceed $25,000,000 at any one time outstanding, of twelve (12)
months selected by the Borrower pursuant to Section 2.4 hereof,
commencing on the borrowing date,
-4-
<PAGE> 6
conversion date or renewal date of a Cost of Funds Loan to which such
period shall apply.
17. A definition of "Cost of Funds Loan" is added which shall read as
follows:
"Cost of Funds Loan" means any of the Revolving Credit Loans bearing
interest at a rate determined on the basis of the Cost of Funds Rate.
18. A definition of "Cost of Funds Option" is added which shall read as
follows:
"Cost of Funds Option" means the interest rate option described in
item (iii) of Subsection 2.4b hereof.
19. A definition of "Cost of Funds Rate" is added which shall read as
follows:
"Cost of Funds Rate" means the Banks' fully absorbed cost of funds
(as accepted and agreed to by all of the Banks) which determination shall
be final and conclusive on the Borrower.
20. A definition of "Eurodollar Interest Period" is added which shall read
as follows:
"Eurodollar Interest Period" means any individual Interest Period of
(x) one (1), two (2), three (3), six (6) or nine (9) months (if available
to the Banks in the market) or (y) applicable only to Revolving Credit
Loans in an aggregate amount not to exceed $25,000,000, twelve (12) months
(if available to the Banks in the market), selected by the Borrower
pursuant to the terms and conditions of Section 2.4 hereof, commencing on
the borrowing date, conversion date or renewal date of a Eurodollar Rate
Loan to which such period shall apply.
21. A definition of "First Amendment" is added which shall read as
follows:
"First Amendment" means the First Amendment to Amended and Restated
Credit Agreement and Joinder dated as of October 13, 1995.
22. A definition of "First Amendment Closing Fee" is added which shall
read as follows:
-5-
<PAGE> 7
"First Amendment Closing Fee" means the fee described in Subsection
2.7b hereof.
23. A definition of "First Amendment Closing Date" is added which shall
read as follows:
"First Amendment Closing Date" means October 13, 1995 or such later
date as is mutually agreeable to the parties hereto.
24. A definition of "Interest Rate Protection Agreement" is added which
shall read as follows:
"Interest Rate Protection Agreement" means any interest rate swap
agreement, interest rate cap agreement, interest rate collar agreement,
interest rate insurance or any other agreement or arrangement designed to
provide protection against fluctuation in interest rates and satisfying
the terms and conditions of Section 5.15 hereof together with all
extensions, renewals, amendments, substitutions and replacements thereto
or thereof.
SECOND: Section 1.2 of the Original Agreement is hereby amended and
restated in its entirety to read as follows:
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 changes in
accounting principles or methods.
THIRD: Subsection 2.2a of the Original Agreement is hereby amended and
restated in its entirety to read as follows:
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 SEVENTY MILLION AND NO/100
DOLLARS ($70,000,000), as reduced in accordance with the provisions of
Subsections 2.2e and 2.2g hereof, 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 further 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.
-6-
<PAGE> 8
FOURTH: Subsection 2.2b of the Original Agreement is hereby amended and
restated in its entirety to read as follows:
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 of the First Amendment; 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 of the
First Amendment or on the most recent Assignment and Assumption Agreement
to which such Bank is a party.
FIFTH: Subsection 2.2c of the Original Agreement is hereby amended and
restated in its entirety to read as follows:
(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-1" 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 either Base Rate Loans or Cost of Funds Loans, on the same
day as the proposed Revolving Credit Disbursement and (B) in the case of
Eurodollar Rate Loans, at least two (2) 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 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
-7-
<PAGE> 9
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 2:00 P.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 2:00 P.M.
(Pittsburgh, Pennsylvania time) on the date of such Revolving Credit
Disbursement.
SIXTH: Subsection 2.2f of the Original Agreement is hereby amended and
restated in its entirety to read as follows:
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 October 13, 1998 and October 13, 1999, 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 fifteen (15) days prior to the
applicable date set forth in the first sentence of this Subsection 2.2f.
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.
SEVENTH: Subsection 2.2g of the Original Agreement is hereby amended and
restated in its entirety to read as follows:
2.2g Reducing 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.
-8-
<PAGE> 10
<TABLE>
<S> <C>
DATE OF REDUCTION REDUCED REVOLVING
CREDIT COMMITMENT
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.
EIGHTH: Item (i) of Subsection 2.3e of the Original Agreement is hereby
amended and restated in its entirety to read as follows:
(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>
<S> <C>
LEVERAGE RATIO APPLICABLE LETTER
OF CREDIT
PERCENTAGE
Greater than 2.00 to 1.0 1.50%
Less than or equal to 2.00 to 1.25%
1.0, but greater than 1.00 to
1.0
Less than or equal to 1.00 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,
-9-
<PAGE> 11
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.
NINTH: Subsection 2.4a of the Original Agreement is hereby amended and
restated in its entirety to read as follows:
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; (B) with respect to each Eurodollar Rate Loan (i) on
the last day of each Eurodollar Interest Period (provided, however, if
the Eurodollar 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 Eurodollar Interest Period and on the last day of such Eurodollar
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; and (C) with respect to
each Cost of Funds Loan (i) on the last day of every three (3) month
period during such Cost of Funds Interest Period and on the last day of
such Cost of Funds 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.
TENTH: Subsection 2.4b of the Original Agreement is hereby amended and
restated in its entirety to read as follows:
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 and Cost of Funds
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 Base Rate.
(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
-10-
<PAGE> 12
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.
<TABLE>
<CAPTION>
LEVERAGE RATIO APPLICABLE
EURODOLLAR RATE
MARGIN
<S> <C>
Greater than 2.00 to 1.0 1.50%
Less than or equal to 2.00 to 1.25%
1.0, but greater than 1.00 to 1.0
Less than or equal to 1.00 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. The foregoing
notwithstanding the Eurodollar Rate Option having a twelve (12) month
Eurodollar Interest Period shall be available only for Revolving Credit
Loans in an aggregate amount at any one time outstanding, when combined
with Revolving Credit Loans then bearing interest at the Cost of Funds
Option, not in excess of TWENTY-FIVE MILLION DOLLARS ($25,000,000).
(iii) Cost of Funds Option. Interest under the Cost of Funds Option
shall accrue at the Cost of Funds Rate (computed on 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 Cost of Funds Rate for each Interest Period plus (B)
the Applicable Cost of Funds Rate Margin as determined below:
<TABLE>
<CAPTION>
LEVERAGE RATIO APPLICABLE COST OF
FUNDS RATE MARGIN
<S> <C>
Greater than 2.00 to 1.0 1.50%
Less than or equal to 2.00 to 1.25%
1.0, but greater than 1.00 to 1.0
Less than or equal to 1.00 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 Cost of Funds 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
-11-
<PAGE> 13
thereof. The Cost of Funds Option shall be available only for Revolving
Credit Loans in an aggregate amount at any one time outstanding, when
combined with Revolving Credit Loans then bearing interest at the
Eurodollar Rate Option and having a Eurodollar Interest Period of twelve
(12) months, not in excess of TWENTY-FIVE MILLION DOLLARS ($25,000,000).
(iv) 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, (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 and (C) the principal amount of all
Cost of Funds 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 Cost of Funds Loans. At the end of each then current
Interest Period, such Eurodollar Rate Loans and Cost of Fund 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(iv).
ELEVENTH: Subsection 2.4e of the Original Agreement is hereby amended and
restated in its entirety to read as follows:
2.4e Interest Periods; Limitations on Elections. At any time when the
Borrower shall select, convert to or renew the Eurodollar Rate Option or
the Cost of Funds Option to apply to all or any Portion of the
outstanding Loans (as otherwise permitted pursuant to the terms hereof),
it may fix one or more Interest Periods to apply to Eurodollar Rate Loans
or Cost of Funds Loans. All the foregoing, however, is subject to the
following:
(i) the nine (9) month or twelve (12) month Eurodollar Interest
Period is subject to such Eurodollar Interest Period being available to
the Banks in the market;
(ii) any Eurodollar 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 Eurodollar Interest Period shall end on the next
preceding Business Day;
-12-
<PAGE> 14
(iii) any Eurodollar 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
Eurodollar Interest Period is to end shall end on the last Business Day
of such subsequent month;
(iv) the Eurodollar Rate Loan for each Eurodollar 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; provided, further that
any Eurodollar Rate Loan having a Eurodollar Interest Period of twelve
(12) months shall be in the aggregate principal amount of $5,000,000 and
each incremental unit in excess of $5,000,000 shall be $1,000,000 or an
integral multiple thereof;
(v) any Cost of Funds Interest Period which would otherwise end on a
day which is not a Business Day shall be extended to the next Business
Day;
(vi) the Cost of Funds Loan for each Cost of Funds Interest Period
shall be in the aggregate principal amount of $5,000,000 or more;
provided, however that each incremental unit in excess of $5,000,000
shall be $1,000,000 or an integral multiple thereof; and
(vii) 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.
TWELFTH: Subsection 2.4f of the Original Agreement is hereby amended and
restated in its entirety to read as follows:
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 or the Cost of
Funds Option shall expire as to each Eurodollar Rate Loan or Cost of
Funds 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 or Cost of Funds Loan, the Borrower (subject to Subsections 2.4b and
2.4e) may cause all or any part of the principal amount of such Loan to
be converted to and/or (in the case of Eurodollar Rate Loans or Cost of
Funds Loans) to be renewed under the Eurodollar Rate Option or the Cost
of Funds Option, as appropriate, 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 (x) not later than 10:00 a.m. (Pittsburgh,
Pennsylvania time) not less than two
-13-
<PAGE> 15
(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 (y)
not later than 10:00 a.m. (Pittsburgh, Pennsylvania time) on the proposed
effective date for conversion to or renewal of, either in whole or in part,
the Cost of Funds 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 or Cost
of Funds Loan.
At the expiration of each Interest Period, any part (including the
whole) of the principal amount of the corresponding Eurodollar Rate Loan
or Cost of Funds 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.
THIRTEENTH: Item (ii) of Section 2.5 of the Original Agreement is hereby
amended and restated in its entirety to read as follows:
(ii) Reimbursement for Cost 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 or Cost of Funds 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 Cost of Funds 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 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 Cost of Funds 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 or a Cost of Funds
-14-
<PAGE> 16
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 Cost of Funds 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 Cost of Funds Loan or any part thereof as determined by such Bank
in the exercise of its sole but reasonable discretion.
FOURTEENTH: Section 2.7 of the Original Agreement is hereby amended and
restated in its entirety to read as follows:
2.7 Closing Fees.
2.7a Initial Closing Fee. The Borrower agrees to pay to the Agent, for
the benefit of the Banks, on the Closing Date, a Closing Fee of
$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.
2.7b First Amendment Closing Fee. The Borrower agrees to pay to the
Agent, for the benefit of the Banks, on the First Amendment Closing Date,
a First Amendment Closing Fee of $150,000. The Agent shall distribute to
each Bank, which was a party to the Credit Agreement as of March 16,
1995, a portion of such First Amendment Closing Fee in an amount equal to
fifteen one-hundredths of one percent (15/100 of 1%) of such Bank's
Revolving Credit Commitment as of March 16, 1995. The Agent shall
distribute to each Bank which either increases its Revolving Credit
Commitment or becomes a Bank as of the First Amendment Closing Date a
portion of such First Amendment Closing Fee in equal to thirty-seven and
one-half one-hundredths of one percent (37.5/100 of 1%) of each Bank's
new or increased portion of its Revolving Credit Commitment.
FIFTEENTH: 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
-15-
<PAGE> 17
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 Revolving Credit Loans for
this purpose and (d) for financing of loans to the ESOP.
SIXTEENTH: Section 5.15 shall be added which shall read in its entirety
as follows:
5.15 Interest Rate Protection. Within thirty (30) days of the First
Amendment Closing Date, the Borrower shall enter into, and maintain in
accordance with the terms of this Section 5.15, and pay and perform as
and when due and payable or required to be performed, all amounts and all
obligations in respect of Interest Rate Protection Agreements which shall
hedge the interest cost to the Borrower with respect to an amount of not
less than FIFTEEN MILLION DOLLARS ($15,000,000) of the Revolving Credit
Loans and which shall protect against three month London interbank
offered rate in excess of 8.75% per annum. Such Interest Rate Protection
Agreements (i) shall provide interest rate protection for three years
from the date of such Interest Rate Protection Agreements, (ii) must be
in form and substance satisfactory to the Agent in all respects,
including but not limited to intercreditor issues, (iii) shall be
entered into with counterparties reasonably satisfactory to the Agent,
(iv) must provide for the calculation of the counterparties' credit
exposure in a reasonable and customary manner and (v) shall conform to
then current International Swap Dealers Association standards. All
counterparty credit exposure of the Borrower to the Agent or any Bank
pursuant to any Interest Rate Protection Agreement (i) shall be Bank
Indebtedness, (ii) shall rank parri passu with all other Bank
Indebtedness and (iii) shall be secured by the several Security
Documents.
SEVENTEENTH: 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:
(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
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<PAGE> 18
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).
EIGHTEENTH: Section 6.2 of the Original Agreement is hereby amended and
restated in its entirety to read as follows:
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>
June 30, 1995 through September 30, 1996 inclusive 3.5 to 1.0
December 31, 1996 and thereafter 4.0 to 1.0
</TABLE>
NINETEENTH: Section 6.4 of the Original Agreement is hereby amended and
restated in its entirety to read as follows:
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>
June 30, 1995 through December 31, 1996 inclusive 2.75 x 1.0
March 31, 1997 and thereafter 2.50 x 1.0
</TABLE>
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<PAGE> 19
TWENTIETH: Item (ii) of Subsection 6.8a of the Original Credit Agreement
is hereby amended and restated to read in its entirety:
(ii) Indebtedness for Borrowed Money outstanding pursuant to the
Senior Subordinated Note Purchase Agreements;
TWENTY-FIRST: Item (i) of Section 6.15 of the Original Agreement is
hereby amended and restated in its entirety to read as follows:
(i) except for a complete prepayment of the Senior Subordinated Debt
with the proceeds of Revolving Credit Loans on the First Amendment
Closing Date, 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 (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;
TWENTY-SECOND: Items (ii) and (iii) of Subsection 10.8b of the Original
Agreement are hereby amended and restated in their entirety to read as follows:
(ii) Each such assignment must be in a minimum amount of $5,000,000,
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 $5,000,000 may sell Participations;
ARTICLE II
JOINDER
By the execution and delivery of this First Amendment, Integra Bank hereby
becomes a Bank party to the Agreement effective as of the First Amendment
Closing Date.
-18-
<PAGE> 20
ARTICLE III
CONDITIONS PRECEDENT
This First 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) First Amendment. Receipt by the Agent on behalf of the Banks and the
Issuing Bank of duly executed counterparts of this First Amendment from the
Borrower and the Banks and the Issuing Bank.
(b) Notes. Receipt by the Agent on behalf of each Bank of a fully
executed amended and restated Revolving Credit Note.
(c) Amendments to Security Documents. Receipt by the Agent on behalf of
the Banks of amendments in form and substance satisfactory to the Agent to each
Security Document, including without limitation an amendment and supplement to
the Subsidiary Pledge Agreement of AII to make subject thereto the stock of Art
Institute of Phoenix, Inc.
(d) 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 First 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).
(e) First Amendment Closing Fee. Receipt by the Agent of the First
Amendment Closing Fee.
(f) Notification of Holders of Senior Subordinated Notes. Receipt of a
true copy of each notice to a holder of a Senior Subordinated Note that the
outstanding principal balance thereof, interest due and payable with respect
thereto and, if applicable, the prepayment premium shall be paid in accordance
with the terms of the Senior Subordinated Notes on the First Amendment Closing
Date.
(g) Management Letters. Letters addressed to the Agent on behalf of the
Banks from the management of Borrower relating to (i) the change in fiscal year
1996 projections and (ii) restatement of goodwill, which letters must be in
form and substance satisfactory to the Agent and the Banks.
-19-
<PAGE> 21
(h) Payment in Full of Senior Subordinated Debt. Payment in full of the
Senior Subordinated Debt on or before October 13, 1995.
(i) Corporate Documents of the Borrower. Receipt by the Agent on behalf
of the Banks of (i) a copy, duly certified as of the First Amendment Closing
Date 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 First Amendment, the amended and restated Revolving Credit Notes, and the
payment in full of the Senior Subordinated Notes and (ii) an incumbency
certificate of the Borrower dated as of the First Amendment Closing Date.
(j) Corporate Documents of AII, NCG and EMC Management Services, Inc.
Receipt by the Agent on behalf of the Banks of (i) a copy duly certified as of
the First Amendment Closing Date by the secretary or assistant secretary of
AII, NCG or EMC Management Services, Inc., as appropriate, of the resolution of
AII's, NCG's or EMC Management Services, Inc.'s Board of Directors authorizing
the amendment of each Security Document executed by it as set forth herein and
(ii) an incumbency certificate of AII, NCG and EMC Management Services, Inc.
(k) 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, in form and substance satisfactory to the
Agent and the Banks.
(l) Proceedings Satisfactory. Receipt by the Agent on behalf of the Banks
of evidence that all proceedings taken in connection with this First 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 IV
MISCELLANEOUS
FIRST: Except as expressly amended by this First Amendment, the Original
Agreement and each and every representation, warranty, covenant, term and
condition contained therein is specifically ratified and confirmed.
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<PAGE> 22
SECOND: 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.
THIRD: This First 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.
FOURTH: Nothing in this First Amendment shall be deemed or construed to
be a waiver, release or limitation upon the Agent's or the Bank's exercise of
any of their respective rights and remedies under the Original Agreement or the
other Loan Documents, 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.
FIFTH: This First 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.
SIXTH: This First 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> 23
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> 24
IN WITNESS WHEREOF, intending to be legally bound hereby, the undersigned
Bank has caused this First Amendment to Amended and Restated Credit Agreement
and Joinder 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
</TABLE>
<TABLE>
<S> <C> <C>
Commitment Percentage: 42.8571%
By
-----------------------------------------
Term Loan Amount: Name:
-----------------------------------------
$2,602,825.00 Title:
-----------------------------------------
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: C. David Cook
Senior Vice President
Telephone: (412) 762-2217
Telecopier: (412) 762-4039
</TABLE>
Address for Eurodollar Rate Loan funding if different from above:
________________________________
________________________________
________________________________
Telephone: _____________________
Telecopier: ____________________
-23-
<PAGE> 25
IN WITNESS WHEREOF, intending to be legally bound hereby, the undersigned
Bank has caused this First Amendment to Amended and Restated Credit Agreement
and Joinder 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 in its capacity as a Bank
Commitment Percentage: 21.4286%
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: ____________________
-24-
<PAGE> 26
IN WITNESS WHEREOF, intending to be legally bound hereby, the undersigned
Bank has caused this First Amendment to Amended and Restated Credit Agreement
and Joinder 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,
$15,000,000 in its capacity as a Bank
</TABLE>
<TABLE>
<S> <C> <C>
Commitment Percentage: 21.4286%
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 Zalewski Attention: Terri Zalewski
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: 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:_____________________
-25-
<PAGE> 27
IN WITNESS WHEREOF, intending to be legally bound hereby, the undersigned
Bank has caused this First Amendment to Amended and Restated Credit Agreement
and Joinder 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: INTEGRA BANK,
$10,000,000 in its capacity as a Bank
</TABLE>
Commitment Percentage: 14.2857%
By __________________________
Name: ________________________
Title: ______________________
Addresses for notice purposes:
<TABLE>
<S> <C>
If by United States Mail: If by other means:
Integra Bank Integra Bank
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: ____________________
-26-
<PAGE> 1
EXHIBIT 4.19
EMC HOLDINGS, INC.
13.25% Senior Subordinated Notes
due December 30, 1999
Common Stock Purchase Warrants
NOTE AND WARRANT PURCHASE AGREEMENT
Dated as of October 25, 1989
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section Page
<S> <C> <C>
1. Authorization of Notes and Warrants.............................................................. 1
2. Sale and Purchase of Notes and Warrants.......................................................... 1
3. Closing ............................................................................... 2
4. Conditions to Closing............................................................................ 3
4.1. Representations and Warranties................................................. 3
4.2. Performance; No Default........................................................ 3
4.3. Compliance Certificate......................................................... 3
4.4. Opinions of Counsel............................................................ 4
4.5. Bank Credit Agreement.......................................................... 4
4.6. Stockholders Agreement......................................................... 4
4.7. Pledge Agreements.............................................................. 4
4.8. Intercreditor Agreement........................................................ 5
4.9. Recapitalization............................................................... 5
4.10. Legal Investment............................................................... 6
4.11. No Adverse U.S. Legislation, Action
or Decision, etc............................................................. 7
4.12. Compliance with Securities Laws................................................ 7
4.13. No Actions Pending............................................................. 7
4.14. Proceedings and Documents...................................................... 7
4.15. Structuring Fee................................................................ 7
5. Representations and Warranties................................................................... 8
5.1. Organization, etc.............................................................. 8
5.2. Subsidiaries................................................................... 8
5.3. Qualification.................................................................. 8
5.4. Business; Financial Statements................................................. 9
5.5. Changes, etc................................................................... 9
5.6. Capital Stock and Related Matters.............................................. 10
5.7. Tax Returns and Payments....................................................... 11
5.8. Short-Term Borrowing and Funded Debt........................................... 12
5.9. Title to Properties............................................................ 12
5.10. Litigation..................................................................... 12
5.11. Compliance with Other Instruments, etc......................................... 13
5.12. Governmental Consents, etc..................................................... 14
5.13. Patents, Trademarks, Authorizations, etc....................................... 14
5.14. Offering of Notes and Warrants................................................. 14
5.15. Representations in the Bank
Credit Agreement............................................................. 14
5.16. Certain Fees................................................................... 15
5.17. Federal Reserve Regulations.................................................... 15
5.18. Investment Company............................................................. 15
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
Section Page
<S> <C> <C> <C>
5.19. Public Utility Holding Company Act............................................. 15
5.20. Federal Power Act.............................................................. 16
5.21. Interstate Commerce Act........................................................ 16
5.22. Compliance with ERISA.......................................................... 16
5.23. Foreign Assets Control Regulations, etc........................................ 18
5.24. Use of Proceeds................................................................ 18
5.25. Disclosure..................................................................... 18
6. Purchase for Investment; Source of Funds......................................................... 19
6.1. Purchase for Investment........................................................ 19
6.2. Source of Funds................................................................ 19
7. Financial and Reporting Covenants
Applicable to the Notes........................................................................ 19
7.1. Financial Statements and Reports............................................... 19
7.2. Inspection; Confidentiality.................................................... 24
8. Business Covenants Applicable to the Notes....................................................... 25
8.1. Funded Debt.................................................................... 25
8.2. Liens, etc..................................................................... 28
8.3. Restricted Payments............................................................ 31
8.4. Leverage Ratio; Interest Coverage
Ratio; Fixed Charge Coverage Ratio........................................... 32
8.5. Operating and Capital Leases................................................... 34
8.6. Corporate Existence, etc....................................................... 34
8.7. Subsidiary Stock and Indebtedness.............................................. 35
8.8. Consolidation, Merger, Sale of Assets, etc..................................... 36
8.9. Loans, Advances and Investments................................................ 40
8.10. Transactions with Affiliates................................................... 41
8.11. Payment of Taxes and Claims;
Tax Consolidation............................................................ 41
8.12 Compliance with ERISA.......................................................... 42
8.13. Compliance with Laws, etc...................................................... 44
8.14. Maintenance of Properties; Insurance........................................... 44
8.15. Amendment of Operative Agreements.............................................. 44
8.16. Maintenance of ESOP............................................................ 45
8.17. Additional Subsidiary Pledge Agreements........................................ 45
9. Prepayment of Notes.............................................................................. 45
9.1. Required Scheduled Prepayments................................................. 45
9.2. Optional Prepayments Without Premium........................................... 46
9.3. Optional Prepayment of Notes with Premium...................................... 46
9.4. Required Prepayment Upon Change
of Control With Premium...................................................... 47
9.5. Notice of Certain Prepayments;
</TABLE>
ii
<PAGE> 4
<TABLE>
<CAPTION>
Section Page
<S> <C> <C>
Officers' Certificate........................................................ 47
9.6. Allocation of Partial Prepayments.............................................. 48
9.7. Maturity; Surrender............................................................ 48
9.8. Acquisition of Notes........................................................... 48
10. Subordination of Notes........................................................................... 49
10.1. General........................................................................ 49
10.2. Subordinated and Superior Debt................................................. 49
10.3. Default in Respect of Superior Debt............................................ 49
10.4. Insolvency, etc................................................................ 51
10.5. Turnover of Payments........................................................... 52
10.6. No Prejudice or Impairment..................................................... 53
10.7. Payment of Superior Debt, Subrogation, etc..................................... 53
10.8. Miscellaneous.................................................................. 53
11. Registration, Transfer and Substitution of Notes................................................. 54
11.1. Note Register; Ownership of Notes.............................................. 54
11.2. Transfer and Exchange of Notes................................................. 54
11.3. Replacement of Notes........................................................... 55
12. Payments on Notes................................................................................ 55
12.1. Place of Payment............................................................... 55
12.2. Home Office Payment............................................................ 55
13. Events of Default; Acceleration.................................................................. 56
14. Remedies on Default, etc......................................................................... 59
15. Definitions ............................................................................... 60
15.1. Certain Defined Terms.......................................................... 60
15.2. Accounting Terms............................................................... 76
16. Expenses, etc. ............................................................................... 76
17. Survival of Representations and Warranties....................................................... 77
18. Amendments and Waivers........................................................................... 77
19. Indemnification ............................................................................... 78
20. Notices, etc. ............................................................................... 79
21. Specific Performance............................................................................. 80
22. Miscellaneous ............................................................................... 80
</TABLE>
iii
<PAGE> 5
<TABLE>
<CAPTION>
Section Page
Schedule of Purchasers
<S> <C>
EXHIBIT A Form of Senior Subordinated Note
EXHIBIT B Form of Warrant
EXHIBIT C-1 Form of opinion of Shearman & Sterling
EXHIBIT C-2 Form of Opinion of Eckert Seamans Cherin
& Mellott
EXHIBIT C-3 Form of Opinion of Special Counsel for
the Purchasers
EXHIBIT D Form of Stockholders Agreement
EXHIBIT E-1 Form of Pledge Agreement
EXHIBIT E-2 Form of Subsidiary Pledge Agreement
EXHIBIT F Form of Intercreditor Agreement
EXHIBIT G Pro Forma Capitalization Table
EXHIBIT H List of Subsidiaries
EXHIBIT I Litigation
</TABLE>
iv
<PAGE> 6
EMC HOLDINGS, INC.
300 Sixth Avenue - Suite 800
Pittsburgh, PA 15222
Dated as of October 25, 1989
TO EACH OF THE PURCHASERS
LISTED IN THE ATTACHED
SCHEDULE OF PURCHASERS
Dear Sirs:
EMC HOLDINGS, INC., a Delaware corporation (the "Company"),
hereby agrees with you as follows:
1. Authorization of Notes and Warrants. The Company will
authorize the issue and sale of (a) $25,000,000 aggregate principal amount of
its 13.25% Senior Subordinated Notes due December 30, 1999 (the "Notes", such
term to include any such notes issued in substitution therefor), to be
substantially in the form set forth in Exhibit A, with such changes therefrom,
if any, as may be approved by you and the Company, and (b) Common Stock Purchase
Warrants (the "Warrants", such term to include any such warrants issued in
substitution therefor), to be substantially in the form set forth in Exhibit B,
for the purchase of an aggregate of 5,956,079 shares of the Company's Class B
Common Stock, par value $.0001 per share (the "Class B Common Stock"), at a
purchase price of $0.0001 (one hundredth of one cent) per share, subject to
adjustment, at any time or from time to time prior to 3:00 P.M., New York City
time, on October 26, 1999 (or such later date as may be determined pursuant to
the Warrants). References to an "Exhibit" are, unless otherwise specified, to
one of the exhibits attached to this Agreement and references to a "section"
are, unless otherwise specified, to one of the sections of this Agreement.
2. Sale and Purchase of Notes and Warrants. Subject to the
terms and conditions of this Agreement, the Company will issue and sell to you
and you will purchase from the Company, at the Closing provided for in section
3, (a) Notes in the principal amount specified opposite your name in the
schedule of purchasers at the end hereof (the "Schedule of Purchasers") at the
purchase price of 100% of the principal amount of such Notes and (b) Warrants
for the purchase of the number of shares of Common Stock specified opposite
your name in the Schedule of Purchasers
<PAGE> 7
at the purchase price for such Warrants of $1.29 per share of Common Stock
initially issuable upon exercise thereof. Contemporaneously herewith the Company
is entering into a separate Note and Warrant Purchase Agreement (the "Other
Agreement") identical to this Agreement with the other purchaser (the "Other
Purchaser") named in the Schedule of Purchasers, providing for the sale to the
Other Purchaser of the Notes and Warrants specified opposite its name in the
Schedule of Purchasers. You and the Other Purchaser are herein referred to
collectively as the "Purchasers" and individually as a "Purchaser". You and the
Company agree (as contemplated by proposed Treasury Regulations section
1.1273-2(d)(2)(iv)) for U.S. federal tax purposes that (i)(a) the present value
of all payments under each of the Notes, using the discount rate based on yields
which you and the Company agree are the original yields of comparable debt
instruments not issued as part of an investment unit (which rate is not less
than the applicable federal rate on the date the Notes are issued), is equal to
100% of the principal amount of each such Note and (b) the aggregate "issue
price" under section 1273(b) of the Code of all of the Notes to be issued to you
hereunder is the original principal amount of such Notes; and (ii) the aggregate
purchase price under section 1273(b) of the Code of all of the Warrants to be
issued to you hereunder is the purchase price to be paid by you for such
Warrants. You and the Company agree to use the foregoing for all U.S. federal
income tax purposes with respect to this transaction.
3. Closing. The sales of the Notes and the Warrants to be
purchased by you and the Other Purchaser shall take place at a closing (the
"Closing") to be held at the offices of Shearman & Sterling, 599 Lexington
Avenue, New York, New York 10022 at 10:00 A.M., New York time, on October 26,
1989 or on such other Business Day thereafter as may be agreed upon by the
Company and you and the Other Purchaser (such date the "Closing Date"). At the
Closing, the Company will deliver to you (a) the Notes to be purchased by you,
in the form of a single Note (or such greater number of Notes as you may request
in denominations of at least $1,000,000), dated the Closing Date and registered
in your name (or in the name of your nominee), and (b) the Warrants to be
purchased by you, in the form of a single Warrant (or such greater number of
Warrants as you may request in denominations of at least 500,000 shares per
Warrant), dated the Closing Date and registered in your name (or in the name of
your nominee), against delivery by you to the Company of immediately available
funds in the amount of the aggregate purchase price therefor. If at the Closing
the Company shall fail to tender the Notes and Warrants to be purchased by you
as provided above in this section 3, or any of the conditions specified in
section 4 shall not have been fulfilled to your satisfaction, you shall, at your
option, be relieved of all further obligations under this Agreement, without
2
<PAGE> 8
thereby waiving any other rights you may have by reason of such failure or such
nonfulfillment.
4. Conditions to Closing. Your obligation to purchase and pay
for the Notes and Warrants to be sold to you at the Closing is subject to the
fulfillment to your satisfaction, prior to or at the Closing, of the following
conditions:
4.1. Representations and Warranties. The representations and
warranties of the Company contained in this Agreement and those made in any
Officers' Certificate delivered in connection with the transactions contemplated
by this Agreement shall be correct when made and at the time of the Closing,
except as affected by the consummation of such transactions.
4.2. Performance: No Default. The Company shall have performed
and complied with all agreements and conditions contained in this Agreement
required to be performed or complied with by it prior to or at the Closing. At
the time of the Closing, no Event of Default or Potential Event of Default shall
have occurred and be continuing.
4.3. Compliance Certificate. The Company shall have delivered
to you an Officers' Certificate, dated the Closing Date, certifying that the
conditions specified in sections 4.1 and 4.2 have been fulfilled and
demonstrating that, after giving effect to the issuance of all of the Notes and
the Warrants, the Company will be in compliance with the most stringent
limitations on the incurrence or maintenance of Funded Debt contained in any
instrument or agreement applicable to or binding on the Company or any
Subsidiary or certifying that a complete and correct copy of a waiver or waivers
of compliance with such limitations is attached to such Officers' Certificate.
4.4. Opinions of Counsel. You shall have received favorable
opinions, dated the Closing Date, (a) from Shearman & Sterling, special counsel
to the Company, substantially in the form set forth in Exhibit C-1, and covering
such other matters incident to the transactions contemplated by this Agreement
as you or your special counsel may reasonably request, (b) from Eckert Seamans
Cherin & Mellott, counsel to the Company, substantially in the form set forth in
Exhibit C-2, and covering such other matters incident to the transactions
contemplated by this Agreement as you or your special counsel may reasonably
request, (c) from counsel to one or more of the Merrill Companies, covering such
matters incident to the transactions contemplated by this Agreement as you or
your special counsel may reasonably request, and (d) from Debevoise & Plimpton,
your special counsel in connection with such transactions, substantially in the
form set forth in Exhibit C-3, and covering
3
<PAGE> 9
such matters incident to such transactions as you may reasonably request.
4.5. Bank Credit Agreement. The Bank Credit Agreement shall
have been duly executed and delivered by the Company, the Banks and the Agent
and shall be in full force and effect, and no term thereof shall have been
amended, modified or waived except with your prior written consent. You and your
special counsel shall have received complete and correct copies of the Bank
Credit Agreement as executed, together with all exhibits and schedules thereto,
and of each closing document required to be delivered or filed in connection
therewith (including, without limitation, pursuant to Article VII thereof). At
the time of the Closing, the Company shall have received the proceeds of the
Term Loan in the principal amount of $36,175,000.
4.6. Stockholders Agreement. A Stockholders Agreement
substantially in the form of Exhibit D (the "Stockholders Agreement") shall have
been duly executed and delivered by the Company, the ESOP, each of the
Purchasers, each of the Persons listed in Schedule 1 thereto and each of the
Merrill Companies and shall be in full force and effect.
4.7. Pledge Agreements. A pledge agreement substantially in
the form of Exhibit E-1 (the "Pledge Agreement") shall have been duly executed
and delivered by the Company, and a pledge agreement substantially in the form
of Exhibit E-2 shall have been duly executed and delivered by each of EMC and
NCG (each individually a "Subsidiary Pledge Agreement" and collectively the
"Subsidiary Pledge Agreements", and, together with the Pledge Agreement, the
"Pledge Agreements"), and the Pledge Agreements shall be in full force and
effect and shall create valid and, assuming possession by the holders of the
Notes or their designated agent of the securities pledged pursuant to such
Pledge Agreements, perfected second security interests in all of the outstanding
capital stock of EMC, NCG and the other Subsidiaries for the benefit of the
holders of the Notes, subject only to the Lien of the First Pledge Agreements.
4.8. Intercreditor Agreement. An Intercreditor Agreement
substantially in the form of Exhibit F (the "Intercreditor Agreement") shall
have been executed and delivered by each of the Banks, the Agent and each of the
Purchasers.
4.9. Recapitalization. The following transactions shall have
been consummated on the Closing Date: The Company shall have contributed to the
ESOP 50,000 shares of its newly created Series A 10.19% Convertible Preferred
Stock, without par value (the "Preferred Stock"), convertible into 771,854
shares of Class A Common Stock and having a fair market value of $5,000,000 as
determined by the ESOP's financial advisor. The proceeds of the Term Loan under
the Bank Credit Agreement shall have been
4
<PAGE> 10
loaned by the Company to the ESOP, and the ESOP shall have applied the proceeds
of such loan to the purchases of 3,685,604 shares of Class A Common Stock from
existing stockholders of the Company for a purchase price of $19,100,000 and
170,750 shares of the Preferred Stock (convertible into 2,635,882 shares of
Class A Common Stock) from the Company for a purchase price of $17,075,000.
Certain existing stockholders of the Company shall have exchanged 2,282,696
shares of Class A Common Stock for an equal number of shares of Class C Common
Stock. The Company shall have redeemed or repurchased from certain of its
employees (a) options to purchase in the aggregate 421,341 shares of Class B
Common Stock for a purchase price of $793,100 and (b) 336,943 shares of Class A
Common Stock for a purchase price of $1,746,148. Options to acquire an
additional 28,659 shares of Class A Common Stock shall have been adjusted into
options to acquire an equal number of shares of Class C Common Stock and shall
have been exercised at the exercise price of $3.30 per share of Class C Common
Stock. The Company shall have repurchased from Merrill Lynch Interfunding Inc.
an option to acquire 2,121,176 shares of Class B Common Stock. Simultaneously
with the Closing (but at a stage subsequent to the issuance of the Notes and the
Warrants), EMC Recapitalization, Inc. will merge into the Company, with the
Company being the surviving corporation, and in connection with such merger the
Company will be recapitalized as follows: (i) the outstanding Class B Common
Stock will be converted into $26,576,725 in cash and 2,355,920 shares of Class B
Common Stock, (ii) the outstanding shares of Class C Common Stock will be
converted into $2,978,197 in cash and 6,977,056 shares of Class B Common Stock,
and (iii) the Class A Common Stock, the Preferred Stock and the Warrants will
remain issued and outstanding without any adjustment, modification or alteration
of the terms thereof. Immediately following the merger and recapitalization of
the Company described in the preceding sentence, Merrill Lynch Interfunding Inc.
will purchase 874,457 shares of Class B Common Stock from the Company for a
purchase price of $1,128,000. All of the documents effecting such transactions
shall be satisfactory to you in substance and form, and you shall have received
true and correct copies thereof. The recapitalization of the Company after
giving effect to all of such transactions and the issue and sale of the Notes
and Warrants shall be as set forth in the pro forma capitalization table set
forth in Exhibit G.
4.10. Legal Investment. On the Closing Date, your purchase of
the Notes and the Warrants (a) shall not be prohibited by any applicable law or
governmental regulation (including, without limitation, Regulation G, T, U or X
of the Board of Governors of the Federal Reserve System), (b) shall not subject
you to any penalty or, in your reasonable judgment, other onerous condition by
reason of any change after the date of this Agreement in any applicable law or
governmental regulation, and (c) shall be permitted by laws and regulations of
the
5
<PAGE> 11
jurisdictions to which you are subject without, in the case of the Notes,
recourse to provisions (such as section 1405(a)(8) of the New York Insurance
Law) permitting limited investments by life insurance companies in securities
not otherwise legally eligible for investment.
4.11. No Adverse U.S. Legislation, Action or Decision, etc. No
legislation shall have been enacted by either house of Congress, no other action
shall have been taken by any United States governmental authority, whether by
order, regulation, rule, ruling or otherwise, and no decision shall have been
rendered by any court of competent jurisdiction in the United States, which
would materially and adversely affect the Notes or the Warrants being purchased
by you hereunder as an investment.
4.12. Compliance with Securities Laws. The offering and sale
of the Notes and the Warrants to be issued at the Closing and all of
transactions effected at the time of the Closing as described in section 4.8
shall have complied with all applicable requirements of federal and state
securities laws and you shall have received evidence thereof reasonably
satisfactory to you.
4.13. No Actions Pending. There shall be no suit, action,
investigation, inquiry or other proceeding by any governmental body or any other
Person or any other legal or administrative proceeding pending or threatened
which (a) seeks to enjoin or otherwise prevent the consummation of, or to
recover any damages or obtain relief as a result of, any transaction
contemplated by this Agreement, or (b) is related to this Agreement and would,
in your reasonable opinion, have a reasonable likelihood of having a materially
adverse effect on either of the parties hereto or any transaction contemplated
hereby.
4.14. Proceedings and Documents. All corporate and other
proceedings in connection with the transactions contemplated by this Agreement
and all documents and instruments incident to such transactions shall be
satisfactory to you and your special counsel, and you and your special counsel
shall have received all such counterpart originals or certified or other copies
of such documents as you or they may reasonably request.
4.15. Structuring Fee. At the Closing the Company shall have
paid to you (or to such other Person designated by you) by wire transfer of
immediately available funds for credit to your account specified in the Schedule
of Purchasers or such other account as may be designated prior to the Closing a
structuring fee in the amount of 0.5% of the aggregate principal amount of the
Notes purchased by you at the Closing.
6
<PAGE> 12
5. Representations and Warranties. The Company represents and
warrants that:
5.1. Organization, etc. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, and has all requisite corporate power and authority to own and operate
its properties, to carry on its business as now conducted and as proposed to be
conducted, to enter into this Agreement and the Operative Agreements to which it
is a party, to issue and sell the Notes and Warrants and otherwise to carry out
the transactions contemplated by this Agreement and the Operative Agreements to
which it is a party.
5.2. Subsidiaries. Exhibit H correctly lists as to each
Subsidiary on the date of this Agreement (a) its name, (b) the jurisdiction of
its incorporation, (c) the percentage of its issued and outstanding shares owned
by the Company or another Subsidiary (specifying such other Subsidiary), and (d)
the date through which the federal income tax liabilities of such Subsidiary
have been finally determined by the Internal Revenue Service and satisfied, or
through which the time for audit has expired. Each Subsidiary is a corporation
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation and has all requisite corporate power and
authority to own and operate its properties, to carry on its business as now
conducted and as proposed to be conducted and, in the case of EMC, to enter into
the Operative Agreements to which it is a party and otherwise to carry out the
transactions contemplated by such Operative Agreements. All the outstanding
shares of capital stock of each Subsidiary are validly issued, fully paid and
nonassessable, and all such shares indicated in Exhibit H as owned by the
Company or by any other Subsidiary are so owned beneficially and of record by
the Company or by such other Subsidiary free and clear of any Lien other than
the Lien of the First Pledge Agreements and the Second Pledge Agreements.
5.3. Qualification. Each of the Company and its Subsidiaries
is duly qualified and in good standing as a foreign corporation authorized to do
business in each jurisdiction (other than the jurisdiction of its incorporation)
in which the nature of its activities or the character of the properties it owns
or leases makes such qualification necessary and in which the failure so to
qualify would have a materially adverse effect on the Company and its
Subsidiaries, taken as a whole.
5.4. Business; Financial Statements. The Company has delivered
to you complete and correct copies of (a) a confidential memorandum entitled
"Financing Proposal - Leveraged Recapitalization of EMC Holdings, Inc./Education
Management Corporation," dated June 1989, prepared by the Company and Merrill
Lynch Capital Partners, Inc. for use in connection with
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the leveraged recapitalization of EMC Holdings, Inc., comprised in part of the
Company's private placement of the Notes and the Warrants (the "Memorandum"),
(b) the audited consolidated balance sheets of the Company and its Subsidiaries
as at June 30 in each of the years 1987 and 1988 and the related statements of
income, stockholders' investment and changes in financial position for the
fiscal years then ended and the audited consolidated balance sheet of the
Company and its Subsidiaries as at June 30, 1989 and the related statements of
income, stockholders' investment and cash flows for the fiscal year then ended
(the "Audited Financial Statements"), accompanied in each case by the opinion
thereon of Arthur Andersen & Co., independent public accountants, (c) the
audited historical consolidated balance sheets of the Company and its
Subsidiaries as at June 30 in each of the years 1984 through 1987 and related
consolidated statements of income, stockholders' investment and changes in
financial position for the fiscal years then ended (the "Historical Financial
Statements", and, together with the Audited Financial Statements, the "Financial
Statements"), and (d) projected yearly balance sheets and statements of income
and cash flow for the fiscal years ending on June 30 in the years 1990 through
1999 (the "Projections"). The Financial Statements have been prepared in
accordance with GAAP applied on a consistent basis throughout the periods
specified (except as otherwise specifically disclosed therein) and present
fairly the financial position of the Company and its consolidated Subsidiaries
as of the respective dates specified and the results of their operations and
changes in financial position for the respective periods specified. The
Projections were prepared in good faith on the basis of assumptions stated
therein, which assumptions were fair in the light of conditions existing at the
time of delivery of such Projections.
5.5. Changes, etc. Since June 30, 1989, (a) there has been no
change in the assets, liabilities or financial condition of the Company or any
of its Subsidiaries, other than changes in the ordinary course of business which
have not been, either in any case or in the aggregate, materially adverse to the
Company and its Subsidiaries, taken as a whole, (b) neither the business,
operations or affairs nor any of the properties or assets of the Company or any
of its Subsidiaries have been affected by any occurrence or development (whether
or not insured against) which has been, either in any case or in the aggregate,
materially adverse to the Company and its Subsidiaries, taken as a whole, and
(c) neither the Company nor any Subsidiary has directly or indirectly declared,
ordered, paid, made or set apart any sum or property for any Restricted Payment
or agreed to do so (other than the Restricted Payments to be made on the Closing
Date as described in section 4.9.
5.6. Capital Stock and Related Matters. At the time of the
Closing and after giving effect to the other transactions contemplated by
section 4.9, the authorized capital stock of the
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Company will consist of (a) 25,000,000 shares of Class A Common Stock, of which
(i) 3,685,604 shares will be issued and outstanding and (ii) 3,407,736 shares
will be reserved for issuance upon conversion of the Preferred Stock, (b)
17,000,000 shares of Class B Common Stock, of which (i) 10,207,433 shares will
be issued and outstanding and (ii) 5,956,079 shares will be reserved for
issuance upon exercise of the Warrants, and (c) 1,000,000 shares of blank check
preferred stock, of which 220,750 shares will be issued and outstanding in the
form of the Preferred Stock. At the time of the sale of the Notes and the
Warrants and after giving effect to the other transactions contemplated by this
Agreement, all outstanding shares of Common Stock and Preferred Stock will be
validly issued, fully paid and nonassessable, except that shares held by the
ESOP may not be considered to be fully paid until such shares become vested. At
the time of the Closing and immediately after giving effect to the other
transactions contemplated by this Agreement, the Company will not have
outstanding stock or securities convertible into or exchangeable or exercisable
for any shares of its capital stock, nor will it have outstanding any rights to
subscribe for or to purchase, or any options for the purchase of, or any
agreements providing for the issuance (contingent or otherwise) of, or any
calls, commitments or claims of any character relating to, any shares of capital
stock or any securities convertible into or exchangeable or exercisable for any
shares of capital stock, except the Warrants and the Preferred Stock. At the
time of the Closing and after giving effect to the other transactions
contemplated by this Agreement, the Company will not be subject to any
obligation (contingent or otherwise) to redeem, purchase or otherwise acquire or
retire any shares of its capital stock, except as contemplated by the Management
Exchange and Repurchase Agreements, the Stockholders Agreement and the ESOP. At
the time of the Closing and after giving effect to the other transactions
contemplated by this Agreement, the Company will not be a party to or have
knowledge of any agreement (except as set forth in this Agreement, the
Stockholders Agreement and the Warrants) restricting the transfer of any shares
of the capital stock of the Company. The Company is not required to file, nor
has it filed, pursuant to section 12 of the Exchange Act, a registration
statement relating to any class of debt or equity securities.
5.7. Tax Returns and Payments. The Company and its
Subsidiaries have filed all tax returns required by law to be filed by them and
have paid all taxes, assessments and other governmental charges levied upon the
Company and its Subsidiaries and any of their respective properties, assets,
income or franchises which are due and payable, other than those presently
payable without penalty or interest, and other than such additional taxes,
assessments and other governmental changes which might result, either in any
case or in the aggregate, in any adverse change in the business, affairs,
condition (financial or other), assets, properties or operations of the Company
and
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<PAGE> 15
its Subsidiaries taken as a whole. To the best knowledge of the Company, there
are no tax Liens upon any assets of the Company except for statutory Liens for
taxes accruing but not yet due and payable. The federal income tax liabilities
of the Company and its Subsidiaries have been finally determined by the Internal
Revenue Service and satisfied, or the time for audit has expired, for all fiscal
periods through the respective dates specified in Exhibit H. The charges, calls
and reserves on the books of the Company and its Subsidiaries in respect of
federal and state income taxes for all fiscal periods are adequate in the
opinion of the Company, and the Company knows of no unpaid assessment for
additional federal or state income taxes for any period or any basis for any
such assessment.
5.8. Short-Term Borrowing and Funded Debt. Exhibit G correctly
sets forth, as of the date hereof, all Short-Term Borrowing and Funded Debt of
the Company and its Subsidiaries outstanding or proposed to be outstanding at
the Closing, after giving effect to the transactions contemplated by this
Agreement, or for which the Company or any Subsidiary has commitments, and
identifies the collateral securing any such Short-Term Borrowing and Funded
Debt. Neither the Company nor any Subsidiary is in default with respect to any
Short-Term Borrowing and Funded Debt or any instrument or agreement relating
thereto, and no instrument or agreement applicable to or binding on the Company
or any Affiliate of the Company contains any restrictions on the incurrence by
the Company of additional Funded Debt except the Bank Credit Agreement.
5.9. Title to Properties. As of the Closing and after giving
effect to the transactions contemplated by this Agreement, the Company and its
Subsidiaries will have good and sufficient title to their respective properties
and assets, including the properties and assets reflected in the financial
statements as of June 30, 1989 referred to in section 5.4 (other than properties
and assets sold or otherwise disposed of in the ordinary course of business, and
other than the dormitory sold by the Art Institute of Fort Lauderdale, Inc. to
E. Gerald Cooper on September 15, 1989, free and clear of all Liens except Liens
permitted by section 8.2. The Company and its Subsidiaries enjoy peaceful and
undisturbed possession under all leases necessary in any material respect for
the operation of their respective properties and assets, and all such leases are
valid and subsisting and are in full force and effect. Except to perfect and
protect security interests of the character permitted by section 8.2, and
lessors' interests under leases permitted by section 8.5, no presently effective
financing statement under the Uniform Commercial Code which names the Company or
any Subsidiary as debtor or lessee is on file in any jurisdiction, and neither
the Company nor any Subsidiary has signed any presently effective financing
statement or any presently effective security agreement
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authorizing any secured party thereunder to file any such financing statement.
5.10. Litigation. There is no action, proceeding or
investigation pending or, to the best knowledge of the Company, threatened (or
any basis therefor known to the Company) which questions the validity or
legality of or seeks damages in connection with this Agreement, the Notes, the
Warrants or the Operative Agreements, or any action taken or to be taken
pursuant to this Agreement, the Notes, the Warrants or the Operative Agreements,
and, except as set forth in Exhibit I, there is no action, proceeding or
investigation pending or, to the best knowledge of the Company, threatened which
might result, either in any case or in the aggregate, in any adverse change in
the business, affairs, condition (financial or other), assets, properties or
operations of the Company or any of its Subsidiaries which would be material to
the Company and its Subsidiaries taken as a whole, or in any liability on the
part of the Company or any of its Subsidiaries which would be material to the
Company and its Subsidiaries taken as a whole.
5.11. Compliance with Other Instruments, etc. Neither the
Company nor any of its Subsidiaries is in violation of any term of its
certificate or articles of incorporation or by-laws. Neither the Company nor any
of its Subsidiaries is in violation of any term of any agreement or instrument
to which it is a party or by which it or any of its properties or assets is
bound or any term of any applicable law, ordinance, rule or regulation of any
governmental authority or any term of any applicable order, judgment or decree
of any court, arbitrator or governmental authority (including, without
limitation, any law, ordinance, rule, regulation, or order relating to
environmental health and safety standards, or equal employment practice
requirements), the consequences of any of which foregoing violations might have
a material adverse affect on the business, affairs, condition (financial or
other), assets, properties or operations of the Company and its Subsidiaries,
taken as a whole; the execution, delivery and performance of this Agreement, the
Operative Agreements, the Notes and the Warrants and the consummation of the
transactions effected at the time of the Closing as described in section 4.8
will not result in any violation of or be in conflict with or constitute a
default under any such term or result in the creation of (or impose any
obligation on the Company or any of its Subsidiaries to create) any Lien (other
than liens permitted by section 8.2) upon any of the properties or assets of the
Company or any of its Subsidiaries pursuant to any such term; and there is no
such term which materially adversely affects, or in the future is reasonably
likely to (so far as the Company can now reasonably foresee) materially
adversely affect the business, condition (financial or other), assets,
properties or operations of the Company and its Subsidiaries, taken as a whole.
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5.12. Governmental Consents, etc. No consent, approval or
authorization of, or declaration or filing with, any governmental authority on
the part of the Company or any of its Subsidiaries is required in connection
with the execution, delivery and performance of this Agreement or the Operative
Agreements, the offer, issue, sale and delivery of the Notes and the Warrants or
the consummation of the transactions effected at the time of the Closing as
described in section 4.8, other than as required under the terms of the Security
Agreement and the Subsidiary Security Agreement (as such terms are defined in
the Bank Credit Agreement), all of which have been or will be duly delivered,
taken, given, made or obtained in accordance with the terms of such Security
Agreement and Subsidiary Security Agreement.
5.13. Patents, Trademarks, Authorizations, etc. The Company
and its Subsidiaries own or possess all patents, trademarks, service marks,
trade names, copyrights, licenses and authorizations, and all rights with
respect to the foregoing, necessary for the conduct of their respective
businesses as now conducted and as proposed to be conducted, without any known
material conflict with the rights of others.
5.14. Offering of Notes and Warrants. Neither the Company nor
any Person acting on its behalf has offered the Notes or the Warrants or any
part thereof or any similar securities to, or solicited any offers to buy any
thereof from, or otherwise approached or negotiated with respect thereto with,
any Person or Persons other than you, the Other Purchaser and not more than 5
other institutional investors, and neither the Company nor any Person acting on
its behalf has taken or will take any action which would subject the offering,
issue or sale of the Notes or the Warrants to be issued hereunder to the
registration provisions of section 5 of the Securities Act.
5.15. Representations in the Bank Credit Agreement. The
representations and warranties made in sections 4.4, 4.5, 4.9, 4.11 and 4.12 of
the Bank Credit Agreement by the Company are true and correct in all material
respects as of the date of this Agreement, and such representations and
warranties are hereby incorporated herein by reference with the same effect as
though set forth herein in their entirety.
5.16. Certain Fees. Except as set forth in section 4.15
hereof, in the Bank Credit Agreement and in the Memorandum, and except for the
fees or commissions payable to the Merrill Companies, no broker's, finder's,
investment banker's or similar fee or commission has been paid or will be
payable by the Company with respect to or for any services rendered to the
Company ancillary to the offer, issue and sale of the Notes and the Warrants or
the transactions contemplated by this Agreement or by the Operative Agreements.
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5.17. Federal Reserve Regulations. Neither the Company nor any
Subsidiary will, directly or indirectly, use any of the proceeds of the sale of
the Notes or the Warrants for the purpose, whether immediate, incidental or
ultimate, of buying a "margin stock" or of maintaining, reducing or retiring any
indebtedness originally incurred to purchase a stock that is currently a "margin
stock", or for any other purpose which might constitute this transaction a
"purpose credit", in each case within the meaning of Regulation G of the Board
of Governors of the Federal Reserve System (12 C.F.R. 207, as amended) or
Regulation U of such Board (12 C.F.R. 221, as amended), or otherwise take or
permit to be taken any action which would involve a violation of such Regulation
G or Regulation U or of Regulation T (12 C.F.R. 220, as amended) or Regulation X
(12 C.F.R. 224, as amended) or any other regulation of such Board. No
indebtedness being reduced or retired out of the proceeds of the sale of the
Notes or the Warrants was incurred for the purpose of purchasing or carrying any
such "margin stock", and neither the Company nor any Subsidiary owns or has any
present intention of acquiring any such "margin stock".
5.18. Investment Company. The Company is not an "investment
company" or a company "controlled" by an "investment company", within the
meaning of the Investment Company Act of 1940, as amended.
5.19. Public Utility Holding Company Act. The Company is not a
"holding company" or a "subsidiary company" of a "holding company", or an
"affiliate" of a "holding company" or of a "subsidiary company" of a "holding
company", as such terms are defined in the Public Utility Holding Company Act of
1935, as amended.
5.20. Federal Power Act. The Company is not a "public utility"
as such term is defined in the Federal Power Act, as amended.
5.21. Interstate Commerce Act. Neither the Company nor any of
its Subsidiaries is a "rail carrier, or a person controlled by or affiliated
with a rail carrier", within the meaning of Title 49, U.S.C., and the Company is
not a "carrier" to which 49 U.S.C. 11301(b)(1) is applicable.
5.22. Compliance with ERISA. (a) Neither the Company, any
Related Person nor, to the best knowledge of the Company, any other fiduciary
has incurred, or reasonably expects to incur, any liability with respect to a
breach of section 404 or 406 of ERISA or section 4975 of the Code which would
materially adversely affect the business, condition (financial or other),
assets, properties or operations of the Company and its Subsidiaries taken as a
whole.
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(b) No liability to the PBGC or any other Plan participant or
beneficiary has been or is reasonably expected to be incurred by the Company or
any Related Person which would materially adversely affect the business,
conditions (financial or other), assets, properties or operations of the Company
and its Subsidiaries taken as a whole, and no event or condition exists or is
reasonably expected to occur with respect to any Plan which presents a material
risk of incurring such a liability. Neither the Company nor any Related Person
has within the past six years contributed to a single employer plan which has at
least two contributing sponsors not under common control or ceased operations at
a facility in a manner which could result in any material liability under
section 4068(f) of ERISA. There has been no Reportable Event with respect to any
Plan with respect to which the Company has incurred or reasonably expects to
incur any liability to the PBGC which would materially adversely affect the
business, condition (financial or other), assets, properties or operations of
the Company and its Subsidiaries taken as a whole. Neither the Company nor any
Related Person has engaged in any transaction which could result in the
incurrence by any of them of any liability under section 4069 or 4212 of ERISA
in the event any employee benefit plans subject to ERISA were terminated.
(c) Full payment has been, or will be, timely made of all
amounts which the Company or any Related Person is required under the terms of
each Plan or applicable law to pay as contributions to such Plan or will be made
within the time required by applicable law and no accumulated funding deficiency
(as defined in section 302 of ERISA and section 412 of the Code), whether or not
waived, has occurred or exists with respect to any Plan (other than a
Multiemployer Plan).
(d) Neither the Company nor any Related Person is obligated to
contribute to any Multiemployer Plan and neither the Company nor any Related
Person has, within the preceding six years, contributed or been obligated to
contribute to any such Plan.
(e) The execution and delivery of this Agreement and the Other
Agreements and the issue and sale of the Notes and Warrants hereunder and under
the other Agreements will not involve any transaction which is subject to the
prohibitions of section 406 of ERISA or in connection with which a tax would be
imposed pursuant to section 4975 of the Code. The representation by the Company
in the preceding sentence is made in reliance upon and subject to the accuracy
of your representation in section 6 of this Agreement and the representation of
the Other Purchaser in section 6 of the Other Agreements as to the sources of
the funds used to pay the purchase price of the Notes and Warrants purchased by
you and the Other Purchaser. The Company has delivered to you, if requested by
you, a complete and correct
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list of all employee benefit plans with respect to which the Company is a party
in interest and with respect to which either of their securities are employer
securities. The terms "employee benefit plans" and "party in interest" have the
respective meanings specified in section 3 of ERISA and the term "employer
securities" has the meaning specified in section 407(d)(1) of ERISA.
(f) Except as previously disclosed to you, the Company does
not maintain or contribute to or has any liability under any welfare benefit
plan (as defined in section 3(1) of ERISA) which provides post-employment
welfare benefits to or in respect of any of their employees or former employees,
other than continuation coverage provided pursuant to section 4980B of the Code.
(g) Neither the Company nor any Related Person has, within the
preceding six years, established, maintained or contributed to or presently
maintains or contributes to any employee pension benefit plan (within the
meaning of section 3(2) of ERISA) subject to section 302 or Title IV of ERISA or
section 412 of the Code.
5.23. Foreign Assets Control Regulations, etc. Neither the
issue and sale of the Notes or the Warrants nor the use of the proceeds thereof
as contemplated by this Agreement will violate the Foreign Assets Control
Regulations, the Transaction Control Regulations, the Cuban Assets Control
Regulations, the Foreign Funds Control Regulations, the Iranian Assets Control
Regulations, the South African Transactions Regulations, the Libyan Sanctions
Regulations, the Nicaraguan Trade Control Regulations, the Soviet Gold Coin
Regulations or the Panamanian Transactions Regulations of the United States
Treasury Department (31 C.F.R., Subtitle B, Chapter V as amended).
5.24. Use of Proceeds. The Company will apply the proceeds of
the sale of the Notes and the Warrants to make the payments required in
connection with the transactions to be effected at the time by the Closing as
described in section 4.9.
5.25. Disclosure. Neither this Agreement, the Financial
Statements, the Memorandum, any Operative Documents nor any Officers'
Certificate or other written materials furnished to you by or on behalf of the
Company in connection with the transactions contemplated by this Agreement
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 not
misleading. There is no fact known to the Company which materially adversely
affects or in the future is reasonably likely to (so far as the Company can now
reasonably foresee) materially adversely affect the business, condition
(financial or other), assets, properties or operations of the Company or any of
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its Subsidiaries which has not been set forth in this Agreement, the Financial
Statements, the Memorandum or the Officers' Certificates or other written
materials furnished to you by or on behalf of the Company in connection with the
transactions contemplated hereby.
6. Purchase for Investment; Source of Funds.
6.1. Purchase for Investment. You represent that you are
purchasing the Notes and the Warrants being purchased by you hereunder for your
own account and not with a view to or for sale in connection with any
distribution of such Notes or Warrants within the meaning of the Securities Act,
provided that the disposition of your property shall at all times be within your
control. You understand that the Notes have not been registered under the
Securities Act and may be resold only if registered pursuant to the provisions
of such Act or if an exemption from registration is available, and that the
Company is not required to register the Notes.
6.2. Source of Funds. You represent that no part of the funds
to be used by you to pay the purchase price of the Notes and the Warrants
purchased by you hereunder constitutes assets allocated to any separate account
maintained by you in which any employee benefit plan (or its related trust) has
any interest. As used in this section 6.2, the terms "employee benefit plan" and
"separate account" shall have the respective meanings assigned to such terms in
section 3 of ERISA.
7. Financial and Reporting Covenants Applicable to the Notes.
From the date of this Agreement and thereafter so long as any of the Notes are
outstanding:
7.1. Financial Statements and Reports. The Company will
maintain, and will cause each of its Subsidiaries to maintain, a system of
accounting established and administered in accordance with GAAP and will accrue,
and will cause each of its Subsidiaries to accrue, all such liabilities as shall
be required by GAAP. The Company will deliver (in duplicate) to you, so long as
you or your nominee holds any of the Notes, and to each institutional holder of
any Notes:
(a) within 45 days after the end of each of the first three
quarterly fiscal periods in each fiscal year of the Company,
consolidated balance sheets of the Company and its Subsidiaries as at
the end of such period and the related consolidated statements of
income, stockholders' equity and cash flows of the Company and its
Subsidiaries for such period and (in the case of the second and third
quarterly periods) for the period from the beginning of the current
fiscal year to the end of such quarterly period, setting forth in each
case in comparative form the consolidated
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figures for the corresponding periods of the previous fiscal year, all
in reasonable detail and certified by a principal financial officer of
the Company as presenting fairly, in accordance with GAAP applied
(except as specifically set forth therein) on a basis consistent with
such prior fiscal periods, the information contained therein, subject
to changes resulting from normal year-end audit adjustments;
(b) within 120 days after the end of each fiscal year of the
Company, consolidated and consolidating balance sheets of the Company
and its Subsidiaries as at the end of such year and the related
consolidated (and, as to statements of income and cash flows,
consolidating) statements of income, stockholders' equity and cash
flows of the Company and its Subsidiaries for such fiscal year, setting
forth in each case in comparative form the consolidated and (where
applicable) consolidating figures for the previous fiscal year, all in
reasonable detail and (i) in the case of consolidated financial
statements, accompanied by a report thereon of Arthur Andersen & Co. or
other independent public accountants of recognized national standing
selected by the Company and reasonably satisfactory to the holders of
at least 51% of the principal amount of the Notes then outstanding,
which report shall state that such consolidated financial statements
present fairly the financial position of the Company and its
Subsidiaries as at the dates indicated and the results of their
operations and cash flows for the periods indicated in conformity with
GAAP applied on a basis consistent with prior years (except as
otherwise specified in such report) and that the audit by such
accountants in connection with such consolidated financial statements
has been made in accordance with generally accepted auditing standards
and (ii) in the case of such consolidating financial statements,
certified by a principal financial officer of the Company as presenting
fairly, in accordance with GAAP applied (except as specifically set
forth therein) on a basis consistent with such prior fiscal periods,
the information contained therein;
(c) together with each delivery of financial statements of the
Company pursuant to subdivisions (a) and (b) above, an Officers'
Certificate (i) stating that the signers have reviewed the terms of
this Agreement and of the Notes and have made, or caused to be made
under their supervision, a review in reasonable detail of the
transactions and conditions of the Company and its Subsidiaries during
the accounting period covered by such financial statements and that
such review has not disclosed the existence during or at the end of
such accounting period, and that the signers do not have knowledge of
the existence as at the date of the Officers' Certificate, of
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any condition or event which constitutes an Event of Default or
Potential Event of Default, or, if any such condition or event existed
or exists, specifying the nature and period of existence thereof and
what action the Company has taken or is taking or proposes to take with
respect thereto, (ii) demonstrating in reasonable detail compliance
during and at the end of such accounting period with the restrictions
contained in sections 8.1, 8.4, 8.5 and 8.8(c)(i) and subsections (c),
(e), (f) and (g) of section 8.9, and (iii) if not specified in the
related financial statements being delivered pursuant to subdivisions
(a) and (b) above, specifying the aggregate amount of interest and
rentals paid or accrued by the Company and its Subsidiaries, and the
aggregate amount of depreciation, depletion and amortization charged on
the books of the Company and its Subsidiaries, during the fiscal period
covered by such financial statements;
(d) together with each delivery of financial statements
pursuant to subdivision (b) above, a written statement by the
independent public accountants giving the report thereon (i) stating
that their audit examination has included a review of the terms of this
Agreement and of the Notes as they relate to accounting matters and
that such review is sufficient to enable them to make the statement
referred to in clause (iii) of this subdivision (d) (it being
understood that no special audit procedures, other than those required
by generally accepted auditing standards, shall be required), (ii)
stating whether, in the course of their audit examination, they
obtained knowledge and whether, as of the date of such written
statement, they have knowledge of the existence of any condition or
event which constitutes an Event of Default or Potential Event of
Default, and, if so, specifying the nature and period of existence
thereof, and (iii) stating that they have examined the Officers'
Certificate delivered in connection therewith pursuant to subdivision
(c) above, and that the matters set forth in such Officers' Certificate
pursuant to clauses (ii) and (iii) of such subdivision (c) have been
properly stated in accordance with the terms of this Agreement;
(e) promptly upon receipt thereof by the Company, copies of
all reports submitted to the Company by the independent public
accountants referred to in section 7.1(b) in connection with each
annual, interim or special audit of the books of the Company or any
Subsidiary made by such accountants, including, without limitation, the
comment letter submitted by such accountants to management in
connection with their annual audit;
(f) promptly upon their becoming available, copies of all
financial statements, reports, notices and proxy
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<PAGE> 24
statements, if any, sent or made available generally by the Company to
its public security holders, if any, or by any Subsidiary to its
security holders other than the Company or another Subsidiary, if any,
of all regular and periodic reports and all registration statements and
prospectuses, if any, filed by the Company or any Subsidiary with any
securities exchange or with the Commission, and of all press releases
made available generally by the Company or any Subsidiary to the public
concerning material developments in the business of the Company or its
Subsidiaries;
(g) immediately upon any executive or financial officer of the
Company familiar with this Agreement obtaining knowledge (i) of any
condition or event which constitutes an Event of Default or Potential
Event of Default, or that the holder of any Note has given any notice
or taken any other action with respect to a claimed Potential Event of
Default or Event of Default under this Agreement, (ii) of any condition
or event which, in the opinion of management of the Company would have
a material adverse effect on the business, condition (financial or
other), assets, properties or operations of the Company or any Material
Subsidiary, (iii) that any Person has given any notice to the Company
or any Subsidiary or taken any other action with respect to a claimed
default or event or condition of the type referred to in section 13(e)
(whether or not such default, event or condition shall have had the
effect of causing any Indebtedness to become due prior to its stated
maturity or its regularly scheduled dates of payment), or (iv) of the
institution of any litigation involving claims against the Company or
any Subsidiary equal to or greater than $1,000,000 or any adverse
determination in any litigation involving a potential liability to the
Company or any Subsidiary equal to or greater than $1,000,000, an
Officers' Certificate specifying the nature and period of existence of
any such condition or event, or specifying the notice given or action
taken by such holder or Person and the nature of such claimed default,
Potential Event of Default, Event of Default, event or condition, and
what action the Company has taken, is taking or proposes to take with
respect thereto;
(h) (i) as soon as possible, and in any event no later than
notification by the PBGC of any Reportable Event regarding any of the
Plans and action which is proposed to be taken with respect thereto, an
Officers' Certificate describing such Reportable Event, (ii) if
requested by any holder of Notes, copies of each report filed with the
DOL or the PBGC and (iii) promptly after receipt thereof, a copy of any
notice the Company or any Subsidiary may receive from the PBGC relating
to the intention of the PBGC (x) to terminate any Plan or (y) to
appoint a trustee to administer
19
<PAGE> 25
any such Plan, or from the Internal Revenue Service relating to the
intention of the Internal Revenue Service to disqualify a Plan or issue
an adverse determination with respect to any Plan;
(i) immediately upon any executive or financial officer of the
Company familiar with this Agreement obtaining knowledge of any Change
of Control or impending Change of Control, a written notice describing
such Change of Control in reasonable detail;
(j) immediately upon receipt thereof by the Company, a copy of
any notice delivered to the Company pursuant to section 10.3(a) or (b);
(k) promptly upon receipt thereof by the Company, a notice of
any change in the identity of the Agent (pursuant to section 9.12 of
the Bank Credit Agreement) or the address thereof; and
(l) with reasonable promptness, such other financial reports
and information and data with respect to the Company or any of its
Subsidiaries as from time to time may be reasonably requested.
7.2. Inspection; Confidentiality. (a) The Company will permit
any authorized representatives designated by you, so long as you or your nominee
shall hold any Notes, or by any other Institutional Holder, without expense to
the Company, to visit and inspect any of the properties of the Company or any of
its Subsidiaries, including its and their books of account, and to make copies
and take extracts therefrom, and to discuss its and their affairs, finances and
accounts with its and their officers and independent public accountants (and by
this provision the Company authorizes such accountants to discuss with such
representatives such affairs, finances and accounts of the Company and its
Subsidiaries, in the presence of the Company), all at such reasonable times
during normal business hours and as often as may be reasonably requested.
(b) You agree that you will use your best efforts not to
disclose without the prior consent of the Company (other than to your employees,
auditors or counsel or to another holder of the Notes) any information with
respect to the Company or any Subsidiary which is furnished pursuant to this
section 7 and which is designated by the Company to you in writing as
confidential, provided that you may disclose any such information (i) as has
become generally available to the public (other than by disclosure by you, your
employees, auditors or counsel), (ii) as may be required or appropriate in any
report, statement or testimony submitted to any municipal, state or federal
regulatory body having or claiming to have jurisdiction over you
20
<PAGE> 26
or to the National Association of Insurance Commissioners or similar
organizations or their successors, (iii) as may be required or appropriate in
response to any summons or subpoena or in connection with any litigation, (iv)
to the extent that you believe it appropriate in order to protect your
investment in the Notes or in order to comply with any law, order, regulation or
ruling applicable to you or (v) to the prospective transferee in connection with
any contemplated transfer of any of the Notes by you, and, further provided,
that you may not disclose any confidential information concerning identified
students before giving the Company notice of such proposed disclosure and
affording it a reasonable opportunity to obtain a judicial protective order from
a court of competent jurisdiction.
8. Business Covenants Applicable to the Notes. From the date
of this Agreement through the closing and thereafter so long as any of the Notes
are outstanding:
8.1. Funded Debt. The Company will not, and will not permit
any subsidiary to, create, incur, assume, guarantee, or otherwise become or
remain directly or indirectly liable with respect to, any Funded Debt, except
that:
(a) the Company may become and remain liable with
respect to the Funded Debt evidenced by the Notes;
(b) the Company or any Subsidiary may become and
remain liable with respect to Funded Debt of the Company or
such Subsidiary owing to a Subsidiary or the Company, as the
case may be;
(c) the Company may become and remain liable with respect to
(i) Funded Debt outstanding at any time under the Bank Credit
Agreement, and (ii) additional Funded Debt, provided that (a) the
aggregate principal amount of all Indebtedness outstanding at any time
under the Bank Credit Agreement and under any facility under which any
other Funded Debt permitted by this subdivision (c) is incurred or
outstanding shall not exceed at any time $62,200,000 and (b) the terms
of the Bank Credit Agreement or any other agreement or other instrument
under which any Funded Debt permitted by this subdivision (c) is
incurred or outstanding, as the same may from time to time be amended,
shall not (x) restrict or limit the ability of the Company to pay the
principal of, or interest or premium, if any, on the Notes or any other
amounts payable under this Agreement to any greater extent than the
provisions contained in section 10 of this Agreement and section 6.16
of the Bank Credit Agreement, or (y) subject the Company to
affirmative or negative covenants or events of default which, in the
aggregate, and taking into account all circumstances, are materially
more onerous than those to
21
<PAGE> 27
which the Company is subject under the Bank Credit Agreement as
originally in effect;
(d) the Company and any Subsidiary may become and
remain liable with respect to Funded Debt secured by Liens
permitted by the provisions of section 8.2(j);
(e) the Company and any Subsidiary may become and remain
liable with respect to Funded Debt under Capital Leases or Guarantees
of obligations thereunder permitted by the provisions of section
8.5(b);
(f) the Company and any Subsidiary may remain liable with
respect to its Funded Debt outstanding prior to the Closing and not to
be retired at the Closing, as identified in the pro forma
capitalization table set forth in Exhibit G, and may extend, renew or
refund any thereof, provided that such extension, renewal or refunding
does not increase the principal amount of the Funded Debt outstanding
immediately prior to such extension, renewal or refunding;
(g) the Company or any Subsidiary may become and remain liable
with respect to Funded Debt under letters of credit which Funded Debt
shall not exceed $500,000 in the aggregate;
(h) the Company may become and remain liable with respect to
Funded Debt arising from transactions contemplated by the provisions of
Article XII of the Stockholders Agreement;
(i) the Company and any Subsidiary may become and
remain liable with respect to Guarantees of Teach-Out
Obligations and other education-related obligations of the
Company or any of its Subsidiaries;
(j) the Company and any Subsidiary may become and remain
liable with respect to Funded Debt evidenced by surety or other bonds
required by governmental authorities in connection with the business of
the Company or any of its Subsidiaries and with respect to Guarantees
related thereto, which Funded Debt and Guarantees (without duplication)
shall not exceed $2,500,000 in the aggregate;
(k) the Company may become and remain liable with respect to
Funded Debt evidenced by promissory notes which are (i) subordinated to
the Notes and to all Superior Debt by subordination provisions which
shall have been approved by you and (ii) issued in connection with the
Company's rights or obligations to repurchase Common Stock under the
Management Stock Subscription Agreements or the Stockholders Agreement;
and
22
<PAGE> 28
(l) the Company may become and remain liable with respect to
Funded Debt owing to certain Persons pursuant to the Stockholders
Contribution and Repayment Agreement, as in effect on the Closing Date,
which Funded Debt shall not exceed $3,312,500 in aggregate principal
amount (excluding any accrued but unpaid interest thereon) and shall at
all times remain expressly subordinated to the Notes on the terms
provided in such Stockholders Contribution and Repayment Agreement, as
in effect on the Closing Date;
provided, however, that (x) no single Subsidiary shall create, incur or assume
during any fiscal year in excess of $1,500,000 in the aggregate of Funded Debt
otherwise permitted by subdivisions (d) and (e) of this section 8.1, and (y)
Funded Debt of any single Subsidiary otherwise permitted by subdivisions (d) and
(e) of this section 8.1 shall at no time exceed $5,000,000 in the aggregate for
such Subsidiary. The Company will not create, incur, assume, guarantee or
otherwise become or remain directly or indirectly liable with respect to (A) any
Funded Debt which is subordinated in right of payment to any other Indebtedness
unless such Funded Debt is subordinated to all Superior Debt in accordance with
Subordination provisions substantially the same as those set forth in section 10
or is Funded Debt permitted by subdivision (k) of this section 8.1, or (B) any
Funded Debt representing or incurred to finance the purchase price of, or
otherwise issued in connection with the repurchase of, Common Stock under the
Management Stock Subscription Agreements or the Stockholders Agreement other
than Funded Debt permitted by subdivision (k) of this section 8.1.
8.2. Liens, etc. The Company will not, and will not permit any
Subsidiary to, directly or indirectly, create, incur, assume or permit to exist
any Lien on or with respect to any property or asset (including any document or
instrument in respect of goods or accounts receivable) of the Company or any
Subsidiary, whether now owned or held or hereafter acquired, or any income or
profits therefrom, except:
(a) Liens 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 Company or the affected Subsidiary has created
reserves which are determined by the Company to be adequate by the
consistent application of GAAP;
(b) Liens to secure the obligations of the Company or any
Subsidiary under workmen's compensation laws, unemployment insurance
laws, social security laws or other similar legislation;
23
<PAGE> 29
(c) Liens in existence on the date hereof and described on
Exhibit G, as the same were in effect on the date hereof without
enlargement or extension of any kind thereof or of the Indebtedness
secured thereby except in accordance with the terms thereof;
(d) Liens in connection with bids, tenders, performance bonds,
contracts, leases or other similar obligations to which the Company or
any Subsidiary is a party, or to secure public or statutory
obligations;
(e) Liens for landlords', mechanics', carriers', workmen's,
warehousemen's, materialmen's or repairmen's Liens or other like Liens
in the ordinary course of business;
(f) Liens to secure surety, replevin, attachment or appeal
bonds relating to legal proceedings to which the Company or any
Subsidiary is a party;
(g) Liens arising out of judgments or awards against the
Company or any Subsidiary with respect to which the Company or such
Subsidiary is currently engaged in proceedings for review or appeal and
with respect to which the Company or such Subsidiary shall have secured
a stay of execution pending such proceedings for review or appeal;
(h) Liens on property or assets of any Subsidiary securing
Indebtedness of such Subsidiary owing to the Company;
(i) any Lien existing on property of a Person immediately
prior to its being consolidated with or merged into the Company or a
Subsidiary or its becoming a Subsidiary, or any Lien existing on any
property acquired by the Company or any Subsidiary at the time such
property is so acquired (whether or not the Indebtedness secured
thereby shall have been assumed), provided that no such Lien shall have
been created or assumed in contemplation of such consolidation or
merger or such Person's becoming a Subsidiary or such acquisition of
property, and provided further that each such Lien shall at all times
be confined solely to the item or items of property so acquired and, if
required by the terms of the instrument originally creating such Lien,
other property which is an improvement to or is acquired for specific
use in connection with such acquired property;
(j) any Lien created to secure all or any part of the purchase
price, or to secure Indebtedness incurred or assumed to pay all or any
part of the purchase price, of property acquired or constructed by the
Company or a
24
<PAGE> 30
Subsidiary after the Closing Date, provided that (i) any such Lien
shall be confined solely to the item or items of property so acquired
or constructed and, if required by the terms of the instrument
originally creating such Lien, other property which is an improvement
to or is acquired for specific use in connection with such acquired or
constructed property, (ii) the principal amount of the Indebtedness
secured by any such Lien shall at no time exceed an amount equal to
100% of the lesser of (A) the cost to the Company or such Subsidiary of
the property so acquired or constructed and (B) the fair market value
of such property (as determined in good faith by the Board of Directors
of the Company) at the time of such acquisition or completion of such
construction, and (iii) any such Lien shall be created within twelve
months after, in the case of property acquired, such acquisition, or,
in the case of property constructed, completion of such construction;
(k) Liens consisting of Capital Leases permitted by the
provisions of section 8.5(b);
(l) any Lien securing any Superior Debt (including, without
limitation, any Lien arising solely as a result of the signing or
filing of a financing statement on behalf of any Person within 10 days
prior to the incurrence of any Superior Debt) or any Note;
(m) leases or subleases granted to others, in each case
incidental to, and not interfering with, the ordinary course of conduct
of the business of the Company or any of its Subsidiaries;
(n) 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 Liens incidental to the ordinary course of conduct of
the business of the Company or any of its Subsidiaries or to the
ownership of their respective properties which were not incurred in
connection with Indebtedness 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 Company or any such Subsidiary;
(o) Liens on cash and investments held in escrow pursuant to
section 2(b) of the Escrow Agreement in an aggregate amount not
exceeding (except when a Specified Superior Event of Default shall have
occurred and be continuing) $3,312,500 arising under section 4(a) of
such Escrow Agreement; and
25
<PAGE> 31
(p) any Lien renewing, extending or refunding any Lien
permitted by the foregoing subdivisions of this section 8.2, provided
that the principal amount of any Indebtedness secured by any such Lien
immediately prior thereto is not increased and such Lien is not
extended to other property.
8.3. Restricted Payments. After consummation of the
transactions contemplated by section 4.9, the Company will not directly or
indirectly declare, order, pay, make or set apart any sum for any Restricted
Payment, except for (i) any payment made in order to redeem, repurchase, or
otherwise acquire Common Stock from management investors in accordance with the
terms of any Management Exchange and Repurchase Agreement, the Stockholders
Agreement or any management incentive stock option plan adopted by the Company
after the Closing Date as long as (a) such payment is not otherwise prohibited
by the terms of this Agreement and (b) all such payments in the aggregate do not
exceed (x) $2,500,000, plus (y) the aggregate proceeds from the resale or
reissuance from time to time of the Common Stock so redeemed, repurchased or
otherwise acquired, plus (z) the aggregate proceeds paid to the Company pursuant
to life insurance policies maintained by it with respect to the management
investors from whom Common Stock is so redeemed, repurchased or otherwise
acquired, provided that such proceeds are applied by the Company to the
acquisition of such Common Stock, (ii) any payment made in order to redeem,
repurchase, or otherwise acquire Class A Common Stock or Preferred Stock from
the ESOP as required by the terms of the ESOP (or any payment made in
fulfillment of the Company's obligations to repurchase Class A Common Stock or
Preferred Stock under the ESOP), (iii) the payment of any regular, periodic
dividend on the Preferred Stock or the Class A Common Stock held by the ESOP or
by any participant or former participant in the ESOP, provided that at least 90%
of the aggregate amount of such dividends paid during any fiscal year of the
Company with respect to such Class A Common Stock and Preferred Stock shall be
applied to the repayment of the Term Loan, (iv) any payment related to the
termination of service of the Company's or any Subsidiary's employees which is
made in order to redeem, repurchase or otherwise acquire Preferred Stock or
Class A Common Stock held by the ESOP for distribution by the ESOP to such
employees and (v) any payment made pursuant to the provisions of Article XII of
the Stockholders Agreement; provided that no Restricted Payment other than
pursuant to clause (v) of this section 8.3 shall be so declared, ordered, paid,
made or set apart if, at the time of any such payment and immediately after
giving effect thereto, a condition or event shall exist which constitutes an
Event of Default or a Potential Event of Default.
8.4. Leverage Ratio; Interest Coverage Ratio; Fixed Charge
Coverage Ratio. (a) Beginning with the fiscal quarter of the Company ending on
December 31, 1989, the Company will not permit
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<PAGE> 32
(i) the Leverage Ratio on the last day of any fiscal quarter
on which any amount is outstanding under the Bank Credit Agreement or
on which any commitment thereunder has not expired or been terminated
to exceed the applicable ratio set forth below opposite the period in
which such day falls:
<TABLE>
<CAPTION>
Fiscal Quarters Ending Maximum Leverage Ratio
- ---------------------- ----------------------
<S> <C>
December 31, 1989 through 350%
June 30, 1990, inclusive
September 30, 1990 through 300%
June 30, 1991, inclusive
September 30, 1991 through 250%
June 30, 1992, inclusive
September 30, 1992 through 200%
June 30, 1993, inclusive
June 30, 1993 and thereafter 150%
</TABLE>
(ii) the Leverage Ratio on the last day of any fiscal quarter
on which no amount is outstanding under the Bank Credit Agreement and
on which no commitment is available thereunder to exceed the applicable
ratio set forth below opposite the period in which such day falls:
<TABLE>
<CAPTION>
Fiscal Years Ending June 30 Maximum Leverage Ratio
- --------------------------- ----------------------
<S> <C> <C>
1990 300%
1991 300%
1992 250%
1993 200%
1994 and thereafter 150%
</TABLE>
(b) Beginning with the fiscal quarter of the Company ending on
December 31, 1989, the Company will not permit
(i) the Interest Coverage Ratio on the last day of any fiscal
quarter on which any amount is outstanding under the Bank Credit
Agreement or on which any commitment thereunder has not expired or been
terminated to be less than the applicable ratio set forth below
opposite the period in which such day falls:
<TABLE>
<CAPTION>
Fiscal Quarters Ending Minimum Interest Coverage Ratio
- ---------------------- -------------------------------
<S> <C>
December 31, 1989 and 1.10 to 1
March 31, 1990
</TABLE>
27
<PAGE> 33
<TABLE>
<CAPTION>
<S> <C>
June 30, 1990 1.00 to 1
September 30, 1990 and 1.30 to 1
December 31, 1990
March 31, 1991 and 1.40 to 1
June 30, 1991
September 30, 1991 and 1.55 to 1
December 31, 1991
March 31, 1992 and 1.65 to 1
June 30, 1992
September 30, 1992 and thereafter 1.80 to 1
</TABLE>
(ii) the Interest Coverage Ratio on the last day of any fiscal
quarter on which no amount is outstanding under the Bank Credit
Agreement and on which no commitment is available thereunder to be less
than the applicable ratio set forth below opposite the period in which
such day falls:
<TABLE>
<CAPTION>
Fiscal Years Ending June 30 Minimum Interest Coverage Ratio
- --------------------------- -------------------------------
<S> <C> <C>
1990 1.30 to 1
1991 1.55 to 1
1992 1.80 to 1
1993 and thereafter 2.00 to 1
</TABLE>
(c) The Company will not permit the Fixed Charge Coverage
Ratio on the last day of any fiscal quarter on which no amount is outstanding
under the Bank Credit Agreement and on which no commitment is available
thereunder to be less than the applicable ratio set forth below opposite the
period in which such day falls:
<TABLE>
<CAPTION>
Fiscal Minimum Fixed
Years Ending June 30 Charge Coverage Ratio
-------------------- ---------------------
<S> <C> <C>
June 30, 1990 0.80 to 1
June 30, 1991 0.80 to 1
June 30, 1992 0.85 to 1
June 30, 1993 0.85 to 1
June 30, 1994 0.90 to 1
June 30, 1995 0.90 to 1
June 30, 1996 0.90 to 1
</TABLE>
8.5. Operating and Capital Leases. The Company will not, and
will not permit any Subsidiary to, directly or indirectly, become or remain
liable as lessee or as guarantor or other surety with respect to:
28
<PAGE> 34
(a) any Operating Lease in any fiscal year of the Company
unless, immediately after giving effect to the incurrence of liability
with respect to such Operating Lease, the aggregate amount of all
minimum or guaranteed annual net rental payments under all Operating
Leases in such fiscal year with respect to which the Company and its
Subsidiaries have incurred liability since the beginning of such fiscal
year shall not exceed $1,250,000 for such year, excluding any
replacements, renewals or extensions of Operating Leases which had been
in effect prior to the beginning of the then current fiscal year; or
(b) any Capital Lease unless in any fiscal year of the
Company, immediately after giving effect to the incurrence of liability
with respect to such Capital Lease in such fiscal year, the aggregate
amount of all Capital Lease Obligations incurred (including Capital
Lease Obligations covered by Guarantees incurred) by the Company and
its Subsidiaries since the beginning of such fiscal year shall not
exceed $4,500,000.
8.6. Corporate Existence, etc. The Company will at all times
preserve and keep in full force and effect its corporate existence, and rights
and franchises deemed material to its business, and those of each of its
Subsidiaries, except as otherwise specifically permitted by section 8.7 and 8.8
and except that the corporate existence of any Subsidiary may be terminated if,
in the good faith judgment of the Board of Directors of the Company, such
termination is in the best interest of the Company and is not disadvantageous to
the holders of the Notes.
8.7. Subsidiary Stock and Indebtedness. The Company will not:
(a) directly or indirectly sell, assign, pledge or otherwise
dispose of any Funded Debt of or any shares of stock of (or warrants,
rights or options to acquire stock of) any Subsidiary except to another
Subsidiary or as directors' qualifying shares if required by applicable
law and except that, subject to section 8.8(c), shares of stock (other
than preferred stock) of a Subsidiary may be sold for a consideration
at least equal to the fair value thereof (as determined in good faith
by the Board of Directors of the Company) at the time of such sale if
such Subsidiary would not thereby cease to be a Subsidiary;
(b) permit any Subsidiary directly or indirectly to sell,
assign, pledge or otherwise dispose of any Funded Debt of the Company
or any other Subsidiary, or any shares of stock of (or warrants, rights
or options to acquire stock of) any other Subsidiary, except to the
Company or another
29
<PAGE> 35
Subsidiary or as directors' qualifying shares if required by applicable
law and except that, subject to section 8.8(c), shares of stock (other
than preferred stock) of a Subsidiary may be sold for a consideration
at least equal to the fair value thereof (as determined in good faith
by the Board of Directors of the Company) at the time of such sale if
such Subsidiary would not thereby cease to be a Subsidiary;
(c) permit any Subsidiary to have outstanding any shares of
preferred stock other than shares of preferred stock which are owned by
the Company or another Subsidiary; or
(d) permit any Subsidiary directly or indirectly to issue or
sell (including, without limitation, in connection with a merger or
consolidation of a Subsidiary otherwise permitted by section 8.8(a))
any shares of its stock (or warrants, rights or options to acquire its
stock) except to the Company or another Subsidiary or as directors'
qualifying shares if required by applicable law and except that such
Subsidiary may sell (including, without limitation, in connection with
a merger or consolidation of a Subsidiary otherwise permitted by
section 8.8(a)) its own shares of stock (other than preferred stock)
for a consideration at least equal to the fair value thereof (as
determined in good faith by the Board of Directors of the Company) at
the time of such sale if such Subsidiary would not thereby cease to be
a Subsidiary;
provided that, (i) subject to compliance with section 8.8(c), all Funded Debt
and shares of stock of any Subsidiary owned by the Company and its other
Subsidiaries may be simultaneously sold as an entirety for a consideration at
least equal to the fair value thereof (as determined in good faith by the Board
of Directors of the Company) at the time of such sale if such Subsidiary does
not at the time own (x) any Funded Debt of the Company or (y) any Funded Debt or
stock of any other Subsidiary which is not also being simultaneously sold as an
entirety in compliance with this proviso or section 8.8(b)(ii), (ii) shares of
stock of Subsidiaries owned by the Company and its other Subsidiaries may be
disposed of in connection with a sale or other disposition by the Company of all
or substantially all of its assets in compliance with section 8.8(b)(iii); and
(iii) shares of stock of Subsidiaries may be pledged under the First Pledge
Agreements and the Second Pledge Agreements and sold or otherwise disposed of
upon exercise of the remedies thereunder.
8.8. Consolidation, Merger, Sale of Assets, etc. The Company
will not, and will not permit any Subsidiary to, directly or indirectly,
30
<PAGE> 36
(a) consolidate with or merge into any other Person or permit
any other Person to consolidate with or merge into it, except that:
(i) any Subsidiary may consolidate with or merge into
the Company or another Subsidiary if the Company or such other
Subsidiary, as the case may be, shall be the surviving
corporation and if, immediately after giving effect to such
transaction, no condition or event shall exist which
constitutes an Event of Default or Potential Event of Default;
(ii) any Subsidiary may consolidate with or merge
into any other corporation if the surviving corporation is a
Subsidiary and if each of the conditions set forth in
subdivision (a)(iv)(B) of this section 8.8 shall have been
fulfilled;
(iii) any corporation (other than a Subsidiary) may
consolidate with or merge into the Company or a Subsidiary if
the Company or such Subsidiary, as the case may be, shall be
the surviving corporation and if each of the conditions set
forth in subdivision (a)(iv)(B) of this section 8.8 shall have
been fulfilled; and
(iv) the Company may consolidate with or merge into
any other corporation if (A) either (x) the Company shall be
the continuing or surviving corporation (in the case of any
such merger), or (y) the successor shall be a solvent
corporation organized under the laws of any State of the
United States of America and shall expressly assume in writing
all of the obligations of the Company under this Agreement,
the Notes and the Operative Agreements to which the Company is
a party, including all covenants herein and therein contained,
and such successor corporation shall succeed to and be
substituted for the Company with the same effect as if it had
been named herein as a party hereto, and (B) immediately after
giving effect to such transaction, (x) no condition or event
shall exist which constitutes an Event of Default or Potential
Event of Default, (y) the Company's Net Worth or the
consolidated net worth of the surviving corporation and its
subsidiaries, as the case may be, shall not be less than the
Company's Net Worth immediately prior to such transaction, and
(z) a majority of the consolidated revenues of the Company or
the surviving corporation, as the case may be, on a pro forma
basis shall be derived from operations in similar lines of
business to those of the businesses operated by the Company
and its Subsidiaries on the Closing Date;
31
<PAGE> 37
(b) sell, lease, abandon or otherwise dispose of all or
substantially all its assets, except that:
(i) any Subsidiary may sell, lease or otherwise
dispose of all or substantially all its assets to the Company
or another Subsidiary;
(ii) subject to compliance with subdivision (c) of
this section 8.8, any Subsidiary may sell, lease or otherwise
dispose of all or substantially all its assets as an entirety
for a consideration at least equal to the fair value thereof
(as determined in good faith by the Board of Directors of the
Company) at the time of such disposition if such Subsidiary
does not at the time own (A) any Funded Debt of the Company,
(B) any Funded Debt of any other Subsidiary which is not also
being simultaneously sold as an entirety in compliance with
this subdivision (b)(ii) or the proviso to section 8.7, unless
the Company or such Subsidiary would be permitted to incur
such Funded Debt pursuant to section 8.1, or (C) any stock of
any other Subsidiary which is not also being simultaneously
sold as an entity in compliance with this subdivision (b)(ii)
or the proviso to section 8.7; and
(iii) the Company may sell, lease or otherwise
dispose of all or substantially all its assets to any
Wholly-Owned Subsidiary or to a corporation into which the
Company could be consolidated or merged in compliance with
subdivision (a)(iv) of this section 8.8, provided that (A)
each of the conditions set forth in such subdivision (a)(iv)
shall have been fulfilled, and (B) no such disposition shall
relieve the Company from its obligations under this Agreement,
the Notes or the Operative Agreements to which the Company is
a party; or
(c) sell, lease, abandon or otherwise dispose of any of its
assets (except in the ordinary course of business or by a Subsidiary to the
Company or another Subsidiary or by the Company to a Wholly-Owned Subsidiary or
in a transaction permitted by subdivision (a)(iv) or (b)(iii) of this section
8.8) unless, immediately after giving effect to such proposed disposition,
(i) the assets so disposed of (whether or not leased
back) by the Company and its Subsidiaries during the then
current fiscal year of the Company (including assets disposed
of through dispositions of shares pursuant to section 8.7),
but excluding assets disposed of if the Company or such
Subsidiary at the time of such disposition either has
previously acquired or is simultaneously acquiring, in
contemplation of such
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<PAGE> 38
disposition, substantially similar assets, or has previously
entered into, or is simultaneously entering into, a binding
purchase agreement or agreements to acquire substantially
similar assets, which assets are acquired within one year of
such disposition, (A) shall not have an aggregate net book
value (determined as to particular assets as of the respective
dates of disposition of such assets), in excess of 15% of the
aggregate net book value of all assets of the Company and its
Subsidiaries at the end of the most recently completed fiscal
year and (B) shall not have contributed more than 15% of
consolidated Unit Operating Profit of the Company and its
Subsidiaries from continuing operations for the period of the
three fiscal years then most recently completed taken as a
single period; and
(ii) no condition or event shall exist which
constitutes an Event of Default or Potential Event of
Default;
provided that the Company may sell the real property owned or leased (from the
Company or any of its Subsidiaries) by the Art Institute of Seattle and the
Colorado Institute of Art in a sale and lease-back transaction, and provided
further that, following the occurrence and during the continuance of an event of
default or potential event of default under the Bank Credit Agreement, the
Company or any of its Subsidiaries may sell, lease or otherwise dispose of its
assets if (x)(A) the condition set forth in clause (i)(B) of this section 8.8(c)
shall have been fulfilled or (B) in the event that the Unit Operating Profit
associated with any assets so disposed of is not reasonably ascertainable, the
condition set forth in clause (i)(A) of this section 8.8(c) shall have also been
fulfilled, and (y) the proceeds of such sale, lease or other disposition shall
be promptly applied to the repayment of Superior Debt.
8.9. Loans, Advances and Investments. The Company will not
make or permit to remain outstanding any loan or advance to, or extend credit
to, or own, purchase or acquire any stock, obligations or securities of, or any
other interest in, or make any capital contributions to, any Person (all of the
foregoing being referred to herein as "Investments"), except that the Company or
any Subsidiary may:
(a) make and permit to remain outstanding Investments in any
Subsidiary or any Person which simultaneously therewith becomes a
Subsidiary;
(b) make and permit to remain outstanding trade credit in the
ordinary course of business;
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<PAGE> 39
(c) make and permit to remain outstanding Investments in
Student Loans in unpaid principal amount not exceeding $7,500,000 in
the aggregate owned by the Company and its Subsidiaries at any one
time;
(d) own, purchase or acquire 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 year from the date of purchase and payable in the United States in
United States dollars, obligations of the United States Government or
any agency thereof, and obligations guaranteed by the United States
Government, and repurchase agreements of such banks for terms of less
than one year in respect of the foregoing certificates and obligations;
(e) acquire and own Investments received in settlement of
debts (created in the ordinary course of business) owing to the Company
or any Subsidiary and make and own any other Investments in the
ordinary course of business, provided that the aggregate amount of all
Investments (at cost) owned under this subdivision (e) by the Company
and its Subsidiaries at any one time shall not exceed $500,000;
(f) make and permit to remain outstanding travel and other
like advances to officers and employees of the Company or any of its
Subsidiaries in the ordinary course of business which advances at any
one time shall not exceed $500,000; and
(g) make or permit to remain outstanding a loan in a principal
amount not exceeding $36,200,000 to the ESOP as contemplated by section
5.1 of the Bank Credit Agreement.
8.10. Transactions with Affiliates. The Company will not, and
will not permit any Subsidiary to, directly or indirectly, enter into or engage
in any transaction (including, without limitation, the purchase, sale, lease or
exchange of any property or the rendering of any service) with any Affiliate of
the Company, except pursuant to the reasonable requirements of the business of
the Company or such Subsidiary and upon fair and reasonable terms that are not
materially less favorable to the Company or such Subsidiary than those which
might be obtained in the good faith judgment of the Company in an arm's-length
transaction at the time from Persons which are not such an Affiliate, provided
that the foregoing restriction shall not apply to any transaction between the
Company and a Subsidiary or between one Subsidiary and another Subsidiary or to
reasonable compensation or related benefits to an employee or officer of the
Company or any of its Subsidiaries.
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<PAGE> 40
8.11. Payment of Taxes and Claims; Tax Consolidation. The
Company will, and will cause each Subsidiary to, pay all taxes, assessments and
other governmental charges imposed upon it or any of its properties or assets or
in respect of any of its franchises, business, income or property before any
penalty or interest accrues thereon, and all claims material to the Company and
its Subsidiaries, taken as a whole (including, without limitation, claims for
labor, services, materials and supplies), for sums which have become due and
payable and which by law have or may become a Lien upon any of its properties or
assets, prior to the time when any penalty or fine shall be incurred with
respect thereto, provided that no such charge or claim need be paid if being
contested in good faith by appropriate proceedings and if such accrual or other
appropriate provision, if any, as shall be required by GAAP shall have been made
therefor. The Company will not file or consent to or permit the filing of or be
a party to any consolidated income tax return on behalf of itself or any of its
Subsidiaries with any Person (other than a consolidated return of the Company
and its own Subsidiaries).
8.12. Compliance with ERISA. The Company covenants that it
will not, and will not permit any Subsidiary or Related Person to:
(a) (i) engage in any transaction in connection with which the
Company or any Related Person could be subject to either a civil
penalty assessed pursuant to section 502(i) of ERISA or a tax imposed
by section 4975 of the Code (provided, however, that this section
8.12(a)(i) shall not be deemed breached solely as a result of any
resale by you of the Notes or Warrants), (ii) terminate or withdraw
from any Plan (other than a Multiemployer Plan), (iii) take any other
action with respect to any Plan which could result in any liability of
the Company or any Related Person to the PBGC, a Plan, a participant or
a trustee appointed under section 4042(b) or (c) of ERISA, (iv) incur
any liability to the PBGC, a Plan or any participant on account of a
withdrawal from or a termination of a Plan under section 4063 or 4064
of ERISA, (v) fail to make full payment when due of all amounts which,
under the provisions of any Plan or applicable law, the Company or any
Related Person is required to pay as contributions thereto, or (vi)
permit to exist any accumulated funding deficiency, whether or not
waived, with respect to any Plan,
if, in any such case, such penalty or tax or such liability, or the failure to
make such payment, or the existence of such deficiency, as the case may be,
could reasonably be expected to result in a liability of the Company in excess
of $5,000,000 in the aggregate;
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<PAGE> 41
(b) at any time permit the present value of all benefit
liabilities under all Plans maintained at such time by the Company or
any Related Person (other than Multiemployer Plans) to exceed the
current value of the assets of all such Plans allocable to such benefit
liabilities by more than $5,000,000;
(c) permit the aggregate complete or partial withdrawal
liability under Title IV of ERISA with respect to Multiemployer Plans
incurred by the Company or any Related Person to exceed $5,000,000;
(d) permit the sum of (i) the amount by which the present
value of all benefit liabilities referred to in subdivision (b) of this
section 8.11 exceeds the current value of the assets referred to in
such subdivision (b) and (ii) the amount of the aggregate incurred
withdrawal liability referred to in subdivision (c) of this section
8.11 to exceed $5,000,000; or
(e) incur any vested liability under applicable law in respect
of employees or former employees of the Company or any Related Person
for post-employment retiree medical benefits (other than as required by
law) in excess of $5,000,000.
For the purposes of subdivisions (c) and (d) of this section 8.12, the amount of
the withdrawal liability of the Company and its Subsidiaries and the Related
Persons at any date shall be the aggregate present value of the amount claimed
to have been incurred less any portion thereof as to which the Company
reasonably believes, after appropriate consideration of possible adjustments
arising under sections 4219 and 4221 of ERISA, it and its Subsidiaries and its
Related Persons will have no liability, provided that the Company shall obtain
prompt written advice from independent actuarial consultants supporting such
determination. The Company agrees that at your request (and at your expense) it
will (A) once in each calendar year request and use its best efforts to obtain a
current statement of withdrawal liability from each Multiemployer Plan and (B)
transmit a copy of such statement to such holder of Notes, within 15 days after
the Company receives the same. As used in this section 8.12 the term
"accumulated funding deficiency" has the meaning specified in section 302 of
ERISA and section 412 of the Code, and the terms "present value" and "current
value" have the meanings specified in section 3 of ERISA and the term "benefit
liabilities" has the meaning specified in section 4001(a)(16) of ERISA.
8.13. Compliance with Laws, etc. The Company will use its best
efforts in order to assure that at all times it complies with the requirements
of all applicable laws, rules, regulations
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<PAGE> 42
and orders of any governmental authority, noncompliance with which would
materially adversely affect the business, condition (financial or other),
assets, properties or operations of the Company and its Subsidiaries, taken as a
whole.
8.14. Maintenance of Properties; Insurance. The Company will
maintain or cause to be maintained in good repair, working order and condition
all properties used or useful in the business of the Company, ordinary wear and
tear excepted, and from time to time will make or cause to be made all
appropriate repairs, renewals and replacements thereof. The Company will
maintain, with financially sound and reputable insurers, insurance with respect
to its properties and business against loss or damage of the kinds customarily
insured against by corporations engaged in the same or similar business and
similarly situated, of such types and in such amounts as are customarily carried
under similar circumstances by such other corporations.
8.15. Amendment of Operative Agreements. The Company will not
amend, supplement or otherwise modify, or permit to be amended, supplemented or
otherwise modified:
(a) any term or provision of the Bank Credit Agreement
relating to affirmative and negative covenants or events of default, if
such amendment, supplement or modification, together with all other
amendments, supplements and modifications thereto becoming effective
concurrently therewith, would, in the aggregate, and taking into
account all circumstances, have the effect of subjecting the Company to
covenants and events of default which are materially more onerous than
those in effect prior to such action, provided that no amendment to the
Bank Credit Agreement shall extend the maturity of the Bank Credit,
increase the rate of interest payable with respect to the Bank Credit,
or restrict or limit the ability of the Company to pay the principal
of, or interest or premium, if any, on the Notes or any other amounts
payable under this Agreement to any greater extent than the provisions
contained in section 6.16 of the Bank Credit Agreement;
(b) any material term contained in the Pledge Agreement, the
Second Pledge Agreement or the Collateral Trust Agreement; or
(c) any material term or provision of its Certificate of
Incorporation or By-Laws.
8.16. Maintenance of ESOP. The Company will cause the ESOP to
be maintained in existence and be operated and administered as a qualified
employee stock ownership plan under section 401(a) and, to the extent
applicable, sections 402 and
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<PAGE> 43
4975(e)(7) of the Code, provided that the Company may cause the ESOP to be
terminated if an adverse change in the tax laws has occurred which, in the good
faith judgment of the Company, makes commercially unreasonable continued
maintenance of the ESOP.
8.17. Additional Subsidiary Pledge Agreements. Within 90 days
of the date on which any Subsidiary (an "Active Subsidiary") (i) becomes an
Accredited Subsidiary, (ii) has assets with a book value exceeding $50,000 in
the aggregate, or (iii) has revenues of at least $100,000 in any fiscal year of
the Company, the Company will, and/or will cause the Subsidiary or Subsidiaries
holding any equity securities in such Active Subsidiary to, execute a Subsidiary
Pledge Agreement substantially in the form of Exhibit E-1 or E-2, as the case
may be, with respect to such equity securities and will deliver, or cause to be
delivered, such equity securities to the holders of the Notes or their
designated agent, so that the holders of the Notes will have a valid and
perfected security interest (subject only to the Intercreditor Agreement, if
then in effect) in all such equity securities of such Active Subsidiary.
9. Prepayment of Notes.
9.1. Required Scheduled Prepayments. On December 30 in each of
the years 1997 and 1998, the Company will prepay $8,334,000 principal amount (or
such lesser principal amount as shall then be outstanding) of the Notes, at the
principal amount of the Notes so prepaid, without premium, provided that, upon
any prepayment pursuant to section 9.4 of less than all of the Notes at the time
outstanding, the principal amount of each required prepayment of the Notes
becoming due under this section 9.1 on and after the date of such prepayment
pursuant to section 9.4 shall be reduced in the same proportion as the aggregate
unpaid principal amount of the Notes is reduced as a result of such prepayment
pursuant to section 9.4. No partial prepayment of the Notes pursuant to section
9.2 or 9.3 and no acquisition of any Notes by the Company shall relieve the
Company from its obligation to make the required prepayment provided for in this
section 9.1.
9.2. Optional--Prepayments Without Premium. On each December
30 when a prepayment is required to be made with respect to the Notes pursuant
to section 9.1, the Company may, at its option, upon notice as provided in
section 9.5, prepay an additional principal amount of the Notes (an integral
multiple of $1,000) not exceeding the amount of such required prepayment, at the
principal amount of the Notes so prepaid, without premium. The right to make an
optional prepayment pursuant to this section 9.2 on any date on which a
prepayment pursuant to section 9.1 is being made shall be noncumulative and the
right to make such a prepayment pursuant to this section 9.2 on such date shall
lapse if and to the extent not exercised on such date.
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9.3. Optional Prepayment of Notes with Premium. At any time
after December 30, 1994 and from time to time thereafter, the Company may, at
its option, upon notice as provided in section 9.5, prepay all or any part (in
integral multiples of $1,000) of the Notes at the principal amount so prepaid,
plus the premium (a percentage of such principal amount) applicable in
accordance with the following table, depending on the 12-month period in which
the date fixed for such prepayment occurs:
<TABLE>
<CAPTION>
12-Month Period
Commencing Percentage
--------------- ----------
<S> <C> <C>
December 30, 1994 5.889%
December 30, 1995 4.417
December 30, 1996 2.944
December 30, 1997 1.472
December 30, 1998 0.000
</TABLE>
provided that in the event the holders of the Warrants or Common Stock issued
upon the exercise of any Warrants shall have exercised their Put, the Company
shall not be obligated to pay any premium upon any prepayment of Notes pursuant
to this section 9.3.
9.4. Required Prepayment Upon Change of Control With
Premium. If, at any time after the occurrence of a Change of
Control until (with respect to any holder of a Note) the later of
(a) the date that is 45 days after such holder of a Note shall
have received a notice of such occurrence from the Company pursuant to
section 7.1(i); and
(b) the date that is 15 days after such holder shall have
received from the Company pursuant to the last sentence of this section
9.4 a copy of a notice from any other holder of a Note requiring the
prepayment of such Note in accordance with this section 9.4,
such holder of a Note shall deliver a notice to the Company (A) stating that it
is electing to exercise its right to require the prepayment pursuant to this
section 9.4 of the Note or Notes then held by such holder and (B) specifying the
date on which such prepayment shall occur (which date shall not be less than 15
nor more than 30 days after the date on which such holder shall have delivered
such notice to the Company), the Company, on such date, shall prepay the Note or
Notes then held by such holder, at the principal amount so prepaid plus interest
thereon to the prepayment date and (x) if the Change of Control occurs on or
prior to the fifth anniversary of the Closing Date, the Make-Whole Premium, if
any, with respect to each such Note and (y) if the Change of Control occurs
after the fifth anniversary
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<PAGE> 45
of the Closing Date, a premium equal to the premium applicable to a prepayment
made pursuant to section 9.3 on the date the Change of Control occurs. Promptly,
and in any event within five days following receipt thereof, the Company will
deliver to each other holder of a Note a copy of each notice delivered to the
Company pursuant to this section 9.4.
9.5. Notice of Certain Prepayments; Officers' Certificate. The
Company will give each holder of any Note written notice of each prepayment
under section 9.2 or 9.3 not less than 30 and not more than 60 days prior to the
date fixed for such prepayment, in each case specifying such date and the
aggregate principal amount of each Note held by such holder to be prepaid on
such date.
9.6. Allocation of Partial Prepayments. In the case of each
partial prepayment of the Notes (except a prepayment pursuant to section 9.4),
the principal amount of the Notes to be prepaid shall be allocated (in integral
multiples of $1,000) among all of the Notes at the time outstanding in
proportion, as nearly as practicable, to the respective unpaid principal amounts
thereof not theretofore called for prepayment, with adjustments, to the extent
practicable, to compensate for any prior prepayments not made exactly in such
proportion. For the purpose of this section 9 only, any Notes acquired by the
Company (including any Notes which shall have been cancelled as provided in
section 9.8 but excluding any Notes which shall have been prepaid pursuant to
section 9.1, 9.2 or 9.3) shall be deemed to be outstanding and the company shall
be deemed to be the holder thereof.
9.7. Maturity; Surrender. In the case of each prepayment, the
principal amount of each Note to be prepaid shall mature and become due and
payable on the date fixed for such prepayment, together with interest on such
principal amount accrued to such date and the applicable premium, if any. From
and after such date, unless the Company shall fail to pay such principal amount
when so due and payable, together with the interest and premium, if any, as
aforesaid, interest on such principal amount shall cease to accrue. Any Note
paid or prepaid in full shall be surrendered to the Company and cancelled and
shall not be reissued, and no Note shall be issued in lieu of any prepaid
principal amount of any Note.
9.8. Acquisition of Notes. The Company will not, and will not
permit any of its Affiliates to, prepay, purchase, redeem or otherwise acquire
any Note, except upon the payment or prepayment thereof in accordance with the
terms of this Agreement and such Note, or pursuant to a purchase or exchange
offer made ratably among all holders of the Notes based upon the aggregate
principal amount of the Notes held by each such holder. In case the Company
acquires any Notes pursuant to any such offer, such
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<PAGE> 46
Notes shall thereafter be cancelled and shall not be reissued and no Note shall
be issued in substitution therefor.
10. Subordination of Notes.
10.1. General. All Subordinated Debt shall, notwithstanding
any provision of this Agreement or the Notes to the contrary, be subordinate and
junior in right of payment to all Superior Debt (as each such term is defined in
section 10.2) to the extent and in the manner provided in this section 10.
10.2. Subordinated and Superior Debt. As used in this section
10:
(i) the term "Subordinated Debt" shall mean all principal of
and premium, if any, and interest on all Indebtedness evidenced by the
Notes; and
(ii) the term "Superior Debt" shall mean (a) all principal of
and premium, if any, and interest on and all other obligations of the
Company under and claims in respect of (x) the Bank Credit and the Bank
Credit Agreement (including overdrafts not exceeding $1,000,000 in the
aggregate) and (y) all other Funded Debt permitted by subdivision (c)
of section 8.1, excluding Funded Debt which is subordinated in right of
payment to any other Indebtedness, (b) all obligations of the Company
under interest rate swap agreements, interest rate cap agreements and
similar instruments providing interest protection for up to (but not
more than) $15,000,000 portion of the Term Loan such that the costs of
funds to the Company with respect to such amount would not exceed a
rate as low as 12% per annum, and (c) Indebtedness in respect of
letters of credit and bankers' acceptances not exceeding $500,000 in
aggregate amount at any time.
Superior Debt shall continue to be Superior Debt and entitled to the benefits of
these subordination provisions irrespective of any amendment, modification or
waiver of any term of the Superior Debt or extension or renewal (in compliance
with the terms of this Agreement) of the Superior Debt.
10.3. Default in Respect of Superior Debt. (a) In the event
the Company shall default in the payment of any principal of, or premium, if
any, or interest on or other amount with respect to any Superior Debt when the
same becomes due and payable, whether at maturity or at a date fixed for
prepayment or by declaration or otherwise (a "Payment Default"), then, during
any period (such period, a "Payment Default Blockage Period") commencing on the
date on which the Company shall have received written notice of such Payment
Default from the Agent
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<PAGE> 47
under the Bank Credit Agreement and continuing until such Payment Default shall
have been remedied or waived or shall have ceased to exist, no direct or
indirect payment by the Company or any of its Subsidiaries or from any of their
respective assets, from any judgments or from any other sources (in cash,
property or securities or by set-off or otherwise) shall be made on account of
the principal of, or premium, if any, or interest on or other amounts with
respect to any Subordinated Debt, or as a sinking fund for Subordinated Debt, or
in respect of any redemption, retirement, purchase or other acquisition of any
Subordinated Debt.
(b) Upon the happening of a Specified Superior Event of
Default (other than a Payment Default), then, unless and until such event of
default shall have been remedied or waived or shall have ceased to exist, no
direct or indirect payment by the Company or any of its Subsidiaries or from any
of their respective assets, from any judgments or from any other source (in
cash, property or securities or by set-off or otherwise) shall be made on
account of the principal of, or premium, if any, or interest on any Subordinated
Debt, or as a sinking fund for the Subordinated Debt, or in respect of any
redemption, retirement, purchase or other acquisition of any Subordinated Debt,
during any period (such period, a "Specified Default Blockage Period") of 179
days after the Company shall have received written notice of such Specified
Superior Event of Default (which notice shall expressly state that it is being
delivered under this section 10.3(b)) (i) from the Agent or (ii) at any time
after payment in full in cash or cash equivalent investments of all Indebtedness
and termination of all revolving credit commitments under the Bank Credit
Agreement, as amended from time to time, from the holders of a majority in
principal amount of the Superior Debt then outstanding, provided that only one
notice may be given for purposes of initiating such 179-day period pursuant to
the terms of this section 10.3(b) in any 365-day period.
(c) During any period that any Superior Debt is outstanding,
payment on the Subordinated Debt may not be accelerated (i) during any Payment
Default Blockage Period, for a period of 60 days commencing on the date on which
the notice commencing such Payment Default Blockage Period shall have been
received by the Company and the holders of the Subordinated Debt and (ii) during
any Specified Default Blockage Period, for a period of 30 days commencing on the
date on which the notice commencing such Specified Default Blockage Period shall
have been received by the Company and the holders of the Subordinated Debt
unless in the case of clauses (i) and (ii) above, (x) at the time such Payment
Default Blockage Period or Specified Default Blockage Period commences or at any
time during any such period, an Event of Default has occurred and is continuing
(other than an Event of Default arising under section
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13 as a result of nonpayment attributable to the operation of the payment
blockage provisions of subsections (a) and (b) of this section 10.3), (y)
Indebtedness in excess of $2,000,000 has been paid or any Superior Debt has been
accelerated and remains unpaid, or (z) the provisions of section 10.4 are
applicable.
10.4. Insolvency, etc. In the event of
(i) any insolvency, bankruptcy, receivership, liquidation,
reorganization, readjustment, composition or other similar proceeding
relating to the Company, its creditors as such or its property,
(ii) any proceeding for the liquidation, dissolution or other
winding-up of the Company, voluntary or involuntary, whether or not
involving insolvency or bankruptcy proceedings,
(iii) any assignment by the Company for the benefit of
creditors, or
(iv) any other marshalling of the assets of the Company,
all Superior Debt (including any claim for interest thereon accruing at the
contract rate after the commencement of any such proceedings and any claim for
additional interest that would have accrued thereon but for the commencement of
such proceedings, whether or not, in either case, such claim shall be
enforceable in such proceedings) shall first be paid in full in cash or cash
equivalent investments before any direct or indirect payment or distribution,
whether in cash, securities or other property (other than securities of the
Company or any other corporation provided for by a plan of reorganization or
readjustment the payment of which is subordinate, at least to the extent
provided in this section 10 with respect to the Subordinated Debt, to the
payment of all Superior Debt at the time outstanding and to any securities
issued in respect thereof under any such plan of reorganization or
readjustment), is made in respect of the Subordinated Debt, and any cash,
securities or other property (other than securities subordinated as aforesaid)
which would otherwise (but for these subordination provisions) be payable or
deliverable in respect of Subordinated Debt by the Company or any of its
Subsidiaries or from any of their respective assets, from any judgments or from
any other source shall be paid or delivered directly to the holders of Superior
Debt in accordance with the priorities then existing among such holders until
all Superior Debt (including claims for interest and additional interest as
aforesaid) shall have been paid in full in cash or cash equivalent investments.
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<PAGE> 49
10.5. Turnover of Payments. If (a) any payment or distribution
shall be collected or received by any holders of Notes in contravention of any
of the terms of this section 10 and prior to the payment in full in cash or cash
equivalent investments of the Superior Debt at the time outstanding and (b) any
holder of such Superior Debt (or any authorized agent thereof) shall have
notified such holders of the Notes of the facts by reason of which such
collection or receipt so contravenes this section 10 (such notice to be given
within 210 days following such payment or distribution, unless any holder of
Superior Debt (or any authorized agent thereof) shall have notified in writing
such holders of the Notes prior to receipt of such payment or distribution that
receipt of such payment or distribution would be in contravention of a specific
term of this Section 10), such holders of the Notes will deliver such payment or
distribution, to the extent necessary to pay all such Superior Debt in full in
cash or cash equivalent investments, to the holders of such Superior Debt and,
until so delivered, the same shall be held in trust by such holder of Notes as
the property of the holders of such Superior Debt. If after any amount is
delivered to the holders of Superior Debt pursuant to this section 10.5, which
amount has not been applied to the payment of Superior Debt, and the outstanding
Superior Debt shall thereafter be paid in full in cash or cash equivalent
investments by the Company or otherwise, other than pursuant to this section
10.5, the holders of Superior Debt shall return to such holders of the Notes an
amount equal to the amount delivered to such holders of Superior Debt pursuant
to this section 10.5 which has not been so applied.
10.6. No Prejudice or Impairment. No present or future holder
of any Superior Debt shall be prejudiced in the right to enforce subordination
of the Subordinated Debt by any act or failure to act on the part of the
Company. Nothing contained herein shall impair, as between the Company and the
holder of any Subordinated Debt, the obligation of the Company to pay to the
holder thereof the principal thereof and interest thereon as and when the same
shall become due and payable in accordance with the terms thereof, or, except as
provided herein or in the Intercreditor Agreement, prevent the holder of any
Subordinated Debt from exercising all rights, powers and remedies otherwise
permitted by applicable law or thereunder upon a Potential Event of Default or
Event of Default hereunder, all subject to the rights of the holders of the
Superior Debt to receive cash, securities or other property otherwise payable or
deliverable to the holders of Subordinated Debt by the Company or any of its
Subsidiaries or from any of their respective assets, from any judgments or from
any other source.
10.7. Payment of Superior Debt, Subrogation, etc. Upon the
payment in full in cash or cash equivalent investments of all Superior Debt, the
holders of Subordinated Debt shall be
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subrogated to all rights of any holders of Superior Debt to receive any further
payments or distributions applicable to the Superior Debt until the Subordinated
Debt shall have been paid in full in cash or cash equivalent investments, and,
for the purposes of such subrogation, no payment or distribution received by the
holders of Superior Debt of cash, securities, or other property to which the
holders of Subordinated Debt would have been entitled except for this section 10
shall, as between the Company and its creditors other than the holders of
Superior Debt, on the one hand, and the holders of Subordinated Debt, on the
other, be deemed to be a payment or distribution by the Company on account of
Superior Debt.
10.8. Miscellaneous. (a) The subordination provisions
contained in this section 10 are for the benefit of the holders of Superior Debt
and, so long as any Superior Debt is outstanding under any agreement, may not be
rescinded, cancelled or modified without the prior written consent thereto of
the requisite percentage of holders of Superior Debt as provided in such
agreements under which any Superior Debt is outstanding.
(b) The holders of the Subordinated Debt hereby (i) authorize
the holders of the Superior Debt, after the occurrence and during the
continuance of any event described in section 10.4, to execute, verify, deliver
and file any proofs of claim, consents, assignments or other instruments which
any such holder of Superior Debt may at any time reasonably require (but only in
the event that the holders of the Subordinated Debt shall not have done so in a
reasonably timely manner) in order to provide and realize upon any rights or
claims pertaining to the Subordinated Debt held by such holders of Subordinated
Debt and (ii) appoint each holder of Superior Debt their attorney-in-fact for
such purposes; provided that nothing contained in this section 10.3(b) shall be
construed as conferring upon the holders of Superior Debt the power to vote
claims belonging to the holders of Subordinated Debt.
11. Registration, Transfer and Substitution of Notes.
11.1. Note Register; Ownership of Notes. The Company will keep
at its principal office a register in which the Company will provide for the
registration of Notes and the registration of transfers of Notes. The Company
may treat the Person in whose name any Note is registered on such register as
the owner thereof for the purpose of receiving payment of the principal of and
the premium, if any, and interest on such Note and for all other purposes,
whether or not such Note shall be overdue, and the Company shall not be affected
by any notice to the contrary. All references in this Agreement to a "holder" of
any Note shall mean the Person in whose name such Note is at the time registered
on such register.
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11.2. Transfer and Exchange of Notes. The Notes are
transferable only in denominations of at least $500,000 (except one Note may be
issued in a lesser principal amount if the unpaid principal amount of the
surrendered Note is not evenly divisible by, or is less than $500,000) and only
upon surrender of the Notes for registration of transfer, duly endorsed, or
accompanied by a written instrument of transfer, duly executed, by the holder
thereof or such holder's attorney duly authorized in writing. Upon surrender of
any Note for registration of exchange or transfer to the Company at its
principal office, the Company at its expense will execute and deliver in
exchange therefor, a new Note or Notes in authorized denominations, as may be
requested by the holder or transferee, which aggregate the unpaid principal
amount of such surrendered Note and which are registered as such holder or
transferee may request, are dated so that there will be no loss of interest on
such surrendered Note and are otherwise of like tenor.
11.3. Replacement of Notes. Upon receipt of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of any Note and, in the case of any such loss, theft or destruction,
upon delivery of an indemnity bond in such reasonable amount as the Company may
determine (or, in the case of any Note held by you or an Institutional Holder or
your or its nominee, of an unsecured indemnity agreement from you or such other
holder reasonably satisfactory to the Company), or, in the case of any such
mutilation, upon the surrender of such Note for cancellation, at the principal
office of the Company, the Company, at its expense, will execute and deliver a
new Note of like tenor, dated so that there will be no loss of interest on such
lost, stolen, destroyed or mutilated Note. Any Note in lieu of which any such
new Note has been so executed and delivered by the Company shall not be deemed
to be an outstanding Note for any purpose of this Agreement.
12. Payments on Notes.
12.1. Place of Payment. Payments of principal, premium, if
any, and interest becoming due and payable on the Notes shall be made at the
principal office of [Name of New York City bank] in the City of New York and
State of New York, unless the Company, by written notice to each holder of any
Notes, shall designate the principal office of another bank or trust company in
such City as such place of payment, in which case the principal office of such
other bank or trust company shall thereafter be such place of payment.
12.2. Home Office Payment. So long as you or your nominee
shall be the holder of any Note and notwithstanding anything contained in
section 12.1 or in such Note to the contrary, all sums becoming due on such Note
for principal, premium, if any, and interest and all other amounts due to you
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under this Agreement will be paid by the method and at the address specified for
such purpose in the Schedule of Purchasers or by such other method or at such
other address as you shall have from time to time specified to the Company in
writing for such purpose, without the presentation or surrender of such Note or
the making of any notation thereon, except that any Note paid or prepaid in full
shall be surrendered to the Company at its principal office or at the place of
payment maintained by the Company pursuant to section 12.1 for cancellation.
Prior to any sale or other disposition of any Note held by you or your nominee
you will, at your election, either endorse thereon the amount of principal paid
thereon and the last date to which interest has been paid thereon or surrender
such Note to the Company in exchange for a new Note or Notes pursuant to section
12.2. The Company will afford the benefits of this section 12.2 to any
Institutional Holder which is the direct or indirect transferee of any Note
purchased by you under this Agreement and which has made the same agreement
relating to such Note as you have made in this section 12.2.
13. Events of Default; Acceleration. If any of the following
conditions or events ("Events of Default") shall occur and be continuing:
(a) if the Company shall default in the payment of any
principal of or premium, if any, on any Note after the same becomes due
and payable, whether at maturity or at a date fixed for prepayment or
by acceleration or otherwise; or
(b) if the Company shall default in the payment of any
interest on any Note for more than ten days after the same becomes due
and payable; or
(c) if the Company shall default in the performance of or
compliance with any term contained in this Agreement (other than those
referred to above in this section 13), or the Company or EMC shall
default in the performance of or compliance with any term contained in
the Pledge Agreements, and such default shall continue unremedied for
30 days after written notice thereof shall have been received by the
Company and, in the event any amount is outstanding under the Bank
Credit Agreement, the Agent from any holder of a Note; or
(d) if any representation or warranty made in writing by or on
behalf of the Company in this Agreement or in any Officers' Certificate
furnished in compliance with or in reference to this Agreement shall
prove to have been false or incorrect in any material respect on the
date as of which made; or
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(e) if (i) the Company shall default (as principal or
guarantor or other surety) in the payment of any principal of or
premium or interest on any Funded Debt which is then outstanding in a
principal amount of at least $1,000,000 in the aggregate, or (ii) any
event shall occur or condition shall exist in respect of any such
Funded Debt or under any evidence of any such Funded Debt or of any
mortgage, indenture or other agreement relating thereto the effect of
which, in the case of either (i) or (ii), has been to cause such Funded
Debt to become due before its stated maturity or before its regularly
scheduled dates of payment, provided that the acceleration of Funded
Debt of Pier Sixty Six Office Associates Limited Partnership, a
Washington limited partnership ("Pier 66") secured by the mortgage on
the real property owned by Pier 66 in fee simple and leased to the Art
Institute of Seattle shall not constitute an Event of Default under
this subdivision (e), unless the leasehold interest of the Art
Institute of Seattle in such real property is terminated as a result of
such acceleration; or
(f) if the Company or any Material Subsidiary shall (i) be
generally not paying its debts as they become due, (ii) file, or
consent by answer or otherwise to the filing against it of, a petition
for relief or reorganization or arrangement or any other petition in
bankruptcy, for liquidation or to take advantage of any bankruptcy or
insolvency law of any jurisdiction, (iii) make an assignment for the
benefit of its creditors, (iv) consent to the appointment of a
custodian, receiver, trustee or other officer with similar powers with
respect to it or with respect to any substantial part of its property,
(v) be adjudicated insolvent or be liquidated under any bankruptcy or
insolvency law or (vi) take corporate action for the purpose of any of
the foregoing; or
(g) if a court or governmental authority of competent
jurisdiction shall enter an order appointing, without consent by the
Company or any Material Subsidiary, a custodian, receiver, trustee or
other officer with similar powers with respect to it or with respect to
any substantial part of its property, or if an order for relief shall
be entered in any case or proceeding for liquidation or reorganization
or otherwise to take advantage of any bankruptcy or insolvency law of
any jurisdiction, or ordering the dissolution, winding-up or
liquidation of the Company or any Material Subsidiary, or if any
petition for any such relief shall be filed against the Company or any
Material Subsidiary and such petition shall not be dismissed within 60
days; or
(h) if a final judgment or judgments shall be rendered against
the Company or any Subsidiary for the payment of
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money in excess of $1,000,000 in the aggregate (net of insurance
proceeds applied to, or payable with respect to, the discharge thereof)
and any one of such judgments shall not be discharged or execution
thereon stayed pending appeal within 60 days after entry thereof, or in
the event of such a stay, such a judgment shall not be discharged
within 60 days after such stay expires;
then, (x) upon the occurrence of any Event of Default described in subdivision
(f) or (g) of this section 13 (other than such an Event of Default described in
clause (i) of subdivision (f) or described in clause (vi) of subdivision (f) by
virtue of the reference in such clause (vi) to such clause (i)), the unpaid
principal amount of and accrued interest on the Notes shall automatically become
due and payable, or (y) upon the occurrence of any other Event of Default, any
holder or holders (other than the Company or any of its Affiliates) of 51% or
more in principal amount of the Notes at the time outstanding (excluding any
Notes directly or indirectly owned by the Company or any of its Affiliates) may
at any time (unless all Events of Default or Potential Events of Default shall
theretofore have been remedied) at its or their option, by written notice or
notices to the Company and, in the event any amount is outstanding under the
Bank Credit Agreement, to the Agent, declare all the Notes to be due and
payable, whereupon the same shall forthwith mature and become due and payable,
together with interest accrued thereon and, upon the occurrence of any Event of
Default referred to in the foregoing subdivision (a), (b) or (c) (but, in the
case of any term referred to in such subdivision (c) other than those contained
in sections 7.1, 8.1 through 8.5, 8.8, 8.9, 8.10, 8.15, or 8.16, only if the
Company has willfully, intentionally or knowingly taken or omitted to take any
action resulting in such Event of Default), there shall also be due and payable,
to the extent permitted by applicable law, the Make-Whole Premium in respect of
the principal amount of the Notes so declared due and payable, all without
presentment, demand, protest or notice, which are hereby waived.
At any time after the principal of, and interest accrued on,
any or all of the Notes are declared due and payable, the holders of not less
than 51% in aggregate principal amount of the Notes then outstanding (excluding
any Notes directly or indirectly owned by the Company or any of its Affiliates),
by written notice to the Company, may rescind and annul any such declaration and
its consequences if (x) the Company has paid all overdue interest on the Notes,
the principal of and premium, if any, on any Notes which have become due
otherwise than by reason of such declaration, and interest on such overdue
principal and premium and (to the extent permitted by applicable law) any
overdue interest in respect of the Notes, (y) all Events of Default, other than
non-payment of amounts which have become due solely by reason of such
declaration, and all conditions and
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events which constitute Events of Default or Potential Events of Default have
been cured or waived pursuant to section 18, and (z) no judgment or decree has
been entered for the payment of any monies due pursuant to the Notes or this
Agreement; but no such rescission and annulment shall extend to or affect any
subsequent Event of Default or Potential Event of Default or impair any right
consequent thereon.
14. Remedies on Default, etc. In case any one or more Events
of Default or Potential Events of Default shall occur and be continuing, the
holder of any Note at the time outstanding may proceed to protect and enforce
the rights of such holder by an action at law, suit in equity or other
appropriate proceeding, whether for the specific performance of any agreement
contained herein or in such Note or for an injunction against a violation of any
of the terms hereof or thereof, or in aid of the exercise of any power granted
hereby or thereby or by law or otherwise, and, after the occurrence of an Event
of Default, the Company will pay to the holder thereof such further amount as
shall be sufficient to cover costs and expenses (including, without limitation,
reasonable attorneys' fees, expenses and disbursements) incurred in connection
with any such proceeding or any collection of any amounts due such holder under
the Notes and this Agreement. No course of dealing and no delay on the part of
any holder of any Note in exercising any right, power or remedy shall operate as
a waiver thereof or otherwise prejudice such holder's rights, powers or
remedies. No right, power or remedy conferred by this Agreement or by any Note
upon any holder thereof shall be exclusive of any other right, power or remedy
referred to herein or therein or now or hereafter available at law, in equity,
by statute or otherwise.
15. Definitions.
15.1. Certain Defined Terms. As used in this Agreement, the
following terms have the following respective meanings:
Accredited Subsidiaries: Those Subsidiaries which are
accredited or approved, as applicable, by the National Association of Trade and
Technical Schools, the American Bar Association or any other similar Person
which accredits, certifies or otherwise approves proprietary post-secondary
vocational or career training schools.
Adjusted Net Worth: At any time of determination, all amounts
which, in accordance with GAAP, would be included under stockholders' equity on
the consolidated balance sheet of the Company and its Subsidiaries at such time,
plus the sum of (a) the amount of any accounting basis adjustment reflected in
such stockholders' equity pursuant to the application of the rules for purchase
accounting in accordance with GAAP for the
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purpose of adjusting the Management Stockholders' reported equity interest in
the Company after the consummation of the transactions contemplated by section
4.9 hereof and (b) any Cumulative Purchase Price Adjustment to such time.
Affiliate: With reference to any Person, any other Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such Person, provided that neither you nor any of your
Affiliates nor any Institutional Holder which is a direct or indirect transferee
of any Notes or Warrants purchased by you under this Agreement by virtue of such
Institutional Holder's holding such Notes or Warrants or any shares of Common
Stock issued upon the exercise of such Warrants shall be deemed to be an
Affiliate of the Company. For the purposes 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
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.
Agent: PNB, or any successor agent, in its capacity as
agent for the Banks under the Bank Credit Agreement.
Bank Credit Agreement: The Credit Agreement, dated as of
October 25, 1989, among the Company, the Banks and the Agent, as the same may be
amended, modified or supplemented from time to time in accordance with section
8.15.
Bank Credit: All loans and other credit extended under the
Bank Credit Agreement.
Banks: PNB, the other banks named in the Bank Credit Agreement
and the assignees of PNB and such banks.
Business Day: Any day except a Saturday, a Sunday or other day
on which commercial banks in New York City are required or authorized by law to
be closed.
Capital Expenditures: For any period, all amounts debited to
the fixed asset accounts on the consolidated balance sheet of any Person during
such period (or required to be so debited in accordance with GAAP) with 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.
Capital Lease: As applied to any Person, any lease of any
property (whether real, personal or mixed) by such Person as lessee which would,
in accordance with GAAP, be required to be classified and accounted for as
capital lease on a balance sheet
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of such Person, other than, in the case of the Company or a Subsidiary, any such
lease under which the Company or a Subsidiary is the lessor.
Capital Lease Obligation: With respect to any Capital Lease,
the amount of the obligation of the lessee thereunder which would, in accordance
with GAAP, appear on a balance sheet of such lessee in respect of such Capital
Lease.
Cash Flow from Operations: For any period, the amount equal to
the sum, computed for such period, of (a) the sum of (i) Net Income for such
period, plus (ii) the amount deducted for income taxes in determining Net Income
for such period, plus (iii) consolidated interest expense of the Company and its
Subsidiaries for such period, as determined in accordance with GAAP, plus (iv)
the amount deducted, in determining Net Income for such period, representing
contributions to the ESOP, plus (v) the amount deducted for non-cash charges in
determining Net Income for such period, minus (b) the sum of (i) the amount of
any non-cash credits to Net Income for such period, plus (ii) the aggregate
proceeds paid during such period to the Company pursuant to life insurance
policies maintained by it with respect to its employees or the employees of any
of its Subsidiaries.
Change of Control: Any transaction the result of which is that
(a) any Person or any "group" (as such term is used in section 13(d) and 14(d)
of the Exchange Act) becomes, directly or indirectly, the beneficial owner of a
majority (by number of votes) of the Voting Stock of the Company or of any
corporation which shall have succeeded to the obligations of the Company under
this Agreement and the Notes; or (b) all or substantially all of the assets of
the Company are sold, leased or otherwise disposed of to any Person or any such
"group"; or (c) one or more of the Permitted Owners, shall not own in the
aggregate at any time at least 2,790,822 shares of Common Stock (adjusted for
stock splits, reclassification or other similar transactions affecting the
Common Stock after the Closing Date), except as such shares may be repurchased
from Robert B. Knutson's estate pursuant to the RBK Exchange and Repurchase
Agreement between Mr. Knutson and the Company, provided that if any transaction
consists of the conversion of any convertible security outstanding immediately
after the Closing, or the exercise of any warrant, option or right outstanding
immediately after the Closing, or the acquisition of any securities by the ESOP,
by the Company or by any Person who immediately after the Closing is the holder
of any Common Stock or of any securities convertible into Common Stock or of any
warrants, options or rights to purchase Common Stock (an "Excluded
Transaction"), or if any transaction would not have had the effect specified in
clause (a), (b) or (c) but for the fact that before such transaction is effected
one or more Excluded Transactions have been effected, such Excluded Transaction
or other transaction shall not be a Change of
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Control, and, further provided, that if the effect specified in clause (a)
resulted immediately after the sale or other disposition by the Purchasers of
the Warrants or the Common Stock issuable upon the exercise of the Warrants,
such a transaction shall not be a Change of Control.
Class A Common Stock: Class A Common Stock of the Company,
having a par value of (a) $.10 per share prior to the consummation of the merger
of EMC Recapitalization, Inc. into the Company on the Closing Date as
contemplated by section 4.9 hereof and (b) $.0001 per share after the
consummation of such merger.
Class B Common Stock: As defined in section 1.
Class C Common Stock: Class C Common Stock, par value $.10 per
share, of the Company.
Closing: As defined in section 3.
Closing Date: As defined in section 3.
Code: The Internal Revenue Code of 1986, as amended from time
to time, and the rulings and regulations promulgated thereunder.
Commission: The United States Securities and Exchange
Commission and any successor federal agency having similar powers.
Common Stock: The Class A Common Stock and the Class B Common
Stock.
Consolidated Funded Debt: At any time of determination, all
Funded Debt of the Company and its Subsidiaries on a consolidated basis
outstanding at such time of determination.
Consolidated Indebtedness for Borrowed Money: At any time of
determination, all Indebtedness for Borrowed Money of the Company and its
Subsidiaries on a consolidated basis outstanding at such time of determination.
Cumulative Purchase Price Adjustment: At any time of
determination, (a)(i) the cumulative 1986 Purchase Price Adjustments from June
24, 1986 to such time and (ii) the cumulative Recapitalization Purchase Price
Adjustments from the Closing Date to such time, plus (b) an amount equal to the
deferred costs or expenses incurred by the Company in connection with the
leveraged buyout of the Company effected in 1986 and the transactions
contemplated by section 4.9 hereof which are due and payable or which are
otherwise amortized at or prior to such time.
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DOL: The United States Department of Labor and/or the United
States Secretary of Labor, or any successor thereto.
EMC: Education Management Corporation, a corporation organized
and existing under the laws of the Commonwealth of Pennsylvania.
Escrow Agreement: The Escrow and Pledge Agreement, dated as of
October 25, 1989, among the Company, the individuals who are parties thereto,
Robert B. Knutson and C. Thomas Burkett collectively as agent for the
Stockholders, the Agent and PNB as escrow agent.
ERISA: The Employee Retirement Income Security Act of 1974, as
amended from time to time, and the rulings and regulations promulgated
thereunder.
ESOP: The EMC Holdings, Inc. Employee Stock Ownership Plan,
established for the benefit of the Company employees as of January 1, 1989.
Event of Default: As defined in section 13.
Exchange Act: At any time, the Securities Exchange Act of
1934, as then in effect or any similar federal statute then in effect, and any
reference to a particular section of such Act shall include a reference to the
comparable section, if any, of any such similar federal statute.
Financial Institution: (i) Any bank, savings bank, savings and
loan association or insurance company, (ii) any pension plan or portfolio or
investment fund managed or administered by any bank, savings bank, savings and
loan association or insurance company, (iii) any investment company owned by any
bank, savings bank, savings and loan association or insurance company the
majority of the shares of the capital stock of which are traded on a national
securities exchange or in the National Association of Securities Dealers
automated quotation system, or (iv) any investment banking company.
Financial Statements: As defined in section 5.4.
Fixed Charge Coverage Ratio: At any time of determination, the
ratio, expressed as a percentage, of: (a) Cash Flow from Operations to (b) Fixed
Charges.
Fixed Charges: For any period, the sum of the following for
the Company and its Subsidiaries on a consolidated basis, after eliminating all
intercompany transactions: (a) all interest expense for such period, determined
in accordance with GAAP, other than accrued interest, whether paid or unpaid, on
the principal amount of Funded Debt permitted by the provisions of
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section 8.1(1) hereof, (b) all payments scheduled or otherwise required to be
made by the Company and its Subsidiaries during such period in respect of the
principal of Indebtedness for Borrowed Money, (c) the Company's contributions to
the ESOP during such period which contributions are not made pursuant to any
salary reduction agreement, (d) all payments made by the Company during such
period for redemptions of stock distributable pursuant to the terms of the ESOP,
(e) cash tax payments made by the Company and its Subsidiaries during such
period and (f) cash Capital Expenditures for such period.
Funded Debt: As applied to any Person, all Indebtedness of
such Person which by its terms or by the terms of any instrument or agreement
relating thereto matures, or which is otherwise payable or unpaid, more than one
year from, or is directly or indirectly renewable or extendible at the option of
the debtor to a date more than one year (including an option under any revolving
credit or similar agreement obligating the lender or lenders to extend credit
over a period of more than one year) from, the date of the creation thereof,
other than any such Indebtedness on account of which funds have been delivered
to an agent for the benefit of the creditors under such Indebtedness for the
payment thereof.
GAAP: Generally accepted accounting principles as set forth in
the opinions of the Accounting Principles Board of the American Institute of
Certified Public Accountants and statements of the Financial Accounting
Standards Board as in effect on the Closing Date.
Guarantee: As applied to any Person, any agreement,
undertaking or arrangement by which such Person guarantees, endorses or
otherwise becomes or is contingently liable upon (by direct or indirect
agreement, contingent or otherwise, to provide funds for payment, to "keep-well"
or supply funds to, or otherwise to invest in, a debtor, or otherwise to assure
a creditor against loss) the debt, obligation or other liability of any other
Person (other than by endorsements of instruments in the ordinary course of
collection), or guarantees the payment of dividends or other distributions upon
the shares of any other Person. The amount of the obligor's obligation under any
Guarantee shall (subject to any limitation set forth therein) be deemed to be
the amount of the debt, obligation or other liability guaranteed or supported
thereby.
Indebtedness: With respect to any Person means, without
duplication,
(a) all obligations of such Person for borrowed money
(including all notes payable and drafts accepted representing
extensions of credit) and all obligations of
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such Person evidenced by bonds, debentures, notes or other similar
instruments;
(b) all obligations, contingent or otherwise, relative to the
face amount of all letters of credit, whether or not drawn, and
bankers' acceptances issued for the account of such Person;
(c) all other items (including Capital Lease Obligations)
which, in accordance with GAAP, would be included as liabilities on the
liability side of a balance sheet of such Person as of the date at
which Indebtedness is to be determined;
(d) whether or not so included as liabilities in accordance
with GAAP,
(i) all indebtedness secured by a Lien on property
owned or being purchased by such Person (including
indebtedness arising under conditional sales or other title
retention agreements), whether or not such indebtedness shall
have been assumed by such Person or is limited in recourse;
and
(ii) all Guarantees made by such Person in
respect of which the obligation being guaranteed
constitutes Indebtedness of any Person; and
(e) net obligations of such Person under any agreement in
respect of interest rate swap, exchange, cap or similar arrangements or
in respect of currency hedging arrangements.
Indebtedness for Borrowed Money: As applied to any Person 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, Capital Lease
Obligation, deferred purchase price arrangement, title retention device,
reimbursement agreement, Guarantee, book entry or otherwise.
Indemnified Party: As defined in section 19.
Institutional Holder: Each of your Affiliates and each
Financial Institution which shall hold any Note.
Intercreditor Agreement: As defined in section 4.8.
Interest Coverage Ratio: As of the last day of any fiscal
quarter, the ratio computed for the period of four consecutive fiscal quarters
ending on the last day of such fiscal quarter (or, if less, for the period of
such lesser number of whole fiscal quarters commencing on October 1, 1989 and
ending on
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the last day of such fiscal quarter) of: (a) Cash Flow from Operations for such
period to (b) Interest Expense for such period.
Interest Expense: For any period, the total consolidated cash
interest due and payable by the Company and its Subsidiaries for such period
with respect to Consolidated Indebtedness for Borrowed Money, as determined in
accordance with GAAP.
Investment: As defined in section 8.9.
Leverage Ratio: At any time of determination, the ratio,
expressed as a percentage, of: (a) Net Debt to (b) Adjusted Net Worth.
Lien: As to any Person, any mortgage, lien, pledge, charge,
security interest or other encumbrance in or on, or any interest or title of any
vendor, lessor, lender or other secured party to or of such Person under any
conditional sale or other title retention agreement or lease classified as a
capital lease in accordance with GAAP with respect to, any property or asset of
such Person, or the signing or filing of a financing statement which names such
Person as debtor, or the signing of any security agreement authorizing any other
party as the secured party thereunder to file any financing statement. For the
purposes of this Agreement, the Company or any Subsidiary shall be deemed to be
the owner of any assets which it has placed in trust for the benefit of the
holders of Indebtedness of the Company or such Subsidiary which Indebtedness is
deemed to be extinguished under GAAP but for which the Company or such
Subsidiary remains legally liable, and such trust shall be deemed to be a Lien.
Make-Whole Premium: A premium, determined as of the date of
any prepayment pursuant to section 9.4 or any acceleration pursuant to section
13 in respect of each Note to be prepaid or each Note being accelerated, equal
to the amount (but not less than zero) obtained by subtracting (a) the sum of
the unpaid principal amount of such Note being prepaid or accelerated and the
amount of interest thereon accrued to the prepayment date or the date of
acceleration from (b) the sum of the Current Values of all amounts of principal
and interest on such Note being prepaid or accelerated that would otherwise have
become due on and after the date of such determination if such Note were not
being prepaid or accelerated (each such amount of principal or interest being
referred to herein as an "Amount Payable"). The "Current Value" of any Amount
Payable means such Amount Payable discounted (on a semiannual basis) to its
present value on the date of determination at the Treasury Yield plus 100 basis
points, in accordance with the following formula:
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Current Value = Amount Payable
(1 + d/2)n
where "d" is the sum of (i) Treasury Yield per annum expressed as a decimal and
(ii) 100 basis points, and "n" is an exponent (which need not be an integer)
equal to the number of semiannual periods and portions thereof (any such portion
of a period to be determined by dividing the number of days in such portion of
such period by the total number of days in such period, both computed on the
basis of twelve 30-day months in a 360-day year) between the date of such
determination and the due date of the Amount Payable. The "Treasury Yield" shall
be determined by reference to the most recent Federal Reserve Statistical
Release H.15 (519) which has become publicly available at least two Business
Days prior to the date of acceleration (or, if such Statistical Release is no
longer published, any publicly available source of similar market data), and
shall be the most recent weekly average yield on actively traded U.S. Treasury
securities adjusted to a constant maturity equal to the then remaining weighted
average life to maturity of all Amounts Payable (the "Remaining Life"), computed
by dividing (a) the sum of all Amounts Payable into (b) the total of the
products obtained by multiplying (i) the amount of each Amount Payable by (ii)
the number of years (calculated to the nearest one-twelfth) which will elapse
between the date as of which such computation is made and the due date of the
Amount Payable. If the Remaining Life is not equal to the constant maturity of a
U.S. Treasury security for which a weekly average yield is given, the Treasury
Yield shall be obtained by linear interpolation (calculated to the nearest
one-twelfth of a year) from the weekly average yields of (a) the actively traded
U.S. Treasury security with the duration closest to and greater than the
Remaining Life and (b) the actively traded U.S. Treasury security with the
duration closest to and less than the Remaining Life except that if the
Remaining Life is less than one year, the weekly average yield on actively
traded U.S. Treasury securities adjusted to a constant maturity of one year
shall be used. The Treasury Yield shall be computed to the fifth decimal place
(one thousandth of a percentage point) and then rounded to the fourth decimal
place (one hundredth of a percentage point).
Management Exchange and Repurchase Agreements: The separate
Exchange and Repurchase Agreements between the Company and each of the Persons
listed on Schedule to the Stockholders Agreement.
Management Stockholders: The Persons listed on Schedule 1 to
the Stockholders Agreement.
Material Subsidiary: Art Institute of Fort Lauderdale, Inc.,
Art Institute of Atlanta, Inc., Art Institute of Dallas, Inc., Art Institute of
Houston, Inc., Art Institute of Philadelphia, Inc., Art Institute of Seattle,
Inc., Colorado
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Institute of Art, NCG, Ocean World, Inc., Art-Photo Supply Corp., Education
Housing Services, Inc., Eisenhower Boulevard Associates, Inc., EMC Placement
Services, Inc., The National Center for Paralegal Training, Inc. (Delaware), The
National Center for Paralegal Training, Inc. (Illinois), The National Center for
Paralegal Training, Inc. (New York), The National Center for Financial Planning,
Inc., The National Center for Educational Training, Inc., The National Center
for Professional Placement, Inc. and EMC and any other Subsidiary which at any
time in the future (a) becomes an Accredited Subsidiary, (b) has assets with a
book value exceeding $50,000 in the aggregate, or (c) has revenues of at least
$100,000 in any fiscal year of the Company.
Merrill Companies: Collectively, the MLCP Investors (as such
term is defined in the Stockholders Agreement) and Merrill Lynch Interfunding
Inc.
Memorandum: As defined in section 5.4.
Multiemployer Plan: A Plan meeting the definition of that term
contained in any of section 3(37) or 4001(a)(3) of ERISA or section 414(f) of
the Code.
NCG: The National Center Group, Inc., a corporation organized
and existing under the laws of the State of Georgia.
Net Debt: At any time of determination, the amount by which
(a) Consolidated Indebtedness for Borrowed Money exceeds (b) all amounts of cash
or cash equivalents, determined in accordance with GAAP, which would be included
in a consolidated balance sheet of the Company and its Subsidiaries as at such
time of determination, including, in any event, any amounts held in cash
collateral or escrow accounts by another Person on behalf of the Company or any
of its Subsidiaries at such time of determination.
Net Income: For any period, all amounts which, in accordance
with GAAP, would be included as net income on the consolidated statement of
income of the Company and its Subsidiaries for such period.
Net Worth: At any time of determination, all amounts which, in
accordance with GAAP, would be included under shareholders' equity on the
consolidated balance sheet of the Company and its Subsidiaries at such time.
Notes: As defined in section 1.
Officers' Certificate: A certificate executed on behalf of the
Company by any of its Chairman (if an officer), its President or one of its
Executive Vice Presidents or Vice
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Presidents and any of its Chief Financial Officer, its Chief Accounting Officer
or its Treasurer.
Operating Lease: Any lease of any property (whether real,
personal or mixed) which is not a Capital Lease, other than, in the case of the
Company or a Subsidiary, any such lease under which the Company or a Subsidiary
is the lessor.
Operative Agreements: (a) the Stockholders Agreement, (b) the
Pledge Agreements and (c) the Intercreditor Agreement.
Payment Default: As defined in section 10.3.
Payment Default Blockage Period: As defined in section 10.3.
PBGC: The Pension Benefit Guaranty Corporation or any
governmental authority succeeding to any of its functions.
"Permitted Owner": With respect to the RBK Exchange and
Repurchase Agreement between the Company and Robert B. Knutson, (a) during Mr.
Knutson's life, Mr. Knutson, his spouse, parents or issue or a trust the
beneficiaries of which are Mr. Knutson, his estate, spouse, parents and/or issue
and (b) after Mr. Knutson's death, his executors, administrators, testamentary
trustees, legatees or beneficiaries.
Person: An individual, a partnership, a joint venture, a
corporation, a trust, an unincorporated organization or a government or any
department or agency thereof.
Pier 66: As defined in section 13.
Plan: An "employee pension benefit plan" (as defined in
section 3 of ERISA) which is or has been established or maintained, or to which
contributions are or have been made, by the Company or any of its Related
Persons.
PNB: Pittsburgh National Bank, a national banking association.
Pledge Agreements: As defined in section 4.7, together with
any pledge agreements delivered after the Closing Date pursuant to section 8.17.
Potential Event of Default: A condition or event which, after
notice or lapse of time or both, would constitute an Event of Default.
Preferred Stock: As defined in section 4.9.
Projections: As defined in section 5.4.
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Put: The rights of the holders of the Warrants or any Common
Stock issued upon exercise of the Warrants under section 12.2 of the
Stockholders Agreement.
Recapitalization Original Purchase Price Premium: The amount
calculated by the Company's independent auditors, which amount shall be
determined by the application of purchase accounting rules, including without
limitation by reference to the amount equal to the excess of (a) the sum of (i)
the aggregate amount of (x) cash paid by Marine Midland Bank, as trustee under
the ESOP, on the Closing Date for 170,750 shares of Preferred Stock and
3,685,604 shares of Class A Common Stock and (y) cash and the value of the Class
B Common Stock distributed by the Company to the holders of such stock in
connection with the transactions contemplated by section 4.9 hereof and (ii) the
aggregate amount of expenses incurred by the Company which are directly
attributable to the transactions contemplated by section 4.9 hereof and related
transactions, over (b) the amount of stockholders' equity and deferred taxes
appearing on the consolidated balance sheet of the Company and its Subsidiaries
at the time immediately preceding the Closing Date.
Recapitalization Purchase Price Adjustment: For any period,
the amount attributable to the amortization of the Recapitalization Original
Purchase Price Premium that is deducted in computing Net Income for such period.
Related Person: Any corporation or trade or business that is a
member of the same controlled group of corporations (within the meaning of
section 414(b) of the Code) as the Company or is under common control (within
the meaning of section 414(c) of the Code) with the Company or is a member of
any affiliated service group (within the meaning of section 414(m) of the Code)
which includes the Company or is otherwise treated as part of the controlled
group which includes the Company (within the meaning of section 414 of the
Code).
Reportable Event: Any of the events set forth in section
4043(b) of ERISA or the regulations thereunder, other than those events as to
which the 30-day notice period has been waived by the PBGC.
Restricted Payment: (a) Any dividend or other distribution,
direct or indirect, on account of any shares of any class of stock of the
Company now or hereafter outstanding and (b) any redemption, retirement,
purchase or other acquisition for value, direct or indirect, of any shares of
any class of stock of the Company now or hereafter outstanding, or of any
warrants, options or other rights to acquire any such shares of stock.
Revolving Credit Loan: The revolving credit loans made
pursuant to section 2.2 of the Bank Credit Agreement.
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Securities Act: At any time, the Securities Act of 1933, as
then in effect or any similar federal statute then in effect, and any reference
to a particular section of such Act shall include a reference to the comparable
section, if any, of any such similar federal statute.
Short-Term Borrowing: As applied to any Person, all
Indebtedness of such Person for borrowed money which by its terms or by the
terms of any instrument or agreement relating thereto matures on demand or
within one year from the date of the creation thereof and is not directly or
indirectly renewable or extendible at the option of the debtor to a date more
than one year from the date of the creation thereof, provided that the
Indebtedness for borrowed money outstanding under a revolving credit or similar
agreement which obligates the lender or lenders to extend credit over a period
of more than one year shall constitute Funded Debt and not Short-Term Borrowing,
even though such Indebtedness by its terms matures on demand or within one year
from the date of the creation thereof.
Specified Default Blockage Period: As defined in section 10.3.
Specified Superior Event of Default: (a) Any of the events
described in section 8.2a of the Bank Credit Agreement, section 8.6 of the Bank
Credit Agreement (but only with respect to breaches or violations of any of
sections 6.1 through 6.4 thereof or Article III thereof) or section 8.7 of the
Bank Credit Agreement (but only with respect to breaches or violations of any of
sections 5.3 or 5.4 thereof) of the Bank Credit Agreement, as each such section
may be amended from time to time pursuant to any amendment, renewal or extension
of the Bank Credit Agreement which complies with section 8.1(c) hereof and does
not render the section so amended more onerous or restrictive for the Company,
and (b) any default by the Company in the payment of any principal of or premium
or interest on any Indebtedness (other than Indebtedness outstanding under the
Bank Credit Agreement) or the occurrence of any event or the existence of any
condition in respect of any such Indebtedness if, in either case, such
Indebtedness has become or been declared due before its date of maturity or
before its regularly scheduled dates of payment, if such default, event or
condition shall constitute an "Event of Default" under the Bank Credit
Agreement.
Stockholders Agreement: As defined in section 4.6.
Stockholders Contribution and Repayment Agreement: The
Stockholders Contribution and Repayment Agreement, dated as of October 25, 1989,
among the Company, the individuals who are parties thereto and Robert B. Knutson
and C. Thomas Burkett as agents for the Stockholders.
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Student Loans: Any interest-bearing loan or advance made by
the Company or any of its Subsidiaries to a student of the Company or any of its
Subsidiaries which has a maturity in excess of one year from the making of such
loan or advance, or any Guarantee by the Company or any of its Subsidiaries of
loans or advances of the same type and maturity made by any other Person.
Subordinated Debt: As defined in section 10.2.
Subsidiary: Any corporation at least 81% (by number of votes)
of the Voting Stock of which is at the time owned by the Company or by one or
more Subsidiaries or by the Company and one or more Subsidiaries.
Subsidiary Pledge Agreement: As defined in section 4.7.
Superior Debt: As defined in section 10.2.
Teach-Out Obligations: Obligations under state law to provide
for the completion of any enrolled student's training in the event of the
closing of a school.
Term Loan: The term loan made pursuant to section 2.1 of the
Bank Credit Agreement.
Unit Operating Profit: For any period, for any school or group
of schools, Cash Flow from Operations generated by such school or group of
schools during such period plus corporate overhead allocated or allocable to
such school or group of schools during such period.
Voting Stock: With reference to any corporation, stock of any
class or classes (or equivalent interest), if the holders of the stock of such
class or classes (or equivalent interests) are ordinarily, in the absence of
contingencies, entitled to vote for the election of the directors (or Persons
performing similar functions) of such corporation, even though the right so to
vote has been suspended by the happening of such a contingency.
Warrants: As defined in section 1.
Wholly-Owned: As applied to any Subsidiary, a Subsidiary all
of the outstanding shares (other than directors' qualifying shares, if required
by law) of every class of stock of which are at the time owned by the Company or
by one or more Wholly-Owned Subsidiaries or by the Company and one or more
Wholly-Owned Subsidiaries.
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1986 Original Purchase Price Premium: The amount calculated by
the Company's independent auditors, which amount shall be determined by the
application of purchase accounting rules, including without limitation by
reference to the amount equal to the excess of (a) the sum of (i) the aggregate
amount of cash and the value of Class A Common Stock of the Company paid by the
Company on June 24, 1986 for all the shares of EMC common stock and (ii) the
aggregate amount of expenses incurred by the Company which are directly
attributable to the purchase by the Company of such shares and related
transactions, over (b) the amount of stockholders' equity and deferred taxes
appearing on the consolidated balance sheet of EMC and its subsidiaries prepared
in accordance with GAAP at the time immediately preceding June 24, 1986.
1986 Purchase Price Adjustment: For any period, the amount
attributable to the amortization of the 1986 Original Purchase Price Premium
that is deducted in computing Net Income for such period.
15.2. Accounting Terms. For the purposes of this Agreement,
all accounting terms not otherwise defined herein shall have the meaning
assigned to them in accordance with GAAP.
16. Expenses, etc. Whether or not the transactions
contemplated by this Agreement shall be consummated, the Company agrees to pay
on demand all expenses in connection with such transactions and in connection
with any amendments or waivers (whether or not the same become effective) under
or in respect of this Agreement and the Notes and Warrants purchased by you,
including, without limitation: (a) the cost and expenses of preparing and
duplicating this Agreement, the Operative Agreements, the Notes and the
Warrants, of furnishing all opinions by counsel for the Company and all
certificates on behalf of the Company, and of the Company's performance of and
compliance with all agreements and conditions contained herein on its part to be
performed or complied with; (b) the cost of delivering to your principal office,
insured to your satisfaction, the Notes delivered to you upon any substitution
of Notes pursuant to section 11, the Warrants delivered to you upon any
substitution of Warrants pursuant to the Warrant and of your delivering any
Notes or Warrants, insured to your satisfaction, upon any such substitution or
exchange; (c) the reasonable fees, expenses and disbursements of your special
counsel in connection with the negotiation, preparation and review of this
Agreement, the Operative Agreements, the Notes and the Warrants, and in
connection with any amendments or waivers (whether or not the same become
effective) of any thereof; and (d) the reasonable out-of-pocket expenses
incurred by you in connection with such transactions and any such amendments or
waivers. The Company also agrees to pay, and to save you and each holder of any
Notes or Warrants harmless from, all claims, demands or liabilities
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<PAGE> 70
asserted against you in respect of the fees, if any, of brokers, finders or
investment bankers or other similar fees and any and all liabilities with
respect to any taxes (including interest and penalties) which may be payable in
respect of the execution and delivery of this Agreement, the issue of the Notes
and Warrants at the Closing and any amendment or waiver under or in respect of
this Agreement, the Operative Agreements, the Notes or the Warrants.
17. Survival of Representations and Warranties. All
representations and warranties contained in this Agreement or otherwise made in
writing in any Officers' Certificate delivered to you by or on behalf of the
Company in connection with the transactions contemplated by this Agreement shall
survive the execution and delivery of this Agreement, any investigation at any
time made by you or on your behalf, and the purchase of the Notes and Warrants
by you under this Agreement and any disposition of the same, payment of the
Notes or exercise of the Warrants; provided, however, that the benefits of this
sentence may only be invoked by the holders of the Notes. All statements
contained in any Officers' Certificate delivered by or on behalf of the Company
pursuant to this Agreement or in connection with the transactions contemplated
by this Agreement shall be deemed representations and warranties of the Company
under this Agreement.
18. Amendments and Waivers. Any term of this Agreement or of
the Notes may be amended and the observance of any term of this Agreement or of
the Notes may be waived (either generally or in a particular instance and either
retroactively or prospectively) only with the written consent of the Company and
(a) in the case of any such action prior to the Closing, you;
and
(b) in the case of any action subsequent to the Closing, the
holders of at least 51% in principal amount of the Notes at the time
outstanding (excluding any Notes directly or indirectly owned by the
Company or any of its Affiliates), provided that, without the prior
written consent of the holders of all the Notes at the time outstanding
(excluding any Notes directly or indirectly owned by the Company or any
of its Affiliates), no such amendment or waiver shall (i), subject to
the last paragraph of section 13, change the maturity or the principal
amount of, or reduce the rate or change the time of payment of interest
on, or change the amount or the time of payment of any principal or
premium payable on any prepayment of, any Note, (ii) reduce the
aforesaid percentage of the principal amount of the Notes the holders
of which are required to consent to any such amendment or waiver, (iii)
change the percentage of the principal amount of the Notes the holders
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of which may declare the Notes to be due and payable as provided in
section 13, or (iv) decrease the percentage of the principal amount of
the Notes the holders of which may rescind and annul any such
declaration as provided in section 13.
Any amendment or waiver effected in accordance with this section 18 shall be
binding upon each holder of any Note at the time outstanding, each future holder
of any Note and the Company.
19. Indemnification. The Company will indemnify and hold
harmless you, your directors, officers, employees and each person, if any, who
controls you within the meaning of the Securities Act or the Exchange Act (any
and all of whom are referred to as the "Indemnified Party") from and against any
and all losses, claims, damages and liabilities, joint or several (including 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
Agreement or any transaction contemplated hereby, other than losses, claims,
damages or liabilities resulting from any representation made by you in section
6, or the transfer of any Notes or Warrants in violation of any applicable law
or regulation.
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 Company
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 Company of its obligations under this section 19 with respect to
such Indemnified Party, except to the extent that the Company is actually
prejudiced by such failure. The Company 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 Company, to employ counsel separate from counsel for the Company 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 Company not advisable, provided that the Company 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 Company (or any of its officers,
directors or
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employees) in which an Indemnified Party is not named as a defendant, the
Company 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.
20. Notices, etc. Except as otherwise provided in this
Agreement, notices and other communications under this Agreement shall be in
writing and shall be delivered, telexed, telecopied or sent by other means of
electronic telecommunications or shall be mailed, return receipt requested, by
first-class mail, postage prepaid, addressed, (a) if to you, at the address set
forth in the Schedule of Purchasers or at such other address as you shall have
furnished to the Company in writing, except as otherwise provided in section 12
with respect to payments on Notes held by you or your nominee, or (b) if to any
other holder of any Note, at such address as such other holder shall have
furnished to the Company in writing, or, until any such other holder so
furnishes to the Company an address, then to and at the address of the last
holder of such Note who has furnished an address to the Company, or (c) if to
the Company, at 300 Sixth Avenue - Suite 800, Pittsburgh, PA 15222, to the
attention of the President, with a copy to Eckert Seamans Cherin & Mellott, 600
Grant Street, Pittsburgh, PA 15219, to the attention of Robert C. McCartney, or
at such other address, or to the attention of such officer, as the Company shall
have furnished to you and each such other holder in writing, provided that the
failure to deliver copies as requested above shall not affect the validity of
the notice otherwise sent to the Company, or (d) all notices to the Agent for
the Banks under the Bank Credit Agreement, as from time to time amended, or to
any other authorized agent of holders of Superior Debt, at Pittsburgh National
Bank, Pittsburgh National Building, Fifth Avenue and Wood Street, Pittsburgh, PA
15222, to the attention of the Special Industries Department, or at such other
address as the holders of Superior Debt shall have furnished to you in writing.
Any notice or other communication so addressed shall be deemed to be given when
received by the addressee.
21. Specific Performance. Without limiting your rights to
pursue all other legal and equitable rights available to you for any failure of
the Company to perform its obligations under this Agreement, the Company
acknowledges and agrees that the remedy at law for any failure to perform its
obligations hereunder would be inadequate and that you shall be entitled to
specific performance, injunctive relief or other equitable remedies in the event
of any such failure.
22. Miscellaneous. This Agreement shall be binding upon and
inure to the benefit of and be enforceable by the respective successors and
assigns of the parties hereto, whether so expressed or not, and, in particular,
shall inure to the benefit of and be enforceable by any holder or holders at the
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time of any Notes, and, to the extent specified herein, any Institutional
Holder. Except as stated in section 17, this Agreement embodies the entire
agreement and understanding between you and the Company and supersedes all prior
agreements and understandings relating to the subject matter hereof. THIS
AGREEMENT AND THE NOTES SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND
GOVERNED BY THE LAW OF THE STATE OF NEW YORK. The headings in this Agreement are
for purposes of reference only and shall not limit or otherwise affect the
meaning hereof. This Agreement may be executed in any number of 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 the
form of agreement on the accompanying counterparts of this letter and return one
of the same to the Company, whereupon this letter shall become a binding
agreement between you and the Company.
Very truly yours,
EMC HOLDINGS, INC.
By: _________________________
Title:
The foregoing Agreement is
hereby agreed to as of the
date thereof.
THE NORTHWESTERN MUTUAL LIFE
INSURANCE COMPANY
By: ________________________
Title:
NATIONAL UNION FIRE INSURANCE
COMPANY OF PITTSBURGH, PA.
By: ________________________
Title: Vice President
68
<PAGE> 1
Exhibit 4.21
AMENDMENT NO. 2
TO
NOTE AND WARRANT PURCHASE AGREEMENTS
THIS AMENDMENT NO. 2 TO NOTE AND WARRANT PURCHASE AGREEMENTS
("Amendment") is made and entered into as of March 16, 1995 by and among
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, EMC and NML are parties to that certain Note and
Warrant Purchase Agreement dated as of October 25, 1989 and EMC and AIG are
parties to that certain Note and Warrant Purchase Agreement dated as of October
25, 1989, each as amended by Amendment No. 1 to Loan Documents; Assumption
Agreement; and Partial Release dated April 30, 1991 (collectively, the
"Agreements"); and
WHEREAS, EMC has requested that NML and AIG amend certain
provisions of the Agreements in connection with the amendment and restatement,
as of the date hereof, of the Bank Credit Agreement (as defined in the
Agreements); and
WHEREAS, NML and AIG are willing to amend the Agreements
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, intending to be
legally bound hereby, agree to amend the Agreements as follows:
1. Amendments to Agreements.
(a) Section 4.8 of each Agreement is hereby deleted in its entirely and
replaced with the following:
"4.8 Intercreditor Agreement. An Intercreditor Agreement,
substantially in the form of Exhibit F, was executed and delivered as of
October 25, 1989 among Pittsburgh National Bank (now known as PNC Bank,
National Association), on its own behalf and as agent, and the Purchasers (as
the same may be amended, modified or supplemented from time to time, the
"Intercreditor Agreement")."
<PAGE> 2
(b) The reference to "section 9.12" in Section 7.1(k) of each Agreement
is hereby replaced with "section 9.11."
(c) Clause (a) of Section 8.1(c) of each Agreement is hereby deleted in
its entirely and replaced with the following:
"(a) the aggregate principal amount of all Indebtedness outstanding at
any time under the Bank Credit Agreement and under any facility under
which any other Funded Debt permitted by this subdivision (c) or
subdivision (g) of this Section 8.1 is incurred or outstanding shall not
exceed at any time $75,000,000 and"
(d) Section 8.1(e) of each Agreement is hereby deleted in its entirety
and replaced with the following:
"(e) the Company and any Subsidiary may become and remain liable
with respect to Funded Debt under Capital Leases or PMF
Instruments, including Guarantees of obligations thereunder,
permitted by the provisions of section 8.5(b);"
(e) The reference to "$500,000" in Section 8.1(g) of each Agreement is
hereby replaced with "$8,000,000."
(f) The references to "Management Stock Subscription Agreements" in
Section 8.1(k) of each Agreement and in the last sentence of
Section 8.1 of each Agreement are hereby replaced with "Management
Repurchase Agreements."
(g) Clause (i) of Section 8.3 of each Agreement is hereby deleted in
its entirety and replaced with the following:
"(i) any payment made in order to redeem, repurchase or otherwise
acquire Common Stock from Management Stockholders in accordance with the
terms of any Management Repurchase Agreement, the Stockholders Agreement
or any management incentive stock option plan adopted by the Company
after the Closing Date as long as (a) such payment is not otherwise
prohibited by this Agreement and (b) the aggregate net purchase price of
all such payments does not exceed, in any fiscal year beginning on and
after July 1, 1994, the sum of (A) the applicable amount from among the
following amounts: (1) $500,000, (2) the difference between (x)
$1,000,000 in the earlier to occur of any fiscal year ended after July
1, 1996 or any fiscal year during which the Company's Consolidated Net
Worth is greater than or equal to $50,000,000 minus (y) any dividends
paid during such period and permitted pursuant to item (b) of clause
(iii) of this Section 8.3 or (3) the difference between (x) $1,500,000
in any fiscal year during which the Company's Consolidated Net Worth is
greater than or equal to $75,000,000 minus (y) and
<PAGE> 3
dividends paid during such period and permitted pursuant to item (b) of clause
(iii) of this Section 8.3 plus (B) the proceeds paid to the Company during such
fiscal year pursuant to life insurance policies on its employees plus (C) the
aggregate net proceeds paid to the Company upon the resale or reissuance of the
treasury stock related to repurchased capital stock,"
(h) Clause (iii) of Section 8.3 of each Agreement is hereby deleted in its
entirety and replaced with the following:
"(iii) the payment of dividends on (a) the Preferred Stock or the Class A
Common Stock to the extent that in excess of 90% of said common stock dividend
is used to repay the Term Loan and (b) any class of stock of the
Company 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 Company'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 (i) of this Section
8.3 or (B) the difference between (1) $1,500,000 in any fiscal year during
which the Company'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 (i) of this Section 8.3,"
(i) Section 8.5(b) of each Agreement is hereby deleted in its entirety and
replaced with the following:
"(b) any Capital Lease or PMF Instrument unless in any fiscal year of
the Company, immediately after giving effect to the incurrence of liability
with respect to such Capital Lease or PMF Instrument in such fiscal year, the
aggregate amount of all Capital Lease Obligations and PMF Instrument
Obligations incurred (including Capital Lease Obligations and PMF Instrument
Obligations covered by Guarantees incurred) by the Company and its Subsidiaries
since the beginning of such fiscal year shall not exceed $5,250,000 (including
Capital Lease Obligations incurred since the beginning of such fiscal year with
respect to Capital Leases relating to assets which were sold and leased back by
the Company and/or subsidiaries during such fiscal year)."
(j) Section 8.9(c) of each Agreement is hereby deleted in its entirety and
replaced with the following:
"(c) make and permit to remain outstanding Investments in Student Loans
(including Guarantees related thereto) in unpaid principal amount not exceeding
$7,500,000 in the aggregate owned by the Company and its Subsidiaries at any
one time;"
<PAGE> 4
(k) Section 8.9(g) of each Agreement is hereby deleted in its entirety and
replaced with the following:
"(g) make or permit to remain outstanding a loan in a principal amount not
exceeding $36,200,000 to the ESOP as contemplated by section 5.1 of the Credit
Agreement, dated as of October 25, 1989, among the Company, PNC and the banks
party thereto."
(l) The reference to "section 6.16" in Section 8.15(a) of each Agreement is
hereby replaced with "section 6.15."
(m) Clause (c) of Section 10.2(ii) of each Agreement is hereby deleted in its
entirety and replaced with the following:
"(c) Indebtedness in respect of letters of credit and bankers' acceptances
not exceeding $500,000 in aggregate amount at any time (exclusive of letters of
credit issued by PNC pursuant to the Bank Credit Agreement or by some other
financial institution pursuant to section 6.8a(vi) of the Bank Credit
Agreement)."
(n) The definition of "Accredited Subsidiaries" in Section 15.1 of each
Agreement is hereby deleted in its entirety and replaced with the
following:
"Accredited Subsidiaries: Those Subsidiaries which are 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 schools, post-secondary or career training schools."
(o) The definition of "Agent" in Section 15.1 of each Agreement is hereby
deleted in its entirety and replaced with the following:
"Agent: PNC, or any successor agent, in its capacity as agent for the
Banks under the Bank Credit Agreement."
(p) The definition of "Bank Credit Agreement" in Section 15.1 of each
Agreement is hereby deleted in its entirety and replaced with the
following:
"Bank Credit Agreement: The Amended and Restated Credit Agreement, dated
as of March 16, 1995, among the Company, the Banks and the Agent, as the same
may be amended, modified or supplemented from time to time in accordance with
section 8.15."
<PAGE> 5
(q) The definition of "Banks" in Section 15.1 of each Agreement is hereby
deleted in its entirety and replaced with the following:
"Banks: PNC, the other banks named in the Bank Credit Agreement and the
assignees of PNC and such banks."
(r) The definition of "ESOP" in Section 15.1 of each Agreement is hereby
deleted in its entirety and replaced with the following:
"ESOP: The Education Management Corporation Employee Stock Ownership
Plan, established for the benefit of the Company employees as of
January 1, 1989."
(s) The definition of "Management Exchange and Repurchase Agreements" in
Section 15.1 of each Agreement is hereby deleted in its entirety and
replaced with the following:
"Management Repurchase Agreements: Any of (i) the separate Exchange and
Repurchase Agreements dated October 25, 1989 between certain of the Management
Stockholders and the Company, (ii) the Exchange and Repurchase Agreement dated
October 25, 1989 between Robert B. Knutson and the Company and (iii) the
separate Subscription and Repurchase Agreements dated as of various dates
between certain of the Management Stockholders and the Company, together with
such amendment or modification of any of such documents permitted pursuant to
section 6.16 of the Bank Credit Agreement.:
(t) The definition of "Management Stockholders" in Section 15.1 of each
Agreement is hereby deleted in its entirety and replaced with the
following:
"Management Stockholders: The Persons who, from time to time, become
Management Stockholders under the Stockholders Agreement."
(u) The definition of "Material Subsidiary" in Section 15.1 of each Agreement
is hereby deleted in its entirety and replaced with the following:
"Material Subsidiary: Art Institute of Fort Lauderdale, Inc., Art
Institute of Atlanta, Inc., Art Institute of Dallas, Inc., Art Institute of
Houston, Inc., Art Institute of Philadelphia, Inc., Art Institute of Seattle,
Inc., Colorado Institute of Art, NCG, Art-Photo Supply Corp., EMC Management
Services, Inc., EMC Marketing & Advertising, Inc., The National Center for
Paralegal Training, Inc. (Delaware), The National Center for Paralegal
Training, Inc. (Illinois), The National Center for Paralegal Training, Inc.,
(New York), The National Center for Financial Services Training, Inc., The
National Center for
<PAGE> 6
Educational Testing, Inc., NCPT, Inc. and Art Institutes International, Inc.
and any other Subsidiary which at any time in the future (a) becomes an
Accredited Subsidiary, (b) has assets with a book value exceeding $50,000 in
the aggregate or (c) has revenues of at least $100,000 in any fiscal year of
the Company."
(v) The definition of "PNB" in Section 15.1 of each Agreement is hereby
deleted in its entirety and replaced with the following:
"PNC: PNC Bank, National Association, a national banking association."
(w) The following new definitions are hereby added to Section 15.1 of each
Agreement:
"Consolidated New Worth: 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 Company's Repurchase Obligations and excluding
any non-cash extraordinary items or cumulative changes in accounting
principles) in the Company and its Subsidiaries, determined in accordance with
GAAP consistently applied.
PMF Instrument: As applied to any Person, any instrument relating to
the purchase-money financing of any property (whether real, personal or mixed).
PMF Instrument Obligation: With respect to any PMF Instrument, the
amount of the obligation of the purchaser thereunder which would, in accordance
with GAAP, appear on a balance sheet of such purchaser in respect of such PMF
Instrument.
Repurchase Obligation: (i) an obligation of the Company, 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."
2. Consent to Amendment and Restatement of Bank Credit Agreement.
NML and AIG hereby consent to (a) the execution and delivery by
EMC of the Amended and Restated Credit Agreement dated as of
March 16, 1995 among EMC, PNC Bank, National Association, as
agent, and the banks party thereto
<PAGE> 7
and (b) the consummation of the transactions contemplated
thereby.
3. Miscellaneous.
(a) Except as expressly amended by this Amendment, the Agreements, 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
Agreements.
(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 EMC has
delivered the items required pursuant to paragraph 3(e) below and
when 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 Agreements pursuant to this
Amendment, EMC shall provide to NML and AIG, contemporaneously with
the execution hereof, the following:
(i) an original of the Subsidiary Pledge Agreement dated as of
March 16, 1995 by and among EMC Management Services, Inc., as
pledgor ("EMCMS"), and NML and AIG, as pledgees, which agreement
shall be in the form of Exhibit A hereto and shall have been
executed on behalf of EMCMS;
(ii) a signed favorable opinion of Eckert Seamans Cherin & Mellott,
counsel to EMC, to the effect that this Amendment is a valid and
binding obligation of EMC.
(f) Within 30 days after the date hereof, EMC shall pay (i) the amount
of $23,437.50 to NML as reimbursement in full for its fee and its
costs and expenses incurred in connection with this Amendment; and
(ii) the amount of $14,062.50 to AIG as reimbursement in full for
its fee and its costs and expenses incurred in connection with this
Amendment.
[remainder of page intentionally left blank]
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the date and year first above written.
EDUCATION MANAGEMENT
CORPORATION
By:
---------------------------------------
Title:
------------------------------------
THE NORTHWESTERN MUTUAL LIFE
INSURANCE COMPANY
By:
---------------------------------------
Title:
------------------------------------
NATIONAL UNION FIRE INSURANCE
COMPANY OF PITTSBURGH, PA
By:
---------------------------------------
Title:
------------------------------------
<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
First Amendment as of the day and year first above written.
THE NORTHWESTERN MUTUAL LIFE
INSURANCE COMPANY
By: _____________________________________
Title: __________________________________
NATIONAL UNION FIRE INSURANCE
COMPANY OF PITTSBURGH, PA
By: _____________________________________
Title: __________________________________
PNC BANK, NATIONAL ASSOCIATION,
individually and as Agent for and
on behalf of the Banks
By: _____________________________________
Title: __________________________________
<PAGE> 1
Exhibit 4.22
NONQUALIFIED STOCK OPTION AGREEMENT
as of May 2, 1996
The parties to this Nonqualified Stock Option Agreement (this "Agreement")
are Education Management Corporation (the "Company"), a Pennsylvania
corporation having its principal place of business in Pittsburgh, Pennsylvania,
and William M. Webster, IV (the "Optionee"), an employee of the Company or its
direct or indirect subsidiary.
The Company desires to have the Optionee serve as an employee of the Company
or its direct or indirect subsidiary and to provide the Optionee with an
incentive to put forth maximum effort for the success of the business.
The Company therefore desires to grant to the Optionee as of the date first
above written (the "Grant Date") nonqualified options to purchase shares of the
Class B Common Stock of the Company, par value $.0001 per share (the "Class B
Common Stock").
Accordingly, intending to be legally bound hereby, the parties agree as
follows:
ARTICLE I
Grant of Options
1.1 Subject to the terms and conditions of this Agreement, the Company
hereby grants to the Optionee as of the Date of Grant the right and option to
purchase from the Company up to, but not exceeding in the aggregate, 150,000
shares of Class B Common Stock, at an option price of $5.50 per share (the
"Option"), and for the period beginning on the Date of Grant and ending on May
1, 2006 (the "Option Term").
1.2 The Options are not incentive stock options within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended.
ARTICLE II
Vesting, Exercise and Tax Withholding
2.1 As of the date of this Agreement, Options with respect to a total of
37,500 shares shall be vested (that is, become exercisable in accordance with
and subject to the terms of
<PAGE> 2
this Agreement). Unless sooner vested or terminated pursuant to this
Agreement, the Options granted to the Optionee hereunder with respect to the
other 112,500 shares shall vest in accordance with the following schedule:
<TABLE>
<CAPTION>
Number of Shares
Date of Vesting for which Options Vest
--------------- ----------------------
<S> <C>
May 1, 1997 28,125
May 1, 1998 28,125
May 1, 1999 28,125
May 1, 2000 28,125
</TABLE>
On and after the date Options have vested, they may be exercised at any time
and from time to time during the Option Term, subject to earlier termination in
accordance with Article III. Upon the termination of any of the Options
pursuant to Article III, the Options so terminated shall cease to exercisable
and the Optionee shall have no further rights under this Agreement with respect
to the Options so terminated.
2.2 If a Change in Control (as hereinafter defined) occurs at a time when
there remain any Options that have not previously been vested or terminated in
accordance with this Agreement, all of those unvested Option shall vest on the
date of the Change in Control. For purposes of this Agreement, "Change in
Control" will mean a transaction or series of transactions at the conclusion of
which any individual, firm or entity (collectively, a "Person"), and any other
Person, directly or indirectly controlling, controlled by or under common
control with, such Person, 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 Education Management
Corporation Employee Stock Ownership Plan (the "ESOP") or (ii) one or more
individuals who are employees of the Company and hold options granted prior to
the Date of Grant by the Company will not be considered in determining whether
a "Change in Control" has occurred as a result of such issuance or transfer
unless the Company, in its absolute discretion, determines that it should be
considered for that purpose.
2.3 The Company, 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 vest the Options, in whole or in part, prior to the time the Options would
otherwise vest under the terms of this Agreement.
- 2 -
<PAGE> 3
2.4 Vested Options shall be exercised by the Optionee by delivering to
the Company a Notice in the form set forth as Exhibit A hereto, together with a
check payable to the order of the Company and/or shares of Class B Common Stock
that have been held by the Optionee for at least six months prior to the date
of exercise, with a stock power executed in blank, equal in value to the option
price of the shares being purchased. Shares of Class B Common Stock
surrendered in exercise of the Option shall be valued at their fair market
value, as determined by the Board of Directors of the Company, on the date of
exercise. If at the time of exercise the shares subject to the Options are
readily tradeable on an established securities market, payment of the exercise
price may also be made in accordance with a "cashless" exercise program, if
established by the Company, under which, if so instructed by the Optionee and
subject to certain conditions, the Company would issue Class B Common Stock
directly to the Optionee's broker or dealer upon receipt of an irrevocable
written notice of exercise from the Optionee specifying that shares subject to
the Options are to be applied in payment of the exercise price for Options.
2.5 The Company shall notify the Optionee of the amount of withholding tax
or other tax, if any, that must be paid under federal and, where applicable,
state and local law in connection with the exercise of the Options or the sale
of shares of Class B Common Stock subject to the Options. The Optionee shall
have the right to elect to meet his withholding requirement (i) by having
withheld from the Options at the time of exercise that number of shares of
Class B Common Stock, rounded up to the next whole share, whose fair market
value, as determined by the Company, 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 exercise or (iii) by a
combination of shares and cash.
ARTICLE III
Termination of Employment
3.1 In event of the termination of employment of the Optionee by the
Optionee or the Company (or its direct or indirect subsidiary) for any reason
whatsoever other than death, permanent disability (as defined in Section 3.2),
retirement after attainment of age 65 or termination for Cause (as defined in
Section 3.3), (i) any Options that were not vested prior to the date of such
termination of employment shall terminate on such date and (ii) any Options
that were vested prior to the date of such termination of employment (and which
were not previously exercised) shall terminate on the ninetieth (90th) day
following the date of such termination of employment or the last day of the
Option Term, whichever is earlier.
- 3 -
<PAGE> 4
3.2 In the event of the termination of the employment of the Optionee by
reason of death, permanent disability or retirement after attainment of age 65,
those unexercised Options that were not vested prior to the date of such
termination of employment and would have otherwise vested in accordance with
the schedule set forth in Section 2.1 on the first May 1 to occur following the
date of such termination, shall become fully vested as of the date of such
termination, and those Options, together with any Options that were vested
prior to date of such termination (and which were not previously exercised)
shall terminate on the first anniversary of the date of such termination or the
last day of the Option Term, whichever is earlier. Any Options that were not
vested prior to the date of such termination and do not become vested pursuant
to the immediately preceding sentence shall terminate as of the date of such
termination. As used in this Agreement, the term "permanent disability" means
the Optionee being deemed to have suffered a disability that makes the Optionee
eligible for immediate benefits under any long-term disability plan of the
Company or its direct or indirect subsidiaries, as in effect from time to time.
3.3 In the event the Company or its direct or indirect subsidiary
terminates the Optionee's employment for Cause (as hereinafter defined), all
remaining Options, whether or not then vested and regardless of whether the
Optionee shall have attempted to exercise those Options on or prior to the date
of such termination, shall terminate immediately upon such termination of
employment. The term "Cause" shall mean the occurrence of any one or more of
the following:
(a) gross negligence or continuing refusal by the Optionee to
use good faith efforts to substantially perform his duties (other than due
to disability);
(b) dishonesty or breach of trust by the Optionee that is
demonstrably injurious to the Company or its direct or indirect
subsidiaries; or
(c) conviction or plea of nolo contendere to a felony or a
misdemeanor involving moral turpitude.
3.4 In the event of termination of employment, the Company, 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 the Options to
be exercised, in whole or in part, after its expiration date described in
Section 3.1 or Section 3.2, but not after the expiration of the Option Term.
- 4 -
<PAGE> 5
ARTICLE IV
Restriction on Resale of Shares; Repurchase by the Company
4.1 The Optionee may not sell or otherwise transfer any
shares of Class B Common Stock acquired pursuant to this Agreement prior to the
expiration of the repurchase period described in Section 4.2 below. To enforce
the restriction on resale set forth above, and during such time as that
restriction may be in effect, the Company will have the right to (i) retain the
certificate or certificates representing the shares of Class B Common Stock
acquired pursuant to this Agreement 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.
4.2 If the employment of the Optionee by the Company and/or
its direct or indirect subsidiaries terminates for any reason and the Optionee
has exercised or thereafter exercises all or any portion of the Options granted
to him under this Agreement, 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 the Options, whichever may last occur, in its discretion, to
repurchase any and all shares acquired by the Optionee pursuant to the exercise
of Options at the price set forth in this Section 4.2. The Company may
exercise its option to repurchase such shares by delivery of written notice
thereof to 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.
The purchase price to be paid per share by the Company under
this Section 4.2 or Section 4.3 will be (i) so long as the Company maintains
the ESOP and is required to obtain appraisals of its common stock for the
purposes of the 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 Section 4.2, the amount obtained by dividing (i)(A)
seven (7) times the Company's Adjusted Earnings (as hereinafter defined), minus
(B) Net Debt (as hereinafter defined), in each case for the immediately
preceding calendar year, by (ii) the number of shares outstanding (calculated
on a fully-diluted basis) as of the end of such year. For purposes of this
Agreement, the term "Adjusted Earnings" shall mean the Company's consolidated
earnings before interest and taxes before giving effect to charges resulting
from (1) the amortization of intangibles, (2) contributions to the Company's
ESOP, if any, (3) special non-cash charges, or (4) the Options granted under
this Agreement or other options granted pursuant to any other Company stock
option plans or agreement now or hereafter in effect. For purposes of this
Agreement, the term "Net Debt" shall mean (I)
- 5 -
<PAGE> 6
the consolidated total interest-bearing debt of the Company, including all
current maturities, short-term interest-bearing debt and capitalized leases,
minus (II) the amount of cash and equivalents. For the purposes of the
foregoing calculation, the outstanding preferred stock of the Company
(currently owned by the ESOP) will be treated either (x) 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 outstanding, or (y) 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.
4.3 If the employment of the Optionee by the Company and/or
its direct or indirect subsidiaries terminates and the Company determines that
such termination was as a result of death, disability, retirement after
attainment of age 65 or termination by the Company or and or any such
subsidiary without Cause, then if the Optionee (or his or her personal
representative) has exercised or thereafter exercises any Options granted to
him, subject to and in accordance with this Agreement, in that event the
Optionee (or his personal representative) shall have the right, for a period of
ninety (90) days following the termination of employment or exercise of such
Options, whichever may last occur, to sell to the Company any and all shares
acquired by such Optionee pursuant to the exercise of Options, at the price
equal to, and under the procedures, set forth in Section 4.2.
4.4 The Optionee hereby irrevocably appoints the Secretary of
the Company as his attorney-in-fact, with full power of substitution, to
endorse over to the Company on behalf of Optionee the certificate(s)
representing the shares subject to the Company's repurchase option set forth
above.
4.5 Upon request by the Company, the Optionee shall execute a
joinder to the Stockholders Agreement dated as of October 26, 1989, as amended
as of April 30, 1991 and as the same may hereafter be amended (the
"Stockholders Agreement"), among the Company and the shareholders named
therein, pursuant to which upon the purchase of share pursuant to the exercise
of the Options, the Optionee shall become a party to the Stockholders Agreement
and be deemed to be a "Management Stockholder" for purposes of thereof.
4.6 The Company may grant waivers of the restrictions imposed
by this Article IV in such cases as it may deem to be in, or not opposed to,
the best interest of the Company.
- 6 -
<PAGE> 7
4.7 During such time as the restriction on resale contained
in this Article IV may be in effect, the Optionee will, with respect solely to
any shares purchased by him pursuant to the exercise of the Options, be
entitled to enjoy all rights and privileges otherwise granted to a shareholder
of the Company relating to the shares subject to such restriction including,
but not limited to the right to vote and to receive dividends with respect to
such shares, but in all cases subject to the terms of the Stockholders
Agreement (if the Company requires the Optionee to execute a joinder pursuant
to Section 4.5).
4.8 Notwithstanding the foregoing, the provisions of
Sections 4.1 through and including 4.7 shall terminate and cease to be of any
further force or effect upon the occurrence of a Public Distribution (as
hereinafter defined). For purposes of this Agreement, "Public Distribution"
shall 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 (the "Exchange Act"), (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 and (iii) which, in the
judgment of the Company, results in common stock of the Company being freely
tradeable in a public market.
ARTICLE V
Miscellaneous
5.1 The number and kind of shares subject to the Options
and the exercise price of the Options 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 Options. The Board of Directors of the Company
shall have the power and sole discretion to determine the nature and amount of
the adjustment to be made in each case.
5.2 After any merger, consolidation or similar
transaction in which the Company is the surviving corporation, the Optionee
shall, at no additional cost, be entitled upon any exercise of the Options to
receive (subject to any required action by shareholders), in lieu of the number
of shares of Class B Common Stock receivable pursuant to such exercise, the
number and class of shares or other securities to which the Optionee would have
been entitled pursuant to the terms of the merger, consolidation or similar
transaction if, at the time of such transaction, Optionee had been the holder
of record of a number of shares equal to the number of shares receivable
pursuant to
- 7 -
<PAGE> 8
such exercise. Comparable rights shall accrue to the Optionee in the event of
successive transactions 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 the Options or substitute awards in respect of the Acquiring
Corporation's stock for such outstanding Options. In the event the Acquiring
Corporation elects not to assume or substitute for such outstanding Option, the
Company shall either provide that any unvested portion of the outstanding
Options that has not previously been terminated shall be immediately vested as
of a date prior to such merger, consolidation or similar transaction or provide
for the Options to be repurchased by the Company at a price and on the terms
determined in good faith by Board of Directors of the Company to be the fair
market value of such Options. In the absence of clear and convincing evidence
to the contrary, the Board of Directors of the Company 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 merger, consolidation or similar transaction as the fair market
value of such shares and to determine that the fair market value of each share
subject to the Options is equivalent to (i) such per share price received by
such other shareholders, reduced by (ii) an amount equivalent to the exercise
price of 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
Company). The exercise that was permissible solely by reason of this Section
5.2 shall be conditioned upon the consummation of the merger, consolidation or
similar transaction. Any Options that are neither assumed by the Acquiring
Corporation nor exercised as of the date of the merger, consolidation or
similar transaction shall terminate effective as of the effective date of the
transaction.
5.3 Nothing contained in this Agreement shall be deemed
to confer upon the Optionee, in his capacity as a holder of Options, any right
to prevent or to approve or vote upon any of the corporate actions described in
this Article V. The existence of the Options granted hereunder shall not
affect in any way the right or the power of the Company or its shareholders to
make or authorize any or all adjustments, recapitalizations, reorganizations or
other changes in the Company's capital structure or its business, or any merger
or consolidation of the Company, or any issue of bonds, debentures, preferred
or prior preference stocks ahead of or affecting the Class B Common Stock or
the rights thereof, or the dissolution or liquidation of the Company, or any
sale or transfer of all or any part of its assets or business, or any other
corporate act or proceeding, whether of a similar character or otherwise.
- 8 -
<PAGE> 9
5.4 Whenever the term "the Optionee" is used in any
provision of this Agreement under circumstances where the provision should
logically be construed to apply to the executors, the administrators, or the
person or persons to whom Options may be transferred by will or by the laws of
descent and distribution, the term "the Optionee" shall be deemed to include
such person or persons.
5.5 The Options granted hereunder are not transferable by
the Optionee otherwise than by will or the laws of descent and distribution and
are exercisable during the Optionee's lifetime only by him or her. No
assignment or transfer of the Options granted hereunder, or of the rights
represented thereby, whether voluntary or involuntary, by the operation of law
or otherwise (except by will or the laws of descent and distribution), shall
vest in the assignee or transferee any interest or right herein whatsoever, but
immediately upon any such assignment or transfer the Options shall terminate
and become of no further effect.
5.6 The Optionee shall not be deemed for any purpose to
be a stockholder of the Company in respect of any shares as to which the
Options shall not have been exercised as herein provided.
5.7 Nothing in this Agreement shall confer upon the
Optionee any right to continue in the employ of the Company or shall affect the
right of the Company or its direct or indirect subsidiaries to terminate the
employment of the Optionee, with or without cause.
5.8 Nothing in this Agreement or otherwise shall obligate the
Company to vest any of the Options, to permit the Options to be exercised other
than in accordance with the terms hereof or to grant any waivers of the terms
of this Agreement, regardless of what actions the Company may take or waivers
the Company may grant under the terms of or with respect to any options now or
hereafter granted to any other person or any other options granted to the
Optionee.
5.9 Notwithstanding any other provision hereof, the
Optionee shall not exercise the Options granted hereunder, and the Company
shall not be obligated to issue any shares to the Optionee hereunder (or to
purchase any of those shares pursuant to Section 4.3), if the exercise thereof
or the issuance (or such purchase) of such shares would constitute a violation
by the Optionee or the Company of any provision of any law or regulation of any
governmental authority (or in the case of any purchase pursuant to Section 4.3,
the terms of any credit agreement or other financing agreement to which the
Company is then a party or by which it is bound.) Any determination in this
connection by the Company shall be final and binding. The Company shall in no
- 9 -
<PAGE> 10
event be obligated to register any securities pursuant to the Securities Act of
1933 (as the same shall be in effect from time to time) or to take any other
affirmative action in order to cause the exercise of the Options or the
issuance of shares pursuant thereto to comply with any law or regulation of any
governmental authority.
5.10 No amounts of income received by the Optionee pursuant
to this Agreement shall be considered compensation for purposes of any pension
or retirement plan, insurance plan or any other employee benefit plan of the
Company unless otherwise provided in such plan.
5.11 Every notice or other communication relating to this
Agreement shall be in writing and shall be mailed to or delivered to the party
for whom it is intended at such address as may from time to time be designated
by it in a notice mailed or delivered to the other party as herein provided;
provided, however, that unless and until some other address be so designated,
all notices or communications by the Optionee to the Company shall be mailed or
delivered to the Company at its office at 300 Sixth Avenue, Pittsburgh,
Pennsylvania 15222, and all notices or communications by the Company to
Optionee may be given to the Optionee personally or may be mailed to him or
her.
5.12 This Agreement shall be governed by the laws of the
Commonwealth of Pennsylvania applicable to agreements made and performed wholly
within the Commonwealth of Pennsylvania (regardless of the laws that might
otherwise govern under applicable conflicts of laws principles).
5.13 As used in this Agreement, unless the context otherwise
requires (i) references to "Articles" or "Sections" are to articles or sections
of this Agreement, (ii) "hereof", "herein", "hereunder" and comparable terms
refer to this Agreement in its entirety and not to any particular part of this
Agreement, (iii) references to any gender include references to all genders,
(iv) "including" means including without limitation, and (v) headings of the
various articles and sections are for convenience of reference only.
5.14 This Agreement sets forth a complete understanding
between the parties with respect to its subject matter and supersedes all prior
and contemporaneous agreements and understandings with respect thereto. Except
as expressly set forth in this Agreement, the Company makes no representations,
warranties or covenants the Optionee with respect to this Agreement or its
subject matter, including with respect to the current or future value of the
shares subject to the Options. Any modification, amendment or waiver to this
Agreement will be effective only if it is in writing signed by the Company and
the Optionee. The failure of any party to enforce at any time any provision of
this Agreement shall not be construed to be a waiver of that or any other
provision of this Agreement.
- 10 -
<PAGE> 11
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
EDUCATION MANAGEMENT CORPORATION
By: /s/ ROBERT B. KNUTSON
--------------------------------
Robert B. Knutson
Chairman and Chief Executive
Officer
OPTIONEE:
/s/ WILLIAM M. WEBSTER, IV
--------------------------------
William M. Webster, IV
- 11 -
<PAGE> 12
EXHIBIT A
EXERCISE OF NONQUALIFIED STOCK OPTION
Pursuant to the provisions of the Nonqualified Stock Option
Agreement entered into as of May 2, 1996 between Education Management
Corporation (the "Company") and William M. Webster, IV, Optionee (the
"Agreement"), I hereby exercise the nonqualified stock option granted under the
terms of the Agreement to the extent of _____ shares of the Class B Common
Stock of the Company (the "Shares"). I deliver to the Company herewith the
following in payment for the Shares:
o $_________ in cash
o Stock certificates for ________ shares of Class B
Common Stock held for at least six months
Date: ______________________ ______________________________
Optionee
______________________________
Address
______________________________
Social Security Number
<PAGE> 1
Exhibit 10.01
EDUCATION MANAGEMENT CORPORATION
EMPLOYEE STOCK OWNERSHIP PLAN
As Amended and Restated
Effective January 1, 1989
Plan No. 002
<PAGE> 2
EDUCATION MANAGEMENT CORPORATION
EMPLOYEE STOCK OWNERSHIP PLAN
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I....................................................................... 1
PURPOSE, INTENT AND EFFECTIVE DATE
1.01 Background..................................................... 1
1.02 Purpose and Intent............................................. 1
1.03 Effective Date................................................. 2
ARTICLE II...................................................................... 3
DEFINITIONS
2.01 Account........................................................ 3
2.02 Affiliate...................................................... 3
2.03 Anniversary Date............................................... 3
2.04 Beneficiary.................................................... 3
2.05 Board.......................................................... 3
2.06 Break in Service............................................... 3
2.07 Capital Accumulations.......................................... 3
2.08 Code........................................................... 3
2.09 Committee...................................................... 3
2.10 Company........................................................ 3
2.11 Company Stock.................................................. 3
2.12 Company Stock Account.......................................... 4
2.13 Compensation................................................... 4
2.14 Disqualified Person............................................ 4
2.15 Effective Date................................................. 4
2.16 Eligibility Year of Service.................................... 4
2.17 Eligible Employee.............................................. 5
2.18 Employee....................................................... 5
2.19 Employer....................................................... 5
2.20 Employer Contributions......................................... 5
2.21 Employer Securities............................................ 5
2.22 Employment Date................................................ 6
2.23 Entry Date..................................................... 6
2.24 ERISA or Act................................................... 6
2.25 Exempt Loan.................................................... 6
2.26 Forfeiture..................................................... 6
2.27 Highly Compensated Employee.................................... 6
2.28 Hour of Service................................................ 8
2.29 Independent Appraiser.......................................... 10
2.30 Normal Retirement Age.......................................... 10
2.31 Normal Retirement Date......................................... 10
2.32 Other Investments Account...................................... 11
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
2.33 Participant.................................................... 11
2.34 Permanent Disability........................................... 11
2.35 Plan........................................................... 11
2.36 Plan Year...................................................... 11
2.37 Reemployment Date.............................................. 11
2.38 Retirement..................................................... 11
2.39 Suspense Account............................................... 11
2.40 Trust.......................................................... 11
2.41 Trust Agreement................................................ 11
2.42 Trust Assets................................................... 11
2.43 Trustee........................................................ 11
2.44 Valuation Date................................................. 12
2.45 Year of Service................................................ 12
ARTICLE III..................................................................... 12
ELIGIBILITY AND PARTICIPATION
3.01 Participation.................................................. 12
3.02 Effect of Participation........................................ 12
3.03 Cessation of Participation..................................... 12
3.04 Reemployment................................................... 12
ARTICLE IV...................................................................... 13
CONTRIBUTIONS
4.01 Employer Contributions......................................... 13
4.02 Form of Contributions.......................................... 13
4.03 Return of Contributions........................................ 13
4.04 Participant Contributions...................................... 14
ARTICLE V....................................................................... 15
INVESTMENT OF TRUST ASSETS
5.01 Investment of Trust Assets..................................... 15
5.02 Purchase of Company Stock...................................... 15
5.03 Sales of Company Stock......................................... 15
5.04 Exempt Loans................................................... 15
5.05 Diversification of Investments................................. 20
ARTICLE VI...................................................................... 22
ALLOCATIONS
6.01 Allocations to Participants' Accounts.......................... 22
6.02 Allocable Shares............................................... 23
6.03 Maximum Additions.............................................. 24
6.04 Defined Contribution and Defined Benefit Plan Fraction......... 27
6.05 Allocation of Net Income (or Loss) of the Trust................ 27
6.06 Accounting for Allocations..................................... 28
6.07 Errors in Allocations.......................................... 28
</TABLE>
<PAGE> 4
<TABLE>
<S> <C>
ARTICLE VII..................................................................... 29
EXPENSES OF THE PLAN AND TRUST
7.01 Expenses....................................................... 29
7.02 Allocation of Expenses Among Employers......................... 29
ARTICLE VIII.................................................................... 30
VOTING COMPANY STOCK
8.01 Trustees' Powers and Duties.................................... 30
8.02 Voting of Shares............................................... 30
ARTICLE IX...................................................................... 31
CAPITAL ACCUMULATION
9.01 Capital Accumulation........................................... 31
9.02 Retirement, Death or Permanent Disability...................... 31
9.03 Other Termination of Service and Vesting....................... 31
9.04 Forfeitures.................................................... 31
9.05 Certain Reemployed Participants................................ 32
ARTICLE X....................................................................... 33
DISTRIBUTIONS
10.01 Time of Distribution to Participants........................... 33
10.02 Benefit Forms for Participants................................. 34
10.03 Benefit Forms for Beneficiaries................................ 34
10.04 Distributions in Cash or Company Stock......................... 34
10.05 Delay in Benefit Determination................................. 35
10.06 Designated Beneficiaries....................................... 35
10.07 Additional Minimum Distribution Requirements................... 35
10.08 Direct Rollover of Eligible Rollover Distribution.............. 36
10.09 Unclaimed Benefits............................................. 37
ARTICLE XI...................................................................... 38
PLAN ADMINISTRATION
11.01 Named Fiduciaries.............................................. 38
11.02 Fiduciary Limitations.......................................... 38
11.03 Company's Responsibilities..................................... 38
11.04 Trustee's Responsibilities..................................... 39
11.05 Appointment of Committee....................................... 39
11.06 Committee Responsibilities..................................... 39
11.07 Indemnification................................................ 41
ARTICLE XII..................................................................... 42
AMENDMENT AND TERMINATION OF THE PLAN
12.01 Amendment of the Plan.......................................... 42
12.02 Mandatory Amendments........................................... 42
12.03 Termination of the Plan........................................ 42
</TABLE>
<PAGE> 5
<TABLE>
<S> <C>
12.04 Employee Nonforfeitable Rights................................. 43
12.05 Distribution Upon Termination.................................. 43
ARTICLE XIII.................................................................... 44
TOP-HEAVY PLAN PROVISIONS
13.01 Application.................................................... 44
13.02 Special Vesting Rule........................................... 44
13.03 Special Minimum Contribution................................... 45
13.04 Special Maximum Combined Plans Limit........................... 45
13.05 Key Employee and Non-Key Employee Defined...................... 45
ARTICLE XIV..................................................................... 46
MISCELLANEOUS
14.01 Governing Law.................................................. 46
14.02 Construction................................................... 46
14.03 Company as Agent for Employers................................. 46
14.04 Participants' Rights........................................... 46
14.05 Spendthrift Clause............................................. 46
14.06 Company's Liability............................................ 47
14.07 Merger, Consolidation or Transfer.............................. 47
14.08 Legal Action................................................... 47
14.09 Binding on All Parties......................................... 47
14.10 Counterparts................................................... 48
14.11 Severability of Provisions..................................... 48
EXECUTION....................................................................... 49
</TABLE>
<PAGE> 6
ARTICLE I
PURPOSE, INTENT AND EFFECTIVE DATE
1.01 Background. Effective January 1, 1989, EMC Holdings, Inc., the
corporate predecessor of Education Management Corporation, adopted this
Plan, then known as the EMC Holdings, Inc. Employee Stock Ownership
Plan, to enable participating employees to share in the growth and
prosperity of EMC Holdings, Inc. and its affiliated companies, and to
provide participating Employees with an opportunity to accumulate
capital for their future economic security.
Effective May 1, 1991, a corporate reorganization of EMC Holdings, Inc.
resulted in Education Management Corporation becoming the successor to
EMC Holdings, Inc. as sponsor of this Plan, thereafter to be known as
the Education Management Corporation Employee Stock Ownership Plan.
Education Management Corporation has now, effective January 1, 1989,
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 Plan shall continue to be known as the Education Management
Corporation Employee Stock Ownership Plan.
1.02 Purpose and Intent. The purpose of this Plan is to enable participating
Employees to share in the growth and prosperity of Education Management
Corporation and its affiliated companies, and to provide participating
Employees with an opportunity to accumulate capital for their future
economic security. The primary method of achieving the purpose of the
Plan is enabling participating Employees to acquire stock ownership
interests in the Company. Accordingly, except as provided in Section
5.05, Employer Contributions to the Plan will be invested primarily in
Company Stock, to the extent that such stock is available on terms
which, in the judgment of the Plan Committee, are appropriate to carry
out the purposes of the Plan.
The Plan is intended to be a stock bonus plan that is qualified under
Section 401(a) of the Internal Revenue Code of 1986, as amended (the
"Code"), and is a leveraged employee stock ownership plan within the
meaning of Section 4975(e)(7) of the Code and is in compliance with the
Employee Retirement Income Security Act of 1974, as amended ("ERISA").
The Plan shall be interpreted, wherever possible, to comply with the
terms of the Code and ERISA.
The Plan is further intended to provide a technique of corporate
finance to the Company. Therefore, it may be used to accomplish the
following objectives:
(a) To provide participating Employees with beneficial ownership
of Company Stock, substantially in proportion to their
relative Compensation;
(b) To meet general financing requirements of the Company;
1
<PAGE> 7
(c) To receive loans (or other extensions of credit) to finance
the acquisition of Employer Securities, with such loans (or
credits) secured by a pledge of the Employer Securities
acquired with the proceeds of the loan (as provided in Section
5.04) and by a commitment by the Company to pay Employer
Contributions to the Trust in amounts sufficient to enable
principal and interest on such loans to be repaid.
1.03 Effective Date. The provisions of this Plan as amended and restated in
this document 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.
2
<PAGE> 8
ARTICLE II
DEFINITIONS
2.01 Account means one of the Accounts maintained to record the allocated
interest of each Participant in the Plan.
2.02 Affiliate means (i) any corporation that is included in a controlled
group of corporations (within the meaning of Section 414(b) of the
Code) that includes the Employer; (ii) any trade or business that is
under common control with the Employer (within the meaning of Section
414(c) of the Code); (iii) any service organization or other
organization that is a member of an affiliated service group that
includes the Employer (within the meaning of Section 414(m) of the
Code); and (iv) any other entity required to be aggregated with the
Employer by regulations under Section 414(o) of the Code. For purposes
of this Plan an Affiliate shall be deemed to be an Affiliate only for
the period of time during which it satisfies the requirements of this
definition.
2.03 Anniversary Date means December 31 of each Plan Year.
2.04 Beneficiary means any person designated by a Participant or otherwise
determined under this Plan to receive any benefits of the Participant
that are payable under the Plan after his or her death.
2.05 Board means the present or succeeding Board of Directors of the
Company.
2.06 Break in Service means a Plan Year during which an Employee or former
Employee has been credited with fewer than one hundred (100) Hours of
Service.
2.07 Capital Accumulation means a Participant's vested (nonforfeitable)
interest in his or her Accounts under the Plan.
2.08 Code means the Internal Revenue Code of 1986, as amended from time to
time.
2.09 Committee means the Committee appointed by the Board to administer the
Plan and to give instructions to the Trustee, and to be the Plan
Administrator of this Plan as provided in Section 11.06(a).
2.10 Company means EMC Holdings, Inc., a Delaware corporation, for periods
before May 1, 1991; and Education Management Corporation, a
Pennsylvania corporation, for periods from and after May 1, 1991.
2.11 Company Stock means any qualifying employer security within the meaning
of Section 407(d)(5) of ERISA and regulations thereunder, including any
share of stock, common or preferred, issued by the Company or by an
Affiliate described in
3
<PAGE> 9
Section 2.02(i) (or that would be described in Section 2.02(i) if 50%
ownership were substituted for 80% ownership in Section 1563(a) of the
Code).
2.12 Company Stock Account. An account of a Participant that is credited
with his or her allocable share of Company Stock purchased and paid for
by the Trust or contributed to the Trust, as adjusted for Employer
Contributions and Forfeitures in Company Stock.
2.13 Compensation of a Participant means, except for purposes of Article
XIII, the amount paid by the Employer to a Participant in connection
with services rendered to the Employer for a Plan Year, including
salary and wages, overtime compensation, incentive compensation, and
deferrals pursuant to any wage or salary reduction election made by
such Participant pursuant to section 401(k) of the code, but excluding
income in respect of the exercise or surrender of stock options and
contributions to this Plan or any other deferred compensation plan
(other than contributions pursuant to section 401(k) or the Code).
Compensation for the entire Plan Year shall be used in determining the
Participant's allocable share of Employer Contributions, Forfeitures,
and shares released from a Suspense Account under Section 6.02
regardless of when during the Plan Year he or she became 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.
2.14 Disqualified Person has the meaning prescribed by Section 4974(e)(2) of
the Code.
4
<PAGE> 10
2.15 Effective Date means January 1, 1989, except as otherwise provided
herein.
2.16 Eligibility Year of Service of an Employee means a twelve consecutive
month period beginning on his or her Employment Date during which he or
she completes at least nine hundred (900) Hours of Service; or, if the
Employee does not complete at least nine hundred Hours of Service
during that period, then the Eligibility Year of Service is the first
Plan Year beginning after his or her Employment Date during which he or
she completes nine hundred (900) Hours of Service.
2.17 Eligible Employee means an Employee who is employed by an Employer (at
a time when it is an Employer), excluding:
(i) individuals matriculated in an Affiliate with an enrollment
agreement;
(ii) individuals covered under a collective bargaining agreement
entered into after the Effective Date where retirement
benefits were the subject of good faith bargaining, unless
such bargaining agreement provides for coverage under the
Plan;
(iii) nonresident alien individuals not receiving any United States
source income within the meaning of Section 861(a)(3) of the
Code; and
(iv) individuals performing services pursuant to a contract
arrangement.
2.18 Employee means any person employed by the Company or an Affiliate as a
salaried, clerical, or hourly employee, excluding individuals who are
leased employees. For this purpose, "leased employee" shall have the
meaning prescribed by Section 414(n) of the Code, covering persons who
are not an employees and who provide services to a service recipient
where such services are (A) performed pursuant to an agreement between
the service recipient and any other person, (B) such person has
performed such services for the service recipient on a substantially
full-time basis for a period of at least one (1) year and (C) such
services are of the type historically performed in the business field
of the service recipient by employees (or such other test as may be
substituted for (C) in Code Section 414(n)(2)).
2.19 Employer means the Company and any Affiliate which adopts this Plan,
with the consent of the Board and pursuant to action of its own board
of directors, and has agreed to be bound by the terms of the Plan and
Trust Agreement, and not terminated such adoption and agreement. For
purposes of determining whether Employees are Eligible Employees under
this Plan an Affiliate shall be deemed to be an Employer only for the
period of time during which it satisfies the requirements of this
definition.
2.20 Employer Contributions means contributions made to the Plan by the
Employer in accordance with Section 4.01.
5
<PAGE> 11
2.21 Employer Securities means shares of Company Stock which meet the
further requirements of Section 409(1) of the Code, which stipulates
that it be:
(a) Common stock issued by the Company, or by a corporation that
is a member of the same controlled group as described in
Section 409(1)(4) of the Code, that is readily tradeable on an
established securities market, or
(b) If there is no common stock that meets the requirements of (a)
above, common stock issued by the Company (or by a corporation
that is a member of the same controlled group) having a
combination of voting power and dividend rights equal to or in
excess of (i) that class of common stock of the Company (or of
any other such corporation) having the greatest voting power,
and (ii) that class of common stock of the Company (or of any
other such corporation) having the greatest dividend rights.
Noncallable preferred stock shall be treated as Employer Securities if
such stock is convertible at any time into Company stock that meets the
requirements of (a) or (b) above, and if such conversion is at a
conversion price that (as of the date of the acquisition by the Plan)
is reasonable. For purposes of the preceding sentence, under
regulations prescribed by the Secretary of the Treasury, preferred
stock shall be treated as noncallable if after the call there will be a
reasonable opportunity for a conversion that meets the requirements of
the preceding sentence.
2.22 Employment Date means the first day on which an Employee completes an
Hour of Service with the Company or any Affiliate.
2.23 Entry Date means June 30th and December 31st of each calendar year.
2.24 ERISA or Act means the Employee Retirement Income Security Act of 1974,
as amended from time to time.
2.25 Exempt Loan means any loan to the Trustee intended to be used to
finance the purchase of Employer Securities that is made or guaranteed
by a Disqualified Person, including, but not limited to, a direct loan
of cash, a purchase-money transaction, an assumption of an obligation
of the Trustee, an unsecured guaranty, or the use of assets of a
Disqualified Person as collateral for a loan.
2.26 Forfeiture means any portion of a Participant's Company Stock and Other
Investments Accounts that does not become part of his or her Capital
Accumulation upon the occurrence of a Break in Service.
2.27 Highly Compensated Employee means:
(a) any Employee of the Employer or an Affiliate who, during the
Look Back Year or the Determination Year:
6
<PAGE> 12
(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 Company 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.
(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 subsection (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 for purposes of
this definition.
(d) For purposes of determining Highly Compensated Employees,
compensation shall mean compensation paid by the Employer or
an Affiliate for purposes of Section 415(c)(3) of the Code and
shall include amounts deferred pursuant to Sections 125,
402(a)(8) and 402(h)(1)(8) of the Code.
(e) For purposes of determining the top twenty percent (20%) of
Employees, or the number of officers taken into account in
subsection (a)(iv) above, the following Employees shall be
excluded:
7
<PAGE> 13
(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 Company or an Affiliate 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.
(h) To the extent permitted by regulations under Section 414(q) of
the Code, the Company 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 Company 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
Company makes the election provided for in this subsection,
such election must be made with respect to all plans, entities
and arrangements of the Company and any Affiliate.
(i) The Company shall make its determination of Highly Compensated
Employees on a controlled group basis among all Affiliates and
not on a plan by plan basis.
(j) The determination of Highly Compensated Employees shall be
governed by Section 414(q) of the Code and the regulations
thereunder.
8
<PAGE> 14
2.28 Hour of Service means any hour for which an Employee is credited or
entitled to be credited with an hour of service in accordance with
Department of Labor Regulation 2530-200b and the following rules:
(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
Company or an Affiliate regardless of the number of Hours of
Service that would otherwise be credited to him pursuant this
Section. A full-time Employee is any Employee who works the
regularly scheduled full work week 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
work week 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 or her 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:
(i) Each hour for which an Employee is directly or
indirectly paid or entitled to payment by the Company
or an Affiliate 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), each hour for which back-pay to the
Employee, irrespective of mitigation of damages, has
been either awarded or agreed by the Company or any
Affiliate, provided, however, that 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
the Company or any Affiliate contributes or pays
premiums) or entitled to payment by the
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<PAGE> 15
Company or any Affiliate 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 the Company or an Affiliate 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
Company or an Affiliate during the period his or
her reemployment rights are preserved by law, or
where an absence is approved by the Company or his or
her employing Affiliate, each hour during the period
of such absence.
(e) Solely for the purpose of determining whether an Employee
incurs 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 Committee may request that the Employee
furnish any information the Committee 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.
(f) Hours worked or otherwise earned under this Section by a
leased employee (as defined in Section 2.17) shall be
considered to be Hours of Service in accordance with this
Section if and when (but only if and when) such leased
employee becomes an actual Employee under Section 2.17.
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<PAGE> 16
Hours of Service with an Affiliate shall be considered Hours
of Service for purposes of this Plan. Hours performed for an
employer before the employer became an Affiliate shall not be
counted as Hours of Service.
2.29 Independent Appraiser means an appraiser meeting requirements similar
to the requirements set forth in Section 170(a)(1) of the Code and the
regulations thereunder.
2.30 Normal Retirement Age means the date on which the Participant attains
age sixty-five (65).
2.31 Normal Retirement Date means the last day of the month coinciding with
or next following the date on which a Participant attains Normal
Retirement Age.
2.32 Other Investments Account means an Account of a Participant that is
credited with his or her allocable share of Trust Assets other than
Company Stock, as adjusted for Employer Contributions and Forfeitures
in a medium other than Company Stock, net income (or loss) of the
Trust, and debits for payments made to pay for Company Stock.
2.33 Participant means any Eligible Employee who becomes a Participant as
provided in Article III hereof.
2.34 Permanent Disability or Permanently Disabled means a condition of a
Participant making him or her unable to engage in any substantially
gainful activity by reason of any medically determinable physical or
mental impairment that can be expected to result in premature death or
to be of long, continued and indefinite duration, if there is filed
with the Committee a written opinion of a physician selected by the
Committee that the Participant is so disabled.
2.35 Plan means this Education Management Corporation Employee Stock
Ownership Plan, known before May 1, 1991, as the EMC Holdings, Inc.
Employee Stock Ownership Plan.
2.36 Plan Year means a twelve (12) consecutive month period beginning on
January 1 and ending on December 31 of the same calendar year.
2.37 Reemployment Date means the first day on which an Employee completes an
Hour of Service as an Eligible Employee of an Employer following a
Break in Service.
2.38 Retirement means a Participant's separation from service with the
Employer on or after his or her Normal Retirement Date or after and on
account of incurring a Permanent Disability.
2.39 Suspense Account means the account maintained as provided in Section
5.04 to hold Employer Securities acquired with the proceeds of an
Exempt Loan but not yet released and allocated pursuant to the formula
of Section 5.04
2.40 Trust means the EMC Holdings, Inc. Employee Stock Ownership Trust
created by the Trust Agreement.
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2.41 Trust Agreement means the EMC Holdings, Inc. Employee Stock Ownership
Trust, created by the Trust Agreement entered July 10, 1989, by and
between the EMC Holdings, Inc. as settlor and Marine Midland Bank,
N.A., as Trustee, as amended from time to time, establishing the Trust
and specifying the duties of the Trustee.
2.42 Trust Assets means all cash, Company Stock and other property held in
the Trust for the exclusive benefit of Participants (and their
Beneficiaries).
2.43 Trustee means the Trustee (and any successor Trustee) designated by the
Board and agreeing to serve by executing the Trust Agreement.
2.44 Valuation Date for the purposes of valuation of Trust Assets means the
last day of each Plan Year and any other interim date which the
Committee may choose from time to time to value Trust Assets. However,
the Committee, in its sole discretion, may cause the value of Company
Stock to be determined as of June 30 of each year, in lieu of or in
addition to any other Valuation Date for Company Stock, so long as the
fiscal year of the Company ends on that date.
2.45 Year of Service means any Plan Year (including any Plan Year period
preceding the Effective Date) during which an Employee has completed at
least nine hundred (900) Hours of Service.
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ARTICLE III
ELIGIBILITY AND PARTICIPATION
3.01 Participation. Each Employee who was an Eligible Employee of an
Employer on January 1, 1989 and who had completed one (1) Eligibility
Year of Service on the Effective Date will become a Participant in the
Plan as of January 1, 1989, without further action on his or her part.
Each other Employee shall become a Participant in the Plan on the first
Entry Date that follows the date he or she has completed an Eligibility
Year of Service.
3.02 Effect of Participation. The Committee shall notify each Eligible
Employee of his or her eligibility to participate and give him or her a
summary of the terms of the Plan as soon as practicable after he or she
becomes eligible. Every Eligible Employee shall provide to the
Committee such data as required by the Committee and be deemed to
assent to the terms of this Plan and the Trust Agreement, including all
prior or subsequent amendments thereto.
3.03 Cessation of Participation. A Participant will cease to be a
Participant if he or she has a Break in Service for any reason.
3.04 Reemployment. A Participant who has incurred a Break in Service will be
reinstated as a Participant as of his Reemployment Date. New Accounts
will be established to record his or her interest in the Plan
attributable to his or her service with the Employer after the Break in
Service. The vesting rules applicable to that Participant's old and new
Accounts are set forth in Sections 9.04 and 9.05.
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ARTICLE IV
CONTRIBUTIONS
4.01 Employer Contributions. For each taxable year of the Company, Employers
shall pay Employer Contributions to the Trustee in such amount, if any,
or under such formula, if any, as the Board determines in its sole
discretion. Employer Contributions for a given taxable year of the
Company shall be delivered in a form acceptable to the Trustee not
later than the due date for filing the Company's federal income tax
return for such taxable year, including any extensions of that due
date. However, Employer Contributions shall not be paid to the Trust in
an amount that would cause the limitation of Sections 6.03 or 6.04 to
be exceeded.
4.02 Form of Contributions. Employer Contributions may be paid to the Trust
in cash or in shares of Company Stock, as the Board determines in its
sole discretion, except that Employer Contributions shall be paid in
cash in such amount and at such times as may be necessary or
appropriate to provide the Trustee with the funds sufficient to pay in
full when due any principal and interest payments required by an Exempt
Loan, after the Board takes into account to the extent it in its sole
discretion deems appropriate cash dividends paid to the Trust on
Company Stock available to satisfy such principal and interest
payments.
4.03 Return of Contributions. Employer contributions may be returned to the
Employer in (but only in) the following circumstances.
(a) In the event that any contribution to the Trust is made under
a mistake of fact, the Trustee at the direction of the Company
shall return such contribution to the Employer within one year
after the date of payment of the contribution.
(b) Each Employer Contribution is conditioned upon the initial
qualification of the Plan under Section 401(a) of the Code. In
the event that the Plan does not so qualify, the Trustee at
the direction of the Company shall return such contribution to
the Employer within one year after the date of the date the
disqualification of the Plan becomes final and non-appealable.
(c) Each Employer Contribution is conditioned upon the
deductibility of that contribution for federal income tax
purposes under Section 404 of the Code. In the event that the
deduction under Section 404 of the Code is disallowed, the
Trustee shall return such contribution to the Employer within
one year after the disallowance of the deduction.
(d) Upon termination of the Plan, any amounts then held in an
excess holdings account maintained under Section 6.05(f) shall
be returned to the Employer as provided in Section 6.05(f)(v).
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<PAGE> 20
4.04 Participant Contributions. No Participant shall be required or
permitted to make contributions to the Plan or Trust.
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<PAGE> 21
ARTICLE V
INVESTMENT OF TRUST ASSETS
5.01 Investment of Trust Assets. Trust Assets will be invested primarily in
Employer Securities to the extent that such stock is available on terms
which, in the judgment of the Committee, are appropriate to carry out
the purposes of the Plan. Employer Contributions, and all other Trust
Assets, including any cash dividends paid on Company Stock, may be used
to acquire shares of Company Stock from shareholders of the Company
(including former Participants) or from the Company. However, any
Company Stock acquired with the proceeds of an Exempt Loan must be
Employer Securities. The Trustee may invest Trust Assets not acquired
with the proceeds of an Exempt Loan, as well as the Trust Assets
subject to Participant-directed diversification under Section 5.05, in
bank accounts, certificates of deposit, securities, short-term income
funds maintained by the Trustee, or any other kinds of realty or
personalty appropriate for the Trust, in accordance with the terms of
the Trust Agreement, or hold Trust Assets in cash. Except as otherwise
provided in this Section 5.01, the Trustee shall make all investments
only upon the direction of the Committee. The Committee may direct that
all of the Trust Assets be invested and held in Company Stock.
Notwithstanding the above provisions of this Section 5.01 or Section
5.02 or any other provision of the Plan, the initial purchase by the
Trustee of shares of Company Stock using the proceeds of an Exempt Loan
shall be effected by the Trustee without direction from the Committee
and pursuant to the Trustee's determination (in the exercise of its
reasonable judgment) that such transaction is in the best interests of
Participants and is in compliance with all applicable provisions of the
Code and ERISA.
5.02 Purchases of Company Stock. All purchases of Company Stock by the Trust
shall be made at a price, or at prices, which, in the judgement of the
Committee, do not exceed the fair market value of such Company Stock.
If at any time Company Stock is not readily tradeable on an established
securities market, the determination of fair market value of Company
Stock for all purposes under the Plan shall be based upon the value
determined by an Independent Appraiser having expertise in rendering
valuations with respect to employee stock ownership plan transactions.
5.03 Sales of Company Stock. The Committee may direct the Trustee to sell or
resell shares of Company Stock to any person, including the Company.
However, sales to any Disqualified Person, including the Company, shall
be made at a price not less than the fair market value of the Company
Stock as determined in accordance with Section 5.02, and no commission
shall be charged. Any such sale shall be made in conformity with
Section 408(e) of ERISA. All sales of Company Stock by the Trustee
shall be charged pro rata to the Company Stock Accounts of the
Participants.
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5.04 Exempt Loans.
(a) General. Any Exempt Loan shall meet all requirements necessary
to be an "exempt loan" within the meaning of Treas. Reg.
Section 1.54.4975-7(b)(1)(iii), and shall be primarily for the
benefit of the Participants (and their Beneficiaries). The
proceeds of any Exempt Loan shall be used, within a reasonable
time after the Exempt Loan is obtained, only to purchase
Employer Securities, repay the Exempt Loan, or repay a prior
Exempt Loan. Any Exempt Loan shall provide for no more than a
reasonable rate of interest, as determined under Treas. Reg.
Section 1.544975-7(b)(7), and must be without recourse against
the Plan or Trust. The number of years to maturity under the
Loan must be definitely ascertainable at all times.
(b) Collateral. The only assets of the Plan that may be given as
collateral for an Exempt Loan are shares of Employer
Securities acquired with the proceeds of the Exempt Loan and
shares of Employer Securities that were used as collateral on
a prior Exempt Loan repaid with the proceeds of the current
Exempt Loan. Any Employer Securities so pledged or otherwise
acquired with the proceeds of an Exempt Loan shall be placed
in a Suspense Account. No person entitled to payment under an
Exempt Loan shall have recourse against the Trust Assets other
than to (i) such collateral, if any; (ii) Employer
Contributions in cash that are available under the Plan to
meet obligations under the Exempt Loan; and (iii) earnings
(including cash dividends paid on Company Stock) attributable
to such collateral, if any, and to the investment of such
Employer Contributions. All Employer Contributions paid during
the Plan Year in which an Exempt Loan is made (whether before
or after the date the proceeds of the Exempt Loan are
received), all Employer Contributions paid thereafter until
the Exempt Loan has been repaid in full, and all earnings from
the investment of such Employer Contributions, without regard
to whether any such Employer Contributions and earnings have
been allocated to Participants' Other Investments Accounts,
shall be available to meet obligations under the Exempt Loan
unless otherwise provided by the Employer at the time any such
Employer Contribution is made. Any pledge of Employer
Securities must provide for the release of shares so pledged,
as provided below, upon the payment of any portion of the
Exempt Loan.
(c) Suspense Account and Release of Shares. For each Plan Year
during the duration of the Exempt Loan, shares of Employer
Securities shall be released from the Suspense Account (and
released from any pledge of Employer Securities in connection
with that Exempt Loan) in an amount determined by multiplying
the number of shares of Employer Securities held in the
Suspense Account immediately before the release for the
current Plan Year by a fraction, the numerator of which is the
amount of principal and interest paid on the Exempt Loan for
the Plan Year, and the denominator of which is the sum of the
numerator plus the principal and interest to be paid on the
Exempt Loan for all future years, or otherwise determined by
any other method then permitted by the Code or regulations
thereunder. The number of
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<PAGE> 23
future years under the Exempt Loan shall be determined without
taking into account any possible extension or renewal periods.
In the event the interest rate under the Exempt Loan is
variable, the interest to be paid in future years shall be
computed by using the interest rate applicable as of the end
of the Plan Year. If the Employer Securities held in the
Suspense Account (or the collateral for the Exempt Loan)
includes more than one class of Employer Securities, the
number of shares of each class to be released for a Plan Year
shall be determined by applying the same fraction to each
class.
The Committee may, in its discretion, elect, in lieu of the
formula for release of Employer Securities in the preceding
paragraph, to release shares of Employer Securities from the
Suspense Account solely with reference to the principal
payments on the Exempt Loan made during the Plan Year. If the
Committee elects to apply this principal-only method of
determining the number of shares to be released from the
Suspense Account, such method shall be applied throughout the
period of such Exempt Loan and shall be applied in accordance
with the requirements imposed by Treas. Reg. Section
1.54.4975-7(b)(8), including the following three rules:
(i) the Exempt Loan must provide for the annual payments
of principal and interest at a cumulative rate that
is not less rapid at any time than level annual
payments of such amounts for ten (10) years;
(ii) The interest included in any payment shall be
disregarded only to the extent it would be determined
to be interest under standard loan amortization
tables; and
(iii) The alternative, principal-only method of release
shall not be applicable after the time at which, by
reason of a renewal, extension or refinancing of the
Exempt Loan, the sum of the already-expired duration
of the Exempt Loan and any extension or renewal
period or the duration of the new Exempt Loan exceeds
ten (10) years.
(d) Source of Debt Service. The Trustee shall make payments of
principal and interest on any Exempt Loan during a Plan Year
(as directed by the Committee) only from (i) Employer
Contributions, and earnings on such Employer Contributions,
made to the Trust to meet the Plan's obligation under the
Exempt Loan and from any earnings attributable to Employer
Securities (including but not limited to, any cash dividends
declared and paid with respect to Employer Securities) held in
the Suspense Account (both received during or prior to the
Plan Year), less such payment in prior years; (ii) the
proceeds of a subsequent Exempt Loan to the Trust made to
repay a prior Exempt Loan, and (iii) the proceeds of the sale
of any Employer Securities held in the Suspense Account. Such
Employer Contributions and earnings must be accounted for
separately by the Plan until the Exempt Loan is repaid.
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<PAGE> 24
(e) Credits to Company Stock Accounts. Employer Securities
released from the Suspense Account by reason of the payment of
principal or interest on an Exempt Loan from amounts
previously allocated to Participants' Other Investments
Accounts shall be credited pro rata to such Participants'
Company Stock Accounts at the time the corresponding
reductions are made in the balance credited to the
Participants' Other Investment Accounts, subject to the
restrictions of Section 6.01(c) on allocations to certain
participants of Employer Securities acquired in a transaction
under Section 1042 of the Code.
(f) Employer Contributions Respecting an Exempt Loan. The
Employers shall contribute to the Trust sufficient amounts,
after the application of cash dividends on Company Stock for
such purpose, to enable the Trust to pay principal and
interest on any Exempt as they are due; subject to the
limitations of Section 6.03. If those limitations make the
Employer Contributions and cash dividends insufficient to
enable the Trust to pay principal and interest on such Exempt
Loan as they are due, then upon the Trustee's request, the
Company shall:
(i) Make an additional Exempt Loan to the Trust under
Treas. Reg. Section 54.4975-7(b)(4)(iii) in
sufficient amounts to meet such principal and
interest payments. Such new Exempt Loan shall also
meet all the requirements of Treas. Reg. Section
1.54.4975-7(b)(1)(iii). Employer Securities released
from a pledge under the prior Exempt Loan shall be
pledged as collateral to secure the new Exempt Loan.
Such Employer Securities shall be released form the
new pledge and allocated to the Accounts of
Participants in accordance with applicable provisions
of the Plan. Or;
(ii) Purchase any Employer Securities pledged as
collateral in an amount necessary to provide the
Trustee with sufficient funds to meet the principal
and interest repayments. Any such sale by the Plan
shall meet the requirements of Section 408(e) of
ERISA. Or;
(iii) Any combination of the foregoing.
However, the Company shall not, pursuant to the provisions of
this subsection, do, cause to be done, fail to do, or cause to
fail to be done any act or thing if the result of such act or
failure to act would disqualify the Plan as a leveraged
employee stock ownership plan under the Code.
(g) Right of First Refusal. Shares of Employer Securities acquired
by the Trust with the proceeds of an Exempt Loan and
distributed by the Trustee and any other Company Stock
distributed by the Trustee from the Trust ("Shares") shall be
subject to a right of first refusal ("Right") on the following
terms. Before any further transfer, the transferring
shareholder ("Seller") shall first offer the Shares in writing
to the Trust and then, if refused by the Trust, to the
Company, at a price equal to the greater of (i) the then fair
market value of such Shares as determined in good faith by the
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<PAGE> 25
Committee, from time to time, or (ii) the purchase price
offered by a buyer, other than the Company or Trustee, making
a good faith (as determined by the Committee) offer to
purchase such Shares. The Trust or the Company, as the case
may be, may accept the offer as to part or all of the Shares
at any time during a period not exceeding fourteen (14) days
after receipt of such offer by the Trust, by written notice to
the Seller, on terms and conditions no less favorable to the
Seller than those offered by the independent third party
buyer, if any. To the extent the offer is not accepted by the
Trust, the Company, or both, by the end of the fourteen (14)
day period, the Seller may complete the proposed transfer
without regard to the Right. Any installment purchase by the
Trust or the Company under the Right shall be made pursuant to
a note secured by the Shares purchased, and shall bear a
reasonable rate of interest as determined by the Committee.
Shares of Employer Securities that are publicly traded within
the meaning of Treas. Reg. Section 54.4975-7(b)(1)(iv) at the
time such right may otherwise be exercised shall not be
subject to the right of first refusal under this Section 5.04.
(h) Put Option. If shares of Employer Securities acquired with the
proceeds of an Exempt Loan or other Company Stock distributed
by the Trustee ("Shares") are, at the time distributed, not
publicly traded within the meaning of Treas. Reg. Section
1.54-4975-7(b)(1)(v) or, if publicly traded, are subject to a
trading limitation, such Shares shall be subject to a put
option ("Put Option") at the time of distribution on the
following terms. For purposes of this paragraph, a "Trading
Limitation" on a security is a restriction under any federal
or state securities law, any regulation thereunder, or an
agreement affecting the security, that would make the security
not as freely tradable as a security not subject to
restriction.
The Put Option shall be exercisable by the Participant or (if
the Participant has died) the Participant's Beneficiary, by
the donee of either, or by a person (including an estate or
its distributee) to whom the Shares pass by reason of the
Participant's or Beneficiary's death (a "Seller"). The
duration of the Put Option shall be an initial period of sixty
(60) consecutive days immediately following the date the
shares are distributed to the Participant or Beneficiary, and
a subsequent period of sixty (60) consecutive days during the
Plan Year next following the Plan Year in which the Shares
were distributed. The period during which the Put Option is
exercisable shall not include (and shall be extended by) any
period during which the Seller is unable to exercise the Put
Option because the Company is prohibited from honoring it by
federal or state law.
The Seller under the Put Option shall have the right to cause
the Company, by notifying it in writing of the Seller's
election to exercise the Put Option, to purchase such Shares
at their fair market value as determined by the Committee. The
Trustee may, in its discretion and with the consent of the
Company, cause the Trust to assume the rights and obligations
of the Company to repurchase Shares under the Put
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<PAGE> 26
Option. The terms of payment of the purchase price for the
Shares shall be as follows:
(i) If the Shares were part of a distribution to a
Participant or Beneficiary within a single taxable
year of such recipient of the entire balance credited
to the Participant's Account (a "Total Distribution")
of the Participant's Capital Accumulation, payment of
the fair market value of those Shares (as of the most
recent Valuation Date) shall be made in substantially
equal installments (made not less frequently then
annually) over a period not longer than five (5)
years as elected by the Company or the Trustee
purchasing the Shares. The first such installment
shall be paid no later than thirty (30) days after
the date of exercise of the Put Option. The unpaid
installments shall bear a reasonable rate of
interest, and shall be adequately secured by the
Company or the Trust.
(ii) If the Shares were part of an installment
distribution of a Participant's Capital Accumulation,
payment of the fair market value of Shares (as of the
most recent Valuation Date) shall be made within
thirty (30) days of the exercise of the Put Option.
The Put Option set forth in this Section 5.04(h) shall
continue to apply to shares of Employer Securities purchased
by the Trust with the proceeds of an Exempt Loan as described
herein, notwithstanding any amendment to or termination of
this Plan that causes the Plan to cease to be a leveraged
employee stock ownership plan within the meaning of Section
4975(e)(7) of the Code. A Holder tendering Shares for payment
under this Put Option shall be deemed to warrant that he, she
or it has title to such Shares and that such Shares as
tendered are free and clear of all liens and encumbrances.
(i) With the exception of the Right and the Put Option, or except
as otherwise required by applicable law, no Employer
Securities acquired with the proceeds of an Exempt Loan shall
be subject to any put, call or other option, or to any
buy-sell or similar arrangement, while held by and when
distributed by the Plan. The provisions of this Section
5.04(i) and the Put Option provisions of Section 5.04(h) shall
be nonterminable and shall continue to apply to shares of
Employer Securities purchased by the Trustee with the proceeds
of an Exempt Loan as described herein notwithstanding any
amendment to or termination of this Plan that causes the Plan
to cease to be a leveraged employee stock ownership plan
within the meaning of Section 4975(e)(7) of the Code.
5.05 Diversification of Investments. Each Qualified Participant (defined
below), by written notice to the Committee received by the Committee
not later than the 90th day after the first day of a Plan Year within
the Qualified Election Period (defined below) of that Qualified
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Participant, may elect to direct the Committee to diversify, as
described below, that portion of his or her Accounts under the Plan
determined by:
(i) multiplying .25 (or, in the case of the last year in the
Qualified Participant's Qualified Election Period, .50) by the
total number of shares of Company Stock acquired by or
contributed to the Plan that have ever been allocated to the
Qualified Participant's Company Stock Account as of the most
recent Anniversary Date before such election; and
(ii) subtracting from the number determined under (i) above the
number, if any, of shares of Company Stock with respect to
which amounts were previously distributed to the Qualified
Participant pursuant to any prior diversification election.
In the event that a Qualified Participant provides notice of an
election to diversify a portion of his or her Account pursuant to this
Section 5.05, the Committee, before the 180th day after the first day
of the Plan Year for which such election is be filed, shall cause the
amount so elected to be transferred to the trustee of the Education
Management Corporation Retirement Plan for investment as directed by
the Qualified Participant. For purposes of this Section 5.05:
(a) Qualified Participant means a Participant who has participated
in this Plan for at least ten (10) years and has attained age
fifty-five (55); and
(b) Qualified Election Period of a qualified Participant means a
period of six (6) Plan Years beginning with the first Plan
Year in which the Participant first became a Qualified
Participant.
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<PAGE> 28
ARTICLE VI
ALLOCATIONS
6.01 Allocations to Participants' Accounts.
(a) Accounts. Separate Company Stock Accounts and Other
Investments Accounts shall be established to reflect each
Participant's interest under the Plan. The Committee shall
keep records from which the portion of each Other Investments
Accounts which at any time is available to meet Exempt Loan
obligations, and the portion that is not so available, can be
determined pursuant to Section 5.04.
(b) Adjustments to Company Stock Accounts. As of each Valuation
Date, the Company Stock Account maintained for each
Participant shall be credited with its allocated share of
Company Stock (including fractional shares) purchased and paid
for by the Trust or contributed in kind to the Trust, with
Forfeitures of Company Stock, and with any stock dividends on
shares of Company Stock allocated to his or her Company Stock
Accounts. Company Stock acquired by the Trust with the
proceeds of an Exempt Loan shall be allocated to the Company
Stock Accounts of Participants as the Company Stock is
released from the Suspense Account, as provided for in Section
5.04.
(c) Nonallocation Rules for Section 1042 Sales. Notwithstanding
subsection (b), if the Trust has acquired Employer Securities
in a transaction for which the seller has elected favorable
tax treatment under Section 1042 of the Code (a "Section 1042
Sale"), no Employer Securities acquired in that transaction,
or other assets attributable to or in lieu of such Employer
Securities, shall be allocated directly or indirectly, to the
Accounts of:
(i) such seller;
(ii) any individual who is related to the seller (within
the meaning of Section 267(b) of the Code), or
(iii) any other individual who owns (directly or by
attribution, after the application of Section 318(a)
of the Code applied without regard to the employee
trust exception in section 318(a)(2)(B)(i) of the
Code) more than twenty-five percent (25%) of (A) any
class of outstanding stock of the Company or any
Affiliate, or (B) the total value of any class of
outstanding stock of the Company or of any Affiliate.
The restriction on allocations to persons described in clause
(i) or (ii) shall apply only during a nonallocation period
which shall begin on the date of the Section 1042 Sale
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<PAGE> 29
and end on the later of (A) the tenth (10th) anniversary of
the date of the Section 1042 Sale, or (B) the date of the
allocation attributable to the last payment of principal
and/or interest on the Exempt Loan incurred with respect to
the Section 1042 The restriction on allocation to persons
described in clause (ii) shall not apply to Participants who
are lineal descendants of the seller, except that the
aggregate amount allocated to the benefit of all such lineal
descendants during the nonallocation period shall not exceed
five percent (5%) of the Employer Securities (or other amounts
attributable to or in lieu thereof) held by the Trust
attributable to a Section 1042 Sale of Employer Securities to
the Trust by any person who is related (within the meaning of
Section 267(c)(4) to such lineal descendants. An individual
shall be restricted under clause (iii) if he or she is
described by that clause at any time during the one-year
period ending on the date of the Section 1042 Sale or as of
the date Employer Securities are allocated to Participants.
(d) Adjustments to Other Investments Accounts. As of each
Valuation Date, each Other Investments Account maintained for
a Participant will be credited (or debited) with its share of
the net income (or loss) of the Trust attributable to
investments other than Company Stock, with any cash dividends
on Company Stock allocated to his or her Company Stock
Accounts, and with Employer Contributions in cash and
Forfeitures in forms other than Company Stock. Each such Other
Investments Account will be debited with its share of any cash
payments applied to the acquisition of Company Stock for the
benefit of Company Stock Accounts or to any repayment of
principal and interest on any Exempt Loan or other debt
chargeable to Participants' Company Stock Accounts. However,
only the portion of an Other Investments Account that is
available to meet obligations under Exempt Loans, as
determined under Section 5.04(a), will be used to pay
principal or interest on an Exempt Loan.
6.02 Allocable Shares.
(a) Allocations Attributable to Dividends. If cash dividends on
Employer Securities allocated to Participants' Company Stock
Accounts are used to repay an Exempt Loan, then before
allocating under subsection (b) any other shares of Employer
Securities released from the Suspense Account, there shall
first be allocated to the Company Stock Account of each
Participant to whose Accounts the cash dividends would have
been allocated but for such Exempt Loan repayment, a number of
shares of Employer Securities having a fair market value equal
to the amount of cash dividends so applied.
(b) Allocations Attributable to Company Contributions. The
allocable share of Employer Contributions, Forfeitures, and
(to the extent not allocated under subsection (a)) Employer
Securities released from the Suspense Account, for a
Participant who is entitled to such allocation for the Plan
Year under subsection (c), shall be determined by multiplying
the aggregate of the amounts to be allocated to Company Stock
Accounts and Other Investment Accounts by a fraction, the
numerator of which
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<PAGE> 30
is the Participant's Compensation for the Plan Year, and the
denominator of which is the aggregate Compensation of all
Participants entitled to an allocation for the Plan Year.
(c) Participants Entitled to Allocations. A Participant will be
entitled to an allocation under this Section 6.02 if, but only
if, the Participant 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 Permanently
Disabled during the Plan Year.
(d) Time of Allocations. Employer Contributions with respect to a
taxable year of the Company that are not designated to be
applied to repay an Exempt Loan shall be allocated to
Participants' Accounts as of the Anniversary Date of the Plan
Year ending with or within such taxable year. Employer
Securities that are released from the Suspense Account in
accordance with Section 5.04 because of an Employer
Contribution designated to be applied to repay an Exempt Loan
shall be allocated to Participants' Accounts as of the
Anniversary Date of the Plan Year with or within which ends
the taxable year of the Company to which such Employer
Contributions relate.
6.03 Maximum Additions.
(a) General Rule. Anything herein to the contrary notwithstanding,
the total Annual Additions (defined below) made to the
Accounts 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:
(i) 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
(ii) Twenty-five (25) percent of the Participant's total
Non-Deferred Compensation (defined below) received
from the Employer or an Affiliate for such Plan Year.
For purposes of this Section 6.03, the Plan Year shall be the
"limitation year," as defined in Section 415 of the Code and
applicable regulations thereunder.
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<PAGE> 31
(b) Annual Additions. For purposes of this Section 6.03, Annual
Additions means for any Participant in any Plan Year, the sum
of (a) Employer Contributions, (b) Forfeitures, (c)
Participant contributions, if any, permitted under any other
relevant Defined Contribution Plan, and (d) 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 13.05 of
this Plan).
(c) Compensation. Non-Deferred Compensation, for purposes of this
Section 6.03 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. Non-Deferred
Compensation does not include: (i) contributions made to a
plan of deferred compensation to the extent that before this
Section 6.03 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; (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); or (v) Compensation in excess of the
Compensation Limit described in Section 2.13.
(d) Other Definitions:
(i) 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.
(ii) 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.
(e) Special Rules. Notwithstanding subsection (b), if no more than
one-third of the Employer Contributions for a Plan Year are
allocated to Highly Compensated Employees, Annual Additions
shall not include Employer Contributions applied to the
repayment of interest on any Exempt Loan or to any Forfeitures
of Employer Securities acquired with the proceeds of an Exempt
Loan. Notwithstanding subsection
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<PAGE> 32
(a)(i), the dollar limitation on Annual Additions to a
Participant's Accounts shall be: the sum of (i) the amount
determined under subsection (a)(i) above, and (B) the lesser
of the amount determined under subsection (a)(i) above or the
amount of the Participant's allocable share of the Employer
Securities contributed to the Plan for the Plan Year or
released from the Suspense Account as a result of Employer
Contributions in cash applied to payments on an Exempt Loan.
(f) Priority of Reduction. In the event a Participant is covered
by one or more other Defined Contribution Plans maintained by
the Employer, then the limitations of this Section 6.03 will
be applied to Annual Additions under all such plans in the
aggregate to ensure that all such plans will remain qualified
under the Code. But notwithstanding anything else in this Plan
or in the other Defined Contribution Plan to the contrary: (i)
for the Plan Year ending December 31, 1989, the maximum Annual
Additions as described above for this Plan shall be decreased
as necessary before the reduction of Annual Additions under
such other Defined Contribution Plans, and (ii) for any later
Plan Year, the maximum Annual Addition as described above for
this Plan shall not be decreased until the Annual Additions
under the other Defined Contribution Plan(s) have been reduced
to elimination.
(g) Excess Annual Additions. If for any Plan Year the Annual
Additions for a Participants' Accounts exceed the maximum
Annual Addition permitted by this Section (or Section 6.04) as
a result of the allocation of Forfeitures, a reasonable error
in estimating a Participant's annual Compensation or
Non-Deferred Compensation, or such other facts and
circumstances as justify this treatment under Section 415 of
the Code and regulations thereunder, the excess Annual
Additions (the "Annual Excess") shall not be allocated to such
Participant's Account but shall be treated as follows:
(i) The Annual Excess shall be allocated and reallocated
to the Accounts of other Participants entitled to an
allocation for such Plan Year, subject to the
limitations on Annual Additions to the Accounts of
such other Participants for such Plan Year'
(ii) If after the application of clause (i) an Annual
Excess remains, the Annual Excess will be held
unallocated in an excess holding account, which will
be allocated and reallocated among Participants in
the next Plan Year, and each succeeding Plan Year, if
necessary, in the manner provided in Section 6./01.
(iii) No Employer Contributions shall be made to the Plan
as long as amounts remain credited to an excess
holding account.
(iv) If an excess holding account is in existence at any
time during a Plan Year, none of the Trust Assets'
investment gains and losses for such year shall be
allocated to the excess holding account.
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<PAGE> 33
(v) If upon termination of the Plan there remains any
amount properly allocated to an excess holding
account, such account shall revert to the Employer.
6.04 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 6.04, 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 6.04 and Section 6.03, 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
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<PAGE> 34
Benefit Plan (in accordance with the provisions of the said plan) and
his benefits herein shall not be affected by such aggregate limitation.
6.05 Allocation of Net Income (or Loss) of the Trust. The net income (or
loss) attributable to Trust Assets for each Plan Year shall be
determined as of each Valuation Date. Each Participant's allocable
share of the Trust's net income (or loss) attributable to Trust Assets
shall be allocated to his Other Investments Account in the ratio in
which the credit balance of such Account on the preceding Anniversary
Date (reduced by the amount of any distribution of Capital Accumulation
from such Account) bears to the aggregate sum of the Other Investment
Account balances for all Participants as of that date. The net income
(or loss) includes the increase (or decrease) in the fair market value
of Trust Assets (other than Company Stock), interest income, dividends
(other than cash dividends on Company Stock used to repay an Exempt
Loan) and other income (or loss) attributable to Trust Assets (other
than allocated Company Stock), since the preceding Anniversary Date.
For purposes of computing net income (or loss), interest paid on any
Loan or installment sales contract for the acquisition of Company Stock
by the Trustee shall be disregarded.
6.06 Accounting for Allocations. The Committee shall adopt accounting
procedures for the purposes of making the allocations, valuations, and
adjustments to Participants' Accounts provided for in this Article and
Section 5.04. Except as provided in Treas. Reg. 1.54-4975-1(b)(2)(ii),
allocations of Company Stock shall be made separately for each class of
stock, and the Committee shall maintain adequate records of the cost
basis of all shares of Company Stock allocated to each Participant's
Company Stock Accounts. From time to time, the Committee may modify the
accounting procedures for the purpose of achieving equitable and
nondiscriminatory allocations among the Accounts of Participants in
accordance with the general concepts of the Plan and the provisions of
this Section. Annual valuations of Trust Assets shall be made at fair
market value.
6.07 Errors in Allocations. Upon the discovery of any error or
miscalculation in the valuation of an Account or allocations thereto or
debits therefrom, the Committee shall correct the same insofar as, in
the Committee's discretion, the correction is feasible, and any gain or
loss resulting therefrom shall be treated as income or expense to be
credited or charged to the Trust Assets in the year in which such
correction is made. Any correction so made shall not otherwise change
the value of any other Participant's Account as such value was
determined at the time such error or miscalculation was made.
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<PAGE> 35
ARTICLE VII
EXPENSES OF THE PLAN AND TRUST
7.01 Expenses. All expenses of establishing and administering the Plan shall
be paid by the Company, and if not paid by the Company, shall be
charged against the Trust Assets.
7.02 Allocation of Expenses Among Employers. Any Employer other than the
Company shall reimburse the Company its share of costs and expenses
paid by the Company for any Plan Year, determined in the proportion
that the amount of Employer Contributions from each such Employer for
such Plan Year bears to the aggregate Employer Contributions from all
Employers for that Plan Year.
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<PAGE> 36
ARTICLE VIII
VOTING COMPANY STOCK
8.01 Trustee's Powers and Duties. All Company Stock held in the Trust shall
be voted by the Trustee only in such manner as provided pursuant to
this Article VIII.
8.02 Voting of Shares.
(a) Participant Direction if Securities are Listed. If any class
of Company Stock is required to be registered under Section 12
of the Securities Exchange Act of 1934, as amended, each
Participant in the Plan shall be entitled to instruct the
Committee as the manner in which any shares of Company Stock
allocated to his or her Company Stock Account on the record
date for any vote of shareholders shall be voted, but only to
the extend required under Section 409(e) of the Code. In
addition, as to any shares of Company Stock acquired by the
Trust with the proceeds of an Exempt Loan with respect to
which the lenders exclude from federal taxable income a
portion of the interest pursuant to Section 133 of the Code,
to the extent required under Section 133(b)(7)(A) of the Code,
each Participant shall be entitled to instruct the Committee
as to the manner in which any such shares of Company Stock
allocated to his or her Company Stock Account shall be voted.
Except as otherwise provided in this Section 8.02(a), voting
rights with respect to shares of Company Stock held in the
Trust shall be governed by the provisions of Section 8.02(b).
(b) Participant Direction Respecting Certain Transactions. With
respect to any vote of shareholders on any corporate merger,
consolidation, recapitalization, reclassification,
liquidation, dissolution, sale of substantially all assets, or
a similar transaction, each Participant shall be entitled to
instruct the Committee as to the manner in which the shares of
Company Stock allocated to his or her Company Stock Account on
the record date for such vote shall be voted, but only to the
extent required by Sections 401(a)(22) and 409(e) of the Code
and regulations thereunder.
(c) Voting Undirected and Unallocated Shares. On any occasion on
which the stockholders of the Company vote, any allocated
Company Stock with respect to which voting instructions are
not received from Participants and all Company Stock that is
not then allocated to any Participant's Company Stock Account
shall be voted by the Trustee in the same manner determined by
the Committee, provided that such determination is consistent
with ERISA.
(d) Committee Voting Direction. The Trustee shall vote all shares
of Company stock not then allocated to the accounts of
Participants in the manner directed by the Committee, to the
extent that such direction is, in the judgment of the Trustee,
consistent with ERISA.
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ARTICLE IX
CAPITAL ACCUMULATION
9.01 Capital Accumulation. Upon termination of a Participant's employment
with his or her Employer, or upon incurring a Break in Service, a
Participant (or, in the case of the Participant's death, his or her
Beneficiary) shall have a vested (nonforfeitable) interest in all, a
part, or none of the final balances in his or her Accounts in
accordance with Sections 9.02 and 9.03. A Participant's (or his or her
Beneficiary's) Capital Accumulation shall be determined as set forth
below as soon after his or her employment ends as practicable.
9.02 Retirement, Death or Permanent Disability. Upon attaining age
sixty-five (65) or upon his or her death, Permanent Disability or
Retirement, a Participant shall have a nonforfeitable right to one
hundred percent (100%) of the balances credited to his or her Accounts.
In such a case, the Participant's Capital Accumulation shall be
determined as of the Anniversary Date coinciding with or next following
such Participant's death, Permanent Disability or Retirement date, as
the case may be, and he or she shall be entitled to receive an
allocation of Employer Contributions and Forfeitures as described in
Section 6.02 for the Plan Year in which his or her employment ends.
9.03 Other Termination of Service and Vesting. If a Participant's employment
with the Employer ends for any reason other than death, Permanent
Disability or Retirement, his or her Capital Accumulation shall be
determined as of the Anniversary Date coinciding with or next following
his or her termination date. His or her Capital Accumulation shall be
determined in accordance with the following vesting 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>
For purposes of this Section 9.03, a Participant's Years of Service
shall include all Years of Service with the Company or any Affiliate.
9.04 Forfeitures. Any portion of the final balance in a Participant's
Accounts that is not vested and does not become part of his or her
Capital Accumulation shall become a Forfeiture in accordance with this
Section 9.04. The amount of the Forfeiture shall first be deducted from
the Participant's Other Investments Accounts. If Forfeiture of the
Participant's Other Investments Account is not sufficient to reduce the
fair market value of his or her Capital
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<PAGE> 38
Accumulation to the percentage of the total value of his or her
Accounts determined under Section 9.03, the remainder of the Forfeiture
shall be deducted from the Participant's Company Stock Account. If a
Participant's Company Stock Account includes more than one class of
Company Stock, the Forfeiture shall consist of the same proportion of
each class of stock. All Forfeitures shall be reallocated to the
Accounts of the remaining Participants pursuant to Section 6.02 as of
the Anniversary Date of the Plan Year in which the Participant incurs
five (5) consecutive Breaks in Service.
If distribution of a Participant's Capital Accumulation occurs before
he or she incurs five (5) consecutive Breaks in Service, and if the
Participant is not one hundred percent (100%) vested in his or her
account balances, the nonvested portion of such Accounts that is not
distributed will continue to be held in his or her Accounts under the
Plan, and shall become a Forfeiture only on the Anniversary Date of the
Plan Year in which the Participant incurs five (5) consecutive Breaks
in Service. Such Accounts shall continue to receive allocations of the
net income (or loss) of the Trust, but shall not be entitled to an
allocated share of Employer Contributions, Forfeitures or Employer
Securities released from the Suspense Account. At any given time
thereafter, the Participant's vested interest ("X) in such Accounts
shall be determined in accordance with the following formula:
X = P(AB + D) - D,
where P is the vested percentage based on the Participant's Years of
Service at the given time, AB is the total of the Account balances at
the time, and D is the amount of the Capital Accumulation previously
distributed.
9.05 Certain Reemployed Participants. If a Participant incurs five (5) or
more consecutive Breaks in Service, all Years of Service after such
Breaks in Service shall be disregarded when determining such
Participant's Capital Accumulation for the period of service before
such Breaks in Service. If the Participant incurs five (5) or more
consecutive Breaks in Service, all Years of Service before such Breaks
in Service shall be disregarded when determining such Participant's
Capital Accumulation for the period of service after such Breaks in
Service, unless either (i) the Participant had vested Capital
Accumulation at the time the Participant's Break in Service began, or
(ii) upon returning to service the number of consecutive Breaks in
Service incurred by the Participant is less than the greater of (A)
five (5) and (B) the number of Years of Service before such Breaks in
Service.
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ARTICLE X
DISTRIBUTIONS
10.01 Time of Distribution to Participants. Distribution of a Participant's
Capital Accumulation shall generally be made, or begin, under
subsection (a) or (b) below, whichever is applicable, unless an earlier
date for distribution is specified by subsection (c) or (e) below, or a
Participant whose Capital Accumulation exceeds $3,500 elects to defer
receipt of his or her distribution under subsection (d) below.
(a) Retirement, Death or Disability. A Participant whose
employment ends on or after he or she becomes eligible for
Retirement, or is Permanently Disabled, or dies, shall
receive, or begin to receive, his or her Capital Accumulation
as soon as practicable and in no event later than one year
after the end of the Plan Year in which his or her employment
ends.
(b) Other Separation from Service. A Participant whose employment
ends for reasons or under circumstances other than as
described in subsection (a) shall receive, or begin to
receive, his or her Capital Accumulation within or beginning
within one year after the end of the Plan Year that is the
fifth Plan Year after the Plan Year in which the Participant's
employment ends, unless the Participant is reemployed by the
Employer before the time for such distribution. However, if
the Participant's Capital Accumulation includes shares of
Employer Securities acquired with the proceeds of an Exempt
Loan, and if his or her Capital Accumulation is greater than
$3,500, no distribution shall be made until one year after the
end of the Plan Year in which such Exempt Loan is repaid in
full.
(c) Age 65. Unless a Participant otherwise elects pursuant to
subsection (d) below or earlier distribution is required by
subsection (e) below, distribution of benefits will begin no
later than the sixtieth (60th) day after the close of the Plan
Year in which occurs the latest of the following events: (i)
the Participant attains age sixty-five (65); (ii) the tenth
(10th) anniversary of the date on which the Participant became
a Participant in the Plan; or (iii) the termination of the
Participant's service with the Employer.
(d) Election to Defer. If the Participant's Capital Accumulation
is more than $3,500 the Participant shall have the right to
defer the date of distribution of his or her benefit. The
Committee shall give the Participant written notice of this
right, and if the Participant does not then elect a current
distribution by giving his or her consent in writing within 60
days of such notice, his or her Capital Accumulation shall be
retained in the Trust until the earlier of the date on which
the Participant dies, requests a distribution in writing or
attains age sixty-five (65).
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<PAGE> 40
(e) Age 70-1/2. In all events, distribution of the benefits of any
Participant who reaches age 70-1/2 shall begin not later than
April 1 of the year after the calendar year in which the
Participant reaches age 70-1/2 regardless of his or her
continued employment, or consent to distribution, or whether
an Exempt Loan has been repaid. In addition, a Participant
shall be entitled to a total distribution of his or her
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 this Article X.
10.02 Benefit Forms for Participants. Except as otherwise provided in
subsection (a) or (b) below, a Participant's Capital Accumulation
shall, at the election of the Participant, be paid to him or her in
either a single distribution or in five (5) annual installments. In the
event of an installment distribution, each installment shall be equal
to (i) the number of shares of Company Stock credited to the
Participant's Company Stock Account and the balance credited to the
Participant's Other Investments Account, each divided by (ii) the
number of installments which remain to be paid (including the current
installment being computed). Notwithstanding the foregoing:
(a) If the Capital Accumulation payable to a Participant does not
exceed $3,500, or if the Capital Accumulation becomes payable
as a result of the Participant's death regardless of the
amount, the Participant (or if the Participant has died, his
or her Beneficiary) shall receive the Participant's Capital
Accumulation in a single sum.
(b) Except as otherwise provided in subsection (a) with respect to
Participants whose Capital Accumulation does not exceed
$3,500, the single distribution (lump sum) form of payment
shall not be available to a Participant whose termination of
employment occurs for reasons other than Retirement, Permanent
Disability or death; provided, however, that the limitation
set forth in this subsection shall become effective only upon
the receipt by the Company of a determination letter from the
Internal Revenue Service to the effect that such limitation
does not adversely affect the qualification of the Plan under
Section 401(a) and other applicable provisions of the Code and
Treasury Regulations.
10.03 Benefit Forms for Beneficiaries. If a Participant's employment is ended
by death, or if a terminated Participant has a Capital Accumulation
that has not been fully distributed at the time of his or her death,
the Participant's remaining Capital Accumulation shall be paid to his
or her Beneficiary in a single lump sum, within one year after the end
of the Plan Year in which the Participant died.
10.04 Distribution in Cash or Company Stock. A Participant's benefits shall
generally be paid in cash. In connection with such distribution, the
Committee shall cause the Participant's Company Stock Account to be
converted into cash based upon the then fair market value of such
Company Stock, with the resulting cash and the balance of the Other
Investments
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<PAGE> 41
Account paid to the Participant or his or her Beneficiary. However, a
Participant or his or her Beneficiary, as the case may be, shall have
the right to demand that the Participant's benefits attributable to
this or her Company Stock Account and his Other Investments Account be
paid in the form of shares of Employer Securities, provided such a
request is made in writing within sixty (60) days after the Committee
finishes notice of the Participant's right to elect the stock
distribution. In that event, the Committee shall cause the
Participant's Other Investments Account and any shares of Company Stock
other than Employer Securities in the Participant's Company Stock
Account to be converted into or exchanged for shares of Employer
Securities and distributed to the Participant or his Beneficiary along
with any shares of Employer Securities held in the Participant's
Company Stock Account, provided that the value of any fractional share
shall be paid in cash.
10.05 Delay in Benefit Determination. If the Committee is unable to determine
the benefits payable to a Participant or Beneficiary on or before the
latest date prescribed for payment, or in the event that an appraisal
of shares in respect to which a distribution is to be made is not
completed within a reasonable time before such date, the benefits shall
be paid within 60 days after the date they can first be determined.
10.06 Designated Beneficiaries. Distribution of a Participant's Capital
Accumulation will be made to the Participant, if living, and if not, to
his or her Beneficiary. In the event of a Participant's death, his or
her Beneficiary shall be his surviving spouse, if living, or if none,
his or her estate unless the Participant designated a Beneficiary other
than his or her surviving spouse or estate. A Participant may designate
a Beneficiary and/or contingent Beneficiaries and may change such
designation from time to time, in writing signed by the Participant and
delivered to the Committee during the Participant's lifetime. However,
a Participant's designation of a Beneficiary other than his or her
spouse will not be effective unless the Participant's spouse consents
to such designation in writing, witnessed by a notary public, signed by
the spouse and delivered to the Committee during the Participant's
lifetime. If the Participant establishes to the satisfaction of the
Committee that such written consent cannot be obtained because there is
no spouse or the spouse cannot be located, the written statement of the
Participant delivered to the Committee during the Participant's
lifetime will be deemed sufficient. The consent of a spouse will be
valid only with respect to the spouse who signs the consent, or for a
deemed consent, the designated spouse. A Participant may revoke his or
her designation of Beneficiary at any time without the consent of his
or her spouse, and may make a new designation of Beneficiary with the
consent of his or her spouse, if applicable, in writing signed by the
Participant and delivered to the Committee during the Participant's
lifetime. The number of such revocations shall not be limited. However,
the consent of a spouse as to a Beneficiary shall be irrevocable unless
and until the Participant revokes his or her designation of such
Beneficiary.
10.07 Additional Minimum Distribution Requirements. All benefit distributions
shall be subject to the following additional requirements.
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<PAGE> 42
(a) Duration of Benefit Payments. The distribution of benefit
payments to each Participant shall be made in accordance with
the minimum distribution requirements of Section 401(a)(9) of
the Code and regulations thereunder, over a period not
extending beyond the life expectancy of the Participant or the
joint life expectancy of the Participant and a designated
beneficiary, except that in no event shall the period of
distribution exceed that otherwise permitted under the Plan.
(b) Death of Participant Before Benefits Commence. In the event
that a Participant dies before the commencement of benefits
under the Plan, the entire interest of the Participant under
the Plan (if any) shall be distributed not later than the last
day of the calendar year in which occurs the fifth anniversary
of the death of the Participant or, where any portion of the
Participant's benefit is to be paid to (or for the benefit of)
the Participant's surviving spouse or other designated
Beneficiary, such benefit must commence not later than the
last day of the calendar year following the calendar year in
which the Participant's death occurred and be paid over a
period not exceeding the life (or life expectancy) of the
surviving spouse or designated Beneficiary, except that where
the Beneficiary is the Participant's surviving spouse,
payments to the surviving spouse need not begin before the
date on which the Participant would have attained age 70-1/2.
However in no event shall the beginning date or period of
distribution exceed that otherwise permitted under the Plan.
(c) Death After Start of Benefits. If the distribution of benefits
under this Plan has begun and the Participant dies before his
or her entire interest has been distributed to him or her, the
remaining part of such interest will be distributed to the
surviving payee no less rapidly than under the method of
distribution that was in effect on the date of the
Participant's death.
(d) Incidental Benefits. In the event that payment under this Plan
is to be made to someone other than the Participant or jointly
to the Participant and his or spouse or other payee, such
payments shall conform to the incidental death benefit rules
of Section 401(a)(9)(G) of the Code and Treas. Reg.
1.1401(a)(9)-2. In addition, all distributions from the Plan
shall conform to the rules of this Section and Section
401(a)(9) of the Code and regulations thereunder to the extent
not in conflict with any other provision of the Code.
10.08 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
Committee 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
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<PAGE> 43
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 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.
10.09 Unclaimed Benefits. If the Committee is unable to ascertain the
whereabouts or identity of a Participant, a Participant's spouse or
other Beneficiary, or legal representative thereof, who is entitled to
a distribution which is due or required to commence under this Article
X, 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 Committee 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 reallocated as provided
in Section 6.02. In the event that the Participant (or spouse or
Beneficiary, if applicable) requests a distribution after a Forfeiture
has occurred under this Section, the amount of such Forfeiture shall be
restored to the Participant's Accounts through a special Employer
Contribution.
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<PAGE> 44
ARTICLE XI
PLAN ADMINISTRATION
11.01 Named Fiduciaries. The Committee and the Company shall each be a "named
fiduciary" within the meaning of Section 402 of ERISA, but each such
party's role and responsibility as a named fiduciary shall be limited
solely to the exercise of its own authority and discretion, as defined
under the terms of this Plan, to control and manage the operation and
administration of the Plan (other than authority and discretion
assigned under this Plan, or delegated pursuant thereto, to the
Trustee). A named fiduciary may designate other persons who are not
named fiduciaries to carry out its or their fiduciary responsibilities
under this Plan, and any such person shall become a fiduciary under the
Plan with respect to such delegated responsibilities. In the event of
such designation, the named fiduciary shall not be liable for an act or
omission of the designee in carrying out responsibilities delegated to
him or her except to the extent provided in Section 405 of ERISA.
11.02 Fiduciary Limitations. Named fiduciaries under the Plan, as well as the
Trustee and any other person who may be a fiduciary by virtue of
Section 3(12) of ERISA, shall exercise and discharge their respective
fiduciary powers and duties in the following manner:
(a) By acting solely in the interest of the Participants and their
Beneficiaries;
(b) By acting for the exclusive purpose of providing benefits to
Participants and their Beneficiaries and defraying reasonable
expenses of administering the Trust and the Plan;
(c) By acting with the care, skill, prudence and diligence under
the circumstances then prevailing that a prudent man acting in
like capacity and familiar with such matters would use in the
conduct of an enterprise of a like character and with like
aims; and
(d) By otherwise acting in accordance with this Plan and the Trust
Agreement to the extent consistent with Title I of ERISA.
11.03 Company's Responsibilities. The Company, acting by duly adopted
resolution of its Board and in its capacity as sponsor of the Plan and
settlor of the Trust and not as a fiduciary, shall have the authority
to amend or terminate the Plan pursuant to Article XII and to determine
the amount of the Employer Contributions to the Plan pursuant to
Article IV. The Company, acting by duly adopted resolution of its Board
and in its capacity as named fiduciary, shall have the authority to
appoint and remove the Trustee and the members of the Committee.
Whenever the Company is permitted or required to do or perform any act
under this Plan, it shall be duly and properly done or performed if
done and performed by any officer authorized by duly adopted resolution
of the Board to take actions of that type respecting this Plan. To
enable the Committee to perform its duties, the Company shall supply
completely and timely all information that the Committee may from time
to time request.
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<PAGE> 45
11.04 Trustee's Responsibilities. The Trustee shall have, to the extent set
forth in the Trust Agreement, authority and discretion to receive, hold
and distribute Trust Assets, fiduciary responsibilities in connection
with the exercise of such authority and discretion, and a duty to issue
reports and otherwise to account to the Company and the Committee.
Notwithstanding anything set forth in this Plan or Trust Agreement to
the contrary, the Trustee shall be subject to the directions of the
Company and other Employers or of the Committee only to the extent such
directions are (a) delivered in writing to the Trustee, (b) executed by
party previously authorized and (c) are proper, made in accordance with
the terms of the Plan and the Trust Agreement and are not contrary to
ERISA. All Employer Contributions shall be paid over to the Trustee
and, together with accretions thereto, shall be invested by the Trustee
in accordance with the directions permitted in this Plan and Trust
Agreement.
11.05 Appointment of Committee. This Plan shall be administered by a
Committee appointed by the Board to serve at its pleasure and without
compensation. A member of the Committee may be removed by the Board at
any time with or without cause upon ten (10) days written notice from
the Board, and any member of the Committee may resign by delivering his
or her written resignation to the Board.
11.06 Committee Responsibilities. The Committee shall have the following
responsibilities:
(a) Powers and Duties. The Committee shall be the Plan
Administrator under Section 414(g) of the Code and under
Section 3(16)(A) of ERISA. Subject to the provisions of the
Plan and the Trust Agreement, and to such restrictions as the
Board may impose, the Committee shall have the power to
interpret and construe the provisions of the Plan, to supply
omissions, to resolve all disputed or uncertain issues of fact
relevant to the rights of Participants and Beneficiaries under
the Plan, and to establish rules and regulations for the
interpretation and administration of the Plan and transaction
of its business, including, among other things, provisions for
determining who are Participants, what constitutes a Year of
Service and Compensation, allocation to Participants of
Employer Contributions, Forfeitures, and income (or loss), and
valuation of the Trust Assets. All such interpretative and
administrative decisions, and rules and regulations, shall be
conclusive and binding on all persons having an interest in or
under the Plan.
(b) Records and Reports. The Committee shall be responsible for
keeping a record of all its proceedings and actions and shall
maintain, or cause its delegees to maintain, all such books of
account, records, and other data as shall be necessary to
administer the Plan and to meet the disclosure and reporting
requirements of ERISA.
(c) Compensation. No member of the Committee who is an Employee of
an Employer shall receive any compensation form the Company,
any other Employer, the Plan or the Trust for his or her
services as a member of the Committee.
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<PAGE> 46
(d) Committee Procedures. The Committee may act at a meeting or in
writing without a meeting. The Committee shall elect one of
its members as Chairman, who shall also be the Plan's agent
for service of legal process, and appoint a Secretary, who may
or may not be a Committee member. The Committee may adopt such
regulations as it deems desirable for the conduct of its
affairs. All decisions of the Committee shall be made by
majority vote of the number then constituting the Committee,
including actions taken without a meeting.
(e) Distributions of Benefits.
(i) Direction to the Trustee. The Committee shall issue
directions to the Trustee concerning all benefits
that are to be paid from the Trust pursuant to the
Plan, and shall warrant that all such directions are
in accordance with this Plan.
(ii) Application by Participants. The Committee may
require a Participant to complete and file with it an
application for the payment of benefits under the
Plan and any other forms deemed necessary and
desirable by the Committee for the proper
administration of the Plan, and furnish all pertinent
information requested by the Committee. The Committee
may rely upon all such information as furnished it,
including the Participant's current mailing address.
(iii) Participant's Incapacity. Whenever in the written and
certified opinion of one or more qualified physicians
or psychiatrists selected by or satisfactory to the
Committee, or by adjudication of a court of competent
jurisdiction, a person entitled to receive a payment
hereunder is under a legal disability or is
incapacitated in any way so as to be unable to manage
his or her financial affairs, the Committee may
direct the Trustee to make payments (A) to such
person, or (B) to his or her legal representative.
Any payment in accordance with this clause shall be a
complete discharge of any liability for the making of
such payment under this Plan.
(f) Claims Procedure. Any claim by a Participant or Beneficiary (a
"Claimant") shall be filed in writing with the Company's
benefits department as agent for the Committee. The Committee
shall determine all facts which are necessary to establish the
right of the Claimant to benefits under the Plan and the
amount thereof. The Committee shall notify the Claimant in
writing of any adverse decision with respect to his or her
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:
(i) The specific reason or reasons for the denial;
(ii) Specific references to the pertinent Plan provisions
on which the denial is based;
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<PAGE> 47
(iii) 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
(iv) 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. Any
Claimant whose claim has been denied, or his or her duly
authorized representative, may (A) appeal to the Committee in
writing within sixty (60) days after receipt of the notice of
denial for a full review of the decision by the Committee; (B)
review pertinent documents; and (C) submit issues and comments
in writing. The decision by the Committee following such
review shall be made no later than sixty (60) days after the
date of receipt by the Committee of the request for review,
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. and shall be conclusive as to all persons affected
thereby.
(g) Bonding. The Committee shall arrange for bonding of Plan
officials as required by Section 412 of ERISA, but no bonding
in excess of the amount required by Section 412 of ERISA shall
be required by this Plan.
11.07 Indemnification. To the extent permitted by the applicable state laws
of the State of Delaware (for periods before May 1, 1991, when the
Company was EMC Holdings, Inc.) or the Commonwealth of Pennsylvania
(for periods from and after May 1, 1991 when the Company is Education
Management Corporation) and ERISA, the Company shall indemnify the
members of the Committee, any present or former member of the Board, or
any other officer or employee of the Company or an Affiliate, against
any and all claims, losses, damages, expenses (including legal fees),
fines, penalties, and liabilities arising out of the acts, omissions,
and conduct as a fiduciary (as defined in Section 3(21) of ERISA) with
respect to the Plan, except to the extent that such person shall be
determined to be liable by a court of competent jurisdiction for his
own gross negligence or willful misconduct. The foregoing rights of
indemnification shall be in addition to such other rights as the above
persons may enjoy, whether as a matter of law or by reason of insurance
coverage of any kind or otherwise.
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<PAGE> 48
ARTICLE XII
AMENDMENT AND TERMINATION OF THE PLAN
12.01 Amendment of the Plan. The Company shall have the right at any time,
with prospective or retroactive effect, by duly adopted resolution of
the Board, to modify, alter or amend the Plan in whole or in part;
provided, however, that:
(a) no amendment shall deprive any Participant of any benefit to
which he or she has a nonforfeitable right under Article IX of
this Plan;
(b) except as permitted by regulations under Section 411(d)(6) of
the Code, no amendment shall 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
(c) no amendment shall make it possible for any part of the Trust
Assets or its income to be used for, or diverted to, purposes
other than the exclusive benefit of the Participants.
Any amendment shall become effective as of the date stated therein upon
delivery of a written instrument, executed by order of the Board, to
the Trustee and the endorsement by the Trustee of its receipt.
12.02 Mandatory Amendments. Notwithstanding the provisions of this Article
XII or of any other provision of this Plan, any amendment may be made,
retroactively if appropriate, that the Company deems necessary or
appropriate to conform the Plan to, or satisfy the conditions of any
law, government regulation or ruling, and to permit the Plan to meet
the requirements for qualification under Section 401(a) of the Code as
a leveraged employee stock ownership plan within the meaning of Section
4975(e)(7) of the Code, and to permit the Trust to meet the
requirements for tax-exempt status under Section 501 of the Code.
12.03 Termination of the Plan. The Company expects to continue the Plan
indefinitely, but continuance is not assumed as a contractual
obligation of the Company. The Company reserves the right to terminate
the Plan and Trust in whole or in part at any time, with prospective or
retroactive effect, by duly adopted resolution of the Board,
accompanied by delivery of written notice of such termination to the
Committee and to the Trustee. Each Employer reserves the right by duly
adopted resolution of its own board of directors to terminate the
participation of its Employees under the Plan, and the Board may
terminate the participation of any Employer pursuant to Section 14.03
of the Plan. No such termination may have an effect prohibited by
subsection (a), (b) or (c) of Section 12.01.
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<PAGE> 49
12.04 Employee Nonforfeitable Rights. Upon termination (or partial
termination) of the Plan within the meaning of Section 411(d)(3) of the
Code, or a complete discontinuance of Employer Contributions, each
Participant (or in the case of a partial termination, each Participant
affected), shall have a nonforfeitable right to one hundred percent
(100%) of the balance in each of his or her Accounts as of the date of
termination, partial termination, or complete discontinuance.
12.05 Distribution Upon Termination. In the event of termination of the Plan
pursuant to Section 12.03, the assets then held in the Trust under the
Plan shall be distributed to the Participants in accordance with
Article X, either, in the sole discretion of the Committee, based upon
a Participant's actual termination of service or as if such
Participant's termination of service occurred as of the date the Plan
terminated; provided, however, the Trustee shall not be required to
make such distribution before the Company receives a favorable written
determination from the Internal Revenue Service with respect to the
qualified status of the Plan, as terminated, under Section 401(a) of
the Code and the tax-exempt status of the Trust under Section 501(a) of
the Code, or the Company agrees, in an agreement acceptable to the
Trustee, to indemnify the Trustee for any liability it may incur by
reason of such distribution constituting a violation of ERISA or the
qualification requirements of the Code.
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<PAGE> 50
ARTICLE XIII
TOP-HEAVY PLAN PROVISIONS
13.01 Application. This Article XIII 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 Committee 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 Accounts of Participants in this Plan (disregarding the
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.
13.02 Special Vesting Rule. Notwithstanding the provisions of Article V
hereof to the contrary, a Participant shall be fully vested in the
balance of his or her 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%
5 years 80%
6 or more years 100%
</TABLE>
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<PAGE> 51
If the Plan becomes a top-heavy plan and subsequently ceases to be
such:
(i) any balance of the Participant's 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 13.02, in lieu of the
vesting schedule contained in Article V.
13.03 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.
13.04 Special Maximum Combined Plans Limit. Notwithstanding the provisions of
Section 6.04 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.
13.05 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 Section 318 of the Code) 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 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.
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<PAGE> 52
ARTICLE XIV
MISCELLANEOUS
14.01 Governing Law. The Plan shall be governed by the laws of the State of
Delaware for periods before May 1, 1991, when the Company was EMC
Holdings, Inc., and by the laws of the Commonwealth of Pennsylvania for
periods from and after May 1, 1991 when the Company is Education
Management Corporation, except to the extent that such laws have been
pre-empted by ERISA or other laws of the United States of America.
14.02 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.
14.03 Company as Agent for Employers. Any Affiliate becoming an Employer as
provided in Section 2.18 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.
14.04 Participant's Rights. Neither the establishment of this Plan, nor any
modification thereof, nor the creation of any fund or account, nor the
payment of any benefits, shall be construed as giving to any
Participant or other person any legal or equitable right against the
Company or any Employer, or any officer or Employee thereof, or the
Trustee, or the Committee, except as expressly provided in this Plan.
The adoption and maintenance of this Plan shall not be deemed to
constitute a contract of employment or otherwise between an Employer
and any Employee, or to be a consideration for, or an inducement or
condition of, any employment. Nothing contained herein shall be deemed
to give an Employee the right to be retained in the service of an
Employer or to interfere with the right of an Employer to discharge,
with or without cause, any Employee at any time.
14.05 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.
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
47
<PAGE> 53
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
Committee 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
Committee shall follow the procedures set forth in paragraph (7) of
Section 414(p) of the Code.
14.06 Company's Liability. All Capital Accumulations shall be paid only from
the Trust Assets, and neither the Company nor any Employer nor the
Committee nor the Trustee shall have any duty or liability to furnish
the Trust with any funds, securities or other assets, except as
expressly provided in the Plan.
14.07 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 12.01. 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.
14.08 Legal Action. In any action or proceeding involving the Trust, or any
property constituting part or all thereof, or the administration
thereof, Employees or former Employees of the Company or an Affiliate
or the Beneficiaries or any other person having or claiming to have an
interest in the Trust Assets or under the Plan shall not be necessary
parties nor entitled to any notice of process.
14.09 Binding on All Parties. Any final judgment that is not appealed or
appealable that may be entered on any legal action or proceeding shall
be binding and conclusive on the parties hereto, the Committee, and all
person having or claiming to have an interest in the Trust Assets or
under the Plan.
48
<PAGE> 54
14.10 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.
14.11 Severability of Provisions. If any provision of this Plan is held to be
invalid or unenforceable, such invalidity or unenforceability shall not
affect any other provision, and this Plan shall be construed and
enforced as if such provision had not been included.
49
<PAGE> 55
EXECUTION
As evidenced of its adoption of the Plan as amended and restated, the Company
has caused this instrument to be executed by its duly authorized officer and its
corporate seal affixed hereto this _____ day of_________________, 1994.
ATTEST: (SEAL) EDUCATION MANAGEMENT CORPORATION
By:_______________________________ By:______________________________
Secretary
50
<PAGE> 1
Exhibit 10.03
SECOND 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 August 9, 1996:
1. Section 5.02 of the Plan is hereby amended by adding the following at
the end thereof:
Notwithstanding the foregoing, the purchases of Class B Common Stock of the
Company, par value $0.0001 per share, by the Trust from certain of the
Company's stockholders on August 9, 1996 shall be made by in the discretion
of the Trustee without direction from the Committee and shall be made at a
price or at prices which, in the judgment of the Trustee, do not exceed the
fair market value of such Class B Common Stock, determined in accordance
with the foregoing provisions of this Section 5.02.
2. The first sentence of Section 5.03 of the Plan is hereby amended by
adding the following at the end thereof:
; provided, however, that the redemption of Series A 10.19% Convertible
Preferred Stock of the Company, par value $0.0001 per share, by the Company
from the Trust on August 9, 1996, shall be made without direction from the
Committee and shall be made solely in the judgment of the Trustee.
EXECUTION OF SECOND AMENDMENT TO THE PLAN
To record the adoption of this Second Amendment to the Plan, the Company
has caused its appropriate officers to affix the Company's corporate name and
seal hereto this 9th day of August 1996.
EDUCATION MANAGEMENT
CORPORATION
By: /s/ ROBERT T. MCDOWELL
----------------------------
Title: Senior Vice President & CFO
---------------------------
<PAGE> 1
Exhibit 10.05
EDUCATION MANAGEMENT CORPORATION
MANAGEMENT INCENTIVE STOCK OPTION PLAN
(Adopted Effective as of November 11, 1993)
WHEREAS, EDUCATION MANAGEMENT CORPORATION, a Pennsylvania corporation
(the "Company"), wishes to adopt a stock option plan to be designated the
"Management Incentive Stock Option Plan" (the "Plan") effective as of November
11, 1993, which Plan was approved by the Board of Directors of the Company (the
"Board of Directors") on November 11, 1993; and
WHEREAS, the Plan is intended to be a nonstatutory stock option plan
for purposes of the Internal Revenue Code of 1986, as amended.
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 the 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 November 11, 1998 in an aggregate amount of not more
than 300,000 shares of Class B Common Stock, $0.0001 par value per share, of the
Company (the "Shares"), including stock issued pursuant to the Plan, or such
additional shares as the Board of Directors shall approve. Each option granted
under the Plan shall represent the right to acquire one Share. Options for up to
300,000 Shares may be granted as of any date on or following November 11, 1993
until all available options have been granted. The stock to be issued under the
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 the Plan in the sole discretion of the Committee (as hereinafter
defined).
3. Administration.
The Plan will be administered by a committee of the Board of Directors
(the "Committee") in accordance with the following provisions:
- 2 -
<PAGE> 3
(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 of Directors will elect one of the members of the Committee
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.
(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
- 3 -
<PAGE> 4
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 hereof.
(iv) The Company and the recipient of the stock option (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 17 hereof and
which may be a different agreement with respect to different
participants. Moreover, if the Optionee is not then a party to the
Stockholders Agreement dated October 26, 1989 among the stockholders
of the Company listed on the Schedule of Stockholders thereto,
Merrill Lynch Interfunding Inc., Education Management Corporation
Employee Stock Ownership Trust and the Company, as amended (the
"Stockholders Agreement"), he or she will execute and deliver a
counterpart thereof to the Secretary of the Company.
- 4 -
<PAGE> 5
(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.
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 Education Management Corporation Employee Stock Option Plan
("ESOP"), and to determine that the fair market value of the
- 5 -
<PAGE> 6
Shares are equal to such appraised value. For options granted effective as of
November 11, 1993, the option price will be $2.85 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, 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>
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 for the first year as described above
provided that the sum of (i) seven times the
- 6 -
<PAGE> 7
Company's consolidated historical earnings from continuing operations before
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 ESOP; and (C) options
granted under any of the Company's Management Incentive Stock Option Plans, this
Plan or any similar plan adopted by the Company in the future ("Adjusted
HEBIT"), 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 by which the
cash and equivalents of the Company ("Net Debt") exceed $95 million for the year
ended June 30, 1994, and exceed targets for fiscal year 1995 and later which
will be established and attached hereto when the Company completes the Strategic
Planning process now in progress. The sale or other disposition of any
significant asset(s) will impact the above calculation because of the effect on
Adjusted HEBIT, Net Debt and other factors. The amounts described above and/or
determined in accordance with the Strategic Planning process 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:
- 7 -
<PAGE> 8
(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.
(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) hereof
or under the applicable Stock Option Agreement in the absence of
such death or other event; provided, however,
- 8 -
<PAGE> 9
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 it is in, or not opposed to, the best interest of the Company
to do so.
(d) Subject to the provisions of Paragraphs 6(a) and 6(b) and other
pertinent provisions of the 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 the 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 realize value on their shares in the Company
in excess of the following amounts:
- 9 -
<PAGE> 10
<TABLE>
<S> <C>
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
After 11/01194 - Subject to Strategic
Planning process
described below
</TABLE>
; or
(b) The product of 7 times Adjusted HEBIT (from continuing
operations) less Net Debt on the date of such transaction equals or
exceeds $95 million for the fiscal year ended June 30, 1994, or
equals or exceeds amounts based on the Strategic Planning process
described below.
Accelerated vesting targets for the 1995 fiscal year and beyond for
both method (a) and (b) above will be established and attached
hereto when the Company completes the Strategic Planning process now
in progress.
"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
- 10 -
<PAGE> 11
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; provided, however, that the issuance or transfer of
shares, stock options and/or other contract rights to acquire shares
(a) to the Education Management Corporation ESOP or any other
employee stock ownership plan hereinafter adopted by the Company or
(b) to one or more individuals who are employees of the Company or
its Subsidiaries and hold options previously granted under the 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 the Plan to the contrary notwithstanding, in
the event of a Change in Control, any options
- 11 -
<PAGE> 12
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 hereof 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 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 of 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 November 11, 1993,
- 12 -
<PAGE> 13
until all options have been granted; (ii) will select the Eligible Employees to
receive options (the "Participants"); and (iii) will designate the number of
options to be allocated to each Participant. The grant of options for up to
300,000 Shares has been approved by the Committee for grant as of November 11,
1993.
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, or the Optionee's
guardian or other duly appointed representative.
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.
- 13 -
<PAGE> 14
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 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 the 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 the 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
- 14 -
<PAGE> 15
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 the Plan, in that event the Optionee (or his or her personal
representative) will have the right for a period of ninety (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 acquired by such Optionee
pursuant to the exercise of options granted under the 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) hereof 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 Paragraph 14(c), seven times the Adjusted HEBIT
(from continuing operations) minus the Net Debt for the immediately preceding
year, divided by the number of shares (on a fully diluted basis) as of the end
of such year, less 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 (x) as an addition to Net
- 15 -
<PAGE> 16
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 (y) 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.
(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 Paragraphs 14(b)(1) and 14(b)(2) will terminate upon a Public
Distribution which results in the Shares being freely tradeable in a public
market. The Committee will determine when and if the 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 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
- 16 -
<PAGE> 17
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 otherwise, then there shall be
substituted for each Share subject to any 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.
- 17 -
<PAGE> 18
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 such other provisions (whether or not the same as or
different from the provisions of other stock options granted under the 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 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 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 November 11, 1998. 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
- 18 -
<PAGE> 19
Optionee, reduce or impair any rights or obligations under any option
theretofore granted under the Plan.
20. Indemnification.
To the maximum extent permitted by law and 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 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; provided that
promptly after institution of any such action, suit or proceeding, the Committee
member in writing offers the Company the opportunity, at its own expense, to
handle and defend the same and the Committee member fully cooperates in the
Company's defense of such action, suit or proceeding.
21. Disclaimer of Employment Rights.
Neither the Plan nor any option granted hereunder will create any
employment right in any person.
- 19 -
<PAGE> 20
ATTEST: EDUCATION MANAGEMENT CORPORATION
By:_________________________ By:______________________________
Title:______________________ Title:___________________________
- 20 -
<PAGE> 1
Exhibit 10.11
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
----------------------------------------------------------
EDUCATION MANAGEMENT CORPORATION
DEFERRED COMPENSATION PLAN
----------------------------------------------------------
OCTOBER 1995
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- --------------------------------------------------------------------------------
<PAGE> 2
- --------------------------------------------------------------------------------
EDUCATION MANAGEMENT CORPORATION
DEFERRED COMPENSATION PLAN
The Education Management Corporation Deferred Compensation Plan has
been designed to permit certain highly compensated officers of the Company to
defer current compensation which cannot be redirected into the Company's
Retirement Plan and the Employee Stock Ownership Plan due to IRS limitations. It
offers you a way to accumulate savings for the future while at the same time
sheltering income from current taxation. Plan accumulations are taxed when you
receive a distribution of your account.
Following is a summary of the plan's main features. Please review this
information carefully and consider how the plan might help you to meet your
current and future financial objectives. If you have questions about any of the
plan's provisions, please contact Bob Cypher, Diane Klimek or any member of the
Retirement Committee who is responsible for managing and administering the plan.
WHO IS ELIGIBLE
Under this plan, participation is at the discretion of the Retirement
Committee. At present, you are eligible to participate in the plan if you are:
- An officer of the Company earning at least $118,800 each year
or an operating unit President; and
- Making pre-tax contributions to the Education Management
Corporation Retirement Plan; or
- Limited in the amount that can be contributed on your behalf
to the Retirement Plan or ESOP.
No executive will be permitted to participate in this Plan if that
executive's participation would cause the Plan to fail to qualify as primarily
for the purpose of providing deferred compensation to a select group of
management or highly compensated employees within the meaning of the Employee
Retirement Income Security Act.
Your participation in the Deferred Compensation Plan begins when you
submit a Deferral Agreement to the Retirement Committee by no later than either
of the following dates:
- 30 days after you are notified of your right to participate in
the plan, or
- December 15 of any calendar year if the above does not apply.
TYPE OF PLAN
The Education Management Corporation Deferred Compensation Plan is a
non-qualified deferred compensation plan. Even though the plan is non-qualified,
it is still subject to rules and regulations as established by the Internal
Revenue Service.
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Education Management Corporation Deferred Compensation Plan Page 1
<PAGE> 3
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PLAN YEAR
Records for the plan are maintained on a calendar year basis which
begins on January 1 and ends on December 31.
IRS LIMITS
The Internal Revenue Code places limits on the amount that may be
contributed by or on behalf of highly compensated employees to qualified plans
like our Retirement Plan and ESOP.
- Even though the EMC Retirement Plan allows participants to
contribute up to 10% of their gross earnings to the 401(k),
the maximum annual dollar amount currently allowed by the IRS
is $9,240.
- Contributions to a 401(a) plan cannot discriminate in favor of
highly compensated employees. The level of pre-tax deferrals
permitted for highly compensated employees depends on the
level of deferrals made by non-highly compensated employees.
- In 1994, Congress lowered the annual compensation cap for
qualified benefit purposes to $150,000.
- Each year, the maximum benefit which can be contributed to an
employee's retirement plan and ESOP accounts, from all
sources, can be no more than 25% of earnings or $30,000,
whichever is less.
DEFERRALS TO THE PLAN
Your Deferrals
You can defer up to 7% of your compensation into a salary deferral
account. The minimum amount you can defer is $100,000 or 1% of your
compensation, whichever is less. You may elect to defer a portion of your base
salary, Management Incentive Bonus (should one be paid) or both.
You must make any deferral election for the upcoming calendar year by
no later than December 15 of the current year. Your election applies to any
compensation that would otherwise be paid to you during the next calendar year.
To change your deferral election for a future calendar year, you must complete
and return a new Deferral Agreement to the Retirement Committee.
Company Credits
You will receive credit to your Individual Account in the Deferred
Compensation Plan if your Company contributions to the Retirement Plan or ESOP
are limited by IRS compensation or contribution maximums. The credits you
receive will be equal to the additional amounts you would have received had pay
and contribution maximums not been in effect.
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Education Management Corporation Deferred Compensation Plan Page 2
<PAGE> 4
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CONDITIONS OF ENTITLEMENT
You are always entitled to receive any compensation you defer through
the plan (plus or minus investment debits or credits) if you leave the Company
for any reason. You become entitled to Company credits in your account based on
your years of service with Education Management Corporation. This means if you
leave the Company for any reason other than retirement, death or disability, you
are entitled to Discretionary Credits, ESOP Credits and Matching Credits in your
individual account. The following chart shows the plan's entitlement schedule
for Company credits:
<TABLE>
<CAPTION>
YEARS OF SERVICE PERCENTAGE ENTITLEMENT
<S> <C>
0 to 2 years 0%
3 years 20%
4 years 40%
5 years 60%
6 years 80%
7 years or more 100%
</TABLE>
Your years of service are measured under the Deferred Compensation Plan
the same way they are measured under the Retirement Plan.
Regardless of your years of service, you or your designated
beneficiary are entitled to the full value of Company credits in your individual
account when you:
- terminate employment at or after reaching the age of 65,
- become totally disabled while actively employed by the
Company. Total disability means your inability to engage in
any substantial gainful activity by reason of any physical or
mental impairment which is expected to result in death or be
of a long, continued and indefinite duration, as certified by
a written opinion of a physician selected by the Retirement
Committee, or
- die while actively employed.
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Education Management Corporation Deferred Compensation Plan Page 3
<PAGE> 5
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GRANTOR TRUST
Many companies choose to pay deferred compensation benefits out of
their general corporate assets when payments become due. Others decide to set
money aside in a grantor trust in advance of the payment date to help reduce
employee concerns that the Company may renege on its promise to pay.
The IRS allows the use of a grantor trust as long as an employee's
rights to deferred compensation meet the following criteria:
- the assets set aside under the plan must be subject to the
claims of the Company's general creditors in the event of
bankruptcy; and
- the employee may not have access to the assets the Company set
aside to fulfill the promise to pay.
Education Management Corporation has established a grantor trust with
PNC Bank to accumulate assets for future benefit payment. Mockenhaupt,
Mockenhaupt, Cowden & Parks (MMC&P) is the recordkeeper for the plan.
INVESTMENT FUNDS
The plan provides the following Fidelity investment funds from which
you can choose:
- Intermediate Bond Fund
- Magellan Fund
- Growth Company Fund
- Fidelity Asset Manager
- Fidelity Asset Manager: Income
- Fidelity Asset Manager: Growth
- Worldwide Fund
You may select one fund or up to all seven funds in increments of at
least 10%.
These investment percentages may apply separately to your existing
account values, or future salary deferral credits, Discretionary Credits, ESOP
and Matching Credits or equally for both existing individual account values and
future credits.
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Education Management Corporation Deferred Compensation Plan Page 4
<PAGE> 6
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CHANGING YOUR ELECTIONS
You may make the following changes to your account:
<TABLE>
<CAPTION>
===========================================================================================
YOU CAN MAKE
YOU MAY CHANGE: THIS CHANGE: TO MAKE A CHANGE:
- -------------------------------------------------------------------------------------------
<S> <C> <C>
YOUR BENEFICIARY -- The individual you name At any time Complete a new
to receive the value of your account upon Beneficiary Designation
your death. Form
- -------------------------------------------------------------------------------------------
YOUR DEFERRAL PERCENTAGE -- The percentage As of any Complete the change
of your compensation you defer through the January 1 section of the Deferral
plan. Agreement and submit it
by December 15 of the
preceding year
- -------------------------------------------------------------------------------------------
YOUR INVESTMENT ELECTION -- The At any time Call MMC&P directly at
investments you select for your individual
account (in 10% increments).
===========================================================================================
</TABLE>
ACCOUNT ACTIVITY
You will receive an account statement as of the last day of each
calendar quarter that shows the market value of the assets of the grantor trust
underlying your individual account and its activity as of that date.
HOW AND WHEN YOUR ACCOUNT IS PAID
When you enroll, you must complete an Election of Form of Payment to
choose how and when you want your account to be paid. Generally:
- if you terminate employment, regardless of age or length of
service, you are entitled to receive a payment of the balance
of your Salary Deferral Account.
- if you die, become disabled or terminate employment after the
attainment of age 65, you (or your beneficiary) are entitled
to receive a payment of the total balance of your Individual
Account.
- if you terminate employment after the attainment of age 55 and
are fully vested, you are entitled to receive a payment of the
total balance of your Individual Account.
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Education Management Corporation Deferred Compensation Plan Page 5
<PAGE> 7
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You may choose to receive payments as soon as administratively possible
following one of these events or at some future point in time. In addition, you
may select either a single lump sum or equal annual installment payments, as
follows:
LUMP SUM -- If you elect to receive your account in a lump sum, the
amount you receive will equal your deferrals and vested Company credits
(plus or minus investment debits or credits).
EQUAL ANNUAL INSTALLMENTS -- If you elect this payment option, your
account (your deferrals and earned Company credits plus investment
debits or credits) will be paid in equal annual installments for the
time period you specify at enrollment, for a period not less than 2
years, but not to exceed 10 years. The balance of your account will
continue to realize investment experience based on the investment
options you have chosen.
PAYMENT FORM
All distributions will be made in cash.
OTHER FACTS ABOUT THE PLAN
- You may request a withdrawal of all or a part of your salary
deferrals (no investment debits and credits and no Company
credits) if you have a hardship. You may request a withdrawal
only for the amount necessary to satisfy the hardship. The
Retirement Committee will approve your request if it concludes
that you have a financial hardship that can be met only by the
credits in your salary deferral account. A financial hardship
under the Deferred Compensation Plan is limited by IRS rules
and regulations to the following situations:
- a sudden and unexpected illness or accident of you or
your dependent, or
- loss of property due to casualty.
- Plan loans are not permitted.
- Normally, plan benefits are paid directly from the Company's
general assets (including the grantor trust). This is because
of special rules imposed by the Internal Revenue Service on
these types of plans.
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Education Management Corporation Deferred Compensation Plan Page 6
<PAGE> 8
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TAX TREATMENT
Under current rules, it is expected that funds you defer will be
excluded from your compensation for federal income tax purposes as reported on
Form W-2 for the year in which they are deferred. As you plan how to receive
your Deferred Compensation Plan account, consider your tax strategy. When you
receive a distribution of your account you will owe ordinary federal income
taxes in the year of receipt.
No preferential federal income tax treatment is available for the
distribution received from your Deferred Compensation Plan account (i.e.
rollover into a qualified plan such as a 401(k) or an IRA).
PLAN DOCUMENT GOVERNS
The information in this summary explains the main features of the
Deferred Compensation Plan and is not intended to give you all the details or
cover every possible situation that could occur. Further, Education Management
Corporation retains the right, at its sole discretion, to change or discontinue
the plan, or any benefit under the plan, at any time.
The Deferred Compensation Plan is governed by an official legal
document -- called a plan document -- which is always the final authority. A
plan document is provided for your reference.
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Education Management Corporation Deferred Compensation Plan Page 7
<PAGE> 9
EDUCATION MANAGEMENT CORPORATION
DEFERRED COMPENSATION TRUST
<PAGE> 10
EDUCATION MANAGEMENT CORPORATION
DEFERRED COMPENSATION TRUST
TABLE OF CONTENTS
<TABLE>
<S> <C>
SECTION 1 ................................................................ 2
ESTABLISHMENT OF TRUST
SECTION 2 ................................................................ 3
PAYMENTS TO PLAN PARTICIPANTS AND THEIR BENEFICIARIES
SECTION 3 ................................................................ 4
TRUSTEE RESPONSIBILITY REGARDING PAYMENTS TO
TRUST BENEFICIARY WHEN COMPANY IS INSOLVENT
SECTION 4 ................................................................ 6
PAYMENTS TO THE COMPANY
SECTION 5 ................................................................ 7
INVESTMENT AUTHORITY
SECTION 6 ................................................................ 8
DISPOSITION OF INCOME
SECTION 7 ................................................................ 9
ACCOUNTING BY TRUSTEE
SECTION 8 ................................................................ 10
RESPONSIBILITY OF TRUSTEE
SECTION 9 ................................................................ 11
COMPENSATION AND EXPENSES OF TRUSTEE
SECTION 10 ............................................................... 12
RESIGNATION AND REMOVAL OF TRUSTEE
SECTION 11 ............................................................... 13
APPOINTMENT OF SUCCESSOR
SECTION 12 ............................................................... 14
AMENDMENT OR TERMINATION
SECTION 13 ............................................................... 16
MISCELLANEOUS
SECTION 14 ............................................................... 17
EFFECTIVE DATE
</TABLE>
<PAGE> 11
EDUCATION MANAGEMENT CORPORATION
DEFERRED COMPENSATION TRUST
(a) This Agreement made this ____ day of _________, 1995, by and among Education
Management Corporation (the "Company"), PNC Bank, National Association (the
"Trustee") and Mockenhaupt, Mockenhaupt, Cowden & Parks, Inc. (the "Agent").
(b) WHEREAS, the Company has adopted a nonqualified deferred compensation plan
designated as the Education Management Corporation Deferred Compensation Plan
(the "Plan");
(c) WHEREAS, the Company has incurred or expects to incur liability under the
terms of such Plan with respect to the individuals participating in such Plan;
(d) WHEREAS, the Company wishes to establish a trust (hereinafter called
"Trust") and to contribute to the Trust assets that shall be held therein,
subject to the claims of the Company's creditors in the event of the Company's
Insolvency, as herein defined, until paid to Plan participants and their
beneficiaries in such manner and at such times as specified in the Plan;
(e) WHEREAS, it is the intention of the parties that this Trust shall not affect
the status of the Plan as an unfunded plan maintained for the purpose of
providing deferred compensation for a select group of management or highly
compensated employees for purposes of Title I of the Employee Retirement Income
Security Act of 1974;
(f) WHEREAS, it is the intention of the Company to make contributions to the
Trust to provide itself with a source of funds to assist it in the meeting of
its liabilities under the Plan;
NOW, THEREFORE, the parties do hereby establish the Trust and agree
that the Trust shall be comprised, held and disposed of as follows.
1
<PAGE> 12
SECTION 1
ESTABLISHMENT OF TRUST
(a) The Company hereby deposits with Trustee in trust $_________, which
shall become the principal of the Trust to be held, administered and
disposed of by Trustee as provided in this Trust Agreement.
(b) The Trust hereby established is revocable by the Company; however, it
shall become irrevocable immediately upon a Change in Control as
defined herein.
(c) The Trust is intended to be a grantor trust, of which the Company is
the grantor, within the meaning of subpart E, part I, subchapter J,
chapter 1, subtitle A of the Internal Revenue Code of 1986, as amended,
and shall be construed accordingly.
(d) The principal of the Trust, and any earnings thereon shall be held
separate and apart from other funds of the Company and shall be used
exclusively for the uses and purposes of Plan participants and general
creditors as herein set forth. Plan participants and their
beneficiaries shall have no preferred claim on, or any beneficial
ownership interest in, any assets of the Trust. Any rights created
under the Plan and this Trust Agreement shall be mere unsecured
contractual rights of Plan participants and their beneficiaries against
the Company. Any assets held by the Trust will be subject to the claims
of the Company's general creditors under federal and state law in the
event of Insolvency, as defined in Section 3(a) herein.
(e) The Company, in its sole discretion, may at any time, or from time to
time, make additional deposits of cash or other property in trust with
Trustee to augment the principal to be held, administered and disposed
of by Trustee as provided in this Trust Agreement. Neither Trustee nor
any Plan participant or beneficiary shall have any right to compel such
additional deposits. Any such deposits must be approved by the Board of
Directors of the Company.
(f) Upon a Change of Control, the Company shall, as soon as possible, but
in no event longer than two (2) business days following the Change of
Control, as defined herein, make an irrevocable contribution to the
Trust in an amount that is sufficient to pay each Plan participant or
beneficiary the benefits which Plan participants or their beneficiaries
would be entitled pursuant to the terms of the Plan as of the date on
which the Change of Control occurred.
2
<PAGE> 13
SECTION 2
PAYMENTS TO PLAN PARTICIPANTS AND THEIR BENEFICIARIES
(a) The Company shall deliver to the Agent a schedule (the "Payment
Schedule") that indicates the amounts payable in respect of each Plan
participant (and his or her beneficiaries), that provides a formula or
other instructions acceptable to the Agent for determining the amounts
so payable, the form in which such amount is to be paid (as provided
for or available under the Plan), and the time of commencement for
payment of such amounts. The Agent shall certify in writing to the
Trustee the amount of funds to be transferred to the account maintained
by the Agent for benefit payments and the time of such transfer, and
the Trustee shall transfer such funds in accordance with the Agent's
written certification. Except as otherwise provided herein, Agent shall
make payments to the Plan participants and their beneficiaries in
accordance with the Payment Schedule. Agent shall make provision for
the reporting and withholding of any federal, state or local taxes that
may be required to be withheld with respect to the payment of benefits
pursuant to the terms of the Plan and shall pay amount withheld to the
appropriate taxing authorities or determine that such amounts have been
reported, withheld and paid by the Company. In addition, Agent shall
perform such participant recordkeeping services as may be agreed upon
between Agent and Company.
(b) The entitlement of a Plan participant or his or her beneficiaries to
benefits under the Plan shall be determined by the Company or such
party as it shall designate under the Plan, and any claim for such
benefits shall be considered and reviewed under the procedures set out
in the Plan.
(c) The Company may make payment of benefits directly to Plan participants
or their beneficiaries as they become due under the terms of the Plan.
The Company shall notify Trustee and Agent of its decision to make
payment of benefits directly prior to the time amounts are payable to
participants or their beneficiaries. In addition, if the principal of
the Trust, and any earnings thereon, are not sufficient to make
payments or benefits in accordance with the terms of the Plan, the
Company shall make the balance of each such payment as it falls due.
Trustee shall notify the Company and Agent where the principal and
earnings are not sufficient to make benefit payments.
3
<PAGE> 14
SECTION 3
TRUSTEE RESPONSIBILITY REGARDING PAYMENTS TO
TRUST BENEFICIARY WHEN COMPANY IS INSOLVENT
(a) Trustee shall cease payment of benefits to Plan participants and their
beneficiaries if the Company is Insolvent. The Company shall be
considered "Insolvent" for purposes of this Trust Agreement if (i) the
Company is unable to pay its debts as they become due, or (ii) the
Company is subject to a pending proceeding as a debtor under the United
States Bankruptcy Code.
(b) At all times during the continuance of this Trust, as provided in
Section l(d) hereof, the principal and income of the Trust shall be
subject to claims of general creditors of the Company under federal and
state law as set forth below.
(1) The Board of Directors and Chief Executive Officer of the
Company shall have the duty to inform the Trustee in writing
of the Company's Insolvency. If a person claiming to be a
creditor of the Company alleges in writing to the Trustee that
the Company has become Insolvent, the Trustee shall determine
whether the Company is Insolvent and, pending such
determination, the Trustee shall discontinue payment of
benefits to Plan participants or their beneficiaries.
(2) Unless the Trustee has actual knowledge of the Company's
Insolvency, or has received notice from the Company or a
person claiming to be a creditor alleging that the Company is
Insolvent, the Trustee shall have no duty to inquire whether
the Company is Insolvent. The Trustee may in all events rely
on such evidence concerning the Company's solvency as may be
furnished to the Trustee and that provides the Trustee with a
reasonable basis for making a determination concerning the
Company's solvency.
(3) If at any time the Trustee has determined that the Company is
Insolvent, the Trustee shall discontinue payments to Plan
participants or their beneficiaries and shall hold the assets
of the Trust for the benefit of the Company's general
creditors. Nothing in this Trust Agreement shall in any way
diminish any rights of Plan participants or their
beneficiaries to pursue their rights as general creditors of
the Company with respect to benefits due under the Plan or
otherwise.
(4) The Trustee shall resume the payments of benefits to Plan
participants or their beneficiaries in accordance with Section
2 of this Trust Agreement only after the Trustee has
determined that the Company is not Insolvent (or is no longer
Insolvent).
4
<PAGE> 15
(c) Provided that there are sufficient assets, if the Trustee discontinues
the payment of benefits from the Trust pursuant to Section 3(b) hereof
and subsequently resumes such payments, the first payment following
such discontinuance shall include the aggregate amount of all payments
due to Plan participants or their beneficiaries under the terms of the
Plan for the period of such discontinuance, less the aggregate amount
of any payments made to Plan participants or their beneficiaries by the
Company in lieu of the payments provided hereunder during any such
period of discontinuance.
5
<PAGE> 16
SECTION 4
PAYMENTS TO THE COMPANY
Except as provided in Section 3 hereof, after the Trust has become irrevocable,
the Company shall have no right or power to direct the Trustee to return to the
Company or to divert to others any of the Trust assets before all payment of
benefits have been made to Plan participants and their beneficiaries pursuant to
the terms of the Plan.
6
<PAGE> 17
SECTION 5
INVESTMENT AUTHORITY
(a) At the direction of the Agent, the Trustee shall invest the assets of
the Trust in such mutual funds as are authorized under Section 6.02 of
the Plan. The Agent shall determine the investment credits and debits
to the individual accounts of Plan participants.
(b) In no event may the Trustee invest in securities (including stock or
rights to acquire stock) or obligations issued by the Company, other
than a de minimis amount held in common investment vehicles in which
Trustee invests. All rights associated with assets of the Trust shall
be exercised by the Trustee or the person designated by the Trustee,
and shall in no event be exercisable by or rest with Plan participants.
(c) The Company shall have the right, at any time, and from time to time in
its sole discretion, to substitute assets of equal fair market value
for any asset held by the Trust.
7
<PAGE> 18
SECTION 6
DISPOSITION OF INCOME
During the term of this Trust, all income received by the Trust, net of expenses
and taxes, shall be accumulated and reinvested. Notwithstanding the foregoing,
the Trustee may hold uninvested from time to time such amounts as are necessary
for the cash requirements of the Plan, without liability for interest.
8
<PAGE> 19
SECTION 7
ACCOUNTING BY TRUSTEE
(a) The Trustee shall maintain such separate accounts within the Trust as
the administrator of the Plan may require for the efficient
administration of the Plan, including, for example, separate accounts
for each participant in the Plan of the types specified therein. Such
accounts shall be valued daily, so that changes of investment may be
made daily.
(b) Trustee shall keep accurate and detailed records of all investments,
receipts, disbursements, and all other transactions required to be
made, including such specific records as shall be agreed upon in
writing between the Company and the Trustee. Within sixty (60) days
following the close of each calendar year and within sixty (60) days
after the removal or resignation of the Trustee, the Trustee shall
deliver to the Company a written account of its administration of the
Trust during such year or during the period from the close of the last
preceding year to the date of such removal or resignation, setting
forth all investments, receipts, disbursements, and other transactions
effected by it, including a description of all securities and
investments purchased and sold with the cost or net proceeds of such
purchases or sales (accrued interest paid or receivable being shown
separately), and showing all cash, securities and other property held
in the Trust at the end of such year or as of the date of such removal
or resignation, as the case may be. Upon the expiration of ninety (90)
days from the date of filing any such account, or upon the earlier
specific approval thereof by the Company or the Agent, the Trustee
shall be forever released and discharged from all liability and
accountability to the Company with respect to the propriety of its acts
and transactions shown in such account, except with respect to any such
acts or transactions as to which the Company or the Agent shall, within
such ninety (90) day period, file written objections with the Trustee.
Nothing herein contained, however, shall be deemed to preclude the
Trustee of its right to have its account judicially settled by a court
of competent jurisdiction.
9
<PAGE> 20
SECTION 8
RESPONSIBILITY OF TRUSTEE
(a) The Trustee shall act with the care, skill, prudence and diligence
under the circumstances then prevailing that a prudent person acting in
like capacity and familiar with such matters would use in the conduct
of an enterprise of a like character and with like aims, provided,
however, that Trustee shall incur no liability to any person for action
taken pursuant to a direction, request or approval given by the Company
which is contemplated by, and in conformity with, the terms of the Plan
or this Trust and is given in writing by the Company. In the event of a
dispute between the Company and party, the Trustee may apply to a court
of competent jurisdiction to resolve the dispute.
(b) If the Trustee undertakes or defends any litigation arising in
connection with this Trust, the Company agrees to indemnify the Trustee
against the Trustee's costs, expenses, and liabilities (including
without limitation, attorneys' fees and expenses) relating thereto and
to be primarily liable for such payments. If the Company does not pay
such costs, expenses and liabilities in a reasonably timely manner, the
Trustee may obtain payment from the Trust.
(c) The Trustee may consult with legal counsel (who may also be counsel for
the Company generally) with respect to any of its duties or obligations
hereunder.
(d) The Trustee may hire agents, accountants, actuaries, investment
advisors, financial consultants or other professionals to assist in
performing any of its duties or obligations hereunder.
(e) The Trustee shall have, without exclusion, all powers conferred on
Trustees by applicable law, unless expressly provided otherwise herein,
as well as all other powers necessary or appropriate to carry out its
responsibilities under this Trust Agreement, provided, however, that if
an insurance policy is held as an asset of the Trust, the Trustee shall
have no power to name a beneficiary of the policy other than the Trust,
to assign the policy (as distinct from conversion of the policy to a
different form) other than to a successor Trustee, or to loan to any
person the proceeds of any borrowing against such policy.
(f) Notwithstanding any powers granted to the Trustee pursuant to this
Trust Agreement or to applicable law, the Trustee shall not have any
power that could give this Trust the objective of carrying on a
business and dividing the gains therefrom, within the meaning of
Section 301.7701-2 of the Procedure and Administrative Regulations
promulgated pursuant to other Internal Revenue Code.
10
<PAGE> 21
SECTION 9
COMPENSATION AND EXPENSES OF TRUSTEE
(a) The compensation of the Trustee shall be such as the Trustee and the
Company separately agree in writing from time to time.
(b) The Company shall pay the compensation and expenses of the Trustee. If
not so paid within ninety (90) days of the date incurred or within
thirty (30) days of the Trustee's billing, whichever last occurs, the
fees and expenses shall be paid from the Trust.
11
<PAGE> 22
SECTION 10
RESIGNATION AND REMOVAL OF TRUSTEE
(a) The Trustee may resign at any time by written notice to the Company,
which shall be effective sixty (60) days after receipt of such notice
unless the Company and the Trustee agree otherwise.
(b) If the Trustee resigns or is removed within two (2) years of a Change
of Control, as defined herein, the Trustee shall select a successor
Trustee in accordance with the provisions of Section 11(b) hereof prior
to the effective date of the Trustee's resignation or removal.
(c) Upon resignation or removal of the Trustee and appointment of a
successor Trustee, all assets shall subsequently be transferred to the
successor Trustee. The transfer shall be completed within ninety (90)
days after receipt of notice of resignation, removal or transfer,
unless the Company extends the time limit.
(d) If the Trustee resigns or is removed, a successor shall be appointed,
in accordance with Section 11 thereof, by the effective date of
resignation or removal under paragraph(s) (a) or (b) of this Section.
If no such appointment has been made, the Trustee may apply to a court
of competent jurisdiction for appointment of a successor or for
instructions. All expenses of the Trustee in connection with the
proceeding shall be allowed as administrative expenses of the Trust.
12
<PAGE> 23
SECTION 11
APPOINTMENT OF SUCCESSOR
(a) If the Trustee resigns (or is removed) in accordance with Section 10(a)
hereof, the Company may appoint any third party as a successor to
replace the Trustee upon resignation or removal. The appointment shall
be effective when accepted in writing by the new Trustee, who shall
have all of the rights and powers of the former Trustee, including
ownership rights in the Trust assets. The former Trustee shall execute
any instrument necessary or reasonably requested by the Company or the
successor Trustee to evidence the transfer.
(b) If the Trustee resigns or is removed pursuant to the provisions of
Section 10(b) hereof and selects a successor Trustee, the Trustee may
appoint any third party such as a bank, trust department, or other
party that may be granted corporate trustee powers under state law. The
appointment of a successor Trustee shall be effective when accepted in
writing by the new Trustee. The new Trustee shall have all the rights
and powers of the former Trustee, including ownership rights in Trust
assets. The former Trustee shall execute any instrument necessary or
reasonably requested by the successor Trustee to evidence the transfer.
(c) The successor Trustee need not examine the records and acts of any
prior Trustee and may retain or dispose of existing Trust assets,
subject to Sections 7 and 8 hereof. The successor Trustee shall not be
responsible for and the Company shall indemnify and defend the
successor Trustee from any claim or liability resulting from any action
or inaction of any prior Trustee or from any other past event, or any
condition existing at the time it becomes successor Trustee.
13
<PAGE> 24
SECTION 12
AMENDMENT OR TERMINATION
(a) This Trust Agreement may be amended by a written instrument executed by
the Trustee and the Company. Notwithstanding the foregoing, no such
amendment shall conflict with the terms of the Plan or shall make the
Trust revocable after it has become irrevocable in accordance with
Section 1(b) hereof.
(b) After Change of Control, the Trust shall not terminate until the date
on which Plan participants and their beneficiaries are no longer
entitled to benefits pursuant to the terms of the Plan. Upon
termination of the Trust any assets remaining in the Trust shall be
returned to the Company.
(c) After Change of Control, upon written approval of participants or
benefits entitled to payment of benefits pursuant to the terms of the
Plan, the Company may terminate this Trust prior to the time all
benefit payments under the Plan have been made. All assets in the Trust
at termination shall be returned to the Company.
(d) For the purposes of this Trust, Change of Control shall mean the
happening of the events set forth below:
(i) The acquisition in one or more transactions, other than from
the Company, by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act of
1934, as amended, the "Exchange Act") of beneficial ownership
(within the meaning of Rule 13-d3 promulgated under the
Exchange Act) of a number of shares of common stock of the
Company in excess of 20% of all the outstanding shares of
common stock of the Company; provided, however, that the
following shall not constitute a Change in Control: any
acquisition by (A) the Company or any of its Subsidiaries, or
any employee benefit plan (or related trust) sponsored or
maintained by the Company or any of its Subsidiaries, or (b)
any corporation with respect to which, following such
acquisition, more than 60% of, respectively, the then
outstanding shares of common stock of such corporation and the
combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in
the election of directors of such corporation is then
beneficially owned, directly or indirectly, by all or
substantially all of the individuals and entities who were the
beneficial owners, respectively, of the Company common stock
immediately prior to such acquisition in substantially the
same proportion as their ownership, immediately prior to such
acquisition, of the Company common stocks; or
14
<PAGE> 25
(ii) Individuals who constitute the incumbent Board of Directors of
the Company cease for any reason to constitute in excess of
two-thirds of the Board; provided, however, that any
individual becoming a director subsequent to January 1, 1994,
whose election or nomination for election by the Company was
approved by a vote of at least a majority of the directors
then comprising the incumbent Board shall be considered as
though such individual were a member of the incumbent Board;
or
(iii) Approval by the stockholders of the Company of a
reorganization, merger or consolidation, unless, following
such reorganization, merger or consolidation, all or
substantially all of the individuals or entities who were the
respective beneficial owners of the Company common stock
immediately prior to such reorganization, merger or
consolidation, following such reorganization, merger or
consolidation beneficially own, directly or indirectly, more
than 60% of, respectively, then outstanding shares of common
stock and the combined voting power of then outstanding voting
securities entitled to vote generally in the election of
directors, as the case may be, or the corporation resulting
from such reorganization, merger or consolidation in
substantially the same proportion as their ownership of the
Company common stock prior to such reorganization, merger or
consolidation in substantially the same proportion as their
ownership of the Company common stock immediately prior to
such reorganization, merger or consolidation, as the case may
be; or
(iv) Approval by the stockholders of the Company of (i) a complete
liquidation or dissolution of the Company or (ii) a sale or
other disposition of all or substantially all the value of the
assets of the Company and its Subsidiaries other than to a
corporation with respect to which, following such sale or
disposition, more than 60% of, respectively, the then
outstanding shares of common stock and the combined voting
power of the then outstanding voting securities entitled to
vote generally in the election of directors is then owned
beneficially, directly or indirectly, by all or substantially
all of the individuals and entities who were the beneficial
owners, respectively, of the Company common stock immediately
prior to such sale or disposition in substantially the same
proportion as their ownership of the Company common stock, as
the case may be, immediately prior to such sale or
disposition.
15
<PAGE> 26
SECTION 13
MISCELLANEOUS
(a) Any provisions of this Trust Agreement prohibited by law shall be
ineffective to the extent of any such prohibitions, without
invalidating the remaining provisions hereof.
(b) Benefits payable to Plan participants and their beneficiaries under
this Trust Agreement may not be anticipated, assigned (either at law or
in equity), alienated, pledged, encumbered or subjected to attachment,
garnishment, levy, execution or other legal or equitable process.
(c) This Trust Agreement shall be governed and construed in accordance with
the laws of the Commonwealth of Pennsylvania.
(d) The Trustee may not assign this Trust Agreement without the express
written consent of the Company.
(e) The Trustee shall be indemnified and saved harmless by the Company from
and against any and all liability to which the Trustee may be
subjected, including all expenses reasonably incurred in its defense,
for any action or failure to act resulting from compliance with the
instructions of the Company, the employees or agents of the Company,
the Agent, the Plan administrator, Plan participants, or any other
fiduciary of the Plan, and for any liability arising from the actions
or nonactions of any predecessor trustee or fiduciary or other
fiduciaries of the Plan.
(f) This Agreement constitutes the entire agreement between the parties
with respect to the subject matter hereof.
16
<PAGE> 27
SECTION 14
EFFECTIVE DATE
The effective date of this Trust Agreement shall be April 1, 1995. In witness
whereof, the parties hereto have executed this Trust Agreement this ______, day
of _______________, 1995.
ATTEST: EDUCATION MANAGEMENT
CORPORATION
By: By:
-------------------------------- --------------------------------
ATTEST: PNC BANK, NATIONAL ASSOCIATION
By: By:
-------------------------------- --------------------------------
ATTEST: MOCKENHAUPT, MOCKENHAUPT,
COWDEN & PARKS, INC.
By: By:
-------------------------------- --------------------------------
17
<PAGE> 28
PAYING AGENT AGREEMENT
AGENCY AGREEMENT made this ____________ day of ___________________, 1995, by and
between EDUCATION MANAGEMENT CORP. (hereinafter called the "Company"), PNC BANK,
NATIONAL ASSOCIATION (hereinafter called the "Trustee") as trustee of the
EDUCATION MANAGEMENT CORPORATION DEFERRED COMPENSATION TRUST (hereinafter called
"Trust"), the PLAN ADMINISTRATOR (hereinafter called the "Plan Administrator")
for the EDUCATION MANAGEMENT CORPORATION DEFERRED COMPENSATION PLAN, and
MOCKENHAUPT, MOCKENHAUPT, COWDEN & PARKS (hereinafter called "Agent").
1. The Trustee hereby appoints the Agent as agent of the Trustee for purposes of
making payments, drawn on account maintained by the Agent, of such benefits as
are directed by the Plan Administrator.
2. The Plan Administrator hereby appoints the Agent as agent of the Plan
Administrator for the purposes of relaying to the Trustee the amount of funds to
be transferred each month to the account maintained by the Agent for benefit
payments pursuant to Paragraph l hereof.
3. The Agent hereby accepts the foregoing appointments and agrees to the
faithful performance of the duties provided in this Paying Agency Agreement.
4. The Company agrees that all terms of the aforesaid agreement governing the
Trust relating to the protection of the Trustee in following directions of the
Company shall apply to instructions given by the Agent pursuant to Paragraph 2
hereof to the same extent as if such instructions were given directly by the
Company to the Trustee.
5. The Agent will provide quarterly reports to the Company of all receipts and
disbursements received or made by it from its account. Periodic reports as may
be requested by the Company from time to time in writing to the Agent are
subject to an additional fee.
6. The Company agrees to defend and indemnify Agent against any and all claims,
actions or causes of action, arising out of or in any manner connected with the
directions provided to the Agent as to the benefit payments to be made by the
Agent during the term of this Paying Agency Agreement.
<PAGE> 29
7. This Paying Agency Agreement may be terminated by written notice from the
Trustee and Plan Administrator to the Agent given at least thirty (30) days
prior to the effective date of such termination. The Agent may resign as Agent
by written notice to the Plan Administrator and the Trustee given at least
thirty (30) days prior to the effective date of such resignation.
PNC BANK, NATIONAL ASSOCIATION
By
-------------------------------
Title
----------------------------
MOCKENHAUPT, MOCKENHAUPT,
COWDEN & PARKS, INC.
By
-------------------------------
Title
----------------------------
EDUCATION MANAGEMENT
CORPORATION, individually and as
Plan Administrator
By
-------------------------------
Title
----------------------------
<PAGE> 30
EDUCATION MANAGEMENT CORPORATION
DEFERRED COMPENSATION PLAN
October 1, 1995
<PAGE> 31
EDUCATION MANAGEMENT CORPORATION
DEFERRED COMPENSATION PLAN
The purpose of the Education Management Corporation Deferred Compensation Plan
is to permit certain highly compensated officers of the Company to defer current
compensation which cannot be redirected into the Company's Retirement Plan and
to supplement the contributions which can be made by the Company to the
Retirement Plan and the Employee Stock Ownership Plan.
The plan is designed to provide Company contributions and salary deferral
opportunities for individuals whose benefits are otherwise limited as a result
of:
- the limits on salary deferral contributions and/or matching
contributions under the nondiscrimination testing requirements of Code
Sections 401(k) and 401(m);
- the limits on compensation which may be recognized for qualified plan
purposes under Code Section 410(a)(17); and/or
- the limits on total annual additions which may be made to a qualified
plan in any Plan year under Code Section 415.
<PAGE> 32
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I ................................................................ 1
TITLE AND EFFECTIVE DATE
ARTICLE II ............................................................... 2
DEFINITIONS AND CONSTRUCTION OF THE PLAN DOCUMENT
ARTICLE III .............................................................. 5
ELIGIBILITY
ARTICLE IV ............................................................... 6
DEFERRAL OF COMPENSATION
ARTICLE V ................................................................ 7
COMPANY CREDITS
ARTICLE VI ............................................................... 8
INVESTMENT CREDITS AND DEBITS
ARTICLE VII .............................................................. 9
CONDITIONS OF ENTITLEMENT
ARTICLE VIII ............................................................. 11
TIME AND MANNER OF PAYMENT
ARTICLE IX ............................................................... 13
BENEFICIARY
ARTICLE X ................................................................ 14
ADMINISTRATION OF THE PLAN
ARTICLE XI ............................................................... 15
CLAIMS PROCEDURE
ARTICLE XII .............................................................. 16
NATURE OF COMPANY'S OBLIGATION
ARTICLE XIII ............................................................. 17
MISCELLANEOUS
</TABLE>
<PAGE> 33
ARTICLE I
TITLE AND EFFECTIVE DATE
Section 1.01 Title. This Plan will be known as the Education Management
Corporation Deferred Compensation Plan (hereinafter referred to as the "Plan").
Section 1.02 Effective Date. The effective date of this plan is October 1, 1995.
1
<PAGE> 34
ARTICLE II
DEFINITIONS AND CONSTRUCTION OF THE PLAN DOCUMENT
The following words and phrases have the meanings specified below unless a
different meaning is clearly required by the context:
Section 2.01 Beneficiary. "Beneficiary" means the person or persons or the
estate of a Participant entitled to receive any benefits under this Plan.
Section 2.02 Board of Directors. The term "Board of Directors" means the Board
of Directors of EMC.
Section 2.03 Code. The "Code" is the Internal Revenue Code of 1986, as amended
and all pertinent rules and regulations issued thereunder.
Section 2.04 Committee. "Committee" means the Retirement Committee appointed by
the Board which shall manage and administer the Plan.
Section 2.05 Company. "Company" means EMC, Education Management Service and Art
Institutes International, as well as any other subsidiary or affiliated
organizations that choose to participate in this Plan and are authorized by the
Board of Directors or the Committee to participate in this Plan with respect to
their Participants.
Section 2.06 Compensation. "Compensation" is the total compensation paid to an
Executive during any calendar year including any salary deferrals elected by the
Executive under plans subject to the requirements of Code Sections 401(k) and
125 and any bonus payments.
Section 2.07 Deferral Agreement. "Deferral Agreement" means the written form
which is submitted to the Committee before the relevant Election Date which
indicates whether the Executive wishes to defer a portion of his Compensation
and indicates the portion of Compensation to be deferred. No Deferral Agreement
will be effective until acknowledged by the Company.
Section 2.08 Deferred Compensation. "Deferred Compensation" means the portion of
a Participant's Compensation for any calendar year, or part thereof, that has
been deferred pursuant to the Plan.
Section 2.09 Discretionary Credits. "Discretionary Credits" are credits made
under the Plan equal to the amount which could not be contributed by the Company
to the Retirement Plan due to the limitations under Code Sections 401(a)(17)
and/or 415.
2
<PAGE> 35
Section 2.10 Discretionary Credit Account. The "Discretionary Credit Account" is
established for each Participant to account for Discretionary Credits.
Section 2.11 Election Date. The "Election Date" is the date established by this
Plan as the date before which an Executive must submit a valid Deferral
Agreement to the Committee. The applicable Election Dates are as follows: (a) 30
days after adoption of the Plan for employees who are eligible to participate at
the time the Plan is adopted, (b) 30 days after a newly eligible employee is
notified of his right to participate in the Plan, or (c) December 15 of any
calendar year if (a) or (b) above do not apply. The Deferral Agreement will be
effective only as to Compensation for services performed subsequent to the
election.
Section 2.12 ESOP. The "ESOP" is the Education Management Corporation Employee
Stock Ownership Plan.
Section 2.13 ESOP Credits. "ESOP Credits" are credits made under the Plan equal
to the amount which would have been contributed to the ESOP by the Company if
the limitations under Code Sections 401(a)(17) and/or 415 did not apply.
Section 2.14 ESOP Credit Account. The "ESOP Credit Account" is established for
each Participant to account for ESOP Credits.
Section 2.15 Executive. "Executive" is any officer of the Company who is earning
at least $118,800 per year and is designated as eligible to participate by the
Committee.
Section 2.16 Individual Account. The "Individual Account" is the aggregate for
each Participant of the Participant's Salary Deferral Account, Matching Credit
Account, Discretionary Credit Account, and/or ESOP Credit Account.
Section 2.17 Matching Credits. The "Matching Credits" are credits made under the
Plan in an amount equal to the amount of matching contributions which the
Company would have contributed to the Retirement Plan if the Retirement Plan
were not subject to the limitations contained under Code Sections 401(k),
401(m), 401(a)(17), and/or 415.
Section 2.18 Matching Credit Account. The "Matching Credit Account" is the
account established for each Participant to account for Matching Credits.
Section 2.19 Participant. "Participant" means an Executive who is participating
in the Plan.
Section 2.20 Plan. "Plan" means the Education Management Corporation Deferred
Compensation Plan, as described in this instrument, as amended from time to
time.
Section 2.21 Plan Year. The "Plan Year" is the twelve-month period beginning
each January 1 and ending the following December 31. Notwithstanding the
foregoing, the first Plan Year will be the three-month period beginning October
1, 1995 and ending December 31, 1995.
3
<PAGE> 36
Section 2.22 Retirement Plan. "Retirement Plan" means the Education Management
Corporation Retirement Plan, as amended from time to time.
Section 2.23 Salary Deferral Credits. "Salary Deferral Credits" are credits made
under the Plan in an amount equal to the Compensation deferred by the
Participant under a Deferral Agreement.
Section 2.24 Salary Deferral Account. "Salary Deferral Account" is the account
established for each Participant (who chooses to defer Compensation) to account
for Compensation deferred under a Deferral Agreement.
Section 2.25 Titles. Titles of the Articles of this Plan are included for ease
of reference only and are not to be used for the purpose of construing any
portion or provision of this Plan document.
Section 2.26 Gender and Number. Wherever the context so requires, masculine
pronouns include the feminine and singular words shall include the plural.
4
<PAGE> 37
ARTICLE III
ELIGIBILITY
Section 3.01 Eligibility. Eligibility for participation in the Plan is
determined by the Committee, in its sole discretion, on an individual basis,
except that:
(a) no Executive will be selected for participation or
continued as a participant in this Plan unless he (i) has elected to
defer Compensation on a pre-tax basis under the Retirement Plan and is
limited in the amount which may be deferred and/or matched by virtue of
the nondiscrimination testing under Code Sections 401(k) and 401(m),
the limit on compensation under Code Section 401(a)(17), and/or the
limit on permissible annual additions under Code Section 415; and/or
(ii) has not received his full allocation of Company contributions to
the ESOP due to the limit on compensation which may be used in
calculating benefits under Code Section 401(a)(17) and/or the limit on
permissible annual additions to a qualified plan under Code Section
415; and
(b) no Executive will be selected for participation or
continued as a participant in this Plan if such Executive's
participation would cause the Plan to fail to qualify as primarily for
the purpose of providing deferred compensation to a select group of
management or highly compensated employees, within the meaning of
sections 201, 301 and 401 of the Employee Retirement Income Security
Act of 1974, as amended.
Section 3.02 Participation. An Executive, after having been selected for
participation by the Committee, must, as a condition of deferring a portion of
his Compensation under the terms of this Plan, complete and return to the
Committee a duly executed Deferral Agreement. The Deferral Agreement will be
acknowledged by a representative of the Committee and a copy will be returned to
the Participant.
Section 3.03 Cessation of Participation. Notwithstanding any Deferral Agreement,
an Executive shall cease to participate in the Plan at any time that his
participation would not be permitted under Section 3.01 (including retroactively
if necessary to preserve the legal status of the Plan) but may be selected by
the Committee to resume participation thereafter if and when he again meets the
requirements of Section 3.01.
5
<PAGE> 38
ARTICLE IV
DEFERRAL OF COMPENSATION
Section 4.01 Salary Deferral. Each Participant in the Plan may have a percentage
of his Compensation (determined without regard to any tax-deferred contributions
under this Plan or the Retirement Plan) deferred in accordance with the terms
and conditions of this Plan. The percentage of salary to be deferred under this
section may not exceed 7% of compensation. The minimum salary deferral is the
lesser of (a) $1,000.00 or (b) 1% of Compensation.
Salary deferrals may be suspended for future Plan Years by submitting a
completed election form by the last business day of the year immediately
preceding the year in which the suspension of the salary deferral is to be
effective. A Participant may also change his level of future salary deferrals by
submitting a completed election form before the last business day of the year
immediately preceding the Plan Year in which the change is to be effective.
Section 4.02 Deferral Agreement. An eligible Executive desiring to defer a
portion of his Compensation under the Plan must submit a written Deferral
Agreement to the Committee on or before the applicable Election Date. Valid
Deferral Agreements filed by the applicable Election Date as provided in Section
2.11(a) or (b) will cause Compensation to be deferred in the calendar year in
which such Agreement is made. Deferral Agreements entered into under the
conditions of 2.11(c) will cause Compensation to be deferred beginning January 1
of the next calendar year.
Section 4.03 No Deferral Without Agreement. A Participant who has not submitted
a valid Deferral Agreement to the Committee before the applicable Election Date
may not defer any Compensation for the applicable Plan Year under this Plan.
6
<PAGE> 39
ARTICLE V
COMPANY CREDITS
Section 5.01 Matching Credits. With respect to amounts deferred under Section
4.01, the Company will credit to the Participant's Matching Credit Account an
amount equal to the difference between the amounts described in 5.01(a) and
5.01(b) as follows:
Section 5.01(a) The amount equal to the matching contribution the
Company would have made to the Retirement Plan if the Participant had
made a contribution to the Retirement Plan in an amount equal to the
sum of the amount actually deferred under the Retirement Plan plus the
amount deferred under Section 4.01 of this Plan without regard to the
limitations imposed by Sections 401(k), 401(m), 401(a)(17) and/or 415
of the Internal Revenue Code.
Section 5.01(b) The amount equal to the Company's actual matching
contribution to the Retirement Plan for such Plan Year.
Section 5.02 Discretionary Credits. The Company will credit to each
Participant's Discretionary Credit Account an amount equal to the excess of (a)
the discretionary contribution which would have been made to the Retirement Plan
for such Participant but for the limitations under Code Section 401(a)(17)
and/or 415 and (b) the discretionary contribution actually made to the
Retirement Plan for such Participant.
Section 5.03 ESOP. The Company will credit to each Participant's ESOP Credit
Account an amount equal to the excess of (a) the amount of contributions the
Company would have contributed to the ESOP for such Participant but for the
restrictions contained in Code Sections 401(a)(17) and/or 415 and (b) the amount
of contributions actually made to the ESOP for such Participant.
Section 5.04 Timing of Company Credits. The Company will make Matching Credits,
Discretionary Credits and ESOP Credits under the Plan as soon as possible after
a determination has been made that the full amount of contributions which should
otherwise be made on behalf of a Participant cannot be made to the Retirement
Plan and/or ESOP without exceeding the required limitations under Code Sections
401(k), 401(m), 401(a)(17), and/or 415.
7
<PAGE> 40
ARTICLE VI
INVESTMENT CREDITS AND DEBITS
Section 6.01 In General. Each Participant's Individual Account will be credited
on a daily basis with investment credits or debits equal to the investment gains
or losses that would have been experienced if the Participant's Individual
Account had been an actual fund of money invested in accordance with the
following Section.
Section 6.02 Funds Used to Determine Investment Credits and Debits. The
investment credits and debits with respect to a Participant shall be determined
as if his Individual Account were actually invested in any one or more of the
following investment funds offered by Fidelity Investments:
Intermediate Bond Fund
Magellan Fund
Growth Company Fund
Fidelity Asset Manager: Income
Fidelity Asset Manager
Fidelity Asset Manager: Growth
Worldwide Fund
For the purpose of determining investment credits and debits, each Participant
must specify the percentage of his Individual Account that will hypothetically
be considered invested in and/or among the investment funds in increments of
10%, the sum of which equals 100% of the Individual Account. The Participant may
specify percentages with respect to existing credit balances, with respect to
the future credits, or with respect to both existing credit balances and future
credits. Changes in investment selections may be made on any business day of the
month.
Section 6.03 Participant Statements. Participants will be provided with
quarterly statements of the amounts credited to their Individual Accounts,
including Salary Deferral Credits, Matching Credits, Discretionary Credits, ESOP
Credits, and investment credits and debits, as of the last day of each calendar
quarter.
8
<PAGE> 41
ARTICLE VII
CONDITIONS OF ENTITLEMENT
Section 7.01 Salary Deferral Account. Upon termination of employment with the
Company or incidence of disability as described in Section 7.02(d), regardless
of age or length of service, a Participant shall be entitled to payment from the
Company equal in amount to the balance of his Salary Deferral Account, including
investment credits and debits. Upon the death of a Participant while still in
the employ of the Company, the Participant's Beneficiary shall be entitled to
payment from the Company equal in amount to the balance of the Participant's
Salary Deferral Account, including investment credits and debits.
Section 7.02 Matching Credit Account, Discretionary Credit Account and
ESOP Credit Account.
(a) Normal Retirement. Upon termination of employment
after attainment of age 65, a Participant shall be
entitled to payment from the Company equal in amount
to the balance of his Matching Credit Account,
Discretionary Credit Account, and ESOP Credit
Account, including investment credits and debits.
(b) Early Retirement. Upon termination of employment after
attainment of age 55 and completion of seven years of
service with the Company, a Participant shall be
entitled to payment from the Company equal in amount
to the balance of his Matching Credit Account,
Discretionary Credit Account, and ESOP Credit Account,
including investment credits and debits.
(c) Death. Upon the death of a Participant while still in
the employ of the Company, the Participant's
Beneficiary shall be entitled to payment from the
Company equal in amount to the balance of his Matching
Credit Account, Discretionary Credit Account, and ESOP
Credit Account, including investment credits and
debits.
(d) Disability. A Participant who, while in the active
employ of the Company, becomes unable to engage in any
substantial gainful activity by reason of any physical
or mental impairment which is expected to result in
death or be of a long, continued and indefinite
duration, as certified by a written opinion of a
physician selected by the Administrator, shall be
entitled to payment from the Company equal in amount
to the balance of his Matching Credit Account,
Discretionary Credit Account, and ESOP Credit Account,
including investment credits and debits.
9
<PAGE> 42
(e) Termination of Employment. Upon termination of
employment for any reason other than retirement, death
or disability, a Participant is entitled to payment
from the Company equal in amount to that percentage of
his Matching Credit Account, Discretionary Credit
Account, and ESOP Credit Account, including investment
credits and debits, which corresponds to his length of
service based upon the following schedule:
<TABLE>
Years of Service Percentage Entitlement
<S> <C>
0-2 0%
3 years 20%
4 years 40%
5 years 60%
6 years 80%
7 years or more 100%
</TABLE>
For this purpose, the number of years of service shall be the same as the number
of years of "Service" to the credit of the Participant as that term is defined
in the Retirement Plan.
Section 7.03 Forfeiture. Upon termination of employment to which Section 7.02(e)
applies, if the Participant has completed fewer than 7 years of service, the
percentage of the Participant's Individual Account to which the Participant is
not entitled will remain credited to the Participant and will continue to
receive investment credits and debits in accordance with the investment choices
last issued by the Participant before termination of employment pending a return
to participation or a "Break-in-Service" as that term is defined in the
Retirement Plan. If the Participant suffers a "Break-in-Service" before
returning to participation under this Plan, all amounts standing to his credit
under this Plan to which he is not entitled in accordance with this Article are
permanently forfeited.
10
<PAGE> 43
ARTICLE VIII
TIME AND MANNER OF PAYMENT
Section 8.01 In General. Payment of the amounts to which the Participant or
Beneficiary is entitled under Article VII will be made according to the terms of
the Participant's Deferral Agreement and this Plan.
Section 8.02 Payment in Cash. All payments under the Plan will be made in cash
only and in any form permitted under the terms of the Deferral Agreement.
Section 8.03 Forms of Payment. The form of payment will be established in the
Deferral Agreement. The options available are (i) a lump sum payment to be paid
as soon as possible after the stated event entitling the Participant or
Beneficiary to payment under the Plan, the value of which will be determined on
the date the request for distribution is processed; or (ii) annual installments
over a period of not less than 2 years nor greater than 10 years beginning on
the date of distribution. The form of payment elected in the Deferral Agreement
applies to all amounts credited to the Participant's Salary Deferral Account,
Matching Credit Account, Discretionary Credit Account and ESOP Credit Account,
including investment credits and debits, while such Deferral Agreement is in
effect. The election as to form of payment may not be changed at a later date
except as to future credits in accordance with a new Deferral Agreement.
Section 8.04 Time of Payment. Payment shall begin as soon as administratively
feasible after the occurrence of an event giving rise to entitlement under
Article VII or thereafter as specified in the Deferral Agreement.
Section 8.05 Loans. Loans are not permitted.
Section 8.06 Hardship Distribution. The Committee may grant a hardship
distribution where a Participant proves severe financial hardship to the
Participant resulting from a sudden and unexpected illness or accident of the
Participant or of a dependent (as defined in section 152(a) of the Code) of the
Participant, loss of the Participant's property due to casualty, or other
similar extraordinary and unforeseeable circumstances arising as a result of
events beyond the control of the Participant. Extraordinary and unforeseeable
circumstances shall not include the need to send a Participant's child to
college or the desire to purchase a home.
Hardship distributions shall be permitted only to the extent reasonably needed
to satisfy the emergency need. Hardship distribution shall not be permitted to
the extent that such hardship is or may be relieved through reimbursement or
compensation by insurance or otherwise; or by liquidation of the Participant's
assets, to the extent the liquidation of such assets would not itself cause
severe financial hardship; or by termination of the Participant's Deferral
Agreement under this Plan. Nor shall hardship distribution be made in excess of
the balance of the Salary
11
<PAGE> 44
Deferral Credits standing to the credit of the Participant under the Plan (not
including investment credits or debits).
Section 8.07 Taxes. The Participant or Beneficiary is responsible for the
payment of any and all taxes applicable to any payment under this Plan including
federal, state or local income tax, unemployment tax, FUTA and FICA, although
all required withholding will be made.
12
<PAGE> 45
ARTICLE IX
BENEFICIARY
Section 9.01 Beneficiary Designation. A Participant must designate his
Beneficiary to receive benefits under the Plan by completing a Beneficiary
designation form. If more than one Beneficiary is named, the shares and/or
precedence of each Beneficiary shall be indicated. A Participant has the right
to change the Beneficiary by submitting to the Committee a Change of Beneficiary
form. However, no change of Beneficiary will be effective until acknowledged in
writing by the Committee.
Section 9.02 Proper Beneficiary. If the Committee has any doubt as to the proper
Beneficiary to receive payments hereunder, the Committee has the right to
withhold such payments until the matter is finally adjudicated. However, any
payment made by the Committee, in good faith and in accordance with the Plan,
will fully discharge the Company from all further obligations with respect to
that payment.
Section 9.03 Minor or Incompetent Beneficiary. In making any payments to or for
the benefit of any minor or an incompetent Beneficiary, the Committee, in its
sole and absolute discretion may make a distribution to a legal or natural
guardian or other relative of a minor or court appointed committee of such
incompetent. Or, it may make a payment to any adult with whom the minor or
incompetent temporarily or permanently resides. The receipt by a guardian,
committee, relative or other person shall be a complete discharge to the
Company. Neither the Committee nor the Company will have any responsibility to
see to the proper application of any payments so made.
13
<PAGE> 46
ARTICLE X
ADMINISTRATION OF THE PLAN
Section 10.01 Majority Vote. All resolutions or other actions taken by the
Committee will be by vote of a majority of those present at a meeting at which a
majority of the members are present, or in writing by all the members at the
time in office if they act without a meeting, provided that no member of the
Committee shall be entitled to vote on a claim or application made on behalf of
that individual.
Section 10.02 Finality of Determination. Subject to the Plan, the Committee will
from time to time, establish rules, forms and procedures for the administration
of the Plan. Except as herein otherwise expressly provided, the Committee has
the exclusive right to interpret the Plan and to decide any and all matters
arising thereunder or in connection with the administration of the Plan, and it
endeavors to act, whether by general rules or by particular decisions so as not
to discriminate in favor of or against any person. The decisions, actions and
records of the Committee will be conclusive and binding upon the Company and all
persons having or claiming to have any right or interest in or under the Plan.
Section 10.03 Certificates and Reports. The members of the Committee and the
officers and directors of the Company are entitled to rely on all certificates
and reports made by any duly appointed accountants, and on all opinions given by
any duly appointed legal counsel, which legal counsel may be counsel for the
Company.
Section 10.04 Indemnification and Exculpation. The Company will indemnify and
save harmless each member of the Committee against any and all expenses and
liabilities arising out of his membership on the Committee. Expenses against
which a member of the Committee will be indemnified hereunder include, without
limitation, the amount of any settlement or judgment, costs, counsel fees, and
related charges reasonably incurred in connection with a claim asserted, or a
proceeding brought or settlement thereof. The foregoing right of indemnification
will be in addition to any other rights to which any such member of the
Committee may be entitled as a matter of law.
Section 10.05 Expenses. The expenses of administering the Plan will be borne by
the Company.
14
<PAGE> 47
ARTICLE XI
CLAIMS PROCEDURE
Section 11.01 Written Claim. Payment under the Plan will be paid in accordance
with the provisions of this Plan and any applicable Deferral Agreement. The
Participant, or a designated recipient or any other person claiming through the
Participant must make a written request for benefits under this Plan. This
written claim must be mailed or delivered to the Committee.
Section 11.02 Denied Claim. If the claim is denied, in full or in part, the
Committee will provide a written notice within ninety (90) days setting forth
the specific reasons for denial, the Plan provisions upon which the denial is
based, any additional material or information necessary to perfect the claim,
and an explanation of why such material or information is necessary, and
appropriate information and explanation of the steps to be taken if a review of
the denial is desired.
Section 11.03 Review Procedure. If the claim is denied and a review is desired,
the Participant (or Beneficiary) must notify the Committee in writing within
sixty (60) days after receipt of the written notice of denial (a claim shall be
deemed denied if the Committee does not take any action within the aforesaid
ninety (90) day period). In connection with such a review, the Participant or
his Beneficiary may review pertinent documents, may submit any written issues
and comments, may request an extension of time for such written submission of
issues and comments, and may request that a hearing be held, but the decision to
hold a hearing shall be within the sole discretion of the Committee.
Section 11.04 Committee Review. The decision on the review of the denial claim
will be rendered by the Committee within sixty (60) days after the receipt of
the request for review (if a hearing is not held) or within sixty (60) days
after the hearing if one is held. The decision will be written and state the
specific reasons for the decision including reference to specific provisions of
this Plan on which the decision is based.
15
<PAGE> 48
ARTICLE XII
NATURE OF COMPANY'S OBLIGATION
Section 12.01 Unfunded, Unsecured Promise to Pay. The Company's obligation under
this Plan is an unfunded and unsecured promise to pay benefits as and when due
under the Plan. Accordingly, the Plan is unfunded and has no assets. In
particular, the difference between the Compensation that the Participant might
have received without participating in the Plan and the lesser compensation that
the Participant chooses to receive under a Deferral Agreement does not
constitute an "employee contribution" and is not an asset of the Participant or
the Plan.
The Company may, in its sole discretion, create a grantor trust or otherwise
segregate its assets through which it may fulfill its obligation under this
Plan. To the extent that any payments are made to Participants or Beneficiaries
by a trust established by the Company, the Company will be released from the
obligation to make such payments.
Section 12.02 Creditor Status. Any assets which the Company may acquire or set
aside to help cover its financial liabilities, including the assets of any
grantor trust, are and must remain general assets of the Company subject to the
claims of its creditors, subject to such limitations as may be set forth in a
grantor trust. Neither the Company nor this Plan gives the Participant any
beneficial ownership interest in any asset of the Company. All rights in any
such assets are and remain in the Company, and Participants and their
Beneficiaries have only the rights of general, unsecured creditors of the
Company.
16
<PAGE> 49
ARTICLE XIII
MISCELLANEOUS
Section 13.01 Written Notice. Any notice which may be given under the Plan or a
Deferral Agreement will be in writing and mailed by United States mail, postage
prepaid or through interoffice mail. If notice is to be given to the Company,
such notice shall be addressed to the Company at 300 Sixth Avenue, Suite 800,
Pittsburgh, PA 15222 for the attention of the Committee or if notice to a
Participant, addressed to the address shown on such Participant's Deferral
Agreement.
Section 13.02 Change of Address. Any party may, from time to time, change the
address to which notices shall be mailed by giving written notice of such new
address.
Section 13.03 Amendment and Termination. EMC retains sole and unilateral right
to terminate, amend, modify, or supplement this Plan, in whole or in part, at
any time. This right includes the right to make retroactive amendments. However,
no action by EMC under this right shall reduce the Individual Account of any
Participant or his Beneficiary. EMC shall exercise its authority under this
section by resolution of its board of directors adopted in accordance with its
by-laws and applicable corporation law.
Section 13.04 Nontransferability. No sale, transfer, alienation, assignment,
pledge, collateralization or attachment of any benefits under the Plan is valid
or recognized by the Company. Neither the Participant, his spouse, or designated
Beneficiary shall have any power to hypothecate, mortgage, commute, modify, or
otherwise encumber in advance of any of the benefits payable hereunder, nor are
any of said benefits be subject to seizure for the payment of any debts,
judgments, alimony maintenance, owed by the Participant or his Beneficiary, or
be transferable by operation of law in the event of bankruptcy, insolvency, or
otherwise.
Section 13.05 Legal Fees. All reasonable legal fees incurred by any Participant
(or former Participant) or Beneficiary to successfully enforce his valid rights
under this Plan will be paid by the Company in addition to sums due under this
Plan.
Section 13.06 Applicable Law. This Plan is governed by the Employee Retirement
Income Security Act of 1974, as amended.
Section 13.07 Liability for Actions. No member of the Board of Directors nor any
officer or employee of the Company will be liable to any person for any action
taken or omitted in connection with the administration of the Plan unless
attributable to his own fraud or willful misconduct; nor will the Company or any
trust fund established by the Company be liable to pay any person for any such
action unless attributable to fraud or willful misconduct on the part to the
director, officer or employee of the Company.
17
<PAGE> 50
IN WITNESS WHEREOF, the Company has caused this instrument to be executed by its
duly authorized officers on __________, 1995, effective as of the 1st day of
October, 1995.
Attest: Education Management Corporation
By: By:
----------------------------------- ------------------------------------
Robert A. Cypher
By: By:
----------------------------------- ------------------------------------
William J. Mazur
By: By:
----------------------------------- ------------------------------------
Robert T. McDowell
18
<PAGE> 1
Exhibit 10.12
EDUCATION MANAGEMENT CORPORATION
1996 EMPLOYEE STOCK PURCHASE PLAN
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.
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. "Committee" shall mean the committee described in Article IX.
2.06. "Common Stock" shall mean the common stock, par value $.01 per share, of
the Company.
2.07. "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.
<PAGE> 2
2.08. "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.
2.09. "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.
2.10. "Offering Commencement Date" shall mean each January 1, April 1, July 1
and October 1 during the term of the Plan, or, with respect to the first
Offering Period, the date on which the Plan becomes effective pursuant to
Section 10.06.
2.11. "Offering Period" shall mean each three-month period beginning on an
Offering Commencement Date, provided, however, that the first 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.
2.12. "Offering Termination Date" shall mean the last day of each Offering
Period.
2.13. "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.
2.14. "Option Price" shall mean the purchase price of shares of Common Stock
subject to an Option as described in Section 5.03.
2.15. "Participant" shall mean an Employee who elects to participate in the
Plan in accordance with Article III.
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<PAGE> 3
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 Offering Period under
the Plan, such authorization may be filed on or before such date as is set by
the Committee. Payroll deductions for a Participant, as elected in accordance
with 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.
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.
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<PAGE> 4
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.
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 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:
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<PAGE> 5
(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.
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.
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.
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<PAGE> 6
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:
(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.
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<PAGE> 7
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. 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. 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.
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.
- 7 -
<PAGE> 8
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, or 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.
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.
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<PAGE> 9
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 on the date of closing of the initial public
offering of the Company's Common Stock but is subject to the approval of the
stockholders of the Company.
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.
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<PAGE> 10
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.
- 10 -
<PAGE> 1
Exhibit 10.14
ASSET PURCHASE AGREEMENT
DATED AS OF AUGUST 1, 1996
BY AND AMONG
NEW YORK RESTAURANT SCHOOL, INC.,
CHICAGO RESTAURANT SCHOOL, INC.
AND
CENTER FOR HOSPITALITY EDUCATION, INC.
AND
NYRS ACQUISITION CORP.
<PAGE> 2
TABLE OF CONTENTS
PAGE
ARTICLE I PURCHASE AND SALE OF ASSETS
1.01 Purchase and Sale of Assets.................................
1.02 Excluded Assets.............................................
1.03 Assumption of Liabilities...................................
1.04 Limitation on Assumption of Liabilities.....................
1.05 Purchase Price..............................................
1.06 Adjustment to Purchase Price................................
1.07 Reimbursement of 1996 Leasehold Improvements................
1.08 Allocation of Value.........................................
1.09 Certain Consents............................................
ARTICLE II REPRESENTATIONS AND WARRANTIES OF SELLER
2.01 Organization and Qualification..............................
2.02 Authority and Authorization.................................
2.03 Execution and Binding Effect................................
2.04 Stock Ownership.............................................
2.05 No Breach, Default, Violation or Consent....................
2.06 Financial Statements........................................
2.07 Undisclosed Liabilities.....................................
2.08 Litigation..................................................
2.09 Absence of Certain Changes and Events.......................
2.10 Compliance with Law; DOE Compliance.........................
2.11 Environmental Matters.......................................
2.12 Real Property...............................................
2.13 Personal Property...........................................
2.14 Intellectual Property.......................................
2.15 Title to Assets.............................................
2.16 Benefit Plans...............................................
2.17 Insurance...................................................
2.18 Taxes.......................................................
2.19 Other Material Agreements...................................
2.20 Labor.......................................................
2.21 Accounts Receivable.........................................
2.22 Transactions with Related Parties...........................
2.23 Disclosure..................................................
2.24 Brokers.....................................................
ARTICLE III REPRESENTATIONS AND WARRANTIES OF BUYER
3.01 Organization................................................
3.02 Authority and Authorization.................................
3.03 Execution and Binding Effect................................
3.04 No Breach, Default, Violation or Consent....................
3.05 Brokers.....................................................
3.06 Ability to Provide Temporary Funds..........................
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TABLE OF CONTENTS
(Continued)
PAGE
ARTICLE IV CERTAIN COVENANTS
4.01 Conduct of Business Prior to Closing................................
4.02 Casualty Loss or Damage to Assets...................................
4.03 Access to Information...............................................
4.04 Reasonable Efforts..................................................
4.05 Remit Funds.........................................................
4.06 No Control..........................................................
4.07 Consent; Assignment of Agreements...................................
4.08 Monthly Financial Statements........................................
4.09 Bulk Sales..........................................................
4.10 NYRS Letter of Credit...............................................
ARTICLE V CLOSING AND CLOSING CONDITIONS
5.01 Closing.............................................................
5.02 Conditions Precedent to Obligations of Buyer to Close...............
5.03 Conditions Precedent to Obligations of Seller to Close..............
5.04 DOE Approval........................................................
5.05 Non-Competition by Seller...........................................
5.06 Employees of NYRS ..................................................
ARTICLE VI INDEMNIFICATION
6.01 Indemnification by Seller...........................................
6.02 Indemnification by Buyer............................................
6.03 Escrow Fund.........................................................
6.04 Indemnification Threshold...........................................
6.05 Financial Aid Claims................................................
6.06 Notice of Claims....................................................
6.07 Representation, Settlement and Cooperation..........................
ARTICLE VII MISCELLANEOUS PROVISIONS
7.01 Amendments..........................................................
7.02 Assignment..........................................................
7.03 Consent to Jurisdiction and Service of Process......................
7.04 Counterparts; Telefacsimile Execution...............................
7.05 Expenses............................................................
7.06 Further Assurances..................................................
7.07 Governing Law.......................................................
7.08 Notices.............................................................
7.09 Publicity...........................................................
7.10 Severability........................................................
7.11 Successors and Assigns..............................................
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TABLE OF CONTENTS
(Continued)
PAGE
7.12 Termination.........................................................
7.13 Waivers.............................................................
7.14 Change of Seller's Name.............................................
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TABLE OF CONTENTS
(Continued)
PAGE
SCHEDULES
Schedule 1.01(c) Intellectual Property
Schedule 1.01(f) Business Agreements
Schedule 1.01(h) Business Permits
Schedule 1.02 Excluded Assets
Schedule 1.03 Assumed Contracts
Schedule 1.07 Construction Contracts
Schedule 1.08 Allocation of Value
Schedule 2.04 Stockholders
Schedule 2.05(e) Authorizations and Approvals
Schedule 2.07 Undisclosed Liabilities
Schedule 2.08 Litigation
Schedule 2.09 Certain Changes and Events
Schedule 2.10(a) Permits
Schedule 2.11 Environmental
Schedule 2.12 Real Property
Schedule 2.13 Personal Property
Schedule 2.14 Intellectual Property
Schedule 2.15 Permitted Encumbrances
Schedule 2.16 Benefit Plans
Schedule 2.17 Insurance
Schedule 2.19 Other Material Agreements
Schedule 2.22 Related Party Transactions
Schedule 3.04 Authorization and Approvals
Schedule 4.01 Conduct of Business
Schedule 5.03(c) Consents and Approvals
Schedule 5.06 Employees
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EXHIBITS
Exhibit A Escrow Agreement
Exhibit B Bill of Sale
Exhibit C Assignment and Assumption Agreement
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ASSET PURCHASE AGREEMENT
This Agreement is made as of August 1, 1996, between New York
Restaurant School, Inc., a Delaware corporation ("NYRS"), Chicago Restaurant
School, Inc., a Delaware corporation ("CRS"), and Center for Hospitality
Education, Inc., a Delaware corporation and wholly-owned subsidiary of CRS
("CHI") (NYRS, CRS and CHI being sometimes referred to herein collectively as
"Seller"), and NYRS Acquisition Corp., a New York corporation ("Buyer").
PREAMBLE
NYRS is engaged in the business of owning and operating a
post-secondary career school (the "Business"), CRS owns all of the stock of CHI
and CHI has the rights to certain intellectual property relating to the
Business. Seller desires to sell to Buyer, and Buyer desires to purchase from
Seller, substantially all of Seller's assets used or useful in connection with,
or otherwise relating to, the Business, all upon the terms and subject to the
conditions set forth herein. Therefore, intending to be legally bound hereby,
the parties agree as follows:
AGREEMENT
ARTICLE I.
PURCHASE AND SALE OF ASSETS
1.01. Purchase and Sale of Assets. On the Closing Date (defined below),
Seller shall sell to Buyer, and Buyer shall purchase from Seller, all of
Seller's right, title and interest in and to all of the assets of Seller other
than the Excluded Assets (as defined in Section 1.02) (collectively, the
"Assets") including without limitation the following:
(a) all equipment and machinery, including all restaurant,
classroom and office equipment and machinery, fixtures, leasehold improvements,
tools, utensils, appliances, computer hardware and software, inventory,
textbooks, course materials, course curricula, syllabi, and furniture used or
useful in connection with the Business (collectively, the "Equipment"), and all
supplies, spare parts and warranties relating to any of the Equipment;
(b) all deposits, investments, securities, advance payments,
prepaid items and expenses, deferred charges, rights of offset and credits and
claims for refunds related to the Business;
(c) all patents, registered and unregistered trademarks, service
marks and logos and any registrations and applications for registration thereof,
curriculum, course materials, recipes,
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teaching aids, corporate and trade names and all copyrights, including all
registrations and applications for registration thereof and all applications
therefor, used or useful in connection with the Business, including, without
limitation, the trademarks, trade names and logos listed on Schedule 1.01(c)
attached hereto, and all of Seller's rights to use the names "New York
Restaurant School" and "Chicago Restaurant School" and any variations thereof
(collectively, the "Intellectual Property");
(d) all inventions, discoveries, techniques, processes, methods,
formulae, designs, trade secrets, confidential information, know-how and ideas
used or useful in connection with the Business;
(e) all accounts receivable of the Business (the "Receivables");
(f) all of Seller's rights under all bids, offers, leases,
licenses, contracts, student enrollment agreements, other agreements and
business arrangements relating to the Business or any of the Assets including,
without limitation, those listed on Schedule 1.01(f) (the "Business
Agreements");
(g) all admissions, enrollment, prospect and student lists,
files, documents, records and correspondence;
(h) to the extent transferable, all permits, licenses,
franchises, certificates, authorizations, consents and approvals obtained from
or issued by any governmental, regulatory or accrediting entity and which are
necessary or desirable for the ownership or operation of the Business or the
ownership, operation or use of any of the Assets (collectively, the "Business
Permits"), including, without limitation, the items listed on Schedule 1.01(h)
attached hereto;
(i) all books, records, files, ledgers, drawings, specifications
and manuals relating to the Business or any of the Assets, all advertising,
recruiting and marketing materials relating to the Business and all other
information relating to the Business or any of the Assets including technical
information, advertising and marketing studies, consulting reports, sales
correspondence, credit and sales records and copies of all account books of
original entry and general ledgers, regardless of the form in which such
information appears;
(j) all goodwill of the Business or associated with any of the
Assets, including without limitation, the goodwill associated with the
trademarks, service marks, logos and corporate and trade names of Seller; and
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(k) all other assets of Seller, tangible or intangible, which are
used or useful in connection with, or relate to, the Business.
1.02. Excluded Assets. Notwithstanding any other provision hereof, the
Assets shall not include the items listed on Schedule 1.02 (the "Excluded
Assets").
1.03. Assumption of Liabilities. Subject to the terms and conditions
hereof, Buyer shall assume and become liable for the obligations and liabilities
of NYRS that arise after the Effective Time and relate to operation of the
Business after the Effective Time under the express terms of NYRS's student
enrollment agreements with current students and under the contracts, leases and
other agreements of NYRS listed on Schedule 1.03 (collectively, the "Assumed
Contracts"). Buyer shall also assume and become liable for the accounts payable,
accrued expenses, deferred tuition and student refunds payable by NYRS as of the
Effective Time (the "Assumed Current Liabilities"), provided, however, that the
Assumed Current Liabilities shall be limited to the amounts incurred in the
ordinary course of business and reflected on the Closing Balance Sheet (as
hereinafter defined) (the Assumed Contracts and the Assumed Current Liabilities
are collectively referred to herein as the "Assumed Liabilities"). Buyer shall
not assume or become liable for any obligations or liabilities of CRS or CHI of
any nature whatsoever.
1.04. Limitation on Assumption of Liabilities. Except as specifically
provided in Section 1.03, Buyer does not hereby and shall not assume, or in any
way undertake to pay, perform, satisfy or discharge any other liabilities,
obligations, agreements or commitments of Seller arising from the operations of
the Business whether due or to become due, whether accrued, absolute,
contingent, known or unknown, disclosed or undisclosed in this Agreement
(including the Schedules hereto) or otherwise, existing as of the Effective Time
or arising out of any transactions entered into, or any state of facts existing
prior to the Effective Time (collectively, the "Excluded Liabilities") and
Seller shall pay and satisfy when due all Excluded Liabilities. Each of NYRS,
CRS and CHI shall jointly and severally indemnify, defend and hold harmless
Buyer from any loss, liability, damage or expense (including reasonable
attorneys' fees) arising out of any failure by Seller to pay, perform or
discharge when due any Excluded Liabilities.
1.05. Purchase Price. The purchase price for the Assets (the "Purchase
Price") shall be Nine Million Five Hundred Thousand U.S. Dollars ($9,500,000),
subject to adjustment in accordance with Section 1.06, which amount shall be
payable by Buyer in immediately available funds delivered to National City Bank
of Pennsylvania (the "Escrow Agent"), to be held in an escrow fund (the "Escrow
Fund") and disbursed in accordance with the terms of an Escrow
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Agreement between Buyer and Seller in substantially the form of Exhibit A (the
"Escrow Agreement").
1.06. Adjustment to Purchase Price. (a) The Purchase Price will be
increased or decreased by the amount by which the Closing Net Working Capital
(as defined in this Section 1.06) exceeds or is less than $1,500,000. For the
purposes hereof, "Closing Net Working Capital" means the sum of NYRS's (a)
accounts receivable, net of reasonable allowance for doubtful accounts, (b)
inventory and (c) certain prepaid expenses (specifically excluding deferred
admissions and recruiting costs) minus the sum of NYRS's (x) accounts payable
and accrued expenses, (y) deferred tuition and student refunds payable and (z)
current portions of capital lease obligations, as shown on the Closing Balance
Sheet (as defined below). The increase or decrease in the Purchase Price
resulting from the adjustments described in this Section 1.06 is herein referred
to as the "Adjustment Amount". Within 30 days after the Closing Date, Buyer will
deliver to Seller a balance sheet as of the Effective Time, prepared in
accordance with generally accepted accounting principles applied on a basis
consistent with the accounting principles applied in the preparation of the
audited financial statements of the Company for the year ended December 31, 1995
(the "Closing Balance Sheet") and (ii) a certificate (the "Adjustment
Certificate"), executed by an officer of Buyer setting forth, in such detail as
Buyer or Seller may reasonably require, a computation of the Adjustment Amount.
Seller shall cooperate and shall cause its employees and representatives to
cooperate with Buyer and shall provide and cause its employees and
representatives to provide such assistance as Buyer shall reasonably request in
connection with the preparation of the Closing Balance Sheet. If Seller delivers
written notice (the "Disputed Items Notice") to Buyer within 30 days after
delivery of the Adjustment Certificate, stating that Seller objects to the
calculations set forth therein, specifying in detail the basis for such
objection and setting forth its computation of the Adjustment Amount, Buyer and
Seller will attempt to resolve and finally determine the Adjustment Amount as
promptly as practicable. If Buyer and Seller are unable to agree upon the
Adjustment Amount within 30 days after delivery of the Disputed Items Notice,
Buyer and Seller will refer the matter to an auditor mutually agreeable to Buyer
and Seller for resolution of the disputed items and determination of the
Adjustment Amount. Such determination will be made within 60 days after such
referral and will be binding upon the parties. The fees, costs and expenses of
such auditor will be shared equally by Buyer and Seller. If Seller does not
deliver a Disputed Items Notice to Buyer within 30 days after delivery of the
Adjustment Certificate, the Adjustment Amount set forth in the Adjustment
Certificate will be conclusively presumed to be true and correct in all respects
and will be binding upon the parties.
(b) Payment Regarding the Adjustment Amount. Within five (5)
business days after the final determination of the Adjustment
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Amount pursuant to the foregoing, either (i) Buyer will deliver to the Escrow
Agent, the amount, if any, by which the Purchase Price is increased as a result
of the calculation of the Adjustment Amount together with instructions to
deposit such amount in the Escrow Fund (as defined in the Escrow Agreement) or
(ii) Buyer and Seller will jointly instruct the Escrow Agent to deliver to Buyer
from the Escrow Fund the amount, if any, by which the Purchase Price is
decreased as a result of the calculation of the Adjustment Amount, in either
case together with interest thereon from the Closing Date to the date of payment
at a rate of interest equal to the rate of interest earned on the Escrow Fund
during such period.
1.07. Reimbursement of 1996 Leasehold Improvements. In addition to the
payment of the Purchase Price, on the Closing Date Buyer shall reimburse Seller
$53,034.55 for all payments made by Seller prior to the Closing Date on account
of the construction and equipping of two additional kitchens and expanded office
and classroom space pursuant to the construction, architectural, engineering,
consulting and equipment purchase agreements and instruments identified on
Schedule 1.07. The amount of such reimbursement shall be paid in cash in
immediately available funds to the Escrow Agent together with instructions to
deposit such amount in the Escrow Fund.
1.08. Allocation of Value. Buyer and Seller hereby agree that Schedule
1.08 hereto reflects the allocation of the Purchase Price to the respective
Assets, which allocation shall be used by them in preparing their respective
income tax returns.
ARTICLE II.
REPRESENTATIONS AND WARRANTIES
Each Seller hereby jointly and severally represents and warrants to
Buyer as follows:
2.01. Organization and Qualification. NYRS is a corporation duly
organized, validly existing and in good standing in the State of Delaware, CRS
is a corporation duly organized, validly existing and in good standing in the
State of Delaware, and CHI is a corporation duly organized, validly existing and
in good standing in the State of Delaware. Each Seller is duly qualified to do
business as a foreign corporation and is in good standing in all jurisdictions
in which the ownership of its properties or the nature of its business makes
such qualification necessary, except to the extent that the failure to be so
qualified has not resulted in, and is not likely to result in, a material
adverse change in the business, properties, operations, condition (financial or
otherwise), net worth, assets or prospects of the Business (a "Material Adverse
Change").
2.02. Authority and Authorization. Each Seller has the corporate power
and authority to own its properties and assets, to
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conduct its business as presently conducted and to execute, deliver and perform
this Agreement and the other Transaction Documents (defined below). The
execution, delivery and performance of this Agreement by Seller has been duly
authorized by all necessary corporate action of each Seller (including approval
of the stockholders of each Seller).
2.03. Execution and Binding Effect. This Agreement has been, and on the
Closing Date the other Transaction Documents will be, duly and validly executed
and delivered by each Seller and constitute (or upon such execution and delivery
will constitute) legal, valid and binding obligations of each Seller enforceable
against each Seller in accordance with their respective terms.
2.04. Stock Ownership. All of the issued and outstanding capital stock
of each Seller is owned by the shareholders listed on Schedule 2.04 hereto (the
"Shareholders").
2.05. No Breach, Default, Violation or Consent. None of the execution,
delivery and performance by Seller of this Agreement and the other Transaction
Documents, the consummation of the transactions contemplated hereby and thereby
or the compliance with or fulfillment of the terms, conditions and provisions
hereof or thereof will:
(a) violate the charter or by-laws of NYRS, CRS or CHI;
(b) conflict with or result in a breach or default (or an event
which, with the giving of notice or the passage of time, or both, would
constitute a default) under, require any consent under or give to others any
rights of termination, acceleration, suspension, revocation, cancellation or
amendment of any contract, agreement, instrument or document to which Seller is
a party or by which Seller or any of its properties or assets is bound;
(c) breach or otherwise violate any order, writ, judgment,
injunction or decree issued by any governmental entity which names Seller or is
directed to Seller, the Business or any of the Assets;
(d) violate any law, rule, regulation, ordinance or code of any
governmental or quasi-governmental entity or other accrediting body, person or
entity with jurisdiction over any of Seller's operations;
(e) except as set forth in Schedule 2.05(e) attached hereto,
require any consent, authorization, approval, exemption or other action by, or
any filing, registration or qualification with, any governmental entity or other
person;
(f) result in the creation or imposition of any mortgages,
claims, pledges, liens, security interests, or other
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encumbrances ("Encumbrances") upon any of the Assets or give to others any
interests or rights therein; or
(g) result in the maturation or acceleration of any liability or
obligation of Seller (or give others the right to cause such a maturation or
acceleration).
2.06. Financial Statements. The books of account and related records of
NYRS and CRS reflect in detail their assets, liabilities, revenues, expenses,
cash flows, and other transactions. Seller has previously delivered to Buyer
correct and complete copies of (a) the combined audited balance sheets and
statements of income, retained earnings and changes in financial position of
NYRS and CRS as of and for their fiscal years ended December 31, 1995, 1994 and
1993, including the footnotes thereto, and (b) unaudited interim balance sheets
of (the "March 31 Balance Sheets") and statements of income and retained
earnings of NYRS, CRS and CHI as of and for their fiscal quarter ended March 31,
1996, (the "Current Financial Statements" and, together with the items described
in clause (a) above, the "Financial Statements"). The Financial Statements are
accurate, correct and complete in all material respects and present fairly the
financial condition of NYRS, CRS and CHI as at the end of the periods covered
thereby and the results of Seller's operations and the changes in Seller's
financial position for the periods covered thereby, and were prepared in
accordance with generally accepted accounting principles ("GAAP") applied on a
consistent basis throughout the periods covered thereby subject, in the case of
the Current Financial Statements, to year-end audit adjustments (which will not
be material) and the lack of footnotes and other presentation items (except for
depreciation and amortization expense and tax accruals which are material).
2.07. Undisclosed Liabilities. NYRS has no debts, obligations or
liabilities, absolute, fixed, contingent or otherwise, of any nature whatsoever,
whether due or to become due (including unasserted claims), whether incurred
directly or by any predecessor thereto, and whether arising out of any act,
omission, transaction, circumstance, sale of goods or services, state of facts
or other condition that occurred or existed on or before March 31, 1996, whether
or not then known, due or payable, except: (a) those reflected or reserved
against on the NYRS March 31 Balance Sheet in the amounts shown therein; (b)
those liabilities not required under GAAP to be included or reflected in the
NYRS March 31 Balance Sheet; (c) those expressly set forth on Schedule 2.07,
attached hereto or specifically described in the letter from Seller to Buyer
dated July 8, 1996; (d) those of the same nature as those set forth in the NYRS
March 31 Balance Sheet that have arisen in the ordinary course of business of
the Business after March 31, 1996 through the date hereof; and (e) potential
financial aid claims related to any failure of NYRS to comply in full conformity
with requirements and regulations of the United
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States Department of Education ("DOE") or the State of New York, all of which
have been consistent in amount and character with past practice and experience,
and none of which, individually or in the aggregate, has resulted in or will
result in a Material Adverse Change.
2.08. Litigation. Except as provided in Schedule 2.08, attached hereto:
i) There are no actions, suits, investigations, claims or
proceedings of any nature or kind whatsoever ("Litigation") pending or, to the
best of Seller's knowledge, threatened against or affecting any of Seller, the
Assets, the Business, or the transactions contemplated by this Agreement, at law
or in equity, by or before the DOE, any accrediting agency or any governmental
body, and, to the best of Seller's knowledge, there is no basis for any such
Litigation which, individually or in the aggregate, would result in a Material
Adverse Change.
ii) There are presently no outstanding judgments, decrees or
orders of any governmental body against or affecting Seller, the Assets, the
Business or the transactions contemplated by this Agreement.
iii) No Seller has commenced or has pending any Litigation
against any third party.
2.09. Absence of Certain Changes and Events. Except as otherwise
disclosed on Schedule 2.09, since March 31, 1996:
(a) Seller has not incurred any material obligation or liability
except for normal trade and other obligations incurred in the ordinary course of
business;
(b) no casualty, loss or damage has occurred with respect to any
of the Assets, whether or not the same is covered by insurance;
(c) Seller has not sold, transferred or otherwise disposed of any
of its properties or assets or any interest therein, or agreed to do any of the
foregoing, except in the ordinary course of business;
(d) Seller has not made, or committed to make, any capital
expenditures in excess of $10,000 in the aggregate except for the additions and
improvements contemplated by the agreements and instruments listed on Schedule
1.07;
(e) no Material Adverse Change, and no event which is likely to
result in a Material Adverse Change, has occurred;
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(f) no strike or other labor trouble relating to the Business has
occurred;
(g) there have been no Encumbrances created on any of the
properties of the Business;
(h) there has been no declaration or payment of any dividend or
redemption of any shares of capital stock of any Seller;
(i) there have been no increases in the compensation or benefits
of any officer or employee of Seller or the Business;
(j) no Seller has made any payment to or entered into any
transaction with any affiliate;
(k) there has been no change in the board of directors or
management of any Seller; and
(l) there has been no agreement or commitment to do any of the
foregoing.
2.10. Compliance with Law; DOE Compliance.
(a) Permits. All licenses, franchises, permits, clearances,
consents, certificates and other evidences of authority of Seller which are
necessary to the conduct of the Business ("Permits") are in full force and
effect and Seller is not in violation of any Permit. All such Permits are listed
on Schedule 2.10(a). The Business is duly licensed by all Federal, state and
local authorities having jurisdiction over the operation of the Business and
Seller has operated the Business in conformity in all material respects with all
applicable Federal, state and local laws and regulations, including those laws
and regulations pertaining to Federal or state financial aid programs. There has
been no actual or alleged violation of any such laws or regulations by Seller or
the Business which could constitute a crime. All returns, reports and statements
required to be filed by Business with the DOE and state Departments of Education
and other regulatory bodies (collectively, the "Education Departments") relating
to the Business have been filed and complied with and are complete and correct
as filed. Without limiting the generality of the foregoing, (i) NYRS is in
compliance in all material respects with requirements and regulations of the DOE
governing an institution's eligibility and participation in and administration
of the Title IV, HEA, TAP and student financial assistance programs, (ii) NYRS
has been in compliance in all material respects with such DOE requirements and
regulations, (iii) there has been no failure to comply which would have an
impact on the eligibility for Title IV aid or TAP or affect the eligibility or
amount of eligibility for Title IV aid or TAP for any NYRS educational program
and (iv) there has been no violation by NYRS of (A) the
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NYRS program participation agreement (34 C.F.R. Section 668.14), (B) DOE factors
of financial responsibility (34 C.F.R. Section 668.15) or (C) the institutional
administrative standards set forth in 34 C.F.R. Section 668.16. Seller has no
knowledge of any pending or threatened program of review or audit by any of the
Education Departments with respect to any federal or state student financial aid
program other than the Annual Compliance Audit for Federal Financial Aid.
(b) Cohort Default Rate. NYRS has provided to Buyer true and
correct copies of NYRS's Official Cohort Default Rate ("OCDR"), as issued by the
DOE, for the fiscal years 1991 through 1993, and NYRS's Pre-Publication Cohort
Default Rate, as issued by the DOE for fiscal year 1994.
(c) Compliance with Definition of Proprietary Institution of
Higher Education. NYRS is in compliance in all material respects with the DOE
definition of "proprietary institution of higher education".
(d) Institutional Refunds. (i) NYRS is in full compliance in all
material respects with state, accrediting commission and DOE requirements and
regulations relating to (A) fair and equitable refund policy, and (B) the
calculation and timely repayment of federal and nonfederal funds; (ii) any and
all refunds required thereunder have been timely paid by NYRS, except for such
refunds which, individually or in the aggregate, would not result in a Material
Adverse Change.
(e) Accreditation. The Business is duly accredited by, and in
good standing with, the Accrediting Commission for Career Schools and Colleges
of Technology ("A.C.C.S.C.T.") and the New York State Board of Regents, and the
Business has not received notice of, and has no knowledge of, any facts or
circumstances which would in any way interfere with or jeopardize such
accreditation.
2.11. Environmental Matters. Except as otherwise disclosed on Schedule
2.11:
(a) no Hazardous Substances have been or are being generated,
used, processed, treated, stored, released, transported or disposed of by
Seller, except in compliance with applicable Environmental Rules;
(b) to the best of Seller's knowledge, no person who has leased,
occupied or used any real property now or previously leased, occupied or used by
Seller generated, used, processed, treated, stored, released or disposed of any
Hazardous Substances on such property;
(c) to the best of Seller's knowledge, no Hazardous Substances
are present on or under any real property (including
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without limitation in any body of water located thereon or adjacent thereto or
any groundwater located thereunder) now or previously leased, occupied or used
by Seller, or in any improvement located thereon in quantities or at levels
which require reporting or remediation under any applicable Environmental Rule;
and
(d) no event has occurred and no condition exists with respect to
Seller or its business, properties or assets which has resulted in, or is likely
to result in, any material liability, cost or expense to Seller or any other
person who owns or operates the Business or the Assets under any applicable
Environmental Rule, and Seller has not received any notice from any governmental
entity or other person of its intention to impose any such liability, cost or
expense upon Seller or any such person.
As used in this Section the following terms have the following
meanings:
"Environmental Rule" shall mean any federal, state or local
governmental rule which relates to Hazardous Substances, pollution or protection
of the environment, natural resources or public health or safety, including
without limitation any federal, state or local governmental rule relating to the
generation, use, processing, treatment, storage, release, transport or disposal
of Hazardous Substances and any common laws of nuisance, negligence and strict
liability relating thereto, together with all rules, regulations and orders
issued thereunder, as any of the same may be amended.
"Hazardous Substance" shall mean any substance which constitutes,
in whole or in part, a pollutant, contaminant or toxic or hazardous substance or
waste under, or the generation, use, processing, treatment, storage, release,
transport or disposal of which is regulated by, any federal, state or local
governmental rule.
2.12. Real Property. Seller currently owns no real property. Schedule
2.12 sets forth a correct and complete list of all real property currently
leased by Seller. Except as otherwise disclosed on Schedule 2.12, all buildings
and other improvements located on such property are in good repair and operating
condition, ordinary wear and tear excepted. Schedule 2.12 sets forth a correct
and complete list of all leases, subleases and other agreements or rights
pursuant to which Seller has the right to occupy or use any real property owned
by others, together with any and all amendments thereto.
2.13. Personal Property. Schedule 2.13 sets forth a correct and
complete list of all leases and other agreements pursuant to which Seller leases
any of the Equipment involving annual lease payments in excess of $5,000,
together with the names of the lessors thereunder and the personal property
covered thereby.
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Except as otherwise disclosed on Schedule 2.13, the Equipment is in good repair
and operating condition, ordinary wear and tear excepted, is suitable for the
purposes for which it is used and constitutes all Equipment necessary to conduct
the Business as currently conducted.
2.14. Intellectual Property. Schedule 2.14 sets forth a correct and
complete list of (a) all registered and unregistered trade names, trademarks and
logos used in the Business and any registrations and applications for
registration thereof, (b) all licenses or other agreements pursuant to which any
person has the right to use any Intellectual Property owned by Seller, together
with the names of the licensees thereof, the Intellectual Property covered
thereby, the annual fee or other consideration payable thereunder and the
duration thereof, including any renewal options, (c) all licenses or other
agreements pursuant to which Seller has the right to use any Intellectual
Property owned by others, together with the names of the licensors thereof, the
Intellectual Property covered thereby, the annual fee or other consideration
payable thereunder and the duration thereof, including any renewal options and
(d) all consents which must be obtained, all filings which must be made and all
other actions which must be taken in order to assign or otherwise transfer
Seller's rights in any of the foregoing to Buyer. Except as set forth in
Schedule 2.14, Seller owns or has the perpetual, royalty-free, transferable
right to use all Intellectual Property used or employed by the Business, free
from any Encumbrances. Seller has the lawful right to use all of the
Intellectual Property, and no such use infringes upon the lawful rights of any
other person. To the best of Seller's knowledge, no person is using any
Intellectual Property in a manner which infringes upon the lawful rights of
Seller.
2.15. Title to Assets. Except as otherwise disclosed on Schedule 2.15
Seller has (a) good and marketable title to all Assets purported to be owned by
it and (b) good leasehold title to all Assets purported to be leased by it, in
each case free and clear of all Encumbrances. On the Closing Date Seller will
transfer to Buyer title to the Assets free and clear of all Encumbrances other
than those marked as "Permitted Encumbrances" on Schedule 2.15.
2.16. Benefit Plans. Schedule 2.16 sets forth a true, correct and
complete list of all Employee Benefit Plans (defined below). Except as otherwise
disclosed on Schedule 2.16:
(a) the Internal Revenue Service ("IRS") has issued favorable
determination letters to the effect that each Pension Plan (defined below) is
qualified within the meaning of Section 401(a) of the Internal Revenue Code of
1986, as amended (the "Code") and that each related trust is exempt under
Section 501 of the Code, correct and complete copies of which have been
delivered to Buyer, each such Pension Plan is qualified in form and operation
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under Section 401(a) of the Code and each trust under each such Pension Plan is
exempt from tax under Section 501(a) of the Code, and no event has occurred that
will or could give rise to disqualification or loss of tax-exempt status of any
such Pension Plan or trust under such sections;
(b) each Employee Benefit Plan and, if applicable, each related
trust has been established, maintained and administered in all material respects
in compliance with ERISA (defined below), the Code and all other applicable
governmental rules;
(c) none of the transactions described in Sections 406 and 408 of
ERISA or Section 4975 of the Code, and none of the events described in Sections
4043 or 4063 of ERISA, have occurred with respect to any Employee Benefit Plan;
(d) no "amount of unfunded benefit liabilities" within the
meaning of Section 4001(a)(18) of ERISA, and no "accumulated funding deficiency"
within the meaning of Section 302(a)(2) of ERISA or Section 412(a) of the Code,
exists with respect to any Pension Plan;
(e) no Employee Benefit Plan has been terminated in whole or in
part, neither Seller nor any ERISA Affiliate (defined below) presently intends
to terminate any Employee Benefit Plan in whole or in part, no proceeding has
been commenced by the Pension Benefit Guaranty Corporation (the "PBGC") or the
IRS to terminate any Pension Plan in whole or in part or to appoint a trustee to
administer any Pension Plan, neither Seller nor any ERISA Affiliate has received
any notice of any such proceeding and Seller has no knowledge of any basis for
the commencement of any such proceeding;
(f) neither Seller nor any ERISA Affiliate owes any amount to the
PBGC other than for PBGC insurance premiums which are not yet due and payable;
(g) neither Seller nor any ERISA Affiliate has contributed to, or
is or has been under any obligation to contribute to, any Multiemployer Plan
(defined below), no event has occurred with respect to a Multiemployer Plan to
which Seller or any of its ERISA Affiliates contribute or have contributed (or
to which Seller or any of its ERISA Affiliates have at any time had an
obligation to contribute) that reasonably can be expected to constitute a
"withdrawal" or "partial withdrawal" with respect to such plan (as such terms
are defined in Title IV of ERISA) which could reasonably be expected to result
in a material liability;
(h) there are no actions, suits, investigations or other
proceedings pending or, to the best of Seller's knowledge, threatened against
any Pension Plan or related trust or any fiduciary thereof;
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(i) there are no outstanding governmental orders which name
Seller, any ERISA Affiliate, any Pension Plan or its fiduciaries or are directed
to any of such parties;
(j) none of the Pension Plans is a defined benefit plan as
defined in Section 3(35) of ERISA; and
(k) Seller has complied with the continuation coverage
requirements of the Consolidated Omnibus Budget Reconciliation Act of 1986, as
amended, and all successor legislation.
As used in this Section, the following terms have the following
meanings:
"Employee Benefit Plan" shall mean any "employee benefit plan" as
defined in Section 3(3) of ERISA including, without limitation, any profit
sharing, pension, savings, deferred compensation, fringe benefit, insurance,
medical, medical reimbursement, life, disability, accident, post-retirement
health or welfare benefit, stock option, stock purchase, sick pay, vacation,
employment, severance, termination or other compensation or benefit plan,
agreement, contract, policy, trust fund or arrangement (i) which is maintained
for past or present employees of Seller or any ERISA Affiliate or (ii) to which
Seller or any ERISA Affiliate made, or was required to make, contributions
within the preceding five years, as any of the same may be amended.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974 and all rules, regulations and orders issued thereunder, as any of the same
may be amended.
"ERISA Affiliate" shall mean any trade or business which,
together with Seller, is treated as a single employer under Section 4001(b)(1)
of ERISA or Sections 414(b), (c), (m) or (o) of the Code.
"Multiemployer Plan" shall mean a "multiemployer plan" as defined
in Section 4001(a)(3) of ERISA.
"Pension Plan" shall mean any "employee pension benefit plan"
within the meaning of Section 3(2) of ERISA, which is also a stock bonus,
pension or profit-sharing plan within the meaning of Section 401(a) of the Code.
2.17. Insurance. Schedule 2.17 sets forth a correct and complete list
of all insurance policies of which Seller is the owner, insured, loss payee or
beneficiary and which relate to the Business or any of the Assets and indicates
for each such policy the carrier, the risks insured against, the amounts of
coverage and deductibles, the annual premium, the cash surrender value, if any,
the expiration date and any pending claims thereunder.
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2.18. Taxes. (a) The amounts provided for all Taxes, charges, levies or
other assessments, however denominated, imposed by the United States or any
state, county or local government or subdivision or agency thereof (including
but not limited to income, franchise, license, transfer, withholding, payroll,
excise, sales, value added, use, occupation, commercial lease, and property
taxes) ("Taxes") as reflected in the Seller's latest financial statements are
sufficient to cover all unpaid liabilities, direct or indirect, that Sellers may
have, or that any taxing authorities may assert that Sellers have, for Taxes
(without regard to whether such liabilities are disputed) accrued or applicable
to the period ended on July 31, 1996 or to any years and periods prior thereto.
Except as disclosed to Buyer in the letter from Buyer to Seller dated July 8,
1996, Seller has timely and duly paid all Taxes due and payable (or claimed to
be due and payable by any taxing authority) other than Taxes that are reflected
as liabilities in the Seller's financial statements. Except as disclosed to
Buyer in the letter from Buyer to Seller dated July 8, 1996, Seller has timely
and duly prepared and filed or caused to be prepared and filed all Tax returns
that Seller is required by law to file and Seller will timely and duly prepare
and file or cause to be prepared and filed all Tax returns required to be filed
after the date hereof.
(b) Seller has withheld and paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any employee,
independent contractor, creditor, stockholder, or other third party.
2.19. Other Material Agreements. Schedule 2.19 sets forth a correct and
complete list of all agreements to which Seller is a party other than (a)
student enrollment agreements, (b) agreements listed on Schedule 1.03 hereto and
(c) agreements involving the payment by or to Seller, or creating any liability
of Seller (whether direct or indirect, fixed or contingent), of less than $5,000
over the term thereof, together with descriptions of the subject matter thereof,
the names of the other parties thereto, the amount of any payments or
liabilities thereunder, the duration thereof, including any renewal options, and
whether any consent is necessary for the assignment thereof to Buyer.
2.20. Labor. The employees of the Business are not represented by any
union or other collective bargaining group. No Seller is a party to any
collective bargaining or other labor agreement with respect to its employees. To
the knowledge of Seller, (a) Seller is not a party to, involved in, or
threatened by, any labor dispute or unfair labor practice charge in connection
with the operation of the Business, (b) there have never been any attempts to
organize the employees of Seller into a collective bargaining unit and (c) there
are no unfair labor practice complaints pending against Seller before the
National Labor Relations Board.
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2.21. Accounts Receivable. All accounts receivable of the Business
reflected on the March Balance Sheet or acquired after March 31, 1996 have
arisen in the ordinary course of business and have been or will be reflected on
the financial statements of the Company, subject to a reasonable reserve for
doubtful accounts, in accordance with GAAP. Except those identified on Schedule
2.21 or so reserved against, all such accounts receivable are bona fide, valid
and binding receivables representing obligations for the face dollar amount
thereof and, to the best knowledge of Seller, are subject to no defenses,
counterclaims or set-offs of any nature whatsoever.
2.22. Transactions with Related Parties. Schedule 2.22, attached hereto
is a complete list of (a) all transactions (other than loans from the
Shareholders to NYRS or CRS) within the last five years between Seller and any
shareholder of Seller or any other entity in which any shareholder, officer or
director of Seller is a shareholder, officer or director (the "Related Parties")
and (b) all distributions of any nature whatsoever from Seller to any
Shareholder since March 31, 1996.
2.23. Disclosure. To the best knowledge of Seller, none of the
representations or warranties of Seller contained herein, none of the
information contained in the Schedules referred to in Articles I and II, and
none of the information or documents furnished or to be furnished to Buyer or
any of its representatives by Seller or their representatives pursuant to the
terms of this Agreement, is false or misleading in any material respect or omits
to state a fact herein or therein necessary to make the statements herein or
therein not misleading in any material respect.
2.24. Brokers. Seller has not employed or retained, and has no
liability to, any broker, agent or finder on account of this Agreement (other
than the stockholders of Seller) or any of the other Transaction Documents or
the transactions contemplated hereby or thereby and Seller shall be solely
liable for any such liability to its stockholders.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby represents and warrants to Seller as follows:
3.01. Organization. Buyer is a corporation duly organized, validly
existing and in good standing in the state of New York.
3.02. Authority and Authorization. Buyer has the corporate power and
authority to own its properties and assets, to conduct its business as presently
conducted and to execute, deliver and perform this Agreement and the other
Transaction Documents.
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3.03. Execution and Binding Effect. This Agreement has been, and on the
Closing Date the other Transaction Documents will be, duly and validly executed
and delivered by Buyer and constitute (or upon such execution and delivery will
constitute) legal, valid and binding obligations of Buyer enforceable against
Buyer in accordance with their respective terms.
3.04. No Breach, Default, Violation or Consent. The execution, delivery
and performance by Buyer of this Agreement and the other Transaction Documents
do not and will not:
(a) violate Buyer's charter or by-laws;
(b) breach or result in a default (or an event which, with the
giving of notice or the passage of time, or both, would constitute a default)
under, require any consent under or give to others any rights of termination,
acceleration, suspension, revocation, cancellation or amendment of any contract,
agreement, instrument or document to which Buyer is a party or by which Buyer or
any of its properties or assets is bound;
(c) breach or otherwise violate any governmental order which
names Buyer or is directed to Buyer or any of its properties or assets;
(d) violate any governmental rule; or
(e) except as set forth in Schedule 3.04, require any consent,
authorization, approval, exemption or other action by, or any filing,
registration or qualification with, any governmental entity.
3.05. Brokers. Buyer has not employed or retained, and has no liability
to, any broker, agent or finder on account of this Agreement or any of the other
Transaction Documents or the transactions contemplated hereby or thereby.
3.06. Ability to Provide Temporary Funds. Buyer will have sufficient
funds available to provide funding for the normal operation of the Business
pending receipt of the DOE Approval.
ARTICLE IV.
CERTAIN COVENANTS
4.01. Conduct of Business Prior to Closing. At all times prior to the
Closing Date, Seller shall, except as set forth on Schedule 4.01:
(a) operate the Business only in the ordinary course and
consistent with past practice;
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(b) use its best efforts to preserve its business organization
intact and to preserve for Buyer the goodwill of customers, suppliers and others
having business relations with the Business;
(c) maintain the Equipment in good repair and operating
condition, ordinary wear and tear excepted;
(d) maintain in full force and effect all Business Permits,
licenses, accreditations, approvals and insurance policies;
(e) not terminate, cause the termination of, amend, renew or
extend any Business Agreement unless in each case such action is in the best
interest of the Business;
(f) not sell, transfer or otherwise dispose of any of the Assets
or any interest therein or agree to do any of the foregoing;
(g) not incur, make, assume or suffer to exist any Encumbrance,
tenancy or other matter affecting title to any of the Assets;
(h) not merge or consolidate Seller with or into any other entity
or agree to do any of the foregoing;
(i) comply with applicable governmental rules in all material
respects;
(j) take no action, and use its best efforts to prevent the
occurrence of any event or the existence of any condition, which would result in
any of Seller's representations and warranties herein not being true and
correct;
(k) not amend any of Seller's charter documents or bylaws;
(l) not change any Seller's authorized or issued capital stock or
issue any rights with respect to shares of its capital stock;
(m) not permit the Business to enter into any contract or
commitment the performance of which may extend beyond the Closing, except those
made in the ordinary course of business, the terms of which are reasonable and
consistent with past practice;
(n) not permit the Business to enter into any employment or
consulting contract or arrangement that is not terminable at will and without
penalty or continuing obligation;
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<PAGE> 25
(o) not fail to pay any taxes or any other liability or charge of
any Seller or the Business when due (other than charges contested in good faith
by appropriate proceedings);
(p) not make, change or revoke any tax election or make any
agreement or settlement with any taxing authority;
(q) promptly inform Buyer of the occurrence of any event or the
existence of any condition which constitutes or, with the giving of notice or
the passage of time, or both, is likely to constitute, a Material Adverse
Change; and
(r) maintain all Intellectual Property and preserve the
confidentiality of trade secrets and other proprietary information.
4.02. Casualty Loss or Damage to Assets. If at any time prior to the
Closing Date any casualty, loss or damage shall occur with respect to any Asset
then Seller shall promptly inform Buyer of the same and shall, at Buyer's
option, either (a) repair or replace such Asset such that the Asset to be
transferred to Buyer hereunder is in a condition at least as good as it was
immediately prior to the occurrence of such casualty, loss or damage, or (b)
transfer all insurance proceeds payable to Seller on account of such casualty,
loss or damage to Buyer at the Closing.
4.03. Access to Information. At all times prior to the Closing Date
Seller shall furnish to Buyer and its employees, counsel, accountants and other
agents and consultants (a) full access during normal business hours to the
properties, books and records and personnel of Seller relating to the Business
or the Assets and (b) all such information concerning the Business or the Assets
as any of them may reasonably request.
4.04. Reasonable Efforts. The parties agree to use their reasonable
efforts to take or cause to be taken and to do or cause to be done all such
actions and things as shall be necessary or advisable, or as shall be reasonably
requested by the other party, in order to consummate the transactions
contemplated hereby and by the other Transaction Documents. Without limiting the
generality of the foregoing, the parties agree to take all reasonable actions
necessary in order to obtain any consent or approval of any third party,
including without limitation any governmental entity, which is required in
connection with this Agreement or the other Transaction Documents or any of the
transactions contemplated hereby or thereby. Notwithstanding the generality of
the foregoing, the parties agree that they will fully and promptly cooperate in
good faith with each other and use all commercially reasonable efforts (a) in
the preparation, filing and prosecution of an application for approval of the
transaction contemplated hereby from all applicable state licensing agencies;
(b) in the preparation, filing and prosecution of an application for approval of
the transactions contemplated hereby from all applicable
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accrediting bodies, including, without limitation, the A.C.C.S.C.T. and the New
York State Board of Regents; and (c) in the preparation, filing and prosecution
of the application for DOE approval (the "DOE Application"). Each of the parties
hereto agree to prepare any and all documents and papers and take or cause to be
taken, all actions which may reasonably be required of such party in connection
with the preparation, filing and prosecution of the foregoing applications,
although it shall be Buyer's responsibility to prepare, file and prosecute the
foregoing applications.
4.05. Remit Funds. After the Closing, Seller shall promptly transfer
and deliver to Buyer any cash or other property, if any, that Seller may hold or
receive and to which Buyer is entitled hereunder.
4.06. No Control. Between the date of this Agreement and the Closing
Date, Buyer shall not, directly or indirectly, control, supervise or direct, or
attempt to control, supervise or direct, the operations of the Business, but
such operations shall be the sole responsibility and in the complete discretion
of Seller.
4.07. Consent; Assignment of Agreements. Each Seller shall use its
respective best efforts prior to, and if necessary, after the Closing Date, to
obtain at the earliest practicable date the consent to the assignment to Buyer
of any Assumed Contract which requires consent to assignment, without any
conditions adverse to Buyer, but if the consent is not obtained (and,
accordingly, the Agreement is excluded from the sale to Buyer), Seller shall
keep the Agreement in effect and shall give Buyer the benefit of the agreement
to the same extent as if it had been assigned and Buyer shall perform the
obligations under the Agreement relating to the benefit obtained by Buyer. If
Seller is unable to obtain consent to the assignment of any agreement and are
unable to give Buyer the benefit of that agreement, Seller and Buyer shall
negotiate in good faith a reduction in the consideration for the Assets to
reflect the loss or cost to Buyer of not obtaining the benefit of that
agreement.
4.08. Monthly Financial Statements. Seller shall deliver to Buyer, as
soon as available and in any event within 30 days after the end of each calendar
month, copies of any monthly financial statements or other reports relating to
the Business that may be prepared during the period from the date of this
Agreement to the date of the Closing. All such financial statements shall be in
accordance with the books and records of the Business, shall show all expenses
attributable to the Business, shall fairly present the financial position and
results of operations of the Business in all material respects as at and for the
periods indicated, and shall have been prepared consistently with Seller's
monthly financial statements for prior periods. Seller shall also furnish to
Buyer any other information concerning the financial and
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operating condition of the Business as Buyer may reasonably request.
4.09. Bulk Sales. Seller shall indemnify and hold harmless Buyer and
their affiliates against any and all liabilities that may be asserted against
Buyer or their affiliates as a result of noncompliance by Seller with any bulk
transfer law applicable to the transactions contemplated hereby. Without
limiting the generality of the foregoing, Seller shall pay all sales tax payable
as a result of the transactions contemplated hereby and provide Buyer evidence
of such payment within thirty days of the Closing Date and Buyer shall promptly
reimburse Seller of one-half of such sales tax paid by Seller.
4.10. NYRS Letter of Credit. In the event that Buyer has not exercised
its right of rescission pursuant to Section 5.04 of this Agreement and there is
a draw on the Letter of Credit dated August 26, 1993 issued by PNC Bank for the
benefit of The Rector, Church-Wardens and Vestrymen of Trinity Church (the
"Landlord") for the account of NYRS (the "Letter of Credit") and NYRS is
obligated to reimburse PNC Bank in respect of such draw, Buyer shall promptly
pay NYRS an amount equal to NYRS's reimbursement obligation to PNC Bank or
otherwise cause NYRS's reimbursement obligation to PNC Bank be paid and
satisfied. Upon disbursement of the Escrow Fund in connection with receipt of
the DOE Approval pursuant to Section 5.04 of this Agreement, Buyer shall cause a
letter of credit to be issued for the benefit of the Landlord and Buyer and
Seller shall cause the Landlord to return the Letter of Credit to Seller and
cause PNC Bank to deliver the UCC-3 termination statements evidencing the
termination of PNC Bank's security interest in the Assets of NYRS.
ARTICLE V.
CLOSING AND CLOSING CONDITIONS
5.01. Closing. The closing of the transactions contemplated hereby (the
"Closing") shall take place at 9:00 a.m., local time, on August 2, 1996 at the
offices of Kirkpatrick & Lockhart LLP, 1500 Oliver Building, Pittsburgh,
Pennsylvania 15222, or at such other time or place, or on such other date as the
parties may mutually agree upon. The date on which the Closing occurs is
referred to herein as the "Closing Date." The transactions shall be deemed
effective for tax and accounting purposes as of the close of business on July
31, 1996 (the "Effective Time").
5.02. Conditions Precedent to Obligations of Buyer to Close. The
obligations of Buyer hereunder to proceed with the Closing shall be subject to
the satisfaction by Seller on or prior to the Closing Date of each of the
following conditions precedent:
(a) Accuracy of Representations and Warranties. The
representations and warranties of Seller set forth herein shall be
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true and correct on and as of the Closing Date with the same force and effect as
though made on and as of such date.
(b) Performance and Compliance. Seller shall have performed or
complied with each covenant and agreement to be performed or complied with by it
hereunder on or prior to the Closing Date.
(c) Litigation. There shall be no pending or threatened action by
or before any governmental entity or arbitrator seeking to restrain, prohibit or
invalidate any of the transactions contemplated hereby or by any of the other
Transaction Documents or seeking monetary relief against Buyer by reason of the
consummation of such transactions, and there shall not be in effect any
Governmental Order which has such effect.
(d) Material Adverse Change. No event shall have occurred and no
condition shall exist which constitutes or, with the giving of notice or the
passage of time, or both, is likely to constitute, a Material Adverse Change.
(e) Officer's Certificate. Seller shall have delivered to Buyer a
certificate of its President dated the Closing Date and certifying that each of
the conditions specified in subsections (a), (b), (c) and (d) above have been
met.
(f) Secretary's Certificate. Seller shall have delivered to Buyer
a certificate of its Secretary dated the Closing Date and certifying (i) that
correct and complete copies of its charter and by-laws are attached thereto,
(ii) that correct and complete copies of each resolution of the board of
directors and shareholders of Seller approving this Agreement and the other
Transaction Documents to which it is a party and authorizing the execution
hereof and thereof and the consummation of the transactions contemplated hereby
and thereby are attached thereto and (iii) the incumbency and signatures of the
officers of Seller authorized to execute and deliver this Agreement and the
other Transaction Documents to which Seller is a party on behalf of Seller.
(g) Opinion of Counsel. Seller shall have delivered to Buyer an
opinion of Seller's counsel dated the Closing Date and in form and substance
reasonably satisfactory to Buyer and its counsel with respect to the matters in
Sections 2.01, 2.02, 2.03 and 2.05 and such other matters as Buyer or its
counsel may reasonably request.
(h) Other Transaction Documents. Seller and any other parties
thereto (other than Buyer) shall have executed and delivered to Buyer the
following documents and such other documents and instruments, in form and
substance satisfactory to Buyer and its counsel, as shall be necessary or
desirable in order to consummate the transactions contemplated hereby, each
dated the
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Closing Date (together with this Agreement and any agreements listed in Section
5.03(h), the "Transaction Documents"):
i) the Escrow Agreement;
ii) a Bill of Sale in substantially the form of Exhibit
B; and
iii) an Assignment and Assumption Agreement in the form
of Exhibit C.
(i) Education Department Approvals. The issuance of such permits,
approvals and permissions that, in Buyer's judgment, are required or desirable
for the continued operation of the Business, including (i) to the extent
practicable, compliance with all conditions necessary to obtain the DOE Approval
(as hereinafter defined), (ii) preliminary operating approval by the New York
State Board of Regents, (iii) compliance with all conditions necessary to obtain
renewal of accreditation and recognition of the Associate in Occupational
Studies degree program by the New York State Board of Regents, and (iv) any
other appropriate approvals by applicable agencies of the State of New York and
local governmental authorities to operate an educational institution and grant
the necessary degrees and certificates.
(j) Consents and Other Approvals. Seller shall have duly
received, without any condition adverse to Buyer, all consents and other
approvals required to be obtained under (i) the Business Agreements and the
Business Permits, (ii) any other material agreement to which any Seller is a
party, and (iii) any statute, rule or regulation to which the Business or any of
the Assets, is subject, necessary for (x) the consummation of the sale of the
Assets to Buyer and (y) Buyer to acquire control of the Business.
(k) No Material Changes or Destruction of Assets. Between the
date hereof and the Closing Date, there shall have been no material adverse
change or destruction (regardless of insurance coverage therefor) of the Assets.
(l) Assignment of Leases. The Rector, Church-Wardens and
Vestrymen of Trinity Church in the City of New York shall have consented to the
modification and assignment of its lease subject to receipt of the DOE approval
on terms and conditions satisfactory to Buyer, in its sole discretion, including
assumption of the obligations of Seller under the lease.
(m) Employees. Buyer shall be satisfied that employees of the
Business that Buyer desires to retain shall be available to continue with Buyer,
should Buyer desire to retain them and that the transactions contemplated by
this Agreement will not have a material adverse effect on any licenses, permits
or approvals of such employees.
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(n) Financial Aid. Buyer shall be reasonably satisfied that the
transactions contemplated hereby will not adversely affect the financial aid
benefits of students and prospective students of the Business. Seller shall
cause all fieldwork related to NYRS's Annual Compliance Audit for Federal
Financial Aid for the NYRS fiscal year ended June 30, 1995 to be completed and
such fieldwork and related summary of finding shall have been delivered to Buyer
with the results thereof satisfactory to Buyer.
(o) Student Recruitment. Buyer shall be satisfied that since
December 31, 1995 the Business has maintained the levels of advertising and
other student recruitment efforts and student enrollment standards consistent
with past practice and prudent business practice.
(p) NYRS Interim Earnings. NYRS's earnings before interest,
taxes, depreciation and amortization for the period from January 1, 1996 to the
Closing Date will be reasonably consistent with the current NYRS financial plan.
(q) Approval to Board of Directors. The Board of Directors of
Buyer shall have authorized this Agreement and the transactions contemplated
hereby.
(r) Due Diligence. Buyer shall be satisfied with the results of
its due diligence investigation of Seller, the Business and the Assets.
5.03. Conditions Precedent to Obligations of Seller to Close. The
obligations of Seller hereunder to proceed with the Closing shall be subject to
the satisfaction by Buyer on or prior to the Closing Date of each of the
following conditions precedent:
(a) Accuracy of Representations and Warranties. The
representations and warranties of Buyer set forth herein shall be true and
correct on and as of the Closing Date with the same force and effect as though
made on and as of such date.
(b) Performance and Compliance. Buyer shall have performed or
complied with each covenant and agreement to be performed or complied with by it
hereunder on or prior to the Closing Date.
(c) Consents and Approvals. Buyer shall have obtained or made
each consent, authorization, approval, exemption, filing, registration or
qualification, if any, listed on Schedule 5.03(c).
(d) Litigation. There shall be no pending or threatened action by
or before any governmental entity or arbitrator seeking to restrain, prohibit or
invalidate any of the transactions contemplated hereby or by any of the other
Transaction Documents or seeking monetary relief against Seller by reason of the
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consummation of such transactions, and there shall not be in effect any
Governmental Order which has such effect.
(e) Officer's Certificate. Buyer shall have delivered to Seller a
certificate of its President dated the Closing Date and certifying that each of
the conditions specified in subsections (a), (b), (c) and (d) above have been
met.
(f) Secretary's Certificate. Buyer shall have delivered to Seller
a certificate of its Secretary dated the Closing Date and certifying (i) that
correct and complete copies of its charter and by-laws are attached thereto,
(ii) that correct and complete copies of each resolution of its board of
directors and shareholders approving this Agreement and the other Transaction
Documents to which it is a party and authorizing the execution hereof and
thereof and the consummation of the transactions contemplated hereby and thereby
are attached thereto and (iii) the incumbency and signatures of the officers of
Buyer authorized to execute and deliver this Agreement and the other Transaction
Documents to which Buyer is a party on behalf of Buyer.
(g) Opinion of Counsel. Buyer shall have delivered to Seller an
opinion of Buyer's counsel dated the Closing Date and in form and substance
reasonably satisfactory to Seller and its counsel with respect to the matters in
Sections 3.01, 3.02, 3.03 and 3.04 and such other matters as Seller or its
counsel may reasonably request.
(h) Other Transaction Documents. Buyer and any other parties
thereto (other than Seller) shall have executed and delivered to Seller (i) the
Escrow Agreement and (ii) the Assignment and Assumption Agreement in
substantially the form of Exhibit C.
5.04. DOE Approval.
(a) DOE Application. Seller and Buyer acknowledge the
unlikelihood that the DOE Application will not be approved by the DOE. They also
acknowledge that in the event, however unlikely, the DOE Application were not
approved by the DOE, the purposes sought to be achieved by the parties in this
Agreement would be frustrated. Seller and Buyer accordingly agree that the full
amount of the Purchase Price, together with any payment regarding the Adjustment
Amount required to be paid by Buyer pursuant to Section 1.06 and the amount, if
any, by which Buyer is required to reimburse Seller pursuant to Section 1.07,
will be placed in escrow pursuant to Sections 1.05, 1.06(b) and 1.07 hereof and
the Escrow Agreement.
(b) Filing of DOE Application. As soon as reasonably practical
following the Closing, Buyer shall prepare the DOE Application and related
opening balance sheet and, upon completion
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thereof satisfactory to Buyer, file the DOE Application with the DOE. Seller
will promptly cooperate with and furnish information to Buyer in connection with
the preparation and filing of the DOE Application and related matters. Each of
Buyer and Seller shall use reasonable good faith efforts to obtain the DOE
Approval (as hereinafter defined).
(c) Partial Release of Escrow Fund Upon DOE Approval and Payment
of Taxes. Upon receipt of (i) an approval from the DOE to allow Buyer to
continue to participate under the same conditions as the Business currently does
in the programs of Title IV of the Higher Education Act of 1965, as amended, and
without adversely affecting the financial aid benefits available to the current
students of the Business and prospective students of the Business (the "DOE
Approval") and (ii) satisfactory evidence of payment by Seller of all sales tax,
commercial rent tax and other taxes which are due and payable by Seller as of
the date of the DOE Approval and which could become a lien on any property of
Buyer, Buyer shall notify the Escrow Agent and Buyer and Seller shall promptly
instruct the Escrow Agent to deliver to Seller an amount equal to the amount of
the Escrow Fund less $1,250,000; provided, however, that if Seller failed to
provide satisfactory evidence of payment of such Taxes then Buyer and Seller
shall notify the Escrow Agent to withhold an additional amount equal to the
maximum amount of all such Taxes, including any applicable penalties and
interest, payable by Seller which amount shall be disbursed to Seller upon
delivery to Buyer of satisfactory evidence of payment thereof by Seller.
(d) Conduct of the Business Pending Receipt of DOE Approval.
Prior to the earlier of receipt of DOE Approval or rescission of this Agreement,
Buyer shall not (A) make any material changes to the curriculum, (B) make any
material alterations to the schedule, (C) terminate any employee earning in
excess of $25,000 per year, (D) except as contemplated by this Agreement, make
capital expenditures outside the ordinary course of business, or (E) incur
obligations or take other actions outside the ordinary course of business which
may change the character of the Business, in each case without the prior
approval of John R. McCartan ("McCartan"), which approval shall not be
unreasonably withheld. Buyer shall have no obligation to make or continue any
expenditures after the rescission regardless of whether Seller will have the
resources to operate the Business thereafter.
(e) Right of Rescission. If Buyer does not receive the DOE
Approval within 150 days after the Closing Date (the "Approval Deadline") after
using reasonable good faith efforts to obtain the same, Buyer shall have the
right in its sole and absolute discretion to elect, within 30 days from the
Approval Deadline, to rescind the transaction contemplated by this Agreement.
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(f) Exercise of Right of Rescission. In the event Buyer exercises
its right of rescission, Buyer will instruct the Escrow Agent and the Escrow
Agent shall be fully authorized to deliver the full amount of the Escrow Fund to
Buyer.
(i) Buyer shall with reasonable promptness reconvey all of
the Assets to Seller. For purposes of this subsection, the term "Assets" shall
mean the Assets conveyed to Buyer at the Closing minus all accounts receivable
which have been paid prior to the date of reconveyance plus all new accounts
receivable outstanding on the date of reconveyance and plus assets acquired and
minus assets disposed of in the ordinary course of business after the Closing
Date. Subject to changes arising in the ordinary course of business, the Assets
shall be reconveyed to Seller free and clear of all Encumbrances other than
Permitted Encumbrances and purchase money liens attaching to the Assets in the
ordinary course of business. The Equipment included in the Assets shall be in
the same condition as it was in on the Closing Date, reasonable wear and tear
excepted.
(ii) Upon the reconveyance in (i) above, Seller shall
immediately reassume all of the Assumed Liabilities from Buyer. For purposes of
this subsection, the term "Assumed Liabilities" shall mean the Assumed
Liabilities assumed by Buyer at the Closing, minus all accounts payable which
have been paid prior to the date of reassumption and all liabilities under any
Assumed Contracts which have been terminated prior to such date, plus all
accounts payable and contractual liabilities which have been incurred in the
ordinary course of business since the Closing Date; provided, that in no event
shall the Assumed Liabilities include any indebtedness incurred by Buyer or any
liabilities arising out of any contractual defaults by Buyer.
(iii) The reconveyance and reassumption described in clauses
(i) and (ii) above shall be effected by (A) delivery of a Bill of Sale, an
Assignment and Assumption Agreement, a Termination of Assignment of Lease and
such other documents and instruments as were delivered at or following the
Closing in order for the Assets and Assumed Liabilities to be conveyed to and
assumed by Buyer, which documents and instruments shall be in substantially the
same form as those originally executed and delivered by the parties, (B)
delivery by Buyer of such executed UCC-3s and other instruments as are necessary
for Buyer to reconvey the required title to the Assets and (C) delivery of any
books and records of the Business, and of any other property included in the
Assets, as is then in Buyer's possession. Buyer shall tender delivery and Seller
shall accept delivery of the foregoing and any other then existing documents
reasonably requested by the parties promptly following Buyer's exercise of its
right of rescission.
(iv) Seller shall with reasonable promptness reimburse Buyer
for any and all expenditures of Buyer related to
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the construction of the two additional kitchens, office space and classrooms and
other capital improvements.
(v) Buyer shall cause any working capital loans advanced to
the Business by affiliates of Buyer to be forgiven. Further, Seller's obligation
to assume other obligations owed to affiliates of Buyer shall be limited to
obligations for goods and services provided to Buyer at competitive prices.
(vi) Seller shall hire all of the employees of Buyer who
were employees of Seller on the Closing Date on substantially the same
compensation and benefits offered to such employees by NYRS on the Closing Date
(but shall not be under any obligation to execute employment agreements with any
person).
(vii) Upon rescission, no party shall have any liability to
any other party other than for any prior breach of this Agreement and, after
rescission, any breach of such party's obligations under Section 5.04(f) of this
Agreement. Seller acknowledges that in the event of a rescission the value of
the Business may be materially, adversely affected and that Buyer shall have no
obligation to Seller of any nature whatsoever for any such diminution in value
of the Business.
5.05. Non-Competition by Seller. i) To accord to Buyer the full value
of its purchase, no Seller or any stockholder of Seller, for a period of four
years after the Closing Date, shall directly or indirectly (a) engage or become
interested in (as owner, stockholder, partner or otherwise) the operation of any
business which owns, operates, administers or establishes any post-secondary
proprietary program or institution that competes with Buyer in a radius of 150
miles of New York, New York or (b) disclose to anyone, or use in competition
with the Business, any information with respect to any confidential or secret
aspect of the operations of the Business, or (c) solicit, directly or
indirectly, call on, accept business from, interfere with, or attempt to divert
or entice away any person or entity who at any time is an employee, student or
prospective student of the Business.
ii) Seller acknowledges that the remedy at law for breach of
the provisions of Section 5.05 will be inadequate and that, in addition to any
other remedy Buyer may have, they will be entitled to an injunction restraining
any such breach or threatened breach, without any bond or other security being
required.
iii) If any court construes the covenant in Section 5.05, or
any part thereof, to be unenforceable because of its duration or the area
covered thereby, the court shall have the power to reduce the duration or area
to the extent necessary so that the provision is enforceable, and such
provision, as reduced, shall then be enforceable.
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5.06. Employees of NYRS. Promptly following the Closing, Buyer shall
offer employment to all employees of NYRS listed on Schedule 5.06 at
substantially the same salary or wage rate listed on Schedule 5.06 (but shall
not be under any obligation to execute employment agreements with any person).
ARTICLE VI.
INDEMNIFICATION
6.01. Indemnification by Seller. Subject to the other provisions of
this Article VI, including without limitation Sections 6.03 and 6.04, Seller
shall defend, indemnify and hold harmless Buyer and its directors, officers,
employees and agents (each a "Buyer Indemnitee") from and against any and all
claims, damages, losses, liabilities, costs and expenses (including without
limitation reasonable attorneys' fees and court costs) that constitute, or arise
out of or in connection with:
(a) any Excluded Assets or Excluded Liabilities, including
without limitation, (i) any unpaid Tax liabilities of Seller related to periods
prior to the Closing, (ii) any claims of employees or former employees of Seller
related to actions prior to Closing, including any claims of James DeVaney and
(iii) any claims asserted against Buyer related to the litigation described in
Schedule 2.15 attached hereto;
(b) the failure of any representation or warranty of Seller set
forth herein, in any other Transaction Document or in any certificate delivered
in connection herewith or therewith;
(c) any default by Seller in the performance or observance of any
of its covenants or agreements hereunder or under any other Transaction
Document; and
(d) any claims asserted against Buyer or any liabilities or
obligations arising in connection with failure of Seller to comply with
applicable Federal, state and local laws and regulations, including without
limitation any liabilities or obligations arising in connection with any DOE
Program Review, any Department of Education Compliance Audit for Financial Aid
and any other reviews or audits of Seller's compliance with law.
6.02. Indemnification by Buyer. Subject to the other provisions of this
Article VI, Buyer shall defend, indemnify and hold harmless Seller and its
directors, officers, employees and agents (each a "Seller Indemnitee") from and
against any and all claims, damages, losses, liabilities, costs and expenses
(including without limitation reasonable attorneys' fees and court costs) that
constitute, or arise out of or in connection with:
(a) any of the Assets or Assumed Liabilities;
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<PAGE> 36
(b) the failure of any representation or warranty of Buyer set
forth herein, in any other Transaction Document or in any certificate delivered
in connection herewith or therewith; and
(c) any default by Buyer in the performance or observance of any
of its covenants or agreements hereunder or under any other Transaction
Document.
6.03. Escrow Fund. Notwithstanding any other provision hereof, except
for claims based on intentional fraud or intentional misrepresentation
(including any claims for intentional fraud or intentional misrepresentation
related to the operation of the Business prior to the Closing) and there shall
be no limitation on Seller's liability hereunder for any such intentional fraud
or intentional misrepresentation, Seller's liability to Buyer pursuant to
Section 6.01 shall be limited to $1,250,000 and shall be satisfied by amounts
held in the Escrow Fund. Except as otherwise provided by the Escrow Agreement,
the Escrow Agent shall maintain the Escrow Fund for a period of three years
following the Closing, provided that on the first anniversary of the Closing
Date Seller and Buyer shall instruct the Escrow Agent to disburse to the Seller
from the Escrow Fund an amount equal to $500,000 less the amount of any claims
for indemnity pursuant to Section 6.01 prior to the first anniversary of the
Closing Date. In the event that the amount of such disbursement is reduced in
respect of any unresolved claim(s) and such claim(s) is resolved after the first
anniversary of the Closing Date for less than the amount reserved for such
claims, Buyer and Seller shall instruct the Escrow Agent to disburse to the
Seller the amount of the difference. Seller shall not be obligated to indemnify
Buyer Indemnitees for claims pursuant to Section 6.01(b) or (c) unless Buyer has
given Seller written notice of such claims pursuant to Section 6.06 hereof on or
before the first anniversary of the Closing Date. In the event of any dispute
regarding disbursements from the Escrow Fund in connection with claims for
indemnification pursuant to this Article VI, the non-prevailing party shall pay
the legal fees, costs and expenses reasonably incurred by the prevailing party
in connection with such dispute and, if the Buyer is the prevailing party, such
fees, costs and expenses may be satisfied by amounts held in the Escrow Fund.
If, after the first anniversary of the date hereof and before the third
anniversary of the date hereof, the school has had (i) DOE Program Reviews and
audits covering periods on or before the Closing Date, (ii) New York State
Department of Education/Board of Regents and New York State Higher Education
Services Corporation Program Reviews and audits relating to the state grant
program and FFELP program covering periods on or before the Closing Date and
(iii) independent audits pursuant to 34 CFR Section 668.23 covering any period
ending on or before June 30, 1996 (collectively, "Financial Aid Audits"), such
Financial Aid Audits have been completed and any claims or potential claims
arising in connection therewith have been paid or otherwise finally resolved and
satisfied, the Escrow Agreement shall terminate and the parties shall instruct
the Escrow
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Agent to disburse any amounts remaining in the Escrow Fund in accordance with
the terms hereof.
6.04. Indemnification Threshold. Neither Buyer nor Seller shall have a
right to indemnification pursuant to Section 6.01(b) or Section 6.02(b), as the
case may be, unless the amount of all Damages incurred by such party in respect
of such claims exceeds $50,000 in the aggregate, in which case the Indemnified
Party will have the right to "first dollar" indemnification for all such Damages
incurred (not just the amount in excess of $50,000). Any claims asserted by
Buyer pursuant to Section 6.01(d) shall not be subject to any indemnification
threshold regardless of whether such claims may also be asserted by Buyer under
Section 6.01(b).
6.05. Financial Aid Claims. Notwithstanding anything to the contrary
contained herein, Buyer shall have the right to control the resolution of any
claims or disputes related to Seller's compliance with financial aid
requirements prior to the Closing and any other claims or disputes related to
Seller's compliance with law prior to the Closing. Buyer shall provide McCartan
with notice of any such claims and, to the extent reasonably practical, consult
with McCartan with respect to the subject matter of any such claims or disputes
and shall provide McCartan with access to such information related thereto as
McCartan shall reasonably request. Buyer shall use reasonable good faith efforts
to resolve any such claims in a fair and reasonable manner and shall provide
Seller with periodic reports of the status of any such claims. Seller shall
cooperate with such efforts and Buyer shall promptly notify Seller of the
resolution of any such claims or disputes which would result in an indemnity
claim pursuant to Section 6.01(d). Notwithstanding anything to the contrary
contained herein, Buyer shall have no obligation to Seller of any nature
whatsoever with respect to Buyer's handling, administration or settlement of any
such financial aid claims. To the extent that there are funds remaining in the
Escrow Fund at the ultimate termination of the Escrow Agreement and before the
balance of the Escrow Fund is distributed to Seller, Buyer and Seller shall
instruct the Escrow Agent to distribute to Buyer an amount equal to 20% of the
difference between the amount of each Original Claim(s) regarding financial aid
liability(s) arising out of circumstances occurring prior to the Closing Date
and the amount ultimately paid out from the Escrow Fund in settling or otherwise
resolving such Original Claim(s).
"Original Claim" as used herein shall mean the amount of money alleged
in a written report to be owed by either Buyer or NYRS (1) by the DOE or caused
or required by the DOE as a result of any allegations arising out of a review or
audit of NYRS's administration of Title IV funds covering any time up to the
Closing Date or (2) by any department or agency of the State of New York or
caused or required by any such department or agency as a result of any
allegations arising out of a review or audit of any
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New York State or federal student aid or grant program covering any time up to
the Closing Date or (3) resulting from an independent audit covering any time
period ending on or before June 30, 1996 and conducted pursuant to 34 CFR
Section 668.23. If the school is requested by the DOE or any department or
agency of the State of New York to perform additional review of the school's
financial aid administration associated with the allegation and, as a result,
the amount alleged to be owed is increased, such larger amount shall be deemed
the Original Claim related to such allegation.
If the calculation of the Original Claim(s) by the DOE, the New York
State Higher Education Services Corporation or the independent auditor is a
statistical extrapolation based upon a review of less than all the pertinent
school files, in giving effect to this provision the amount of the "Original
Claim" shall be deemed to be the financial exposure derived from such
statistical extrapolation. Buyer's entitlement to its 20% share in any savings
shall not be diminished by any assertion by Seller that the sample techniques
utilized were improperly arrived at or employed in estimating the total amount
allegedly owed. If ever the Original Claim is expressed in a range, the midpoint
of the range shall be utilized in computing whether Buyer is entitled to a
payment hereunder and the amount thereof.
6.06. Notice of Claims. If any Buyer Indemnitee or Seller Indemnitee
(an "Indemnified Party") believes that it has suffered or incurred or will
suffer or incur any damages ("Damages") for which it is entitled to
indemnification under this Article VI, such Indemnified Party shall so notify in
writing the party or parties from whom indemnification is being claimed (the
"Indemnifying Party") with reasonable promptness and reasonable particularity in
light of the circumstances then existing. If any action at law or suit in equity
is instituted by or against a third party with respect to which any Indemnified
Party intends to claim any Damages, such Indemnified Party shall promptly notify
the Indemnifying Party of such action or suit. The failure of an Indemnified
Party to give any notice required by this Section shall not affect any of such
party's rights under this Article VI or otherwise except and to the extent that
such failure is materially prejudicial to the Indemnifying Party.
6.07. Representation, Settlement and Cooperation (Non-Financial Aid
Claims). If any investigation, action or other proceeding described in Section
6.01(a), (b) or (c) or Section 6.02 (each a "Proceeding") is initiated against
any Indemnified Party and such Indemnified Party intends to seek indemnification
from an Indemnifying Party under this Article on account of its involvement in
such Proceeding, then such Indemnified Party shall give prompt written notice to
the applicable Indemnifying Party of such Proceeding. Upon receipt of such
notice, such Indemnifying Party shall diligently defend against such Proceeding
on behalf of such
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Indemnified Party at its own expense using counsel reasonably acceptable to such
Indemnified Party; provided, that if such Indemnifying Party shall fail or
refuse to conduct such defense, or such Indemnified Party has been advised by
counsel that it may have defenses available to it which are different from or in
addition to those available to such Indemnifying Party, or that its interests in
such Proceeding are adverse to such Indemnifying Party's interests, then such
Indemnified Party may defend against such Proceeding at such Indemnifying
Party's expense. Notwithstanding the foregoing, if such Proceeding relates to an
action against Buyer initiated by any student of the Business on or after the
Closing Date or any employee of the Business on or after the Closing Date, then
Buyer shall have the right (but not the obligation) to defend against such
Proceeding at its own expense. Such Indemnifying Party or Indemnified Party, as
applicable, may participate in any Proceeding being defended against by the
other at its own expense, and shall not settle any Proceeding without the prior
consent of the other, which consent shall not be unreasonably withheld. Such
Indemnifying Party and Indemnified Party shall cooperate with each other in the
conduct of any such Proceeding.
ARTICLE VII.
MISCELLANEOUS PROVISIONS
7.01. Amendments. This Agreement may be amended only by a writing
signed by each of the parties, and any such amendment shall be effective only to
the extent specifically set forth in such writing.
7.02. Assignment. Neither this Agreement nor any right, interest or
obligation hereunder may be assigned, pledged or otherwise transferred by any
party, whether by operation of law or otherwise, without the prior consent of
the other party or parties. This Agreement and the rights, interests and
obligations hereunder may not be assigned by any party hereto, without the prior
written consent of the other parties hereto.
7.03. Consent to Jurisdiction and Service of Process.
(a) Each of the parties hereby:
i) irrevocably submits to the jurisdiction of the Court of
Common Pleas of Allegheny County, Pennsylvania and to the jurisdiction of the
United States District Court for the Western District of Pennsylvania for the
purposes of any action or proceeding arising out of or relating to this
Agreement or the other Transaction Documents or the subject matter hereof or
thereof and brought by any other party;
ii) waives and agrees not to assert, by way of motion, as a
defense or otherwise, in any such action or proceeding, any claim that (A) it is
not personally subject to the
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jurisdiction of such courts, (B) the action or proceeding is brought in an
inconvenient forum or (C) the venue of the action or proceeding is improper; and
iii) agrees that, notwithstanding any right or privilege it
may possess at any time, such party and its property are and shall be generally
subject to suit on account of the obligations assumed by it hereunder.
(b) Each party agrees that service in person or by certified or
registered U.S. mail to its address set forth in Section 7.09 shall constitute
valid in personam service upon such party and its successors and assigns in any
action or proceeding with respect to any matter as to which it has submitted to
jurisdiction hereunder.
(c) Notwithstanding the foregoing, any party may at its option
bring any action or other proceeding arising out of or relating to this
Agreement or any other Transaction Document or the subject matter hereof or
thereof against any other party or any of its assets in the courts of any
jurisdiction or place where such other party or such assets may be found or
where such other party may be subject to personal jurisdiction, and may effect
service of process as provided under any applicable Governmental Rule.
(d) Each party hereby acknowledges that this is a commercial
transaction, that the foregoing provisions for consent to jurisdiction and
service of process have been read, understood and voluntarily agreed to by each
party and that by agreeing to such provisions each party is waiving important
legal rights.
7.04. Counterparts; Telefacsimile Execution. This Agreement may be
executed in any number of counterparts, and by each of the parties on separate
counterparts, each of which, when so executed, shall be deemed an original, but
all of which shall constitute but one and the same instrument. Delivery of an
executed counterpart of this Agreement by telefacsimile shall be equally as
effective as delivery of a manually executed counterpart of this Agreement. Any
party delivering an executed counterpart of this Agreement by telefacsimile also
shall deliver a manually executed counterpart of this Agreement, but the failure
to deliver a manually executed counterpart shall not affect the validity,
enforceability or binding effect of this Agreement.
7.05. Expenses. Except as otherwise specifically provided herein or in
any other Transaction Document, each party shall be responsible for such
expenses as it may incur in connection with the negotiation, preparation,
execution, delivery, performance and enforcement of this Agreement and the other
Transaction Documents.
7.06. Further Assurances. The parties shall from time to time do and
perform such additional acts and execute and deliver
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such additional documents and instruments as may be required by applicable
governmental rules or reasonably requested by any party to establish, maintain
or protect its rights and remedies or to effect the intents and purposes of this
Agreement and the other Transaction Documents. Without limiting the generality
of the foregoing, each party agrees to endorse (if necessary) and deliver to the
other, promptly after its receipt thereof, any payment or document which it
receives after the Closing Date and which is the property of the other and
Seller agrees to cooperate with Buyer and execute such additional documents as
may be reasonably requested by Buyer in connection with the transfer and
assignment of rights to the Intellectual Property.
7.07. Governing Law. This Agreement shall be a contract under the laws
of the Commonwealth of Pennsylvania and for all purposes shall be governed by
and construed and enforced in accordance with the laws of said Commonwealth.
7.08. Notices. Unless otherwise specifically provided herein, all
notices, consents, requests, demands and other communications required or
permitted hereunder:
(a) shall be in writing;
(b) shall be sent by messenger, certified or registered U.S.
mail, a reliable express delivery service or telecopier (with a copy sent by one
of the foregoing means), charges prepaid as applicable, to the appropriate
address(es) or number(s) set forth below; and
(c) shall be deemed to have been given on the date of receipt by
the addressee (or, if the date of receipt is not a Business Day, on the first
Business Day after the date of receipt), as evidenced by (i) a receipt executed
by the addressee (or a responsible person in his or her office), the records of
the Person delivering such communication or a notice to the effect that such
addressee refused to claim or accept such communication, if sent by messenger,
U.S. mail or express delivery service, or (ii) a receipt generated by the
sender's telecopier showing that such communication was sent to the appropriate
number on a specified date, if sent by telecopier.
All such communications shall be sent to the following addresses or numbers, or
to such other addresses or numbers as any party may inform the others by giving
five Business Days' prior notice:
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If to Seller: With a copy to:
New York Restaurant School, Inc. Cohen & Grigsby, P.C.
Chicago Restaurant School, Inc. 2900 CNG Tower
Hospitality Center, Inc. 625 Liberty Avenue
635 Smithfield Street Pittsburgh, PA 15222
Pittsburgh, PA 15222
Attn: Daniel L. Wessels
Attn: J. R. McCartan, President Telecopier No.: 412-391-3382
Telecopier No.: 412-232-3945
If to Buyer: With a copy to:
c/o Education Management Kirkpatrick & Lockhart LLP
Corporation 1500 Oliver Building
300 Sixth Avenue Pittsburgh, PA 15222
8th Floor
Pittsburgh, PA 15222 Attn: Robert P. Zinn, Esq.
Attn: Robert T. McDowell Telecopier: (412) 355-6501
Senior Vice President and CFO
and
Frederick W. Steinberg
Senior Vice President, General
Counsel and Secretary
Telecopier: (412) 562-0934
7.09. Publicity. Prior to Closing, neither party shall make any press
release or other public announcement regarding this Agreement or the other
Transaction Documents or any transaction contemplated hereby or thereby until
the text of such release or announcement has been submitted to the other party
and the other party has approved the same.
7.10. Severability. Any provision of this Agreement which is prohibited
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining portions hereof or affecting the validity or
enforceability of such provision in any other jurisdiction.
7.11. Successors and Assigns. This Agreement shall be binding upon and
shall inure to the benefit of each of the parties and their respective heirs,
successors and permitted assigns.
7.12. Termination.
(a) This Agreement may be terminated at any time prior to the
Closing:
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<PAGE> 43
i) by mutual agreement of Buyer and Seller;
ii) by Buyer if there has been a misrepresentation by Seller
hereunder, a breach by Seller of any of its warranties or covenants set forth
herein or if any of the conditions specified in Section 5.02 shall not have been
fulfilled within the time required and shall not have been waived by Buyer;
iii) by Seller if there has been a misrepresentation by
Buyer hereunder, a breach by Buyer of any of its warranties or covenants set
forth herein or if any of the conditions specified in Section 5.03 shall not
have been fulfilled within the time required and shall not have been waived by
Seller; or
iv) by Buyer or Seller if the Closing shall not have
occurred prior to August 30, 1996; provided, that Buyer or Seller may terminate
this Agreement pursuant to this subparagraph only if the Closing shall not have
occurred on or prior to such date for a reason other than a failure by such
party to satisfy the conditions to Closing of the other party set forth in
Section 5.02 or 5.03.
(b) If this Agreement is terminated by either Seller or Buyer as
provided above, then neither party shall have any further obligations or
liabilities hereunder except for obligations or liabilities arising from a
breach of this Agreement prior to such termination or which survive such
termination by their own terms.
7.13. Waivers. The due performance or observance by the parties of
their respective obligations hereunder and under the other Transaction Documents
shall not be waived, and the rights and remedies of the parties hereunder and
under the other Transaction Documents shall not be affected, by any course of
dealing or performance or by any delay or failure of any party in exercising any
such right or remedy. The due performance or observance by a party of any of its
obligations hereunder or under any other Transaction Document may be waived only
by a writing signed by the party against whom enforcement of such waiver is
sought, and any such waiver shall be effective only to the extent specifically
set forth in such writing.
7.14. Change of Seller's Name. Each of NYRS, CRS and CHI acknowledges
that from and after the Closing Date it shall have no right to use its
respective present corporate name or any trade names included in the Assets.
Therefore, each of NYRS, CRS and CHI agrees that, immediately after the Closing,
it will take all such action as is necessary to change its corporate name and to
otherwise permit Buyer to have the exclusive right to such corporate and trade
names.
- 37 -
<PAGE> 44
SIGNATURE PAGE
NEW YORK RESTAURANT SCHOOL, INC.
By: /s/
------------------------------------
Title: President
CHICAGO RESTAURANT SCHOOL, INC.
By: /s/
------------------------------------
Title: President
CENTER FOR HOSPITALITY
EDUCATION, INC.
By: /s/
------------------------------------
Title: Vice President
NYRS ACQUISITION CORP.
By: /s/
------------------------------------
Title: Chief Executive Officer
The undersigned, intending to be legally bound, hereby execute and
deliver this Agreement solely for purposes of Section 5.05 hereof.
LOYALHANNA VENTURE FUND
By: /s/
------------------------------------
Title: General Partner
PNC VENTURE CORP
By: /s/
------------------------------------
Title: Assistant Vice President
<PAGE> 45
SIGNATURE PAGE
NEW YORK RESTAURANT SCHOOL, INC.
By:
------------------------------------
Title:
---------------------------------
CHICAGO RESTAURANT SCHOOL, INC.
By:
------------------------------------
Title:
---------------------------------
CENTER FOR HOSPITALITY
EDUCATION, INC.
By:
------------------------------------
Title:
---------------------------------
NYRS ACQUISITION CORP.
By:
------------------------------------
Title:
---------------------------------
The undersigned, intending to be legally bound, hereby execute and
deliver this Agreement solely for purposes of Section 5.05 hereof.
LOYALHANNA VENTURE FUND
By:
------------------------------------
Title:
---------------------------------
PNC VENTURE CORP
By:
------------------------------------
Title:
---------------------------------
-----------------------------------------
<PAGE> 46
EXHIBIT A
ESCROW AGREEMENT
THIS ESCROW AGREEMENT (this "Agreement") is made on August , 1996
among NEW YORK RESTAURANT SCHOOL, INC., a Delaware corporation ("NYRS"),
CHICAGO RESTAURANT SCHOOL, INC., a Delaware corporation ("CRS"), CENTER FOR
HOSPITALITY EDUCATION, INC., a Delaware corporation and wholly-owned subsidiary
of CRS ("CHI") (NYRS, CRS and CHI being referred to herein together as the
"Seller"), NYRS ACQUISITION CORP., a New York corporation (the "Buyer"), and
NATIONAL CITY BANK OF PENNSYLVANIA as escrow agent (the "Escrow Agent").
PREAMBLE
Buyer and Seller have entered into an Asset Purchase Agreement dated as
of August 1, 1996 (the "Purchase Agreement"). The Purchase Agreement requires
the parties to enter into this Agreement. Sections 1.05, 1.06(b) and 1.07 of
the Purchase Agreement require the Buyer to pay all amounts otherwise payable
to Seller to the Escrow Agent to be held and disbursed in accordance with the
terms of the Purchase Agreement.
NOW, THEREFORE, in consideration of the mutual promises set forth
herein and in the Purchase Agreement and intending to be legally bound hereby,
the parties agree as follows:
1. APPOINTMENT OF ESCROW AGENT. The Buyer and the Seller hereby
appoint the Escrow Agent as the Escrow Agent hereunder, and the Escrow Agent
hereby accepts such appointment.
2. ESCROW FUND. Simultaneously with the execution of this Escrow
Agreement, the Buyers are depositing with the Escrow Agent the principal sum of
Nine Million Five Hundred Thousand, ($9,500,000), plus the amount of any
reimbursement payable pursuant to Section 1.07 of the Purchase Agreement, such
amount plus the amount, if any, payable to Seller pursuant to Section 1.06(b)
of the Purchase Agreement is hereinafter referred to herein as the "Principal
Amount" and The Principal Amount and any interest thereon, are hereinafter
collectively referred to as the "Escrow Fund". The Escrow Agent shall invest
the assets in the Escrow Fund in Permitted Investments (as hereinafter defined)
in accordance with joint instructions of Buyer and Seller.
(a) USE OF ESCROW FUNDS. The rights of Seller and Buyer to the
Escrow Fund shall be as set forth in the Purchase Agreement. Each Seller and
Buyer covenants that it will not
<PAGE> 47
assign or encumber or attempt to assign or encumber the Escrow Fund and
neither the Escrow Agent nor its successors or assigns shall be bound by any
such assignment, encumbrance, attempted assignment or attempted encumbrance.
(b) REQUEST OF THE PARTIES. Upon receipt of a written request
(the "Request") from either the Seller or the Buyer (each an "Instructing
Party") to disburse all or a portion of the Escrow Fund, the Escrow Agent shall
immediately deliver by facsimile and certified mail a copy of the Request to the
other party (each an "Instructed Party"). If, within the ten business day period
following the delivery of the Request to the Instructed Party, the Instructed
Party shall not have delivered to the Escrow Agent a written objection to the
Request, the Escrow Agent shall disburse the funds specified in the Request in
accordance with such Request.
(c) NOTICE OF RESCISSION. Upon receipt of written notice from
Buyer that Buyer has rescinded the transaction contemplated by the Purchase
Agreement, the Escrow Agent shall immediately disburse the Escrow Fund to the
Buyer and the Escrow Agent shall not be governed by any notice provisions or
other objection period mechanisms noted above.
(d) COURT ORDER OF JOINT INSTRUCTIONS. The Escrow Agent may
deposit the Escrow Fund with the Clerk of any court of competent jurisdiction
upon commencement of an action in the nature of interpleader or in the course of
any court proceeding. If any time the Escrow Agent receives a final
non-appealable order of a court of competent jurisdiction directing delivery of
the Escrow Fund, the Escrow Agent shall comply with the order or instruction.
The Escrow Agent shall comply with written instructions signed by Buyer and
Seller directing delivery of the Escrow Fund. Upon any delivery of deposit of
all or a portion of the Escrow Fund as provided in this Section 3, the Escrow
Agent shall not be governed by any notice provisions or other objection period
mechanisms noted above.
3. INVESTMENT OF ESCROW FUNDS. The Escrow Agent shall invest and
reinvest the Escrow Funds from time to time in (a) treasury bills or other
obligations issued and unconditionally guaranteed by the government of the
United States of America or money market funds investing solely in such
obligations, (b) fully insured certificates of deposit in U.S. commercial banks
(having at least $500 million of capital resources in each case) due within 90
days or (c) otherwise as the Buyer and the Seller may direct by joint written
notice to the Escrow Agent. Each such investment shall be of not more than 90
days duration. All interest and other income received from the investment of
the Escrow Fund less losses, if any, incurred as a result of such investment
shall be for the account of Seller (unless the full amount of the Escrow Fund
is disbursed to the
- 2 -
<PAGE> 48
Buyer pursuant to Section 3(c) hereof). Such interest and other income shall be
paid by the Escrow Agent to the Seller at the end of each calendar quarter
during the term hereof with the first such payment to be made at the end of the
second calendar quarter following the date hereof (unless sooner disbursed to
the Buyer pursuant to Section 5 hereof).
4. TERMINATION. This Agreement shall terminate and be of no further
force and effect on the date when all monies comprising the Escrow Fund have
been disbursed in accordance with the terms hereof. If this Agreement is still
in effect on the date which is three years after the date hereof (the "Claim
Notice Date"), and if the Escrow Agent has not received any Notice ("Claim
Notice") from Buyer with respect to indemnification claims pursuant to the
Purchase Agreement ("Claims") on or prior to such date or has received Claim
Notices on or prior to such date with respect to Claims which have all been
finally settled or resolved, then the Escrow Agent shall promptly disburse the
entire Escrow Fund to the Seller. If this Agreement is still in effect on the
Claim Notice Date and the Escrow Agent has received on or prior to such date one
or more Claim Notices with respect to any Claims which have not been finally
settled, then the Escrow Agent shall (a) retain an amount in the Escrow Fund
equal to the lesser of the aggregate of the amounts specified in all such Claim
Notices or the entire Escrow Fund pending final settlement of all such Claims
and (b) promptly disburse the excess in the Escrow Fund over the amount so
retained (if any) to the Seller. Upon the final settlement of all Claims that
had not been finally settled on the Claim Notice Date, the Escrow Agent shall
disburse to the Buyer the portion (if any) of the Escrow Fund to which it is
entitled pursuant to the terms and the provisions hereof and disburse the
remainder (if any) to the Seller. Nothing contained in this Agreement shall
impose any obligation on any party to provide the Escrow Agent with any notice
of claims for indemnification under the Purchase Agreement.
5. ESCROW AGENT'S DUTIES AND FEES.
(a) DUTIES LIMITED. The Escrow Agent undertakes to perform
only such duties as are expressly set forth herein and shall not be subject to,
or have any liability or responsibility under, or to be obligated to recognize,
the Purchase Agreement or any other agreement between or directions or
instructions of any of the parties hereto or any other person in carrying out
its duties hereunder, except for Claim Notices, Dispute Notices, other
documents delivered to the Escrow Agent in accordance with Section 6 and
notices, instructions and other communications purported to be executed by each
of the Buyer and Seller.
(b) RELIANCE. The Escrow Agent may rely upon, and shall be
protected in acting or refraining from acting upon, any
-3-
<PAGE> 49
written notice, instruction or request furnished to it hereunder and reasonably
believed by it to be genuine and to have been signed or presented by the proper
party or parties. The Escrow Agent may act in reliance upon the reasonable
advice of counsel satisfactory to it in reference to any matter connected with
its obligations hereunder and shall not incur any liability for any action
taken in accordance with such advice.
(c) STANDARD OF CARE; INDEMNIFICATION. The Escrow Agent shall not be
responsible for any act or failure to act hereunder except in the case of its
gross negligence or willful misconduct. The Buyer and the Seller shall jointly
and severally indemnify the Escrow Agent and hold it harmless from and against
any claims, damages, losses, liabilities, costs and expenses (including without
limitation reasonable attorneys' fees and court costs) that arise out of or in
connection with this Agreement or the performance by the Escrow Agent of its
obligations hereunder; provided, that the Buyer and the Seller shall have no
obligation to indemnify the Escrow Agent to the extent, but only to the extent,
that any of such claims, damages, losses, liabilities, costs or expenses arise
out of the gross negligence or willful misconduct of the Escrow Agent.
(d) COMPLIANCE WITH COURT ORDER. If all or any part of any of the
Escrow Funds shall be attached, garnished or levied upon under any order of
court, or if the delivery thereof shall be stayed or enjoined by any order of
court, or if any other order, judgment or decree shall be made or entered by
any court which affects any of the Escrow Funds or any part thereof, the Escrow
Agent is expressly authorized in its sole reasonable discretion to comply with
all writs, orders, judgments or decrees so entered or issued, whether with or
without jurisdiction, and the Escrow Agent shall not be liable to the Buyer or
the Seller by reason of such compliance notwithstanding that such writ, order,
judgment or decree be subsequently reversed, modified, annulled, set aside or
vacated.
(e) FEES AND EXPENSES. The Escrow Agent shall receive a fee for its
services hereunder of Two Thousand Dollars ($2,000) per annum payable in
advance, and shall be reimbursed for its reasonable out-of-pocket expenses
incurred in performing its duties hereunder. The Buyer and the Seller shall
each pay one-half of such fees and expenses.
(f) SUCCESSOR ESCROW AGENT. The Escrow Agent may resign by giving
notice in writing of such resignation to the Buyer and the Seller, specifying
the date upon which such resignation is to take effect. The Buyer and the
Seller shall have the right to terminate the appointment of the Escrow Agent
hereunder by giving to it notice in writing of such termination, specifying the
date upon which such termination is to take effect. Upon any such resignation
or termination of the Escrow
- 4 -
<PAGE> 50
Agent (i) the Escrow Agent shall deliver the Escrow Funds in accordance
with instructions from the Buyer and the Seller, whereupon the Escrow Agent
shall have no further obligations hereunder, and (ii) the Buyer and the Seller
shall appoint a successor Escrow Agent who shall have all rights of an Escrow
Agent hereunder and be bound by all of the provisions hereof.
6. MISCELLANEOUS.
(a) AMENDMENTS. This Agreement may be amended only by a writing signed
by each of the parties, and any such amendment shall be effective only to the
extent specifically set forth in such writing.
(b) ASSIGNMENT. Neither this Agreement nor any right, interest or
obligation hereunder may be assigned, pledged or otherwise transferred by any
party, whether by operation of law or otherwise, without the prior consent of
the other parties.
(c) COUNTERPARTS; TELEFACSIMILE EXECUTION. This Agreement may be
executed in any number of counterparts, and by each of the parties on separate
counterparts, each of which, when so executed, shall be deemed an original, but
all of which shall constitute but one and the same instrument. Delivery of an
executed counterpart of this Agreement by telefacsimile shall be equally as
effective as delivery of a manually executed counterpart of this Agreement. Any
party delivering an executed counterpart of this Agreement by telefacsimile
also shall deliver a manually executed counterpart of this Agreement, but the
failure to deliver a manually executed counterpart shall not affect the
validity, enforceability or binding effect of this Agreement.
(d) GOVERNING LAW. This Agreement shall be a contract under the laws of
the Commonwealth of Pennsylvania and for all purposes shall be governed by and
construed and enforced in accordance with the laws of said Commonwealth.
(e) NOTICES. Unless otherwise specifically provided herein, all notices,
consents, requests, demands and other communications required or permitted
hereunder:
(i) shall be in writing;
(ii) shall be sent by messenger, certified or registered U.S.
mail, a reliable express delivery service or telecopier (with a copy sent by
one of the foregoing means), charges prepaid as applicable, to the appropriate
address(es) or number(s) set forth below; and
(iii) shall be deemed to have been given on the date of receipt
by the addressee (or, if the date of receipt
-5-
<PAGE> 51
is not a business day, on the first business day after the date of receipt), as
evidenced by (A) a receipt executed by the addressee (or a responsible person
in his or her office), the records of the person delivering such communication
or a notice to the effect that such addressee refused to claim or accept such
communication, if sent by messenger, U.S. mail or express delivery service, or
(B) a receipt generated by the sender's telecopier showing that such
communication was sent to the appropriate number on a specified date, if sent
by telecopier.
All such communications shall be sent to the following addresses or numbers, or
to such other addresses or numbers as any party may inform the others by giving
10 days' prior notice:
If to the Seller: With a copy to:
New York Restaurant School, Inc. Cohen & Grigsby, P.C.
Chicago Restaurant School, Inc. 2900 CNG Tower
Center for Hospitality Education, Inc. 625 Liberty Avenue
c/o Pittsburgh Technical Institute Pittsburgh, PA 15222
635 Smithfield Street Attn: Daniel L. Wessels, Esq.
Pittsburgh, PA 15222 Telecopier No. 412-391-3382
Attn: J.R. McCartan, President
If to the Buyer: With a copy to:
NYRS Acquisition Corp. Kirkpatrick & Lockhart LLP
c/o Education Management Corporation 1500 Oliver Building
300 Sixth Avenue Pittsburgh, PA 15222
8th Floor Attn: Robert P. Zinn, Esq.
Pittsburgh, PA 15222 Telecopier No. 412-355-6501
Attn: Robert T. McDowell
Attn: Frederick W. Steinberg
Telecopier No.: 412-562-0934
-6-
<PAGE> 52
If to the Escrow Agent:
National City Bank of Pennsylvania
Corporate Trust Department
300 Fourth Avenue
Pittsburgh, PA 15278-2331
Attention: Robert G. Mialki
Telecopier No. 412-644-7971
(f) SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon
and shall inure to the benefit of each of the parties and their respective
heirs, successors and permitted assigns.
(g) DISCLOSURE. The Escrow Agent hereby acknowledges and agrees
that it shall not have a security interest in the Escrow Fund.
-7-
<PAGE> 53
SIGNATURE PAGE
WITNESS the due execution hereof on the date first written above.
NEW YORK RESTAURANT SCHOOL, INC.
By:
------------------------------------
Title:
---------------------------------
CHICAGO RESTAURANT SCHOOL, INC.
By:
------------------------------------
Title:
---------------------------------
CENTER FOR HOSPITALITY EDUCATION, INC.
By:
------------------------------------
Title:
---------------------------------
NYRS ACQUISITION CORP.
By:
------------------------------------
Title:
---------------------------------
NATIONAL CITY BANK OF PENNSYLVANIA
By:
------------------------------------
Title:
---------------------------------
<PAGE> 54
EXHIBIT B
BILL OF SALE
KNOW ALL MEN BY THESE PRESENTS THAT New York Restaurant School, Inc., a
Delaware corporation ("NYRS"), Chicago Restaurant School, Inc., a Delaware
corporation ("CRS"), and Center for Hospitality Education, Inc., a Delaware
corporation and a wholly-owned subsidiary of CRS, ("CHI") (NYRS, CRS and CHI
being sometimes referred to herein collectively as the "Seller"), and NYRS
Acquisition Corp., a New York corporation ("Buyer"), have entered into an Asset
Purchase Agreement dated as of August ___, 1996 (the "Purchase Agreement") for
the sale by the Seller to Buyer of substantially all of the assets of NYRS and
certain specified liabilities, on the terms set forth in the Purchase Agreement.
NOW, THEREFORE, the Seller, for good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, and pursuant to the
terms and conditions of the Purchase Agreement, hereby sell, grant, bargain,
convey, transfer, assign and deliver to the Buyer the Assets, to have and to
hold forever, free and clear of any and all Encumbrances. The Assets include,
but are not limited to:
(1) all equipment and machinery, including all restaurant, classroom
and office equipment and machinery, fixtures, leasehold improvements, tools,
utensils, appliances, computer hardware and software, inventory, textbooks,
course materials, course curricula, syllabi, and furniture used or useful in
connection with the Business (collectively the
<PAGE> 55
"Equipment"), and all supplies, spare parts and warranties relating to any of
the Equipment;
(2) all deposits, investments, securities, advance payments, prepaid
items and expenses, deferred charges, rights of offset and credits and claims
for refunds related to the Business;
(3) all patents, registered and unregistered trademarks, service marks
and logos and any registrations and applications for registration thereof,
curriculum, course materials, recipes, teaching aids, corporate and trade names
and all copyrights, including all registrations and applications for
registration thereof and all applications therefor, used or useful in
connection with the Business, including, without limitation, the trademarks,
trade names and logos listed on Schedule 1.01(c) and all of Seller's rights to
use the names "New York Restaurant School" and "Chicago Restaurant School" and
any variations thereof;
(4) all inventions, discoveries, techniques, processes, methods,
formulae, designs, trade secrets, confidential information, know-how and ideas
used or useful in connection with the Business;
(5) all accounts receivable of the Business;
(6) all of Seller's rights under all bids, offers, leases, licenses,
contracts, agreements and business arrangements relating to the Business or any
of the Assets including, without limitation, those listed on Schedule 1.01(f);
- 2 -
<PAGE> 56
(7) all admissions, enrollment, prospect and student lists, files,
documents, records and correspondence;
(8) to the extent transferable, all permits, licenses, franchises,
certificates, authorizations, consents and approvals obtained from or issued by
any governmental, regulatory or accrediting entity and which are necessary or
desirable for the ownership or operation of the Business or the ownership,
operation or use of any of the Assets, including, without limitation, the items
listed on Schedule 1.01(h) attached hereto;
(9) all books, records, files, ledgers, drawings, specifications and
manuals relating to the Business or any of the Assets, all advertising,
recruiting and marketing materials relating to the Business and all other
information relating to the Business or any of the Assets including technical
information, advertising and marketing studies, consulting reports, sales
correspondence, credit and sales records and copies of all account books of
original entry and general ledgers, regardless of the form in which such
information appears;
(10) all goodwill of the Business or associated with any of the Assets,
including without limitation, the goodwill associated with the trademarks,
service marks, logos and corporate and trade names of Seller; and
(11) all other assets of Seller, tangible or intangible, which are used
or useful in connection with, or relate to, the Business.
- 3 -
<PAGE> 57
The assets of the Seller described as Excluded Assets in Section 1.02
of the Purchase Agreement are specifically excluded and are not transferred to
the Buyer.
After delivery of this instrument, Seller, at the request of Buyer,
shall promptly execute and deliver, or cause to be executed and delivered, to
Buyer all such further assignments, bills of sale, endorsements and other
documents, in form and substance reasonably satisfactory to Buyer and its
counsel, as Buyer may reasonably request in order to (a) vest in Buyer title to
and possession of the Assets and (b) perfect and record, if necessary, the
sale, assignment, conveyance, transfer and delivery to Buyer of the Assets.
Seller further agrees to transfer promptly to Buyer any and all other
properties and assets acquired by Seller after the date hereof to the extent
that such items would constitute Assets of Seller as of the Closing Date.
Seller acknowledges that the Assets are sold, conveyed, transferred,
granted, assigned and delivered pursuant to the terms, agreements, conditions,
representations and warranties of Seller set forth in the Purchase Agreement.
The terms and conditions of this Bill of Sale shall be binding upon, inure to
the benefit of, and be enforceable by the respective successors and permitted
assigns of the parties hereto.
Any capitalized terms used herein that are not otherwise defined shall
have the meanings set forth in the Purchase Agreement. All references to
Schedules are references to the Schedules to the Purchase Agreement. This Bill
of Sale is
- 4 -
<PAGE> 58
made subject to and with the benefit of the respective representations,
warranties, covenants, terms, conditions, limitations, and other provisions of
the Purchase Agreement.
-5-
<PAGE> 59
IN WITNESS WHEREOF, Seller have caused this Bill of Sale to be duly
executed and delivered this _____ day of August, 1996.
NEW YORK RESTAURANT SCHOOL, INC.
By:
----------------------------
Title:
-------------------------
CHICAGO RESTAURANT SCHOOL, INC.
By:
----------------------------
Title:
-------------------------
CENTER FOR HOSPITALITY EDUCATION, INC.
By:
----------------------------
Title:
-------------------------
<PAGE> 60
ACKNOWLEDGEMENT
STATE OF PENNSYLVANIA )
) SS
COUNTY OF ALLEGHENY )
On this, the ___ day of August, 1996, before me a notary public, the
undersigned officer personally appeared ___________________________, who
acknowledged himself to be the __________________________ of New York
Restaurant School, Inc., a Delaware corporation, and that as such
________________________, being authorized to do so, executed the foregoing
instrument for the purposes therein contained by signing the name of the
corporation by himself as ___________________________.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
____________________________
Notary Public
My commission expires on:
____________________________
<PAGE> 61
ACKNOWLEDGEMENT
STATE OF PENNSYLVANIA )
) SS
COUNTY OF ALLEGHENY )
On this, the ___ day of August, 1996, before me a notary public, the
undersigned officer personally appeared ___________________________, who
acknowledged himself to be the __________________________ of Chicago
Restaurant School, Inc., a Delaware corporation, and that as such
________________________, being authorized to do so, executed the foregoing
instrument for the purposes therein contained by signing the name of the
corporation by himself as ___________________________.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
____________________________
Notary Public
My commission expires on:
____________________________
<PAGE> 62
ACKNOWLEDGEMENT
STATE OF PENNSYLVANIA )
) SS
COUNTY OF ALLEGHENY )
On this, the ___ day of August, 1996, before me a notary public, the
undersigned officer personally appeared ___________________________, who
acknowledged himself to be the __________________________ of Center for
Hospitality Education, Inc., a Delaware corporation, and that as such
________________________, being authorized to do so, executed the foregoing
instrument for the purposes therein contained by signing the name of the
corporation by himself as ___________________________.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
____________________________
Notary Public
My commission expires on:
____________________________
<PAGE> 63
EXHIBIT C
ASSIGNMENT AND ASSUMPTION AGREEMENT
THIS ASSIGNMENT AND ASSUMPTION AGREEMENT (the "Agreement") is made this
___ day of August, 1996 by and between New York Restaurant School, Inc., a
Delaware corporation ("Seller"), and NYRS Acquisition Corp., a New York
corporation ("Buyer").
W I T N E S S E T H:
WHEREAS, Seller, Chicago Restaurant School, Inc. and Center for
Hospitality Education, Inc. and Buyer entered into an Asset Purchase Agreement
dated August __, 1996 ("Purchase Agreement"), pursuant to which Seller agreed
to sell and Buyer agreed to purchase substantially all of the assets and
specified liabilities of Seller as set forth in the Purchase Agreement; and
WHEREAS, Seller desires by this Agreement to assign to Buyer its rights
and obligations under the Assumed Contracts, and Buyer desires by this
Agreement to undertake and assume the Assumed Contracts and the Assumed Current
Liabilities.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants hereinafter set forth, and for other 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:
<PAGE> 64
1. All capitalized terms used herein shall have the same meaning
as in the Purchase Agreement, unless otherwise defined in this Agreement.
2. Seller hereby assigns, transfers and delivers to Buyer, and
Buyer hereby accepts, all of Seller's right, title and interest in, to, and
under the Assumed Contracts. Buyer hereby assumes Seller's obligations and
liabilities under the Assumed Contracts that arise after the Effective Time and
relate to the operation of the Business after the Effective Time.
3. Seller hereby transfers, assigns, and delivers to Buyer, and
Buyer hereby assumes and agrees to pay, perform and discharge the Assumed
Liabilities.
4. The terms of this Agreement shall be binding upon, inure to the
benefit of and be enforceable by the respective successors and permitted
assigns of the parties hereto.
5. This Agreement shall be governed by the laws of the
Commonwealth of Pennsylvania applicable to agreements made and to be performed
in Pennsylvania, without regard to the conflict of law doctrines of the
Commonwealth of Pennsylvania.
6. This Agreement is made subject to and with the benefit of the
respective representations, agreements, warranties, covenants, terms,
conditions, limitations and other provisions of the Purchase Agreement
(including without limitation the Schedules attached thereto), which are
incorporated herein by reference.
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<PAGE> 65
7. The provisions of this Agreement shall not confer any rights on
any person not a party to this Agreement, and, with respect to any person not a
party to this Agreement, Buyer reserves all defenses, offsets or counterclaims
in respect of any undertaking made by it herein.
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
- 3 -
<PAGE> 66
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
WITNESS: NEW YORK RESTAURANT SCHOOL, INC.
By:
- ---------------------------------- -------------------------------
Title:
----------------------------
WITNESS: NYRS ACQUISITION CORP.
By:
- ---------------------------------- -------------------------------
Title:
----------------------------
<PAGE> 1
Exhibit 10.15
SECOND AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
OF ROBERT B. KNUTSON
THIS AGREEMENT is entered into, as of August 14, 1996, by and between
EDUCATION MANAGEMENT CORPORATION, a Pennsylvania corporation (the "Company"),
and the undersigned individual (the "Executive").
The Company and the Executive currently are parties to the "Amended and
Restated Employment Agreement of Robert B. Knutson" dated as of October 26,
1989 (the "Prior Contract"). The Executive possesses an intimate knowledge of
the business and affairs of the Company, its policies, methods, personnel and
operations. The Company considers the continued availability of the management
services of the Executive to be important to its future success. The Company
and the Executive wish to confirm the continued employment of the Executive
under the Prior Employment Agreement, as amended and restated in this
Agreement.
In consideration of the foregoing and of the respective covenants of the
parties set forth below, and each intending to be legally bound, the Company
and the Executive hereby agree as follows:
1. EMPLOYMENT
(a) The Company hereby agrees to employ the Executive, and the Executive
hereby agrees to serve the Company, on the terms and conditions set forth in
this Agreement.
(b) The employment of the Executive by the Company under this Agreement
will be for the period commencing on the date of this Agreement (the "Effective
Date") and expiring on June 30, 2000 (the "Scheduled Expiration Date"), unless
the Scheduled Expiration Date is extended thereafter by the provisions of the
following sentence, or otherwise, or by the mutual agreement of the parties, or
unless it properly is terminated earlier in accordance with the provisions of
this Agreement. On June 30, 2000, and on June 30 of each year thereafter, the
Scheduled Expiration Date will be extended automatically for one (1) additional
year unless (i) at least two hundred seventy (270) days prior to such June 30
date, the Company shall have delivered to the Executive, or the Executive shall
have delivered to the Company, written notice that the Scheduled Expiration
Date will not be extended, or (ii) the Executive's employment hereunder shall
have properly terminated, by mutual agreement, effective on or prior to such
June 30 date, or (iii) the Executive shall have
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been properly replaced or removed in accordance with Paragraphs 5 or 6 of this
Agreement, effective on or prior to such June 30 date. The "Term of the
Executive's Employment" will mean the period beginning on the Effective Date
and ending on the "Date of Termination" as defined in Paragraph 5(e) of this
Agreement.
2. POSITION AND DUTIES
The Executive will serve in the capacity of the Chairman and Chief
Executive Officer of the Company. In that capacity he will be accountable and
subject to the Board of Directors of the Company. He will have supervision and
control over, and responsibility for, all aspects of the business and affairs
of the Company, subject to general supervision by the Board of Directors and to
the rights and privileges of the Stockholders of the Company. He will possess
and may exercise the customary duties and powers of his position, will
recommend policies to the Board of Directors, and will provide for the day to
day management of the Company. He will have such other powers, duties and
responsibilities as may be prescribed by the Board of Directors of the Company
from time to time, provided that such duties and responsibilities are
consistent with his present duties and responsibilities and with the customary
nature of his position. Notwithstanding any other provision of this Agreement,
the duties and authority of the Executive will not be changed materially, at
any time, without his consent (which consent will not unreasonably be
withheld).
The Executive will perform his duties and responsibilities faithfully,
diligently, and to the best of his ability, and he will devote his full working
time and efforts to the business and affairs of the Company. However, the
Executive will be entitled, at his discretion, to serve on the boards of
directors of other companies, to participate in civic and charitable
activities, to perform consulting services from time to time for others, and to
engage in such additional activities as he may select at any time, so long as
those activities do not, in the reasonable opinion of the Board of Directors of
the Company, violate Paragraph 8 of this Agreement or materially interfere with
the performance of his obligations to the Company under this Agreement.
3. PLACE OF PERFORMANCE
In connection with his employment by the Company, the Executive will be
based at the Company's principal executive offices in Pittsburgh, Pennsylvania.
In his capacity as Chief Executive Officer of the Company, the Executive
will have the authority to change the location and facilities of the principal
executive offices of the Company subject to the approval of the Board of
Directors of the Company. The Company will not move its business from its
present location in the Pittsburgh, Pennsylvania area (or such other area to
which such offices may have been moved in accordance with the preceding
sentence) without the Executive's prior, written consent.
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4. COMPENSATION
(a) Base Salary. During the Term of the Executive's Employment under
this Agreement, the Executive will receive a base salary ("Base Salary") at the
annual rate of $325,000, subject to adjustments (if any) in that annual rate
approved at any time by the Board of Directors of the Company, on the
recommendation of the Compensation Committee of the Board of Directors. Base
Salary will be payable in substantially equal biweekly installments. Any
increase in Base Salary or other compensation will not, without the consent of
the Executive, limit or reduce any other obligation of the Company under this
Agreement.
(b) Incentive Compensation. In addition to the receipt of his Base
Salary, during the Term of the Executive's Employment under this Agreement, the
Executive will be entitled to receive such incentive compensation payments (if
any) as the Board of Directors of the Company, or a duly authorized
Compensation Committee thereof, may decide to award to him under any incentive
compensation plan ("Plan"), established by the Company from time to time. The
amount of any additional compensation payable to the Executive under a Plan
pursuant to this Paragraph 4(b) will be paid to the Executive in accordance
with the terms of the pertinent Plan. The Executive also may receive such
additional incentive compensation (if any) as may be awarded to him from time
to time by the Board of Directors of the Company, or by the Compensation
Committee of the Board under authority duly delegated to it, in its discretion.
(c) Expenses. During the Term of the Executive's Employment, the
Executive will be entitled to receive prompt reimbursement for all reasonable
expenses incurred by him (in accordance with the policies and practices
presently followed by the Company or as may be established by the Board of
Directors of the Company for its senior executive officers) in performing
services under this Agreement, provided that the Executive properly accounts
for such expenses in accordance with the Company's policies.
(d) Employee Benefits. During the Term of the Executive's Employment,
the Executive will be entitled to continue to participate in and to receive
benefits under all of the Company's employee benefit plans and arrangements (to
the extent that the Executive is eligible under the terms of such plans and
arrangements) in effect on the date of this Agreement, or as they may be duly
amended or adopted by the Board of Directors of the Company at any future time.
Without limiting the generality of the preceding sentence, the Executive will
be entitled to participate in and to receive benefits under any retirement
plan, profit sharing plan, savings plan, life insurance plan, health insurance
plan, stock-based compensation plan and accident or disability insurance plan
made available by the Company in the future to any of its executives and key
management employees, subject to and on a basis consistent with the terms,
conditions, and overall administration of such plans (unless the Executive
agrees in his discretion to be excluded from such benefits). Nothing paid to
the Executive under an employee benefit plan of the Company presently in effect
or made available by the Company in the future (other than any
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Plan referred to in Paragraph 4(b) above) will be deemed to be in lieu of
compensation which the Executive is entitled to receive under Paragraphs 4(a),
4(b), or 4(f) of this Agreement.
(e) Vacations. During the Term of the Executive's Employment, the
Executive will be entitled to a reasonable number of paid vacation days in each
fiscal year as determined by the Company from time to time for its senior
executive officers generally.
(f) Support Services. In accordance with the policies and practices
presently followed by the Company or as may be established by the Board of
Directors of the Company from time to time for its senior executive officers,
the Company at all times will provide for the use of the Executive, the
services of a full-time secretary selected by him and such other services as
the Executive reasonably may require for the performance of his duties under
this Agreement.
(g) Vesting of Initial Stock Options. The initial stock options, if any,
granted to the Executive by the Company on or after the date of this Agreement
shall, except to the extent previously terminated, become fully vested and
exercisable no later than June 30, 2000.
5. TERMINATION
(a) Death. The Executive's employment hereunder will terminate upon his
death.
(b) Termination by the Company. Subject to the compensation provisions
of Paragraph 7 and the other applicable terms and conditions hereof, the
Company may terminate the Executive's employment hereunder with or without
"Cause." For the purpose of this Agreement, the Company will have "Cause" to
terminate the Executive's employment under this Agreement if (i) the Executive
willfully, or as a result of gross negligence on his part, fails substantially
to perform and to discharge his duties and responsibilities hereunder, for any
reason other than the Executive's "Disability" (as that term is defined in
Paragraph 6) or (ii) the engaging by the Executive in serious "Misconduct"
which is demonstrably and substantially injurious to the Company (the term
"Misconduct" meaning an action or course of conduct which is unlawful or
materially in violation of his obligations to the Company under this
Agreement), or (iii) the deliberate and intentional violation by the Executive
of the provisions of Paragraphs 8(a), 8(b), 8(c) or 8(d) of this Agreement,
provided that any such violation of those provisions reasonably could be
expected to result in substantial injury to the Company.
The foregoing portions of this Paragraph 5(b) to the contrary
notwithstanding, the Executive will not be deemed to have been terminated for
Cause unless and until the occurrence of the following three events:
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(A) The Executive is given a notice from the Board of Directors of the
Company which identifies with reasonable specificity the grounds for the
proposed termination of the Executive's employment. Such notice will,
except as is otherwise provided in the next sentence, provide the
Executive with thirty (30) days from the day such notice is given to cure
the alleged grounds of termination contained therein. If, in the
reasonable good faith opinion of the Board of Directors, such grounds may
not reasonably be cured by the Executive, then the notice required by this
Paragraph 5(b)(iii)(A) need not provide for any cure period.
(B) The Executive is given a copy of resolutions, duly adopted by the
affirmative vote of not less than a majority of the entire membership of
the Board of Directors (excluding the Executive) at a meeting of the Board
of Directors called and held for the purpose of finding that in the
reasonable good faith opinion of such majority of the Board of Directors,
the Executive was guilty of conduct set forth above in this Paragraph
5(b), above, specifying the particulars thereof in detail, and that the
grounds for termination have not been cured within the time limits, if any
specified in the notice referred to in Paragraph 5(b)(iii)(A), above; and
(C) The Executive receives an affidavit sworn to by the Secretary or
Assistant Secretary of the Company stating that such resolution was in
fact adopted by the affirmative vote of not less than a majority of the
entire membership of the Board of Directors (excluding the Executive).
(c) Termination by the Executive. Subject to the compensation provisions
of Paragraph 7 and the other applicable terms and conditions hereof, the
Executive may terminate his obligations under this Agreement upon thirty (30)
days' prior written notice to the Company. If such termination is for "Good
Reason," such notice must identify with reasonable specificity the grounds for
the Executive's resignation and provide the Company with thirty (30) business
days from the day such notice is given to cure the alleged grounds for
resignation contained in the notice. For purposes of this Paragraph 5(c),
"Good Reason" will mean any of the following to which the Executive shall not
consent: (i) an assignment to the Executive of any duties significantly
different from those contemplated by this Agreement, or any limitation of the
powers of the Executive in any respect not reasonably contemplated by this
Agreement or (ii) any removal of the Executive from, or any failure to reelect
the Executive to his offices of Chairman and Chief Executive Officer of the
Company, except in connection with the termination of the Executive's
employment for Cause or the Executive's Disability, (iii) a reduction in the
Executive's Base Salary, or a material reduction in the Executive's fringe
benefits, or any other material failure by the Company to comply with Paragraph
4 of this Agreement, or (iv) any failure by the Company to comply with
Paragraph 3 of this Agreement.
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(d) Notice of Termination. Any termination of Executive's employment
under this Agreement by the Company or by the Executive must be communicated by
written "Notice of Termination" to the other party. For the purposes of this
Agreement, a "Notice of Termination" will mean a notice which refers to the
specific termination provision in this Agreement relied upon (if any), and
which sets forth in reasonable detail the alleged facts and circumstances
constituting the basis for such termination of the Executive's employment,
together with compliance with any procedural requirement required under this
Agreement with respect to the termination.
(e) Date of Termination. "Date of Termination" will mean the earlier of
(i) the "Scheduled Expiration Date" (as defined in Paragraph 1(b), above) or
(ii) if the Executive's employment is terminated (A) by his death, the date of
his death, or (B) by reason of any other circumstances provided for in this
Paragraph 5, upon the effective date of a proper written Notice of Termination
following the delivery of such Notice.
6. DISABILITY
If, as a result of the Executive's Disability, (the term "Disability", as
used in this Agreement, means that the Executive shall have been absent from
his duties under this Agreement on essentially a full-time basis for six (6)
consecutive months and unable to perform his duties under this Agreement, by
reason of a medical condition), and either (a) within thirty (30) days after
the Company notifies the Executive in writing that it intends to replace him,
the Executive shall not have returned to the performance of his duties
hereunder on essentially a full-time basis, or (b) within thirty (30) days
thereafter the Executive notifies the Company that he does not intend to return
to active employment, then the Company may replace the Executive without
breaching this Agreement. Such Disability will not act to terminate the
Executive's employment under this Agreement. However, the Company will be
entitled to offset against the amounts payable by the Company to the Executive
under this Agreement the amount of benefits received by the Executive from
third parties under long-term disability plans carried by the Company (if any);
provided, however, that in no event will the total annual obligation of the
Company under this Agreement to make Base Salary payments to the Executive
during a period of his Disability, as defined above in this Paragraph 6, be
greater than an amount equal to two-thirds (2/3) of the Executive's Base
Salary, beginning in the year in which the Executive is replaced in accordance
with this Paragraph 6, and continuing until the earlier of the year in which
the Expiration Date occurs or the year in which the Executive dies.
If the Executive becomes "Disabled" (under the definition of "Disability"
set forth above), the Company will maintain in full force and effect, for the
continued benefit of the Executive, and throughout the full period of the Term
of the Executive's Employment under this Agreement, all employee benefit plans
and programs in which the Executive shall have been entitled to participate
immediately prior to the date on which he became Disabled, provided that the
Executive's continued participation is possible under the general terms and
conditions of such plans and programs.
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7. COMPENSATION UPON TERMINATION
(a) Death. If the Executive's employment under this Agreement is
terminated by reason of his death, the Company will continue to pay the
Executive's Base Salary at the rate in effect at the time of his death to such
person or persons as the Executive shall have designated for that purpose in a
notice filed with the Company, or, if no such person shall have been so
designated, to his estate, for a period of six (6) months after the Executive's
date of death. In that event, the Company also will pay to such person(s) or
estate, at the appropriate or customary time or times, the amount of incentive
compensation payable to the Executive for the year of his death pursuant to
Paragraph 4(b) of this Agreement. The amounts provided for in the preceding
two sentences will be exclusive of and in addition to any payments which the
Executive's widow, beneficiaries or estate may be entitled to receive pursuant
to any pension plan, profit sharing plan, employee benefit plan, or life
insurance policy maintained by the Company.
(b) By the Company for Cause or the Executive Without Good Reason. If
the Executive's employment is properly terminated by the Company for Cause, or
if the Executive terminates his employment without Good Reason, the Company
will continue to pay the Executive his Base Salary through the Date of
Termination at the rate in effect at the time when the Notice of Termination is
given, and the Company thereafter will have no further obligation to the
Executive under this Agreement.
(c) By the Executive for Good Reason or the Company Other Than for Cause.
If the Company terminates the Executive's employment other than for Cause, or
if the Executive terminates his employment for Good Reason, then the Company
will continue to pay to the Executive (i) his full Base Salary, at the highest
rate in effect at any time during the twelve (12)-month period prior to the
date the Notice of Termination is given, (ii) incentive compensation, on a
monthly basis, at the rate equal to one-twelve (1/12) of the average annual
incentive compensation paid to the Executive in the last three fiscal years
prior to the Date of Termination is given and (iii) without duplication of any
amounts set forth in clause (ii) of this sentence, the benefits referred to in
the last paragraph of Paragraph 6 hereof (on the terms set forth therein), in
each case through the Expiration Date or for a period of one (1) year following
the Date of Termination, whichever is longer, and the Company will pay all
legal fees and expenses, if any, incurred by the Executive in the enforcement
of his rights under this Agreement. In addition, all stock options held by the
Executive as of the Date of Termination shall be fully vested and
nonforfeitable and immediately exercisable by the Executive. Such payments and
benefits will constitute liquidated damages and severance pay to the Executive.
(d) Lump Sum Payment. The Company shall have the right, at its option,
to discharge its obligations to the Executive under subparagraphs (a) and (c)
of this Paragraph 7 in respect of payments of Base Salary by the payment in
cash or cash equivalents of a single lump sum equal to the present value,
discounted at the Prime Rate (as hereinafter defined) in effect on the Date of
Termination, of each installment of Base Salary
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payable to the Executive pursuant to such obligations. As used herein, the
term "Prime Rate" means the interest rate per annum announced publicly in
Pittsburgh, Pennsylvania from time to time by PNC Bank as its prime rate.
(e) No Mitigation. The Executive will not be required to mitigate the
amount of any payment provided for in this Paragraph 7 by seeking other
employment or otherwise, and the amounts of damages or severance benefits
payable to the Executive under this Paragraph 7 or other provisions of this
Agreement shall not be reduced by compensation received by the Executive from
any other employment he shall choose to undertake following termination of his
employment hereunder. The Executive's entitlement of payments hereunder shall,
however, be subject to his compliance with the covenants set forth in Paragraph
8.
8. NON-COMPETITION AND TRADE SECRETS
The Executive shall abide by the following covenants at all times during the
Term and for a period of two (2) years thereafter (the "Restricted Period"),
except that if the Executive's employment is terminated (i) by the Company
without Cause or (ii) by the Executive for Good Reason, the covenant period
shall not exceed the period with respect to which compensation payments are
payable in accordance with Paragraph 7 hereof:
(a) No Competing Employment. The Executive shall not, unless he receives
the prior written consent of the Company, directly or indirectly, own an
interest in, manage, operate, join, control, lend money or render financial or
other assistance to or participate in or be connected with, as an officer,
employee, partner, stockholder, consultant or otherwise, any individual,
partnership, firm, corporation or other business organization or entity (each,
a "Person") that is engaged in a business which is directly or indirectly
competitive with any of the business activities of the Company or any Affiliate
(as hereinafter defined) anywhere within the geographical territory of the
United States and Canada; provided, however, that the foregoing shall not apply
with respect to any line-of-business in which the Company or any Affiliate was
not engaged on or before the Date of Termination. The term "Affiliate" means
any other Person that controls, is controlled by, or is under common control
with, the Company.
(b) No Interference. The Executive shall not, whether for his own
account or for the account of any other Person (other than the Company or an
Affiliate), intentionally solicit, endeavor to entice away from the Company or
an Affiliate, or otherwise interfere with the relationship of the Company or an
Affiliate with, any person who is employed by the Company or an Affiliate
(including, but not limited to, any independent sales representatives or
organizations), or any person or entity who is, or was within the then most
recent twelve-month period, a customer or client of the Company or an
Affiliate.
(c) Secrecy. The Executive recognizes that the services to be performed
by him hereunder are special, unique and extraordinary in that, by reason of
his
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employment with the Company, he may acquire confidential information and trade
secrets concerning the operation of the Company or an Affiliate, the use or
disclosure of which could cause the Company or an Affiliate substantial loss
and damages which could not be readily calculated and for which no remedy at
law would be adequate. Accordingly, the Executive covenants and agrees with
the Company that he will not at any time, except in the performance of his
obligations to the Company hereunder or with the prior written consent of the
Board of Directors of the Company, directly or indirectly, disclose any secret
or confidential information that he may learn or has learned by reason of his
association with the Company, or any predecessors to their business, or use any
such information to the detriment of the Company. The term "confidential
information" includes, without limitation, information not previously disclosed
to the public or to the trade by the Company's management with respect to the
Company's products, facilities and methods, research and development, trade
secrets and other intellectual property, systems, patents and patent
applications, procedures, manuals, confidential reports, product price lists,
customer lists, financial information (including the revenues, costs or profits
associated with any of the Company's products), business plans, prospects or
opportunities; provided, however, that the term "confidential information" will
not include, and the Executive will have no obligation hereunder with respect
to, any information that (i) becomes generally available to the public other
than as a result of a disclosure by the Executive or his agent or other
representative or (ii) becomes available to the Executive on a non-confidential
basis from a source other than the Company or any Affiliate. The Executive
will have no obligation hereunder to keep confidential any of the confidential
information to the extent that a disclosure of it is required by law or is
consented to by the Company; provided, however, that if and when such a
disclosure is required by law, the Executive promptly will provide the Company
with notice of such requirement, so that the Company may seek an appropriate
protective order.
(d) Exclusive Property. The Executive confirms that all confidential
information is the exclusive property of the Company. All business records,
papers and documents kept or made by the Executive relating to the business of
the Company or an Affiliate shall be and remain the property of the Company or
the Affiliate during the Restricted Period and at all times thereafter. Upon
the termination of his employment with the Company or upon the request of the
Company at any time, the Executive shall promptly deliver to the Company, and
shall retain no copies of, any written materials, records and documents made by
the Executive or coming into his possession concerning the business or affairs
of the Company or an Affiliate.
(e) Injunctive Relief. The Executive acknowledges that a breach of any
of the covenants contained in this Paragraph 8 may result in material,
irreparable injury to the Company for which there is no adequate remedy at law,
that it will not be possible to measure damages for such injuries precisely and
that, in the event of such a breach or threat thereof, the Company shall be
entitled to obtain a temporary restraining order and/or a preliminary or
permanent injunction restraining the Executive from engaging in activities
prohibited by this Paragraph 8 or such other relief as may be required to
specifically enforce any of the covenants in this Paragraph 8. The Executive
hereby agrees and consents that
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such injunctive relief may be sought in any state or federal court of record in
the Commonwealth of Pennsylvania, or in the state and county in which such
violation may occur or in any other court having jurisdiction, at the election
of the Company; to the extent that the Company seek a temporary restraining
order (but not a preliminary or permanent injunction), the Executive agrees
that such temporary restraining order may be obtained ex parte. The Executive
agrees to and hereby does submit to in personam jurisdiction before each and
every such court for that purpose.
(f) Blue-Pencilling. The parties consider the covenants and restrictions
contained in this Paragraph 8 to be reasonable. However, if and when any such
covenant or restriction is found to be void or unenforceable and would have
been valid had some part of it been deleted or had its scope of application
been modified, such covenant or restriction will be deemed to have been applied
with such modification as would be necessary and consistent with the intent of
the parties to have made it valid, enforceable and effective.
9. ASSIGNMENT; SUCCESSORS; BINDING AGREEMENT
(a) By the Company. The Company will require any successor (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company, by an agreement
in form and substance reasonably satisfactory to the Executive, expressly to
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place, unless the Executive's employment under this Agreement
previously has been terminated, either by the Company or by the Executive and a
"Dispute" (as defined below) exists as to any amounts which are or are alleged
to be payable to the Executive pursuant to this Agreement. A failure of the
Company to obtain the agreement of the successor described above by the
effective date of any such succession, unless such agreement is not required
under the preceding sentence as a result of the existence of a "Dispute" (as
defined below in this Paragraph 9(a)), will be a breach of this Agreement and
will entitle the Executive immediately to receive in a lump sum payment
(without discounting for the time value of money) compensation from the Company
in the same amount and on the same terms as he would be entitled to under this
Agreement if he had terminated his employment for Good Reason, except that, for
the purpose of implementing the foregoing, the date on which any such
succession becomes effective will be deemed to be the Date of Termination. If
a "Dispute" (as defined below) exists on the date of any such succession, the
Company will make adequate provision for their potential liability with respect
to the amount which is the subject of the Dispute, in a manner which is
reasonably acceptable to the Executive. For purposes of this Paragraph 9, the
term "Dispute" will mean the good faith assertion by the Company that an amount
claimed by the Executive to be payable to him under this Agreement is in excess
of the amount, if any, which is in fact owed to the Executive hereunder. As
used in this Agreement, the term "Company" will include, in addition to
Education Management Corporation, any and all successors to its business and/or
assets as described above in this Paragraph 9(a), which
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executes and delivers the agreement provided for in this Paragraph 9(a), or
which otherwise becomes bound by all of the terms and conditions of this
Agreement by operation of law.
(b) By the Executive. This Agreement and all rights of the Executive
under it will inure to the benefit of and be enforceable by the Executive's
personal or legal representatives, executors, administrators, heirs,
distributees, devisees and legatees. However, the Executive may not assign any
of his obligations under this Agreement at any time. If the Executive dies
while any amount remains payable to him hereunder or otherwise would have been
payable to him had he continued to live, all such amounts (unless otherwise
expressly provided in this Agreement) will be paid in accordance with the
pertinent provisions of this Agreement to such person or persons as the
Executive shall have designated for that purpose in a written notice filed by
him with the Company, or, if no such persons shall have been so designated, to
his estate.
10. NOTICE
For the purpose of this Agreement, notices and all other communications to
either party provided for in this Agreement will be furnished in writing and
will be deemed to have been duly given when delivered or when mailed if such
mailing is by United States certified or registered mail, return receipt
requested, postage prepaid, addressed to such party (notices to the Company
being addressed to the Secretary of the Company) at the Company's principal
executive office, or at such other address as either party shall have
designated by giving written notice of such change to the other party at any
time hereafter.
11. MISCELLANEOUS
No provision of this Agreement may be modified, waived, or discharged
unless such waiver, modification or discharge is duly approved by the Board of
Directors of the Company and is agreed to in writing by the Executive and such
officer(s) as may be specifically authorized by the Board of Directors of the
Company to effect it. No waiver by any party of any breach by any other party
of, or of compliance with, any term or condition of this Agreement to be
performed by any other party, at any time, will constitute a waiver of similar
or dissimilar terms or conditions at that time or at any prior or subsequent
time. No agreement or representation, oral or otherwise, express or implied,
with respect to the subject matter of this Agreement, has been made by either
party which is not set forth expressly in this Agreement. The validity,
interpretation, construction and performance of this Agreement will be governed
by the laws of the Commonwealth of Pennsylvania other than the conflict of laws
provision thereof.
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12. VALIDITY
The invalidity or unenforceability of any provision or provisions of this
Agreement will not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect.
13. COUNTERPARTS
This Agreement may be executed in one or more counterparts, each of which
will be deemed to be an original but all of which together will constitute one
and the same instrument.
14. DEFAULTS AND REMEDIES
Except as is otherwise provided for in this Paragraph 14, in the event of
an alleged breach of this Agreement by any party to it, the party alleging such
breach will notify the other parties of the alleged breach. Such notice must
identify with reasonable specificity the grounds for the alleged breach and
shall provide a period of thirty (30) days for the allegedly breaching party to
cure such breach. The non-breaching party will be entitled to all of its
proper legal remedies resulting from such breach. The provisions for notice
and an opportunity to cure under this Paragraph 14 will not apply to a breach
or allegation of a breach of the provisions of Paragraphs 5, 7 or 8 of this
Agreement.
15. EFFECTIVENESS
This Agreement will become effective immediately, upon its Effective Date
(as defined in Paragraph 1(b)). It will amend and supersede any and all
previously existing employment or consulting agreements between the Executive
and the Company or any of its subsidiaries or affiliates, including the Prior
Contract.
16. AMENDMENT OF EXCHANGE AND REPURCHASE AGREEMENT
Upon the effectiveness of this Agreement, the RBK Exchange and Repurchase
Agreement dated as of October 26, 1989 (the "Exchange and Repurchase
Agreement"), between Robert Knutson, as trustee, and the Company is hereby
amended as follows:
(1) the term "Knutson Employment Agreement" set forth in section 1 of the
Exchange and Repurchase Agreement is amended in its entirety to read as
follows: "Knutson Employment Agreement" means the Second Amended and Restated
Employment Agreement of Robert B. Knutson dated as of August 14, 1996, as the
same may be amended from time to time; and
- 12 -
<PAGE> 13
(2) a new section 20 to the Exchange and Repurchase Agreement is added
as follows: "Termination. Upon the occurrence of a Public Distribution, this
Agreement shall automatically terminate and cease to be of any further force or
effect, except that Section 8(c) [Restrictions following Public Distribution]
shall survive such termination and Section 10(a)(ii) [Additional Consideration]
shall survive such termination if, and solely with respect to, those Shares
that have been repurchased pursuant to a Call Repurchase occurring prior to the
Public Distribution."
IN WITNESS WHEREOF, the parties have duly executed this Agreement on the
date and year first above written.
Attest: EDUCATION MANAGEMENT CORPORATION
By:
- -------------------- ----------------------------
Title:
-------------------------
Witness: EXECUTIVE
- -------------------- --------------------------------
Robert B. Knutson,
individually and, solely with
respect to Section 16, as trustee
- 13 -
<PAGE> 1
Exhibit 10.16
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made effective as of the 1st day of June, 1996, by and
between EDUCATION MANAGEMENT CORPORATION, a corporation organized under the
laws of the Commonwealth of Pennsylvania (the "Company"), and ALBERT GREENSTONE
(the "Employee").
WITNESSETH:
WHEREAS, the parties desire to set forth herein the terms and conditions of
their employment relationship;
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants herein contained, and intending to be legally bound hereby, the
parties agree as follows:
1. EMPLOYMENT. The Company hereby agrees to employ the Employee, and the
Employee hereby agrees to serve the Company, for the period stated in Paragraph
3 hereof and upon the other terms and conditions herein provided. As a
condition of the Employee's employment, the Employee shall provide to the
Company, prior to commencement of his employment, a written statement of his
attending physician releasing him for employment.
2. RESPONSIBILITIES. The Employee shall be accountable and subject to the
authority of the Chief Executive Officer of the Company or his designee, the
President of The National Center for Professional Training. The Employee shall
be responsible for such duties, particularly with respect to The National Center
for Professional Training, as may from time to time be assigned to the Employee.
3. TERM. The term of the Employee's employment under this Agreement shall
commence as of the date hereof and shall end as of May 31, 1997, subject to
any extension of such term as hereinafter described and subject to earlier
termination as provided in Section 5. The period of employment shall
automatically be extended without further action by the parties, unless sooner
terminated, on June 1, 1997, and on each June 1 thereafter, for one (1)
additional year unless (i) at least sixty (60) days prior to such June 1 date,
the Company shall have delivered to the Employee or the Employee shall have
delivered to
<PAGE> 2
the Company written notice that this Agreement shall terminate, or (ii) the
Employee's employment hereunder shall have terminated pursuant to Section 5 on
or prior to such June 1 date.
4. COMPENSATION.
(a) BASE SALARY. Subject to all applicable tax withholdings, the Employee
shall receive an annual base salary of not less than $50,000.00 per year. Such
salary shall be payable in substantially equal monthly installments.
(b) REIMBURSEMENT OF EXPENSES. The Employee shall be entitled to receive
prompt reimbursement for all reasonable expenses incurred by him in performing
services hereunder, provided that such reimbursement shall be subject to the
Company's expense reimbursement policy.
(c) BENEFITS. The Employee shall be entitled to participate in or
receive benefits under all compensation, insurance and benefit plans and
arrangements made available by the Company during the term of this Agreement
generally to its full-time employees, subject to and on a basis consistent with
the terms, conditions and overall administration of such plans and arrangements.
(d) LIFE INSURANCE. The Company and the Employee were parties to a prior
employment agreement, dated July 1, 1986 (the "1986 Agreement"). Under Section
4(f) of the 1986 Agreement, the Company was required to pay premiums and
interest on certain life insurance policies described therein. At all times on
and after the effective date of this Agreement, the Employee shall make all
premium and interest payments on the aforementioned policies and the Company
shall have no responsibility therefor.
(e) EXCHANGE AND REPURCHASE AGREEMENT. The parties acknowledge and agree
that for purposes of the Exchange and Repurchase Agreement, dated October 26,
1989, the Employee shall be considered to be an employee of the Company and not
retired or terminated until such date as the Employee retires or his employment
is terminated following the date hereof.
5. TERMINATION.
(a) DEATH OR DISABILITY. The Employee's employment hereunder shall
terminate upon his death or if, in the reasonable judgment of the Board, the
Employee is disabled so as to be unable to perform his material duties
hereunder.
(b) TERMINATION BY THE COMPANY FOR CAUSE. The Company may terminate the
Employee's employment hereunder for Cause. For purpose of this Agreement
"Cause" shall mean (A)
<PAGE> 3
Employee's willful or material and substantial failure to perform duties
hereunder, or (B) Employee's serious misconduct which is demonstrably and
substantially injurious to the Company including, without limitation, a course
of conduct which is unlawful or materially in violation of his obligations to
the Company under this Agreement, or (C) the deliberate and intentional
violation by the Employee of the provisions of Section 6 or Section 7 hereof,
provided that any such violations of Section 6 or Section 7 could reasonably be
expected to result in substantial injury to the Company. If the Employee's
employment shall be properly terminated for Cause, the Company shall continue
to pay the Employee his base salary through the date of termination and the
Company shall have no further obligations to the Employee under this Agreement.
(c) TERMINATION BY THE COMPANY FOR OTHER THAN CAUSE. If the Company
shall terminate the Employee's employment other than for Cause, the Company
shall continue to pay the Employee his base salary and shall continue to
provide the Employee all employee benefit plans and programs through the end of
the then-remaining term of this Agreement, and shall pay the Employee all legal
fees and expenses, if any, incurred by him in the enforcement of his rights
under this Agreement. Such payments constitute liquidated damages and severance
pay to the Employee.
6. NON-COMPETITION. The Employee agrees that so long as this Agreement
shall continue in effect, he will not directly or indirectly own, manage,
operate, join, or control, or participate in any way in the ownership (except
ownership of less than two percent (2%) of the number of shares outstanding of
any securities which are publicly traded), management, operation or control of,
or be connected with as an officer, employee, partner, or otherwise, or have a
beneficial interest in any other business in the United States or Canada
directly or indirectly competitive with any of the businesses engaged in by the
Company or any subsidiary. In the event of a breach or threatened breach of
this Section 6, the Company's remedies at law, i.e., money damages, are hereby
recognized to be inadequate and the Company shall be entitled to an injunction
requiring specific performance of this Section 6 in addition to its legal
remedies.
7. CONFIDENTIAL INFORMATION. The Employee will not at any time, whether
before or after the termination of this Agreement, divulge, furnish or make
accessible to anyone (other than in the ordinary course of the business of the
Company or any subsidiary thereof) any knowledge or information with respect to
confidential or secret information, trade secrets, customer lists, details of
client or consultant contracts, pricing policies, operational methods,
marketing plans or strategies, product development techniques or plans,
business acquisition plans, new personnel acquisition plans, technical
processes,
<PAGE> 4
designs and design products, inventions and research projects or other
proprietary information of the Company or any subsidiary developed, acquired or
learned by the Employee while in the employ of the Company; provided, however,
that any such knowledge or information in the public domain shall not be
covered by this section.
8. EFFECT OF PRIOR AGREEMENTS. This Agreement contains the entire
understanding between the parties hereto and supersedes any prior employment
agreement between the Company and the Employee including, without limitation,
the 1986 Agreement.
9. ASSIGNMENT; SUCCESSORS; BINDING AGREEMENT. Except as otherwise expressly
provided herein, this Agreement is not assignable by any party and no payment
to be made hereunder shall be subject to anticipation, alienation, sale,
transfer, assignment, pledge, encumbrance or other charge. This Agreement shall
be binding upon and inure to the benefit of the heirs and representatives of
the Employee and the successors and assigns of the Company. The Company shall
require any successor (whether direct or indirect, by purchase, merger,
reorganization, consolidation, acquisition of property or stock, liquidation,
or otherwise) to all or a significant portion of its assets expressly to assume
and agree to perform this Agreement in the same manner and to the same extent
that the Company would be required to perform this Agreement if no such
succession had taken place. Regardless whether such agreement is executed, this
Agreement shall be binding upon any successor of the Company in accordance with
the operation of law and such successor shall be deemed the "Company," for
purposes of this Agreement.
10. NOTICES. All notices or communications hereunder shall be in writing
and shall be sent certified or registered mail, return receipt requested,
postage prepaid, addressed to such party (notices to the Company being
addressed to the Secretary of the Company) at the Company's principal executive
office, or to such other address as either party shall designate by giving
written notice of such changes to the other party.
11. MODIFICATION AND WAIVER.
(a) AMENDMENT OF AGREEMENT. This Agreement may not be modified or
amended except by an instrument in writing signed by the parties hereto.
(b) WAIVER. No waiver by any party hereto at any time of any breach by
any other party hereto of, or compliance with, any condition or provision of
this Agreement to be performed by any other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time.
<PAGE> 5
12. SEVERABILITY. If, for any reason, any provision of this Agreement is
held invalid, such invalidity shall not affect any other provision of this
Agreement not held so invalid, and each such other provision shall to the full
extent consistent with law continue in full force and effect. If any provision
of this Agreement shall be held invalid in part, such invalidity shall in no
way affect the rest of such provision not held so invalid, and the rest of such
provision, together with all other provisions of this Agreement, shall to the
full extent consistent with law continue in full force and effect.
13. HEADINGS. The headings of sections herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
14. GOVERNING LAW. This Agreement has been executed and delivered in the
Commonwealth of Pennsylvania, and its validity, interpretation, performance,
and enforcement shall be governed by the laws of said Commonwealth other than
the conflict of laws provisions of such laws.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed and
its seal to be affixed hereunto by its officers thereunto duly authorized, and
the Employee has signed this Agreement, all as of the day and year first above
written.
ATTEST: EDUCATION MANAGEMENT CORPORATION
/s/ XXXXXXXXXXX By: /s/ XXXXXXXXXXXXXXX
- ------------------------------ ----------------------------------
Title: XXXXXXXXXXX Title: Chairman & CEO
----------------------- ------------------------------
WITNESS: EMPLOYEE
/s/ GEORGIA M. WHITE /s/ ALBERT GREENSTONE
- ------------------------------ ----------------------------------
Albert Greenstone
<PAGE> 1
Exhibit 10.17
EMC-ART INSTITUTES INTERNATIONAL, INC.
DIRECTOR'S AND/OR OFFICER'S
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT ("this Agreement") is entered into as of July
17, 1991, effective as of July 17, 1991, among EDUCATION MANAGEMENT
CORPORATION, a Pennsylvania corporation, and ART INSTITUTES INTERNATIONAL,
INC., a Pennsylvania corporation (collectively, the "Corporations"), and
___________ ________________________ (the "Indemnitee"), who serves as a
director, trustee and/or officer of one or both of the Corporations, or of a
subsidiary or sub-tier subsidiary of one or both of the Corporations
(collectively, the "Subsidiaries"), and whose mailing address is set forth
following the signature of the Indemnitee, below.
RECITALS:
A. The Indemnitee is serving as director, trustee, and/or officer of one or
both of the Corporations and/or of one or more of the Subsidiaries, and in such
capacity (or capacities) is performing valuable services which benefit the
Corporations.
B. The Indemnitee has requested that the Corporations enter into this
Agreement in consideration of the Indemnitee's continued service to the
Corporations and/or to the pertinent Subsidiary or Subsidiaries, and to induce
the Indemnitee to continue such service.
C. It is essential for the Corporations and the Subsidiaries to attract and
to retain capable individuals as directors and officers, and it is essential
for that purpose for the Corporations to provide reasonable protection against
unwarranted legal risks.
D. The Corporations' By-laws (collectively, the "By-laws") and the applicable
laws of the Commonwealth of Pennsylvania authorize the Corporations to provide
for the indemnification of officers and directors and other persons requested
to serve by the Corporations in similar capacities with corporations in which
the Corporations have an interest, consistent with Section 513 of the
Pennsylvania Business Corporation Law of 1988, as amended to date, and other
applicable laws or regulations (collectively the "State Statutes").
E. The By-laws and the State Statutes each specifically provide that they are
not exclusive and, therefore, contemplate that agreements may be entered into
between the Corporations and their directors and officers and the directors and
officers of the Subsidiaries with respect to the indemnification of such
directors and officers.
<PAGE> 2
PROVISIONS:
NOW, THEREFORE, in consideration of the Indemnitee's continued service as a
director and/or officer of one or both of the Corporations and/or one or more
Subsidiaries, and intending to be legally bound, the parties agree as follows:
1. Indemnity of Director and/or Officer.
Subject to and in accordance with the terms and conditions of this Agreement,
each of the Corporations jointly and severally agrees to indemnify the
Indemnitee and to hold him or her harmless to the maximum extent permitted by
the applicable State Statutes, as they may be amended from time to time, or by
any other statute authorizing the indemnification of directors and officers at
any time and from time to time in the future.
2. Additional Indemnity.
Subject to the applicable provisions of the By-laws and the State Statutes,
and subject to the limitations set forth in this Agreement, each of the
Corporations also jointly and severally agrees to indemnify the Indemnitee for,
and to hold him or her harmless from, all expenses (including attorneys' fees),
judgments, and amounts paid in settlement, and/or otherwise actually and
reasonably incurred at any time by the Indemnitee (collectively, "Expenses") in
connection with any threatened, pending, or completed action or legal
proceeding of any kind (whether civil, criminal, administrative or
investigative), including (without limitation) any action by or in the right of
either of the Corporations, to which the Indemnitee is or at any time may
become a witness or party, or is threatened to be made a party, and which
arises at any time out of or as a consequence of the Indemnitee's service in
that capacity or as a director, officer, agent, employee, or consultant of
either of the Corporations and/or any of the Subsidiaries at any time after the
date of this Agreement. The legal proceedings and claims referred to in the
preceding sentence are collectively called "Suits" in this Agreement.
3. Limitations on Additional Indemnity.
The indemnity obligations of the Corporations under this Agreement will be
subject to the following limitations:
(a) No amount will be paid under this Agreement if it is determined by a
court of competent jurisdiction in an interlocutory ruling or a final judgment,
that such payment would be a violation of applicable law. The Corporations
will cooperate with any efforts of the Indemnitee to obtain a prompt, appellate
review of any such interlocutory ruling or other judgment.
(b) No amount will be paid under this Agreement in any Suit in which the
sole allegation of wrongdoing by the Indemnitee is based upon his or her
trading, or upon trading on behalf of the indemnitee, in the securities of
either of the Corporations.
- 2 -
<PAGE> 3
(c) No amount will be paid under this Agreement on account of any act or
omission of the Indemnitee which is determined by a final decision of a court
of competent jurisdiction to have been illegal, fraudulent, or in reckless
disregard of the duties of the Indemnitee to the Corporations or Subsidiaries,
or which constitutes willful misconduct; provided, however, that (i) if such
act or omission is determined to have been taken in good faith and in a manner
reasonably believed by the Indemnitee to have been in the best interests of the
Corporations, or (ii) if it is determined with respect to any criminal
proceeding, that the Indemnitee had no reasonable cause to know that the
alleged act or omission was unlawful, the limitation set forth in this Section
3(c) will not apply.
(d) The Indemnitee and/or some of the other indemnitees (if any) who are
parties similarly situated in any suit may be required (in the discretion of
the Corporations' Board of Directors) to retain and to use the same counsel,
which counsel will be selected by the Corporations, subject to the reasonable
approval of each affected Indemnitee. Any Indemnitee may retain additional
counsel at his or her own expense in any event.
(e) If the Indemnitee elects to retain separate counsel, the Indemnitee will
require such counsel to cooperate fully with counsel for the Corporations,
except where to do so would prevent that Indemnitee from being effectively
represented in the judgment of that Indemnitee and/or his or her counsel.
(f) If the Indemnitee is entitled to and does elect to retain counsel at the
expense of the Corporations under this Agreement, the Indemnitee will require
such counsel to submit statements to the Corporations on a regular basis, at
least monthly. The Corporations may object to and refuse to pay any fees or
expenses which they reasonably and in good faith determine to be excessive,
unnecessary, or duplicative of costs expended by the Corporations for
themselves or for other defendants.
4. Continuation of Indemnity.
The obligations of the Corporations under this Agreement will continue in
effect so long as the Indemnitee serves as a director, officer, agent,
employee, or consultant of either of the Corporations and/or any of the
Subsidiaries (the "Period of Service"); and they will continue in effect
thereafter with respect to any Suit arising at any time thereafter by reason of
alleged acts or omissions occurring during the Period of Service.
5. Settlements.
The Corporations will not be liable to indemnify the Indemnitee under this
Agreement for any amount paid in settlement of any Suit effected without their
written consent. The Corporations will not settle any Suit in any manner which
would materially and adversely affect the Indemnitee without the Indemnitee's
prior written consent. Neither the Corporations nor the Indemnitee will
withhold such consent unreasonably.
- 3 -
<PAGE> 4
6. Advance of Expenses.
Expenses will be paid or reimbursed by the Corporations promptly upon the
written request of the Indemnitee, subject to the limitations set forth in this
Agreement, and subject to the possible requirement of reimbursement under
Section 7, below. Any other provision of this Agreement to the contrary
notwithstanding, except only for the limitation set forth in Section 3(a), each
Indemnitee will be entitled to have the expenses of any Suit advanced by the
Corporations.
7. Repayment of Expenses.
The Indemnitee will reimburse the Corporations for all Expenses and other
amounts paid or advanced by the Corporations on behalf of the Indemnitee under
this Agreement if and when it is determined, by the final judgment of a court
of competent jurisdiction, that the Indemnitee is not entitled to
indemnification. The Indemnitee will make such reimbursement either (i) in
cash within one year from the date on which the reimbursement obligation is
found to exist pursuant to the preceding sentence, or (ii) by delivery within
that period of a promissory note bearing interest on the outstanding principal
amount from time to time outstanding at a rate equivalent to the then
prevailing "Applicable Federal Rate" (determined monthly in accordance with
Section 7872 of the Internal Revenue Code, as amended, or any successor to that
Section). The Indemnitee will not in any event be obligated to pay principal
and interest under such promissory note in amounts grater than $10,000 per
annum.
8. Additional Provisions.
The rights of the Indemnitee and of the Corporations under this agreement
will be enforceable in any court of competent jurisdiction in the Commonwealth
of Pennsylvania or in the state in which the Indemnitee is domiciled at the
time of such action. A conviction, or a plea of nolo contendere, or its
equivalent, will not create a presumption that the Indemnitee did not act in
good faith and in a manner reasonably believed to be (a) in the best interest
of the Corporations or (b) (with respect to a criminal action) lawful conduct.
Expenses reasonably incurred in connection with successfully establishing the
Indemnitee's right to indemnification under this Agreement, in whole or in
part, also will be indemnified by the Corporations, under the provisions of
this Agreement.
9. Severability.
If any provision of this Agreement is held to be invalid or unenforceable for
any reason, such invalidity or unenforceability will not affect the validity or
enforceability of any other provision of this Agreement.
10. Governing Law; Binding Effect; Amendment and Termination.
(a) This Agreement will be interpreted and enforced in accordance with the
laws of the Commonwealth of Pennsylvania in all respects.
- 4 -
<PAGE> 5
(b) This Agreement will be binding upon the Indemnitee and his or her heirs,
personal representatives, and assigns, and upon the Corporations and their
respective successors and assigns. It will inure to the benefit of the
Indemnitee and his or her heirs, personal representatives, and assigns, and to
the benefit of the Corporations and their respective successors and assigns.
(c) No modification or termination or cancellation of this Agreement, in
whole or in part, will be effective unless it is in writing and is signed by
all of the parties.
IN WITNESS WHEREOF, the parties have executed this Agreement on and as of the
date and year first above written.
CORPORATIONS:
ATTEST: EDUCATION MANAGEMENT CORPORATION
300 Sixth Avenue, Pittsburgh, PA 15222
By: By:
-------------------------------- ----------------------------------
Robert T. McDowell, Miryam L. Drucker,
Assistant Secretary President
ATTEST: ART INSTITUTES INTERNATIONAL, INC.
300 Sixth Avenue, Pittsburgh, PA 15222
By: By:
-------------------------------- ----------------------------------
Robert T. McDowell, George L. Pry,
Assistant Secretary Executive Director
WITNESS: INDEMNITEE
Signature: Signature:
------------------------- ----------------------------
Please print full name below
Address:
- ----------------------------------- ----------------------------
----------------------------
- 5 -
<PAGE> 1
EXHIBIT 11.01
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CALCULATION OF NET INCOME (LOSS) PER COMMON SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
-------------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Income (loss) before extraordinary item....................... $(1,702) $ 1,513 $ 6,846
Extraordinary loss on early extinguishment of debt............ - - 926
------- ------- -------
Net income (loss)............................................. (1,702) 1,513 5,920
Dividends on preferred stock.................................. 2,249 2,249 2,249
------- ------- -------
Net income (loss) allocable to common shareholders............ $(3,951) $ (736) $ 3,671
======= ======= =======
Weighted average common shares outstanding during the year.... 13,893 13,893 13,893
Dilutive effect of options issued one year prior to the
offering.................................................... 150 150 150
Effect of shares issued upon exercise of options and
warrants.................................................... -(1) -(1) 6,509
------- ------- -------
Weighted average primary shares............................... 14,043 14,043 20,552
Effect of shares issued upon conversion of preferred stock.... -(1) -(1) 3,408
------- ------- -------
Weighted average fully diluted shares......................... 14,043 14,043 23,960
------- ------- -------
PER SHARE DATA
Primary:
Income (loss) before extraordinary item..................... $ (.28) $ (.05) $ .22
Net income (loss)........................................... (.28) (.05) .18
Fully Diluted:
Income (loss) before extraordinary item..................... (.28) (.05) .19
Net income (loss)........................................... (.28) (.05) .15
</TABLE>
- ---------
(1) The exercise of common equivalent shares and the conversion of preferred
stock are not assumed to occur when the effect is antidilutive.
<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
August , 1996
