<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 21, 1997
REGISTRATION NO. 333-37389
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------
EDUCATION MANAGEMENT CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
PENNSYLVANIA 8200 25-1119571
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
300 SIXTH AVENUE
PITTSBURGH, PENNSYLVANIA 15222
(412) 562-0900
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------
FREDERICK W. STEINBERG
VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
EDUCATION MANAGEMENT CORPORATION
300 SIXTH AVENUE
PITTSBURGH, PENNSYLVANIA 15222
(412) 562-0900
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------
Copies to:
<TABLE>
<S> <C>
LEONARD S. FERLEGER MORTON A. PIERCE
KIRKPATRICK & LOCKHART LLP DEWEY BALLANTINE LLP
1500 OLIVER BUILDING 1301 AVENUE OF THE AMERICAS
PITTSBURGH, PENNSYLVANIA 15222 NEW YORK, NY 10019-6092
(412) 355-6500 (212) 259-8000
</TABLE>
------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] __________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED OCTOBER 21, 1997
2,833,409 Shares
EDUCATION MANAGEMENT CORPORATION
Common Stock
($.01 par value)
------------------
All of the shares of Common Stock, $.01 par value (the "Common Stock"), of
Education Management Corporation ("EDMC" or the "Company") offered hereby (the
"Offering") are being sold by the Selling Shareholders named herein under
"Principal and Selling Shareholders." The Company will not receive any proceeds
from the sale of shares by the Selling Shareholders.
The Common Stock is listed on the Nasdaq National Market under the symbol
"EDMC." On October 20,
1997, the last reported sale price of the Common Stock on the Nasdaq National
Market was $28-1/8 per share. See "Price Range of Common Stock."
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 8.
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 ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C>
Underwriting Proceeds to
Price to Discounts and Selling
Public Commissions Shareholders(1)
------------- ------------- -------------
Per Share.................................... $ $ $
Total (2).................................... $ $ $
</TABLE>
(1) Before deduction of expenses payable by the Selling Shareholders 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 283,421 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 $ , and Proceeds to Selling Shareholders will be $ .
The shares of Common Stock are offered by the several Underwriters when, as
and if delivered to and accepted by the Underwriters and subject to their right
to reject orders in whole or in part. It is expected that the shares of Common
Stock will be ready for delivery on or about , 1997, against
payment in immediately available funds.
CREDIT SUISSE FIRST BOSTON
SMITH BARNEY INC.
ABN AMRO CHICAGO CORPORATION
Prospectus dated , 1997.
<PAGE> 3
[GRAPHICS DEPICTING THE COMPANY'S SCHOOLS, STUDENTS AND CLASSROOMS.]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
OFFERED HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE
SHORT COVERING TRANSACTIONS, PENALTY BIDS AND PASSIVE MARKET MAKING. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Company's Consolidated Financial Statements and Notes
thereto included elsewhere in this Prospectus. Prospective investors should
consider carefully, among other things, the information set forth under "Risk
Factors" below. Unless otherwise indicated, all information in this Prospectus
assumes no exercise of the over-allotment option. As used in this Prospectus,
unless the context indicates otherwise, the terms the "Company" and "EDMC" refer
to Education Management Corporation and its subsidiaries, including all of its
schools.
THE COMPANY
Education Management Corporation is among the largest providers of
proprietary postsecondary education in the United States based on student
enrollments and revenues. Through its operating units, the Art Institutes ("The
Art Institutes"), The New York Restaurant School ("NYRS"), The National Center
for Paralegal Training ("NCPT") and The National Center for Professional
Development ("NCPD"), the Company offers associate's and bachelor's degree
programs and non-degree programs in the areas of design, media arts, culinary
arts, fashion and professional development. The Company has provided
career-oriented education programs for 35 years, and its schools have graduated
over 100,000 students. In the fall quarter of fiscal 1997, beginning October 1,
1996, EDMC's schools had approximately 15,800 students enrolled, representing
all 50 states and over 80 countries.
The Company's main operating unit, The Art Institutes, consists of 13
schools in 12 cities throughout the United States and accounted for
approximately 93% of the Company's net revenues in fiscal 1997. Art Institute
programs are designed to provide the knowledge and skills necessary for
entry-level employment in various fields, including graphic design, multimedia,
computer animation, video production, culinary arts, interior design, industrial
design, photography, fashion marketing and fashion design. Those programs
typically are completed in 18 to 27 months and culminate in an associate's
degree. Five Art Institutes currently offer bachelor's degree programs, and EDMC
expects to continue to introduce bachelor's degree programs at schools in states
that permit proprietary postsecondary institutions to offer such programs.
In January 1997, the Company acquired the assets of Lowthian College in
Minneapolis, Minnesota and renamed the school The Art Institute of Minnesota.
The Company's newest school, The Art Institute of Los Angeles, began offering
classes in October 1997.
The Company offers a culinary arts curriculum at seven Art Institutes,
including The Art Institute of Philadelphia, which began offering that
curriculum in October 1997. In addition, in August 1996, the Company acquired
NYRS, a well-known culinary arts and restaurant management school located in New
York City. NYRS offers an associate's degree program and certificate programs.
NYRS accounted for approximately 5% of the Company's net revenues in fiscal
1997.
The Company offers paralegal training at NCPT, a leading source of
paralegals in the southeastern United States. NCPT, located in Atlanta, offers
certificate programs that generally are completed in four to nine months. NCPD
maintains consulting relationships with seven colleges and universities to
assist in the development, marketing and delivery of paralegal, legal nurse
consultant and financial planner test preparation programs for recent college
graduates and working adults. In fiscal 1997, the Company derived approximately
2% of its net revenues from NCPT and NCPD combined.
EDMC's primary objective is to provide career-focused education that
maximizes employment opportunities for its students after graduation. EDMC's
graduates are employed by a broad range of employers nationwide. Approximately
86% of the calendar year 1996 graduates of all programs at EDMC's schools who
were available for employment obtained positions in fields related to their
programs of study within six months of graduation.
The Company believes that demand for postsecondary education will generally
increase due to (i) an increase of 20% in the number of new high school
graduates per year from approximately 2.5 million in 1994 to 3.0 million in 2005
(as projected by the National Center for Education Statistics), (ii) the growing
interest of working adults in enhancing their marketable skills, (iii) the
income premium attributable to higher education degrees, and (iv) employers'
continuing demand for entry-level workers with appropriate technical skills.
3
<PAGE> 5
EDMC has capitalized on these favorable trends in the postsecondary
education market through continued implementation of the following strategic
initiatives:
- Enhancing Growth at the Company's Schools: The Company has augmented its
recruiting efforts directed at high school students and has expanded its
program offerings to attract more working adults. The Art Institutes
experienced approximately a 29% increase in the number of applications
from high school seniors in fiscal 1997 (for education programs starting
in fiscal 1997 or fiscal 1998) over the prior year. The total number of
students participating in evening programs at The Art Institutes
increased 40% to approximately 2,100 students in the spring quarter of
fiscal 1997 from approximately 1,500 students in the spring quarter of
fiscal 1996. The total number of students attending The Art Institutes
rose approximately 20% from the fall quarter of fiscal 1993 to the fall
quarter of fiscal 1997 (13.4% excluding schools opened or acquired during
fiscal 1996).
- Opening or Acquiring Schools: The Company believes that significant
opportunities exist for growth through new school openings and
acquisitions. In fiscal 1996, the Company acquired or opened three
schools: The Art Institute of Phoenix, The Illinois Institute of Art at
Chicago and The Illinois Institute of Art at Schaumburg. Since the
beginning of fiscal 1997, the Company has acquired or opened three
additional schools: NYRS, The Art Institute of Minnesota and The Art
Institute of Los Angeles. The Company also has committed significant
resources to its integrated, customized information network that the
Company believes enhances its ability to integrate newly established or
acquired schools into the Company's operations.
- Expanding Education Programs: EDMC seeks to optimize its portfolio of
programs to meet the needs of both its students and the employment
market. Within three years of its development and introduction, the
Company's computer animation curriculum had an enrollment of
approximately 3,500 students in October 1996 (fall of fiscal 1997) and
generated tuition revenues during fiscal 1997 of approximately $35
million. Since the beginning of fiscal 1994, the Company has increased
the number of Art Institutes at which it offers culinary arts programs
from three to seven, including The Art Institute of Philadelphia, which
began offering that program in October 1997. In fiscal 1997, the Company
introduced or enhanced its bachelor's degree programs in the areas of
computer animation, graphic design, interior design and industrial
design, and the Company expects to introduce a bachelor's degree program
in interactive multimedia programming in fiscal 1998.
- Improving Student Outcomes: The Company continues to seek to increase the
number of students who finish their programs of study, the number of
graduates who find employment in fields related to their programs of
study and the starting salaries of those graduates. At The Art
Institutes, the average quarterly net persistence rate, a measure of the
number of students that are enrolled during an academic quarter and
advance to the next academic quarter, improved from 88.4% in fiscal 1994
to 90.2% for the first three quarters of fiscal 1997. From calendar year
1993 to calendar year 1996, the placement rate for all graduates
available for employment, who completed any program at an Art Institute,
improved from 83.1% to 86.8% and average starting salaries rose 29.5%
from approximately $15,600 to approximately $20,200.
The Company believes the experience of its management team and the
substantial equity ownership of its employees are significant factors
contributing to its success. EDMC's senior management has an average of nine
years with EDMC and 18 years of experience in the education industry.
Approximately two-thirds of the employees of EDMC, including a substantial
majority of the management team, has an ownership interest in the Company
through direct holdings, participation in the Company's Employee Stock Ownership
Plan and Trust (the "ESOP") or both.
EDMC's principal executive offices are located at 300 Sixth Avenue,
Pittsburgh, Pennsylvania 15222, and its telephone number is (412) 562-0900. The
Art Institutes' Internet web site address is "http://www.aii.edu". See
"Business."
4
<PAGE> 6
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by Selling Shareholders........... 2,833,409 shares
Common Stock to be outstanding after the Offering(1)... 14,439,168 shares
Use of Proceeds........................................ All shares offered hereby are being
sold by the Selling Shareholders. The
Company will not receive any proceeds
from the sale of shares by the
Selling Shareholders. See "Use of
Proceeds."
Nasdaq National Market symbol.......................... EDMC
</TABLE>
- ---------
(1) Excludes 2,375,427 shares reserved for issuance under the Company's
stock-based compensation plans, under which plans options to purchase
650,495 shares will be exercisable as of October 31, 1997.
5
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
The following summary consolidated financial and other data should be read
in conjunction with the Company's Consolidated Financial Statements and Notes
thereto, "Selected Consolidated Financial and Other Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus. Certain of the summary consolidated
financial data presented below are derived from the Company's consolidated
financial statements audited by Arthur Andersen LLP, independent public
accountants, whose report covering the financial statements as of June 30, 1996
and 1997 and for each of the three years in the period ended June 30, 1997 also
is included elsewhere in this Prospectus. The summary consolidated income
statement data for the years ended June 30, 1993 and 1994 and the summary
consolidated balance sheet data as of June 30, 1993, 1994 and 1995 are derived
from audited financial statements not included in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------------------------
1993 1994(8) 1995(9)(10) 1996(10) 1997(10)
-------- -------- ------------ -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenues............................. $117,234 $122,549 $131,227 $147,863 $182,849
Amortization of intangibles(1)........... 10,025 6,599 1,937 1,060 2,076
ESOP expense(2).......................... 4,791 4,759 7,086 1,366 --
Income (loss) before extraordinary
item(3)................................ (1,174) (1,702) 1,513 6,846 9,985
Net income (loss)........................ (1,174) (1,702) 1,513 5,920 9,985
Dividends on Series A Preferred Stock.... 2,249 2,249 2,249 2,249 83
Other Series A Preferred Stock
transactions(4)........................ -- -- -- -- 403
PER SHARE DATA, FULLY DILUTED (5):
Income (loss) before extraordinary
item................................... (.49) (.57) (.11) .39 .72
Net income (loss)........................ (.49) (.57) (.11) .31 .72
Weighted average number of common shares
outstanding, in thousands(6)........... 6,959 6,926 6,890 11,874 13,687
OTHER DATA:
Capital expenditures..................... $ 8,448 $ 6,289 $ 11,640 $ 14,981 $ 18,098
Enrollments at beginning of fall quarter
during period(7)....................... 12,708 12,592 12,749 13,407 15,838
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30,
--------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total cash and cash equivalents............ $ 24,164 $ 20,487 $ 39,623 $ 27,399 $ 33,227
Current assets............................. 31,729 30,705 49,662 39,858 48,886
Total assets............................... 85,091 78,527 102,303 101,412 126,292
Current liabilities........................ 30,343 30,129 34,718 27,264 36,178
Long-term debt (including current
portions)................................ 68,923 63,112 69,810 65,919 34,031
Shareholders' investment (deficit)(11)..... (10,790) (7,724) 1,855 9,656 57,756
</TABLE>
6
<PAGE> 8
- ---------
(1) Includes the amortization of goodwill and intangibles resulting from the
application of purchase accounting to the establishment and financing of
the ESOP and the related leveraged transaction in 1989. See Note 3 of Notes
to Consolidated Financial Statements on page F-11. The majority of the
intangible assets related to student enrollments and applications,
accreditation and contracts with colleges and universities and were
amortized over two to five year periods. The excess of the investment in
EDMC and other acquisitions (including NYRS) over the fair market value of
the net assets acquired has been assigned to goodwill and is being
amortized over 40 years.
(2) ESOP expense equals the sum of the payments on the senior term loan
obtained for the ESOP's acquisition of securities from EDMC (the "ESOP Term
Loan"), plus repurchases of shares from participants in the ESOP, less the
dividends paid on the shares of Series A 10.19% Convertible Preferred
Stock, $.0001 par value (the "Series A Preferred Stock"), held by the ESOP.
In fiscal 1995, the Company made a voluntary prepayment of $2.1 million on
the ESOP Term Loan. In fiscal 1996, the ESOP Term Loan was repaid in full.
In addition, as a result of the initial public offering of shares of Common
Stock in November 1996 (the "IPO"), the Company has no obligation to
repurchase shares of Common Stock from participants in the ESOP. Therefore,
there was no ESOP expense in fiscal 1997.
(3) In fiscal 1996, the $25.0 million aggregate principal amount of the
Company's 13.25% Senior Subordinated Notes due 1999 (the "Subordinated
Notes") was prepaid in full. The resulting $1.5 million prepayment penalty
is classified as an extraordinary item net of the related tax benefit.
(4) These transactions were the redemption of 75,000 shares of Series A
Preferred Stock (which resulted in the payment of a redemption premium) in
August 1996 and the conversion of the remaining shares of Series A
Preferred Stock into shares of Common Stock (which resulted in the accrual
of dividends that were not payable) at the time of the IPO.
(5) Except in fiscal 1997, dividends on the outstanding shares of Series A
Preferred Stock have been deducted from net income (loss) in calculating
net income (loss) per common share. In fiscal 1997, the redemption premium
paid upon redemption of 75,000 shares of Series A Preferred Stock has been
deducted from net income in calculating net income per common share.
(6) The weighted average number of common shares used to calculate income
(loss) per share includes, where dilutive, equivalent common shares
calculated under the treasury stock method and resulting from the
conversion of outstanding shares of Series A Preferred Stock.
(7) Excludes students enrolled at colleges and universities in programs under
consulting agreements with NCPD.
(8) A special charge of $3.0 million was recorded in fiscal 1994 for unusual
items, including the early write-off of equipment, program termination
expenses, severance compensation, expenses related to the settlement of a
lease and various legal expenses. Such special charge was included in
educational services and general and administrative expenses.
(9) Results for fiscal 1995 include a $1.1 million nonrecurring credit for the
refund of state and local business and occupation taxes.
(10) Charges of $1.1 million, $0.5 million and $0.4 million are reflected in
fiscal 1995, 1996 and 1997, respectively, to account for non-cash
compensation expense related to the performance-based vesting of
nonstatutory stock options.
(11) Prior to the closing date of an initial public offering of its securities,
holders of the Company's equity securities had the right, under certain
circumstances, to require the Company to repurchase such securities. In
addition, the Company had the right to redeem shares of the Series A
Preferred Stock and its Class B Common Stock, $.0001 par value, under
certain circumstances. These rights expired upon consummation of the IPO.
7
<PAGE> 9
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be considered carefully in evaluating the Company
and its business before purchasing any shares of Common Stock offered hereby.
POTENTIAL ADVERSE EFFECTS OF REGULATION; IMPAIRMENT OF FEDERAL FUNDING
GENERAL
The Company and its schools are subject to extensive regulation by federal
and state governmental agencies and accrediting agencies. In particular, the
Higher Education Act of 1965, as amended (the "HEA"), and the regulations
promulgated thereunder by the United States Department of Education (the "U.S.
Department of Education") set forth numerous standards that schools must satisfy
in order to participate in the various federal student financial assistance
programs under Title IV of the HEA ("Title IV Programs"). For example, the HEA
and the regulations issued thereunder (i) establish maximum acceptable rates of
default by students on federally guaranteed or funded student loans, (ii) limit
the proportion of school revenues that may be derived from Title IV Programs,
(iii) establish certain financial responsibility and administrative capability
standards, (iv) restrict the ability of a school or its parent corporation to
engage in certain types of transactions that would result in a change in
ownership and control of that school or corporation, and (v) prohibit the
payment of certain types of incentives to personnel engaged in student
recruiting and admissions activities. See "Business--Student Financial
Assistance--Federal Oversight of Title IV Programs." Under the rule concerning
the limitation on the amount of school revenues that may be derived from Title
IV sources, commonly referred to as the "85/15 Rule," a school would be
disqualified from participation in Title IV Programs if more than 85% of its
revenues in any year was derived from Title IV Programs. The Company has
calculated that, since this requirement took effect in fiscal 1995, none of the
Company's schools has derived more than 79% of its revenues from Title IV
Programs for any fiscal year, and that for fiscal 1997 the range for the
Company's schools was from approximately 50% to approximately 70%. See
"Business--Student Financial Assistance--Federal Oversight of Title IV
Programs-- The '85/15 Rule.' "
Based upon independent, governmental and other outside agencies' reviews
and audits, the Company's schools that participate in Title IV Programs have
been found to be in substantial compliance with the requirements for
participating in Title IV Programs, and the Company believes that those schools
continue to be in substantial compliance with those requirements. However,
because the U.S. Department of Education periodically revises its regulations
(e.g., the U.S. Department of Education has recently proposed new regulations
with respect to financial responsibility standards) and changes its
interpretation of existing laws and regulations, there can be no assurance that
the U.S. Department of Education will agree with the Company's understanding of
each such requirement.
In the event of a determination by the U.S. Department of Education that
one of the Company's schools had improperly disbursed Title IV Program funds,
the affected school could be required to repay those funds and could be assessed
an administrative fine. The U.S. Department of Education could also transfer
that school from the "advance" system of payment of Title IV Program funds,
under which a school requests and receives funding from the U.S. Department of
Education in advance based on anticipated needs, to the "reimbursement" system
of payment, under which a school must disburse funds to students and document
their eligibility for Title IV Program funds before receiving funds from the
U.S. Department of Education. Violations of Title IV Program requirements could
also subject a school or the Company to sanctions under the False Claims Act as
well as other civil and criminal penalties. The failure by any of the Company's
schools to comply with applicable federal, state or accrediting agency
requirements could result in the limitation, suspension or termination of that
school's ability to participate in Title IV Programs or the loss of state
licensure or accreditation. Any such event could have a material adverse effect
on the Company. There are no proceedings for any such purposes pending, and the
Company has no reason to believe that any such proceeding is contemplated. See
"Business--Student Financial Assistance--Federal Oversight of Title IV
Programs."
Significant factors related to the HEA and its implementing regulations
that could adversely affect the Company include the following:
8
<PAGE> 10
RISK OF LEGISLATIVE ACTION
Title IV Programs are subject to significant political and budgetary
pressures. The reauthorization of the HEA by the United States Congress (the
"U.S. Congress") began in 1997 and is expected to be completed during 1998.
Numerous changes to the HEA have been proposed by the U.S. Department of
Education and other parties. At this time it is not possible to predict whether
current funding levels will be maintained for any or all Title IV Programs or
how current requirements for institutional participation and student eligibility
may be changed. A reduction in government funding levels could lead to lower
enrollments at the Company's schools and require the Company to arrange for
alternative sources of financial aid for students enrolled in its schools. Given
the significant percentage of the Company's revenues that are indirectly derived
from Title IV Programs, the loss thereof or a significant reduction in Title IV
Program funds could have a material adverse effect on the Company.
STUDENT LOAN DEFAULTS
Under the HEA, an institution could lose its eligibility to participate in
some or all Title IV Programs if the defaults of its students on their federal
student loans exceed specified rates for specified periods of time. A school's
annual cohort default rate is calculated as the rate at which borrowers
scheduled to begin repayment on their loans in one year default on those loans
by the end of the following year. Under the Federal Family Education Loan (the
"FFEL") program, any institution that has FFEL cohort default rates of 25% or
greater for three consecutive federal fiscal years will no longer be eligible to
participate in the FFEL program or the Federal Direct Student Loan (the "FDSL")
program for the remainder of the federal fiscal year in which the determination
of ineligibility is made and for the two subsequent federal fiscal years. An
institution whose FFEL cohort default rate for any federal fiscal year exceeds
40% may have its eligibility to participate in all Title IV Programs limited,
suspended or terminated. If an institution's FFEL cohort default rate is 25% or
greater in any of the three most recent federal fiscal years, or if an
institution's cohort default rate for loans under the Federal Perkins Loan
("Perkins") program exceeds 15% for the most recent federal award year, that
institution may be placed on "provisional certification" status for up to four
years. Provisional certification does not limit an institution's access to Title
IV Program funds, but does subject that institution to closer review by the U.S.
Department of Education and possible summary adverse action if that institution
commits violations of Title IV Program requirements.
None of the Company's schools has published FFEL cohort default rates of
25% or greater for three consecutive federal fiscal years. The Art Institute of
Houston, which accounted for approximately 7% of the Company's net revenues in
fiscal 1997, had published FFEL cohort default rates of 25.4% and 30.2% for
federal fiscal years 1993 and 1994 (the latest years for which rates have been
published), respectively, but has received a preliminary FFEL cohort default
rate of 20.3% for federal fiscal year 1995 from the U.S. Department of
Education. The Art Institute of Houston has been placed on provisional
certification status as a result of its FFEL cohort default rates. The remainder
of the Company's schools had published 1993 and 1994 FFEL cohort default rates
and preliminary 1995 rates below 25%. (Preliminary cohort default rates are
subject to revision by the U.S. Department of Education based on information
that schools and guaranty agencies identify and submit to the U.S. Department of
Education for review in order to correct any errors in the data previously
provided to the U.S. Department of Education. Any such adjustment will be made
by the U.S. Department of Education at the time that final rates are officially
published for the applicable year.) 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."
Five of the Company's schools have Perkins cohort default rates in excess
of 15% for students who were scheduled to begin repayment in the 1995/1996
federal award year, the most recent year for which such rates have been
calculated. Those schools and their Perkins cohort default rates for that year
are: The Art Institute of Atlanta (21.3%); The Art Institute of Fort Lauderdale
(21.8%); The Art Institute of Houston (49.1%); The Art Institute of Philadelphia
(20.4%) and The Art Institute of Seattle (23.3%). Those schools accounted for
approximately 9%, 13%, 7%, 12% and 14%, respectively, of the Company's net
revenues in fiscal 1997. For each such school, funds from the Perkins program
equaled less than 2% of the school's net revenues in fiscal 1997, other than The
Art Institute of Houston where such funds equaled approximately 3% of net
revenues in fiscal
9
<PAGE> 11
1997. Thus, those schools could be placed on provisional certification status
based on their Perkins cohort default rates, which would subject them to closer
review by the U.S. Department of Education. To date, none of those schools has
been placed on such status for this reason. If one of those schools were placed
on provisional certification status for this reason and that school reduced its
Perkins cohort default rate below 15% in a subsequent year, that school could
ask the U.S. Department of Education to remove the provisional status. See
"Business--Student Financial Assistance--Federal Oversight of Title IV
Programs--Cohort Default Rates."
FINANCIAL RESPONSIBILITY STANDARDS
The HEA and its implementing regulations establish specific standards of
financial responsibility that must be satisfied in order to qualify for
participation in Title IV Programs. Under such standards, an institution must:
(i) have an acid test ratio (defined as the ratio of cash, cash equivalents and
current accounts receivable to current liabilities) of at least 1:1 at the end
of each fiscal year, (ii) have a positive tangible net worth at the end of each
fiscal year, and (iii) not have a cumulative net operating loss during its two
most recent fiscal years that results in a decline of more than 10% of the
institution's tangible net worth at the beginning of that two-year period.
Historically, the U.S. Department of Education has evaluated the financial
condition of the Company's schools on an institution-by-institution basis,
although recently the U.S. Department of Education has requested, and the
Company has provided, financial information concerning The Art Institutes on a
consolidated basis at the level of The Art Institutes International, Inc.
("AII"), the parent of all The Art Institutes other than The Art Institute of
Pittsburgh, which is a division of AII. When they were acquired, The Illinois
Institute of Art at Chicago (combined with its additional location, The Illinois
Institute of Art at Schaumburg), NYRS and The Art Institute of Minnesota
satisfied the financial responsibility standards by filing the consolidated
financial statements of AII. For the year ended June 30, 1996, The Illinois
Institute of Art at Chicago (combined with its additional location, The Illinois
Institute of Art at Schaumburg) satisfied the financial responsibility standards
on both an individual institution basis as well as on a consolidated basis at
the level of AII. The Colorado Institute of Art (combined with its additional
location, The Art Institute of Phoenix) has satisfied the financial
responsibility standards for the relevant periods on an individual institution
basis. Each of the other Art Institutes (other than The Art Institute of Los
Angeles, which has not yet applied for participation in Title IV programs) has
satisfied the financial responsibility standards for the relevant periods on an
individual basis.
An institution that is determined by the U.S. Department of Education not
to meet the standards of financial responsibility on the basis of failing to
meet one or more of the specified numeric indicators is nonetheless entitled to
participate in Title IV Programs if it can demonstrate to the U.S. Department of
Education that it is financially responsible on an alternative basis. An
institution may do so by demonstrating, with the support of a statement from a
certified public accountant, proof of prior compliance with the numeric
standards and other information specified in the regulations, that its continued
operation is not jeopardized by its financial condition. Alternatively, an
institution may post surety either in an amount equal to one-half of the total
Title IV Program funds received by students enrolled at such institution during
the prior year or in an amount equal to 10% of such prior year's funds and agree
to receive Title IV Program funds under an arrangement other than the U.S.
Department of Education's standard advance funding arrangement. The U.S.
Department of Education has interpreted this surety condition to require the
posting of an irrevocable letter of credit in favor of the U.S. Department of
Education. See "Business--Student Financial Assistance--Federal Oversight of
Title IV Programs--Financial Responsibility Standards."
STATE AUTHORIZATION
In order to award degrees and certificates and to participate in Title IV
Programs, an institution must be authorized to offer its programs of instruction
by the relevant agency of the state in which such school is located. Each state
has its own standards and requirements for authorization, which vary
substantially among the states. Typically, state laws require that an
institution demonstrate that it has the personnel, resources and facilities
appropriate to its instructional programs. Each of the Company's schools is
licensed and approved by the relevant agency of the state in which such school
is located. If one of the Company's schools were to lose its state license or
authorization, such school would lose its eligibility to participate in Title IV
Programs, which could have a material adverse effect on the Company. See
"Business--State Authorization."
10
<PAGE> 12
ACCREDITATION
In order to participate in Title IV Programs, an institution must be
accredited by an accrediting agency recognized by the U.S. Department of
Education. Accreditation is a non-governmental process through which an
institution submits to qualitative review by an organization of peer
institutions, based on the standards of the accrediting agency and the stated
aims and purposes of the institution. The three types of accrediting agencies
are: (i) regional accrediting associations, of which there are six, which
accredit degree-granting institutions located within their geographic areas,
(ii) national accrediting agencies, which accredit institutions on the basis of
the overall natures of the institutions without regard to their locations, and
(iii) specialized accrediting agencies, which accredit specific programs within
an institution. An accrediting agency primarily examines the academic quality of
an institution's programs, as well as the institution's administrative and
financial operations. Certain states require institutions to maintain
accreditation as a condition of continued authorization to grant degrees. The
HEA specifies certain standards that each accrediting agency must utilize in
reviewing institutions in order for such accrediting agency to be recognized by
the U.S. Department of Education. Each of the Company's schools is accredited by
at least one accrediting agency recognized by the U.S. Department of Education,
other than The Art Institute of Los Angeles, for which the Company expects to
file an application for initial accreditation in November or December 1997. If
one of the Company's schools were to lose its accreditation, such school would
lose its eligibility to participate in Title IV Programs, which could have a
material adverse effect on the Company. See "Business--Accreditation."
REGULATORY CONSEQUENCES OF A CHANGE OF OWNERSHIP OR CONTROL
Upon a "change of ownership" of an institution resulting in a "change in
control," as defined in the HEA and applicable regulations, that institution
becomes ineligible to participate in Title IV Programs. In such event, an
institution may receive and disburse only previously committed Title IV Program
funds to its students until it has applied for and received from the U.S.
Department of Education recertification under such institution's new ownership.
Approval of an application for recertification must be based upon a
determination by the U.S. Department of Education that the institution under its
new ownership is in compliance with the requirements for institutional
eligibility. The time required to act on such an application can vary
substantially and may take several months. Under the HEA and its implementing
regulations, a change of ownership resulting in a change in control would occur
upon the transfer of a controlling interest in the voting stock of an
institution or such institution's parent corporation. With respect to a publicly
traded corporation such as the Company, a change of ownership resulting in a
change in control occurs when there is an event that would obligate that
corporation to file a Current Report on Form 8-K with the Securities and
Exchange Commission (the "Commission") disclosing a change of control. A change
of ownership and control also could require an institution to reaffirm its state
authorization and accreditation. The requirements of state and accrediting
agencies with jurisdiction over the Company's schools vary widely in this
regard.
The Company believes that the Offering will not constitute a change of
ownership resulting in a change in control for purposes of Title IV Programs
because the Company will not be obligated to file a Current Report on Form 8-K
to disclose the consummation of the Offering. The Offering may be determined to
be a change of ownership by the Accrediting Commission of Career Schools and
Colleges of Technology ("ACCSCT"), which accredits eleven of the Company's
schools, or the relevant agencies of the states of Arizona, Colorado and
Illinois. Based upon its review of applicable state and accrediting agency
standards, precedent and practice and upon the advice of its regulatory legal
counsel, Dow, Lohnes & Albertson, PLLC (which advice is based upon such legal
counsel's review of applicable state and accrediting agency precedent and
practice), the Company believes that the Offering should not be considered to be
a change of ownership under the standards of any of the state agencies that
license its schools or any of the accrediting agencies that accredit its
schools. If the applicable agency of the state of Arizona determines that the
Offering constitutes a change of ownership, The Art Institute of Phoenix would
be required to notify the agency of the transaction, but no approval would be
required. If ACCSCT or the applicable agency of the state of Colorado or
Illinois determines that the Offering constitutes a change of ownership, the
Company's schools that are accredited or licensed by such entity may be subject
to review by such entity to reaffirm their accreditation or state authorization.
A significant delay in reobtaining or the failure to reobtain state
authorization or accreditation for any or all of these schools could have a
material
11
<PAGE> 13
adverse effect on the Company. The Company does not believe it will experience
any material delay or difficulty in reobtaining accreditation or state
authorization, as applicable, for any of those institutions.
The potential adverse implications of a change of ownership resulting in a
change in control could influence future decisions by the Company and its
shareholders regarding the sale, purchase, transfer, issuance or redemption of
the Company's capital stock. However, the Company believes that any such future
transaction having an adverse effect on state authorization, accreditation or
participation in Title IV Programs of any of the Company's schools is not likely
to occur without the consent of the Company's Board of Directors (the "Board of
Directors"). See "--Ownership and Significant Influence of Principal
Shareholders," "--Certain Anti-Takeover Effects," "Principal and Selling
Shareholders" and "Description of Capital Stock."
SEASONALITY IN RESULTS OF OPERATIONS
EDMC has experienced seasonality in its results of operations primarily due
to the pattern of student enrollments. Historically, EDMC's lowest quarterly
revenues and income have been in the first quarter (July to September) of its
fiscal year due to fewer students being enrolled during the summer months and
the expenses incurred in preparation for the peak in enrollment in the fall
quarter (October to December). EDMC expects that this seasonal trend will
continue. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Seasonality and Other Factors Affecting Quarterly
Results."
RISKS ASSOCIATED WITH CHANGES IN MARKET NEEDS AND TECHNOLOGY
Many prospective employers of Art Institute graduates increasingly demand
that their entry-level employees possess appropriate technological skills.
Education programs at The Art Institutes, particularly programs for computer
animators, graphic designers and multimedia technicians, must keep pace with
such shifting requirements. The Company believes its management processes and
information systems should permit the Company to make changes in curricula
content and supporting technology in response to market needs. However, the
inability of the Company to adequately respond to changes in market requirements
due to financial constraints, unusually rapid technological change or other
factors could have a material adverse effect on the Company.
RISKS ASSOCIATED WITH EXPANSION AND ACQUISITION PLANS
Prior to fiscal 1996, EDMC had not acquired a school since fiscal 1985 and
had not established a new school since the early 1970s. In fiscal 1996, the
Company opened The Art Institute of Phoenix and acquired the Ray College of
Design (renamed The Illinois Institute of Art at Chicago and The Illinois
Institute of Art at Schaumburg). Since the beginning of fiscal 1997, EDMC has
acquired NYRS and The Art Institute of Minnesota and opened The Art Institute of
Los Angeles, which began classes in October 1997. As part of its business
strategy, EDMC intends to continue to expand its operations through the
establishment of new schools and the acquisition of existing institutions. When
the Company acquires an existing school, a significant portion of the purchase
price for such school typically will be allocated to goodwill and intangibles
(e.g., student enrollments and curricula), since most of these acquisitions will
not involve the purchase of significant amounts of tangible property. The
Company amortizes goodwill over a period of 40 years and intangible assets over
periods of two to five years. In addition, start-up schools and smaller
acquisitions are expected to incur operating losses during the first two to
three years following their opening or purchase.
There can be no assurance that suitable expansion or acquisition
opportunities will be identified or that any new or acquired institutions
(including the schools described above) can be operated profitably or
successfully integrated into the Company's operations. Growth through expansion
or acquisition also could involve other risks, including the diversion of
management's attention from normal operating activities, the inability to find
appropriate personnel to manage the Company's expanding operations and the
possibility that new or acquired schools will be subject to unanticipated
business or regulatory uncertainties or liabilities. In addition, the Company's
acquisition of a school would constitute a change in ownership resulting in a
change of control with respect to such school for purposes of eligibility to
participate in Title IV Programs. See "--Potential Adverse Effects of
Regulation; Impairment of Federal Funding--Regulatory Consequences of a Change
of Ownership or
12
<PAGE> 14
Control." Generally, the Company intends to acquire schools subject to the
condition that they be recertified promptly for such eligibility by the U.S.
Department of Education. The failure of the Company to manage its expansion and
acquisition program effectively could have a material adverse effect on the
Company.
OWNERSHIP AND SIGNIFICANT INFLUENCE OF PRINCIPAL SHAREHOLDERS
After consummation of the Offering, the executive officers and directors of
the Company and the ESOP collectively will own approximately 38% of the
outstanding shares of Common Stock. In particular, the ESOP and Mr. Knutson will
own approximately 24% and 12%, respectively. As a result of such concentration
of ownership, if the employees of the Company, through the ESOP, and the
executive officers and directors of the Company vote together, they will have
the ability to exert significant influence on the policies and affairs of the
Company and corporate actions requiring shareholder approval, including the
election of the members of the Board of Directors. This concentration of
ownership could have the effect of delaying, deferring or preventing a change of
control of the Company, including any business combination with an unaffiliated
party, and could also affect the price that investors might be willing to pay in
the future for shares of Common Stock. See "Principal and Selling Shareholders"
and "Description of Capital Stock."
CERTAIN ANTI-TAKEOVER EFFECTS
Certain provisions of EDMC's Amended and Restated Articles of Incorporation
(the "Articles") and Restated Bylaws (the "Bylaws"), together with the terms of
the 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 requirement that the holders of two-thirds of
the Common Stock approve the amendment, alteration or repeal of certain
provisions of the Articles and the Bylaws, and (iv) the authorization of the
Board of Directors to fix the rights and preferences of, and issue shares of,
the preferred stock, $.01 par value (the "Preferred Stock"), of the Company
without further action by its shareholders. See "Description of Capital Stock."
COMPETITION
The postsecondary education market is highly competitive. The Art
Institutes compete with traditional public and private two-year and four-year
colleges and universities and other proprietary schools. Certain public and
private colleges and universities may offer programs similar to those of The Art
Institutes. Public institutions are often able to charge lower tuition than The
Art Institutes, due in part to government subsidies, government and foundation
grants, tax-deductible contributions and other financial sources not available
to proprietary schools. However, tuition at private non-profit institutions is,
on average, higher than The Art Institutes' tuition. See
"Business--Competition."
RELIANCE ON CURRENT MANAGEMENT
The Company's success to date has been, and its continuing success will be,
substantially dependent on the continued services of its executive officers and
other key personnel, who, generally, have extensive experience in the industry
and have been employed by the Company for substantial periods of time. None of
EDMC's executive officers or other key employees is subject to an employment or
non-competition agreement other than Mr. Knutson. The loss of the services of
any one or more of its executive officers and other key personnel or the
inability to attract and retain other qualified employees could have a material
adverse effect on the Company. There can be no assurance that the Company will
continue to be successful in attracting and retaining such personnel. See
"Management and Directors."
13
<PAGE> 15
DIVIDEND POLICY
Since the IPO, the Company has not declared or paid any dividends on the
Common Stock. The Company currently anticipates that it will retain future
earnings, if any, to fund the development and growth of its business and does
not anticipate paying any cash dividends in the foreseeable future. See
"Dividend Policy." In addition, U.S. Department of Education financial
responsibility standards applicable to the Company's schools could, in certain
circumstances, restrict the ability of the Company to obtain dividends or other
funds from its subsidiaries, which, in turn, could limit the Company's ability
to pay dividends. See "--Potential Adverse Effects of Regulation; Impairment of
Federal Funding--Financial Responsibility Standards."
SHARES ELIGIBLE FOR FUTURE SALE
After consummation of the Offering, 2,060,719 outstanding shares of Common
Stock (2,022,310 outstanding shares if the over-allotment option is exercised in
full) held by the directors and executive officers of the Company may be
eligible for sale pursuant to exemptions from registration provided by Rule 144
under the Securities Act of 1933, as amended (the "Securities Act"). The Company
also has granted certain registration rights to certain shareholders (including
the ESOP and Mr. Knutson which or who will own an aggregate of approximately
5,220,000 outstanding shares of Common Stock (approximately 5,186,000
outstanding shares if the over-allotment option is exercised in full) following
consummation of the Offering). The Company and its executive officers and
directors, the Selling Shareholders and certain other shareholders (including
the ESOP), which or who, immediately following the consummation of the Offering,
will own in the aggregate approximately 5,910,000 outstanding shares of Common
Stock (approximately 5,630,000 shares if the over-allotment option is exercised
in full) and vested and exercisable options to purchase an additional 326,643
shares of Common Stock in the aggregate, have agreed not to offer, sell,
contract to sell, pledge or otherwise dispose of, directly or indirectly, or
file or cause to be filed with the Commission a registration statement under the
Securities Act relating to, any shares of Common Stock or securities or other
rights convertible into or exchangeable or exercisable for any shares of Common
Stock, or publicly disclose the intention to make any such offer, sale, pledge,
disposal or filing, without the prior written consent of Credit Suisse First
Boston Corporation, for a period of 90 days after the date of this Prospectus.
Certain of the Merrill Lynch Entities (as defined under "Principal and Selling
Shareholders") that are limited partnerships will distribute an aggregate of
approximately 108,376 shares of Common Stock (or if the Underwriters exercise
their overallotment option in full, approximately 119,213 shares) owned by them
to their partners that elect not to receive their pro rata share of the proceeds
of the sale of shares of Common Stock by such limited partnerships (the "Merrill
Lynch Distribution"). As a condition to receiving shares of Common Stock in the
Merrill Lynch Distribution, such partners have agreed to be bound by the same
lock-up provision as the Company, its officers and directors, the Selling
Shareholders and certain other shareholders (including the ESOP). The Merrill
Lynch Distribution is expected to occur as soon as practicable after 90 days
after the date of this Prospectus or on such earlier date consented to by Credit
Suisse First Boston Corporation. No prediction can be made as to the effect, if
any, that future sales of any of these shares of Common Stock, or the
availability of these shares for future sale, will have on the market price of
the Common Stock prevailing from time to time. Sales of a substantial number of
these shares of Common Stock in the public market following the Offering, or the
perception that such sales could occur, could adversely affect market prices for
the Common Stock and could impair the Company's ability to raise capital through
an offering of its equity securities. See "Shares Eligible for Future Sale" and
"Underwriting."
14
<PAGE> 16
USE OF PROCEEDS
All shares of Common Stock offered hereby are being sold by the Selling
Shareholders. The Company will not receive any proceeds from the sale of those
shares.
DIVIDEND POLICY
Since the IPO, the Company has not declared or paid any dividends on the
Common Stock. The Company 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
EDMC is, and will continue to be, subject to certain restrictions under the
terms of its Amended and Restated Credit Agreement, dated March 16, 1995, as
amended (the "Revolving Credit Agreement").
PRICE RANGE OF COMMON STOCK
The Common Stock commenced trading on the Nasdaq National Market under the
symbol "EDMC" on October 31, 1996. The prices set forth below reflect the high
and low sales prices for the Common Stock for the periods indicated, as reported
in the consolidated transaction reporting system of the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
FISCAL 1997
Second Quarter (from October 31, 1996).................. $21.00 $15.50
Third Quarter........................................... $23.25 $18.00
Fourth Quarter.......................................... $26.75 $21.50
FISCAL 1998
First Quarter........................................... $29.00 $24.25
Second Quarter (through October 20, 1997)............... $29.06 $25.75
</TABLE>
On October 20, 1997, the last reported sale price of the Common Stock on
the Nasdaq National Market was $28.125 per share. As of September 29, 1997,
there were approximately 525 holders of record of the Common Stock.
CAPITALIZATION
The following table sets forth the historical consolidated capitalization
of the Company as of June 30, 1997. 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>
JUNE 30, 1997
--------------
(IN THOUSANDS)
<S> <C>
Total cash and cash equivalents................................ $ 33,227
===========
Current portion of long-term debt.............................. 3,637
Long-term debt, excluding current portion...................... 30,394
Total shareholders' investment................................. 57,756
-----------
Total capitalization......................................... $ 91,787
===========
</TABLE>
15
<PAGE> 17
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following selected consolidated financial and other data should be read
in conjunction with the Company's Consolidated Financial Statements and Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Prospectus. Certain of the
selected consolidated financial data presented below are derived from the
Company's consolidated financial statements audited by Arthur Andersen LLP,
independent public accountants, whose report covering the financial statements
as of June 30, 1996 and 1997 and for each of the three years in the period ended
June 30, 1997 also is included elsewhere in this Prospectus. The selected
consolidated income statement data for the years ended June 30, 1993 and 1994
and the selected consolidated balance sheet data as of June 30, 1993, 1994 and
1995 are derived from audited financial statements not included in this
Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------------------------
1993 1994(8) 1995(9)(10) 1996(10) 1997(10)
-------- -------- ---------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenues.............................. $117,234 $122,549 $ 131,227 $147,863 $182,849
Cost and expenses:
Educational services.................... 73,823 83,566 86,865 98,841 120,918
General and administrative.............. 24,679 26,174 28,841 32,344 41,036
Amortization of intangibles(1).......... 10,025 6,599 1,937 1,060 2,076
ESOP expense(2)......................... 4,791 4,759 7,086 1,366 --
-------- -------- ---------- -------- --------
113,318 121,098 124,729 133,611 164,030
-------- -------- ---------- -------- --------
Income (loss) before interest and taxes... 3,916 1,451 6,498 14,252 18,819
Interest expense, net..................... 5,113 4,765 4,495 3,371 1,603
-------- -------- ---------- -------- --------
Income (loss) before income taxes......... (1,197) (3,314) 2,003 10,881 17,216
Provision (credit) for income taxes....... (23) (1,612) 490 4,035 7,231
-------- -------- ---------- -------- --------
Income (loss) before extraordinary item... (1,174) (1,702) 1,513 6,846 9,985
-------- -------- ---------- -------- --------
Extraordinary item(3)..................... -- -- -- 926 --
Net income (loss)......................... $ (1,174) $ (1,702) $ 1,513 $ 5,920 $ 9,985
======== ======== ======== ======== ========
Dividends on Series A Preferred Stock..... $ 2,249 $ 2,249 $ 2,249 $ 2,249 $ 83
Other Series A Preferred Stock
transactions(4)......................... -- -- -- -- $ 403
PER SHARE DATA(5):
PRIMARY:
Income (loss) before extraordinary item... $ (.49) $ (.57) $ (.11) $ .45 $ .72
Net income (loss)......................... $ (.49) $ (.57) $ (.11) $ .36 $ .72
Weighted average number of common shares
outstanding, in thousands(6)............ 6,959 6,926 6,890 10,170 13,235
FULLY DILUTED:
Income (loss) before extraordinary item... $ (.49) $ (.57) $ (.11) $ .39 $ .72
Net income (loss)......................... $ (.49) $ (.57) $ (.11) $ .31 $ .72
Weighted average number of common shares
outstanding, in thousands(6)............ 6,959 6,926 6,890 11,874 13,687
OTHER DATA:
Capital expenditures...................... $ 8,448 $ 6,289 $ 11,640 $ 14,981 $ 18,098
Enrollments at beginning of fall quarter
during period(7)........................ 12,708 12,592 12,749 13,407 15,838
</TABLE>
16
<PAGE> 18
<TABLE>
<CAPTION>
AS OF JUNE 30,
--------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total cash and cash equivalents............ $ 24,164 $ 20,487 $ 39,623 $ 27,399 $ 33,227
Current assets............................. 31,729 30,705 49,662 39,858 48,886
Total assets............................... 85,091 78,527 102,303 101,412 126,292
Current liabilities........................ 30,343 30,129 34,718 27,264 36,178
Long-term debt (including current
portions)................................ 68,923 63,112 69,810 65,919 34,031
Shareholders' investment (deficit)(11)..... (10,790) (7,724) 1,855 9,656 57,756
</TABLE>
- ---------
(1) Includes the amortization of goodwill and intangibles resulting from the
application of purchase accounting to the establishment and financing of
the ESOP and the related leveraged transaction in 1989. See Note 3 of Notes
to Consolidated Financial Statements on page F-11. The majority of the
intangible assets related to student enrollments and applications,
accreditation and contracts with colleges and universities and were
amortized over two to five year periods. The excess of the investment in
EDMC and other acquisitions (including NYRS) over the fair market value of
the net assets acquired has been assigned to goodwill and is being
amortized over 40 years.
(2) ESOP expense equals the sum of the payments on the ESOP Term Loan, plus
repurchases of shares from participants in the ESOP, less the dividends
paid on the shares of Series A Preferred Stock held by the ESOP. In fiscal
1995, the Company made a voluntary prepayment of $2.1 million on the ESOP
Term Loan. In fiscal 1996, the ESOP Term Loan was repaid in full. In
addition, as a result of the IPO, the Company has no obligation to
repurchase shares of Common Stock from participants in the ESOP. Therefore,
there was no ESOP expense in fiscal 1997.
(3) In fiscal 1996, the $25.0 million aggregate principal amount of the
Subordinated Notes was prepaid in full. The resulting $1.5 million
prepayment penalty is classified as an extraordinary item net of the
related tax benefit.
(4) These transactions were the redemption of 75,000 shares of Series A
Preferred Stock (which resulted in the payment of a redemption premium) in
August 1996 and the conversion of the remaining shares of Series A
Preferred Stock into shares of Common Stock (which resulted in the accrual
of dividends that were not payable) at the time of the IPO.
(5) Except in fiscal 1997, dividends on the outstanding shares of Series A
Preferred Stock have been deducted from net income in calculating primary
and fully diluted net income (loss) per common share. In fiscal 1997, the
redemption premium paid upon redemption of 75,000 shares of Series A
Preferred Stock has been deducted from net income in calculating primary
and fully diluted net income per common share. In fiscal 1997, dividends
paid and dividends accrued but not payable on outstanding shares of Series
A Preferred Stock have been deducted from net income in calculating primary
net income per common share.
(6) The weighted average number of common shares used to calculate income
(loss) per share includes, where dilutive, equivalent common shares
calculated under the treasury stock method and resulting from the
conversion of outstanding shares of Series A Preferred Stock.
(7) Excludes students enrolled at colleges and universities in programs under
consulting agreements with NCPD.
(8) A special charge of $3.0 million was recorded in fiscal 1994 for unusual
items, including the early write-off of equipment, program termination
expenses, severance compensation, expenses related to the settlement of a
lease and various legal expenses. Such special charge was included in
educational services and general and administrative expenses.
(9) Results for fiscal 1995 include a $1.1 million nonrecurring credit for the
refund of state and local business and occupation taxes.
(10) Charges of $1.1 million, $0.5 million and $0.4 million are reflected in
fiscal 1995, 1996 and 1997, respectively, to account for non-cash
compensation expense related to the performance-based vesting of
nonstatutory stock options.
(11) Prior to the closing date of an initial public offering of its securities,
holders of the Company's equity securities had the right, under certain
circumstances, to require the Company to repurchase such securities. In
addition, the Company had the right to redeem shares of the Series A
Preferred Stock and its Class B Common Stock, $.0001 par value, under
certain circumstances. These rights expired upon consummation of the IPO.
17
<PAGE> 19
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
EDMC is among the largest providers of proprietary postsecondary education
in the United States based on student enrollments and revenues. Through its
operating units, The Art Institutes, NYRS, NCPT and NCPD, the Company offers
associate's and bachelor's degree programs and non-degree programs in the areas
of design, media arts, culinary arts, fashion and professional development. The
Company has provided career-oriented education programs for 35 years, and its
schools have graduated over 100,000 students. The Company's main operating unit,
The Art Institutes, consists of 13 schools in 12 major metropolitan areas
throughout the United States and accounted for approximately 93% of the
Company's net revenues in 1997.
Net revenues, income before interest and taxes and net income increased in
each of the last two years. Net revenues are presented after deducting refunds,
scholarships and other adjustments. Net revenues increased 39.3% to $182.8
million in 1997 from $131.2 million in 1995. Income before interest and taxes
increased 189.2% to $18.8 million in 1997 from $6.5 million in 1995. Net income
increased by 560.0% to $10.0 million in 1997 from $1.5 million in 1995. Average
quarterly student enrollments at the Company's schools were 14,490 in 1997
compared to 11,349 in 1995. The increase in average enrollments was due to new
education programs, additional school locations, and expanded evening program
offerings.
The Company's revenues consist of tuition and fees, student housing fees
and student supply store and restaurant sales. In 1997, the Company derived
87.8% of its net revenues from tuition and fees paid by, or on behalf of, its
students. Tuition revenue generally varies based on the average tuition charge
per credit hour and the average student population. Student supply store,
housing and restaurant revenue is largely a function of the average student
population. The average student population is influenced by the number of
continuing students attending school at the beginning of a fiscal period and by
the number of new students entering school during such period. New students
enter The Art Institutes at the beginning of each academic quarter, which
typically commence in January, April, July and October. The Company believes
that the size of its student population is influenced by the number of
graduating high school students, the attractiveness of its program offerings,
the effectiveness of its marketing efforts, the strength of employment markets,
the persistence of its students, the length of its education programs and
general economic conditions. The introduction of additional program offerings at
existing schools and the establishment of new schools (through acquisition or
start-up) are important influences on the Company's average student population.
Tuition increases have been implemented in varying amounts in each of the
past several years. Historically, the Company has been able to pass along cost
increases through increases in tuition. The Company believes that it can
continue to increase tuition as educational costs at other postsecondary
institutions, both public and private, continue to rise. The Company's schools
implemented tuition rate increases averaging approximately 5.5% for the fall
quarter of 1997. Tuition rates have generally been consistent across the
Company's schools and programs. However, as the Company enters more markets in
different geographic regions, tuition rates across Company schools might not
remain consistent.
The majority of students at The Art Institutes and NYRS rely on funds
received under various government sponsored student financial aid programs,
especially Title IV Programs, to pay a substantial portion of their tuition and
other education-related expenses. For the year ended June 30, 1997,
approximately 63% of the Company's net revenues was indirectly derived from
Title IV Programs.
Educational services expense consists primarily of costs related to the
delivery and administration of the Company's education programs. Major cost
components are faculty compensation, administrative salaries, costs of
educational materials, facility leases and school occupancy costs, management
information system costs, bad
18
<PAGE> 20
debt expense and depreciation and amortization of property and equipment. During
1997, The Art Institutes' faculty was comprised of approximately 44% full-time
and approximately 56% part-time employees. In 1996, these same percentages were
45% and 55%, respectively.
General and administrative expense consists of marketing and student
admissions expenses and departmental costs such as for the executive management,
finance and accounting, legal and corporate development departments that do not
provide direct services to the Company's students. The Company has centralized
many of these services to gain consistency in management reporting, efficiency
in administrative effort and control of costs. All marketing and student
admissions costs are expensed in the year incurred.
Amortization of intangibles relates to the values assigned to student
enrollment agreements and applications, accreditation, contracts with colleges
and universities and goodwill which arose principally from the application of
purchase accounting to the establishment and financing of the ESOP and the
related leveraged transaction in October 1989 and the acquisitions of NYRS and
Lowthian College (renamed The Art Institute of Minnesota). See Note 3 of Notes
to Consolidated Financial Statements.
ESOP expense equals the sum of the payments on the ESOP Term Loan plus
repurchases of shares from participants in the ESOP, less the dividends paid on
the Series A Preferred Stock that was held by the ESOP. As of June 30, 1996, the
entire ESOP Term Loan was repaid and, in November 1996, the IPO was consummated.
As a result, there was no ESOP expense in 1997. Coincident with the IPO, the
ESOP converted its shares of Series A Preferred Stock into shares of Common
Stock and, therefore, dividends are no longer payable on the Series A Preferred
Stock.
In November 1995, the Company purchased the assets of the two schools of
the Ray College of Design for $1.1 million in cash and the assumption of
specified liabilities. The Company acquired accounts receivable, property and
equipment and certain other assets. The schools, which regained eligibility as
of March 1996 to participate in Title IV Programs, were renamed The Illinois
Institute of Art at Chicago and The Illinois Institute of Art at Schaumburg.
In 1996, the Company established The Art Institute of Phoenix at which
classes commenced in January 1996. The Art Institute of Phoenix initiated the
accreditation process in January 1996, submitted its application to the U.S.
Department of Education in June 1996, and became eligible to participate in
Title IV Programs in August 1996. During 1996, the Company deferred
approximately $0.4 million of certain pre-opening non-marketing and admissions
costs associated with The Art Institute of Phoenix start-up. All of the costs
deferred in 1996 were expensed in 1997.
In August 1996, the Company purchased certain assets of NYRS for $9.5
million. The Company acquired current assets net of specified current
liabilities, property and equipment, student enrollment agreements, curriculum,
trade names and certain other assets. The school regained its eligibility as of
November 1996 to participate in Title IV Programs.
In January 1997, the Company acquired the assets of Lowthian College in
Minneapolis, Minnesota for $0.4 million, which included the assumption of
certain liabilities. The school, which regained eligibility as of April 1997 to
participate in Title IV Programs, has been renamed The Art Institute of
Minnesota.
In March 1997, the Company established The Art Institute of Los Angeles,
which has obtained its license to operate in the state of California. In
connection with this start-up, marketing and student recruiting activities
commenced in April 1997. The school began classes in October 1997. In 1997, the
Company changed its policy and did not defer pre-opening costs for The Art
Institute of Los Angeles. The $0.4 million of pre-opening costs incurred in 1997
were expensed.
Start-up schools and smaller acquisitions are expected to incur operating
losses during the first two to three years following their opening or purchase.
As expected, the combined operating losses of the Company's newer schools in
Arizona, Illinois, Minnesota and California were approximately $3.4 million in
1997.
19
<PAGE> 21
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,
-------------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Net revenues........................................ 100.0% 100.0% 100.0%
Costs and expenses:
Educational services.............................. 66.2 66.8 66.1
General and administrative........................ 22.0 21.9 22.4
Amortization of intangibles....................... 1.5 0.7 1.1
ESOP expense...................................... 5.4 0.9 --
----- ----- -----
95.0 90.4 89.6
----- ----- -----
Income before interest and taxes.................... 5.0 9.6 10.3
Interest expense, net............................... 3.4 2.3 0.9
----- ----- -----
Income before income taxes.......................... 1.6 7.3 9.5
Provision for income taxes.......................... 0.4 2.7 4.0
----- ----- -----
Income before extraordinary item.................... 1.2 4.6 5.5
Extraordinary item.................................. -- 0.6 --
----- ----- -----
Net income.......................................... 1.2% 4.0% 5.5%
===== ===== =====
</TABLE>
YEAR ENDED JUNE 30, 1997 COMPARED WITH YEAR ENDED JUNE 30, 1996
Net Revenues
Net revenues increased by 23.7% to $182.8 million in 1997 from $147.9
million in 1996. The revenue increase was primarily due to a 13.1% increase in
average quarterly student enrollments ($15.4 million) and an average 5.5%
tuition price increase ($5.8 million) at The Art Institutes owned by EDMC prior
to 1997, and the addition of two schools ($10.2 million). The average academic
year (three academic quarters) tuition rate for a student attending classes at
an Art Institute on a recommended full schedule increased to $9,860 in 1997 from
$9,345 in 1996. In August 1996, the Company acquired NYRS and in January 1997,
the Company acquired Lowthian College in Minneapolis, Minnesota and renamed it
The Art Institute of Minnesota.
Net housing revenues increased by 12.5% to $10.4 million in 1997 from $9.2
million in 1996 and revenues from the sale of educational materials in 1997
increased by 33.4% to $8.7 million. Both are primarily the result of increased
student enrollments.
Refunds for 1997 increased $1.3 million from $4.7 million in 1996 to $6.0
million in 1997. As a percentage of gross revenue, refunds remained consistent
between years.
Educational Services
Educational services expense increased by $22.1 million, or 22.3%, to
$120.9 million in 1997 from $98.8 million in 1996. The increase was primarily
due to incremental education expenses needed to service higher student
enrollments accompanied by normal cost increases for wages and other services at
the schools owned by EDMC prior to 1996 ($8.8 million) and schools added in 1996
and 1997 ($10.1 million). Other factors that have contributed to the increase
are expanded capital spending for culinary arts programs and classroom
technology, and initiatives to improve student persistence rates and graduate
starting salaries.
On an overall basis, as a percentage of net revenue, educational services
expense in 1997 decreased by 0.7% from 1996. The reduction is primarily the
result of improved efficiencies at The Art Institutes due to economies of scale.
20
<PAGE> 22
General and Administrative
General and administrative expense increased by $8.7 million, or 26.9%, to
$41.0 million in 1997 from $32.3 million in 1996 due in large measure to the
incremental increase in marketing and student admissions expenses that resulted
in higher student enrollments at the schools owned by EDMC prior to 1996 ($2.2
million), and additional marketing and student admissions expenses at the
schools added since 1996 ($3.4 million). During 1997, additional expenses were
incurred by the Company's central staff organization that supports school
operations because of the increased number of Company-owned schools and the
growth in student enrollments. General and administrative expense increased as a
percentage of net revenues in 1997 compared to 1996 as a result of the factors
described above.
Amortization of Intangibles
Amortization of intangibles increased by $1.0 million, or 90.9%, to $2.1
million in 1997 from $1.1 million in 1996. The higher expense in 1997 was
primarily the result of the amortization of goodwill and other intangible assets
associated with the acquisition of NYRS.
ESOP Expense
ESOP expense was zero in 1997, down from $1.4 million in 1996, due to the
repayment in 1996 of the final $3.6 million of the ESOP Term Loan and the
consummation of the IPO. As a result, the Company incurred no ESOP expense in
1997 related to the repayment of the ESOP Term Loan or the repurchase of shares.
Interest Expense
Net interest expense decreased by $1.8 million, or 52.9%, to $1.6 million
in 1997 from $3.4 million in 1996. The factors that contributed to lower
interest expense are: (i) a decrease in the average debt balance outstanding
from $38.0 million in 1996 to $22.4 million in 1997, and (ii) lower average
interest rates on debt instruments. The lower average debt balance is the result
of the Company repaying outstanding indebtedness ($38.5 million) under the
Revolving Credit Agreement with proceeds from the IPO; the ESOP Term Loan being
repaid as of June 30, 1996; and scheduled payments on capitalized leases.
In October 1995, the Company retired the entire $25 million issue of its
Subordinated Notes with borrowings under the Revolving Credit Agreement which
were at a lower rate of interest. Borrowings under the Revolving Credit
Agreement were at a weighted average interest rate of 7.3% and 7.2% during 1996
and 1997, respectively.
Provision for Income Tax
The Company's effective tax rate increased from 37.1% in 1996 to 42.0% in
1997. The effective rate in fiscal 1996 was lower than the combined federal and
state statutory rate due to the tax deductible dividends on the Series A
Preferred Stock paid to the ESOP and used for ESOP Term Loan repayment. In 1996,
tax deductible dividends of $1.6 million offset approximately 14.7% of the
Company's income before taxes, substantially reducing the Company's effective
tax rate.
Income Before Extraordinary Item
Income before extraordinary item increased by $3.2 million to $10.0 million
in 1997 from $6.8 million in 1996. The higher income resulted from improved
operations at the Company's schools owned prior to 1996, the addition of NYRS,
lower ESOP expense and reduced net interest expense charges, partially offset by
increased expense associated with the amortization of intangible assets and a
higher provision for income taxes.
Extraordinary Item
In 1996, the Company prepaid the entire $25 million issue of the
Subordinated Notes, resulting in a $0.9 million (net of tax) prepayment penalty.
21
<PAGE> 23
YEAR ENDED JUNE 30, 1996 COMPARED WITH YEAR ENDED JUNE 30, 1995
Net Revenues
Net revenues increased by 12.7% to $147.9 million in 1996 from $131.2
million in 1995 due primarily to a 5.7% increase in average quarterly student
enrollments ($6.3 million), an average 6.0% tuition price increase at The Art
Institutes owned by EDMC prior to 1996 ($7.4 million), and the addition of new
schools ($2.0 million). The average academic year (three academic quarters)
tuition rate for a student attending classes at an Art Institute on a
recommended full schedule increased to $9,345 in 1996 from $8,820 in 1995. In
November 1995, the two schools of the Ray College of Design were acquired and
renamed The Illinois Institute of Art at Chicago and The Illinois Institute of
Art at Schaumburg. A new school, The Art Institute of Phoenix, commenced classes
in January 1996.
Net housing revenues increased by 7.7% to $9.2 million in 1996 from $8.6
million in 1995, primarily resulting from price increases. Revenues from the
sale of educational materials in 1996 increased by 6.5% to $6.5 million.
Refunds in 1996 increased $0.6 million from $4.1 million in 1995 to $4.7
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 $6.8 million
of incremental education expenses related to higher student enrollments at the
schools owned by EDMC prior to 1996, $3.5 million of education expenses at the
three new schools and $1.7 million of additional depreciation expense resulting
from expanded capital spending for culinary arts programs and classroom
technology. Contributing to the increases at the schools owned by the Company
prior to 1996 were investments in initiatives to improve student persistence
rates and to increase graduates' starting salaries. These initiatives included
additional student remediation, instructor development and expanded employment
assistance services. The Art Institutes implemented a system wide remediation
program to help students overcome deficiencies in academic preparedness so they
successfully complete their education.
In addition, a $1.1 million refund of state and local business and
occupation taxes reduced educational services expense in 1995. As a result of an
administrative appeal, The Art Institute of Seattle was exempted from the State
of Washington and the City of Seattle business and occupation taxes. Requests
for refunds were filed for prior years to the extent permitted by the statute of
limitations. The taxes to which the refunds applied had been originally recorded
as educational services expense in the years paid.
General and Administrative
General and administrative expense increased by $3.5 million, or 12.1%, to
$32.3 million in 1996 from $28.8 million in 1995 due principally to the
incremental increase in marketing and student admissions expenses that resulted
in higher student enrollments at the schools owned by EDMC prior to 1996 and the
addition of marketing and student admissions expenses for three schools added in
1996.
Amortization of Intangibles
Amortization of intangibles decreased by $0.9 million, or 45.3%, to $1.1
million in 1996 from $1.9 million in 1995. The reduction in amortization expense
occurred because certain intangible assets resulting from the 1989 leveraged
ESOP transaction became fully amortized during 1995.
ESOP Expense
ESOP expense decreased by $5.7 million, or 80.7%, to $1.4 million in 1996
from $7.1 million in 1995 due to the repayment in 1996 of $3.6 million of ESOP
debt, as compared to the repayment in 1995 of $9.1 million of ESOP debt.
Repayments in 1996 and 1995 included voluntary prepayments of $0.4 million and
$2.1 million, respectively, on the ESOP Term Loan. As of June 30, 1996, the
entire ESOP Term Loan had been repaid. As a
22
<PAGE> 24
result, 1996 was the last year in which the Company incurred ESOP expense
resulting from the repayment of such loan.
Interest Expense
Net interest expense decreased by $1.1 million, or 25.0%, to $3.4 million
in 1996 from $4.5 million in 1995. The decrease was attributable to (i) a
reduction in the average debt balance outstanding to approximately $38.0 million
in 1996 from $45.0 million in 1995 as a result of principal payments on the ESOP
Term Loan and capitalized leases, and (ii) the retirement in 1996 of the
Subordinated Notes through borrowings under the Revolving Credit Agreement.
Borrowings under the Revolving Credit Agreement were at a weighted average
interest rate of 7.3% during 1996.
Provision for Income Tax
The Company's effective tax rate increased from 24.5% in 1995 to 37.1% in
1996, which is lower than the Company's blended state and federal statutory rate
of 40.0%. The variance from the statutory rate in 1996 was due to the tax
deductibility of $1.6 million of dividends on the Series A Preferred Stock paid
to the ESOP and used for ESOP Term Loan repayment. The favorable effect of those
dividends was partly offset by $0.4 million of non-deductible goodwill
amortization and other items. In 1995, tax deductible dividends were $1.6
million which offset approximately 80% of the Company's income before taxes,
substantially reducing the Company's effective tax rate. Non-deductible goodwill
amortization in 1995 was $0.4 million. The effective tax rate increased in 1996
because the dollar amount of non-deductible goodwill amortization and deductible
ESOP dividends remained largely unchanged from 1995, whereas 1996 earnings
before taxes were $8.9 million higher than in 1995.
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
In October 1995, the Company prepaid in full the $25 million issue of the
Subordinated Notes resulting in a $0.9 million (net of tax) prepayment penalty.
SEASONALITY AND OTHER FACTORS AFFECTING QUARTERLY RESULTS
The Company's quarterly revenues and income fluctuate primarily as a result
of the pattern of student enrollments. The Company experiences a seasonal
increase in new enrollments in the fall (fiscal year second quarter), which is
traditionally when the largest number of new high school graduates begin
postsecondary education. Some students choose not to attend classes during
summer months, although The Art Institutes and NYRS encourage year-round
attendance. As a result, total student enrollments at the Company's schools are
highest in the fall quarter and lowest in the summer months (fiscal year first
quarter). The Company's costs and expenses, however, do not fluctuate as
significantly as revenues on a quarterly basis. Historically, EDMC has
experienced net losses in its fiscal first quarter ending September 30 due to
lower revenues combined with expenses incurred in preparation for the peak
enrollments in the fall quarter. The Company anticipates that the seasonal
pattern in revenues and earnings will continue in the future.
23
<PAGE> 25
The following table sets forth the Company's quarterly results for 1996 and
1997.
QUARTERLY FINANCIAL RESULTS
<TABLE>
<CAPTION>
1996
----------------------------------------------
SEPT. 30 DEC. 31 MAR. 31 JUNE 30
(SUMMER) (FALL) (WINTER) (SPRING)
-------- ------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenues....................................... $28,333 $42,635 $ 39,637 $ 37,258
Income (loss) before interest and taxes............ $ (565) $ 8,654 $ 5,118 $ 1,045
Income (loss) before income taxes.................. $(1,481) $ 7,761 $ 4,239 $ 362
Net income (loss).................................. $ (931) $ 3,955 $ 2,668 $ 228
Net income (loss) per common share
--Primary........................................ $ (.22) $ .33 $ .21 $ (.05)
--Fully diluted.................................. $ (.22) $ .29 $ .18 $ (.05)
</TABLE>
<TABLE>
<CAPTION>
1997
----------------------------------------------
SEPT. 30 DEC. 31 MAR. 31 JUNE 30
(SUMMER) (FALL) (WINTER) (SPRING)
-------- ------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenues....................................... $33,410 $52,015 $ 50,696 $ 46,728
Income (loss) before interest and taxes............ $ (143) $10,447 $ 6,401 $ 2,114
Income (loss) before income taxes.................. $(1,095) $ 9,848 $ 6,305 $ 2,158
Net income (loss).................................. $ (635) $ 5,709 $ 3,655 $ 1,256
Net income (loss) per common share
--Primary........................................ $ (.15) $ .43 $ .25 $ .08
--Fully diluted.................................. $ (.15) $ .42 $ .25 $ .08
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
The Company has generated positive cash flow from operations over the last
three years. Cash flow from operations was $22.2 million, $16.3 million and
$28.5 million for the years 1995, 1996 and 1997, respectively. During 1995, the
Company began to receive student loan receipts via electronic funds transfers
("EFT") from lenders. The introduction of EFT resulted in a one-time increase in
cash flows from operations in 1995. The Company had $12.7 million of working
capital as of June 30, 1997 as compared to $12.6 million of working capital as
of June 30, 1996.
At June 30, 1997, gross trade accounts receivable increased by $7.5 million
to $16.1 million or 87.2% from $8.6 million. Approximately 60% of the increase
is attributable to new schools, including NYRS. Another factor contributing to
the increase is the timing of the write off of accounts receivable against the
bad debt reserve in 1997 compared to 1996. Because of the completion of the
Company's integrated, customized information network in 1996, the Company tracks
accounts receivable for longer periods prior to write-off. The allowance for
doubtful accounts increased by $4.5 million, or 155%, to $7.4 million in 1997
from $2.9 million in 1996. This increase was the result of the timing of
accounts being written off against the reserve in 1997 as compared to 1996, in
combination with the increased gross accounts receivable balance. The allowance
for doubtful accounts as of June 30, 1996 increased by $1.4 million, or 93.0%,
to $2.9 million from $1.5 million as of June 30, 1995.
Debt Service
Effective October 13, 1995, the Company and its lenders amended the
Revolving Credit Agreement in order to increase the amount of the facility
thereunder to $70.0 million and to extend its term to October 13, 2000.
Borrowings under the Revolving Credit Agreement bear interest at one of three
rates set forth in the Revolving Credit Agreement at the election of the
Company. The Revolving Credit Agreement contains customary covenants that, among
other things, require the Company to maintain specified levels of consolidated
net worth
24
<PAGE> 26
and meet specified interest and leverage ratio requirements, restrict capital
expenditures by the Company, restrict the payment of dividends on the Common
Stock and restrict the incurrence of certain additional indebtedness. As of June
30, 1997, the Company was in compliance with all covenants under the Revolving
Credit Agreement. The facility is reduced by outstanding letters of credit. As
of June 30, 1997, the Company had $42.5 million of additional borrowing capacity
available under the Revolving Credit Agreement.
Borrowings under the Revolving Credit Agreement are used by the Company
primarily to fund its working capital needs. The pattern of cash receipts is
seasonal throughout the year. The level of accounts receivable reaches a peak
immediately after the billing of tuition and fees at the beginning of each
academic quarter. Collection of these receivables is heaviest at the start of
each academic quarter.
Borrowings under the Revolving Credit Agreement were used to prepay all of
the Subordinated Notes on October 13, 1995 in order to reduce interest expense.
The Company incurred a $1.5 million ($0.9 million after the related income tax
benefit) prepayment penalty as a result.
In June 1995, the Company made a voluntary prepayment of $2.1 million on
the ESOP Term Loan. In June 1996, the Company made another voluntary prepayment
of $0.4 million on the ESOP Term Loan, at which time it was completely repaid.
Following the completion of the IPO on November 5, 1996, $38.5 million of
the net proceeds received by the Company was used to repay indebtedness under
the Revolving Credit Agreement.
Future Financing and Cash Flows
The Company believes that cash flow from operations, supplemented from time
to time by borrowings under the Revolving Credit Agreement, will provide
adequate funds for ongoing operations, planned expansion to new locations,
planned capital expenditures and debt service during the term of the Revolving
Credit Agreement.
Capital Expenditures
Capital expenditures in 1996 and 1997 have, in substantial part, resulted
from the implementation of the Company's initiatives emphasizing the addition of
new schools and programs (particularly culinary programs) and investment in
classroom technology. The Company's capital expenditures were $11.6 million,
$15.0 million and $18.1 million for 1995, 1996 and 1997, respectively. The
Company anticipates increased capital spending for 1998, principally related to
the introduction and expansion of culinary programs, further investment in
schools acquired during 1996 and 1997 and additional classroom technology. As a
percentage of net revenues, capital expenditures are expected to decline in 1998
compared to 1997. The Company does not have any material commitments for capital
expenditures in 1998 or beyond.
The Company leases nearly all of its facilities. Future commitments on
existing leases will be paid from cash provided by operating activities.
REGULATION
The Company indirectly derived approximately 63% of its net revenues from
Title IV Programs in 1997. U.S. Department of Education regulations prescribe
the timing of disbursements of funds under Title IV Programs. Students must
apply for a new loan for each academic year. Loan funds are generally provided
by lenders in multiple disbursements each academic year. The first disbursement
is generally received either at least 30 days after, in the case of students
commencing a program of study, or, at the earliest, ten days before, the
commencement of the first academic quarter of a student's academic year.
U.S. Department of Education regulations require Title IV Program funds
received by the Company's schools in excess of the tuition and fees owed by the
relevant students at that time to be, with these students' permission,
maintained and classified as restricted until they are billed for the portion of
their education program related to those funds. In addition, all funds
transferred to the Company through EFT programs are held in a separate cash
account until certain conditions are satisfied. These restrictions have not
significantly affected the Company's ability to fund daily operations.
25
<PAGE> 27
Effective July 1997, postsecondary education institutions are subject to
changes in the delivery of FFEL program proceeds. Prior to July 1997, certain
Company-owned schools delivered FFEL loan proceeds for an academic year
(typically three quarters) to students in two equal disbursements. The change
will result in FFEL loan proceeds being delivered equally in each of the
academic quarters. The Company anticipates that this change will result in a
reduction in interest income of approximately $150,000 in 1998. Some of the
Company's schools began to deliver loan proceeds in this manner prior to the
change in regulation becoming effective.
Regulations promulgated under the HEA require all higher education
institutions to meet an acid test ratio of at least 1:1 and maintain positive
tangible net worth, calculated at the end of each fiscal year, comply with the
"85/15 Rule," and insure that any operating losses do not result in a reduction
of tangible net worth by 10% or more over a two-year period. The acid test ratio
is defined as the ratio of cash (including funds classified as restricted), cash
equivalents and current accounts receivable to total current liabilities. The
"85/15 Rule" prohibits participating schools from deriving 85% or more of total
revenue from Title IV Programs in any year. If an institution fails to meet
these requirements, it may be deemed to be not financially responsible by the
U.S. Department of Education, which could result in a loss of its eligibility to
participate in Title IV Programs. These requirements apply to the separate
audited financial statements of The Art Institutes and NYRS and historically
have not been applied to the Company's consolidated financial statements. All of
the participating schools met these requirements as of June 30, 1997.
EFFECT OF INFLATION
The Company does not believe its operations have been materially affected
by inflation.
IMPACT OF NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Financial
Accounting Standard #128 ("FAS #128"). FAS #128 changes the methodology of
calculating earnings per share ("EPS") and renames the two calculations, Basic
(currently primary) and Diluted (currently fully diluted) Earnings per Share.
The calculations differ by eliminating any common stock equivalents (such as
stock options, warrants and convertible preferred stock) from Basic Earnings per
Share and changing certain calculations when computing Diluted Earnings per
Share. FAS #128 is effective for reporting periods ending after December 15,
1997; early adoption is prohibited and when adopted all prior periods must be
restated. However, if FAS #128 were in effect, the new EPS calculations would be
as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------
1995 1996 1997
------ ------- -------
<S> <C> <C> <C>
BASIC:
Income (loss) before extraordinary item........ $ (.11) $ .66 $ .80
Net income (loss).............................. $ (.11) $ .53 $ .80
DILUTED:
Income (loss) before extraordinary item........ $ (.11) $ .39 $ .72
Net income (loss).............................. $ (.11) $ .31 $ .72
WEIGHTED AVERAGE SHARES OUTSTANDING (IN 000'S):
Basic.......................................... 6,890 6,913 11,939
Diluted........................................ 6,890 11,874 13,671
</TABLE>
YEAR 2000 ISSUES
The Company is evaluating the Year 2000 issues and the impact upon
information systems and computer technologies. Certain applications and system
software critical to processing financial and operational information are Year
2000 compliant. However, the Company expects to incur some costs in testing and
implementing updates to such software. The Company is also evaluating the impact
of Year 2000 on other computer technologies and software. All costs to evaluate
and make modifications will be expensed as incurred and are not expected to have
a significant impact on the Company's ongoing results of operations.
26
<PAGE> 28
BUSINESS
GENERAL
The Company is among the largest providers of proprietary postsecondary
education in the United States based on student enrollments and revenues.
Through its operating units, The Art Institutes, NYRS, NCPT and NCPD, the
Company offers associate's and bachelor's degree programs and non-degree
programs in the areas of design, media arts, culinary arts, fashion and
professional development. The Company has provided career-oriented education
programs for 35 years, and its schools have graduated over 100,000 students. In
the fall quarter of fiscal 1997, beginning October 1, 1996, EDMC's schools had
approximately 15,800 students enrolled, representing all 50 states and over 80
countries.
The Company's main operating unit, The Art Institutes, consists of 13
schools in 12 cities throughout the United States and accounted for
approximately 93% of the Company's net revenues in fiscal 1997. Art Institute
programs are designed to provide the knowledge and skills necessary for
entry-level employment in various fields, including graphic design, multimedia,
computer animation, video production, culinary arts, interior design, industrial
design, photography, fashion marketing and fashion design. Those programs
typically are completed in 18 to 27 months and culminate in an associate's
degree. Five Art Institutes currently offer bachelor's degree programs, and EDMC
expects to continue to introduce bachelor's degree programs at schools in states
that permit proprietary postsecondary institutions to offer such programs.
In January 1997, the Company acquired the assets of Lowthian College in
Minneapolis, Minnesota and renamed the school The Art Institute of Minnesota.
The Company's newest school, The Art Institute of Los Angeles, began offering
classes in October 1997.
The Company offers a culinary arts curriculum at seven Art Institutes,
including The Art Institute of Philadelphia, which began offering that
curriculum in October 1997. In addition, in August 1996, the Company acquired
NYRS, a well-known culinary arts and restaurant management school located in New
York City. NYRS offers an associate's degree program and certificate programs.
NYRS accounted for approximately 5% of the Company's net revenues in fiscal
1997.
The Company offers paralegal training at NCPT, a leading source of
paralegals in the southeastern United States. NCPT, located in Atlanta, offers
certificate programs that generally are completed in four to nine months. NCPD
maintains consulting relationships with seven colleges and universities to
assist in the development, marketing and delivery of paralegal, legal nurse
consultant and financial planner test preparation programs for recent college
graduates and working adults. In fiscal 1997, the Company derived approximately
2% of its net revenues from NCPT and NCPD combined.
EDMC's primary objective is to provide career-focused education that
maximizes employment opportunities for its students after graduation. EDMC's
graduates are employed by a broad range of employers nationwide. Approximately
86% of the calendar year 1996 graduates of all programs at EDMC's schools who
were available for employment obtained positions in fields related to their
programs of study within six months of graduation.
The Company believes that demand for postsecondary education will generally
increase due to (i) an increase of 20% in the number of new high school
graduates per year from approximately 2.5 million in 1994 to 3.0 million in 2005
(as projected by the National Center for Education Statistics), (ii) the growing
interest of working adults in enhancing their marketable skills, (iii) the
income premium attributable to higher education degrees, and (iv) employers'
continuing demand for entry-level workers with appropriate technical skills.
The Company also believes the experience of its management team and the
substantial equity ownership of its employees are significant factors
contributing to its success. EDMC's senior management has an average of nine
years with EDMC and 18 years of experience in the education industry.
Approximately two-thirds of the employees of EDMC, including a substantial
majority of the management team, has an ownership interest in the Company
through direct holdings, participation in the ESOP or both.
27
<PAGE> 29
COMPANY HISTORY
The Company was organized as a Pennsylvania corporation in 1962. In 1971,
Robert B. Knutson (currently the Chairman and Chief Executive Officer) became
President of the Company. At that time, EDMC consisted primarily of The Art
Institute of Pittsburgh, which was acquired in 1970. Between 1971 and the
present, the Company opened three schools and acquired 11 others. In October
1997, classes began at the Company's newest school, The Art Institute of Los
Angeles. The Company's net revenues have increased from approximately $1.9
million in 1971 to approximately $182.8 million in fiscal 1997.
INDUSTRY OVERVIEW
According to The National Center for Education Statistics, education is the
second largest sector of the U.S. economy, accounting for approximately 8% of
gross domestic product in 1995, or over $600 billion. EDMC's schools are part of
the postsecondary education market, which accounts for approximately one-third
of the total sector. Of the approximately 6,000 postsecondary schools that are
eligible to participate in Title IV Programs, approximately 500 are proprietary
degree-granting institutions such as EDMC's schools. The U.S. Department of
Education estimates that by the year 2001 the number of students enrolled in
higher education institutions will increase by more than 1.5 million to over 16
million students.
The Company believes that a significant portion of the growth in the
postsecondary education market will result from an increase in the number of new
high school graduates. According to the U.S. Department of Education, the number
of new high school graduates per year is expected to increase by approximately
20%, from 2.5 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
several years, initial enrollments in postsecondary education institutions by
working adults will increase more rapidly than initial enrollments of recent
high school graduates.
The postsecondary education industry is also expected to benefit from the
public's increased recognition of the value of a postsecondary education.
According to The National Center for Education Statistics, the percentage of
recent high school graduates who continued their education after graduation
increased from approximately 53% in 1983 to approximately 63% in 1993. The
Company believes that the income premium associated with a postsecondary
education has been a significant factor contributing to this trend. The Census
Bureau has reported that, in 1995, a full-time male worker with an associate's
degree earned an average of 37% more per year than a comparable worker with only
a high school diploma, and a full-time male worker with a bachelor's degree
earned an average of approximately 72% more per year than a comparable worker
with only a high school diploma. In addition, employment in technical
occupations is expected to increase over the next several years as the demand
for technically skilled labor increases.
The Company believes that private degree-granting institutions, such as The
Art Institutes and NYRS, will have an advantage over their principal
competitors, the public two-year and four-year institutions, in capitalizing on
the trends in the postsecondary education market. Private degree-granting
institutions have the ability to work closely with employers to develop
education programs. Well-capitalized companies, such as EDMC, 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
EDMC 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 program offerings, and (iv) improving
student outcomes.
ENHANCING GROWTH AT THE COMPANY'S SCHOOLS
EDMC 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. EDMC augmented its efforts to recruit high school students by
enlarging its high school admissions staff by 35% from fiscal 1995 to fiscal
1997 and by
28
<PAGE> 30
increasing the number of high schools visited to approximately 8,500 in fiscal
1997 (an increase of approximately 22% over fiscal 1995) and the number of high
schools at which presentations were made to approximately 7,300 in fiscal 1997
(an increase of approximately 21% over fiscal 1995). The Company believes that,
due in part to these efforts, applications from high school seniors in fiscal
1997 (for education programs starting in fiscal 1997 or fiscal 1998) were 28.7%
greater than in fiscal 1996. The Company also believes it can penetrate the
growing working adult market by introducing and augmenting evening programs. The
first introduction of such programs was at The Art Institute of Dallas in fiscal
1993. Currently, substantially all of The Art Institutes offer evening programs.
The total number of students participating in such programs at The Art
Institutes increased 40% to approximately 2,100 students in the spring quarter
of fiscal 1997 from approximately 1,500 students in the spring quarter of fiscal
1996.
In addition, the Company actively seeks international students for The Art
Institutes. The Company employs both admissions personnel with international
experience and independent recruiters abroad. To accommodate the special needs
of international students, staff members are assigned to act as international
student advisors. Average international student enrollments in fiscal 1997 were
approximately 27% greater than in fiscal 1996, and international students
currently constitute approximately 6% of the total enrollments at The Art
Institutes.
TARGETING EXPANSION OPPORTUNITIES IN A FRAGMENTED MARKET
To further its national presence and to take advantage of the highly
fragmented postsecondary education industry, EDMC plans to open new schools and
to acquire existing schools in favorable locations. The Company analyzes a new
market for enrollment potential, positive long-term demographic trends, the
concentration of likely employers, the level of competition, facility costs, the
availability of faculty and management talent, and the regulatory approval
process.
Establishing New Schools. New schools, such as The Art Institute of Phoenix
(which opened in fiscal 1996) and The Art Institute of Los Angeles (which began
offering classes in October 1997), will be established primarily as Art
Institutes, allowing the Company to use its accumulated knowledge and experience
in Art Institute operations. In recent years, the Company has developed a
financial and operational model to analyze prospective start-up investments,
which takes into account, among other things, enrollment projections,
pre-opening expenditures, the marketing expenses necessary to build interest in
a school and a risk/return profile.
Acquiring Existing Schools. The Company also believes that significant
opportunities exist for growth through acquisitions. In particular, many smaller
institutions have limited resources to manage the increasingly complex
regulatory environment or to fund the high costs of developing the new programs
required to meet the changing demands of the employment market. The Company's
acquisition focus will be on schools that (i) can be integrated efficiently into
its existing operations, (ii) will benefit from EDMC's expertise and scale in
marketing and administration, and (iii) possess a strong, established
reputation. In November 1995, the Company acquired the assets of the Ray College
of Design (renamed The Illinois Institute of Art at Chicago and The Illinois
Institute of Art at Schaumburg). Combined enrollment at The Illinois Institutes
of Art has increased from 346 as of January 1, 1996 to 604 as of October 1,
1996. In August 1996, the Company acquired the assets of NYRS, a well-known
culinary arts and restaurant management school located in New York City. In
January 1997, the Company acquired the assets of Lowthian College in
Minneapolis, Minnesota (renamed The Art Institute of Minnesota).
EXPANDING EDUCATION PROGRAMS
EDMC currently offers education programs in a variety of fields and
continually seeks to optimize its portfolio of programs to meet the needs of
both its students and the employment market. The Company believes that
developing programs that balance the opportunities in the job market and the
interests of students will increase enrollment and expand the Company's revenue
base. Within three years of its development and introduction, the Company's
computer animation curriculum had an enrollment of approximately 3,500 students
in October 1996 (fall of fiscal 1997) and generated tuition revenues during
fiscal 1997 of approximately $35 million. In addition to the acquisition of
NYRS, the Company has introduced its culinary arts program at seven Art
Institutes, including The Art Institute of Philadelphia, which began offering
that program in October 1997.
29
<PAGE> 31
The Company also offers bachelor's degree programs in several fields of
study which are designed to appeal to students seeking enhanced career
preparation and credentials. Bachelor's degree programs benefit the Company by
providing a longer revenue stream than two-year associate's degree programs. The
Company will seek to introduce additional bachelor's degree programs at schools
in states that permit proprietary postsecondary institutions, such as The Art
Institutes, to offer such programs. In fiscal 1997, the Company introduced or
enhanced its bachelor's degree programs in the areas of computer animation,
graphic design, interior design and industrial design, and the Company expects
to introduce a bachelor's degree program in interactive multimedia programming
in 1998. The average number of students enrolled in bachelor's degree programs
at The Art Institutes in fiscal 1997 increased 143% from fiscal 1996 to
approximately 600. See "The Business of Education--Programs of Study."
The Company has begun to test the feasibility of a new type of education
program that is intended to serve the needs of working professionals in the art,
design and digital publishing fields. In this type of program, the initial
instruction would occur at one of The Art Institutes and subsequent work would
be done off-site through the use of the World Wide Web.
IMPROVING STUDENT OUTCOMES
EDMC intends to continue to improve student persistence and graduate
starting salaries in order to enhance the reputation of its schools and their
education programs and increase student enrollments. Measures implemented by the
Company include higher admissions standards, academic placement testing,
remediation courses, improved faculty training and increased administrative
resources dedicated to placement assistance. The Art Institutes' average net
quarterly persistence rate, which measures the number of students that are
enrolled during an academic quarter and advance to the next academic quarter,
increased from 89.0% in fiscal 1995 to 89.6% in fiscal 1996 to 90.2% for the
first three quarters of fiscal 1997. From calendar year 1993 to calendar year
1996, The Art Institutes' placement rate for all graduates available for
employment, who completed any program, improved from 83.1% to 86.8% and average
starting salaries rose 29.5% from approximately $15,600 to approximately
$20,200.
THE BUSINESS OF EDUCATION
EDMC's primary mission is to maximize student success by providing students
with the education necessary to meet employers' current and anticipated needs.
To achieve this objective, the Company focuses on (i) marketing to a broad
universe of potential students, (ii) admitting students who possess the relevant
interests and capabilities, (iii) providing students with courses taught by
industry professionals, and (iv) assisting students in job placement upon
graduation.
STUDENT RECRUITMENT AND MARKETING
EDMC seeks to attract students with both the motivation and ability to
complete the programs offered by its schools. To generate interest, the Company
engages in a broad range of activities to inform potential students and their
parents about its schools and programs of study.
The general reputation of The Art Institutes and referrals from current
students, alumni and employers are the largest sources of new students. The
Company also employs marketing tools such as television and print media
advertising, the World Wide Web, high school visits and recruitment events, and
utilizes its internal advertising agency to create publications, television and
radio commercials, videos and other promotional materials for the Company's
schools. The Company estimates that in fiscal 1997 referrals accounted for 39%
of new student enrollments at The Art Institutes, broadcast advertising
accounted for 22%, high school recruitment programs accounted for 21%, print
media accounted for 12%, international marketing accounted for 3% and the
remaining 3% was classified as miscellaneous. The goal of the Company's
recruitment efforts is to increase awareness of the Company's schools among
potential applicants in a cost-effective manner.
The Company carefully monitors the effectiveness of its marketing efforts.
In fiscal 1997, The Art Institutes' marketing efforts generated inquiries from
approximately 175,200 qualified prospective students. The Art
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<PAGE> 32
Institutes' inquiry-to-application conversion ratio increased from 6.5% in
fiscal 1992 to 10.4% in fiscal 1997, and the applicant-to-new student ratio
increased from 55.8% in fiscal 1992 to 66.8% in fiscal 1997.
To capitalize on the growing number of new high school graduates, the
Company employs approximately 54 high school representatives and utilizes a
variety of strategies. These high school representatives make presentations at
high schools, during which student artwork, videos and a multimedia
demonstration are shown to students and educators to promote The Art Institutes.
Each Art Institute also conducts college preview seminars at which prospective
students can meet with a representative, view artwork and videos, and receive
enrollment information. Summer teenager and teacher workshops are held to inform
students and educators of the education programs offered by The Art Institutes.
The Company's marketing efforts to reach young adults and working adults who may
be attracted to evening programs are conducted through local newspaper
advertising, direct mail campaigns and broadcast advertising.
NYRS relies on local television and referrals as its primary marketing
tools and has begun to use high school representatives and presentations at high
schools in the New York metropolitan area to increase its applicant pool. NCPT
uses direct mail, print media and advertisements in related national trade
periodicals to generate interest. Referrals, especially from employers, are an
important source of new students for NCPT. In addition, NCPT conducts an
extensive recruitment program at colleges, featuring college visits,
participation in college career fairs, posters and advertising in college
newspapers.
STUDENT ADMISSION AND RETENTION
Each applicant for admission to an Art Institute is required to have a high
school diploma or a recognized equivalent and submit a written essay.
Prospective students are interviewed to assess their qualifications, their
interest in the programs offered by the applicable Art Institute and their
commitment to their education. In addition, the curricula, student services,
education cost, available financial resources and student housing are reviewed
during interviews, and tours of the facilities are conducted for prospective
students.
At each Art Institute, student admissions is overseen by a committee,
comprised principally of members of the faculty, that reviews each application
and makes admissions decisions. Art Institute students are of varying ages and
backgrounds. For fiscal 1997, approximately 29% of the entering students
matriculated directly from high school, approximately 28% were between the ages
of 19 and 21, approximately 31% were 22 to 29 years of age and approximately 12%
were 30 years old or older.
The Company recognizes that the ability to retain students until graduation
is an important indicator of the success of its schools and that early academic
intervention is crucial to improve student persistence and completion rates. As
with other postsecondary institutions, students at the Company's schools may
fail to finish their programs for a variety of personal, financial or academic
reasons. To reduce the risk of student withdrawals, each Art Institute devotes
staff resources to advise students regarding academic and financial matters,
part-time employment and housing. Remedial courses are mandated for students
with low academic skill levels and tutoring is encouraged for students
experiencing academic difficulties. The average student-to-faculty ratio at the
Company's schools was approximately 18:1 during fiscal 1997.
At The Art Institutes, the average net quarterly persistence rate, which
measures the number of students that are enrolled during an academic quarter and
advance to the next academic quarter, improved from 88.4% in fiscal 1994 to
90.2% for the first three quarters of fiscal 1997. The Company believes that it
has been able to improve its average net quarterly persistence rate, in part,
due to its investment in academic programs, student academic testing and
placement, remediation programs and faculty training initiatives, the increased
availability of supplemental student financing and orientation and socialization
programs designed to provide transition assistance to incoming students.
The Company's schools bill students for their tuition and other
institutional charges by the term of instruction, typically an academic quarter.
Each school's refund policies must meet the requirements of the U.S. Department
of Education and such school's state and accrediting agencies. Generally, if a
student ceases attendance during the first 60% of his or her first term, the
applicable school will refund institutional charges based on the number of weeks
remaining in that term. After a student has attended 60% of that term, the
school
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<PAGE> 33
will retain 100% of the institutional charges. After a student's first term, the
school refunds institutional charges based on the number of weeks attended in
the quarter in which the student withdraws. Generally, after six weeks of a
term, the school will retain 100% of the institutional charges for that academic
quarter.
PROGRAMS OF STUDY
EDMC's degree programs are designed to provide career-oriented education to
students. The Company believes that the educational needs of students are served
through curricula and a teaching/learning model that support the development of
problem-solving, interpersonal and team skills, as well as technical and
professional skills. The Art Institutes attempt to serve students through
education provided by industry-experienced faculty, a low student-to-faculty
ratio and an interactive learning methodology. Classes at The Art Institutes are
scheduled throughout the year with quarterly start dates for the convenience of
students. Classes at NYRS begin monthly and classes at NCPT begin three times
annually.
The development of new education programs at any postsecondary institution
demands a substantial commitment of human resources and capital. Most new
programs at The Art Institutes are currently approved on a system-wide basis and
are made available to each of The Art Institutes for implementation as
determined by that school's administration and its Board of Trustees, where
applicable. Faculty, employment assistance specialists, curricula advisory
boards, industry experts, industry literature and employers are the most common
sources for new program offerings. Approximately 550 employers are represented
on local curricula advisory boards for The Art Institutes. Generally, proposed
education programs are referred to a series of system-wide administrative bodies
that decide whether to proceed with development of those programs. As part of
such process, an independent contractor, or internal analyst where appropriate,
may be retained to develop and compile data for the purpose of identifying both
potential student interest in a program and the skills required of a graduate
upon program completion. Such research is then used to produce a curriculum
model for final review. The goals of the curriculum development process are to
provide new program opportunities and to revise existing curricula to be
consistent with changing industry needs.
The Art Institutes offer the following degree programs, among others. Not
all programs are offered at each Art Institute.
<TABLE>
<S> <C>
THE SCHOOL OF DESIGN THE SCHOOL OF MEDIA ARTS
Associate's Degree Programs Associate's Degree Programs
Computer Animation Multimedia
Graphic Design Photography
Interior Design Video Production
Industrial Design Technology Web Site Administration*
Bachelor's Degree Programs Bachelor's Degree Programs
Computer Animation Interactive Multimedia Programming*
Graphic Design
Interior Design
Industrial Design
THE SCHOOL OF CULINARY ARTS THE SCHOOL OF FASHION
Associate's Degree Programs Associate's Degree Programs
Culinary Arts Fashion Design
Travel and Tourism Fashion Marketing
Bachelor's Degree Programs
Fashion Design
Fashion Marketing and Management
</TABLE>
- ---------
* Starting in fiscal 1998.
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Approximately 3.8% of The Art Institutes' average quarterly student
enrollments in fiscal 1997 were in specialized diploma programs. Academic
credits from all of the specialized diploma programs are fully transferable into
associate's and bachelor's degree programs at The Art Institutes. Diploma
programs are designed for working adults who seek to supplement their education
or are interested in enhancing their marketable skills.
The Company expects to continue to add additional bachelor's degree
programs at schools in states that permit proprietary postsecondary institutions
to offer such programs. In Pennsylvania, the legislature has recently directed
the State Board of Education to authorize proprietary postsecondary
institutions, such as the Company's schools in Philadelphia and Pittsburgh, to
offer bachelor's degree programs. The Company has determined not to offer such
programs at certain Art Institutes at this time because of possible interference
with the current regional accreditation process for those schools. See
"Accreditation."
GRADUATE EMPLOYMENT
The Company believes that employment of its graduates in occupations
related to their fields of study is critical to the ability of its schools to
continue to recruit students successfully. Based on information received from
graduating students and employers, the Company believes that students graduating
from The Art Institutes during the five calendar years ended December 31, 1996
obtained employment in fields related to their programs of study as follows:
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF AVAILABLE GRADUATES
GRADUATING CLASSES AVAILABLE WHO OBTAINED EMPLOYMENT
(CALENDAR YEAR) GRADUATES(1) RELATED TO PROGRAM OF STUDY(2)
- ------------------ ------------ ---------------------------------
<S> <C> <C>
1996.................................. 3,676 86.8%
1995.................................. 3,734 87.4
1994.................................. 3,495 86.4
1993.................................. 3,580 83.1
1992.................................. 3,440 81.7
</TABLE>
- ---------
(1) The term "Available Graduates" refers to all graduates except those pursuing
further education, that are deceased, that are in active military service,
with medical conditions that prevent such graduates from working, or who are
international students no longer residing in the United States.
(2) For calendar years 1996, 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 1996, the approximate average starting salaries of
graduates of degree and diploma programs at The Art Institutes were as follows:
The School of Culinary Arts--$20,900; The School of Design-- $21,800; The School
of Fashion--$18,200; and The School of Media Arts--$18,000.
Each Art Institute offers career-planning services to all graduating
students through its employment assistance department. Specific career advice is
provided during the last two quarters of a student's education. Interviewing
techniques and resume-writing skills are developed, and students receive
portfolio counseling where appropriate. The Art Institutes maintain contact with
approximately 38,000 employers nationwide. Employment assistance advisors
educate employers about the programs at The Art Institutes and the caliber of
their graduates. Employment assistance advisors participate in professional
organizations, trade shows and community events to keep apprised of industry
trends and maintain relationships with key employers. The Company believes that
the ability of employment assistance advisors to generate job leads and match
employers' needs with graduates' skills and the active role of graduates in
their own job searches are major reasons for the percentage of Art Institute
graduates employed in their fields throughout the country.
Employers of Art Institute graduates include numerous small and
medium-sized companies (such as radio and television stations), as well as
better-known larger companies. The following companies are representative of the
larger companies that employ Art Institute graduates: Bell Atlantic Corporation,
The Boeing Company, Eddie Bauer, Inc., Ethan Allen Interiors Inc., Humongous
Entertainment, Inc., J. C. Penney Company, Inc., Marriott
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International, Inc., The May Department Stores Company, Microsoft Corporation,
The Neiman Marcus Group, Inc., Nordstrom, Inc., Sierra On-Line, Inc., Take2
Interactive Software, Inc., Tele-Communications, Inc., Time Warner Inc., Turner
Broadcasting System, Inc. and The Walt Disney Company.
SCHOOLS
The following table shows the location of each of EDMC's schools, the name
under which it operates, the date of its establishment, the date EDMC opened or
acquired it, and the number of students enrolled as of the beginning of the
second quarter of fiscal 1997.
<TABLE>
<CAPTION>
FISCAL YEAR
CALENDAR YEAR EDMC
SCHOOL LOCATION ESTABLISHED ACQUIRED/OPENED ENROLLMENT(1)
- ------ --------------------- -------------- --------------- -------------
<S> <C> <C> <C> <C>
The Art Institute of Atlanta...... Atlanta, GA 1949 1971 1,455
The Art Institute of Dallas....... Dallas, TX 1964 1985 1,238
The Art Institute of Fort Fort Lauderdale, FL
Lauderdale...................... 1968 1974 2,073
The Art Institute of Houston...... Houston, TX 1974 1979 1,111
The Art Institute of Los Los Angeles, CA
Angeles......................... 1997 1998 n/a
The Art Institute of Minnesota.... Minneapolis, MN 1964 1997 n/a
The Art Institute of Philadelphia, PA
Philadelphia.................... 1971 1980 1,840
The Art Institute of Phoenix...... Phoenix, AZ 1995 1996 241
The Art Institute of Pittsburgh... Pittsburgh, PA 1921 1970 2,431
The Art Institute of Seattle...... Seattle, WA 1946 1982 2,255
The Colorado Institute of Art..... Denver, CO 1952 1976 1,489
The Illinois Institute of Art at Chicago, IL
Chicago......................... 1916 1996 367
The Illinois Institute of Art at Schaumburg, IL
Schaumburg...................... 1983 1996 237
National Center for Paralegal Atlanta, GA
Training........................ 1973 1973 307
New York Restaurant School........ New York, NY 1980 1997 794
</TABLE>
- ---------
(1) Enrollments are as of October 1, 1996 (i.e., the start of the second quarter
of fiscal 1997), prior to the acquisition of The Art Institute of Minnesota
and prior to the start-up of The Art Institute of Los Angeles.
GOVERNANCE OF THE ART INSTITUTES
EDMC believes that the three-tier governance structure for The Art
Institutes differs from governance structures at other proprietary school
systems and possesses several advantages. One of these advantages is that it
permits each of EDMC's schools to be recognized by regulatory authorities and
accrediting agencies on an individual basis, thereby enabling the school to be
accredited in its geographic region.
AII is the parent corporation for all of The Art Institutes other than The
Art Institute of Pittsburgh, which is a division of AII. The Board of Directors
of AII approves the annual and long-range operating plans of The Art Institutes,
including their annual budgets. The AII Board of Directors also appoints the
members of the AII System Coordinating Board, the primary focus of which is AII
system-wide education policy and quality. The AII System Coordinating Board
coordinates education research, academic programming, development and planning.
It also communicates with external governmental and corporate entities on behalf
of AII, approves new education programs, reviews existing programs and assists
The Art Institutes in developing policies and procedures.
At most of The Art Institutes, Boards of Trustees are vested with the
authority to manage the schools' business and affairs. Thus, each such Art
Institute puts its own imprint on the academic programs it offers,
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<PAGE> 36
consistent with applicable state laws, regulations and licensure requirements
and accreditation standards, while maintaining compatibility among The Art
Institutes. Each Board of Trustees is empowered to select the president and
adopt institutional policies and procedures to achieve the mission of its Art
Institute.
In addition, in calendar 1994, AII organized an International Advisory
Board (the "IAB"). The IAB is comprised of renowned artists, designers, chefs
and entertainment professionals who provide advice and support to AII. Members
of the IAB also review curricula as requested and provide other services as
agreed upon by the IAB members.
TECHNOLOGY
EDMC is committed to providing its students access to the technology
necessary for developing the skills required by their education programs. To
help fulfill this commitment, at June 30, 1997, The Art Institutes had
approximately 2,075 desktop and workstation computers with applicable software
in classroom laboratories, largely operating on a seven-day per week basis. Each
Art Institute monitors the utilization of these classroom laboratories to ensure
that students have sufficient and appropriate equipment and software. Animation
students use powerful desktop and workstation computer technologies to create,
animate, color and render two-dimensional and three-dimensional projects.
Multimedia students integrate digital audio, screen-layout and motion content
into their productions. Design students make significant use of technologies for
computer-aided design and layout, photo composition and digital prepress
applications. Video production students use computer technologies for
programming schedules, digital non-linear editing and special effects.
Photography students utilize computers to translate traditional silver-based
images into digital forms, where composition, perspective, sharpness and color
can be manipulated. Interior and industrial design students learn to use
computer-aided drafting and visualization technology and equipment.
The Art Institutes have implemented a process to systematize the
specification and acquisition of equipment, computer hardware and software based
upon present and proposed curricula. Through its director of technology and a
technology committee comprised of key faculty and technology staff, each Art
Institute researches and monitors changing market and technological
requirements. These efforts, conducted in each school's market area and
coordinated on a national basis, are used to develop a system-wide, unified
strategy for the purchase and implementation of classroom technology.
MANAGEMENT AND EMPLOYEES
EDMC is led by a senior management team possessing an average of more than
18 years of experience in the education industry and nine years with the
Company. A substantial majority of the management team has an ownership interest
in the Company through direct holdings, participation in the ESOP or both. As of
June 30, 1997, EDMC had 1,554 full-time and 640 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.
ADMINISTRATIVE SUPPORT SYSTEMS
During the last four years, EDMC has centralized many of its administrative
functions to permit the staff at its schools to devote more of their efforts to
attracting new students and promoting student success. Centralized
administrative functions include: accounting, marketing, finance, real estate,
student financial aid, curricula research and development, purchasing, human
resource management, legal, regulatory and legislative affairs, information
systems and technology support services. The Company believes that this
centralization has contributed to operating efficiencies and has positioned the
Company to control general and administrative costs more effectively during its
planned expansion.
The Company has invested and continues to invest substantial resources in
its integrated, customized information network designed to assist Company
personnel in maximizing internal efficiency. The Company believes that this
system has improved its ability to recruit new students, administer student
financial aid, prepare and track student academic schedules, monitor part-time
and full-time employment opportunities for its students
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<PAGE> 37
and graduates, perform general and student accounting and manage human
resources. The Company believes that its investment in technology also
facilitates the integration of acquisitions and newly established schools into
the Company's operations.
NATIONAL CENTER FOR PARALEGAL TRAINING
NCPT is one of the leading sources of paralegals in the southeastern United
States. NCPT offers certificate programs to recent college graduates,
employer-sponsored students and adults interested in changing careers. Programs
offered by NCPT include paralegal studies, legal nurse consultant and legal
administrative assistant. NCPT paralegal and legal administrative assistant
graduates are employed in law firms and corporations. Legal nurse consultants
typically are employed on a project basis and are trained to be independent
contractors.
NATIONAL CENTER FOR PROFESSIONAL DEVELOPMENT
NCPD maintains consulting relationships with seven colleges and
universities. NCPD offers a wide range of services to its college and university
clients, including assistance with curricula development, the formulation and
execution of marketing strategies for the program offerings, training for
admissions staff, program directors and faculty, preparation of annual program
budgets, establishment of instructor evaluation guidelines and development of
strategies for employment assistance and consultation on other academic issues
as requested by a client institution. Certificate programs, developed by NCPD
and offered by its client institutions, are paralegal studies, legal nurse
consultant training and financial planner test preparation. In the fall of
fiscal 1997, NCPD client institutions had approximately 950 students enrolled in
these programs.
COMPETITION
The postsecondary education market is highly competitive. The Art
Institutes compete with traditional public and private two-year and four-year
colleges and universities and other proprietary schools. Certain public and
private colleges and universities may offer programs similar to those of The Art
Institutes. Public institutions are often able to charge lower tuition than The
Art Institutes due in part to government subsidies, government and foundation
grants, tax-deductible contributions and other financial sources not available
to proprietary schools. However, tuition at private non-profit institutions is,
on average, higher than The Art Institutes' tuition.
EDMC believes its students are well served by its student-centered
education environment, career-oriented curricula developed with employer input,
the effectiveness of its employment assistance activities and its national
reputation and market presence. The Company believes that its students also
should benefit from its investments in technology, including modern facilities
with well-equipped classrooms, programs that permit attendance year-round
thereby facilitating early graduation, and the Company's commitment to selecting
faculty with appropriate academic credentials and relevant employment
experience. Another competitive strength of EDMC's schools is the ability to
address evolving regulatory and accreditation requirements.
FACILITIES
EDMC's schools are located in major metropolitan areas in eleven states.
Typically, the schools occupy an entire building or several floors or portions
of floors in a building. The Company and its subsidiaries lease all of their
facilities, except in Denver where one building with 44,495 square feet is owned
by the Company. Such leases currently have remaining terms ranging from less
than one year to 17 years and typically include options for renewal. Most school
leases are guaranteed by EDMC. In fiscal 1997, the Company and its subsidiaries
paid approximately $12.2 million in rent for educational and administrative
facilities.
New leases entered into for schools typically are for ten years to 15
years, with two to four five-year renewal options. Currently, the Company
expects to spend $40 to $50 per square foot, in addition to any allowance
provided by the landlord, to make improvements necessary for the facility to
meet the Company's operating standards. For new or rapidly growing schools, a
lease typically provides for expansion rights within a building in order to
accommodate increases in student enrollment.
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The majority of schools lease facilities for student parking and housing.
These arrangements generally are intended to assist only a limited number of a
school's students, are designed to be flexible, are for terms of one to five
years and usually do not involve an EDMC guarantee. Annual rent for
school-sponsored housing arrangements ranges from approximately $80,000 to $1.2
million per school, depending on the number of housing units and local market
conditions.
The following table sets forth certain information as of June 30, 1997 with
respect to the principal properties leased by the Company and its subsidiaries:
<TABLE>
<CAPTION>
LOCATION (CITY/STATE) SQUARE FEET
- --------------------- ------------
<S> <C>
Phoenix, AZ.................... 53,500
Los Angeles, CA................ 37,755
Denver, CO..................... 59,755
Ft. Lauderdale, FL(1).......... 118,500
Atlanta, GA.................... 88,250
Atlanta, GA.................... 14,570
Chicago, IL.................... 29,470
Schaumburg, IL................. 17,935
<CAPTION>
LOCATION (CITY/STATE) SQUARE FEET
- --------------------- ------------
<S> <C>
Minneapolis, MN................ 22,320
New York, NY................... 30,500
Philadelphia, PA(2)............ 113,900
Pittsburgh, PA................. 26,115
Pittsburgh, PA(3).............. 126,500
Dallas, TX(4).................. 75,250
Houston, TX.................... 79,345
Seattle, WA.................... 114,750
</TABLE>
- ---------
(1) One of the properties occupied by The Art Institute of Fort Lauderdale is
owned by a limited partnership that includes among its limited partners one
current member of EDMC's management who is also a director.
(2) One of the properties occupied by The Art Institute of Philadelphia is owned
indirectly by a limited partnership that includes among its limited partners
one current member of EDMC's management who is also a director and another
current director of EDMC.
(3) This lease expires in the year 2000 with no renewal option.
(4) This lease expires in the year 1999 with no renewal option.
ACCREDITATION
Accreditation is a process through which an institution submits itself to
qualitative review by an organization of peer institutions. Accrediting agencies
primarily examine the academic quality of the instructional programs of an
institution, and a grant of accreditation is generally viewed as certification
that an institution's programs meet generally accepted academic standards.
Accrediting agencies also review the administrative and financial operations of
the institutions they accredit to ensure that each institution has the resources
to perform its educational mission.
Pursuant to provisions of the HEA, the U.S. Department of Education relies
on accrediting agencies to determine whether institutions' educational programs
qualify them to participate in Title IV Programs. The HEA specifies certain
standards that all recognized accrediting agencies must adopt in connection with
their review of postsecondary institutions. Accrediting agencies that meet U.S.
Department of Education standards are recognized as reliable evaluators of
educational quality. All of EDMC's schools, other than The Art Institute of Los
Angeles which has not yet applied for initial accreditation, 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, or are candidates for
accreditation, by 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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The accrediting agencies for each of the Company's schools are set forth in
the following table (for schools accredited by more than one recognized
accrediting agency, the primary accrediting agency is listed first):
<TABLE>
<CAPTION>
SCHOOL ACCREDITING AGENCY
- ------ ------------------
<S> <C>
The Art Institute of Atlanta Commission on Colleges of the Southern Association of
Colleges and Schools ("COC of SACS")
The Art Institute of Dallas Accrediting Commission of Career Schools and Colleges
of Technology ("ACCSCT")
COC of SACS (Candidate)
The Art Institute of Fort Lauderdale ACCSCT
The Art Institute of Houston ACCSCT
COC of SACS (Candidate)
The Art Institute of Los Angeles *
The Art Institute of Minnesota Accrediting Council for Independent Colleges and
Schools ("ACICS")
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 ACCSCT
Chicago
The Illinois Institute of Art at ACCSCT
Schaumburg
National Center for Paralegal ACICS
Training
New York Restaurant School ACCSCT
New York State Board of Regents
</TABLE>
- ---------
* The Company could not submit an application for The Art Institute of Los
Angeles to be accredited until students began classes there. The Company
intends to file such an application with ACCSCT in November or December 1997.
The HEA requires each recognized accrediting agency to submit to a periodic
review of its procedures and practices by the U.S. Department of Education as a
condition of its continued recognition. Each of the accrediting agencies listed
above has been reviewed within the past 26 months and has had its recognition
extended.
An accrediting agency may place an institution on "reporting" status in
order to monitor one or more specified areas of a school's performance. An
institution placed on reporting status is required to report periodically to its
accrediting agency on that school's performance in the specified areas. While on
reporting status, an institution may not open and commence teaching at new
locations without first receiving a waiver from its accrediting agency. The Art
Institute of Houston, which accounted for approximately 7% of the Company's net
revenues in fiscal 1997, was placed on reporting status by ACCSCT in February
1993, based on ACCSCT's concern about that school's reported student completion
rates for certain programs. The Art Institute of Dallas, which was placed on
reporting status by ACCSCT for similar reasons in January 1993, was informed by
ACCSCT in December 1996 that it was no longer on reporting status. The Art
Institute of Philadelphia, which accounted for approximately 12% of the
Company's net revenues in fiscal 1997, was placed on reporting status in August
1995 by ACCSCT based on that accrediting agency's concern about that school's
overall student completion rate. ACCSCT's standards define a program's
completion rate as the percentage of the students who started that program
during a twelve-month period and who have either graduated from that program
within a period of time equal to 150% of that program's length or withdrawn from
that program during the same period in order to accept full-time employment in
the occupation or job category for which the program was offered. Because that
calculation can only be performed after a student's scheduled completion date,
it does not provide a
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<PAGE> 40
timely basis for a school to affect student outcomes. For that reason, the
Company uses the net quarterly persistence rate as a method to track the
retention rate of students. Such rate is equal to the number of students in a
program at the beginning of an academic quarter, including any formerly
withdrawn students who restarted the program during the prior academic quarter,
divided by the number of students enrolled in that program at the beginning of
that prior academic quarter.
Both of the schools currently on reporting status have filed completion and
placement reports as required by ACCSCT, using ACCSCT's definition of student
completion rate. Although ACCSCT has acknowledged that there has been some
improvement with respect to the completion rates of some programs at the two
schools, and although for The Art Institute of Houston the total number of
students enrolled in the programs being monitored is only a small portion of
that school's total enrollment, ACCSCT has continued the two institutions on
reporting status based on its concern about some of the reported completion
rates. EDMC's expansion plans do not depend on either of those schools opening
additional locations.
STUDENT FINANCIAL ASSISTANCE
As is the case at most postsecondary institutions, many students enrolled
at one of EDMC's schools must rely, at least in part, on financial assistance to
pay the cost of their education. The largest source of such support is the
federal programs of student financial assistance under Title IV of the HEA.
Additional sources of funds include other federal grant programs, state grant
and loan programs, private loan programs and institutional grants and
scholarships.
To provide students access to financial assistance resources available
through Title IV Programs, a school must be (i) authorized to offer its programs
of instruction by the relevant agency of the state in which it is located, (ii)
accredited by an accrediting agency recognized by the U.S. Department of
Education, and (iii) certified as an eligible institution by the U.S. Department
of Education. In addition, that school must ensure that Title IV Program funds
are properly accounted for and disbursed in the correct amounts to eligible
students.
Under the HEA and its implementing regulations, each of the Company's
schools that participates in Title IV Programs must comply with certain
standards on an institutional basis. For purposes of these standards, the
regulations define an institution as a main campus and its additional locations
(formerly called branch campuses), if any. Under this definition, each of the
Company's schools is a separate institution, except for The Art Institute of
Phoenix, which is an additional location of The Colorado Institute of Art, The
Illinois Institute of Art at Schaumburg, which is an additional location of The
Illinois Institute of Art at Chicago, and The Art Institute of Los Angeles,
which will be an additional location of The Art Institute of Pittsburgh.
When The Art Institute of Los Angeles receives its accreditation from
ACCSCT, The Art Institute of Pittsburgh will file an application with the U.S.
Department of Education for The Art Institute of Los Angeles to participate in
Title IV Programs as its additional location. All other Art Institutes and NYRS
participate in Title IV Programs. NCPT has not applied to participate in Title
IV Programs.
NATURE OF FEDERAL SUPPORT FOR POSTSECONDARY EDUCATION
While the states support public colleges and universities primarily through
direct state subsidies, the federal government provides a substantial part of
its support for postsecondary education in the form of grants and loans to
students who can use this support at any institution that has been certified as
eligible by the U.S. Department of Education. Title IV Programs have provided
aid to students for more than 30 years and, since the mid-1960s, the scope and
size of such programs have steadily increased. Since 1972, Congress has expanded
the scope of the HEA to provide for the needs of the changing national student
population by, among other things, providing that students at proprietary
schools are eligible for assistance under Title IV Programs, establishing a
program for loans to parents of eligible students, opening Title IV Programs to
part-time students, increasing maximum loan limits and eliminating the
requirement that students demonstrate financial need to obtain federally
guaranteed student loans. Most recently, the FDSL program was enacted, enabling
students to obtain loans from the federal government rather than from commercial
lenders. In recent years, federal funds appropriated for Title IV Programs have
increased from $8.6 billion for the federal fiscal year ended September 30, 1994
to $10.5 billion for the federal fiscal year ended September 30, 1996. The
volume of federally guaranteed student loans (and,
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<PAGE> 41
more recently, loans issued under the FDSL program) has increased from $17.9
billion in the federal fiscal year ended September 30, 1993 to $29.1 billion in
the federal fiscal year ended September 30, 1996.
Students at EDMC's schools receive grants and loans to fund their education
under several Title IV Programs, of which the two largest are the Federal Pell
Grant ("Pell") program and the FFEL program. The Company's schools also
participate in the Federal Supplemental Educational Opportunity Grant ("FSEOG")
program, the Perkins program and the Federal Work-Study ("FWS") program. Most of
the Company's schools also have been selected by the U.S. Department of
Education to participate in the FDSL program.
Pell. Pell grants are the primary component of the Title IV Programs under
which the U.S. Department of Education makes grants to students who demonstrate
financial need. Every eligible student is entitled to receive a Pell grant;
there is no institutional allocation or limit. During fiscal 1997, Pell grants
ranged from $400 to $2,470 per year; beginning on July 1, 1997, the limit was
increased to $2,700 per year. Amounts received by students enrolled in the
Company's schools in fiscal 1997 under the Pell program equaled approximately 6%
of the Company's net revenues.
FSEOG. FSEOG awards are designed to supplement Pell grants for the
neediest students. FSEOG grants generally range in amount from $100 to $4,000
per year; however, the availability of FSEOG awards is limited by the amount of
those funds allocated to an institution under a formula that takes into account
the size of the institution, its costs and the income levels of its students. At
most of the Company's schools, FSEOG awards generally do not exceed $1,200 per
eligible student per year. The Company is required to make a 25% matching
contribution for all FSEOG program funds disbursed. Resources for this
institutional contribution may include institutional grants and scholarships
and, in certain states, portions of state grants and scholarships. In fiscal
1997, the Company's required 25% institutional match was approximately $695,000.
Amounts received by students in the Company's schools under the FSEOG program in
fiscal 1997 equaled approximately 1% of the Company's net revenues.
FFEL. The FFEL program consists of two types of loans, Stafford loans,
which are made available to students regardless of financial need, and PLUS
loans, which are made available to parents of students classified as dependents.
Under the Stafford loan program, a student may borrow up to $2,625 for the first
academic year, $3,500 for the second academic year and, in some educational
programs, $5,500 for each of the third and fourth academic years. Students with
significant financial need qualify for interest subsidies while in school and
during grace periods. Students who are classified as independent can increase
their borrowing limits and receive additional unsubsidized Stafford loans. Such
students can obtain an additional $4,000 for each of the first and second
academic years and, depending upon the educational program, an additional $5,000
for each of the third and fourth academic years. The obligation to begin
repaying Stafford loans does not commence until six months after a student
ceases enrollment as at least a half-time student. Amounts received by students
in the Company's schools under the Stafford program in fiscal 1997 equaled
approximately 41% of the Company's net revenues. PLUS loans may be obtained by
the parents of a dependent student in an amount not to exceed the difference
between the total cost of that student's education (including allowable
expenses) and other aid to which that student is entitled. Amounts received by
parents of students in the Company's schools under the PLUS loan program in
fiscal 1997 equaled approximately 14% of the Company's net revenues.
Perkins. Eligible undergraduate students may borrow up to $3,000 under the
Perkins program during each academic year, with an aggregate maximum of $15,000,
at a 5% interest rate and with repayment delayed until nine months after a
student ceases enrollment as at least a half-time student. Perkins loans are
made available to those students who demonstrate the greatest financial need.
Perkins loans are made from a revolving account, 75% of which is capitalized by
the U.S. Department of Education. Subsequent federal capital contributions in
the same proportion may be received if an institution meets certain
requirements. Each school collects payments on Perkins loans from its former
students and reloans those funds to currently enrolled students. Collection and
disbursement of Perkins loans is the responsibility of each participating
institution. During fiscal 1997, the Company collected approximately $1,990,000
from its former students. In fiscal 1997, the Company's required matching
contribution was approximately $159,000. The Perkins loans disbursed to students
in the Company's schools in fiscal 1997 equaled approximately 2% of the
Company's net revenues.
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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 1997, FWS funds accounted for less than
1% of the Company's net revenues.
FDSL. Under the FDSL program, students may obtain loans directly from the
U.S. Department of Education rather than commercial lenders. The conditions on
FDSL loans are generally the same as on loans made under the FFEL program. Ten
of the Company's 13 schools currently eligible to participate in Title IV
Programs have been selected by the U.S. Department of Education to participate
in the FDSL program, but all have deferred participation since their respective
students' loan needs continue to be satisfied under the FFEL program.
OTHER FINANCIAL ASSISTANCE SOURCES
Students at several of the Company's schools participate in state grant
programs. In fiscal 1997, approximately 3% of the Company's net revenues was
derived from state grant programs. In addition, certain students at some of the
Company's schools receive financial aid provided by the United States Department
of Veterans Affairs, the United States Department of the Interior (Bureau of
Indian Affairs) and the Rehabilitative Services Administration of the U.S.
Department of Education (vocational rehabilitation funding). In fiscal 1997,
financial assistance from such federal programs equaled less than 2% of the
Company's net revenues. The Art Institutes also provide institutional
scholarships to qualified students. In fiscal 1997, institutional scholarships
had a value equal to approximately 2% of the Company's net revenues. In
September 1995, the Company negotiated access to a supplemental loan program
with a commercial bank that allows students to repay loans over ten years after
graduation and allows students with lower than average credit ratings to obtain
loans. To the Company's knowledge, The Art Institutes are the only institutions
primarily offering associate's degree programs that are eligible to participate
in that loan program. The primary objective of such loan program is to lower the
monthly payments required of students. Such loans are without recourse to the
Company or its schools.
AVAILABILITY OF LENDERS
During fiscal 1997, five lending institutions (Bank One, Indianapolis,
National Association; First Union Bank; National City Bank, Indiana; Central
Bank; and Mellon PSFS (NJ) National Association) provided over 80% of all
federally guaranteed loans to students attending the Company's schools. While
the Company believes that other lenders would be willing to make federally
guaranteed student loans to its students if loans were no longer available from
its current lenders, there can be no assurances in this regard. In addition, the
HEA requires the establishment of lenders of last resort in every state to make
loans to students at any school that cannot otherwise identify lenders willing
to make federally guaranteed loans to its students.
One student loan guaranty agency (United Student Aid Funds) 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 it
guaranteed.
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 U.S. Congress has required the U.S. Department of Education to
increase its level of regulatory oversight of schools to ensure that public
funds are properly used. Each institution must annually submit to the U.S.
Department of Education an audit by an independent accounting firm of that
school's compliance with Title IV Program requirements, as well as audited
financial statements. The U.S. Department of Education also conducts compliance
reviews, which include on-site evaluations, of several hundred institutions each
year, and directs student loan guaranty agencies to conduct additional reviews
relating to student loan programs. In addition, the Office of the Inspector
General of the U.S. Department of Education conducts audits and
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<PAGE> 43
investigations in certain circumstances. Under the HEA, accrediting agencies and
state licensing agencies also have responsibilities for overseeing institutions'
compliance with certain Title IV Program requirements. As a result, each
participating institution 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.
Largely as a result of this increased oversight, more than 800 institutions
have either ceased to be eligible for, or have voluntarily relinquished their,
participation in some or all Title IV Programs since October 1, 1992. This has
reduced competition among institutions with respect to certain markets and
education programs. Due to the specialized nature of their education programs,
the reduction in the number of participating institutions has had no substantial
effect on The Art Institutes.
Cohort Default Rates. A significant component of the Congressional
initiative aimed at reducing fraud, waste and abuse was the imposition of
limitations on participation in Title IV Programs by institutions whose former
students defaulted on the repayment of federally guaranteed student loans at an
"excessive" rate. Since the U.S. Department of Education began to impose
sanctions on institutions with cohort default rates above certain levels, more
than 600 institutions have lost their eligibility to participate in some or all
Title IV Programs for this reason. However, many institutions, including The Art
Institutes that participate in Title IV Programs, have responded by implementing
aggressive student loan default management programs aimed at reducing the
likelihood of students failing to repay their loans in a timely manner.
A school's cohort default rate under the FFEL program is calculated on an
annual basis as the rate at which student borrowers scheduled to begin repayment
on their loans in one federal fiscal year default on those loans by the end of
the next federal fiscal year. Any institution whose FFEL cohort default rate
equals or exceeds 25% for three consecutive years will no longer be eligible to
participate in that program or the FDSL program for the remainder of the federal
fiscal year in which the U.S. Department of Education determines that such
institution has lost its eligibility and for the two subsequent federal fiscal
years. In addition, an institution whose FFEL cohort default rate for any
federal fiscal year exceeds 40% may have its eligibility to participate in all
Title IV Programs limited, suspended or terminated. Since the calculation of
FFEL cohort default rates involves the collection of data from many
non-governmental agencies (i.e., lenders and private guarantors), as well as the
U.S. Department of Education, the HEA provides a formal process for the review
and appeal of the accuracy of FFEL cohort default rates before the U.S.
Department of Education takes any action against an institution based on its
FFEL cohort default rates.
None of the Company's schools has had a FFEL cohort default rate of 25% or
greater for three consecutive federal fiscal years. The Art Institute of
Houston, which accounted for approximately 7% of the Company's net revenues in
fiscal 1997, had published FFEL cohort default rates of 25.4% and 30.2% for
federal fiscal years 1993 and 1994 (the latest years for which rates have been
published), respectively, but has received a preliminary FFEL cohort default
rate of 20.3% for federal fiscal year 1995 from the U.S. Department of
Education. The remainder of the Company's schools had published 1993 and 1994
FFEL cohort default rates and preliminary 1995 rates below 25%. (Preliminary
cohort default rates are subject to revision by the U.S. Department of Education
based on information that schools and guaranty agencies identify and submit to
the U.S. Department of Education for review in order to correct any errors in
the data previously provided to the U.S. Department of Education. Any such
adjustment will be made by the U.S. Department of Education at the time that
final rates are officially published for the applicable year.) For federal
fiscal year 1994, the combined FFEL cohort default rate for all borrowers at the
Company's schools was 18.2% and its individual schools' rates ranged from 9.2%
to 30.2%. The average FFEL cohort default rate for all proprietary institutions
for federal fiscal year 1994 was 21.1%. For federal fiscal year 1995, the
combined preliminary FFEL cohort default rate for all borrowers at the Company's
schools was 17.7% and its individual schools' rates ranged from 6.8% to 23.4%.
The Company understands that the U.S. Department of Education anticipates
issuing official 1995 FFEL cohort default rates in November 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 the most recent federal award
year (i.e., July 1 through June 30), that institution may be placed on
provisional certification status
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<PAGE> 44
for up to four years. Provisional certification does not limit an institution's
access to Title IV Program funds, but does subject that institution to closer
review by the U.S. Department of Education and possible summary adverse action
if that institution commits violations of Title IV Program requirements. To
EDMC's knowledge, the U.S. Department of Education reviews an institution's
compliance with the cohort default rate thresholds described in this paragraph
only when that school is otherwise subject to a U.S. Department of Education
certification review. Five of the Company's schools have Perkins cohort default
rates in excess of 15% for students who were scheduled to begin repayment in the
1995/1996 federal award year, the most recent year for which such rates have
been calculated. Those schools and their Perkins cohort default rates for that
year are: The Art Institute of Atlanta (21.3%); The Art Institute of Fort
Lauderdale (21.8%); The Art Institute of Houston (49.1%); The Art Institute of
Philadelphia (20.4%) and The Art Institute of Seattle (23.3%). Those schools
accounted for approximately 9%, 13%, 7%, 12% and 14%, respectively, of the
Company's net revenues in fiscal 1997. For each such school, funds from the
Perkins program equaled less than 2% of the school's net revenues in fiscal
1997, other than The Art Institute of Houston where such funds equaled
approximately 3% of net revenues in fiscal 1997. Thus, those schools could be
placed on provisional certification status based on their Perkins cohort default
rates, which would subject them to closer review by the U.S. Department of
Education. To date, none of those schools has been placed on such status for
this reason. If one of those schools were placed on provisional certification
status for this reason and that school reduced its Perkins cohort default rate
below 15% in a subsequent year, that school could ask the U.S. Department of
Education to remove the provisional status. One of those schools, The Art
Institute of Houston, has been placed on provisional certification status
because of its FFEL cohort default rates.
Each of the Company's schools has adopted a student loan default management
plan. Those plans provide for extensive loan counseling, methods to increase
student persistence and completion rates and graduate employment rates,
strategies to increase graduates' salaries and, for most schools, the use of
external agencies to assist the school with loan counseling and loan servicing
if a student ceases attending that school. Those activities are in addition to
the loan servicing and collection activities of FFEL lenders and guaranty
agencies.
Increased Regulatory Scrutiny. The 1992 reauthorization of the HEA
expanded the role of accrediting agencies in the oversight of institutions
participating in Title IV Programs. As a result, the accrediting agencies of
which the Company's schools are members have increased the depth and intensity
of reviews and have expanded examinations in such areas as financial
responsibility and timeliness of student refunds. The HEA also requires each
accrediting agency recognized by the U.S. Department of Education to undergo
comprehensive periodic review by the U.S. Department of Education to ascertain
whether such accrediting agency is adhering to required standards. Each
accrediting agency that accredits any of the Company's schools has been reviewed
by the U.S. Department of Education within the past 26 months and reapproved for
continued recognition by the U.S. Department of Education.
The 1992 reauthorization of the HEA also tightened the standards to be
applied by the U.S. Department of Education in evaluating the financial
responsibility and administrative capability of institutions participating in
Title IV Programs, and mandated that the U.S. Department of Education
periodically review the eligibility and certification to participate in Title IV
Programs of every such eligible institution. By law, all institutions are
required to undergo such a recertification review by the U.S. Department of
Education by 1997 and every four years thereafter. Under these standards, each
of the Company's schools that participate in Title IV Programs would be
evaluated by the U.S. Department of Education more frequently than in the past.
One of those schools currently has a recertification application pending with
the U.S. Department of Education. All of the rest of the Company's schools that
participate in Title IV Programs have been reviewed and recertified by the U.S.
Department of Education during 1996 or 1997. A denial of recertification would
preclude a school from continuing to participate in Title IV Programs.
Financial Responsibility Standards. All institutions participating in
Title IV Programs must satisfy a series of specific standards of financial
responsibility. Institutions are evaluated for compliance with those
requirements as part of the U.S. Department of Education's quadrennial
recertification process and also annually as each institution submits its
audited financial statements to the U.S. Department of Education. One standard
requires each institution to demonstrate an acid test ratio (defined as the
ratio of cash, cash equivalents and current accounts receivable to current
liabilities) of at least 1:1 at the end of each fiscal year. Another standard
requires
43
<PAGE> 45
that each institution have a positive tangible net worth at the end of each
fiscal year. A third standard prohibits any institution from having a cumulative
net operating loss during its two most recent fiscal years that results in a
decline of more than 10% of that institution's tangible net worth as measured at
the beginning of that two-year period. An institution that is determined by the
U.S. Department of Education not to meet the standards of financial
responsibility on the basis of failing to meet one or more of the specified
numeric indicators is nonetheless entitled to participate in Title IV Programs
if it can demonstrate to the U.S. Department of Education that it is financially
responsible on an alternative basis. An institution may do so by demonstrating,
with the support of a statement from a certified public accountant, proof of
prior compliance with the numeric standards and other information specified in
the regulations, that its continued operation is not jeopardized by its
financial condition. Alternatively, an institution may post surety either in an
amount equal to one-half of the total Title IV Program funds received by
students enrolled at such institution during the prior year or in an amount
equal to 10% of such prior year's funds and agree to receive Title IV Program
funds under an arrangement other than the U.S. Department of Education's
standard advance funding arrangement. The U.S. Department of Education has
interpreted this surety condition to require the posting of an irrevocable
letter of credit in favor of the U.S. Department of Education.
Historically, the U.S. Department of Education has evaluated the financial
condition of the Company's schools on an institution-by-institution basis,
although recently the U.S. Department of Education has requested, and the
Company has provided, financial information concerning The Art Institutes on a
consolidated basis at the level of their parent company, AII. When they were
acquired, The Illinois Institute of Art at Chicago (combined with its additional
location, The Illinois Institute of Art at Schaumburg), NYRS and The Art
Institute of Minnesota satisfied the financial responsibility standards by
filing the consolidated financial statements of AII. For the year ended June 30,
1996, The Illinois Institute of Art at Chicago (combined with its additional
location, The Illinois Institute of Art at Schaumburg) satisfied the financial
responsibility standards on both an individual institution basis as well as on a
consolidated basis at the level of AII. The Colorado Institute of Art (combined
with its additional location, The Art Institute of Phoenix) has satisfied the
financial responsibility standards for the relevant periods on an individual
institution basis. Each of the other Art Institutes (other than The Art
Institute of Los Angeles, which has not yet applied for participation in Title
IV programs) has satisfied the financial responsibility standards for the
relevant periods on an individual basis.
In 1996, the U.S. Department of Education issued proposed regulations that,
if adopted as issued, would significantly revise the present financial
responsibility requirements, primarily by replacing the three separate numeric
standards described above with a composite score based on three new
calculations. The U.S. Department of Education has extended the period for
comment on the proposed regulations on three occasions, due to concerns
expressed by institutions about the proposed standards. The U.S. Department of
Education has not yet issued the regulations in final form, but has stated its
intention to do so by December 1997 and to make the new regulations effective as
of July 1, 1998.
Restrictions on Operating Additional Schools. The HEA generally requires
that certain institutions, including proprietary schools, be in full operation
for two years before applying to participate in Title IV Programs. However,
under the HEA and applicable regulations, an institution that is certified to
participate in Title IV Programs may establish an additional location and apply
to participate in Title IV Programs at that location without reference to the
two-year requirement, if such additional location satisfies all other applicable
requirements. In addition, a school which undergoes a change of ownership
resulting in a change in control (as defined under the HEA) must be reviewed and
recertified for participation in Title IV Programs under its new ownership.
Pending recertification, the U.S. Department of Education suspends Title IV
Program funding to that school's students. If a school is recertified, it will
be on a provisional basis. During the time a school is provisionally certified,
it may be subject to summary adverse action for violations of Title IV Program
requirements, but provisional certification does not otherwise limit an
institution's access to Title IV Program funds. The Company's expansion plans
are based, in part, on its ability to add additional locations and acquire
schools that can be recertified.
The Art Institute of Minnesota, The Illinois Institute of Art at Chicago,
The Illinois Institute of Art at Schaumburg and NYRS are provisionally certified
by the U.S. Department of Education due to their recent acquisition by the
Company. When it receives its accreditation from ACCSCT, a fifth school, The Art
Institute of
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<PAGE> 46
Los Angeles, will file an application with the U.S. Department of Education to
participate in Title IV Programs. As it is an additional location of The Art
Institute of Pittsburgh, the Company believes that it will be approved and will
not be provisionally certified. None of the Company's other schools that are
participating in Title IV Programs are on provisional certification status,
except The Art Institute of Houston which in the course of the normal
recertification process was provisionally recertified in 1997 because of its
FFEL cohort default rates.
Certain of the state authorizing agencies and accrediting agencies with
jurisdiction over the Company's schools also have requirements that may, in
certain instances, limit the ability of the Company to open a new school,
acquire an existing school or establish an additional location of an existing
school. The Company does not believe that those standards will have a material
adverse effect on the Company or its expansion plans.
The "85/15 Rule." Under a provision of the HEA commonly referred to as the
"85/15 Rule," a proprietary institution, such as each of EDMC's schools, would
cease being eligible to participate in Title IV Programs if, on a cash
accounting basis, more than 85% of its revenues for the prior fiscal year was
derived from Title IV Programs. Any school that violates the 85/15 Rule
immediately becomes ineligible to participate in Title IV Programs and is unable
to apply to regain its eligibility until the following fiscal year. The Company
has calculated that, since this requirement took effect in fiscal 1995, none of
the Company's schools has derived more than 79% of its revenues from Title IV
Programs for any fiscal year, and that for fiscal 1997 the range for the
Company's schools was from approximately 50% to approximately 70%. For fiscal
1996, the Company's independent public accountants examined management's
assertion that the Company's schools complied with these requirements and opined
that such assertion was fairly stated in all material respects. The Company's
independent public accountants have not yet issued their reports with respect to
these assertions for fiscal 1997. They have, however, informed the Company that
their work is substantially complete and that they expect to again opine that
management's assertion was fairly stated in all material respects. The Company
regularly monitors compliance with this requirement in order to minimize the
risk that any of its schools would derive more than 85% of its revenues from
Title IV Programs for any fiscal year. If a school appears likely to approach
the 85% threshold, the Company would evaluate the appropriateness of making
changes in student funding and financing to ensure compliance.
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. EDMC believes that
its current compensation plans are in compliance with HEA standards, although
the regulations of the U.S. Department of Education do not establish clear
criteria for compliance.
Legislative Action. The HEA was most recently reauthorized by the U.S.
Congress in 1992, at which time funding for Title IV Programs was authorized
through September 30, 1997, with an automatic one-year extension if the HEA was
not reauthorized by that date. The U.S. Congress has commenced the
reauthorization process, which is expected to be completed during 1998. Numerous
changes to the HEA have been proposed by the U.S. Department of Education and
other parties. At this time it is not possible to predict whether current
funding levels will be maintained for any or all Title IV Programs or how
current requirements for institutional participation and student eligibility may
be changed.
In addition, in July 1997, the U.S. Congress passed the Taxpayer Relief Act
of 1997, which the President signed into law in August 1997. The new law
contains a number of provisions relating to students attending postsecondary
education institutions, including various tax credits, tax deductions and
provisions liberalizing the use of individual retirement accounts to meet
educational expenses. The provisions of this new law will be phased in beginning
in 1998 and are intended by the U.S. Congress to assist students and their
families in paying for their postsecondary education programs.
STATE AUTHORIZATION
Each of EDMC'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
45
<PAGE> 47
education agency. State laws establish standards for instruction, qualifications
of faculty, location and nature of facilities, financial policies and
responsibility and other operational matters. State laws and regulations may
limit the ability of the Company to obtain authorization to operate in certain
states or to award degrees or diplomas or offer new degree programs. Certain
states prescribe standards of financial responsibility that are different from
those prescribed by the U.S. Department of Education. The Company believes that
each of the Company's schools is in substantial compliance with state
authorizing and licensure laws.
LEGAL PROCEEDINGS
EDMC is subject to litigation in the ordinary course of its business. While
there can be no assurance as to the ultimate outcome of any litigation involving
the Company, the Company does not believe that any pending legal proceeding is
likely to result in a judgment or settlement that would have a material adverse
effect on the Company's financial condition, results of operations or liquidity.
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<PAGE> 48
MANAGEMENT AND DIRECTORS
DIRECTORS AND EXECUTIVE OFFICERS
Under the Articles, the Board of Directors is divided into three classes,
with the classes to be as nearly equal in the number of directors as possible.
At each annual meeting of shareholders, directors are elected for three-year
terms to succeed the directors of that class whose terms are expiring. Messrs.
Atwell, Campbell and Greenstone are Class I directors whose terms of office
expire in 1997; Mr. Burke and Ms. Drucker are Class II directors whose terms
expire in 1998; and Messrs. Knutson and Pasman are Class III directors whose
terms expire in 1999.
Set forth below is certain information as of October 7, 1997 concerning the
Company's directors and executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Robert B. Knutson............. 63 Chairman and Chief Executive Officer
Miryam L. Drucker............. 52 Vice Chairman and Director
Patrick T. DeCoursey.......... 52 Executive Vice President
Robert T. McDowell............ 43 Senior Vice President, Chief Financial Officer and
Treasurer
Carol J. Viola................ 59 Vice President, Education
Robert H. Atwell.............. 66 Director
James J. Burke, Jr............ 45 Director
William M. Campbell, III...... 37 Director
Albert Greenstone............. 70 Director
James S. Pasman, Jr........... 66 Director
</TABLE>
Robert B. Knutson has been the Chairman and Chief Executive Officer of the
Company since 1986 and a director of the Company since 1969. He is a graduate of
the University of Michigan (B.A., Economics 1956) and was a fighter pilot with
the U.S. Air Force from 1957 to 1962. Mr. Knutson joined the Company as a
director in 1969, became its 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 and has been a
director of the Company since 1990. She is a graduate of the Universidad del
Zulia, Venezuela (B.A., Journalism 1965). Ms. Drucker joined the Company in
1984. From 1985 to 1987, she was the president of The Art Institute of Dallas
and, from 1987 to 1988, she was the president of The Art Institute of Fort
Lauderdale. From 1988 to 1989, she was the head of The Art Institutes and, from
1989 to 1996, she was the Company's President and Chief Operating Officer. Ms.
Drucker is the wife of Robert B. Knutson.
Patrick T. DeCoursey is the Executive Vice President of the Company
responsible for the operation of the Company's schools. He is a graduate of
Maryknoll College (B.A., Philosophy, Spanish 1967). Mr. DeCoursey joined the
Company as president of The Art Institute of Dallas in 1991. In 1993 he became
an Executive Vice President of the Company.
Robert T. McDowell is the Senior Vice President, Chief Financial Officer
and Treasurer of the Company. He is a graduate of the University of Pittsburgh
(M.B.A., 1978; B.A., Economics 1977). Mr. McDowell joined the Company in 1988.
From 1990 to 1993, Mr. McDowell was the Treasurer of the Company.
Carol J. Viola is the Vice President, Education of the Company. She is a
graduate of Northern Illinois University (Ed. D., Curriculum and Instruction
1982; C.A.S., Community College Curriculum and Instruction 1975; M.A., Speech
1965; B.A., Speech and English 1960). From 1987 to 1994, Ms. Viola was Provost,
Open Campus, College of DuPage in Illinois. She joined the Company in 1994.
Robert H. Atwell has been a director of the Company since 1996. He is a
graduate of the College of Wooster (B.A., Political Science 1953) and of the
University of Wisconsin (M.A., Public Administration 1957). From
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<PAGE> 49
1965 to 1970, Mr. Atwell was the vice chancellor for administration, University
of Wisconsin at Madison, and, from 1970 to 1984, he was the president of Pitzer
College. From 1984 until November 1996, Mr. Atwell was the president of the
American Council on Education. On November 1, 1996, he joined A.T. Kearney,
Inc., a global consulting firm.
James J. Burke, Jr. has been a director of the Company since 1986. He is a
graduate of Brown University (B.A., Psychology 1973) and Harvard University
Graduate School of Business Administration (M.B.A., 1979). From 1987 to 1994, he
was the president and chief executive officer of Merrill Lynch Capital Partners,
Inc. and a managing director of Merrill Lynch, Pierce, Fenner & Smith
Incorporated. He has been a partner of Stonington Partners, Inc., a private
investment firm, since July 1994. Mr. Burke serves on the boards of directors of
Ann Taylor Stores Corporation, Borg-Warner Security Corporation, Pathmark
Stores, Inc., Supermarkets General Holdings Corporation and United Artists
Theatre Circuit, Inc.
William M. Campbell, III has been a director of the Company since 1996. He
is a graduate of Harvard College (B.A., Economics 1982) and Harvard University
Graduate School of Business Administration (M.B.A., 1987). From 1991 to 1995,
Mr. Campbell was the senior vice president, drama development, for Warner
Brothers Television. Since 1995, he has been the executive vice president of CBS
Entertainment.
Albert Greenstone is the president emeritus of NCPD and has been a director
of the Company since 1973. He attended the University of Virginia (1946 to 1948)
and graduated from the University of Georgia Law School (J.D., 1950). Mr.
Greenstone joined the Company in 1972 as president and chief executive officer
of NCPT and became the president emeritus of NCPD in 1994.
James S. Pasman, Jr. was elected to the Board of Directors in July 1997. He
is a graduate of Upsala College (B.B.A., 1956) and the Stern School of Business
at New York University (M.B.A., 1962). From 1987 to 1989, Mr. Pasman was the
chairman and chief executive officer of Kaiser Aluminum and Chemical Corp. and,
prior to that, vice chairman of the Aluminum Company of America. From 1989 to
1991, he was the president and chief operating officer of National Intergroup,
Inc. and chairman of the board of Permian Oil Corp. Since then, Mr. Pasman has
been retired. Mr. Pasman serves on the boards of directors of BEA Income Fund,
Inc., BEA Global Income Fund, Inc., BT Insurance Funds Trust and Tyco
International, Ltd.
DIRECTORS' COMPENSATION
The Company provides each non-employee director with the following
compensation: (i) a $12,000 annual retainer and reimbursement for out-of-pocket
expenses, (ii) a $1,000 fee for each meeting of the Board of Directors attended,
(iii) a $500 fee for each committee meeting attended that is not held on the
same day as a meeting of the Board of Directors, (iv) pursuant to the Company's
1996 Stock Incentive Plan, a non-discretionary grant of an option to purchase
7,500 shares of Common Stock, such grant to be made on the date that a
non-employee director is first elected to the Board of Directors, which option
vests 50% on the first anniversary and 50% on the second anniversary of such
grant, and (v) pursuant to the Company's 1996 Stock Incentive Plan, an annual
non-discretionary grant of an option to purchase 2,500 shares of Common Stock,
such grant to be made on the date of each annual meeting of the Company's
shareholders while such director remains a director, which option will vest 50%
on the first anniversary and 50% on the second anniversary of that meeting. The
exercise price for each such non-employee director stock option 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. Directors who are employees of the Company
receive no additional compensation for serving on the Board of Directors.
THE BOARD OF DIRECTORS
The Board of Directors currently has seven members and three committees:
(i) an Audit Committee comprised of Mr. Pasman (Chair), Mr. Burke and Mr.
Greenstone, (ii) a Compensation Committee comprised of Mr. Burke (Chair), Mr.
Campbell, Mr. Greenstone and Mr. Pasman, and (iii) a Nominating Committee
comprised of Mr. Knutson (Chair), Mr. Atwell and Ms. Drucker.
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<PAGE> 50
COMPENSATION OF EXECUTIVE OFFICERS
The following tables set forth certain information concerning the
compensation of, option grants to, and aggregate options held by, the Company's
Chairman and Chief Executive Officer, the Company's three other most highly
compensated executive officers during fiscal 1997 and one other individual who
is a former executive officer.
SUMMARY COMPENSATION TABLE FOR THE FISCAL YEAR ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) OPTIONS(#) COMPENSATION($)(2)
- ---------------------------- ---- --------- -------- --------------- ------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
Robert B. Knutson........... 1997 $325,000 $300,000 -- 60,000 $ 6,143
Chairman and 1996 310,340 225,000 -- -- 44,312
Chief Executive Officer
Miryam L. Drucker........... 1997 250,000 200,000 -- 50,000 5,482
Vice Chairman 1996 239,664 160,000 -- -- 64,362
Patrick T. DeCoursey........ 1997 200,000 185,000 -- 50,000 6,855
Executive Vice President 1996 191,672 110,000 -- -- 37,632
Robert T. McDowell.......... 1997 166,664 120,000 -- 40,000 5,211
Senior Vice President, 1996 150,000 65,000 -- -- 36,604
Chief Financial Officer
and Treasurer
William M. Webster, IV(1)... 1997 158,333 50,000 -- 50,000 4,440
Executive Vice President 1996 21,141 -- -- 75,000 --
</TABLE>
- ---------
(1) Mr. Webster resigned effective May 1, 1997. The salary and bonus shown
represents the compensation earned from July 1, 1996 through May 1, 1997.
Effective upon his resignation, the options granted him in fiscal 1997 were
forfeited.
(2) Such amounts represent the Company's contributions to the ESOP (in 1996
only), its profit-sharing retirement plan (in both years) and its deferred
compensation plan (in 1996 only) 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 (in both years).
OPTION GRANTS IN THE FISCAL YEAR ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------- VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF
SECURITIES OPTIONS STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE OR FOR OPTION TERM
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION --------------------------
NAME GRANTED(#) FISCAL YEAR ($/SHARE) DATE 5%($) 10%($)
- ---- ---------- ------------ ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Robert B. Knutson............. 33,336 5.30% $15.00 10/29/06 $314,358 $ 797,064
26,664 4.20 16.50 10/29/01 121,552 268,598
Miryam L. Drucker............. 50,000 7.90 15.00 10/29/06 471,500 1,195,500
Patrick T. DeCoursey.......... 50,000 7.90 15.00 10/29/06 471,500 1,195,500
Robert T. McDowell............ 40,000 6.30 15.00 10/29/06 377,200 956,400
William M. Webster, IV(1)..... 50,000 7.90 15.00 10/29/06 471,500 1,195,500
</TABLE>
- ---------
(1) Mr. Webster resigned effective May 1, 1997. Effective upon his resignation,
the options granted him in fiscal 1997 were forfeited.
49
<PAGE> 51
AGGREGATED OPTION/SAR EXERCISES IN FISCAL YEAR 1997
AND JUNE 30, 1997 OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF
NUMBER VALUE OF SECURITIES VALUE OF
OF SECURITIES UNEXERCISED, UNDERLYING UNEXERCISED,
SHARES UNDERLYING EXERCISABLE UNEXERCISED AND UNEXERCISABLE
ACQUIRED UNEXERCISED & IN-THE-MONEY UNEXERCISABLE IN-THE-MONEY
ON VALUE EXERCISABLE OPTIONS OPTIONS AT OPTIONS AT OPTIONS AT
NAME EXERCISE(#) REALIZED($) AT JUNE 30, 1997(#)(1) JUNE 30, 1997($)(2) JUNE 30, 1997(#)(1) JUNE 30, 1997($)(2)
- ----- ----------- ----------- ---------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Robert B.
Knutson... -- -- -- -- 60,000 $ 620,003
Miryam L.
Drucker... -- -- 145,762 $ 3,333,106 50,000 550,000
Patrick T.
DeCoursey... -- -- 75,000 1,522,500 50,000 550,000
Robert T.
McDowell... -- -- 34,631 790,523 40,000 440,000
William M.
Webster, IV... 18,750 $ 229,687 -- -- 14,063 210,945
</TABLE>
- ---------
(1) In August 1996, the Board provided for the vesting of the approximately 11%
of the then-outstanding options that had not previously vested in accordance
with their terms (other than Mr. Webster's).
(2) Based on the closing price of the Common Stock on June 30, 1997 of $26.00
per share.
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 during fiscal 1997 consisted of Mr. Burke, Mr. Campbell,
Mr. Knutson and Harvey Sanford, who died in April 1997. 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 terms of the Employment Agreement, Mr.
Knutson will serve as Chairman and Chief Executive Officer of the Company and is
to receive a base salary at an annual rate of $325,000, subject to adjustment,
and incentive compensation and other employee benefits under the various benefit
plans and programs maintained by the Company.
The Employment Agreement will terminate prior to the scheduled expiration
date in the event of the death or disability of Mr. Knutson. In addition, the
Company may terminate the Employment Agreement with or without cause (as defined
therein) and Mr. Knutson may resign upon 30 days' advance written notice to the
Company. If Mr. Knutson is discharged from his employment by the Company without
cause or if he resigns with good reason (as defined therein), he will continue
to receive payment of his base salary, average incentive compensation and other
benefits for the remainder of the term of the Employment Agreement, or a period
of one year following the date of termination, whichever is longer. In addition,
all of Mr. Knutson's stock options will become fully vested and exercisable. The
Employment Agreement contains non-competition, non-interference and
confidentiality covenants on the part of Mr. Knutson.
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<PAGE> 52
CERTAIN TRANSACTIONS
Mr. Knutson is a limited partner, with no managerial authority, in Ocean
World Associates Ltd. The Art Institute of Fort Lauderdale leases one of its
buildings from Ocean World Associates Ltd. for approximately $1.3 million
annually.
Mr. Knutson and Mr. Greenstone are limited partners, with no managerial
authority, in AIPH Limited Partnership, which is a general partner of The Art
Institute of Philadelphia Limited Partnership. The Art Institute of Philadelphia
leases one of its buildings from The Art Institute of Philadelphia Limited
Partnership for approximately $516,000 annually.
In connection with acquiring shares of Common Stock: (i) in July 1995, Mr.
DeCoursey incurred indebtedness to the Company in an aggregate amount of
$133,400; and (ii) in September 1991, February 1992 and July 1995, Mr. McDowell
incurred indebtedness to the Company in the aggregate amount of $179,700. The
largest principal amount of such indebtedness outstanding during the fiscal year
ended June 30, 1997 was approximately $133,400, in the case of Mr. DeCoursey,
and $158,000, in the case of Mr. McDowell. Interest rates on such indebtedness
were 6.28% for Mr. DeCoursey and 9%, 6.28% and 6.75% for Mr. McDowell. As of the
date of this Prospectus, Messrs. DeCoursey and McDowell have prepaid all such
indebtedness in full.
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 $13.14 per share of Common Stock), plus aggregate accrued and unpaid
dividends thereon equal to $83,750 (or the equivalent of $.14 per share of
Common Stock). The Company financed such redemption with borrowings under the
Revolving Credit Agreement.
On August 9, 1996, the ESOP purchased a total of 594,235 shares of Common
Stock from 18 current or former members of the Company's management (including
three executive officers of the Company) at a price of $12.50 per share, or
$7,427,937 in the aggregate. No management shareholder sold more than 20% of the
total number of shares he or she beneficially owned in that transaction.
In connection with the IPO, the ESOP converted all the shares of Series A
Preferred Stock it then owned into 1,124,977 shares of Common Stock.
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<PAGE> 53
PRINCIPAL AND SELLING SHAREHOLDERS
The following table (including the notes thereto) sets forth certain
information regarding the beneficial ownership of the Common Stock as of
September 29, 1997 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 as of such date, (ii) each director of the Company, (iii) each
executive officer of the Company, (iv) all of the Company's directors and
executive officers as a group, and (v) all persons who are selling shares of
Common Stock in the Offering (the "Selling Shareholders"). Each shareholder
possesses sole voting and investment power with respect to the shares listed,
unless otherwise noted.
<TABLE>
<CAPTION>
SHARES OF COMMON SHARES OF SHARES OF COMMON
STOCK BENEFICIALLY COMMON STOCK STOCK BENEFICIALLY
OWNED PRIOR TO BE SOLD OWNED AFTER
TO THE OFFERING IN THE OFFERING THE OFFERING(14)
-------------------- --------------- --------------------
NAME AND ADDRESS(1) NUMBER PERCENT NUMBER NUMBER PERCENT
- ------------------- --------- ------- --------------- --------- -------
<S> <C> <C> <C> <C> <C>
Education Management Corporation Employee
Stock Ownership Trust....................... 3,495,578 24.2% -- 3,495,578 24.2%
Merrill Lynch Entities(2)..................... 971,378 6.7 744,868 226,510 1.6
The Northwestern Mutual Life Insurance
Company..................................... 1,171,810 8.1 1,065,282 106,528 *
National Union Fire Insurance Company of
Pittsburgh, PA.............................. 703,085 4.9 639,168 63,917 *
Robert B. Knutson(3)(4)(5).................... 2,107,352 14.6 318,182 1,780,079 12.3%
Robert H. Atwell(6)........................... 11,250 * -- 11,250 *
James J. Burke, Jr.(7)........................ 31,979 * -- 31,979 *
William M. Campbell, III(8)................... 3,750 * -- 3,750 *
Miryam L. Drucker(4)(9)....................... 297,175 2.0 51,818 245,357 1.7%
Albert Greenstone(6).......................... 45,585 * 5,000 40,585 *
James S. Pasman, Jr........................... 2,000 * -- 2,000 *
Patrick T. DeCoursey(10)...................... 129,455 * -- 129,455 *
Robert T. McDowell(11)........................ 94,791 * -- 94,791 *
William M. Webster, IV........................ 37,400 * -- 37,400 *
All executive officers and directors as a
group(5)(12)................................ 2,763,953 18.7% 375,000 2,379,862 16.1%
Estate of Harvey Sanford(5)(13)............... 34,500 * 9,091 25,409 *
</TABLE>
- ---------
* Less than 1%
(1) The address of each listed shareholder, unless noted otherwise, is c/o
Education Management Corporation, 300 Sixth Avenue, Pittsburgh,
Pennsylvania 15222.
(2) Shares of Common Stock beneficially owned by the Merrill Lynch Entities
prior to the Offering are owned of record as follows: 619,145 shares by
Merrill Lynch Capital Appreciation Partnership No. IV, L.P.; 15,828 shares
by ML Offshore LBO Partnership No. IV; 28,402 shares by ML IBK Positions,
Inc.; 275,273 shares by Merrill Lynch Capital Corporation; 16,496 shares by
ML Employees LBO Partnership No. I, L.P.; and 16,234 shares by Merrill
Lynch KECALP L.P. 1986. All of the Merrill Lynch Entities other than ML
Employees LBO Partnership No. I, L.P. and Merrill Lynch KECALP L.P. 1986
are selling shares in the Offering. After the Merrill Lynch Distribution,
the Merrill Lynch Entities will own in the aggregate approximately 118,134
shares (or less than 1%) of the Common Stock assuming no exercise of the
over-allotment option.
(3) Includes 15,000 shares of Common Stock receivable upon the exercise of
options that are exercisable within 60 days of the date of the table set
forth above.
(4) Mr. Knutson and Ms. Drucker, who are husband and wife, disclaim beneficial
ownership of each other's shares.
(5) Mr. Knutson previously granted to Mr. Sanford an option to purchase up to
25,000 shares of Common Stock beneficially owned by Mr. Knutson. Such
option is exercisable as of the date of the table set forth above. The
Estate of Harvey Sanford intends to exercise that option, in part, to
purchase the shares it will sell in the Offering.
52
<PAGE> 54
(6) Includes 3,750 shares of Common Stock receivable upon the exercise of
options that are exercisable within 60 days of the date of the table set
forth above.
(7) Mr. Burke is a director of a corporation which is the general partner of a
partnership which in turn is a general partner of certain of the Merrill
Lynch Entities. Mr. Burke disclaims beneficial ownership of any shares held
by any of the Merrill Lynch Entities.
(8) The 3,750 shares of Common Stock are receivable upon the exercise of
options that are exercisable within 60 days of the date of the table set
forth above.
(9) Includes 158,262 shares of Common Stock receivable upon the exercise of
options that are exercisable within 60 days of the date of the table set
forth above.
(10) Includes 87,500 shares of Common Stock receivable upon the exercise of
options that are exercisable within 60 days of the date of the table set
forth above.
(11) Includes 44,631 shares of Common Stock receivable upon the exercise of
options that are exercisable within 60 days of the date of the table set
forth above.
(12) Includes 319,143 shares of Common Stock receivable upon the exercise of
options that are exercisable within 60 days of the date of the table set
forth above.
(13) Includes 32,500 shares of Common Stock receivable upon the exercise of
options (including the option from Mr. Knutson) that are exercisable within
60 days of the date of the table set forth above.
(14) If the Underwriters exercise their over-allotment option in full and
purchase an additional 283,421 shares of Common Stock, Mr. Knutson will own
1,747,352 shares (or 12.1%) of the Common Stock, Ms. Drucker will own
240,175 shares (or 1.7%) of the Common Stock, Mr. Greenstone will own
40,085 shares (or less than 1%) of the Common Stock, the Estate of Harvey
Sanford will own 24,500 shares (or less than 1%) of the Common Stock, the
Merrill Lynch Entities will own an aggregate of 151,943 shares (or 1.1%) of
the Common Stock, and each of The Northwestern Mutual Life Insurance
Company and National Union Fire Insurance Company of Pittsburgh, PA will no
longer own any shares of Common Stock. After the Merrill Lynch
Distribution, two of the Merrill Lynch Entities (ML Employees LBO
Partnership No. I, L.P. and Merrill Lynch KECALP L.P. 1986) will own an
aggregate of 32,730 shares (or less than 1%) of the Common Stock and no
other Merrill Lynch Entities will own any shares.
53
<PAGE> 55
DESCRIPTION OF CAPITAL STOCK
The following is a description of the material provisions of the Articles,
the Bylaws and the Rights Agreement, but does not purport to be complete and is
qualified in its entirety by reference to applicable Pennsylvania law. The
Articles, the Bylaws and the Rights Agreement are exhibits to the Registration
Statement (as defined below), of which this Prospectus forms a part.
The authorized capital stock of the Company consists 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 validly issued, fully paid and nonassessable. The rights, preferences
and privileges of holders of shares of Common Stock are subject to, and may be
adversely affected by, the rights of the holders of shares of any series of
Preferred Stock the Company may designate and issue in the future.
PREFERRED STOCK
The Board of Directors has the authority, without further action by the
shareholders, to issue shares of Preferred Stock in one or more series and to
fix the number of shares, designations, voting powers, preferences, optional and
other special rights and the restrictions or qualifications thereof. The rights,
preferences, privileges and powers of each series of Preferred Stock may differ
with respect to dividend rates, amounts payable on liquidation, voting rights,
conversion rights, redemption provisions, sinking fund provisions and other
matters. The issuance of shares of Preferred Stock could decrease the amount of
earnings and assets available for distribution to holders of shares of Common
Stock and could adversely affect the rights and powers, including voting rights,
of holders of shares of Common Stock. The existence of authorized and
undesignated shares of Preferred Stock may also have a depressive effect on the
market price of the Common Stock. In addition, the issuance of any shares of
Preferred Stock could have the effect of delaying, deferring or preventing a
change of control of the Company. No shares of Preferred Stock are outstanding,
and the Company has no current intention to issue any shares of Preferred Stock.
PROVISIONS OF THE ARTICLES AND THE BYLAWS
The Articles and the Bylaws contain a number of provisions relating to
corporate governance and the rights of shareholders. Certain of these provisions
may be deemed to have a potential "anti-takeover" effect insofar as such
provisions may delay, defer or prevent a change of control of the Company,
including, but not limited, to the following provisions:
The Bylaws 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 or a proposed nomination must be timely given in writing to
the Secretary of the Company prior to the appropriate meeting. To be timely,
notice relating to an annual meeting must be given not less than 60, nor more
than 90, days in advance of such meeting; provided, that if the date of the
annual meeting is changed by more than 30 days from the anniversary date of the
prior annual meeting, written notice must be given no later than the fifth day
after the first public disclosure of the date of the meeting. The Bylaws provide
that special meetings of shareholders may be called only by certain officers of
the Company or the Board of Directors.
54
<PAGE> 56
The Bylaws contain certain provisions permitted under the Pennsylvania
Business Corporation Law of 1988, as amended (the "PBCL"), regarding the
liability of directors. These provisions eliminate the personal liability of a
director to the Company and its shareholders for monetary damages unless such
director has breached or failed to perform the duties of his or her office under
Subchapter 17B of the PBCL and that breach or failure constitutes self-dealing,
willful misconduct or recklessness. Those provisions do not eliminate a
director's duty of care and do not affect the availability of equitable remedies
such as an action to enjoin or rescind a transaction involving a breach of
fiduciary duty. In accordance with Section 1715 of the PBCL, the 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 Bylaws further provide that the Company will indemnify its
directors and officers, and may indemnify any authorized representative of the
Company, to the fullest extent permitted by the PBCL. The Company believes that
such provisions will assist the Company in attracting and retaining qualified
individuals to serve as directors and officers.
The Bylaws 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 Bylaws further provide that any amendment of the Bylaws to permit
the removal of directors without cause by shareholders will not apply to any
incumbent director for the balance of his term.
The Articles and Bylaws 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 Bylaws may be amended by a majority of the Board of Directors, subject
to the right of the shareholders to amend the Bylaws by the affirmative vote of
the holders of at least two-thirds of the outstanding shares of Common Stock.
The Articles may be amended by the affirmative vote of the holders of a majority
of the outstanding shares of Common Stock, except that the affirmative vote of
the holders of at least two-thirds of such shares is required to amend certain
provisions, including provisions establishing a classified board, prohibiting
cumulative voting and granting the Board of Directors the right to designate one
or more series or classes of Preferred Stock.
RIGHTS PLAN
Pursuant to the Company's Preferred Share Purchase Rights Plan (the "Rights
Plan"), each outstanding share of Common Stock (unless and until the Rights
expire or are redeemed or a Distribution Date (as described below) occurs) is
accompanied by one preferred share purchase right (each, a "Right") entitling
the registered holder to purchase from the Company one one-hundredth of a share
of Series A Junior Participating Preferred Stock, $.01 par value (the "Junior
Preferred Shares"), of the Company at an exercise price of $50 (the "Purchase
Price"), subject to adjustment. The terms of the Rights Plan are set forth in a
Rights Agreement (the "Rights Agreement") between the Company and Mellon Bank,
N.A., as Rights Agent. 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 Right certificates
will be distributed, until the occurrence of a Distribution Date. The Rights
will separate from the Common Stock and a Distribution Date will occur at the
close of business on the earlier of (x) the tenth business day following a
public announcement that a person or group of affiliated or associated persons
has acquired or obtained the right to acquire beneficial ownership of 17.5% or
more of the outstanding shares of Common Stock (an "Acquiring Person"), unless
the person becomes the owner of 17.5% solely by reason of a share purchase by
the Company or under certain other circumstances, or (y) the tenth business day
(or such later date as may be determined by action of the Board of Directors
prior to such time as any person becomes an Acquiring Person) following the
commencement of (or announcement of the intention to commence) a tender offer or
exchange offer (other than by the Company or certain affiliates) that would
result in
55
<PAGE> 57
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 Junior Preferred Share per Right, subject to adjustment.
The Junior Preferred Shares purchasable upon exercise of the Rights are not
redeemable. Each Junior Preferred Share is 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 are entitled to a minimum
preferential liquidation payment of $100 per share and are entitled to an
aggregate payment of 100 times the payment to be made per share of Common Stock.
Each Junior Preferred Share has 100 votes and is 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 is 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 Junior Preferred Shares issuable upon exercise of each
Right are also subject to adjustment in the event of a stock split of the Common
Stock or a stock dividend on the Common Stock payable in Common Stock or
subdivisions, consolidations or combinations of the Common Stock occurring, in
any such case, prior to the Distribution Date.
Certain of the provisions described above could discourage potential
acquisition proposals and could delay or prevent a change in control of the
Company. These provisions are intended to enhance the likelihood of continuity
and stability in the composition of the Board of Directors and in the policies
formulated by the Board of Directors and to discourage certain types of
transactions that may involve an actual or threatened change of control of the
Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C.
56
<PAGE> 58
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, 14,439,168 shares of Common Stock will be
outstanding. All of these shares will be freely tradeable without restriction or
further registration under the Securities Act, except that any shares of Common
Stock owned by affiliates of the Company as that term is defined in Rule 144
under the Securities Act ("Affiliates") or purchased in private transactions may
generally be sold only in compliance with the limitations of Rule 144 described
below. Those shares of Common Stock are deemed "restricted securities" under
Rule 144.
In general, under Rule 144 as currently in effect, a shareholder, including
an Affiliate, who has beneficially owned his or her restricted securities (as
that term is defined in Rule 144) for at least one year 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 two years
has elapsed from the date the restricted securities were acquired from the
Company or an Affiliate, a shareholder that is not an Affiliate at the time of
sale and has not been an Affiliate for at least three months prior to the sale
is entitled to sell such securities without compliance with the above-noted
requirements under Rule 144.
Certain of the Merrill Lynch Entities that are limited partnerships will
distribute an aggregate of approximately 108,376 shares of Common Stock (or if
the Underwriters exercise their overallotment option in full, approximately
119,213 shares) owned by them in the Merrill Lynch Distribution. As a condition
to receiving shares of Common Stock in the Merrill Lynch Distribution, the
applicable partners of those Merrill Lynch Entities have agreed to be bound by
the same lock-up provision as the Company, its executive officers and directors,
the Selling Shareholders and certain other shareholders (including the ESOP).
The Merrill Lynch Distribution is expected to occur as soon as practicable after
90 days after the date of this Prospectus, or on such earlier date consented to
by Credit Suisse First Boston Corporation.
The Company has previously entered into a Registration Rights Agreement
with each of the Selling Shareholders and the ESOP (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 IPO, 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 Offering is not being done under the Registration Rights
Agreement and the Selling Shareholders have agreed to reimburse the Company for
substantially all of the expenses associated with the Offering.
The Company and its executive officers and directors, the Selling
Shareholders and certain other shareholders (including the ESOP), which or who,
immediately following the consummation of the Offering, will own in the
aggregate approximately 5,910,000 outstanding shares of Common Stock
(approximately 5,630,000 shares if the over-allotment option is exercised in
full) and vested and exercisable options to purchase an additional 326,643
shares of Common Stock in the aggregate, have agreed not to offer, sell,
contract to sell, pledge or otherwise dispose of, directly or indirectly, or
file or cause to be filed with the Commission a registration statement under the
Securities Act relating to, any Common Stock or securities or other rights
convertible into or exchangeable or exercisable for any shares of Common Stock
or publicly disclose the intention to make any such offer, sale, pledge,
disposal or filing, without the prior written consent of Credit Suisse First
Boston Corporation, for a period of 90 days after the date of this Prospectus
other than in connection with an acquisition by the Company. See "Underwriting."
57
<PAGE> 59
UNDERWRITING
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated , 1997 (the "Underwriting Agreement"), the
underwriters named below (the "Underwriters"), for whom Credit Suisse First
Boston Corporation, Smith Barney Inc. and ABN AMRO Chicago Corporation are
acting as representatives (the "Representatives"), have severally but not
jointly agreed to purchase from the Selling Shareholders the following
respective numbers of shares of Common Stock:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------- ---------
<S> <C>
Credit Suisse First Boston Corporation..........................................
Smith Barney Inc................................................................
ABN AMRO Chicago Corporation....................................................
---------
Total...................................................................... 2,833,409
=========
</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 283,421 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 shares of the Common
Stock to the public initially at the public offering price set forth on the
cover page of this Prospectus and, through the Representatives, to certain
dealers at such price less a concession of $ per share, and the Underwriters
and such dealers may allow a discount of $ per share on sales to certain
other dealers. After the initial public offering, the public offering price and
concession and discount to dealers may be changed by the Representatives.
The Company and its executive officers and directors, the Selling
Shareholders and certain other shareholders (including the ESOP), which or who,
immediately following the consummation of the Offering, will own in the
aggregate approximately 5,910,000 outstanding shares of Common Stock
(approximately 5,630,000 shares if the over-allotment option is exercised in
full) and vested and exercisable options to purchase an additional 326,643
shares of Common Stock in the aggregate, have agreed not to offer, sell,
contract to sell, pledge or otherwise dispose of, directly or indirectly, or
file or cause to be filed with the Commission a registration statement under the
Securities Act relating to, any shares of the Common Stock or securities or
other rights convertible into or exchangeable or exercisable for any shares of
Common Stock or publicly disclose the intention to make any such offer, sale,
pledge, disposal or filing, without the prior written consent of Credit Suisse
First Boston Corporation, for a period of 90 days after the date of this
Prospectus.
58
<PAGE> 60
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.
The Representatives, on behalf of the Underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions,
penalty bids and "passive" market making in accordance with Regulation M under
the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Over-allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase shares of Common Stock so long as the stabilizing bids do not exceed a
specified maximum. Syndicate covering transactions involve purchases of shares
of Common Stock in the open market after the distribution has been completed in
order to cover syndicate short positions. Penalty bids permit the
Representatives to reclaim a selling concession from a syndicate member when the
shares of Common Stock originally sold by such syndicate member are purchased in
a syndicate covering transaction to cover syndicate short positions. In
"passive" market making, market makers in the Common Stock who are Underwriters
or prospective underwriters may, subject to certain limitations, make bids for
or purchases of shares of Common Stock until the time, if any, at which a
stabilizing bid is made. Such stabilizing transactions, syndicate covering
transactions and penalty bids may cause the price of the shares of Common Stock
to be higher than it would otherwise be in the absence of such transactions.
These transactions may be effected on the Nasdaq National Market or otherwise
and, if commenced, may be discontinued at any time.
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 and the
Selling Shareholders prepare and file a prospectus with the securities
regulatory authorities in each province where trades of 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 (ONTARIO PURCHASERS)
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.
59
<PAGE> 61
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein and the Selling Shareholders may be located outside of Canada and, as a
result, it may not be possible for Canadian purchasers to effect service of
process within Canada upon the issuer or such persons. All or a substantial
portion of the assets of the issuer and such persons may be located outside of
Canada and, as a result, it may not be possible to satisfy a judgment against
the issuer or such persons in Canada or to enforce a judgment obtained in
Canadian courts against such issuer or those persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of shares of Common Stock to whom the Securities Act (British
Columbia) applies is advised that that purchaser is required to file with the
British Columbia Securities Commission a report within ten days of the sale of
any shares of Common Stock acquired by that purchaser pursuant to the Offering.
Such report must be in the form attached to British Columbia Securities
Commission Blanket Order BOR #95/17, a copy of which may be obtained from the
Company. One such report must be filed in respect of shares of Common Stock
acquired on the same date and under the same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of Common Stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the Common
Stock in their particular circumstances and with respect to the eligibility of
the Common Stock for investment by the purchaser under relevant Canadian
legislation.
CERTAIN U.S. FEDERAL TAX CONSIDERATIONS
FOR NON-U.S. HOLDERS OF COMMON STOCK
The following is a general discussion of certain U.S. federal income and
estate tax consequences of the ownership and disposition of Common Stock
applicable to a beneficial owner thereof that is a "Non-U.S. Holder." A
"Non-U.S. Holder" is a person or entity other than (i) a citizen or resident of
the United States, (ii) a corporation or partnership created or organized in or
under the laws of the United States or of any state, (iii) an estate the income
of which is subject to U.S. federal income tax, regardless of its source, or
(iv) a trust if (a) a court within the United State is able to exercise primary
supervision over the administration of the trust and (b) one or more United
States persons have the authority to control all substantial decisions of the
trust.
This discussion is based on the Code, proposed regulations promulgated
thereunder and administrative and judicial interpretations thereof as of the
date hereof, all of which are subject to change, including changes with
retroactive effect. This discussion does not address all aspects of U.S. federal
income and estate taxation that may be important to Non-U.S. Holders in light of
their particular circumstances (including tax consequences applicable to
Non-U.S. Holders that are, or hold interests in Common Stock through,
partnerships or other fiscally transparent entities) and does not address United
States state and local or non-United States tax consequences. Prospective
Non-U.S. Holders should consult their own tax advisors with respect to the
particular United States federal income tax and estate tax consequences to them
of owning and disposing of shares of Common Stock, as well as the tax
consequences arising under the laws of any other taxing jurisdiction.
DIVIDENDS
Subject to the discussions below, dividends, if any, paid to a Non-U.S.
Holder of shares of Common Stock generally will be subject to United States
withholding tax at a rate of 30% of the gross amount of the dividends or such
lower rate as may be specified by an applicable income tax treaty. Non-U.S.
Holders (and, in the case of Non-U.S. Holders that are treated as partnerships
or otherwise fiscally transparent, partners, shareholders or other beneficiaries
of such Non-U.S. Holders) may be required to satisfy certain certification
requirements and provide certain information in order to claim treaty benefits.
Under recently enacted Section 894(c) of the Code and recently issued Treasury
Regulations Section 1.894-1T, special rules regarding the availability of treaty
benefits apply with respect to entities that are treated as partnerships or
otherwise fiscally transparent for U.S. federal
60
<PAGE> 62
income tax purposes but treated as corporations for purposes of the tax laws of
an applicable treaty country (or, conversely, treated as corporations for U.S.
federal income tax purposes but treated as partnerships or otherwise fiscally
transparent for purposes of the tax laws of an applicable treaty country). Any
such entities that hold Common Stock and partners, beneficiaries and
shareholders of such entities should consult their tax advisors as to the
applicability of such rules to their particular circumstances.
Dividends paid to a Non-U.S. Holder that are either (i) effectively
connected with the Non-U.S. Holder's conduct of a trade or business within the
United States or (ii) if a tax treaty applies, attributable to a permanent
establishment maintained by the Non-U.S. Holder, will not be subject to the
withholding tax (provided in either case the Non-U.S. Holder files the
appropriate documentation with the Company or its paying agent), but, instead
will be subject to regular U.S. federal income tax at the graduated rates in the
same manner as if the non-U.S. Holder were a U.S. resident. In addition to such
graduated tax in the case of a Non-U.S. Holder that is a corporation,
effectively connected dividends or, if a tax treaty applies, dividends
attributable to a U.S. permanent establishment of the corporate Non-U.S. Holder
may be subject to a "branch profits tax" which is imposed, under certain
circumstances, at a rate of 30% (or such lower rate as may be specified by an
applicable tax treaty) of the non-U.S. corporation's effectively connected
earnings and profits, subject to certain adjustments.
GAIN ON DISPOSITION OF COMMON STOCK
A Non-U.S. Holder generally will not be subject to U.S. federal income tax
(and no tax will generally be withheld) with respect to gain realized on a sale
or other disposition of Common Stock unless (i) the gain is effectively
connected with a trade or business of such Non-U.S. Holder in the United States
or, if a tax treaty applies, attributable to a United States permanent
establishment of the Non-U.S. Holder, (ii) in the case of certain Non-U.S.
Holders who are nonresident alien individuals and hold the Common Stock as a
capital asset, such individuals are present in the United States for 183 or more
days in the taxable year of the sale or other disposition and certain other
conditions are met, (iii) the Non-U.S. Holder is subject to tax pursuant to the
provisions of the Code regarding the taxation of U.S. expatriates, or (iv) the
Company is or has been a "U.S. real property holding corporation" within the
meaning of the Code and the Non-U.S. Holder owned directly or pursuant to
certain attribution rules more than 5% of the Common Stock (assuming the Common
Stock is regularly traded on an established securities market within the meaning
of the Code) at any time within the shorter of the five-year period preceding
such disposition or such non-U.S. Holder's holding period. The Company is not,
and does not anticipate becoming, a U.S. real property holding corporation.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
Generally, the Company must report annually to the Internal Revenue Service
the amount of dividends paid to a Non-U.S. Holder and the amount, if any, of tax
withheld with respect to, such Non-U.S. Holder. A similar report is sent to the
Non-U.S. Holder. Pursuant to tax treaties or certain other agreements, the
Internal Revenue Service may made its reports available to tax authorities in
the recipient's county of residence.
United States backup withholding tax (which is generally a withholding tax
imposed at a rate of 31% on certain payments to persons that fail to furnish the
information required under the United States information reporting requirements)
will generally not apply to dividends paid on Common Stock to a Non-U.S. Holder
at an address outside the United States, unless the payor has actual knowledge
that the payee is a U.S. Holder. Backup withholding tax generally will apply to
dividends paid on Common Stock at addresses inside the United States to Non-U.S.
Holders who fail to provide certain identifying information in the manner
required.
Under current U.S. federal income tax law, information reporting and backup
withholding imposed at a rate of 31% will apply to the proceeds of a disposition
of Common Stock paid to or through a U.S. office of a broker unless the
disposing holder, under penalties of perjury, certifies as to its non-U.S.
status or otherwise establishes an exemption. Generally, U.S. information
reporting and backup withholding will not apply to a payment of disposition
proceeds if the payment is made outside the United States through a no-U.S.
office of a non-U.S. broker. However, U.S. information reporting requirements
(but not backup withholding) will apply to a payment of disposition proceeds
outside the United States if the payment is made through an office outside the
United States of a broker that is (i) a U.S. person, (ii) a foreign person which
derives 50% or more of its gross income for
61
<PAGE> 63
certain periods from the conduct of a trade or business in the United States or
(iii) a "controlled foreign corporation" for U.S. federal income tax purposes,
unless the broker maintains documentary evidence that the holder is a Non-U.S.
Holder and certain other conditions are met, or the holder otherwise establishes
an exemption.
Proposed United States Treasury regulations, issued in April 1996, would,
if adopted, alter the foregoing rules in certain respects. Among other things,
such proposed regulations would provide certain presumptions under which a
Non-U.S. Holder would be subject to backup withholding and information reporting
unless the Company receives certification from the holder of non-U.S. status.
The proposed regulations are generally proposed to be effective with respect to
dividends paid after December 31, 1997, subject to certain transition rules.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided than the required information is furnished to the Internal
Revenue Service.
FEDERAL ESTATE TAX
An individual holder who is not a citizen or resident (as defined for U.S.
estate tax purposes) of the United States and at the time of death is treated as
the owner of, or has made certain lifetime transfers of, an interest in the
Common Stock will be required to include the value thereof in his gross estate
for U.S. federal estate tax purposes, and may be subject to U.S. federal estate
tax unless an applicable estate tax treaty provides otherwise. Estates of
non-resident aliens are generally allowed a statutory credit which has the
effect of offsetting the United States federal estate tax imposed on the first
$60,000 of the taxable estate.
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 by
Kirkpatrick & Lockhart LLP, Pittsburgh, Pennsylvania. Certain legal matters
relating to the Offering will be passed upon for the Selling Shareholders by
Fried, Frank, Harris, Shriver & Jacobson, New York, New York and Williams
Coulson, Pittsburgh, Pennsylvania. Certain legal matters relating to the
Offering will be passed upon for the Underwriters by Dewey Ballantine LLP, New
York, New York.
EXPERTS
The consolidated financial statements included in this Prospectus have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said report.
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 that is 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 Room 1024, 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 7 World Trade Center,
62
<PAGE> 64
Suite 1300, New York, New York 10048. Copies of such materials may be obtained
from the Public Reference Section of the Commission, Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of the prescribed
rates. The Commission also maintains a web site at http://www.sec.gov which
contains reports, proxy statements and other information regarding registrants
that file electronically with the Commission.
The Company is also subject to the informational requirements of the
Exchange Act, and in accordance therewith files reports, proxy statements and
other information with the Commission. Such reports, proxy statements and other
information may be inspected, copied and obtained from the facilities and web
site referenced above in the same manner as the Registration Statement. The
Common Stock is traded on the Nasdaq National Market. Such reports, proxy
statements and other information concerning the Company may also be inspected at
the offices of the National Association of Securities Dealers, Inc., 1735 "K"
Street, N.W., Washington D.C. 20006.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
THIS PROSPECTUS INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. ALL
STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL FACTS INCLUDED IN THIS
PROSPECTUS, INCLUDING WITHOUT LIMITATION, CERTAIN STATEMENTS UNDER "PROSPECTUS
SUMMARY," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" AND "BUSINESS," REGARDING THE COMPANY'S FINANCIAL
POSITION AND BUSINESS STRATEGY MAY CONSTITUTE FORWARD-LOOKING STATEMENTS.
ALTHOUGH THE COMPANY BELIEVES THAT THE EXPECTATIONS REFLECTED IN SUCH
FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT CAN GIVE NO ASSURANCE THAT SUCH
EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT. IMPORTANT FACTORS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE COMPANY'S EXPECTATIONS ("CAUTIONARY
STATEMENTS") ARE DISCLOSED IN THIS PROSPECTUS, INCLUDING WITHOUT LIMITATION IN
CONJUNCTION WITH THE FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS AND
UNDER "RISK FACTORS." ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS
ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY
QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS.
63
<PAGE> 65
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants............................................ F-2
Consolidated Balance Sheets as of June 30, 1996 and 1997............................ F-3
Consolidated Statements of Income for the years ended June 30, 1995, 1996 and
1997.............................................................................. F-4
Consolidated Statements of Shareholders' Investment for the years ended June 30,
1995, 1996 and 1997............................................................... F-5
Consolidated Statements of Cash Flows for the years ended June 30, 1995, 1996 and
1997.............................................................................. F-6
Notes to Consolidated Financial Statements.......................................... F-7
</TABLE>
F-1
<PAGE> 66
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, 1996 and 1997, and the related consolidated statements of income,
shareholders' investment and cash flows for each of the three years in the
period ended June 30, 1997. 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, 1996 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1997 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Pittsburgh, Pennsylvania,
August 4, 1997
F-2
<PAGE> 67
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AS OF JUNE 30,
----------------------
1996 1997
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................................. $ 26,162 $ 32,646
Restricted cash........................................................ 1,237 581
-------- --------
Total cash and cash equivalents................................... 27,399 33,227
Receivables:
Trade, net of allowances of $2,938 and $7,393, respectively.......... 5,680 8,706
Notes, advances and other............................................ 2,492 1,841
Inventories............................................................ 1,271 1,356
Deferred income taxes.................................................. 381 1,509
Other current assets................................................... 2,635 2,247
-------- --------
Total current assets.............................................. 39,858 48,886
-------- --------
PROPERTY AND EQUIPMENT, NET.............................................. 41,174 52,571
OTHER ASSETS............................................................. 5,837 6,381
GOODWILL, NET OF AMORTIZATION OF $2,713 AND $3,236, RESPECTIVELY......... 14,543 18,454
-------- --------
TOTAL ASSETS...................................................... $101,412 $126,292
========= =========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Current portion of long-term debt...................................... $ 3,890 $ 3,637
Accounts payable....................................................... 4,776 6,931
Accrued liabilities.................................................... 7,355 9,778
Advance payments....................................................... 11,243 15,832
-------- --------
Total current liabilities......................................... 27,264 36,178
-------- --------
LONG-TERM DEBT, LESS CURRENT PORTION..................................... 62,029 30,394
DEFERRED INCOME TAXES AND OTHER LONG-TERM LIABILITIES.................... 2,463 1,964
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' INVESTMENT:
Capital stock:
Series A 10.19% Convertible Preferred Stock, at paid-in value........ 22,075 --
Common Stock, Class A, par value $.0001 per share; 1,842,802 and 0
shares issued and outstanding...................................... -- --
Common Stock, Class B, par value $.0001 per share; 5,103,717 and 0
shares issued, 5,075,217 and 0 shares outstanding.................. 1 --
Common Stock, par value $.01 per share; 0 and 14,457,275 shares
issued, 0 and 14,417,874 shares outstanding........................ -- 144
Warrants outstanding................................................... 7,683 --
Additional paid-in capital............................................. 19,742 87,893
Treasury stock, 28,500 and 39,401 shares at cost....................... (99) (354)
Stock subscriptions receivable......................................... (442) (122)
Accumulated deficit.................................................... (39,304) (29,805)
-------- --------
TOTAL SHAREHOLDERS' INVESTMENT.................................... 9,656 57,756
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT.................... $101,412 $126,292
========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-3
<PAGE> 68
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
------------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
NET REVENUES.................................................. $131,227 $147,863 $182,849
COSTS AND EXPENSES:
Educational services........................................ 86,865 98,841 120,918
General and administrative.................................. 28,841 32,344 41,036
Amortization of intangibles................................. 1,937 1,060 2,076
ESOP expense................................................ 7,086 1,366 --
-------- -------- --------
124,729 133,611 164,030
-------- -------- --------
INCOME BEFORE INTEREST AND TAXES.............................. 6,498 14,252 18,819
Interest expense, net....................................... 4,495 3,371 1,603
-------- -------- --------
INCOME BEFORE INCOME TAXES.................................... 2,003 10,881 17,216
Provision for income taxes.................................. 490 4,035 7,231
-------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEM.............................. 1,513 6,846 9,985
Extraordinary loss on early extinguishment of debt.......... -- 926 --
-------- -------- --------
NET INCOME.................................................... $ 1,513 $ 5,920 $ 9,985
========= ========= =========
INCOME AVAILABLE TO COMMON SHAREHOLDERS:
Dividends paid on Series A Preferred Stock.................... $ (2,249) $ (2,249) $ (83)
Redemption premium paid on Series A Preferred Stock........... -- -- (107)
Dividends accrued on Series A Preferred Stock, but not
payable..................................................... -- -- (296)
-------- -------- --------
Income (loss) before extraordinary item available to common
shareholders................................................ $ (736) $ 4,597 $ 9,499
Net income (loss) available to common shareholders............ $ (736) $ 3,671 $ 9,499
Net income (loss) available to common shareholders assuming
full dilution............................................... $ (736) $ 3,671 $ 9,878
INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE:
PRIMARY:
Income (loss) before extraordinary item................... $ (.11) $ .45 $ .72
Extraordinary loss on early extinguishment of debt........ -- (.09) --
-------- -------- --------
Net income (loss)...................................... $ (.11) $ .36 $ .72
========= ========= =========
FULLY DILUTED:
Income (loss) before extraordinary item................... $ (.11) $ .39 $ .72
Extraordinary loss on early extinguishment of debt........ -- (.08) --
-------- -------- --------
Net income (loss)...................................... $ (.11) $ .31 $ .72
========= ========= =========
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING (IN THOUSANDS):
Primary................................................... 6,890 10,170 13,235
Fully diluted............................................. 6,890 11,874 13,687
========= ========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-4
<PAGE> 69
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A
PREFERRED CLASS A CLASS B DEFERRED
STOCK COMMON COMMON COMMON COMPEN- STOCK
STATED AT STOCK STOCK STOCK ADDITIONAL SATION SUB-
PAID-IN AT PAR AT PAR AT PAR WARRANTS PAID-IN RELATED TREASURY SCRIPTIONS
VALUE VALUE VALUE VALUE OUTSTANDING CAPITAL TO ESOP STOCK RECEIVABLE
--------- ------ ------- ------- ----------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1994..... $ 22,075 $ -- $ -- $ 1 $ 7,683 $ 17,972 $(12,706) $ (227) $ (225)
Net income............... -- -- -- -- -- -- -- -- --
Dividends on Series A
Preferred Stock........ -- -- -- -- -- -- -- -- --
Purchase of Class B
Common Stock........... -- -- -- -- -- -- -- (21) --
Payment on stock
subscriptions
receivable for purchase
of stock............... -- -- -- -- -- -- -- -- 13
Payments received on ESOP
debt................... -- -- -- -- -- -- 9,119 -- --
Tax effect of dividends
on unallocated shares
held by ESOP........... -- -- -- -- -- -- -- -- --
Vesting of compensatory
stock options.......... -- -- -- -- -- 1,146 -- -- --
--------- ------ ------- ------- ----------- ---------- -------- -------- -----
Balance, June 30, 1995..... 22,075 -- -- 1 7,683 19,118 (3,587) (248) (212)
Net income............... -- -- -- -- -- -- -- -- --
Dividends on Series A
Preferred Stock........ -- -- -- -- -- -- -- -- --
Sale of Class B Common
Stock.................. -- -- -- -- -- 160 -- 149 (239)
Payments 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)
Net income............... -- -- -- -- -- -- -- -- --
Dividends on Series A
Preferred Stock........ -- -- -- -- -- -- -- -- --
Dividends accrued on
Series A Preferred
Stock, but not
payable................ -- -- -- -- -- 296 -- -- --
Series A Preferred Stock
redemption............. (7,606) -- -- -- -- -- -- -- --
Series A Preferred Stock
redemption premium..... 107 -- -- -- -- -- -- -- --
Conversion of Series A
Preferred Stock........ (14,576) -- -- -- -- 14,576 -- -- --
Purchase of Class B
Common Stock........... -- -- -- -- -- (2) -- (255) --
Payment on stock
subscriptions
receivable for purchase
of stock............... -- -- -- -- -- -- -- -- 320
Exercise of warrants..... -- -- -- -- (7,683) 7,683 -- -- --
Exercise of stock
options................ -- -- -- -- -- 419 -- -- --
Issuance of common stock
in connection with IPO
and employee stock
purchase plan.......... -- 144 -- (1) -- 44,804 -- -- --
Vesting of compensatory
stock options.......... -- -- -- -- -- 375 -- -- --
--------- ------ ------- ------- ----------- ---------- -------- -------- -----
Balance, June 30, 1997..... $ -- $144 $ -- $ -- $ -- $ 87,893 $ -- $ (354) $ (122)
======== ======= ====== ====== ========== ======== ======= ======= ========
<CAPTION>
ACCUMU- TOTAL
LATED SHAREHOLDERS'
DEFICIT INVESTMENT
-------- ------------
<S> <C> <C>
Balance, June 30, 1994..... $(42,297) $ (7,724)
Net income............... 1,513 1,513
Dividends on Series A
Preferred Stock........ (2,249) (2,249)
Purchase of Class B
Common Stock........... -- (21)
Payment on stock
subscriptions
receivable for purchase
of stock............... -- 13
Payments received on ESOP
debt................... -- 9,119
Tax effect of dividends
on unallocated shares
held by ESOP........... 58 58
Vesting of compensatory
stock options.......... -- 1,146
-------- ------------
Balance, June 30, 1995..... (42,975) 1,855
Net income............... 5,920 5,920
Dividends on Series A
Preferred Stock........ (2,249) (2,249)
Sale of Class B Common
Stock.................. -- 70
Payments 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
Net income............... 9,985 9,985
Dividends on Series A
Preferred Stock........ (83) (83)
Dividends accrued on
Series A Preferred
Stock, but not
payable................ (296) --
Series A Preferred Stock
redemption............. -- (7,606)
Series A Preferred Stock
redemption premium..... (107) --
Conversion of Series A
Preferred Stock........ -- --
Purchase of Class B
Common Stock........... -- (257)
Payment on stock
subscriptions
receivable for purchase
of stock............... -- 320
Exercise of warrants..... -- --
Exercise of stock
options................ -- 419
Issuance of common stock
in connection with IPO
and employee stock
purchase plan.......... -- 44,947
Vesting of compensatory
stock options.......... -- 375
-------- ------------
Balance, June 30, 1997..... $(29,805) $ 57,756
======== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-5
<PAGE> 70
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
----------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 1,513 $ 5,920 $ 9,985
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH FLOWS FROM
OPERATING ACTIVITIES:
Depreciation and amortization........................ 7,505 8,530 12,343
ESOP expense......................................... 7,086 1,366 --
Tax effect of dividends on unallocated shares held
by ESOP........................................... 58 -- --
Vesting of compensatory stock options................ 1,146 464 375
Deferred provision (credit) for income taxes......... (210) 137 (1,613)
Changes in current assets and liabilities:
Restricted cash................................... (2,406) 6,266 656
Receivables....................................... (223) (758) (158)
Inventories....................................... 1 (279) (73)
Other current assets.............................. 182 (1,183) 443
Accounts payable.................................. 3,236 (1,213) 1,604
Accrued liabilities............................... 382 (1,015) 2,269
Advance payments.................................. 3,951 (1,921) 2,715
-------- -------- --------
Total adjustments............................... 20,708 10,394 18,561
-------- -------- --------
Net cash flows from operating activities........ 22,221 16,314 28,546
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiaries............................... -- (400) (9,753)
Expenditures for property and equipment................... (10,481) (15,749) (18,098)
Other items, net.......................................... (1,492) (2,282) 119
-------- -------- --------
Net cash flows from investing activities........ (11,973) (18,431) (27,732)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock................ -- -- 45,143
Principal payments on debt................................ (12,438) (32,525) (31,988)
Dividends paid to ESOP.................................... (2,249) (2,249) (83)
Payments received from ESOP, net.......................... 2,032 2,220 --
New borrowings............................................ 19,145 28,634 --
Redemption of Series A Preferred Stock and other, net..... (8) 79 (7,402)
-------- -------- --------
Net cash flows from financing activities........ 6,482 (3,841) 5,670
-------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS..................... 16,730 (5,958) 6,484
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 15,390 32,120 26,162
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 32,120 $ 26,162 $ 32,646
======= ======= =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-6
<PAGE> 71
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. OWNERSHIP AND OPERATIONS:
Education Management Corporation ("EDMC" or the "Company") is among the
largest providers of proprietary postsecondary education in the United States
based on student enrollments and revenues. Through its operating units, the Art
Institutes ("The Art Institutes"), The New York Restaurant School ("NYRS"), The
National Center for Paralegal Training ("NCPT"), and The National Center for
Professional Development ("NCPD"), the Company offers associate's and bachelor's
degree programs and non-degree programs in the areas of design, media arts,
culinary arts, fashion and professional development. The Company has provided
career-oriented education programs for 35 years.
The Company's main operating unit, The Art Institutes, consists of 13
schools in 12 major metropolitan areas throughout the United States. Art
Institute programs are designed to provide the knowledge and skills necessary
for entry-level employment in various fields, including graphic design,
multimedia, computer animation, video production, culinary arts, interior
design, industrial design, photography, fashion marketing and fashion design.
Those programs typically are completed in 18 to 27 months and culminate in an
associate's degree. In addition, as of June 30, 1997, five Art Institutes
offered bachelor's degree programs.
As of June 30, 1997, the Company offers a culinary arts curriculum at six
Art Institutes and NYRS, a culinary arts and restaurant management school
located in New York City. The Company expects to open its seventh culinary arts
program at an Art Institute in October 1997. NYRS offers an associate's degree
program and certificate programs.
The Company offers paralegal training at NCPT in Atlanta. NCPT's
certificate programs generally are completed in four to nine months. NCPD
maintains consulting relationships with colleges and universities to assist in
the development, marketing and delivery of paralegal, legal nurse consultant and
financial planner test preparation programs for recent college graduates and
working adults.
2. INITIAL PUBLIC OFFERING AND SHAREHOLDER INVESTMENT:
On November 5, 1996, the Company completed the initial public offering (the
"Offering") of 5,073,600 shares of its Common Stock, $.01 par value (the "Common
Stock"), including 1,701,391 shares sold by certain shareholders, at a price to
the public of $15 per share. Since that date, the authorized capital stock of
the Company has consisted of the Common Stock and Preferred Stock, $.01 par
value (the "Preferred Stock").
From 1989 until immediately prior to the consummation of the Offering, the
Company's outstanding capital stock consisted of Class A Common Stock, $.0001
par value ("Class A Stock"), Class B Common Stock, $.0001 par value ("Class B
Stock"), and Series A 10.19% Convertible Preferred Stock, $.0001 par value (the
"Series A Preferred Stock"). All the outstanding shares of Series A Preferred
Stock were owned by the Education Management Corporation Employee Stock
Ownership Plan and Trust (the "ESOP"). In addition, warrants to purchase shares
of Class B Stock were outstanding.
Immediately prior to the consummation of the Offering, the following
occurred: (i) the warrants to purchase 5,956,079 shares of Class B Stock were
exercised ($.0001 exercise price per share), (ii) the ESOP converted all the
outstanding shares of Series A Preferred Stock into 2,249,954 shares of Class A
Stock, (iii) the Company's Articles of Incorporation were amended and restated
to authorize the Common Stock and Preferred Stock, and (iv) all outstanding
shares of Class A Stock and Class B Stock (including the shares resulting from
the exercise of the warrants and the conversion of the Series A Preferred Stock)
were reclassified into shares of Common Stock on a one-for-two basis (also
referred to as a one-for-two reverse stock split).
For the purpose of presenting comparable financial information in this
report for 1995, 1996 and 1997, the per share amounts, the number of shares of
Class A Stock and Class B Stock, the conversion ratio for the Series A Preferred
Stock and the exercise price for the warrants have been restated to reflect the
one-for-two reverse stock split, except in this Note 2.
F-7
<PAGE> 72
Prior to the closing of the Offering, holders of the Company's equity
securities had the right, under certain circumstances, to require the Company to
repurchase such securities. In addition, the Company had the right to redeem
shares of Series A Preferred Stock and Class B Stock under certain
circumstances. Coincident with the Offering, these rights expired and
accordingly, the term "redeemable" that appeared as the caption in previous
balance sheets has been removed.
In the Offering, the Company received total net proceeds, after deduction
of expenses and underwriting discounts payable by the Company, of approximately
$45 million. On the date the Offering closed, $38.5 million of those proceeds
were used to repay the outstanding indebtedness under the Company's amended and
restated credit facility dated March 16, 1995 (the "Revolving Credit
Agreement"). The remaining proceeds were used for general corporate purposes.
At June 30, 1996 and 1997, the Company's authorized and outstanding
preferred and common stock is presented below:
<TABLE>
<CAPTION>
AUTHORIZED OUTSTANDING
---------- -----------
<S> <C> <C>
JUNE 30, 1996
Series A Preferred Stock........................... 1,000,000 220,750
Class A Stock...................................... 25,000,000 1,842,802
Class B Stock...................................... 17,000,000 5,103,717
JUNE 30, 1997
Preferred Stock.................................... 10,000,000 --
Common Stock....................................... 60,000,000 14,417,874
</TABLE>
Pursuant to a Preferred Share Purchase Rights Plan (the "Rights Plan")
approved by the Company's Board of Directors, which became effective upon the
consummation of the Offering, one Preferred Share Purchase Right (a "Right") is
associated with each outstanding share of Common Stock. Each Right entitles its
holder to buy one one-hundredth of a share of Series A Junior Participating
Preferred Stock, $.01 par value, at an exercise price of $50, subject to
adjustment (the "Purchase Price"). The Rights Plan is not subject to shareholder
approval.
The Rights will become exercisable under certain circumstances following a
public announcement by a person or group of persons (an "Acquiring Person") that
they acquired or commenced a tender offer for 17.5% or more of the outstanding
shares of Common Stock. If an Acquiring Person acquires 17.5% or more of the
Common Stock, each Right will entitle its holder, except the Acquiring Person,
to acquire upon exercise a number of shares of Common Stock having a market
value of two times the Purchase Price. In the event that 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
becomes an Acquiring Person, each Right will entitle its holder to purchase, at
the Purchase Price, that number of shares of the acquiring company having a
market value of two times the Purchase Price. The Rights will expire on the
tenth anniversary of the closing of the Offering and are subject to redemption
by the Company at $.01 per Right, subject to adjustment.
Common Stock held in the treasury has from time to time been sold to key
management under stock subscription agreements providing for annual payments
based on incentive compensation received during the year and interest at the
applicable federal rate. In any event, all principal must be repaid by the
maturity of the agreements. The remaining maturity of all outstanding agreements
is seven years.
The unaudited pro forma income statement data in the following table gives
effect to the Offering as if it had occurred on July 1, 1996. Proceeds from the
Offering were utilized pro forma to retire outstanding indebtedness under the
Revolving Credit Agreement and for general corporate purposes. The adjustment to
interest expense represents the effect of the reduction of debt as if it had
occurred on July 1, 1996. Pro forma taxes are applied at an effective tax rate
of 42% of taxable income. This unaudited pro forma income statement data is not
necessarily
F-8
<PAGE> 73
indicative of what the Company's results of operations actually would have been
had the above transactions in fact occurred on July 1, 1996.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1997
-------------------------------------
ACTUAL ADJUSTMENTS PRO FORMA
------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
INFORMATION)
<S> <C> <C> <C>
Income before interest and taxes........ $18,819 $ -- $18,819
Interest expense, net................... 1,603 (931) 672
------- ----------- ---------
Income before income taxes.............. 17,216 931 18,147
Income taxes............................ 7,231 391 7,622
------- ----------- ---------
Net income.............................. $ 9,985 $ 540 $10,525
Net income available to common
shareholders.......................... 10,039
------- ----------- ---------
Earnings per share
--Primary............................. $ 0.70
--Fully diluted....................... $ 0.70
Weighted average number of common shares
--Primary............................. 14,341
--Fully diluted....................... 14,793
</TABLE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF CONSOLIDATION AND PRESENTATION
The consolidated financial statements include the accounts of EDMC 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.
ACQUISITIONS
Effective August 1, 1996, the Company acquired certain assets of NYRS for
$9.5 million in cash. The Company acquired principally current assets net of
specified current liabilities, property and equipment, student enrollment
agreements, curriculum and trade names. The excess of the purchase price over
the fair value of the assets acquired has been assigned to goodwill. This
transaction was accounted for as a purchase.
On January 30, 1997, the company acquired the assets of Lowthian College,
located in Minneapolis, Minnesota for $200,000 in cash and approximately
$200,000 of assumed liabilities. The Company acquired principally accounts
receivable, equipment, and student enrollment agreements. The excess of the
purchase price over the fair value of the assets acquired has been assigned to
goodwill. The school was renamed The Art Institute of Minnesota. This
transaction was accounted for as a purchase.
GOVERNMENT REGULATIONS
The Art Institutes and NYRS ("the participating schools"), participate in
various federal student financial assistance programs ("Title IV Programs")
under Title IV of the Higher Education Act of 1965, as amended (the
F-9
<PAGE> 74
"HEA"). Approximately 63% of the Company's net revenues in 1997 was indirectly
derived from funds distributed under these programs to students at the
participating schools.
The participating schools are required to comply with certain federal
regulations established by the U.S. Department of Education. Among other things,
they are required to classify as restricted certain Title IV Program loan
proceeds in excess of charges currently applicable to students' accounts. Such
funds are reported as restricted cash in the accompanying consolidated balance
sheets.
The participating schools are required to administer Title IV Program funds
in accordance with the HEA and U.S. Department of Education regulations and must
use due diligence in approving and disbursing funds and servicing loans. In the
event a participating school does not comply with federal requirements or if
student loan default rates are at a level considered excessive by the federal
government, that school could lose its eligibility to participate in Title IV
Programs or could be required to repay funds determined to have been improperly
disbursed. Management believes that the participating schools are in substantial
compliance with the federal requirements and that student loan default rates are
not at a level considered to be excessive.
EDMC makes contributions to Federal Perkins Loan Programs (the "Funds") at
certain Art Institutes. Current contributions to the Funds are made 75% by the
federal government and 25% by EDMC. EDMC 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 the lease meets certain other prerequisites, the leasing arrangement is
classified as a capitalized lease. The remaining lease arrangements are treated
as operating leases.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation.
Expenditures for additions and betterments are capitalized, while those for
maintenance, repairs and minor renewals are expensed as incurred. The Company
uses the straight-line method of depreciation for financial reporting, while
using different methods for tax purposes. Depreciation is based upon estimated
useful lives. Leasehold improvements are amortized over the term of the leases,
or over their estimated useful lives, whichever is shorter.
SCHOOL START-UP EXPENSE
In fiscal 1997 all costs associated with starting up a new school location
were expensed as incurred. Principal components of start-up costs include
compensation, legal, rent, relocation, marketing and admissions expenses. This
represents a change in policy from fiscal 1996 when the Company had capitalized
and amortized over one year, non-marketing and admissions expenses associated
with the start-up of The Art Institute of Phoenix. This change did not have a
material effect on the results of operations or the financial position of the
Company.
GOODWILL
The excess of the investment in EDMC 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.
F-10
<PAGE> 75
EMPLOYEE STOCK OWNERSHIP PLAN
The Company provides the ESOP for certain of its employees. In connection
with establishing the ESOP, the borrowings under a senior term loan financing
("ESOP Term Loan") were loaned to the ESOP on the same terms.
As this loan was repaid, shares were released from pledge and allocated to
ESOP participants' accounts. ESOP expense primarily represents the difference
between the cost of shares released to ESOP participants' accounts and the
dividends used by the ESOP for principal and interest repayment on this loan.
The dividends paid to the ESOP on the Series A Preferred Stock were used by the
ESOP trustee to pay the Company for principal and interest due on the ESOP's
loan from the Company. As of June 30, 1996, the ESOP Term Loan had been entirely
repaid, as was the loan due from the ESOP to the Company.
REVENUE RECOGNITION AND RECEIVABLES
The Company's net revenues consist of tuition and fees, student housing
charges and supply store and restaurant sales. In fiscal 1997, the Company
derived 87.8% of its net revenues from tuition and fees paid by, or on behalf
of, its students. Net revenues, as presented, are reduced for student refunds
and scholarships.
The Company recognizes tuition and housing revenues on a monthly pro rata
basis over the term of instruction, typically an academic quarter. Fees are
generally recognized as revenue at the start of the academic period to which
they apply. Student supply store and restaurant sales are recognized as they
occur. Refunds are calculated in accordance with federal, state and accrediting
agency standards. Advance payments represent that portion of payments received
but not earned and are reflected as a current liability in the accompanying
consolidated balance sheets.
The trade receivable balances are comprised of individually insignificant
amounts due primarily from students throughout the United States.
COSTS AND EXPENSES
Educational services expense consists primarily of costs related to the
delivery and administration of the Company's education programs. Major cost
components are faculty compensation, administrative salaries, costs of
educational materials, facility leases and school occupancy costs, computer
systems costs, bad debt expense and depreciation and amortization of property
and equipment.
General and administrative expense consists of the expenses of marketing
and student admissions, executive management, finance and accounting, legal,
corporate development and other departments that do not provide direct services
to the Company's students. All marketing and student admissions costs are
expensed in the fiscal year incurred.
Amortization of intangibles relates principally to the values assigned to
student enrollment agreements and applications, accreditation, contracts with
colleges and universities and goodwill, which arose principally from the
application of purchase accounting to the establishment and financing of the
ESOP and the related leveraged transaction in October 1989. This transaction was
accounted for in accordance with FASB Emerging Issues Task Force Issue No.
88-16. In addition, it includes the amortization of values assigned to student
enrollment agreements, curriculum and goodwill that resulted from the
acquisition of NYRS in August 1996 and Lowthian College in January 1997.
F-11
<PAGE> 76
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------
1995 1996 1997
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash paid during the period for:
Interest....................................... $5,130 $3,558 $2,264
Income taxes................................... 976 2,854 8,279
Noncash investing and financing activities:
Expenditures for property and equipment in
accounts payable............................ 931 163 552
</TABLE>
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to the
current year presentation.
4. EARNINGS PER SHARE:
Earnings per share ("EPS") of common stock have been computed using the
weighted average number of common and common equivalent shares outstanding
during the period. Common equivalent shares include stock warrants and options
for both the primary and fully diluted computations calculated using the
treasury stock method. For all periods presented, the weighted average number of
common and common equivalent shares outstanding include options issued within
one year of the Offering. The Series A Preferred Stock is assumed to be
converted for fully diluted EPS. In 1995, the weighted average common and common
equivalent shares does not include the assumed exercise of the stock options and
warrants or the conversion of the Series A Preferred Stock as the effect would
have been anti-dilutive.
The net income available to common shareholders in 1995 and 1996 has been
reduced by the dividends paid on Series A Preferred Stock in the computation of
both primary and fully diluted EPS. In the event that the Series A Preferred
Stock was converted into Class A Stock, the Company would no longer have paid
dividends; however, ESOP expense in the accompanying consolidated statements of
income would have increased proportionately.
In February 1997, the Financial Accounting Standards Board issued Financial
Accounting Standard #128 ("FAS #128"), addressing EPS. FAS #128 changes the
methodology for calculating EPS and renames the two calculations, Basic
(currently primary) and Diluted (currently fully diluted) Earnings per Share.
The calculations differ by eliminating any common stock equivalents (such as
stock options, warrants and convertible preferred stock) from Basic EPS and
changes certain calculations when computing Diluted EPS. FAS #128 is effective
for reporting periods ending after December 15, 1997; early adoption is
prohibited, and when adopted in fiscal 1998 all prior periods must be restated.
However, if FAS #128 were in effect, the new EPS calculations would be as
follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------
1995 1996 1997
----- ------ ------
<S> <C> <C> <C>
BASIC:
Income (loss) before extraordinary item........... $(.11) $ .66 $ .80
Net income (loss)................................. $(.11) $ .53 $ .80
DILUTED:
Income (loss) before extraordinary item........... $(.11) $ .39 $ .72
Net income (loss)................................. $(.11) $ .31 $ .72
WEIGHTED AVERAGE SHARES OUTSTANDING (IN
THOUSANDS):
Basic............................................. 6,890 6,913 11,939
Diluted........................................... 6,890 11,874 13,671
</TABLE>
F-12
<PAGE> 77
5. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following as of June 30:
<TABLE>
<CAPTION>
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Assets (asset lives)
Land.................................................. $ 300 $ 300
Buildings and improvements (20 years)................. 1,841 1,841
Equipment and furniture (5 to 10 years)............... 47,615 61,204
Leasehold interests and improvements
(4 to 20 years).................................... 27,936 36,475
------- -------
Total.............................................. 77,692 99,820
Less accumulated depreciation......................... 36,518 47,249
------- -------
$41,174 $52,571
======= =======
</TABLE>
6. LONG-TERM DEBT:
The Company and its subsidiaries were indebted under the following
obligations as of June 30:
<TABLE>
<CAPTION>
1996 1997
------- -------
(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)........................................... $55,000 $27,000
Capitalized lease and equipment installment note
obligations (see below)............................... 10,919 7,031
------- -------
65,919 34,031
Less current portion.................................... 3,890 3,637
------- -------
$62,029 $30,394
======= =======
</TABLE>
The Revolving Credit Agreement, as amended, allows for maximum borrowings
of $70,000,000, reduced annually by $5,000,000 beginning on October 13, 1997,
through its expiration on October 13, 2000. The Revolving Credit Agreement
requires, among other things, that the Company maintain a specified level of
consolidated net worth and meet interest and leverage ratio requirements, and
restricts capital expenditures, declaration or payment of dividends on or
repurchases of Common Stock and the incurrence of additional indebtedness, as
defined. As of June 30, 1997, the Company was in compliance with all covenants.
The Revolving Credit Agreement interest rate is variable; interest can be
charged at prime, Eurodollar or cost of funds (as defined) rates, at the option
of the Company. As of June 30, 1997, the average interest rate under the
Revolving Credit Agreement was 8.25%. The borrowings outstanding under the
Revolving Credit Agreement as of June 30, 1997 were repaid by July 3, 1997.
The Company had 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 paid a
fixed rate of interest and received a variable rate of interest based upon the
three-month London Interbank Offered Rate. The net effect of the swaps was that
the Company paid a fixed rate on $15,000,000 of revolving credit debt. On May
29, 1997, the Company terminated its swap agreements, which were scheduled to
expire in November 1998. This termination resulted in the Company receiving
approximately $95,000, the estimated fair value of the swaps at that date. This
nonleveraged interest rate swap acquired to manage interest rate risk represents
the only derivative financial instrument used by the Company.
F-13
<PAGE> 78
Relevant information regarding borrowings under the Revolving Credit
Agreement is reflected below:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------
1995 1996 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Outstanding borrowings, end of period............... $30,000 $55,000 $27,000
Approximate average outstanding balance throughout
the period........................................ 415 16,847 13,602
Approximate maximum outstanding balance during the
period............................................ 40,000 55,000 55,000
Weighted average interest rate for the period....... 8.46% 7.33% 7.20%
</TABLE>
The ESOP Term Loan was prepaid in its entirety on June 30, 1996 by paying
$412,000 that was scheduled for payment in September, 1996.
The $25,000,000 principal amount of the Company's 13.25% Subordinated Notes
was prepaid in full in October 1995. The resulting prepayment penalty of
$1,472,000 was classified as an extraordinary item, loss on early extinguishment
of debt, in the accompanying consolidated statements of income, net of tax of
$546,000.
Capitalized leases and installment notes for equipment and furniture expire
at various dates through June 2000. The following is a schedule of approximate
future minimum payments under capitalized leases, together with the present
value of the net minimum payments as of June 30, 1997:
<TABLE>
<CAPTION>
FISCAL YEARS (IN THOUSANDS)
------------ --------------
<S> <C>
1998................................................... $4,092
1999................................................... 2,820
2000................................................... 772
-------
Total minimum payments................................. 7,684
-------
Less amount representing interest...................... 653
Present value of net minimum payments.................. $7,031
==========
</TABLE>
Depreciation expense on assets financed through capitalized leases and
installment notes was approximately $3,913,000, $3,182,000 and $3,705,000 for
the years ended June 30, 1995, 1996 and 1997, respectively.
7. 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, 1997 are reflected below:
<TABLE>
<CAPTION>
FISCAL YEARS (IN THOUSANDS)
------------ --------------
<S> <C>
1998................................................... $ 16,899
1999................................................... 14,904
2000................................................... 11,682
2001................................................... 8,713
2002................................................... 6,799
Thereafter............................................. 44,308
--------------
$103,305
==========
</TABLE>
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
F-14
<PAGE> 79
ultimate outcome of such legal proceedings, individually and in the aggregate,
will not have a material adverse effect on the consolidated financial position,
results of operations or liquidity of the Company.
8. RELATED PARTY TRANSACTIONS:
The Art Institute of Philadelphia, Inc., a wholly owned subsidiary of The
Art Institutes International, Inc. ("AII"), which is a wholly owned subsidiary
of EDMC, leases one of the buildings it occupies from a partnership in which the
subsidiary serves as a 1% general partner and an executive officer/director and
a director of EDMC are minority limited partners. The Art Institute of Fort
Lauderdale, Inc., another wholly owned subsidiary of AII, leases part of its
facility from a partnership in which an executive officer/director of EDMC is a
minority limited partner. Total rental payments under these arrangements were
$1,894,000 for each of the three years ended June 30, 1997.
9. 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 $504,000, $515,000 and $526,000 for the years ended June 30, 1995,
1996 and 1997, respectively.
The Company has established an ESOP which enables eligible employees to
acquire stock ownership in the Company. The Company has made annual
contributions, in addition to dividends paid on the Series A Preferred Stock
held by the ESOP, sufficient to service the interest and principal obligations
on the ESOP's debt to the Company. Since the Company functioned as the lender to
the ESOP, the contribution for the interest component of debt service is
immediately returned to the Company. Such interest income and expense have been
netted in the accompanying consolidated statements of income. As of June 30,
1996, the ESOP Term Loan was entirely repaid, as was the loan between the ESOP
and the Company.
Shares and cash forfeiture allocations are made to the accounts of eligible
participating employees based upon each participant's compensation level
relative to the total compensation of all eligible employees. Eligible employees
vest their ESOP accounts based on a seven-year schedule which includes credit
for past service. Distribution of shares from the ESOP are made following the
retirement, disability or death of an employee. For employees who terminate for
any other reason, their vested balance will be offered for distribution in
accordance with the terms of ESOP.
10. OTHER ASSETS:
Other assets consist of the following as of June 30:
<TABLE>
<CAPTION>
1996 1997
------ ------
(IN THOUSANDS)
<S> <C> <C>
Investment in Federal Perkins Loan Program, net of
allowance for estimated future loan losses of $575 and
$602, respectively...................................... $2,343 $2,398
Cash value of life insurance, net of loans of $781 each
year; face value of $5,321 and $6,362, respectively..... 1,542 1,785
Other..................................................... 1,952 2,198
------ ------
$5,837 $6,381
====== ======
</TABLE>
F-15
<PAGE> 80
11. ACCRUED LIABILITIES:
Accrued liabilities consist of the following as of June 30:
<TABLE>
<CAPTION>
1996 1997
------ ------
(IN THOUSANDS)
<S> <C> <C>
Payroll taxes and payroll related......................... $2,787 $4,599
Income and other taxes.................................... 1,223 1,003
Other..................................................... 3,345 4,176
------ ------
$7,355 $9,778
====== ======
</TABLE>
12. INCOME TAXES:
The provision for income taxes includes current and deferred taxes as
reflected below:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------
1995 1996 1997
----- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current taxes:
Federal................................................ $ 577 $3,215 $ 7,594
State.................................................. 123 683 1,250
----- ------ -------
Total current taxes................................. 700 3,898 8,844
----- ------ -------
Deferred taxes........................................... (210) 137 (1,613)
----- ------ -------
Total provision..................................... $ 490 $4,035 $ 7,231
===== ====== ======
</TABLE>
The provisions for income taxes reflected in the accompanying consolidated
statements of income vary from the amounts that would have been provided by
applying the federal statutory income tax rate to earnings before income taxes
as shown below:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------
1995 1996 1997
----- ---- ----
<S> <C> <C> <C>
Federal statutory income tax rate......................... 34.0% 34.0% 35.0%
State and local income taxes, net of federal income tax
benefit................................................. 6.0 6.0 5.1
Amortization of goodwill and other intangibles............ 8.1 1.5 .9
Deductible portion of dividends on Series A Preferred
Stock................................................... (32.1) (6.0) --
Non-deductible expenses................................... 4.9 1.1 .8
All other, net............................................ 3.6 .5 .2
----- ---- ----
Income tax provision................................. 24.5% 37.1% 42.0%
==== ==== ====
</TABLE>
Net deferred income tax assets (liabilities) are composed of the following
as of June 30:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred income tax-current............................ $ 181 $ 381 $ 1,509
Deferred income tax-long term.......................... (1,809) (2,146) (1,661)
------- ------- -------
Net deferred income tax liability...................... $(1,628) $(1,765) $ (152)
======= ======= =======
Consisting of:
Financial reserves and other......................... $ 717 $ 921 $ (408)
Reserve for doubtful accounts........................ 612 1,175 2,959
Assigned asset values in excess of tax basis......... (2,369) (2,126) (2,006)
Depreciation......................................... (588) (1,735) (697)
------- ------- -------
Total net deferred income tax liability........... $(1,628) $(1,765) $ (152)
======= ======= =======
</TABLE>
F-16
<PAGE> 81
13. STOCK BASED COMPENSATION:
In October 1996, the Company adopted the 1996 Stock Incentive Plan (the
"1996 Plan") for directors, executive management and key personnel. The 1996
Plan provides for the issuance of stock-based incentive awards with respect to a
maximum of 1,250,000 shares. During fiscal 1997, options covering a total of
609,500 shares were granted under the 1996 Plan. Options issued under this plan
provide for time-based vesting over four years.
The Company has two non-qualified management stock option plans under which
options to purchase a maximum of 359,642 and 200,000 shares of Common Stock have
been granted to management employees. In August 1996 all outstanding options
under these non-qualified plans were vested. The option covering 21,500 shares
granted during fiscal 1997 under one of these plans provides for time-based
vesting over four years. Under the terms of these plans, the Board of Directors
granted options to purchase shares at prices varying from $2.54 to $15.00 per
share, representing the fair market value at the time of the grant. Compensation
expense related to vesting of certain options of $1,146,000, $464,000 and
$375,000 was recognized for the years ended June 30, 1995, 1996 and 1997,
respectively.
In addition to the above stock option plans, an agreement was entered into
with an executive during fiscal 1996 granting options for the purchase of 75,000
shares of Class B Stock at $11.00 per share. The agreement provided for
time-based vesting over four years. This executive discontinued employment
during fiscal 1997 and forfeited options which had been granted with respect to
42,187 shares.
The Company accounts for these plans under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees".
In fiscal 1997 the Company adopted an employee stock purchase plan. The
plan allows eligible employees of the Company to purchase up to an aggregate of
750,000 shares of common stock at quarterly intervals through periodic payroll
deduction. In fiscal 1997, 7,836 shares of Common Stock were issued under this
plan. In addition, eligible employees were permitted to purchase 173,208 shares
of Common Stock in the Offering.
Had compensation expense for these plans been determined consistent with
FASB Statement No. 123, (Accounting for Stock Based Compensation) the Company's
net income and earnings per share would have been reduced to the following pro
forma amounts:
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C> <C>
Net income (in thousands):................ As reported $5,920 $9,985
Pro forma $5,721 $7,730
Primary EPS:.............................. As reported $ 0.36 $ 0.72
Pro forma $ 0.34 $ 0.55
Fully diluted EPS:........................ As reported $ 0.31 $ 0.72
Pro forma $ 0.29 $ 0.55
</TABLE>
A summary of stock option activity follows:
F-17
<PAGE> 82
SUMMARY OF STOCK OPTIONS
<TABLE>
<CAPTION>
1995 1996 1997
--------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year............................ 495,293 $ 3.88 538,145 $ 4.15 613,145 $ 4.97
Granted........................... 42,852 7.20 75,000 11.00 631,000 15.07
Exercised......................... -- -- 52,600 6.66
Forfeited......................... -- -- 95,187 13.23
--------- -------- --------- -------- --------- --------
Outstanding at end of year........ 538,145 $ 4.15 613,145 $ 4.98 1,096,358 $10.00
======== ======== ========= ======== ========= ========
Exercisable at end of year........ 401,022 473,593 521,358
======== ========= =========
Weighted average fair value of
options granted (000's)*........ $ 309 $ 342 $ 3,852
======== ========= =========
</TABLE>
- ---------
* The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted averages
assumptions for grants in 1996 and 1997.
<TABLE>
<S> <C>
Risk free interest rate.................................... 6.124%
Expected dividend yield.................................... 0
Expected life of options................................... 6 years
Expected volatility rate................................... 33.7%
</TABLE>
14. UNUSUAL ITEM:
The Company received a refund of state and local business and occupation
taxes in 1995. In the years paid, these taxes had been recorded as educational
services expenses. This credit of $1,107,000 is recorded as an offset to
educational services expenses in the accompanying consolidated statements of
income.
15. STOCK PRICES AND DIVIDENDS:
The Company's Common Stock is traded on the Nasdaq National Market System
under the symbol "EDMC." The prices set forth below reflect the high and low
sales prices for the Common Stock for the periods indicated, as reported in the
consolidated transaction reporting system of the Nasdaq National Market System.
<TABLE>
<CAPTION>
1997
-----------------
THREE MONTHS ENDED HIGH LOW
------------------ ------ ------
<S> <C> <C>
September 30.............................................. N/A N/A
December 31............................................... $21.00 $15.50
March 31.................................................. 23.25 18.00
June 30................................................... 26.75 21.50
</TABLE>
The Company has not declared or paid any cash dividends on its capital
stock during the last three years other than on the shares of its Series A
Preferred Stock. The payment of dividends by the Company is, and will continue
to be, subject to certain restrictions under the terms of its Revolving Credit
Agreement.
F-18
<PAGE> 83
- ------------------------------------------------------
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........................... 8
Use of Proceeds........................ 15
Dividend Policy........................ 15
Price Range of Common Stock............ 15
Capitalization......................... 15
Selected Consolidated Financial and
Other Data........................... 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 18
Business............................... 27
Management and Directors............... 47
Certain Transactions................... 51
Principal and Selling Shareholders..... 52
Description of Capital Stock........... 54
Shares Eligible for Future Sale........ 57
Underwriting........................... 58
Notice to Canadian Residents........... 59
Certain U.S. Federal Tax Considerations
for Non-U.S. Holders of Common
Stock................................ 60
Legal Matters.......................... 62
Experts................................ 62
Additional Information................. 62
Disclosure Regarding Forward-Looking
Statements........................... 63
Index to Consolidated Financial
Statements........................... F-1
</TABLE>
- ------------------------------------------------------
------------------------------------------------------
EDUCATION MANAGEMENT
CORPORATION
2,833,409 Shares
Common Stock
($.01 par value)
P R O S P E C T U S
CREDIT SUISSE FIRST BOSTON
SMITH BARNEY INC.
ABN AMRO
CHICAGO CORPORATION
------------------------------------------------------
<PAGE> 84
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the actual fees payable to the Securities
and Exchange Commission and the National Association of Securities Dealers, Inc.
and the estimated fees and expenses expected to be incurred in connection with
the distribution of the shares of Common Stock, $.01 par value, of the
registrant being registered (other than underwriting discounts and commissions).
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee............ $ 25,387
National Association of Securities Dealers, Inc. Filing Fee.... 8,878
Printing Expenses.............................................. 150,000
Accounting Fees and Expenses................................... 50,000
Legal Fees and Expenses........................................ 300,000
Blue Sky Qualification Fees and Expenses....................... 5,000
Transfer Agent Fees and Expenses............................... 5,000
Miscellaneous.................................................. 155,735
--------
Total..................................................... $700,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under the Pennsylvania Business Corporation Law of 1988, as amended (the
"BCL"), the registrant is obligated to indemnify a director or officer and to
reimburse (but not advance) expenses with respect to any threatened, pending or
completed action or proceeding only if such director or officer ultimately
prevails in that action. Therefore, the registrant has entered into
indemnification agreements with each of its directors and officers in which the
registrant agrees to indemnify such directors and officers to the fullest extent
permitted by law and to advance the expenses of any suit or other action to such
directors and officers upon their demand; subject to repayment if such directors
or officers are found by a court of competent jurisdiction not to have been
entitled to indemnification by the registrant.
BCL Sections 1741 and 1742 provide that a business corporation shall have
the power to indemnify any person who was or is a party, or is threatened to be
made a party, to any threatened, pending or completed action or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation), by reason of the fact that such person
is or was a representative (as defined below) of that corporation, or is or was
serving at the request of that corporation as a representative of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection with
such action or proceeding, if such person acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of that
corporation and, with respect to any criminal proceeding, had no reasonable
cause to believe his conduct was unlawful. In the case of an action by or in the
right of a business corporation, such indemnification is limited to expenses
(including attorneys' fees) actually and reasonably incurred by such person in
connection with the defense or settlement of such action, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person has been adjudged to be liable to that corporation unless and
only to the extent that a court determines upon application that, despite the
adjudication of liability but in view of all the circumstances of the case, such
person is fairly and reasonably entitled to indemnity for the expenses that the
court deems proper. A representative means a person occupying the position or
discharging the functions of a director, officer, employee or agent of any
enterprise, regardless of the name or title by which that person may be
designated.
BCL Section 1744 provides that, unless ordered by a court, any
indemnification referred to above shall be made by a business corporation only
as authorized in the specific case upon a determination that indemnification is
proper in the circumstances because the indemnitee has met the applicable
standard of conduct. Such determination shall be made:
II-1
<PAGE> 85
(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 bylaw, 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 bylaw, 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 Bylaws of the registrant 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 the Restated Bylaws 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 the Restated Bylaws 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 the Restated Bylaws in defending or appearing as a
witness in any civil or criminal action, suit or proceeding described in Section
7.1 of the Restated Bylaws in advance of the final disposition of such action,
suit or proceeding. The expenses incurred by such director or officer shall be
paid by the registrant in advance of the final disposition of such action, suit
or proceeding only upon receipt of an undertaking by or on behalf of such
director or officer to repay all amounts advanced if it shall ultimately be
determined that he is not entitled to be indemnified by the registrant, and an
irrevocable assignment to the registrant of all payments to which such director
or officer may be or become entitled, under any policy of insurance or
otherwise, in reimbursement of any such expenses paid by the registrant.
II-2
<PAGE> 86
The Restated Bylaws 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 the Restated Bylaws 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 Article VII of the Restated Bylaws.
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 Restated
Bylaws.
As permitted by BCL Section 1713, the Restated Bylaws provide that no
director shall be personally liable for monetary damages for any action taken,
or failure to take any action, except to the extent that such elimination or
limitation of liability is expressly prohibited by the Act of November 28, 1986
(P.L. No. 145) as in effect at the time of the alleged action or failure to take
action by the director. The BCL states that this exculpation from liability does
not apply where the director has breached or failed to perform the duties of his
office and the breach or failure to perform constitutes self-dealing, willful
misconduct or recklessness, and does not apply to the responsibility or
liability of a director pursuant to any criminal statute or the liability of a
director for payment of taxes pursuant to Federal, state or local law. It may
also not apply to liabilities imposed upon directors by the Federal securities
laws.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Within the past three years, the Company sold shares of its capital stock
in the following transactions, each of which was intended to be exempt from the
registration requirements of the Securities Act of 1933, as amended, by virtue
of Section 4(2) thereof.
<TABLE>
<CAPTION>
AGGREGATE
CONSIDERATION
AMOUNT OF PAID IN EACH
PURCHASER DATE OF SALE TITLE SECURITIES SOLD TRANSACTION
- ---------------------- ------------------ --------------------- --------------- -------------
<S> <C> <C> <C> <C>
N.G. Temnick.......... August 9, 1996 Class B Common Stock 1,500 Shares $ 5,250.00(a)
L.S. Pritchard, III... October 13, 1995 Class B Common Stock 7,500 Shares $ 54,000.00
R.M. Barber........... July 31, 1995 Class B Common Stock 3,000 Shares $ 21,600.00
R.S. Peterson......... July 31, 1995 Class B Common Stock 3,000 Shares $ 21,600.00
P.T. DeCoursey........ July 17, 1995 Class B Common Stock 24,704 Shares $ 177,872.40
R.T. McDowell......... July 17, 1995 Class B Common Stock 5,000 Shares $ 36,000.00
</TABLE>
- ---------
(a) Representing the exercise of stock options at an exercise price of $3.50 per
share.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed as part of this registration
statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------------------------------
<S> <C>
1.01 Form of Underwriting Agreement*
3.01 Restated Articles of Incorporation**
3.02 Articles of Amendment filed on February 4, 1997**
3.03 Restated Bylaws**
4.01 Specimen Common Stock Certificate**
4.02 Rights Agreement, dated as of October 1, 1996, between Education Management
Corporation and Mellon Bank, N.A.**
</TABLE>
II-3
<PAGE> 87
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------------------------------
<S> <C>
5.01 Opinion of Kirkpatrick & Lockhart LLP as to the validity of the securities being
registered***
10.01 Education Management Corporation Employee Stock Ownership Plan**
10.02 First Amendment to Education Management Corporation Employee Stock Ownership Plan**
10.03 Second Amendment to Amended and Restated Education Management Corporation Employee
Stock Ownership Plan**
10.04 Third Amendment to Amended and Restated Education Management Corporation Employee
Stock Ownership Plan**
10.05 Education Management Corporation Management Incentive Stock Option Plan, effective
November 11, 1993**
10.06 EMC Holdings, Inc. Management Incentive Stock Option Plan, effective July 1, 1990**
10.07 Form of Management Incentive Stock Option Agreement, dated various dates, between
EMC Holdings, Inc. and various management employees**
10.08 Form of Amendment to Management Incentive Stock Option Agreement, dated January 19,
1995, among Education Management Corporation and various management employees**
10.09 Education Management Corporation Retirement Plan**
10.10 Education Management Corporation Deferred Compensation Plan**
10.11 Education Management Corporation 1996 Employee Stock Purchase Plan**
10.12 Education Management Corporation 1996 Stock Incentive Plan**
10.13 Second Amended and Restated Employment Agreement, dated August 15, 1996, between
Robert B. Knutson and Education Management Corporation**
10.14 Employment Agreement, dated June 1, 1996, between Albert Greenstone and Education
Management Corporation**
10.15 Form of EMC-Art Institutes International, Inc. Director's and/or Officer's
Indemnification Agreement**
10.16 Agreement and Lease, dated September 1, 1978, between Stabile & Associates and
Education Management Corporation**
10.17 Amendment to Agreement and Lease, dated March 1, 1980, between Stabile & Associates
and Education Management Corporation**
10.18 Renewal Option Letter Agreement dated November 21, 1984, between Stabile &
Associates and Education Management Corporation**
10.19 Common Stock Registration Rights Agreement, dated as of August 15, 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 Lynch KECALP L.P. 1986, Merrill Lynch Offshore LBO Partnership No. IV,
Merrill Lynch Capital Corporation, Merrill Lynch Capital Appreciation Partnership
IV, L.P., Robert B. Knutson and certain other individuals**
10.20 Amended and Restated Credit Agreement, dated March 16, 1995, among Education
Management Corporation, certain banks and PNC Bank, National Association**
10.21 First Amendment to Amended and Restated Credit Agreement, dated October 13, 1995,
among Education Management Corporation, certain banks and PNC Bank, National
Association**
10.22 Second Amendment to Amended and Restated Credit Agreement, dated July 31, 1996,
among Education Management Corporation, certain banks and PNC Bank, National
Association**
10.23 Third Amendment to Amended and Restated Credit Agreement, dated March 14, 1997,
among Education Management Corporation, certain banks and PNC Bank, National
Association**
10.24 Nonqualified Stock Option Agreement, dated May 2, 1996, between Education Management
Corporation and William M. Webster, IV**
10.25 Letter Agreement, dated August 9, 1996, between Education Management Corporation
Employee Stock Ownership Trust and Education Management Corporation**
</TABLE>
II-4
<PAGE> 88
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------------------------------
<S> <C>
10.26 Form of Common Stock Subscription and Repurchase Agreement, dated various dates,
between Education Management Corporation and various stock purchasers**
10.27 Form of Amendment No. 1 to Common Stock Subscription and Repurchase Agreement, dated
January 1, 1996, between Education Management Corporation and certain management
stockholders**
10.28 Form of Common Stock Subscription and Repurchase Agreement, dated various dates,
between Education Management Corporation and certain management stockholders**
10.29 Amendment No. 1 to Common Stock Subscription and Repurchase Agreement, dated January
19, 1995, between Education Management Corporation and certain management
stockholders**
10.30 Amendment No. 2 to Common Stock Subscription and Repurchase Agreement, dated January
1, 1996, between Education Management Corporation and certain management
stockholders**
10.31 Letter Agreement dated October 6, 1997 by and among Education Management Corporation
and certain shareholders***
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 Powers of Attorney***
27.01 Financial Data Schedule**
</TABLE>
- ---------
* Filed herewith.
** Incorporated herein by reference.
*** Previously filed.
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-5
<PAGE> 89
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this amendment to registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Pittsburgh, Commonwealth of Pennsylvania, on October 21, 1997.
EDUCATION MANAGEMENT CORPORATION
By: /s/ ROBERT B. KNUTSON
----------------------------------
Robert B. Knutson
Chairman and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this amendment to 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, Chief Executive October 21, 1997
- ---------------------------------- Officer and Director
Robert B. Knutson
/s/ ROBERT T. MCDOWELL Senior Vice President, Chief October 21, 1997
- ---------------------------------- Financial Officer, Treasurer
Robert T. McDowell and Principal Accounting
Officer
* Director October 21, 1997
- ----------------------------------
Robert H. Atwell
* Director October 21, 1997
- ----------------------------------
James J. Burke, Jr.
* Director October 21, 1997
- ----------------------------------
William M. Campbell, III
* Director October 21, 1997
- ----------------------------------
Miryam L. Drucker
* Director October 21, 1997
- ----------------------------------
Albert Greenstone
* Director October 21, 1997
- ----------------------------------
James S. Pasman, Jr.
</TABLE>
*By: /s/ ROBERT T. MCDOWELL
---------------------------------------------
Robert T. McDowell
Attorney-in-fact, pursuant to
powers of attorney previously filed as
exhibits to the registration statement.
<PAGE> 90
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION SEQUENTIAL PAGE NUMBERING
- ------ --------------------------------------------- ---------------------------------
<S> <C> <C>
1.01 Form of Underwriting Agreement Filed herewith
3.01 Amended and Restated Articles of Incorporated herein by reference
Incorporation to Exhibit 3.01 to the Annual
Report on Form 10-K (File No.
000-21363) filed on September 29,
1997 (the "Form 10-K")
3.02 Articles of Amendment filed on February 4, Incorporated herein by reference
1997 to Exhibit 3.02 to the Form 10-K
3.03 Restated Bylaws Incorporated herein by reference
to Exhibit 3.03 to the Form 10-K
4.01 Specimen Common Stock Certificate Incorporated herein by reference
to Exhibit 4.01 to Amendment No.
3 filed on October 28, 1996 to
the Registration Statement on
Form S-1 (File No. 333-10385)
filed on August 19, 1996 (the
"Form S-1")
4.02 Rights Agreement, dated as of October 1, Incorporated herein by reference
1996, between Education Management to Exhibit 4.02 to the Form 10-K
Corporation and Mellon Bank, N.A.
5.01 Opinion of Kirkpatrick & Lockhart LLP as to Previously filed
the validity of the securities being
registered
10.01 Education Management Corporation Employee Incorporated herein by reference
Stock Ownership Plan to Exhibit 10.01 to the Form S-1
10.02 First Amendment to Education Management Incorporated herein by reference
Corporation Employee Stock Ownership Plan to Exhibit 10.02 to Amendment No.
1 filed on October 1, 1996
("Amendment No. 1") to the Form
S-1
10.03 Second Amendment to Amended and Restated Incorporated herein by reference
Education Management Corporation Employee to Exhibit 10.03 to the Form S-1
Stock Ownership Plan
10.04 Third Amendment to Amended and Restated Incorporated herein by reference
Education Management Corporation Employee to Exhibit 10.04 to Amendment No.
Stock Ownership Plan 1
10.05 Education Management Corporation Management Incorporated herein by reference
Incentive Stock Option Plan, effective to Exhibit 10.05 to the Form S-1
November 11, 1993
10.06 EMC Holdings, Inc. Management Incentive Stock Incorporated herein by reference
Option Plan, effective July 1, 1990 to Exhibit 10.06 to Amendment No.
1
10.07 Form of Management Incentive Stock Option Incorporated herein by reference
Agreement, dated various dates, between EMC to Exhibit 10.07 to Amendment No.
Holdings, Inc. and various management 1
employees
10.08 Form of Amendment to Management Incentive Incorporated herein by reference
Stock Option Agreement, dated January 19, to Exhibit 10.08 to Amendment No.
1995, among Education Management Corporation 1
and various management employees
</TABLE>
<PAGE> 91
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION SEQUENTIAL PAGE NUMBERING
- ------ --------------------------------------------- ---------------------------------
<S> <C> <C>
10.09 Education Management Corporation Retirement Incorporated herein by reference
Plan to Exhibit 10.09 to Amendment No.
1
10.10 Education Management Corporation Deferred Incorporated herein by reference
Compensation Plan to Exhibit 10.11 to the Form S-1
10.11 Education Management Corporation 1996 Incorporated herein by reference
Employee Stock Purchase Plan to Exhibit 10.12 to Amendment No.
1
10.12 Education Management Corporation 1996 Stock Incorporated herein by reference
Incentive Plan to Exhibit 10.13 to Amendment No.
1
10.13 Second Amended and Restated Employment Incorporated herein by reference
Agreement, dated August 15, 1996, between to Exhibit 10.15 to the Form S-1
Robert B. Knutson and Education Management
Corporation
10.14 Employment Agreement, dated June 1, 1996, Incorporated herein by reference
between Albert Greenstone and Education to Exhibit 10.16 to the Form S-1
Management Corporation
10.15 Form of EMC-Art Institutes International, Incorporated herein by reference
Inc. Director's and/or Officer's to Exhibit 10.17 to the Form S-1
Indemnification Agreement
10.16 Agreement and Lease, dated September 1, 1978, Incorporated herein by reference
between Stabile & Associates and Education to Exhibit 10.18 to Amendment No.
Management Corporation 1
10.17 Amendment to Agreement and Lease, dated March Incorporated herein by reference
1, 1980, between Stabile & Associates and to Exhibit 10.19 to Amendment No.
Education Management Corporation 1
10.18 Renewal Option Letter Agreement dated Incorporated herein by reference
November 21, 1984, between Stabile & to Exhibit 10.20 to Amendment No.
Associates and Education Management 1
Corporation
10.19 Common Stock Registration Rights Agreement, Incorporated herein by reference
dated as of August 15, 1996, among Education to Exhibit 10.19 to the Form 10-K
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
Lynch KECALP L.P. 1986, Merrill Lynch
Offshore LBO Partnership No. IV, Merrill
Lynch Capital Corporation, Merrill Lynch
Capital Appreciation Partnership IV, L.P.,
Robert B. Knutson and certain other
individuals
10.20 Amended and Restated Credit Agreement, dated Incorporated herein by reference
March 16, 1995, among Education Management to Exhibit 4.16 to Amendment No.
Corporation, certain banks and PNC Bank, 1
National Association
10.21 First Amendment to Amended and Restated Incorporated herein by reference
Credit Agreement, dated October 13, 1995, to Exhibit 4.17 to the Form S-1
among Education Management Corporation,
certain banks and PNC Bank, National
Association
</TABLE>
<PAGE> 92
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION SEQUENTIAL PAGE NUMBERING
- ------ --------------------------------------------- ---------------------------------
<S> <C> <C>
10.22 Second Amendment to Amended and Restated Incorporated herein by reference
Credit Agreement, dated July 31, 1996, among to Exhibit 4.18 to Amendment No.
Education Management Corporation, certain 1
banks and PNC Bank, National Association
10.23 Third Amendment to Amended and Restated Incorporated herein by reference
Credit Agreement, dated March 14, 1997, among to Exhibit 10.23 to the Form 10-K
Education Management Corporation, certain
banks and PNC Bank, National Association
10.24 Nonqualified Stock Option Agreement, dated Incorporated herein by reference
May 2, 1996, between Education Management to Exhibit 4.22 to the Form S-1
Corporation and William M. Webster, IV
10.25 Letter Agreement, dated August 9, 1996, Incorporated herein by reference
between Education Management Corporation to Exhibit 4.23 to Amendment No.
Employee Stock Ownership Trust and Education 1
Management Corporation
10.26 Form of Common Stock Subscription and Incorporated herein by reference
Repurchase Agreement, dated various dates, to Exhibit 4.11 to Amendment No.
between Education Management Corporation and 1
various stock purchasers
10.27 Form of Amendment No. 1 to Common Stock Incorporated herein by reference
Subscription and Repurchase Agreement, dated to Exhibit 4.12 to Amendment No.
January 1, 1996, between Education Management 1
Corporation and certain management
stockholders
10.28 Form of Common Stock Subscription and Incorporated herein by reference
Repurchase Agreement, dated various dates, to Exhibit 4.13 to Amendment No.
between Education Management Corporation and 1
certain management stockholders
10.29 Amendment No. 1 to Common Stock Subscription Incorporated herein by reference
and Repurchase Agreement, dated January 19, to Exhibit 4.14 to Amendment No.
1995, between Education Management 1
Corporation and certain management
stockholders
10.30 Amendment No. 2 to Common Stock Subscription Incorporated herein by reference
and Repurchase Agreement, dated January 1, to Exhibit 4.15 to Amendment No.
1996, between Education Management 1
Corporation and certain management
stockholders
10.31 Letter Agreement dated October 6, 1997 by and Previously filed
among Education Management Corporation and
certain shareholders
11.01 Statement re: Calculation of Earnings Per Incorporated herein by reference
Share to Exhibit 11.01 to the Form 10-K
21.01 List of subsidiaries of Education Management Incorporated herein by reference
Corporation to Exhibit 21.01 to the Form 10-K
23.01 Consent of Arthur Andersen LLP Filed herewith
24.01 Powers of Attorney Previously filed
27.01 Financial Data Schedule Incorporated herein by reference
to Exhibit 27.01 to the Form 10-K
</TABLE>
<PAGE> 1
Exhibit 1.01
[2,932,766] SHARES
EDUCATION MANAGEMENT CORPORATION
COMMON STOCK ($.01 PAR VALUE)
UNDERWRITING AGREEMENT
___________, 1997
CREDIT SUISSE FIRST BOSTON CORPORATION
SMITH BARNEY INC.
ABN AMRO CHICAGO CORPORATION
As Representatives of the Several Underwriters,
c/o Credit Suisse First Boston Corporation,
Eleven Madison Avenue,
New York, NY 10010-3629
Dear Sirs:
1. Introductory. The shareholders listed in Schedule A hereto
(collectively, the "Selling Shareholders") propose severally to sell an
aggregate of [2,932,766] outstanding shares ("Firm Securities") of the common
stock, $.01 par value ("Securities") of Education Management Corporation, a
Pennsylvania corporation ("Company"), and certain of the Selling Shareholders
also propose to sell to the Underwriters, at the option of the Underwriters, an
aggregate of not more than [293,277] additional outstanding shares ("Optional
Securities") of the Company's Securities as set forth below. The Firm Securities
and the Optional Securities are herein collectively referred to as the "Offered
Securities". The Company and the Selling Shareholders hereby agree with the
several Underwriters named in Schedule B hereto ("Underwriters") as follows:
2. Representations and Warranties of the Company and the Selling Shareholders.
(a) The Company represents and warrants to, and agrees with, the
several Underwriters that:
(i) A registration statement (No. 333-37389) relating to the
Offered Securities, including a form of prospectus, has been
filed with the Securities and Exchange Commission ("Commission")
and either (A) has been declared effective under the Securities
Act of 1933, as amended ("Act"), and is not
<PAGE> 2
proposed to be amended or (B) is proposed to be amended by
amendment or post-effective amendment. If such registration
statement (the "initial registration statement") has been
declared effective, either (A) an additional registration
statement (the "additional registration statement") relating to
the Offered Securities may have been filed with the Commission
pursuant to Rule 462(b) ("Rule 462(b)") under the Act and, if so
filed, has become effective upon filing pursuant to such Rule and
the Offered Securities all have been duly registered under the
Act pursuant to the initial registration statement and, if
applicable, the additional registration statement or (B) such an
additional registration statement is proposed to be filed with
the Commission pursuant to Rule 462(b) and will become effective
upon filing pursuant to such Rule and upon such filing the
Offered Securities will all have been duly registered under the
Act pursuant to the initial registration statement and such
additional registration statement. If the Company does not
propose to amend the initial registration statement or if an
additional registration statement has been filed and the Company
does not propose to amend it, and if any post-effective amendment
to either such registration statement has been filed with the
Commission prior to the execution and delivery of this Agreement,
the most recent amendment (if any) to each such registration
statement has been declared effective by the Commission or has
become effective upon filing pursuant to Rule 462(c) ("Rule
462(c)") under the Act or, in the case of the additional
registration statement, Rule 462(b). For purposes of this
Agreement, "Effective Time" with respect to the initial
registration statement or, if filed prior to the execution and
delivery of this Agreement, the additional registration statement
means (A) if the Company has advised the Representatives that it
does not propose to amend such registration statement, the date
and time as of which such registration statement, or the most
recent post-effective amendment thereto (if any) filed prior to
the execution and delivery of this Agreement, was declared
effective by the Commission or has become effective upon filing
pursuant to Rule 462(c), or (B) if the Company has advised the
Representatives that it proposes to file an amendment or
post-effective amendment to such registration statement, the date
and time as of which such registration statement, as amended by
such amendment or post-effective amendment, as the case may be,
is declared effective by the Commission. If an additional
registration statement has not been filed prior to the execution
and delivery of this Agreement but the Company has advised the
Representatives that it proposes to file one, "Effective Time"
with respect to such additional registration statement means the
date and time as of which such registration statement is filed
and becomes effective pursuant to Rule 462(b). "Effective Date"
with respect to the initial registration statement or the
additional registration statement (if any) means the date of the
Effective Time
2
<PAGE> 3
thereof. The initial registration statement, as amended at its
Effective Time, including all information contained in the
additional registration statement (if any) and deemed to be a
part of the initial registration statement as of the Effective
Time of the additional registration statement pursuant to the
General Instructions of the Form on which it is filed and
including all information (if any) deemed to be a part of the
initial registration statement as of its Effective Time pursuant
to Rule 430A(b) ("Rule 430A(b)") under the Act, is hereinafter
referred to as the "Initial Registration Statement". The
additional registration statement, as amended at its Effective
Time, including the contents of the initial registration
statement incorporated by reference therein and including all
information (if any) deemed to be a part of the additional
registration statement as of its Effective Time pursuant to Rule
430A(b), is hereinafter referred to as the "Additional
Registration Statement". The Initial Registration Statement and
the Additional Registration Statement are hereinafter referred to
collectively as the "Registration Statements" and individually as
a "Registration Statement". The form of prospectus relating to
the Offered Securities, as first filed with the Commission
pursuant to and in accordance with Rule 424(b) ("Rule 424(b)")
under the Act or (if no such filing is required) as included in a
Registration Statement, is hereinafter referred to as the
"Prospectus". No document has been or will be prepared or
distributed in reliance on Rule 434 under the Act. No stop order
suspending the effectiveness of a Registration Statement or any
part thereof has been issued and no proceeding for that purpose
has been instituted or, to the best knowledge of the Company,
threatened by the Commission.
(ii) If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this
Agreement: (A) on the Effective Date of the Initial Registration
Statement, the Initial Registration Statement conformed in all
respects to the requirements of the Act and the rules and
regulations of the Commission ("Rules and Regulations") and did
not include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or
necessary to make the statements therein not misleading, (B) on
the Effective Date of the Additional Registration Statement (if
any), each Registration Statement conformed, or will conform, in
all respects to the requirements of the Act and the Rules and
Regulations and did not include, or will not include, any untrue
statement of a material fact and did not omit, or will not omit,
to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, and (C)
on the date of this Agreement, the Initial Registration Statement
and, if the Effective Time of the Additional Registration
Statement is prior to the execution and delivery of this
Agreement, the Additional Registration
3
<PAGE> 4
Statement each conforms, and at the time of filing of the
Prospectus pursuant to Rule 424(b) or (if no such filing is
required) on the Effective Date of the Registration Statement in
which the Prospectus is included, each Registration Statement and
the Prospectus will conform in all respects to the requirements
of the Act and the Rules and Regulations, and neither of such
documents includes, or will include, any untrue statement of a
material fact or omits, or will omit, to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading. If the Effective Time of the Initial
Registration Statement is subsequent to the execution and
delivery of this Agreement: on the Effective Date of the Initial
Registration Statement, the Initial Registration Statement and
the Prospectus will conform in all respects to the requirements
of the Act and the Rules and Regulations, neither of such
documents will include any untrue statement of a material fact or
will omit to state any material fact required to be stated
therein or necessary to make the statements therein not
misleading, and no Additional Registration Statement has been or
will be filed. The two preceding sentences do not apply to
statements in or omissions from a Registration Statement or the
Prospectus based upon written information furnished to the
Company by any Underwriter through the Representatives
specifically for use therein, it being understood and agreed that
the only such information is that described as such in Section
7(c).
(iii) The Company has been duly incorporated and is a
validly subsisting corporation in good standing under the laws of
the Commonwealth of Pennsylvania, with corporate power and
authority to own, lease and operate its properties and conduct
its business as described in the Prospectus; and the Company is
duly qualified to do business as a foreign corporation in good
standing in all other jurisdictions in which its ownership,
leasing or operation of property or the conduct of its business
requires such qualification, except where the failure to be so
qualified or in good standing would not, individually or in the
aggregate, have a material adverse effect on the financial
condition, business or results of operations of the Company and
its subsidiaries taken as a whole ("Material Adverse Effect").
(iv) Exhibit 1 hereto sets forth all subsidiaries of the
Company which are, individually or on a consolidated basis,
material to the operations of the Company and its subsidiaries
and the conduct of their respective businesses (collectively,
"Material Subsidiaries"). Each such subsidiary of the Company has
been duly incorporated and is validly existing as a corporation
in good standing under the laws of the jurisdiction of its
incorporation, with corporate power and authority to own, lease
and operate its properties and conduct its
4
<PAGE> 5
business as described in the Prospectus; and each such subsidiary
of the Company is duly qualified to do business as a foreign
corporation in good standing in all other jurisdictions in which
its ownership, leasing or operation of property or the conduct of
its business requires such qualification, except where the
failure to be so qualified or in good standing would not,
individually or in the aggregate, have a Material Adverse Effect;
all of the issued and outstanding capital stock of each such
subsidiary of the Company has been duly authorized and validly
issued and is fully paid and nonassessable; and the capital stock
of each such subsidiary is owned by the Company, directly or
through one or more of the Company's other subsidiaries, free and
clear of any mortgage, pledge, lien, security interest, claim,
encumbrance or defect of any kind, except for shares of the
capital stock of certain of the Company's subsidiaries which have
been pledged as collateral pursuant to the Company's Amended and
Restated Credit Agreement dated March 16, 1995, as amended (the
"Revolving Credit Agreement"); and there are no rights granted to
or in favor of any third party (whether acting in an individual,
fiduciary or other capacity) other than the Company to acquire
such capital stock, any additional capital stock or any other
equity securities of any such subsidiary.
(v) The Offered Securities have been duly authorized,
validly issued, fully paid and nonassessable and no further
approval or authorization of the shareholders or the Board of
Directors of the Company is or will be required for the sale of
the Offered Securities as contemplated by this Agreement; on each
Closing Date (as defined below), all other outstanding shares of
capital stock of the Company will be duly authorized, validly
issued, fully paid and nonassessable and will have been issued in
compliance with applicable federal and state securities laws; the
authorized and outstanding capital stock of the Company on each
Closing Date will conform to the descriptions thereof contained
in the Prospectus under the captions "Capitalization" and
"Description of Capital Stock"; and on each Closing Date the
shareholders of the Company will have no preemptive or similar
rights with respect to the Offered Securities or any other
securities of the Company.
(vi) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings between the Company and
any third party that would give rise to a valid claim against the
Company or any Underwriter for a brokerage commission, finder's
fee or other like payment in connection with the transactions
contemplated by this Agreement.
(vii) Except as disclosed in the Prospectus, on each Closing
Date there will be no contracts, agreements or understandings
between the Company and any third party (whether acting in an
individual, fiduciary or other
5
<PAGE> 6
capacity) granting such third party the right to require the
Company to file a registration statement under the Act with
respect to any securities of the Company owned or to be owned by
such third party or to require the Company to include such
securities in the Offered Securities registered pursuant to the
Registration Statement or in any securities being registered
pursuant to any other registration statement filed by the Company
under the Act.
(viii) The Securities are listed on the Nasdaq Stock
Market's National Market.
(ix) Except as disclosed in the Prospectus, no consent,
approval, authorization, order, registration or qualification of,
or filing with, any third party (whether acting in an individual,
fiduciary or other capacity) or any governmental, regulatory or
accrediting agency or body or any court is required to be
obtained or made by the Company for the consummation of the
transactions contemplated by this Agreement in connection with
the sale of the Offered Securities, except such as have been
obtained and made under the Act and such as may be required under
state securities laws.
(x) The execution, delivery and performance by the Company
of this Agreement and the consummation by the Company of the
transactions herein contemplated have been duly authorized by all
necessary corporate action on the part of the Company and, to the
extent required, its shareholders and do not and will not
conflict with or result in a breach or violation of any of the
terms and provisions of, and do not and will not constitute a
default (or an event which with the giving of notice or the lapse
of time or both could reasonably be likely to constitute a
default) under, and do not and will not result in the creation or
imposition of any lien, charge or encumbrance upon any assets or
properties of the Company or any of its Material Subsidiaries
(including any individual institution within such entity) under,
(A) the charter, by-laws or other organizational documents of the
Company or any such subsidiary, (B) any statute, any rule,
regulation, requirement, order or decree of any governmental,
regulatory or accrediting agency or body or any court having
jurisdiction over the Company or any such subsidiary or any of
their properties, assets or operations, including, without
limitation, The Higher Education Act of 1965, as amended, and the
regulations promulgated thereunder (the "HEA"), or (C) any
indenture, mortgage, loan or credit agreement, note, lease,
permit, license or other agreement or instrument to which the
Company or any such subsidiary is a party or by which the Company
or any such subsidiary is bound or to which any of the
properties, assets or operations of the Company or any such
subsidiary is subject, except for such conflicts, breaches,
violations, defaults, liens, charges and encumbrances which
6
<PAGE> 7
would not, individually or in the aggregate, have a Material
Adverse Effect. The consummation of the transactions contemplated
by this Agreement in connection with the sale of the Offered
Securities will not constitute a change in ownership resulting in
a "change of control" of the Company as defined in the HEA.
(xi) This Agreement has been duly authorized, executed and
delivered by the Company and constitutes the legal, valid and
binding obligations of the Company enforceable against the
Company in accordance with its terms, except to the extent that
(A) enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to
creditors' rights generally and by general principles of equity
and (B) rights to indemnity and contribution may be limited by
federal and state securities laws or policies underlying such
laws.
(xii) The Company and its Material Subsidiaries have good
and marketable title to all real properties and all other
material properties and assets owned by them, in each case free
and clear of any mortgage, pledge, lien, security interest, claim
or other encumbrance or defect that would, individually or in the
aggregate, materially interfere with the use made or to be made
thereof by them or have a Material Adverse Effect; the Company
and its Material Subsidiaries hold all their material leased real
or personal properties under valid, subsisting and enforceable
leases or subleases with no exceptions that would materially
interfere with the use made or to be made thereof by them;
neither the Company nor any Material Subsidiary is in default
under any such lease or sublease, except for any such defaults
which would not, individually or in the aggregate, have a
Material Adverse Effect; and, except as described in the
Prospectus, no claim of any sort has been asserted by anyone
adverse to the rights of the Company or any such subsidiary under
any such lease or sublease or affecting or questioning the right
of such entity to the continued possession of the leased or
subleased properties under any such lease or sublease, except for
any such claims which would not, individually or in the
aggregate, have a Material Adverse Effect.
(xiii) Except as disclosed in the Prospectus, the Company
and its Material Subsidiaries (including any individual
institution within such entity) possess all accreditations,
approvals, authorizations, certificates, permits and licenses
(collectively, "Licenses") issued by appropriate governmental,
regulatory or accrediting agencies or bodies, including, without
limitation, all authorizations required for participation in
federal aid programs under Title IV of the HEA ("Title IV
Programs"), as are necessary to own, lease or operate their
properties and to conduct the business now operated by them and
all such
7
<PAGE> 8
Licenses are in full force and effect, except where the failure
to possess such Licenses or the failure of such Licenses to be in
full force and effect would not, individually or in the
aggregate, have a Material Adverse Effect; the Company and its
Material Subsidiaries are in substantial compliance with their
respective obligations under such Licenses, subject to such
qualifications as are described in the Prospectus; and neither
the Company nor any of its Material Subsidiaries has received
notice of any proceedings, investigations or inquiries or, to the
knowledge of the Company, are any proceedings, investigations or
inquiries threatened, relating to the revocation, modification,
termination or suspension of any such License, except where any
such noncompliance, revocation, modification, termination or
suspension would not, individually or in the aggregate, have a
Material Adverse Effect.
(xiv) No labor dispute with the employees of the Company or
any Material Subsidiary exists or, to the knowledge of the
Company, is imminent that would, individually or in the
aggregate, have a Material Adverse Effect.
(xv) The Company and its Material Subsidiaries own or have
obtained valid licenses for all trademarks, trademark
registrations, service marks, service mark registrations, trade
names, copyrights, copyright registrations, confidential
information and any other intellectual property described in the
Prospectus as being owned, licensed or used by the Company or any
of its Material Subsidiaries or that are necessary for the
conduct of their businesses (collectively, "Intellectual
Property"), except where the failure to own or obtain any such
Intellectual Property would not, individually or in the
aggregate, have a Material Adverse Effect, and the Company has no
knowledge of any written claim to the contrary or any challenge
in writing by any third party with respect to the rights of the
Company or any such subsidiaries in any such Intellectual
Property or to the validity or scope of any such Intellectual
Property and neither the Company nor any of its subsidiaries has
any written claim against a third party with respect to the
infringement by such third party of any such Intellectual
Property that, if determined adversely to the Company or any of
its subsidiaries, would, individually or in the aggregate, have a
Material Adverse Effect.
(xvi) The Company and its Material Subsidiaries are in
compliance with all applicable federal, state and local
environmental laws, rules and regulations, orders, decrees,
judgments, permits and licenses relating to public and worker
health and safety, and to the protection and clean-up of the
natural environment, including, without limitation, those
relating to the production, generation, handling, disposal,
transportation or release of hazardous materials (collectively,
"Environmental Laws"), except where noncompliance would not,
8
<PAGE> 9
individually or in the aggregate, have a Material Adverse Effect.
To the knowledge of the Company, neither the Company nor any of
its Material Subsidiaries is the subject of any federal, state or
local investigation, and neither the Company nor any such
subsidiaries has received any notice or claim of or entered into
any negotiations or agreements with any third party relating to
any liability or potential liability or remedial action or
potential remedial action under Environmental Laws, nor are there
any pending or, to the knowledge of the Company, threatened
actions, suits or proceedings against or affecting the Company,
any of its Material Subsidiaries or their properties, assets or
operations in connection with any such Environmental Laws. The
term "hazardous materials" shall mean those substances that are
regulated by or form the basis for liability under any applicable
Environmental Laws.
(xvii) Except as disclosed in the Prospectus, there are no
pending actions, suits, proceedings or investigations against the
Company or any of its Material Subsidiaries (including any
individual institution within such entity) or any of their
respective properties, assets or operations, or as to which the
Company or any such subsidiary or any of their properties, assets
or operations is a subject or a target, that, if determined
adversely to the Company or any of its Material Subsidiaries,
would, individually or in the aggregate, have a Material Adverse
Effect or could materially and adversely affect the ability of
the Company to perform its obligations under this Agreement or
which are otherwise material in the context of the sale of the
Offered Securities; and no such actions, suits, proceedings or
investigations are, to the knowledge of the Company, threatened.
(xviii) The audited financial statements and related
schedules and notes included in each Registration Statement and
the Prospectus present fairly the financial position of the
Company and its consolidated subsidiaries as of the dates shown
and their results of operations and cash flows for the periods
shown, have been prepared in conformity with the generally
accepted accounting principles in the United States applied on a
consistent basis, and, to the knowledge of the Company, comply
with the requirements of the Act and the Rules and Regulations.
The financial information and statistical data set forth in the
Prospectus under the captions "Summary Consolidated Financial and
Other Data", "Capitalization" and "Selected Consolidated
Financial and Other Data" present fairly the information shown
therein and, with the exception of any pro forma information,
have been compiled on a basis consistent with that of the audited
consolidated financial statements included in the Registration
Statements.
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<PAGE> 10
(xix) Since the dates as of which information is given in
each Registration Statement and the Prospectus, (A) neither the
Company nor any of its Material Subsidiaries has incurred any
material liability or obligation (indirect, direct or contingent)
or entered into any material verbal or written agreement or other
transaction that is not in the ordinary course of business; (B)
except as described in the Prospectus, there has been no material
change in the indebtedness of the Company, no change in the
capital stock of the Company and no dividend or distribution of
any kind declared, paid or made by the Company on any class of
its capital stock; and (C) there has been no material adverse
change, nor any development or event involving a prospective
material adverse change, in the financial condition, business or
results of operations of the Company and its subsidiaries taken
as a whole.
(xx) The Company is not and, after giving effect to the
offering and sale of the Offered Securities and the application
of the proceeds therefrom as described in the Prospectus, will
not be an "investment company" as defined in the Investment
Company Act of 1940, as amended.
(xxi) Except as described in the Prospectus, there are no
outstanding (A) securities or obligations of the Company
convertible into or exchangeable for any capital stock of the
Company, (B) warrants, rights or options to subscribe for or
purchase from the Company any such capital stock or any such
convertible or exchangeable securities or obligations or (C)
obligations of the Company to issue any such capital stock,
convertible or exchangeable securities or obligations, or
warrants, rights or obligations.
(xxii) Each "employee benefit plan" within the meaning of
the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), in which employees of the Company or any subsidiary of
the Company participate or as to which the Company or any such
subsidiary has any liability (the "ERISA Plans") is in
substantial compliance with the applicable provisions of ERISA
and the Internal Revenue Code of 1986, as amended (the "Code").
Neither the Company nor any subsidiary of the Company has any
liability, whether or not contingent, with respect to the ERISA
Plans or otherwise under Title IV of ERISA. Neither the Company
nor any subsidiary of the Company has any liability, whether or
not contingent, with respect to any ERISA Plan that provides
post-retirement welfare benefits. The descriptions of the
Company's stock arrangements set forth in the Prospectus are
accurate and complete in all material respects.
(xxiii) The Company's Employee Stock Ownership Plan and
Trust (the "ESOP") constitutes an "employee stock ownership plan"
as defined in Section
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<PAGE> 11
4957(e)(7) of the Code and Section 407(d)(6) of ERISA. All loans
to the trust created pursuant to the ESOP (the "ESOP Trust") and
each pledge of shares of securities of the Company by the ESOP
Trust in connection with the ESOP has satisfied the requirements
of Section 4975(d)(3) of the Code and Section 408(b)(3) of ERISA,
and has not and will not subject the Company or any subsidiary to
a tax imposed under Section 4975 of the Code or a civil penalty
assessed under Section 502(i) of ERISA. The Securities satisfy
the definition of a "qualifying employer security" within the
meaning of Section 4975(e)(8) of the Code and Section 407(d)(5)
of ERISA. Sales of shares of securities of the Company to the
ESOP Trust have satisfied and continue to satisfy the
requirements of Section 4975(d)(13) of the Code and Section
408(e) of ERISA, and such sales have not and will not subject the
Company nor any subsidiary to a tax imposed under Section 4975 of
the Code or a civil penalty assessed under Section 502(i) of
ERISA.
(xxiv) The Company and its subsidiaries have filed on a
timely basis all federal, state and local tax returns required to
be filed, such returns are complete and correct in all material
respects, and all taxes shown by such returns or otherwise
assessed that are due and payable have been paid, except such
taxes as are being contested in good faith and as to which
adequate reserves have been provided. The accruals and reserves
on the books of the Company and its subsidiaries in respect of
any tax liability for any year not finally determined are
adequate to meet any assessments or reassessments for additional
taxes; and there has been no tax deficiency asserted against the
Company or any of its subsidiaries that would, individually or in
the aggregate, have a Material Adverse Effect.
(xxv) The Company and its subsidiaries maintain a system of
internal accounting controls sufficient in all material respects
for purposes of the prevention or detection of errors or
irregularities in amounts that could be expected to be material
to the Company's consolidated financial statements and the
recording of transactions so as to permit the preparation of such
consolidated financial statements in conformity with generally
accepted accounting principles.
(xxvi) Neither the Company nor any of its Material
Subsidiaries (including any individual institution within such
entity) is in violation of (A) its charter, by-laws or other
organizational documents or (B) any statute, any rule,
regulation, requirement, order, decree or judgment of any
governmental, regulatory or accrediting agency or body or any
court having jurisdiction over the Company or any such
subsidiary, except for any such violations which would not,
individually or in the aggregate, have a Material Adverse Effect;
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<PAGE> 12
and no event of default or event which with the giving of notice
or the lapse of time or both, could constitute an event of
default exists under any indenture, mortgage, loan or credit
agreement, note, lease, permit, license or other agreement or
instrument to which the Company or any such subsidiary is a party
or by which the Company or any such subsidiary is bound or to
which any of the properties, assets or operations of the Company
or any such subsidiary is subject, except for any such defaults
which would not, individually or in the aggregate, have a
Material Adverse Effect. There are no statutes, regulations,
contracts or other documents that are required to be described in
the Registration Statements or the Prospectus or to be filed as
an exhibit to the Registration Statements that are not described
or filed as required.
(xxvii) The Company has not taken and will not take any
action designed to or that could cause or result in the
stabilization or manipulation of the price of the Offered
Securities to facilitate the sale or resale of the Offered
Securities.
(xxviii) The Company is subject to Section 13 or 15(d) of
the Exchange Act.
(b) Each Selling Shareholder severally represents and warrants
to, and agrees with, the several Underwriters that:
(i) Such Selling Shareholder has, and on each Closing Date will
have, valid and unencumbered title to the Offered Securities to be
delivered by such Selling Shareholder on such Closing Date and has
full right, power and authority to enter into this Agreement and the
Custody Agreement (the "Custody Agreement") and the Irrevocable Power
of Attorney (the "Power of Attorney") entered into by such Selling
Shareholder in connection with the transactions contemplated hereby
and will have full right, power and authority to sell, assign,
transfer and deliver the Offered Securities to be delivered by such
Selling Shareholder on such Closing Date hereunder; and upon the
delivery of and payment for the Offered Securities on each Closing
Date hereunder the several Underwriters will acquire valid and
unencumbered title to the Offered Securities to be delivered by such
Selling Shareholder on such Closing Date.
(ii) If the Effective Time of the Initial Registration Statement
is prior to the execution and delivery of this Agreement: (A) on the
Effective Date of the Initial Registration Statement, the Initial
Registration Statement did not include any untrue statement of a
material
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<PAGE> 13
fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading, (B) on the
Effective Date of the Additional Registration Statement (if any), each
Registration Statement did not include, or will not include, any
untrue statement of a material fact and did not omit, or will not
omit, to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, and (C) on
the date of this Agreement, the Initial Registration Statement and, if
the Effective Time of the Additional Registration Statement is prior
to the execution and delivery of this Agreement, the Additional
Registration Statement, and at the time of filing of the Prospectus
pursuant to Rule 424(b) or (if no such filing is required) at the
Effective Date of the Registration Statement in which the Prospectus
is included, each Registration Statement and the Prospectus does not
include, or will not include, any untrue statement of a material fact
or does not omit, or will not omit, to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading. If the Effective Time of the Initial
Registration Statement is subsequent to the execution and delivery of
this Agreement: on the Effective Date of the Initial Registration
Statement, neither the Initial Registration Statement nor the
Prospectus will include any untrue statement of a material fact or
will omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading. The two
preceding sentences apply to each Selling Shareholder only to the
extent that any statements in or omissions from a Registration
Statement or the Prospectus are based upon written information
furnished to the Company or its representatives by or on behalf of
such Selling Shareholder specifically for use therein.
(iii) This Agreement, the Custody Agreement and the Power of
Attorney have each been duly authorized, executed and delivered by or
on behalf of such Selling Shareholder and constitute the legal, valid
and binding obligations of such Selling Shareholder enforceable
against such Selling Shareholder in accordance with their respective
terms, except to the extent that (A) enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to creditors' rights generally and by general principles
of equity and (B) rights to indemnity and contribution may be limited
by federal and state securities laws or policies underlying such laws.
(iv) No consent, approval, authorization, order, registration or
qualification of, or filing with, any third party (whether acting in
an individual, fiduciary or other capacity) or any governmental or
regulatory agency or body or any court is required to be obtained or
made by such Selling Shareholder for the consummation of the
transactions contemplated by this Agreement, the
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<PAGE> 14
Custody Agreement and the Power of Attorney by such Selling
Shareholder in connection with the sale of the Offered Securities by
such Selling Shareholder or for the consummation of the other
transactions contemplated by this Agreement or the Prospectus, except
such as have been obtained and made or are required under the Act and
such as may be required under state securities laws.
(v) The execution, delivery and performance by such Selling
Shareholder of this Agreement, the Custody Agreement and the Power of
Attorney and the consummation by such Selling Shareholder of the
transactions herein or therein contemplated in connection with the
sale of the Offered Securities being sold by such Selling Shareholder
do not and will not conflict with or result in a breach or violation
of any of the terms and provisions of, or constitute or will
constitute a default (or an event which with the giving of notice or
the lapse of time or both could reasonably be likely to constitute a
default) under, or result in the creation or imposition of any lien,
charge or encumbrance upon the Offered Securities to be sold by such
Selling Shareholder under (A) the charter, by-laws or other
organizational documents of such Selling Shareholder, (B) any statute,
any rule, regulation, or any requirement, order or decree of any
governmental or regulatory agency or body, or any court, which
requirement, order or decree is binding on such Selling Shareholder or
any of its properties, assets or operations or (C) any indenture,
mortgage, loan or credit agreement, note, lease, permit, license or
other agreement or instrument to which such Selling Shareholder is a
party or by which such Selling Shareholder is bound or to which any of
the properties, assets or operations of such Selling Shareholder is
subject, except, in the case of clauses (B) and (C), for such
conflicts, breaches, violations, defaults, liens, charges and
encumbrances which could not, individually or in the aggregate, have a
material adverse effect on the ability of such Selling Shareholder to
consummate the transactions contemplated by this Agreement, the
Custody Agreement and the Power of Attorney or perform such Selling
Shareholder's obligations hereunder or thereunder.
(vi) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings between such Selling
Shareholder and any third party that would give rise to a valid claim
against such Selling Shareholder or any Underwriter for a brokerage
commission, finder's fee or other like payment in connection with the
transactions contemplated by this Agreement, the Custody Agreement and
the Power of Attorney.
(vii) Such Selling Shareholder has not taken and will not take,
directly or indirectly, any action designed to or that could cause or
result in the
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<PAGE> 15
stabilization or manipulation of the price of the Offered Securities
to facilitate the sale or resale of the Offered Securities.
3. Purchase, Sale and Delivery of Offered Securities. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, each Selling Shareholder agrees,
severally and not jointly, to sell to the Underwriters, and each Underwriter
agrees, severally and not jointly, to purchase from each Selling Shareholder, at
a purchase price of $_________ per share, that number of Firm Securities
(rounded up or down, as determined by Credit Suisse First Boston Corporation
("CSFBC") in its discretion, in order to avoid fractions) obtained by
multiplying the number of Firm Securities set forth opposite the name of such
Selling Shareholder in Schedule A hereto by a fraction the numerator of which is
the number of Firm Securities set forth opposite the name of such Underwriter in
Schedule B hereto and the denominator of which is the total number of Firm
Securities.
Certificates in negotiable form for the Offered Securities have been placed
in custody, for delivery under this Agreement, under Custody Agreements made
with ChaseMellon Shareholder Services, L.L.C., as custodian ("Custodian"). Each
Selling Shareholder agrees that the shares represented by the certificates held
in custody for the Selling Shareholders under such Custody Agreements are
subject to the interests of the Underwriters hereunder, that the arrangements
made by the Selling Shareholders for such custody are to that extent
irrevocable, and that the obligations of the Selling Shareholders hereunder
shall not be terminated by operation of law, whether by the death of any
individual Selling Shareholder or the occurrence of any other event, or in the
case of a trust, by the death of any trustee or trustees or the termination of
such trust. If any individual Selling Shareholder or any such trustee or
trustees should die, or if any other such event should occur, or if any of such
trusts should terminate, before the delivery of the Offered Securities
hereunder, certificates for the Offered Securities shall be delivered by the
Custodian in accordance with the terms and conditions of this Agreement as if
such death or other event or termination had not occurred, regardless of whether
or not the Custodian shall have received notice of such death or other event or
termination.
The Custodian will deliver the Firm Securities to the Representatives for
the accounts of the Underwriters, against payment of the purchase price in
Federal (same day) funds by wire transfer to an account at a bank acceptable to
CSFBC drawn to the order of the Custodian, at the office of Dewey Ballantine,
1301 Avenue of the Americas, New York, New York 10019, at 10:00 A.M., New York
time, on __________, 1997, or at such other time not later than seven full
business days thereafter as CSFBC and the Custodian determine, such time being
herein referred to as the "First Closing Date". The certificates for the Firm
Securities so to be delivered will be in definitive form, in such denominations
and registered in such names as CSFBC requests and will be made available for
checking and packaging at
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<PAGE> 16
the office of CSFBC, Eleven Madison Avenue, New York, New York 10010-3629 at
least 24 hours prior to the First Closing Date.
In addition, upon written notice from CSFBC given to the Company and the
Selling Shareholders from time to time not more than 30 days subsequent to the
date of the Prospectus, the Underwriters may purchase all or less than all of
the Optional Securities at the purchase price per Security to be paid for the
Firm Securities. The Selling Shareholders agree, severally and not jointly, to
sell to the Underwriters the respective numbers of Optional Securities obtained
by multiplying the number of Optional Securities specified in such notice by a
fraction the numerator of which is the number of shares set forth opposite the
names of such Selling Shareholders in Schedule A hereto under the caption
"Number of Optional Securities to be Sold" and the denominator of which is the
total number of Optional Securities (subject to adjustment by CSFBC to eliminate
fractions). Such Optional Securities shall be purchased from each Selling
Shareholder for the account of each Underwriter in the same proportion as the
number of Firm Securities set forth opposite such Underwriter's name bears to
the total number of Firm Securities (subject to adjustment by CSFBC to eliminate
fractions) and may be purchased by the Underwriters only for the purpose of
covering over allotments made in connection with the sale of the Firm
Securities. No Optional Securities shall be sold or delivered unless the Firm
Securities previously have been, or simultaneously are, sold and delivered. The
right to purchase the Optional Securities or any portion thereof may be
exercised from time to time and to the extent not previously exercised may be
surrendered and terminated at any time upon notice by CSFBC to the Selling
Shareholders.
Each time for the delivery of and payment for the Optional Securities,
being herein referred to as an "Optional Closing Date", which may be the First
Closing Date (the First Closing Date and each Optional Closing Date, if any,
being sometimes referred to as a "Closing Date"), shall be determined by CSFBC
but shall be not later than five full business days after written notice of
election to purchase Optional Securities is given. The Custodian will deliver
the Optional Securities being purchased on each Optional Closing Date to the
Representatives for the accounts of the several Underwriters, against payment of
the purchase price in Federal (same day) funds by wire transfer to an account at
a bank acceptable to CSFBC drawn to the order of the Custodian, at the office of
Dewey Ballantine, 1301 Avenue of the Americas, New York, New York 10019. The
certificates for the Optional Securities being purchased on each Optional
Closing Date will be in definitive form, in such denominations and registered in
such names as CSFBC requests upon reasonable notice prior to such Optional
Closing Date and will be made available for checking and packaging at the above
office of CSFBC, Eleven Madison Avenue, New York, New York 10010-3629 at a
reasonable time in advance of such Optional Closing Date.
4. Offering by Underwriters. It is understood that the several Underwriters
propose to offer the Offered Securities for sale to the public as set forth in
the Prospectus.
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<PAGE> 17
5. Certain Agreements of the Company and the Selling Shareholders. The
Company agrees with the several Underwriters and the Selling Shareholders and,
with respect to clauses (j), (k) and (l) below, the Selling Shareholders agree
with the Company and the several Underwriters that:
(a) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement, the Company will
file the Prospectus with the Commission pursuant to and in accordance with
subparagraph (1) (or, if applicable and if consented to by CSFBC,
subparagraph(4)) of Rule 424(b) not later than the earlier of (A) the
second business day following the execution and delivery of this Agreement
or (B) the fifteenth business day after the Effective Date of the Initial
Registration Statement. The Company will advise CSFBC promptly of any such
filing pursuant to Rule 424(b). If the Effective Time of the Initial
Registration Statement is prior to the execution and delivery of this
Agreement and an additional registration statement is necessary to register
a portion of the Offered Securities under the Act but the Effective Time
thereof has not occurred as of such execution and delivery, the Company
will file the additional registration statement or, if filed, will file a
post-effective amendment thereto with the Commission pursuant to and in
accordance with Rule 462(b) on or prior to 10:00 P.M., New York time, on
the date of this Agreement or, if earlier, on or prior to the time the
Prospectus is printed and distributed to any Underwriter, or will make such
filing at such later date as shall have been consented to by CSFBC.
(b) The Company will advise CSFBC promptly of any proposal to amend or
supplement the initial registration statement or any additional
registration statement as filed or the related prospectus or the Initial
Registration Statement, the Additional Registration Statement (if any) or
the Prospectus and will not effect such amendment or supplementation
without CSFBC's prior consent; and the Company will also advise CSFBC
promptly of the effectiveness of each Registration Statement (if its
Effective Time is subsequent to the execution and delivery of this
Agreement) and of any amendment or supplementation of a Registration
Statement or the Prospectus and of the institution by the Commission of any
stop order proceedings in respect of a Registration Statement and will use
its reasonable best efforts to prevent the issuance of any such stop order
and to obtain as soon as possible its lifting, if issued.
(c) If, at any time when a prospectus relating to the Offered
Securities is required to be delivered under the Act in connection with
sales by any Underwriter or dealer, any event occurs or a condition exists
as a result of which the Prospectus as then amended or supplemented would
include an untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if it is
necessary at any time to amend the Prospectus to comply with the Act, the
Company will promptly
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<PAGE> 18
notify CSFBC of such event and will promptly prepare and file with the
Commission, at its own expense, an amendment or supplement which will
correct such statement or omission or an amendment which will effect such
compliance. Neither CSFBC's consent to, nor the Underwriters' delivery of,
any such amendment or supplement shall constitute a waiver of any of the
conditions set forth in Section 6.
(d) As soon as practicable, but not later than the Availability Date
(as defined below), the Company will make generally available to its
security holders an earnings statement covering a period of at least 12
months beginning after the Effective Date of the Initial Registration
Statement (or, if later, the Effective Date of the Additional Registration
Statement) which will satisfy the provisions of Section 11(a) of the Act.
For the purpose of the preceding sentence, "Availability Date" means the
45th day after the end of the fourth fiscal quarter following the fiscal
quarter that includes such Effective Date, except that, if such fourth
fiscal quarter is the last quarter of the Company's fiscal year,
"Availability Date" means the 90th day after the end of such fourth fiscal
quarter.
(e) The Company will furnish to the Representatives copies of each
Registration Statement (three of which will be signed and will include all
exhibits and a signed accountant's report of Arthur Andersen LLP), each
related preliminary prospectus, and, so long as a prospectus relating to
the Offered Securities is required to be delivered under the Act in
connection with sales by any Underwriter or dealer, the Prospectus and all
amendments and supplements to such documents, in each case in such
quantities as CSFBC reasonably requests. The Prospectus shall be so
furnished at or prior to 3:00 P.M., New York time, on the business day
following the later of the execution and delivery of this Agreement or the
Effective Time of the Initial Registration Statement. All other such
documents shall be furnished as soon as available. The Selling Shareholders
will pay the expenses of printing and distributing to the Underwriters all
such documents.
(f) The Company will, in cooperation with CSFBC and counsel for the
Underwriters, arrange for the qualification of the Offered Securities for
sale under the laws of such jurisdictions as CSFBC designates and will
continue such qualifications in effect so long as required for the
distribution; provided, that the Company shall not be required to file a
general consent to service of process or qualify to do business in any
jurisdiction in which it is not so qualified.
(g) During the period ending on the fifth anniversary hereof, the
Company will furnish to the Representatives and, upon request, to each of
the other Underwriters, (i) as soon as practicable after the end of each of
its fiscal years, a copy of its annual report to shareholders for such
year, (ii) as soon as available, a copy of each report and definitive proxy
statement of the Company filed with the Commission under the
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<PAGE> 19
Securities Exchange Act of 1934, as amended, or mailed to shareholders and
(iii) from time to time, such other information concerning the Company as
CSFBC may reasonably request.
(h) For a period of 90 days after the date of the initial public
offering of the Offered Securities, the Company will not offer, sell,
contract to sell, pledge or otherwise dispose of, directly or indirectly,
or file or cause to be filed with the Commission a registration statement
under the Act relating to, any shares of Securities or securities or other
rights convertible into or exchangeable or exercisable for any shares of
Securities, or publicly disclose the intention to make any such offer,
sale, pledge, disposal or filing, without the prior written consent of
CSFBC.
(i) The Company will use its reasonable best efforts to cause its
officers, directors and shareholders (other than the Selling Shareholders)
of the Company who or which, immediately following consummation of the
initial public offering of the Offered Securities, will beneficially own an
aggregate of __________ shares (or approximately ______%) of the
outstanding Securities and vested and exercisable options to purchase an
additional __________ shares of the Securities to agree that each such
holder will not offer, sell, contract to sell, pledge or otherwise dispose
of, directly or indirectly, or cause to be filed with the Commission a
registration statement under the Act relating to, any shares of the
Securities or securities or other rights convertible into or exchangeable
or exercisable for any shares of Securities, or publicly disclose the
intention to make any such offer, sale, pledge or disposal, without the
prior written consent of CSFBC, for a period of 90 days after the date of
the initial public offering of the Offered Securities.
(j) The Selling Shareholders will pay all expenses incident to the
performance of the obligations of the Company and each Selling Shareholder
under this Agreement and will reimburse the Underwriters (if and to the
extent incurred by them) for any filing fees and other expenses (including
fees and disbursements of counsel) incurred by them in connection with the
qualification of the Offered Securities for sale under the laws of such
jurisdictions as CSFBC designates in accordance with clause (f) and the
printing of memoranda relating thereto, for the filing fee of the National
Association of Securities Dealers, Inc. relating to the Offered Securities,
for any travel expenses of the Company's officers and employees and any
other expenses of the Company in connection with attending or hosting
meetings with prospective purchasers of the Offered Securities and for
expenses incurred in printing and distributing preliminary prospectuses and
the Prospectus (including any amendments and supplements thereto) or
related documents. Each Selling Shareholder will reimburse the Underwriters
(if and to the extent incurred by them) for any transfer taxes on the sale
by the Selling Shareholders of Offered Securities to the Underwriters.
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<PAGE> 20
(k) Each Selling Shareholder agrees to deliver to CSFBC (Attention:
Transactions Advisory Group) on or prior to the First Closing Date a
properly completed and executed United States Treasury Department Form W-9
(or other applicable form or statement specified by Treasury Department
regulations in lieu thereof).
(l) Each Selling Shareholder agrees, for a period of 90 days after the
date of the initial public offering of the Offered Securities, not to
offer, sell, contract to sell, pledge or otherwise dispose of, directly or
indirectly, or cause to be filed with the Commission a registration
statement under the Act relating to any shares of the Securities of the
Company or securities or other rights convertible into or exchangeable or
exercisable for any shares of Securities, or publicly disclose the
intention to make any such offer, sale, pledge or disposal, without the
prior written consent of CSFBC.
6. Conditions of the Obligations of the Underwriters. The obligations of
the several Underwriters to purchase and pay for the Firm Securities on the
First Closing Date and the Optional Securities to be purchased on each Optional
Closing Date will be subject to the accuracy of the representations and
warranties on the part of the Company and the Selling Shareholders herein, to
the accuracy of the statements of Company officers made pursuant to the
provisions hereof, to the performance by the Company and the Selling
Shareholders of their obligations hereunder and to the following additional
conditions precedent:
(a) The Representatives shall have received a letter, dated the date
of delivery thereof (which, if the Effective Time of the Initial
Registration Statement is prior to the execution and delivery of this
Agreement, shall be on or prior to the date of this Agreement or, if the
Effective Time of the Initial Registration Statement is subsequent to the
execution and delivery of this Agreement, shall be prior to the filing of
the amendment or post-effective amendment to be filed shortly prior to such
Effective Time), of Arthur Andersen LLP confirming that they are
independent public accountants within the meaning of the Act and the
applicable Rules and Regulations and stating to the effect that:
(i) in their opinion the financial statements and schedules
examined by them and included in the Registration Statements comply as
to form in all material respects with the applicable accounting
requirements of the Act and the related published Rules and
Regulations;
(ii) they have performed the procedures specified by the American
Institute of Certified Public Accountants for a review of interim
financial information as described in Statement of Auditing Standards
No. 71, Interim
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Financial Information, on the unaudited financial statements included
in the Registration Statements;
(iii) on the basis of the review referred to in clause (ii)
above, a reading of the latest available interim financial statements
of the Company, a reading of the minutes of all meetings of the
shareholders and directors (including each committee thereof) of the
Company and its subsidiaries, inquiries of officials of the Company
who have responsibility for financial and accounting matters and other
specified procedures, nothing came to their attention that caused them
to believe that:
(A) the unaudited financial statements included in the
Registration Statements and the Prospectus do not comply as to
form in all material respects with the applicable accounting
requirements of the Act and the related published Rules and
Regulations or any material modifications should be made to such
unaudited financial statements for them to be in conformity with
generally accepted accounting principles;
(B) the information set forth in the Prospectus under the
captions "Summary Consolidated Financial and Other Data" and
"Selected Consolidated Financial and Other Data" does not agree
with the amounts set forth in the unaudited consolidated
financial statements or the audited consolidated financial
statements, as the case may be, from which it was derived or were
not determined on a basis substantially consistent with that of
the corresponding amounts in the audited statements included in
the Registration Statements and the Prospectus;
(C) at the date of the latest available balance sheet read
by such accountants, or at a subsequent specified date not more
than three days prior to the date of this Agreement, there was
any decrease in shareholders' equity or change in the capital
stock or any increase in short-term indebtedness or long-term
debt of the Company and its consolidated subsidiaries or, at the
date of the latest available balance sheet read by such
accountants, there was any decrease in consolidated net current
assets or net assets, as compared with amounts shown on the
latest balance sheet included in the Registration Statements and
the Prospectus; or
(D) for the period from the closing date of the latest
income statement included in the Registration Statements and the
Prospectus to
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the closing date of the latest available income statement
read by such accountants there were any decreases, as compared
with the corresponding period of the previous year and with the
period of corresponding length ended the date of the latest
income statement included in the Registration Statements and the
Prospectus, in consolidated net revenues or consolidated net
income, or in the total or per share amounts of consolidated net
income or income from continuing operations before extraordinary
item, or any increases or decreases, as the case may be, in other
items specified by the Representatives;
except in all cases set forth in clauses (C) and (D) above for changes,
increases or decreases which the Prospectus discloses have occurred;
(iv) they have compared specified dollar amounts (or percentages
derived from such dollar amounts) and other financial information contained
in the Registration Statements and the Prospectus (in each case to the
extent that such dollar amounts, percentages, numerical data and other
financial information are derived from the general accounting records of
the Company and its subsidiaries subject to the internal controls of the
Company's accounting system or are derived directly from such records by
analysis or computation) with the results obtained from inquiries, a
reading of such general accounting records and other procedures specified
in such letter and have found such dollar amounts, percentages, numerical
data and other financial information to be in agreement with such results.
For purposes of this subsection, (i) if the Effective Time of the Initial
Registration Statements is subsequent to the execution and delivery of this
Agreement, "Registration Statements" shall mean the initial registration
statement as proposed to be amended by the amendment or post-effective amendment
to be filed shortly prior to its Effective Time; (ii) if the Effective Time of
the Initial Registration Statements is prior to the execution and delivery of
this Agreement but the Effective Time of the Additional Registration Statement
is subsequent to such execution and delivery, "Registration Statements" shall
mean the Initial Registration Statement and the additional registration
statement as proposed to be filed or as proposed to be amended by the
post-effective amendment to be filed shortly prior to its Effective Time; and
(iii) "Prospectus" shall mean the prospectus included in the Registration
Statements.
(b) If the Effective Time of the Initial Registration Statement is not
prior to the execution and delivery of this Agreement, such Effective Time shall
have occurred not later than 10:00 P.M., New York time, on the date of this
Agreement or such later date as shall have been consented to by CSFBC. If the
Effective Time of the Additional
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<PAGE> 23
Registration Statement (if any) is not prior to the execution and delivery of
this Agreement, such Effective Time shall have occurred not later than 10:00
P.M., New York time, on the date of this Agreement or, if earlier, the time the
Prospectus is printed and distributed to any Underwriter or such later date as
shall have been consented to by CSFBC. If the Effective Time of the Initial
Registration Statement is prior to the execution and delivery of this Agreement,
the Prospectus shall have been filed with the Commission in accordance with the
Rules and Regulations and Section 5(a) of this Agreement. Prior to such Closing
Date, no stop order suspending the effectiveness of a Registration Statement
shall have been issued and no proceedings for that purpose shall have been
instituted or, to the knowledge of any Selling Shareholder, the Company or the
Representatives, shall be threatened by the Commission.
(c) Subsequent to the execution and delivery of this Agreement, there shall
not have occurred (i) any change, or any development or event involving a
prospective change, in the condition (financial or other), business, prospects,
results of operations or general affairs of the Company and its subsidiaries
taken as a whole which, in the judgment of a majority in interest of the
Underwriters including the Representatives, is material and adverse and makes it
impractical or inadvisable to proceed with completion of the public offering or
the sale of and payment for the Offered Securities; (ii) any downgrading in the
rating of any debt securities of the Company by any "nationally recognized
statistical rating organization" (as defined for purposes of Rule 436(g) under
the Act), or any public announcement that any such organization has under
surveillance or review its rating of any debt securities of the Company (other
than an announcement with positive implications of a possible upgrading, and no
implication of a possible downgrading, of such rating); (iii) any suspension or
limitation of trading in securities generally on the New York Stock Exchange, or
any setting of minimum prices for trading on such exchange, or any suspension of
trading of any securities of the Company on any exchange or in the
over-the-counter market; (iv) any banking moratorium declared by U.S. Federal or
New York authorities; or (v) any outbreak or escalation of major hostilities in
which the United States is involved, any declaration of war by Congress or any
other substantial national or international calamity or emergency if, in the
judgment of a majority in interest of the Underwriters including the
Representatives, the effect of any such outbreak, escalation, declaration,
calamity or emergency makes it impractical or inadvisable to proceed with
completion of the public offering or the sale of and payment for the Offered
Securities.
(d) The Representatives shall have received an opinion, dated such Closing
Date, of Kirkpatrick & Lockhart LLP, counsel for the Company, to the effect
that:
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<PAGE> 24
(i) The Company has been duly incorporated and is a validly subsisting
corporation in good standing under the laws of the Commonwealth of
Pennsylvania, with corporate power and authority to own, lease and operate
its properties and conduct its business as described in the Prospectus.
(ii) The Offered Securities delivered on such Closing Date by the
Selling Shareholders have been duly authorized, validly issued, fully paid
and nonassessable; and, to the knowledge of such counsel, the shareholders
of the Company have no preemptive or similar rights with respect to the
Offered Securities.
(iii) All outstanding shares of the capital stock of the Company have
been duly authorized, are validly issued, fully paid and non-assessable;
the authorized and outstanding shares of capital stock of the Company are
as set forth in the Prospectus under the captions "Capitalization" and
"Description of Capital Stock" and conform to the descriptions thereof
contained in the Prospectus; and the shareholders of the Company have no
preemptive or similar rights with respect to any securities of the Company.
(iv) Except as disclosed in the Prospectus, to the knowledge of such
counsel, no consent, approval, authorization, order, registration or
qualification of, or filing with, any third party (whether acting in an
individual, fiduciary or other capacity) or any governmental or regulatory
agency or body or any court is required to be obtained or made by the
Company for the consummation of the transactions contemplated by this
Agreement in connection with the sale of the Offered Securities, except
such as have been obtained and made under the Act, such as may be required
under state securities laws and such as may be required under the HEA or
any similar state statute.
(v) The execution, delivery and performance by the Company of this
Agreement and the consummation by the Company of the transactions herein
contemplated have been duly authorized by all necessary corporate action on
the part of the Company and, to the extent required, its shareholders and
do not and will not conflict with or result in a breach or violation of any
of the terms and provisions of, and do not and will not constitute a
default (or an event which with the giving of notice or the lapse of time
or both could reasonably be likely to constitute a default) under, and do
not and will not result in the creation or imposition of any lien, charge
or encumbrance upon any assets or properties of the Company or any of its
Material Subsidiaries (including any individual institution within such
entity) under, (A) the charter, by-laws or other organizational documents
of the Company or any such subsidiary, (B) except as to the HEA or any
similar state statute and any rules,
24
<PAGE> 25
regulations, requirements, orders or decrees related thereto as to which
such counsel need express no opinion, to the knowledge of such counsel, any
statute, any rule, regulation, requirement, order or decree of any
governmental or regulatory agency or body or any court having jurisdiction
over the Company or any such subsidiary or any of their properties, assets
or operations, or (C) to the knowledge of such counsel, any indenture,
mortgage, loan or credit agreement, note, lease, permit, license or other
agreement or instrument to which the Company or any such subsidiary is a
party or by which the Company or any such subsidiary is bound or to which
any of the properties, assets or operations of the Company or any such
subsidiary is subject, except for such conflicts, breaches, violations,
defaults, liens, charges and encumbrances which would not, individually or
in the aggregate, have a Material Adverse Effect.
(vi) This Agreement has been duly authorized, executed and delivered
by the Company.
(vii) Except as disclosed in the Prospectus, there are no pending or,
to the knowledge of such counsel, threatened actions, suits, proceedings or
investigations against or affecting the Company or any of its Material
Subsidiaries (including any individual institution within such entity) or
any of their respective properties, assets or operations that, if
determined adversely to the Company or any of its Material Subsidiaries,
would, individually or in the aggregate, have a Material Adverse Effect or
could materially and adversely affect the ability of the Company to perform
its obligations under this Agreement.
(viii) The Company is not and, after giving effect to the offering and
sale of the Offered Securities and the application of the proceeds
therefrom as described in the Prospectus, will not be an "investment
company" as defined in the Investment Company Act of 1940, as amended.
(ix) To the knowledge of such counsel, the descriptions in the
Registration Statements and the Prospectus of statutes, legal and
governmental proceedings and contracts and other documents are accurate in
all material respects and fairly present the information required to be
shown and such counsel do not know of any legal or governmental proceedings
required to be described in a Registration Statement or the Prospectus or
of any contracts or documents of a character required to be described or to
be filed as exhibits to a Registration Statement or the Prospectus which,
in each case, are not described and filed as required (it being understood
that such counsel need express no opinion as to the portions of the
Registration Statements and the Prospectus as
25
<PAGE> 26
to which Dow, Lohnes & Albertson is providing an opinion to the
Underwriters).
(x) The Initial Registration Statement was declared effective under
the Act as of the date specified in such opinion, the Additional
Registration Statement (if any) was filed and became effective under the
Act as of the date and time (if determinable) specified in such opinion,
the Prospectus either was filed with the Commission pursuant to the
subparagraph of Rule 424(b) specified in such opinion on the date specified
therein or was included in the Initial Registration Statement or the
Additional Registration Statement (as the case may be), and, to the
knowledge of such counsel, no stop order suspending the effectiveness of a
Registration Statement or any part thereof has been issued and no
proceedings for that purpose have been instituted or are pending or
threatened under the Act, and each Registration Statement and the
Prospectus, and each amendment or supplement thereto, as of their
respective effective or issue dates, complied as to form in all material
respects with the requirements of the Act and the Rules and Regulations.
Such counsel have participated in the preparation of the Registration
Statements and the Prospectus and have no reason to believe that any part
of a Registration Statement or any amendment thereto, as of its effective
date or as of such Closing Date, contained any untrue statement of a
material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading or that
the Prospectus or any amendment or supplement thereto, as of its issue date
or as of such Closing Date, contained any untrue statement of a material
fact or omitted to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading (it being understood that such counsel need express no
opinion as to the financial statements and schedules or other financial
data contained in the Registration Statements or the Prospectus or the
portions of the Registration Statements and the Prospectus as to which Dow,
Lohnes & Albertson is providing an opinion to the Underwriters).
In rendering such opinion, such counsel may rely as to matters governed by
the laws of jurisdictions other than the laws of jurisdictions in which such
counsel are admitted to practice and the federal laws of the United States upon
the opinions of counsel reasonably satisfactory to the Representatives and
counsel to the Underwriters.
(e) The Representatives shall have received an opinion, dated such
Closing Date, of Frederick W. Steinberg, Vice President, General Counsel
and Secretary of the Company, to the effect that:
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<PAGE> 27
(i) Each of the Company's Material Subsidiaries has been duly
incorporated and is a validly existing corporation in good standing
under the laws of the jurisdiction of its incorporation, with
corporate power and authority to own, lease and operate its properties
and conduct its business as described in the Prospectus.
(ii) Each of the Company and its Material Subsidiaries is duly
qualified to do business as a foreign corporation in good standing in
all other jurisdictions in which its ownership, leasing or operation
of property or the conduct of its business requires such
qualification, other than where the failure to be so qualified or in
good standing would not, individually or in the aggregate, have a
Material Adverse Effect.
(iii) All of the issued and outstanding capital stock of each of
the Company's Material Subsidiaries has been duly authorized and
validly issued, is fully paid and non-assessable and is owned by the
Company, directly or through one or more of its other subsidiaries,
free and clear of any mortgage, pledge, lien, security interest,
claim, encumbrance or defect of any kind, except for shares of the
capital stock of certain of the Company's subsidiaries which have been
pledged as collateral pursuant to the Revolving Credit Agreement; and
there are no rights granted to or in favor of any third party (whether
acting in an individual, fiduciary or other capacity) other than the
Company to acquire such capital stock, any additional capital stock or
any other equity securities of any such subsidiary.
(iv) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings between the Company and any
third party (whether acting in an individual, fiduciary or other
capacity) granting such third party the right to require the Company
to file a registration statement under the Act with respect to any
securities of the Company owned or to be owned by such third party or
to require the Company to include such securities in the Offered
Securities registered pursuant to the Registration Statement or in any
securities being registered pursuant to any other registration
statement filed by the Company under the Act.
(v) Except as disclosed in the Prospectus, there are no pending
or, to the knowledge of such counsel, threatened actions, suits,
proceedings or investigations against the Company or any of its
Material Subsidiaries (including any individual institution within
such entity) or any of their respective properties, assets or
operations, or as to which the Company or any such subsidiary or any
of their properties, assets or operations is a subject or a target,
that, if determined adversely to the Company or any of its Material
27
<PAGE> 28
Subsidiaries, would, individually or in the aggregate, have a Material
Adverse Effect or could materially and adversely affect the ability of
the Company to perform its obligations under this Agreement.
(vi) Except as disclosed in the Prospectus, there are no
outstanding (A) securities or obligations of the Company convertible
into or exchangeable for any capital stock of the Company, (B)
warrants, rights or options to subscribe for or purchase from the
Company any such capital stock or any such convertible or exchangeable
securities or obligations or (C) obligations of the Company to issue
any capital stock, convertible or exchangeable securities or
obligations, or any warrants, rights or obligations.
(vii) Neither the Company nor any of its Material Subsidiaries
(including any individual institution within such entity) is in
violation of (A) its charter, by-laws or other organizational
documents or (B) any statute, any rule, regulation, requirement, order
or decree of any governmental, regulatory or accrediting agency or
body or any court having jurisdiction over the Company or any of its
Material Subsidiaries, except for any such violations which would not,
individually or in the aggregate, have a Material Adverse Effect; and
no event of default or event which with the giving of notice or the
lapse of time or both, could reasonably be expected to constitute an
event of default exists under any indenture, mortgage, loan or credit
agreement, note, lease, permit, license or other agreement or
instrument to which the Company or any Material Subsidiary is a party
or by which the Company or any such subsidiary is bound or to which
any of the properties, assets or operations of the Company or any such
subsidiary is subject, except for any such defaults which would not,
individually or in the aggregate, have a Material Adverse Effect.
(viii) Such counsel has participated in the preparation of the
Registration Statements and the Prospectus and has no reason to
believe that any part of a Registration Statement or any amendment
thereto, as of its effective date or as of such Closing Date,
contained any untrue statement of a material fact or omitted to state
any material fact required to be stated therein or necessary to make
the statements therein not misleading or that the Prospectus or any
amendment or supplement thereto, as of its issue date or as of such
Closing Date, contained any untrue statement of a material fact or
omitted to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading (it being understood that such counsel need
express no opinion as to the financial statements and schedules or
other financial data contained in the Registration Statements and the
Prospectus or the portions of the
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<PAGE> 29
Registration Statements and the Prospectus as to which Dow, Lohnes &
Albertson is providing an opinion to the Underwriters).
In rendering such opinion, such counsel may rely as to matters governed by
the laws of jurisdictions other than the laws of jurisdictions in which such
counsel is admitted to practice and the federal laws of the United States upon
the opinions of counsel reasonably satisfactory to the Representatives and
counsel for the Underwriters.
(f) The Representatives shall have received an opinion, dated such
Closing Date, of counsel for each of the Selling Shareholders, to the
effect that:
(i) Assuming the several Underwriters acquire the Offered
Securities delivered by such Selling Shareholder in good faith and
without notice of any adverse claim, as such term is used in Section
8-302 of the Uniform Commercial Code as in effect in the State of New
York, upon delivery of certificates representing such Offered
Securities against payment therefor on such Closing Date in accordance
with the terms of this Agreement, the several Underwriters will
acquire valid title to such Offered Securities free of adverse claims
on such Closing Date.
(ii) This Agreement, the Custody Agreement and the Power of
Attorney constitute the legal, valid and binding obligations of each
Selling Shareholder enforceable against such Selling Shareholder in
accordance with their respective terms, subject to bankruptcy,
insolvency, reorganization, fraudulent transfer, moratorium or other
similar laws relating to or affecting creditors' rights generally and
general principles of equity (regardless of whether considered in a
proceeding in equity or at law) and except that rights to indemnity
and contribution may be limited by federal and state securities laws
or policies underlying such laws.
(iii) To the best knowledge of such counsel, no consent,
approval, authorization, order, registration or qualification of, or
filing with, any governmental or regulatory agency or body or any
court of the United States of America or the State of New York is
required to be obtained or made by the Selling Shareholders for the
consummation of the sale of the Offered Securities by the Selling
Shareholders, except registration of the Offered Securities under the
Act, the filing of the Registration Statement with and the declaration
of the effectiveness thereof by the Commission and the filing of the
Prospectus and any other information required pursuant to Rule 424(b)
under the Act, and such as may be required under state securities laws
in connection with the sale or distribution of the Offered Securities.
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<PAGE> 30
(g) The Representatives shall have received opinions, which may be
included in the opinions delivered pursuant to paragraph(f) above, dated
such Closing Date, of counsel for each Selling Shareholder, to the effect
that:
(i) Such Selling Shareholder has, as the case may be, corporate
power or partnership power and authority to enter into this Agreement,
the Custody Agreement and the Power of Attorney and to sell, assign,
transfer and deliver the Offered Securities delivered by such Selling
Shareholder on such Closing Date.
(ii) This Agreement, the Custody Agreement and the Power of
Attorney have each been duly authorized, executed and delivered by or
on behalf of such Selling Shareholder.
(iii) To the best knowledge of such counsel, no consent,
approval, authorization, order, registration or qualification of, or
filing with, any third party or any governmental or regulatory agency
or body or any court of, in each case as applicable, the State of
Delaware, the State of New York, the Commonwealth of Pennsylvania or
the State of Wisconsin, is required to be obtained or made by such
Selling Shareholder for the consummation of the sale of the Offered
Securities by such Selling Shareholder, except such as have been
obtained or required under the Act and such as may be required under
state securities laws in connection with the sale and distribution of
the Offered Securities.
(iv) The execution, delivery and performance by such Selling
Shareholder of this Agreement, the Custody Agreement, the Power of
Attorney and the sale of the Offered Securities being sold by such
Selling Shareholder do not and will not conflict with or result in a
breach or violation of any of the terms and provisions of, and do not
and will not constitute a default (or an event which with the giving
of notice or the lapse of time or both could reasonably be likely to
constitute a default) under, or result in the creation or imposition
of any lien, charge or encumbrance upon the Offered Securities to be
sold by such Selling Shareholder under (A) the charter, by-laws or
other organizational documents of such Selling Shareholder, (B) to the
best knowledge of such counsel, any statute, rule or regulation
applicable to such Selling Shareholder of, in each case as applicable
the State of Delaware, the State of New York, the Commonwealth of
Pennsylvania or the State of Wisconsin, except that no opinion shall
be given as to the Act and the Rules and Regulations thereunder, the
antifraud provisions of the United States federal securities laws and
state securities laws in connection with the sale and distribution of
the Offered Securities, or (C) to the best knowledge of such
30
<PAGE> 31
counsel, any requirement, order or decree of any governmental or
regulatory agency or body of the United States of America or, as the
case may be, the State of Delaware, the State of New York, the
Commonwealth of Pennsylvania or the State of Wisconsin, or any federal
court or court of, as the case may be, the State of Delaware, the
State of New York, the Commonwealth of Pennsylvania or the State of
Wisconsin, which requirement, order or decree is binding on such
Selling Shareholder or any of its properties, assets or operations, or
any agreement or instrument to which such Selling Shareholder is a
party or by which such Selling Shareholder is bound or to which any of
the properties, assets or operations of such Selling Shareholder is
subject, except in the case of clauses (B) and (C), for such
conflicts, breaches, violations, defaults, liens, charges and
encumbrances which would not, individually or in the aggregate, have a
material adverse effect on the ability of such Selling Shareholder to
consummate the sale of the Offered Securities by such Selling
Shareholder or perform such Selling Shareholder's obligations under
this Agreement, the Custody Agreement and the Power of Attorney.
(h) The Representatives shall have received from Dow, Lohnes &
Albertson, PLLC, special regulatory counsel to the Company, such opinion or
opinions, dated as of such Closing Date, to the effect that:
(i) The statements contained in the Prospectus under the captions
"Risk Factors -- Potential Adverse Effects of Regulation; Impairment
of Federal Funding -- General"; "Risk Factors -- Potential Adverse
Effects of Regulation; Impairment of Federal Funding -- Risk of
Legislative Action"; "Risk Factors -- Potential Adverse Effects of
Regulation; Impairment of Federal Funding -- Student Loan Defaults";
"Risk Factors -- Potential Adverse Effects of Regulation; Impairment
of Federal Funding -- Financial Responsibility Standards"; "Risk
Factors -- Potential Adverse Effects of Regulation; Impairment of
Federal Funding -- State Authorization"; "Risk Factors -- Potential
Adverse Effects of Regulation; Impairment of Federal Funding --
Accreditation"; "Risk Factors -- Potential Adverse Effects of
Regulation; Impairment of Federal Funding -- Regulatory Consequences
of a Change of Ownership or Control"; "Management's Discussion and
Analysis of Financial Condition and Results of Operations --
Regulation"; "Business -- Accreditation"; "Business -- Student
Financial Assistance"; "Business -- Student Financial Assistance --
Nature of Federal Support for Postsecondary Education"; "Business --
Student Financial Assistance -- Availability of Lenders"; "Business --
Student Financial Assistance -- Other Financial Assistance Sources";
"Business -- Student Financial Assistance -- Federal Oversight of
Title IV Programs" and "Business -- State Authorization"
31
<PAGE> 32
(collectively, "Regulatory Matters"), insofar as such statements
constitute a summary of legal matters, documents or proceedings with
respect to the operation of post-secondary educational institutions
and the offering of programs of postsecondary education, are accurate
and complete in all material respects.
(ii) Such counsel have participated in the preparation of those
portions of the Registration Statements and the Prospectus relating to
Regulatory Matters and have no reason to believe that the information
relating to Regulatory Matters contained in any Registration Statement
or any amendment thereto, as of its effective date or as of such
Closing Date, contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, or that any
such information contained in the Prospectus or any amendment or
supplement thereto, as of its issue date or as of such Closing Date,
contained any untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary in order to
make the statements therein, in the light of the circumstances under
which they were made, not misleading.
(iii) Except as disclosed in the Prospectus, no consent,
approval, authorization, order, registration or qualification of, or
filing with, the U.S. Department of Education under Title IV of the
HEA, any state agency under any state statute pertaining to the
authorization to operate postsecondary educational institutions, or
any accrediting agency that presently accredits any of the Company's
schools is required for the consummation by the Company of the
transactions contemplated by this Agreement in connection with the
sale of the Offered Securities.
(iv) To the best knowledge of such counsel, the execution,
delivery and performance by the Company of this Agreement and the
consummation by the Company of the transactions herein contemplated,
do not and will not conflict with or result in a violation of (A)
Title IV of the HEA, (B) any rule, regulation or requirement of the
U.S. Department of Education promulgated under Title IV of the HEA,
(C) any state statute pertaining to the authorization to operate
postsecondary educational institutions, or (D) the standards of
accreditation of any accrediting agency that presently accredits any
of the Company's schools, except for such conflicts or violations
which would not be reasonably likely to, individually or in the
aggregate, have a Material Adverse Effect.
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<PAGE> 33
(v) The consummation of the transactions contemplated by this
Agreement in connection with the sale of the Offered Securities will
not constitute a change in ownership resulting in a "change in
control" as defined in the HEA.
(vi) To the best knowledge of such counsel, except as disclosed
in the Prospectus, the Company and its subsidiaries possess all
necessary Licenses required for the Company and such subsidiaries
pertaining to (A) participation in Title IV Programs, (B) state
authorization to operate postsecondary educational institutions and
(C) accrediting agency approvals, as are required for participation in
Title IV Programs as described in the Registration Statements and the
Prospectus, and all such Licenses are in full force and effect, except
where the failure to possess such Licenses or the failure of such
Licenses to be in full force and effect would not be reasonably likely
to, individually or in the aggregate, have a Material Adverse Effect.
Except as disclosed in the Prospectus, to the knowledge of such
counsel, neither the Company nor any of its Material Subsidiaries has
received notice of any proceedings, investigations or inquiries, nor
are any such proceedings, investigations or inquiries threatened,
relating to the revocation, modification, termination or suspension of
any such License, except where any such revocation, modification,
termination or suspension would not be reasonably likely to,
individually or in the aggregate, have a Material Adverse Effect.
(i) The Representatives shall have received from Dewey Ballantine,
counsel for the Underwriters, such opinion or opinions, dated such Closing
Date, with respect to the validity of the Offered Securities delivered on
such Closing Date, the Registration Statements, the Prospectus and other
related matters as the Representatives may require, and the Selling
Shareholders and the Company shall have furnished to such counsel such
documents as they reasonably request for the purpose of enabling them to
pass upon such matters.
(j) The Representatives shall have received a certificate, dated such
Closing Date, of the President or any Vice-President and the principal
financial and accounting officer of the Company in which such officers, to
their knowledge after reasonable investigation, shall state that: (A) the
representations and warranties of the Company in this Agreement are true
and correct; (B) the Company has complied in all material respects with all
agreements and satisfied in all material respects all conditions on its
part to be performed or satisfied hereunder at or prior to such Closing
Date; (C) no stop order suspending the effectiveness of any Registration
Statement has been issued and no proceedings for that purpose have been
instituted or are threatened by the Commission; (D) the Additional
Registration Statement (if any) satisfying the requirements of
subparagraphs (1) and (3) of Rule 462(b) was filed pursuant to Rule
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<PAGE> 34
462(b), including payment of the applicable filing fee in accordance with
Rule 111(a) or (b) under the Act, prior to the time the Prospectus was
printed and distributed to any Underwriter; and (E) subsequent to the dates
as of which information is given in the Registration Statements and the
Prospectus, there has been no material adverse change, nor any development
or event involving a prospective material adverse change, in the financial
condition, business or results of operations of the Company and its
subsidiaries taken as a whole.
(k) The Representatives shall have received a letter, dated such
Closing Date, of Arthur Andersen LLP which meets the requirements of
subsection (a) of this Section, except that the specified date referred to
in such subsection will be a date not more than three days prior to such
Closing Date for the purposes of this subsection.
(l) The Representatives shall have received written undertakings of
shareholders of the Company (other than the Selling Shareholders) who or
which, immediately following consummation of the initial public offering of
the Offered Securities, will beneficially own an aggregate of _________
shares (or approximately ____%) of the outstanding Securities and vested
options to purchase an additional _________ shares of the Securities
immediately following the Offering to the effect contemplated in subsection
(i) of Section 5 hereof unless otherwise waived or agreed to by the
Representatives.
(m) The Representatives shall have received such other opinions,
certificates, letters and other documents from or on behalf of the Company
or the Selling Shareholders as the Representatives shall reasonably
request.
All such opinions, certificates, letters and other documents will be in
compliance with the provisions hereof, only if they are reasonably satisfactory
in form and substance to CSFBC and counsel for the Underwriters. The Company and
the Selling Shareholders will furnish the Representatives with such conformed
copies of such opinions, certificates, letters and documents as the
Representatives reasonably requests. CSFBC may in its sole discretion waive on
behalf of the Underwriters compliance with any conditions to the obligations of
the Underwriters hereunder, whether in respect of an Optional Closing Date or
otherwise.
7. Indemnification and Contribution. (a) The Company will indemnify and
hold harmless each Underwriter against any losses, claims, damages or
liabilities, joint or several, to which such Underwriter may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any Registration Statement, the Prospectus, or any amendment or supplement
thereto, or any related preliminary prospectus, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the
34
<PAGE> 35
statements therein not misleading, and will reimburse each Underwriter for any
legal or other expenses reasonably incurred by such Underwriter in connection
with investigating or defending any such loss, claim, damage, liability or
action as such expenses are incurred; provided, however, that the Company will
not be liable in any such case to the extent that any such loss, claim, damage
or liability arises out of or is based upon an untrue statement or alleged
untrue statement in or omission or alleged omission from any of such documents
in reliance upon and in conformity with written information furnished to the
Company by any Underwriter through the Representatives specifically for use
therein, it being understood and agreed that the only such information furnished
by any Underwriter consists of the information described as such in subsection
(c) below; and provided further, however, that as to any preliminary prospectus
this subsection shall not inure to the benefit of any Underwriter on account of
any loss, claim, damage, liability or action arising from the sale of Offered
Securities to any person by that Underwriter if that Underwriter failed to send
or give a copy of a Prospectus, as the same may be amended or supplemented, to
that person within the time required by law or under the Act, and the untrue
statement or alleged untrue statement of a material fact or omission or alleged
omission to state a material fact in such preliminary prospectus was corrected
in such Prospectus unless such failure resulted from non-compliance by the
Company with Section 5(b), 5(c) or 5(e) hereof.
(b) The Selling Shareholders, severally and not jointly, will indemnify and
hold harmless each Underwriter against any losses, claims, damages or
liabilities, joint or several, to which such Underwriter may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any Registration Statement, the Prospectus, or any amendment or supplement
thereto, or any related preliminary prospectus, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
in each case to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with written information furnished to the Company or its
representatives by or on behalf of such Selling Shareholder specifically for use
therein, and will reimburse each Underwriter for any legal or other expenses
reasonably incurred by such Underwriter in connection with investigating or
defending any such loss, claim, damage, liability or action as such expenses are
incurred; provided, however, that the liability of each Selling Shareholder
pursuant to this Section 7(b) is limited to the proceeds received (less
underwriting discounts and commissions) by such Selling Shareholder from the
sale of the Offered Securities; provided further, however, that the Selling
Shareholders will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement in or omission or alleged omission from
any of such documents in reliance upon and in conformity with written
information furnished to the Company by an Underwriter through the
Representatives specifically for use
35
<PAGE> 36
therein, it being understood and agreed that the only such information furnished
by any Underwriter consists of the information described as such in subsection
(c) below.
(c) Each Underwriter will severally and not jointly indemnify and hold
harmless the Company and each Selling Shareholder against any losses, claims,
damages or liabilities to which the Company or such Selling Shareholder may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
contained in any Registration Statement, the Prospectus, or any amendment or
supplement thereto, or any related preliminary prospectus, or arise out of or
are based upon the omission or the alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, in each case to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission was
made in reliance upon and in conformity with written information furnished to
the Company by such Underwriter through the Representatives specifically for use
therein, and will reimburse any legal or other expenses reasonably incurred by
the Company and each Selling Shareholder in connection with investigating or
defending any such loss, claim, damage, liability or action as such expenses are
incurred, it being understood and agreed that the only such information
furnished by any Underwriter consists of the following information in the
Prospectus furnished on behalf of each Underwriter: (i) the legend concerning
over-allotments and stabilizing on the inside front cover page and (ii) the
information appearing under the caption "Underwriting" with respect to (A) the
list of names of the Underwriters and the number of Offered Securities to be
purchased by each Underwriter, (B) concession and discount figures and (C)
discretionary sales.
(d) Promptly after receipt by an indemnified party under this Section of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against an indemnifying party under
subsection (a), (b) or (c) above, notify the indemnifying party of the
commencement thereof; but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
otherwise than under subsection (a), (b) or (c) above. In case any such action
is brought against any indemnified party and it notifies an indemnifying party
of the commencement thereof, the indemnifying party will be entitled to
participate therein and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel reasonably satisfactory to such indemnified party (who shall not, except
with the consent of the indemnified party, be counsel to the indemnifying
party), and after notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the indemnifying party will
not be liable to such indemnified party under this Section for any legal or
other expenses subsequently incurred by such indemnified party in connection
with the defense thereof other than reasonable costs of investigation. No
indemnifying party shall, without the prior written consent of the relevant
indemnified party,
36
<PAGE> 37
effect any settlement of any pending or threatened action in respect of which
such indemnified party is or could have been a party and indemnity could have
been sought hereunder by such indemnified party unless such settlement includes
an unconditional release of such indemnified party from all liability on any
claims that are the subject matter of such action.
(e) If the indemnification provided for in this Section is unavailable or
insufficient to hold harmless an indemnified party under subsection (a), (b) or
(c) above, then each indemnifying party shall contribute to the amount paid or
payable by such indemnified party as a result of the losses, claims, damages or
liabilities referred to in subsection (a), (b) or (c) above (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company and the Selling Shareholders on the one hand and the Underwriters on the
other from the offering of the Offered Securities or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of the Company and the
Selling Shareholders on the one hand and the Underwriters on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities as well as any other relevant equitable
considerations. The relative benefits received by the Company and the Selling
Shareholders on the one hand and the Underwriters on the other shall be deemed
to be in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Selling Shareholders bear to the total
underwriting discounts and commissions received by the Underwriters. The
relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by the
Company, the Selling Shareholders or the Underwriters and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such untrue statement or omission. The amount paid by an indemnified party as a
result of the losses, claims, damages or liabilities referred to in the first
sentence of this subsection (e) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any action or claim which is the subject of this
subsection (e). Notwithstanding the provisions of this subsection (e), no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the Offered Securities underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission, and no
Selling Shareholder shall be required to contribute any amount in excess of the
amount by which the proceeds received (less underwriting discounts and
commissions) by such Selling Shareholder from the sale of the Offered Securities
exceeds the amount of any damages which such Selling Shareholder has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The
37
<PAGE> 38
Underwriters' obligations in this subsection (e) to contribute are several in
proportion to their respective underwriting obligations and not joint. The
Selling Shareholders' obligations in this subsection (e) to contribute are
several and not joint.
(f) The obligations of the Company and the Selling Shareholders under this
Section shall be in addition to any liability which the Company and the Selling
Shareholders may otherwise have and shall extend, upon the same terms and
conditions, to each person, if any, who controls any Underwriter within the
meaning of the Act; and the obligations of the Underwriters under this Section
shall be in addition to any liability which the respective Underwriters may
otherwise have and shall extend, upon the same terms and conditions, to each
director of the Company, to each officer of the Company who has signed a
Registration Statement and to each person, if any, who controls the Company
within the meaning of the Act.
8. Default of Underwriters. If any Underwriter or Underwriters default in
their obligations to purchase Offered Securities hereunder on either the First
Closing Date or any Optional Closing Date and the aggregate number of shares of
Offered Securities that such defaulting Underwriter or Underwriters agreed but
failed to purchase does not exceed 10% of the total number of shares of Offered
Securities that the Underwriters are obligated to purchase on such Closing Date,
CSFBC may make arrangements satisfactory to the Company and the Selling
Shareholders for the purchase of such Offered Securities by other persons,
including any of the Underwriters, and if no such arrangements are made by such
Closing Date, the non-defaulting Underwriters shall be obligated severally, in
proportion to their respective commitments hereunder, to purchase the Offered
Securities that such defaulting Underwriters agreed but failed to purchase on
such Closing Date. If any Underwriter or Underwriters so default and the
aggregate number of shares of Offered Securities with respect to which such
default or defaults occur exceed 10% of the total number of shares of Offered
Securities that the Underwriters are obligated to purchase on such Closing Date
and arrangements satisfactory to CSFBC, the Company and the Selling Shareholders
for the purchase of such Offered Securities by other persons are not made within
36 hours after such default, this Agreement will terminate without liability on
the part of any non-defaulting Underwriter, the Company or the Selling
Shareholders, except as provided in Section 9 (provided that if such default
occurs with respect to Optional Securities after the First Closing Date, this
Agreement will not terminate as to the Firm Securities or any Optional
Securities purchased prior to such termination). As used in this Agreement, the
term "Underwriter" includes any person substituted for an Underwriter under this
Section. Nothing herein will relieve a defaulting Underwriter from liability for
its default.
9. Survival of Certain Representations and Obligations. The respective
indemnities, agreements, representations, warranties and other statements of the
Selling Shareholders, of the Company or its officers and of the several
Underwriters set forth in or made pursuant to this Agreement will remain in full
force and effect, regardless of any investigation, or
38
<PAGE> 39
statement as to the results thereof, made by or on behalf of any Underwriter,
any Selling Shareholder, the Company or any of their respective representatives,
officers or directors or any controlling person, and will survive delivery of
and payment for the Offered Securities. If this Agreement is terminated pursuant
to Section 8 or if for any reason the purchase of the Offered Securities by the
Underwriters is not consummated, the Selling Shareholders shall remain
responsible for the expenses to be paid or reimbursed by them pursuant to
Section 5 and the respective obligations of the Company, the Selling
Shareholders, and the Underwriters pursuant to Section 7 shall remain in effect,
and if any Offered Securities have been purchased hereunder the representations
and warranties in Section 2 and all obligations under Section 5 shall also
remain in effect. If the purchase of the Offered Securities by the Underwriters
is not consummated for any reason other than solely because of the termination
of this Agreement pursuant to Section 8 or the occurrence of any event specified
in clause (iii), (iv) or (v) of Section 6(c), the Selling Shareholders will
jointly and severally reimburse the Underwriters for all out-of-pocket expenses
(including fees and disbursements of counsel) reasonably incurred by them in
connection with the offering of the Offered Securities.
10. Notices. All communications hereunder will be in writing and, if sent
to the Underwriters, will be mailed, delivered or telegraphed and confirmed to
the Representatives, c/o Credit Suisse First Boston Corporation, 11 Madison
Avenue, New York, New York 10010, Attention: Investment Banking Department
Transactions Advisory Group, or, if sent to the Company, will be mailed,
delivered or telegraphed and confirmed to it at Education Management
Corporation, 300 Sixth Avenue, Pittsburgh, Pennsylvania 15222, Attention:
Frederick W. Steinberg; or, if sent to Merrill Lynch Capital Appreciation
Partnership No. IV, L.P., ML Offshore LBO Partnership No. IV, ML IBK Positions,
Inc., Merrill Lynch Capital Corporation, or any of them, will be mailed,
delivered or telegraphed and confirmed to James V. Caruso at 225 Liberty Street,
New York, New York 10080; or, if sent to National Union Fire Insurance Company
of Pittsburgh, PA, will be mailed, delivered or telegraphed and confirmed to
David B. Pinkerton at 200 Liberty Street, New York, New York 10281; or, if sent
to The Northwestern Mutual Life Insurance Company, will be mailed, delivered or
telegraphed and confirmed to J. Thomas Christofferson at 720 East Wisconsin
Avenue, Milwaukee, Wisconsin 53202; or, if sent to any other Selling
Shareholder, will be mailed, delivered or telegraphed and confirmed to the
Attorneys-in-Fact at Education Management Corporation, 300 Sixth Avenue,
Pittsburgh, Pennsylvania 15222; provided, however, that any notice to an
Underwriter pursuant to Section 7 will be mailed, delivered or telegraphed and
confirmed to such Underwriter.
11. Successors. This Agreement will inure to the benefit of and be binding
upon the parties hereto and their respective successors and the officers and
directors and controlling persons referred to in Section 7, and no other person
will have any right or obligation hereunder.
39
<PAGE> 40
12. Representation. The Representatives will act for the several
Underwriters in connection with the transactions contemplated by this Agreement,
and any action taken under this Agreement by the Representatives jointly or by
CSFBC will be binding upon all the Underwriters. The Custodian will act for the
Selling Shareholders in connection with such transactions, and any action taken
under or in respect of this Agreement by the Custodian will be binding upon all
the Selling Shareholders.
13. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.
14. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES
OF CONFLICTS OF LAWS.
The Company hereby submits to the non-exclusive jurisdiction of the Federal
and state courts in the Borough of Manhattan in The City of New York in any suit
or proceeding arising out of or relating to this Agreement or the transactions
contemplated hereby.
40
<PAGE> 41
If the foregoing is in accordance with the Representatives'
understanding of our agreement, kindly sign and return to the Company one of the
counterparts hereof, whereupon it will become a binding agreement among the
Selling Shareholders, the Company and the several Underwriters in accordance
with its terms.
Very truly yours,
EDUCATION MANAGEMENT CORPORATION
By
------------------------
Name: Robert B. Knutson
Title: Chairman and Chief
Executive Officer
SELLING SHAREHOLDERS:
MERRILL LYNCH CAPITAL APPRECIATION
PARTNERSHIP NO. IV, L.P.
ML OFFSHORE LBO PARTNERSHIP NO. IV
ML IBK POSITIONS, INC.
MERRILL LYNCH CAPITAL CORPORATION
NATIONAL UNION FIRE INSURANCE
COMPANY OF PITTSBURGH, PA
THE NORTHWESTERN MUTUAL LIFE
INSURANCE COMPANY
ROBERT B. KNUTSON
MIRYAM L. DRUCKER
ALBERT GREENSTONE
[other Selling Shareholders]
By
------------------------
Name:
Title: Attorney-in-Fact
41
<PAGE> 42
The foregoing Underwriting Agreement is hereby confirmed and accepted as of the
date first above written.
CREDIT SUISSE FIRST BOSTON CORPORATION
SMITH BARNEY INC.
ABN AMRO CHICAGO CORPORATION
Acting on behalf of themselves and as the
Representatives of the several
Underwriters.
By CREDIT SUISSE FIRST BOSTON CORPORATION
By
-----------------------------
Name:
Title:
<PAGE> 43
<TABLE>
<CAPTION>
DBB2-365131.7
SCHEDULE A
Number of Number of
Firm Optional
Securities Securities
Selling Shareholder to be Sold to be Sold
------------------- ---------- ----------
<S> <C> <C>
Merrill Lynch Capital Appreciation Partnership No. IV, L.P. -- --
ML Offshore LBO Partnership No. IV ........................ -- --
ML IBK Positions, Inc. .................................... -- --
Merrill Lynch Capital Corporation ......................... -- --
National Union Fire Insurance Company of Pittsburgh, PA ... 639,168 63,917
The Northwestern Mutual Life Insurance Company ............ 1,065,282 106,528
Robert B. Knutson ......................................... 318,182 --
Miryam L. Drucker ......................................... 51,818 --
Albert Greenstone ......................................... 5,000 --
[OTHER SELLING SHAREHOLDERS] .............................. -- --
--------- -------
Total .................................................... [2,932,766] [293,277]
========= =======
</TABLE>
<PAGE> 44
SCHEDULE B
UNDERWRITER NUMBER OF
FIRM SECURITIES
TO BE PURCHASED
----------------------
Credit Suisse First Boston Corporation................
Smith Barney Inc......................................
ABN AMRO Chicago Corporation..........................
------------------
Total........................................ [2,932,766]
<PAGE> 45
[TO BE UPDATED BY K&L]
EXHIBIT 1
SUBSIDIARIES
<TABLE>
<CAPTION>
NAME OF SUBSIDIARY JURISDICTION OF INCORPORATION
- ---------------------------------------------------- ----------------------------
<S> <C>
Art Institutes International Inc. Pennsylvania
Art Institute of Atlanta, Inc. Georgia
Art Institute of Dallas, Inc. Texas
Art Institute of Fort Lauderdale, Inc. Florida
Art Institute of Houston, Inc. Texas
Illinois Institute of Art, Inc. Illinois
Illinois Institute of Art at Schaumburg, Inc. Illinois
Art Institute of Philadelphia, Inc. Pennsylvania
Art Institute of Phoenix, Inc. Arizona
Art Institute of Seattle, Inc. Washington
Colorado Institute of Art, Inc. Colorado
The National Center for Professional Development, Inc. Georgia
NCPT, Inc. Georgia
NYRS Acquisition Corp. New York
</TABLE>
<PAGE> 1
Exhibit 23.01
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this
Registration Statement.
/s/ ARTHUR ANDERSEN LLP
---------------------------------
Pittsburgh, Pennsylvania
October 21, 1997
