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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: JUNE 30, 1997 COMMISSION FILE NUMBER: 000-21363
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EDUCATION MANAGEMENT CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
PENNSYLVANIA 25-1119571
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
300 SIXTH AVENUE, PITTSBURGH, PA 15222
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (412) 562-0900
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(TITLE OF CLASS)
PREFERRED SHARE PURCHASE RIGHTS
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy statement incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of September 22, 1997 was approximately $202,300,000. The number
of shares of Common Stock outstanding on September 22, 1997 was 14,434,737
shares.
Documents incorporated by reference:
Notice of 1997 Annual Meeting and Proxy Statement (Part III of Form 10-K).
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PART I
ITEM 1--BUSINESS
The following discussion contains forward-looking statements relating to
future plans, expectations, events or performances that involve risks and
uncertainties. The Company's actual results of operations could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors. The following discussion should be read in
conjunction with the consolidated financial statements and notes thereto
included elsewhere in this report.
GENERAL
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, 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 92.7% 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
in which applicable regulations 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. In
March 1997, the Company's newest school, The Art Institute of Los Angeles,
obtained its license to operate in the state of California. The Art Institute of
Los Angeles expects to begin offering classes in October 1997.
The Company offers a culinary arts curriculum at six Art Institutes and
expects to begin offering that curriculum at The Art Institute of Philadelphia
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 5.4% of the Company's net revenues in fiscal 1997.
The Company offers paralegal training at NCPT in Atlanta, a leading source
of paralegals in the southeastern United States. NCPT offers certificate
programs that generally are completed in four to nine months. NCPD maintains
consulting relationships with seven colleges and universities to assist in the
development, marketing and delivery of paralegal, legal nurse consultant and
financial planner test preparation programs for recent college graduates and
working adults. In fiscal 1997, the Company derived approximately 1.8% 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 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
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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.
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 continued to
expand its evening programs and to augment its efforts to recruit high
school students. The total number of students attending The Art
Institutes (including schools opened or acquired during fiscal 1996) rose
approximately 20.3% from the fall quarter of fiscal 1993 to the fall
quarter of fiscal 1997. Excluding those new schools, the increase was
approximately 13.4% over the same period. In fiscal 1997, The Art
Institutes experienced a 28.7% increase over the prior year in the number
of applications from high school seniors for education programs starting
in fiscal 1997 or fiscal 1998.
- Opening or Acquiring Schools: The Company believes that significant
opportunities exist for growth through the establishment of new schools
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 an 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. 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 six (in addition to acquiring NYRS) and expects to start a
culinary arts program at The Art Institute of Philadelphia in October
1997. The Company has also added education program offerings in high
growth fields such as computer animation, multimedia and video
production, and expects to start classes in fiscal 1998 in interactive
multimedia programming and web site administration.
- 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.
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 fiscal
1997, the Company opened two schools and acquired 11 others. A third new school,
The Art Institute of Los Angeles, is expected to begin classes in October 1997.
Since 1971, the Company's net revenues have increased from approximately $1.9
million to approximately $182.8 million in fiscal 1997.
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In November 1996, the Company and certain shareholders sold shares of the
Company's common stock, $.01 par value (the "Common Stock"), to the public in an
initial public offering (the "Offering").
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 1996, or over $600 billion. EDMC's schools are part of
the postsecondary education market, which accounts for approximately one-third
of the total sector, or $208 billion. Of the approximately 6,000 postsecondary
schools that are eligible to participate in federal financial aid programs
("Title IV Programs") under Title IV of the Higher Education Act of 1965, as
amended (the "HEA"), approximately 500 are proprietary degree-granting
institutions such as EDMC's schools. The United States Department of Education
(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 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 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
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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. Now, 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 establish new schools
and to acquire existing schools in favorable locations. The Company analyzes a
new market for enrollment potential, positive long-term demographic trends, the
concentration of likely employers, the level of competition, facility costs, the
availability of 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 is
expected to begin 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 a fiscal fall 1997 enrollment of approximately
3,500 students and generated tuition revenues during fiscal 1997 of
approximately $35 million. In addition to the acquisition of NYRS, the Company
has introduced culinary arts programs at six Art Institutes, and expects to
begin offering a seventh program at The Art Institute of Philadelphia in October
1997.
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 in which applicable regulations
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permit proprietary postsecondary institutions, such as The Art Institutes, to
offer such programs. In fiscal 1997, the Company introduced and augmented its
bachelor's degree programs in the areas of computer animation, graphic design,
interior design and industrial design, and 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 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 will
occur at one of The Art Institutes and subsequent work will 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 programs, 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 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 made
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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 complete 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 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.
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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.
THE SCHOOL OF DESIGN
Associate's Degree Programs
Computer Animation
Graphic Design
Interior Design
Industrial Design Technology
Bachelor's Degree Programs
Computer Animation
Graphic Design
Interior Design
Industrial Design
THE SCHOOL OF CULINARY ARTS
Associate's Degree Programs
Culinary Arts
Travel and Tourism
THE SCHOOL OF MEDIA ARTS
Associate's Degree Programs
Multimedia
Photography
Video Production
Web Site Administration*
Bachelor's Degree Programs
Interactive Multimedia Programming*
THE SCHOOL OF FASHION
Associate's Degree Programs
Fashion Design
Fashion Marketing
Bachelor's Degree Programs
Fashion Design
Fashion Marketing and Management
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* Starting in fiscal 1998.
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 in which applicable regulations permit proprietary
postsecondary institutions to offer such programs. In Pennsylvania, the
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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. For several
other Art Institutes, the Company has determined not to offer such programs 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>
PERCENT OF AVAILABLE
GRADUATES WHO OBTAINED
NUMBER OF EMPLOYMENT RELATED
GRADUATING CLASSES AVAILABLE TO PROGRAM OF STUDY
(CALENDAR YEAR) GRADUATES(1) (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>
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(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,
Blockbuster Entertainment Group, The Boeing Company, Eddie Bauer, Inc., Ethan
Allen Interiors Inc., Humongous Entertainment, Inc., J. C. Penney Company, Inc.,
Marriott 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.
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<PAGE> 10
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
CALENDAR YEAR EDMC
YEAR ACQUIRED
SCHOOL LOCATION ESTABLISHED /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
Lauderdale....................... Fort Lauderdale, FL 1968 1974 2,073
The Art Institute of Houston....... Houston, TX 1974 1979 1,111
The Art Institute of Los Angeles... Los Angeles, CA 1997 1998 n/a
The Art Institute of Minnesota..... Minneapolis, MN 1964 1997 n/a
The Art Institute of
Philadelphia..................... Philadelphia, PA 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.......................... Chicago, IL 1916 1996 367
The Illinois Institute of Art at
Schaumburg....................... Schaumburg, IL 1983 1996 237
National Center for Paralegal
Training......................... Atlanta, GA 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 governance structure for The Art Institutes differs
from governance structures at other proprietary school systems and possesses
several advantages. EDMC's three-tier structure has the advantage of permitting
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.
The Art Institutes International, Inc. ("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, 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.
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<PAGE> 11
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 approximately $10.0 million and devoted
substantial resources to set-up an integrated, customized information network
designed to assist Company personnel in maximizing internal efficiency. The
Company believes that this system has improved its ability to recruit new
students, administer student financial aid, prepare and track student academic
schedules, monitor part-time and full-time employment opportunities for its
students and graduates, perform general and student accounting and manage human
resources. The Company believes that its investment in technology also
facilitates the integration of acquisitions and newly established schools into
the Company's operations.
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.
11
<PAGE> 12
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.
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.
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, 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
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<PAGE> 13
regional accrediting agencies that accredit virtually all of the public and
private non-profit colleges and universities in the United States.
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 Chicago.... ACCSCT
The Illinois Institute of Art at ACCSCT
Schaumburg................................
National Center for Paralegal Training...... ACICS
(NCPT, Inc.)
New York Restaurant School.................. ACCSCT
New York State Board of Regents
</TABLE>
- ---------
* The Company cannot submit an application for The Art Institute of Los Angeles
to be accredited until students begin classes there. The Company intends to
file such an application with ACCSCT in October 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. Two of
the Company's schools, The Art Institute of Dallas and The Art Institute of
Houston, each of which accounted for approximately 7.3% of the Company's net
revenues in fiscal 1997, were placed on reporting status by their accrediting
agency in January 1993 and February 1993, respectively, based on that
accrediting agency's concern about those schools' reported student completion
rates for certain programs. The Art Institute of Philadelphia, which accounted
for approximately 11.7% of the Company's net revenues in fiscal 1997, was placed
on reporting status in August 1995 by the same accrediting agency based on that
accrediting agency's concern about that school's overall student completion
rate. The accrediting agency's standards define a program's completion rate as
the percentage of the students who started that program during a twelve-month
period and who have either graduated from that program within a period of time
equal to 150% of that program's length or withdrawn from that program during the
same period in order to accept full-time employment in the occupation or job
category for which the program was offered. Because that calculation can
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<PAGE> 14
only be performed after a student's scheduled completion date, it does not
provide a timely basis for a school to affect student outcomes. For that reason,
the Company uses the net quarterly persistence rate as a method to track the
retention rate of students. Such rate is equal to the number of students in a
program at the beginning of an academic quarter, including any formerly
withdrawn students who restarted the program during the prior academic quarter,
divided by the number of students enrolled in that program at the beginning of
that prior academic quarter.
Each of the three schools that were placed on reporting status has filed
completion and placement reports as required by the accrediting agency, using
the accrediting agency's definition of student completion rate. The Art
Institute of Dallas has been notified that it is no longer on reporting status.
Although the accrediting agency has acknowledged that there has been some
improvement with respect to the completion rates of some programs at the other
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, the accrediting agency 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 Federal Direct Student Loan
("FDSL") program was enacted, enabling students to obtain loans from the federal
government rather than from commercial lenders. In recent years, federal funds
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<PAGE> 15
appropriated for Title IV Programs have increased from $8.6 billion for the
federal fiscal year ending September 30, 1994 to $10.5 billion for the federal
fiscal year ending September 30, 1996. The volume of federally guaranteed
student loans (and, more recently, loans issued under the FDSL program) has
increased from $17.9 billion in the federal fiscal year ending September 30,
1993 to $29.1 billion in the federal fiscal year ending 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 Federal Family Education Loan ("FFEL") program.
The Company's schools also participate in the Federal Supplemental Educational
Opportunity Grant ("FSEOG") program, the Federal Perkins Loan ("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 the
termination of studies. Perkins loans are made available to those students who
demonstrate the greatest financial need. Perkins loans are made from a revolving
account, 75% of which is capitalized by the U.S. Department of Education.
Subsequent federal capital contributions in the same 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
15
<PAGE> 16
$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.
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 the last year, 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
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 United States Congress (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
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<PAGE> 17
hundred institutions each year, and directs student loan guaranty agencies to
conduct additional reviews relating to student loan programs. In addition, the
Office of the Inspector General of the U.S. Department of Education conducts
audits and investigations in certain circumstances. Under the HEA, accrediting
agencies and state licensing agencies also have responsibilities for overseeing
institutions' compliance with Title IV Program requirements. As a result, each
participating institution, including each Art Institute and NYRS, is subject to
frequent and detailed oversight and must comply with a complex framework of laws
and regulations or risk being required to repay funds or becoming ineligible to
participate in Title IV Programs.
Largely as a result of this increased oversight, more than 800 institutions
have either ceased to be eligible for, or have voluntarily relinquished their,
participation in some or all Title IV Programs since October 1, 1992. This has
reduced competition among institutions with respect to certain markets and
education programs. Due to the specialized nature of their education programs,
the reduction in the number of participating institutions has had no substantial
effect on The Art Institutes.
Cohort Default Rates. A significant component of the Congressional
initiative aimed at reducing fraud, waste and abuse was the imposition of
limitations on participation in Title IV Programs by institutions whose former
students defaulted on the repayment of federally guaranteed student loans at an
"excessive" rate. Since the U.S. Department of Education began to impose
sanctions on institutions with cohort default rates above certain levels, more
than 600 institutions have lost their eligibility to participate in some or all
Title IV Programs for this reason. However, many institutions, including all of
The Art Institutes, have responded by implementing aggressive student loan
default management programs aimed at reducing the likelihood of students failing
to repay their loans in a timely manner.
A school's cohort default rate under the FFEL program is calculated on an
annual basis as the rate at which student borrowers scheduled to begin repayment
on their loans in one federal fiscal year default on those loans by the end of
the next federal fiscal year. Any institution whose FFEL cohort default 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. The remainder of the Company's
schools had published 1994 FFEL cohort default rates and preliminary 1995 rates
below 25%. For federal fiscal year 1994, the combined FFEL cohort default rate
for all borrowers at the Company's schools was 18.2% and the 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 the individual schools' rates
ranged from 6.8% to 23.4%. (Preliminary cohort default rates are subject to
revision by the U.S. Department of Education based on information that schools
and guaranty agencies identify and submit to the U.S. Department of Education
for review, in order to correct any errors in the data previously provided to
the U.S. Department of Education. Any such adjustment will be made by the U.S.
Department of Education at the time that final rates are officially published.)
The 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 any federal award
17
<PAGE> 18
year (i.e., July 1 through June 30), that institution may be placed on
provisional certification status for up to four years. Provisional certification
does not limit an institution's access to Title IV Program funds; however, an
institution with provisional status is under closer review by the U.S.
Department of Education and may be subject to summary adverse action if it
commits violations of Title IV Program requirements. To 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,
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
contained a three-part initiative, referred to as the Program Integrity Triad,
intended to increase regulatory scrutiny of postsecondary education
institutions. Part one of that initiative required each state to establish a
State Postsecondary Review Entity ("SPRE") to review certain institutions within
that state to determine their eligibility to continue participating in Title IV
Programs. SPRE review would be mandatory for an institution that met specified
statutory criteria, such as high cohort default rates, lack of financial
responsibility, certain changes in ownership or a pattern of student complaints,
and would be conducted using standards developed by the applicable SPRE based on
guidelines in the HEA. The U.S. Congress has declined to provide funding for
SPREs and the U.S. Department of Education has repealed its regulations
concerning SPREs. As a result, no SPREs are currently functioning.
Part two of the Program Integrity Triad expanded the role of accrediting
agencies in the oversight of institutions participating in Title IV Programs. As
a result, the accrediting agencies of which the Company's schools are members
have increased the depth and intensity of reviews and have expanded examinations
in such areas as financial responsibility and timeliness of student refunds. The
Program Integrity Triad provisions also require each accrediting agency
recognized by the U.S. Department of Education to undergo comprehensive periodic
reviews by the U.S. Department of Education to ascertain whether such
accrediting agency is adhering to required standards. Each accrediting agency
that accredits any of the Company's schools has been reviewed by the U.S.
Department of Education under the Program Integrity Triad provisions and
reapproved for continued recognition by the U.S. Department of Education.
Part three of the Program Integrity Triad tightened the standards to be
applied by the U.S. Department of Education in evaluating the financial
responsibility and administrative capability of institutions participating in
Title IV Programs, and mandated that the U.S. Department of Education
periodically review the eligibility and certification to participate in Title IV
Programs of every such eligible institution. By law, all institutions are
required to undergo such a recertification review by the U.S. Department of
Education by 1997 and every four years thereafter. Under these standards, each
of the Company's schools would be evaluated by the U.S. Department of Education
more frequently than in the past. Two of the Company's schools currently have
18
<PAGE> 19
recertification applications pending with the U.S. Department of Education. A
denial of recertification would preclude a school from continuing to participate
in Title IV Programs.
Financial Responsibility Standards. All institutions participating in Title
IV Programs must satisfy a series of specific standards of financial
responsibility. Institutions are evaluated for compliance with those
requirements as part of the U.S. Department of Education's quadrennial
recertification process and also annually as each institution submits its
audited financial statements to the U.S. Department of Education. One standard
requires each institution to demonstrate an acid test ratio (defined as the
ratio of cash, cash equivalents and current accounts receivable to current
liabilities) of at least 1:1 at the end of each fiscal year. Another standard
requires that each institution have a positive tangible net worth at the end of
each fiscal year. A third standard prohibits any institution from having a
cumulative net operating loss during its two most recent fiscal years that
results in a decline of more than 10% of that institution's tangible net worth
as measured at the beginning of that two-year period. An institution that is
determined by the U.S. Department of Education not to meet the standards of
financial responsibility on the basis of failing to meet one or more of the
specified numeric indicators is nonetheless entitled to participate in Title IV
Programs if it can demonstrate to the U.S. Department of Education that it is
financially responsible on an alternative basis. An institution may do so by
demonstrating, with the support of a statement from a certified public
accountant, proof of prior compliance with the numeric standards and other
information specified in the regulations, that its continued operation is not
jeopardized by its financial condition. Alternatively, an institution may post
surety either in an amount equal to one-half of the total Title IV Program funds
received by students enrolled at such institution during the prior year or in an
amount equal to 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. Each of The Art
Institutes individually (other than The Art Institute of Minnesota, The Illinois
Institute of Art at Chicago and The Illinois Institute of Art at Schaumburg) and
on a consolidated basis at the level of AII (which is the parent of all The Art
Institutes other than The Art Institute of Pittsburgh, which is a division of
AII) has met the financial responsibility standards described above as applied
by the U.S. Department of Education for the relevant periods. At the times of
their acquisitions, The Art Institute of Minnesota, The Illinois Institute of
Art at Chicago and The Illinois Institute of Art at Schaumburg satisfied those
standards by relying on the consolidated financial statements of AII in their
applications to the U.S. Department of Education.
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
19
<PAGE> 20
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 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
20
<PAGE> 21
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 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.
ITEM 2--PROPERTIES
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.
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>
21
<PAGE> 22
- ---------
(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.
ITEM 3--LEGAL PROCEEDINGS
EDMC is subject to litigation in the ordinary course of its business.
Certain proceedings have been brought under the Texas Deceptive Trade Practices
Act and similar statutes in other jurisdictions. Typically, under those laws, an
individual can seek treble damages and attorneys' fees or, in the alternative,
actual and punitive damages, plus interest and court costs.
While there can be no assurance as to the ultimate outcome of any
litigation involving the Company, the Company does not believe that any pending
legal proceeding is likely to result in a judgment or settlement that would have
a material adverse effect on the Company's financial condition, results of
operations or liquidity.
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5-- MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Common Stock is traded on the Nasdaq National Market System under the
symbol "EDMC." As of September 22, 1997, there were 14,434,737 shares of Common
Stock outstanding held by approximately 525 holders of record. 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>
EDMC has not declared or paid any cash dividends on its capital stock
during the last ten years other than on the shares of its Series A 10.19%
Convertible Preferred Stock, $.0001 par value (the "Series A Preferred Stock"),
none of which is currently outstanding. EDMC 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 the Amended and Restated Credit Agreement, dated
March 16, 1995, as amended (the "Revolving Credit Agreement").
During fiscal 1997, the Company sold 1,500 shares of Common Stock to N.G.
Temnick on August 9, 1996 for $3.50 per share ($5,250 in the aggregate) pursuant
to the exercise of stock options in a transaction 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.
22
<PAGE> 23
ITEM 6--SELECTED FINANCIAL DATA
The following summary consolidated financial and other data should be read
in conjunction with the Company's Consolidated Financial Statements and Notes
Thereto filed in response to Item 8 and the information included in response to
Item 7 below. 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 filed in response to Item 8
below. The summary consolidated income statement data for the years ended June
30, 1993 and 1994 are derived from audited financial statements not included
herein.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------------------------
1993 1994(7) 1995(8)(9) 1996(9) 1997
-------- -------- ---------- -------- --------
(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) from continuing operations
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........................... -- -- -- -- 403
PER SHARE DATA(4):
Primary:
Income (loss) from continuing operations
before extrordinary item............... (.49) (.57) (.11) .45 .72
Net income (loss)........................ (.49) (.57) (.11) .36 .72
Weighted average number of shares of
Common Stock outstanding, in
thousands(5)........................... 6,959 6,926 6,890 10,170 13,235
Fully Diluted:
Income (loss) from continuing operations
before extraordinary item.............. (.49) (.57) (.11) .39 .72
Net income (loss)........................ (.49) (.57) (.11) .31 .72
Weighted average number of shares of
Common Stock outstanding, in
thousands(5)........................... 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(6)....................... 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)(10).... (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
23
<PAGE> 24
Notes to Consolidated Financial Statements on page 43. The majority of the
intangible assets related to student enrollments and applications,
accreditation and contracts with colleges and universities and were written
off over two to five year periods. The excess of the investment in 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 Preferred Stock previously 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. Therefore, there will be no future ESOP expense resulting
from the repayment of such loan or, as the Offering has been consummated,
from repurchases of shares.
(3) In fiscal 1996, the $25.0 million aggregate principal amount of the
Company's 13.25% Senior Subordinated Notes due 1999 (the "Subordinated
Notes") was prepaid in full. The resulting $1.5 million prepayment penalty
is classified as an extraordinary item net of the related tax benefit.
(4) Dividends on the outstanding shares of Series A Preferred Stock, dividends
accrued but not paid on outstanding shares of Series A Preferred Stock and
a redemption premium paid upon redemption of 75,000 shares of Series A
Preferred Stock have been deducted from net income (loss) in calculating
net income (loss) per share of Common Stock.
(5) The weighted average number of shares of Common Stock used to calculate
income (loss) per share includes, where dilutive, equivalent shares of
Common Stock calculated under the treasury stock method and resulting from
the conversion of outstanding shares of Series A Preferred Stock.
(6) Excludes students enrolled in programs at colleges and universities having
consulting agreements with NCPD.
(7) 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.
(8) Results for fiscal 1995 include a $1.1 million nonrecurring credit for the
refund of state and local business and occupation taxes.
(9) Charges of $1.1 million, $0.5 million and $0.4 million are reflected in
1995, 1996 and 1997, respectively, to account for non-cash compensation
expense related to the performance-based vesting of nonstatutory stock
options.
(10) 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
Offering.
24
<PAGE> 25
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BACKGROUND
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 92.7% of the Company's net
revenues in 1997. Unless otherwise specified, any reference to a year is to a
fiscal year ended June 30.
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. 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 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.
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 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.
25
<PAGE> 26
General and administrative expense consists of marketing and student
admissions expenses and departmental costs such as executive management, finance
and accounting, legal, corporate development and other departments that do not
provide direct services to the Company's students. The Company has centralized
many of these services to gain consistency in management reporting, efficiency
in administrative effort and control of costs. All marketing and student
admissions costs are expensed in the year incurred.
Amortization of intangibles relates to the values assigned to student
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. As a result, there was no ESOP expense in 1997
nor will there be future ESOP expense resulting from the repayment of such loan.
Coincident with the Offering, 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 a wholly owned subsidiary, The Art
Institute of Los Angeles, which 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 expects to begin 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 several quarters following their opening or purchase. As
expected, the combined operating losses of the Company's newer schools in
Arizona, Illinois, Minnesota and California totaled approximately $3.4 million
in 1997.
26
<PAGE> 27
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.
27
<PAGE> 28
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. As a result
the Company incurred no ESOP expense in 1997 related to the repayment of such
loan.
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 balances 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 Offering; 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.
28
<PAGE> 29
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
29
<PAGE> 30
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.
30
<PAGE> 31
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 and meet specified interest and leverage ratio requirements, restrict
capital expenditures by the Company, restrict
31
<PAGE> 32
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 Offering 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.
32
<PAGE> 33
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 tangible
net worth, calculated at the end of each fiscal year, comply with the 85% rule
and insure that any operating losses do not result in a reduction of tangible
net worth by 10% or more. 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. Tangible net worth is equal to
shareholders equity less intangible assets. The 85% rule prohibits participating
schools from deriving 85% or more of total revenue from Title IV Programs. 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 changes 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 is 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.
33
<PAGE> 34
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Not applicable.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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
34
<PAGE> 35
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.................... -- --
Common Stock, Class B, par value $.0001 per share.................... 1 --
Common Stock, par value $.01 per share, 14,417,874 issued and
outstanding........................................................ -- 144
Warrants outstanding................................................... 7,683 --
Additional paid-in capital............................................. 19,742 87,893
Treasury stock, 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.
35
<PAGE> 36
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 000'S):
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.
36
<PAGE> 37
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.
37
<PAGE> 38
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.
38
<PAGE> 39
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.
39
<PAGE> 40
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
40
<PAGE> 41
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
41
<PAGE> 42
"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.
42
<PAGE> 43
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.
43
<PAGE> 44
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................................... 979 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 000'S):
Basic............................................. 6,890 6,913 11,939
Diluted........................................... 6,890 11,874 13,671
----- ------ ------
</TABLE>
44
<PAGE> 45
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.
45
<PAGE> 46
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
46
<PAGE> 47
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>
47
<PAGE> 48
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>
48
<PAGE> 49
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 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
------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Net income (in 000's):.................... 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:
49
<PAGE> 50
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.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
50
<PAGE> 51
PART III
ITEM 10--DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information required by this Item will be contained in the Company's
definitive Proxy Statement for its 1997 Annual Meeting of Stockholders under the
captions "Nominees as Directors for Terms Expiring at the 2000 Annual Meeting of
Shareholders," "Directors Continuing in Office," "Executive Officers of the
Company," and "Section 16(a) Beneficial Ownership Reporting Compliance," and is
incorporated herein by reference.
ITEM 11--EXECUTIVE COMPENSATION
The information required by this Item will be contained in the Company's
definitive Proxy Statement for its 1997 Annual Meeting of Stockholders under the
captions "Compensation of Executive Officers and Directors," "Compensation
Committee Interlocks and Insider Participants," "Employment Agreement,"
"Compensation Committee Report on Executive Compensation," and "Performance
Graph," and is incorporated herein by reference.
ITEM 12-- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item will be contained in the Company's
definitive Proxy Statement for its 1997 Annual Meeting of Stockholders under the
caption "Security Ownership," and is incorporated herein by reference.
ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item will be contained in the Company's
definitive Proxy Statement for its 1997 Annual Meeting of Stockholders under the
caption "Certain Transactions," and is incorporated herein by reference.
PART IV
ITEM 14-- EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
No reports on Form 8-K were filed for the three months ended June 30, 1997.
51
<PAGE> 52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
EDUCATION MANAGEMENT CORPORATION
By: /s/ ROBERT B. KNUTSON
------------------------------------
Robert B. Knutson
Chairman and Chief Executive Officer
Date: September 11, 1997
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------- ------------------------------ -------------------
<S> <C> <C>
/s/ ROBERT B. KNUTSON Chairman and September 11, 1997
- ------------------------------------- Chief Executive Officer
Robert B. Knutson and Director
/s/ MIRYAM L. DRUCKER Vice Chairman and Director September 11, 1997
- -------------------------------------
Miryam L. Drucker
/s/ ROBERT T. MCDOWELL Senior Vice President, September 11, 1997
- ------------------------------------- Chief Financial Officer
Robert T. McDowell and Treasurer
/s/ JAMES J. BURKE, JR. Director September 11, 1997
- -------------------------------------
James J. Burke, Jr.
/s/ ALBERT GREENSTONE Director September 11, 1997
- -------------------------------------
Albert Greenstone
/s/ ROBERT H. ATWELL Director September 11, 1997
- -------------------------------------
Robert H. Atwell
/s/ WILLIAM M. CAMPBELL, III Director September 29, 1997
- -------------------------------------
William M. Campbell, III
/s/ JAMES S. PASMAN, JR. Director September 11, 1997
- -------------------------------------
James S. Pasman, Jr.
</TABLE>
52
<PAGE> 53
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT SEQUENTIAL PAGE NUMBER
- ------ ----------------------------------------------------- ---------------------------
<S> <C> <C>
3.01 Amended and Restated Articles of Incorporation
3.02 Articles of Amendment filed on February 4, 1997
3.03 Restated By-laws
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, 1996,
between Education Management Corporation and Mellon
Bank, N.A.
10.01 Education Management Corporation Employee Stock Incorporated herein by
Ownership Plan reference to Exhibit 10.01
to the Form S-1
10.02 First Amendment to Education Management Corporation Incorporated herein by
Employee Stock Ownership Plan reference 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 Education Incorporated herein by
Management Corporation Employee Stock Ownership Plan reference to Exhibit 10.03
to the Form S-1
10.04 Third Amendment to Amended and Restated Education Incorporated herein by
Management Corporation Employee Stock Ownership Plan reference to Exhibit 10.04
to Amendment No. 1
10.05 Education Management Corporation Management Incentive Incorporated herein by
Stock Option Plan, effective November 11, 1993 reference to Exhibit 10.05
to the Form S-1
10.06 EMC Holdings, Inc. Management Incentive Stock Option Incorporated herein by
Plan, effective July 1, 1990 reference to Exhibit 10.06
to Amendment No. 1
10.07 Form of Management Incentive Stock Option Agreement, Incorporated herein by
dated various dates, between EMC Holdings, Inc. and reference to Exhibit 10.07
various management employees to Amendment No. 1
10.08 Form of Amendment to Management Incentive Stock Incorporated herein by
Option Agreement, dated January 19, 1995, among reference to Exhibit 10.08
Education Management Corporation and various to Amendment No. 1
management employees
10.09 Education Management Corporation Retirement Plan Incorporated herein by
reference to Exhibit 10.09
to Amendment No. 1
10.10 Education Management Corporation Deferred Incorporated herein by
Compensation Plan reference to Exhibit 10.11
to the Form S-1
</TABLE>
<PAGE> 54
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT SEQUENTIAL PAGE NUMBER
- ------ ----------------------------------------------------- ---------------------------
<S> <C> <C>
10.11 1996 Employee Stock Purchase Plan Incorporated herein by
reference to Exhibit 10.12
to Amendment No. 1
10.12 Education Management Corporation 1996 Stock Incentive Incorporated herein by
Plan reference to Exhibit 10.13
to Amendment No. 1
10.13 Second Amended and Restated Employment Agreement of Incorporated herein by
Robert B. Knutson, dated August 15, 1996, between reference to Exhibit 10.15
Robert B. Knutson and Education Management to the Form S-1
Corporation
10.14 Employment Agreement, dated June 1, 1996, between Incorporated herein by
Albert Greenstone and Education Management reference to Exhibit 10.16
Corporation to the Form S-1
10.15 Form of EMC-Art Institutes International, Inc. Incorporated herein by
Director's and/or Officer's Indemnification Agreement reference to Exhibit 10.17
to the Form S-1
10.16 Agreement and Lease, dated September 1, 1978, between Incorporated herein by
Stabile & Associates and Education Management reference to Exhibit 10.18
Corporation to Amendment No. 1
10.17 Amendment to Agreement and Lease, dated March 1, Incorporated herein by
1980, between Stabile & Associates and Education reference to Exhibit 10.19
Management Corporation to Amendment No. 1
10.18 Renewal Option Letter Agreement dated November 21, Incorporated herein by
1984, between Stabile & Associates and Education reference to Exhibit 10.20
Management Corporation to Amendment No. 1
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 Incorporated herein by
16, 1995, among Education Management Corporation, reference to Exhibit 4.16
certain banks and PNC Bank, National Association to Amendment No. 1
10.21 First Amendment to Amended and Restated Credit Incorporated herein by
Agreement, dated October 13, 1995, among Education reference to Exhibit 4.17
Management Corporation, certain banks and PNC Bank, to the Form S-1
National Association
10.22 Second Amendment to Amended and Restated Credit Incorporated herein by
Agreement, dated July 31, 1996, among Education reference to Exhibit 4.18
Management Corporation, certain banks and PNC Bank, to Amendment No. 1
National Association
</TABLE>
<PAGE> 55
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT SEQUENTIAL PAGE NUMBER
- ------ ----------------------------------------------------- ---------------------------
<S> <C> <C>
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, Incorporated herein by
1996, between Education Management Corporation and reference to Exhibit 4.22
William M. Webster, IV to the Form S-1
10.25 Letter Agreement, dated August 9, 1996, between Incorporated herein by
Education Management Corporation Employee Stock reference to Exhibit 4.23
Ownership Trust and Education Management Corporation to Amendment No. 1
10.26 Form of Common Stock Subscription and Repurchase Incorporated herein by
Agreement, dated various dates, between Education reference to Exhibit 4.11
Management Corporation and various stock purchasers to Amendment No. 1
10.27 Form of Amendment No. 1 to Common Stock Subscription Incorporated herein by
and Repurchase Agreement, dated January 1, 1996, reference to Exhibit 4.12
between Education Management Corporation and certain to Amendment No. 1
management stockholders
10.28 Form of Common Stock Subscription and Repurchase Incorporated herein by
Agreement, dated various dates, between Education reference to Exhibit 4.13
Management Corporation and certain management to Amendment No. 1
stockholders (this looks like the same as 4.04, but
it was repeated in the S-1)
10.29 Amendment No. 1 to Common Stock Subscription and Incorporated herein by
Repurchase Agreement, dated January 19, 1995, between reference to Exhibit 4.14
Education Management Corporation and certain to Amendment No. 1
management stockholders
10.30 Amendment No. 2 to Common Stock Subscription and Incorporated herein by
Repurchase Agreement, dated January 1, 1996, between reference to Exhibit 4.15
Education Management Corporation and certain to Amendment No. 1
management stockholders
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
27.01 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 3.01
Microfilm Number _________ Filed with the Department of State on _________
Entity Number ____________ _____________________________________
Secretary of the Commonwealth
ARTICLES OF AMENDMENT - DOMESTIC BUSINESS CORPORATION
DSCB:15-1915 (Rev 90)
In compliance with the requirements of 15 Pa.C.S. Section 1915
(relating to articles of amendment), the undersigned business corporation,
desiring to amend its Articles, hereby states that:
1. The name of the corporation is: Education Management Corporation
2. The address of this corporation's current (a) registered office in
this Commonwealth or (b) commercial registered office provider and the
county of venue is (the Department is hereby authorized to correct the
following address to conform to the records of the Department):
(a) 300 Sixth Ave., Pittsburgh, PA 15222, Allegheny
----------------------------------------------------
Number and Street City State Zip County
(b)___________________________________________________________________
Name of Commercial Registered Office Provider
For a corporation represented by a commercial registered office
provider, the county in (b) shall be deemed the county in which the
corporation is located for venue and official publication purposes.
3. The statute by or under which it was incorporated is: Pennsylvania
Business Corporation Law of 1988.
4. The date of its incorporation is: May 16, 1962.
5. (Check, and if appropriate complete, one of the following):
_X_ The amendment shall be effective upon filing these Articles of
Amendment in the Department of State.
___ The amendment shall be effective on:
-1-
<PAGE> 2
6. (Check one of the following):
_X_ The amendment was adopted by the shareholders pursuant to 15
Pa.C.S. Section 1914(a) and (b).
___ The amendment was adopted by the board of directors pursuant to
15 Pa.C.S. Section 1914(c).
7. (Check and if appropriate complete, one of the following):
___ The amendment adopted by the corporation, set forth in full, is
as follows:
_X_ The amendment adopted by the corporation as set forth in full in
Exhibit A, attached hereto and made a part hereof.
8. (Check if the amendment restates the articles)
_X_ The restated articles of incorporation supersede the original
articles and all amendments thereto.
IN TESTIMONY WHEREOF, the undersigned corporation has caused these
articles of amendment to be signed by a duly authorized officer thereof this
29th day of October, 1996.
EDUCATION MANAGEMENT CORPORATION
(Name of Corporation)
/s/ William M. Webster, IV
----------------------------
(Signature)
By: William M. Webster, IV
Title: Executive Vice President
-2-
<PAGE> 3
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
EDUCATION MANAGEMENT CORPORATION
FIRST: The name of the Corporation is:
EDUCATION MANAGEMENT CORPORATION.
SECOND: The location and post office address of the registered office of the
Corporation in this Commonwealth is 300 Sixth Avenue, Pittsburgh, PA 15222,
Allegheny County.
THIRD: The Corporation is incorporated under the Business Corporation Law of
1988.
FOURTH: The term for which the Corporation is to exist is perpetual.
FIFTH: A. Authorized Shares
The aggregate number of shares which the Corporation shall have
authority to issue is Seventy Million (70,000,000) shares, as follows:
1. Sixty Million (60,000,000) shares of Common Stock, with a par
value of one cent ($.01) per share.
Except for and subject to those rights as may be expressly granted
to the holders of Preferred Stock pursuant to the authority vested by
these Articles of Incorporation in the Board of Directors of the
Corporation, or except as may be provided by the laws of the
Commonwealth of Pennsylvania, the holders of Common Stock shall have
exclusively all rights of shareholders.
2. Ten Million (10,000,000) shares of Preferred Stock, with a par
value of one cent ($.01) per share.
B. Authority is hereby expressly vested in the Board of Directors of
the Corporation at any time and from time to time by resolution to divide into
and issue the Preferred Stock in one or more classes or series, or both, and to
determine for any such class or series its designation and the number of shares
of the class or series and the voting rights, preferences, limitations and
special rights, if any, of the shares of the class or series.
-3-
<PAGE> 4
SIXTH: The directors of the Corporation shall be divided into three classes:
Class I, Class II and Class III. Each class shall consist, as nearly as may be
possible, of one-third of the whole number of the Board of Directors. The
initial Class I, II and III directors shall be those elected and designated to
serve as such directors at the meeting of shareholders to held approve the
Articles of Amendment dated as of October 24, 1996 (the "Shareholders
Meeting"), such Class I directors shall hold office for a term to expire at the
first annual meeting of the shareholders after the Shareholders Meeting; such
Class II directors shall hold office for a term to expire at the second annual
meeting of the shareholders after the Shareholders Meeting; and such Class III
directors shall hold office for a term to expire at the third annual meeting of
the shareholders after the Shareholders Meeting, and in the case of each class,
until their respective successors are duly elected and qualified. At each
annual election the directors elected to succeed those whose terms expire shall
be identified as being of the same class as the directors they succeed and
shall be elected to hold office for a term to expire at the third annual
meeting of the shareholders after their election, and until their respective
successors are duly elected and qualified. If the number of directors is
changed, any increase or decrease in directors shall be apportioned among the
classes so as to maintain all classes as equal in number as possible, and any
additional director elected to any class shall hold office for a term which
shall coincide with the terms of the other directors in such class and until
his successor is duly elected and qualified.
Subject to the rights of holders of any series of Preferred Stock then
outstanding, in the case of any increase in the number of directors of the
Corporation the additional director or directors shall be elected by the Board
of Directors. No decrease in the number of directors of the Corporation shall
shorten the term of any incumbent director.
The entire Board of Directors, or any class of the Board of Directors,
or any individual director may be removed from office by vote of the
shareholders entitled to vote thereon only for cause. In case the Board of
Directors or a class of the Board of Directors or any one or more directors are
so removed, new directors may be elected at the same meeting. The repeal of a
provision of these Articles or the Bylaws of the Corporation prohibiting, or
the addition of a provision to these Articles or the Bylaws of the Corporation
permitting, the removal by the shareholders of the Board of Directors, a class
of the Board of Directors or a director without assigning any cause shall not
apply to any incumbent director during the balance of the term for which he was
elected.
SEVENTH: The shareholders of the Corporation shall not have the right to
cumulate their votes for the election of directors of the Corporation.
EIGHTH: Subchapters E, F, G and H of Chapter 25 of the Business Corporation Law
of 1988 shall not be applicable to the Corporation.
-4-
<PAGE> 5
NINTH: The Board of Directors is authorized to adopt, amend or repeal any term
or provision of the Bylaws of the Corporation by a vote of a majority of its
members, subject always to the power of the shareholders to adopt, amend or
repeal the Bylaws of the Corporation by the affirmative vote of the holders of
at least two-thirds of the outstanding shares of Common Stock of the
Corporation.
TENTH: In addition to the requirements of (i) law, and (ii) the other
provisions of these Articles of Incorporation, as amended, the affirmative vote
of the holders of at least two-thirds of the outstanding shares of Common Stock
of the Corporation entitled to vote shall be required to delete, amend or
supplement any term or provision of this Article Ten, Articles Four, Six,
Seven, Eight or Nine, or Subparagraph B of Article Five hereof.
ELEVENTH: Immediately effective upon the filing of the Articles of Amendment
dated as of October 29, 1996 in the Department of State of the Commonwealth of
Pennsylvania (the "Effective Time"), each share of Class A Common Stock, par
value $.0001 per share, and of Class B Common Stock, par value $.0001 per
share, outstanding immediately prior to the Effective Time, and each share of
Class B Common Stock which immediately prior to the Effective Time is held by
the Corporation as treasury stock, automatically and without any action on the
part of the holder thereof shall be reclassified as and converted into one-half
of a share of Common Stock, par value $.01 per share, subject to the treatment
of fractional share interests as described below. Each holder of a certificate
or certificates that immediately prior to the Effective Time represented
outstanding shares of Class A and Class B Common Stock (the "Old Certificates")
will be entitled to receive, upon surrender of such Old Certificates to the
Corporation for cancellation, a certificate or certificates (the "New
Certificate", whether one or more) representing the number of whole shares of
the Common Stock into which and for which the shares of the Class A and Class B
Common Stock formerly represented by such Old Certificates so surrendered are
reclassified under the terms hereof. From and after the Effective Time, Old
Certificates shall represent only the right to receive New Certificates (and,
where applicable, cash in lieu of fractional shares, as provided below)
pursuant to the provisions hereof. No certificates or scrip representing
fractional share interests in Common Stock will be issued, and no such
fractional share interest will entitle the holder thereof to vote, or to any
rights of a shareholder of the Corporation. In lieu of any such fractional
shares of Common Stock, each shareholder with a fractional share will be
entitled to receive, upon surrender of Old Certificates to the Corporation for
cancellation, an amount in cash equal to the fair market value thereof as
determined in good faith by the Board of Directors to be the fair value of one
share of Common Stock as of the Effective Time multiplied by such fraction. If
more than one Old Certificate shall be surrendered at one time for the account
of the same shareholder, the number of full shares of Common Stock for which
New Certificates shall be issued shall be computed on the basis of the
aggregate number of shares represented by the Old
-5-
<PAGE> 6
Certificates so surrendered. In the event that the Corporation determines that
a holder of Old Certificates has not tendered all his certificates for
exchange, the Corporation shall carry forward any fractional share until all
certificates of that holder have been presented for exchange such that payment
for fractional shares to any one person shall not exceed the value of
four-fifths of one share of Common Stock. The Old Certificates surrendered for
exchange shall be properly endorsed and otherwise in proper form for transfer,
and the person or persons requesting such exchange shall affix any requisite
stock transfer tax stamps to the Old Certificates surrendered, or provide funds
for their purchase, or establish to the satisfaction of the Corporation that
such taxes are not payable. From and after the Effective Time the amount of
capital represented by the shares of the Common Stock into which and for which
the shares of the Old Common Stock are reclassified under the terms hereof
shall be an amount equal to the product of the number of issued and outstanding
shares of Common Stock and the One Cent ($.01) par value of each such share.
-6-
<PAGE> 1
EXHIBIT 3.02
Microfilm Number _________ Filed with the Department of State on __________
Entity Number ____________ ________________________________________________
Secretary of the Commonwealth
ARTICLES OF AMENDMENT - DOMESTIC BUSINESS CORPORATION
DSCB:15-1915 (Rev 90)
In compliance with the requirements of 15 Pa.C.S. Section 1915
(relating to articles of amendment), the undersigned business corporation,
desiring to amend its Articles, hereby states that:
1. The name of the corporation is: Education Management Corporation
2. The address of this corporation's current (a) registered office in
this Commonwealth or (b) commercial registered office provider and the
county of venue is (the Department is hereby authorized to correct the
following address to conform to the records of the Department):
(a) 300 6th Avenue Building Pittsburgh PA 15222 Allegheny
---------------------------------------------------------------
Number and Street City State Zip County
(b)_______________________________________________________________
Name of Commercial Registered Office Provider
For a corporation represented by a commercial registered office
provider, the county in (b) shall be deemed the county in which the
corporation is located for venue and official publication purposes.
3. The statute by or under which it was incorporated is: Pennsylvania
Business Corporation Law, Act of May 5, 1933, as amended.
4. The date of its incorporation is: 5/16/62
5. (Check, and if appropriate complete, one of the following):
_X_ The amendment shall be effective upon filing these Articles of
Amendment in the Department of State.
___ The amendment shall be effective on:
6. (Check one of the following):
___ The amendment was adopted by the shareholders pursuant to 15
Pa.C.S. Section 1914(a) and (b).
<PAGE> 2
_X The amendment was adopted by the board of directors pursuant to
15 Pa.C.S. Section 1914(c).
7. (Check and if appropriate complete, one of the following):
___ The amendment adopted by the corporation, set forth in full, is
as follows:
_X_ The amendment adopted by the corporation as set forth in full in
Exhibit A, attached hereto and made a part hereof.
8. (Check if the amendment restates the articles)
___ The restated articles of incorporation supersede the original
articles and all amendments thereto.
IN TESTIMONY WHEREOF, the undersigned corporation has caused these
articles of amendment to be signed by a duly authorized officer thereof this
31st day of January, 1997.
EDUCATION MANAGEMENT CORPORATION
(Name of Corporation)
By: /s/ William M. Webster, IV
--------------------------
(Signature)
Name: William M. Webster, IV
Title: Executive Vice-President
<PAGE> 3
Exhibit A
CERTIFICATE OF DESIGNATIONS
of
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
of
EDUCATION MANAGEMENT CORPORATION
(Pursuant to Section 1522 of the
Pennsylvania Business Corporation Law of 1988)
- - - - - - - - - - - - - - - - - - - - - -
Education Management Corporation, a corporation organized and existing
under the Business Corporation Law of the Commonwealth of Pennsylvania
(hereinafter called the "Corporation"), hereby certifies that the following
resolution was adopted by the Board of Directors of the Corporation as required
by Section 1522 of the Pennsylvania Business Corporation Law of 1988 at a
meeting duly called and held on August 15, 1996
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of this Corporation (hereinafter called the "Board of
Directors" or the "Board") in accordance with the provisions of the Restated
Articles of Incorporation, the Board of Directors hereby creates a series of
Preferred Stock, par value one cent ($0.01) per share, of the Corporation (the
"Preferred Stock") and hereby states the designation and number of shares, and
fixes the relative rights, preferences, and limitations thereof as follows:
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
Section 1. Designation and Amount. The shares of such series shall be
designated as "Series A Junior Participating Preferred Stock" (the "Series A
Preferred Stock") and the number of shares constituting the Series A Preferred
Stock shall be 250,000. Such number of shares may be increased or decreased by
resolution of the Board of Directors; provided, that no decrease shall reduce
the number of shares of Series A Preferred Stock to a number less than the
number of shares then outstanding plus the number of shares reserved for
issuance upon the exercise of outstanding options, rights or warrants or upon
the conversion of any outstanding securities issued by the Corporation
convertible into Series A Preferred Stock.
Section 2. Dividends and Distributions.
<PAGE> 4
(A) Subject to the rights of the holders of any shares of any
series of Preferred Stock (or any similar stock) ranking prior and
superior to the Series A Preferred Stock with respect to dividends,
the holders of shares of Series A Preferred Stock, in preference to
the holders of Common Stock, par value $.01 per share (the "Common
Stock"), of the Corporation, and of any other junior stock, shall be
entitled to receive, when, as and if declared by the Board of
Directors out of funds legally available for the purpose, quarterly
dividends payable in cash on the first day of March, June, September
and December in each year (each such date being referred to herein as
a "Quarterly Dividend Payment Date"), commencing on the first
Quarterly Dividend Payment Date after the first issuance of a share or
fraction of a share of Series A Preferred Stock, in an amount per
share (rounded to the nearest cent) equal to the greater of (a) $1 or
(b) subject to the provision for adjustment hereinafter set forth, 100
times the aggregate per share amount of all cash dividends, and 100
times the aggregate per share amount (payable in kind) of all non-cash
dividends or other distributions, other than a dividend payable in
shares of Common Stock or a subdivision of the outstanding shares of
Common Stock (by reclassification or otherwise), declared on the
Common Stock since the immediately preceding Quarterly Dividend
Payment Date or, with respect to the first Quarterly Dividend Payment
Date, since the first issuance of any share or fraction of a share of
Series A Preferred Stock. In the event the Corporation shall at any
time declare or pay any dividend on the Common Stock payable in shares
of Common Stock, or effect a subdivision or combination or
consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common
Stock, then in each such case the amount to which holders of shares of
Series A Preferred Stock were entitled immediately prior to such event
under clause (b) of the preceding sentence shall be adjusted by
multiplying such amount by a fraction, the numerator of which is the
number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common
Stock that were outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution
on the Series A Preferred Stock as provided in paragraph (A) of this
Section immediately after it declares a dividend or distribution on
the Common Stock (other than a dividend payable in shares of Common
Stock); provided that, in the event no dividend or distribution shall
have been declared on the Common Stock during the period between any
Quarterly Dividend Payment Date and the next subsequent Quarterly
Dividend Payment Date, a dividend of $1 per share on the Series A
Preferred Stock shall nevertheless be payable on such subsequent
Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series A Preferred Stock from the Quarterly
Dividend Payment Date next preceding the date of issue of such shares,
unless the date of issue of such shares is prior to the record date
for the first Quarterly Dividend Payment Date, in which case dividends
on such shares shall begin to accrue from the date of issue of such
shares, or unless the date of issue is a Quarterly Dividend Payment
Date or is a date after the record date for the determination of
holders of shares of Series A Preferred Stock entitled to receive a
quarterly dividend and before such Quarterly Dividend Payment Date, in
either of which events such dividends shall begin to accrue and be
cumulative from such Quarterly Dividend Payment Date. Accrued but
unpaid dividends shall not bear interest. Dividends paid on the shares
<PAGE> 5
of Series A Preferred Stock in an amount less than the total amount of
such dividends at the time accrued and payable on such shares shall be
allocated pro rata on a share-by-share basis among all such shares at
the time outstanding. The Board of Directors may fix a record date for
the determination of holders of shares of Series A Preferred Stock
entitled to receive payment of a dividend or distribution declared
thereon, which record date shall be not more than 60 days prior to the
date fixed for the payment thereof.
Section 3. Voting Rights. The holders of shares of Series A
Preferred Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set
forth, each share of Series A Preferred Stock shall entitle the holder
thereof to 100 votes on all matters submitted to a vote of the
shareholders of the Corporation. In the event the Corporation shall at
any time declare or pay any dividend on the Common Stock payable in
shares of Common Stock, or effect a subdivision or combination or
consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common
Stock, then in each such case the number of votes per share to which
holders of shares of Series A Preferred Stock were entitled
immediately prior to such event shall be adjusted by multiplying such
number by a fraction, the numerator of which is the number of shares
of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(B) Except as otherwise provided herein, in any other
Certificate of Designations creating a series of Preferred Stock or
any similar stock, or by law, the holders of shares of Series A
Preferred Stock and the holders of shares of Common Stock and any
other capital stock of the Corporation having general voting rights
shall vote together as one class on all matters submitted to a vote of
shareholders of the Corporation.
(C) Except as set forth herein, or as otherwise provided by
law, holders of Series A Preferred Stock shall have no special voting
rights and their consent shall not be required (except to the extent
they are entitled to vote with holders of Common Stock as set forth
herein) for taking any corporate action.
Section 4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or
distributions payable on the Series A Preferred Stock as provided in
Section 2 are in arrears, thereafter and until all accrued and unpaid
dividends and distributions, whether or not declared, on shares of
Series A Preferred Stock outstanding shall have been paid in full, the
Corporation shall not:
(i) declare or pay dividends, or make any other
distributions, on any shares of stock ranking junior (either
as to dividends or upon liquidation, dissolution or winding
up) to the Series A Preferred Stock;
<PAGE> 6
(ii) declare or pay dividends, or make any other
distributions, on any shares of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or
winding up) with the Series A Preferred Stock, except
dividends paid ratably on the Series A Preferred Stock and
all such parity stock on which dividends are payable or in
arrears in proportion to the total amounts to which the
holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking junior (either as
to dividends or upon liquidation, dissolution or winding up)
to the Series A Preferred Stock, provided that the
Corporation may at any time redeem, purchase or otherwise
acquire shares of any such junior stock in exchange for
shares of any stock of the Corporation ranking junior (either
as to dividends or upon dissolution, liquidation or winding
up) to the Series A Preferred Stock; or
(iv) redeem or purchase or otherwise acquire for
consideration any shares of Series A Preferred Stock, or any
shares of stock ranking on a parity with the Series A
Preferred Stock, except in accordance with a purchase offer
made in writing or by publication (as determined by the Board
of Directors) to all holders of such shares upon such terms
as the Board of Directors, after consideration of the
respective annual dividend rates and other relative rights
and preferences of the respective series and classes, shall
determine in good faith will result in fair and equitable
treatment among the respective series or classes.
(B) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any
shares of stock of the Corporation unless the Corporation could, under
paragraph (A) of this Section 4, purchase or otherwise acquire such
shares at such time and in such manner.
Section 5. Reacquired Shares. Any shares of Series A Preferred
Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and cancelled promptly after the acquisition
thereof. All such shares shall upon their cancellation become authorized but
unissued shares of Preferred Stock and may be reissued as part of a new series
of Preferred Stock subject to the conditions and restrictions on issuance set
forth herein, in the Certificate of Incorporation, or in any other Certificate
of Designations creating a series of Preferred Stock or any similar stock or as
otherwise required by law.
Section 6. Liquidation, Dissolution or Winding Up. Upon any
liquidation, dissolution or winding up of the Corporation, no distribution shall
be made (1) to the holders of shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Series A
Preferred Stock unless, prior thereto, the holders of shares of Series A
Preferred Stock shall have received $100 per share, plus an amount equal to
accrued and unpaid dividends and distributions thereon, whether or not declared,
to the date of such payment, provided that the holders of shares of Series A
Preferred Stock shall be entitled to receive an aggregate amount per share,
subject to the provision for adjustment hereinafter set forth, equal to 100
times the aggregate amount to be distributed per share to holders of shares of
Common Stock, or (2) to the holders of shares of stock ranking on a parity
(either as to dividends or upon
<PAGE> 7
liquidation, dissolution or winding up) with the Series A Preferred Stock,
except distributions made ratably on the Series A Preferred Stock and all such
parity stock in proportion to the total amounts to which the holders of all
such shares are entitled upon such liquidation, dissolution or winding up. In
the event the Corporation shall at any time declare or pay any dividend on the
Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the aggregate amount to which holders of shares of Series A Preferred
Stock were entitled immediately prior to such event under the proviso in clause
(1) of the preceding sentence shall be adjusted by multiplying such amount by a
fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to
such event.
Section 7. Consolidation, Merger, etc. In case the Corporation
shall enter into any consolidation, merger, combination or other transaction in
which the shares of Common Stock are exchanged for or changed into other stock
or securities, cash and/or any other property, then in any such case each share
of Series A Preferred Stock shall at the same time be similarly exchanged or
changed into an amount per share, subject to the provision for adjustment
hereinafter set forth, equal to 100 times the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the case may
be, into which or for which each share of Common Stock is changed or exchanged.
In the event the Corporation shall at any time declare or pay any dividend on
the Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the amount set forth in the preceding sentence with respect to the
exchange or change of shares of Series A Preferred Stock shall be adjusted by
multiplying such amount by a fraction, the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section 8. No Redemption. The shares of Series A Preferred
Stock shall not be redeemable.
Section 9. Rank. The Series A Preferred Stock shall rank, with
respect to the payment of dividends and the distribution of assets, junior to
all series of any other class of the Corporation's Preferred Stock.
Section 10. Amendment. The Certificate of Incorporation of the
Corporation shall not be amended in any manner which would materially alter or
change the powers, preferences or special rights of the Series A Preferred Stock
so as to affect them adversely without the affirmative vote of the holders of at
least two-thirds of the outstanding shares of Series A Preferred Stock, voting
together as a single class.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 8
IN WITNESS WHEREOF, this Certificate of Designations is executed on
behalf of the Corporation by its Executive Vice-President and attested by its
Secretary this 31st day of January, 1997.
Attest: EDUCATION MANAGEMENT CORPORATION
/s/ Frederick W. Steinberg By: /s/ William M. Webster, IV
- -------------------------- --------------------------------
Frederick W. Steinberg William M. Webster, IV
Title: Executive Vice-President
<PAGE> 1
EXHIBIT 3.03
RESTATED BYLAWS
OF
EDUCATION MANAGEMENT CORPORATION
Adopted: August 15, 1996
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RESTATED BY-LAWS
OF
EDUCATION MANAGEMENT CORPORATION
TABLE OF CONTENTS
PAGE
ARTICLE I MEETING OF SHAREHOLDERS
Section 1.1 Annual Meeting 1
Section 1.2 Special Meetings 1
Section 1.3 Place of Meetings 1
Section 1.4 Notice of Meetings 1
Section 1.5 Quorum; Adjournments 1
Section 1.6 Advance Notice of Shareholder Proposals 2
Section 1.7 Advance Notice of Shareholder Nominations 3
Section 1.8 Voting 4
Section 1.10 Informal Action 4
Section 1.11 Presence at Meetings 5
ARTICLE II DIRECTORS
Section 2.1 Number, Qualifications, Election
and Term of Office 5
Section 2.2 Vacancies 6
Section 2.3 Removal of Directors 6
Section 2.4 Annual Meeting; Other Regular Meetings 6
Section 2.5 Special Meetings 7
Section 2.6 Quorum 7
Section 2.7 Powers of Directors 7
Section 2.8 Informal Action 7
Section 2.9 Telephone Participation in Meetings 7
Section 2.10 Compensation of Directors 7
ARTICLE III COMMITTEES OF DIRECTORS
Section 3.1 Appointment and Powers 8
Section 3.2 Appointment by Committees of Substitute Members 8
Section 3.3 Procedure 8
Section 3.4 Telephone Participation in Meetings 9
Section 3.5 Informal Action 9
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ARTICLE IV OFFICERS PAGE
Section 4.1 Enumeration 9
Section 4.2 Chairman 9
Section 4.3 Chief Executive Officer 9
Section 4.4 President 10
Section 4.5 Vice President 10
Section 4.6 Secretary 10
Section 4.7 Treasurer 10
Section 4.8 Other Officers 11
Section 4.9 Compensation 11
Section 4.10 Additional Duties of Officers 11
ARTICLE V STOCK
Section 5.1 Issuance of Stock 11
Section 5.2 Certificate of Stock 11
Section 5.3 Transfer of Stock 12
Section 5.4 Lost, Stolen, Destroyed or
Mutilated Certificates 12
Section 5.5 Regulations 12
Section 5.6 Holders of Record 12
Section 5.7 Record Date 12
Section 5.8 Restriction on Transfer Rights 13
ARTICLE VI LIABILITY OF DIRECTORS
Section 6.1 Directors' Personal Liability 13
Section 6.2 Preservation of Rights 13
ARTICLE VII INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 7.1 Mandatory Indemnification of Directors and Officers 14
Section 7.2 Mandatory Advancement of Expenses
to Directors and Officers 15
Section 7.3 Permissive Indemnification and Advancement of Expenses 16
Section 7.4 Enforcement 16
Section 7.5 General 17
Section 7.6 Definition of Corporation 17
Section 7.7 Definition of Authorized Representative 17
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PAGE
Section 7.8 Savings Clause 18
Section 7.9 Insurance 18
Section 7.10 Funding to Meet Indemnification Obligations 18
ARTICLE VIII GENERAL PROVISIONS
Section 8.1 Corporate Seal 18
Section 8.2 Fiscal Year 18
Section 8.3 Authorization 19
Section 8.4 Inapplicability of Subchapter 25E 19
Section 8.5 Inapplicability of Subchapter 25F 19
Section 8.6 Inapplicability of Subchapter 25G 19
Section 8.7 Inapplicability of Subchapter 25H 19
ARTICLE IX AMENDMENTS 19
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RESTATED BYLAWS
OF
EDUCATION MANAGEMENT CORPORATION
ARTICLE I
MEETING OF SHAREHOLDERS
Section 1.1 Annual Meeting. An annual meeting of the
shareholders for the election of directors and the transaction of such other
business as may properly come before the same shall be held on the ____ day of
November of each year, at 10:00 a.m., prevailing time, or at such other date
and time as shall be designated by the Board of Directors. If the day fixed for
the meeting falls on a Saturday or Sunday, or is a legal holiday, the meeting
shall be held at the same hour on the next succeeding full business day or as
soon thereafter as practicable.
Section 1.2 Special Meetings. Special meetings may be called
only by the Chairman, the Chief Executive Officer, the President, or a majority
of the directors in office. The only business to be transacted at a special
meeting of shareholders shall be the business stated in the notice provided
pursuant to Section 1.4 of these Bylaws.
Section 1.3 Place of Meetings. Meetings of the shareholders
shall be held at the registered office of the Corporation, or at such other
place within or without the Commonwealth of Pennsylvania as shall be fixed by
the Board of Directors or the person or persons calling the meeting.
Section 1.4 Notice of Meetings. A written notice stating the
place, day and hour of any meeting and, in the case of a special meeting, the
purpose or purposes for which the meeting is called shall be given by, or at
the direction of, the Secretary, to each shareholder of record entitled to vote
at such meeting, at such address as appears upon the records of the
Corporation, at least twenty (20) days before the day named for the meeting if
written notice is given by bulk mail or five (5) days before the day named for
the meeting if written notice is given by first class or express mail, postage
prepaid, or by telegram, telex or TWX (with answerback received), unless a
greater period of time is required by law in a particular case.
Section 1.5 Quorum; Adjournments. The presence, in person or
by proxy, of the majority of the outstanding shares entitled to vote shall
constitute a quorum. The shareholders present at a duly authorized meeting can
continue to do business until adjournment, notwithstanding the withdrawal of
enough shareholders to leave less than a quorum. If a meeting cannot be
organized because a quorum has not attended, those present may, except as
otherwise provided by statute, adjourn the meeting to such time and place as
they may determine, but in the
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case of any meeting called for the election of directors, those who attend the
second of such adjourned meetings, although less than a quorum, shall
nevertheless constitute a quorum for the purpose of electing the directors.
When a meeting is adjourned, it shall not be necessary to give any notice of
the adjourned meeting or of the business to be transacted at an adjourned
meeting other than the announcement at the meeting at which such adjournment is
taken. If after the adjournment a new record date is fixed for the adjourned
meeting, a notice of the adjourned meeting shall be given to each shareholder
of record entitled to vote at the meeting.
Section 1.6 Advance Notice of Shareholder Proposals. At any
annual meeting of shareholders, only such business shall be conducted as shall
have been brought before the meeting (i) by or at the direction of the Board of
Directors or (ii) by any shareholder of the Corporation who complies with the
notice procedure set forth in this Section 1.6. For business to be properly
brought before any annual meeting of the shareholders by a shareholder, the
shareholder must be entitled by Pennsylvania law to present such business and
such shareholder must have given timely notice of such shareholder's intent to
make such presentation. To be timely, a shareholder's notice must have been
received by the Secretary of the Corporation not less than 60 nor more than 90
days in advance of the first anniversary of the previous year's annual meeting;
provided, however, that in the event that the date of the annual meeting is
changed by more than 30 days from such anniversary date, notice by the
shareholder to be timely must have been received no later than the close of
business on the 5th day following the day on which public announcement of the
date of such meeting is first made. Each such notice shall set forth: (i) a
brief description of each item of business desired to be brought before the
meeting and the reasons for conducting such business at the meeting; (ii) the
name and address, as they appear on the Corporation's books, of the shareholder
proposing such business; (iii) a representation by the shareholder proposing
such business that such shareholder will be a holder of record of shares of the
Corporation entitled to vote at such meeting and intends to appear in person or
by proxy at the meeting; (iv) the class and number of shares of the Corporation
that are beneficially owned by the shareholder; and (v) as to each item of
business the shareholder proposes to bring before the meeting, any material
interest of the shareholder in such business. In addition, the shareholder
making such proposal shall promptly provide any other information reasonably
requested by the Corporation.
Only such business shall be conducted at any annual meeting
of shareholders as shall have been brought before such meeting in accordance
with the requirements set forth in these Bylaws. Notwithstanding the foregoing
provisions of this Section 1.6, a shareholder shall also comply with all
applicable requirements of the Securities Exchange Act of 1934, as amended, and
the rules and regulations thereunder with respect to the matters set forth in
these Bylaws. Nothing in these Bylaws shall be deemed to affect any rights of
any shareholder to request inclusion of a proposal in the Corporation's proxy
statement pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Except as otherwise required by law, the chairman
of any annual meeting of shareholders shall have the power and duty (x) to
determine whether any business proposed to be brought before the meeting was
brought in accordance with the requirements set forth in these Bylaws and (y)
if any proposed
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business was not brought in compliance with these Bylaws to declare that such
defective proposal shall be disregarded. For purposes of Sections 1.6 and 1.7
of these Bylaws, "public announcement" shall mean disclosure in a press release
reported by the Dow Jones News Service, the Associated Press or any comparable
national news service or in a document publicly filed by the Corporation with
the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of
the Exchange Act.
Section 1.7 Advance Notice of Shareholder Nominations.
Nominations for the election of directors may be made by the Board of Directors
or by any shareholder entitled to vote generally in the election of directors;
provided, however, that a shareholder may nominate a person for election as a
director at a meeting only if timely notice of such shareholder's intent to
make such nomination has been given to the Secretary of the Corporation. To be
timely, a shareholder's notice must have been received by the Secretary of the
Corporation (a) in the case of an annual meeting, not less than 60 nor more
than 90 days in advance of the first anniversary of the previous year's annual
meeting; provided, however, that in the event that the date of the annual
meeting is changed by more than 30 days from such anniversary date, notice by
the shareholder to be timely must have been received no later than the close of
business on the fifth day following the date on which public announcement of
the date of such meeting is first made; and (b) in the case of a special
meeting at which directors are to be elected, not later than the close of
business on the fifth day following such public announcement. Each such notice
shall set forth: (i) the name and address, as they appear on the Corporation's
books, of the shareholder who intends to make the nomination and the name(s)
and address list of the person or persons to be nominated; (ii) a
representation that the holder will be a holder of record of shares of the
Corporation entitled to vote at such meeting and intends to appear in person or
by proxy at the meeting and nominate the person or persons specified in the
notice; (iii) the class and number of shares of the Corporation that are
beneficially owned by the shareholder; (iv) a description of all arrangements
or understandings between the shareholder and each nominee and any other person
or persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by the shareholder; (v) such other information
regarding each nominee proposed by such shareholder as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission had the nominee been nominated, or intended
to be nominated, by the Board of Directors; and (vi) the consent of each
nominee to serve as a director of the Corporation, if so elected. In addition,
the shareholder making such nomination shall promptly provide any other
information reasonably requested by the Corporation. Notwithstanding anything
in these Bylaws to the contrary, no person shall be eligible for election as a
director of the Corporation unless nominated in accordance with the procedures
set forth in this Section 1.7. Notwithstanding the foregoing provisions of
these Bylaws, a shareholder shall also comply with all applicable requirements
of the Securities Exchange Act of 1934, as amended, and the rules and
regulations thereunder with respect to the matters set forth in these Bylaws.
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<PAGE> 8
Except as otherwise required by law, the chairman of any
meeting of shareholders shall have the power and duty (x) to determine whether
a nomination was made in accordance with the requirements set forth in these
Bylaws and (y) if any proposed nomination was not made in compliance with these
Bylaws, to declare that such defective nomination shall be disregarded.
Section 1.8 Voting. Except as otherwise provided by law or
the Articles of Incorporation, every shareholder of record shall have the right
at every shareholders' meeting to one (1) vote for every share standing in his
or her name on the books of the Corporation. A majority of the votes cast shall
decide every question or matter submitted to the shareholders unless otherwise
provided by law or the Articles of Incorporation. The vote upon any matter
submitted to the shareholders may be taken viva voce; provided, however, that
the vote upon any question shall be by ballot if demand for the same is made by
any shareholder or is directed by the chairman of the meeting.
Section 1.9 Informal Action. Whenever the vote of the
shareholders at a meeting thereof is required or permitted to be taken in
connection with any corporate action by any provision of law or of the Articles
of Incorporation, the meeting, notice and vote of shareholders may be dispensed
with, if a consent in writing, setting forth the action so taken, shall be
signed by the holders of all the outstanding shares, prior or subsequent to
such corporate action, and filed with the Secretary of the Corporation.
Section 1.10 Presence at Meetings. A shareholder may
participate in a meeting of the shareholders only if the shareholder or the
shareholder's duly authorized proxy is physically present in person at the
meeting. A shareholder or a proxy may not participate in a meeting of the
shareholders by means of conference telephone or similar communications
equipment.
ARTICLE II
DIRECTORS
Section 2.1 Number, Qualifications, Election and Term of
Office. The number of directors to manage and control the affairs of the
Corporation shall be as determined by the Board of Directors from time to time,
but shall not be less than three (3). Directors need not be shareholders of the
Corporation or residents of the Commonwealth of Pennsylvania. Directors shall
be elected by the shareholders at the annual meeting or any special meeting
called for such purpose. Each director shall be elected to serve until the next
annual meeting of the shareholders and until his or her successor is duly
elected and qualified.
The directors of the Corporation shall be divided into three
classes: Class I, Class II and Class III. Each class shall consist, as nearly
as may be possible, of one-third of the whole number of the Board of Directors.
The initial Class I, II and III directors shall be those elected
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and designated to serve as such directors at the meeting of shareholders held
to approve the Articles of Amendment dated as of October 24, 1996 (the
"Shareholders Meeting"), such Class I directors shall hold office for a term to
expire at the first annual meeting of the shareholders after the Shareholders
Meeting; such Class II directors shall hold office for a term to expire at the
second annual meeting of the shareholders after the Shareholders Meeting; and
such Class III directors shall hold office for a term to expire at the third
annual meeting of the shareholders after the Shareholders Meeting, and in the
case of each class, until their respective successors are duly elected and
qualified. At each annual election the directors elected to succeed those whose
terms expire shall be identified as being of the same class as the directors
they succeed and shall be elected to hold office for a term to expire at the
third annual meeting of the shareholders after their election, and until their
respective successors are duly elected and qualified. If the number of
directors is changed, any increase or decrease in directors shall be
apportioned among the classes so as to maintain all classes as equal in number
as possible, and any additional director elected to any class shall hold office
for a term which shall coincide with the terms of the other directors in such
class and until his or her successor is duly elected and qualified.
Subject to the rights of holders of any series of Preferred
Stock then outstanding, in the case of any increase in the number of directors
of the Corporation the additional director or directors shall be elected by the
Board of Directors. No decrease in the number of directors of the Corporation
shall shorten the term of any incumbent director.
Section 2.2 Vacancies. Vacancies in the Board of Directors
caused by death, resignation, increase in the number of directors or otherwise
shall be filled by a majority vote of the remaining member or members of the
Board; and each director so elected shall hold office until the next selection
of the class for which such director has been chosen and until his or her
successor is duly elected and qualified.
Section 2.3 Removal of Directors. The entire Board of
Directors, or any class of the Board, or any individual director may be removed
from office by vote of the shareholders entitled to vote thereon only for
cause. In case the Board or a class of the Board or any one or more directors
are so removed, new directors may be elected at the same meeting. The repeal of
a provision of the Articles of Incorporation or these Bylaws prohibiting, or
the addition of a provision to the Articles of Incorporation or these Bylaws
permitting, the removal by the shareholders of the Board, a class of the Board
or a director without assigning any cause shall not apply to any incumbent
director during the balance of the term for which he was elected.
Section 2.4 Annual Meeting; Other Regular Meetings. An annual
meeting of the Board of Directors shall be held each year as soon as
practicable after the annual meeting of shareholders, at the place where such
meeting of shareholders was held or at such other place as the Board of
Directors may determine, for the purposes of organization, election or
appointment of officers and the transaction of such other business as shall
come before the annual meeting. No
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notice of the annual meeting need be given. Other regular meetings of the Board
of Directors shall be held at such times and places as the Board of Directors
may from time to time by resolution appoint; and no notice shall be required to
be given of any such regular meeting. No minimum number of regular meetings and
no more than one annual meeting of the Board of Directors need be called in any
year.
Section 2.5 Special Meetings. Special meetings of the Board
of Directors may be called by the Chairman, the Chief Executive Officer, the
President or a majority of the directors in office, to be held at such time (as
will permit the giving of notice as provided in this Section) and at such place
in the Commonwealth of Pennsylvania or elsewhere as may be designated by the
person or persons calling the meeting. Notice of the place, day and hour of
such special meeting shall be given to each director by the Secretary (i) by
written notice deposited in the United States mail not later than during the
third full business day immediately preceding the day for such meeting, or (ii)
by telephone, telex, facsimile transmission or other oral, written or
electronic means received not later than 24 hours before the meeting. The
notice need not refer to the business to be transacted at the meeting except
action under Article VII of the Bylaws. No minimum number of special meetings
of the Board of Directors need be called in any year.
Section 2.6 Quorum. A majority of the directors in office
shall constitute a quorum for the transaction of business, and actions may be
taken by a majority of the members present at any meeting at which a quorum is
present.
Section 2.7 Powers of Directors. Except as otherwise provided
by statute or the Articles of Incorporation, all powers vested by law in the
Corporation shall be exercised by or under the authority of, and the business
and affairs of the Corporation shall be managed under the direction of, the
Board of Directors.
Section 2.8 Informal Action. Any action which may be taken at
a meeting of the directors may be taken without a meeting, if a consent or
consents in writing setting forth the action so taken shall be signed by all of
the directors in office and filed with the Secretary of the Corporation.
Section 2.9 Telephone Participation in Meetings. Any one or
more directors may participate in a meeting of the Board of Directors by means
of a conference telephone or similar communications equipment by means of which
all persons participating in the meeting can hear each other.
Section 2.10 Compensation of Directors. Each director of the
Corporation who is not a salaried officer or employee of the Corporation or of
a subsidiary of the Corporation, shall receive such compensation (whether in
cash or otherwise) and reimbursement of expenses for serving as a director and
for attendance at meetings of the Board of Directors or any committee appointed
by the Board of Directors as the Board of Directors may from time to time
determine.
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ARTICLE III
COMMITTEES OF DIRECTORS
Section 3.1 Appointment and Powers. The Board of Directors
may, by resolution adopted by a majority of the directors in office, establish
one or more committees, each of which shall consist of one or more of the
directors of the Corporation. To the extent provided in the resolution
establishing any committee, such committee shall have and may exercise all of
the powers and authority of the Board of Directors; provided, however, that no
such committee shall have any power or authority as to the following:
(i) the submission to the shareholders of the Corporation of
any action requiring approval of the shareholders under the Pennsylvania
Business Corporation Law of 1988, as amended;
(ii) the creation or filling of vacancies in the Board of
Directors;
(iii) the adoption, amendment or repeal of the By-laws;
(iv) the amendment or repeal of any resolution of the Board
that by its terms is amendable or repealable only by the Board; or
(v) action on matters committed by the By-laws or resolution
of the Board of Directors to another committee of the Board.
Section 3.2 Appointment by Committees of Substitute Members.
In the absence or disqualification of any member of any such committee, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may by unanimous action
appoint another director to act at the meeting in the place of any such absent
or disqualify member.
Section 3.3 Procedure. The Board of Directors may establish
reasonable rules and regulations for the conduct of the proceedings of any such
committee and may appoint a chairman of the committee who shall be a member
thereof and a secretary of the committee who need not be a member thereof. To
the extent that the Board of Directors shall not exercise such powers, they may
be exercised by the Committee.
Section 3.4 Telephone Participation in Meetings. Any one or
more committee members may participate in a meeting of a committee of the Board
of Directors by means of a
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conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other.
Section 3.5 Informal Action. Any action which may be taken at
a meeting of any such committee may be taken without a meeting, if a consent or
consents in writing setting forth the action so taken shall be signed by all
the members of any such committee and filed with the Secretary of the
Corporation.
ARTICLE IV
OFFICERS
Section 4.1 Enumeration. The officers of the Corporation
shall be elected by the Board of Directors and shall consist of a Chairman, a
Chief Executive Officer, a President, one or more Vice-Presidents, a Secretary,
a Chief Financial Officer, a Treasurer and, in the discretion of the Board of
Directors, such other officers as shall from time to time be chosen and
appointed by the Board of Directors. Any two (2) or more offices may be held by
one (1) person. Every officer of the Corporation shall hold his or her position
at the will of the Board of Directors.
Section 4.2 Chairman. The Chairman shall preside at meetings
of the Board of Directors and meetings of the shareholders, and he shall
perform such other duties and exercise such other powers as the Board of
Directors may from time to time prescribe.
Section 4.3. Chief Executive Officer. The Chief Executive
Officer shall have general charge and control over the affairs of the
Corporation, subject to the Board of Directors. The Chief Executive Officer
shall sign certificates for shares of capital stock of the Corporation and may,
together with the Secretary, execute on behalf of the Corporation any contract
which has been authorized by the Board of Directors. In the absence of the
Chairman, the Chief Executive Officer shall preside at meetings of the
shareholders. In the absence of the President or if the Board of Directors has
not appointed a person holding the title of "President," the Chief Executive
Officer shall also perform the duties and exercise the powers of president
within the meaning of the Business Corporation Law of 1988.
Section 4.4 President. In the absence of the Chief Executive
Officer or if the Board of Directors has not appointed a person holding the
title of "Chief Executive Officer," the President shall perform the duties and
exercise the powers of chief executive officer, and shall report to the Board
of Directors. The President shall perform such other duties and have such other
powers as the Board of Directors may from time to time prescribe.
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Section 4.5 Vice President. The Vice President, or, if there
shall be more than one, the Vice Presidents, in the order determined by the
Board of Directors, shall, in the absence or disability of the President,
perform the duties and exercise the powers of the President and shall perform
such other duties and have such other powers as the Board of Directors may from
time to time prescribe.
Section 4.6 Secretary. The Secretary shall keep a record of
the minutes of the proceedings of meetings of shareholders and directors and
shall give notice as required by statute or these Bylaws of all such meetings.
The Secretary shall have custody of the seal of the Corporation and of all the
books, records and papers of the Corporation, except such as shall be in the
charge of the Treasurer or of some other person authorized to have custody and
be in possession thereof by resolution of the Board of Directors. The Secretary
shall sign certificates for shares of the capital stock of the Corporation. The
Secretary may, together with the Chief Executive Officer, execute on behalf of
the Corporation any contract which has been authorized by the Board of
Directors.
Section 4.7 Treasurer. The Treasurer shall keep accounts of
all moneys of the Corporation received and disbursed, and shall deposit all
moneys and valuables of this Corporation in its name and to its credit in such
banks and depositories as the Board of Directors shall designate. In the
absence of the Treasurer or if the Board of Directors has not appointed a
person holding the title of "Treasurer," the chief financial officer of the
Corporation shall perform the duties and exercise the powers of treasurer
within the meaning of the Business Corporation Law of 1988. The Treasurer shall
perform such other duties and have such other powers as the Board of Directors
may from time to time prescribe.
Section 4.8 Other Officers. The duties and powers of other
officers who may from time to time be chosen by the Board of Directors shall be
as specified by the Board of Directors at the time of the appointment of such
other officers.
Section 4.9 Compensation. The salaries and other compensation
(whether cash or otherwise) of all officers listed in Sections 4.2 through 4.8
of this Article shall be fixed by, or pursuant to authority delegated by, the
Board of Directors.
Section 4.10 Additional Duties of Officers. The Board of
Directors may from time to time by resolution increase or decrease the duties
and powers of the Chairman, the Chief Executive Officer, the President, one or
more Vice-Presidents, the Secretary, the Chief Financial Officer, the
Treasurer, or any other officer.
ARTICLE V
STOCK
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Section 5.1 Issuance of Stock. Shares of capital stock of any
class now or hereafter authorized, securities convertible into such shares or
options or other rights to purchase such shares or securities may be issued or
granted only in accordance with the authority granted by the Board of
Directors.
Section 5.2 Certificate of Stock. Certificates for shares of
the capital stock of the Corporation shall be in the form adopted by the Board
of Directors, shall be signed by the Chief Executive Officer or the President
and the Secretary or an Assistant Secretary, and shall be sealed with the seal
of the Corporation. Where any such certificate is signed by a registrar other
than the Corporation or its employee, the signatures thereon of any officer of
the Corporation and, where authorized by the Board of Directors, any transfer
agent, may be facsimiles. All such certificates shall be numbered
consecutively; and the name of the person owning the shares and the date of
issue shall be stated on each certificate and entered on the books of the
Corporation. In case any officer, transfer agent or registrar who has executed,
by facsimile or otherwise, any share certificate shall have ceased to be such
officer, transfer agent or registrar by reason of death, resignation or
otherwise, before the certificate is issued, it may be issued by the
Corporation with the same effect as if the officer, transfer agent or registrar
had not ceased to be such at the date of its issue.
Section 5.3 Transfer of Stock. Shares of capital stock of the
Corporation shall be transferred only on the books of the Corporation by the
holder thereof in person or by his or her duly authorized attorney. All stock
certificates transferred by endorsement thereon shall be surrendered for
cancellation and new certificates issued to the transferee.
Section 5.4 Lost, Stolen, Destroyed or Mutilated
Certificates. New certificates of stock may be issued to replace certificates
of stock lost, stolen, destroyed or mutilated, upon such terms and conditions,
including proof of loss or destruction, and, if appropriate, the giving of a
satisfactory bond of indemnity, as the Board of Directors or as one or more of
the officers of the Corporation, as delegated to by the Board of Directors, may
determine from time to time.
Section 5.5 Regulations. The Board of Directors shall have
power and authority to make all such rules and regulations not inconsistent
with these Bylaws as it may deem expedient concerning the issue, transfer and
registration of certificates of stock of the Corporation. The Board of
Directors may appoint one or more transfer agents or assistant transfer agents
and one or more registrars of transfers, and may require all stock certificates
to bear the signature of a transfer agent or assistant transfer agent and a
registrar of transfers. The Board of Directors may at any time terminate the
appointment of any transfer agent or any assistant transfer agent or any
registrar of transfers.
Section 5.6 Holders of Record. The Corporation shall be
entitled to treat the holder of record of any stock of the Corporation as the
holder and owner in fact thereof for all purposes and shall not be bound to
recognize any equitable or other claim to, or right, title or
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interest in, such stock on the part of any other person, whether or not it
shall have express or other notice thereof, except as otherwise provided by
law.
Section 5.7 Record Date. The Board of Directors may fix a
time prior to the date of any meeting of shareholders as a record date for the
determination of the shareholders entitled to notice of, or to vote at, the
meeting, which time, except in the case of an adjourned meeting, shall be not
more than 90 days prior to the date of the meeting of shareholders. Only
shareholders of record on the date fixed shall be so entitled notwithstanding
any transfer of shares on the books of the Company after any record date fixed
as provided herein. The Board of Directors may similarly fix a record date for
the determination of shareholders of record for any other purpose. When a
determination of shareholders of record has been made as provided herein for
purposes of a meeting, the determination shall apply to any adjournment thereof
unless the Board fixes a new record date for the adjourned meeting. If a record
date is not fixed by the Board of Directors: (i) the record date for
determining shareholders entitled to notice of or to vote at a meeting of the
shareholders shall be at the close of business on the day next preceding the
day on which notice is given or, if notice is waived, at the close of business
on the day immediately preceding the day on which the meeting is held; and (ii)
the record date for determining shareholders entitled to express consent or
dissent to corporate action in writing without a meeting, when prior action by
the Board of Directors is not necessary, shall be the close of business on the
day on which the first written consent or dissent is filed with the Secretary
of the Corporation.
Section 5.8 Restriction on Transfer Rights. Rights issued
pursuant to the Rights Agreement, dated October 1, 1996, between the Corporation
and the [Rights Agent], as the same may be amended from time to time (the
"Rights Agreement") may be transferred by an Acquiring Person or an Associate
or Affiliate of any such Person (as such terms are defined in the Rights
Agreement) only in accordance with the terms of, and subject to the
restrictions contained in, the Rights Agreement.
ARTICLE VI
LIABILITY OF DIRECTORS
Section 6.1 Directors' Personal Liability. A director of the
Corporation shall not be personally liable for monetary damages for any action
taken, or any failure to take any action; provided, however, that this
provision shall not eliminate or limit the liability of a director to the
extent that such elimination or limitation of liability is expressly prohibited
by the Business Corporation Law of 1988 or any successor statute as in effect
at the time of the alleged action or failure to take action by such director.
Section 6.2 Preservation of Rights. Any repeal or
modification of this Article shall not adversely affect any right or protection
existing at the time of such repeal or
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<PAGE> 16
modification to which any director or former director may be entitled under
this Article. The rights conferred by this Article shall continue as to any
person who has ceased to be a director of the Corporation and shall inure to
the benefit of the heirs, executors and administrators of such person.
ARTICLE VII
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 7.1 Mandatory Indemnification of Directors and
Officers.
(A) The Corporation shall promptly indemnify, to the fullest
extent now or hereafter permitted by law and by Section 7.1(B) hereof, each
director or officer (including each former director or officer) (an
"indemnitee") of the Corporation who was or is made a party to or a witness in
or is threatened to be made a party to or a witness in, any threatened, pending
or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative and whether external or internal to the
Corporation (a "proceeding"), by reason of the fact that the indemnitee is or
was an authorized representative of the Corporation, against all expenses
(including attorneys' fees, disbursements and other charges), judgments, fines
(including excise taxes and penalties) and amounts paid in settlement actually
and reasonably incurred by the indemnitee in connection with such proceeding.
(B) Indemnification pursuant to this Section 7.1 shall
include but shall not be limited to cases in which indemnification is permitted
pursuant to the provisions of Chapter 17, Subchapter D, of the Business
Corporation Law of 1988. Indemnification pursuant to this Section 7.1 shall be
made in every case described in Section 7.1(A) hereof except:
(i) in connection with a proceeding (or any claim, issue or
matter therein or any part thereof) initiated by the indemnitee,
unless such initiation was authorized by the Board of Directors of the
Corporation; or
(ii) with respect to any act that is established, by a final,
unappealable adjudication adverse to the indemnitee, as having been
material to the cause of action so adjudicated and as having
constituted either willful misconduct or recklessness; or
(iii) with respect to any benefit or advantage gained by the
indemnitee to which the indemnitee was not legally entitled; or
(iv) in connection with a proceeding by or for the benefit of
the Corporation to recover any profit pursuant to the provisions of
section 16(b) of the Securities Exchange
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<PAGE> 17
Act of 1934 and regulations thereunder or similar provisions of any
applicable state law; or
(v) to the extent that the indemnitee actually receives
payment under any policy of insurance or is otherwise reimbursed.
(C) Notwithstanding the foregoing provisions of this Section
7.1, to the extent that an indemnitee is successful on the merits or otherwise
in defense of any proceeding or any part thereof or in defense of any claim,
issue or matter therein, including but not limited to obtaining a dismissal
without prejudice or a settlement without admission of liability, the
indemnitee shall be promptly indemnified by the Corporation against expenses
(including attorneys' fees, disbursements and other charges) actually and
reasonably incurred by the indemnitee in connection therewith.
(D) The right of indemnification pursuant to this Section 7.1
is conferred in order to attract and retain the services of highly qualified
directors and officers and to encourage them to make corporate decisions
without fear of strike suits and legal harassment. Indemnification pursuant to
this Section 7.1 is therefore declared to be consistent with the fiduciary duty
of the Corporation's Board of Directors. Except as specifically provided in
this Section 7.1, such indemnification shall be made by the Corporation without
any requirement that any determination be made or any action be taken by the
Board of Directors, shareholders, or legal counsel. A failure of the Board of
Directors, shareholders, or legal counsel to make a determination or take
action favorable to the claim of an indemnitee for indemnification pursuant to
this Section 7.1, or the making of a determination or taking of action adverse
to such a claim, shall not preclude indemnification under this Article or
create any presumption that the indemnitee is not entitled to such
indemnification.
Section 7.2 Mandatory Advancement of Expenses to Directors
and Officers. The Corporation shall promptly pay all expenses (including
attorneys' fees, disbursements and other charges) actually and reasonably
incurred by an indemnitee in defending or appearing in any proceeding described
in Section 7.1(A) hereof in advance of the final disposition of such proceeding
upon receipt of (i) an undertaking by or on behalf of the indemnitee to repay
all amounts advanced if it is ultimately specifically determined by a final,
unappealable adjudication that the indemnitee is not entitled to be indemnified
by the Corporation and (ii) an irrevocable assignment to the Corporation of all
payments to which the indemnitee may be or become entitled, under any policy of
insurance or otherwise, in reimbursement of any such expenses paid by the
Corporation pursuant to this Section 7.2. Notwithstanding the foregoing, no
advance payment shall be made by the Corporation pursuant to this Section 7.2
if the Board of Directors reasonably and promptly determines by a majority vote
of the directors who are not parties to the proceeding that, based upon the
facts known to the Board at the time the determination is made, the matter is
of the kind described in Section 7.1(B)(i) or (iv) hereof or the indemnitee's
actions were of the kind described in Section 7.1(B)(ii) or (iii) hereof.
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<PAGE> 18
Section 7.3 Permissive Indemnification and Advancement of
Expenses. The Corporation may, as determined by the Board of Directors from
time to time:
(A) indemnify, to the fullest extent permitted by Section 7.1
hereof, any other person who was or is made a party to or required to
appear in, or is threatened to be made a party to or required to
appear in, or was or is otherwise involved in, any threatened, pending
or completed proceeding by reason of the fact that such person is or
was an authorized representative of the Corporation, both as to action
in such person's official capacity and as to action in another
capacity while holding such office or position, against all expenses
(including attorneys' fees, disbursements and other charges),
judgments, fines (including excise taxes and penalties), and amounts
paid in settlement actually and reasonably incurred by such person in
connection with such action or proceeding, with the same effect as
though such person were an "indemnitee" as defined in Section 7.1
hereof; and
(B) pay expenses incurred by any such other person by reason
of his or her participation in any such proceeding in advance of the
final disposition of such proceeding upon receipt of an undertaking by
or on behalf of such person to repay such amount if it shall
ultimately be determined that he or she is not entitled to be
indemnified by the Corporation and to repay all amounts advanced for
which he or she is reimbursed under any policy of insurance or
otherwise, with the same effect as though such person were an
"indemnitee" as defined in Section 7.1 hereof.
Section 7.4 Enforcement. If the Corporation refuses or fails
to make any payment to an indemnitee required by this Article, the indemnitee
shall be promptly indemnified by the Corporation against expenses (including
attorneys' fees, disbursements and other charges) actually and reasonably
incurred by the indemnitee in connection with the successful establishment of
his or her right to indemnification or advancement of expenses, in whole or in
part, in an action in a court of competent jurisdiction.
Section 7.5 General. Each director or officer of the
Corporation shall be deemed to act in such capacity in reliance upon such
rights of indemnification and advancement of expenses as are provided in this
Article. The rights of indemnification and advancement of expenses provided by
this Article shall not be deemed exclusive of any other rights to which any
person seeking indemnification or advancement of expenses may be entitled under
any agreement, vote of shareholders or disinterested directors, statute or
otherwise, both as to action in such person's official capacity and as to
action in another capacity while holding such office or position, and shall
continue as to a person who has ceased to be an authorized representative of
the Corporation and shall inure to the benefit of the heirs and personal
representatives of such person. Indemnification and advancement of expenses
under this Article shall be provided whether or not the indemnified liability
arises or arose from any threatened, pending or completed action by or in the
right of the Corporation. Any repeal or modification of this Article shall not
adversely affect
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<PAGE> 19
any right or protection existing at the time of such repeal or modification to
which any person may be entitled under this Article.
Section 7.6 Definition of Corporation. For the purposes of
this Article, references to "the Corporation" shall include all constituent
corporations absorbed in a consolidation, merger or division, as well as the
surviving or new corporations surviving or resulting therefrom, so that (i) any
person who is or was an authorized representative of a constituent, surviving
or new corporation shall stand in the same position under the provisions of
this Article with respect to the surviving or new corporation as such person
would if he or she had served the surviving or new corporation in the same
capacity and (ii) any person who is or was an authorized representative of the
Corporation shall stand in the same position under the provisions of this
Article with respect to the surviving or new corporation as such person would
with respect to the Corporation if its separate existence had continued.
Section 7.7 Definition of Authorized Representative. For the
purposes of this Article, the term "authorized representative" shall mean a
director, officer, employee or agent of the Corporation or of any subsidiary of
the Corporation, or a trustee, custodian, administrator, committeeman or
fiduciary of any employee benefit plan established and maintained by the
Corporation or by any direct or indirect subsidiary of the Corporation, or a
person serving another corporation, partnership, joint venture, trust or other
enterprise in any of the foregoing capacities at the request of the
Corporation.
Section 7.8 Savings Clause. If a court of competent
jurisdiction determines that any provision of this Article requires the
Corporation to take an action that would violate applicable law, such provision
shall be limited or modified in its application to such action to the minimum
extent necessary to avoid such violation of law, and, as so limited or
modified, such provision and the balance of this Article shall be enforceable
in accordance with their terms to the fullest extent permitted by applicable
law, including but not limited to the Business Corporation Law of 1988.
Section 7.9 Insurance. The Corporation may purchase and
maintain insurance on behalf of any person who is or was a director or officer
of the Corporation, or is or was an authorized representative of the
Corporation, against any liability asserted against or incurred by such person
in any such capacity, or arising out of the status of such person as such,
whether or not the Corporation would have the power to indemnify such person
against such liability under the provisions of this Article.
Section 7.10 Funding to Meet Indemnification Obligations. The
Board of Directors, without approval of the shareholders, shall have the power
to borrow money on behalf of the Corporation, including the power to pledge the
assets of the Corporation, from time to time to discharge the Corporation's
obligations with respect to indemnification, the advancement and reimbursement
of expenses, and the purchase and maintenance of insurance referred to in this
Article. The Corporation may, in lieu of or in addition to the purchase and
maintenance of
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<PAGE> 20
insurance referred to in Section 7.9 hereof, establish and maintain a fund of
any nature or otherwise secure or insure in any manner its indemnification
obligations, whether arising under or pursuant to this Article or otherwise.
ARTICLE VIII
GENERAL PROVISIONS
Section 8.1 Corporate Seal. The Corporate seal of the
Corporation shall be a circular seal with the name of the Corporation and state
of incorporation around the border or a seal in such form as the Board of
Directors shall from time to time determine.
Section 8.2 Fiscal Year. The fiscal year of the Corporation
shall be as designated by the Board of Directors.
Section 8.3 Authorization. All checks, notes, vouchers,
warrants, drafts, acceptances and other orders for the payment of moneys of the
Corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
Section 8.4 Inapplicability of Subchapter 25E. Subchapter E
of Chapter 25 of the Pennsylvania Business Corporation Law of 1988, as amended
(former Section 910 of the Pennsylvania Business Corporation Law of 1933, as
amended), shall not be applicable to the Corporation.
Section 8.5 Inapplicability of Subchapter 25F. Subchapter F
of Chapter 25 of the Pennsylvania Business Corporation Law of 1988, as amended
(former Section 911 of the Pennsylvania Business Corporation Law of 1933, as
amended), shall not be applicable to the Corporation.
Section 8.6 Inapplicability of Subchapter 25G. Subchapter G
of Chapter 25 of the Pennsylvania Business Corporation Law of 1988, as amended,
shall not be applicable to the Corporation.
Section 8.7 Inapplicability of Subchapter 25H. Subchapter H
of Chapter 25 of the Pennsylvania Business Corporation Law of 1988, as amended,
shall not be applicable to the Corporation.
ARTICLE IX
AMENDMENTS
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<PAGE> 21
The authority to adopt, amend or repeal the Bylaws of the
Corporation is expressly conferred upon the Board of Directors, which may take
such action by the affirmative vote of a majority of the whole Board of
Directors at any annual, regular or special meeting duly convened after notice
of that purpose, subject always to the power of the shareholders to adopt,
amend or repeal the Bylaws of the Corporation by the affirmative vote of the
holders of two-thirds of the outstanding shares of common stock of the
Corporation. Any change in the Bylaws shall take effect when adopted unless
otherwise provided in the resolution effecting the change.
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<PAGE> 1
EXHIBIT 4.02
RIGHTS AGREEMENT
Dated as of October 1, 1996
Between
EDUCATION MANAGEMENT CORPORATION
AND
MELLON BANK, N.A.
Rights Agent
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<PAGE> 2
TABLE OF CONTENTS
Page
Section 1. Certain Definitions .................................... 1
Section 2. Appointment of Rights Agent..............................6
Section 3. Issue of Right Certificates..............................6
Section 4. Form of Right Certificates...............................8
Section 5. Countersignature and Registration........................8
Section 6 Transfer, Split Up, Combination and Exchange of Right
Certificates; Mutilated, Destroyed, Lost or Stolen Right
Certificates.............................................9
Section 7. Exercise of Rights; Purchase Price; Expiration Date of
Rights..................................................10
Section 8. Cancellation and Destruction of Right
Certificates............................................11
Section 9. Availability of Preferred Shares........................12
Section 10. Preferred Shares Record Date............................13
Section 11. Adjustment of Purchase Price, Number of
Shares or Number of Rights..............................13
Section 12. Certificate of Adjusted Purchase Price or Number of
Shares..................................................21
Section 13. Consolidation, Merger or Sale or Transfer of Assets or
Earning Power...........................................21
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<PAGE> 3
Section 14. Fractional Rights and Fractional Shares.................22
Section 15. Rights of Action........................................23
Section 16. Agreement of Right Holders..............................24
Section 17.. Right Certificate Holder Not Deemed a
Stockholder.............................................25
Section 18. Concerning the Rights Agent.............................25
Section 19.. Merger or Consolidation or Change of Name of Rights
Agent...................................................25
Section 20. Duties of Rights Agent..................................26
Section 21. Change of Rights Agent..................................28
Section 22. Issuance of New Right Certificates......................29
Section 23. Redemption..............................................30
Section 24. Exchange................................................30
Section 25. Notice of Certain Events................................32
Section 26. Notices.................................................33
Section 27. Supplements and Amendments..............................33
Section 28. Successors..............................................34
Section 29. Benefits of This Agreement..............................34
Section 30. Severability............................................34
Section 31. Governing Law...........................................34
Section 32. Counterparts............................................34
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Section 33. Descriptive Headings....................................35
Section 34. Effective Date of This Agreement........................35
Exhibit A - Form of Certificate of Designations
Exhibit B - Form of Right Certificate
Exhibit C - Summary of Rights to Purchase Preferred Shares
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This Rights Agreement (the "Agreement"), dated as of October 1, 1996,
between Education Management Corporation, a Pennsylvania corporation (the
"Company"), and Mellon Bank, N.A., a national banking association as Rights
Agent (the "Rights Agent").
The board of directors of the Company (the "Board of Directors") has
authorized and declared a dividend of one preferred share purchase right (a
"Right") for each Common Share (as hereinafter defined) of the Company
outstanding at the Close of Business (as defined hereinafter) on the date of
the consummation of the offering (the "Record Date"), each Right representing
the right to purchase one one-hundredth of a Preferred Share (as hereinafter
defined), upon the terms and subject to the conditions herein set forth, and
has further authorized and directed the issuance of one Right with respect to
each Common Share that shall become outstanding between the Record Date and the
earliest of the Distribution Date, the Redemption Date and the Final Expiration
Date (as such terms are hereinafter defined), including any Common Shares
issued in connection with the initial public offering of the Common Shares.
Accordingly, in consideration of the premises and the mutual
agreements herein set forth, and intending to be legally bound, the parties
hereby agree as follows:
Section 1. Certain Definitions. For purposes of this Agreement, the
following terms have the meanings indicated:
(a) "Acquiring Person" shall mean any Person (as hereinafter defined)
who or which, together with all Affiliates and Associates (as such terms are
hereinafter defined) of such Person, shall be the Beneficial Owner (as
hereinafter defined) of 17.5% or more of the Common Shares of the Company then
outstanding, but shall not include (i) the Company, (ii) any Subsidiary (as
hereinafter defined) of the Company, (iii) any employee benefit plan of the
Company or of any Subsidiary of the Company, or any entity holding Common
Shares for or pursuant to the terms of any such plan, or (iv) a Person who or
which shall become the Beneficial Owner of 17.5% or more of the Common Shares
then outstanding, if the transaction in which such Person became the Beneficial
Owner of 17.5% or more of the Common Shares then outstanding had received prior
approval of a majority of the Board of Directors. Notwithstanding anything in
this definition of Acquiring Person to the contrary, no Person shall become an
Acquiring Person as the result of an acquisition of Common Shares by the
Company which, by reducing the number of shares outstanding, increases the
proportionate number of shares beneficially owned by such Person to 17.5% or
more of the Common Shares of the Company then outstanding; provided, however,
that if a Person shall become the Beneficial Owner of 17.5% or more of the
Common Shares of the Company then outstanding by reason of share purchases by
the Company and shall, after such share purchases by the Company, become the
Beneficial Owner of any additional Common Shares of the Company (other than
through the acquisition of
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<PAGE> 6
Employee Stock (as hereinafter defined)), then such Person shall be deemed to
be an Acquiring Person. Notwithstanding anything in this definition of
Acquiring Person to the contrary, no Person shall become an Acquiring Person as
the result of his acquisition of Employee Stock that increases the number of
shares beneficially owned by such Person to 17.5% or more of the Common Shares
of the Company then outstanding; provided, however, that if a Person shall
become the Beneficial Owner of 17.5% or more of the Common Shares of the
Company then outstanding by reason of the acquisition of Employee Stock and
shall, after such acquisition of Employee Stock, become the Beneficial Owner of
any additional Common Shares of the Company by reason other than the
acquisition of Employee Stock, then such Person shall be deemed to be an
Acquiring Person. Notwithstanding anything in this definition of Acquiring
Person to the contrary, if the Board of Directors determines in good faith that
a Person who would otherwise be an Acquiring Person, as defined pursuant to the
foregoing provisions of this paragraph (a), has become such inadvertently, and
such Person divests as promptly as practicable a sufficient number of Common
Shares so that such Person would no longer be an Acquiring Person, as defined
pursuant to the foregoing provisions of this paragraph (a), then such Person
shall not be deemed to be an Acquiring Person for any purposes of this
Agreement.
(b) "Affiliate" shall have the meaning ascribed to such term in Rule
12b-2 of the General Rules and Regulations under the Exchange Act (as
hereinafter defined) as in effect on the date of this Agreement.
(c) "Associate" shall have the meaning ascribed to such term in Rule
12b-2 of the General Rules and Regulations under the Exchange Act as in effect
on the date of this Agreement.
(d) A Person shall be deemed the "Beneficial Owner" of and shall be
deemed to "beneficially own" any securities:
(i) which such Person or any of such Person's Affiliates or
Associates beneficially owns, directly or indirectly;
(ii) which such Person or any of such Person's Affiliates or
Associates has (A) the right to acquire (whether such right is exercisable
immediately or only after the passage of time) pursuant to any agreement,
arrangement or understanding (other than customary agreements with and between
underwriters and selling group members with respect to a bona fide public
offering of securities), whether or not in writing, or upon the exercise of
conversion rights, exchange rights, rights (other than the Rights), warrants or
options, or otherwise; provided, however, that a Person shall not be deemed the
Beneficial Owner of, or to beneficially own, securities tendered pursuant to a
tender or exchange offer made by or on behalf of such Person or any of such
Person's Affiliates or Associates until such tendered securities are accepted
for purchase or exchange; and provided, further, that a Person shall not be
deemed to be the
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<PAGE> 7
Beneficial Owner of, or to beneficially own, securities which such Person has
the right to acquire (whether such right is exercisable immediately or only
after the passage of time) upon the exercise of conversion rights conferred in
any class or series of Preference Stock of the Company issued prior to the
Distribution Date (as hereinafter defined) if the resolutions of the Board
providing for the issuance of such class or series of Preference Stock shall
specifically refer to this Rights Agreement and provide that the right to
acquire securities upon the exercise of conversion rights so conferred shall
not be deemed to constitute beneficial ownership of such securities; or (B) the
right to vote, or the right to direct the vote, or dispose of, or has
"beneficial ownership" (as determined pursuant to Rule 13d-3 of the General
Rules and Regulations under the Exchange Act, as in effect on the Record Date)
of, (including pursuant to any agreement, arrangement or understanding, whether
or not in writing); provided, further, that a Person shall not be deemed the
Beneficial Owner of, or to beneficially own, any security, if the agreement,
arrangement or understanding to vote, or direct the vote of, such security (1)
arises solely from a revocable proxy or consent given to such Person in
response to a public proxy or consent solicitation made pursuant to, and in
accordance with, the applicable rules and regulations promulgated under the
Exchange Act and (2) is not also then reportable on Schedule 13D under the
Exchange Act (or any comparable or successor report); or
(iii) which are beneficially owned, directly or indirectly,
by any other Person with which such Person or any of such Person's Affiliates
or Associates has any agreement, arrangement or understanding, whether or not
in writing, (other than customary agreements with and between underwriters and
selling group members with respect to a bona fide public offering of
securities) for the purpose of acquiring, holding, voting (except to the extent
contemplated by the proviso to Section 1(c)(ii)(B)) or disposing of any
securities of the Company.
Notwithstanding anything in this definition of Beneficial Ownership to
the contrary, no Person (and no Affiliate or Associate of any Person) shall at
any time prior to the commencement of the Company's initial public offering be
deemed to be the "Beneficial Owner" of or to "beneficially own" any securities
if such Person is the Beneficial Owner of or "beneficially owns" such
securities as a result of one or more agreements, arrangements or
understandings with any Person described in Sections 1(a)(iv) and (v) (whether
or not the Company or any other Person is a party thereto) and if such Person
would not be the Beneficial Owner of or "beneficially own" such securities if
such agreements, arrangements or understandings were not then in effect.
Notwithstanding anything in this definition of Beneficial Ownership to the
contrary, the phrase "then outstanding", when used with reference to a Person's
Beneficial Ownership of securities of the Company, shall mean the number of
such securities then issued and outstanding together with the number of such
securities not then actually issued and outstanding which such Person would be
deemed to own beneficially hereunder.
(e) "Board of Directors" shall have the meaning set forth in the
preamble hereof.
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<PAGE> 8
(f) "Business Day" shall mean any day other than a Saturday, a Sunday,
or a day on which banking institutions in Pittsburgh, Pennsylvania are
authorized or obligated by law or executive order to close.
(g) "Close of Business" on any given date shall mean 5:00 P.M.,
Pittsburgh, Pennsylvania time, on such date; provided, however, that, if such
date is not a Business Day, it shall mean 5:00 P.M., Pittsburgh, Pennsylvania
time, on the next succeeding Business Day.
(h) "Common Shares" when used with reference to the Company shall mean
the shares of common stock, par value $.01 per share, of the Company. "Common
Shares," when used with reference to any Person other than the Company, shall
mean the capital stock (or equity interest) with the greatest voting power of
such Person or, if such Person is a Subsidiary of another Person, the Person or
Persons which ultimately control such first-mentioned Person.
(i) "Company" shall have the meaning set forth in the preamble hereof.
(j) "Current Per Share Market Price" shall have the meaning set forth
in Section 11(d)(i) hereof.
(k) "Distribution Date" shall have the meaning set forth in Section 3
hereof.
(l) "equivalent preferred shares" shall have the meaning set forth in
Section 11(b) hereof.
(m) "Employee Stock" shall mean, with respect to any Person who is a
current or former officer or director of the Company, any Common Shares
acquired after the effective date of this Agreement, as set forth in Section 34
hereof, by that Person pursuant to any employee benefit plan, employee stock
purchase plan, stock incentive plan or any other similar right, plan or
arrangement of the Company that provided or provides one or more officers or
directors of the Company with the right to acquire Common Shares.
(n) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(o) "Exchange Ratio" shall have the meaning set forth in Section 24(a)
hereof.
(p) "Final Expiration Date" shall have the meaning set forth in
Section 7(a) hereof.
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<PAGE> 9
(q) "Person" shall mean any individual, firm, corporation, partnership
or other entity, and shall include any successor (by merger or otherwise) of
such entity.
(r) "Preferred Shares" shall mean shares of Series A Junior
Participating Preferred Stock, par value $.01 per share, of the Company having
the rights and preferences set forth in the Form of Certificate of Designations
attached to this Agreement as Exhibit A.
(s) "Purchase Price" shall have the meaning set forth in Section 4
hereof.
(t) "Record Date" shall have the meaning set forth in the preamble
hereof.
(u) "Redemption Date" shall have the meaning set forth in Section 7(a)
hereof.
(v) "Redemption Price" shall have the meaning set forth in Section
23(a) hereof.
(w) "Right" shall have the meaning set forth in the preamble hereof.
(x) "Right Certificate" shall have the meaning set forth in Section
3(a) hereof.
(y) "Rights Agent" shall have the meaning set forth in the preamble
hereof.
(z) "Securities Act" shall have the meaning set forth in Section 9(d)
hereof.
(aa) "Security" shall have the meaning set forth in Section 11(d)
hereof.
(bb) "Shares Acquisition Date" shall mean the first date of public
announcement by the Company or an Acquiring Person that an Acquiring Person has
become such.
(cc) "Subsidiary" of any Person shall mean any corporation or other
entity of which a majority of the voting power of the voting equity securities
or equity interest is owned, directly or indirectly, by such Person or
otherwise controlled by such Person.
(dd) "Summary of Rights" shall have the meaning set forth in Section
3(b) hereof.
(ee) "Trading Day" shall have the meaning set forth in Section 11(d)
hereof.
Section 2. Appointment of Rights Agent. The Company hereby appoints
the Rights Agent to act as agent for the Company and the holders of the Rights
(who, in accordance
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with Section 3 hereof, shall prior to the Distribution Date also be the holders
of the Common Shares) in accordance with the terms and conditions hereof, and
the Rights Agent hereby accepts such appointment and agrees to act as Rights
Agent under this Agreement. The Company may from time to time appoint such
co-Rights Agents as it may deem necessary or desirable.
Section 3. Issue of Right Certificates.
(a) Until the earlier of (i) the Close of Business on the tenth
Business Day after the Shares Acquisition Date or (ii) the Close of Business on
the tenth Business Day (or such later date as may be determined by action of
the Board of Directors prior to such time as any Person becomes an Acquiring
Person) after the date of the commencement by any Person (other than the
Company, any Subsidiary of the Company, any employee benefit plan of the
Company or of any Subsidiary of the Company, or any entity holding Common
Shares for or pursuant to the terms of any such plan of, or of the first public
announcement of the intention of any Person (other than the Company, any
Subsidiary of the Company, any employee benefit plan of the Company or of any
Subsidiary of the Company, any entity holding Common Shares for or pursuant to
the terms of any such plan to commence, a tender or exchange offer the
consummation of which would result in any Person becoming the Beneficial Owner
of Common Shares aggregating to 17.5% or more of the then outstanding Common
Shares (the earlier of such dates being herein referred to as the "Distribution
Date"), (x) the Rights will be evidenced (subject to the provisions of Section
3(b) hereof) by the certificates for Common Shares registered in the names of
the holders thereof (which certificates shall also be deemed to be Right
Certificates) and not by separate Right Certificates, and (y) the right to
receive Right Certificates will be transferable only in connection with the
transfer of Common Shares. As soon as practicable after the Distribution Date,
the Company will prepare and execute, the Rights Agent will countersign, and
the Company will send or cause to be sent (and the Rights Agent will, if
requested, send) by first-class, insured, postage-prepaid mail, to each record
holder of Common Shares as of the Close of Business on the Distribution Date,
at the address of such holder shown on the records of the Company, a Right
Certificate, in substantially the form of Exhibit B hereto (a "Right
Certificate"), evidencing one Right for each Common Share so held. From and
after the Distribution Date, the Rights will be evidenced solely by such Right
Certificates.
(b) On the Record Date, or as soon as practicable thereafter, the
Company will send a copy of a Summary of Rights to Purchase Preferred Shares,
in substantially the form of Exhibit C hereto (the "Summary of Rights"), by
first-class, postage-prepaid mail, to each record holder of Common Shares as of
the Close of Business on the Record Date, at the address of such holder shown
on the records of the Company. With respect to certificates for Common Shares
outstanding as of the Record Date, until the Distribution Date, the Rights will
be evidenced by such certificates registered in the names of the holders
thereof together with a copy of the Summary of Rights attached thereto. Until
the Distribution Date (or the earlier of the
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<PAGE> 11
Redemption Date or the Final Expiration Date), the surrender for transfer of
any certificate for Common Shares outstanding on the Record Date, with or
without a copy of the Summary of Rights attached thereto, shall also constitute
the transfer of the Rights associated with the Common Shares represented
thereby.
(c) Certificates for Common Shares which become outstanding
(including, without limitation, reacquired Common Shares referred to in the
last sentence of this paragraph (c)) after the Record Date but prior to the
earliest of the Distribution Date, the Redemption Date or the Final Expiration
Date, shall have impressed on, printed on, written on or otherwise affixed to
them the following legend:
This certificate also evidences and entitles the holder
hereof to certain Rights as set forth in a Rights Agreement
between Education Management Corporation and Mellon Bank,
dated as of October __, 1996 (the "Rights Agreement"), the
terms of which are hereby incorporated herein by reference
and a copy of which is on file at the principal executive
offices of Education Management Corporation. Under certain
circumstances, as set forth in the Rights Agreement, such
Rights will be evidenced by separate certificates and will no
longer be evidenced by this certificate. Education Management
Corporation will mail to the holder of this certificate a
copy of the Rights Agreement without charge after receipt of
a written request therefor. Under certain circumstances, as
set forth in the Rights Agreement, Rights issued to any
Person who becomes an Acquiring Person or any Affiliate or
Associate thereof (as such terms are defined in the Rights
Agreement), whether currently held by or on behalf of such
Person or by any subsequent holder, may become null and void.
With respect to such certificates containing the foregoing legend, until the
Distribution Date, the Rights associated with the Common Shares represented by
such certificates shall be evidenced by such certificates alone, and the
surrender for transfer of any such certificate shall also constitute the
transfer of the Rights associated with the Common Shares represented thereby.
In the event that the Company purchases or acquires any Common Shares after the
Record Date but prior to the Distribution Date, any Rights associated with such
Common Shares shall be deemed cancelled and retired so that the Company shall
not be entitled to exercise any Rights associated with the Common Shares which
are no longer outstanding.
Section 4. Form of Right Certificates.
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<PAGE> 12
(a) The Right Certificates (and the forms of election to
purchase Preferred Shares and of assignment to be printed on the reverse
thereof) shall be substantially the same as Exhibit B hereto and may have such
marks of identification or designation and such legends, summaries or
endorsements printed thereon as the Company may deem appropriate and as are not
inconsistent with the provisions of this Agreement, or as may be required to
comply with any applicable law or with any rule or regulation made pursuant
thereto or with any rule or regulation of any stock exchange or automated
quotation system on which the Rights may from time to time be listed, or to
conform to usage. Subject to the provisions of Section 22 hereof, the Right
Certificates shall entitle the holders thereof to purchase such number of one
one-hundredths of a Preferred Share as shall be set forth therein at the price
per one one-hundredth of a Preferred Share set forth therein (the "Purchase
Price"), but the number of such one one-hundredths of a Preferred Share and the
Purchase Price shall be subject to adjustment as provided herein.
Section 5. Countersignature and Registration. The Right
Certificates shall be executed on behalf of the Company by its Chairman of the
Board, its President, any of its Vice Presidents, or its Treasurer, either
manually or by facsimile signature, shall have affixed thereto the Company's
seal or a facsimile thereof, and shall be attested by the Secretary or an
Assistant Secretary of the Company, either manually or by facsimile signature.
The Right Certificates shall be manually countersigned by the Rights Agent and
shall not be valid for any purpose unless countersigned. In case any officer of
the Company who shall have signed any of the Right Certificates shall cease to
be such officer of the Company before countersignature by the Rights Agent and
issuance and delivery by the Company, such Right Certificates, nevertheless,
may be countersigned by the Rights Agent and issued and delivered by the
Company with the same force and effect as though the individual who signed such
Right Certificates had not ceased to be such officer of the Company; and any
Right Certificate may be signed on behalf of the Company by any individual who,
at the actual date of the execution of such Right Certificate, shall be a
proper officer of the Company to sign such Right Certificate although at the
date of the execution of this Agreement any such individual was not such an
officer.
Following the Distribution Date, the Rights Agent will keep
or cause to be kept, at its principal office, books for registration and
transfer of the Right Certificates issued hereunder. Such books shall show the
names and addresses of the respective holders of the Right Certificates, the
number of Rights evidenced on its face by each of the Right Certificates and
the date of each of the Right Certificates.
Section 6. Transfer, Split Up, Combination and Exchange of
Right Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates.
Subject to the provisions of Section 14 hereof, at any time after the Close of
Business on the Distribution Date, and at or prior to the Close of Business on
the earlier of the Redemption Date or the Final Expiration Date, any Right
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<PAGE> 13
Certificate or Right Certificates (other than Right Certificates representing
Rights that have become void pursuant to Section 11(a)(ii) hereof or that have
been exchanged pursuant to Section 24 hereof) may be transferred, split up,
combined, or exchanged for another Right Certificate or other Right
Certificates entitling the registered holder to purchase a like number of one
one-hundredths of a Preferred Share as the Right Certificate or Right
Certificates surrendered then entitled such holder to purchase. Any registered
holder desiring to transfer, split up, combine or exchange any Right
Certificate or Right Certificates shall make such request in writing delivered
to the Rights Agent, and shall surrender the Right Certificate or Right
Certificates to be transferred, split up, combined or exchanged at the
principal office of the Rights Agent. Neither the Rights Agent nor the Company
shall be obligated to take any action whatsoever with respect to the transfer
of any such surrendered Right Certificate until the registered holder shall
have provided such additional evidence of the identity of this Beneficial Owner
(or former Beneficial Owner) Affiliates or Associates thereof as the Company
shall reasonably request. Thereupon the Rights Agent shall countersign and
deliver to the Person entitled thereto a Right Certificate or Right
Certificates, as the case may be, as so requested. The Company may require
payment of a sum sufficient to cover any tax or governmental charge that may be
imposed in connection with any transfer, split up, combination or exchange of
Right Certificates.
Upon receipt by the Company and the Rights Agent of evidence
reasonably satisfactory to them of the loss, theft, destruction or mutilation
of a Right Certificate, and, in case of loss, theft or destruction, of
indemnity or security reasonably satisfactory to them, and, at the Company's
request, reimbursement to the Company and the Rights Agent of all reasonable
expenses incidental thereto, and upon surrender to the Rights Agent and
cancellation of the Right Certificate if mutilated, the Company will make and
deliver a new Right Certificate of like tenor to the Rights Agent for delivery
to the registered holder in lieu of the Right Certificate so lost, stolen,
destroyed or mutilated.
Section 7. Exercise of Rights; Purchase Price; Expiration
Date of Rights.
(a) The registered holder of any Right Certificate may
exercise the Rights evidenced thereby (except as otherwise provided herein), in
whole or in part, at any time after the Distribution Date, upon surrender of
the Right Certificate, with the form of election to purchase on the reverse
side thereof duly executed, to the Rights Agent at the principal office of the
Rights Agent, together with payment of the Purchase Price for each one
one-hundredth of a Preferred Share as to which the Rights are exercised, at or
prior to the earliest of (i) the Close of Business on the tenth anniversary of
the date of the consummation of the offering (the "Final Expiration Date"),
(ii) the time at which the Rights are redeemed as provided in Section 23 hereof
(the "Redemption Date"), or (iii) the time at which such Rights are exchanged
as provided in Section 24 hereof.
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<PAGE> 14
(b) The Purchase Price for each one one-hundredth of a
Preferred Share purchasable pursuant to the exercise of a Right shall initially
be $50.00, and shall be subject to adjustment from time to time as provided in
Section 11 or 13 hereof and shall be payable in lawful money of the United
States of America in accordance with paragraph (c) below.
(c) Upon receipt of a Right Certificate representing
exercisable Rights, with the form of election to purchase duly executed,
accompanied by payment of the Purchase Price for the shares to be purchased and
an amount equal to any applicable transfer tax required to be paid by the
holder of such Right Certificate in accordance with Section 9 hereof by
certified check, cashier's check or money order payable to the order of the
Company, the Rights Agent shall thereupon promptly (i) (A) requisition from any
transfer agent of the Preferred Shares certificates for the number of Preferred
Shares to be purchased and the Company hereby irrevocably authorizes any such
transfer agent to comply with all such requests, or (B) requisition from the
depositary agent depositary receipts representing such number of one
one-hundredths of a Preferred Share as are to be purchased (in which case
certificates for the Preferred Shares represented by such receipts shall be
deposited by the transfer agent of the Preferred Shares with such depositary
agent) and the Company hereby directs such depositary agent to comply with such
request; (ii) when appropriate, requisition from the Company the amount of cash
to be paid in lieu of issuance of fractional shares in accordance with Section
14 hereof; (iii) promptly after receipt of such certificates or depositary
receipts, cause the same to be delivered to or upon the order of the registered
holder of such Right Certificate, registered in such name or names as may be
designated by such holder; and (iv) when appropriate, after receipt, promptly
deliver such cash to or upon the order of the registered holder of such Right
Certificate.
(d) In case the registered holder of any Right Certificate
shall exercise less than all the Rights evidenced thereby, a new Right
Certificate evidencing Rights equivalent to the Rights remaining unexercised
shall be issued by the Rights Agent to the registered holder of such Right
Certificate or to his duly authorized assigns, subject to the provisions of
Section 14 hereof.
Section 8. Cancellation and Destruction of Right
Certificates. All Right Certificates surrendered for the purpose of exercise,
transfer, split up, combination or exchange shall, if surrendered to the
Company or to any of its agents, be delivered to the Rights Agent for
cancellation or in canceled form, or, if surrendered to the Rights Agent, shall
be canceled by it, and no Right Certificates shall be issued in lieu thereof
except as expressly permitted by any of the provisions of this Agreement. The
Company shall deliver to the Rights Agent for cancellation and retirement, and
the Rights Agent shall so cancel and retire, any other Right Certificate
purchased or acquired by the Company otherwise than upon the exercise thereof.
The Rights Agent shall deliver all canceled Right Certificates to the Company,
or shall, at the written request of the Company, destroy such canceled Right
Certificates, and, in such case, shall deliver a certificate of destruction
thereof to the Company.
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<PAGE> 15
Section 9. Availability of Preferred Shares; Registration.
(a) The Company covenants and agrees that it will cause to be
reserved and kept available out of its authorized and unissued Preferred Shares
or any Preferred Shares held in its treasury, the number of Preferred Shares
that will be sufficient to permit the exercise in full of all outstanding
Rights in accordance with Section 7. The Company covenants and agrees that it
will take all such action as may be necessary to ensure that all Preferred
Shares delivered upon exercise of Rights shall, at the time of delivery of the
certificates for such Preferred Shares (subject to payment of the Purchase
Price), be duly and validly authorized and issued and fully paid and
nonassessable shares.
(b) The Company further covenants and agrees that it will pay
when due and payable any and all federal and state transfer taxes and charges
which may be payable in respect of the issuance or delivery of the Right
Certificates or of any Preferred Shares upon the exercise of Rights. The
Company shall not, however, be required to pay any transfer tax which may be
payable in respect of any transfer or delivery of Right Certificates to a
Person other than, or the issuance or delivery of certificates or depositary
receipts for the Preferred Shares in a name other than that of, the registered
holder of the Right Certificate evidencing Rights surrendered for exercise or
to issue or to deliver any certificates or depositary receipts for Preferred
Shares upon the exercise of any Rights until any such tax shall have been paid
(any such tax being payable by the holder of such Right Certificate at the time
of surrender) or until it has been established to the Company's reasonable
satisfaction that no such tax is due.
(c) The Company shall use all reasonable efforts to cause,
from and after such time as the Rights become exercisable, all Preferred
Shares, Common Shares and/or other securities issued or reserved for issuance
in accordance with this Rights Agreement to be listed, upon official notice of
issuance, upon a national securities exchange, or to be eligible for quotation
in the National Association of Securities Dealers, Inc. Automated Quotation
System ("NASDAQ") or any successor thereto or other comparable quotation
system.
(d) The Company shall use its best efforts to (i) file, as
soon as practicable following the earliest date after the occurrence of an
event under Section 11(a)(ii) hereof in which the consideration to be delivered
by the Company upon exercise of the Rights has been determined in accordance
with Section 11(a)(iii) hereof, or as soon as it is required by law following
the Distribution Date, as the case may be, a registration statement under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
securities purchasable upon exercise of the Rights of an appropriate form, (ii)
cause such registration statement to become effective as soon as practicable
after such filing, and (iii) cause such registration statement to remain
effective (with a prospectus at all times meeting the requirements of the
Securities Act)
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<PAGE> 16
until the earlier of (A) the date as of which the Rights are no longer
exercisable for such securities, and (B) the date of the expiration of the
Rights. The company will also take such action as may be appropriate under, or
to ensure compliance with, the securities or "blue sky" laws of the various
states in connection with the exercisability of the Rights. The Company may
temporarily suspend, for a period of time not to exceed 90 days after the date
set forth in clause (i) of the first sentence of this Section 9(c), the
exercisability of the Rights in order to prepare and file such registration
statement. Upon any such suspension, the Company shall issue a public
announcement stating, and notify the Rights Agent, that the exercisability of
the Rights has been temporarily suspended, as well as a public announcement at
such time as the suspension is no longer in effect. Notwithstanding any
provisions of this Agreement to the contrary, the Rights shall not be
exercisable in any jurisdiction unless the requisite qualification in such
jurisdiction shall have been obtained.
Section 10. Preferred Shares Record Date. Each Person in
whose name any certificate for Preferred Shares is issued upon the exercise of
Rights shall for all purposes be deemed to have become the holder of record of
the Preferred Shares represented thereby on, and such certificate shall be
dated, the date upon which the Right Certificate evidencing such Rights was
duly surrendered and payment of the Purchase Price (and any applicable transfer
taxes) was made; provided, however, that if the date of such surrender and
payment is a date upon which the Preferred Shares transfer books of the Company
are closed, such Person shall be deemed to have become the record holder of
such shares on, and such certificate shall be dated, the next succeeding
Business Day on which the Preferred Shares transfer books of the Company are
open. Prior to the exercise of the Rights evidenced thereby, the holder of a
Right Certificate shall not be entitled to any rights of a holder of Preferred
Shares for which the Rights shall be exercisable, including, without
limitation, the right to vote, to receive dividends or other distributions or
to exercise any preemptive rights, and shall not be entitled to receive any
notice of any proceedings of the Company, except as provided herein.
Section 11. Adjustment of Purchase Price, Number of Shares or
Number of Rights. The Purchase Price, the number of Preferred Shares covered by
each Right and the number of Rights outstanding are subject to adjustment from
time to time as provided in this Section 11.
(a) (i) In the event the Company shall at any time after the
date of this Agreement (A) declare a dividend on the Preferred Shares payable
in Preferred Shares, (B) subdivide the outstanding Preferred Shares, (C)
combine the outstanding Preferred Shares into a smaller number of Preferred
Shares or (D) issue any shares of its capital stock in a reclassification of
the Preferred Shares (including any such reclassification in connection with a
consolidation or merger in which the Company is the continuing or surviving
corporation), except as otherwise
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<PAGE> 17
provided in this Section 11(a), the Purchase Price in effect at the time of the
record date for such dividend or of the effective date of such subdivision,
combination or reclassification, and the number and kind of shares of capital
stock issuable on such date, shall be proportionately adjusted so that the
holder of any Right exercised after such time shall be entitled to receive the
aggregate number and kind of shares of capital stock which, if such Right had
been exercised immediately prior to such date and at a time when the Preferred
Shares transfer books of the Company were open, he would have owned upon such
exercise and been entitled to receive by virtue of such dividend, subdivision,
combination or reclassification; provided, however, that in no event shall the
consideration to be paid upon the exercise of one Right be less than the
aggregate par value of the shares of capital stock of the Company issuable upon
exercise of one Right.
(ii) Subject to Section 24 of this Agreement, in the
event any Person becomes an Acquiring Person, each holder of a Right shall
thereafter have a right to receive, upon exercise thereof at a price equal to
the then current Purchase Price multiplied by the number of one one-hundredths
of a Preferred Share for which a Right is then exercisable, in accordance with
the terms of this Agreement and in lieu of Preferred Shares, such number of
Common Shares of the Company as shall equal the result obtained by (A)
multiplying the then current Purchase Price by the number of one one-hundredths
of a Preferred Share for which a Right is then exercisable and dividing that
product by (B) 50% of the then Current Per Share Market Price of the Company's
Common Shares (determined pursuant to Section 11(d)(i) hereof) on the date of
the occurrence of such event. In the event that any Person shall become an
Acquiring Person and the Rights shall then be outstanding, the Company shall
not take any action which would eliminate or diminish the benefits intended to
be afforded by the Rights.
From and after the occurrence of such event, any Rights that
are or were acquired or beneficially owned by any Acquiring Person (or any
Associate or Affiliate of such Acquiring Person) shall be void and any holder
of such Rights shall thereafter have no right to exercise such Rights under any
provision of this Agreement. No Right Certificate shall be issued pursuant to
Section 3 that represents Rights beneficially owned by an Acquiring Person
whose Rights would be void pursuant to the preceding sentence, or any Associate
or Affiliate thereof; no Right Certificate shall be issued at any time upon the
transfer of any Rights to an Acquiring Person whose Rights would be void
pursuant to the preceding sentence or any Associate or Affiliate thereof or to
any nominee of such Acquiring Person, Associate or Affiliate; and any Right
Certificate delivered to the Rights Agent for transfer to an Acquiring Person
whose Rights would be void pursuant to the preceding sentence shall be
canceled.
(iii) In the event that there shall not be sufficient
Common Shares issued but not outstanding or authorized but unissued to permit
the exercise in full of the Rights in accordance with the foregoing
subparagraph (ii), the Company shall take all such action as may be necessary
to authorize additional Common Shares for issuance upon exercise of the Rights.
In the event the Company shall, after good faith effort, be unable to take all
such action as may be
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<PAGE> 18
necessary to authorize such additional Common Shares, the Company shall
substitute, for each Common Share that would otherwise be issuable upon
exercise of a Right, a number of Preferred Shares or fraction thereof such that
the Current Per Share Market Price of one Preferred Share multiplied by such
number or fraction is equal to the Current Per Share Market Price of one Common
Share as of the date of issuance of such Preferred Shares or fraction thereof.
(b) In case the Company shall fix a record date for the
issuance of rights, options or warrants to all holders of Preferred Shares
entitling them (for a period expiring within 45 calendar days after such record
date) to subscribe for or purchase Preferred Shares (or shares having the same
rights, privileges and preferences as the Preferred Shares ("equivalent
preferred shares")) or securities convertible into Preferred Shares or
equivalent preferred shares at a price per Preferred Share or equivalent
preferred share (or having a conversion price per share, if a security
convertible into Preferred Shares or equivalent preferred shares) less than the
then Current Per Share Market Price of the Preferred Shares) on such record
date, the Purchase Price to be in effect after such record date shall be
determined by multiplying the Purchase Price in effect immediately prior to
such record date by a fraction, the numerator of which shall be the number of
Preferred Shares outstanding on such record date plus the number of Preferred
Shares which the aggregate offering price of the total number of Preferred
Shares and/or equivalent preferred shares so to be offered (and/or the
aggregate initial conversion price of the convertible securities so to be
offered) would purchase at such current market price and the denominator of
which shall be the number of Preferred Shares outstanding on such record date
plus the number of additional Preferred Shares and/or equivalent preferred
shares to be offered for subscription or purchase (or into which the
convertible securities so to be offered are initially convertible); provided,
however, that in no event shall the consideration to be paid upon the exercise
of one Right be less than the aggregate par value of the shares of capital
stock of the Company issuable upon exercise of one Right. In case such
subscription price may be paid in a consideration part or all of which shall be
in a form other than cash, the value of such consideration shall be as
determined in good faith by the Board of Directors, whose determination shall
be described in a statement filed with the Rights Agent and shall be binding on
the Rights Agent and holders of the Rights. Preferred Shares owned by or held
for the account of the Company shall not be deemed outstanding for the purpose
of any such computation. Such adjustment shall be made successively whenever
such a record date is fixed; and in the event that such rights, options or
warrants are not so issued, the Purchase Price shall be adjusted to be the
Purchase Price which would then be in effect if such record date had not been
fixed.
(c) In case the Company shall fix a record date for the
making of a distribution to all holders of the Preferred Shares (including any
such distribution made in connection with a consolidation or merger in which
the Company is the continuing or surviving corporation) of evidences of
indebtedness or assets (other than a regular quarterly cash dividend or a
dividend payable in Preferred Shares) or subscription rights or warrants
(excluding those referred to in Section 11(b) hereof), the Purchase Price to be
in effect after such record date shall be determined
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<PAGE> 19
by multiplying the Purchase Price in effect immediately prior to such record
date by a fraction, the numerator of which shall be the then Current Per Share
Market Price of the Preferred Shares on such record date, less the fair market
value (as determined in good faith by the Board of Directors, whose
determination shall be described in a statement filed with the Rights Agent and
shall be binding on the Rights Agent and holders of the Rights) of the portion
of the assets or evidences of indebtedness so to be distributed or of such
subscription rights or warrants applicable to one Preferred Share and the
denominator of which shall be such Current Per Share Market Price of the
Preferred Shares; provided, however, that in no event shall the consideration
to be paid upon the exercise of one Right be less than the aggregate par value
of the shares of capital stock of the Company to be issued upon exercise of one
Right. Such adjustments shall be made successively whenever such a record date
is fixed; and in the event that such distribution is not so made, the Purchase
Price shall again be adjusted to be the Purchase Price which would then be in
effect if such record date had not been fixed.
(d) (i) For the purpose of any computation hereunder, the
"Current Per Share Market Price" of any security (a "Security" for the purpose
of this Section 11(d)(i)) on any date shall be deemed to be the average of the
daily closing prices per share of such Security for the 30 consecutive Trading
Days immediately prior to such date; provided, however, that in the event that
the Current Per Share Market Price of the Security is determined during a
period following the announcement by the issuer of such Security of (A) a
dividend or distribution on such Security payable in shares of such Security or
securities convertible into such shares, or (B) any subdivision, combination or
reclassification of such Security and prior to the expiration of [30] Trading
Days after the ex-dividend date for such dividend or distribution, or the
record date for such subdivision, combination or reclassification, then, and in
each such case, the Current Per Share Market Price shall be appropriately
adjusted to reflect the current market price per share equivalent of such
Security. The closing price for each day shall be the last sale price, regular
way, or, in case no such sale takes place on such day, the average of the
closing bid and asked prices, regular way, in either case, as reported in the
principal consolidated transaction reporting system with respect to securities
listed or admitted to trading on the New York Stock Exchange or, if the
Security is not listed or admitted to trading on the New York Stock Exchange,
as reported in the principal consolidated transaction reporting system with
respect to securities listed on the principal national securities exchange on
which the Security is listed or admitted to trading or, if the Security is not
listed or admitted to trading on any national securities exchange, the last
quoted price or, if not so quoted, the average of the high bid and low asked
prices in the over-the-counter market, as reported on the Nasdaq National
Market or such other system then in use, or, if on any such date the Security
is not quoted by any such organization, the average of the closing bid and
asked prices as furnished by a professional market maker making a market in the
Security selected by the Board of Directors. The term "Trading Day" shall mean
a day on which the principal national securities exchange on which the Security
is listed or admitted to trading is open for the transaction of business or, if
the Security is not listed or admitted to trading on any national securities
exchange, a Business Day.
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<PAGE> 20
(ii) For the purpose of any computation hereunder, the
"Current Per Share Market Price" of the Preferred Shares shall be determined in
accordance with the method set forth in Section 11(d)(i). If the Preferred
Shares are not publicly traded, the "Current Per Share Market Price" of the
Preferred Shares shall be conclusively deemed to be the Current Per Share
Market Price of the Common Shares as determined pursuant to Section 11(d)(i)
(appropriately adjusted to reflect any stock split, stock dividend or similar
transaction occurring after the date hereof), multiplied by one hundred. If
neither the Common Shares nor the Preferred Shares are publicly held or so
listed or traded, "Current Per Share Market Price" shall mean the fair value
per share as determined in good faith by the Board of Directors, whose
determination shall be described in a statement filed with the Rights Agent and
shall be binding on the Rights Agent and the holders of the Rights.
(e) No adjustment in the Purchase Price shall be required
unless such adjustment would require an increase or decrease of at least 1% in
the Purchase Price; provided, however, that any adjustments which by reason of
this Section 11(e) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment. All calculations under this
Section 11 shall be made to the nearest cent or to the nearest one
one-millionth of a Preferred Share or one ten-thousandth of any other share or
security as the case may be. Notwithstanding the first sentence of this Section
11(e), any adjustment required by this Section 11 shall be made no later than
the earlier of (i) three years from the date of the transaction which requires
such adjustment or (ii) the date of the expiration of the right to exercise any
Rights.
(f) If as a result of an adjustment made pursuant to Section
11(a) hereof, the holder of any Right thereafter exercised shall become
entitled to receive any shares of capital stock of the Company other than
Preferred Shares, thereafter the number of such other shares so receivable upon
exercise of any Right shall be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the provisions with
respect to the Preferred Shares contained in Section 11(a) through (c),
inclusive, and the provisions of Sections 7, 9, 10 and 13 with respect to the
Preferred Shares shall apply on like terms to any such other shares.
(g) All Rights originally issued by the Company subsequent to
any adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of one one-hundredths of a
Preferred Share purchasable from time to time hereunder upon exercise of the
Rights, all subject to further adjustment as provided herein.
(h) Unless the Company shall have exercised its election as
provided in Section 11(i), upon each adjustment of the Purchase Price as a
result of the calculations made in Sections 11(b) and (c), each Right
outstanding immediately prior to the making of such adjustment shall thereafter
evidence the right to purchase, at the adjusted Purchase Price, that number of
one one-hundredths of a Preferred Share (calculated to the nearest one
one-millionth of a Preferred
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<PAGE> 21
Share) obtained by (A) multiplying (x) the number of one one-hundredths of a
share covered by a Right immediately prior to this adjustment by (y) the
Purchase Price in effect immediately prior to such adjustment of the Purchase
Price and (B) dividing the product so obtained by the Purchase Price in effect
immediately after such adjustment of the Purchase Price.
(i) The Company may elect on or after the date of any
adjustment of the Purchase Price to adjust the number of Rights in substitution
for any adjustment in the number of one one-hundredths of a Preferred Share
purchasable upon the exercise of a Right. Each of the Rights outstanding after
such adjustment of the number of Rights shall be exercisable for the number of
one one-hundredths of a Preferred Share for which a Right was exercisable
immediately prior to such adjustment. Each Right held of record prior to such
adjustment of the number of Rights shall become that number of Rights
(calculated to the nearest one ten-thousandth) obtained by dividing the
Purchase Price in effect immediately prior to adjustment of the Purchase Price
by the Purchase Price in effect immediately after adjustment of the Purchase
Price. The Company shall make a public announcement of its election to adjust
the number of Rights, indicating the record date for the adjustment, and, if
known at the time, the amount of the adjustment to be made. This record date
may be the date on which the Purchase Price is adjusted or any day thereafter,
but, if the Right Certificates have been issued, shall be at least 10 days
later than the date of the public announcement. If Right Certificates have been
issued, upon each adjustment of the number of Rights pursuant to this Section
11(i), the Company shall, as promptly as practicable, cause to be distributed
to holders of record of Right Certificates on such record date Right
Certificates evidencing, subject to Section 14 hereof, the additional Rights to
which such holders shall be entitled as a result of such adjustment, or, at the
option of the Company, shall cause to be distributed to such holders of record
in substitution and replacement for the Right Certificates held by such holders
prior to the date of adjustment, and upon surrender thereof, if required by the
Company, new Right Certificates evidencing all the Rights to which such holders
shall be entitled after such adjustment. Right Certificates so to be
distributed shall be issued, executed and countersigned in the manner provided
for herein and shall be registered in the names of the holders of record of
Right Certificates on the record date specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase
Price or the number of one one-hundredths of a Preferred Share issuable upon
the exercise of the Rights, the Right Certificates theretofore and thereafter
issued may continue to express the Purchase Price and the number of one
one-hundredths of a Preferred Share which were expressed in the initial Right
Certificates issued hereunder.
(k) Before taking any action that would cause an adjustment
reducing the Purchase Price below one one-hundredth of the then par value, if
any, of the Preferred Shares issuable upon exercise of the Rights, the Company
shall take any corporate action which may, in
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<PAGE> 22
the opinion of its counsel, be necessary in order that the Company may validly
and legally issue fully paid and nonassessable Preferred Shares at such
adjusted Purchase Price.
(l) In any case in which this Section 11 shall require that
an adjustment in the Purchase Price be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event the issuing to the holder of any Right exercised after such record date
of the Preferred Shares and other capital stock or securities of the Company,
if any, issuable upon such exercise over and above the Preferred Shares and
other capital stock or securities of the Company, if any, issuable upon such
exercise on the basis of the Purchase Price in effect prior to such adjustment;
provided, however, that the Company shall deliver to such holder a due bill or
other appropriate instrument evidencing such holder's right to receive such
additional shares upon the occurrence of the event requiring such adjustment.
(m) Anything in this Section 11 to the contrary
notwithstanding, the Company shall be entitled to make such reductions in the
Purchase Price, in addition to those adjustments expressly required by this
Section 11, as and to the extent that it, in its sole discretion, shall
determine to be advisable in order that (i) any consolidation or subdivision of
the Preferred Shares, (ii) issuance wholly for cash of any Preferred Shares at
less than the current market price, (iii) issuance wholly for cash of Preferred
Shares or securities which by their terms are convertible into or exchangeable
for Preferred Shares, (iv) dividends on Preferred Shares payable in Preferred
Shares or (v) issuance of rights, options or warrants referred to hereinabove
in Section 11(b), hereafter made by the Company to holders of its Preferred
Shares shall not be taxable to such shareholders.
(n) In the event that at any time after the date of this
Agreement and prior to the Distribution Date, the Company shall (i) declare or
pay any dividend on the Common Shares payable in Common Shares, or (ii) effect
a subdivision, combination or consolidation of the Common Shares (by
reclassification or otherwise than by payment of dividends in Common Shares)
into a greater or lesser number of Common Shares, then in any such case (A) the
number of one one-hundredths of a Preferred Share purchasable after such event
upon proper exercise of each Right shall be determined by multiplying the
number of one one-hundredths of a Preferred Share so purchasable immediately
prior to such event by a fraction, the numerator of which is the number of
Common Shares outstanding immediately before such event and the denominator of
which is the number of Common Shares outstanding immediately after such event,
and (B) each Common Share outstanding immediately after such event shall have
issued with respect to it that number of Rights which each Common Share
outstanding immediately prior to such event had issued with respect to it. The
adjustments provided for in this Section 11(n) shall be made successively
whenever such a dividend is declared or paid or such a subdivision, combination
or consolidation is effected.
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<PAGE> 23
Section 12. Certificate of Adjusted Purchase Price or Number
of Shares. Whenever an adjustment is made as provided in Section 11 or 13
hereof, the Company shall promptly (a) prepare a certificate setting forth such
adjustment, and a brief statement of the facts accounting for such adjustment,
(b) file with the Rights Agent and with each transfer agent for the Common
Shares or the Preferred Shares a copy of such certificate and (c) mail a brief
summary thereof to each holder of a Right Certificate in accordance with
Section 25 hereof. The Rights Agent shall be fully protected in relying on any
such certificate and on any adjustment therein contained.
Section 13. Consolidation, Merger or Sale or Transfer of
Assets or Earning Power. In the event, directly or indirectly, at any time
after a Person has become an Acquiring Person, (a) the Company shall
consolidate with, or merge with and into, any other Person, and the Company
shall not be the continuing or surviving corporation of such consolidation or
merger, (b) any Person shall consolidate with the Company, or merge with and
into the Company and the Company shall be the continuing or surviving
corporation of such merger and, in connection with such merger, all or part of
the Common Shares shall be changed into or exchanged for stock or other
securities of any other Person (or the Company) or cash or any other property,
or (c) the Company shall sell or otherwise transfer (or one or more of its
Subsidiaries shall sell or otherwise transfer), in one or more transactions,
assets or earning power aggregating 50% or more of the assets or earning power
of the Company and its Subsidiaries (taken as a whole) to any other Person, or
group of related Persons, other than the Company or one or more of its wholly
owned Subsidiaries, then, and in each such case, proper provision shall be made
so that (i) each holder of a Right (except as otherwise provided herein) shall
thereafter have the right to receive, upon the exercise thereof at a price
equal to the then current Purchase Price multiplied by the number of one
one-hundredths of a Preferred Share for which a Right is then exercisable, in
accordance with the terms of this Agreement and in lieu of Preferred Shares,
such number of Common Shares of such other Person (including the Company as
successor thereto or as the surviving corporation) as shall equal the result
obtained by (A) multiplying the then current Purchase Price by the number of
one one-hundredths of a Preferred Share for which a Right is then exercisable
and dividing that product by (B) 50% of the then Current Per Share Market Price
of the Common Shares of such other Person (determined pursuant to Section 11(d)
hereof) on the date of consummation of such consolidation, merger, sale or
transfer; (ii) the issuer of such Common Shares shall thereafter be liable for,
and shall assume, by virtue of such consolidation, merger, sale or transfer,
all the obligations and duties of the Company pursuant to this Agreement; (iii)
the term "Company" shall thereafter be deemed to refer to such issuer; and (iv)
such issuer shall take such steps (including, but not limited to, the
reservation of a sufficient number of its Common Shares in accordance with
Section 9 hereof) in connection with such consummation as may be necessary to
assure that the provisions hereof shall thereafter be applicable, as nearly as
reasonably may be, in relation to the Common Shares thereafter deliverable upon
the exercise of the Rights. The Company shall not consummate any such
consolidation, merger, sale or transfer unless prior thereto the Company
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<PAGE> 24
and such issuer shall have executed and delivered to the Rights Agent a
supplemental agreement so providing. The Company shall not enter into any
transaction of the kind referred to in this Section 13 if at the time of such
transaction there are any rights, warrants, instruments or securities
outstanding or any agreements or arrangements which, as a result of the
consummation of such transaction, would eliminate or substantially diminish the
benefits intended to be afforded by the Rights. The provisions of this Section
13 shall similarly apply to successive mergers or consolidations or sales or
other transfers.
Section 14. Fractional Rights and Fractional Shares.
(a) The Company shall not be required to issue fractions of
Rights or to distribute Right Certificates which evidence fractional Rights. In
lieu of such fractional Rights, there shall be paid to the registered holders
of the Right Certificates with regard to which such fractional Rights would
otherwise be issuable, an amount in cash equal to the same fraction of the
current market value of a whole Right. For the purposes of this Section 14(a),
the current market value of a whole Right shall be the closing price of the
Rights for the Trading Day immediately prior to the date on which such
fractional Rights would have been otherwise issuable. The closing price for any
day shall be the last sale price, regular way, or, in case no such sale takes
place on such day, the average of the closing bid and asked prices, regular
way, in either case, as reported in the principal consolidated transaction
reporting system with respect to securities listed on the principal national
securities exchange on which the Rights are listed or admitted to trading or,
if the Rights are not listed or admitted to trading on any national securities
exchange, the last quoted price or, if not so quoted, the average of the high
bid and low asked prices in the over-the-counter market, as reported on the
Nasdaq National Market or such other system then in use or, if on any such date
the Rights are not quoted by any such organization, the average of the closing
bid and asked prices as furnished by a professional market maker making a
market in the Rights selected by the Board of Directors. If on any such date no
such market maker is making a market in the Rights, the fair value of the
Rights on such date as determined in good faith by the Board of Directors shall
be used.
(b) The Company shall not be required to issue fractions of
Preferred Shares (other than fractions which are integral multiples of one
one-hundredth of a Preferred Share) upon exercise of the Rights or to
distribute certificates which evidence fractional Preferred Shares (other than
fractions which are integral multiples of one one-hundredth of a Preferred
Share). Fractions of Preferred Shares in integral multiples of one
one-hundredth of a Preferred Share may, at the election of the Company, be
evidenced by depositary receipts, pursuant to an appropriate agreement between
the Company and a depositary selected by it; provided that such agreement shall
provide that the holders of such depositary receipts shall have all the rights,
privileges and preferences to which they are entitled as beneficial owners of
the Preferred Shares represented by such depositary receipts. In lieu of
fractional Preferred Shares that are not integral multiples of
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<PAGE> 25
one one-hundredth of a Preferred Share, the Company shall pay to the registered
holders of Right Certificates at the time such Rights are exercised as herein
provided an amount in cash equal to the same fraction of the current market
value of one Preferred Share. For the purposes of this Section 14(b), the
current market value of a Preferred Share shall be the closing price of a
Preferred Share (as determined pursuant to the second sentence of Section
11(d)(i) hereof) for the Trading Day immediately prior to the date of such
exercise.
(c) The holder of a Right by the acceptance of the Right
expressly waives his right to receive any fractional Rights or any fractional
shares upon exercise of a Right (except as provided above).
Section 15. Rights of Action. All rights of action in respect
of this Agreement, excepting the rights of action given to the Rights Agent
under Section 18 hereof, are vested in the respective registered holders of the
Right Certificates (and, prior to the Distribution Date, the registered holders
of the Common Shares) and any registered holder of any Right Certificate (or,
prior to the Distribution Date, of the Common Shares), without the consent of
the Rights Agent or of the holder of any other Right Certificate (or, prior to
the Distribution Date, of the Common Shares), may, in his own behalf and for
his own benefit, enforce, and may institute and maintain any suit, action or
proceeding against the Company to enforce, or otherwise act in respect of, his
right to exercise the Rights evidenced by such Right Certificate in the manner
provided in such Right Certificate and in this Agreement. Without limiting the
foregoing or any remedies available to the holders of Rights, it is
specifically acknowledged that the holders of Rights would not have an adequate
remedy at law for any breach of this Agreement and will be entitled to specific
performance of the obligations under, and injunctive relief against actual or
threatened violations of the obligations of any Person subject to, this
Agreement.
Section 16. Agreement of Right Holders. Every holder of a
Right, by accepting the same, consents and agrees with the Company and the
Rights Agent and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be
transferable only in connection with the transfer of the Common Shares;
(b) after the Distribution Date, the Right Certificates are
transferable only on the registry books of the Rights Agent if surrendered at
the principal office of the Rights Agent, duly endorsed or accompanied by a
proper instrument of transfer deed with appropriate forms and certificates
fully executed;
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<PAGE> 26
(c) the Company and the Rights Agent may deem and treat the
person in whose name the Right Certificate (or, prior to the Distribution Date,
the associated Common Shares certificate) is registered as the absolute owner
thereof and of the Rights evidenced thereby (notwithstanding any notations of
ownership or writing on the Right Certificate or the associated Common Shares
certificate made by anyone other than the Company or the Rights Agent) for all
purposes whatsoever, and neither the Company nor the Rights Agent shall be
affected by any notice to the contrary; and
(d) notwithstanding anything in this Agreement to the
contrary, neither the Company nor the Rights Agent shall have any liability to
any holder of a Right or other Person as a result of its inability to perform
any of its obligations under this Agreement by reason of any preliminary or
permanent injunction or other order, decree or ruling issued by a court of
competent jurisdiction or by a governmental, regulatory or administrative
agency or commission, or any statute, rule, regulation or executive order
promulgated or enacted by any governmental authority prohibiting or otherwise
restraining performance of such obligation.
Section 17. Right Certificate Holder Not Deemed a
Stockholder. No holder, as such, of any Right Certificate shall be entitled to
vote, receive dividends or be deemed for any purpose the holder of the
Preferred Shares or any other securities of the Company which may at any time
be issuable on the exercise of the Rights represented thereby, nor shall
anything contained herein or in any Right Certificate be construed to confer
upon the holder of any Right Certificate, as such, any of the rights of a
stockholder of the Company or any right to vote for the election of directors
or upon any matter submitted to shareholders at any meeting thereof, or to give
or withhold consent to any corporate action, or to receive notice of meetings
or other actions affecting shareholders (except as provided in Section 25
hereof), or to receive dividends or subscription rights, or otherwise, until
the Right or Rights evidenced by such Right Certificate shall have been
exercised in accordance with the provisions hereof.
Section 18. Concerning the Rights Agent. The Company agrees
to pay to the Rights Agent reasonable compensation for all services rendered by
it hereunder and, from time to time, on demand of the Rights Agent, its
reasonable expenses and counsel fees and other disbursements incurred in the
administration and execution of this Agreement and the exercise and performance
of its duties hereunder. The Company also agrees to indemnify the Rights Agent
for, and to hold it harmless against, any loss, liability, or expense incurred
without negligence, bad faith or willful misconduct on the part of the Rights
Agent, for anything done or omitted by the Rights Agent in connection with the
acceptance and administration of this Agreement, including the costs and
expenses of defending against any claim of liability in the premises.
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<PAGE> 27
The Rights Agent shall be protected and shall incur no
liability for, or in respect of any action taken, suffered or omitted by it in
connection with, its administration of this Agreement in reliance upon any
Right Certificate or certificate for the Preferred Shares or Common Shares or
for other securities of the Company, instrument of assignment or transfer,
power of attorney, endorsement, affidavit, letter, notice, direction, consent,
certificate, statement, or other paper or document believed by it to be genuine
and to be signed, executed and, where necessary, verified or acknowledged, by
the proper person or persons, or otherwise upon the advice of counsel as set
forth in Section 20 hereof.
Section 19. Merger or Consolidation or Change of Name of
Rights Agent. Any corporation into which the Rights Agent or any successor
Rights Agent may be merged or with which it may be consolidated, or any
corporation resulting from any merger or consolidation to which the Rights
Agent or any successor Rights Agent shall be a party, or any corporation
succeeding to the stock transfer or corporate trust powers of the Rights Agent
or any successor Rights Agent, shall be the successor to the Rights Agent under
this Agreement without the execution or filing of any paper or any further act
on the part of any of the parties hereto; provided, however, that such
corporation would be eligible for appointment as a successor Rights Agent under
the provisions of Section 21 hereof. In case at the time such successor Rights
Agent shall succeed to the agency created by this Agreement, any of the Right
Certificates shall have been countersigned but not delivered, any such
successor Rights Agent may adopt the countersignature of the predecessor Rights
Agent and deliver such Right Certificates so countersigned; and, in case at
that time any of the Right Certificates shall not have been countersigned, any
successor Rights Agent may countersign such Right Certificates either in the
name of the predecessor Rights Agent or in the name of the successor Rights
Agent; and in all such cases such Right Certificates shall have the full force
provided in the Right Certificates and in this Agreement.
In case at any time the name of the Rights Agent shall be
changed and at such time any of the Right Certificates shall have been
countersigned but not delivered, the Rights Agent may adopt the
countersignature under its prior name and deliver Right Certificates so
countersigned; and in case at that time any of the Right Certificates shall not
have been countersigned, the Rights Agent may countersign such Right
Certificates either in its prior name or in its changed name; and in all such
cases such Right Certificates shall have the full force provided in the Right
Certificates and in this Agreement.
Section 20. Duties of Rights Agent. The Rights Agent
undertakes the duties and obligations imposed by this Agreement upon the
following terms and conditions, by all of which the Company and the holders of
Right Certificates, by their acceptance thereof, shall be bound:
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<PAGE> 28
(a) The Rights Agent may consult with legal counsel (who may
be legal counsel for the Company), and the opinion of such counsel shall be
full and complete authorization and protection to the Rights Agent as to any
action taken or omitted by it in good faith and in accordance with such
opinion.
(b) Whenever in the performance of its duties under this
Agreement the Rights Agent shall deem it necessary or desirable that any fact
or matter be proved or established by the Company prior to taking or suffering
any action hereunder, such fact or matter (unless other evidence in respect
thereof be herein specifically prescribed) may be deemed to be conclusively
proved and established by a certificate signed by any one of the Chairman, the
Chief Executive Officer, the President, any Vice President, the Treasurer or
the Secretary of the Company and delivered to the Rights Agent; and such
certificate shall be full authorization to the Rights Agent for any action
taken or suffered in good faith by it under the provisions of this Agreement in
reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder to the Company
and any other Person only for its own negligence, bad faith or willful
misconduct.
(d) The Rights Agent shall not be liable for or by reason of
any of the statements of fact or recitals contained in this Agreement or in the
Right Certificates (except its countersignature thereof) or be required to
verify the same, but all such statements and recitals are and shall be deemed
to have been made by the Company only.
(e) The Rights Agent shall not be under any responsibility in
respect of the validity of this Agreement or the execution and delivery hereof
(except the due execution hereof by the Rights Agent) or in respect of the
validity or execution of any Right Certificate (except its countersignature
thereof); nor shall it be responsible for any breach by the Company of any
covenant or condition contained in this Agreement or in any Right Certificate;
nor shall it be responsible for any change in the exercisability of the Rights
(including the Rights becoming void pursuant to Section 11(a)(ii) hereof) or
any adjustment in the terms of the Rights (including the manner, method or
amount thereof) provided for in Section 3, 11, 13, 23 or 24, or the
ascertaining of the existence of facts that would require any such change or
adjustment (except with respect to the exercise of Rights evidenced by Right
Certificates after actual notice that such change or adjustment is required);
nor shall it by any act hereunder be deemed to make any representation or
warranty as to the authorization or reservation of any Preferred Shares to be
issued pursuant to this Agreement or any Right Certificate or as to whether any
Preferred Shares will, when issued, be validly authorized and issued, fully
paid and nonassessable.
(f) The Company agrees that it will perform, execute,
acknowledge and deliver or cause to be performed, executed, acknowledged and
delivered all such further and other
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<PAGE> 29
acts, instruments and assurances as may reasonably be required by the Rights
Agent for the carrying out or performing by the Rights Agent of the provisions
of this Agreement.
(g) The Rights Agent is hereby authorized and directed to
accept instructions with respect to the performance of its duties hereunder
from any one of the Chairman, the Chief Executive Officer the President, any
Vice President, the Secretary or the Treasurer of the Company, and to apply to
such officers for advice or instructions in connection with its duties, and it
shall not be liable for any action taken or suffered by it in good faith in
accordance with instructions of any such officer or for any delay in acting
while waiting for those instructions.
(h) The Rights Agent and any shareholder, director, officer
or employee of the Rights Agent may buy, sell or deal in any of the Rights or
other securities of the Company or become pecuniarily interested in any
transaction in which the Company may be interested, or contract with or lend
money to the Company or otherwise act as fully and freely as though it were not
Rights Agent under this Agreement. Nothing herein shall preclude the Rights
Agent from acting in any other capacity for the Company or for any other legal
entity.
(i) The Rights Agent may execute and exercise any of the
rights or powers hereby vested in it or perform any duty hereunder either
itself or by or through its attorneys or agents, and the Rights Agent shall not
be answerable or accountable for any act, default, neglect or misconduct of any
such attorneys or agents or for any loss to the Company resulting from any such
act, default, neglect or misconduct, provided reasonable care was exercised in
the selection and continued employment thereof.
(j) No provision of this Agreement shall require the Rights
Agent to expend or risk its own funds or otherwise incur any financial
liability in the performance of any of its duties hereunder or in the exercise
of its rights if there shall be reasonable grounds for believing that repayment
of such funds or adequate indemnification against such risk or liability is not
reasonably assured to it.
(k) If, with respect to any Right Certificate surrendered to
the Rights Agent for exercise or transfer, the certificate attached to the form
of assignment or form of election to purchase, as the case may be, has either
not been completed or indicates an affirmative response to clause 1 and/or 2 on
such certificate attached to the form of assignment or form of election to
purchase, the Rights Agent shall not take any further action with respect to
such requested exercise or transfer without first consulting with the Company.
Section 21. Change of Rights Agent. The Rights Agent or any
successor Rights Agent may resign and be discharged from its duties under this
Agreement upon 30 days' notice in writing mailed to the Company and to each
transfer agent of the Common Shares or Preferred
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<PAGE> 30
Shares by registered or certified mail, and to the holders of the Right
Certificates by first-class mail. The Company may remove the Rights Agent or
any successor Rights Agent upon 30 days' notice in writing, mailed to the
Rights Agent or successor Rights Agent, as the case may be, and to each
transfer agent of the Common Shares or Preferred Shares by registered or
certified mail, and to the holders of the Right Certificates by first-class
mail. If the Rights Agent shall resign or be removed or shall otherwise become
incapable of acting, the Company shall appoint a successor to the Rights Agent.
If the Company shall fail to make such appointment within a period of 30 days
after giving notice of such removal or after it has been notified in writing of
such resignation or incapacity by the resigning or incapacitated Rights Agent
or by the holder of a Right Certificate (who shall, with such notice, submit
his Right Certificate for inspection by the Company), then the registered
holder of any Right Certificate may apply to any court of competent
jurisdiction for the appointment of a new Rights Agent. Any successor Rights
Agent, whether appointed by the Company or by such a court, shall be a
corporation or an affiliate of such corporation organized and doing business
under the laws of the United States or of the Commonwealth of Pennsylvania (or
of any other state of the United States so long as such corporation is
authorized to do business as a banking institution in the Commonwealth of
Pennsylvania), in good standing, having an office in the Commonwealth of
Pennsylvania, which is authorized under such laws to exercise corporate trust
or stock transfer powers and is subject to supervision or examination by
federal or state authority and which has at the time of its appointment as
Rights Agent a combined capital and surplus of at least $50 million. After
appointment, the successor Rights Agent shall be vested with the same powers,
rights, duties and responsibilities as if it had been originally named as
Rights Agent without further act or deed; but the predecessor Rights Agent
shall deliver and transfer to the successor Rights Agent any property at the
time held by it hereunder, and execute and deliver any further assurance,
conveyance, act or deed necessary for the purpose. Not later than the effective
date of any such appointment, the Company shall file notice thereof in writing
with the predecessor Rights Agent and each transfer agent of the Common Shares
or Preferred Shares, and mail a notice thereof in writing to the registered
holders of the Right Certificates. Failure to give any notice provided for in
this Section 21, however, or any defect therein, shall not affect the legality
or validity of the resignation or removal of the Rights Agent or the
appointment of the successor Rights Agent, as the case may be.
Section 22. Issuance of New Right Certificates.
Notwithstanding any of the provisions of this Agreement or of the Rights to the
contrary, the Company may, at its option, issue new Right Certificates
evidencing Rights in such form as may be approved by the Board of Directors to
reflect any adjustment or change in the Purchase Price and the number or kind
or class of shares or other securities or property purchasable under the Right
Certificates made in accordance with the provisions of this Agreement.
Section 23. Redemption.
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(a) The Board of Directors may, at its option, at any time
prior to such time as any Person becomes an Acquiring Person, redeem all but
not less than all the then outstanding Rights at a redemption price of $.01 per
Right, appropriately adjusted to reflect any stock split, stock dividend or
similar transaction occurring after the date hereof (such redemption price
being hereinafter referred to as the "Redemption Price"). The redemption of the
Rights by the Board of Directors may be made effective at such time, on such
basis and with such conditions as the Board of Directors, in its sole
discretion, may establish.
(b) Immediately upon the action of the Board of Directors
ordering the redemption of the Rights pursuant to paragraph (a) of this Section
23, and without any further action and without any notice, the right to
exercise the Rights will terminate and the only right thereafter of the holders
of Rights shall be to receive the Redemption Price. The Company shall promptly
give public notice of any such redemption; provided, however, that the failure
to give, or any defect in, any such notice shall not affect the validity of
such redemption. Within 10 days after such action of the Board of Directors
ordering the redemption of the Rights, the Company shall mail a notice of
redemption to all the holders of the then outstanding Rights at their last
addresses as they appear upon the registry books of the Rights Agent or, prior
to the Distribution Date, on the registry books of the transfer agent for the
Common Shares. Any notice which is mailed in the manner herein provided shall
be deemed given, whether or not the holder receives the notice. Each such
notice of redemption will state the method by which the payment of the
Redemption Price will be made. Neither the Company nor any of its Affiliates
or Associates may redeem, acquire or purchase for value any Rights at any time
in any manner other than that specifically set forth in this Section 23 or in
Section 24 hereof, and other than in connection with the purchase of Common
Shares prior to the Distribution Date.
Section 24. Exchange.
(a) The Board of Directors may, at its option (but subject to
the provisions of Chapter 15 of the Pennsylvania Business Corporation Law of
1988, or any successor provision thereto, relating to the consideration to be
paid for shares with a par value), at any time after any Person becomes an
Acquiring Person, exchange all or part of the then outstanding and exercisable
Rights (which shall not include Rights that have become void pursuant to the
provisions of Section 11(a)(ii) hereof) for Common Shares at an exchange ratio
of one Common Share per Right, appropriately adjusted to reflect any stock
split, stock dividend or similar transaction occurring after the date hereof
(such exchange ratio being hereinafter referred to as the "Exchange Ratio").
Notwithstanding the foregoing, the Board of Directors shall not be empowered to
effect such exchange at any time after any Person (other than the Company, any
Subsidiary of the Company, any employee benefit plan of the Company or of any
Subsidiary of the Company or any entity holding Common Shares for or pursuant
to the terms of any such plan,
- A31 -
<PAGE> 32
together with all Affiliates and Associates of such Person, becomes the
Beneficial Owner of 50% or more of the Common Shares then outstanding.
(b) Immediately upon the action of the Board of Directors
ordering the exchange of any Rights pursuant to paragraph (a) of this Section
24 and without any further action and without any notice, the right to exercise
such Rights shall terminate and the only right thereafter of a holder of such
Rights shall be to receive that number of Common Shares equal to the number of
such Rights held by such holder multiplied by the Exchange Ratio. The Company
shall promptly give public notice of any such exchange; provided, however, that
the failure to give, or any defect in, such notice shall not affect the
validity of such exchange. The Company promptly shall mail a notice of any such
exchange to all of the holders of such Rights at their last addresses as they
appear upon the registry books of the Rights Agent. Any notice which is mailed
in the manner herein provided shall be deemed given, whether or not the holder
receives the notice. Each such notice of exchange will state the method by
which the exchange of the Common Shares for Rights will be effected and, in the
event of any partial exchange, the number of Rights which will be exchanged.
Any partial exchange shall be effected pro rata based on the number of Rights
(other than Rights which have become void pursuant to the provisions of Section
11(a)(ii) hereof) held by each holder of Rights.
(c) In the event that there shall not be sufficient Common
Shares issued but not outstanding or authorized but unissued to permit any
exchange of Rights as contemplated in accordance with this Section 24, the
Company shall take all such action as may be necessary to authorize additional
Common Shares for issuance upon exchange of the Rights. In the event the
Company shall, after good faith effort, be unable to take all such action as
may be necessary to authorize such additional Common Shares, the Company shall
substitute, for each Common Share that would otherwise be issuable upon
exchange of a Right, a number of Preferred Shares or fraction thereof such that
the Current Per Share Market Price of one Preferred Share multiplied by such
number or fraction is equal to the Current Per Share Market Price of one Common
Share as of the date of issuance of such Preferred Shares or fraction thereof.
(d) The Company shall not be required to issue fractions of
Common Shares or to distribute certificates which evidence fractional Common
Shares. In lieu of such fractional Common Shares, the Company shall pay to the
registered holders of the Right Certificates with regard to which such
fractional Common Shares would otherwise be issuable an amount in cash equal to
the same fraction of the current market value of a whole Common Share. For the
purposes of this paragraph (d), the current market value of a whole Common
Share shall be the closing price of a Common Share (as determined pursuant to
the second sentence of Section 11(d)(i) hereof) for the Trading Day immediately
prior to the date of exchange pursuant to this Section 24.
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<PAGE> 33
Section 25. Notice of Certain Events.
(a) In case the Company shall propose, at any time after the
Distribution Date, (i) to pay any dividend payable in stock of any class to the
holders of its Preferred Shares or to make any other distribution to the
holders of its Preferred Shares (other than a regular quarterly cash dividend),
(ii) to offer to the holders of its Preferred Shares rights or warrants to
subscribe for or to purchase any additional Preferred Shares or shares of stock
of any class or any other securities, rights or options, (iii) to effect any
reclassification of its Preferred Shares (other than a reclassification
involving only the subdivision of outstanding Preferred Shares), (iv) to effect
any consolidation or merger into or with, or to effect any sale or other
transfer (or to permit one or more of its Subsidiaries to effect any sale or
other transfer), in one or more transactions, of 50% or more of the assets or
earning power of the Company and its Subsidiaries (taken as a whole) to, any
other Person, (v) to effect the liquidation, dissolution or winding up of the
Company, or (vi) to declare or pay any dividend on the Common Shares payable in
Common Shares or to effect a subdivision, combination or consolidation of the
Common Shares (by reclassification or otherwise than by payment of dividends in
Common Shares), then, in each such case, the Company shall give to each holder
of a Right Certificate, in accordance with Section 26 hereof, a notice of such
proposed action, which shall specify the record date for the purposes of such
stock dividend, or distribution of rights or warrants, or the date on which
such reclassification, consolidation, merger, sale, transfer, liquidation,
dissolution, or winding up is to take place and the date of participation
therein by the holders of the Common Shares and/or Preferred Shares, if any
such date is to be fixed, and such notice shall be so given in the case of any
action covered by clause (i) or (ii) above at least 10 days prior to the record
date for determining holders of the Preferred Shares for purposes of such
action, and in the case of any such other action, at least 10 days prior to the
date of the taking of such proposed action or the date of participation therein
by the holders of the Common Shares and/or Preferred Shares, whichever shall be
the earlier.
(b) In case any event set forth in Section 11(a)(ii) hereof
shall occur, then the Company shall as soon as practicable thereafter give to
each holder of a Right Certificate, in accordance with Section 26 hereof, a
notice of the occurrence of such event, which notice shall describe such event
and the consequences of such event to holders of Rights under Section 11(a)(ii)
hereof.
Section 26. Notices. Notices or demands authorized by this
Agreement to be given or made by the Rights Agent or by the holder of any Right
Certificate to or on the Company shall be sufficiently given or made if sent by
first-class mail, postage prepaid, addressed (until another address is filed in
writing with the Rights Agent) as follows:
Education Management Corporation
300 Sixth Avenue
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<PAGE> 34
Pittsburgh, Pennsylvania 15222
Attention: Corporate Secretary
Subject to the provisions of Section 21 hereof, any notice or demand authorized
by this Agreement to be given or made by the Company or by the holder of any
Right Certificate to or on the Rights Agent shall be sufficiently given or made
if sent by first-class mail, postage prepaid, addressed (until another address
is filed in writing with the Company) as follows:
Jack Livingston, Vice-President
ChaseMellon Shareholder Services, L.L.C.
Four Station Square
Third Floor
Pittsburgh, PA 15219
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Right Certificate shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed to such holder at the address of such holder as shown on the registry
books of the Rights Agent.
Section 27. Supplements and Amendments. The Company may from
time to time supplement or amend this Agreement without the approval of any
holders of Right Certificates in order to cure any ambiguity, to correct or
supplement any provision contained herein which may be defective or
inconsistent with any other provisions herein, or to make any other provisions
with respect to the Rights which the Company may deem necessary or desirable,
any such supplement or amendment to be evidenced by a writing signed by the
Company and the Rights Agent; provided, however, that from and after such time
as any Person becomes an Acquiring Person, this Agreement shall not be amended
in any manner which would adversely affect the interests of the holders of
Rights. Upon the delivery of a certificate from an appropriate officer of the
Company, which states that the proposed supplement or amendment is in
compliance with the terms of this Section 27, the Rights Agent shall execute
such supplement or amendment.
Section 28. Successors. All the covenants and provisions of
this Agreement by or for the benefit of the Company or the Rights Agent shall
bind and inure to the benefit of their respective successors and assigns
hereunder.
Section 29. Benefits of This Agreement. Nothing in this
Agreement shall be construed to give to any Person other than the Company, the
Rights Agent and the registered holders of the Right Certificates (and, prior
to the Distribution Date, the Common Shares) any
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<PAGE> 35
legal or equitable right, remedy or claim under this Agreement; but this
Agreement shall be for the sole and exclusive benefit of the Company, the
Rights Agent and the registered holders of the Right Certificates (and, prior
to the Distribution Date, the Common Shares).
Section 30. Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated.
Section 31. Governing Law. This Agreement and each Right
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the Commonwealth of Pennsylvania and for all purposes shall be governed
by and construed in accordance with the laws of such Commonwealth applicable to
contracts to be made and performed entirely within such Commonwealth.
Section 32. Counterparts. This Agreement may be executed in
any number of counterparts and each of such counterparts shall for all purposes
be deemed to be an original, and all such counterparts shall together
constitute but one and the same instrument.
Section 33. Descriptive Headings. Descriptive headings of the
several Sections of this Agreement are inserted for convenience only and shall
not control or affect the meaning or construction of any of the provisions
hereof.
Section 34. Effective Date of This Agreement. This Agreement
shall be effective upon and subject to the consummation of the Company's
initial public offering.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE> 36
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and attested, all as of the day and year first
above written.
Attest: EDUCATION MANAGEMENT CORPORATION
By /s/ DANIEL K. O'DAY By /s/ FREDRICK W. STEINBERG
---------------------------- -------------------------------
Name: Daniel K. O'Day Name: Fredrick W. Steinberg
Title: Assistant Treasurer Title: Vice President General
Counsel and Secretary
MELLON BANK, N.A.
Attest:
By /s/ J. D. CURTIN By /s/ J. A. LIVINGSTON
---------------------------- -------------------------------
Name: J. D. Curtin Name: J. A. Livingston
Title: Authorized Officer Title: Authorized Officer
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<PAGE> 37
Exhibit A
FORM
of
CERTIFICATE OF DESIGNATIONS
of
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
of
EDUCATION MANAGEMENT CORPORATION
(Pursuant to Section 1522 of the
Pennsylvania Business Corporation Law of 1988)
- - - - - - - - - - - - - - - - - - - - - -
Education Management Corporation, a corporation organized and
existing under the Business Corporation Law of the Commonwealth of Pennsylvania
(hereinafter called the "Corporation"), hereby certifies that the following
resolution was adopted by the Board of Directors of the Corporation as required
by Section 1522 of the Pennsylvania Business Corporation Law of 1988 at a
meeting duly called and held on August 15, 1996
RESOLVED, that pursuant to the authority granted to and
vested in the Board of Directors of this Corporation (hereinafter called the
"Board of Directors" or the "Board") in accordance with the provisions of the
Restated Articles of Incorporation, the Board of Directors hereby creates a
series of Preferred Stock, par value one cent ($0.01) per share, of the
Corporation (the "Preferred Stock") and hereby states the designation and
number of shares, and fixes the relative rights, preferences, and limitations
thereof as follows:
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
Section 1. Designation and Amount. The shares of such series
shall be designated as "Series A Junior Participating Preferred Stock" (the
"Series A Preferred Stock") and the number of shares constituting the Series A
Preferred Stock shall be 600,000. Such number of shares may be increased or
decreased by resolution of the Board of Directors; provided, that no
- A37 -
<PAGE> 38
decrease shall reduce the number of shares of Series A Preferred Stock to a
number less than the number of shares then outstanding plus the number of
shares reserved for issuance upon the exercise of outstanding options, rights
or warrants or upon the conversion of any outstanding securities issued by the
Corporation convertible into Series A Preferred Stock.
Section 2. Dividends and Distributions.
(A) Subject to the rights of the holders of any shares of any
series of Preferred Stock (or any similar stock) ranking prior and
superior to the Series A Preferred Stock with respect to dividends,
the holders of shares of Series A Preferred Stock, in preference to
the holders of Common Stock, par value $.01 per share (the "Common
Stock"), of the Corporation, and of any other junior stock, shall be
entitled to receive, when, as and if declared by the Board of
Directors out of funds legally available for the purpose, quarterly
dividends payable in cash on the first day of March, June, September
and December in each year (each such date being referred to herein as
a "Quarterly Dividend Payment Date"), commencing on the first
Quarterly Dividend Payment Date after the first issuance of a share or
fraction of a share of Series A Preferred Stock, in an amount per
share (rounded to the nearest cent) equal to the greater of (a) $1 or
(b) subject to the provision for adjustment hereinafter set forth, 100
times the aggregate per share amount of all cash dividends, and 100
times the aggregate per share amount (payable in kind) of all non-cash
dividends or other distributions, other than a dividend payable in
shares of Common Stock or a subdivision of the outstanding shares of
Common Stock (by reclassification or otherwise), declared on the
Common Stock since the immediately preceding Quarterly Dividend
Payment Date or, with respect to the first Quarterly Dividend Payment
Date, since the first issuance of any share or fraction of a share of
Series A Preferred Stock. In the event the Corporation shall at any
time declare or pay any dividend on the Common Stock payable in shares
of Common Stock, or effect a subdivision or combination or
consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common
Stock, then in each such case the amount to which holders of shares of
Series A Preferred Stock were entitled immediately prior to such event
under clause (b) of the preceding sentence shall be adjusted by
multiplying such amount by a fraction, the numerator of which is the
number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common
Stock that were outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution
on the Series A Preferred Stock as provided in paragraph (A) of this
Section immediately after it declares a dividend or distribution on
the Common Stock (other than a dividend payable in shares of Common
Stock); provided that, in the event no dividend or distribution shall
have been
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<PAGE> 39
declared on the Common Stock during the period between any Quarterly
Dividend Payment Date and the next subsequent Quarterly Dividend
Payment Date, a dividend of $1 per share on the Series A Preferred
Stock shall nevertheless be payable on such subsequent Quarterly
Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series A Preferred Stock from the Quarterly
Dividend Payment Date next preceding the date of issue of such shares,
unless the date of issue of such shares is prior to the record date
for the first Quarterly Dividend Payment Date, in which case dividends
on such shares shall begin to accrue from the date of issue of such
shares, or unless the date of issue is a Quarterly Dividend Payment
Date or is a date after the record date for the determination of
holders of shares of Series A Preferred Stock entitled to receive a
quarterly dividend and before such Quarterly Dividend Payment Date, in
either of which events such dividends shall begin to accrue and be
cumulative from such Quarterly Dividend Payment Date. Accrued but
unpaid dividends shall not bear interest. Dividends paid on the shares
of Series A Preferred Stock in an amount less than the total amount of
such dividends at the time accrued and payable on such shares shall be
allocated pro rata on a share-by-share basis among all such shares at
the time outstanding. The Board of Directors may fix a record date for
the determination of holders of shares of Series A Preferred Stock
entitled to receive payment of a dividend or distribution declared
thereon, which record date shall be not more than 60 days prior to the
date fixed for the payment thereof.
Section 3. Voting Rights. The holders of shares of Series A
Preferred Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set
forth, each share of Series A Preferred Stock shall entitle the holder
thereof to 100 votes on all matters submitted to a vote of the
shareholders of the Corporation. In the event the Corporation shall at
any time declare or pay any dividend on the Common Stock payable in
shares of Common Stock, or effect a subdivision or combination or
consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common
Stock, then in each such case the number of votes per share to which
holders of shares of Series A Preferred Stock were entitled
immediately prior to such event shall be adjusted by multiplying such
number by a fraction, the numerator of which is the number of shares
of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
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<PAGE> 40
(B) Except as otherwise provided herein, in any other
Certificate of Designations creating a series of Preferred Stock or
any similar stock, or by law, the holders of shares of Series A
Preferred Stock and the holders of shares of Common Stock and any
other capital stock of the Corporation having general voting rights
shall vote together as one class on all matters submitted to a vote of
shareholders of the Corporation.
(C) Except as set forth herein, or as otherwise provided by
law, holders of Series A Preferred Stock shall have no special voting
rights and their consent shall not be required (except to the extent
they are entitled to vote with holders of Common Stock as set forth
herein) for taking any corporate action.
Section 4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or
distributions payable on the Series A Preferred Stock as provided in
Section 2 are in arrears, thereafter and until all accrued and unpaid
dividends and distributions, whether or not declared, on shares of
Series A Preferred Stock outstanding shall have been paid in full, the
Corporation shall not:
(i) declare or pay dividends, or make any other
distributions, on any shares of stock ranking junior (either
as to dividends or upon liquidation, dissolution or winding
up) to the Series A Preferred Stock;
(ii) declare or pay dividends, or make any other
distributions, on any shares of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or
winding up) with the Series A Preferred Stock, except
dividends paid ratably on the Series A Preferred Stock and
all such parity stock on which dividends are payable or in
arrears in proportion to the total amounts to which the
holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking junior (either as
to dividends or upon liquidation, dissolution or winding up)
to the Series A Preferred Stock, provided that the
Corporation may at any time redeem, purchase or otherwise
acquire shares of any such junior stock in exchange for
shares of any stock of the Corporation ranking junior (either
as to dividends or upon dissolution, liquidation or winding
up) to the Series A Preferred Stock; or
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<PAGE> 41
(iv) redeem or purchase or otherwise acquire for
consideration any shares of Series A Preferred Stock, or any
shares of stock ranking on a parity with the Series A
Preferred Stock, except in accordance with a purchase offer
made in writing or by publication (as determined by the Board
of Directors) to all holders of such shares upon such terms
as the Board of Directors, after consideration of the
respective annual dividend rates and other relative rights
and preferences of the respective series and classes, shall
determine in good faith will result in fair and equitable
treatment among the respective series or classes.
(B) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any
shares of stock of the Corporation unless the Corporation could, under
paragraph (A) of this Section 4, purchase or otherwise acquire such
shares at such time and in such manner.
Section 5. Reacquired Shares. Any shares of Series A
Preferred Stock purchased or otherwise acquired by the Corporation in any
manner whatsoever shall be retired and cancelled promptly after the acquisition
thereof. All such shares shall upon their cancellation become authorized but
unissued shares of Preferred Stock and may be reissued as part of a new series
of Preferred Stock subject to the conditions and restrictions on issuance set
forth herein, in the Certificate of Incorporation, or in any other Certificate
of Designations creating a series of Preferred Stock or any similar stock or as
otherwise required by law.
Section 6. Liquidation, Dissolution or Winding Up. Upon any
liquidation, dissolution or winding up of the Corporation, no distribution
shall be made (1) to the holders of shares of stock ranking junior (either as
to dividends or upon liquidation, dissolution or winding up) to the Series A
Preferred Stock unless, prior thereto, the holders of shares of Series A
Preferred Stock shall have received $100 per share, plus an amount equal to
accrued and unpaid dividends and distributions thereon, whether or not
declared, to the date of such payment, provided that the holders of shares of
Series A Preferred Stock shall be entitled to receive an aggregate amount per
share, subject to the provision for adjustment hereinafter set forth, equal to
100 times the aggregate amount to be distributed per share to holders of shares
of Common Stock, or (2) to the holders of shares of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or winding up) with
the Series A Preferred Stock, except distributions made ratably on the Series A
Preferred Stock and all such parity stock in proportion to the total amounts to
which the holders of all such shares are entitled upon such liquidation,
dissolution or winding up. In the event the Corporation shall at any time
declare or pay any dividend on the Common Stock payable in shares of Common
Stock, or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in shares of Common Stock) into a greater or lesser
number of shares of
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<PAGE> 42
Common Stock, then in each such case the aggregate amount to which holders of
shares of Series A Preferred Stock were entitled immediately prior to such
event under the proviso in clause (1) of the preceding sentence shall be
adjusted by multiplying such amount by a fraction the numerator of which is the
number of shares of Common Stock outstanding immediately after such event and
the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section 7. Consolidation, Merger, etc. In case the
Corporation shall enter into any consolidation, merger, combination or other
transaction in which the shares of Common Stock are exchanged for or changed
into other stock or securities, cash and/or any other property, then in any
such case each share of Series A Preferred Stock shall at the same time be
similarly exchanged or changed into an amount per share, subject to the
provision for adjustment hereinafter set forth, equal to 100 times the
aggregate amount of stock, securities, cash and/or any other property (payable
in kind), as the case may be, into which or for which each share of Common
Stock is changed or exchanged. In the event the Corporation shall at any time
declare or pay any dividend on the Common Stock payable in shares of Common
Stock, or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in shares of Common Stock) into a greater or lesser
number of shares of Common Stock, then in each such case the amount set forth
in the preceding sentence with respect to the exchange or change of shares of
Series A Preferred Stock shall be adjusted by multiplying such amount by a
fraction, the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to
such event.
Section 8. No Redemption. The shares of Series A Preferred
Stock shall not be redeemable.
Section 9. Rank. The Series A Preferred Stock shall rank,
with respect to the payment of dividends and the distribution of assets, junior
to all series of any other class of the Corporation's Preferred Stock.
Section 10. Amendment. The Certificate of Incorporation of
the Corporation shall not be amended in any manner which would materially alter
or change the powers, preferences or special rights of the Series A Preferred
Stock so as to affect them adversely without the affirmative vote of the
holders of at least two-thirds of the outstanding shares of Series A Preferred
Stock, voting together as a single class.
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<PAGE> 43
IN WITNESS WHEREOF, this Certificate of Designations is
executed on behalf of the Corporation by its _______________________ and
attested by its ___________________ this ______ day of _________________, 1996.
_______________________________
Attest:
__________________________________
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<PAGE> 44
Exhibit B
FORM OF RIGHT CERTIFICATE
Certificate No. R- ___________ Rights
NOT EXERCISABLE AFTER _______ __, 2006 OR EARLIER IF
REDEMPTION OR EXCHANGE OCCURS. THE RIGHTS ARE SUBJECT
TO REDEMPTION AT $.01 PER RIGHT AND TO EXCHANGE
ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT.
Right Certificate
EDUCATION MANAGEMENT CORPORATION
This certifies that ______________, or registered assigns, is
the registered owner of the number of Rights set forth above, each of which
entitles the owner thereof, subject to the terms, provisions and conditions of
the Rights Agreement, dated as of October 1, 1996 (the "Rights Agreement"),
between Education Management Corporation, a Pennsylvania corporation (the
"Company"), and Mellon Bank, N.A., a national banking association (the "Rights
Agent"), to purchase from the Company at any time after the Distribution Date
(as such term is defined in the Rights Agreement) and prior to 5:00 P.M.,
Pittsburgh, Pennsylvania time, on the tenth anniversary of the date of the
consummation of the offering at the principal office of the Rights Agent, or at
the office of its successor as Rights Agent, one one-hundredth of a fully paid
non-assessable share of Series A Junior Participating Preferred Stock, par
value one cent ($0.01) per share, of the Company (the "Preferred Shares"), at a
purchase price of $__ per one one-hundredth of a Preferred Share (the "Purchase
Price"), upon presentation and surrender of this Right Certificate with the
Form of Election to Purchase duly executed. The number of Rights evidenced by
this Right Certificate (and the number of one one-hundredths of a Preferred
Share which may be purchased upon exercise hereof) set forth above, and the
Purchase Price set forth above, are the number and Purchase Price as of
________ ___, 1996, based on the Preferred Shares as constituted at such date.
As provided in the Rights Agreement, the Purchase Price and the number of one
one-hundredths of a Preferred Share which may be purchased upon the exercise of
the Rights evidenced by this Right Certificate are subject to modification and
adjustment upon the happening of certain events.
This Right Certificate is subject to all of the terms,
provisions and conditions of the Rights Agreement, which terms, provisions and
conditions are hereby incorporated herein by reference and made a part hereof
and to which Rights Agreement reference is hereby made for a
- B1 -
<PAGE> 45
full description of the rights, limitations of rights, obligations, duties and
immunities hereunder of the Rights Agent, the Company and the holders of the
Right Certificates. Copies of the Rights Agreement are on file at the principal
executive offices of the Company and the offices of the Rights Agent.
This Right Certificate, with or without other Right
Certificates, upon surrender at the principal office of the Rights Agent, may
be exchanged for another Right Certificate or Right Certificates of like tenor
and date evidencing Rights entitling the holder to purchase a like aggregate
number of Preferred Shares as the Rights evidenced by the Right Certificate or
Right Certificates surrendered shall have entitled such holder to purchase. If
this Right Certificate shall be exercised in part, the holder shall be entitled
to receive upon surrender hereof another Right Certificate or Right
Certificates for the number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights
evidenced by this Right Certificate (i) may be redeemed by the Company at a
redemption price of $.01 per Right or (ii) may be exchanged in whole or in part
for Preferred Shares or shares of the Company's Common Stock, par value $.01
per share.
No fractional Preferred Shares will be issued upon the
exercise of any Right or Rights evidenced hereby (other than fractions which
are integral multiples of one one-hundredth of a Preferred Share, which may, at
the election of the Company, be evidenced by depositary receipts), but, in lieu
thereof, a cash payment will be made, as provided in the Rights Agreement.
No holder of this Right Certificate shall be entitled to vote
or receive dividends or be deemed for any purpose the holder of the Preferred
Shares or of any other securities of the Company which may at any time be
issuable on the exercise hereof, nor shall anything contained in the Rights
Agreement or herein be construed to confer upon the holder hereof, as such, any
of the rights of a stockholder of the Company or any right to vote for the
election of directors or upon any matter submitted to shareholder at any
meeting thereof, or to give or withhold consent to any corporate action, or to
receive notice of meetings or other actions affecting shareholders (except as
provided in the Rights Agreement), or to receive dividends or subscription
rights, or otherwise, until the Right or Rights evidenced by this Right
Certificate shall have been exercised as provided in the Rights Agreement.
This Right Certificate shall not be valid or obligatory for
any purpose until it shall have been countersigned by the Rights Agent.
WITNESS the facsimile signature of the proper officers of the
Company and its corporate seal. Dated as of _____________________.
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<PAGE> 46
ATTEST: EDUCATION MANAGEMENT CORPORATION
_____________________________ By________________________________
Name: Name:
Title: Title:
Countersigned:
[TRUST COMPANY]
By_____________________________
Name:
Title:
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<PAGE> 47
Form of Reverse Side of Right Certificate
FORM OF ASSIGNMENT
(To be executed by the registered holder if such
holder desires to transfer the Right Certificate.)
FOR VALUE RECEIVED ____________________ hereby sells, assigns
and transfers unto ___________________________________________________________
(Please print name and address of transferee)
______________________________________________________________________________
this Right Certificate, together with all right, title and interest therein, and
does hereby irrevocably constitute and appoint ___________ Attorney, to transfer
the within Right Certificate on the books of the within-named Company, with full
power of substitution.
Dated: _______________, ____
_________________________________
Signature
Signature Guaranteed:
Signatures must be guaranteed by a member firm of a
registered national securities exchange, a member of the National Association
of Securities Dealers, Inc., or a commercial bank or trust company having an
office or correspondent in the United States or by another eligible guarantor
institution, as defined in Rule 17Ad-15 under the Securities Exchange Act of
1934.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - -
The undersigned hereby certifies that the Rights evidenced by
this Right Certificate are not beneficially owned by an Acquiring Person or an
Affiliate or Associate thereof (as defined in the Rights Agreement).
_________________________________
Signature
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<PAGE> 48
Form of Reverse Side of Right Certificate -- continued
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to exercise
Rights represented by the RightCertificate.)
To: EDUCATION MANAGEMENT CORPORATION
The undersigned hereby irrevocably elects to exercise
__________ Rights represented by this Right Certificate to purchase the
Preferred Shares issuable upon the exercise of such Rights and requests that
certificates for such Preferred Shares be issued in the name of:
Please insert social security
or other identifying number
______________________________________________________________________________
(Please print name and address)
______________________________________________________________________________
If such number of Rights shall not be all the Rights evidenced by this Right
Certificate, a new Right Certificate for the balance remaining of such Rights
shall be registered in the name of and delivered to:
Please insert social security
or other identifying number
______________________________________________________________________________
(Please print name and address)
______________________________________________________________________________
Dated: ________________, ____
_________________________________
Signature
Signature Guaranteed:
- B5 -
<PAGE> 49
Signatures must be guaranteed by a member firm of a
registered national securities exchange, a member of the National Association
of Securities Dealers, Inc., or a commercial bank or trust company having an
office or correspondent in the United States or by another eligible guarantor
institution, as defined in Rule 17Ad-15 under the Securities Exchange Act of
1934.
Form of Reverse Side of Right Certificate -- continued
- - - - - - - - - - - - - - - - - - - - - - - - - - - - -
The undersigned hereby certifies that the Rights evidenced by
this Right Certificate are not beneficially owned by an Acquiring Person or an
Affiliate or Associate thereof (as defined in the Rights Agreement).
_________________________________
Signature
- - - - - - - - - - - - - - - - - - - - - - - - - - - - -
NOTICE
The signature in the Form of Assignment or Form of Election
to Purchase, as the case may be, must conform to the name as written upon the
face of this Right Certificate in every particular, without alteration or
enlargement or any change whatsoever.
In the event the certification set forth above in the Form of
Assignment or the Form of Election to Purchase, as the case may be, is not
completed, the Company and the Rights Agent will deem the beneficial owner of
the Rights evidenced by this Right Certificate to be an Acquiring Person or an
Affiliate or Associate thereof (as defined in the Rights Agreement) and such
Assignment or Election to Purchase will not be honored.
- B6 -
<PAGE> 50
Exhibit C
SUMMARY OF RIGHTS TO PURCHASE
PREFERRED SHARES
On _______ __, 1996, the Board of Directors of Education
Management Corporation (the "Company") declared a dividend of one preferred
share purchase right (a "Right") for each outstanding share of common stock,
par value $.01 per share, of the Company (the "Common Shares"). The dividend is
payable on on the date of the consummation of the offering (the "Record Date")
to the shareholders of record on that date. Each Right entitles the registered
holder to purchase from the Company one one-hundredth of a share of Series A
Junior Participating Preferred Stock, par value one cent ($0.01) per share, of
the Company (the "Preferred Shares") at a price of $____ per one one-hundredth
of a Preferred Share (the "Purchase Price"), subject to adjustment. The
description and terms of the Rights are set forth in a Rights Agreement dated
as of October 1, 1996 (the "Rights Agreement") between the Company and Mellon
Bank, N.A., as Rights Agent (the "Rights Agent").
Until the earlier to occur of (i) 10 days following a public
announcement that a person or group of affiliated or associated persons (an
"Acquiring Person") have acquired beneficial ownership of 17.5% or more of the
outstanding Common Shares or (ii) 10 business days (or such later date as may
be determined by action of the Board of Directors of the Company prior to such
time as any person or group of affiliated persons becomes an Acquiring Person)
following the commencement of, or announcement of an intention to make, a
tender offer or exchange offer the consummation of which would result in the
beneficial ownership by a person or group of 17.5% or more of the outstanding
Common Shares (the earlier of such dates being the "Distribution Date"), the
Rights will be evidenced, with respect to any of the Common Share certificates
outstanding as of the Record Date, by such Common Share certificate with a copy
of this Summary of Rights attached thereto. The Rights Agreement contains
exceptions from its operating provision for a person who or which shall become
the Beneficial Owner of 17.5% or more of the Common Shares then outstanding
upon receipt of the prior approval of a majority of the Board of Directors.
The Rights Agreement provides that, until the Distribution
Date (or earlier redemption or expiration of the Rights), the Rights will be
transferred with and only with the Common Shares. Until the Distribution Date
(or earlier redemption or expiration of the Rights), new Common Share
certificates issued after the Record Date upon transfer or new issuance of
Common Shares will contain a notation incorporating the Rights Agreement by
reference. Until the Distribution Date (or earlier redemption or expiration of
the Rights), the surrender for transfer of any certificates for Common Shares
outstanding as of the Record Date, even without such notation or a copy of this
Summary of Rights being attached thereto, will also constitute the transfer of
the Rights associated with the Common Shares represented by such certificate.
As
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<PAGE> 51
soon as practicable following the Distribution Date, separate certificates
evidencing the Rights ("Right Certificates") will be mailed to holders of
record of the Common Shares as of the close of business on the Distribution
Date and such separate Right Certificates alone will evidence the Rights.
The Rights are not exercisable until the Distribution Date.
The Rights will expire on the tenth anniversary of the date of the consummation
of the offering (the "Final Expiration Date"), unless the Final Expiration Date
is extended or unless the Rights are earlier redeemed or exchanged by the
Company, in each case, as described below.
The Purchase Price payable, and the number of Preferred
Shares or other securities or property issuable, upon exercise of the Rights
are subject to adjustment from time to time to prevent dilution (i) in the
event of a stock dividend on, or a subdivision, combination or reclassification
of, the Preferred Shares; (ii) upon the grant to holders of the Preferred
Shares of certain rights or warrants to subscribe for or purchase Preferred
Shares at a price, or securities convertible into Preferred Shares with a
conversion price; less than the then-current market price of the Preferred
Shares or (iii) upon the distribution to holders of the Preferred Shares of
evidences of indebtedness or assets (excluding regular periodic cash dividends
paid out of earnings or retained earnings or dividends payable in Preferred
Shares) or of subscription rights or warrants (other than those referred to
above).
The number of outstanding Rights and the number of one
one-hundredths of a Preferred Share issuable upon exercise of each Right are
also subject to adjustment in the event of a stock split of the Common Shares
or a stock dividend on the Common Shares payable in Common Shares or
subdivisions, consolidations or combinations of the Common Shares occurring, in
any such case, prior to the Distribution Date.
Preferred Shares purchasable upon exercise of the Rights will
not be redeemable. Each Preferred Share will be entitled to a minimum
preferential quarterly dividend payment of $1 per share but will be entitled to
an aggregate dividend of 100 times the dividend declared per Common Share. In
the event of liquidation, the holders of the Preferred Shares will be entitled
to a minimum preferential liquidation payment of $100 per share but will be
entitled to an aggregate payment of 100 times the payment made per Common
Share. Each Preferred Share will have 100 votes, voting together with the
Common Shares. Finally, in the event of any merger, consolidation or other
transaction in which Common Shares are exchanged, each Preferred Share will be
entitled to receive 100 times the amount received per Common Share. These
rights are protected by customary antidilution provisions.
Because of the nature of the Preferred Shares' dividend,
liquidation and voting rights, the value of the one one-hundredth interest in a
Preferred Share purchasable upon exercise of each Right should approximate the
value of one Common Share.
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<PAGE> 52
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 has become an
Acquiring Person, proper provision will be made so that each holder of a Right
will thereafter have the right to receive, upon the exercise thereof at the
then current exercise price of the Right, that number of shares of common stock
of the acquiring company which at the time of such transaction will have a
market value of two times the exercise price of the Right. In the event that
any person or group of affiliated or associated persons becomes an Acquiring
Person, proper provision shall be made so that each holder of a Right, other
than Rights beneficially owned by the Acquiring Person (which will thereafter
be void), will thereafter have the right to receive upon exercise that number
of Common Shares having a market value of two times the exercise price of the
Right.
At any time after any person or group becomes an Acquiring
Person and prior to the acquisition by such person or group of 50% or more of
the outstanding Common Shares, the Board of Directors of the Company may
exchange the Rights (other than Rights owned by such person or group which will
have become void), in whole or in part, at an exchange ratio of one Common
Share, or one one-hundredth of a Preferred Share, per Right (subject to
adjustment).
With certain exceptions, no adjustment in the Purchase Price
will be required until cumulative adjustments require an adjustment of at least
1% in such Purchase Price.
No fractional Preferred Shares will be issued (other than
fractions which are integral multiples of one one-hundredth of a Preferred
Share, which may, at the election of the Company, be evidenced by depositary
receipts) and, in lieu thereof, an adjustment in cash will be made based on the
market price of the Preferred Shares on the last trading day prior to the date
of exercise.
At any time prior to the acquisition by a person or group of
affiliated or associated persons of beneficial ownership of 17.5% or more of
the then outstanding Common Shares, the Board of Directors of the Company may
redeem the Rights in whole, but not in part, at a price of $.01 per Right (the
"Redemption Price"). The redemption of the Rights may be made effective at such
time on such basis with such conditions as the Board of Directors in its sole
discretion may establish. Immediately upon any redemption of the Rights, the
right to exercise the Rights will terminate and the only right of the holders
of Rights will be to receive the Redemption Price.
The terms of the Rights may be amended by the Board of
Directors of the Company without the consent of the holders of the Rights,
except that from and after such time as any person or group of affiliated or
associated persons becomes an Acquiring Person no such amendment may adversely
affect the interests of the holders of the Rights.
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<PAGE> 53
Until a Right is exercised, the holder thereof, as such, will
have no rights as a stockholder of the Company, including, without limitation,
the right to vote or to receive dividends.
A copy of the Rights Agreement has been filed with the
Securities and Exchange Commission as an Exhibit to a Registration Statement on
Form S-1 (Registration No.333-10385). A copy of the Rights Agreement is
available free of charge from the Company. This summary description of the
Rights does not purport to be complete and is qualified in its entirety by
reference to the Rights Agreement, which is hereby incorporated herein by
reference.
- C4 -
<PAGE> 1
EXHIBIT 10.19
COMMON STOCK
REGISTRATION RIGHTS AGREEMENT
as of August 15, 1996
The parties to this Common Stock Registration Rights
Agreement ("Agreement") are Education Management Corporation, a Pennsylvania
corporation (the "Company"); Marine Midland Bank, not in its corporate
capacity, but solely as trustee (the "ESOP Trustee") of the Education
Management Corporation Employee Stock Ownership Trust; The Northwestern Mutual
Life Insurance Company ("Northwestern Mutual"); National Union Fire Insurance
Company of Pittsburgh, PA ("National Union"); ML Employees LBO Partnership No.
I, L.P., ML IBK Positions, Inc., Merrill Lynch KECALP L.P. 1986, ML Offshore
LBO Partnership No. IV, Merrill Lynch Capital Corporation and Merrill Lynch
Capital Appreciation Partnership IV, L.P. (collectively, the "ML Holders");
Robert B. Knutson, as trustee ("Knutson"); and those other persons who are
signatories to this Agreement.
This Agreement shall become effective when duly executed and
delivered by the Company, the ESOP Trustee, Northwestern Mutual, National
Union, the ML Holders and Robert B. Knutson and subject to and automatically
upon the occurrence of the date (the "Effective Date") on which the Company
first becomes subject to the periodic reporting requirements of Section 13 of
the Exchange Act by virtue of its registration under Section 12 of the Exchange
Act of Common Stock.
The parties to this Agreement, intending to be legally bound
hereby, agree as follows:
I. Definitions. As used in this Agreement, the following terms
shall have the following meanings:
"affiliate" has the meaning ascribed to that term in Rule
1-02 of Regulation S-X promulgated under the Securities Act.
"Common Stock" means the Common Stock, par value $.01 per
share, of the Company.
"Demand" has the meaning ascribed to that term in Section
3.1.
"Effective Date" has the meaning ascribed to that term in the
recitals to this Agreement.
1
<PAGE> 2
"Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time.
"Incidental Registration" has the meaning ascribed to that
term in Section 3.2.
"Initiating Holder" means any of (i) the ESOP Trustee, (ii)
Northwestern Mutual, (iii) National Union, (iv) any of the ML Holders, and (v)
Knutson.
"person" means an individual, partnership, corporation, trust
or unincorporated organization, or a government or agency or political
subdivision thereof.
"Prospectus" means the prospectus included in any
Registration Statement, as amended or supplemented by any prospectus supplement
and by all other amendments, and supplements to such prospectus, including
post-effective amendments, and all information incorporated by reference in
such prospectus.
"Registrable Securities" means any shares of Common Stock (i)
owned as of the Effective Date by a party to this Agreement (other than any
shares that are sold by any parties hereto in the initial public offering by
the Company), (ii) underlying the option held on the Effective Date by one such
party identified as an "Option Holder" in the signature page to this Agreement,
or (iii) acquired after the Effective Date by a party to this Agreement by
virtue of any stock split or combination, stock dividend or similar event in
respect of any of the shares referred to in clause (i) or clause (ii) of this
definition; provided, however, that shares of Common Stock that are Registrable
Securities shall cease to be Registrable Securities upon the sale thereof
pursuant to an effective Registration Statement or pursuant to Rule 144 (or
successor rule) under the Securities Act or upon, in the case of any holder
thereof, shares of Common Stock that have become saleable pursuant to Rule 144
without volume or other restrictions; and provided further that shares of
Common Stock that are Registrable Securities shall continue to be Registrable
Securities upon their transfer in a private transaction exempt from the
registration requirements of the Securities Act to a person who is already a
party to this Agreement (or an affiliate of any party to this Agreement) or who
becomes a party to this Agreement by agreeing in writing to be bound by the
terms of this Agreement, such agreement to be in form and substance reasonably
satisfactory to the Company.
"Registration Expenses" means all registration and filing
fees, fees with respect to filings required to be made with the National
Association of Securities Dealers, Inc. (the "NASD"), the fees and expenses of
any "qualified independent underwriter" (and its counsel), if any, that is
required to be retained by any holder of Registrable Securities in accordance
with the rules and regulations of the NASD, fees and expenses of compliance
with securities or blue sky laws (including reasonable fees and disbursements
of one counsel for the underwriters or sellers of Registrable Securities in
connection with blue sky qualifications of the Registrable Securities and
determination of their eligibility for investment under the laws of such
jurisdictions as the managing underwriters or holders of a majority of the
Registrable Securities being sold may designate), printing expenses, messenger,
telephone and distribution expenses associated with the preparation and
distribution of any Registration Statement, any Prospectus, and amendments or
2
<PAGE> 3
supplements thereto, any underwriting agreements, securities sales agreements
and other documents relating to the performance of and compliance with this
Agreement, all fees and expenses associated with the listing of any Registrable
Securities on any securities exchange or exchanges, and fees and disbursements
of counsel for the Company and its independent certified public accountants,
any fees and expenses of underwriters customarily paid by issuers (but
specifically excluding any Selling Expenses), the fees and expenses of other
persons retained by the Company, and the reasonable fees and disbursements of
one counsel to the holders of the Registrable Securities that are being sold,
which counsel shall be reasonably satisfactory to the Company.
"Registration Statement" means any registration statement of
the Company filed under the Securities Act, including the Prospectus forming a
part thereof, amendments and supplements to such Registration Statement,
including post-effective amendments, and all exhibits to and all information
incorporated by reference in such Registration Statement.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended
from time to time.
"Selling Expenses" means, with respect to any holder of
Registrable Securities, all underwriting discounts, selling commissions and
stock transfer or documentary stamp taxes, if any, applicable to any
Registrable Securities registered and sold by such holder, and all fees and
disbursements of any counsel for such holder (other than any counsel fees
expressly constituting a Registration Expense as defined in this Agreement).
"Selling Holders" has the meaning ascribed to that term in
Section 3.1.
"underwritten offering" means an offering registered under
the Securities Act in which securities are sold to an underwriter, whether on a
"firm commitment", "best efforts" or other basis, for reoffering to the public.
2. Securities Subject to this Agreement. The only securities
entitled to the benefits of this Agreement are the Registrable Securities.
3. Registration of Registrable Securities.
3.1 Demand Registration.
(a) Demand. At any time after the first anniversary
of the Effective Date and subject to the other provisions of this Agreement,
any Initiating Holder or Holders shall have the right, exercisable by making a
written request to the Company (with each such request being referred to
hereinafter as a "Demand"), to require that the Company effect the registration
in accordance with the provisions of the Securities Act of the offering and
sale of any of the Registrable Securities held by such Initiating Holder or
Holders, but in no event fewer than 500,000 shares per Initiating Holder (with
such number to be adjusted, as appropriate, by the
3
<PAGE> 4
Company to reflect any stock splits, reverse stock splits, stock combinations
or the like occurring after the Effective Date). Upon receipt of one or more
Demands, the Company shall promptly give written notice of the Demand to all
other holders of Registrable Securities, and the Company shall use all
reasonable efforts to effect, at the earliest practicable date, the
registration under the Securities Act on Form S-3 (or a successor form
thereto), including by means of a shelf registration on Form S-3 (or a
successor form thereto) pursuant to Rule 415 under the Securities Act if so
requested in such Demand (in any case only if Form S-3 (or such successor form)
is then available to the Company and only if the Company is then eligible to
use such a shelf registration), of (i) the offering and sale of the Registrable
Securities that the Company has been so required to register by such Initiating
Holder or Holders, and (ii) the offering and sale of all other Registrable
Securities that the Company has been requested to register by the holders
thereof (such holders together with the Initiating Holders being hereinafter
referred to as the "Selling Holders") by written request given to the Company
within 20 days after the giving of such written notice by the Company.
(b) Effective Registration Statement. A registration
requested pursuant to this Section 3.1 shall not be deemed to have been
effected (i) unless a Registration Statement with respect thereto has become
effective and remained effective in compliance with the provisions of the
Securities Act with respect to the disposition of all Registrable Securities
covered by such Registration Statement until such time as all of such
Registrable Securities have been disposed of in accordance with the intended
methods of disposition by the Selling Holders thereof set forth in such
registration statement, unless the failure to so dispose of such Registrable
Securities shall be caused solely by reason of a failure on the part of the
Selling Holders); provided, that with respect to any registration statement
filed pursuant to Rule 415 under the Securities Act, such period need not
exceed 180 days, and that with respect to any other such registration
statement, such period need not exceed 135 days, (ii) if, after it has become
effective, such registration is interfered with by any stop order, injunction
or other order or requirement of the SEC or other governmental agency or court
for any reason not attributable to the Selling Holders and has not thereafter
become effective, or (iii) if the conditions to closing specified in the
underwriting agreement, if any, entered into in connection with such
registration are not satisfied or waived, other than by reason of a failure on
the part of the Selling Holders.
(c) Selection of Underwriters. The underwriter or
underwriters of each underwritten offering of the Registrable Securities so to
be registered shall be selected by the Selling Holders of more than 50% of the
Registrable Securities to be included in such registration and shall be
reasonably acceptable to the Company.
(d) Priority in Requested Registration. If the
managing underwriter of any underwritten offering of Registrable Securities
shall advise the Company in writing (and the Company shall so advise each
Selling Holder of Registrable Securities requesting registration of such
advice) that, in its opinion, the number of Registrable Securities requested to
be included in such registration exceeds the number which can be sold in such
offering within a price range acceptable to the Selling Holders of 66_% of the
Registrable Securities requested to be included in such registration, the
Company, except as provided in the following sentence, shall include in such
registration, to the extent of the number which the Company is so advised can
be sold in
4
<PAGE> 5
such offering, Registrable Securities requested to be included in such
registration allocated first to the Registrable Securities requested to be
included in such registration by the Initiating Holder or the Initiating
Holders exercising one or more Demands, and then, to the extent of the
remainder of the number which the Company is so advised can be sold in the
offering, pro rata among the other Selling Holders requesting such registration
on the basis of the estimated gross proceeds from the sale thereof. If the
total number of Registrable Securities requested by a Selling Holder to be
included in such registration cannot be included as provided in the preceding
sentence, a Selling Holder shall have the right to withdraw such Selling
Holder's request for registration by giving written notice to the Company
within 10 days after receipt of such notice by the Company and, in the event of
such withdrawal, such request shall not be counted for purposes of the number
of Demands an Initiating Holder is entitled pursuant to Section 3.1(e).
(e) Limitations on Demand Registrations. No
Initiating Holder may exercise more than two Demands during the term of this
Agreement; provided, however, that for purposes of this sentence only the ML
Holders shall be considered as a single group and accordingly the ML Holders
may not exercise more than two Demands in the aggregate regardless of which ML
Holder exercises a Demand. Following a registration pursuant to this Section
3.1, the Company shall not be required to effect another registration pursuant
to this Section 3.1 for the six-month period immediately subsequent to the
effectiveness (within the meaning of Section 3.1(b)) of the Registration
Statement filed with respect to such first registration. In addition, the
Company may delay the filing of any Registration Statement pursuant to this
Section 3.1 for a reasonable period of time if, in the good faith judgment of
the Board of Directors of the Company, the Company would be required to include
in such registration statement material information which at that time could
not be publicly disclosed without materially interfering with any financing,
acquisition, corporate reorganization or other material development or
transaction then pending or in progress and without other material adverse
consequences; provided, however, that the duration of any such delay shall not
exceed 90 days from the date the Company's Board of Directors actually becomes
aware of such material development or transaction; and, provided, further, that
the Company shall make such filing no later than the earlier of (i) the date on
which the conditions that permitted it to delay such filing no longer pertain
and (ii) the end of such 90-day period. In the event of any such delay, any
Selling Holder shall have the right to withdraw his or its request for
registration, and any such withdrawn request that would otherwise have been
considered a Demand shall not be considered for purposes of the determining the
maximum number of Demands provided for in the first sentence of this Section
3.1(e).
5
<PAGE> 6
3.2 Incidental Registration.
(a) Right to Include Registrable Securities. If the
Company at any time proposes to register the offering and sale of shares of
Common Stock under the Securities Act by registration on any form other than
forms S-4 or S-8 (or any successors thereto) whether or not for sale for its
own account, it shall each such time give prompt written notice to all holders
of Registrable Securities of its intention to do so and of such holders' rights
under this Section 3.2. Upon the written request of any such holder (a
"Requesting Holder") made as promptly as practicable and in any event within 20
days after the receipt of any such notice (which request shall specify the
Registrable Securities intended to be disposed of by such Requesting Holder and
the intended methods of such disposition), the Company shall use all reasonable
efforts to effect the registration under the Securities Act of all Registrable
Securities which the Company has been so requested to register by the
Requesting Holders thereof to the extent requisite to permit the disposition
(in accordance with such intended methods thereof) of the Registrable
Securities so to be registered; provided that (i) if such registration involves
an underwritten public offering, all holders of Registrable Securities
requesting to be included in the Company's registration must sell their
Registrable Securities to the underwriters selected by the Company on the same
terms and conditions as apply to the Company; and (ii) if, at any time after
giving notice of its intention to register any securities pursuant to this
Section 3.2(a) and prior to the effective date of the registration statement
filed in connection with such registration, the Company shall determine for any
reason not to register such securities, the Company shall give written notice
to all holders of Registrable Securities and, thereupon, shall be relieved of
its obligation to register any Registrable Securities in connection with such
registration (but not from any obligation of the Company to pay the
Registration Expenses in connection therewith), without prejudice, however, to
the rights of holders under Section 3.1. If a registration pursuant to this
Section 3.2(a) involves an underwritten public offering, any holder of
Registrable Securities requesting to be included in such registration may
elect, in writing prior to the effective date of the registration statement
filed in connection with such registration, not to register such securities in
connection with such registration. No registration effected under this Section
3.2 shall relieve the Company of its obligations to effect registrations upon
request under Section 3.1.
(b) Priority in Incidental Registrations. If the
managing underwriter of the underwritten offering shall inform the Company by
letter of its opinion that the number of Registrable Securities requested to be
included in such registration would, in its opinion, materially adversely
affect such offering, including the price at which such securities can be sold,
and the Company has so advised the Requesting Holders in writing, then the
Company shall include in such registration, to the extent of the number which
the Company is so advised can be sold in (or during the time of) such offering,
first, all securities proposed by the Company as so advised can be sold for its
own account, second, to the extent that the number of shares of Common Stock
which the Company proposes to sell for its own account pursuant to Section
3.2(a) is less than the number of shares of Common Stock which the Company has
been advised can be sold in such offering without having the material adverse
effect referred to above, such Registrable Securities requested to be included
in such registration pursuant to this Section 3.2, allocated pro rata among
such Requesting Holders on the basis of the estimated gross proceeds from the
sale thereof.
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<PAGE> 7
4. Hold-Back Agreements. Each holder of Registrable Securities
whose Registrable Securities are covered by a Registration Statement filed
pursuant to Section 3 shall, if requested by the managing underwriter or
underwriters in an underwritten offering, agree not to effect any public sale
or distribution of securities of the Company of the same class as the
securities included in such Registration Statement, including a sale pursuant
to Rule 144 under the Securities Act, except as part of such underwritten
registration, during the 15-day period prior to, and during a period of up to
120 days beginning on, the closing date of each underwritten offering made
pursuant to such Registration Statement, to the extent timely notified in
writing by the Company or the managing underwriter or underwriters.
5. Registration Procedures.
In connection with the Company's obligations under Section 3,
the Company shall use all reasonable efforts to effect such registration to
permit the sale of such Registrable Securities in accordance with the intended
method or methods of distribution thereof, and pursuant thereto the Company
shall as expeditiously as practicable:
(a) prepare and file with the SEC, as soon as practicable, a
Registration Statement on an appropriate registration form, which Registration
Statement shall comply as to form in all material respects with the
requirements of the applicable form and include or incorporate by reference all
financial statements required by the SEC to be filed therewith or incorporated
by reference therein, and in either case use all reasonable efforts to cause
such Registration Statement to become effective and remain effective in
accordance with Section 3.1(b); provided, however, that before filing a
Registration Statement or Prospectus or any amendment or supplement thereto,
including information incorporated by reference after the initial filing of the
Registration Statement, the Company shall furnish to the holders of the
Registrable Securities covered by such Registration Statement and the managing
underwriter or underwriters, if any, copies of all such documents proposed to
be filed (including, upon request, any and all exhibits thereto), which
documents shall be subject to the reasonable and prompt review of such holders
and underwriters, and the Company shall not file any Registration Statement or
amendment thereto or any Prospectus or any supplement thereto to which the
holders of at least 50% of the Registrable Securities covered by such
Registration Statement, or the managing underwriter or underwriters, if any,
shall reasonably object;
(b) prepare and file with the SEC such amendments and
post-effective amendments to such Registration Statement as may be necessary to
keep the Registration Statement effective for the applicable period, or such
shorter period which shall terminate when all Registrable Securities covered by
such Registration Statement have been sold; cause the Prospectus to be
supplemented by any required Prospectus supplement, and to be filed pursuant to
Rule 424 under the Securities Act; and comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by
such Registration Statement during the applicable period in accordance with the
intended method or methods of distribution by the Selling Holders set forth in
such Registration Statement or supplement to the Prospectus;
7
<PAGE> 8
(c) notify the Selling Holders of Registrable Securities and the
managing underwriter or underwriters, if any, promptly, and (if requested by
any such person) confirm such advice in writing promptly, (1) when the
Prospectus or any Prospectus supplement or post-effective amendment to the
Registration Statement has been filed, and, with respect to such Registration
Statement or any post-effective amendment thereto, when the same has become
effective, (2) of any comments of the SEC or any state securities authority
with regard to the Registration Statement and of any request by the SEC or any
state securities authority for amendments or supplements to the Registration
Statement or the Prospectus or for additional information, (3) of the issuance
by the SEC or any state securities authority of any stop order suspending the
effectiveness of the Registration Statement or the initiation of any
proceedings for that purpose, (4) of the receipt by the Company of any
notification with respect to the suspension of the qualification of the
Registrable Securities for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose, (5) in the case of any shelf
Registration Statement, if between the effective date of a Registration
Statement and the closing of any sale of Registrable Securities covered
thereby, the representations and warranties of the Company contained in any
underwriting agreement, securities sale agreement or other similar agreement,
relating to the offering cease to be true and correct in all material respects
and (6) of the happening of any event or the discovery of any facts that makes
any statement made in the Registration Statement, the Prospectus or any
document incorporated therein by reference untrue in any material respect or
which requires the making of any changes in the Registration Statement, the
Prospectus or any document incorporated therein by reference in order to make
the statements therein not contain an untrue statement of a material fact or
omit to state any material fact necessary to make the statements therein not
misleading;
(d) make every reasonable effort to obtain the withdrawal of any
order suspending the effectiveness of the Registration Statement at the
earliest possible time;
(e) if requested by the managing underwriter or underwriters or
a Holder of Registrable Securities being offered for sale in connection with an
underwritten offering, promptly incorporate in a Prospectus supplement or
post-effective amendment such information as the managing underwriter or
underwriters or such holder of Registrable Securities being offered for sale
consider should be included therein relating to the plan of distribution with
respect to such Registrable Securities, including, without limitation,
information with respect to the number of Registrable Securities being offered
for sale, the purchase price being paid therefor and with respect to any other
terms of the offering of the Registrable Securities to be sold in such
offering; and make all required filings of such Prospectus supplement or
post-effective amendment as soon as practicable after being notified of the
matters to be incorporated in such Prospectus supplement or post-effective
amendment;
(f) furnish to each selling holder of Registrable Securities and
each managing underwriter, without charge, at least one signed copy of the
Registration Statement, any amendment (including any post-effective amendment)
thereto, including financial statements and schedules, all documents
incorporated therein by reference and all exhibits (including those
incorporated by reference);
8
<PAGE> 9
(g) deliver to each selling holder of Registrable Securities and
the underwriters, if any, without charge, as many copies of the Prospectus
(including each preliminary prospectus) and any amendment or supplement thereto
as such persons may reasonably request;
(h) prior to any public offering of Registrable Securities,
register or qualify or cooperate with the selling holders of Registrable
Securities, the underwriters, if any, and their respective counsel in
connection with the registration or qualification of such Registrable
Securities for offer and sale under the state securities or blue sky laws of
such jurisdictions as any seller or underwriter reasonably requests in writing
and do any and all other acts or things necessary or advisable to enable the
disposition in such jurisdictions of the Registrable Securities covered by the
Registration Statement; provided that the Company shall not be required to
qualify generally to do business in any jurisdiction where it is not then so
qualified or to take any action which would subject it to general service of
process in any such jurisdiction where it is not then so subject;
(i) cooperate with the selling holders of Registrable Securities
and the managing underwriter or underwriters, if any, to facilitate the timely
preparation and delivery of certificates representing Registrable Securities to
be sold without any restrictive legends; and enable such Registrable Securities
to be in such denominations and registered in such names as the managing
underwriter or underwriters may request at least two business days prior to any
sale of Registrable Securities to underwriters;
(j) upon the occurrence of any event contemplated by clause (6)
of paragraph (c) above, prepare a supplement or post-effective amendment to the
Registration Statement or the related Prospectus or any document incorporated
therein by reference or file any other required document so that, as thereafter
delivered to purchasers of the Registrable Securities, the Prospectus shall not
contain an untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein not misleading;
(k) use all reasonable efforts to cause all Registrable
Securities covered by the Registration Statement to be listed on each
securities exchange or on the Nasdaq National Market, if any, on which the
Common Stock is then listed;
(l) enter into such agreements (including an underwriting
agreement) and take all such other actions in connection therewith in order to
expedite or facilitate the disposition of Registrable Securities covered by a
Registration Statement and in such connection, whether or not an underwriting
agreement is entered into and whether or not the registration is an
underwritten registration (1) make such representations and warranties to the
holders of such Registrable Securities and the underwriters, if any, in form,
substance and scope as are customarily made by issuers to underwriters in
primary underwritten offerings; (2) obtain opinions of counsel to the Company
and updates thereof (which counsel and opinions (in form, scope and substance)
shall be reasonably satisfactory to the managing underwriter or underwriters,
if any, and the holders of at least 50% of the Registrable Securities being
sold, addressed to each selling holder and the underwriters, if any, covering
the matters customarily covered in opinions requested in underwritten offerings
and such other matters as may be reasonably requested by such holders and
9
<PAGE> 10
underwriters; and (3) obtain "comfort" letters and updates thereof from the
Company's independent certified public accountants addressed to the selling
holders of Registrable Securities and the underwriters, if any, such letters to
be in customary form and covering matters of the type customarily covered in
"comfort" letters by underwriters in connection with primary underwritten
offerings;
(m) make available for inspection by a representative of the
holders of at least a majority of the Registrable Securities, any underwriter
participating in any disposition pursuant to Registration Statement and any
attorney or accountant retained by any selling holder or holders of Registrable
Securities or any underwriter, all financial and other records and all
pertinent corporate documents and properties of the Company, and cause the
Company's officers, directors and employees to be available for discussions
with and to supply all information reasonably requested by any such
representative, underwriter, attorney or accountant in connection with such
Registration Statement; provided, that any records, information or documents
that are designated by the Company in writing as confidential shall be kept
confidential by such persons unless disclosure of such records, information or
documents is required by court or administrative order or becomes publicly
available;
(n) use all reasonable best efforts to comply with all
applicable rules and regulations of the SEC and make generally available to its
security holders, as provided in Rule 158 or otherwise, earnings statements
satisfying the provisions of Section 11(a) of the Securities Act;
(o) promptly prior to the filing of any document which is to be
incorporated by reference into Registration Statement or Prospectus (after
initial filing of the Registration Statement), provide copies of such document
to counsel to the selling holders of Registrable Securities and to the managing
underwriter or underwriters, if any, make the Company's representatives
available for discussion of such document and make such changes in such
document prior to the filing thereof as counsel for such selling holders or
underwriters may reasonably request; and
(p) otherwise reasonably cooperate with the Selling Holders to
carry out the intent of this Agreement.
The Company may require each seller of Registrable Securities as
to which any registration is being effected to furnish to the Company such
information regarding the distribution of such securities as the Company may
from time to time reasonably request in writing; provided, however, that such
information shall be used by the Company only to the extent necessary for and
in connection with, such registration.
Each holder of Registrable Securities agrees that, upon receipt
of any notice from the Company of the happening of any event of the kind
described in Section 5(c)(6) hereof, such holder shall forthwith discontinue
disposition of such Registrable Securities until such holder's receipt of the
copies of the supplemented or amended Prospectus contemplated by Section 5(j),
or until it is advised in writing (the "Advice") by the Company that the use of
the Prospectus may be
10
<PAGE> 11
resumed, and has received copies of any additional or supplemental filings
which are incorporated by reference in the Prospectus, and, if so directed by
the Company, such holder shall deliver to the Company (at the Company's
expense) all copies, other than permanent file copies then in such holder's
possession, of the Prospectus covering such Registrable Securities current at
the time of receipt of such notice. In the event the Company shall give any
such notice, the time periods regarding the maintenance of the Registration
Statement in Section 3 shall be extended by the number of days during the
period from and including the date of the giving of such notice pursuant to
Section 5(c)(6) to and including the date when each seller of Registrable
Securities covered by such Registration Statement shall have received the
copies of the supplemented or amended prospectus contemplated by Section 5(j)
or the Advice.
6. Expenses of Registration. All Registration Expenses incurred in
connection with any registration commenced in accordance with Section 3 or 4
(even if subsequently terminated or withdrawn) shall be borne by the Company.
All Selling Expenses relating to Registrable Shares registered on behalf of any
person shall be borne by such person.
7. Indemnification.
(a) Indemnification by Company. The Company shall indemnify
and hold harmless, to the full extent permitted by law, each holder of
Registrable Securities, its officers, directors and employees and each person
who controls such holder (within the meaning of the Securities Act) against all
losses, claims, damages, liabilities and expenses arising out of any untrue or
alleged untrue statement of a material fact contained in any Registration
Statement (or amendment (including any post-effective amendment) or supplement
thereto), Prospectus or preliminary Prospectus) or any amendment or supplement
thereto, including all documents incorporated therein by reference, or any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading,
except insofar as the same are caused by or contained in any information
furnished in writing to the Company by such holder expressly for use therein or
by such holder's failure to deliver a copy of the Registration Statement or
Prospectus after the Company has furnished such holder with a sufficient number
of copies of the same; provided, however, that in the event of an underwritten
offering, no holder shall be deemed to have failed to make any such delivery.
The Company shall also indemnify underwriters, selling brokers, dealer managers
and similar securities industry professionals participating in the
distribution, their officers and directors and each person who controls such
persons (within the meaning of the Securities Act) to the same extent as
provided above with respect to the indemnification of the holders of
Registrable Securities, if requested.
(b) Indemnification by Holder of Registrable Securities. In
connection with a Registration Statement, each holder of Registrable Securities
covered thereby shall furnish to the Company in writing such information as the
Company reasonably requests for use in connection with any Registration
Statement (or amendment (including any post-effective amendment) or supplement
thereto) or Prospectus (or any amendment or supplement thereto) and shall
indemnify and hold harmless, to the full extent permitted by law, the Company,
its directors and officers and each person who controls the Company (within the
meaning of the Securities Act) against any
11
<PAGE> 12
losses, claims, damages, liabilities and expenses arising out of any untrue or
alleged untrue statement of a material fact or any omission or alleged omission
of a material fact required to be stated in the Registration Statement (or
amendment (including any post-effective amendment) or supplement thereto) or
Prospectus or preliminary Prospectus (or any amendment or supplement thereto),
including all documents incorporated therein by reference or necessary to make
the statements therein not misleading, to the extent, but only to the extent,
that such untrue statement is contained or omission is required to be in any
information so furnished in writing by such holder to the Company specifically
for inclusion in such Registration Statement (or amendment (including any
post-effective amendment) or supplement thereto) or Prospectus (or any
amendment or supplement thereto). The liability of any selling holder of
Registrable Securities hereunder shall not exceed the dollar amount of the
proceeds received by such holder upon the sale of the Registrable Securities
giving rise to such indemnification obligation. The Company shall be entitled
to receive indemnities from underwriters, selling brokers, dealer managers and
similar securities industry professionals participating in the distribution, to
the same extent as provided above with respect to information so furnished in
writing by such persons specifically for inclusion in any Prospectus or
Registration Statement (or amendment (including any post-effective amendment)
or supplement thereto).
(c) Conduct of Indemnification Proceedings. Any person
entitled to indemnification hereunder shall (i) give prompt notice to the
indemnifying party of any claim with respect to which it seeks indemnification
and (ii) permit such indemnifying party to assume the defense of such claim
with counsel reasonably satisfactory to the indemnified party, provided,
however, that any person entitled to indemnification hereunder shall have the
right to employ separate counsel and to participate in the defense of such
claim, but the fees and expenses of such counsel shall be at the expense of
such person unless (a) the indemnifying party has agreed to pay such fees or
expenses, or (b) the indemnifying party shall have failed to assume the defense
of such claim and employ counsel reasonably satisfactory to such person, or (c)
in the reasonable judgment of any such person, based upon advice of its
counsel, a conflict of interest may exist between such person and the
indemnifying party with respect to such claims or there may exist legal
defenses for such person that are materially different from or in addition to
those available to the indemnifying party (in which case, if the person
notifies the indemnifying party in writing that such person elects to employ
separate counsel at the expense of the indemnifying party, the indemnifying
party shall not have the right to assume the defense of such claim on behalf of
such person). If such defense is not assumed by the indemnifying party, the
indemnifying party shall not be subject to any liability for any settlement or
consent to judgment made without its consent (but if such consent is requested,
such consent shall not be unreasonably withheld). No indemnifying party shall
be required to consent to entry of any judgment or enter into any settlement
which does not include as an unconditional term thereof the giving by the
claimant or plaintiff to such indemnified party of a release from all liability
in respect to such claim or litigation. An indemnifying party who is not
entitled to, or elects not to, assume the defense of a claim shall not be
obligated to pay the fees and expenses of more than one counsel for all parties
indemnified by such indemnifying party with respect to such claim, unless in
the reasonable judgment of any indemnified party, after consultation with
counsel, a conflict of interest may exist between such indemnified party and
any other of such indemnified parties or there may exist legal defenses for
such indemnified party that are materially different from or in addition to
those
12
<PAGE> 13
available to the other indemnified parties with respect to such claim, in which
event the indemnifying party shall be obligated to pay the fees and expenses of
such additional counsel or counsels.
(d) Contribution. If for any reason the indemnification
provided for in the preceding clauses (a) and (b) is unavailable to an
indemnified party or insufficient to hold it harmless as contemplated by the
preceding clauses (a) and (b), then the indemnifying party shall contribute to
the amount paid or payable by the indemnified party as a result of such loss,
claim, damage or liability (i) in such proportion as is appropriate to reflect
the relative fault of the indemnified party and the indemnifying party, or (ii)
if the allocation provided by clause (i) is not permitted by applicable law, in
such proportion as is appropriate to reflect the relative benefits received by
the indemnified party and the indemnifying party as well as their relative
fault, as well as any other relevant equitable considerations. The relative
fault of the indemnified party and the indemnifying party shall be determined
by reference to, among other things, whether any such untrue or alleged untrue
statement of a material fact or omission or alleged omission to state a
material fact relates to information supplied by the indemnified party or the
indemnifying party and each party's relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission,
provided that no holder of Registrable Securities shall be required to
contribute in an amount greater than the dollar amount of the proceeds received
by such holder with respect to the sale of any Registrable Securities. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
8. Current Public Information. For so long as the Company is
subject to the reporting requirements of Section 13 or 15 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), the Company covenants
that it will file the reports required to be filed by it under the Securities
Act and Section 13(a) or 15 (d) of the Exchange Act and the rules and
regulations adopted by the SEC thereunder, that if it ceases to be so required
to file such reports, it will upon the request of any holder of Registrable
Securities (a) make publicly available such information as is necessary to
permit sales pursuant to Rule 144 under the Securities Act, (b) deliver such
information to a prospective purchaser as is necessary to permit sales pursuant
to Rule 144A under the Securities Act and it will take such further action as
any holder of Registrable Securities may reasonably request, and (c) take such
further action that is reasonable in the circumstances, in each case, to the
extent required from time to time to enable such holder to sell its Registrable
Securities without registration under the Securities Act within the limitation
of the exemptions provided by (i) Rule 144 under the Securities Act, as such
Rule may be amended from time to time, (ii) Rule 144A under the Securities Act,
as such Rule may be amended from time to time, or (iii) any similar rules or
regulations hereafter adopted by the SEC. Upon the request of any holder of
Registrable Securities, the Company will deliver to such holder a written
statement as to whether it has complied with such requirements.
9. Miscellaneous.
(a) Amendments and Waivers. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or
13
<PAGE> 14
consents to departures from the provisions hereof may not be given unless the
Company has obtained the written consent of holders of at least 80% of the
Registrable Securities; provided, however, that with respect to a particular
Registration Statement filed pursuant to Section 3, a waiver or consent to
departure from the provisions of this Agreement regarding only such
Registration Statement and the offering covered thereby may be given by the
holders of not less than 66-2/3% of the Registrable Securities covered by such
Registration Statement, except that no such waiver or consent shall operate to
affect adversely the rights hereunder of any other holder of Registrable
Securities.
(b) Notices. All notices and other communications provided
for or permitted hereunder shall be made in writing by hand-delivery,
registered first-class mail, telex, telecopier, or courier guaranteeing
overnight delivery:
(i) if to a holder of Registrable Securities, at the most
current address given by such holder to the Company in accordance
with the provisions of this Section 9(b); and
(ii) if to the Company, initially at 300 Sixth Avenue,
Pittsburgh, PA 15222, Telecopy: (412) 562-0934, Attention: Chief
Executive Officer and General Counsel, and thereafter at such other
address, notice of which is given in accordance with the provisions
of this Section 9(b).
All such notices and communications shall be deemed to have been duly given: at
the time delivered by hand, if personally delivered; three days after being
deposited in the mail, postage prepaid, if mailed; when answered back, if
telexed; when receipt acknowledged, if telecopied; and on the next business day
if timely delivered to a courier guaranteeing overnight delivery.
(c) Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the successors and assigns of each of the
parties.
(d) Counterparts. This Agreement may be executed in any
number of counterparts and by the parties hereto in separate counterparts, each
of which when so executed shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement.
(e) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the Commonwealth of Pennsylvania
applicable to agreements made and to be performed in Pennsylvania without
regard to principles of conflicts of laws.
(f) Severability. Each provision of this Agreement shall be
considered severable, and if for any reason any provision that is not essential
to the effectuation of the basic purposes of the Agreement is determined by a
court of competent jurisdiction to be invalid or unenforceable under existing
or future applicable law, such invalidity shall not impair the operation of or
affect those provisions of this Agreement that are valid. In that case, this
Agreement shall be construed so as to limit any term or provision so as to make
it enforceable or
14
<PAGE> 15
valid within the requirements of any applicable law, and in the event such term
or provision cannot be so limited, this Agreement shall be construed to omit
such invalid or unenforceable provisions.
(g) Entire Agreement. This Agreement is intended by the
parties as a final expression of their agreement and intended to be a complete
and exclusive statement of the agreement and understanding of the parties
hereto in respect of the subject matter contained herein. There are no
representations, promises, warranties or undertakings, other than those set
forth or referred to herein with respect to the registration rights granted by
the Company hereby. Upon the Effective Date, this Agreement supersedes all
prior agreements and understandings between the parties with respect to such
subject matter, and cannot be changed or terminated orally; provided, however,
that nothing contained in this Agreement shall be deemed to modify the
provisions a letter agreement dated as of August 9, 1996, between the Company
and the ESOP Trustee, with respect to the disposition of shares of the
Company's capital stock held by the ESOP Trustee.
(h) Term. This Agreement shall terminate and cease to be of
any further force or effect on the earlier of (i) the tenth anniversary of the
Effective Date and (i) the first date on which both (A) the total number of
shares of Registrable Securities subject to this Agreement is less than
1,750,000 and (B) no Initiating Holder (with the ML Holders being treated as a
single Initiating Holder) holds 500,000 or more shares (such numbers in clause
(A) and (B) to be adjusted, as appropriate, by the Company to reflect any stock
splits, reverse stock split, stock combinations or the like occurring after the
Effective Date); provided, however, that with respect to any particular party
to this Agreement, this Agreement shall terminate and cease to be of any
further force or effect on the first date which that party ceases to hold any
Registrable Securities.
(i) Construction. As used in this Agreement, unless the
context otherwise requires (i) references to "Sections" are to sections of this
Agreement, (ii) "hereof", "herein", "hereunder" and comparable terms refer to
this Agreement in its entirety and not to any particular part of this
Agreement, (iii) the singular includes the plural and the masculine, feminine
and neutral gender includes the other, (iv) "including" or "includes" shall be
deemed to be followed by the phrase "without limitation", and (v) headings of
the various Sections and subsections are for convenience of reference only and
shall not be given any effect for purposes of interpreting this Agreement.
(j) Termination of Stockholders Agreement. Subject to and
automatically upon the effectiveness of this Agreement, the Stockholders
Agreement dated as of October 26, 1989, as amended, among the Company, the
Initiating Holders and the other parties named therein shall terminate and be
of no further force or effect, except that the provisions of section 6.1.3
thereof [Demand Registration Expenses], insofar as they relate to the
registration of shares of Common Stock in the Company's initial public
offering, shall survive such termination.
15
<PAGE> 16
Witness the due execution hereof, as of this date first above
written, on behalf of the undersigned thereunto duly authorized.
EDUCATION MANAGEMENT MERRILL LYNCH CAPITAL
CORPORATION APPRECIATION PARTNERSHIP
IV, L.P.
By: /s/ FREDERICK W. STEINBERG By: Merrill Lynch LBO Partners,
-------------------------- No. I, L.P.,
General Partner
Title: Vice President, General
Counsel & Secretary By: Merrill Lynch Capital Partners,
Inc.,
General Partner
By: /s/ JAMES V. CARUSO
------------------------
Title: Vice President
--------------------
THE NORTHWESTERN MUTUAL ML EMPLOYEES
LIFE INSURANCE COMPANY LBO PARTNERSHIP NO. I, L.P.
By: ML Employees LBO Managers, Inc.,
General Partner
By: /s/ J. THOMAS CHRISTOFFERSON By: /s/ JAMES V. CARUSO
---------------------------- -----------------------
Title: Vice President Title: Vice President
------------------------- --------------------
NATIONAL UNION FIRE INSURANCE ML IBK POSITIONS, INC.
COMPANY OF PITTSBURGH, PA
By: /s/ DAVID B. PINKERTON By: /s/ JAMES V. CARUSO
---------------------------- -----------------------
Title: Vice President Title: Vice President
------------------------- --------------------
MERRILL LYNCH CAPITAL MERRILL LYNCH KECALP L.P. 1986
CORPORATION
By: KECALP Inc., General Partner
By: /s/ JAMES V. CARUSO By: /s/ JAMES V. CARUSO
---------------------------- -----------------------
16
<PAGE> 17
Title: Senior Vice President Title: Vice President
------------------------- ----------------------
ML OFFSHORE LBO
PARTNERSHIP NO. IV
By: Merrill Lynch LBO Partners,
No. I, L.P. Investment,
General Partner
By: Merrill Lynch Capital Partners, Inc.
General Partners
By: /s/ JAMES V. CARUSO
----------------------------
Title: Vice President
--------------------------
MARINE MIDLAND BANK, not in
its corporate capacity, but solely
in its capacity as trustee, and on
behalf, of the Education Management
Corporation Employee Stock Ownership Trust
By: /s/ STEPHEN HARTMAN
---------------------------
Title: Senior Vice President
--------------------------
ROBERT B. KNUTSON, not in his
individual capacity, but solely
in his capacity as trustee of
the Revocable Trust Agreement
of Robert B. Knutson dated 3/4/93
By: /s/ ROBERT B. KNUTSON
----------------------------
Title: Vice President
--------------------------
17
<PAGE> 18
/s/ R. MARGARET BARBER /s/ C. THOMAS BURKETT
- ----------------------------- ----------------------------
R. Margaret Barber C. Thomas Burkett
/s/ GARY C. GRYSIAK /s/ PATRICK T. DECOURSEY
- ----------------------------- ----------------------------
Gary C. Grysiak Patrick T. DeCoursey
/s/ RONALD G. GUIDA /s/ MIRYAM L. DRUCKER
- ----------------------------- -----------------------------
Ronald G. Guida Miryam L. Drucker
18
<PAGE> 19
/s/ DENNIS R. HARKINS /s/ ALAN R. FREEDMAN
- ----------------------------- -----------------------------
Dennis R. Harkins Alan R. Freedman
/s/ MARK C. HODGES /s/ JAMES R. GRAFT
- ----------------------------- ----------------------------
Mark C. Hodges James R. Graft
/s/ ALBERT GREENSTONE /s/ STEVE R. GREGG, JR.
- ----------------------------- -----------------------------
Albert Greenstone Steve R. Gregg, Jr.
/s/ DANIEL J. LAFFERTY /s/ ROBERT S. PETERSON
- ----------------------------- ----------------------------
Daniel J. Lafferty Robert S. Peterson
/S/ ELLIS MATHEWS /s/ LESLIE E. PRITCHARD, III
- ----------------------------- ----------------------------
Ellis Mathews Leslie E. Pritchard, III
/s/ WILLIAM J. MAZUR /s/ GEORGE L. PRY
- ---------------------------- ----------------------------
William J. Mazur George L. Pry
/s/ ROBERT T. MCDOWELL /s/ SAUNDRA M. VANDYKE
- ---------------------------- ----------------------------
Robert T. McDowell Saundra M. VanDyke
/s/ HARVEY SANFORD
- ----------------------------
Harvey Sanford
[Option Holder]
19
<PAGE> 1
Exhibit 10.23
THIRD AMENDMENT TO
AMENDED AND RESTATED CREDIT AGREEMENT
THIS THIRD AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
is made as of the 14th day of March, 1997 (the "Third Amendment") to that
certain Amended and Restated Credit Agreement dated as of March 16, 1995, as
previously amended by the First Amendment to Amended and Restated Credit
Agreement dated as of October 13, 1995 and the Second Amendment to Amended and
Restated Credit Agreement (the Amended and Restated Credit Agreement as
previously amended, together with all exhibits and schedules thereto, the
"Original Agreement") (the Original Agreement as amended by the Third
Amendment, together with all extensions, substitutions, replacements,
restatements and other amendments or modifications thereof or thereto, the
"Credit Agreement") by and among EDUCATION MANAGEMENT CORPORATION, a
corporation organized and existing under the laws of the Commonwealth of
Pennsylvania (the "Borrower"), the FINANCIAL INSTITUTIONS listed on the
signature pages to this Third Amendment (individually a "Bank" and collectively
the "Banks"), PNC BANK, NATIONAL ASSOCIATION as the issuer of letters of credit
under the Credit Agreement (in such capacity the "Issuing Bank") and PNC BANK,
NATIONAL ASSOCIATION, a national banking association as the agent for the Banks
(in such capacity the "Agent").
WITNESSETH:
WHEREAS, the Borrower and the Banks, the Issuing Bank and the
Agent desire to amend the Original Agreement as set forth herein.
NOW, THEREFORE, in consideration of the terms and conditions
contained herein, and other good and valuable consideration, the parties
hereto, intending to be legally bound, hereby agree as follows:
ARTICLE I
AMENDMENTS TO ORIGINAL AGREEMENT
FIRST: Section 1.1 of the Original Agreement is hereby
amended in the following particulars:
1. A definition of "Moody's" is added which shall read:
"Moody's" means Moody's Investors Services, Inc. or
any successor thereto.
2. A definition of "S&P" is added which shall read:
<PAGE> 2
"S&P" means Standard & Poor's Rating Group, a
division of McGraw-Hill, Inc. and any successor thereto.
3. A definition of "Third Amendment" is added which
shall read:
"Third Amendment" means the Third Amendment to
Amended and Restated Credit Agreement dated as of March 14, 1997.
SECOND: Section 5.15 of the Original Agreement as added by the First
Amendment and captioned "Interest Rate Protection", is hereby deleted in its
entirety.
THIRD: Section 5.15 of the Original Agreement as added by the Second
Amendment and captioned "Performance under the Preferred Stock Redemption
Plan", is hereby confirmed as Section 5.15 of the Agreement.
FOURTH: Section 6.11b of the Original Agreement is amended and
restated in its entirety to read as follows:
6.11b Investments. The Borrower will not, nor will it permit any
Subsidiary to make any capital contribution to purchase any stock, bonds,
notes, debentures or other securities of, or make any other investment in
any other Person, except:
a) existing Subsidiaries;
b) acquisitions permitted by Section 6.18
hereof;
c) direct obligations of the United States of
America or any agency or instrumentality thereof or obligations backed by the
full faith and credit of the United States of America maturing in twelve months
or less from the date of acquisition;
d) commercial paper maturing in 180 days or
less rated not lower than A-1 by S&P or P-1 by Moody's on the date of
acquisition;
e) demand deposits, time deposits or
certificates of deposit maturing within one year in commercial banks whose
obligations are rated A-1, A or the equivalent or better by S&P or Moody's on
the date of acquisition;
f) publicly traded debt securities, privately
placed debt securities as to which there is an existence a remarketing
arrangement creating liquidity for such privately placed debt securities or
preferred stocks, in each case rated at least A or the equivalent or better by
S&P or Moody's; and
g) money market funds rated AA or AAm-G or
higher (or an equivalent rating) by S&P or Moody's whose net asset value
remains a constant $1.00 per share.
- 2 -
<PAGE> 3
ARTICLE II
CONDITIONS PRECEDENT
This Third Amendment shall become operative as of the date
hereof when each of the following conditions precedent are satisfied in the
judgment of the Agent or have been waived in writing by the Agent:
(a) Third Amendment. Receipt by the Agent on behalf of
the Banks and the Issuing Bank of duly executed counterparts of this Third
Amendment from the Borrower and the Banks and the Issuing Bank.
(b) Closing Certificate. Receipt by the Agent on
behalf of the Banks of a certificate signed by an Authorized Officer of the
Borrower dated as of even date herewith certifying that the representations and
warranties set forth in the Original Agreement are true and correct in all
material respects on and as of the date of this Third Amendment as though made
on and as of such date, except to the extent that such representations and
warranties relate solely to an earlier date (in which case, such
representations and warranties shall have been true and correct on and as of
such earlier date).
(c) Corporate Documents of the Borrower. Receipt by the
Agent on behalf of the Banks of an incumbency certificate of the Borrower dated
as of the date hereof.
(d) Proceedings Satisfactory. Receipt by the Agent on
behalf of the Banks of evidence that all proceedings taken in connection with
this Third Amendment and the consummation of the transactions contemplated
hereby and all documents and papers relating hereto have been completed or duly
executed, and receipt by the Agent on behalf of the Banks of such documents and
papers, all in form and substance reasonably satisfactory to the Agent and
Agent's special counsel, as the Agent or its special counsel may reasonably
request in connection therewith.
ARTICLE III
MISCELLANEOUS
FIRST: Except as expressly amended by this Third Amendment,
the Original Agreement and each and every representation, warranty, covenant,
term and condition contained therein is specifically ratified and confirmed.
SECOND: Except for proper nouns and as otherwise defined or
amended herein, capitalized terms used herein which are not defined herein, but
which are defined in the Original Agreement, shall have the meaning given them
in the Original Agreement.
THIRD: This Third Amendment has been duly authorized,
executed and delivered by the Borrower.
- 3 -
<PAGE> 4
FOURTH: This Third Amendment shall be binding upon and inure
to the benefit of the Borrower, the Banks, the Issuing Bank, the Agent and
their respective successors and assigns.
FIFTH: Nothing in this Third Amendment shall be deemed or
construed to be a waiver, release or limitation upon the Agent's or any Bank's
exercise of any of their respective rights and remedies under the Original
Agreement or the other Loan Documents, whether arising as a consequence of any
Events of Default which may now exist, hereafter arise or otherwise, and all
such rights and remedies are hereby expressly reserved.
SIXTH: This Third Amendment may be executed in as many
different counterparts as shall be convenient and by the different parties
hereto on separate counterparts, each of which when executed by the Borrower, a
Bank, the Issuing Bank and the Agent shall be regarded as an original. All such
counterparts shall constitute but one and the same instrument.
SEVENTH: This Third Amendment shall be a contract made under
and governed by the laws of the Commonwealth of Pennsylvania without regard to
the principles thereof regarding conflict of laws.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
- 4 -
<PAGE> 5
Executed as of the day and year first above written.
EDUCATION MANAGEMENT CORPORATION
By /s/ ROBERT T. McDOWELL
------------------------------------
Name Robert T. McDowell
----------------------------------
Title Senior Vice President and
---------------------------------
Chief Financial Officer
---------------------------------
PNC BANK, NATIONAL ASSOCIATION, in its
capacity as the Agent, a Bank and the
Issuing Bank
By /s/ JONATHAN RITZ
------------------------------------
Name Jonathan Ritz
----------------------------------
Title Vice President
---------------------------------
KEYBANK NATIONAL ASSOCIATION
By /s/ LAWRENCE A. MACK
------------------------------------
Name Lawrence A. Mack
----------------------------------
Title Vice President
---------------------------------
NATIONAL CITY BANK OF PENNSYLVANIA
By /s/ VINCENT J. DELIE, JR.
------------------------------------
Name Vincent J. Delie, Jr.
----------------------------------
Title Vice President
---------------------------------
- 5 -
<PAGE> 1
EXHIBIT 11.01
EDUCATION MANAGEMENT CORPORATION
CALCULATION OF OUTSTANDING SHARES FOR
EARNINGS PER SHARE CALCULATION
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Weighted average primary common shares outstanding during the year 6,876 9,872 12,923
Dilutive effect of shares assumed issued upon exercise of stock
options (less shares assumed purchased by the Company) 14 298 312
-- --- ---
Outstanding common shares for primary earnings per share calculation 6,890 10,170 13,235
===== ====== ======
Weighted average fully diluted common shares outstanding during the year 6,876 11,576 13,352
Dilutive effect of shares assumed issued upon exercise of stock options
(less shares assumed purchased by the Company) 14 298 335
-- --- ---
Outstanding common shares for fully diluted earnings per share calculation 6,890 11,874 13,687
===== ====== ======
</TABLE>
<PAGE> 1
EXHIBIT 21.01
MATERIAL
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
Art-Photo Supply Corp. Florida
Eisenhower Boulevard Associates, Inc. Florida
EMC Management Services, Inc. Pennsylvania
EMC Marketing & Advertising, Inc. Georgia
Ocean World, Inc. Florida
The National Center for Educational Testing, Inc. New York
The National Center for Financial Services Training, Inc. Georgia
The National Center for Paralegal Training Delaware
The National Center for Paralegal Training Illinois
The National Center for Paralegal Training New York
NCPT, Inc. Georgia
NCPT, Inc. California
NCPT-AZ, Inc. Arizona
New York Restaurant School, Inc. New York
Art Institute of Los Angeles, Inc. California
Art Institute of Minnesota, Inc. Minnesota
</TABLE>
<PAGE> 2
<TABLE>
<S> <C>
Art Institutes International - Twin Cities, Inc. Minnesota
Art Institute of Charleston, Inc. South Carolina
Art Institute of Honolulu, Inc. Hawaii
Art Institute of Indianapolis, Inc. Indiana
Art Institute of Las Vegas, Inc. Nevada
Art Institute of New Orleans, Inc. Louisiana
Art Institute of Orlando, Inc. Florida
Art Institute of Washington, Inc. District of Columbia
AII Placement Services, Inc. New York
Chicago Institute of Art and Design, Inc. Illinois
Education Management Corporation New York
Music Business Institute, Inc. Tennessee
New York Institute of Art, Inc. New York
San Francisco Institute of Design, Inc. California
The Design Schools Pennsylvania
The National Center for Credit Training, Inc. New York
The National Center for Financial Services Training, Inc. Illinois
The National Center for Legal Training, Inc. Georgia
The National Center for Professional Fund Raising Training, Inc. New York
The National Center for Professional Placement, Inc. New York
Education Housing Services, Inc. Pennsylvania
Art Institute of Minneapolis, Inc. Minnesota
</TABLE>
-2-
<PAGE> 1
Exhibit 23.01
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated August 4, 1997 included in this Form 10-K into the Company's
previously filed Registration Statements on Form S-8, File Nos. 333-20057 and
333-20073.
/s/ ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania
August 4, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 33,227
<SECURITIES> 0
<RECEIVABLES> 16,099
<ALLOWANCES> (7,393)
<INVENTORY> 1,356
<CURRENT-ASSETS> 48,886
<PP&E> 99,820
<DEPRECIATION> (47,249)
<TOTAL-ASSETS> 126,292
<CURRENT-LIABILITIES> 36,178
<BONDS> 34,031
0
0
<COMMON> 144
<OTHER-SE> 57,612
<TOTAL-LIABILITY-AND-EQUITY> 126,292
<SALES> 182,849
<TOTAL-REVENUES> 182,849
<CGS> 120,918
<TOTAL-COSTS> 164,030
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,603
<INCOME-PRETAX> 17,216
<INCOME-TAX> 7,231
<INCOME-CONTINUING> 9,985
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,985
<EPS-PRIMARY> .72
<EPS-DILUTED> .72
</TABLE>
