<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A)
OF THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO.__)
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission Only
[ X ] Definitive Proxy Statement (as permitted by Rule 14a-6(e)(2))
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to
Section 240.14a-11(c) or Section 240.14a-12
</TABLE>
EDUCATION MANAGEMENT CORPORATION
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
- --------------------------------------------------------------------------------
(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE REGISTRANT)
Payment of filing fee (Check the appropriate box):
[ X ] No fee required.
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
-----------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-----------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
-----------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-----------------------------------------------------------------
(5) Total fee paid:
-----------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-----------------------------------------
(2) Form, Schedule or Registration Statement No.:
-------------------
(3) Filing Party:
---------------------------------------------------
(4) Date Filed:
-----------------------------------------------------
<PAGE> 2
EDUCATION MANAGEMENT CORPORATION
300 SIXTH AVENUE
PITTSBURGH, PA 15222
October 4, 1999
Dear Shareholder,
You are cordially invited to attend the Annual Meeting of Shareholders to
be held at 10:00 a.m. on Thursday, November 4, 1999, at the Rihga Royal Hotel,
151 West 54th Street, New York, New York.
Regardless of whether you plan to attend, we urge you to participate in the
business of the Annual Meeting by completing and returning the enclosed proxy as
promptly as possible. Your vote is important.
The accompanying Notice of Annual Meeting and Proxy Statement provide
information about the matters to be acted upon by the shareholders. The Proxy
Statement also contains information about the roles and responsibilities of the
Board of Directors and the committees of the Board and provides important
information about each nominee for election as a director.
Sincerely,
/s/ ROBERT B. KNUTSON
Robert B. Knutson
Chairman and Chief Executive Officer
<PAGE> 3
EDUCATION MANAGEMENT CORPORATION
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON NOVEMBER 4, 1999
The 1999 Annual Meeting of Shareholders of Education Management Corporation
will be held on Thursday, November 4, 1999, commencing at 10:00 a.m., local
time, at the Rihga Royal Hotel, 151 West 54th Street, New York, New York, for
the following purposes:
1. To elect three Class III Directors to serve until the Annual Meeting
of Shareholders to be held in the year 2002.
2. To ratify the selection by the Board of Directors of Arthur Andersen
LLP as independent public accountants for the current fiscal year.
3. To amend the 1996 Stock Incentive Plan in order to, among other
things, increase the number of shares authorized to be issued
thereunder from 2,500,000 to 5,000,000.
4. To transact such other business as may properly come before the
meeting or any adjournment thereof.
All shareholders of record at the close of business on September 7, 1999
will be entitled to vote at the meeting.
It is important that your shares be represented at the meeting. Whether or
not you expect to be present, please fill in, date and sign the enclosed proxy
and return it in the accompanying addressed, postage-prepaid envelope. If you
attend the meeting, you may revoke your proxy and vote in person.
By Order of the Board of Directors,
/s/ FREDRICK W. STEINBERG
Frederick W. Steinberg
Vice President, General Counsel and
Secretary
October 4, 1999
<PAGE> 4
EDUCATION MANAGEMENT CORPORATION
300 SIXTH AVENUE
PITTSBURGH, PA 15222
PROXY STATEMENT
FOR THE ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON THURSDAY, NOVEMBER 4, 1999
This Proxy Statement and the accompanying proxy are being furnished to
shareholders on or about October 4, 1999 in connection with the solicitation by
the Board of Directors (the "Board") of Education Management Corporation (the
"Company") of proxies for voting at the Annual Meeting of Shareholders to be
held at 10:00 a.m., local time, on Thursday, November 4, 1999, at the Rihga
Royal Hotel, 151 West 54th Street, New York, New York, and at any adjournments
of that meeting (the "Annual Meeting"). Each proxy will be voted in accordance
with the shareholder's instructions set forth therein, although, to the extent
no choice is specified, a proxy will be voted in favor of the matters set forth
in the accompanying Notice of Annual Meeting. Any proxy may be revoked by a
shareholder at any time before its exercise by delivery of a written revocation
or a subsequently dated proxy to the Secretary of the Company or by voting in
person at the Annual Meeting.
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR
ENDED JUNE 30, 1999 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION WILL BE
FURNISHED, WITHOUT EXHIBITS, AT NO CHARGE TO A SHAREHOLDER UPON WRITTEN REQUEST
ADDRESSED TO THE INVESTOR RELATIONS DEPARTMENT, EDUCATION MANAGEMENT
CORPORATION, 300 SIXTH AVENUE, PITTSBURGH, PA 15222. EXHIBITS WILL BE PROVIDED
UPON WRITTEN REQUEST AND PAYMENT OF AN APPROPRIATE PROCESSING FEE.
At the close of business on September 7, 1999, the record date for
determining the shareholders entitled to vote at the Annual Meeting, there were
outstanding and entitled to be voted an aggregate of 29,567,022 shares of Common
Stock, $.01 par value (the "Common Stock"), of the Company. Shareholders are
entitled to one vote per share. The presence in person or by proxy of
shareholders holding a majority of the shares of Common Stock outstanding as of
the record date will constitute a quorum for the transaction of business at the
Annual Meeting. Shares of Common Stock present in person or by proxy (including
shares that are present but are not voted with respect to any of the proposals
presented for shareholder approval) will be counted for purposes of determining
whether a quorum is present.
The election of directors, the ratification of the appointment of the
independent public accountants and the amendment of the 1996 Stock Incentive
Plan each requires the affirmative vote of the holders of a majority of the
shares of Common Stock voting thereon at the Annual Meeting. Shares whose
holders abstain from voting with respect to a specific proposal and shares held
in "street name" by brokers or nominees who indicate on their proxies that they
do not have discretionary authority to vote such shares as to a particular
proposal will not be counted as having been voted with respect to such proposal.
Accordingly, neither broker non-votes nor abstentions will have any effect on
whether either of the three proposals is approved since each proposal merely
requires the affirmative vote of the holders of a majority of the shares voting
on that proposal.
The Board knows of no matters other than those set forth below that are to
be brought before the Annual Meeting. If other matters properly come before the
Annual Meeting, it is the intention of the persons named in the enclosed proxy
to vote the shares represented by such proxy in accordance with their judgment
on such matters. Under the applicable rules of the Securities and Exchange
Commission, those persons would have that discretionary authority with respect
to any proposal brought before the Annual Meeting if the Company did not have
notice of the proposal by September 6, 1999.
All expenses of the solicitation of proxies will be borne by the Company.
The Company has retained ChaseMellon Consulting Services, L.L.C., at a cost of
$3,500 plus reimbursement of out-of-pocket expenses, to assist in its
solicitation of proxies. Present and former directors and officers and other
employees of the Company may also solicit proxies by telephone, telegram or
mail, or by meeting with shareholders or their representatives. The Company will
reimburse brokers, banks and other custodians, nominees and fiduciaries for
their charges and expenses in forwarding proxy materials to beneficial owners.
<PAGE> 5
PROPOSAL ONE: ELECTION OF DIRECTORS
The Board of Directors of the Company currently consists of nine directors
divided into three classes. The Board is comprised of three Class I Directors,
three Class II Directors and three Class III Directors, with all directors
holding office for staggered terms. Each director will serve (subject to his or
her earlier death, resignation or removal) until the Annual Meeting of
Shareholders held in the year in which his or her term is scheduled to expire or
thereafter until such director's successor is elected and has qualified.
At the Annual Meeting, three directors are to be elected to hold office for
three-year terms scheduled to expire at the Annual Meeting of Shareholders to be
held in the year 2002 (the "2002 Annual Meeting of Shareholders"). Unless there
is a contrary indication, the persons named in the accompanying proxy intend to
vote the shares represented by such proxy for the election to the Board of
Robert B. Knutson, John R. McKernan, Jr. and James S. Pasman, Jr., the current
Class III Directors whose terms expire this year.
Each of the nominees has consented to serve as a director. If for any
reason a nominee should become unable or unwilling to accept nomination or
election, the persons named in the accompanying proxy intend to vote the shares
represented by such proxy for the election of such other person as the Board may
recommend. Alternatively, the Board may reduce the number of directors to
eliminate the vacancy.
A brief summary of each director's principal occupation and business
affiliations and certain other information follows.
NOMINEES AS DIRECTORS FOR TERMS EXPIRING AT THE 2002 ANNUAL MEETING OF
SHAREHOLDERS
Robert B. Knutson, age 65, has been the Chairman and Chief Executive
Officer of the Company since 1986 and a director of the Company since 1969. He
is a graduate of the University of Michigan (B.A., Economics 1956) and was a
fighter pilot with the U.S. Air Force from 1957 to 1962. Mr. Knutson joined the
Company as a director in 1969 and became its President in 1971 and the Chairman,
President and Chief Executive Officer in 1986. Mr. Knutson is the husband of
Miryam L. Knutson.
John R. McKernan, Jr., age 51, was appointed Vice Chairman of the Company
and a member of the Board of Directors of the Company in June 1999. Mr. McKernan
served as Governor of the State of Maine from 1987 to 1995. Since 1995, he has
been the Chief Executive Officer of McKernan Enterprises, Inc., a consulting and
investment firm. He is a graduate of Dartmouth College (B.A., Government 1970)
and the University of Maine Law School (J.D., 1974). Mr. McKernan serves on the
boards of directors of The Bear Stearns Funds and of Managed Securities Plus
Fund, Inc.
James S. Pasman, Jr., age 68, has been a director of the Company since
1997. He is a graduate of Upsala College (B.B.A., 1956) and the Stern School of
Business at New York University (M.B.A., 1962). From 1987 to 1989, Mr. Pasman
was the chairman and chief executive officer of Kaiser Aluminum and Chemical
Corp. and, prior to that, vice chairman of the Aluminum Company of America. From
1989 to 1991, he was the president and chief operating officer of National
Intergroup, Inc. and chairman of the board of Permian Oil Corp. Since then, Mr.
Pasman has been retired. Mr. Pasman serves on the boards of directors of CSAM
Income Fund, Inc., CSAM Global Strategic Income Fund, Inc., the Warburg Pincus
family of funds, The BT Insurance Funds Trust and Tyco International, Ltd.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH OF THE NOMINEES LISTED
ABOVE.
DIRECTORS CONTINUING IN OFFICE
TERMS EXPIRING AT THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD IN THE YEAR
2000
Robert H. Atwell, age 68, has been a director of the Company since 1996. He
is a graduate of the College of Wooster (B.A., Political Science 1953) and of
the University of Wisconsin (M.A., Public Administration 1957). From 1965 to
1970, Mr. Atwell was the vice chancellor for administration, University of
Wisconsin at Madison, and, from 1970 to 1984, he was the president of Pitzer
College. From 1984 until 1996, Mr. Atwell was the president of the American
Council on Education. In 1996, he joined A.T. Kearney, Inc., a global consulting
firm.
2
<PAGE> 6
William M. Campbell, III, age 39, has been a director of the Company since
1996. He is a graduate of Harvard College (B.A., Economics 1982) and Harvard
University Graduate School of Business Administration (M.B.A., 1987). From 1991
to 1994, Mr. Campbell was the senior vice president, drama development, for
Warner Brothers Television. From 1994 to 1998, he was the executive vice
president of CBS Television. Since 1998, he has been the president of Miramax
Television.
Albert Greenstone, age 72, is the president emeritus of The National Center
for Professional Development, a unit of the Company, and has been a director of
the Company since 1973. He attended the University of Virginia (1946 to 1948)
and graduated from the University of Georgia Law School (J.D., 1950). Mr.
Greenstone joined the Company in 1972 as president and chief executive officer
of The National Center for Paralegal Training and became the president emeritus
of The National Center for Professional Development in 1994.
TERMS EXPIRING AT THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD IN THE YEAR
2001
James J. Burke, Jr., age 47, has been a director of the Company since 1986.
He is a graduate of Brown University (B.A., Psychology 1973) and Harvard
University Graduate School of Business Administration (M.B.A., 1979). From 1987
to 1994, he was the president and chief executive officer of Merrill Lynch
Capital Partners, Inc. and a managing director of Merrill Lynch, Pierce, Fenner
& Smith Incorporated. He has been a partner of Stonington Partners, Inc., a
private investment firm, since 1994. Mr. Burke serves on the boards of directors
of Ann Taylor Stores Corporation, Burns International Services Corporation
(formerly Borg-Warner Security Corporation), Pathmark Stores, Inc., Supermarkets
General Holdings Corporation, and United Artists Theatre Circuit, Inc.
Miryam L. Knutson, age 54, has been a director of the Company since 1990.
She is a graduate of the Universidad del Zulia, Venezuela (B.A., Journalism
1965). Ms. Knutson joined the Company in 1984. From 1985 to 1987, she was the
president of The Art Institute of Dallas, and from 1987 to 1988, she was the
president of The Art Institute of Fort Lauderdale. From 1988 to 1989, she was
the head of The Art Institutes and from 1989 to 1996, she was the Company's
President and Chief Operating Officer. From 1996 to 1998, she was the Vice
Chairman of the Company. Since 1998, she has worked as a part-time
consultant-employee for the Company and has acted as a consultant for Stonington
Partners, Inc. and Arena Capital Partners, L.L.C. Ms. Knutson is the wife of
Robert B. Knutson.
Robert P. Gioella, age 51, has been the President and Chief Operating
Officer of the Company since March 1999 and was appointed a member of the Board
of Directors of the Company in June 1999. From 1998 to March 1999, he was the
Senior Vice President/Operations of the Company, and from 1997 to 1998, he was
the Vice President - New School Operations of the Company. From 1993 to 1997,
Mr. Gioella was president of The Art Institute of Philadelphia. He is a graduate
of the University of Steubenville (B.A., Political Science 1970) and Duquesne
University (M.A., Political Science 1976).
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The standing committees of the Board are the Audit Committee, the
Compensation Committee and the Nominating Committee.
The Audit Committee reviews and makes recommendations to the Board with
respect to the selection of the Company's independent public accountants, the
fees to be paid to such accountants, the adequacy of the audit and accounting
procedures of the Company, and such other matters as are specifically delegated
to the Audit Committee by the Board. The Audit Committee held two meetings
during fiscal 1999. The members of the Audit Committee during fiscal 1999 were
Messrs. Pasman (Chair), Burke and Greenstone.
The Compensation Committee recommends to the Board the management
remuneration policies of the Company, including but not limited to increases in
salary rates and fringe benefits of elected officers, other remuneration plans
such as incentive compensation and deferred compensation, and directors'
compensation and benefits. The Compensation Committee also administers the
Company's stock-based compensation plans, except that the full Board administers
those stock-based compensation plans with respect to their applicability to
directors of the Company. The Compensation Committee held two meetings during
fiscal 1999. The members of the Compensation Committee during fiscal 1999 were
Messrs. Burke (Chair), Campbell, Greenstone and Pasman.
3
<PAGE> 7
The Nominating Committee proposes to the full Board nominees for election
to the Board and its standing committees. The Nominating Committee held one
meeting during fiscal 1999. The members of the Nominating Committee during
fiscal 1999 were Mr. Knutson (Chair), Mr. Atwell and Ms. Knutson. In considering
persons to nominate for election as directors, the Nominating Committee will
consider recommendations from shareholders that are submitted in accordance with
the following procedures. Any such recommendation must be received by the
Secretary of the Company on behalf of the Nominating Committee 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, the
shareholder must deliver such recommendation 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. The letter setting forth a shareholder's
recommendation for nomination must include the name and address of that
shareholder, a description of any arrangement or understanding between that
shareholder and each person being recommended as a nominee with respect to the
Company or such recommendation, and such other information regarding each person
being recommended as a nominee as would be required to be included in a proxy
statement filed pursuant to the proxy rules of the Securities and Exchange
Commission concerning such person as a nominee. In addition, any such letter
must be accompanied by a consent from each person being recommended to serve as
a director if elected.
During fiscal 1999, there were four regular meetings and two special
meetings of the Board. Each of the directors named above attended 75% or more of
the aggregate number of meetings of the Board of Directors of the Company and
the standing committees on which he or she served during fiscal 1999.
SECURITY OWNERSHIP
The following table sets forth, as of September 20, 1999, the number of
shares of Common Stock beneficially owned by (i) any person (including any
group) known by management to own beneficially more than 5% of the outstanding
shares of Common Stock, (ii) each director and nominee for election as a
director of the Company, (iii) each of the executive officers of the Company
named in the Summary Compensation Table, and (iv) all directors and executive
officers as a group. Unless otherwise indicated in a footnote, each individual
or group possesses sole voting and investment power with respect to the shares
indicated as beneficially owned.
<TABLE>
<CAPTION>
PERCENTAGE OF
OUTSTANDING
NUMBER OF SHARES
NAME AND ADDRESS OF BENEFICIAL OWNER(1) SHARES OWNED OWNED
--------------------------------------- ------------ -----
<S> <C> <C>
Education Management Corporation Employee Stock Ownership
Trust(2).................................................. 5,916,079 20.0%
Baron Capital Group, Inc.(3)................................ 3,571,500 12.1%
Putnam Investments, Inc. (4)................................ 2,641,525 8.9%
Robert B. Knutson(5)(6)..................................... 3,140,137 10.6%
Robert H. Atwell(7)......................................... 6,500 *
James J. Burke, Jr.(8)...................................... 247,302 *
William M. Campbell, III(9)................................. 24,500 *
Miryam L. Knutson(5)(10).................................... 406,454 1.4%
Robert P. Gioella(11)....................................... 69,584 *
Albert Greenstone(12)....................................... 34,676 *
Robert T. McDowell(13)...................................... 249,054 *
John R. McKernan, Jr........................................ 5,200 *
James S. Pasman, Jr.(14).................................... 24,500 *
David J. Pauldine(15)....................................... 126,928 *
All executive officers and directors as a group(16)......... 4,334,835 14.7%
</TABLE>
- ---------------
* Less than 1%
(1) The address of each listed shareholder, unless otherwise noted, is c/o
Education Management Corporation, 300 Sixth Avenue, Pittsburgh,
Pennsylvania 15222.
4
<PAGE> 8
(2) These shares are held by the trustee, Fidelity Management Trust Company, 82
Devonshire Street, Boston, Massachusetts 02109, for the benefit of
participants in the Education Management Corporation Employee Stock
Ownership Trust (the "ESOP"). The ESOP is administered by the Company's
Retirement Committee. ESOP participants are entitled to direct the voting
of the shares of Common Stock allocated to their respective accounts.
Allocated shares of Common Stock for which voting instructions are not
given and unallocated shares held by the ESOP are voted by the trustee in
the manner determined by the Retirement Committee.
(3) The address of Baron Capital Group, Inc. and its affiliates, BAMCO, Inc.,
Baron Capital Management, Inc., Baron Asset Fund, and Ronald Baron, is 767
Fifth Avenue, New York, New York 10153. These persons share both voting and
dispositive power over some or all of the shares set forth opposite the
name "Baron Capital Group, Inc." in the table. The information provided for
Baron Capital Group, Inc. is based on information provided in a Schedule
13G filed with the Securities and Exchange Commission.
(4) The address of Putnam Investments, Inc. and its affiliates, Putnam
Investment Management, Inc., The Putnam Advisory Company, Inc., and Putnam
OTC & Emerging Growth Fund, is One Post Office Square, Boston,
Massachusetts 02109. These persons share both voting and dispositive power
over some or all of the shares set forth opposite the name "Putnam
Investments, Inc." in the table. The information provided for Putnam
Investments, Inc. is based on information provided in a Schedule 13G filed
with the Securities and Exchange Commission.
(5) Mr. Knutson and Ms. Knutson, who are husband and wife, disclaim beneficial
ownership of each other's shares.
(6) Includes 1,645,650 shares of Common Stock held by the Amended and Restated
Revocable Trust of Robert B. Knutson dated October 8, 1996, 88,664 shares
receivable upon the exercise of options that are exercisable within 60 days
of the date of the table set forth above and 21,332 shares allocated to Mr.
Knutson under the ESOP.
(7) Includes 5,000 shares of Common Stock receivable upon the exercise of
options that are exercisable within 60 days of the date of the table set
forth above.
(8) Includes 22,500 shares of Common Stock receivable upon the exercise of
options that are exercisable within 60 days of the date of the table set
forth above and 46,000 shares held by trusts.
(9) Includes 22,500 shares of Common Stock receivable upon the exercise of
options that are exercisable within 60 days of the date of the table set
forth above.
(10) Includes 366,524 shares of Common Stock receivable upon the exercise of
options that are exercisable within 60 days of the date of the table set
forth above and 39,930 shares allocated to Ms. Knutson under the ESOP.
(11) Includes 57,000 shares of Common Stock receivable upon the exercise of
options that are exercisable within 60 days of the date of the table set
forth above and 10,262 shares allocated to Mr. Gioella under the ESOP.
(12) Includes 25,000 shares of Common Stock receivable upon the exercise of
options that are exercisable within 60 days of the date of the table set
forth above and 500 shares held by Mr. Greenstone's spouse.
(13) Includes 72,336 shares of Common Stock receivable upon the exercise of
options that are exercisable within 60 days of the date of the table set
forth above and 29,437 shares allocated to Mr. McDowell under the ESOP.
(14) Includes 22,500 shares of Common Stock receivable upon the exercise of
options that are exercisable within 60 days of the date of the table set
forth above.
(15) Includes 105,500 shares of Common Stock receivable upon the exercise of
options that are exercisable within 60 days of the date of the table set
forth above and 18,497 shares allocated to Mr. Pauldine under the ESOP.
(16) Includes 787,524 shares of Common Stock receivable upon the exercise of
options that are exercisable within 60 days of the date of the table set
forth above and 119,458 shares allocated to the accounts of officers and
Ms. Knutson under the ESOP.
5
<PAGE> 9
PROPOSAL TWO: RATIFY THE SELECTION BY THE BOARD OF DIRECTORS OF ARTHUR ANDERSEN
LLP AS INDEPENDENT PUBLIC ACCOUNTANTS FOR THE CURRENT FISCAL YEAR
In accordance with the recommendation of the Audit Committee, the Board has
reappointed Arthur Andersen LLP as independent public accountants of the Company
for fiscal 2000. Although ratification of this reappointment is not legally
required, the Board believes it is appropriate for the shareholders to ratify
such action. In the event that the shareholders do not ratify the selection of
Arthur Andersen LLP as the Company's independent public accountants, the Company
will reconsider such appointment. A representative of Arthur Andersen LLP, which
has served as the Company's independent public accountants for over 20 years,
will attend the Annual Meeting, will have the opportunity to make a statement if
he or she desires to do so, and will be available to respond to appropriate
questions. The Board reserves the right to replace the Company's independent
public accountants at any time upon recommendation of the Audit Committee.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THIS PROPOSAL.
PROPOSAL THREE: AMENDMENT OF 1996 STOCK INCENTIVE PLAN
The 1996 Stock Incentive Plan (the "Incentive Plan") became effective
following its approval by the shareholders of the Company at their 1996 annual
meeting. The Board believes that the Incentive Plan, and its predecessor plans,
the 1993 and 1990 Management Incentive Stock Option Plans, have been effective
in attracting executives, key employees and non-employee directors to the
Company and its subsidiaries and in providing long-term incentives and rewards
to those executives and key employees responsible for the continued growth of
the Company. The Board further believes that the awards granted under the
Incentive Plan have provided an incentive that aligns the economic interests of
management and other key employees with those of the Company's shareholders. The
Board continues to believe that it is in the Company's best interest to utilize
these types of awards as an integral part of its compensation programs, and
considers these programs to be key contributors to the ongoing success of the
Company.
The Incentive Plan initially authorized the issuance of 1,250,000 shares of
Common Stock, and this number was automatically increased to 2,500,000 in
connection with the Company's December 1998 2-for-1 stock split, in accordance
with the terms of the Incentive Plan. Of the 2,500,000 shares of Common Stock
currently authorized for use under the Incentive Plan, 87,010 shares were
available for awards as of June 30, 1999. The Board of Directors believes that
an increase by 2,500,000 in the number of shares of Common Stock authorized for
issuance pursuant to awards under the Incentive Plan is necessary to continue
the Incentive Plan in future years. Accordingly, the Board of Directors
approved, subject to the approval of the Company's shareholders, an increase in
the total shares of Common Stock available for issuance under the Incentive Plan
from 2,500,000 shares to 5,000,000 shares. The Board also adopted, subject to
shareholder approval, amendments to the Incentive Plan (i) providing that shares
surrendered to or withheld by the Company in payment or satisfaction of the
purchase price or tax withholding obligation of an award shall be available for
the grant of new awards under the Incentive Plan, (ii) limiting to 15% of the
total shares available under the Incentive Plan the number of shares issuable as
restricted stock and performance awards, (iii) clarifying that the exercise
price of all stock options granted under the Incentive Plan can be no less than
the fair market value on the grant date of the shares of Common Stock subject to
the stock options and (iv) limiting the option term of all stock options to ten
years from the date of grant.
The material features of the Incentive Plan are summarized below. The
summary is qualified in its entirety by reference to the specific provisions of
the Incentive Plan, as it is proposed to be amended, the full text of which is
set forth as Appendix A to this proxy statement.
ADMINISTRATION
The Incentive Plan is administered by the Compensation Committee of the
Board of Directors of the Company (the "Committee"), except that the full Board
administers the Incentive Plan with respect to its applicability to directors of
the Company. All members of the Committee are non-employee directors of the
Company. The Committee has the authority to determine, within the limits of the
express provisions of the
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<PAGE> 10
Incentive Plan, the individuals to whom awards will be granted, the nature,
amount and terms of such awards and the objectives and conditions for earning
such awards. With respect to employees who are not subject to Section 16 of the
Securities Exchange Act of 1934, as amended, the Committee may delegate its
authority under the Incentive Plan to one or more officers or employees of the
Company.
TYPES OF AWARDS
Awards under the Incentive Plan may include nonqualified stock options,
incentive stock options, stock appreciation rights ("SARs"), limited stock
appreciation rights ("Limited SARS"), restricted shares of Common Stock, and
performance awards.
Stock Options. The Committee may grant to a participant incentive stock
options, options that do not qualify as incentive stock options ("non-qualified
stock options") or a combination thereof. The terms and conditions of stock
option grants, including the quantity, price, vesting periods, and other
conditions on exercise will be determined by the Committee. Incentive stock
option grants shall be made in accordance with Section 422 of the Internal
Revenue Code.
The exercise price for stock options will be determined by the Committee in
its discretion, provided that the exercise price per share for each stock option
shall be at least equal to 100% of the fair market value of one share of Common
Stock on the date when the stock option is granted. Additionally, in the case of
incentive stock options granted to a holder of more than 10% of the total
combined voting power of all classes of stock of the Company on the date of
grant, the exercise price may not be less than 110% of the fair market value of
one share of Common Stock on the date the stock option is granted.
Stock options must be exercised within a period fixed by the Committee that
may not exceed ten years from the date of grant, except that in the case of
incentive stock options granted to a holder of more than 10% of the total
combined voting power of all classes of stock of the Company on the date of
grant, the exercise period may not exceed five years. The Incentive Plan
provides for earlier termination of stock options upon the participant's
termination of employment, unless extended by the Committee, but in no event may
the options be exercised after the scheduled expiration date of the options.
At the Committee's discretion, payment for shares of Common Stock on the
exercise of stock options may be made in cash, shares of Common Stock held by
the participant for at least six months, a combination of cash and shares of
Common Stock or in any other form of consideration acceptable to the Committee
(including one or more "cashless" exercise forms).
Stock Appreciation Rights. SARs may be granted by the Committee to a
participant either separate from or in tandem with non-qualified stock options
or incentive stock options. SARs may be granted at the time of the stock option
grant or, with respect to non-qualified stock options, at any time prior to the
exercise of the stock option. A SAR entitles the participant to receive, upon
its exercise, a payment equal to (i) the excess of the fair market value of a
share of Common Stock on the exercise date over the SAR exercise price, times
(ii) the number of shares of Common Stock with respect to which the SAR is
exercised.
The exercise price of a SAR is determined by the Committee, but in the case
of SARs granted in tandem with stock options, may not be less than the exercise
price of the related stock option. Upon exercise of a SAR, payment will be made
in cash or shares of Common Stock, or a combination thereof, as determined by
the Committee.
Limited SARs. Limited SARs may be granted independent of or in tandem with
stock options and shall be exercisable by the participant for a period of sixty
(60) days following the occurrence of a change in control (as defined in the
Incentive Plan). Upon the exercise of a Limited SAR, the participant will be
entitled to receive from the Company in exchange therefor cash in an amount
equal to the excess of the value on the date of exercise of the number of shares
of Common Stock subject to the limited SARs being exercised over the exercise
price of such Limited SAR. For this purpose, the value of Common Stock will be
the highest fair market value of the Common Stock during the period beginning on
the 90th day prior to the date on which the Limited SARs are exercised and
ending on such date.
7
<PAGE> 11
Restricted Shares. The Committee may award to a participant shares of
Common Stock subject to specified restrictions ("Restricted Shares"). Restricted
Shares are subject to forfeiture if the participant does not meet certain
conditions such as continued employment over a specified forfeiture period
and/or the attainment of specified performance targets over the forfeiture
period. The terms and conditions of Restricted Share awards are determined by
the Committee. The performance targets will also be determined by the Committee
and may, but need not, include specified levels of earnings before interest,
taxes and amortization of intangibles and/or earnings per share.
Performance Awards. The Committee may grant performance awards to
participants under such terms and conditions as the Committee deems appropriate.
A performance award entitles a participant to receive a payment from the
Company, the amount of which is based upon the attainment of predetermined
performance targets over a specified award period. Performance awards may be
paid in cash, shares of Common Stock or a combination thereof, as determined by
the Committee.
Award periods will be established at the discretion of the Committee. The
performance targets will also be determined by the Committee and may, but need
not, include specified levels of earnings before interest, taxes and
amortization of intangibles and/or earnings per share. When circumstances occur
that cause predetermined performance targets to be an inappropriate measure of
achievement, the Committee, at its discretion, may adjust the performance
targets.
Change in Control. If a change in control occurs (as defined in the
Incentive Plan), all outstanding options and other awards will become fully
exercisable and all restrictions on outstanding options and awards will lapse.
Non-Employee Director Grants. The Incentive Plan also provides for annual,
non-discretionary stock option grants to be made to members of the Board of
Directors who are not employees of the Company. Each person who is a
non-employee director receives an option to purchase 15,000 shares of Common
Stock on the date that he or she is first elected to the Board. Each
non-employee director also receives an annual non-discretionary grant of an
option to purchase 5,000 shares of Common Stock on the date of each annual
meeting of the Company's shareholders while such director remains a director.
Both the initial and the annual non-employee director options vest 50% on the
first and 50% on the second anniversary of the date of grant and have a ten-year
term.. The exercise price of each such non-employee director stock option is the
fair market value on the date of grant of the shares subject to the option.
ELIGIBILITY
The Committee may grant awards to any officer or key employee of the
Company or any of its direct or indirect subsidiaries. Non-employee directors
receive awards in accordance with automatic, non-discretionary provisions of the
Incentive Plan. It is presently contemplated that approximately 160 employees
will be eligible to receive awards. Such number may increase with acquisitions
by the Company.
AWARDS GRANTED UNDER THE INCENTIVE PLAN
The Committee and the Board of Directors approved the grant of stock
options as of September 10, 1998, for the following numbers of shares of Common
Stock: 128,000 shares for Mr. Knutson; 80,000 shares for Mr. Gioella; 40,000
shares for Mr. McDowell; 46,000 shares for Mr. Pauldine; 294,000 shares for all
executive officers as a group and 875,400 shares for all employees as a group
(excluding executive officers). All such options had an exercise price per share
equal to $14.94 (the closing price on the date of grant) except for 13,388
options granted to Mr. Knutson with an exercise price of $16.43. On November 5,
1998, each non-employee director of the Company was granted an option to
purchase 5,000 shares of Common Stock with an exercise price of $18.50. On June
4, 1999, Mr. McKernan was awarded a stock option to purchase 100,000 shares of
Common Stock with an exercise price of $18.50 in connection with the
commencement of his employment. Options were
8
<PAGE> 12
also granted during fiscal 1999 to a limited number of employees. The dates of
those grants, the total number of shares of Common Stock subject to the options
granted, and the exercise price per share are as follows:
<TABLE>
<CAPTION>
SHARES SUBJECT TO GRANT DATE OF GRANT OPTION PRICE
- ----------------------- ----------------- ------------
<C> <S> <C>
14,000 November 1, 1998 $18.31
18,000 December 12, 1998 $19.38
56,000 June 1, 1999 $18.31
</TABLE>
The exact types and amounts of any future awards to be made to any eligible
employees pursuant to the Incentive Plan are not presently determinable, and the
Company has not yet determined any specific awards to be made using the
additional shares to be authorized under the Incentive Plan. As a result of the
discretionary nature of the Incentive Plan, it is not possible to state who the
participants in the Incentive Plan will be in the future or the number of
options or other awards to be received by a person or group.
ASSIGNABILITY
No award granted pursuant to the Incentive Plan is transferable or
assignable by its recipient other than by will or the laws of descent and
distribution, except that the Committee may grant non-statutory stock options
that are transferable to immediate family members or trusts or partnerships for
such family members.
SHARES SUBJECT TO THE INCENTIVE PLAN
Currently, an aggregate of 2,500,000 shares of Common Stock is reserved for
issuance under the Incentive Plan, and, as of June 30, 1999, 87,010 shares were
available for awards under the Incentive Plan. Under the proposed amendment, the
aggregate number of shares reserved for issuance under the Incentive Plan would
be increased by 2,500,000 shares to 5,000,000 shares. No more than 15% of the
total shares of Common Stock available for issuance under the Incentive Plan may
be granted in the form of Restricted Shares or performance awards. Shares of
Common Stock not actually issued (as a result, for example, of the lapse of an
option) are available for additional grants. Shares surrendered to or withheld
by the Company in payment or satisfaction of the exercise price of a stock
option or tax withholding obligations with respect to an award may be the
subject of a new award under the Incentive Plan. Shares of Common Stock to be
delivered or purchased under the Incentive Plan may be either authorized but
unissued Common Stock or treasury shares.
ANTI-DILUTION PROTECTION
In the event of any changes in the capital structure of the Company,
including a change resulting from a stock dividend or stock split, or
combination or reclassification of shares, the Board of Directors is empowered
to make such equitable adjustments with respect to awards or any provisions of
the Incentive Plan as it deems necessary and appropriate, including, if
necessary, any adjustments in the maximum number of shares of Common Stock
subject to the Plan, the number of shares of Common Stock subject to an
outstanding award, or the maximum number of shares that may be subject to one or
more awards granted to any one recipient during a calendar year. An adjustment
was made in connection with the Company's December 1998 stock split.
MARKET VALUE RESTRICTIONS
The exercise price per share of Common Stock under each nonqualified stock
option or ISO granted under the Incentive Plan, which is paid to the Company at
the time of the exercise, is determined by the Committee, but may not be less
than the market value of such Common Stock on the date of grant of such option.
The exercise price for each option remains constant during the life of the
option, subject to adjustment pursuant to the anti-dilution provisions of the
Incentive Plan described above. On September 20, 1999, the market price per
share of Common Stock was $14.625 based on the closing price of the Common Stock
on the NASDAQ National Market System on such date.
9
<PAGE> 13
AMENDMENTS AND TERMINATIONS
The Board of Directors may at any time terminate or amend the Incentive
Plan, provided that no such action may be taken that adversely affects any
rights or obligations with respect to any awards theretofore made under the Plan
without the consent of the recipient. No ISO awards may be made under the
Incentive Plan after October 31, 2006.
FEDERAL INCOME TAX CONSEQUENCES
The federal income tax consequences of the issuance and/or exercise of
awards under the Incentive Plan are as described below. The following
information is not a definitive explanation of the tax consequences of the
awards, and recipients should consult with their own tax advisors with respect
to the tax consequences inherent in the ownership and/or exercise of the awards,
and the ownership and disposition of any underlying securities.
Incentive Stock Options. The Incentive Plan qualifies as an incentive stock
option plan within the meaning of Section 422 of the Internal Revenue Code. A
recipient who is granted an ISO will not recognize any taxable income for
federal income tax purposes either on the grant or exercise of the ISO. If the
recipient disposes of the shares purchased pursuant to the ISO more than two
years after the date of grant and more than one year after the transfer of the
shares to the recipient (the required statutory "holding period"), (a) the
recipient will recognize long-term capital gain or loss, as the case may be,
equal to the difference between the selling price and the option price; and (b)
the Company will not be entitled to a deduction with respect to the shares of
stock so issued. If the holding period requirements are not met, any gain
realized upon disposition will be taxed as ordinary income to the extent of the
excess of the lesser of (i) the excess of the fair market value of the shares at
the time of exercise over the option price, and (ii) the gain on the sale. The
Company will be entitled to a deduction in the year of disposition in an amount
equal to the ordinary income recognized by the recipient. Any additional gain
will be taxed as short-term or long-term capital gain depending upon the holding
period for the stock. A sale for less than the option price results in a capital
loss.
The excess of the fair market value of the shares on the date of exercise
over the option price is, however, includable in the option holder's income for
alternative minimum tax purposes.
Nonqualified Stock Options. The recipient of a nonqualified stock option
under the Incentive Plan will not recognize any income for federal income tax
purposes on the grant of the option. Generally, on the exercise of the option,
the recipient will recognize taxable ordinary income equal to the excess of the
fair market value of the shares on the exercise date over the option price for
the shares. The Company generally will be entitled to a deduction on the date of
exercise in an amount equal to the ordinary income recognized by the recipient.
Upon disposition of the shares purchased pursuant to the stock option, the
recipient will recognize long-term or short-term capital gain or loss, as the
case may be, equal to the difference between the amount realized on such
disposition and the basis for such shares, which basis includes the amount
previously recognized by the recipient as ordinary income.
Stock Appreciation Rights. A recipient who is granted stock appreciation
rights will not recognize any taxable income on the receipt of the SARs. Upon
the exercise of a SAR, (a) the recipient will recognize ordinary income equal to
the amount received (the increase in the fair market value of one share of the
Company's Common Stock from the date of grant of the SAR to the date of
exercise); and (b) the Company will be entitled to a deduction on the date of
exercise in an amount equal to the ordinary income recognized by the recipient.
Restricted Shares. A recipient will not be taxed at the date of an award of
Restricted Shares, but will be taxed at ordinary income rates on the fair market
value of any restricted shares as of the date that the restrictions lapse,
unless the recipient, within 30 days after transfer of such Restricted Shares to
the recipient, elects under Section 83(b) of the Internal Revenue Code to
include in income the fair market value of the Restricted Shares as of the date
of such transfer. The Company will be entitled to a corresponding deduction. Any
disposition of shares after restrictions lapse will be subject to the regular
rules governing long-term and short-term capital gains and losses, with the
basis for this purpose equal to the fair market value of the shares at the end
of the restricted period (or on the date of the transfer of the restricted
shares, if the employee elects to be taxed on the fair market value upon such
transfer). Dividends received by a recipient during the restricted period will
be taxable to the
10
<PAGE> 14
recipient at ordinary income tax rates and will be deductible by the Company
unless the recipient has elected to be taxed on the fair market value of the
restricted shares upon transfer, in which case they will thereafter be taxable
to the employee as dividends and will not be deductible by the Company.
Performance Awards. A recipient of performance shares or performance units
will not recognize any income for federal income tax purposes on the date of the
grant of the right to receive performance shares or units. The recipient will
recognize ordinary income for federal income tax purposes at the time of receipt
of cash and/or Common Stock with respect to the performance share or units in an
amount equal to the excess, if any, of the fair market value of the performance
shares or units on the date received over the price, if any, of the performance
shares or units on the date of grant. The Company will be entitled to a
deduction on the date of receipt of the performance shares by the recipient in
an amount equal to the ordinary income recognized by the recipient. Upon
disposition of any stock received, the recipient will recognize long-term or
short-term gain or loss depending upon the period for which he or she has held
the stock in an amount equal to the difference between the amount realized and
the fair market value of the stock on the date of receipt.
EFFECTIVE DATE
The amendment to the Incentive Plan shall be effective immediately on the
date of its approval by the shareholders of the Company. If the amendment is not
approved by such shareholders, the Incentive Plan will remain in effect as it
currently exists, without the amended provision proposed herein.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THIS PROPOSAL.
EXECUTIVE OFFICERS OF THE COMPANY
Set forth below is information concerning the Company's executive officers.
Additional information with respect to Messrs. Knutson, Gioella and McKernan is
set forth above on pages 2-3.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Chairman and Chief Executive Officer and
Robert B. Knutson............................ 65 Director
President and Chief Operating Officer and
Robert P. Gioella............................ 51 Director
John R. McKernan, Jr......................... 51 Vice Chairman and Director
Executive Vice President and Chief Financial
Robert T. McDowell........................... 45 Officer
David J. Pauldine............................ 42 Executive Vice President
</TABLE>
Robert T. McDowell is Executive Vice President and Chief Financial Officer
of the Company. From 1994 to September 1999, he was Senior Vice President and
Chief Financial Officer of the Company. He is a graduate of the University of
Pittsburgh (M.B.A., 1978; B.A., Economics 1977). Mr. McDowell joined the Company
in 1988. From 1990 to 1993, Mr. McDowell was the Treasurer of the Company.
David J. Pauldine is Executive Vice President of the Company and is
responsible for marketing, accreditation and licensing, student financial
services and career services. He is a graduate of The University of Dayton
(B.A., Marketing 1979) and Antioch University (M.A., Leadership 1997). From 1994
to 1998, Mr. Pauldine was the president of The Art Institute of Fort Lauderdale,
and from 1998 to March 1999, he was Senior Vice President, Marketing of the
Company.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors and executive officers and persons who own more than 10%
of the outstanding Common Stock to file reports of ownership and changes in
ownership with the Securities and Exchange Commission.
Based on a review of the forms it has received, the Company believes that
during the fiscal year ended June 30, 1999 all Section 16(a) filing requirements
were complied with by such persons, except that two transactions by Mr. McDowell
and one by Mr. Pauldine were reported on a Form 5 rather than on a Form 4.
11
<PAGE> 15
CERTAIN TRANSACTIONS
Mr. Knutson is a limited partner, with no managerial authority, in Ocean
World Associates Ltd. The Art Institute of Fort Lauderdale leases one of its
buildings from Ocean World Associates Ltd. for approximately $1.4 million
annually.
Mr. Knutson and Mr. Greenstone are limited partners, with no managerial
authority, in AIPH Limited Partnership, which is a general partner of The Art
Institute of Philadelphia Limited Partnership. The Art Institute of Philadelphia
leases one of its buildings from The Art Institute of Philadelphia Limited
Partnership for approximately $500,000 annually.
Mr. McKernan is the chief executive officer of McKernan Enterprises, Inc.
The Company makes monthly payments of approximately $15,000 to McKernan
Enterprises, Inc. for the use of office space in Maine and in Washington, D.C.
and for the services of two employees.
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
The Summary Compensation Table shows, for the fiscal years 1997 through
1999, the compensation paid or awarded to Mr. Knutson, the Company's Chairman
and Chief Executive Officer, and the Company's next four most highly compensated
executive officers during fiscal 1999 and one individual who is a former
executive officer. All share numbers have been adjusted as necessary to reflect
the Company's December 1998 stock split.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------------- ------------
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) OPTIONS(#) COMPENSATION($)(3)
- --------------------------- ---- --------- -------- --------------- ---------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Robert B. Knutson........... 1999 325,000 385,000 -- 128,000 37,062
Chairman and 1998 325,000 350,000 -- 0 14,124
Chief Executive Officer 1997 325,000 300,000 -- 120,000 6,143
Robert P. Gioella........... 1999 199,167 160,000 -- 80,000 28,773
President and 1998 142,667 100,000 0 5,096
Chief Operating Officer 1997 121,875 70,000 40,000 4,413
John R. McKernan, Jr.(1).... 1999 20,833 50,000 -- 100,000
Vice Chairman
Robert T. McDowell.......... 1999 179,167 130,000 -- 40,000 27,069
Executive Vice President
and 1998 175,000 110,000 -- 0 10,387
Chief Financial Officer 1997 166,664 120,000 -- 80,000 5,211
David J. Pauldine........... 1999 170,000 100,000 -- 46,000 23,461
Executive Vice President 1998 126,667 65,000 0 8,994
1997 116,668 55,000 40,000 5,526
Miryam L. Knutson(2)........ 1999 103,458 -- -- 0 21,954
Vice Chairman 1998 250,000 225,000 -- 0 15,168
1997 250,000 200,000 -- 50,000 5,482
</TABLE>
- ---------------
(1) Mr. McKernan was elected Vice Chairman of the Company in June 1999
(2) Ms. Knutson resigned as Vice Chairman of the Company in November 1998 and
has served as a part-time employee-consultant of the Company since that
time.
(3) Such amounts represent, to the extent applicable, the Company's
contributions to the ESOP, contributions to the Company's profit-sharing
retirement plan and deferred compensation plan and the dollar value of life
12
<PAGE> 16
insurance premiums paid by the Company with respect to term life insurance
for the benefit of certain executive officers of the Company. For fiscal
1999, the amounts paid are as follows:
<TABLE>
<CAPTION>
DEFERRED GROUP LIFE
RETIREMENT COMPENSATION INSURANCE
ESOP PLAN PLAN PREMIUMS
------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Robert B. Knutson....................... $10,485 $8,239 $17,906 $432
Robert P. Gioella....................... 26,502 867 972 432
Robert T. McDowell...................... 12,781 7,939 5,917 432
David J. Pauldine....................... 15,364 6,443 1,222 432
Miryam L. Knutson....................... 10,485 3,123 8,124 222
</TABLE>
OPTION GRANTS IN FISCAL YEAR 1999
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
---------------------------- ANNUAL RATES OF
NUMBER % OF TOTAL STOCK PRICE
OF SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION -----------------------
NAME GRANTED(#) FISCAL YEAR PRICE(S) DATE 5% 10%
---- ------------- ------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Robert B. Knutson........ 128,000 9.3% $14.94 and 9/9/08 $1,076,858 $2,728,970
$16.43(1) 138,335 350,567
Robert P. Gioella........ 80,000 5.8% $14.94 9/9/08 751,655 1,904,841
John R. McKernan, Jr..... 100,000 7.2% $18.50 6/3/09 1,163,455 2,948,424
Robert T. McDowell....... 40,000 2.9% $14.94 9/9/08 375,827 952,420
David J. Pauldine........ 46,000 3.3% $14.94 9/9/08 432,202 1,095,284
Miryam L. Knutson........ -- -- -- -- -- --
</TABLE>
- ---------------
(1) The exercise price for 114,612 shares of Common Stock subject to these
options is $14.94 and for the remaining 13,388 the exercise price is $16.43.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1999
AND JUNE 30, 1999 OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
SECURITIES VALUE OF SECURITIES
UNDERLYING UNEXERCISED, UNDERLYING
UNEXERCISED & EXERCISABLE UNEXERCISED &
SHARES EXERCISABLE IN-THE-MONEY UNEXERCISABLE
ACQUIRED ON VALUE OPTIONS AT OPTIONS AT OPTIONS AT
NAME EXERCISE(#)(1) REALIZED($) JUNE 30, 1999(#) JUNE 30, 1999($)(2) JUNE 30, 1999(#)
---- -------------- ----------- ---------------- ------------------- ----------------
<S> <C> <C> <C> <C> <C>
Robert B. Knutson...... 33,336 $397,535 26,664 $ 333,300 188,000
Robert P. Gioella...... 8,000 146,637 27,000 385,050 100,000
John R. McKernan,
Jr................... -- -- -- -- 100,000
Robert T. McDowell..... 46,813 243,213 52,336 785,827 70,000
David J. Pauldine...... 7,000 190,610 84,000 1,437,800 66,000
Miryam L. Knutson...... -- -- 341,524 6,254,917 50,000
<CAPTION>
VALUE OF
UNEXERCISED,
UNEXERCISABLE
IN-THE-MONEY
OPTIONS AT
NAME JUNE 30, 1999($)(2)
---- -------------------
<S> <C>
Robert B. Knutson...... $1,499,003
Robert P. Gioella...... 730,000
John R. McKernan,
Jr................... 225,000
Robert T. McDowell..... 704,375
David J. Pauldine...... 532,375
Miryam L. Knutson...... 662,500
</TABLE>
- ---------------
(1) All share numbers have been adjusted to the extent necessary to reflect the
Company's December 1998 stock split.
(2) Based on the closing price of the Common Stock on June 30, 1999 of $20.75
per share.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPANTS
The Company's Compensation Committee reviews and acts on matters relating
to compensation levels and benefit plans for key executives of the Company. The
Compensation Committee during fiscal 1999 consisted of
13
<PAGE> 17
Messrs. Burke, Campbell, Greenstone and Pasman, none of whom is employed by the
Company. Mr. Greenstone was the president and chief executive officer of The
National Center for Paralegal Training, a unit of the Company, from 1972 to
1994. In addition, Mr. Greenstone is a limited partner, with no managerial
authority, in AIPH Limited Partnership, which is a general partner of The Art
Institute of Philadelphia Limited Partnership. The Art Institute of Philadelphia
leases one of its buildings from this partnership for approximately $500,000
annually.
EMPLOYMENT AGREEMENTS
The Company and Mr. Knutson have entered into an employment agreement,
dated as of September 8, 1999 (the "Employment Agreement"). The Employment
Agreement amends and restates Mr. Knutson's existing employment agreement, which
had a term that was scheduled to expire on June 30, 2000. The Employment
Agreement is for an initial three-year term ending in September 2002 and is
subject to successive, automatic one-year extensions unless either party gives
written notice of non-extension to the other party at least 180 days prior to
any renewal date. Under the terms of the Employment Agreement, Mr. Knutson will
serve as Chairman and Chief Executive Officer of the Company and is to receive a
base salary at an annual rate of $375,000, subject to annual cost of living
increases and discretionary increases by the Board, plus incentive compensation
and other employee benefits under the various benefit plans and programs
maintained by the Company.
The Employment Agreement will terminate prior to its then-scheduled
expiration date in the event of the death or disability of Mr. Knutson. In
addition, the Company may terminate the Employment Agreement with or without
cause (as defined therein) and Mr. Knutson may resign upon 30 days' advance
written notice to the Company. If Mr. Knutson is discharged from his employment
by the Company without cause or if he resigns with good reason (as defined
therein) (each referred to as an "eligible termination"), and the termination is
not in anticipation of or two years following a change in control of the Company
(as defined), he will continue to receive payment of his base salary and average
incentive compensation for a period of one year following the date of
termination. During this one-year period, Mr. Knutson will be eligible to
receive certain other fringe benefits, such as health and life insurance. In
addition, the Company will provide outplacement services to Mr. Knutson (or, at
Mr. Knutson's election, payment of the value of such services) and all of Mr.
Knutson's stock options will become vested and exercisable immediately upon the
termination. If an eligible termination occurs in anticipation of or within a
two-year period following a change in control of the Company, he will instead
receive an amount equal to two times his annual base salary and average
incentive compensation, which will be payable in a lump sum within 30 days of
the date of termination, as well as certain other fringe benefits for a period
of two years following the date of termination and immediate vesting and
accelerated distribution of certain supplemental retirement benefits.
The Employment Agreement contains non-competition, non-solicitation and
confidentiality covenants on the part of Mr. Knutson. The non-solicitation and
non-competition provisions continue for one year following termination of
employment, except that the non-competition covenant will cease to be applicable
in the event of an eligible termination or a termination in anticipation of or
within two years after a change in control. In addition, the Employment
Agreement entitles Mr. Knutson to receive a tax gross-up bonus to cover, on an
after-tax basis, any change in control excise taxes payable by him as a result
of any payments made under the terms of the Employment Agreement.
The Company has also entered into employment agreements with its other
executive officers, Messrs. Gioella, McDowell, McKernan and Pauldine. Each
agreement is dated as of September 8, 1999 except Mr. McKernan's, which is dated
as of June 4, 1999. Those agreements are on substantially the same terms as the
Employment Agreement but reflect each such officer's individual position and
current compensation.
DIRECTORS' COMPENSATION
The Company provides each non-employee director with the following
compensation: (i) a $12,000 annual retainer and reimbursement for out-of-pocket
expenses, (ii) a $1,000 fee for each Board meeting attended, (iii) a $500 fee
for each committee meeting attended that is not held on the same day as a Board
meeting, (iv) pursuant to the Incentive Plan, a non-discretionary grant of an
option to purchase 15,000 shares of Common Stock, such
14
<PAGE> 18
grant to be made on the date that a non-employee director is first elected to
the Board, which option vests 50% on the first anniversary and 50% on the second
anniversary of such grant, and (v) pursuant to the Incentive Plan, an annual
non-discretionary grant of an option to purchase 5,000 shares of Common Stock,
such grant to be made on the date of each annual meeting of the Company's
shareholders while such director remains a director, which option will vest 50%
on the first anniversary and 50% on the second anniversary of that meeting. The
exercise price for each such non-employee director stock option will be the fair
market value on the date of grant of the shares subject to the option. All such
options will have a ten-year term. Directors who are employees of the Company
receive no additional compensation for serving on the Board.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
COMPENSATION PHILOSOPHY AND PROGRAMS
The Compensation Committee of the Board (the "Committee") is responsible
for, among other things, reviewing and administering the Company's policies
governing compensation, employee benefits and incentive plans for its executive
officers. During fiscal 1999, the Committee was comprised of four non-employee
directors, James J. Burke, Jr., Albert Greenstone, James S. Pasman, Jr., and
William M. Campbell, III. The Committee met two times during fiscal 1999.
The key objectives of the Committee's policies on compensation and benefits
are to enhance the Company's ability to attract and retain highly qualified
executives, to establish and maintain compensation and benefit programs that are
fair and competitive with those of comparable organizations, and to develop and
maintain executive compensation programs that link compensation to the
short-term and long-term performance of the Company and the interests of its
shareholders.
The primary elements in the Company's compensation program for its
executive officers are an annual base salary, an annual cash bonus and long-term
incentive grants, which at the present time are in the form of stock options.
Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code"), restricts the deductibility for federal income tax purposes of the
compensation paid to the chief executive officer and each of the four other most
highly compensated executive officers of an entity for any fiscal year to the
extent that such compensation exceeds $1,000,000 and does not qualify as
"performance-based" as defined under the Code. The Committee intends to obtain
the fullest compensation deduction possible without sacrificing the flexibility
needed to recognize and reward desired performance. The Committee believes that
all compensation provided to the Company's executive officers in fiscal 1999 is
fully deductible.
BASE SALARIES
The annual base salaries for the Company's executive officers for fiscal
1999 were established by the Committee based, in part, upon information
available to it concerning the salaries paid to similar officers at the
comparable, publicly-traded, postsecondary education companies included in the
peer group index for purposes of the performance graph set forth below. The
Committee expects to adjust salaries periodically to take into account
competitive market conditions, individual and corporate performance and changes
in job responsibilities.
ANNUAL CASH BONUSES
The Company provides annual incentives to its executive officers and other
key employees in the form of cash bonuses. At the beginning of each fiscal year,
performance objectives and corporate goals are established for each eligible
individual. Bonus payments are based on the attainment of these objectives and
goals. The Company has established an incentive bonus plan for executive
officers and other key employees. The plan provides that bonuses are to be paid
based on the attainment of certain earnings and revenue targets, placement rates
and average starting salaries for graduates of the Company's schools, as well as
the achievement of individual performance objectives.
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LONG-TERM INCENTIVES
The Committee administers the Incentive Plan which was adopted by the
Company to attract and retain key personnel and non-employee directors. Under
the Incentive Plan, the Committee is authorized to grant officers and key
employees of the Company and its subsidiaries non-statutory stock options,
incentive stock options, stock appreciation rights, limited stock appreciation
rights, performance shares and restricted stock with respect to up to 2,500,000
shares of Common Stock. If the Incentive Plan is amended as proposed, that
maximum authorization would be increased to 5,000,000 shares of Common Stock.
The Committee's primary objectives when making grants under the Incentive
Plan are to allow key employees to participate in the success of the Company
through stock ownership, to provide a strong and direct link between employee
compensation and the interests of shareholders, and to encourage recipients to
focus on the long-term performance of the Company. The number of shares of
Common Stock that are the basis of an award to any individual is determined by
the individual's position in and level of responsibility at the Company, which,
to a great extent, reflect that individual's ability to influence the Company's
long-term performance. The grants previously made to and then held by an
individual may also be taken into account by the Committee when determining the
size of the award to that individual in the then-current year.
Incentive stock options granted to any holder of more than 10% of the total
combined voting power of all classes of stock of the Company on the date of
grant must be exercised not later than five years from the date of grant of the
options. All other options granted under the Incentive Plan must be exercised
within a period fixed by the Committee, which may not exceed ten years from the
date of any such grant. Additionally, in the case of incentive stock options
granted to any holder of more than 10% of the total combined voting power of all
classes of stock of the Company on the date of grant, the exercise price may not
be less than 110% of the market value per share of the Common Stock on the date
of grant. In all other cases, the exercise price must be not less than the fair
market value per share on the date of grant as determined pursuant to the
methods and procedures established by the Committee. The Committee sets the
exercise price for options granted under the Incentive Plan and is authorized to
grant stock appreciation rights, which authorize payments of cash and/or stock
to holders of such rights in an amount based on the appreciation in the value of
the Common Stock from the date of grant to the date of exercise. Limited stock
appreciation rights are stock appreciation rights that become exercisable only
upon a Change in Control (as defined in the Incentive Plan) of the Company.
The Committee also may grant performance shares, the number and value of
which are determined by the extent to which the grantee meets performance goals
and other terms and conditions set by the Committee. In addition, the Committee
is authorized to grant shares of Common Stock subject to restrictions on
transferability and other restrictions it may impose, including time-based and
performance-based forfeiture restrictions. Such restricted stock is subject to
forfeiture upon termination of employment during the restriction period.
Options and awards granted under the Incentive Plan are not transferable by
the grantee other than by will or the laws of descent and distribution, except
that the Committee may grant non-statutory stock options that are transferable
to immediate family members or trusts or partnerships for such family members.
If a Change in Control occurs, all outstanding options and awards will become
fully exercisable and all restrictions on outstanding options and awards will
lapse. The Incentive Plan also provides that, in the event of changes in the
corporate structure of the Company affecting the Common Stock, the Committee
will make adjustments in the number, class and/or price of the shares of capital
stock subject to awards granted under the Incentive Plan to preserve the
proportionate interests of participants in awards and to prevent dilution or
enlargement of rights. The number of shares available for future awards will
also be adjusted.
During fiscal 1999, options for a total of 1,357,400 shares of Common Stock
were granted to officers and other key employees. All such options have an
exercise price equal to the fair market value per share of the Common Stock on
the date of grant, vest on a pro rata basis over four years and expire ten years
from the date of grant.
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COMPENSATION OF CHIEF EXECUTIVE OFFICER
Mr. Knutson's compensation has been and will continue to be based upon the
Company's overall financial performance and his achievement of individual
performance goals. In establishing that compensation, the Committee applied the
factors described above, which are applicable to all executive officers of the
Company. The Committee also took into account information concerning the overall
compensation and bonuses paid to chief executive officers of other
publicly-traded, postsecondary education companies, including those companies
that were included in the peer group index for purposes of the performance graph
set forth below.
The Committee believes that the Company's compensation and benefit programs
for its executive officers effectively accomplish the objectives stated above.
COMPENSATION COMMITTEE
James J. Burke, Jr. (Chair)
William M. Campbell, III
Albert Greenstone
James S. Pasman, Jr.
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PERFORMANCE GRAPH
The performance graph set forth below compares the cumulative total
shareholder return on the Common Stock with the Nasdaq Stock Market (U.S.) Index
and a Peer Group Index for the period from October 31, 1996 through June 30,
1999. The graph assumes the investment of $100 at the close of trading on
October 31, 1996 in the Common Stock, the Nasdaq Stock Market (U.S.) Index and
the Peer Group Index and assumes re-investment of all dividends, if any. The
peer group consists of the following companies selected on the basis of their
similar businesses: Apollo Group, Inc., Career Education Corp., Computer
Learning Centers, Inc., DeVry Inc., ITT Educational Services, Inc., and Strayer
Education, Inc. The Company believes that, including itself, these companies
represent a substantial portion of the market value of publicly traded companies
whose primary business is postsecondary education. The Common Stock commenced
trading on the Nasdaq Stock Market on October 31, 1996.
COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG EDUCATION MANAGEMENT CORPORATION,
THE NASDAQ STOCK MARKET (U.S.) INDEX
AND A PEER GROUP INDEX
<TABLE>
<CAPTION>
EDUCATION PEER GROUP
MANAGEMENT ---------- NASDAQ STOCK
CORPORATION MARKET (U.S.)
----------- -------------
<S> <C> <C> <C>
'10/96' 100.00 100.00 100.00
'6/97' 173.00 126.00 119.00
'6/98' 219.00 180.00 156.00
'6/99' 277.00 150.00 224.00
</TABLE>
SHAREHOLDER PROPOSALS FOR ANNUAL MEETING OF SHAREHOLDERS TO BE HELD IN 2000
The latest date by which shareholder proposals must be received by the
Company for inclusion in the Company's proxy materials relating to the Annual
Meeting of Shareholders to be held in 2000 is September 5, 2000.
By Order of the Board of Directors,
/S/ FREDRICK W. STEINBERG
Frederick W. Steinberg
Vice President, General Counsel and
Secretary
October 4, 1999
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APPENDIX A
1999 RESTATEMENT OF THE
EDUCATION MANAGEMENT CORPORATION
1996 STOCK INCENTIVE PLAN
(LANGUAGE TO BE ADDED IS UNDERSCORED. LANGUAGE TO BE DELETED IS LINED OUT.)
ARTICLE I
PURPOSE AND ADOPTION OF THE PLAN
1.01 PURPOSE. The [purpose of the] Education Management Corporation 1996
Stock Incentive Plan (hereinafter referred to as the "Plan") [is] was adopted to
assist in attracting and retaining highly competent employees and directors and
to act as an incentive in motivating selected officers and other key employees
and directors of Education Management Corporation and its Subsidiaries to
achieve long-term corporate objectives. On September 20, 1999, the Board of
Directors of Education Management Corporation approved certain amendments to the
Plan effective upon approval thereof by the shareholders of Education Management
Corporation. This restatement of the Plan reflects the terms of the Plan as so
amended.
1.02 ADOPTION AND TERM. The Plan [has been] was approved by the Board of
Directors and shareholders of Education Management Corporation, to be effective
as of the closing date of the initial public offering of equity securities by
the Company (the "Effective Date"), [but is subject to the approval of the
stockholders of the Company.] The Plan shall remain in effect until terminated
by action of the Board; provided, however, that no Incentive Stock Option may be
granted hereunder after the tenth anniversary of the Effective Date and the
provisions of Articles VII and VIII with respect to performance-based awards to
"covered employees" under Section 162(m) of the Code) shall expire as of the
fifth anniversary of the Effective Date.
ARTICLE II
DEFINITIONS
For the purpose of this Plan, capitalized terms shall have the following
meanings:
2.01 AWARD means (a) any grant to a Participant of one or a combination of
Non-Qualified Stock Options or Incentive Stock Options described in Article VI,
Stock Appreciation Rights described in Article VI, Restricted Shares described
in Article VII and Performance Awards described in Article VIII and (b) any
grant to a Non-Employee Director of a Non-Employee Director Award described in
Article IX.
2.02 AWARD AGREEMENT means a written agreement between the Company and a
Participant or a written acknowledgment from the Company to a Participant
specifically setting forth the terms and conditions of an Award granted under
the Plan.
2.03 AWARD PERIOD means, with respect to an Award, the period of time set
forth in the Award Agreement during which specified target performance goals
must be achieved or other conditions set forth in the Award Agreement must be
satisfied.
2.04 BENEFICIARY means an individual, trust or estate who or which, by a
written designation of the Participant filed with the Company or by operation of
law, succeeds to the rights and obligations of the Participant under the Plan
and the Award Agreement upon the Participant's death.
2.05 BOARD means the Board of Directors of the Company.
2.06 CHANGE IN CONTROL means, and shall be deemed to have occurred upon the
occurrence of, any one of the following events:
(a) The acquisition in one or more transactions by any individual,
entity (including any employee benefit plan or any trust for an employee
benefit plan) or group (within the meaning of Section 13(d)(3) or
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14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) (a "Person") of beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of shares or other securities (as
defined in Section 3(a)(10) of the Exchange Act) representing 50% or more
of either (A) the shares of common stock of the Company (the "Company
Common Stock") or (B) the combined voting power of the securities of the
Company entitled to vote generally in the election of directors (the
"Company Voting Securities"), in each case calculated on a fully-diluted
basis in accordance with generally accepted accounting principles after
giving effect to the acquisition; provided, however, that none of the
following acquisitions shall constitute a Change in Control as defined in
this clause (i): (x) any acquisition by any shareholder of the Company
immediately prior to the Effective Date (a "Current Shareholder") or any
Permitted Transferee (as defined in the Stockholders Agreement among the
Company and certain of its shareholders as in effect immediately prior to
the Effective Date (the "Stockholders Agreement")) or any group that
consists solely of Current Shareholders and Permitted Transferees (a
"Permitted Group") or (y) any acquisition by the Company so long as such
acquisition does not result in any Person (other than any Current
Shareholder, Permitted Transferee or Permitted Group) beneficially owning
shares or securities representing 50% or more of either the Company Common
Stock or Company Voting Securities; or
(b) Any election has occurred of persons to the Board that causes
two-thirds of the Board to consist of persons other than (i) persons who
were members of the Board on the Effective Date and (ii) persons who were
nominated for elections as members of the Board at a time when two-thirds
of the Board consisted of persons who were members of the Board on the
Effective Date; provided, however, that any person nominated for election
by a Board at least two-thirds of whom constituted persons described in
clauses (i) and/or (ii) or by persons who were themselves nominated by such
Board shall, for this purpose, be deemed to have been nominated by a Board
composed of persons described in clause (i);
(c) The shareholder rights plan of the Company is triggered and the
Board fails to redeem the rights within the time provided for in the rights
agreement;
(d) Approval by the shareholders of the Company of a reorganization,
merger, consolidation or similar transaction (a "Reorganization
Transaction"), in each case, unless, immediately following such
Reorganization Transaction, more than 50% of, respectively, the outstanding
shares of common stock (or similar equity security) of the corporation or
other entity resulting from or surviving such Reorganization Transaction
and the combined voting power of the securities of such corporation or
other entity entitled to vote generally in the election of directors, in
each case calculated on a fully-diluted basis in accordance with generally
accepted accounting principles after giving effect to such Reorganization
Transaction, is then beneficially owned, directly or indirectly, by the
Current Shareholders and Permitted Transferees; or
(e) Approval by the shareholders of the Company of (A) a complete
liquidation or dissolution of the Company or (B) the sale or other
disposition of all or substantially all of the assets of the Company, other
than to a corporation or other entity, with respect to which immediately
following such sale or other disposition more than 50% of, respectively,
the shares of common stock (or similar equity security) of such corporation
or other entity and the combined voting power of the securities of such
corporation or other entity entitled to vote generally in the election of
directors, in each case calculated on a fully-diluted basis in accordance
with generally accepted accounting principles after giving effect to such
sale or other disposition, is then beneficially owned, directly or
indirectly, by the Current Shareholders and Permitted Transferees.
2.07 CODE means the Internal Revenue Code of 1986, as amended. References
to a section of the Code shall include that section and any comparable section
or sections of any future legislation that amends, supplements or supersedes
said section
2.08 COMMITTEE means the Committee defined in Section 3.01.
2.09 COMPANY means Education Management Corporation, a Pennsylvania
corporation, and its successors.
2.10 COMMON STOCK means Common Stock of the Company, par value $.01 per
share.
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2.11 COMPANY VOTING SECURITIES means the combined voting power of all
outstanding voting securities of the Company entitled to vote generally in the
election of directors to the Board.
2.12 DATE OF GRANT means the date designated by the Committee as the date
as of which it grants an Award, which shall not be earlier than the date on
which the Committee approves the granting of such Award.
2.13 EXCHANGE ACT means the Securities Exchange Act of 1934, as amended.
2.14 EXERCISE PRICE means, with respect to a Stock Appreciation Right, the
amount established by the Committee in the Award Agreement which is to be
subtracted from the Fair Market Value on the date of exercise in order to
determine the amount of the payment to be made to the Participant, as further
described in Section 6.02(b).
2.15 FAIR MARKET VALUE means, as of any applicable date: (i) if the Common
Stock is listed on a national securities exchange or is authorized for quotation
on The Nasdaq Stock Market's national Market ("NNM"), the closing price, regular
way, of the Common Stock on such exchange or NNM, as the case may be, or if no
such reported sale of the Common Stock shall have occurred on such date, on the
next preceding date on which there was such a reported sale; or (ii) if the
Common Stock is not listed for trading on a national securities exchange or
authorized for quotation on NNM, the closing bid price as reported by The Nasdaq
Stock Market or The Nasdaq SmallCap Market (if applicable), of if no such prices
shall have been so reported for such date, on the next preceding date for which
such prices were so reported; or (iii) if the Common Stock is not listed for
trading on a national securities exchange or authorized for quotation on NNM,
The Nasdaq Stock Market or The Nasdaq SmallCap Market (if applicable), the last
reported bid price published in the "pink sheets" or displayed on the National
Association of Securities Dealers, Inc. ("NASD") Electronic Bulletin Board, as
the case may be; or (iv) if the Common Stock is not listed for trading on a
national securities exchange, or is not authorized for quotation on NNM, The
Nasdaq Stock Market or The Nasdaq SmallCap Market, or is not published in the
"pink sheets" or displayed on the NASD Electronic Bulletin Board, the Fair
Market Value of the Common Stock as determined in good faith by the Committee.
2.16 INCENTIVE STOCK OPTION means a stock option within the meaning of
Section 422 of the Code.
2.17 LIMITED STOCK APPRECIATION RIGHT means an Award granted in accordance
with Section 6.06.
2.18 MERGER means any merger, reorganization, consolidation, exchange,
transfer of assets or other transaction having similar effect involving the
Company.
2.19 NON-EMPLOYEE DIRECTOR means each member of the Board who is not an
employee of the Company.
2.20 NON-EMPLOYEE DIRECTOR AWARDS means Awards granted in accordance with
Article IX.
2.21 NON-QUALIFIED STOCK OPTION means a stock option which is not an
Incentive Stock Option.
2.22 OPTIONS means all Non-Qualified Stock Options and Incentive Stock
Options granted at any time under the Plan.
2.23 OUTSTANDING COMMON STOCK means, at any time, the issued and
outstanding shares of Common Stock.
2.24 PARTICIPANT means a person designated to receive an Award under the
Plan in accordance with Section 5.01 and, solely to the extent provided in
Article IX of the Plan, any Non-Employee Directors of the Company.
2.25 PERFORMANCE AWARDS means Awards granted in accordance with Article
VIII.
2.26 PLAN means the Education Management Corporation 1996 Stock Incentive
Plan as described herein, as the same may be amended from time to time.
2.27 PURCHASE PRICE, with respect to Options, shall have the meaning set
forth in Section 6.01(b).
2.28 RESTRICTED SHARES means Common Stock subject to restrictions imposed
in connection with Awards granted under Article VII.
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2.29 RETIREMENT means early or normal retirement under a pension plan or
arrangement of the Company or one of its Subsidiaries in which the Participant
participates.
2.30 STOCK APPRECIATION RIGHTS means Awards granted in accordance with
Article VI.
2.31 SUBSIDIARY means a subsidiary of the Company within the meaning of
Section 424(f) of the Code.
2.32 TERMINATION OF EMPLOYMENT means the voluntary or involuntary
termination of a Participant's employment with the Company or a Subsidiary for
any reason, including death, disability, retirement or as the result of the
divestiture of the Participant's employer or any similar transaction in which
the Participant's employer ceases to be the Company or one of its Subsidiaries.
Whether entering military or other government service shall constitute
Termination of Employment, or whether a Termination of Employment shall occur as
a result of disability, shall be determined in each case by the Committee in its
sole discretion.
ARTICLE III
ADMINISTRATION
3.01 COMMITTEE. The Plan shall be administered by a committee of the Board
("Committee") comprised of at least two persons. The Committee shall have
exclusive and final authority in each determination, interpretation or other
action affecting the Plan and its Participants. The Committee shall have the
sole discretionary authority to interpret the Plan, to establish and modify
administrative rules for the Plan, to impose such conditions and restrictions on
Awards as it determines appropriate, and to take such steps in connection with
the Plan and Awards granted hereunder as it may deem necessary or advisable. The
Committee may, subject to compliance with applicable legal requirements, with
respect to Participants who are not subject to Section 16(b) of the Exchange
Act, delegate such of its powers and authority under the Plan as it deems
appropriate to designated officers or employees of the Company. In addition, the
Board may exercise any of the authority conferred upon the Committee hereunder.
In the event of such delegation of authority or exercise of authority by the
Board, references in the Plan to the Committee shall be deemed to refer to the
delegate of the Committee or the Board, as the case may be.
ARTICLE IV
SHARES
4.01 NUMBER OF SHARES ISSUABLE. The total number of shares initially
authorized to be issued under the Plan shall be [1,250,000] 5,000,000 shares of
Common Stock. The number of shares available for issuance under the Plan shall
be further subject to adjustment in accordance with Section 10.07.
Notwithstanding any contrary provision of this Plan, no more than 15% of the
aggregate shares of Common Stock authorized for issuance under the Plan shall be
granted in the form of Restricted Shares or Performance Awards. The shares to be
offered under the Plan shall be authorized and unissued Common Stock, or issued
Common Stock which shall have been reacquired by the Company.
4.02 SHARES SUBJECT TO TERMINATED AWARDS. Common Stock covered by any
unexercised portions of terminated Options (including canceled Options) granted
under Article VI, Common Stock forfeited as provided in Section 7.02(a) and
Common Stock subject to any Awards which are otherwise surrendered by the
Participant may again be subject to new Awards under the Plan. Shares of Common
Stock surrendered to or withheld by the Company in payment or satisfaction of
the Purchase Price of an Option or tax withholding obligation with respect to an
Award shall be available for the grant of new Awards under the Plan. Common
Stock subject to Options, or portions thereof, which have been surrendered in
connection with the exercise of Stock Appreciation Rights shall not be available
for subsequent Awards under the Plan, but Common Stock issued in payment of such
Stock Appreciation Rights shall not be charged against the number of shares of
Common Stock available for the grant of Awards hereunder.
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ARTICLE V
PARTICIPATION
5.01 ELIGIBLE PARTICIPANTS. Participants in the Plan shall be such officers
and other key employees of the Company and its Subsidiaries, whether or not
members of the Board, as the Committee, in its sole discretion, may designate
from time to time. The Committee's designation of a Participant in any year
shall not require the Committee to designate such person to receive Awards or
grants in any other year. The designation of a Participant to receive awards or
grants under one portion of the Plan does not require the Committee to include
such Participant under other portions of the Plan. The Committee shall consider
such factors as it deems pertinent in selecting Participants and in determining
the type and amount of their respective Awards. Subject to adjustment in
accordance with Section 10.07, during the term of this Plan, no Participant
shall be granted Awards in respect of more than 200,000 shares of Common Stock
(whether through grants of Options or Stock Appreciation Rights or other grants
of Common Stock or rights with respect thereto) in any calendar year.
Non-Employee Directors shall receive Non-Employee Director Awards in accordance
with Article IX of the Plan, the provisions of which are automatic and
non-discretionary in operation. Non-Employee Directors shall not be eligible to
receive any other Awards under the Plan.
ARTICLE VI
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
6.01 OPTION AWARDS.
(a) The Committee may grant, to such Participants as the Committee may
select, Options entitling the Participant to purchase shares of Common Stock
from the Company in such number, at such price, and on such terms and subject to
such conditions, not inconsistent with the terms of this Plan, as may be
established by the Committee. The terms of any Option granted under this Plan
shall be set forth in an Award Agreement.
(B) PURCHASE PRICE OF OPTIONS. The Purchase Price of each share of Common
Stock which may be purchased upon exercise of any Option granted under the Plan
shall be determined by the Committee; provided, however, that the Purchase Price
shall in all cases be equal to or greater than the Fair Market Value on the Date
of Grant [as required under Section 422 of the Code].
(C) DESIGNATION OF OPTIONS. Except as otherwise expressly provided in the
Plan, the Committee may designate, at the time of the grant of each Option, the
Option as an Incentive Stock Option or a Non-Qualified Stock Option.
(D) INCENTIVE STOCK OPTION SHARE LIMITATION. No Participant may be granted
Incentive Stock Options under the Plan (or any other plans of the Company and
its Subsidiaries) which would result in shares with an aggregate Fair Market
Value (measured on the Date of Grant) of more than $100,000 first becoming
exercisable in any one calendar year.
(E) RIGHTS AS A SHAREHOLDER. A Participant or a transferee of an Option
pursuant to Section 10.04 shall have no rights as a shareholder with respect to
Common Stock covered by an Option until the Participant or transferee shall have
become the holder of record of any such shares, and no adjustment shall be made
for dividends in cash or other property or distributions or other rights with
respect to any such Common Stock for which the record date is prior to the date
on which the Participant or a transferee of the Option shall have become the
holder of record of any such shares covered by the Option; provided, however,
that Participants are entitled to share adjustments to reflect capital changes
under Section 10.07.
6.02 STOCK APPRECIATION RIGHTS.
(A) STOCK APPRECIATION RIGHT AWARDS. The Committee is authorized to grant
to any Participant one or more Stock Appreciation Rights. Such Stock
Appreciation Rights may be granted either independent of or in tandem with
Options granted to the same Participant. Stock Appreciation Rights granted in
tandem with Options may be granted simultaneously with, or, in the case of
Non-Qualified Stock Options, subsequent to, the grant to such Participant of the
related Option; provided, however, that: (i) any Option covering any share of
Common
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Stock shall expire and not be exercisable upon the exercise of any Stock
Appreciation Right with respect to the same share, (ii) any Stock Appreciation
Right covering any share of Common Stock shall expire and not be exercisable
upon the exercise of any related Option with respect to the same share, and
(iii) an Option and Stock Appreciation Right covering the same share of Common
Stock may not be exercised simultaneously. Upon exercise of a Stock Appreciation
Right with respect to a share of Common Stock, the Participant shall be entitled
to receive an amount equal to the excess, if any, of (A) the Fair Market Value
of a share of Common Stock on the date of exercise over (B) the Exercise Price
of such Stock Appreciation Right established in the Award Agreement, which
amount shall be payable as provided in Section 6.02(c).
(B) EXERCISE PRICE. The Exercise Price established under any Stock
Appreciation Right granted under this Plan shall be determined by the Committee,
but in the case of Stock Appreciation Rights granted in tandem with Options
shall not be less than the Purchase Price of the related Option. Upon exercise
of Stock Appreciation Rights, the number of shares subject to exercise under any
related Option shall automatically be reduced by the number of shares of Common
Stock represented by the Option or portion thereof which are surrendered as a
result of the exercise of such Stock Appreciation Rights.
(C) PAYMENT OF INCREMENTAL VALUE. Any payment which may become due from the
Company by reason of a Participant's exercise of a Stock Appreciation Right may
be paid to the Participant as determined by the Committee (i) all in cash, (ii)
all in Common Stock, or (iii) in any combination of cash and Common Stock. In
the event that all or a portion of the payment is made in Common Stock, the
number of shares of Common Stock delivered in satisfaction of such payment shall
be determined by dividing the amount of such payment or portion thereof by the
Fair Market Value on the Exercise Date. No fractional share of Common Stock
shall be issued to make any payment in respect of Stock Appreciation Rights; if
any fractional share would be issuable, the combination of cash and Common Stock
payable to the Participant shall be adjusted as directed by the Committee to
avoid the issuance of any fractional share.
6.03 TERMS OF STOCK OPTIONS AND STOCK APPRECIATION RIGHTS.
(A) CONDITIONS ON EXERCISE. An Award Agreement with respect to Options
and/or Stock Appreciation Rights may contain such waiting periods, exercise
dates and restrictions on exercise (including, but not limited to, periodic
installments) as may be determined by the Committee at the time of grant.
(B) DURATION OF OPTIONS AND STOCK APPRECIATION RIGHTS. Options and Stock
Appreciation Rights shall terminate after the first to occur of the following
events:
(i) Expiration of the Option or Stock Appreciation Right as provided
in the Award Agreement; or
(ii) Termination of the Award as provided in Section 6.03(e),
following the Participant's Termination of Employment; or
(iii) [In the case of an Incentive Stock Option, ten] Ten years from
the Date of Grant of the Option or Stock Appreciation Right; or
(iv) Solely in the case of a Stock Appreciation Right granted in
tandem with an Option, upon the expiration of the related Option.
(C) ACCELERATION OF EXERCISE TIME. The Committee, in its sole discretion,
shall have the right (but shall not in any case be obligated), exercisable at
any time after the Date of Grant, to permit the exercise of any Option or Stock
Appreciation Right prior to the time such Option or Stock Appreciation Right
would otherwise become exercisable under the terms of the Award Agreement.
(D) EXTENSION OF EXERCISE TIME. In addition to the extensions permitted
under Section 6.03(e) in the event of Termination of Employment, the Committee,
in its sole discretion, shall have the right (but shall not in any case be
obligated), exercisable on or at any time after the Date of Grant, to permit any
Option or Stock Appreciation Right granted under this Plan to be exercised after
its expiration date described in Section 6.03(e), subject, however, to the
limitations described in Section 6.03(b)(i), (iii), and (iv).
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(E) EXERCISE OF OPTIONS OR STOCK APPRECIATION RIGHTS UPON TERMINATION OF
EMPLOYMENT.
(I) TERMINATION OF VESTED OPTIONS AND STOCK APPRECIATION RIGHTS UPON
TERMINATION OF EMPLOYMENT.
(A) TERMINATION. In the event of Termination of Employment of a
Participant other than by reason of death, disability or Retirement, the
right of the Participant to exercise the Option or Stock Appreciation
Right under the Plan shall terminate on the date of such Termination of
Employment, unless the exercise period is extended by the Committee in
accordance with Section 6.03(d).
(B) DISABILITY OR RETIREMENT. In the event of a Participant's
Termination of Employment by reason of disability or Retirement, the
right of the Participant to exercise the Options or Stock Appreciation
Rights which he or she was entitled to exercise upon Termination of
Employment (or which became exercisable at a later date pursuant to
Section 6.03(e)(ii)) shall terminate one year after the date of such
Termination of Employment, unless the exercise period is extended by the
Committee in accordance with Section 6.03(d). In no event, however, may
any Option or Stock Appreciation Right be exercised later than the date
of expiration of the Option determined pursuant to Section 6.03(b)(i),
(iii) or (iv).
(C) DEATH. In the event of the death of a Participant while
employed by the Company or a Subsidiary or within the additional period
of time from the date of the Participant's Termination of Employment and
prior to the expiration of the Option or Stock Appreciation Right as may
be permitted in Section 6.03(e)(i)(B) or Section 6.03(d) above, to the
extent the right to exercise the Option or Stock Appreciation Right
accrued as of the date of such Termination of Employment and did not
expire during such additional period and prior to the Participant's
death, the right of the Participant's Beneficiary to exercise the Option
or Stock Appreciation Right under the Plan shall terminate upon the
expiration of one year from the date of the Participant's death (but in
no event more than one year from the date of the Participant's
Termination of Employment by reason of disability or retirement), unless
the exercise period is extended by the Committee in accordance with
Section 6.03(d). In no event, however, may any Option or Stock
Appreciation Right be exercised later than the date of expiration of the
Option determined pursuant to Section 6.03(b)(i), (iii) or (iv).
(II) TERMINATION OF UNVESTED OPTIONS OR STOCK APPRECIATION RIGHTS UPON
TERMINATION OF EMPLOYMENT. Subject to Section 6.03(c), to the extent the
right to exercise an Option or a Stock Appreciation Right, or any portion
thereof, has not accrued as of the date of Termination of Employment, such
right shall expire at the date of such Termination of Employment.
Notwithstanding the foregoing, the Committee, within its discretion and
under such terms as it deems appropriate, may permit a Participant who
terminates employment by reason of Retirement and who will continue to
render significant services to the Company or one of its Subsidiaries after
his or her Termination of Employment, to continue vesting in his or her
Options and Stock Appreciation Rights during the period in which the
individual continues to render such services.
6.04 EXERCISE PROCEDURES. Each Option and Stock Appreciation Right granted
under the Plan shall be exercised by written notice to the Company which must be
received by the officer or employee of the Company designated in the Award
Agreement on or before the close of business on the expiration date of the
Award. The Purchase Price of shares purchased upon exercise of an Option granted
under the Plan shall be paid in full in cash by the Participant pursuant to the
Award Agreement; provided, however, that the Committee may (but shall not be
required to) permit payment to be made by delivery to the Company of either (a)
Common Stock (which may include Restricted Shares or shares otherwise issuable
in connection with the exercise of the Option, subject to such rules as the
Committee deems appropriate) or (b) any combination of cash and Common Stock, or
(c) such other consideration as the Committee deems appropriate and in
compliance with applicable law (including payment in accordance with a cashless
exercise program under which, if so instructed by the Participant, Common Stock
may be issued directly to the Participant's broker or dealer upon receipt of an
irrevocable written notice of exercise from the Participant). In the event that
any Common Stock shall be transferred to the Company to satisfy all or any part
of the Purchase Price, the part of the Purchase Price deemed to have been
satisfied by such transfer of Common Stock shall be equal to the product derived
by multiplying the Fair Market Value as of the date of exercise times the number
of shares of Common Stock transferred to the Company. The Participant may not
transfer to the Company in satisfaction of the Purchase Price any fractional
share of Common Stock.
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Any part of the Purchase Price paid in cash upon the exercise of any Option
shall be added to the general funds of the Company and may be used for any
proper corporate purpose. Unless the Committee shall otherwise determine, any
Common Stock transferred to the Company as payment of all or part of the
Purchase Price upon the exercise of any Option shall be held as treasury shares.
6.05 CHANGE IN CONTROL. Unless otherwise provided by the Committee in the
applicable Award Agreement, in the event of a Change in Control, all Options
outstanding on the date of such Change in Control, and all Stock Appreciation
Rights shall become immediately and fully exercisable. The provisions of this
Section 6.05 shall not be applicable to any Options or Stock Appreciation Rights
granted to a Participant if any Change in Control results from such
Participant's beneficial ownership (within the meaning of Rule 13d-3 under the
Exchange Act) of Common Stock or Company Voting Securities.
6.06 LIMITED STOCK APPRECIATION RIGHTS. Limited Stock Appreciation Rights
may be granted independent of or in tandem with Options and shall be exercisable
by the Participant for a period of sixty (60) days following the occurrence of a
Change in Control. Upon the exercise of a Limited Stock Appreciation Right, the
Participant shall be entitled to receive from the Company in exchange therefor
cash in the amount equal to the excess of the value on the date of exercise of
the number of shares of Common Stock subject to the Limited Stock Appreciation
Rights being exercised over the Exercise Price of such Limited Stock
Appreciation Right. For this purpose, the value of Common Stock shall be the
highest Fair Market Value of the Common Stock during the period beginning on the
90th day prior to the date on which the Limited Stock Appreciation Rights are
exercised and ending on such date. The date of exercise of Limited Stock
Appreciation Rights shall be determined under procedures established by the
Committee, and payment under this Section 6.06 shall be made by the Company as
soon as practicable after the date of exercise. To the extent that any Option in
tandem with which the Limited Stock Appreciation Rights shall have been granted
is exercised, cancelled, terminates or expires, the Limited Stock Appreciation
Rights shall be cancelled. Subject to the foregoing provisions of this Section
6.06 and the other provisions of the Plan, Limited Stock Appreciation Rights
granted under the Plan shall be subject to such other terms and conditions as
shall be determined by the Committee, in its discretion, and set forth in the
applicable Award Agreement.
ARTICLE VII
RESTRICTED SHARES
7.01 RESTRICTED SHARE AWARDS. The Committee may grant to any Participant an
Award of Common Stock in such number of shares, and on such terms, conditions
and restrictions, whether based on performance standards, periods of service,
retention by the Participant of ownership of purchased or designated shares of
Common Stock or other criteria, as the Committee shall establish. With respect
to performance-based Awards of Restricted Shares intended to qualify for
deductibility under Section 162(m) of the Code, performance targets will include
specified levels of one or more of earnings before interest, taxes and
amortization of intangibles and/or earnings per share. The terms of any
Restricted Share Award granted under this Plan shall be set forth in an Award
Agreement which shall contain provisions determined by the Committee and not
inconsistent with this Plan.
(A) ISSUANCE OF RESTRICTED SHARES. As soon as practicable after the
Date of Grant of a Restricted Share Award by the Committee, the Company
shall cause to be transferred on the books of the Company, or its agent,
Common Stock, registered on behalf of the Participant, evidencing the
Restricted shares covered by the Award, but subject to forfeiture to the
Company as of the Date of Grant if an Award Agreement with respect to the
Restricted Shares covered by the Award is not duly executed by the
Participant and timely returned to the Company. All Common Stock covered by
Awards under this Article VII shall be subject to the restrictions, terms
and conditions contained in the Plan and the Award Agreement entered into
by the Participant. Until the lapse or release of all restrictions
applicable to an Award of Restricted Shares the share certificates
representing such Restricted Shares may be held in custody by the Company,
its designee, or, if the certificates bear a restrictive legend, by the
Participant. Upon the lapse or release of all restrictions with respect to
an Award as described in Section 7.01(d), one or more share certificates,
registered in the name of the Participant, for an appropriate number of
shares as provided in Section 7.01(d), free of any restrictions set forth
in the Plan and the Award Agreement shall be delivered to the Participant.
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(B) SHAREHOLDER RIGHTS. Beginning on the Date of Grant of the
Restricted Share Award and subject to execution of the Award Agreement as
provided in Section 7.01(a), the Participant shall become a shareholder of
the Company with respect to all shares subject to the Award Agreement and
shall have all of the rights of a shareholder, including, but not limited
to, the right to vote such shares and the right to receive dividends;
provided, however, that any Common Stock distributed as a dividend or
otherwise with respect to any Restricted Shares as to which the
restrictions have not yet lapsed, shall be subject to the same restrictions
as such Restricted Shares and held or restricted as provided in Section
7.01(a).
(C) RESTRICTION ON TRANSFERABILITY. None of the Restricted Shares may
be assigned or transferred (other than by will or the laws of descent and
distribution, or to an inter vivos trust with respect to which the
Participant is treated as the owner under Sections 671 through 677 of the
Code), pledged or sold prior to lapse of the restrictions applicable
thereto.
(D) DELIVERY OF SHARES UPON VESTING. Upon expiration or earlier
termination of the forfeiture period without a forfeiture and the
satisfaction of or release from any other conditions prescribed by the
Committee, or at such earlier time as provided under the provisions of
Section 7.03, the restrictions applicable to the Restricted Shares shall
lapse. As promptly as administratively feasible thereafter, subject to the
requirements of Section 10.05, the Company shall deliver to the Participant
or, in case of the Participant's death, to the Participant's Beneficiary,
one or more share certificates for the appropriate number of shares of
Common Stock, free of all such restrictions, except for any restrictions
that may be imposed by law.
7.02 TERMS OF RESTRICTED SHARES.
(A) FORFEITURE OF RESTRICTED SHARES. Subject to Sections 7.02(b) and
7.03, all Restricted Shares shall be forfeited and returned to the Company
and all rights of the Participant with respect to such Restricted Shares
shall terminate unless the Participant continues in the service of the
Company or a Subsidiary as an employee until the expiration of the
forfeiture period for such Restricted Shares and satisfies any and all
other conditions set forth in the Award Agreement. The Committee shall
determine the forfeiture period (which may, but need not, lapse in
installments) and any other terms and conditions applicable with respect to
any Restricted Share Award.
(B) WAIVER OF FORFEITURE PERIOD. Notwithstanding anything contained in
this Article VII to the contrary, the Committee may, in its sole
discretion, waive the forfeiture period and any other conditions set forth
in any Award Agreement under appropriate circumstances (including the
death, disability or Retirement of the Participant or a material change in
circumstances arising after the date of an Award) and subject to such terms
and conditions (including forfeiture of a proportionate number of the
Restricted Shares) as the Committee shall deem appropriate.
7.03 CHANGE IN CONTROL. Unless otherwise provided by the Committee in the
applicable Award Agreement, in the event of a Change in Control, all
restrictions applicable to the Restricted Share Award shall terminate fully and
the Participant shall immediately have the right to the delivery of share
certificate or certificates for such shares in accordance with Section 7.01(d).
ARTICLE VIII
PERFORMANCE AWARDS
8.01 PERFORMANCE AWARDS.
(A) AWARD PERIODS AND CALCULATIONS OF POTENTIAL INCENTIVE AMOUNTS. The
Committee may grant Performance Awards to Participants. A Performance Award
shall consist of the right to receive a payment (measured by the Fair
Market Value of a specified number of shares of Common Stock, increases in
such Fair Market Value during the Award Period and/or a fixed cash amount)
contingent upon the extent to which certain predetermined performance
targets have been met during an Award Period. Performance Awards may be
made in conjunction with, or in addition to, Restricted Share Awards made
under Article VII. The Award Period shall be two or more fiscal or calendar
years as determined by the Committee. The Committee, in its discretion and
under such terms as it deems appropriate, may permit newly eligible
employees, such as those who are promoted or newly hired, to receive
Performance Awards after an Award Period has commenced.
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(B) PERFORMANCE TARGETS. The performance targets may include such
goals related to the performance of the Company and/or the performance of a
Participant as may be established by the Committee in its discretion. In
the case of Performance Awards intended to qualify for deductibility under
Section 162(m) of the Code, the targets will include specified levels of
one or more of earnings before interest, taxes and amortization of
intangibles and/or earnings per share. The performance targets established
by the Committee may vary for different Award Periods and need not be the
same for each Participant receiving a Performance Award in an Award Period.
Except to the extent inconsistent with the performance-based compensation
exception under Section 162(m) of the Code, in the case of Performance
Awards granted to employees to whom such section is applicable, the
Committee, in its discretion, but only under extraordinary circumstances as
determined by the Committee, may change any prior determination of
performance targets for any Award Period at any time prior to the final
determination of the Award when events or transactions occur to cause the
performance targets to be an inappropriate measure of achievement.
(C) EARNING PERFORMANCE AWARDS. The Committee, at or as soon as
practicable after the Date of Grant, shall prescribe a formula to determine
the percentage of the Performance Award to be earned based upon the degree
of attainment of performance targets.
(D) PAYMENT OF EARNED PERFORMANCE AWARDS. Payments of earned
Performance Awards shall be made in cash or Common Stock, or a combination
of cash and Common Stock, in the discretion of the Committee. The
Committee, in its sole discretion, may define such terms and conditions
with respect to the payment of earned Performance Awards as it may deem
desirable.
8.02 TERMS OF PERFORMANCE AWARDS.
(A) TERMINATION OF EMPLOYMENT. Unless otherwise provided below or in
Section 8.03, in the case of a Participant's Termination of Employment
prior to the end of an Award Period, the Participant will not have earned
any Performance Awards
(B) RETIREMENT. If a Participant's Termination of Employment is
because of Retirement prior to the end of an Award Period, the Participant
will not be paid any Performance Awards, unless the Committee, in its sole
and exclusive discretion, determines that an Award should be paid. In such
a case, the Participant shall be entitled to receive a pro-rata portion of
his or her Award as determined under Subsection (d).
(C) DEATH OR DISABILITY. If a Participant's Termination of Employment
is due to death or disability (as determined in the sole and exclusive
discretion of the Committee) prior to the end of an Award Period, the
Participant or the Participant's personal representative shall be entitled
to receive a pro-rata share of his or her Award as determined under
Subsection (d).
(D) PRO-RATA PAYMENT. The amount of any payment made to a Participant
whose employment is terminated by retirement, death or disability (under
circumstances described in Subsections (b) and (c)) will be the amount
determined by multiplying the amount of the Performance Award which would
have been earned, determined at the end of the Award Period, had such
employment not been terminated, by a fraction, the numerator of which is
the number of whole months such Participant was employed during the Award
Period, and the denominator of which is the total number of months of the
Award Period. Any such payment made to a Participant whose employment is
terminated prior to the end of an Award Period under this Section 8.02
shall be made at the end of the respective Award Period, unless otherwise
determined by the Committee in its sole discretion. Any partial payment
previously made or credited to a deferred account for the benefit of a
Participant as provided under Section 8.01(d) of the Plan shall be
subtracted from the amount otherwise determined as payable as provided in
this Section.
(E) OTHER EVENTS. Notwithstanding anything to the contrary in this
Article VIII, the Committee may, in its sole and exclusive discretion,
determine to pay all or any portion of a Performance Award to a Participant
who has terminated employment prior to the end of an Award Period under
certain circumstances (including the death, disability or retirement of the
Participant or a material change in circumstances arising after the Date of
Grant) and subject to such terms and conditions as the Committee shall deem
appropriate.
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8.03 CHANGE IN CONTROL. Unless otherwise provided by the Committee in the
applicable Award Agreement, in the event of a Change in Control, all Performance
Awards for all Award Periods shall immediately become fully payable to all
Participants and shall be paid to Participants within 30 days after such Change
in Control.
ARTICLE IX
NON-EMPLOYEE DIRECTOR AWARDS
9.01 GRANT OF NON-EMPLOYEE DIRECTOR AWARDS. Each person who is a
Non-Employee Director as of the Effective Date shall be granted as of the
Effective Date an Option to purchase 7,500 shares of Common Stock. Each person
whose initial election or appointment as a Director occurs after the Effective
Date shall be granted as of the date of such election or appointment an Option
to purchase 7,500 shares of Common Stock. Each person whose term as a Director
continues after the date of each annual meeting of shareholders of the Company,
commencing with the initial annual meeting after the Effective Date and
continuing until the date this Plan terminates, shall as of the date of each
such annual meeting of shareholders be granted an Option to purchase 2,500
shares of Common Stock. The exercise price for such Options shall be the Fair
Market Value on the Date of Grant of the shares subject to the Option. All such
Options shall be designated as Non-Qualified Stock Options and shall have a ten
year term. Such Options shall vest and become exercisable in equal installments
on the first and second anniversaries of the Date of Grant, except that, in the
event of a Change in Control, all outstanding Non-Employee Director Awards shall
be immediately vested and exercisable.
9.02 TERMINATION OF SERVICE AND OTHER TERMS. If a Non-Employee Director's
service with the Company terminates by reason of death or disability, any Award
held by such Non-Employee Director may be exercised for a period of one year
from the date of such termination or until the expiration of the Award,
whichever is shorter. If a Non-Employee Director's service with the Company
terminates other than by reason of death or disability, under mutually
satisfactory conditions, any Award held by such Non-Employee Director shall
expire on the date of such termination. All applicable provisions of the Plan
not inconsistent with this Article IX shall apply to Awards granted to
Non-Employee Directors; provided, however, that the Committee may not exercise
discretion under any provision of the Plan with respect to Awards granted under
this Article IX except to the extent expressly provided herein.
ARTICLE X
TERMS APPLICABLE TO ALL AWARDS GRANTED UNDER THE PLAN
10.01 PLAN PROVISIONS CONTROL AWARD TERMS. The terms of the Plan shall
govern all Awards granted under the Plan, and in no event shall the Committee
have the power to grant any Award under the Plan which is contrary to any of the
provisions of the Plan. In the event any provision of any Award granted under
the Plan shall conflict with any term in the Plan as constituted on the Date of
Grant of such Award, the term in the Plan as constituted on the Date of Grant of
such Award shall control. Except as provided in Section 10.03 and Section 10.07,
the terms of any Award granted under the Plan may not be changed after the Date
of Grant of such Award so as to materially decrease the value of the Award
without the express written approval of the holder.
10.02 AWARD AGREEMENT. No person shall have any rights under any Award
granted under the Plan unless and until the Company and the Participant to whom
such Award shall have been granted shall have executed and delivered an Award
Agreement or received any other Award acknowledgment authorized by the Committee
expressly granting the Award to such person and containing provisions setting
forth the terms of the Award.
10.03 MODIFICATION OF AWARD AFTER GRANT. No Award granted under the Plan to
a Participant may be modified (unless such modification does not materially
decrease the value of the Award) after the Date of Grant except by express
written agreement between the Company and the Participant, provided that any
such change (a) shall not be inconsistent with the terms of the Plan, and (b)
shall be approved by the Committee.
10.04 LIMITATION ON TRANSFER. Except as provided in Section 7.01(c) in the
case of Restricted Shares, a Participant's rights and interest under the Plan
may not be assigned or transferred other than by will or the laws of descent and
distribution, and during the lifetime of a Participant, only the Participant
personally (or the
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Participant's personal representative) may exercise rights under the Plan. The
Participant's Beneficiary may exercise the Participant's rights to the extent
they are exercisable under the Plan following the death of the Participant.
Notwithstanding the foregoing, the Committee may grant Non-Qualified Stock
Options that are transferable, without payment of consideration, to immediate
family members of the Participant or to trusts or partnerships for such family
members, and the Committee may also amend outstanding Non-Qualified Stock
Options to provide for such transferability.
10.05 TAXES. The Company shall be entitled, if the Committee deems it
necessary or desirable, to withhold (or secure payment from the Participant in
lieu of withholding) the amount of any withholding or other tax required by law
to be withheld or paid by the Company with respect to any amount payable and/or
shares issuable under such Participant's Award, or with respect to any income
recognized upon a disqualifying disposition of shares received pursuant to the
exercise of an Incentive Stock Option, and the Company may defer payment or
issuance of the cash or shares upon exercise or vesting of an Award unless
indemnified to its satisfaction against any liability for any such tax. The
amount of such withholding or tax payment shall be determined by the Committee
and shall be payable by the Participant at such time as the Committee determines
in accordance with the following rules:
(a) The Participant shall have the right to elect to meet his or her
withholding requirement (i) by having withheld from such Award at the
appropriate time that number of shares of Common Stock, rounded up to the
next whole share, whose Fair Market Value is equal to the amount of
withholding taxes due, (ii) by direct payment to the Company in cash of the
amount of any taxes required to be withheld with respect to such Award or
(iii) by a combination of shares and cash.
(b) The Committee shall have the discretion as to any Award, to cause
the Company to pay to tax authorities for the benefit of any Participant,
or to reimburse such Participant for the individual taxes which are due on
the grant, exercise or vesting of any share Award, or the lapse of any
restriction on any share Award (whether by reason of a Participant's filing
of an election under Section 83(b) of the Code or otherwise), including,
but not limited to, Federal income tax, state income tax, local income tax
and excise tax under Section 4999 of the Code, as well as for any such
taxes as may be imposed upon such tax payment or reimbursement.
(c) In the case of Participants who are subject to Section 16 of the
Exchange Act, the Committee may impose such limitations and restrictions as
it deems necessary or appropriate with respect to the delivery or
withholding of shares of Common Stock to meet tax withholding obligations.
10.06 SURRENDER OF AWARDS. Any Award granted under the Plan may be
surrendered to the Company for cancellation on such terms as the Committee and
the holder approve.
10.07 ADJUSTMENTS TO REFLECT CAPITAL CHANGES.
(A) RECAPITALIZATION. The number and kind of shares subject to
outstanding Awards, the Purchase Price or Exercise Price for such shares,
the number and kind of shares available for Awards subsequently granted
under the Plan and the maximum number of shares in respect of which Awards
can be made to any Participant in any calendar year shall be appropriately
adjusted to reflect any stock dividend, stock split, combination or
exchange of shares, merger, consolidation or other change in capitalization
with a similar substantive effect upon the Plan or the Awards granted under
the Plan. The Committee shall have the power and sole discretion to
determine the amount of the adjustment to be made in each case.
(B) MERGER. After any Merger in which the Company is the surviving
corporation, each Participant shall, at no additional cost, be entitled
upon any exercise of all Option or receipt of other Award to receive
(subject to any required action by shareholders, in lieu of the number of
shares of Common Stock receivable or exercisable pursuant to such Award,
the number and class of shares or other securities to which such
Participant would have been entitled pursuant to the terms of the Merger
if, at the time of the Merger, such Participant had been the holder of
record of a number of shares equal to the number of shares receivable or
exercisable pursuant to such Award. Comparable rights shall accrue to each
Participant in the event of successive Mergers of the character described
above. In the event of a Merger in which the Company is not
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the surviving corporation, the surviving, continuing, successor, or
purchasing corporation, as the case may be (the "Acquiring Corporation"),
shall either assume the Company's rights and obligations under outstanding
Award Agreements or substitute awards in respect of the Acquiring
Corporation's stock for such outstanding Awards. In the event the Acquiring
Corporation elects not to assume or substitute for such outstanding Awards,
the Board shall provide that any unexercisable and/or unvested portion of
the outstanding Awards shall be immediately exercisable and vested as of a
date prior to such merger or consolidation, as the Board so determines. The
exercise and/or vesting of any Award that was permissible solely by reason
of this Section 10.07(b) shall be conditioned upon the consummation of the
merger or consolidation. Any Options which are neither assumed by the
Acquiring Corporation not exercised as of the date of the Merger shall
terminate effective as of the effective date of the Merger.
(C) OPTIONS TO PURCHASE SHARES OR STOCK OF ACQUIRED COMPANIES. After
any merger in which the Company or a Subsidiary shall be a surviving
corporation, the Committee may grant substituted options under the
provisions of the Plan, pursuant to Section 424 of the Code, replacing old
options granted under a plan of another party to the merger whose shares or
stock subject to the old options may no longer be issued following the
merger. The foregoing adjustments and manner of application of the
foregoing provisions shall be determined by the Committee in its sole
discretion. Any such adjustments may provide for the elimination of any
fractional shares which might otherwise become subject to any Options.
10.08 NO RIGHT TO EMPLOYMENT. No employee or other person shall have any
claim of right to be granted an Award under this Plan. Neither the Plan nor any
action taken hereunder shall be construed as giving any employee any right to be
retained in the employ of the Company or any of its Subsidiaries.
10.09 AWARDS NOT INCLUDABLE FOR BENEFIT PURPOSES. Payments received by a
Participant pursuant to the provisions of the Plan shall not be included in the
determination of benefits under any pension, group insurance or other benefit
plan applicable to the Participant which is maintained by the Company or any of
its Subsidiaries, except as may be provided under the terms of such plans or
determined by the Board.
10.10 GOVERNING LAW. All determinations made and actions taken pursuant to
the Plan shall be governed by the laws of the State of Delaware and construed in
accordance therewith.
10.11 NO STRICT CONSTRUCTION. No rule of strict construction shall be
implied against the Company, the Committee, or any other person in the
interpretation of any of the terms of the Plan, any Award granted under the Plan
or any rule or procedure established by the Committee.
10.12 CAPTIONS. The captions (i.e., all Section headings) used in the Plan
are for convenience only, do not constitute a part of the Plan, and shall not be
deemed to limit, characterize or affect in any way any provisions of the Plan,
and all provisions of the Plan shall be construed as if no captions have been
used in the Plan.
10.13 SEVERABILITY. Whenever possible, each provision in the Plan and every
Award at any time granted under the Plan shall be interpreted in such manner as
to be effective and valid under applicable law, but if any provision of the Plan
or any Award at any time granted under the Plan shall be held to be prohibited
by or invalid under applicable law, then (a) such provision shall be deemed
amended to accomplish the objectives of the provision as originally written to
the fullest extent permitted by law and (b) all other provisions of the Plan and
every other Award at any time granted under the Plan shall remain in full force
and effect.
10.14 AMENDMENT AND TERMINATION.
(A) AMENDMENT. The Board shall have complete power and authority to
amend the Plan at any time. No termination or amendment of the Plan may,
without the consent of the Participant to whom any Award shall theretofore
have been granted under the Plan, adversely affect the right of such
individual under such Award.
(B) TERMINATION. The Board shall have the right and the power to
terminate the Plan at any time. No Award shall be granted under the Plan
after the termination of the Plan, but the termination of the Plan shall
not have any other effect and any Award outstanding at the time of the
termination of the Plan may be exercised after termination of the Plan at
any time prior to the expiration date of such Award to the same extent such
Award would have been exercisable had the Plan not terminated.
A-13
<PAGE> 35
PROXY
EDUCATION MANAGEMENT CORPORATION
300 Sixth Avenue, Pittsburgh, Pennsylvania 15222
Proxy for Annual Meeting of Shareholders on November 4, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Robert T. McDowell and Frederick W.
Steinberg and each or either of them as proxies, each with the power to appoint
his substitute and hereby authorizes either of them to represent and to vote
all shares of Common Stock of Education Management Corporation, a Pennsylvania
corporation (the "Company") which the undersigned is entitled to vote at the
Annual Meeting of Shareholders of the Company (the "Annual Meeting") to be
held on November 4, 1999, commencing at 10:00 a.m., local time, at the Rihga
Royal Hotel, 151 West 54th Street, New York, New York 10019, or any adjournment
or postponement thereof, as designated on the reverse side of this proxy card.
PLEASE DATE AND SIGN ON REVERSE SIDE
FOLD AND DETACH HERE
<PAGE> 36
<TABLE>
<CAPTION>
Please mark
your votes as
indicated in
this example [X}
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ALL PROPOSALS.
<S> <C> <C>
1. The election of three directors, 2. The proposal to ratify the selection by the 3. The proposal to amend
each for a term of three years: Board of Directors of Arthur Andersen LLP as the Company's 1996
independent public accountants for the Stock Incentive Plan.
FOR WITHHOLD Company.
all nominees AUTHORITY
listed below to FOR AGAINST ABSTAIN FOR AGAINST ABSTAIN
(except as marked to vote for
the contrary). all nominees
NOMINEES: Robert B. Knutson THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED
James S. Pasman, Jr. IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED
John R. McKernan, Jr. SHAREHOLDER. IF NO DIRECTION IS GIVEN, THIS PROXY
WILL BE VOTED "FOR" PROPOSALS 1, 2 AND 3.
INSTRUCTIONS: To withhold authority
to vote for any individual nominee, In their discretion, the Proxy holders are
draw a line through such nominee's authorized to vote upon such other business as may
name). properly come before the Annual Meeting.
DATED _____________________________________________
___________________________________________________
(Signature)
___________________________________________________
(Signature)
NOTE: Please sign exactly as name or names appear
hereon. When signing as attorney, executor,
administrator, trustee or guardian, please
give your full title. If a corporation,
please sign in corporate name by president
or other authorized officer. If partnership,
please sign in partnership name by authorized
partner.
FOLD AND DETACH HERE
</TABLE>
