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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: JUNE 30, 1999 COMMISSION FILE NUMBER: 000-21363
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EDUCATION MANAGEMENT CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
PENNSYLVANIA 25-1119571
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
300 SIXTH AVENUE, PITTSBURGH, PA 15222
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (412) 562-0900
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(TITLE OF CLASS)
PREFERRED SHARE PURCHASE RIGHTS
(TITLE OF CLASS)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy statement incorporated
by reference in Part III of this Form 10-K or any amendment to this Form
10-K. __
The aggregate market value of the voting common stock held by non-affiliates of
the registrant as of September 20, 1999 was approximately $292,128,379. The
number of shares of Common Stock outstanding on September 20, 1999 was
29,318,522 shares.
Documents incorporated by reference: Portions of the definitive Proxy Statement
of the registrant for the annual meeting of shareholders to be held on November
4, 1999 ("Proxy Statement") are incorporated by reference into Part III of this
Form 10-K. The incorporation by reference herein of portions of the Proxy
Statement shall not be deemed to incorporate by reference the information
referred to in Item 402(a)(8) of Regulation S-K.
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PART I
Forward-Looking Statements: This Annual Report on Form 10-K contains
statements that may be forward-looking statements within the meaning of the U.S.
Private Securities Litigation Reform Act of 1995. Those statements can be
identified by their use of terms such as "believes," "estimates," "anticipates,"
"continues," "contemplates," "expects," "may," "will," "could," "should" or
"would" or the negatives thereof or other variations thereon or comparable
terminology. Those statements are based on the intent, belief or expectation of
Education Management Corporation ("EDMC" or the "Company") as of the date of
this Annual Report. Such forward-looking statements are not guarantees of future
performance and may involve risks and uncertainties that are outside the control
of the Company. Actual results may vary materially from the forward-looking
statements contained herein as a result of changes in United States or
international economic conditions, governmental regulations and other factors,
including those factors described at the end of the responses to Item 7 under
the heading "Risk Factors." The Company expressly disclaims any obligation or
understanding to release publicly any updates or revisions to any
forward-looking statement contained herein to reflect any change in the
Company's expectations with regard thereto or any change in events, conditions
or circumstances on which any such statement is based. The following discussion
should be read in conjunction with the Consolidated Financial Statements and
Notes thereto filed in response to Item 8 of this Annual Report.
ITEM 1--BUSINESS
BUSINESS OVERVIEW
EDMC is among the largest providers of proprietary postsecondary education
in the United States, based on student enrollments and revenues. The Company was
organized as a Pennsylvania corporation in 1962 and completed its initial public
offering (the "IPO") in 1996. Through its main operating unit, the Art
Institutes ("The Art Institutes"), the Company offers associate's and bachelor's
degree programs and non-degree programs in the areas of design, media arts,
culinary arts and fashion. The Company's schools have graduated over 100,000
students. In the fall quarter beginning October 1998, EDMC's schools had 21,518
students enrolled, representing all 50 states and over 85 countries.
The Company's main operating unit, The Art Institutes, consisted on June
30, 1999 of 18 schools in 16 cities throughout the United States. Art Institute
programs are designed to provide the knowledge and skills necessary for
entry-level employment in various fields, including graphic design, multimedia
and web design, computer animation, video production, culinary arts, interior
design, industrial design, photography, fashion marketing and fashion design.
Those programs typically are completed in 18 to 48 months and culminate in a
bachelor's or associate's degree. Eight Art Institutes currently offer
bachelor's degree programs, and EDMC expects to continue to introduce bachelor's
degree programs at schools in states that permit proprietary postsecondary
institutions to offer such programs. In August 1999, the Company acquired the
American Business & Fashion Institute in Charlotte, North Carolina and
Massachusetts Communications College in Boston.
The Company offers a culinary arts curriculum at ten Art Institutes,
including The Art Institute of Los Angeles, The Art Institutes International
Minnesota and The Art Institute of Dallas, which began culinary arts classes in
July 1998, October 1998 and April 1999, respectively. The Company also owns the
New York Restaurant School ("NYRS"), a culinary arts and restaurant management
school located in New York City. NYRS offers an associate's degree program and
certificate programs.
The Company also owns NCPT (The National Center for Paralegal Training),
which offers paralegal certificate programs, and The National Center for
Professional Development, which maintains consulting relationships with five
colleges and universities to assist in the development, marketing and delivery
of paralegal, legal nurse consultant and financial planning certificate
programs.
EDMC's primary objective is to provide career-focused education that
maximizes employment opportunities for its students after graduation. EDMC's
graduates are employed by a broad range of employers nationwide. Approximately
90.9% of the calendar year 1998 graduates of all programs at EDMC's schools who
were available for employment obtained positions in fields related to their
programs of study within six months of graduation.
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THE BUSINESS OF EDUCATION
EDMC's primary mission is to maximize student success by providing students
with the education necessary to meet employers' current and anticipated needs.
To achieve this objective, the Company focuses on marketing to a broad range of
potential students, admitting students who possess the relevant interests and
capabilities, providing students with programs of study taught by industry
professionals, and assisting students with job placement.
STUDENT RECRUITMENT AND MARKETING
The general reputation of The Art Institutes and referrals from current
students, alumni and employers are the largest sources of new students. The
Company also employs marketing tools such as television and print media
advertising, the World Wide Web, high school visits and recruitment events, and
uses its internal advertising agency to create publications, television and
radio commercials, videos and other promotional materials for the Company's
schools. The Company estimates that in fiscal 1999 referrals accounted for 36%
of new student enrollments at The Art Institutes, high school recruitment
programs accounted for 21%, broadcast advertising accounted for 22%, print media
accounted for 9%, the Company's web sites accounted for 7%, and international
marketing accounted for 2%. The remainder was classified as miscellaneous.
In fiscal 1999, The Art Institutes' marketing efforts generated inquiries
from approximately 215,000 qualified prospective students. The Art Institutes'
inquiry-to-application conversion ratio has increased from 9.0% in fiscal 1996
to 10.9% in fiscal 1999, and the applicant-to-new student ratio has decreased
slightly from 66.7% in fiscal 1996 to 66.6% in fiscal 1999.
The Company also employs approximately 80 representatives who make
presentations at high schools to promote The Art Institutes. Each Art Institute
also conducts college preview seminars at which prospective students can meet
with a representative, view artwork and videos, and receive enrollment
information. In fiscal 1999, representatives visited over 9,000 high schools and
attended approximately 1,600 career events. Summer teenager and teacher
workshops are held to inform students and educators of the education programs
offered by The Art Institutes. The Company's marketing efforts to reach young
adults and working adults who may be attracted to evening programs are conducted
through local newspaper advertising, direct mail campaigns and broadcast
advertising.
NYRS relies on local television and referrals as its primary marketing
tools and also uses high school representatives and presentations at high
schools in the New York metropolitan area.
STUDENT ADMISSIONS AND RETENTION
Each applicant for admission to an Art Institute is required to have a high
school diploma or a recognized equivalent and to submit a written essay.
Prospective students are interviewed to assess their qualifications, their
interest in the programs offered by the applicable Art Institute and their
commitment to their education. In addition, the curricula, student services,
education cost, available financial resources and student housing are reviewed
during interviews, and tours of the facilities are conducted for prospective
students.
Art Institute students are of varying ages and backgrounds. For fiscal
1999, approximately 26% of the entering students matriculated directly from high
school, approximately 31% were between the ages of 19 and 21, approximately 31%
were 22 to 29 years of age and approximately 12% were 30 years old or older.
Students at the Company's schools may fail to finish their programs for a
variety of personal, financial or academic reasons. To reduce the risk of
student withdrawals, each Art Institute devotes staff resources to advise
students regarding academic and financial matters, part-time employment and
housing. Remedial courses are mandated for students with low academic skill
levels and tutoring is encouraged for students experiencing academic
difficulties. The Art Institutes' net annual persistence rate, which measures
the number of students who are enrolled during a fiscal year and either graduate
or advance to the next fiscal year, was 66.4% in fiscal 1998 and 65.4% in fiscal
1999.
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EDUCATION PROGRAMS
The Art Institutes offer the following degree programs. Certain programs
are offered only at select Art Institutes. (For internal purposes, the Company
classifies its degree programs according to four "schools" or areas of study.)
THE SCHOOL OF DESIGN THE SCHOOL OF MEDIA ARTS
Associate's Degree Programs Associate's Degree Programs
Computer-Aided Drafting & Design Audio Production
Computer Animation Broadcasting
Graphic Design Multimedia & Web Design
Interior Design Photography
Industrial Design Technology Video Production
Web Site Administration
Bachelor's Degree Programs
Computer Animation Bachelor's Degree Programs
Game Art and Design
Graphic Design Interactive Multimedia Programming
Interior Design Online Media & Marketing
Industrial Design
THE SCHOOL OF FASHION
THE SCHOOL OF CULINARY ARTS
Associate's Degree Programs
Associate's Degree Programs
Fashion Design
Culinary Arts Fashion Marketing
Restaurant and Catering Management Visual Merchandising
Bachelor's Degree Programs
Bachelor's Degree Programs
Fashion Design
Culinary Management Fashion Marketing and Management
NYRS offers associate's degree programs in culinary arts and restaurant
management and certificate programs in culinary arts, pastry arts, culinary
skills and restaurant management.
Approximately 7% of the average quarterly student enrollments at the
Company's schools in fiscal 1999 were in specialized diploma programs. Academic
credits from all of the specialized diploma programs at the Art Institutes and
NYRS are fully transferable into associate's and bachelor's degree programs at
those schools. Diploma programs are designed for working adults who seek to
supplement their education or are interested in enhancing their marketable
skills.
The Company expects to continue to add additional bachelor's degree
programs at schools in states that permit proprietary postsecondary institutions
to offer such programs.
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GRADUATE EMPLOYMENT
Based on information received from graduating students and employers, the
Company believes that students graduating from The Art Institutes during the
five calendar years ended December 31, 1998 obtained employment in fields
related to their programs of study as follows:
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PERCENT OF AVAILABLE
NUMBER OF GRADUATES WHO OBTAINED
GRADUATING CLASSES AVAILABLE EMPLOYMENT RELATED TO
(CALENDAR YEAR) GRADUATES(1)(2) PROGRAM OF STUDY(2)(3)
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1998............................................ 3,941 90.5%
1997............................................ 3,811 89.0
1996............................................ 3,676 86.8
1995............................................ 3,734 87.4
1994............................................ 3,495 86.4
</TABLE>
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(1) The term "Available Graduates" refers to all graduates except those who are
pursuing further education, deceased, in active military service, have
medical conditions that prevent such graduates from working or are
international students no longer residing in the United States.
(2) If the graduates of NCPT and NYRS (since its acquisition in August 1996)
were included in this table, then the number of graduates and placement
rates for 1996, 1997 and 1998 would have been 4,167, 4,749 and 4,719, and
86.4%, 87.3%, and 90.9%, respectively. In addition, the data for 1999
exclude graduates of programs in teach-out status. Had these 230 graduates
been included, the total number of graduates available for employment would
have been 4,949 with a placement rate of 90.9%.
(3) The information presented reflects employment in fields related to
graduates' programs of study within six months after graduation.
For calendar year 1998, the approximate average starting salaries of
graduates of degree and diploma programs at The Art Institutes were as follows:
The School of Culinary Arts--$23,300; The School of Design--$24,500; The School
of Fashion--$21,900; and The School of Media Arts--$22,800.
Each Art Institute offers career-planning services to all graduating
students through its employment assistance department. Specific career advice is
provided during the last two quarters of a student's education. Interviewing
techniques and resume-writing skills are developed, and students receive
portfolio counseling where appropriate. The Art Institutes maintain contact with
approximately 40,000 employers nationwide. Employment assistance advisors
educate employers about the programs at The Art Institutes and the caliber of
their graduates and also participate in professional organizations, trade shows
and community events to keep apprised of industry trends and maintain
relationships with key employers.
Employers of Art Institute graduates include numerous small and
medium-sized companies, as well as better-known larger companies. The following
companies are representative of the larger companies that employ Art Institute
graduates: Bell Atlantic Corporation, The Boeing Company, Eddie Bauer, Inc.,
Ethan Allen Interiors Inc., Flight Safety International, The Home Depot, Inc.,
Humongous Entertainment, Inc., J. C. Penney Company, Inc., Kinko's Corporation,
Marriott International, Inc., The May Department Stores Company, Microsoft
Corporation, The Neiman Marcus Group, Inc., Nintendo of America, Nordstrom,
Inc., The Ritz-Carlton, Sears Roebuck and Co., Sierra On-Line, Inc., Take2
Interactive Software, Inc., Tele-Communications, Inc., Time Warner Inc., Turner
Broadcasting System, Inc., and The Walt Disney Company.
ACCREDITATION
Accreditation is a process through which an institution submits itself to
qualitative review by an organization of peer institutions. Accrediting agencies
primarily examine the academic quality of the instructional programs of an
institution, and a grant of accreditation is generally viewed as certification
that an institution's programs meet generally accepted academic standards.
Accrediting agencies also review the administrative and financial operations of
the institutions they accredit to ensure that each institution has the resources
to perform its educational mission.
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Pursuant to provisions of the Higher Education Act of 1965 ("HEA"), the
U.S. Department of Education relies on accrediting agencies to determine whether
institutions' educational programs qualify them to participate in federal
financial aid programs under Title IV of the HEA ("Title IV Programs"). The HEA
specifies certain standards that all recognized accrediting agencies must adopt
in connection with their review of postsecondary institutions. All of EDMC's
schools are accredited by one or more accrediting agencies recognized by the
U.S. Department of Education. Five of the Company's schools are either
accredited, or are candidates for accreditation, by one of the six regional
accrediting agencies that accredit virtually all of the public and private
non-profit colleges and universities in the United States.
The following table shows the location of each of EDMC's schools, the name
under which it operates, the year of its establishment, the date EDMC opened or
acquired it, the number of students enrolled as of the beginning of the second
(fall) quarter of fiscal 1999, and the accrediting agencies (for schools
accredited by more than one recognized accrediting agency, the primary
accrediting agency is listed first).
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FISCAL YEAR
CALENDAR EDMC
YEAR ACQUIRED/
SCHOOL LOCATION ESTABLISHED OPENED ENROLLMENT ACCREDITING AGENCY
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The Art Institute of
Atlanta.................... Atlanta, GA 1949 1971 1,699 Commission on Colleges of the
Southern Association of
Colleges and Schools ("SACS")
The Art Institute of
Dallas..................... Dallas, TX 1964 1985 1,334 SACS
The Art Institute of Fort
Lauderdale................. Fort Lauderdale, FL 1968 1974 2,645 Accrediting Commission of
Career Schools and Colleges
of Technology ("ACCSCT")
The Art Institute of
Houston.................... Houston, TX 1974 1979 1,690 ACCSCT, SACS (Candidate)
The Art Institute of Los
Angeles.................... Los Angeles, CA 1997 1998 407 ACCSCT, as an additional
location of The Art Institute
of Pittsburgh
The Art Institute of
Philadelphia............... Philadelphia, PA 1971 1980 2,361 ACCSCT
The Art Institute of
Phoenix.................... Phoenix, AZ 1995 1996 834 ACCSCT, as an additional
location of The Colorado
Institute of Art
The Art Institute of
Pittsburgh................. Pittsburgh, PA 1921 1970 2,585 ACCSCT
The Art Institute of
Seattle.................... Seattle, WA 1946 1982 2,700 ACCSCT
Commission on Colleges of the
Northwest Association of
Schools and Colleges
("NWASC") (Candidate)
The Art Institutes
International at
Portland................... Portland, OR 1963 1998 205 NWASC
The Art Institutes
International at San
Francisco.................. San Francisco, CA 1939 1998 77 ACCSCT
The Art Institutes
International Minnesota.... Minneapolis, MN 1964 1997 531 Accrediting Council for
Independent Colleges and
Schools ("ACICS")
The Colorado Institute of
Art........................ Denver, CO 1952 1976 1,748 ACCSCT
The Illinois Institute of Art
at Chicago................. Chicago, IL 1916 1996 804 ACCSCT
The Illinois Institute of Art
at Schaumburg.............. Schaumburg, IL 1983 1996 507 ACCSCT, as an additional
location of The Illinois
Institute of Art at Chicago
</TABLE>
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<TABLE>
<CAPTION>
FISCAL YEAR
CALENDAR EDMC
YEAR ACQUIRED/
SCHOOL LOCATION ESTABLISHED OPENED ENROLLMENT ACCREDITING AGENCY
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<S> <C> <C> <C> <C> <C>
NCPT: The National Center for
Paralegal Training......... Atlanta, GA 1973 1973 385 ACICS
The New York Restaurant
School..................... New York, NY 1980 1997 1,006 ACCSCT, New York State Board
of Regents
</TABLE>
Accrediting agencies monitor each institution's performance in specific
areas. In the event that the information provided by a school to an accrediting
agency indicates that such school's performance in one or more areas falls below
certain parameters, the accrediting agency may require that school to supply it
with supplemental reports on the accrediting agency's specific areas of concern
until that school meets the accrediting agency's performance guideline or
standard. A school that is subject to this heightened monitoring must seek the
prior approval of its accrediting agency in order to open or commence teaching
at new locations. The accrediting agencies do not consider requesting that a
school provide supplemental reports to be a negative action.
ACCSCT has notified three of the Company's schools that, due to concerns
regarding student completion rates for certain programs at each of those
schools, such schools were required to provide certain supplemental reports to
the agency. ACCSCT's standards define a program's completion rate as the
percentage of the students who started that program during a twelve-month period
and who have either graduated from that program within a period of time equal to
150% of that program's length or withdrawn from that program during the same
period in order to accept full-time employment in the occupation or job category
for which the program was offered. Because that calculation can only be
performed after a student's scheduled completion date, it does not provide a
timely basis for a school to take action to affect student outcomes. For that
reason, for internal purposes, the Company uses the net annual persistence rate
as a method to track the retention rate of students.
At the time that the Company purchased the assets of Bassist College in
Portland, Oregon, the school was on probation status with NWASC due to concerns
that NWASC had with the financial stability of the school's previous owner.
NWASC approved the change of ownership of that school to the Company while
continuing its probation status. NWASC removed the school (now named The Art
Institutes International at Portland) from probation status at its spring 1999
meeting.
STUDENT FINANCIAL ASSISTANCE
Many students at EDMC's schools must rely, at least in part, on financial
assistance to pay the cost of their education. The largest source of such
support is the federal programs of student financial assistance under Title IV
of the HEA. Additional sources of funds include other federal grant programs,
state grant and loan programs, private loan programs and institutional grants
and scholarships. To provide students access to financial assistance resources
available through Title IV Programs, a school must be (i) authorized to offer
its programs of instruction by the relevant agency of the state in which it is
located, (ii) accredited by an agency recognized by the U.S. Department of
Education, and (iii) certified as an eligible institution by the U.S. Department
of Education. In addition, the school must ensure that Title IV Program funds
are properly accounted for and disbursed in the correct amounts to eligible
students. All Art Institutes and NYRS participate in Title IV Programs.
NATURE OF FEDERAL SUPPORT FOR POSTSECONDARY EDUCATION
While the states support public colleges and universities primarily through
direct state subsidies, the federal government provides a substantial part of
its support for postsecondary education in the form of grants and loans to
students who can use this support at any institution that has been certified as
eligible by the U.S. Department of Education. Students at EDMC's schools receive
loans, grants and work-study funding to fund their education under several Title
IV Programs, of which the two largest are the Federal Family Education Loan
("FFEL") program and the Federal Pell Grant ("Pell") program. The Company's
schools also participate in the Federal Supplemental Educational Opportunity
Grant ("FSEOG") program, the Federal Perkins Loan ("Perkins") program, and the
Federal Work-Study ("FWS") program.
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FFEL. The FFEL program consists of two types of loans, Stafford loans,
which are made available to students regardless of financial need, and PLUS
loans, which are made available to parents of students classified as dependents.
Under the Stafford loan program, a student may borrow up to $2,625 for the first
academic year, $3,500 for the second academic year and, in certain educational
programs, $5,500 for each of the third and fourth academic years. Students who
are classified as independent can obtain an additional $4,000 for each of the
first and second academic years and, depending upon the educational program, an
additional $5,000 for each of the third and fourth academic years. Amounts
received by students in the Company's schools under the Stafford loan program in
fiscal 1999 equaled approximately 37% of the Company's net revenues. PLUS loans
may be obtained by the parents of a dependent student in an amount not to exceed
the difference between the total cost of that student's education (including
allowable expenses) and other aid to which that student is entitled. Amounts
received by parents of students in the Company's schools under the PLUS loan
program in fiscal 1999 equaled approximately 15% of the Company's net revenues.
Under the Federal Direct Student Loan Program ("FDSL"), students may obtain
loans directly from the U.S. Department of Education rather than commercial
lenders. The conditions on FDSL loans are generally the same as on loans made
under the FFEL program. All of the Company's schools currently eligible to
participate in Title IV Programs are also approved by the U.S. Department of
Education to participate in the FDSL program, but all have deferred
participation since their respective students' loan needs continue to be
satisfied under the FFEL program.
Pell. Pell grants are the primary component of the Title IV Programs under
which the U.S. Department of Education makes grants to students who demonstrate
financial need. Every eligible student is entitled to receive a Pell grant;
there is no institutional allocation or limit. During fiscal 1999, Pell grants
ranged from $400 to $3,000 per year; beginning on July 1, 1999, the limit was
increased to $3,125 per year. Amounts received by students enrolled in the
Company's schools in fiscal 1999 under the Pell program equaled approximately 7%
of the Company's net revenues.
FSEOG. FSEOG awards are designed to supplement Pell grants for the neediest
students. FSEOG grants generally range in amount from $100 to $4,000 per year;
however, the availability of FSEOG awards is limited by the amount of those
funds allocated to an institution under a formula that takes into account the
size of the institution, its costs and the income levels of its students. At
most of the Company's schools, FSEOG awards generally do not exceed $1,200 per
eligible student per year. The Company is required to make a 25% matching
contribution for all FSEOG program funds disbursed. Resources for this
institutional contribution may include institutional grants and scholarships
and, in certain states, portions of state grants and scholarships. In fiscal
1999, the Company's required 25% institutional match was approximately $840,000.
Amounts received by students in the Company's schools under the FSEOG program in
fiscal 1999 equaled approximately 1% of the Company's net revenues.
Perkins. Eligible undergraduate students may borrow up to $4,000 under the
Perkins program during each academic year, with an aggregate maximum of $15,000,
at a 5% interest rate and with repayment delayed until nine months after a
student ceases enrollment as at least a half-time student. Perkins loans are
made available to those students who demonstrate the greatest financial need.
Perkins loans are made from a revolving account, with 75% of new funding
contributed by the U.S. Department of Education, and the remainder by the
applicable school. Subsequent federal capital contributions, which must be
matched by school funds, may be received if an institution meets certain
requirements. Each school collects payments on Perkins loans from its former
students and relends those funds to currently enrolled students. Collection and
disbursement of Perkins loans is the responsibility of each participating
institution. During fiscal 1999, the Company collected approximately $2.5
million from its former students. In fiscal 1999, the Company's required
matching contribution was approximately $190,000. The Perkins loans disbursed to
students in the Company's schools in fiscal 1999 were less than 1% of the
Company's net revenues. Ten of the Company's schools participate in the Perkins
program.
Federal Work-Study. Under the FWS program, federal funds are made available
to pay up to 75% of the cost of part-time employment of eligible students, based
on their financial need, to perform work for the institution or for off-campus
public or non-profit organizations. At least 5% of an institution's FWS
allocation
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must be used to fund student employment in community service positions. In
fiscal 1999, FWS funds accounted for less than 0.5% of the Company's net
revenues.
OTHER FINANCIAL ASSISTANCE SOURCES
Students at several of the Company's schools participate in state grant
programs. In fiscal 1999, approximately 3% of the Company's net revenues was
derived from state grant programs. In addition, certain students at some of the
Company's schools receive financial aid provided by the United States Department
of Veterans Affairs, the United States Department of the Interior (Bureau of
Indian Affairs) and the Rehabilitative Services Administration of the U.S.
Department of Education (vocational rehabilitation funding). In fiscal 1999,
financial assistance from such federal and state programs equaled less than 2%
of the Company's net revenues. The Art Institutes also provide institutional
scholarships to qualified students. In fiscal 1999, institutional scholarships
had a value equal to approximately 3% of the Company's net revenues. The Company
has also arranged alternative supplemental loan programs that allow students to
repay a portion of their loans after graduation and allow students with lower
than average credit ratings to obtain loans. The primary objective of these loan
programs is to lower the monthly payments required of students. Such loans are
without recourse to the Company or its schools.
AVAILABILITY OF LENDERS
During fiscal 1999, five lending institutions provided over 81% of all
federally guaranteed loans to students attending the Company's schools. While
the Company believes that other lenders would be willing to make federally
guaranteed student loans to its students if loans were no longer available from
its current lenders, there can be no assurances in this regard. In addition, the
HEA requires the establishment of lenders of last resort in every state to make
certain loans to students at any school that cannot otherwise identify lenders
willing to make federally guaranteed loans to its students.
One student loan guaranty agency (USA Group Guarantee Services, formerly
United Student Aid Funds) currently guarantees approximately 87% of all
federally guaranteed student loans made to students enrolled at the Company's
schools. The Company believes that other guaranty agencies would be willing to
guarantee loans to the Company's students if that agency ceased guaranteeing
those loans or reduced the volume of those loans it guaranteed.
FEDERAL OVERSIGHT OF TITLE IV PROGRAMS
Each institution that participates in Title IV Programs must annually
submit to the U.S. Department of Education an audit by an independent accounting
firm of that school's compliance with Title IV Program requirements, as well as
audited financial statements. The U.S. Department of Education also conducts
compliance reviews, which include on-site evaluations, of several hundred
institutions each year, and directs student loan guaranty agencies to conduct
additional reviews relating to student loan programs. In addition, the Office of
the Inspector General of the U.S. Department of Education conducts audits and
investigations in certain circumstances. Under the HEA, accrediting agencies and
state licensing agencies also have responsibilities for overseeing institutions'
compliance with certain Title IV Program requirements. As a result, each
participating institution is subject to frequent and detailed oversight and must
comply with a complex framework of laws and regulations or risk being required
to repay funds or becoming ineligible to participate in Title IV Programs.
Cohort Default Rates. The U.S. Department of Education may impose sanctions
on institutions whose former students default at an "excessive" rate on the
repayment of federally guaranteed student loans. A school's cohort default rate
under the FFEL program is calculated on an annual basis as the rate at which
student borrowers scheduled to begin repayment on their loans in one federal
fiscal year default on those loans by the end of the next federal fiscal year.
Any institution whose FFEL cohort default rate equals or exceeds 25% for three
consecutive years will no longer be eligible to participate in that program or
the FDSL program for the remainder of the federal fiscal year in which the U.S.
Department of Education determines that such institution has lost its
eligibility and for the two subsequent federal fiscal years. In addition, an
institution whose FFEL cohort default rate for any federal fiscal year exceeds
40% may have its eligibility to participate in all Title IV Programs limited,
9
<PAGE> 10
suspended or terminated. Since the calculation of FFEL cohort default rates
involves the collection of data from many non-governmental agencies (i.e.,
lenders and non-federal guarantors), as well as the U.S. Department of
Education, the HEA provides a formal process for the review and appeal of the
accuracy of FFEL cohort default rates before the U.S. Department of Education
takes any action against an institution based on its FFEL cohort default rates.
As part of that process, the U.S. Department of Education provides each
institution with its FFEL cohort default rate on a preliminary basis for review.
Preliminary cohort default rates are subject to revision by the U.S. Department
of Education based on information that schools and guaranty agencies identify
and submit to the U.S. Department of Education for review in order to correct
any errors in the data previously provided.
None of the Company's schools has had an FFEL cohort default rate of 25% or
greater for the last three consecutive federal fiscal years. For federal fiscal
year 1996, the most recent year for which such rates have been published, the
average FFEL cohort default rate for borrowers at all proprietary institutions
was 18.2%. For that year, the combined preliminary FFEL cohort default rate for
all borrowers at the Company's schools was 16.6%. For federal fiscal year 1997,
the combined preliminary FFEL cohort default rate for all borrowers at the
Company's schools was 14.7% and its individual schools' preliminary rates ranged
from 4.4% to 22.6%, although only two such schools had preliminary rates that
exceeded 20%. EDMC has submitted information to the U.S. Department of Education
with respect to the preliminary FFEL cohort default rates for federal fiscal
year 1997 for most of its schools and believes that the published FFEL cohort
default rates for such year for one or more of its schools will be greater or
less than such schools' preliminary rates.
If an institution's FFEL cohort default rate equals or exceeds 25% in any
of the three most recent federal fiscal years, or if its cohort default rate for
loans under the Perkins program exceeds 15% for the most recent federal award
year (i.e., July 1 through June 30), that institution may be placed on
provisional certification status for up to four years. Provisional certification
does not limit an institution's access to Title IV Program funds, but does
subject that institution to closer review by the U.S. Department of Education
and possible summary adverse action if that institution commits a material
violation of Title IV Program requirements. To EDMC's knowledge, the U.S.
Department of Education reviews an institution's compliance with the cohort
default rate thresholds described in this paragraph only when that school is
otherwise subject to a U.S. Department of Education certification review. As a
result of such a certification review in 1997, The Art Institute of Houston was
placed on provisional certification status because of its FFEL cohort default
rates for federal fiscal years 1993 and 1994. Five of the Company's schools had
Perkins cohort default rates in excess of 15% for students who were to begin
repayment during the federal award year ending June 30, 1998, the most recent
year for which such rates have been calculated. For each of those schools, funds
from the Perkins program equaled less than 4% of the school's net revenues in
fiscal 1999. To date, none of those schools has been placed on provisional
certification status for this reason. If an institution is placed on such status
for this reason and the institution reduces its Perkins cohort default rate to
below 15% in a subsequent year, the institution can ask the U.S. Department of
Education to remove the provisional status.
Each of the Company's schools has adopted a student loan default management
plan. Those plans provide for extensive loan counseling, methods to increase
student persistence and completion rates and graduate employment rates,
strategies to increase graduate salaries and, for most schools, the use of
external agencies to assist the school with loan counseling and loan servicing
if a student ceases to attend that school. Those activities are in addition to
the loan servicing and collection activities of FFEL lenders and guaranty
agencies.
Regulatory Oversight. The U.S. Department of Education is required to
conduct periodic reviews of the eligibility and certification of every
institution participating in Title IV Programs. A denial of recertification
precludes a school from continuing to participate in Title IV Programs.
The Art Institutes International Minnesota, The Illinois Institute of Art
at Chicago and The Illinois Institute of Art at Schaumburg applied for
recertification by the U.S. Department of Education during fiscal 1999, and each
has received recertification. During fiscal 2000, eight of the Company's schools
are scheduled to apply for recertification.
NYRS, The Art Institutes International at San Francisco and The Art
Institutes International at Portland are provisionally certified by the U.S.
Department of Education due to their recent acquisition by the Company. None
10
<PAGE> 11
of the Company's other schools that are participating in Title IV Programs are
on provisional certification status except The Art Institute of Houston which in
the course of the normal recertification process was provisionally recertified
in 1997 because of its 1993 and 1994 FFEL cohort default rates.
The HEA requires each accrediting agency recognized by the U.S. Department
of Education to undergo comprehensive periodic review by the U.S. Department of
Education to ascertain whether such accrediting agency is adhering to required
standards. Each accrediting agency that accredits any of the Company's schools
has been reviewed by the U.S. Department of Education within the past four years
and re-approved for continued recognition by the U.S. Department of Education.
Financial Responsibility Standards. All institutions participating in Title
IV Programs must satisfy a series of specific standards of financial
responsibility. Institutions are evaluated for compliance with those
requirements as part of the U.S. Department of Education's quadrennial
recertification process and also annually as each institution submits its
audited financial statements to the U.S. Department of Education. For the year
ended June 30, 1999, the Company believes that, on an individual institution
basis, each of its schools then participating in Title IV Programs satisfied the
financial responsibility standards. The Illinois Institute of Art at Schaumburg,
The Art Institute of Phoenix and The Art Institute of Los Angeles are combined
with their main campuses, The Illinois Institute of Art at Chicago, The Colorado
Institute of Art, and The Art Institute of Pittsburgh, respectively, for that
purpose.
Restrictions on Operating Additional Schools. The HEA generally requires
that certain institutions, including proprietary schools, be in full operation
for two years before applying to participate in Title IV Programs. However,
under the HEA and applicable regulations, an institution that is certified to
participate in Title IV Programs may establish an additional location and apply
to participate in Title IV Programs at that location without reference to the
two-year requirement, if such additional location satisfies all other applicable
requirements. In addition, a school that undergoes a change of ownership
resulting in a change in control (as defined under the HEA) must be reviewed and
recertified for participation in Title IV Programs under its new ownership.
Previously, if a school was awaiting recertification, the U.S. Department of
Education would suspend Title IV Program funding to that school's students.
Recently, a mechanism was developed that allows most of a school's change of
ownership application to be reviewed prior to the change of ownership. If the
application is considered to be substantially complete, the U.S. Department of
Education may generate a temporary Provisional Program Participation Agreement
allowing the school's students to continue to receive federal funding, subject
to certain conditions. After the change of ownership and the remainder of the
application is submitted, if the school is recertified, it is recertified on a
provisional basis. During the time a school is provisionally certified, it may
be subject to summary adverse action for a material violation of Title IV
Program requirements and may not establish additional locations without prior
approval from the U.S. Department of Education. However, provisional
certification does not otherwise limit an institution's access to Title IV
Program funds. The Company's expansion plans are based, in part, on its ability
to add additional locations and acquire schools that can be recertified.
Certain of the state authorizing agencies and accrediting agencies with
jurisdiction over the Company's schools also have requirements that may, in
certain instances, limit the ability of the Company to open a new school,
acquire an existing school or establish an additional location of an existing
school. The Company does not believe that those standards will have a material
adverse effect on the Company or its expansion plans.
The "90/10 Rule." Under a provision of the HEA commonly referred to as the
"90/10 Rule" (formerly known as the "85/15 Rule"), a proprietary institution
such as each of EDMC's schools will cease to be eligible to participate in Title
IV Programs if, on a cash accounting basis, more than 90% of its revenues for
the prior fiscal year was derived from Title IV Programs. Any school that
violates the 90/10 Rule immediately becomes ineligible to participate in Title
IV Programs and is unable to apply to regain its eligibility until the following
fiscal year. For fiscal 1999, the range for the Company's schools was from
approximately 52% to approximately 72%.
Restrictions on Payment of Bonuses, Commissions or Other Incentives. The
HEA prohibits an institution from providing any commission, bonus or other
incentive payment based directly or indirectly on success in securing
enrollments or financial aid to any person or entity engaged in any student
recruitment, admission or
11
<PAGE> 12
financial aid awarding activity. EDMC believes that its current compensation
plans are in compliance with HEA standards.
STATE AUTHORIZATION
Each of EDMC's schools is authorized to offer education programs and grant
degrees or diplomas by the state in which such school is located. The level of
regulatory oversight varies substantially from state to state. In some states,
the schools are subject to licensure by the state education agency and also by a
separate higher education agency. State laws establish standards for
instruction, qualifications of faculty, location and nature of facilities,
financial policies and responsibility and other operational matters. State laws
and regulations may limit the ability of the Company to obtain authorization to
operate in certain states or to award degrees or diplomas or offer new degree
programs. Certain states prescribe standards of financial responsibility that
are different from those prescribed by the U.S. Department of Education. The
Company believes that each of the Company's schools is in substantial compliance
with state authorizing and licensure laws.
EMPLOYEES
As of June 30, 1999, EDMC employed 1,998 full-time and 782 part-time staff
and faculty.
COMPETITION
The postsecondary education market is highly competitive. The Art
Institutes compete with traditional public and private two-year and four-year
colleges and universities and other proprietary schools. Certain public and
private colleges and universities may offer programs similar to those of The Art
Institutes. Public institutions often receive government subsidies, government
and foundation grants, tax-deductible contributions and other financial
resources generally not available to proprietary schools. Accordingly, public
institutions may have facilities and equipment, which are superior to those of
the private sector, and can offer lower tuition prices. However, tuition at
private non-profit institutions is, on average, higher than The Art Institutes'
tuition.
SEASONALITY IN RESULTS OF OPERATIONS
EDMC has experienced seasonality in its results of operations primarily due
to the pattern of student enrollments. Historically, EDMC's lowest quarterly
revenues and income have been in the first quarter (July to September) of its
fiscal year due to fewer students being enrolled during the summer months and
the expenses incurred in preparation for the peak in enrollment in the fall
quarter (October to December). EDMC expects that this seasonal trend will
continue.
ITEM 2--PROPERTIES
As of June 30, 1999, EDMC's schools were located in major metropolitan
areas in 12 states. Typically, the schools occupy an entire building or several
floors or portions of floors in a building. The Company and its subsidiaries
currently lease the majority of their facilities. In fiscal 1999, the Company
acquired the 71,627 square foot main facility of The Art Institute of Seattle, a
99,400 square foot building in Denver to be occupied by The Colorado Institute
of Art, a 51,545 square foot dormitory facility in Fort Lauderdale and a 177,600
square foot building in Pittsburgh, which will house The Art Institute of
Pittsburgh after renovations currently anticipated to be completed in June 2000.
12
<PAGE> 13
\The following table sets forth certain information as of June 30, 1999 with
respect to the principal properties leased by the Company and its subsidiaries:
<TABLE>
<CAPTION>
LOCATION (CITY/STATE) SQUARE FEET
--------------------- -----------
<S> <C>
Phoenix, AZ................... 58,635
Los Angeles, CA............... 45,835
San Francisco, CA............. 53,095
Denver, CO.................... 59,755
Ft. Lauderdale, FL(1)......... 118,590
Atlanta, GA(2)................ 106,197
Atlanta, GA................... 119,375
Chicago, IL................... 54,553
Schaumburg, IL................ 39,970
</TABLE>
<TABLE>
<CAPTION>
LOCATION (CITY/STATE) SQUARE FEET
--------------------- -----------
<S> <C>
Minneapolis, MN............... 67,750
New York, NY.................. 64,697
Portland, OR.................. 27,115
Philadelphia, PA(3)........... 116,375
Pittsburgh, PA(2)............. 36,930
Pittsburgh, PA(2)............. 128,200
Dallas, TX.................... 96,190
Houston, TX................... 83,600
Seattle, WA................... 149,755
</TABLE>
- ---------
(1) One of the properties occupied by The Art Institute of Fort Lauderdale is
owned by a limited partnership that includes among its limited partners one
current member of EDMC's management who is also a director.
(2) These leases expire in fiscal 2000 (Atlanta) and fiscal 2001 (Pittsburgh).
(3) One of the properties occupied by The Art Institute of Philadelphia is owned
indirectly by a limited partnership that includes among its limited partners
one current member of EDMC's management who is also a director and another
current director of EDMC.
ITEM 3--LEGAL PROCEEDINGS
The Company and its wholly-owned subsidiaries The Art Institutes
International, Inc. and The Art Institute of Houston, Inc. are defendants in a
suit filed in the District Court of Harris County, Texas on June 30, 1999. The
lawsuit was brought by 145 former and current students of The Art Institute of
Houston who allege being misled about the benefits or quality of educational
services provided to them. The complaint was subsequently amended to add claims
by an additional 90 plaintiffs. The complaint does not specify the amount of
damages being sought. The Company is also a defendant in other legal proceedings
in the ordinary course of business. While there can be no assurance as to the
ultimate outcome of any litigation involving the Company, in the opinion of
management, based upon its investigation of these claims and discussion with
legal counsel, the ultimate outcome of such legal proceedings, individually and
in the aggregate, will not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
13
<PAGE> 14
PART II
ITEM 5-- MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
The Common Stock is traded on the Nasdaq National Market System under the
symbol "EDMC." As of September 20, 1999, there were 29,318,522 shares of Common
Stock outstanding held by approximately 480 holders of record. The prices set
forth below reflect the high and low sales prices, adjusted for a two-for-one
stock split effected in the form of a stock dividend in December 1998, for the
Company's Common Stock, as reported in the consolidated transaction reporting
system of the Nasdaq National Market System.
<TABLE>
<CAPTION>
1998 1999
---------------- ----------------
THREE MONTHS ENDED HIGH LOW HIGH LOW
------------------ ---- --- ---- ---
<S> <C> <C> <C> <C>
September 30.................... $14.50 $12.13 $20.13 $14.50
December 31..................... 16.00 12.25 24.00 15.63
March 31........................ 17.63 13.63 31.75 21.75
June 30......................... 19.06 15.83 30.75 14.56
</TABLE>
EDMC has not declared or paid any cash dividends on its capital stock
during the past two years. EDMC currently intends to retain future earnings, if
any, to fund the development and growth of its business and does not anticipate
paying any cash dividends in the foreseeable future.
14
<PAGE> 15
ITEM 6--SELECTED FINANCIAL DATA
The following summary consolidated financial and other data should be read
in conjunction with the Company's Consolidated Financial Statements and Notes
thereto filed in response to Item 8 and the information included in response to
Item 7 below. Certain of the summary consolidated financial data presented below
are derived from the Company's consolidated financial statements audited by
Arthur Andersen LLP, independent public accountants, whose report covering the
financial statements as of June 30, 1998 and 1999 and for each of the three
years in the period ended June 30, 1999 also is filed in response to Item 8
below. The summary consolidated income statement data for the years ended June
30, 1995 and 1996 and the summary consolidated balance sheet data as of June 30,
1995, 1996 and 1997 are derived from audited financial statements not included
herein.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------------------
1995(7)(8) 1996(8) 1997(8) 1998 1999
---------- ------- ------- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenues.............................. $131,227 $147,863 $182,849 $221,732 $260,805
ESOP expense(1)........................... 7,086 1,366 -- -- --
Income before extraordinary item(2)....... 1,513 6,846 9,985 14,322 18,752
Net income................................ 1,513 5,920 9,985 14,322 18,752
Dividends on Series A Preferred
Stock(3)................................ 2,249 2,249 83 -- --
Other Series A Preferred Stock
transactions(3)......................... -- -- 403 -- --
PER SHARE DATA(3):
Basic:
Income (loss) before extraordinary
item................................. $ (.05) $ .33 $ .40 $ .50 $ .64
Net income (loss)....................... $ (.05) $ .27 $ .40 $ .50 $ .64
Weighted average number of shares
outstanding, in thousands(4)......... 13,780 13,826 23,878 28,908 29,314
Diluted:
Income (loss) before extraordinary
item................................. $ (.05) $ .19 $ .36 $ .48 $ .61
Net income (loss)....................... $ (.05) $ .15 $ .36 $ .48 $ .61
Weighted average number of shares
outstanding, in thousands(4)......... 13,780 23,748 27,342 29,852 30,615
OTHER DATA:
Capital expenditures(5)................... $ 11,640 $ 14,981 $ 18,487 $ 17,951 $ 54,933
Enrollments at beginning of fall
quarter(6).............................. 12,749 13,407 15,838 18,763 21,518
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30,
------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total cash and cash equivalents........... $ 39,623 $ 27,399 $ 33,227 $ 47,310 $ 32,871
Receivables, net.......................... 7,414 8,172 10,547 11,678 15,333
Current assets............................ 49,662 39,858 48,886 65,623 55,709
Total assets.............................. 102,303 101,412 126,292 148,783 178,746
Current liabilities....................... 34,718 27,264 36,178 38,097 45,188
Long-term debt (including current
portion)................................ 69,810 65,919 34,031 38,382 37,231
Shareholders' investment.................. 1,855 9,656 57,756 73,325 96,805
</TABLE>
- ---------
(1) Expenses incurred in connection with the Education Management Corporation
Employee Stock Ownership Plan and Trust (the "ESOP") equal the sum of the
payments on the senior term loan obtained for the ESOP's acquisition of
securities from EDMC (the "ESOP Term Loan"), plus repurchases of shares from
participants in the ESOP, less the dividends paid on the shares of Series A
10.19% Convertible Preferred Stock, $.0001 par value (the "Series A
Preferred Stock"), previously held by the ESOP. In fiscal 1995, the Company
made
15
<PAGE> 16
a voluntary prepayment of $2.1 million on the ESOP Term Loan. In fiscal 1996,
the ESOP Term Loan was repaid in full. Therefore, subsequent thereto there has
not been, nor will there be in the future ESOP expense resulting from the
repayment of such loan or, so long as the Common Stock is publicly traded,
from repurchases of shares.
(2) In fiscal 1996, the $25.0 million aggregate principal amount of the
Company's 13.25% Senior Subordinated Notes due 1999 (the "Subordinated
Notes") was prepaid in full. The resulting $1.5 million prepayment penalty
is classified as an extraordinary item, net of the related income tax
benefit.
(3) Dividends on the outstanding shares of Series A Preferred Stock, dividends
accrued but not paid on outstanding shares of Series A Preferred Stock and a
redemption premium paid upon redemption of 75,000 shares of Series A
Preferred Stock have been deducted from net income (loss) in calculating net
income (loss) per share of Common Stock.
(4) The weighted average shares outstanding used to calculate basic income
(loss) per share does not include potentially dilutive securities (such as
stock options, warrants and convertible preferred stock). Diluted income
(loss) per share includes, where dilutive, the equivalent shares of Common
Stock calculated under the Treasury stock method for the assumed exercise of
options and warrants and conversion of shares of Series A Preferred Stock.
(5) Capital expenditures for fiscal 1999 reflect approximately $5.1 million
included in accounts payable at year-end.
(6) Excludes students enrolled in programs at those colleges and universities
with which the Company has consulting arrangements.
(7) Results for fiscal 1995 include a $1.1 million nonrecurring credit for the
refund of state and local business and occupation taxes.
(8) Charges of $1.1 million, $0.5 million and $0.4 million are reflected in
1995, 1996 and 1997, respectively, to account for non-cash compensation
expense related to the performance-based vesting of nonqualified stock
options.
16
<PAGE> 17
ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the Company's results of operations and
financial condition should be read in conjunction with the information filed in
response to Item 6 above and Item 8 below. Unless otherwise specified, any
reference to a "year" is to a fiscal year ended June 30.
BACKGROUND
EDMC is one of the largest providers of proprietary postsecondary education
in the United States, based on student enrollments and revenues. Through its
operating units, primarily The Art Institutes, the Company offers bachelor's and
associate's degree programs and non-degree programs in the areas of design,
media arts, culinary arts, fashion and paralegal studies. The Company has
provided career-oriented education programs for over 35 years, and its schools
have graduated more than 100,000 students. As of June 30, 1999, the Company
operated 18 schools in 15 major metropolitan areas throughout the United States.
Net revenues, income before interest and taxes and net income increased in
each of the last two years. Net revenues are presented after deducting refunds,
scholarships and other adjustments. Net revenues increased 42.6% to $260.8
million in 1999 from $182.8 million in 1997. Income before interest and taxes
increased 68.4% to $31.7 million in 1999 from $18.8 million in 1997. Net income
increased by 87.8% to $18.8 million in 1999 from $10.0 million in 1997. Average
quarterly student enrollments at the Company's schools were 19,325 in 1999
compared to 14,490 in 1997. The increase in average enrollments relates to,
among other factors, new education programs and additional school locations,
along with expanded bachelor's degree and evening degree program offerings.
The Company's revenues consist of tuition and fees, student housing fees
and student supply store and restaurant sales. In 1999, the Company derived
88.0% of its net revenues from net tuition and fees paid by, or on behalf of,
its students. Tuition revenue generally varies, based on the average tuition
charge per credit hour and the average student population. Student supply store
and housing revenue is largely a function of the average student population. The
average student population is influenced by the number of continuing students
attending school at the beginning of a fiscal period and by the number of new
students entering school during such period. New students enter The Art
Institutes at the beginning of each academic quarter, which typically commence
in January, April, July and October. The Company believes that the size of its
student population is influenced by the number of graduating high school
students, the attractiveness of its program offerings, the effectiveness of its
marketing efforts, changes in technology, the persistence of its students, the
length of its education programs and general economic conditions. The
introduction of additional program offerings at existing schools and the
establishment of new schools (through acquisition or start-up) are important
factors influencing the Company's average student population.
Tuition increases have been implemented in varying amounts in each of the
past several years. Historically, the Company has been able to pass along cost
increases through increases in tuition. The Company believes that it can
continue to increase tuition as educational costs at other postsecondary
institutions, both public and private, continue to rise. The Company's schools
implemented tuition rate increases averaging approximately 6% during 1999.
Tuition rates have generally been consistent across the Company's schools and
programs. However, as the Company enters more markets in different geographic
regions, tuition rates across Company schools might not remain consistent.
The majority of students at The Art Institutes rely on funds received under
various government sponsored student financial aid programs, especially Title IV
Programs, to pay a substantial portion of their tuition and other
education-related expenses. For the year ended June 30, 1999, approximately 66%
of the Company's net revenues was indirectly derived from Title IV Programs.
Educational services expense consists primarily of costs related to the
development, delivery and administration of the Company's education programs.
Major cost components are faculty compensation, administrative salaries, costs
of educational materials, facility and school occupancy costs, information
systems costs, bad debt expense and depreciation and amortization of property
and equipment. During 1999, the Company's faculty
17
<PAGE> 18
comprised approximately 46% full-time and approximately 54% part-time employees.
In 1998, these same percentages were 45% and 55%, respectively.
General and administrative expense consists of marketing and student
admissions expenses and certain central staff departmental costs such as
executive management, finance and accounting, legal and corporate development
and other departments that do not provide direct services to the Company's
students. The Company has centralized many of these services to gain consistency
in management reporting, efficiency in administrative effort and control of
costs.
Amortization of intangibles relates to the values assigned to identifiable
intangible assets and goodwill. These intangible assets arose principally from
the application of purchase accounting to the establishment and financing of the
ESOP and the related leveraged transaction in October 1989 and the acquisitions
of the schools discussed below. See Note 2 of Notes to Consolidated Financial
Statements.
In August 1996, the Company purchased certain assets of NYRS for
approximately $9.5 million. The Company acquired current assets net of specified
current liabilities, property and equipment and certain other intangible assets.
In January 1997, the Company acquired the assets of Lowthian College in
Minneapolis, Minnesota for $0.4 million, which included the assumption of
certain liabilities. The school was renamed The Art Institutes International
Minnesota.
In March 1997, the Company established The Art Institute of Los Angeles, at
which classes began in October 1997.
In December 1997, the Company purchased certain assets of the Louise
Salinger School in San Francisco, California for $0.6 million in cash. The
Company also entered into a consulting agreement with its former president in
exchange for an option to purchase 20,000 shares of Common Stock. The school was
renamed The Art Institutes International at San Francisco.
In February 1998, the Company acquired certain assets related to the
operations of Bassist College in Portland, Oregon, for approximately $0.9
million in cash. The purchase agreement provides for additional consideration
based upon a specified percentage of gross revenues over the next five years.
The school was renamed The Art Institutes International at Portland.
In October 1998, the Company acquired the assets of Socrates Distance
Learning Technologies Group for approximately $0.5 million in cash. This
acquisition was made to further the development of the Company's distance
learning capabilities. The Company employs the previous owners under two-year
employment and non-compete arrangements.
Start-up schools and smaller acquisitions are expected to incur operating
losses during the first two to three years following their opening or purchase.
The combined operating losses of the Company's newer schools were approximately
$6.0 million in 1999.
18
<PAGE> 19
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage
relationships of certain income statement items to net revenues.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Net revenues.................................... 100.0% 100.0% 100.0%
Costs and expenses:
Educational services............................ 66.1 66.4 65.5
General and administrative...................... 22.4 21.7 21.9
Amortization of intangibles..................... 1.1 0.7 0.5
----- ----- -----
89.7 88.9 87.8
----- ----- -----
Income before interest and taxes................ 10.3 11.1 12.2
Interest expense (income), net.................. 0.9 -- --
----- ----- -----
Income before income taxes...................... 9.4 11.1 12.2
Provision for income taxes...................... 4.0 4.7 5.0
----- ----- -----
Net income...................................... 5.5% 6.5% 7.2%
===== ===== =====
</TABLE>
YEAR ENDED JUNE 30, 1999 COMPARED WITH YEAR ENDED JUNE 30, 1998
NET REVENUES
Net revenues increased by 17.6% to $260.8 million in 1999 from $221.7
million in 1998. The revenue increase was primarily due to an increase in
average quarterly student enrollments ($23.2 million) and tuition increases of
approximately 6% ($12.5 million). The average academic year (three academic
quarters) tuition rate for a student attending classes at an Art Institute on a
recommended full schedule increased to $11,262 in 1999 from $10,350 in 1998.
Net housing revenues increased by 13.4% to $14.7 million in 1999 from $12.9
million in 1998 and revenues from the sale of educational materials in 1999
increased by 17.3% to $12.3 million. Both increased primarily as a result of
higher average student enrollments. Refunds increased from $7.1 million in 1998
to $8.0 million in 1999. As a percentage of gross revenue, refunds decreased
slightly from 1998.
EDUCATIONAL SERVICES
Educational services expense increased by $23.4 million, or 15.9%, to
$170.7 million in 1999 from $147.3 million in 1998. The increase was primarily
due to additional costs required to service higher student enrollments,
accompanied by normal cost increases for wages and other services at the schools
owned by EDMC prior to 1998 ($15.8 million) and schools added in 1998 and 1999
($6.0 million). Higher costs associated with establishing and supporting new
schools and developing new education programs contributed to the increase. As a
percentage of net revenues, educational services expense decreased from 66.4% in
1998 to 65.5% in 1999, reflecting leverage on fixed costs.
GENERAL AND ADMINISTRATIVE
General and administrative expense increased by 18.9% to $57.2 million in
1999 from $48.1 million in 1998 due to the incremental marketing and student
admissions expenses incurred to generate higher student enrollments at the
schools owned by EDMC prior to 1998 ($4.8 million), and additional marketing and
student admissions expenses at the schools added in 1998 and 1999 ($2.9
million). General and administrative expense increased slightly as a percentage
of net revenues in 1999 compared to 1998 as a result of increased advertising
expenditures designed to promote awareness of and generate inquiries about the
newer locations and new program offerings.
19
<PAGE> 20
AMORTIZATION OF INTANGIBLES
Amortization of intangibles decreased by $.4 million, or 25.3%, to $1.2
million in 1999 from $1.6 million in 1998, as a result of certain intangible
assets becoming fully amortized.
INTEREST EXPENSE (INCOME), NET
The Company had net interest income of $113,000 in 1999 as compared to
$3,000 in 1998. The average outstanding debt balance decreased from $5.6 million
in 1998 to $4.6 million in 1999. Accordingly, less interest cost on borrowings
has been offset against interest earned on investments.
PROVISION FOR INCOME TAXES
The Company's effective tax rate decreased to 41.1% in 1999 from 42.0% in
1998. This reduction reflects a more favorable distribution of taxable income
among the states in which the Company operates and a decrease in non-deductible
expenses as a percentage of taxable income. The effective rates differed from
the combined federal and state statutory rates due to expenses that are
nondeductible for tax purposes.
NET INCOME
Net income increased by $4.4 million or 30.9% to $18.8 million in 1999 from
$14.3 million in 1998. The increase resulted from improved operations at the
Company's schools owned prior to 1998, reduced amortization of intangibles and a
lower effective income tax rate.
YEAR ENDED JUNE 30, 1998 COMPARED WITH YEAR ENDED JUNE 30, 1997
NET REVENUE
Net revenues increased by 21.3% to $ 221.7 million in 1998 from $182.8
million in 1997. The revenue increase was primarily due to an increase in
average quarterly student enrollments ($25.5 million) and an approximate 5%
tuition increase ($7.4 million) at schools owned by EDMC prior to 1998, and the
addition of three schools ($2.0 million). The average academic year (three
academic quarters) tuition rate for a student attending classes at an Art
Institute on a recommended full schedule increased to $10,350 in 1998 from
$9,860 in 1997. The Art Institute of Los Angeles was established in March 1997
and commenced classes in October 1997. The Company acquired the Louise Salinger
School in December 1997 (renamed The Art Institutes International at San
Francisco) and Bassist College in February 1998 (renamed The Art Institutes
International at Portland).
Net housing revenues increased by 24.3% to $12.9 million in 1998 from $10.4
million in 1997 and revenues from the sale of educational materials in 1998
increased by 20.3% to $10.4 million. Both increased primarily as a result of
higher average student enrollments. Refunds for 1998 increased from $6.0 million
in 1997 to $7.1 million in 1998. As a percentage of gross revenue, refunds
decreased slightly from 1997.
EDUCATIONAL SERVICES
Educational services expense increased by $26.4 million, or 21.8%, to
$147.3 million in 1998 from $120.9 million in 1997. The increase was primarily
due to additional costs required to service higher student enrollments,
accompanied by normal cost increases for wages and other services at the schools
owned by EDMC prior to 1997 ($16.8 million) and schools added in 1997 and 1998
($7.6 million). Higher costs associated with establishing and supporting new
schools and developing new education programs contributed to the increase.
GENERAL AND ADMINISTRATIVE
General and administrative expense increased by 17.2% to $48.1 million in
1998 from $41.0 million in 1997 due to the incremental marketing and student
admissions expenses incurred to generate higher student enrollments at the
schools owned by EDMC prior to 1997 ($4.5 million), and additional marketing and
student admissions expenses at the schools added in 1997 and 1998 ($3.0
million). General and administrative expense decreased slightly as a percentage
of net revenues in 1998 compared to 1997 as a result of a reduction of expenses
incurred by the Company's central staff organization.
20
<PAGE> 21
AMORTIZATION OF INTANGIBLES
Amortization of intangibles decreased by $0.5 million, or 22.4%, to $1.6
million in 1998 from $2.1 million in 1997, as a result of certain intangible
assets becoming fully amortized.
INTEREST EXPENSE (INCOME), NET
The Company had net interest income of $3,000 in 1998 as compared to
interest expense of $1.6 million in 1997. The lower interest expense was
primarily attributable to a decrease in the average outstanding debt balance
from $22.4 million in 1997 to $5.6 million in 1998.
PROVISION FOR INCOME TAXES
The Company's effective tax rate was 42.0% in 1998 and 1997, and differed
from the combined federal and state statutory rates due to expenses that are
nondeductible for tax purposes.
NET INCOME
Net income increased by $4.3 million or 43.4% to $14.3 million in 1998 from
$10.0 million in 1997. The increase resulted from improved operations at the
Company's schools owned prior to 1997 and reduced net interest expense,
partially offset by a higher provision for income taxes.
SEASONALITY AND OTHER FACTORS AFFECTING QUARTERLY RESULTS
The Company's quarterly revenues and income fluctuate primarily as a result
of the pattern of student enrollments. The Company experiences a seasonal
increase in new enrollments in the fall (fiscal year second quarter), which is
traditionally when the largest number of new high school graduates begin
postsecondary education. Some students choose not to attend classes during
summer months, although the Company's schools encourage year-round attendance.
As a result, total student enrollments at the Company's schools are highest in
the fall quarter and lowest in the summer months (fiscal year first quarter).
The Company's costs and expenses, however, do not fluctuate as significantly as
revenues on a quarterly basis. The Company anticipates that the seasonal pattern
in revenues and earnings will continue in the future.
QUARTERLY FINANCIAL RESULTS (UNAUDITED)
The following table sets forth the Company's quarterly results for 1998 and
1999.
<TABLE>
<CAPTION>
1998
-----------------------------------------------
SEPT. 30 DEC. 31 MAR. 31 JUNE 30
(SUMMER) (FALL) (WINTER) (SPRING)
-------- ------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenues..................................... $43,176 $63,068 $59,807 $55,681
Income before interest and taxes................. $ 228 $13,174 $ 8,004 $ 3,285
Income before income taxes....................... $ 181 $13,120 $ 8,019 $ 3,374
Net income....................................... $ 105 $ 7,610 $ 4,651 $ 1,956
Net income per share
--Basic........................................ $ .00 $ .26 $ .16 $ .07
--Diluted...................................... $ .00 $ .26 $ .16 $ .06
</TABLE>
<TABLE>
<CAPTION>
1999
-----------------------------------------------
SEPT. 30 DEC. 31 MAR. 31 JUNE 30
(SUMMER) (FALL) (WINTER) (SPRING)
-------- ------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenues..................................... $50,079 $74,986 $70,575 $65,165
Income before interest and taxes................. $ 698 $16,646 $10,249 $ 4,105
Income before income taxes....................... $ 732 $16,543 $10,365 $ 4,171
Net income....................................... $ 425 $ 9,749 $ 6,105 $ 2,473
Net income per share
--Basic........................................ $ .01 $ .33 $ .21 $ .08
--Diluted...................................... $ .01 $ .32 $ .20 $ .08
</TABLE>
21
<PAGE> 22
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
The Company's cash flow from operations has been the primary source of
financing for capital expenditures and growth. Cash flow from operations was
$28.2 million, $28.6 million and $35.7 million for 1997, 1998 and 1999,
respectively. For the year ended June 30, 1999, cash flow from operations and
cash flow from investing activities are reflected net of approximately $5.1
million of capital expenditures included in accounts payable as of June 30,
1999. As a result of the significant increase in capital expenditures, the
Company had net working capital of $10.5 million as of June 30, 1999, down from
$27.5 million as of June 30, 1998.
As of June 30, 1999, gross trade accounts receivable increased by $3.5
million, or 21.6%, to $19.5 million from the prior year as a result of the
increased net revenues. The allowance for doubtful accounts increased by $1.0
million, or 12.6%, to $9.4 million in 1999 from $8.3 million in 1998.
DEBT SERVICE
The Company's Amended and Restated Credit Agreement, dated March 16, 1995,
as amended (the "Revolving Credit Agreement"), currently allows for maximum
borrowings of $60 million, reduced annually by $5 million, through its
expiration on October 13, 2000. Borrowings under the Revolving Credit Agreement
bear interest at one of three rates set forth in the Revolving Credit Agreement
at the election of the Company. Certain outstanding letters of credit reduce the
facility. As of June 30, 1999, the Company had approximately $22.5 million of
additional borrowing capacity available under the Revolving Credit Agreement.
The Revolving Credit Agreement contains customary covenants that, among
other matters, require the Company to maintain specified levels of consolidated
net worth and meet specified interest, leverage and fixed charge ratio
requirements, and restrict repurchases of Common Stock and the incurrence of
certain additional indebtedness. As of June 30, 1999, the Company was in
compliance with all covenants under the Revolving Credit Agreement.
Borrowings under the Revolving Credit Agreement are used by the Company
primarily to fund its occasional working capital needs, arising from the
seasonal pattern of cash receipts throughout the year. The level of accounts
receivable reaches a peak immediately after the billing of tuition and fees at
the beginning of each academic quarter. Collection of these receivables is
heaviest at the start of each academic quarter.
FUTURE FINANCING AND CASH FLOWS
The Company believes that cash flow from operations, supplemented from time
to time by borrowings under the Revolving Credit Agreement, will provide
adequate funds for ongoing operations, planned expansion to new locations,
planned capital expenditures and debt service during the term of the Revolving
Credit Agreement.
CAPITAL EXPENDITURES
Capital expenditures made during the three years ended June 30, 1999
reflect the implementation of the Company's initiatives emphasizing the addition
of new schools and programs and investment in classroom technology. During 1999,
the Company purchased buildings in Denver, Ft. Lauderdale, Pittsburgh and
Seattle. The buildings in Ft. Lauderdale and Seattle were previously leased. The
real estate purchases in Denver and Pittsburgh will become, after completion of
renovations, the new facilities of The Colorado Institute of Art and The Art
Institute of Pittsburgh. The aggregate purchase price and costs of subsequent
improvements made during the fiscal year related to the buildings acquired was
approximately $29.1 million. The Company's capital expenditures were $18.5
million, $18.0 million and $54.9 million for 1997, 1998 and 1999, respectively.
Exclusive of the real estate purchases and related improvements, the Company
expects that total capital spending for 2000 will increase as a percentage of
net revenues, as compared to 1999. The anticipated expenditures relate
principally to the introduction and expansion of culinary programs, further
investment in schools acquired or started during the previous four years and
anticipated to be added in 2000, continued improvements to the facilities
currently under construction, additional or replacement school and housing
facilities and classroom technology.
22
<PAGE> 23
The Company leases the majority of its facilities. Future commitments on
existing leases will be paid from cash provided by operating activities.
REGULATION
The Company indirectly derived approximately 66% of its net revenues from
Title IV Programs in 1999. U.S. Department of Education regulations prescribe
the timing of disbursements of funds under Title IV Programs. Students must
apply for a new loan for each academic year. Lenders in multiple disbursements
each academic year generally provide loan funds. For first-time students in
their first academic quarter, the initial loan disbursement is generally
received at least 30 days after the commencement of that academic quarter.
Otherwise, the first loan disbursement is received, at the earliest, 10 days
before the commencement of the student's academic quarter.
U.S. Department of Education regulations require Title IV Program funds
received by the Company's schools in excess of the tuition and fees owed by the
relevant students at that time to be, with these students' permission,
maintained and classified as restricted until they are billed for the portion of
their education program related to those funds. Funds transferred through
electronic funds transfer programs are held in a separate cash account and
released when certain conditions are satisfied. These restrictions have not
significantly affected the Company's ability to fund daily operations.
Effective July 1997, postsecondary education institutions became subject to
changes in the delivery of FFEL program proceeds. Prior to July 1997, certain
schools delivered FFEL proceeds for an academic year (typically three quarters)
to students in two equal disbursements. The change resulted in FFEL proceeds
being delivered equally in each of the academic quarters. Some of the Company's
schools began to deliver loan proceeds in this manner prior to the change in
regulation becoming effective.
Education institutions participating in Title IV Programs must satisfy a
series of specific standards of financial responsibility. Under regulations that
took effect in July 1998, the U.S. Department of Education has adopted standards
(replacing the former "acid test," tangible net worth test and two-year
operating loss test) to determine an institution's financial responsibility to
participate in Title IV Programs. The regulations establish three ratios: (i)
the equity ratio, measuring an institution's capital resources, ability to
borrow and financial viability; (ii) the primary reserve ratio, measuring an
institution's ability to support current operations from expendable resources;
and (iii) the net income ratio, measuring an institution's profitability. Each
ratio is calculated separately, based on the figures in the institution's most
recent annual audited financial statements, and then weighted and combined to
arrive at a single composite score. Such composite score must be at least 1.5
for the institution to be deemed financially responsible without conditions or
additional oversight.
Regulations promulgated under the HEA also require all proprietary
education institutions to comply with the "90/10 Rule," (previously referred to
as the "85/15 Rule"), which prohibits participating schools from deriving 90% or
more of total revenue from Title IV Programs in any year.
If an institution fails to meet any of these requirements, it may be deemed
to be not financially responsible by the U.S. Department of Education, or
otherwise ineligible to participate in Title IV Programs. The Company believes
that all of its participating schools met these requirements as of June 30,
1999.
EFFECT OF INFLATION
The Company does not believe its operations have been materially affected
by inflation.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. The statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value.
Additionally, SFAS No. 133 requires that changes in a derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. This statement has been amended by SFAS No. 137 "Accounting for Derivative
Instruments and Hedging Activities - Deferral
23
<PAGE> 24
of the effective date of SFAS No. 133." SFAS No. 137 will be effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. The Company does
not anticipate that these standards will have a significant impact on its
financial statements.
YEAR 2000 ISSUES
THE PROBLEM
The Year 2000 problem arises from the fact that many existing information
technology ("IT") hardware and software systems and non-information technology
("non-IT") products containing embedded microchip processors were originally
programmed to represent any date with six digits (e.g., 12/31/99), as opposed to
eight digits (e.g., 12/31/1999). Accordingly, problems may arise for many such
products and systems when attempting to process information containing dates
that fall after December 31, 1999. As a result, many such products and systems
could experience miscalculations, malfunctions or disruptions. This problem is
commonly referred to as the "Year 2000" problem, and the acronym "Y2K" is
commonly substituted for the phrase "Year 2000."
At this time, the Company believes that all of the significant internal IT
and non-IT systems with potential Y2K problems have been repaired, replaced or
upgraded in order to avoid any major business interruption from Y2K issues.
THE COMPANY'S STATE OF READINESS FOR ITS YEAR 2000 ISSUES
As a result of the Company's software upgrades and computer system
purchases over the past few years, a substantial number of EDMC's computer
systems should not have a Y2K problem (i.e., are "Y2K-compliant") or have been
warranted to be Y2K-compliant by third-party vendors. The Company created a task
force (the "Y2K Task Force") which has members from the Company's significant
operating areas. The Y2K Task Force implemented a program, the goal of which was
to assess the potential exposure of each such area to the Y2K problem, the first
phase of EDMC's overall Y2K program, and, as the second phase thereof, designed
a coordinated plan to determine whether any such potential exposure would result
in a problem that would require some remediation. As each such area's Y2K
problems have been identified, the third phase has been to formulate proposals
to determine the best course of action to address each such problem, implement
the solution and develop contingency plans to the extent possible and necessary.
The final phase of the overall Y2K program is both independent and coordinated
testing to ensure Y2K compliance in each operating area.
The Y2K Task Force has the responsibility for addressing any Y2K problems
in either IT or non-IT systems. The Company has completed the
assessment/inventory phase for its IT systems, including its accounting, human
resources, admissions, education, student financial services and student
services systems. The Y2K Task Force reports that testing of EDMC's most
critical IT systems is substantially completed. The Y2K Task Force has also
substantially finished its identification of non-IT systems that may have Y2K
problems, and has sent inquiries to the entities that own or control any of
those non-IT systems, including elevators, electricity, telephones, security
systems and HVAC systems, that could have a material impact on the Company's
operations, such as the owners of the buildings and other facilities that house
or service the Company's schools and administrative offices. The Y2K Task Force
has also identified those third parties, such as governmental and other
regulatory agencies, guaranty agencies, software and hardware suppliers,
telephone companies, significant vendors and external file exchange system
providers, whose Y2K compliance or lack thereof may pose problems for the
Company. Pursuant to the Y2K Task Force's plan, inquiries have been sent to
those third parties. All entities have responded with Y2K compliance plans that
appear to be adequate. However, the Company can not independently verify each
agency.
THE COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES
To date, the Company has incurred approximately $150,000 of costs directly
associated with its efforts to address its Y2K issues. This amount does not
include an allocation of salaries of EDMC personnel participating in this
effort. Nor does it include recent hardware, software, or systems purchases
which are, or have been, warranted to be Y2K-compliant. Based upon its current
understanding of the Company's Y2K issues, the Y2K Task Force anticipates
additional direct costs ranging from $250,000 to $350,000, will be incurred to
address
24
<PAGE> 25
these issues. This represents a reduction from previous estimates ranging to
$750,000. Of the remaining cost to be incurred, approximately $150,000 will be
used, if necessary, to replace technology hardware and software at Company
schools; $100,000 is budgeted for contingency plan implementation, if necessary.
The Company plans to charge its direct Y2K expenses to its information systems
budget. All Y2K-related expenditures are expensed as incurred.
RISKS RELATED TO THE COMPANY'S YEAR 2000 ISSUES
The Company has identified several possible worst-case scenarios that could
arise because of Y2K issues; however, at this time, the Company does not have
sufficient information to make an assessment of the likelihood of any of these
worst-case scenarios. It should be noted that the Company's schools will not be
in session on December 31, 1999 or January 1, 2000, with classes resuming in
mid-January 2000.
The Company has shifted resources to the resolution of Y2K issues. This has
resulted in the deferral of some existing or contemplated projects, particularly
computer-system oriented projects. Although the Company is unable at this time
to quantify its internal, indirect costs resulting from such changes, with its
resultant deferral of projects, management believes that the cost of remediating
the Company's internal Y2K problems will not have a material adverse impact upon
its business, results of operations, liquidity or financial condition.
Because the Company is in a regulated industry and relies, indirectly, on
only a few sources for a substantial portion of its revenues, EDMC's business is
very dependent upon those entities' efforts to address their own Y2K issues. The
Y2K Task Force has identified those third parties whose failure to resolve their
own Y2K issues could have a material impact upon the Company's operations, and
is taking steps it currently believes appropriate to analyze both such parties'
Y2K status and the Company's options in the event that any such party is not
Y2K-compliant in sufficient time prior to December 31, 1999. Should any such
third parties experience Y2K-related disruptions, it could have a material
adverse impact on the Company's business, results of operations, liquidity or
financial condition.
For example, as with all postsecondary education-oriented businesses whose
students receive governmental financial aid, the Company's operations and
liquidity depend upon the student funding provided by Title IV Programs for its
students. The U.S. Department of Education's computer systems handle processing
of applications for this funding. The U.S. Department of Education has stated
that its systems are Y2K-compliant. The Company has successfully completed file
exchange tests with the U.S. Department of Education. Any problems with the U.S.
Department of Education's systems could result in an interruption in the funding
for students nationwide, including the Company's students. Any prolonged
interruption could have a material adverse impact upon the education industry
and, accordingly, upon the Company's business, results of operations, liquidity
and financial condition.
Similarly, the Company's schools are licensed by one or more agencies in
the states in which they are based and accredited by one or more accrediting
bodies that are recognized by the U.S. Department of Education. The Company
continues to assess the Y2K-readiness of these agencies and bodies. In the event
that any of these entities are unable, due to Y2K problems, to renew a school's
license or accreditation, an interruption in such school's operations could
occur. Depending upon the school involved, a prolonged interruption could have a
material adverse impact upon the Company's business, results of operations,
liquidity and financial condition.
Five guaranty agencies provide the vast majority of the guarantees for the
loans issued to the Company's students under Title IV Programs. The Company has
completed file exchange tests successfully with the agency that accounts for
approximately 85% of those guarantees. The Company is investigating all these
agencies to determine whether they will be Y2K-compliant or whether contingency
plans need to be made with respect thereto. As with the U.S. Department of
Education, the Company is unable to assess independently the readiness of any of
these agencies at the present time, although all such agencies have reported
that they are Y2K-compliant. The majority of the Title IV Program loans to the
Company's students are funded through six banks, five of which work with the
Company's primary guaranty agency. The five lenders that work with that agency
use an affiliate of that agency to disburse and service their loans, and the
Company has successfully completed file exchange tests with the affiliated
agency. The Company is exploring as a contingency plan the availability of other
lenders that have stated that they expect to be Y2K-compliant.
25
<PAGE> 26
The Company has also reviewed the Y2K compliance efforts of its transfer
agent and of the NASDAQ National Market System and does not anticipate any
serious disruptions in service from these providers.
The Y2K Task Force has made inquiries of the major financial institutions
and utilities that provide services to the Company and continues to assess the
potential effects of those entities' failures to become Y2K-compliant within the
time remaining. If, notwithstanding any such entity's representations that it
will be Y2K-compliant in time, it is not compliant, the Company's business,
results of operations, liquidity and financial condition could be adversely
affected.
CONTINGENCY PLANS
The Y2K Task Force's responsibilities include developing contingency plans
for each of EDMC's significant operating areas. These contingency plans would be
utilized in the event that, despite the Company's best efforts, or due to the
Company's lack of control over certain third parties, a system is not
Y2K-compliant and EDMC's business is adversely affected. Each operating area is
preparing a contingency plan to operate for up to three consecutive days without
standard computer support. In addition, the Company maintains a "hot site"
contract with Hewlett-Packard that allows it to run its day-to-day central
computer operations from a remote location in Washington State. The "hot site"
is a contingency against a regional Y2K failure that would cause business
interruptions at the Company's corporate offices in Pittsburgh, Pennsylvania.
The Y2K Task Force expects to have substantially all of its contingency plans in
place by December 1, 1999.
RISK FACTORS
In addition to the important factors described elsewhere in this Annual
Report on Form 10-K, the following factors, among others, could affect the
Company's business, results of operations, financial condition and prospects in
fiscal 2000 and later years: (i) the perceptions of the U.S. Congress, the U.S.
Department of Education and the public concerning proprietary postsecondary
education institutions to the extent those perceptions could result in changes
in the HEA in connection with its reauthorization; (ii) EDMC's ability to comply
with federal and state regulations and accreditation standards, including any
changes therein or changes in the interpretation thereof; (iii) the Company's
capability to foresee changes in the skills required of its graduates and to
design new courses and programs to develop those skills; (iv) the ability of the
Company to gauge successfully which markets are underserved in the skills that
the Company's schools teach; (v) the Company's ability to gauge appropriate
acquisition and start-up opportunities and to manage and integrate them
successfully; (vi) the Company's ability to defend litigation successfully; and
(vii) competitive pressures from other educational institutions.
ITEM 7A-- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The fair values and carrying amounts of the Company's financial
instruments, primarily accounts receivable and debt, are approximately
equivalent. The debt instruments bear interest at floating rates based upon
market rates or at fixed rates that approximate market rates. All other
financial instruments are classified as current and will be utilized within the
next operating cycle.
26
<PAGE> 27
ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES:
We have audited the accompanying consolidated balance sheets of Education
Management Corporation (a Pennsylvania corporation) and Subsidiaries as of June
30, 1998 and 1999, and the related consolidated statements of income,
shareholders' investment and cash flows for each of the three years in the
period ended June 30, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Education Management
Corporation and Subsidiaries as of June 30, 1998 and 1999, and their results of
operations and their cash flows for each of the three years in the period ended
June 30, 1999 in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Pittsburgh, Pennsylvania,
July 28, 1999
27
<PAGE> 28
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AS OF JUNE 30,
--------------------
1998 1999
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents, including restricted balances
of $777 and $725....................................... $ 47,310 $ 32,871
Receivables:
Trade, net of allowances of $8,318 and $9,367.......... 7,689 10,100
Notes, advances and other.............................. 3,989 5,233
Inventories............................................... 1,933 2,038
Deferred income taxes..................................... 2,361 2,476
Other current assets...................................... 2,341 2,991
-------- --------
Total current assets................................. 65,623 55,709
-------- --------
PROPERTY AND EQUIPMENT, NET................................. 57,420 96,081
DEFERRED INCOME TAXES AND OTHER LONG-TERM ASSETS............ 6,287 7,614
GOODWILL, NET OF AMORTIZATION OF $3,873 AND $4,484.......... 19,453 19,342
-------- --------
TOTAL ASSETS......................................... $148,783 $178,746
======== ========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Current portion of long-term debt......................... $ 2,615 $ 731
Accounts payable.......................................... 6,982 12,110
Accrued liabilities....................................... 10,162 11,438
Advance payments.......................................... 18,338 20,909
-------- --------
Total current liabilities............................ 38,097 45,188
-------- --------
LONG-TERM DEBT, LESS CURRENT PORTION........................ 35,767 36,500
DEFERRED INCOME TAXES AND OTHER LONG-TERM LIABILITIES....... 1,594 253
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' INVESTMENT:
Common Stock, par value $.01 per share; 60,000,000 shares
authorized; 28,998,892 and 29,546,833 shares issued.... 290 295
Additional paid-in capital................................ 88,880 93,736
Treasury stock, 78,802 and 85,646 shares at cost.......... (354) (495)
Stock subscriptions receivable............................ (8) --
Retained earnings (accumulated deficit)................... (15,483) 3,269
-------- --------
TOTAL SHAREHOLDERS' INVESTMENT....................... 73,325 96,805
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT....... $148,783 $178,746
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
28
<PAGE> 29
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
--------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
NET REVENUES............................................... $182,849 $221,732 $260,805
COSTS AND EXPENSES:
Educational services..................................... 120,918 147,336 170,742
General and administrative............................... 41,036 48,094 57,162
Amortization of intangibles.............................. 2,076 1,611 1,203
-------- -------- --------
164,030 197,041 229,107
-------- -------- --------
INCOME BEFORE INTEREST AND TAXES........................... 18,819 24,691 31,698
Interest expense (income), net........................... 1,603 (3) (113)
-------- -------- --------
INCOME BEFORE INCOME TAXES................................. 17,216 24,694 31,811
Provision for income taxes............................... 7,231 10,372 13,059
-------- -------- --------
NET INCOME................................................. $ 9,985 $ 14,322 $ 18,752
======== ======== ========
INCOME AVAILABLE TO COMMON SHAREHOLDERS:
Dividends paid on Series A Preferred Stock................. $ (83) $ -- $ --
Redemption premium paid on Series A Preferred Stock........ (107) -- --
Dividends accrued on Series A Preferred Stock, but not
paid..................................................... (296) -- --
-------- -------- --------
Net income available to common shareholders -- basic....... $ 9,499 $ 14,322 $ 18,752
Net income available to common shareholders -- diluted..... $ 9,878 $ 14,322 $ 18,752
INCOME PER SHARE:
Basic................................................. $ .40 $ .50 $ .64
Diluted............................................... $ .36 $ .48 $ .61
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (IN 000'S):
Basic................................................. 23,878 28,908 29,314
Diluted............................................... 27,342 29,852 30,615
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
29
<PAGE> 30
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
--------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 9,985 $ 14,322 $ 18,752
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH FLOWS FROM
OPERATING ACTIVITIES:
Depreciation and amortization........................ 12,343 14,316 16,766
Vesting of compensatory stock options................ 375 -- --
Deferred credit for income taxes..................... (1,613) (1,184) (1,992)
Changes in current assets and liabilities:
Receivables....................................... (158) (1,084) (3,655)
Inventories....................................... (73) (577) (105)
Other current assets.............................. 443 (87) (650)
Accounts payable.................................. 1,993 1 57
Accrued liabilities............................... 2,269 473 3,940
Advance payments.................................. 2,715 2,413 2,571
-------- -------- --------
Total adjustments............................... 18,294 14,271 16,932
-------- -------- --------
Net cash flows from operating activities.......... 28,279 28,593 35,684
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiaries, net of cash acquired......... (9,753) (1,488) (500)
Expenditures for property and equipment................... (18,487) (17,951) (49,862)
Other items, net.......................................... 119 (233) (674)
-------- -------- --------
Net cash flows from investing activities.......... (28,121) (19,672) (51,036)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
New borrowings............................................ -- 8,000 1,500
Principal payments on debt................................ (31,988) (3,689) (2,651)
Net proceeds from issuance of Common Stock................ 45,143 737 2,197
Redemption of Series A Preferred Stock.................... (7,607) -- --
Other capital stock transactions, net..................... 122 114 (133)
-------- -------- --------
Net cash flows from financing activities.......... 5,670 5,162 913
-------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS..................... 5,828 14,083 (14,439)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 27,399 33,227 47,310
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 33,227 $ 47,310 $ 32,871
======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
30
<PAGE> 31
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A CLASS A CLASS B
PREFERRED COMMON COMMON COMMON STOCK
STOCK AT STOCK STOCK STOCK ADDITIONAL SUB-
PAID-IN AT PAR AT PAR WARRANTS AT PAR PAID-IN TREASURY SCRIPTIONS
VALUE VALUE VALUE OUTSTANDING VALUE CAPITAL STOCK RECEIVABLE
--------- ------- ------- ----------- ------ ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1996....... $ 22,075 $-- $ 1 $ 7,683 $ -- $19,742 $ (99) $(442)
Net income................. -- -- -- -- -- -- -- --
Dividends on Series A
Preferred Stock.......... -- -- -- -- -- -- -- --
Dividends accrued on Series
A Preferred Stock, but
not paid................. -- -- -- -- -- 296 -- --
Series A Preferred Stock
redemption............... (7,606) -- -- -- -- -- -- --
Series A Preferred Stock
Stock redemption
premium.................. 107 -- -- -- -- -- -- --
Conversion of Series A
Preferred Stock.......... (14,576) -- -- -- -- 14,576 -- --
Purchase of Class B
Common Stock............... -- -- (1) -- -- (2) (255) --
Payments on stock
subscriptions
receivable............... -- -- -- -- -- -- -- 320
Exercise of warrants....... -- -- -- (7,683) -- 7,683 -- --
Exercise of stock
options.................. -- -- -- -- -- 419 -- --
Issuance of Common Stock in
connection with IPO and
employee stock purchase
plan..................... -- -- -- -- 289 44,659 -- --
Vesting of compensatory
stock options............ -- -- -- -- -- 375 -- --
-------- --- --- ------- ---- ------- ----- -----
Balance, June 30, 1997....... -- -- -- -- 289 87,748 (354) (122)
Net income................. -- -- -- -- -- -- -- --
Payments on stock
subscriptions
receivable............... -- -- -- -- -- -- -- 114
Exercise of stock
options.................. -- -- -- -- 1 611 -- --
Stock options issued in
connection with
acquisition of
subsidiary............... -- -- -- -- -- 77 -- --
Issuance of Common Stock in
connection with employee
stock purchase plan...... -- -- -- -- -- 444 -- --
-------- --- --- ------- ---- ------- ----- -----
Balance, June 30, 1998....... -- -- -- -- 290 88,880 (354) (8)
Net income................. -- -- -- -- -- -- -- --
Purchase of Common Stock... -- -- -- -- -- -- (141) --
Payments on stock
subscriptions
receivable............... -- -- -- -- -- -- -- 8
Exercise of stock
options.................. -- -- -- -- 5 4,278 -- --
Issuance of Common Stock in
connection with employee
stock purchase plan...... -- -- -- -- -- 578 -- --
-------- --- --- ------- ---- ------- ----- -----
Balance, June 30, 1999....... $ -- $-- $-- $ -- $295 $93,736 $(495) $ --
======== === === ======= ==== ======= ===== =====
<CAPTION>
RETAINED
EARNINGS
(ACCUMU- TOTAL
LATED SHAREHOLDERS'
DEFICIT) INVESTMENT
-------- -------------
<S> <C> <C>
Balance, June 30, 1996....... $(39,304) $ 9,656
Net income................. 9,985 9,985
Dividends on Series A
Preferred Stock.......... (83) (83)
Dividends accrued on Series
A Preferred Stock, but
not paid................. (296) --
Series A Preferred Stock
redemption............... -- (7,606)
Series A Preferred Stock
Stock redemption
premium.................. (107) --
Conversion of Series A
Preferred Stock.......... -- --
Purchase of Class B
Common Stock............... -- (258)
Payments on stock
subscriptions
receivable............... -- 320
Exercise of warrants....... -- --
Exercise of stock
options.................. -- 419
Issuance of Common Stock in
connection with IPO and
employee stock purchase
plan..................... -- 44,948
Vesting of compensatory
stock options............ -- 375
-------- -------
Balance, June 30, 1997....... (29,805) 57,756
Net income................. 14,322 14,322
Payments on stock
subscriptions
receivable............... -- 114
Exercise of stock
options.................. -- 612
Stock options issued in
connection with
acquisition of
subsidiary............... -- 77
Issuance of Common Stock in
connection with employee
stock purchase plan...... -- 444
-------- -------
Balance, June 30, 1998....... (15,483) 73,325
Net income................. 18,752 18,752
Purchase of Common Stock... -- (141)
Payments on stock
subscriptions
receivable............... -- 8
Exercise of stock
options.................. -- 4,283
Issuance of Common Stock in
connection with employee
stock purchase plan...... -- 578
-------- -------
Balance, June 30, 1999....... $ 3,269 $96,805
======== =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
31
<PAGE> 32
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. OWNERSHIP AND OPERATIONS:
Education Management Corporation ("EDMC" or the "Company") is among the
largest providers of proprietary postsecondary education in the United States,
based on student enrollments and revenues. Through its operating units,
primarily the Art Institutes ("The Art Institutes"), the Company offers
bachelor's and associate's degree programs and non-degree programs in the areas
of design, media arts, culinary arts, fashion and paralegal studies. The Company
has provided career oriented education programs for over 35 years.
As of June 30, 1999, EDMC operated 18 schools in 15 major metropolitan
areas throughout the United States. The Company's main operating unit, The Art
Institutes, offer programs designed to provide the knowledge and skills
necessary for entry-level employment in various fields, including computer
animation, culinary arts, graphic design, multimedia, video production, interior
design, industrial design, photography, and fashion. Those programs typically
are completed in 18 to 48 months and culminate in a bachelor's or associate's
degree. As of June 30, 1999, eight Art Institutes offered bachelor's degree
programs.
As of June 30, 1999, the Company offered a culinary arts curriculum at 10
Art Institutes and The New York Restaurant School ("NYRS"), a culinary arts and
restaurant management school located in New York City. NYRS offers an
associate's degree program and certificate programs.
The Company offers paralegal and legal nurse consulting training and
financial planning certificate programs for college graduates and working adults
at The National Center for Paralegal Training ("NCPT") in Atlanta, and through
relationships with five colleges and universities.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF CONSOLIDATION AND PRESENTATION
The consolidated financial statements include the accounts of Education
Management Corporation and its subsidiaries. All significant intercompany
transactions and balances have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from these estimates.
GOVERNMENT REGULATIONS
The Art Institutes and NYRS ("the participating schools") participate in
various federal student financial assistance programs ("Title IV Programs")
under Title IV of the Higher Education Act of 1965, as amended (the "HEA").
Approximately 66% of the Company's net revenues in 1999 was indirectly derived
from funds distributed under these programs to students at the participating
schools.
The participating schools are required to comply with certain federal
regulations established by the U.S. Department of Education. Among other things,
they are required to classify as restricted certain Title IV Program funds in
excess of charges currently applicable to students' accounts. Such funds are
reported as restricted cash in the accompanying consolidated balance sheets.
The participating schools are required to administer Title IV Program funds
in accordance with the HEA and U.S. Department of Education regulations and must
use due diligence in approving and disbursing funds and servicing loans. In the
event a participating school does not comply with federal requirements or if
student loan default rates are at a level considered excessive by the federal
government, that school could lose its eligibility to participate in Title IV
Programs or could be required to repay funds determined to have been improperly
32
<PAGE> 33
disbursed. Management believes that the participating schools are in substantial
compliance with the federal requirements and that student loan default rates are
not at a level considered to be excessive.
EDMC makes contributions to Federal Perkins Loan Programs (the "Funds") at
certain Art Institutes. Current contributions to the Funds are made 75% by the
federal government and 25% by EDMC. The Company carries its investments in the
Funds at cost, net of an allowance for estimated future loan losses.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents. These investments are
stated at cost which, based upon the scheduled maturities, approximates market
value.
U.S. Department of Education regulations require Title IV Program funds
received by the Company's schools in excess of the tuition and fees owed by the
relevant students at that time to be, with these students' permission,
maintained and classified as restricted until the students are billed for the
portion of their education program related to those funds. Funds transferred
through electronic funds transfer programs are held in a separate cash account
and released when certain conditions are satisfied. These restrictions have not
significantly affected the Company's ability to fund daily operations.
ACQUISITIONS
Effective August 1, 1996, the Company purchased certain assets of NYRS for
$9.5 million in cash. The assets acquired consisted principally of current
assets net of specified current liabilities, property and equipment and certain
intangible assets.
On January 30, 1997, the Company acquired the assets of Lowthian College,
located in Minneapolis, Minnesota, for $200,000 in cash and approximately
$200,000 of assumed liabilities. The Company acquired principally accounts
receivable, equipment, and certain intangible assets. The school was renamed The
Art Institutes International Minnesota.
On December 19, 1997, the Company purchased certain assets of the Louise
Salinger School in San Francisco, California, for $600,000 in cash,. The Company
also entered into a consulting agreement with the former president in exchange
for an option to purchase 20,000 shares of the Company's Common Stock at an
exercise price of $12.97 (the closing price as of the acquisition date). The
assets acquired were principally accounts receivable and equipment. The school
was renamed The Art Institutes International at San Francisco.
On February 7, 1998, the Company acquired certain assets related to the
operations of Bassist College in Portland, Oregon for approximately $900,000 in
cash. The purchase agreement provides for certain adjustments based upon the
resolution of certain liabilities and additional consideration based upon a
specified percentage of gross revenues over the next five years. The assets
acquired were principally accounts receivable and equipment. The school was
renamed The Art Institutes International at Portland.
On October 1, 1998, the Company acquired the assets of Socrates Distance
Learning Technologies Group for approximately $500,000 in cash. This acquisition
was made to further the development of the Company's distance learning
capabilities. The Company employs the previous owners under two-year employment
and non-compete arrangements.
These acquisitions were accounted for using the purchase method of
accounting, with the excess of the purchase price over the fair value of the
assets acquired being assigned to identifiable intangible assets and goodwill.
The results of the acquired entities have been included in the Company's results
from the respective dates of acquisition. The pro forma effects, individually
and collectively, of the acquisitions in the Company's consolidated financial
statements would not materially impact the reported results.
LEASE ARRANGEMENTS
The Company conducts a major part of its operations from leased facilities.
In addition, the Company leases a portion of its furniture and equipment. In
those cases in which the lease term approximates the useful life of the
33
<PAGE> 34
leased asset or the lease meets certain other prerequisites, the leasing
arrangement is classified as a capitalized lease. The remaining lease
arrangements are treated as operating leases.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation.
Expenditures for additions and major improvements are capitalized, while those
for maintenance, repairs and minor renewals are expensed as incurred. The
Company uses the straight-line method of depreciation for financial reporting,
while using different methods for tax purposes. Depreciation is based upon
estimated useful lives, ranging from 5 to 30 years. Leasehold improvements are
amortized over the term of the lease, or over their estimated useful lives,
whichever is shorter.
FINANCIAL INSTRUMENTS
The fair values and carrying amounts of the Company's financial
instruments, primarily accounts receivable and debt, are approximately
equivalent. The debt instruments bear interest at floating rates based upon
market rates or at fixed rates that approximate market rates. All other
financial instruments are classified as current and will be utilized within the
next operating cycle.
REVENUE RECOGNITION AND RECEIVABLES
The Company's net revenues consist of tuition and fees, student housing
charges and supply store and restaurant sales. In fiscal 1999, the Company
derived 88.0% of its net revenues from tuition and fees paid by, or on behalf
of, its students. Net revenues, as presented, are reduced for student refunds
and scholarships.
The Company recognizes tuition and housing revenues on a monthly pro rata
basis over the term of instruction, typically an academic quarter. Fees are
generally recognized as revenue at the start of the academic period to which
they apply. Student supply store and restaurant sales are recognized as they
occur. Refunds are calculated in accordance with federal, state and accrediting
agency standards. Advance payments represent that portion of payments received
but not earned and are reflected as a current liability in the accompanying
consolidated balance sheets.
The trade receivable balances are comprised of individually insignificant
amounts due primarily from students throughout the United States.
COSTS AND EXPENSES
Educational services expense consists primarily of costs related to the
development, delivery and administration of the Company's education programs.
Major cost components are faculty compensation, administrative salaries, costs
of educational materials, facility leases and school occupancy costs,
information systems costs and bad debt expense, along with depreciation and
amortization of property and equipment.
General and administrative expense consists of marketing and student
admissions expenses and certain central staff departmental costs such as
executive management, finance and accounting, legal, corporate development and
other departments that do not provide direct services to the Company's students.
Amortization of intangibles relates principally to the values assigned to
identifiable intangibles and goodwill, which arose principally from the
application of purchase accounting to the establishment and financing of the
Education Management Corporation Employee Stock Ownership Plan and Trust (the
"ESOP") and the related leveraged transaction in October 1989. In addition, this
balance includes the amortization of intangible assets and goodwill that
resulted from the acquisitions discussed above. These intangible assets are
amortized over periods ranging from 2 to 40 years.
NEW ACCOUNTING STANDARDS
During fiscal 1999, the Company adopted the Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" and SFAS
No. 131, "Disclosure about Segments of an Enterprise
34
<PAGE> 35
and Related Information." The adoption of these statements did not have a
significant impact on the financial statements and disclosures, as the Company's
comprehensive income is equal to its net income and it has no reportable
segments.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------
1997 1998 1999
------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash paid during the period for:
Interest (net of amount capitalized)......... $2,264 $ 771 $ 313
Income taxes................................. 8,279 13,373 13,846
Noncash investing and financing activities:
Expenditures for property and equipment
included in accounts payable.............. -- -- 5,071
Tax deduction for options exercised.......... -- 291 2,664
</TABLE>
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to the
current year presentation.
3. SHAREHOLDERS' INVESTMENT:
On December 2, 1998, the Company's Board of Directors authorized a
two-for-one stock split effected in the form of a stock dividend. The
distribution was made on December 29, 1998 to shareholders of record as of the
close of business on December 8, 1998. Shareholders received one share of Common
Stock for each outstanding share of Common Stock owned. Except as noted herein,
all applicable data, including earnings per share, related to the Company's
Common Stock have been restated to reflect this stock split.
In November 1996, the Company completed the initial public offering ("IPO")
of 10,147,200 shares of its Common Stock, $.01 par value (the "Common Stock"),
including 3,402,782 shares sold by certain shareholders, at a price to the
public of $7.50 per share. Since that date, the authorized capital stock of the
Company has consisted of the Common Stock and Preferred Stock, $.01 par value
(the "Preferred Stock").
From 1989 until immediately prior to the consummation of the IPO, the
Company's outstanding capital stock consisted of Class A Common Stock, $.0001
par value ("Class A Stock"), Class B Common Stock, $.0001 par value ("Class B
Stock"), and Series A 10.19% Convertible Preferred Stock, $.0001 par value (the
"Series A Preferred Stock"). All the outstanding shares of Series A Preferred
Stock were owned by the ESOP. In addition, warrants to purchase shares of Class
B Stock were outstanding.
Immediately prior to the consummation of the IPO, the following occurred:
(i) the warrants to purchase 5,956,079 shares of Class B Stock were exercised
($.0001 exercise price per share), (ii) the ESOP converted all the outstanding
shares of Series A Preferred Stock into 2,249,954 shares of Class A Stock, (iii)
the Company's Articles of Incorporation were amended and restated to authorize
the Common Stock and Preferred Stock and (iv) all outstanding shares of Class A
Stock and Class B Stock (including the shares resulting from the exercise of the
warrants and the conversion of the Series A Preferred Stock) were reclassified
into shares of Common Stock on a one-for-two basis (also referred to as a
one-for-two reverse stock split).
For the purpose of presenting comparable financial information for 1997 in
this report, the per share amounts, the number of shares of Class A Stock and
Class B Stock, the conversion ratio for the Series A Preferred Stock and the
exercise price for the warrants have been restated to reflect the one-for-two
reverse stock split and the two-for-one stock split, except in this Note 3.
In the IPO, the Company received total net proceeds, after deduction of
expenses and underwriting discounts payable by the Company, of approximately $45
million. On the date the IPO closed, $38.5 million of those proceeds were used
to repay the outstanding indebtedness under the Company's amended and restated
credit
35
<PAGE> 36
facility dated March 16, 1995 (the "Revolving Credit Agreement"). The remaining
proceeds were used for general corporate purposes.
Pursuant to a Preferred Share Purchase Rights Plan (the "Rights Plan")
approved by the Company's Board of Directors, which became effective upon the
consummation of the IPO, one Preferred Share Purchase Right (a "Right") is
associated with each outstanding share of Common Stock. Each Right entitles its
holder to buy one two-hundredth of a share of Series A Junior Participating
Preferred Stock, $.01 par value, at an exercise price of $50, subject to
adjustment (the "Purchase Price"). The Rights Plan is not subject to shareholder
approval.
The Rights will become exercisable under certain circumstances following a
public announcement by a person or group of persons (an "Acquiring Person") that
they acquired or commenced a tender offer for 17.5% or more of the outstanding
shares of Common Stock. If an Acquiring Person acquires 17.5% or more of the
Common Stock, each Right will entitle its holder, except the Acquiring Person,
to acquire upon exercise a number of shares of Common Stock having a market
value of two times the Purchase Price. In the event that the Company is acquired
in a merger or other business combination transaction or 50% or more of its
consolidated assets or earning power are sold after a person or group of persons
becomes an Acquiring Person, each Right will entitle its holder to purchase, at
the Purchase Price, that number of shares of the acquiring company having a
market value of two times the Purchase Price. The Rights will expire on the
tenth anniversary of the closing of the IPO and are subject to redemption by the
Company at $.01 per Right, subject to adjustment.
On November 10, 1997, certain principal shareholders of the Company sold
6,141,984 shares of Common Stock in a public offering. The Company did not
receive any proceeds from this offering and was reimbursed by the selling
shareholders for all out-of-pocket expenses related to this offering.
The unaudited pro forma income statement data in the following table gives
effect to the IPO as if it had occurred on July 1, 1996. Proceeds from the IPO
were utilized pro forma to retire outstanding indebtedness under the Revolving
Credit Agreement and for general corporate purposes. The adjustment to interest
expense represents the effect of the reduction of debt as if it had been repaid
on July 1, 1996. Pro forma taxes are applied at an effective tax rate of 42% of
taxable income.
This unaudited pro forma income statement data is not necessarily
indicative of what the Company's results of operations actually would have been
had the above transactions in fact occurred on July 1, 1996.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1997
-----------------------------------------
ACTUAL ADJUSTMENTS PRO FORMA
--------- ------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Income before interest and taxes........... $18,819 $ -- $18,819
Interest expense, net...................... 1,603 (931) 672
------- ------ -------
Income before income taxes................. 17,216 931 18,147
Income taxes............................... 7,231 391 7,622
------- ------ -------
Net income................................. $ 9,985 $ 540 $10,525
======= ====== =======
Net income available to common
shareholders............................. $ 9,499 $ 540 $10,039
Earnings per share:
--Basic $ 0.40 $ (.05) $ 0.35
--Diluted $ 0.36 $ (.01) $ 0.35
Weighted average number of shares
outstanding:
--Basic.................................. 23,878 4,904 28,782
--Diluted................................ 27,342 2,146 29,488
</TABLE>
4. EARNINGS PER SHARE:
Basic EPS is computed using the weighted average number of shares actually
outstanding during the period, while diluted EPS is calculated to reflect the
potential dilution related to stock options, warrants and the assumed conversion
of Series A Preferred Stock.
36
<PAGE> 37
RECONCILIATION OF DILUTED SHARES
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------
1997 1998 1999
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Basic shares..................................... 23,878 28,908 29,314
Dilution for stock options....................... 648 944 1,301
Dilution for warrants and Series A Preferred
Stock.......................................... 2,816 -- --
------ ------ ------
Diluted shares................................... 27,342 29,852 30,615
====== ====== ======
</TABLE>
The net income available to common shareholders in 1997 has been reduced by
the Series A Preferred Stock dividends in the computation of basic EPS. The
premium paid upon the redemption of 75,000 shares of Series A Preferred Stock
has been deducted from net income in calculating both basic and diluted EPS for
1997.
5. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following as of June 30:
<TABLE>
<CAPTION>
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Assets (asset lives in years)
Land................................................ $ 300 $ 2,800
Buildings and improvements (30)..................... 1,841 16,075
Equipment and furniture (5 to 10)................... 73,469 89,528
Leasehold interests and improvements (4 to 20)...... 42,201 50,399
Construction in progress............................ -- 12,550
-------- --------
Total............................................ 117,811 171,352
Less accumulated depreciation....................... 60,391 75,271
-------- --------
$ 57,420 $ 96,081
======== ========
</TABLE>
6. LONG-TERM DEBT:
The Company and its subsidiaries were indebted under the following
obligations as of June 30:
<TABLE>
<CAPTION>
1998 1999
------- -------
(IN THOUSANDS)
<S> <C> <C>
Revolving Credit Agreement.............................. $35,000 $36,500
Capitalized lease and equipment installment note
obligations........................................... 3,382 731
------- -------
38,382 37,231
Less current portion.................................... 2,615 731
------- -------
$35,767 $36,500
======= =======
</TABLE>
The Revolving Credit Agreement, as amended, currently allows for maximum
borrowings of $60 million, reduced annually by $5 million through its expiration
on October 13, 2000. The Revolving Credit Agreement requires, among other
matters, that the Company maintain a specified level of consolidated net worth
and meet specified interest, leverage and fixed charge ratio requirements, and
restricts repurchases of Common Stock and the incurrence of additional
indebtedness, as defined. As of June 30, 1999, the Company was in compliance
with all covenants. Borrowings under this agreement are secured by the stock of
the Company's subsidiaries and all of the Company's assets and accrue interest
at either prime, Eurodollar or cost of funds (as defined) rates, at the option
of the Company. As of June 30, 1999, the interest rate under the Revolving
Credit Agreement was 7.75%.
37
<PAGE> 38
Relevant information regarding borrowings under the Revolving Credit
Agreement is reflected below:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------
1997 1998 1999
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Outstanding borrowings, end of period......... $27,000 $35,000 $36,500
Approximate average outstanding balance
throughout the period....................... 13,602 530 2,550
Approximate maximum outstanding balance during
the period.................................. 55,000 35,000 37,000
Weighted average interest rate for the
period...................................... 7.20% 8.50% 7.48%
</TABLE>
Capitalized leases and installment notes for equipment and furniture expire
in fiscal 2000. The total future minimum payments under these obligations are
approximately $772,000, with approximately $41,000 representing interest.
Depreciation expense on assets originally financed through capitalized leases
and installment notes was approximately $3,705,000, $3,441,000 and $2,907,000
for the years ended June 30, 1997, 1998 and 1999, respectively.
7. COMMITMENTS AND CONTINGENCIES:
The Company and its subsidiaries lease certain classroom, dormitory and
office space under operating leases, which expire on various dates through
August 2019. Rent expense under these leases was approximately $20,226,000,
$24,904,000 and $28,250,000, respectively for 1997, 1998 and 1999. The
approximate minimum future commitments under non-cancelable, long-term operating
leases as of June 30, 1999 are reflected below:
<TABLE>
<CAPTION>
FISCAL YEARS (IN THOUSANDS)
- ------------ --------------
<S> <C>
2000.................................................. $ 20,039
2001.................................................. 15,676
2002.................................................. 13,020
2003.................................................. 12,971
2004.................................................. 13,089
Thereafter............................................ 105,250
--------
$180,045
========
</TABLE>
The Company has a management incentive compensation plan that provides for
the awarding of cash bonuses to management personnel using formalized guidelines
based upon the operating results of each subsidiary and the Company.
The Company and its wholly-owned subsidiaries, The Art Institutes
International, Inc. ("AII") and The Art Institute of Houston, Inc. are
defendants in a suit brought by 145 former and current students who allege being
misled about the benefits or quality of educational services provided to them at
The Art Institute of Houston. The complaint was subsequently amended to add
claims by an additional 90 plaintiffs. The complaint does not specify the amount
of damages being sought. The Company is also a defendant in certain other legal
proceedings arising out of the conduct of its businesses. In the opinion of
management, based upon its investigation of these claims and discussion with
legal counsel, the ultimate outcome of such legal proceedings, individually and
in the aggregate, will not have a material adverse effect on the consolidated
financial position, results of operations or liquidity of the Company.
8. RELATED PARTY TRANSACTIONS:
The Art Institute of Philadelphia, Inc., a wholly-owned subsidiary of AII,
leases one of the buildings it occupies from a partnership in which the
subsidiary serves as a 1% general partner and an executive officer/director and
a director of EDMC are minority limited partners. The Art Institute of Fort
Lauderdale, Inc., another wholly-owned subsidiary of AII, leases part of its
facility from a partnership in which an executive officer/director of EDMC is a
minority limited partner. Total rental payments under these arrangements were
38
<PAGE> 39
$1,894,000 for each of the years ended June 30, 1997 and 1998, and $1,901,000
for the year ended June 30, 1999.
9. EMPLOYEE BENEFIT PLANS:
The Company sponsors a retirement plan, which covers substantially all
employees. This plan provides for matching Company contributions of 100% of
employee 401(k) contributions up to 3% of compensation and 50% of contributions
between 4% and 6% of compensation. Other contributions to the plan are at the
discretion of the Board of Directors. The expense relating to these plans was
approximately $526,000, $1,198,000 and $2,198,000 for the years ended June 30,
1997, 1998 and 1999, respectively.
The Company established an ESOP in 1989, which enables eligible employees
to acquire stock ownership in the Company. Allocations of forfeited shares and
cash are made to the accounts of eligible participating employees based upon
each participant's compensation level relative to the total compensation of all
eligible employees. Eligible employees vest their ESOP accounts based on a
seven-year schedule, which includes credit for past service. Distribution of
shares from the ESOP is made following the retirement, disability or death of an
employee. For employees who terminate for any other reason, their vested balance
will be offered for distribution in accordance with the terms of the ESOP.
10. DEFERRED INCOME TAXES AND OTHER LONG-TERM ASSETS:
Deferred income taxes and other long-term assets consist of the following
as of June 30:
<TABLE>
<CAPTION>
1998 1999
------ ------
(IN THOUSANDS)
<S> <C> <C>
Investment in Federal Perkins Loan Program, net of
allowance for estimated future loan losses of $1,032 and
$1,155.................................................. $2,408 $2,617
Cash value of life insurance, net of loans of $781 each
year; face value of $6,065.............................. 2,045 2,324
Deferred income taxes..................................... -- 548
Other, net of amortization of $201 and $349............... 1,834 2,125
------ ------
$6,287 $7,614
====== ======
</TABLE>
11. ACCRUED LIABILITIES:
Accrued liabilities consist of the following as of June 30:
<TABLE>
<CAPTION>
1998 1999
------- -------
(IN THOUSANDS)
<S> <C> <C>
Payroll taxes and payroll related....................... $ 6,297 $ 6,924
Income and other taxes.................................. 431 545
Other................................................... 3,434 3,969
------- -------
$10,162 $11,438
======= =======
</TABLE>
39
<PAGE> 40
12. INCOME TAXES:
The provision for income taxes includes current and deferred taxes as
reflected below:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------
1997 1998 1999
------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current taxes:
Federal...................................... $7,594 $ 9,780 $11,824
State........................................ 1,250 1,776 3,227
------ ------- -------
Total current taxes....................... 8,844 11,556 15,051
------ ------- -------
Deferred taxes................................. (1,613) (1,184) (1,992)
------ ------- -------
Total provision........................... $7,231 $10,372 $13,059
====== ======= =======
</TABLE>
The provision for income taxes reflected in the accompanying consolidated
statements of income vary from the amounts that would have been provided by
applying the federal statutory income tax rate to earnings before income taxes
as shown below:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Federal statutory income tax rate........................... 35.0% 35.0% 35.0%
State and local income taxes, net of federal income tax
benefit................................................... 5.1 4.7 4.6
Amortization of goodwill and other intangibles.............. .9 .6 .5
Non-deductible expenses..................................... .8 1.0 .7
Other, net.................................................. .2 .7 .3
---- ---- ----
Effective income tax rate.............................. 42.0% 42.0% 41.1%
==== ==== ====
</TABLE>
Net deferred income tax assets (liabilities) consist of the following as of
June 30:
<TABLE>
<CAPTION>
1997 1998 1999
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred income tax--current................................ $1,509 $2,361 $2,476
Deferred income tax--long term.............................. (1,661) (1,329) 548
------ ------ ------
Net deferred income tax asset (liability)................. $ (152) $1,032 $3,024
====== ====== ======
Consisting of:
Allowance for doubtful accounts........................ $2,959 $3,494 $3,850
Assigned asset values in excess of tax basis........... (2,006) (1,753) (1,585)
Depreciation........................................... (697) (314) 1,508
Financial reserves and other........................... (408) (395) (749)
------ ------ ------
Net deferred income tax asset (liability)................. $ (152) $1,032 $3,024
====== ====== ======
</TABLE>
13. STOCK BASED COMPENSATION:
The Company adopted a Stock Incentive Plan in October 1996 (the "1996
Plan") for directors, executive management and key personnel. The 1996 Plan
provides for the issuance of stock-based incentive awards with respect to a
maximum of 2,500,000 shares of Common Stock. During 1997, 1998 and 1999, options
covering a total of 1,219,000, 40,000 and 1,372,523 shares, respectively, were
granted under the 1996 Plan. Options issued under this plan provide for
time-based vesting over four years.
The Company also has two non-qualified management stock option plans under
which options to purchase a maximum of 1,119,284 shares of Common Stock were
granted to management employees, prior to 1996. Substantially all outstanding
options under these non-qualified plans are fully vested. Under the terms of the
three plans, the Board of Directors granted options to purchase shares at prices
varying from $1.27 to $19.38 per share,
40
<PAGE> 41
representing the fair market value at the time of the grant. Compensation
expense related to vesting of certain options of $375,000 was recognized for the
year ended June 30, 1997.
In 1997, the Company adopted an employee stock purchase plan. The plan
allows eligible employees of the Company to purchase up to an aggregate of
1,500,000 shares of Common Stock at quarterly intervals through periodic payroll
deduction. The number of shares of Common Stock issued under this plan was
15,672 in 1997, 36,508 in 1998 and 37,620 in 1999.
The Company accounts for these plans under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." Had compensation
expense for the stock option and stock purchase plans been determined consistent
with SFAS No. 123, "Accounting for Stock Based Compensation," the Company's net
income and earnings per share would have been reduced to the following pro forma
amounts:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C> <C>
Net income (in 000's):................... As reported $9,985 $14,322 $18,752
Pro forma $9,553 $13,591 $16,850
Basic EPS:............................... As reported $ .40 $ .50 $ .64
Pro forma $ .38 $ .47 $ .57
Diluted EPS:............................. As reported $ .36 $ .48 $ .61
Pro forma $ .35 $ .46 $ .55
</TABLE>
SUMMARY OF STOCK OPTIONS
<TABLE>
<CAPTION>
1997 1998 1999
--------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE
--------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year...................... 1,226,290 $ 2.49 2,192,716 $ 5.00 2,110,240 $ 5.21
Granted..................... 1,262,000 7.54 60,000 13.14 1,372,523 15.54
Exercised................... 105,200 3.33 115,476 5.09 544,610 4.42
Forfeited................... 190,374 6.61 27,000 7.50 65,500 13.29
---------- ------ ---------- ------ ---------- ------
Outstanding, end of year.... 2,192,716 $ 5.00 2,110,240 $ 5.21 2,872,653 $10.11
========== ====== ========== ====== ========== ======
Exercisable, end of year.... 1,042,716 1,267,164 1,031,753
========== ========== ==========
Weighted average fair value
of options granted
(000's)*.................. $ 3,852 $ 240 $ 10,919
========== ========== ==========
</TABLE>
- ---------
* The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions for grants:
<TABLE>
<CAPTION>
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Risk free interest rate................. 6.14% 6.12% 4.97%
Expected dividend yield................. 0 0 0
Expected life of options (years)........ 6 6 6
Expected volatility rate................ 34.3% 33.7% 46.0%
</TABLE>
14. SUBSEQUENT EVENTS:
Subsequent to June 30, 1999, the following transactions occurred:
ACQUISITIONS:
Effective August 17, 1999, the Company acquired American Business and
Fashion Institute in Charlotte, North Carolina. Additionally, effective August
26, 1999, the Company acquired Massachusetts Communications
41
<PAGE> 42
College in Boston Massachusetts. These transactions are subject to obtaining
certain regulatory approvals. The Company acquired the outstanding stock of both
of these entities and these transactions will be accounted for using the
purchase method of accounting.
STOCK REPURCHASE PROGRAM:
On August 3, 1999, the Board of Directors authorized the Company to
repurchase up to $10 million of its currently outstanding Common Stock. The
quantity and timing of such purchases will be determined by management based
upon market conditions and other factors, including the effect such repurchases
could have on potential business combinations accounted for using the pooling of
interests method of accounting.
ITEM 9-- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
42
<PAGE> 43
PART III
ITEM 10--DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information required by this Item will be contained in the Proxy
Statement under the captions "Nominees as Directors for Terms Expiring at the
2002 Annual Meeting of Shareholders," "Directors Continuing in Office,"
"Executive Officers of the Company," and "Section 16(a) Beneficial Ownership
Reporting Compliance," and is incorporated herein by reference.
ITEM 11--EXECUTIVE COMPENSATION
The information required by this Item will be contained in the Proxy
Statement under the captions "Compensation of Executive Officers and Directors,"
"Compensation Committee Interlocks and Insider Participants" and "Employment
Agreements," and is incorporated herein by reference.
ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item will be contained in the Proxy
Statement under the caption "Security Ownership," and is incorporated herein by
reference.
ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item will be contained in the Proxy
Statement under the caption "Certain Transactions," and is incorporated herein
by reference.
PART IV
ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The exhibits listed on the Exhibit Index on pages E-1 and E-2 of this
Form 10-K are filed herewith or are incorporated herein by reference.
(1) Financial Statements:
The following financial statements of the Company and its subsidiaries
are included in Part II, Item 8, on pages 27 through 42 of this Form
10-K.
Report of Independent Public Accountants
Consolidated Balance Sheets for years ended June 30, 1998 and 1999
Consolidated Statements of Income for years ended June 30, 1997, 1998
and 1999
Consolidated Statements of Cash Flows for years ended June 30, 1997,
1998 and 1999
Consolidated Statements of Shareholders' Investment for years ended
June 30, 1997, 1998 and 1999
Notes to Consolidated Financial Statements
(2) Supplemental Financial Statement Schedules
Valuation and Qualifying Accounts, on page S-1 of this Form 10-K is
filed herewith.
(b) No reports on Form 8-K were filed during the three months ended June
30, 1999.
43
<PAGE> 44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
EDUCATION MANAGEMENT CORPORATION
By: /s/ ROBERT B. KNUTSON
------------------------------------
Robert B. Knutson
Chairman and Chief Executive Officer
Date: September 28, 1999
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ ROBERT B. KNUTSON Chairman and Chief September 28, 1999
- --------------------------------------------- Executive Officer; Director
Robert B. Knutson
/s/ ROBERT T. GIOELLA President and Chief September 28, 1999
- --------------------------------------------- Operating Officer; Director
Robert T. Gioella
/s/ JOHN R. MCKERNAN, JR. Vice Chairman; Director September 28, 1999
- ---------------------------------------------
John R. McKernan, Jr.
/s/ ROBERT T. MCDOWELL Executive Vice President and September 28, 1999
- --------------------------------------------- Chief Financial Officer
Robert T. McDowell
/s/ MIRYAM L. KNUTSON Director September 28, 1999
- ---------------------------------------------
Miryam L. Knutson
/s/ JAMES J. BURKE, JR. Director September 28, 1999
- ---------------------------------------------
James J. Burke, Jr.
/s/ ALBERT GREENSTONE Director September 28, 1999
- ---------------------------------------------
Albert Greenstone
/s/ ROBERT H. ATWELL Director September 28, 1999
- ---------------------------------------------
Robert H. Atwell
/s/ WILLIAM M. CAMPBELL, III Director September 28, 1999
- ---------------------------------------------
William M. Campbell, III
/s/ JAMES S. PASMAN, JR. Director September 28, 1999
- ---------------------------------------------
James S. Pasman, Jr.
/s/ DANIEL M. FITZPATRICK Vice President and Controller September 28, 1999
- ---------------------------------------------
Daniel M. Fitzpatrick
</TABLE>
44
<PAGE> 45
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT METHOD OF FILING
- ------- ------- ----------------
<S> <C> <C>
3.01 Amended and Restated Articles of Incorporation Incorporated herein by
reference to Exhibit 3.01
to the Annual Report on
Form 10-K for the year
ended June 30, 1997 (the
"1997 Form 10-K")
3.02 Articles of Amendment filed on February 4, 1997 Incorporated herein by
reference to Exhibit 3.02
to the 1997 Form 10-K
3.03 Restated By-laws Incorporated herein by
reference to Exhibit 3.03
to the 1997 Form 10-K
4.01 Specimen Common Stock Certificate Incorporated herein by
reference to Exhibit 4.01
to Amendment No. 3 filed
on October 28, 1996 to the
Registration Statement on
Form S-1 (File No.
333-10385) filed on August
19, 1996 (the "Form S-1")
4.02 Rights Agreement, dated as of October 1, 1996, between Education Incorporated herein by
Management Corporation and Mellon Bank, N.A. reference to Exhibit 4.02
to the 1997 Form 10-K
4.03 Amended and Restated Credit Agreement, dated March 16, 1995, Incorporated herein by
among Education Management Corporation, certain banks and PNC reference to Exhibit 4.16
Bank, National Association to Amendment No. 1 to the
Form S-1, filed on October
1, 1996 ("Amendment No.
1")
4.04 First Amendment to Amended and Restated Credit Agreement, dated Incorporated herein by
October 13, 1995, among Education Management Corporation, certain reference to Exhibit 4.17
banks and PNC Bank, National Association to the Form S-1
4.05 Second Amendment to Amended and Restated Credit Agreement, dated Incorporated herein by
July 31, 1996, among Education Management Corporation, certain reference to Exhibit 4.18
banks and PNC Bank, National Association to Amendment No. 1
4.06 Third Amendment to Amended and Restated Credit Agreement, dated Incorporated herein by
March 14, 1997, among Education Management Corporation, certain reference to Exhibit 10.23
banks and PNC Bank, National Association to the 1997 Form 10-K
4.07 Fourth Amendment to Amended and Restated Credit Agreement, dated Incorporated herein by
June 30, 1998, among Education Management Corporation, certain reference to Exhibit 10.25
banks and PNC Bank, National Association to the Annual Report on
Form 10-K for the year
ended June 30, 1998 (the
"1998 Form 10-K")
4.08 Fifth Amendment to Amended and Restated Credit Agreement, dated Filed herewith
July 30, 1999, among Education Management Corporation, certain
banks and PNC Bank, National Association
</TABLE>
E-1
<PAGE> 46
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT METHOD OF FILING
- ------- ------- ----------------
<S> <C> <C>
10.01 Education Management Corporation Retirement Plan Filed herewith
10.02 Education Management Corporation Management Incentive Stock Incorporated herein by
Option Plan, effective November 11, 1993 reference to Exhibit 10.05
to the Form S-1*
10.03 EMC Holdings, Inc. Management Incentive Stock Option Plan, Incorporated herein by
effective July 1, 1990 reference to Exhibit 10.06
to Amendment No. 1*
10.04 Form of Management Incentive Stock Option Agreement, dated Incorporated herein by
various dates, between EMC Holdings, Inc. and various management reference to Exhibit 10.07
employees to Amendment No. 1*
10.05 Form of Amendment to Management Incentive Stock Option Agreement, Incorporated herein by
dated January 19, 1995, among Education Management Corporation reference to Exhibit 10.08
and various management employees* to Amendment No. 1*
10.06 Education Management Corporation Deferred Compensation Plan Filed herewith *
10.07 1996 Employee Stock Purchase Plan Incorporated herein by
reference to Exhibit 10.12
to Amendment No. 1
10.08 Education Management Corporation 1996 Stock Incentive Plan Incorporated herein by
reference to Exhibit 10.13
to Amendment No. 1*
10.09 Third Amended and Restated Employment Agreement, dated as of Filed herewith*
September 8, 1999 between Robert B. Knutson and Education
Management Corporation
10.10 Form of Employment Agreement, dated as of June 4 and September 8, Filed herewith*
1999 between certain executives and Education Management
Corporation
10.11 Form of EMC-Art Institutes International, Inc. Director's and/or Incorporated herein by
Officer's Indemnification Agreement reference to Exhibit 10.17
to the Form S-1
10.12 Senior Management Team Incentive Compensation Plan Filed herewith*
10.13 Common Stock Registration Rights Agreement, dated as of August Incorporated herein by
15, 1996, among Education Management Corporation and Marine reference to Exhibit 10.19
Midland Bank, Northwestern Mutual Life Insurance Company, to the 1997 Form 10-K
National Union Fire Insurance Company of Pittsburgh, PA, Merrill
Lynch Employees LBO Partnership No. I, L.P., Merrill Lynch IBK
Positions, Inc., Merrill Lynch KECALP L.P., 1986, Merrill Lynch
Offshore LBO Partnership No. IV, Merrill Lynch Capital
Corporation, Merrill Lynch Capital Appreciation Partnership IV,
L.P., Robert B. Knutson and certain other individuals
21.01 Material subsidiaries of Education Management Corporation Filed herewith
23.01 Consent of Arthur Andersen LLP Filed herewith
27.01 Financial Data Schedule Filed herewith
</TABLE>
- ---------
* Management contract or compensatory plan or arrangement
E-2
<PAGE> 47
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements of Education Management Corporation and
Subsidiaries included in this registration statement, and have issued our report
thereon dated July 28, 1999. Our audit was made for the purpose of forming an
opinion on the basic financial statements taken as a whole. The schedule listed
in Item 14(a)(2) of this Form 10-K is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
Pittsburgh, Pennsylvania
July 28, 1999
<PAGE> 48
SCHEDULE
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE AT
BEGINNING CHARGED TO END OF
OF PERIOD EXPENSES DEDUCTIONS OTHER(A) PERIOD
---------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
ALLOWANCE ACCOUNTS FOR:
Year ended June 30, 1997
Uncollectible accounts receivable......... $2,938 $3,911 $ -- $544 $7,393
Estimated future loan losses.............. 575 27 -- -- 602
Year ended June 30, 1998
Uncollectible accounts receivable......... 7,393 5,443 4,518 -- 8,318
Estimated future loan losses.............. 602 430 -- -- 1,032
Year ended June 30, 1999
Uncollectible accounts receivable........... 8,318 5,660 4,611 -- 9,367
Estimated future loan losses.............. 1,032 123 -- -- 1,155
</TABLE>
- ---------
(a) Uncollectible accounts receivable acquired in connection with acquisitions
of subsidiaries.
S-1
<PAGE> 1
EXHIBIT 4.08
FIFTH AMENDMENT TO
AMENDED AND RESTATED CREDIT AGREEMENT
Dated as of July 30, 1999
By and Among
EDUCATION MANAGEMENT CORPORATION,
as the Borrower
THE BANKS PARTY THERETO,
as the Banks
PNC BANK, NATIONAL ASSOCIATION,
as the Issuing Bank and as the Agent
<PAGE> 2
FIFTH AMENDMENT TO
AMENDED AND RESTATED CREDIT AGREEMENT
THIS FIFTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT is made
as of the 30th day of July, 1999 (the "FIFTH AMENDMENT"), to that certain
Amended and Restated Credit Agreement dated as of March 16, 1995, as previously
amended by the First Amendment to Amended and Restated Credit Agreement dated as
of October 13, 1995, the Second Amendment to Amended and Restated Credit
Agreement dated as of July 31, 1996, the Third Amendment to Amended and Restated
Credit Agreement dated as of March 14, 1997, and the Fourth Amendment to Amended
and Restated Credit Agreement dated as of June 30, 1998 (the Amended and
Restated Credit Agreement as previously amended, together with all exhibits and
schedules thereto, the "ORIGINAL AGREEMENT") (the Original Agreement as amended
by the Fifth Amendment, together with all extensions, substitutions,
replacements, restatements and other amendments or modifications thereof or
thereto, the "CREDIT AGREEMENT") by and among EDUCATION MANAGEMENT CORPORATION,
a corporation organized and existing under the laws of the Commonwealth of
Pennsylvania (the "BORROWER"), the FINANCIAL INSTITUTIONS listed on the
signature pages to this Fifth Amendment (individually a "BANK" and collectively
the "BANKS"), PNC BANK, NATIONAL ASSOCIATION as the issuer of letters of credit
under the Credit Agreement (in such capacity the "ISSUING BANK") and PNC BANK,
NATIONAL ASSOCIATION, a national banking association as the agent for the Banks
(in such capacity the "AGENT").
WITNESSETH:
WHEREAS, the Borrower and the Banks, the Issuing Bank and the Agent
desire to amend the Original Agreement as set forth herein.
NOW, THEREFORE, in consideration of the terms and conditions contained
herein, and other good and valuable consideration, the parties hereto, intending
to be legally bound, hereby agree as follows:
ARTICLE I
AMENDMENTS TO ORIGINAL AGREEMENT
FIRST: Section 1.1 of the Original Agreement is hereby amended in the
following particulars:
The following definitions are added to Section 1.1:
(a) "Common Stock Repurchase Program" means the Borrower's
announced program to repurchase, up to $10,000,000 of the Borrower's common
stock in one or more series of purchases at the current market price at the time
of each such purchase.
(b) "Fifth Amendment" means the Fifth Amendment to the Amended
and Restated Credit Agreement dated as of July 30, 1999.
SECOND: Section 5.1 of the Original Agreement is amended and restated
in its entirety to read as follows:
<PAGE> 3
5.1 Use of Proceeds. Proceeds of the Term Loans hereunder will
be used to purchase the 1989 Term Loans from the 1989 Banks. Proceeds of the
Revolving Credit Loans shall be used by the Borrower (a) to refinance the
revolving credit loans, if any, outstanding under the 1989 Credit Agreement, (b)
for general working capital purposes of the Borrower and its Active
Subsidiaries, including but not limited to capital expenditures, the acquisition
and development of additional schools, draws to meet DOE regulatory requirements
and Permitted Acquisitions, (c) to refinance the existing Senior Subordinated
Notes; provided, however, such proceeds must be used to repay existing Senior
Subordinated Notes in full not later than October 13, 1995 or the Borrower shall
lose the ability to use proceeds of the Revolving Credit Loans for this purpose,
(d) for financing of loans to the ESOP, (e) provided the provisions of Section
7.3 have been satisfied, to acquire and hold as treasury shares up to
approximately 98,000 shares of the Borrower's Series A 10.19% convertible
preferred stock; provided, however, proceeds used for such purchase may not
exceed $10,000,000 and must be disbursed in a single Disbursement; and provided,
further this Preferred Stock Repurchase Draw may only be repaid with Net
Offering Proceeds or by the issuance of Additional Term Loan Notes, and (f) to
finance the Common Stock Repurchase Program; provided, however, proceeds of the
Revolving Credit Loans used for such purchases must not exceed $10,000,000 in
the aggregate.
THIRD: Section 6.12b of the Original Agreement is hereby amended and
restated in its entirety to read as follows:
6.12b Redemption Restrictions. The Borrower shall not, nor
shall it permit any Subsidiary to, purchase the Borrower's capital stock while
the Credit Facility is outstanding, except for (i) the redemption of any such
capital stock held by the ESOP in connection with the termination of service of
employees of the Borrower or its Subsidiaries, (ii) the Common Stock Repurchase
Program, and (iii) the redemption of any such capital stock by the Borrower from
Management Shareholders as more fully set forth below.
(A) Upon the death, incapacity, retirement or
termination of a Management Stockholder (other than Knutson, except as
provided below), the Borrower may purchase such Management
Stockholder's capital stock upon the terms and conditions set forth in
the applicable Management Repurchase Agreement; provided that after
giving effect to such purchase no Event of Default has occurred and is
continuing; and provided, further, that the aggregate Net Purchase
Price of all such purchases does not exceed in any Fiscal Year
beginning on and after July 1, 1994, the sum of:
(1) the applicable amount from among the
following amounts: (a) $500,000, (b) the difference between
(i) $1,000,000 in the earlier to occur of (A) any Fiscal Year
ended after July 1, 1996 or (B) any Fiscal Year during which
the Borrower's Consolidated Net Worth is greater than or equal
to $50,000,000, plus
(2) the proceeds paid to the Borrower during
such Fiscal Year pursuant to life insurance policies on its
employees, plus
(3) the Net Proceeds paid to the Borrower
during such Fiscal Year upon the resale or reissuance of the
treasury stock related to repurchased capital stock.
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<PAGE> 4
(B) Upon the death, incapacity, retirement or
termination of Knutson, the Borrower may purchase his capital stock
upon the terms and conditions set forth in the RBK Exchange and
Repurchase Agreement, provided that after giving effect to such
purchase no Event of Default has occurred or is continuing, and if such
purchase is pursuant to the Initial Put and the Secondary Put (as such
terms are defined in the RBK Exchange and Repurchase Agreement) (1)
such purchases do not exceed the amounts set forth in Section 10(b) of
the RBK Exchange and Repurchase Agreement, and (2) any purchases of
capital stock owned by any Permitted Owner for cash may not exceed the
proceeds available for such purposes under Key Man Life Insurance;
provided, however, to the extent that such Key Man Life Insurance is
unavailable or insufficient, the Borrower may purchase capital stock
owned by any Permitted Owner subject to the limitations set forth in
item (A) of this Subsection 6.12b.
The foregoing notwithstanding, any amount permitted to be expended, pursuant to
items (A) and (B) immediately above, to redeem the capital stock of the Borrower
in the immediate Fiscal Year, but not so expended, may be expended in the next
succeeding Fiscal Year.
ARTICLE II
CONDITIONS PRECEDENT
This Fifth Amendment shall become operative as of the date hereof when
each of the following conditions precedent are satisfied in the judgment of the
Agent or have been waived in writing by the Agent:
(a) Fifth Amendment. Receipt by the Agent on behalf of the
Banks and the Issuing Bank of duly executed counterparts of this Fifth Amendment
from the Borrower and the Required Banks and the Issuing Bank.
(b) Closing Certificate. Receipt by the Agent on behalf of the
Banks of a certificate signed by an Authorized Officer of the Borrower dated as
of even date herewith certifying (i) that the representations and warranties set
forth in the Original Agreement are true and correct in all material respects on
and as of the date of this Fifth Amendment as though made on and as of such
date, except to the extent that such representations and warranties relate
solely to an earlier date (in which case, such representations and warranties
shall have been true and correct on and as of such earlier date), and (ii) that
no Default or Event of Default has occurred.
(c) Pro Forma Projections. Receipt by the Agent of pro forma
financial calculations establishing that had the Borrower borrowed the entire
$10,000,000 for the Common Stock Repurchase Program on or before June 30, 1999,
it would have been in compliance with each of the Fiscal Covenants set forth in
Sections 6.1, 6.2, 6.3 and 6.4 as of June 30, 1999.
(d) Fee. Receipt by the Agent for the pro rata benefit of the
Banks of a fee in the amount of $30,000.
(e) Form U-1. Receipt by the Agent of executed and completed
forms U-1.
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<PAGE> 5
(f) Proceedings Satisfactory. Receipt by the Agent on behalf
of the Banks of evidence that all proceedings taken in connection with this
Fifth Amendment and the consummation of the transactions contemplated hereby and
all documents and papers relating hereto have been completed or duly executed,
and receipt by the Agent on behalf of the Banks of such documents and papers,
all in form and substance reasonably satisfactory to the Agent and Agent's
special counsel, as the Agent or its special counsel may reasonably request in
connection therewith.
ARTICLE III
MISCELLANEOUS
FIRST: Except as expressly amended by this Fifth Amendment, the
Original Agreement and each and every representation, warranty, covenant, term
and condition contained therein is specifically ratified and confirmed.
SECOND: Except for proper nouns and as otherwise defined or amended
herein, capitalized terms used herein which are not defined herein, but which
are defined in the Original Agreement, shall have the meaning given them in the
Original Agreement.
THIRD: This Fifth Amendment has been duly authorized, executed and
delivered by the Borrower.
FOURTH: This Fifth Amendment shall be binding upon and inure to the
benefit of the Borrower, the Banks, the Issuing Bank, the Agent and their
respective successors and assigns.
FIFTH: Nothing in this Fifth Amendment shall be deemed or construed to
be a waiver, release or limitation upon the Agent's or any Bank's exercise of
any of their respective rights and remedies under the Original Agreement or the
other Loan Documents, whether arising as a consequence of any Events of Default
which may now exist, hereafter arise or otherwise, and all such rights and
remedies are hereby expressly reserved.
SIXTH: This Fifth Amendment may be executed in as many different
counterparts as shall be convenient and by the different parties hereto on
separate counterparts, each of which when executed by the Borrower, a Bank, the
Issuing Bank and the Agent shall be regarded as an original. All such
counterparts shall constitute but one and the same instrument.
SEVENTH: This Fifth Amendment shall be a contract made under and
governed by the laws of the Commonwealth of Pennsylvania without regard to the
principles thereof regarding conflict of laws.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE> 6
Executed as of the day and year first above written.
EDUCATION MANAGEMENT CORPORATION
By: /s/ Robert T. McDowell
Name:Robert T. McDowell
Title:Senior Vice President and CFO
PNC BANK, NATIONAL ASSOCIATION, in its
capacity as the Agent, a Bank and the
Issuing Bank
By: /s/ Christine A. Filippi
Name:Christine A. Filippi
Title:Vice President
KEYBANK NATIONAL ASSOCIATION
By: /s/ Lawrence A. Mack
Name:Lawrence A. Mack
Title:Senior Vice President
NATIONAL CITY BANK OF PENNSYLVANIA
By: /s/ Vincent J. Delio, Jr.
Name:Vincent J. Delio, Jr.
Title:Vice President
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<PAGE> 1
EXHIBIT 10.01
THE
EDUCATION MANAGEMENT CORPORATION
RETIREMENT PLAN
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
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QUICK-REFERENCE INFORMATION
Sponsor .................................................................................................1
Other Participating Employers............................................................................1
Plan Administrator.......................................................................................1
Trustee .................................................................................................1
Appeals Authority........................................................................................1
Classification of Employees Eligible to Get Into The Plan................................................2
Minimum Length of Service to Get Into The Plan...........................................................2
Length of Service Required For Benefits (Vesting Schedule)...............................................2
Plan Year Ends Every.....................................................................................2
Plan Number..............................................................................................2
WELCOME TO THE PLAN!
Introduction.............................................................................................3
Individual Accounts......................................................................................3
Contributions............................................................................................3
Payments ................................................................................................3
Plan and Summary Plan Description........................................................................4
Ordinary Names...........................................................................................4
Effective Date...........................................................................................4
HOW YOU GET INTO THE PLAN
Introduction.............................................................................................5
The Eligibility Requirements.............................................................................5
Actually Getting In......................................................................................5
If Things Change.........................................................................................5
TRADING OFF YOUR PAY FOR CONTRIBUTIONS TO THE PLAN
Introduction.............................................................................................6
How Much You Can Trade Off...............................................................................6
How to Do it.............................................................................................6
MATCHING CONTRIBUTIONS
Introduction.............................................................................................7
Rate of Match............................................................................................7
Reports .................................................................................................7
</TABLE>
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<TABLE>
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PROFIT SHARING CONTRIBUTIONS AND FORFEITURES
Introduction.............................................................................................8
Profit Sharing Contributions.............................................................................8
Who Shares in Profit Sharing Contributions...............................................................8
How Much You Get.........................................................................................8
Reports .................................................................................................8
ESOP CONTRIBUTIONS AND FORFEITURES
Introduction.............................................................................................9
ESOP Contributions and Forfeitures.......................................................................9
Who Has an Employer Stock Account........................................................................9
Who Shares in Employer Contributions and Forfeitures.....................................................9
How Much You Get........................................................................................10
Reports ................................................................................................10
INCOMING ROLLOVERS
Introduction............................................................................................10
Direct Rollover.........................................................................................10
Indirect Rollover.......................................................................................10
Rules Applicable to Both Types of Rollover..............................................................10
Approval of Plan Administrator..........................................................................11
Separate Accounting.....................................................................................11
WHAT HAPPENS TO THE MONEY WHILE IT'S IN THE PLAN
Introduction............................................................................................11
"Exclusive Benefit".....................................................................................11
Investment..............................................................................................11
Recordkeeping...........................................................................................11
Return of Contributions.................................................................................11
MAKING YOUR OWN INVESTMENT DECISIONS
Introduction............................................................................................12
The Choices.............................................................................................12
Getting Information.....................................................................................12
Implementing Your Choices...............................................................................12
Your Responsibility.....................................................................................13
WHEN YOU RETIRE OR TERMINATE EMPLOYMENT
Introduction............................................................................................13
Normal Retirement after Age 65..........................................................................13
Early Retirement after Age 55...........................................................................13
Disability..............................................................................................13
</TABLE>
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<TABLE>
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Other Termination of Employment.........................................................................14
Forfeitures.............................................................................................14
Some Special Rules about Termination of Employment......................................................15
WHEN PAYMENT IS ACTUALLY MADE
Introduction............................................................................................15
Normal or Early Retirement or Disability................................................................15
Other Termination of Employment.........................................................................15
Your Choices about Timing...............................................................................16
Latest Possible Date to Take the Money (Or Stock).......................................................16
HOW PAYMENT IS MADE
Introduction............................................................................................17
All Accounts Other than Employer Stock Account..........................................................17
Employer Stock Account..................................................................................17
Having the Money Transferred Directly to Another Plan...................................................17
"Put" Option............................................................................................18
HOW TO CLAIM YOUR MONEY OR STOCK
Introduction............................................................................................19
First-Level Decision....................................................................................19
Appeal .................................................................................................19
Discretionary Authority.................................................................................19
PAYMENT BEFORE TERMINATION OF EMPLOYMENT
Introduction............................................................................................20
Withdrawal of After-Tax Contributions...................................................................20
Age 59 1/2 .............................................................................................20
Age 70 1/2 .............................................................................................20
Hardship ...............................................................................................20
BORROWING MONEY FROM YOUR ACCOUNTS
Introduction............................................................................................21
Eligibility.............................................................................................21
Number .................................................................................................22
Amount .................................................................................................22
Promissory Note.........................................................................................22
Term ...................................................................................................22
Interest ...............................................................................................22
Source and Application of Funds.........................................................................22
Repayment...............................................................................................22
Security ...............................................................................................23
Pre-Payment.............................................................................................23
Default ................................................................................................23
How to Apply............................................................................................23
</TABLE>
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IN CASE OF DEATH
Introduction............................................................................................24
If You're Married and You Were a Participant in the Plan Before May 1, 1992.............................24
If You're Married and Became a Participant in the Plan on or after May 1, 1992..........................25
If You're Not Married...................................................................................25
Naming Your Beneficiary and Getting Spousal Consent.....................................................25
Claiming Your Accounts..................................................................................26
CHILD SUPPORT, ALIMONY AND PROPERTY DIVISION IN DIVORCE
Introduction............................................................................................26
What a Domestic Relations Order Is......................................................................26
What Happens When a Domestic Relations Order Comes In...................................................27
HOW THE LENGTH OF YOUR SERVICE IS CALCULATED
Introduction............................................................................................27
12-Month Periods........................................................................................27
Years of Service........................................................................................28
Full-Time Employees.....................................................................................28
Part-Time Faculty.......................................................................................28
Other Part-Time Employees...............................................................................28
Back Pay ...............................................................................................28
Breaks in Service.......................................................................................28
How Breaks in Service Cancel Years of Service...........................................................29
Service with Related Employers..........................................................................29
WHEN YOU RETURN FROM MILITARY SERVICE
Introduction............................................................................................30
Break in Service........................................................................................30
401(k) Contributions....................................................................................30
Matching Contributions..................................................................................30
Profit Sharing Contributions and ESOP Contributions.....................................................30
Your "Pay"..............................................................................................31
Percentage of Entitlement to Employer Accounts..........................................................31
Limits and Testing......................................................................................31
WHAT THE PLAN ADMINISTRATOR DOES
Introduction............................................................................................31
Reporting and Disclosure................................................................................31
Bonding ................................................................................................32
Numerical Testing.......................................................................................32
Prohibited Transactions.................................................................................32
Expenses ...............................................................................................32
Limitation..............................................................................................32
</TABLE>
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WHAT THE EMPLOYER DOES
Introduction............................................................................................33
Establishment...........................................................................................33
Contributions...........................................................................................33
Employment Records......................................................................................33
Insurance and Indemnification...........................................................................33
Changing the Plan.......................................................................................33
Ending the Plan.........................................................................................34
MAXIMUM AMOUNT OF 401(k) CONTRIBUTIONS
Introduction............................................................................................34
$10,000 Limit...........................................................................................34
If the $10,000 Limit Is Exceeded........................................................................34
Utilization Test........................................................................................35
Who the Restricted Employees Are........................................................................35
Performing the Utilization Test.........................................................................35
If the Utilization Test Reveals a Problem...............................................................36
Returning Excess Contributions..........................................................................37
Combining Plans.........................................................................................37
MAXIMUM AMOUNT OF MATCHING CONTRIBUTIONS
Introduction............................................................................................38
Matching Contributions by Themselves....................................................................38
Matching Contributions in Combination...................................................................38
If this Test of Matching Contributions Reveals a Problem................................................38
MAXIMUM AMOUNT OF TOTAL CONTRIBUTIONS
Introduction............................................................................................39
25% of Pay Limit........................................................................................39
If There's More than One Defined Contribution Plan......................................................39
If There's Also a Defined Benefit Plan..................................................................40
Related Employers.......................................................................................40
IMPROVEMENTS WHEN THE PLAN IS TOP-HEAVY
Introduction............................................................................................40
Who Is in the Concentration Group.......................................................................41
Performing the Concentration Test.......................................................................41
Changes If the Plan Is Top-Heavy........................................................................42
ALTERNATIVE FORM OF PAYMENT FOR GRANDFATHERED MEMBERS
Introduction............................................................................................43
Single Employees........................................................................................43
Married Employees.......................................................................................44
Beneficiary Is Fixed on Your Annuity Starting Date......................................................44
Legal Limitation on Age of Your Beneficiary.............................................................45
Notice from the Plan Administrator......................................................................45
</TABLE>
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<TABLE>
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SPECIAL ESOP PROVISIONS
Introduction............................................................................................45
The Nature of an ESOP...................................................................................45
Investment..............................................................................................46
"Employer Securities"...................................................................................46
Voting .................................................................................................47
Diversification.........................................................................................48
"Nonterminable" Protections and Rights..................................................................49
Non-Allocation under Code Section 409(n)................................................................49
MISCELLANEOUS
What "Pay" or "Compensation" Means......................................................................50
Leased Employees........................................................................................50
Family and Medical Leave................................................................................50
Changes in Vesting Schedule.............................................................................51
Non-Alienation..........................................................................................51
Payments to Minors......................................................................................51
Unclaimed Benefits......................................................................................51
Plan Assets Sole Source of Benefits.....................................................................51
No Right to Employment..................................................................................51
Profit Sharing and Stock Bonus Plan.....................................................................51
Merger of Plan..........................................................................................52
Protection of Benefits, Rights, and Features from Previous Edition of Plan..............................52
Governing Law...........................................................................................52
No PBGC Coverage........................................................................................52
Statement of ERISA Rights...............................................................................52
SPECIAL ARRANGEMENTS FOR NEW PARTICIPATING EMPLOYERS
Introduction............................................................................................53
Illinois Institute of Art...............................................................................53
New York Restaurant School..............................................................................53
Art Institutes International Portland, Inc..............................................................54
</TABLE>
<PAGE> 8
QUICK-REFERENCE INFORMATION
SPONSOR
Education Management Corporation
300 Sixth Avenue, Suite 800
Pittsburgh, PA 15222
Employer identification number assigned by the IRS: 25-1119571
OTHER PARTICIPATING EMPLOYERS
The other participating employers are listed on Appendix A, which appears at the
end of the plan
PLAN ADMINISTRATOR
Retirement Committee
c/o Education Management Corporation
300 Sixth Avenue, Suite 800
Pittsburgh, PA 15222
Telephone (412) 562-0900
TRUSTEE
Fidelity Management Trust Company
82 Devonshire Street
Boston, MA 02109
(Prior to the merger of the ESOP into the Retirement Plan,
the trustee of the assets of the ESOP was:
Marine Midland Bank
One Marine Midland Center, 17th Floor
P. O. Box 4567
Buffalo, NY 14240)
APPEALS AUTHORITY
Retirement Committee
c/o Education Management Corporation
300 Sixth Avenue, Suite 800
Pittsburgh, PA 15222
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<PAGE> 9
CLASSIFICATION OF EMPLOYEES ELIGIBLE TO GET INTO THE PLAN
All employees of the employer who are classified by the employer as salaried,
clerical or hourly employees, except for (a) individuals matriculated in an
employer with an enrollment agreement (i.e., students) and (b) members of a
collective bargaining unit unless the collective bargaining agreement provides
for participation in this plan. Independent contractors are not employees of the
employer, nor are workers whose services are leased from a leasing organization
(such as "temps"), and they are therefore not eligible for the plan.
MINIMUM LENGTH OF SERVICE TO GET INTO THE PLAN
One year of service. (This doesn't necessarily mean 12 months. You may be
credited with a "year of service" after just 900 hours of service. This is
explained in the plan under the heading "How the Length of Your Service Is
Calculated.")
LENGTH OF SERVICE REQUIRED FOR BENEFITS (VESTING SCHEDULE)
less than 3 years of service..................................................0%
3 years of service...........................................................20%
4 years of service...........................................................40%
5 years of service...........................................................60%
6 years of service...........................................................80%
7 years of service or more..................................................100%
PLAN YEAR ENDS EVERY December 31
PLAN NUMBER 001
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<PAGE> 10
WELCOME TO THE PLAN!
INTRODUCTION. This is the Retirement Plan sponsored by Education
Management Corporation, which we will call "the sponsor." It is maintained by
the sponsor and the other participating employers identified above in the
section called "Quick-Reference Information" under the heading "Other
Participating Employers."
Please note: The sponsor used to maintain two separate plans the
Retirement Plan and the Employee Stock Ownership Plan. To simplify
administration and make it easier for you to understand your retirement
benefits, they have now been consolidated into a single plan, and this
is it.
INDIVIDUAL ACCOUNTS. Simply put, the plan consists of a series of
individual accounts set up for the employees who are in the plan. Actually, an
employee may have a number of different accounts:
- a 401(k) account (if you choose to trade off pay for contributions
to the plan),
- a match account (again, if you choose to trade off pay for
contributions to the plan),
- a profit sharing account,
- an employer stock account (if you are eligible to participate in the
ESOP portion of the plan), and
- a rollover account (if you roll money into this plan from another
plan).
Employees who were in this plan (that is, the Retirement Plan) before May 1,
1992 and who made after-tax employee contributions also have an after-tax
contribution account for those after-tax employee contributions.
CONTRIBUTIONS. Money goes into your 401(k) account if you choose to
trade off pay for a contribution to the plan. If you do, the employer matches
your 401(k) contributions (as described later in the plan); the matching
contributions go into your match account.
The employer is permitted (but not required) to make additional
contributions beyond your 401(k) contributions and any matching contributions.
Your share of any additional contributions goes into your profit sharing
account.
And if you are eligible to participate in the ESOP portion of the plan,
your employer stock account participates in any forfeitures from the employer
stock accounts of other participants who leave before becoming fully vested.
PAYMENTS. While the money is in the plan, it is invested in accordance
with your investment instructions (except for any employer stock account, of
course, which is invested in employer stock). Then, after you leave the company,
you are entitled to all of the money in your 401(k) account (and any rollover
account or after-tax employee contribution account, if you have one). Depending
on the length of your service, you may be entitled to part or all of the money
in your match account and your profit sharing account and the stock in your
employer stock account.
-3-
<PAGE> 11
Please note: Federal law may require withholding or other taxes on the
money that you are paid from this plan. The plan administrator will
naturally comply with any such law. But for the sake of simplicity, we
will say here in the plan that you will receive "all the money." Just
keep in mind that "all the money" is before any required withholding or
other taxes.
PLAN AND SUMMARY PLAN DESCRIPTION. The plan document that's what this
is sets out the rules for how and when you get into the plan, how and when money
goes into your accounts, what happens to the money while it's in the plan, and
how and when you can get the money out.
This plan is written in simple, easy-to-understand language. Therefore,
it serves as both the plan document and the "summary plan description" required
by federal law.
ORDINARY NAMES. Throughout the plan, we will refer to things by their
ordinary names. We will call this plan simply "the plan." We will call the
sponsor which is identified in the section called "Quick-Reference Information"
simply "the sponsor." When we say "employer," we mean the sponsor or one of the
other participating employers whichever one employs you. When we say "you," we
mean you the employee (or former employee) who participates in the plan. When we
say "Code," we mean the federal Internal Revenue Code of 1986, as in effect from
time to time.
There is one exception to this rule. From time to time, we will refer
to your "pay" or "compensation." Unfortunately, those terms have highly
technical meanings, which can change for different purposes under the plan. The
various technical definitions are set forth at the end of the plan under the
heading "Miscellaneous."
EFFECTIVE DATE. This consolidated plan takes effect on April 7, 1999.
As of that date, the Education Management Corporation Employee Stock Ownership
Plan is hereby merged into the Education Management Corporation Retirement Plan,
with the Retirement Plan as the surviving plan. This document constitutes the
merger document and represents an amendment of the Employee Stock Ownership
Plan, too, to effectuate the merger.
This restatement of the Education Management Corporation Retirement
Plan including the merger of the Employee Stock Ownership Plan is conditional
upon approval by the Internal Revenue Service. Sometimes, the IRS asks for
minor, technical changes in order to give their approval, but if any such
changes are made, we will let you know.
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<PAGE> 12
HOW YOU GET INTO THE PLAN
INTRODUCTION. Before you can get any benefit from the plan, you have to
get into the plan. This part of the plan document explains how you get in.
THE ELIGIBILITY REQUIREMENTS. There are three requirements in order to
be eligible to get into the plan:
- First, you have to be an employee of the employer. Remember, when we
say "the employer," we mean the sponsor or one of the other participating
employers whichever one employs you.
- Second, you must be working in the classification of employees
identified at the beginning of the plan in the section called "Quick-Reference
Information" under the heading "Classification Of Employees Eligible To Get Into
The Plan."
- Third, you must have worked for the employer for the period shown at
the beginning of the plan in the section called "Quick-Reference Information"
under the heading "Minimum Length Of Service To Get Into The Plan." (To figure
out whether you meet this requirement, see "How The Length Of Your Service Is
Calculated," later in the plan.)
Any special arrangements that might be made for employees of new
participating employers are described at the end of the plan in the section
called "Special Arrangements for New Participating Employers."
ACTUALLY GETTING IN. As soon as you meet all of the eligibility
requirements at the same time, you are enrolled in the plan on the next January
1 or July 1. Enrollment is automatic; you don't have to fill out any forms just
to get into the plan. But you do have to complete the appropriate form and file
it with the plan administrator if you want to:
- trade off pay for contributions to the plan, as explained in the
following section called "Trading Off Your Pay for Contributions to the Plan,"
or
- direct the investment of your accounts into any investment option
other than the default investment option, as explained later in the section
called "Making Your Own Investment Decisions," or
- name a beneficiary for any benefits that may be payable after your
death, as explained in the section called "In Case of Death."
IF THINGS CHANGE. If at any time you cease to be an employee of the
employer or you cease to be employed in the classification of employees who are
eligible to get into the plan, then your participation in the plan ceases
immediately and automatically. (If you later return to employment with the
employer in the classification of eligible employees, you will participate in
the plan again immediately. It may be necessary to sign a new authorization
form, as described in the next section.)
Of course, after you leave the plan, you may still be entitled to
receive the money in your account. (We will discuss this later in the section
called "When You Retire or Terminate Employment.") And you remain entitled to
direct the investment of the money in your account until it is paid or
forfeited.
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<PAGE> 13
TRADING OFF YOUR PAY FOR CONTRIBUTIONS TO THE PLAN
INTRODUCTION. You may have heard about plans called "401(k)" plans.
That's what this is. It offers you the opportunity to trade off your pay for
contributions to the plan. It is particularly attractive because, under the
current federal income tax law, you don't pay current federal income tax on the
amount of pay that you trade off for a contribution to the plan.
Please note: While free from federal income tax, these amounts are
still subject to Social Security tax (FICA) and state and local income
tax in Pennsylvania and a few other states.
HOW MUCH YOU CAN TRADE OFF. You can trade off any percentage of your
pay, expressed in whole numbers, up to 10% of your pay.
HOW TO DO IT. If you would like to trade off some of your pay in return
for a contribution to the plan, you complete a form authorizing the employer to
reduce your pay by a certain percentage and, instead of paying it to you in
cash, to put that amount into your 401(k) account in the plan.
There are several simple rules for making contributions by this method
(these rules were created by the IRS):
- You must sign an agreement with the employer to do this. (The plan
administrator will provide you with the forms at the appropriate time or on
request.)
- The agreement only applies to pay that you earn after the agreement
is signed. (In other words, you can't make this type of contribution
retroactively).
- You can terminate the agreement at any time by filing a new form with
the plan administrator showing zero as the rate of contribution, but the
agreement still applies to all pay that was earned while the agreement was in
effect. (In other words, you can't terminate the agreement retroactively.)
- You can change your agreement at any time, but the change will take
effect at the beginning of the following month.
Whenever a contribution is made by this method, you will see it on your
pay stub. From this point forward in the plan, we will call these your "401(k)
contributions."
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MATCHING CONTRIBUTIONS
INTRODUCTION. In order to encourage employees to make 401(k)
contributions (in other words, to encourage savings for retirement), the
employer agrees to make an additional contribution to the plan on your behalf if
you make 401(k) contributions. This is called a matching contribution and it is
an additional contribution on top of your pay.
RATE OF MATCH. The employer agrees to make an additional contribution
to the plan of $1 for every dollar of 401(k) contributions that you choose to
make up to 3% of your pay plus $.50 for every dollar of 401(k) contributions
from 4% to 6% of your pay. Here is a table showing the match that would apply to
various levels of 401(k) contributions:
401(k) Contributions Match
-------------------- -----
1% 1%
2% 2%
3% 3%
4% 3.5%
5% 4%
6% - 10% 4.5%
Matching contributions are made each pay period. (Please note: a
mid-month advance for an employee who is paid monthly does not count as a pay
period, so no 401(k) contributions will be taken from mid-month advances. The
full 401(k) contribution will be taken from the paycheck that is cut at the end
of the pay period.)
With one exception, the matching contribution is calculated separately
for each pay period, based on your 401(k) contributions for that pay period
alone, not on a cumulative basis during the plan year. For example, if your rate
of 401(k) contributions is less than 6% for a particular pay period (so you're
not getting the maximum available matching contribution), you can't make it up
by boosting your rate to more than 6% in some future pay period. And if your
401(k) contributions reach the dollar limit described later in the plan in the
section called "Maximum Amount of 401(k) Contributions" (and therefore stop)
before the end of the year, your matching contributions will stop at the same
time. As an exception, however, effective January 1, 1999, if you have
maintained a rate of 401(k) contributions of 6% or more throughout the plan year
but your matching contributions stop because you reach the dollar limit on
401(k) contributions before the end of the year, the employer will make a
"catch-up" matching contribution, as soon as administratively possible at the
end of the plan year, in whatever additional amount is necessary to provide you
with the maximum available matching contribution for the plan year.
REPORTS. The employer's matching contribution is added to your match
account. When the employer contributes in this manner, you will see it on your
quarterly statement.
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PROFIT SHARING CONTRIBUTIONS
AND FORFEITURES
INTRODUCTION. In addition to 401(k) contributions that you choose to
make, and the matching contributions that go with them, the employer can make
profit sharing contributions whenever it chooses to do so. Also, if participants
in the plan leave before becoming entitled to all of the money in their profit
sharing accounts, the unvested portion is forfeited and re-distributed among the
remaining participants in the same manner as a profit sharing contribution.
PROFIT SHARING CONTRIBUTIONS. The employer is under no obligation to
contribute to the plan in this manner. If the employer contributes in this
manner, its contribution is on top of your pay. That is, the employer makes the
contribution out of its own money; you don't have to trade off any pay to get
it. We will call these "profit sharing contributions."
WHO SHARES IN PROFIT SHARING CONTRIBUTIONS. If the employer makes a
profit sharing contribution (or there are forfeitures from profit sharing
accounts), the amount is allocated as of the last day of the plan year
(currently, December 31) among the individual accounts of all the participants
in the plan who meet both of these requirements:
- you completed a year of service during that plan year (see "How the
Length of Your Service Is Calculated," later in the plan, for what constitutes a
"year of service") and
- you were employed by the employer on the last day of the plan year,
currently December 31 (or you retired during the year, became disabled during
the year or died during the year).
Keep in mind that only employees who have joined the plan are entitled
to share in profit sharing contributions. If you do not enter the plan until
January 1, you do not share in the profit sharing contributions for the
preceding year, because you were not a participant in the plan on the preceding
December 31.
HOW MUCH YOU GET. Profit sharing contributions (and forfeitures from
profit sharing accounts) are divided in proportion to each employee's pay from
the employer during that year so everybody gets an amount equal to the same
percentage of pay added to his or her account.
REPORTS. A profit sharing contribution by the employer (or your share
of any forfeitures from profit sharing accounts) is added to your profit sharing
account. When the employer contributes in this manner, you will see it on your
quarterly statement.
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<PAGE> 16
ESOP CONTRIBUTIONS
AND FORFEITURES
INTRODUCTION. The ESOP loan has been paid off, so no more ESOP
contributions by the employer are contemplated (as explained near the end of the
plan in the section called "Special ESOP Provisions"). But there are forfeitures
from time to time, and they are allocated in the same manner as ESOP
contributions, so it is useful to describe the system.
ESOP CONTRIBUTIONS AND FORFEITURES. The employer is under no obligation
to make ESOP contributions to the plan but may do so at its discretion. However,
if employees in the plan leave before becoming entitled to all of the stock in
their employer stock accounts, the unvested portion is forfeited and
re-distributed among the employer stock accounts of employees remaining in the
plan in the same manner as an ESOP contribution by the employer (we'll call
these "ESOP forfeitures" to distinguish them from forfeitures of matching
contributions or profit sharing contributions).
WHO HAS AN EMPLOYER STOCK ACCOUNT. Not everyone in the plan has an
employer stock account. There are two categories of employees who have employer
stock accounts:
- Everyone who had an account in the Education Management Corporation
Employee Stock Ownership Plan before it was merged into this plan, effective
April 7, 1999, still has an employer stock account. It is the same account that
he or she had under the ESOP; now it is maintained under this plan instead.
- Everyone who receives an allocation of ESOP contributions or
forfeitures in accordance with the following subsection also has an employer
stock account, in which those ESOP contributions or forfeitures are held.
WHO SHARES IN EMPLOYER CONTRIBUTIONS AND FORFEITURES. For each plan
year, ESOP forfeitures (and ESOP contributions, if any) are allocated as of the
last day of the plan year (currently, December 31) among the employer stock
accounts of employees in the plan who meet both of these requirements:
- You were employed on the last day of the plan year by an employer
that participates in the ESOP feature of the plan (or you retired from such an
employer during the year, became disabled from such an employer during the year,
or died during the year while employed by such an employer).
Please note: Not all employers who participate in the 401(k) feature of
the plan participate in the ESOP feature. To find out if your employer
participates in the ESOP feature, look at the list of participating
employers on Appendix A at the end of this plan: employers that do not
participate in the ESOP are denoted with an asterisk.
- You completed a year of service during that plan year (see "How the
Length of Your Service Is Calculated," later in the plan, for what constitutes a
"year of service").
Keep in mind that only employees who have joined the plan are entitled
to share in ESOP forfeitures. If you do not enter the plan until January 1, you
do not share in the ESOP forfeitures for the preceding year, because you were
not a participant in the plan on the preceding December 31.
HOW MUCH YOU GET. ESOP forfeitures (and ESOP contributions, if any) are
divided in proportion to each eligible employee's pay from the employer during
that year so everybody gets an amount equal to the same percentage of pay added
to his or her employer stock account. (If you are still technically employed by
the sponsor or another employer that participates in the ESOP, so that you are
entitled to share in ESOP contributions or forfeitures, but some of your pay
comes from another employer that does not participate in the ESOP feature, your
pay from both employers will be taken into account for this purpose.)
REPORTS. Your share of ESOP forfeitures (and ESOP contributions, if
any) is added to your employer stock account as of the last day of the plan
year. You will see the amount on your quarterly statement.
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<PAGE> 17
INCOMING ROLLOVERS
INTRODUCTION. There is one other way that money can come into the plan
for you. That is when money is transferred from another plan. It is called a
"rollover," and this section will explain how it works.
DIRECT ROLLOVER. If you are entitled to get money from a pension,
profit sharing or stock bonus plan, and it constitutes an "eligible rollover
distribution" under the Code, that plan must offer you the opportunity to have
the money transferred directly to another plan (instead of paid to you in cash)
if you can find a plan that will take it.
This plan will take a direct transfer of that type, if all of the other
rules of this section are met. (This is what the law calls a "direct rollover.")
INDIRECT ROLLOVER. Instead of choosing a direct rollover from that
other plan to this plan, you may choose to take the money in cash from that
other plan. If you do, and you get what the law calls an "eligible rollover
distribution," you can still make a rollover to this plan if:
- you deliver a check to the plan administrator not later than the 60th
day after you received the money from the other plan, or
- put the money in a "conduit" individual retirement account within 60
days after you received the money from the other plan, never make any other
contributions to that conduit IRA, and then transfer all of that money to this
plan; and
- all of the other rules of this section are met.
The rules of the Code for indirect rollovers are very strict and can be
very tricky. This plan does not attempt to explain those rules. You should
consult the tax advisor of your choice.
RULES APPLICABLE TO BOTH TYPES OF ROLLOVER. This plan will not accept
any rollover that does not comply with the requirements of the Code. Foremost
among them is the requirement that the rollover come from a pension, profit
sharing or stock bonus plan that is qualified under section 401(a) of the Code.
In addition, this plan is set up to be generally exempt from the joint
and survivor annuity rules of the Code. This plan will not accept any transfer
of assets from another plan if the effect would be to make this a "transferee
plan" subject to those rules.
APPROVAL OF PLAN ADMINISTRATOR. If you would like to make a rollover to
this plan, get in touch with your local director of human resources, who can
give you the forms. The plan administrator has complete authority to deny any
requested rollover if the person requesting the rollover is unable or unwilling
to satisfy the plan administrator that the rollover complies with these rules
and will not jeopardize the intended status and operation of the plan.
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<PAGE> 18
SEPARATE ACCOUNTING. If the plan accepts a rollover on your behalf,
that rollover will be put into a separate account for you separate from your
401(k) account, your match account, your profit sharing account and your
employer stock account (if any).
WHAT HAPPENS TO THE MONEY
WHILE IT'S IN THE PLAN
INTRODUCTION. As required by law, the individual accounts of the
employees in the plan are held in trust by the trustee identified at the
beginning of the plan in the section called "Quick-Reference Information" under
the heading "Trustee." A trust is a pool of assets held by an individual or
company (such as a bank) who is called the "trustee." All contributions to the
plan are paid in cash to the trustee.
"EXCLUSIVE BENEFIT". The trustee holds the assets of the plan for the
exclusive benefit of the employees in the plan that is, exclusively for the
purposes of providing benefits to participants and beneficiaries of the plan and
defraying the reasonable expenses of administering the plan.
INVESTMENT. Assets held by the trustee are invested by the trustee in
accordance with the terms of the plan. Except for employer stock accounts, the
plan gives you free choice among a number of different investment funds (as
described in the following section of the plan). Employer stock accounts are
invested in employer stock, as described in more detail near the end of the plan
in the section called "Special ESOP Provisions."
RECORDKEEPING. Though the money is all pooled together for investment
purposes, you still have one or more individual accounts. The plan administrator
is responsible for keeping track of your individual accounts.
The investments are valued daily. But the government requires us to say
here that the plan administrator will figure out the total value of the
investments of the plan at the end of every year. If the value has gone up since
the last valuation, then all of the accounts will be increased in the same
proportion. If the value has gone down since the last valuation, then all of the
accounts will be decreased in the same proportion. The plan administrator will
give you periodic reports of the value of your account.
RETURN OF CONTRIBUTIONS. Except for a few unusual circumstances, once
the employer puts money into the plan, the money can never come back to the
employer. Here are the exceptions:
- If the employer made the contribution by mistake of fact, then it can
be returned within 1 year after the contribution was made.
- All contributions by the employer are made on the condition that they
are deductible by the employer for federal income tax purposes. If any part of a
contribution is disallowed, that part of the contribution can be returned to the
employer within 1 year after disallowance of the deduction.
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<PAGE> 19
- If this plan fails to qualify initially for favorable tax treatment
under the Code, then all contributions can be returned to the employer, as long
as an application for determination on the plan was filed with the Internal
Revenue Service by the due date of the employer's return for the taxable year in
which the plan was adopted.
MAKING YOUR OWN
INVESTMENT DECISIONS
INTRODUCTION. This plan allows you to have considerable control over
how your money is invested. This section of the plan will explain how you do it.
Keep in mind that this section applies to all of your accounts except your
employer stock account, which is invested in employer stock (but can be
diversified after age 55 and 10 years of participation in the plan), as
described in more detail near the end of the plan in the section called "Special
ESOP Provisions."
THE CHOICES. The plan offers a number of choices. They are listed on
Appendix B, which is a separate sheet that forms a part of this plan and which
also includes a brief description of each alternative (taken from information
published by Fidelity).
The choices may change from time to time. When they do, you will be
given a new Appendix B showing all of the choices that are in effect after the
change is made.
GETTING INFORMATION. The plan administrator cannot tell you which
investment choice is best for you; that is your decision alone, and the plan
administrator is not licensed as an investment advisor.
But the plan administrator will provide you with more specific
information about the choices, including exactly what each fund is invested in,
who runs each fund, and how each fund has performed in the past. We hope this
information will be helpful to you in making your choices.
IMPLEMENTING YOUR CHOICES. When you first join the plan, you will be
asked to make your investment choices on a form available from the plan
administrator. Fill it out and return it to the plan administrator.
After joining the plan, you can change your investment choices whenever
you like during normal business hours. Just call the trustee (Fidelity) on the
toll-free number shown in the materials that you receive from the trustee. A
representative will guide you through making the change.
If for any reason there is no current investment direction on file for
you with the trustee, the plan hereby requires that your accounts
(other than your employer stock account, if any) be invested in the
Managed Income Portfolio, and neither the plan administrator nor the
trustee nor any other fiduciary of the plan shall have any authority or
discretion to direct otherwise. The same applies to any portion of your
investment direction that becomes out of date, such as if you have
chosen a particular fund and that fund is no longer offered (unless a
substitute fund is automatically provided).
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<PAGE> 20
YOUR RESPONSIBILITY. In return for complete freedom to choose how your
accounts are invested among the available investment funds, you take complete
responsibility for your choices. No one else is responsible for helping you or
keeping you from making bad decisions. In fact, no one monitors your decisions
at all.
This plan is designed to take advantage of section 404(c) of the
Employee Retirement Income Security Act of 1974, as amended, which means that
the plan administrator and the trustee and all other fiduciaries of the plan are
relieved of any and all responsibility for the investment decisions that you
make.
WHEN YOU RETIRE OR
TERMINATE EMPLOYMENT
INTRODUCTION. This is a retirement plan. The purpose is for both you
and the employer to save for your retirement. This section will explain when you
can get your money (or stock, in the case of an employer stock account).
NORMAL RETIREMENT AFTER AGE 65. If your employment with the employer
terminates any time on or after your 65th birthday, you are entitled to all the
money in your 401(k) account, match account, and profit sharing account, as well
as all of the money in your after-tax contribution account and rollover account,
if you have them. In addition, you are entitled to all of the stock and cash in
your employer stock account (and cash equal to any fractional share of stock).
EARLY RETIREMENT AFTER AGE 55. If your employment with the employer
terminates any time before age 65 but after age 55 and you have completed at
least 7 years of service, you are entitled to all the money in your 401(k)
account, match account, and profit sharing account, as well as all of the money
in your after-tax contribution account and rollover account, if you have them.
In addition, you are entitled to all of the stock and cash in your employer
stock account (and cash equal to any fractional share of stock). (To figure out
your length of service, see the section entitled "How Your Length Of Service Is
Calculated.")
DISABILITY. If you become permanently and totally disabled, then you
are entitled to all the money in your 401(k) account, match account, and profit
sharing account, as well as all of the money in your after-tax contribution
account and rollover account, if you have them. In addition, you are entitled to
all of the stock and cash in your employer stock account (and cash equal to any
fractional share of stock).
For this purpose, "totally and permanently disabled" means that, in the
opinion of a physician selected by the plan administrator, you are unable to
engage in any substantially gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to result in
death or to be of long, continued and indefinite duration.
OTHER TERMINATION OF EMPLOYMENT. If your employment with the employer
terminates before normal or early retirement or disability (as just described),
you are entitled to receive all the money in your 401(k) account, as well as all
of the money in your after-tax contribution account and rollover account, if you
have them.
In addition, you are entitled to receive part or all of the money in
your match account, your profit sharing
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<PAGE> 21
account, and your employer stock account (if you have them) if you completed at
least 3 years of service before your employment terminated. Whether you get all
or just a portion of your match account, profit sharing account, and employer
stock account depends on your length of service. At the beginning of the plan,
in the section called "Quick-Reference Information," under the heading "Length
Of Service Required For Benefits," there is a table showing what percentage of
these accounts you get. (To figure out your length of service, see the section
entitled "How Your Length Of Service Is Calculated.")
FORFEITURES. Aside from normal and early retirement and disability, if
your employment terminates before you have completed at least 3 years of
service, you are not entitled to any of the money in your match account or
profit sharing account or any of the stock or cash in your employer stock
account. As soon as you suffer a break in service year (as described below under
the heading "How the Length of Your Service Is Calculated"), those accounts are
forfeited.
If you have completed at least 3 years of service but not 7 years of
service, you are entitled to some but not all of the money (or stock) in those
accounts. If you take the portion to which you are entitled, the balance is
forfeited as soon as your suffer a break in service year. If you choose to leave
the money in the plan, the balance is forfeited when you have five consecutive
break in service years (or when you take the money, if you take it before then).
With respect to your employer stock account, forfeitures are taken first from
any cash in your account; they are taken from stock allocated to your account
only as a last resort.
If you are later re-employed, the amount of the forfeiture (with no
adjustment for subsequent gains, losses, or expenses) will be restored to your
accounts if, and only if, you re-pay the full amount that you previously
received from the plan. Re-payment must be made within 5 years after you are
first re-employed and before you suffer 5 break in service years in a row (as
described below under the heading "How The Length Of Your Service Is
Calculated").
The money or stock to restore each of your accounts (match, profit
sharing or employer stock) will come from forfeitures from accounts of the same
type occurring during the same year when restoration is required. If those
forfeitures are inadequate, the employer will contribute the balance in cash.
Any balance of forfeitures from any one type of account (match, profit sharing
or employer stock) during a plan year in excess of what is necessary to restore
accounts of the same type during that year will be used as follows:
- forfeitures from match accounts will be applied toward the employer's
obligation to make matching contributions and allocated as if they were matching
contributions, thus reducing the amount of cash contribution necessary from the
employer to make the required matches,
- forfeitures from profit sharing accounts will be allocated as if they
were discretionary employer contributions, and
- forfeitures from employer stock accounts will be allocated as if they
were ESOP contributions.
SOME SPECIAL RULES ABOUT TERMINATION OF EMPLOYMENT. When we say your
"employment with the employer terminates," we mean that you are no longer
employed by any employer that participates in the plan nor by any other member
of the controlled group of trades or businesses (as described later in the plan
under the heading "How The Length Of Your Service Is Determined"). In addition,
we mean that you have a "separation from service" that permits you to receive
your 401(k) contributions under the rules of section 401(k) of the Code and the
regulations under that section.
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<PAGE> 22
WHEN PAYMENT IS
ACTUALLY MADE
INTRODUCTION. The preceding section described what you are entitled to
when you retire or your employment terminates for some other reason. This
section will go on to describe when payment is actually made, which depends on a
number of factors.
NORMAL OR EARLY RETIREMENT OR DISABILITY. If you take normal or early
retirement or suffer disability (as described in the preceding section), payment
is made as soon as administratively possible after your termination of
employment.
OTHER TERMINATION OF EMPLOYMENT. If your employment terminates for any
reason other than normal or early retirement or disability, the time of payment
is different for different types of accounts.
401(k) Account, After-Tax Account, Rollover Account
---------------------------------------------------
Payment of the money in your 401(k) account, after-tax account, and
rollover account (if you have them) is made as soon as administratively possible
after your termination of employment.
Match Account, Profit Sharing Account
-------------------------------------
Payment of your match account and profit sharing account (if you have
them) will not be made until you have a "break in service." Breaks in service
are described later in the plan under the heading "How the Length Of Your
Service Is Calculated."
Employer Stock Account
----------------------
Payment of your employer stock account will be made:
- in 1999, if your employment with the employer ended during 1996 or
1997,
- in 2000, if your employment with the employer ended during 1998, or
- if your employment with the employer ends after 1998, as soon as
administratively feasible after you suffer a break in service year (as described
below under the heading "How the Length of Your Service Is Calculated").
Payment of your employer stock account will be made during the calendar quarter
that corresponds to the calendar quarter in which your employment terminated.
For example, if your employment terminated in the second quarter of 1997,
payment of your employer stock account will be made in the second quarter of
1999.
YOUR CHOICES ABOUT TIMING. If your entitlement is $5,000 or less, you
do not have any choices about timing. You must take the money (or stock) when
you are first entitled to payment. (For distributions before March 22, 1999,
there was an additional rule that your entitlement was never more than $5,000 on
the occasion of any previous distribution.) If your entitlement is $5,000 or
less, the plan administrator will notify you and, if you don't initiate a
withdrawal by calling the trustee, will direct the trustee to pay you your
entitlement.
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<PAGE> 23
But if your entitlement is more than $5,000, payment will not be made
unless and until you apply for it. This gives you some ability to postpone
payment. When you want to take the money (or stock), start the process by
calling the trustee (Fidelity) at (800) 835-5092. The trustee will prepare the
paperwork and send it to you. Then you check it, sign it if it's correct, and
forward it to the plan administrator. The plan administrator will need a little
time to process your application. If your application is approved, the plan
administrator will direct the trustee to pay the money (or stock).
The law says that, after your employment terminates, you must receive
the money (or stock) no later than 60 days after the close of the plan year in
which your employment terminated (or you attain age 65, if later) unless you
choose not to take it. If you don't apply for the money by that date, we will
interpret your silence as your choice not to take the money yet.
LATEST POSSIBLE DATE TO TAKE THE MONEY (OR STOCK). While you have some
ability to postpone payment of your benefit, you can't postpone it forever. Once
your employment has terminated and you have reached age 70, you must at least
begin to take the money by April 1 of the following year (that is, April 1 of
the year following the year in which your employment with the employer
terminates or you attain age 70, whichever comes later). Then you must take
more by the end of that plan year and every following plan year on a schedule
that does not extend beyond your life expectancy (or the joint life expectancies
of you and your designated beneficiary). Life expectancy is determined by tables
issued by the Internal Revenue Service and will be re-determined every year. (Of
course, you may take all the money to which you are entitled at any time after
age 70; you need not string it out.)
Please note: There is a stricter rule for 5% owners. Any employee who
is a 5% owner upon attainment of age 70 must begin to take the money
by April 1 of the following year even if he or she remains employed.
The plan administrator will pay you whatever is necessary to comply
with this provision of the law (section 401(a)(9) of the Code, including the
"minimum incidental death benefit" rules) even if you don't apply for payment.
Payments that are required to be made under this section can not be transferred
to another plan in a direct rollover.
HOW PAYMENT IS MADE
INTRODUCTION. When your employment has terminated and the time comes
for payment, the next question is, In what form is the payment made? This
section will answer that question.
ALL ACCOUNTS OTHER THAN EMPLOYER STOCK ACCOUNT. The normal form of
payment for all accounts other than your employer stock account(if you
have one) is payment in a single sum by check made payable to you.
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<PAGE> 24
Alternatively, if you were a member of this plan (that is, the
Retirement Plan) before May 1, 1992, you may choose to receive your benefit in
the form of an annuity contract purchased from an insurance company, rather than
in a lump sum payment. Because the rules are rather complicated and nobody has
ever actually chosen to receive an annuity contract, we have relegated this
alternative to its own section of the plan, near the end, entitled "Alternative
Form of Payment for Grandfathered Members."
EMPLOYER STOCK ACCOUNT. Now that the stock of Education Management
Corporation is publicly traded, the form of payment of your employer stock
account is always the same form in which your account is invested. That is, any
stock in your account is paid in stock, either by having the stock issued in
your name and sending the actual stock certificate to you or your account at
some institution or, if the trustee can do it, by making a wire transfer to a
brokerage account that you designate. Any cash is paid in the form of cash,
except that you have the right to demand payment of the cash portion of your
account in stock. Any remaining partial share of stock is paid in cash, of
course.
You may take payment of your employer stock account in a single
payment. Or, if you prefer, you may take your account in annual installments
over two, three, four or five years. If you take it in installments, each annual
payment is equal to the amount in your account, divided by the number of
remaining payments. For example, if you chose to take your employer stock
account in annual installments over five years, when the first payment was to be
made, there would be 5 remaining payments, so you would get 1/5 of the amount in
your account at that time. The next year, there would be 4 remaining payments,
so you would get 1/4 of the amount in your account at that time. Eventually, in
the fifth year, there would be only 1 remaining payment, so you would get 1/1
(that is, all) of the amount in your account at that time.
After receiving stock from the trustee, it's yours to keep or sell on
the open market, as you see fit. (The stock is publicly traded.)
HAVING THE MONEY TRANSFERRED DIRECTLY TO ANOTHER PLAN. Rather than
taking the money (or stock) and paying taxes on it when the time comes for
payment, you may be able to make a "direct rollover" to another plan.
Direct rollovers can be made to plans of these types:
- a pension, profit sharing or stock bonus plan that is qualified under
section 401(a) of the Code, or
- an individual retirement account or individual retirement annuity
(IRA), or
- an annuity plan described in section 403(a) of the Code.
This might happen, for example, if you get another job and the plan of your new
employer will accept the transfer. Naturally, this plan will not make the
transfer if the other plan will not accept it.
All payments from this plan are eligible for direct rollover except the
following:
- any payment to the extent that it is required because you have
reached age 70,
- effective for payments after 1999, any hardship distribution of
401(k) contributions, and
- any payment under an annuity contract that has been purchased for and
given to you as described near the end of the plan in the section called
"Alternative Form of Payment for Grandfathered Members."
If the money that you are about to receive is eligible for direct
rollover to another plan, the plan
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<PAGE> 25
administrator will notify you and give you at least 30 days to decide whether
you would like to have a direct rollover to another plan. On the other hand, you
don't have to wait 30 days; you may take the money or do the direct rollover as
soon as 7 days after receiving notification from the plan administrator, as long
as you sign the appropriate form waiving your right to consider your decision
for 30 days.
"PUT" OPTION. In the unusual event that the stock of Education
Management Corporation that you receive is subject to a restriction under any
federal or state securities law, any regulation thereunder, or an agreement
affecting the security, that would make the security not as freely tradable as a
security not subject to restriction, you are entitled to make Education
Management Corporation buy the stock back from you for cash. This is officially
known as a "put option" and it also applies to any beneficiary of yours. Here
are the rules:
- You can exercise the put option at any time within 60 days after you
get the stock or during a corresponding window period of 60 days during the
following plan year. (The time will be extended by any period during which
Education Management Corporation is prohibited by law from buying the stock back
from you.)
- You exercise your put option by notifying Education Management
Corporation in writing.
- Education Management Corporation will buy the stock back from you at
fair market value, as determined by the ESOP Committee. Or, with the consent of
Education Management Corporation, the trustee may buy the stock back from you at
fair market value.
- If the stock was distributed to you within a single taxable year and
represented your complete entitlement under the plan, payment for your stock
will be made in substantially equal installments (at least annually) over a
period of not more than 5 years, as chosen by the purchaser, with the first
payment within 30 days after you exercise the put option. The unpaid
installments will bear a reasonable rate of interest and will be adequately
secured by the purchaser.
- On the other hand, if the stock is coming to you in installments,
payment for your stock will be made within 30 days after you exercise the put
option with respect to each installment.
HOW TO CLAIM YOUR
MONEY OR STOCK
INTRODUCTION. To claim your entitlement under the plan, start by
calling the trustee (Fidelity). The trustee will talk with you about the options
that are available and, when you decide what you would like to do, provide you
with the application forms. Complete and return them to Human Resources at EDMC
in Pittsburgh.
FIRST-LEVEL DECISION. Applications are reviewed and approved on the
15th of the month and again on the last day of the month. After your application
is approved:
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- For all accounts other than your employer stock account, you can
expect to receive payment from the trustee within 7 to 10 days.
- For your employer stock account, it takes the trustee about 4 to 6
weeks to issue a paper stock certificate. If you would prefer a wire transfer to
a brokerage account of your choosing, ask the trustee whether wire transfers are
available. If so, the trustee will provide you with the necessary information.
Wire transfers (if available) can be made in 7 to 10 days.
If your claim is denied, the plan administrator will respond to you in
writing, point out the specific reasons and plan provisions on which the denial
is based, describe any additional information needed to complete the claim, and
describe the appeal procedure.
APPEAL. If your claim is denied and you disagree and want to pursue the
matter, you must file an appeal in accordance with the following procedure. You
cannot take any other steps unless and until you have exhausted the appeal
procedure. For example, if your claim is denied and you do not use the appeal
procedure, the denial of your claim is conclusive and cannot be challenged, even
in court.
To file an appeal, write to the appeals authority identified at the
beginning of the plan in the section called "Quick-Reference Information"
stating the reasons why you disagree with the denial of your claim. You must do
this within 60 days after the claim was denied. In the appeal process, you have
the right to review pertinent documents. You have the right to be represented by
anyone else, including a lawyer if you wish. And you have the right to present
evidence and arguments in support of your position.
The appeals authority will issue a written decision within 60 days. The
appeals authority may, in its sole discretion, decide to hold a hearing, in
which case it will issue its decision within 120 days. The decision will explain
the reasoning of the appeals authority and refer to the specific provisions of
this plan on which the decision is based.
DISCRETIONARY AUTHORITY. The plan administrator and appeals authority
shall have and shall exercise complete discretionary authority to construe,
interpret and apply all of the terms of the plan, including all matters relating
to eligibility for benefits, amount, time or form of benefits, and any disputed
or allegedly doubtful terms. In exercising such discretion, the plan
administrator and appeals authority shall give controlling weight to the intent
of the sponsor of the plan. All decisions of the appeals authority in the
exercise of its authority under the plan (or of the plan administrator absent an
appeal) shall be final and binding on the plan, the plan sponsor and all
participants and beneficiaries.
PAYMENT BEFORE
TERMINATION OF EMPLOYMENT
INTRODUCTION. Normally, your accounts will be paid after you retire (or
your employment terminates for some other reason). But there are a few
circumstances in which you can take money out of certain accounts even before
your employment has terminated. This part of the plan explains those times.
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WITHDRAWAL OF AFTER-TAX CONTRIBUTIONS. If you were a member of this
plan (that is, the Retirement Plan) before May 1, 1992 and you made after-tax
contributions, you may withdraw all or any portion of those contributions at any
time upon request, except that if the value of your after-tax contribution
account has declined below the amount of contributions that you made, you may
only withdraw the lesser amount, of course.
AGE 59. When you reach age 59, you may withdraw all or any portion of
your 401(k) account upon request, except that withdrawal may not be made more
often than once during each plan year, and the minimum withdrawal is $500.
AGE 70. After you reach age 70, you may take all the money in all
your accounts at any time upon request, even if you are still employed by the
employer.
HARDSHIP. If you suffer immediate and heavy financial need (whether or
not you are still employed by the employer), you may be able to get some or all
of your 401(k) contributions out of the plan. There are general eligibility
rules, but there is also a "safe harbor." The "safe harbor" means that you
qualify automatically for a hardship withdrawal under particular, narrow
circumstances. We will describe the safe harbor eligibility rules first.
Safe harbor. Under the safe harbor eligibility rules, the following
four types of financial need automatically qualify for a hardship withdrawal:
- medical expenses that would be deductible under section 213 of the
Code,
- purchase of a principal residence for the employee,
- payment of college or graduate school tuition (for the next school
term only) for the employee, spouse, children or other dependents, or
- the need to prevent eviction of the employee or foreclosure on his or
her personal residence.
If you have one of those financial needs, you can get a hardship withdrawal (no
more than the amount of the financial need, of course), provided that:
- you have obtained all distributions and loans available under all
plans of the employer;
- all qualified plans of the employer provide that your 401(k)
contributions and employee contributions (if applicable under the plan) will be
suspended for at least 12 months following the distribution (this plan so
provides if you choose to use this safe harbor); and
- all qualified plans of the employer provide that the 401(k)
contributions made during the year of the distribution will count against the
$10,000 limit on 401(k) contributions (described later in this plan) for the
calendar year following the calendar year of the distribution (this plan so
provides if you choose to use this safe harbor).
General eligibility rules. If you do not have one of the four "safe
harbor" financial needs, or if you choose not to use the safe harbor, you may
still qualify for a hardship withdrawal. The plan administrator will determine
whether your financial need is immediate and heavy within the meaning of the
plan, taking into account whether the need was predictable and within your
control.
The amount of hardship distribution that you can receive from the plan
under the general eligibility rules is only that which is necessary to respond
to the need after all other resources reasonably available to you have been
exhausted. All other resources available to you will be considered to have been
exhausted only if you truthfully affirm that the need cannot be met by insurance
reimbursement, reasonable liquidation of your assets
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<PAGE> 28
or assets of your husband or wife or minor children that are reasonably
available to you, cessation of 401(k) contributions or employee contributions
under any plan of the employer, borrowing from commercial sources or other
distributions or non-taxable loans from any employer.
Source of hardship distribution. A hardship distribution can be made
from the contributions that were made by trading off pay. This really means just
the contributions, not any earnings on those amounts, except that, if you were a
member of the plan before January 1, 1989 and you made 401(k) contributions,
then the earnings on those contributions up through December 31, 1988 can be
taken into account.
Application. If you suffer immediate and heavy financial need and want
a hardship distribution from the plan, you need to do two things. First, get a
form from your local director of human resources, fill it out and return it to
the plan administrator. Then call the trustee (Fidelity) to set up your hardship
withdrawal pending approval from the plan administrator.
BORROWING MONEY
FROM YOUR ACCOUNTS
INTRODUCTION. This is a retirement plan, and we do not encourage people
to take loans from their accounts. Nevertheless, active employees (not retirees
or other former employees) may borrow from their 401(k) account (and after-tax
account and rollover account, if any), and this section of the plan will
describe how much you can get and how to do it.
ELIGIBILITY. Loans are available only to members of the plan who are
receiving a paycheck from the employer. For example, loans are available to
active employees, employees on paid leave of absence and former employees who
are receiving severance pay. But loans are not available to other former
employees (such as retirees) or to employees on unpaid leave of absence. In
addition, under the law, loans are not available to anyone who is treated as an
owner-employee under section 408(d) of ERISA or to the members of their
families.
NUMBER. You may have one home loan (as described below) and one
personal loan (as described below) but you may not have more than one of each
kind (that is, you may not have more than two loans).
AMOUNT. The minimum loan is $1,000. The maximum loan is one-half of the
sum of your 401(k) account and, if you have them, your rollover account and
after-tax contribution account. The amount is judged at the time of your
application for the loan.
As an exception, you may never have loans outstanding of more than
$50,000 from all plans of the employer and any other members of the same
controlled group of trades or businesses. And the limit of $50,000 is reduced by
the amount by which you have paid off any loans within the previous twelve
months.
EXAMPLE: In January, you took out a loan of $30,000. By December, you
have paid it down to $25,000. Though the present balance is $25,000 and
you might think that you could get another $25,000 loan, the amount
that you paid off during the past year $5,000 counts against the
$50,000 limit, so you can't get a loan of more than $20,000 now.
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<PAGE> 29
PROMISSORY NOTE. Loans from the plan must be evidenced by a legally
enforceable promissory note.
TERM. You may choose the term of the loan, except that the term for a
personal loan may not be more than five years and the term for a home loan may
not be longer than twenty years. A "home loan" is a loan that is used to acquire
a dwelling unit that, within a reasonable time after the loan is made, will be
used as your principal residence. (Home improvement loans, loans to buy a second
home, and loans to buy homes for other members of the family do not qualify as
loans used to acquire a dwelling unit that will be used as your principal
residence.) All other loans are "personal loans."
INTEREST. Loans bear interest at the same rate charged by the
employer's principal bank on loans of the same type. Specifically, loans used to
acquire a dwelling unit that will be used as your principal residence bear the
same interest rate as mortgage loans. All other loans bear the same rate of
interest as secured personal loans. The rate is the rate quoted by the bank on
the first business day of the month in which you request the loan.
SOURCE AND APPLICATION OF FUNDS. The money to make a loan is obtained
by liquidating investments in your 401(k) account. (If you have a rollover
account or after-tax contribution account in addition to your 401(k) account,
the money is taken from all of them proportionately.) The promissory note is
then considered an asset of that account or accounts. When made, repayments
(both principal and interest) are credited proportionately to the account or
accounts from which the money was originally taken to make the loan.
REPAYMENT. Repayment must be made on a schedule set out in (or attached
to) the promissory note, requiring payment of principal and interest in regular,
substantially equal installments over the term of the loan. Repayment must be
made by payroll deduction from each paycheck (not counting mid-month advances
for employees who are paid monthly).
As an exception, the duty to pay according to the payment schedule will
be suspended (but not for more than one year) while you are on a leave of
absence without pay. When you return from the leave, the installment payments
will resume in the original amount and the term of the loan will be extended by
the same number of payments which were suspended. If such an extension would
extend the term of the loan beyond five years (in the case of a personal loan)
or twenty years (in the case of a home loan), however, a new installment payment
schedule will be established instead, under which the new installment payments
are sufficient to pay off the remaining balance of the loan by the end of the
maximum five- or twenty-year period.
As another exception, the duty to pay according to the payment schedule
will be suspended if, and for as long as, you are performing military service
within the meaning of the federal Uniformed Services Employment and Reemployment
Rights Act of 1994. When you cease to perform such service, the installment
payments will resume in the original amount and the term of the loan will be
extended by the same number of payments which were suspended.
SECURITY. As a condition of receiving a loan, you must post collateral
by pledging as security for the loan fifty percent of your vested accrued
benefit under the plan at the time when the loan is made.
PRE-PAYMENT. You may pay the outstanding balance of a loan at any time
without penalty for pre-payment.
DEFAULT. If you fail to make the full amount of any required
installment payment by payroll deduction, the loan will be considered in
default, and the entire outstanding balance due and payable immediately, on the
last day of the calendar quarter following the calendar quarter in which the
installment
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payment was due. This may occur, for example, when your employment
with the employer terminates or if you declare bankruptcy.
If your loan goes into default and you do not pay the outstanding
balance, the outstanding balance will be considered a "deemed distribution" for
tax purposes to the extent provided in regulations of the Internal Revenue
Service. When you become entitled to a distribution from the plan, the plan
administrator will foreclose on your vested accrued benefit that was pledged as
security for the loan in order to satisfy the unpaid balance of the loan,
effectively offsetting the unpaid balance of the loan against the amount
otherwise payable from the plan.
In addition, all loans will be due and payable immediately upon
distribution of assets in the event of termination of the plan.
HOW TO APPLY. To get the ball rolling, call the trustee at (800)
835-5092. You will need to know the identification number that the trustee has
assigned to this plan for its internal purposes, which is 90094.
The trustee will check on the amount available in your account and talk
to you about how much you would like, what the monthly payments would be, and
what the length of the loan would be. When you are happy with the terms of the
loan, the trustee will generate the loan application and send it to you. All you
have to do is sign where indicated and send it on to Human Resources at EDMC in
Pittsburgh.
Loans are reviewed and approved on the 15th of each month and again on
the last day of each month. If your loan is approved, you should expect to get a
check from the trustee in 7 to 10 days. The payroll department will
automatically start to withhold the loan payments from your paycheck.
IN CASE OF DEATH
INTRODUCTION. If you die before your entitlement has been paid (such as
while you are still employed by the employer), the plan will pay out all of the
money (and stock) in all your accounts under the plan, regardless of how long
you have worked for the employer. Whom it is paid to, and how, depends on a
number of factors. This section will explain.
Please note: If you are married at the time of your death, your choice
of beneficiary cannot be honored for certain portions of your accounts
unless your husband or wife consented before you died, in accordance
with the rules explained in this section. This is called "spousal
consent" and it is explained in this section under the heading "Naming
your beneficiary and getting spousal consent."
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IF YOU'RE MARRIED AND YOU WERE A PARTICIPANT IN THE PLAN BEFORE MAY 1,
1992. If you were married at the time of your death and you were a participant
in this plan (that is, the Retirement Plan) before May 1, 1992, then your
accounts are divided up and paid out as follows:
<TABLE>
<CAPTION>
PORTION SUBJECT TO SPOUSAL CONSENT PORTION NOT SUBJECT TO SPOUSAL CONSENT
---------------------------------- --------------------------------------
<S> <C> <C>
This portion consists of: This portion consists of:
- half of your 401(k) account, - the other half of your 401(k) account,
- half of your match account, - the other half of your match account,
WHAT - half of your profit sharing account, - the other half of your profit sharing
- half of your after-tax account (if any), and account,
- all of your employer stock account (if any). - the other half of your after-tax account (if
any), and
- all of your rollover account (if any).
- ----------------------------------------------------------------------------------------------------------------------
This portion is paid to your surviving husband or This portion is paid to the beneficiary that you
wife, unless, before your death, you named some last designated on the records of the plan
WHO other beneficiary with the written consent of the administrator before you died. Your surviving
husband or wife who survives you (as described husband or wife does not have to consent to your
below). choice of beneficiary for this portion of your
accounts.
- ----------------------------------------------------------------------------------------------------------------------
It is paid in a single sum, if the recipient so It is paid in a single sum to the designated
chooses. (If the recipient is your surviving beneficiary. (If your designated beneficiary is
husband or wife, he or she may make a direct your surviving husband or wife, he or she may
rollover into an IRA.) make a direct rollover into an IRA.)
HOW
If the recipient does not make a choice, this
portion of your accounts (except for your
employer stock account, which is always paid in
a single sum) will be applied to the purchase of
an annuity contract from an insurance company,
in which the insurance company promises to
make monthly payments to the recipient for as
long as he or she lives.
</TABLE>
IF YOU'RE MARRIED AND BECAME A PARTICIPANT IN THE PLAN ON OR AFTER MAY
1, 1992. If you were married at the time of your death but you became a
participant in this plan (the Retirement Plan) on or after May 1, 1992, then the
money (or stock) will be paid to your surviving husband or wife in a single
payment, unless, before your death, you named some other beneficiary with the
written consent of the husband or wife who survives you (as described below). If
the recipient is your surviving husband or wife, he or she may make a direct
rollover into an IRA.
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<PAGE> 32
IF YOU'RE NOT MARRIED. If you are not married at the time of your
death, then the money will be paid to whomever you named as your beneficiary
before your death. (If you and your husband or wife die simultaneously, so that
you do not have a "surviving spouse," you will be treated as if you were
unmarried at the time of your death, and this paragraph will apply.)
NAMING YOUR BENEFICIARY AND GETTING SPOUSAL CONSENT. You can name your
beneficiary at any time before your death by completing a form from the plan
administrator and returning it to the plan administrator. Your beneficiary is
whomever you last named on the records of the plan administrator.
Please note: Only you can change your beneficiary, and you can only do
it by filing a new beneficiary designation with the plan administrator.
Death or divorce does not automatically change your beneficiary.
Because there is some disagreement among the federal courts on how to
apply this provision, however, you should always make a new beneficiary
designation after a divorce, even if you want to keep the same person
as your beneficiary.
If you have named a beneficiary in place of your surviving husband or
wife, your choice of beneficiary will not be honored for any portion of your
accounts that is subject to spousal consent unless your surviving husband or
wife has consented in writing (or can't be located). The plan administrator has
a form for this purpose, which must be completed, signed by your husband or
wife, witnessed by a notary public, and filed with the plan administrator before
you die.
If you complete and file the form with the plan administrator and then
want to change your mind (that is, you would like to go back to having your
husband or wife as your beneficiary), you can withdraw the form just by filing a
new beneficiary form with the plan administrator any time before you die.
If money should be paid to a beneficiary, but you have not named a
beneficiary or your beneficiary does not survive you, the money will be divided
among the people in the first of the following classes that contains a survivor:
(a) your surviving husband or wife, (b) your children, (c) your parents, (d)
your brothers and sisters, or (e) your estate.
CLAIMING YOUR ACCOUNTS. To claim the money, your husband, wife or other
beneficiary should contact the plan administrator, get an application form, and
follow the same procedure as you would have done to claim the money. While we
expect payment to happen as soon as administratively possible after your death,
we must recite here, in accordance with IRS rules, that all of your accounts
must be completely paid out not later than five years after your death.
CHILD SUPPORT, ALIMONY AND
PROPERTY DIVISION IN DIVORCE
INTRODUCTION. The plan will honor certain court orders made in the
context of family law, child support, alimony and division of property in
divorce. This means that part of your account may have to be paid to someone
else; you may not get all that you are expecting. This section of the plan will
explain when and how that can happen.
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<PAGE> 33
WHAT A DOMESTIC RELATIONS ORDER IS. It is a judgment, decree or order
of a court (including approval of a property settlement) made pursuant to state
domestic relations law (including a community property law) that provides child
support, alimony payments, or marital property rights to your spouse, former
spouse, child or other dependent.
The plan will not honor a domestic relations order unless it specifies:
- that it applies to this plan,
- your name and last known mailing address, as well as the name and
last known mailing address of anyone else who is supposed to get payments,
- the amount or percentage of your benefits that are supposed to be
paid to someone else, or the manner in which the amount or percentage is to be
determined, and
- the number of payments or the period to which the order applies.
Also, the plan will not honor a domestic relations order if it attempts
to require the plan to:
- provide increased benefits,
- provide any type or form of benefit, or any option, that is not
already provided for here in the plan document (except to the extent
specifically permitted by the Code), or
- pay to anyone any benefits that are already required to be paid to
someone else under a previous domestic relations order.
WHAT HAPPENS WHEN A DOMESTIC RELATIONS ORDER COMES IN. When a domestic
relations order comes to the plan administrator, the plan administrator will
first notify you and everyone else who is supposed to get part of your benefit
under the order that the order has come in. The plan administrator will also
tell you about the following procedure for deciding whether to honor the order.
Next, the plan administrator will separately account for the benefits
that, under the order, would be paid to someone other than you and hold onto
them while deciding whether to honor the order.
Next, the plan administrator will decide whether the plan should honor
the order, applying the rules that are described in this section of the plan.
When the decision is made, the plan administrator will notify you and everyone
else who is supposed to get part of your benefit.
If the plan administrator decides that the plan will honor the order,
the plan administrator will proceed to make the payments required by the order
(or schedule them for future payment, if they are not due yet). If the plan
administrator decides that the plan cannot honor the order, the plan
administrator will make payment as if there had been no order.
In the unlikely event that the plan administrator cannot decide whether
the plan should honor the order within 18 months after the first payment should
have been made under the order, the plan administrator will make payments as if
there had been no order until the decision is made, and then make future
payments (but no past payments) in accordance with the decision.
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<PAGE> 34
HOW THE LENGTH OF YOUR
SERVICE IS CALCULATED
INTRODUCTION. The length of your service with the employer can matter
for two reasons under the plan: for getting into the plan and for deciding what
portion of your account you are entitled to if you leave before retirement or
disability. This part of the plan will explain how to calculate the length of
your service.
Two notes before we start. First, this section of the plan describes
the rules currently in effect. Other rules may have been in effect for earlier
periods, such as before ERISA took effect and before the Retirement Equity Act
took effect. Those earlier rules continue to apply to service that was rendered
before those laws took effect. Second, any special arrangements that might be
made for employees of new participating employers are described at the end of
the plan in the section called "Special Arrangements for New Participating
Employers."
12-MONTH PERIODS. The plan looks at how many hours of service you have
in certain 12-month periods.
Getting into the plan. For the purpose of joining the plan, the first
12-month period runs from your date of hire to the first anniversary of your
date of hire. After that, the 12-month period is the plan year, beginning with
the plan year in which the first anniversary of your date of hire occurs.
Portion of your account. For the purpose of determining what portion of
your account you are entitled to if you leave before retirement or disability,
the 12-month periods are plan years. At the beginning of the plan, in the
section called "Quick-Reference Information," it shows what the plan year is.
YEARS OF SERVICE. Your length of service is measured in full years. You
get credit for a year of service if you complete 900 hours of service during
that 12-month period. You get credit for the year whenever you have accumulated
900 hours of service, regardless of what happens during the rest of the year.
(This is entirely independent of whether you are working in the classification
of employees covered by the plan.)
However, years of service can be cancelled by breaks in service, as
explained below.
FULL-TIME EMPLOYEES. Full-time employees are credited with 45 hours of
service for each week in which they receive credit for one hour of service for
performing services for the employer. A full-time employee for this purpose is
any employee who works the regularly scheduled full work week as established by
normal office hours for the location where the employee is employed.
PART-TIME FACULTY. Part-time faculty are credited with 1.88 hours of
service for each one hour of actual classroom time in recognition of the
required preparation for classroom time. For this purpose, any faculty member
who is assigned to teach less than a full work week will be considered part-time
faculty.
OTHER PART-TIME EMPLOYEES. Part-time employees other than faculty
receive credit for each clock hour for which the employee is paid (or entitled
to payment) by the employer. It doesn't matter how much you are paid for that
hour; an overtime hour is still one hour.
Working hours. Hours of service naturally include hours when you are
actually working as an employee.
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<PAGE> 35
Non-working hours. They also include hours when you are still an
employee but not working due to vacation, holiday, illness, layoff, jury duty,
military service, and leave of absence, if you are paid (or entitled to payment)
for those hours by the employer. The number of hours credited for a time when
you were not working is the number of regularly scheduled working hours in the
period for which you are paid. For example, if a day consists of 8 regularly
scheduled working hours and you are paid for a day of vacation, you get credit
for 8 hours of service.
As an exception, no more than 501 hours of service will be credited for
any one, continuous period during which you were not working (or, in the case of
back pay, would not have been working).
As another exception, payments made solely to comply with workers'
compensation, unemployment compensation, or disability insurance laws, and
payments that reimburse you for medical expenses, do not result in credit for
hours of service.
BACK PAY. If for some reason you don't work for some period but are
later granted back pay for that time, hours of service include hours for which
you are granted back pay. Credit for hours of service is allocated to the period
when the work was (or would have been) performed.
BREAKS IN SERVICE. If you complete fewer than 100 hours of service
during one of these 12-month periods, that is a "break in service."
The one exception is if you are absent due to pregnancy, birth (or
placement for adoption), or caring for a child immediately after birth (or
placement). If you don't have more than 100 hours of service in the year when
absence begins but the hours that would normally have been credited for the
absence during that year would bring your total over 100, then that 12-month
period will not count as a break in service. (If you have more than 100 hours in
the year when the absence begins, but you don't have more than 100 hours in the
following year, this rule applies to the second year instead. That is to say, if
you remain absent during the following year and the hours that would normally
have been credited for the absence during the following year would bring your
total over 100, then the following year will not count as a break in service.)
HOW BREAKS IN SERVICE CANCEL YEARS OF SERVICE. A break in service
cancels your credit for all prior years of service temporarily until you return
to work and complete another year of service.
A break in service cancels your credit for all prior years of service
permanently if:
- when the first break in service occurred, you had no entitlement to
any portion of any account derived from employer contributions (within the
meaning of section 410(a)(5)(D)(iii) of the Code); and
- you have at least 5 break in service years in a row; and
- the number of break in service years is at least equal to your prior
years of service.
EXAMPLE: You accumulate 3 years of service. Then you have 1 break in
service. Then you return to work. When you return, you have credit for
no years of service (the break in service has temporarily cancelled all
prior service credit). But suppose that, after returning to work, you
complete another full year of service. Then you regain credit for the
first 3 years, and you have credit for a total of 4 years of service.
EXAMPLE: You accumulate 2 years of service. Then you have 5 consecutive
breaks in service. Then you return to work. You have credit for no
years of service, but even if you work another full year of service,
you will still not regain any of your prior years of service. They were
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permanently cancelled because you had 5 consecutive breaks in service,
which was equal to or greater than your prior service credit.
SERVICE WITH RELATED EMPLOYERS. Service with someone other than the
employer still counts for the purpose of calculating the length of your service
with the employer under this section of the plan if it was performed at a time
when the employer maintained this plan and it was performed for:
- a corporation which, at that time, was under common control with the
employer under section 414(b) of the Code, or
- a trade or business which, at that time, was under common control
with the employer under section 414(c) of the Code, or
- an entity which, at that time, was a member of an affiliated service
group with the employer under section 414(m) of the Code, or
- an entity which, at that time, was required to be aggregated with the
employer under section 414(o) of the Code (including the regulations under that
section).
Please note: service with related employers does not count for any
other purpose under the plan. Specifically, you are not entitled to get into the
plan or to get a share of the employer contributions if you are working for
anyone other than the employer.
WHEN YOU RETURN
FROM MILITARY SERVICE
INTRODUCTION. There are a few special rules to accommodate employees
who enter military service and then return to employment with the employer, and
they are listed in this section. These rules apply only to employees who are
entitled to re-employment under the federal Uniformed Services Employment and
Reemployment Rights Act of 1994 (which is called "USERRA"), as it may be amended
from time to time, which contains detailed rules about what "military service"
is, how long an employee can be absent, when the employee must return, and other
conditions such as an honorable discharge. If you do not meet the requirements
of USERRA, this section of the plan does not apply to you.
Please note: It is your responsibility to let the plan administrator
know if you are returning from military service, so that this section
of the plan can be appropriately applied.
BREAK IN SERVICE. If you are entitled to re-employment and are in fact
re-employed in accordance with USERRA, you will not be considered to have
incurred a break in service (as described in the preceding section of the plan)
by reason of that military service.
401(k) CONTRIBUTIONS. You obviously were not in a position to make
401(k) contributions to the plan during your military service. But if you are
entitled to re-employment and are in fact re-employed in accordance with USERRA,
you are entitled to "make up" those contributions. Here's how:
- Besides the amount of contributions that you could ordinarily get by
trading off your pay for
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contributions to the plan, you may trade off additional pay (that is, pay for
work performed after you are re-employed) for additional contributions to the
plan.
- The maximum amount of additional contributions that you can get by
trading off your pay is the maximum amount that you could have gotten if you had
not been absent in military service.
- You can make these additional 401(k) contributions any time beginning
on your re-employment and ending after a period equal to three times your period
of military service (or five years, whichever comes first). For example, if your
military service lasted 10 months, you can make these additional 401(k)
contributions over a period of 30 months, beginning with your date of
re-employment.
MATCHING CONTRIBUTIONS. If you choose to make the additional 401(k)
contributions referred to in the preceding paragraph, your employer contribution
account will be credited with the corresponding matching contributions that it
would have received if you had not been absent in military service. (Your
account will not be credited with investment earnings on those amounts that you
might have earned if you had not been absent in military service.)
PROFIT SHARING CONTRIBUTIONS AND ESOP CONTRIBUTIONS. If you are
entitled to re-employment and are in fact re-employed in accordance with USERRA,
your profit sharing account will be credited with the employer profit sharing
contributions (and your employer stock account will be credited with the ESOP
contributions) that you would have received if you had not been absent in
military service. This means contributions only; your account will not be
credited with investment earnings on those amounts or forfeitures that you might
have received if you had not been absent in military service.
YOUR "PAY". For the purpose of this section of the plan, you will be
treated as though you received pay at the same rate that you would have received
if you had not been absent in military service (including raises, for example,
that you would have received if you had not been absent). If the amount of pay
cannot be determined with reasonable certainty, you will be treated as though
you continued to receive pay during your absence at the same rate as your
average rate of pay from the employer during the 12 months before you entered
military service.
PERCENTAGE OF ENTITLEMENT TO EMPLOYER ACCOUNTS. If you are entitled to
re-employment and are in fact re-employed in accordance with USERRA, you will be
given credit for that period of military service when the plan administrator
calculates the percentage of your employer contribution accounts to which you
are entitled on the table under the heading "Length Of Service Required For
Benefits" in the section called "Quick-Reference Information."
LIMITS AND TESTING. Contributions made under this section of the plan
because of USERRA:
- will not be taken into account at all for the purpose of the
utilization test described in the section entitled "Maximum Amount of 401(k)
Contributions" or the section entitled "Maximum Amount of Matching
Contributions";
- will not cause the plan to fail to meet the requirements in the
section entitled "Improvements When the Plan is Top-Heavy";
- will be subject to the limits in the year when they would have been
paid if you had not entered military service (rather than the year in which they
are actually paid under this section) for the purpose of the $10,000 limit
described in the section entitled "Maximum Amount of 401(k) Contributions" and
the section entitled "Maximum Amount of Total Contributions" and will be ignored
when applying those limits to the other contributions actually paid for those
years.
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WHAT THE PLAN
ADMINISTRATOR DOES
INTRODUCTION. The plan administrator has all rights, duties and powers
necessary or appropriate for the administration of the plan. Many of those
functions are described elsewhere in the plan. This section will mention some
others.
Please note: The description in this section of certain
responsibilities imposed by law is solely for convenient reference by the plan
administrator and is not intended to alter or increase those duties or transform
them into contractual duties.
REPORTING AND DISCLOSURE. The plan administrator will provide a copy of
this plan to each new member of the plan no later than 90 days after joining the
plan.
The plan administrator will prepare and file the annual return/report
(Form 5500) for the plan each year, if required. For that purpose, the plan
administrator will retain an independent qualified public accountant (within the
meaning of ERISA) to perform such services as ERISA requires.
After filing the annual return/report, the plan administrator will
distribute to all participants and to all beneficiaries receiving benefits the
"summary annual report" if required by ERISA.
The plan administrator will furnish to any participant or beneficiary,
within 30 days of a written request, any and all information required by ERISA
to be provided, including copies of the plan and any associated trust agreements
and insurance contracts. The participant must pay the plan the actual cost of
copying (unless that is more than the maximum permitted by ERISA, in which case
the plan administrator will charge the maximum permitted by ERISA).
BONDING. The plan administrator will assure that all "plan officials"
who are required by ERISA to be covered by a fidelity bond are so covered.
NUMERICAL TESTING. It is the responsibility of the plan administrator
to monitor compliance with the following sections of the plan regarding (1) the
maximum amount of 401(k) contributions, (2) the maximum amount of matching
contributions, (3) the maximum amount of total contributions, and (4) top-heavy.
It is the plan administrator's responsibility to take whatever action is
required by those sections.
PROHIBITED TRANSACTIONS. ERISA prohibits a variety of transactions,
most involving "parties in interest." The plan administrator will not cause the
plan to engage in any transaction that is prohibited by ERISA.
EXPENSES. The expenses of administering the plan will be paid out of
the plan assets. They may include, for example, fidelity bond premiums, trustee
and investment management fees, and professional fees.
If the plan administrator is a full-time employee of the employer, then
the plan administrator will not
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receive any compensation from the plan for serving as plan administrator but
will be reimbursed for expenses.
LIMITATION. The plan administrator does not have any authority or
responsibility to perform any of the functions that are described in the
following section as employer functions. Specifically:
- The plan administrator must accept as a fact the employment
information furnished by the employer. The plan administrator has no authority
or responsibility with regard to the employment relationship, and any disputes
over the employment history are strictly between the employer and the employee.
To the extent possible, the plan administrator will, of course, give effect
under the plan to any new or corrected employment information furnished by the
employer.
- The plan administrator has no authority or responsibility for
collecting employer contributions.
WHAT THE EMPLOYER DOES
INTRODUCTION. The sponsor and the participating employers have
functions entirely different from the administration functions that are
performed by the plan administrator. This section will identify those functions.
ESTABLISHMENT. The sponsor was responsible for establishing the plan in
the first place. That included establishing all the terms of the plan as set
forth in this document.
CONTRIBUTIONS. The employer contributes to the plan as described above
in the sections entitled "Trading Off Your Pay For Contributions To The Plan,"
"Matching Contributions," "Profit Sharing Contributions and Forfeitures," and
"ESOP Contributions and Forfeitures." In addition, the employer may, but does
not have to, pay any expenses of the plan, so that they are not charged against
the plan assets.
EMPLOYMENT RECORDS. Since the plan administrator does not employ the
employees who are members of the plan and does not keep employment records, it
is the responsibility of the employer to provide to the plan administrator
whatever information the plan administrator needs to apply the rules of the
plan.
INSURANCE AND INDEMNIFICATION. The employer will provide fiduciary
liability insurance to, or otherwise indemnify, every employee of the employer
who serves the plan in a fiduciary capacity against any and all claims, loss,
damages, expense, and liability arising from any act or failure to act in that
capacity unless there is a final court decision that the person was guilty of
gross negligence or willful misconduct.
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CHANGING THE PLAN. The sponsor has the right to change the plan in any
way and at any time and does not have to give any reason for doing so. These
changes can be retroactive.
For example, the plan names the plan administrator, the trustee, any
investment manager or insurance company, and the appeals authority (they're all
shown at the beginning of the plan in the section called "Quick-Reference
Information"). The sponsor has the right to amend the plan to replace any of
those individuals or firms at any time and without giving any reason.
Exceptions. The Code says that no amendment can be adopted that would
make it possible for the assets of the plan to be used for, or diverted to,
purposes other than the exclusive benefit of participants and beneficiaries, and
the plan adopts that language but only to the extent (and with the same meaning)
required by the Code.
The plan also adopts, but only to the extent and with the same meaning
required by the Code, the Code prohibition on amendments which have the effect
of reducing the "accrued benefit" of any member of the plan (including the
provision of the Code which imposes the same prohibition on amendments
eliminating or reducing an early retirement benefit or a retirement-type subsidy
or eliminating an optional form of payment).
Changes made by the sponsor may be made by resolution of the board of
directors of the sponsor adopted in accordance with the by-laws of the sponsor.
Alternatively, changes that do not materially increase the liability of the
sponsor or any participating employer under the plan may be made by the
Retirement Committee of the sponsor, as long as any such amendment is reflected
in a writing that is formally designated as an amendment to this plan, is
adopted by the unanimous consent of the members of the Retirement Committee, and
is broadly applicable to participants under the plan (rather than targeted at
any individual or small group of participants). For this purpose, the decision
to admit a new participating employer will be considered as not materially
increasing the liability of the sponsor or any participating employer under the
plan.
ENDING THE PLAN. The plan has no set expiration date; when it was
established, it was not intended to be temporary. Nevertheless, the sponsor has
the right to end the plan (in whole or in part) at any time and without giving a
reason for doing so. The procedure for the sponsor to end the plan is the same
as for changing the plan, as described in the preceding paragraph. In addition,
any participating employer may withdraw from participation in the plan at any
time and without giving a reason for doing so.
If there is a "termination" or "partial termination" of the plan within
the meaning of Treasury Regulation 1.411(d)-2 (sorry, but it's too difficult to
try to describe what that is, particularly because it is not the same as ending
the plan) or a complete discontinuance of contributions, everyone who is
affected by the termination or partial termination or complete discontinuance of
contributions and who is still a member of the plan at that time will
automatically be advanced to 100% on the table at the beginning of the plan in
the section called "Quick-Reference Information" under the heading "Length Of
Service Required For Benefits," regardless of their length of service. For this
purpose, those whose employment previously terminated at a time when their
percentage was zero will be considered to have been "cashed out" at zero and
will no longer be considered participants.
MAXIMUM AMOUNT OF
401(k) CONTRIBUTIONS
INTRODUCTION. The Code puts a couple of different limits on the amount
that you can cause the employer to contribute to the plan by trading off your
pay. This part of the plan describes them.
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$10,000 LIMIT. Contributions that you cause the employer to make by
trading off your pay cannot be more than $10,000 in any one calendar year. And
we are not talking just about this plan. This limit applies to any and all plans
of any and all employers, including 401(k) plans, simplified employee pension
plans, and 403(b) tax-sheltered annuities.
The $10,000 figure changes from time to time according to the
cost-of-living. The plan administrator can tell you what the exact figure is for
this year. In the paragraphs that follow, however, we'll keep saying "$10,000"
just because it's easier that way.
IF THE $10,000 LIMIT IS EXCEEDED. There are two ways in which the
$10,000 limit might be exceeded. First, although this plan prohibits 401(k)
contributions of more than $10,000, a mistake might be made. In that case, as
soon as the mistake is discovered, the plan administrator will simply return any
and all 401(k) contributions that were more than $10,000 for a given plan year,
adjusted for any income or loss experienced while the excess was in the plan.
Second, although 401(k) contributions to this plan are not more than
$10,000, you might have worked for some other employer during part of the year
and the total of 401(k) contributions made to this plan and the plan of that
other employer might be more than $10,000. In that case, you may withdraw all or
part of the excess from this plan (not more than the 401(k) contributions that
were actually made to this plan, of course), as long as you give the plan
administrator written notice which is received by the plan administrator no
later than March 15 of the calendar year following the year in which the excess
401(k) contributions were made. Then the plan administrator will return the
amount that you have designated, adjusted for any income or loss experienced
while the excess was in the plan.
UTILIZATION TEST. How much employees at the top of the organization can
trade off pay for contributions depends on how much all the other employees
trade off their pay for contributions. You only have to worry about this if you
are at the top of the organization. We will call these people "restricted
employees."
WHO THE RESTRICTED EMPLOYEES ARE. The restricted employees are
determined each year. They are anybody who owned 5% or more of the employer
during that year or the preceding year. They are also anybody who had
compensation from the employer during the preceding year of more than $80,000.
(The dollar figure changes slightly from year to year according to the
cost-of-living. The plan administrator can tell you what the exact figure is for
this year.)
Special rules for former employees. Former employees are considered
restricted employees if they were restricted any time after age 55 or they were
restricted when they left the employer.
Special rule for non-resident aliens. Non-resident aliens who have no
U.S.-source income are not taken into account at all when applying this part of
the plan.
PERFORMING THE UTILIZATION TEST. First, the plan administrator will
identify all the restricted employees who are eligible to choose 401(k)
contributions to the plan for the plan year being tested (whether or not they
have chosen to trade off pay for contributions). The plan administrator will
figure, separately for each such employee, what percent of pay he or she has
traded off for contributions. For employees who have chosen not to trade off pay
for contributions, this percentage will be zero. The plan administrator will
then average all of those percentages.
Second, the plan administrator will focus on the year before the year
being tested, identifying those individuals who were not restricted employees
but were eligible to choose 401(k) contributions to the plan for that plan year
(whether or not they chose to trade off pay for contributions). The plan
administrator will figure,
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separately for each such employee, what percent of pay he or she traded off for
contributions during the preceding year. Once again, for employees who chose not
to trade off pay for contributions, this percentage will be zero (except to the
extent that the employer chooses to make "qualified nonelective contributions"
as described below). The plan administrator will then average all of those
percentages. (As an exception for 1997 only, instead of using the year before
the year being tested, the administrator may use the year being tested.)
Please note: In calculating these averages, the plan administrator may
take advantage of any special rules provided in the law or in published
guidance from the IRS. For example, the plan administrator may exclude
from the calculation entirely individuals who are not restricted
employees and who have neither attained age 21 nor completed one year
of service with the employer. Alternatively, the plan administrator may
consider all individuals who have neither attained age 21 nor completed
one year of service with the employer, whether they are restricted
employees or not, as a separate plan for this purpose, as long as the
coverage rules of section 410(b) of the Code would be met by both this
plan and the separate plan.
In calculating these percentages, the plan administrator will take into
account only pay that, but for the choice to trade it off for contributions to
the plan, would have been received by the employee in the appropriate plan year
or is attributable to services performed in that plan year and would have been
received by the employee within 2 months after the end of the plan year. In
addition, 401(k) contributions will be taken into account for a plan year only
if not contingent on participation or performance of services after the end of
the plan year and actually paid to the trustee not later than 12 months after
the end of the plan year.
If the average for the employees who are not restricted was less than
2% in the preceding year, the average for the restricted employees in the year
being tested cannot be more than twice that percentage. If the average for the
employees who are not restricted was between 2% and 8% in the preceding year,
the average for the restricted employees in the year being tested cannot be more
than 2 percentage points higher. If the average for the employees who are not
restricted was more than 8% in the preceding year, the average for the
restricted employees in the year being tested cannot be more than 1.25 times
that percentage.
IF THE UTILIZATION TEST REVEALS A PROBLEM. If the average for the
restricted employees is higher than it should be, the plan administrator will
correct the problem by paying the contributions back to the restricted
employees, as follows.
Step 1 -- Calculating the total amount to be returned. The plan
administrator will take the restricted employee with the highest percentage of
401(k) contributions and figure out how much of that employee's 401(k)
contributions would have to be returned to that employee so that his or her
percentage would be reduced enough to solve the problem for the whole group, but
not more than would make the percentage of that employee's 401(k) contributions
equal the percentage for the restricted employee with the second-highest
percentage.
If the problem has not been solved for the group as a whole, then the
plan administrator will figure out how much of the 401(k) contributions of both
of those people (the restricted employee with the highest percentage and the
employee with the second-highest percentage) would have to be returned so that
their percentage would be reduced enough to solve the problem for the whole
group, but not more than would make the percentage for those two employees equal
the percentage for the restricted employee with the third-highest percentage.
If the problem has not been solved for the group as a whole, the plan
administrator will keep doing this until the problem is solved. Then the
administrator will complete step one by totalling the dollar amount of the
contributions that would have to be returned to solve the problem. That is the
total amount that will have to be returned.
Step 2 -- Calculating how much is returned to each restricted employee.
Now the administrator will take the restricted employee with the highest dollar
amount of 401(k) contributions and return that employee's 401(k) contributions
to him or her until (a) the total amount that has to be returned (as determined
in step one) has been
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returned or (b) the dollar amount of that employee's 401(k) contributions has
been reduced to the dollar amount of the restricted employee with the
second-highest dollar amount of 401(k) contributions.
If the total amount that has to be returned has not yet been returned,
then the plan administrator will return the 401(k) contributions of those two
employees (the restricted employee with the highest dollar amount and the
employee with the second-highest dollar amount) to those two employees until (a)
the total amount that has to be returned (as determined in step one) has been
returned or (b) the dollar amount of those two employees' 401(k) contributions
has been reduced to the dollar amount of the restricted employee with the
third-highest dollar amount of 401(k) contributions.
If the total amount that has to be returned (as determined in step one)
has not yet been returned, the plan administrator will keep doing this until the
total amount that has to be returned has been returned. It is understood that,
after returning 401(k) contributions by this method, if the utilization test
were to be run again, it might still not be passed, but the IRS has stated in
Notice 97-2 that this is the method to be used and when this method has been
followed, the utilization test is considered to have been satisfied.
RETURNING EXCESS CONTRIBUTIONS. The concept of returning any excess
contributions (due to either the $10,000 limit or the limitation on restricted
employees) is simply to reverse the contributions as if they had never been
made. If the contributions had never been made, of course, the employee would
have received those amounts as pay and would have had to pay federal income tax
on them. So you have to pay income tax on them when you get them back.
When you get the excess contributions back depends on why you are
getting them back:
- If you are getting them back because of the $10,000 limit, you will
get them back (including the allocable income or loss) by April 15 of the
following year. The returned contributions are included in your taxable income
for the previous year (the year when they were contributed), while the income on
them is included in your taxable income for the year when you actually receive
it.
- If you are getting them back because of the utilization test, you
will get them back (including allocable income or loss) by the end of the
following plan year. The returned contributions and any allocable income are
included in your taxable income for the year in which you actually receive them.
(The only exception is the unlikely event that you get them back before March 15
of the following year, in which case they are included in your taxable income
for the previous year.)
The allocable income or loss is that portion of the total income or
loss for the year for your 401(k) account which bears the same proportion to the
total as the excess 401(k) contributions for the year bear to the account
balance of your 401(k) account at the end of the year (minus the income (or plus
the loss) on that account for the year).
The amount of excess contributions returned to you because of the
annual dollar limit will be reduced by any excess contributions previously
returned to you because of the limitation on restricted employees for the plan
year beginning with or within your taxable year. And the amount of excess
contributions returned to you because of the limitation on restricted employees
will be reduced by any excess contributions previously returned to you because
of the annual dollar limit for your taxable year ending with or within the plan
year.
COMBINING PLANS. If two or more plans are aggregated for purposes of
section 401(a)(4) of the Code or section 410(b) of the Code (other than section
410(b)(2)(A)(ii)), then all 401(k) contributions made under both plans will be
treated as made under a single plan, for the purpose of this section of the
plan. (Of course, the aggregated plans must comply with sections 401(a)(4) and
410(b) as though they were a single plan.) In addition, if a restricted employee
is eligible to trade off contributions under two or more plans of the employer,
those cash-or-deferred arrangements will be treated as a single arrangement,
unless the applicable rules would prohibit permissive aggregation of those
arrangements.
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MAXIMUM AMOUNT OF
MATCHING CONTRIBUTIONS
INTRODUCTION. Besides limiting the amount of 401(k) contributions that
can be made on behalf of restricted employees, the Code also limits the amount
of matching contributions that can be made for restricted employees both by
themselves and when considered in combination with the 401(k) contributions.
This part of the plan describes these additional limitations.
MATCHING CONTRIBUTIONS BY THEMSELVES. The plan administrator will test
the matching contributions by themselves by running the same test as described
in the preceding section ("Maximum Amount of 401(k) Contributions"), taking into
account all the same employees but using matching contributions rather than
their 401(k) contributions.
MATCHING CONTRIBUTIONS IN COMBINATION. If the utilization test for
401(k) contributions (described in the preceding section of the plan) and the
utilization test for matching contributions (described in the preceding
paragraph of this section) both show that the average for the restricted
employees is more than 1.25 times the average for all other employees (after any
corrective distributions), then the plan administrator must run this additional
test.
Step 1. The plan administrator will add the average percentage for the
restricted employees under the trade-off test (already calculated under the
preceding section of the plan) and the average percentage for the restricted
employees under the matching test (already calculated under the preceding
paragraph of this section).
Step 2. The plan administrator will look at the average percentage for
all other employees under the trade-off test (already calculated under the
preceding section of the plan) and the average percentage for all other
employees under the matching test (already calculated under the preceding
paragraph of this section) and identify which is larger.
Step 3. The plan administrator will take the larger number in Step 2
and multiply by 1.25, then take the smaller number and either add 2 percentage
points or double it (whichever produces the lower number), and then add those
two numbers together.
Step 4. The plan administrator will take the smaller number in Step 2
and multiply by 1.25, then take the larger number and either add 2 percentage
points or double it (whichever produces the lower number), and then add those
two numbers together.
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Step 5. The plan administrator will see if the number in Step 1 is
larger than both the number in Step 3 and the number in Step 4. If it is larger
than both of them, the test is failed. If it is smaller than either of them, the
test is passed.
IF THIS TEST OF MATCHING CONTRIBUTIONS REVEALS A PROBLEM. If the
matching contributions fail the tests in this section (either by themselves or
in combination with the 401(k) contributions), then the plan administrator will
return the excess matching contributions in the same manner as under the
preceding section of the plan (which specifies how excess 401(k) contributions
are returned). Alternatively, the employer may, but is not required to, solve
the problem in whole or in part by making additional "qualified nonelective
contributions" to the 401(k) accounts of employees who are not restricted, as
described in the preceding section of the plan.
MAXIMUM AMOUNT OF
TOTAL CONTRIBUTIONS
INTRODUCTION. Federal law sets a limit on how much money can go into
your accounts in this plan in any one year. This section describes the limit.
You don't have to worry about this, though; the plan administrator will pay
attention to this section and make sure that the limit is not exceeded.
25% OF PAY LIMIT. The total of employer contributions, employee
contributions (if applicable), and forfeitures allocated to your accounts for
any one plan year cannot be more than 25% of your compensation from the employer
(or $30,000, whichever is less). (As the $30,000 figure rises in accordance with
the cost of living, the new figure will automatically be applied here.)
As an exception, forfeitures of stock that was acquired with the
proceeds of an exempt loan will not count against the limit if no more than
one-third of the employer contributions to this plan for a year which are
deductible under section 404(a)(9) of the Code are allocated to highly
compensated employees all within the meaning of section 415(c)(6) of the Code.
If this limitation would be exceeded as a result of the allocation of
forfeitures, a reasonable error in estimating your annual compensation, a
reasonable error in determining the amount of 401(k) contributions that may be
made on your behalf within this limitation, or any other facts and circumstances
that the Commissioner of Internal Revenue finds justifies relief under this
paragraph, the excess amounts otherwise allocable to your account for that plan
year will be used to reduce employer contributions for the next plan year (and
succeeding plan years, as necessary) for you, as long as you are covered by the
plan at the end of that plan year. However, if you are not covered by the plan
at the end of that plan year, the excess amounts will be held unallocated in a
suspense account for that plan year and allocated and reallocated in the next
plan year to all of the remaining participants in the plan in accordance with
the rules set forth in subparagraph Treas. Reg. 1.415-6(b)(6)(i). Furthermore,
the excess amounts will be used to reduce employer contributions for the next
plan year (and succeeding plan years, as necessary) for all of the remaining
participants in the plan.
And, though it may never apply, the IRS requires us to say that the
$30,000 limit is reduced by employer contributions allocated to any individual
medical account which is part of a pension or annuity plan and contributions on
behalf of a member of the concentration group, as described below under the
heading "Improvements When the Plan Is Top-Heavy," to a separate account for
post-retirement medical benefits pursuant to Code section 419A(d) prior to the
employee's separation from service.
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IF THERE'S MORE THAN ONE DEFINED CONTRIBUTION PLAN. All "defined
contribution" plans of the employer (that's what this is) are considered to be
one plan, so that, if the employer runs any other defined contribution plans,
the limit applies to the total contributions under all of those plans. These may
be plans qualified under section 401(a) of the Code, annuity plans under section
403(a), annuity contracts under section 403(b), or simplified employee pension
plans under section 408(k). But the limitation of this section of the plan will
be applied first to the other plan or plans, reducing the annual additions under
those plans to elimination before any reduction is applied under this plan.
"Employee contributions" does not include rollover contributions from
another plan and does not include employee contributions to a simplified
employee pension plan that are excludable from gross income under section
408(k)(6) of the Code.
IF THERE'S ALSO A DEFINED BENEFIT PLAN. There are some complicated
mathematics if you are a participant in this plan and also a participant in any
"defined benefit" plan that the employer has ever maintained (a pension plan
that promises you a fixed pension calculated by a formula).
In essence, the plan administrator must figure out how much of the
maximum permissible benefit you are getting from the defined benefit plan and
how much of the maximum permissible contributions you have gotten in this plan
and then compare to be sure that they don't exceed the combined limit.
Defined benefit fraction. The plan administrator will divide your
projected annual benefit under the defined benefit plan as of the end of the
year by either (i) 1.25 times the dollar limit in effect for that year under
section 415(b)(1)(A) of the Code or (ii) 1.4 times your average compensation for
your high 3 years under section 415(b)(1)(B), whichever is less. That will be
your "defined benefit fraction."
Defined contribution fraction. The plan administrator will divide the
total annual additions (for this year and all prior years) to all of your
accounts under this and all other defined contribution plans of the employer as
of the close of the year by the sum, for all prior years of service with the
employer, of either (i) 1.25 times the dollar limit in effect for that year
under section 415(c)(1)(A) of the Code (without regard to section 415(c)(6) or
(ii) 1.4 times 25% of your compensation for that year under section
415(c)(1)(B), whichever is less (figured separately for each prior year). That
will be your "defined contribution fraction."
The rule. The defined benefit fraction and the defined contribution
fraction, when added together, cannot exceed 1. If there is a problem, then your
benefit in the defined benefit plan will be reduced just enough to eliminate the
problem. No change will be made in your accounts under this plan.
RELATED EMPLOYERS. For the purpose of this section of the plan, all
related employers are considered to be a single employer to the extent required
by Code sections 414(b), (c), (m), and (o) and 415(h).
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IMPROVEMENTS WHEN THE
PLAN IS TOP-HEAVY
INTRODUCTION. The plan administrator has to monitor the plan year by
year to see if the benefits of the plan are concentrated in a group of employees
that we will call the "concentration group." If so, the plan is said to be
"top-heavy" and several improvements are automatically made in the plan for that
year. This section of the plan describes what the plan administrator does to
figure out if the plan is top-heavy and what improvements are made if it is.
Please note: This plan has never been top-heavy and is unlikely ever to
become top-heavy. But the IRS makes us put these provisions in the
document just in case.
WHO IS IN THE CONCENTRATION GROUP. The plan administrator will first
figure out who is in the concentration group for a given plan year. This is what
the plan administrator will do:
Officers. List each officer on the last day of each of the five
preceding plan years and how much he or she made each year. Delete from the list
anyone who did not make more than the defined benefit dollar limit in section
415 of the Code for that year.
Find the highest number of employees of the employer at any time during
the five preceding plan years, excluding employees who have not completed 6
months of service, employees who normally work less than 17 hours per week,
employees who normally work during not more than 6 months during any year,
employees who have not attained age 21, and employees included in a collective
bargaining unit. And then delete from the list of officers as follows:
- If the number of employees is less than 30, delete all but the 3
officers having the greatest aggregate compensation during those five years.
- If the number of employees is more than 30 but less than 500, take 10
percent of that number, round to the next highest whole number, and then delete
all but the resulting number of officers having the greatest aggregate
compensation during those five years.
- If the number of employees is more than 500, delete all but the 50
officers having the greatest aggregate compensation during those five years.
Everybody left on the list is in the concentration group.
5% Owners. List all employees who owned more than 5% of the value of
the stock or voting power of the stock of the employer on the last day of the
preceding plan year. All those people are in the concentration group.
1% Owners. Separately for each of the five preceding years, list all
employees who owned more than 1% (but not more than 5%) of the value of the
stock or voting power of the stock of the employer on the last day of each year.
Delete anyone who did not make more than $150,000 that year. (That figure is
adjusted for the cost of living every year.) Everybody left on the list is in
the concentration group.
% Owners. Separately for each of the five preceding years, list all
employees who owned more than % of the value of the stock or voting power of
the stock of the employer at any time during those five plan years. Delete the
entry for any year if the employee did not make more than the defined
contribution dollar limit in 415 that year. Select the 10 entries having the
highest ownerships. (In case of a tie in ownership, the one with the higher
compensation wins.) Those ten people are in the concentration group.
PERFORMING THE CONCENTRATION TEST. To test for top-heaviness, the plan
administrator will identify all pension, profit sharing and stock bonus plans of
the employer in which any member of the concentration group participated in any
of the preceding five years. (This includes
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plans that have previously been terminated if they were maintained at any time
during those five years.) In addition, if any of those plans relies on the
existence of some other plan in order to meet the coverage or nondiscrimination
rules, then that other plan will also be thrown into the test. All of them will
be tested together as if they were one plan.
Defined benefit plans. For each defined benefit plan, the plan
administrator will calculate the present value of each participant's accrued
benefit as of the valuation date coincident with or last preceding the end of
the last plan year, as if the participant terminated on the valuation date,
using the same actuarial assumptions for all plans. This will include the value
of nonproportional subsidies and accrued benefits attributable to nondeductible
employee contributions (whether voluntary or mandatory). If there is no uniform
accrual method under all such defined benefit plans, the plan administrator will
determine the accrued benefit by applying the slowest accrual rate permitted
under the "fractional rule" of Code section 411(b)(1)(C).
Defined contribution plans. For each defined contribution plan
(including this one), the plan administrator will calculate the account balance
of each participant, as of the valuation date coincident with or last preceding
the end of the last plan year. This will include contributions due by the last
day of the last plan year.
Add-backs. For both defined benefit and defined contribution plans, the
plan administrator will add back in the value of all distributions made in those
five years, except to the extent already taken into account.
Exclusions. The plan administrator will exclude from the total all
accrued benefits and account balances of persons who were members of the
concentration group for prior years but are not members of the concentration
group for the year being tested. The plan administrator will also exclude from
the total all rollovers except those which (1) were not made at the initiative
of the employee or (2) came from a plan of an employer required to be aggregated
with this employer under section 414 of the Code.
Concentration percentage. The plan administrator will divide the total
accrued benefits and account balances of the members of the concentration group
by the total accrued benefits and account balances of everyone in the plans. If
the result is more than 60%, all the plans are top-heavy. If the result is 60%
or less, none of the plans are top-heavy.
Exception. If the percentage is more than 60%, but would not be more
than 60% if another plan were added to the group of plans that are being tested
(and that plan is one which could be added without taking the group out of
compliance with the coverage and nondiscrimination rules), then none of the
plans are top-heavy.
CHANGES IF THE PLAN IS TOP-HEAVY. There are three changes that apply
for a particular plan year if the plan is top-heavy for that year.
Benefits in the event of termination of employment before retirement.
If the plan is top-heavy for a particular year, then the schedule at the
beginning of the plan in the section called "Quick-Reference Information" under
the heading "Length Of Service Required For Benefits" may be changed for
everyone who has at least one hour of service after the plan became top-heavy.
- If that schedule provides for 100% after 5 years of service, it is
changed to 100% after 3 years of service.
- If it provides for gradually increasing percentages from 3 to 7 years
of service, it is changed to provide the same progression but from 2 to 6 years
of service.
- If it already provides a schedule which is better than 100% after 3
years or graded from 2 to 6 years, then there is no change in the schedule.
If, in a future year, the plan is no longer top-heavy, the schedule in
"Quick-Reference Information" is
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reinstated, except that the reinstatement of the original schedule is treated as
an amendment to the plan subject to the two limitations described below in the
"Miscellaneous" section under the heading "Changes in the Vesting Schedule."
Minimum contribution. For a year when the plan is top-heavy, each
member of the plan who is not a member of the concentration group will receive
an employer contribution on top of his pay of at least 3%, with three
exceptions:
- The percentage is not required to be greater than the highest
percentage received for that year by anyone who is a member of the concentration
group. In figuring that percentage, contributions made by trading off pay are
counted as contributions, as are matching contributions.
- If the employer also maintains a defined benefit plan that is
top-heavy and that plan provides that the concentration requirements will be met
by providing the minimum required accrual in that defined benefit plan, then
there is no minimum contribution required in this plan.
- If the employer also maintains a defined benefit plan that is
top-heavy and that plan does not provide that the concentration requirements
will be met by providing the minimum required accrual in that defined benefit
plan, then the minimum contribution in this plan is 5%.
The minimum contribution requirement applies to everyone in the plan
who has not separated from service by the end of the plan year, including those
who have not completed 1000 hours of service during the year and those who have
not chosen to trade off pay for contributions. The minimum contribution
requirement cannot be met by counting contributions made by trading off pay or
matching contributions.
Maximum amount of total contributions. Under the heading "Maximum
Amount of Total Contributions," there are rules that apply when the employer
maintains both this plan and a defined benefit plan. If the plan is top-heavy
for a particular year, the factor of 1.25 is replaced with the factor of 1.0. (A
corresponding change is made in the transition factor in section
415(e)(6)(B)(i).)
There is one exception. If the concentration percentage is not more
than 90%, the factor of 1.25 can still be used if each person in the plan who is
not a member of the concentration group gets a minimum contribution of at least
4% (rather than 3%) or, if the employer also maintains a defined benefit plan,
the defined benefit plan provides a minimum accrual of 3% per year of service
(to a maximum of 30%).
ALTERNATIVE FORM OF PAYMENT
FOR GRANDFATHERED MEMBERS
INTRODUCTION. For accounts other than employer stock accounts, the
normal form of payment is a single payment of cash (sometimes called a "lump
sum"). But if you were a member of this plan (that is, the Retirement Plan)
before May 1, 1992, there is an alternative available. This section of the plan
lays out that alternative form of payment. Remember, when we say "you" in this
section of the plan, we are referring only to employees who were members of this
plan (the Retirement Plan) before May 1, 1992.
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SINGLE EMPLOYEES. If you are not married on your "annuity starting
date" (that's the first day of the first period for which benefits are payable,
in the form of an annuity or otherwise), you may choose to have the plan
purchase an annuity and give it to you. An annuity is an insurance contract, in
which the insurance company promises to make monthly payments to you for as long
as you live. If you would prefer, the plan can purchase an annuity that provides
for payments after your death to a beneficiary (that you choose before the
annuity is purchased), with the beneficiary receiving monthly payments for as
long as your beneficiary lives after your death equal to at least 50%, but not
more than 100%, of the amount that you were receiving before your death.
Exactly what the monthly payments will be under any particular annuity
depends on how much of your account balance is used to purchase the annuity and
what type of annuity is purchased. In any event, the different annuities will
all have the same actuarial present value, namely, the amount that is paid for
them.
If you would like to consider this alternative, please tell the plan
administrator what options you would like to consider and who your beneficiary
will be, so that the plan administrator can calculate how much your (and your
beneficiary's) monthly pension would be in that form of payment.
MARRIED EMPLOYEES. If you are married on your annuity starting date,
you can take your entitlement in any of the annuity forms that we just described
for employees who are single. However, if you choose any annuity other than an
annuity with your husband or wife as the beneficiary receiving at least 50% of
the amount that you were receiving before your death, you can get the optional
form only if your husband or wife consents in writing in accordance with these
rules:
- You must fill out a form supplied by the plan administrator that
explains the consequences of not taking an annuity that contains protection for
your husband or wife.
- Your husband or wife must sign the form too, and his or her signature
must be witnessed by a notary public.
- If you are choosing a form of payment with survivor payments to a
beneficiary other than your husband or wife, the form must specify that other
beneficiary and will apply only with respect to that beneficiary unless the form
also states that you may change the beneficiary without getting any further
written consent from your husband or wife.
- And you must file the completed, notarized form with the plan
administrator.
You can complete and file the form any time during the 90 days
immediately preceding your annuity starting date. (As required by law, forms
completed or filed earlier than 90 days before your annuity starting date are
invalid.) If you complete and file the form with the plan administrator and then
want to change your mind (that is, you would like to go back to having an
annuity for the life of both you and your husband or wife), you can withdraw the
form just by telling the plan administrator any time before your annuity
starting date.
BENEFICIARY IS FIXED ON YOUR ANNUITY STARTING DATE. It is very
important to note that, if your annuity involves a beneficiary (whether your
husband or wife or some other person) that person is fixed on your annuity
starting date and cannot be changed. For example, if you choose an annuity with
payments after your death to your husband or wife, the "husband or wife" that
will get payments after your death is the person that you are married to on your
annuity starting date. If you get divorced later, that person will still be
entitled to the pension after your death. And if you get re-married, your new
husband or wife will not be entitled to any pension from this plan after your
death. Therefore, if you are considering retirement and want an annuity but you
are having marital difficulties, you might want to resolve the marital
difficulties before your annuity starting date.
Please note too: The plan will honor domestic relations orders in some
circumstances. (See "Divorce, Etc.") For example, before your pension starts, a
domestic relations order may require the plan to treat your former
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spouse as if he or she were your current spouse, in which case your pension will
cover you and your former spouse; your current spouse will get nothing. After
your pension has started, of course, no changes can be made under any
circumstances.
LEGAL LIMITATION ON AGE OF YOUR BENEFICIARY. If your beneficiary is not
your husband or wife, the government has a rule that the present value of the
payments that are expected to be made to you during your life must be more than
50% of the present value of the payments that are expected to be made to you and
your beneficiary, which is a fancy way of saying that you cannot name a
beneficiary who is too much younger than you are. The plan administrator will
tell you if this rule creates a problem with your choice.
NOTICE FROM THE PLAN ADMINISTRATOR. Be sure to let the plan
administrator know when you are planning to retire. The plan administrator will
provide you with a complete description of the annuities in which your pension
can be paid, the requirements for choosing them, and all the necessary
paperwork.
The plan administrator must provide you with this information no
earlier than 90 days before your "annuity starting date" and no later than 30
days before your "annuity starting date." Depending on when you tell the plan
administrator about your plans and when the plan administrator can get this
information out to you, your "annuity staring date" may have to be adjusted to
fit these requirements. There are two possible exceptions:
- You may choose to start your annuity less than 30 days after
receiving the information from the plan administrator, as long as you are
notified of your right to consider the information for 30 days and you sign a
written form waiving that right, in which case your annuity can start as soon as
7 days after you received the information.
- Your "annuity starting date" can actually be before you are provided
with this information as long as you are notified of your right to consider the
information for 30 days and payments do not actually begin until at least 7 days
after you receive the information. (In this case, payment will be made
retroactively to your annuity starting date.)
SPECIAL ESOP PROVISIONS
INTRODUCTION. Since the Education Management Corporation Employee Stock
Ownership Plan has been merged into this plan (the Education Management
Corporation Retirement Plan), there are a number of special provisions from the
Employee Stock Ownership Plan that need to be preserved in this plan. This
section contains them.
THE NATURE OF AN ESOP. This type of ESOP borrows money from a bank and
uses it to buy stock of the sponsor Education Management Corporation. The stock
is held as collateral for the loan. Then, from year to year, the employer makes
cash contributions to the plan that are used to pay down the loan.
As the loan is paid down each year, a corresponding amount of stock no
longer needs to be held as collateral for the loan. The stock that is released
is allocated among the employer stock accounts of the employees who are in the
plan.
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Over time, the idea is that the loan will be completely paid off, which
means that all of the stock will be released and allocated to the accounts of
the employees in the plan. As a matter of fact, in this plan, that has already
happened: the loan has been paid off and the stock has all been allocated to the
employer stock accounts of the employees in the plan.
INVESTMENT. Investments of employer stock accounts are made at the
direction of the plan administrator. Since this is in part an ESOP, however, the
assets of the employer stock accounts must be invested primarily in stock of
Education Management Corporation. (If any future ESOP contributions are made or
dividends are paid, the trustee must use them to buy more stock of Education
Management Corporation to the extent that stock is available on terms that the
plan administrator considers prudent.)
Technically, this includes any "qualifying employer security" within
the meaning of section 407(d)(5) of ERISA that also meets the requirements of
section 409(l) of the Code. This includes common stock issued by Education
Management Corporation that is readily tradable on an established securities
market, as well as noncallable preferred stock (as long as it is convertible at
any time into readily tradable common stock and the conversion price was
reasonable when the noncallable preferred stock was acquired by this plan). The
full definition is set out later in this section, but we will call this simply
"stock" or "employer stock."
Purchases of stock must be made at a price which, in the judgment of
the plan administrator, does not exceed the fair market value of the stock.
Sales of stock may be made to any person, except that if the buyer is a
"disqualified person" under section 4975(e)(2) of the Code, the sales price may
not be less than the fair market value of the stock and no commission can be
charged on the sale. All sales will comply with section 408(e) of ERISA.
There may also be a small amount of cash in employer stock accounts. It
may be invested in bank accounts, certificates of deposit, securities,
short-term funds maintained by the trustee, or any other kind of investment in
accordance with the trust agreement, or it may simply be held in cash.
"EMPLOYER SECURITIES". We said earlier that the stock must constitute
"employer securities" under Code section 409(l). Here is the text of Code
section 409(l) so there is no doubt about what we mean:
"(1) IN GENERAL.--The term 'employer securities' means common stock
issued by the employer (or by a corporation which is a member of the same
controlled group) which is readily tradable on an established securities market.
"(2) SPECIAL RULE WHERE THERE IS NO READILY TRADABLE COMMON STOCK.--If
there is no common stock which meets the requirements of paragraph (1), the term
'employer securities' means common stock issued by the employer (or by a
corporation which is a member of the same controlled group) having a combination
of voting power and dividend rights equal to or in excess of--
"(A) that class of common stock of the employer (or of any other such
corporation) having the greatest voting power, and
"(B) that class of common stock of the employer (or of any other such
corporation) having the greatest dividend rights.
"(3) PREFERRED STOCK MAY BE ISSUED IN CERTAIN CASES.--Noncallable
preferred stock shall be treated as employer securities if such stock is
convertible at any time into stock which meets the requirements of paragraph (1)
or (2) (whichever is applicable) and if such conversion is at a conversion price
which (as of the date of the acquisition by the tax credit employee stock
ownership plan) is reasonable. For purposes of the preceding sentence, under
regulations prescribed by the Secretary, preferred stock shall be treated as
noncallable if after the call there will be a reasonable opportunity for a
conversion which meets the requirements of the preceding sentence.
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"(4) APPLICATION TO CONTROLLED GROUP OF CORPORATIONS.--
"(A) IN GENERAL.--For purposes of this subsection, the term 'controlled
group of corporations' has the meaning given to such term by section 1563(a)
(determined without regard to subsections (a)(4) and (e)(3)(C) of section 1563).
"(B) WHERE COMMON PARENT OWNS AT LEAST 50 PERCENT OF FIRST TIER
SUBSIDIARY.--For purposes of subparagraph (A), if the common parent owns
directly stock possessing at least 50 percent of the voting power of all classes
of stock and at least 50 percent of each class of nonvoting stock in a first
tier subsidiary, such subsidiary (and all other corporations below it in the
chain which would meet the 80 percent test of section 1563(a) if the first tier
subsidiary were the common parent) shall be treated as includible corporations.
"(C) WHERE COMMON PARENT OWNS 100 PERCENT OF FIRST TIER
SUBSIDIARY.--For purposes of subparagraph (A), if the common parent owns
directly stock possessing all of the voting power of all classes of stock and
all of the nonvoting stock, in a first tier subsidiary, and if the first tier
subsidiary owns directly stock possessing at least 50 percent of the voting
power of all classes of stock, and at least 50 percent of each class of
nonvoting stock, in a second tier subsidiary of the common parent, such second
tier subsidiary (and all other corporations below it in the chain which would
meet the 80 percent test of section 1563(a) if the second tier subsidiary were
the common parent) shall be treated as includible corporations.
"(5) NONVOTING COMMON STOCK MAY BE ACQUIRED IN CERTAIN
CASES.--Nonvoting common stock of an employer described in the second sentence
of section 401(a)(22) shall be treated as employer securities if an employer has
a class of nonvoting common stock outstanding and the specific shares that the
plan acquires have been issued and outstanding for at least 24 months."
VOTING. In a number of instances, you may be entitled to direct how the
stock in your employer stock account is voted when votes of the shareholders of
Education Management Corporation are taken. Here they are:
- If any class of stock in the plan is required to be registered under
section 12 of the Securities Exchange Act of 1934, as amended, then you are
entitled to instruct the plan administrator how to vote the stock in your
employer stock account to the extent required under section 409(e) of the Code.
- As to any stock acquired by the ESOP with the proceeds of a loan with
respect to which the lenders exclude from federal taxable income a portion of
the interest pursuant to section 133 of the Code, you are entitled to instruct
the plan administrator how to vote the stock in your employer stock account, to
the extent required under section 133(b)(7)(A) of the Code.
- In any event, you are entitled to direct the plan administrator how
to vote the stock in your employer stock account with respect to any vote of
shareholders on any corporate merger, consolidation, recapitalization,
reclassification, liquidation, dissolution, sale of substantially all assets, or
a similar transaction, to the extent required by Sections 401(a)(22) and 409(e)
of the Code and regulations thereunder.
If you do not instruct the plan administrator how to vote the stock in
your employer stock account (or if there is any stock that is not allocated to
the accounts of the members of the plan), the plan administrator is entitled to
instruct the trustee how to vote the stock, assuming that the instructions of
the plan administrator are consistent with ERISA.
DIVERSIFICATION. If you have reached age 55 and you have participated
in the ESOP for at least ten years, you may choose to have some of the stock in
your employer stock account sold and the proceeds transferred to your profit
sharing account here in the plan, where it will be invested in accordance with
the investment instructions then in effect for your profit sharing account. This
is called "diversification."
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In measuring your period of participation in the ESOP, your
participation in the ESOP while it was a separate plan before April 7, 1999 will
obviously count; participation in this consolidated plan on and after April 7,
1999 will also count. And since the ESOP was only established effective January
1, 1989, ten years of participation in the ESOP obviously can't happen until the
end of 1998.
Your "window of opportunity." The opportunity to diversify your
employer stock account begins as soon as you have attained age 55 and completed
10 years of participation in the plan (or upon the adoption of this edition of
the plan, if later). For example, once this edition of the plan is adopted, if
you have already completed 10 years of participation in the plan, it begins on
your 55th birthday. On the other hand, if you reach age 55 before you have
completed 10 years of participation in the plan, it begins after you have
completed 10 years of participation.
The opportunity continues for the rest of that plan year (the plan year
in which you attained age 55 and completed 10 years of participation) and then
for the next six full plan years.
EXAMPLE: Your participation in the ESOP began effective January 1,
1989. You remain a participant through December 31, 1998, so that, as
of January 1, 1999, you have completed 10 years of participation in the
plan. This edition of the plan is adopted on April 7, 1999. Then you
attain age 55 on September 12, 1999. You may diversify the investment
of your employer stock account beginning on September 12, 1999. The
opportunity continues for the rest of the 1999 and then for the next
six full plan years, the years 2000, 2001, 2002, 2003, 2004 and 2005.
What portion of your account can be diversified. There's a formula to
determine what portion of your account can be diversified. It is:
- 25% (or, in the case of the last year in which you can diversify,
50%) of the number of shares of stock that have ever been allocated to your
account as of the most recent December 31 minus
- the number of shares that you have previously asked to have
diversified under this section.
EXAMPLE: You may diversify the investment of your employer stock
account beginning on September 12, 1999. As of December 31, 1998, the
total number of shares of stock ever allocated to your account was 100
shares. That means you may diversify up to 25 shares of stock beginning
on September 12, 1999.
EXAMPLE CONTINUED: Suppose you choose to diversify 10 shares of stock
in January of the year 2000. You still have the opportunity to
diversify through the year 2005. Suppose that no additional shares are
allocated to your account. Since the total number of shares ever
allocated to your account is 100 and you have previously chosen to
diversify 10 shares, you may diversify up to 15 more shares at any time
through the year 2005.
EXAMPLE CONTINUED: Suppose you diversify another 15 shares during the
year 2001. You have now diversified 25 shares, so you are at the limit
of 25%. But in the year 2005, the limit rises to 50%, so during the
year 2005, you may diversify up to another 25 shares (for a total of 50
shares out of 100).
How. Call the trustee (Fidelity) whenever you are eligible to
diversify. The trustee will verify your eligibility against the information
provided by the plan administrator, calculate the number of shares that are
available to be diversified, and take your direction to diversify part or all of
those shares.
What happens. After receiving your call, the trustee (Fidelity) will
take out of your employer stock account the number of shares that you have
chosen to diversify. It will then sell them as soon as administratively
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possible on the open market. The money that it receives from selling those
shares will be deposited in your profit sharing account here in the plan, where
it will automatically be invested in accordance with the investment instructions
then in effect for your profit sharing account.
"NONTERMINABLE" PROTECTIONS AND RIGHTS. With one exception, stock will
never be subject to a put, call or other option or a buy-sell or similar
arrangement while held by and when distributed from this plan. The exception is
that stock may be subject to a put option to the extent provided earlier in the
plan in the section called "How Payment Is Made" under the heading "'Put'
Option."
This prohibition remains effective despite the fact that the ESOP loan
has been repaid and regardless of whether the plan remains an ESOP in the
future. And the provision of the plan regarding put options also remains
effective despite the fact that the ESOP loan has been repaid and regardless of
whether the plan remains an ESOP in the future.
NON-ALLOCATION UNDER CODE SECTION 409(N). While there is no stock
acquired in a transaction for which the seller has elected favorable tax
treatment under section 1042 of the Code that remains unallocated at the present
time, this section expresses a rule that was applied when the stock was
allocated, for historical purposes only.
No employer securities, or other assets attributable to or in lieu of
such employer securities, acquired in such a transaction may be allocated
directly or indirectly, to the Accounts of:
- such seller;
- any individual who is related to the seller (within the meaning of
Section 267(b) of the Code), or
- any other individual who owns (directly or by attribution, after the
application of section 318(a) of the Code applied without regard to the employee
trust exception in section 318(a)(2)(B)(i) of the Code) more than 25% of (A) any
class of outstanding stock of the employer or any affiliate, or (B) the total
value of any class of outstanding stock of the employer or of any affiliate.
The restriction on allocations to persons described in the first or
second bullet points shall apply only during a nonallocation period which shall
begin on the date of the section 1042 sale and end on the later of (A) the tenth
(10th) anniversary of the date of the section 1042 sale, or (B) the date of the
allocation attributable to the last payment of principal and/or interest on the
exempt loan incurred with respect to the section 1042 sale.
The restriction on allocation to persons described in the second bullet
point shall not apply to participants who are lineal descendants of the seller,
except that the aggregate amount allocated to the benefit of all such lineal
descendants during the nonallocation period shall not exceed 5% of the employer
securities (or other amounts attributable to or in lieu thereof) held by the
trust attributable to a section 1042 sale of employer securities to the trust by
any person who is related (within the meaning of section 267(c)(4) to such
lineal descendants.
An individual shall be restricted under the third bullet point if he or
she is described by that clause at any time during the one-year period ending on
the date of the section 1042 sale or as of the date employer securities are
allocated to participants.
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<PAGE> 56
MISCELLANEOUS
WHAT "PAY" OR "COMPENSATION" MEANS. With the three exceptions noted
below in this section, when we refer to your "pay" or "compensation" we mean
your taxable wages for the purpose of federal income tax as shown in the box
labelled "Wages, Tips, Other Compensation" on your W-2, plus any amounts
excluded solely because of the nature or location of the services provided. The
period used to determine your pay or compensation for a plan year is the plan
year.
Adding back salary reduction amounts. "Pay" or "compensation" also
includes salary reduction amounts under a cafeteria plan (Code section 125), a
401(k) plan (Code section Code section 402(e)(3)), a tax-sheltered annuity (Code
section 403(b)), a simplified employee pension plan (Code section 402(h)) or an
eligible deferred compensation plan of a tax-exempt organization (Code section
457).
Excluding extraordinary items. For all purposes except the limit
described under the heading "Maximum Amount of Total Contributions" and the
rules described under the heading "Improvements When the Plan Is Top-Heavy,"
"pay" or "compensation" does not include:
- reimbursements or other expense allowances,
- fringe benefits(cash and non-cash),
- moving expenses,
- deferred compensation, or
- welfare benefits.
$160,000 limit on compensation. As required by section 401(a)(17) of
the Code, compensation in excess of $160,000 (adjusted for the cost of living)
is not taken into account for any purpose under this plan.
LEASED EMPLOYEES. If the employer previously leased your services from
a leasing organization but later you become employed by the employer itself,
your length of service includes your service as a leased employee if it was
performed at a time when the employer maintained this plan. (When we say
"employer," we include related employers, as described above under the heading
"How The Length of Your Service Is Calculated".) For this purpose, service as a
leased employee is service performed under primary direction or control by the
employer, pursuant to an agreement between a leasing organization and the
employer, regardless of how long you performed that service.
FAMILY AND MEDICAL LEAVE. Any leave to which you are entitled under the
federal Family and Medical Leave Act of 1993 will not result in the loss of any
"employment benefit" provided by this plan that had accrued prior to the leave
and that would not have been lost if you had remained actively at work during
the leave.
CHANGES IN VESTING SCHEDULE. If the schedule shown at the beginning of
the plan in the section called "Quick-Reference Information" under the heading
"Length of Service Required for Benefits" is ever changed, there are two
limitations. First, the change will never reduce the percentage that applies to
your account based on employer contributions that were made on top of your pay
through the end of the last year before the change was adopted (or became
effective, if later). Second, if you have 3 or more years of service when the
change is adopted (or becomes effective, if later), you may nevertheless choose
to stay under the schedule that was in effect before the change was made.
NON-ALIENATION. Except for domestic relations orders described in the
section entitled "Child Support, Alimony and Division of Property in Divorce,"
your right to benefits under the plan cannot be assigned or alienated. This
means you cannot sell your interest in the plan or pledge it as security for a
loan. No creditor of yours can take away your interest in the plan. This
provision of the plan is intended to comply with,
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<PAGE> 57
and apply just as broadly and as stringently as, section 206(d) of ERISA and
section 401(a)(13) of the Code.
PAYMENTS TO MINORS. If the proper recipient of money from the plan is a
minor, or if the plan administrator believes the recipient to be legally
incompetent to receive it, the plan administrator may direct that the payment be
made instead to anyone who has authority over the affairs of the recipient, such
as a parent, guardian, or other relative.
Payment made in this manner will entirely satisfy the obligation of the
plan to pay the money, and the plan administrator will have no responsibility to
see what happens to the money after it is paid.
UNCLAIMED BENEFITS. People are expected to claim their money from the
plan when their employment terminates. It is your responsibility to make the
claim; the plan administrator does not have any responsibility to track you
down.
If you still haven't claimed your money by the time when it must be
paid, the plan administrator will make a reasonable effort to locate you (such
as inquiring of the employer, sending a letter to your last known address, and
inquiring of the Social Security Administration). If the plan administrator
still can't find you, the plan administrator will set up an interest-bearing
account with a financial institution in your name in order to get your money out
of the plan. If no financial institution will set up an account in your name
without your participation, the plan administrator will have to assume that you
are dead and pay the money in accordance with the death provisions of the plan.
PLAN ASSETS SOLE SOURCE OF BENEFITS. The plan assets (held in the trust
fund or by an insurance company) are the only source of benefits under the plan.
The employer and plan administrator are not responsible to pay benefits from
their own money, nor do they guarantee the sufficiency of the trust fund or
insurance contracts in any way.
NO RIGHT TO EMPLOYMENT. Many of the requirements of the plan depend on
your employment status, particularly how long you have worked for the employer.
But your employment status is purely a matter between you and your employer; the
plan does not change anything. The fact that your rights under the plan might be
different if your employment history were different does not give you any
different employment rights than if the plan had never existed.
PROFIT SHARING AND STOCK BONUS PLAN. This plan is intended to qualify
under section 401(a) of the Code as a profit sharing plan with a qualified
cash-or-deferred arrangement and, to the extent of the employer stock accounts,
as a stock bonus plan.
MERGER OF PLAN. The Code requires that the plan contain the following
provision (which is also a requirement of ERISA). However, the interpretation
and application of this provision are quite different from what it appears to
say, and we intend that it be interpreted and applied no more strictly than
required by the regulations under the Code:
The plan may not merge or consolidate with, or engage in a transfer of
assets or liabilities with, any other plan unless the benefit that each
participant in this plan would receive if both plans terminated immediately
after the transaction is no less than the benefit that the participant would
have received if this plan had terminated immediately before the transaction.
PROTECTION OF BENEFITS, RIGHTS, AND FEATURES FROM PREVIOUS EDITION OF
PLAN. Since this document constitutes an amendment and restatement of the plan,
it must preserve, to the minimum extent required by section 411(d)(6) of the
Code and Treasury Regulation 1.411(d)-4, all benefits, rights and features
required by that Code section and regulation to be protected against reduction.
While we believe that this document preserves all such benefits, rights and
features, as a failsafe we recite here that the terms of all such benefits,
rights, and features, to the extent entitled
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<PAGE> 58
to protection under this restatement of the plan, are hereby incorporated by
reference from the prior plan document.
GOVERNING LAW. The plan is subject to ERISA and therefore governed
exclusively by federal law except where ERISA provides otherwise. If state law
ever applies to the interpretation or application of the plan, it shall be the
law of the state where the employer has its principal place of business.
NO PBGC COVERAGE. This plan is not covered by the plan termination
insurance system established under Title IV of ERISA and administered by the
Pension Benefit Guaranty Corporation. As a defined contribution, individual
account plan, it is not eligible for coverage under the law.
STATEMENT OF ERISA RIGHTS. Regulations of the federal government
require that the following "Statement of ERISA Rights" appear in this document,
and we are reproducing it here with quotation marks. Not all of the statement is
necessarily accurate or applies to this plan. Neither the employer nor the plan
administrator takes any responsibility for the accuracy or completeness of this
statement, which is made to you by the federal government, not by anyone
connected with the plan:
"As a participant in this plan, you are entitled to certain rights and
protections under the Employee Retirement Income Security Act of 1974 (ERISA).
ERISA provides that all plan participants shall be entitled to:
"Examine, without charge, at the plan administrator's office and at
other specified locations, such as worksites and union halls, all plan
documents, including collective bargaining agreements and copies of all
documents filed by the plan with the U.S. Department of Labor, such as detailed
annual reports and plan descriptions.
"Obtain copies of all plan documents and other plan information upon
written request to the plan administrator. The administrator may make a
reasonable charge for the copies.
"Receive a summary of the plan's annual financial report. The plan
administrator is required by law to furnish each participant with a copy of this
summary annual report.
"Obtain a statement telling you whether you have a right to receive a
pension at normal retirement age (age 65) and if so, what your benefits would be
at normal retirement age if you stopped working under the plan now. If you do
not have a right to a pension, the statement will tell you how many more years
you have to work to get a right to a pension. This statement must be requested
in writing and is not required to be given more than once a year. The plan must
provide the statement free of charge.
"In addition to creating rights for plan participants, ERISA imposes
duties upon the people who are responsible for the operation of the employee
benefit plan. The people who operate your plan, called 'fiduciaries' of the
plan, have a duty to do so prudently and in the interest of you and other plan
participants and beneficiaries. No one, including your employer or any other
person, may fire you or otherwise discriminate against you in any way to prevent
you from obtaining a pension benefit or exercising your rights under ERISA. If
your claim for a pension benefit is denied in whole or in part you must receive
a written explanation of the reason for the denial. You have the right to have
the plan review and reconsider your claim. Under ERISA, there are steps you can
take to enforce the above rights. For instance, if you request materials from
the plan and do not receive them within 30 days, you may file suit in a federal
court. In such a case, the court may require the plan administrator to provide
the materials and pay you up to $100 a day until you receive the materials,
unless the materials were not sent because of reasons beyond the control of the
administrator. If you have a claim for benefits which is denied or ignored, in
whole or in part [and you have exhausted the plan's claim and appeal procedure],
you may file suit in a state or federal court. If it should happen that plan
fiduciaries misuse the plan's money, or if you are discriminated against for
asserting your rights, you may seek assistance from the U.S. Department of
Labor, or you may file suit in a federal court. The court will decide who should
pay court costs and legal fees. If you are successful the court may order the
person you have sued to pay these costs and fees. If you lose, the court may
order you to pay these costs and fees, for example, if it finds your claim is
frivolous. If you have any questions about this
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<PAGE> 59
statement or about your rights under ERISA, you should contact the nearest Area
Office of the U.S. Labor-Management Services Administration, Department of
Labor."
Service of legal process may be made on the plan administrator or any
trustee.
SPECIAL ARRANGEMENTS FOR
NEW PARTICIPATING EMPLOYERS
INTRODUCTION. When a new school joins the EDMC family, it is sometimes
appropriate to make special arrangements for the employees of that school, in
order to bring them into this plan in a way that harmonizes with the plan that
they were in before. If a special arrangement is made, this section describes
it.
ILLINOIS INSTITUTE OF ART. In determining the length of your service
for getting into this plan (that is, the Retirement Plan) effective January 1,
1996 and for deciding what portion of your account you are entitled to if you
leave before age 65, hours of service in the employ of Ray College of Design
from January 1, 1995 to November 8, 1995 are taken into account as hours of
service under the plan to the same extent as if Ray College of Design had been a
participating employer during that period.
NEW YORK RESTAURANT SCHOOL. In determining the length of your service
for getting into this plan (that is, the Retirement Plan) effective January 1,
1997 and for deciding what portion of your account you are entitled to if you
leave before age 65, hours of service in the employ of New York Restaurant
School, Inc. from January 1, 1996 to August 2, 1996 are taken into account as
hours of service under the plan to the same extent as if New York Restaurant
School, Inc. had been a participating employer during that period.
In addition, any individual who was an employee of New York Restaurant
School, Inc. immediately prior to August 2, 1996 and was eligible to participate
in the New York Restaurant School, Inc. 401(k) Profit Sharing Plan and becomes
an employee eligible to participate in this plan by reason of New York
Restaurant School's becoming a participating employer on or about August 2, 1996
is eligible to participate in this plan effective September 1, 1996
notwithstanding the semi-annual entry dates otherwise provided in the section
entitled "How You Get Into the Plan."
ART INSTITUTES INTERNATIONAL PORTLAND, INC. In determining the length
of your service for getting into this plan (that is, the Retirement Plan)
effective April 1, 1998 and for deciding what portion of your account you are
entitled to if you leave before age 65, hours of service in the employ of
Bassist College from January 1, 1997 to February 26, 1998 are taken into account
as hours of service under the plan to the same extent as if Bassist College had
been a participating employer during that period.
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<PAGE> 60
APPENDIX A TO THE
EDUCATION MANAGEMENT CORPORATION
RETIREMENT PLAN
Participating Employers As of April 7, 1999
-------------------------------------------
(* denotes employer that does not participate in ESOP feature)
<TABLE>
<CAPTION>
<S> <C>
Art Institute of Atlanta Art Institute of Philadelphia
3376 Peachtree Road, NE 622 Chestnut Street
Atlanta, GA 30326 Philadelphia, PA 19103
Art Institute of Dallas Art Institute of Phoenix*
8080 Park Lane, Suite 100 2233 West Dunlap Avenue
Dallas, TX 75231 Phoenix, AZ 85021
Art Institute of Ft. Lauderdale Art Institute of Seattle
1799 SE 17th Street 2323 Elliott Avenue
Ft. Lauderdale, FL 33316 Seattle, WA 98121
Art Institute of Houston Colorado Institute of Art
1900 Yorktown 200 East 9th Avenue
Houston, TX 77056 Denver, CO 80203
Art Institutes International at San Francisco* EDMC OnLine*
101 Jessie Street 6737 West Union Hills Drive
San Francisco, CA 94105 Glendale, AZ 85308
(effective December 19, 1997)
Illinois Institute of Art at Chicago*
Art Institutes International Portland, Inc.* 350 North Orleans, Suite 136-L
2000 Southwest Fifth Avenue Chicago, IL 60654
Portland, OR 97201
(effective April 1, 1998) Illinois Institute of Art at Schaumburg*
1000 Plaza Drive, Suite 1000
Art Institute of Los Angeles* Schaumburg, IL 60173
Santa Monica Business Park, Building T
2950 31st Street, Suite 150 National Center for Paralegal Training
Santa Monica, CA 90405 3414 Peachtree Road, N.E., Suite 528
(effective January 13, 1997) Atlanta, GA 30326
Art Institutes International Minnesota, Inc.* National Center for Professional Development
15 South 9th Street University Division
LaSalle Building 3414 Peachtree Road, N.E., Suite 528
Minneapolis, MN 55402 Atlanta, GA 30326
(effective January 28, 1997)
Mind Leap, Inc.*
Art Institute of Pittsburgh 230 West Monroe Street, Suite 2450
526 Penn Avenue Chicago, IL 60606
Pittsburgh, PA 15222
New York Restaurant School*
75 Varick Street, 16th Floor
New York, NY 10013
</TABLE>
<PAGE> 61
APPENDIX B TO THE
EDUCATION MANAGEMENT CORPORATION
RETIREMENT PLAN
Investment Options Effective July 1, 1998
-----------------------------------------
MANAGED INCOME PORTFOLIO (FIDELITY). This is a commingled pool of the
Fidelity Group Trust for Employee Benefit Plans. Its objective is to preserve
principal while earning interest income. It invests in investment contracts
offered by major insurance companies and other approved financial institutions
and in certain types of fixed income securities. A small portion of the fund is
invested in a money market fund to provide daily liquidity.
FIDELITY INTERMEDIATE BOND FUND. This is a mutual fund that invests in
all types of U. S. and foreign bonds, including corporate or U. S. government
issues. Normally, it selects bonds considered medium to high quality
("investment grade") while maintaining an average maturity of 3 to 10 years.
These bond prices will go up and down more than those of short-term bonds.
FIDELITY ASSET MANAGER. This is a mutual fund that invests in all three
basic types of investments: stocks, bonds and short-term instruments of U. S.
and foreign issuers. The managers may gradually shift assets from one type to
another based on the current outlook of the various markets. But over the long
term, the fund will generally aim for 50% stocks, 40% bonds, and 10% in
short-term/money market instruments.
FIDELITY ASSET MANAGER: INCOME. This is a mutual fund that invests in
all three basic types of investments: stocks, bonds and short-term instruments
of U. S. and foreign issuers. Its approach focuses on bonds and short-term
investments for current income. The managers may gradually shift assets from one
type to another based on the current outlook of the various markets. But over
the long term, the fund will generally aim for 20% stocks, 50% bonds, and only
30% in short-term/money market instruments.
FIDELITY ASSET MANAGER: GROWTH. This is a mutual fund that invests in
all three basic types of investments: stocks, bonds and short-term instruments
of U. S. and foreign issuers. Its more aggressive approach focuses on stocks for
high potential return. The managers may gradually shift assets from one type to
another based on the current outlook of the various markets. But over the long
term, the fund will generally aim for 70% stocks, 25% bonds, and only 5%
short-term/money market instruments. This is Fidelity's most flexible and
aggressive asset allocation fund.
SPARTAN U. S. EQUITY INDEX FUND. This fund, managed by Bankers Trust,
seeks to provide investment results that correspond to the total return of
common stocks publicly traded in the United States. In seeking this objective,
the fund attempts to duplicate the composition and total return of the S&P 500.
The fund uses an "indexing" approach and allocates its assets similarly to those
of the index. The fund's composition may not always be identical to that of the
S&P 500.
FIDELITY MAGELLAN FUND. This is a growth mutual fund that seeks
long-term capital appreciation by investing in the stocks of both well-known and
lesser known companies with potentially above-average growth potential and a
correspondingly higher level of risk. Securities may be of foreign, domestic,
and multinational companies.
MAS VALUE PORTFOLIO. This fund, managed by Miller, Anderson & Sherrerd,
LLP, invests mostly in common stocks of large undervalued companies. It looks
for undervalued companies with potential for growth in stock price. Investments
are spread out across different kinds of companies and industries. Share price
and return will vary.
FIDELITY GROWTH COMPANY FUND. This is a mutual fund that seeks
long-term capital appreciation by investing primarily in common stocks and
securities convertible into
<PAGE> 62
common stocks. It may invest in companies of any size with above-average growth
potential, though growth is most often sought in smaller, less well known
companies in emerging areas of the economy. The stocks of small companies often
involve more risk than those of larger companies.
NEUBERGER & BERMAN GENESIS TRUST. This fund invests primarily in common
stocks of small-cap companies (those with market capitalizations of $1.5 billion
or less at the time of investment). Market capitalization refers to the total
market value of a company's outstanding stock. The fund looks for growth
potential by investing in strong companies with solid performance histories and
a proven management team. The fund diversifies among many companies and
industries.
FIDELITY WORLDWIDE FUND. This is a mutual fund that seeks growth of
capital by investing in securities issued anywhere in the world. Under normal
conditions, it will invest in at least three different countries, one of which
will be the U. S. The fund will invest in established companies as well as newer
or smaller capitalization companies. Foreign investments may pose greater risks
and potential rewards than U. S. investments. The risks include political and
economic uncertainties of foreign countries as well as the risk of currency
fluctuations.
<PAGE> 1
EXHIBIT 10.06
THE
EDUCATION MANAGEMENT CORPORATION
DEFERRED COMPENSATION PLAN
<PAGE> 2
TABLE OF CONTENTS
Welcome to the Plan!....................................................Page 1
Participation................................................................1
Salary Deferrals.............................................................2
Company Credits..............................................................3
Investment Credits...........................................................4
Lack of Funding..............................................................5
Payment of Benefits..........................................................6
Hardship Withdrawals.........................................................8
Administration, Claims and Appeals...........................................9
Miscellaneous...............................................................10
<PAGE> 3
WELCOME TO THE PLAN!
INTRODUCTION. This is the plan document for the Education Management
Corporation Deferred Compensation Plan. This is an unfunded, non-qualified
deferred compensation arrangement. The purpose is to allow additional retirement
savings for a select group of management or highly compensated employees in view
of the restrictions on the contributions that can be made, or benefits that can
be accrued, for these employees under tax-qualified retirement plans of the
employer.
ORDINARY NAMES. In this document, we will call things by their ordinary
names. Education Management Corporation will be called "the company." This plan
will simply be called "the plan." When we say "you," we mean employees who are
eligible to participate in the plan and choose to do so. When we say "the Code,"
we mean the Internal Revenue Code of 1986, as amended.
EFFECTIVE DATE. This document amends and restates the plan effective
January 1, 1998.
PARTICIPATION
COMMITTEE DISCRETION. The Retirement Committee has complete discretion
to select employees for participation in this plan.
CURRENT CRITERIA. At present, the Retirement Committee has exercised
its discretion to make eligible each employee of the company who is:
- an elected officer of the company or
- chief executive of an operating unit.
LEGAL LIMITATION. Despite the discretion of the Retirement Committee
and the current criteria just described, no employee will be selected for
participation or continued as a participant in this plan if, due to the
employee's participation, the plan would fail to qualify as primarily for the
purpose of providing deferred compensation to a select group of management or
highly compensated employees, within the meaning of sections 201, 301 and 401 of
the Employee Retirement Income Security Act of 1974, as amended.
PARTICIPATION AGREEMENT. Participation is not automatic if and when you
satisfy the current criteria. Instead, employees who satisfy the current
criteria will be notified of their eligibility and offered the opportunity to
participate. If you wish to participate, you must complete and file with the
administrator of the plan a written participation agreement.
If you choose to make salary deferrals, the participation agreement
will reflect your choice. But in any event, the participation agreement will (i)
confirm your participation, (ii) indicate your choice with regard to investment
credits on any company credits that may be made, (iii) indicate your choice as
to the form of payment
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Deferred Compensation Plan Page 1
<PAGE> 4
and (iv) designate your beneficiary.
ANNUAL DETERMINATION. Eligibility to participate is determined
annually. The fact that you were eligible to participate (and did participate)
in one year does not automatically entitle you to participate in any future
year.
Your participation agreement, however, is "evergreen." It remains in
effect and governs your choices under the plan during those years when you do
participate in the plan, unless and until you change it by completing and filing
a new one.
SALARY DEFERRALS
INTRODUCTION. You may choose to defer a certain percentage of your
salary and/or bonus into the plan. If you do, that amount will not be paid to
you currently in cash but will be credited to a bookkeeping account in your name
under the plan.
AMOUNT. There are two possible elements of your choice to defer.
Ordinary deferral of salary. First, you may defer a fixed, whole
percentage of your salary and/or bonus. The amount of deferral must be at least
1% of your compensation or $1,000, whichever is less. The amount may not be more
than 7% of your compensation.
Supplemental deferral based on amounts returned under Retirement Plan.
Second, entirely separate from the percentage described in the preceding
paragraph, you may defer an additional amount of salary equal to all or a
portion of any elective contributions (plus interest) that are returned to you
from the Education Management Corporation Retirement Plan (we'll just call it
the "Retirement Plan") by reason of the non-discrimination requirements of law.
That is to say, in a given calendar year, elective contributions made
under the Retirement Plan in the preceding year may be returned to you (with
interest) because of the non-discrimination requirements of law. If you have
elected supplemental deferral under this paragraph, while the elective
contributions (and interest) will still be returned to you in cash from the
Retirement Plan, an offsetting additional deferral will be taken from your
current salary under this plan. The net economic effect will be that the amount
remains deferred, but under this plan instead of under the Retirement Plan. You
may elect to defer any whole percentage of any such return of elective
contributions, from zero to 100%.
WRITTEN ELECTION. In order to defer compensation into the plan, you
must complete and file with the administrator of the plan a written election.
The written election will specify the percentage and whether it applies to
salary or bonus or both. The election will also specify whether you wish to
defer an additional amount equal to all or any portion of any elective
contributions (and interest) that may be returned to you in the particular
calendar year.
TIMING. In order to defer for a particular calendar year, you must
complete and file the written election with the administrator of the plan no
later than December 15 of the preceding calendar year.
With respect to the additional deferral equal to all or a portion of
the elective contributions that may be returned under the Retirement Plan, the
timing may require more explanation. An election made by December 15
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Page 2 The Education Management Corporation
<PAGE> 5
of Year 1 applies to compensation earned in Year 2. In the case of supplemental
deferrals equal to contributions that are returned under the Retirement Plan,
the supplemental deferral occurs in Year 2 based on elective contributions that
are returned in Year 2 and the deferral is made from compensation earned and
otherwise payable in Year 2.
This is so even though the contributions returned from the Retirement
Plan in Year 2 were made to the Retirement Plan in Year 1. An election of
supplemental deferral under this plan must therefore be made before it is known
whether elective contributions will be returned from the Retirement Plan at all.
The election will therefore be contingent applicable only if and when elective
contributions are in fact returned under the Retirement Plan.
COMPANY CREDITS
INTRODUCTION. Whether or not you choose to defer salary and/or bonus,
you may receive company credits under the plan in the following circumstances.
MATCHING CONTRIBUTIONS. If you made elective contributions under the
Retirement Plan that generated the maximum matching contribution under the
Retirement Plan (or your matching contributions did not reach the maximum
because your elective contributions reached the dollar limit before the end of
the year), you may be entitled to a company credit under this section.
If so, you are entitled to a credit under this section if the amount of
matching contributions that you received under the Retirement Plan was limited:
- by section 410(a)(17) of the Code (which limits compensation taken
into account under the Retirement Plan to a stated amount, which was $160,000 in
1998, for example) or
- by section 402(g) of the Code (which limits elective contributions
under the Retirement Plan to a stated amount, which was $10,000 in 1998, for
example).
If so, the company will credit you under this plan with an amount equal to the
additional matching contribution that you would have received under the
Retirement Plan if you had not been so limited.
EXAMPLE 1: It is 1998. Your compensation is $200,000. You make elective
contributions under the Retirement Plan of 6% of compensation. Since
compensation for that purpose is limited by law to $160,000, your
elective contributions amount to $9,600. You receive a matching
contribution under the Retirement Plan equal to 4% of $160,000, or
$7,200. Under this section of this plan, you receive a company credit
equal to 4% of $40,000, or $1,800.
EXAMPLE 2: Same facts as Example 1, except that you make elective
contributions under the Retirement Plan of 4% of compensation. You
receive no credit under this section of this plan, because you did not
make elective contributions under the Retirement Plan that generated
the maximum matching contribution under the Retirement Plan, nor did
your matching contributions reach the maximum because your elective
contributions reached the dollar limit.
EXAMPLE 3: It is 1998. Your compensation is $240,000. You make elective
contributions under the Retirement Plan of 6.25% of compensation. Your
elective contributions amount
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Deferred Compensation Plan Page 3
<PAGE> 6
exactly to the limit of $10,000 (6.25% of $160,000). You receive a
matching contribution under the Retirement Plan equal to 4 % of
$160,000 or $7,200. Under this section of this plan, you receive a
company credit equal to 4 % of $80,000, or $3,600.
EXAMPLE 4: Same facts as Example 3, except that you make elective
contributions under the Retirement Plan of 10% of compensation. As a
result, your elective contributions under the Retirement Plan hit the
limit of $10,000 after just five months and are shut off. And, as a
result, your matching contributions total just $4,500. Under this
section of this plan, you receive a company credit equal to $2,700 (the
difference between the maximum match under the Retirement Plan and the
match you actually received) plus 4 % of $80,000, for a total credit
under this section of the plan of $6,300.
DISCRETIONARY CONTRIBUTIONS AND FORFEITURES. Your share of company
discretionary contributions and forfeitures under the Retirement Plan may be
limited by either or both of two legal limits the limit on compensation that may
be taken into account under the Retirement Plan (in 1998, $160,000) and the
limit under section 415 of the Code on total allocations of contributions and
forfeitures under the Retirement Plan and the Education Management Corporation
Employee Stock Ownership Plan (which we will call "the ESOP"). If so, the
company will credit you under this plan with the discretionary contributions
and/or forfeitures that you would have received under the Retirement Plan (if
the Retirement Plan had not been subject to those two legal limits) but did not
receive under the Retirement Plan.
ESOP CONTRIBUTIONS. Your share of company contributions and forfeitures
under the ESOP may likewise be limited by the legal limit on compensation taken
into account and the limit under section 415 of the Code. If so, the company
will credit you under this plan with the contributions and/or forfeitures that
you would have received under the ESOP (if the ESOP had not been subject to
those two legal limits) but did not receive under the ESOP. These credits are in
cash, of course, not stock.
INVESTMENT CREDITS
INTRODUCTION. The amount that you are entitled to receive under the
plan is a function of the salary deferrals that you make, the company credits
that you receive under the plan, and investment credits. This section will
explain the system of investment credits.
HYPOTHETICAL INVESTMENTS. Investment credits are calculated as if the
amounts standing to your credit under the plan were invested in one or more of a
variety of mutual or collective funds (listed below). While we call them
investment "credits," you realize of course that they may be either positive or
negative, depending on the performance of the funds that are used as measuring
devices.
In addition, we want to emphasize that, for legal reasons, the amounts
standing to your credit under the plan are nothing more than bookkeeping entries
that measure the extent of the company's contractual obligation to pay you under
the terms of the plan. That includes the investment credits. You do not have any
right to, or interest in, any assets that the company may set aside for this
purpose or investment gains on them.
YOUR CHOICE. You do, however, have a choice as to the mutual or
collective funds that will be used as the measuring stick for the investment
credits that will be added to your account. When you first become eligible to
participate, you will be asked to choose from among the funds offered under the
Retirement Plan. Those choices
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<PAGE> 7
are shown on Appendix A to the Retirement Plan, which is incorporated here by
reference as it may be in effect from time to time. As an exception, the Managed
Income Portfolio (Fidelity) is not available under this plan.
If for any reason there is no current choice on file for you, the plan
hereby requires that the measuring stick be the Fidelity Intermediate
Bond Fund, and neither the plan administrator nor any other fiduciary
of the plan shall have any authority or discretion to direct otherwise.
The same applies to any portion of your choice that becomes out of
date, such as if you have chosen a particular fund and that fund is no
longer offered (unless a substitute fund is automatically provided).
The choice that you make for the amounts currently standing to your
credit under the plan need not be the same as the choice you make for future
credits. But choices among the funds are not permitted in increments smaller
than 10% of the amount to which they apply.
STATEMENTS. The administrator of the plan will provide regular
statements showing the amounts standing to your credit under the plan. The
statements will separately account for salary deferrals, different types of
company credits, and investment credits.
LACK OF FUNDING
INTRODUCTION. We say "credits" in this document deliberately, because
this plan involves nothing more than a contractual promise by the company to pay
deferred compensation when (and in the amounts) determined under the terms of
the plan. Legally, the plan is unfunded and unsecured, as this section will
explain.
UNFUNDED, UNSECURED PROMISE TO PAY. This plan is unfunded and has no
assets. The promise of benefits under the plan is no more than a contractual
obligation of the company to be satisfied from its general assets. Participation
in the plan gives you nothing more than the company's contractual promise to pay
deferred compensation when due in accordance with the terms of this plan.
SALARY DEFERRAL. Just to make the point clear once again, if you choose
to defer salary under the plan, the amount that you choose to defer is not an
"employee contribution" and is not an asset of yours or of the plan. It reflects
nothing more than a re-structuring of your compensation arrangement, whereby
current compensation is somewhat less and deferred compensation is somewhat
more.
RESERVES. The company is not required to segregate, maintain or invest
any portion of its assets by reason of its contractual commitment to pay
deferred compensation under this plan. If the company nevertheless chooses to
establish and invest a reserve (as a matter of prudent management of its
contractual liability), such reserve remains an asset of the company in which no
participating employee has any right, title or interest. Employees entitled to
deferred compensation under this plan have the status of general unsecured
creditors of the company.
RABBI TRUST. Though not required to do so, the company may establish
(and has in fact established) a so-called rabbi trust (so named because it was
invented by a synagogue and first approved by the IRS for a rabbi). Here is how
the rabbi trust works:
- The rabbi trust is held by a financial institution as trustee under a
detailed, written trust agreement.
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Deferred Compensation Plan Page 5
<PAGE> 8
- The company contributes cash to the rabbi trust at whatever times and
in whatever amounts it chooses.
- The assets of the trust are considered to be assets of the company.
For example, the investment earnings of the trust are taxable income to the
company under the "grantor trust" rules. As noted in the previous section of
this plan, no participant or beneficiary of the plan has any right, title or
interest in the assets of the rabbi trust.
- But under the terms of the rabbi trust, the assets may be used only
for the purpose of paying benefits under this plan, barring bankruptcy of the
company (or similar events), in which event the assets of the rabbi trust are
available not just to participants and beneficiaries of this plan but to all
other creditors of the company as well.
- To the extent that payments are made to participants and
beneficiaries by the trustee from the rabbi trust, those payments are considered
payments by the company under the plan and satisfy the company's obligation
under the plan.
PAYMENT OF BENEFITS
INTRODUCTION. This section of the plan explains when you are entitled
to payment under the plan, how much, and in what form.
NORMAL RETIREMENT. If your employment with the company terminates on or
after your 65th birthday, you are entitled to receive payment equal to the total
amount standing to your credit under the plan, including salary deferral
credits, company credits, and investment credits.
EARLY RETIREMENT. If your employment with the company terminates on or
after your 55th birthday and you have completed at least 7 years of service with
the company (with the meaning of the Retirement Plan), you are entitled to
receive payment equal to the total amount standing to your credit under the
plan, including salary deferral credits, company credits, and investment
credits.
DISABILITY. If you become totally and permanently disabled while still
employed by the company, you are entitled to receive payment equal to the total
amount standing to your credit under the plan, including salary deferral
credits, company credits, and investment credits.
For this purpose, total and permanent disability means that you are
unable to engage in any substantial gainful activity by reason of any physical
or mental impairment which is expected to result in death or be of a long,
continued and indefinite duration, as certified by a written opinion of a
physician selected by the administrator of the plan.
DEATH. If you die while still employed by the company, your beneficiary
is entitled to receive payment equal to the total amount standing to your credit
under the plan, including salary deferral credits, company credits, and
investment credits.
OTHER TERMINATION OF EMPLOYMENT. If your employment with the company
terminates under any circumstances other than those previously listed in this
section, you are entitled to receive all of your salary deferral credits and
investment credits on them.
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<PAGE> 9
You are also entitled to receive some or all of the company credits and
investment credits on them if you have completed at least 3 years of service
(within the meaning of the Retirement Plan). The percentage that you are
entitled to receive is determined by the following table:
Years of Service Percentage
---------------- ----------
3 20%
4 40%
5 60%
6 80%
7 or more 100%.
FORM OF PAYMENT. The available forms of payment are:
- a single payment of cash or
- annual installment payments over a period that you choose, as long as
it is at least 2 years and not more than 10 years.
If you choose installment payments, the unpaid balance of your
entitlement will remain in the plan and will remain subject to investment
credits. The amount of each annual payment will be the balance then standing to
your credit under the plan multiplied by a fraction which is 1 divided by the
number of remaining payments.
Payment will be made in the form indicated on your original
participation agreement. As an exception, you may change the form of payment by
indicating a different choice on a subsequent participation agreement, but the
new choice will apply only to amounts credited to you under the plan after the
new participation agreement is filed with the administrator of the plan.
WHEN PAYMENT IS MADE. Ordinarily, payment is made (or, in the case of
installments, begun) as soon as administratively feasible after the event
triggering payment.
On your participation agreement, however, you may choose for payment
(or, in the case of installments, the start of payments) to be delayed for a
fixed period or until a fixed date.
If you die before payment is made in full, the balance of your
entitlement will be paid to your beneficiary as soon as administratively
feasible.
YOUR BENEFICIARY. Your beneficiary is the individual or entity
designated on the last participation agreement that was completed and filed with
the administrator of the plan before your death. Please note that separation or
divorce does not automatically change your designation of beneficiary. It is
your responsibility to keep your designation current based on your current
circumstances.
If no designated beneficiary survives you, your estate will be
considered your beneficiary. This might occur if you fail to name a beneficiary
or if all of your designated beneficiaries die before you do.
If your beneficiary is a minor or legally incompetent, the
administrator may, in its discretion, make payment to a legal or natural
guardian, other relative, court-appointed representative, or any other adult
with whom the minor or incompetent resides. Any payment made in good faith by
the administrator will fully discharge the obligation of the plan with regard to
that payment, and the administrator will have no duty or responsibility to see
to the proper application of any such payment.
FORFEITURES. If your employment terminates as described above under the
heading "Other termination
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Deferred Compensation Plan Page 7
<PAGE> 10
of employment" and you are not entitled to 100% of
your company credits (and investment credits on them), the balance will be
retained on the books of the plan until you have a "Break in Service" within the
meaning of the Retirement Plan but will then be permanently forfeited.
That is to say, if you return to employment before incurring a "Break
in Service," the forfeiture amount will remain in your account and you may be
able to earn additional entitlement to that amount with additional years of
service. But if you return after incurring a "Break in Service," the forfeiture
amount will have been removed from your account and you will never be able to
earn any additional entitlement to that amount.
HARDSHIP DISTRIBUTIONS
INTRODUCTION. Besides the events described in the preceding section of
the plan all of which involve termination of employment with the company there
is one circumstance in which you may be able to withdraw from the plan while
still employed.
ADMINISTRATOR'S DISCRETION. The administrator of the plan has
discretion to grant an in-service withdrawal in the circumstance where you
establish hardship. But hardship withdrawal is limited to your salary deferral
credits. That means no company credits and no investment credits on either
salary deferral credits or company credits.
HARDSHIP. For this purpose, hardship means severe financial hardship to
you resulting from:
- a sudden and unexpected illness or accident of you or a dependent
(within the meaning of section 152(a) of the Code),
- loss of your property due to casualty, or
- other similar extraordinary and unforeseeable circumstances arising
as a result of events beyond your control.
The need to send a child to college and the desire to purchase a home
do not qualify for a hardship withdrawal.
AMOUNT AVAILABLE. The amount available is not more than is reasonably
necessary to satisfy the need after exhaustion of other sources such as:
- reimbursement or compensation by insurance or otherwise,
- liquidation of other assets (except to the extent that such
liquidation would itself create a hardship), and
- cessation of salary deferrals under this plan.
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<PAGE> 11
ADMINISTRATION, CLAIMS
AND APPEALS
INTRODUCTION. The administrator of the plan is the Retirement Committee
appointed by the board of directors of the company. The administrator has all
rights, duties and powers necessary or appropriate for the administration of the
plan.
CLAIMS. To claim your money under the plan, file a written claim with
the administrator (c/o Education Management Corporation, 300 Sixth Avenue,
Pittsburgh, PA 15222). The plan administrator will respond in writing within 90
days and, if the claim is denied, point out the specific reasons and plan
provisions on which the denial is based, describe any additional information
needed to complete the claim, and describe the appeal procedure.
APPEAL. If your claim is denied and you disagree and want to pursue the
matter, you must file an appeal in accordance with the following procedure. You
cannot take any other steps unless and until you have exhausted the appeal
procedure. For example, if your claim is denied and you do not use the appeal
procedure, the denial of your claim is conclusive and cannot be challenged, even
in court.
To file an appeal, write to the administrator stating the reasons why
you disagree with the denial of your claim. You must do this within 60 days
after the claim was denied. In the appeal process, you have the right to review
pertinent documents. You have the right to be represented by anyone else,
including a lawyer if you wish. And you have the right to present evidence and
arguments in support of your position.
The administrator will ordinarily issue a written decision within 60
days. The administrator may extend the time to 120 days as long as it notifies
you of the extension within the original 60 days. The administrator may, in its
sole discretion, hold a hearing. The decision will explain the reasoning of the
administrator and refer to the specific provisions of this plan on which the
decision is based.
DISCRETIONARY AUTHORITY. The administrator shall have and shall
exercise complete discretionary authority to construe, interpret and apply all
of the terms of the plan, including all matters relating to eligibility for
benefits, amount, time or form of benefits, and any disputed or allegedly
doubtful terms. In exercising such discretion, the administrator shall give
controlling weight to the intent of the company in establishing the plan. All
decisions of the administrator in the exercise of its appellate authority under
the plan (or in the exercise of its claims authority, absent an appeal) shall be
final and binding on the plan, the company and all participants and
beneficiaries.
MISCELLANEOUS
INTEGRATION. This plan document represents the totality of the
company's commitment to provide deferred compensation under this plan. There are
no other writings, nor are there any oral representations or understandings,
that reflect, add to, subtract from, or alter the terms of this document.
AMENDMENT AND TERMINATION. Although the plan was not established with
the intention that it be temporary or expire on a certain date, the company
reserves the right, in its sole discretion, to amend or terminate the plan at
any time, for any reason (or no reason), without notice, retroactively or
prospectively.
As the only exception to the foregoing authority to amend or terminate,
the company may not amend or
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Deferred Compensation Plan Page 9
<PAGE> 12
terminate the plan in such a way as to reduce the balance that stands to the
credit of any participant as of the date of adoption of any such amendment or
termination, including salary deferral credits, company credits, and investment
credits earned up to that time.
EXPENSES. The expenses of the plan will be borne by the company.
NON-ALIENATION. As required by the Internal Revenue Service, your right
to benefits under this plan is not subject in any manner to anticipation, sale,
transfer, assignment, pledge, encumbrance, attachment, garnishment or any other
type of alienation, whether initiated by you or by creditors of you or your
beneficiary. Any attempt at alienation will simply be void.
LIMITATION OF LIABILITY. No director, officer, or other employee of the
company shall be personally liable for any action taken or omitted in connection
with this plan and its administration unless attributable to his own fraud or
willful misconduct.
The company hereby agrees to provide insurance to, or otherwise
indemnify, every director, officer, and other employee of the company who serves
the plan in an administrative or fiduciary capacity against any and all claims,
loss, damages, expense, and liability arising from any act or failure to act in
that capacity unless there is a final court decision that the person was guilty
of gross negligence or willful misconduct.
APPLICABLE LAW. This plan will be construed according to the law of the
Commonwealth of Pennsylvania to the extent not pre-empted by ERISA.
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Page 10 The Education Management Corporation
<PAGE> 1
EXHIBIT 10.09
THIRD AMENDED AND RESTATED EMPLOYMENT AGREEMENT
WITH ROBERT B. KNUTSON
SEPTEMBER 8, 1999
The parties to this Third Amended and Restated Employment Agreement
(this "Agreement") are Education Management Corporation, a Pennsylvania
corporation (the "Company"), and Robert B. Knutson (the "Executive"). The
Company and the Executive currently are parties to the Second Amended and
Restated Employment Agreement of Robert B. Knutson dated August 14, 1996 (the
"Existing Employment Agreement"). The Executive is presently the Chairman and
Chief Executive Officer of the Company and the parties wish to provide for the
continued employment of the Executive in such positions.
Accordingly, the parties, intending to be legally bound, agree that the
Existing Employment Agreement is amended and restated in its entirety as
follows:
1. Position and Duties. During the term of the Executive's employment under this
Agreement, the Company shall employ the Executive and the Executive shall serve
the Company as its Chairman and Chief Executive Officer. He shall report to and
otherwise shall be subject to the direction and control of the Board of
Directors of the Company. The Executive's duties, titles and responsibilities
shall not be changed materially at any time without his consent (which consent
shall not be unreasonably withheld). The Executive shall use his best efforts to
promote the Company's interests and he shall perform his duties and
responsibilities faithfully, diligently and to the best of his ability,
consistent with sound business practices. The Executive shall devote his full
working time to the business and affairs of the Company, but may engage in such
activities that do not, in the reasonable opinion of the Board of Directors of
the Company, violate Section 8 or materially interfere with the performance of
his obligations to the Company under this Agreement. The Executive shall perform
his duties under this Agreement at the Company's principal executive offices in
Pittsburgh, Pennsylvania.
<PAGE> 2
2. Term of Employment. The term of the Executive's employment by the Company or
any direct or indirect subsidiary of the Company under this Agreement shall be
for a period of three (3) years commencing on the date of this Agreement (the
"Effective Date"), subject to earlier termination under Section 5 or Section 6
or extension of such term as described in the next sentence. The Executive's
employment under this Agreement shall renew automatically for successive
one-year periods, unless at least one hundred eighty (180) days prior to the
third or any subsequent anniversary of the Effective Date (each such anniversary
referred to herein as an "Expiration Date") either party shall have given notice
to the other party that the term of employment shall terminate on that
anniversary date. The term during which the Executive is employed pursuant to
this Agreement shall be referred to herein as the "Employment Term."
3. Compensation.
3.1. Base Salary. During the Employment Term, the Executive shall be
entitled to receive a base salary ("Base Salary") at the annual rate of not less
than $375,000 for services rendered to the Company or any of its direct or
indirect subsidiaries and payable in substantially equal biweekly installments.
The Executive's Base Salary under this Section 3.1 shall be increased on each
July 1 during the Employment Term, beginning on July 1, 2000, by the percentage
increase, if any, in the United States Bureau of Labor Statistics Consumer Price
Index for Urban Wage Earners and Clerical Workers - all items, for the
Pittsburgh Metropolitan Area during the immediately preceding twelve (12)
months. The Executive's Base Salary shall be subject to further increases, if
any, as may be approved at any time by the Board of Directors of the Company in
its discretion, on the recommendation of the Compensation Committee of the Board
of Directors.
3.2. Incentive Compensation. During the Employment Term, the Executive
also shall be entitled to receive incentive compensation (a "Bonus") in such
amounts and at such times as the Board of Directors of the Company (or a duly
authorized Compensation Committee of the Board, if applicable) may determine in
its discretion to award to him under any incentive compensation or other bonus
plan or plans for senior executives of the Company as may be established by the
Company from time to time (collectively, the "Executive Bonus Plan"). The
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<PAGE> 3
amount of any Bonus payable to the Executive under the Executive Bonus Plan
shall be paid to the Executive in accordance with the terms of the Executive
Bonus Plan. In accordance with the provisions of the Executive Bonus Plan and
generally subject to the discretion of the Board of Directors, the Executive
shall have an annual target bonus opportunity (a "Bonus Opportunity"). For the
Company's fiscal year ending June 30, 2000, the Executive's Bonus Opportunity
shall be not less than $400,000, but the actual bonus amount earned and payable
shall be contingent on the Executive meeting or exceeding performance standards
and goals to be established by the Board of Directors of the Company (or the
Compensation Committee, if applicable). For fiscal years beginning after June
30, 2000, the Executive's Bonus Opportunity shall be determined by the Board of
Directors of the Company (or a duly authorized Compensation Committee of the
Board, if applicable) in its discretion.
4. Expenses and Other Benefits.
4.1. Reimbursement of Expenses. During the Employment Term, the
Executive shall be entitled to receive prompt reimbursement for all reasonable
expenses incurred by him (in accordance with the policies and practices
presently followed by the Company or as may be established by the Board of
Directors of the Company for its senior executive officers) in performing
services under this Agreement, provided that the Executive properly accounts for
such expenses in accordance with the Company's policies.
4.2. Employee Benefits. During the Employment Term, the Executive shall
be entitled to participate in and to receive benefits as a senior executive
under all of the Company's employee benefit plans, programs and arrangements, as
they may be duly amended, approved or adopted by the Board of Directors of the
Company as of the Effective Date and from time to time thereafter, including any
retirement plan, profit sharing plan, savings plan, life insurance plan, health
insurance plan, stock-based compensation or incentive plan, accident or
disability insurance plan and any vacation policy.
4.3. Vesting of Stock Options. Any stock options granted to the
Executive during the term of the Existing Employment Agreement, to the extent
those options have not previously vested or terminated, shall be fully vested
and exercisable no later than June 30, 2000.
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<PAGE> 4
5. Termination of Employment.
5.1. Death. The Executive's employment under this Agreement shall
terminate upon his death.
5.2. Termination by the Company.
(a) With or Without Cause. Subject to the provisions of
Section 5.2(b), the Company may terminate the Executive's employment under this
Agreement with or without Cause (as defined below). For purposes of this
Agreement, the Company shall have "Cause" to terminate the Executive's
employment under this Agreement if (i) the Executive willfully, or as a result
of gross negligence on his part, fails substantially to perform and to discharge
his duties and responsibilities under this Agreement for any reason other than
the Executive's Disability (as defined in Section 6) or (ii) the Executive
engages in an action or course of conduct which is unlawful or materially in
violation of his obligations to the Company under this Agreement and which is
demonstrably and substantially injurious to the Company, or (iii) the Executive
deliberately and intentionally violates the provisions of Sections 8.1, 8.2, 8.3
or 8.4. For purposes of this Agreement, a "termination by the Company without
Cause" shall include the termination of the Executive's employment on the
Expiration Date solely as a result of the Company's electing under Section 2 not
to extend the term of the Agreement.
(b) Right to Cure. The Executive shall not be deemed to have
been terminated for Cause unless and until the occurrence of the following two
events:
(i) The Executive is given a notice from the Board of
Directors of the Company that identifies with reasonable specificity the grounds
for the proposed termination of the Executive's employment and notifies the
Executive that he shall have an opportunity to address the Board of Directors
with respect to the alleged grounds for termination at a meeting of the Board
called and held for the purpose of determining whether the Executive engaged in
conduct described in Section 5.2. The notice shall, except as is otherwise
provided in the last sentence of this Subsection (i), provide the Executive with
thirty (30) days from the day such notice is given to cure the alleged grounds
of termination contained in this Agreement. The Board of Directors shall
determine, reasonably and in good faith, whether the Executive has
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<PAGE> 5
effectively cured the alleged grounds of termination. If the grounds for
termination are limited to acts or conduct described in Subsections (ii) or
(iii) of Section 5.2(a), and in the reasonable good faith opinion of the Board
of Directors those grounds may not reasonably be cured by the Executive, then
the notice required by this Section 5.2(b)(i) need not provide for any cure
period; and
(ii) The Executive is given a copy of certified
resolutions, duly adopted by the affirmative vote of not less than a majority of
the entire membership of the Board of Directors (excluding the Executive, if
applicable) at a meeting of the Board of Directors called and held for the
purpose of finding that, in the reasonable good faith opinion of a majority of
the Board of Directors, the Executive was guilty of conduct set forth in Section
5.2, which specify in detail the grounds for termination and indicate that the
grounds for termination have not been cured within the time limits, if any,
specified in the notice referred to in Section 5.2(b)(i).
5.3. Termination by the Executive. The Executive may terminate his
employment under this Agreement with or without Good Reason (as defined below).
If such termination is with Good Reason, the Executive shall give the Company
notice, which shall identify with reasonable specificity the grounds for the
Executive's resignation and provide the Company with thirty (30) days from the
day such notice is given to cure the alleged grounds for resignation contained
in the notice. In the event that the Executive fails to give such notice and the
Executive's employment under this Agreement in fact terminates at the initiation
of the Executive, such termination shall be deemed a termination by the
Executive without Good Reason. For purposes of this Agreement, "Good Reason"
shall mean any of the following to which the Executive shall not consent in
writing: (i) a reduction in the Executive's Base Salary, (ii) a reduction in the
amount of the Executive's annual Bonus Opportunity of more than 20% of the
Applicable Base Period Bonus Opportunity (as defined below), including a
material change in the individual performance goals applicable to the
Executive's annual Bonus Opportunity that (A) as of the date of such change,
makes achievement of those goals highly unlikely even if the Executive performs
his obligations under this Agreement, and (B) would result in a reduction in the
annual Bonus Opportunity of more than such 20% amount, (iii) a relocation of the
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<PAGE> 6
Executive's primary place of employment from his current place of employment as
described in Section 1, (iv) any change or diminution in offices, titles, status
or reporting requirements in the Executive's specific executive officer
position, other than an insubstantial and inadvertent act that is remedied by
the Company promptly after receipt of notice given by the Executive, or (v) on
or after a Change in Control (as defined in Section 7.3(d)), in addition to
those events stated above, a material reduction in the Executive's actual annual
Bonus. For purposes of this Agreement, "Applicable Base Period Bonus
Opportunity" means (A) with respect to the annual Bonus Opportunity for any
fiscal year ending on or prior to June 30, 2002, the annual Bonus Opportunity in
effect for fiscal year 2000, and (B) with respect to the annual Bonus
Opportunity for any fiscal year ending after June 30, 2002, the average annual
Bonus Opportunity in effect for the three preceding fiscal years.
5.4. Date of Termination. "Date of Termination" shall mean the earlier
of (a) the "Expiration Date" (as defined in Section 2) and (b) if the
Executive's employment is terminated (i) by his death, the date of his death, or
(ii) pursuant to the provisions of Section 5.2 or Section 5.3, as the case may
be, the date on which the Executive's employment with the Company actually
terminates.
6. Disability. The Executive shall be determined to be "Disabled" (and the
provisions of this Section 6 shall be applicable) if the Executive is unable to
perform his duties under this Agreement on essentially a full-time basis for six
(6) consecutive months by reason of a physical or mental condition (a
"Disability") and, within thirty (30) days after the Company gives notice to the
Executive that it intends to replace him due to his Disability, the Executive
shall not have returned to the performance of his duties on essentially a
full-time basis. Upon a determination that the Executive is Disabled, the
Company may replace the Executive without breaching this Agreement; provided,
however, that this Agreement shall not terminate until the Expiration Date next
following the date that the Executive is determined to be Disabled. Prior to
such Expiration Date, the Executive shall continue to be entitled to the
compensation and benefits provided in Sections 3 and 4; provided, however, that
the Company shall be entitled to offset against the amounts payable by the
Company to the Executive under this Agreement the amount of benefits
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<PAGE> 7
received by the Executive from third parties under long-term disability plans
carried by the Company (if any) and that in no event shall the total annual
obligation of the Company under this Agreement to make Base Salary payments to
the Executive during a period of his Disability be greater than an amount equal
to two-thirds (2/3) of the Executive's Base Salary, beginning in the year in
which the Executive is replaced in accordance with this Section 6, and
continuing until the earlier of the year in which the Expiration Date occurs or
the year in which the Executive dies.
7. Compensation Upon Termination.
7.1. Death. If the Executive's employment under this Agreement is
terminated by reason of his death, the Company shall continue to pay the
Executive's Base Salary at the rate in effect at the time of his death to such
person or persons as the Executive shall have designated for that purpose in a
notice filed with the Company, or, if no such person shall have been so
designated, to his estate, for a period of six (6) months after the Executive's
date of death. The Company also shall pay to such person(s) or estate, (a) the
amount of the Executive's Accrued Obligations (as defined below), and (b) an
amount equal to one-twelfth (1/12) of the Executive's average annual Bonus paid
or payable under Section 3.2 with respect to the most recent three (3) full
fiscal years or, if greater, the most recent twelve (12)-month period (in each
case, determined by annualizing the bonus paid or payable with respect to any
partial fiscal year) (the "Average Bonus"), that amount being payable in each of
the six (6) months following the Date of Termination. Any amounts payable under
this Section 7.1 shall be exclusive of and in addition to any payments which the
Executive's widow, beneficiaries or estate may be entitled to receive pursuant
to any pension plan, profit sharing plan, employee benefit plan, or life
insurance policy maintained by the Company. For purposes of this Agreement, the
Executive's "Accrued Obligations" means, as of the Date of Termination, any
accrued but unpaid Base Salary, accrued Bonus (including (1) any accrued but
unpaid Bonus (if any) with respect to the fiscal year prior to the year in which
the Date of Termination occurs, and (2) the amount of the Executive's Average
Bonus multiplied by a fraction, the numerator of which is the number of days
from the first day of the fiscal year of the Company in which such termination
occurs through and
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including the Date of Termination and the denominator of which is 365 (the "Pro
Rata Bonus")) and any accrued but unpaid cash entitlements.
7.2. By the Company for Cause or the Executive Without Good Reason. If
the Executive's employment is terminated by the Company for Cause, or if the
Executive terminates his employment other than for Good Reason, the Company
shall pay to the Executive the amount of any Accrued Obligations within 30 days
of the Date of Termination and the Company thereafter shall have no further
obligation to the Executive under this Agreement, other than for payment of any
amounts accrued and vested under any employee benefit plans or programs of the
Company.
7.3. By the Executive for Good Reason or the Company other than for
Cause.
(a) Termination Prior to a Change in Control.
(i) Severance Benefits. Subject to the provisions of
Section 7.3(a)(ii) and Section 7.3(c), if, prior to (and not in anticipation of)
or more than two (2) years after a Change in Control (as defined in Section
7.3(d)), the Company terminates the Executive's employment without Cause, or the
Executive terminates his employment for Good Reason, then the Executive shall be
entitled to the following benefits (the "Severance Benefits"):
(A) the amount of his Accrued Obligations,
that amount being payable in a single lump sum cash payment within thirty (30)
days of the Date of Termination;
(B) a cash amount equal to the sum of (1)
one-twelfth (1/12) of the Executive's Base Salary at the highest rate in effect
at any time during the twelve (12)-month period prior to the Date of
Termination, and (2) one-twelfth (1/12) of the Executive's Average Bonus, that
total amount being payable in each of the twelve (12) months following the month
in which the Date of Termination occurs;
(C) all welfare benefits, including (to the
extent applicable) medical, dental, vision, life and disability benefits
pursuant to plans maintained by the Company under which the Executive and/or the
Executive's family is eligible to receive benefits and/or coverage, shall be
continued for the twelve (12)-month period following the Date of Termination,
with such benefits provided to the Executive at no less than the same coverage
level
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as in effect as of the Date of Termination and the Executive shall pay any
portion of such cost as was required to be borne by key executives of the
Company generally on the Date of Termination; provided, however, that,
notwithstanding the foregoing, the benefits described in this Section
7.3(a)(i)(C) may be discontinued prior to the end of the period provided in this
Subsection (C) to the extent, but only to the extent, that the Executive
receives substantially similar benefits from a subsequent employer;
(D) key executive outplacement services in
accordance with Company policies for senior executives as in effect on the Date
of Termination (or, at the request of the Executive, a lump sum payment in lieu
thereof, in an amount determined by the Company to be equal to the estimated
cost of those services); and
(E) notwithstanding any provisions of any
applicable stock option plan and agreement(s) to the contrary, any nonvested
stock options held by the Executive as of the Date of Termination shall become
vested and immediately exercisable by the Executive as of the Date of
Termination.
(ii) Conditions to Receipt of Severance Benefits
under Section 7.3(a). As a condition to receiving any Severance Benefits (other
than any Accrued Obligations) to which the Executive may otherwise be entitled
under this Section 7.3(a) only, the Executive shall execute a release (the
"Release"), in a form and substance reasonably satisfactory to the Company, of
any claims, whether arising under Federal, state or local statute, common law or
otherwise, against the Company and its direct or indirect subsidiaries which
arise or may have arisen on or before the date of the Release, other than any
claims under this Agreement or any rights to indemnification from the Company
and its direct or indirect subsidiaries pursuant to any provisions of the
Company's (or any of its subsidiaries') articles of incorporation or by-laws or
any directors and officers liability insurance policies maintained by the
Company. If the Executive fails or otherwise refuses to execute a Release within
a reasonable time after the Company's request to do so, the Executive will not
be entitled to any Severance Benefits or any other benefits provided under this
Agreement and the Company shall have no further obligations with respect to the
payment of the Severance Benefits. In addition, if, following a termination of
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employment that gives the Executive a right to the payment of Severance
Benefits under Section 7.3(a), the Executive engages in any activities that
would have violated any of the covenants in Section 8.3 (had those covenants
been applicable), the Executive shall have no further right or claim to any
Severance Benefits (other than any Accrued Obligations) to which the Executive
may otherwise be entitled under this Section 7.3(a) from and after the date on
which the Executive engages in such activities and the Company shall have no
further obligations with respect to the payment of the Severance Benefits.
(b) Termination In Anticipation of or After a Change in
Control.
(i) Change in Control Severance Benefits. Subject to
the provisions of Section 7.3(c), if, in anticipation of (as defined below) or
within a two (2) year period following the occurrence of a Change in Control,
the Company terminates the Executive's employment without Cause, or the
Executive terminates his employment for Good Reason, then the Executive shall be
entitled to the following benefits (the "Change in Control Severance Benefits"):
(A) the sum of his Accrued Obligations, that
amount being payable in a single lump sum cash payment within thirty (30) days
of the Date of Termination;
(B) a cash amount equal to twenty-four (24)
times the sum of (1) one-twelfth (1/12) of the Executive's Base Salary at the
highest rate in effect at any time during the twelve (12)-month period prior to
the Date of Termination, and (2) one-twelfth (1/12) of the Executive's Average
Bonus, that total amount being payable in a single lump sum cash payment within
thirty (30) days of the Date of Termination;
(C) all welfare benefits, including (to the
extent applicable) medical, dental, vision, life and disability benefits
pursuant to plans maintained by the Company under which the Executive and/or the
Executive's family is eligible to receive benefits and/or coverage, shall be
continued for the twenty-four (24) month period following the Date of
Termination, with such benefits provided to the Executive at no less than the
same coverage level as in effect as of the Date of Termination and the Executive
shall pay any portion of such cost as was required to be borne by key executives
of the Company generally on the Date of
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Termination; provided, however, that, notwithstanding the foregoing, the
benefits described in this Section 7.3(b)(i)(C) may be discontinued prior to the
end of the period provided in this Subsection (C) to the extent, but only to the
extent, that the Executive receives substantially similar benefits from a
subsequent employer;
(D) key executive outplacement services in
accordance with Company policies for senior executives as in effect on the Date
of Termination (or, at the request of the Executive, a lump sum payment in lieu
thereof, in an amount determined by the Company to be equal to the estimated
cost of those services);
(E) notwithstanding any provisions of any
applicable stock option plan and agreement(s) to the contrary, all unexercised
stock options held by the Executive as of the Date of Termination shall become
fully vested and shall be immediately exercisable by the Executive; and
(F) notwithstanding any provisions of the
Supplemental Executive Retirement Plan ("SERP") in which the Executive is a
participant to the contrary, the Executive shall be deemed fully vested and
entitled to an immediate lump sum distribution of his benefit under the SERP,
calculated as if the Executive had been employed during the twenty-four (24)
month period following the Date of Termination and had received compensation as
provided under Section 3 for that period.
(ii) Definition of In Anticipation Of. For purposes
of this Section 7.3, the termination of the Executive's employment shall be
deemed to have been "in anticipation of" a Change in Control if such termination
(A) was at the request of an unrelated third party who has taken steps
reasonably calculated to effect a Change in Control, or (B) otherwise arose in
connection with a Change in Control.
(c) Superseding Termination. If, subsequent to the giving by
either party of a notice of termination under this Agreement and prior to the
actual Date of Termination pursuant to such notice, the Executive's employment
is properly terminated pursuant to any other provision of this Agreement, the
Executive shall be entitled only to those benefits, if any, arising out of such
subsequent and superseding termination.
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(d) Definition of Change in Control. For purposes of this
Agreement, a "Change in Control" shall mean, and shall be deemed to have
occurred upon the occurrence of, any one of the following events:
(i) The acquisition in one or more transactions by
any individual, entity (including any employee benefit plan or any trust for an
employee benefit plan) or group (within the meaning of Section 13(d)(3) or
14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of shares or other securities (as defined in
Section 3(a)(10) of the Exchange Act) representing 50% or more of either (1) the
shares of common stock of the Company (the "Company Common Stock") or (2) 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): (A) any acquisition by any shareholder or
group consisting solely of shareholders of the Company immediately prior to the
date of this Agreement or (B) any acquisition by the Company so long as such
acquisition does not result in any Person (other than any shareholder or
shareholders of the Company immediately prior to the date of this Agreement),
beneficially owning shares or securities representing 50% or more of either the
Company Common Stock or Company Voting Securities; or
(ii) Any election has occurred of persons to the
Board that causes two-thirds of the Board to consist of persons other than (A)
persons who were members of the Board on the date of this Agreement and (B)
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 date of this Agreement; provided, however, that any person nominated for
election by a Board at least two-thirds of whom constituted persons described in
clauses (A) and/or (B) or by persons who were themselves nominated by such Board
shall, for
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this purpose, be deemed to have been nominated by a Board composed of persons
described in clause (A);
(iii) 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;
(iv) 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 shareholders of the Company immediately prior to such
approval; or
(v) 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 shareholders of the
Company immediately prior to such approval.
7.4. No Mitigation. The Executive shall not be required to mitigate the
amount of any payment or benefit provided for in this Section 7 by seeking other
employment or otherwise, and, except as otherwise expressly provided in Sections
7.3(a)(i)(C) and 7.3(b)(i)(C), the amounts of compensation or benefits payable
or otherwise due to the Executive under this Section 7 or other
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provisions of this Agreement shall not be reduced by compensation or benefits
received by the Executive from any other employment he shall choose to undertake
following termination of his employment under this Agreement; provided, however,
that the Executive's entitlement to Severance Benefits or Change in Control
Severance Benefits, as the case may be, shall be subject to his compliance with
the covenants set forth in Section 8.
7.5. Certain Additional Payments by the Company.
(a) Anything in this Agreement to the contrary
notwithstanding, in the event it shall be determined that any economic benefit,
payment or distribution by the Company to or for the benefit of the Employee,
whether paid, payable, distributed or distributable pursuant to the terms of
this Agreement or otherwise (a "Payment"), would be subject to the excise tax
imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the
"Code"), or any interest or penalties with respect to such excise tax (such
excise tax and any applicable interest and penalties, collectively referred to
in this Agreement as the "Excise Tax"), then the Executive shall be entitled to
receive an additional payment (a "Gross-Up-Payment") in an amount such that
after payment by the Executive of all applicable taxes (including any interest
or penalties imposed with respect to such taxes), the Executive retains an
amount equal to the amount he would have retained had no Excise Tax been imposed
upon the Payment.
(b) Subject to the provisions of Section 7.5(c), all
determinations required to be made under this Section 7.5, including whether a
Gross-Up Payment is required and the amount of such Gross-Up Payment, shall be
made by the Company's regular outside independent public accounting firm (the
"Accounting Firm") which shall provide detailed supporting calculations both to
the Company and the Executive within 15 business days of the Date of
Termination, if applicable, or such earlier time as is requested by the Company.
The initial Gross-Up Payment, if any, as determined pursuant to this Section
7.5, shall be paid to the Executive within 5 business days of the receipt of the
Accounting Firm's determination. If the Accounting Firm determines that no
Excise Tax is payable by the Executive, it shall furnish the Executive with an
opinion that he has substantial authority not to report any Excise Tax on his
federal income tax return. Any determination by the Accounting Firm shall be
binding upon the
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Company and the Executive. As a result of the uncertainty in the application of
Section 4999 of the Code at the time of the initial determination by the
Accounting Firm, it is possible that Gross-Up Payments that have not been made
by the Company should have been made ("Underpayment"), consistent with the
calculations required to be made under this Section 7.5(b). In the event that
the Company exhausts its remedies pursuant to Section 7.5(c) and the Executive
thereafter is required to make a payment of any Excise Tax, the Accounting Firm
shall determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the benefit of the
Executive.
(c) The Executive shall notify the Company of any claim by the
Internal Revenue Service that, if successful, would require the payment by the
Company of the Gross-Up Payment under the terms of this Section 7.5. This notice
shall be given as soon as practicable but no later than ten business days after
the later of either (i) the date the Executive has actual knowledge of the
claim, or (ii) ten days after the Internal Revenue Service issues to the
Executive either a written report proposing imposition of the Excise Tax or a
statutory notice of deficiency with respect to the Excise Tax, and shall apprise
the Company of the nature of the claim and the date on which the claim is
requested to be paid. The Executive shall not pay the claim prior to the
expiration of the thirty-day period following the date on which he gives such
notice to the Company (or such shorter period ending on the date that any
payment of taxes with respect to the claim is due). If the Company notifies the
Executive prior to the expiration of the above period that it desires to contest
the claim, the Executive shall: (A) give the Company any information reasonably
requested by the Company relating to the claim, (B) take such action in
connection with contesting the claim as the Company shall reasonably request in
writing from time to time, including accepting legal representation with respect
to the claim by an attorney reasonably selected by the Company, (C) cooperate
with the Company in good faith in order to effectively contest the claim, (D)
permit the Company to participate in any proceedings relating to the claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold the Executive harmless, on an
after-tax basis, for any Excise Tax or income
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tax, including interest and penalties with respect thereto, imposed as a result
of such representation and payment of costs and expenses. Without limitation of
the foregoing provisions of this Section 7.5(c), the Company shall control all
proceedings taken in connection with such contest and, at its sole option, may
pursue or forego any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of the claim and may, at its
sole option, either direct the Executive to request or accede to a request for
an extension of the statute of limitations with respect only to the tax claimed,
or pay the tax claimed and sue for a refund or contest the claim in any
permissible manner, and the Executive agrees to prosecute such contest to a
determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that if the Company directs the Executive to pay
the claim and sue for a refund, the Company shall advance the amount of the
required payment to the Executive, on an interest-free basis and shall indemnify
and hold the Executive harmless, on an after-tax basis, from any Excise Tax or
income tax, including interest or penalties with respect thereto, imposed with
respect to any advance or with respect to any imputed income in relation to any
advance; and further provided that any extension of the statute of limitations
requested or acceded to by the Executive at the Company's request and relating
to payment of taxes for the taxable year of the Executive with respect to which
the contested amount is claimed to be due is limited solely to the contested
amount. Furthermore, the Company's control of the contest shall be limited to
issues with respect to which a Gross-Up Payment would be payable under the
Agreement and the Executive shall be entitled to settle or contest, as the case
may be, any other issue raised by the Internal Revenue Service or any other
taxing authority.
(d) If, after the receipt by the Executive of an amount
advanced by the Company pursuant to Section 7.5(c), the Executive becomes
entitled to receive any refund with respect to the claim, the Executive shall
(subject to the Company's complying with the requirements of Section 7.5(c))
promptly pay to the Company the amount of that refund (together with any
interest paid or credited thereon after taxes applicable thereto). If, after the
receipt by the Executive of an amount advanced by the Company pursuant to
Section 7.5(c), a
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determination is made that the Executive shall not be entitled to any refund
with respect to the claim and the Company does not notify the Executive of its
intent to contest such denial of refund prior to the expiration of thirty days
after the determination, then the advance shall be forgiven and shall not be
required to be repaid and the amount of the advance shall offset, to the extent
thereof, the amount of Gross-Up Payment required to be paid.
(e) In the event that any state or municipality or subdivision
thereof shall subject any Payment to any special tax which shall be in addition
to the generally applicable income tax imposed by the state, municipality, or
subdivision with respect to receipt of the Payment, the foregoing provisions of
this Section 7.5 shall apply, mutatis mutandis, with respect to such special
tax.
7.6. Severance Benefits Not Includable for Employee Benefits Purposes.
Subject to all applicable federal and state laws and regulations, income
recognized by the Executive pursuant to the provisions of this Section 7 (other
than income accrued but unpaid as of the Date of Termination) shall not be
included in the determination of benefits under any employee benefit plan (as
that term is defined in Section 3(3) of the Employee Retirement Income Security
Act of 1974, as amended) or any other benefit plans, policies or programs
applicable to the Executive that are maintained by the Company or any of its
direct or indirect subsidiaries and the Company shall be under no obligation to
continue to offer or provide such benefits to the Executive after the Date of
Termination other than as provided under this Section 7 or to the extent to
which any benefit under a pertinent plan has accrued as of the Date of
Termination.
7.7. Exclusive Benefits. The Severance Benefits payable under Section
7.3(a) and the Change in Control Severance Benefits payable under Section
7.3(b), if either benefits become applicable under the terms of this Agreement,
shall be mutually exclusive and shall be in lieu of any other severance or
similar benefits that would otherwise be payable under any other agreement,
plan, program or policy of the Company.
8. Restrictive Covenants.
8.1. Confidentiality. The Executive recognizes that the services to be
performed by him under this Agreement are special, unique and extraordinary in
that, by reason of his
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employment with the Company, he may acquire confidential information and trade
secrets concerning the operation of the Company or an Affiliate (as defined
below), the use or disclosure of which could cause the Company or an Affiliate
substantial loss and damages which could not be readily calculated and for which
no remedy at law would be adequate. For purposes of this Section 8, the term
"Affiliate" means any direct or indirect subsidiary of the Company, including
any individual, partnership, firm, corporation or other business organization or
entity that controls, is controlled by, or is under common control with, the
Company. Accordingly, during the Employment Term and at all times thereafter,
the Executive covenants and agrees with the Company that he shall not at any
time, except in the performance of his obligations to the Company under this
Agreement or with the prior written consent of the Board of Directors of the
Company, directly or indirectly, disclose any secret or confidential information
that he may learn or has learned by reason of his association with the Company,
or any predecessors to their business, or use any such information to the
detriment of the Company. The term "confidential information" includes
information not previously disclosed to the public or to the trade by the
Company's management or otherwise known by the public or the trade with respect
to the Company's products, facilities and methods, research and development,
trade secrets and other intellectual property, systems, patents and patent
applications, procedures, manuals, confidential reports, product price lists,
customer lists, financial information (including the revenues, costs or profits
associated with any of the Company's products), business plans, prospects or
opportunities; provided, however, that the term "confidential information" shall
not include, and the Executive shall have no obligation under this Agreement
with respect to, any information that (a) becomes generally available to the
public other than as a result of a disclosure by the Executive or his agent or
other representative or (b) becomes available to the Executive on a
non-confidential basis from a source other than the Company or any Affiliate.
The Executive shall have no obligation under this Agreement to keep confidential
any of the confidential information to the extent that a disclosure of it is
required by law or is consented to by the Company; provided, however, that if
and when such a disclosure is required by law, the Executive promptly
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shall provide the Company with notice of such requirement, so that the Company
may seek an appropriate protective order.
8.2. Exclusive Property. The Executive confirms that all confidential
information is the exclusive property of the Company. All business records,
papers and documents kept or made by the Executive relating to the business of
the Company or its direct or indirect subsidiaries shall be and remain the
property of the Company or the applicable subsidiary during the Employment Term
and at all times thereafter. Upon the termination of his employment with the
Company or upon the request of the Company at any time, the Executive shall
promptly deliver to the Company, and shall retain no copies of, any written
materials, records and documents made by the Executive or coming into his
possession concerning the business or affairs of the Company or its direct or
indirect subsidiaries; provided, however, that the Executive shall be permitted
to retain copies of any documents or materials of a personal nature or otherwise
related to the Executive's rights under this Agreement.
8.3. Non Competition. During the Employment Term and, except as
provided in the last sentence of this Section 8.3, for a period of one (1) year
after the Date of Termination, the Executive shall not, unless he receives the
prior written consent of the Company, directly or indirectly, own an interest
in, manage, operate, join, control, lend money or render financial or other
assistance to, participate in or be connected with, as an officer, employee,
partner, stockholder, consultant or otherwise, or engage in any activity or
capacity (collectively, the "Competitive Activities") with respect to any
individual, partnership, limited liability company, firm, corporation or other
business organization or entity (each, a "Person"), that is engaged directly or
indirectly in the ownership or operation of proprietary post-secondary schools
or that is in competition with any of the business activities of the Company or
its direct or indirect subsidiaries either (i) anywhere in the United States or
(ii) in any other country in which the Company or its direct or indirect
subsidiaries conduct, or actively intend to conduct, business as of the Date of
Termination; provided, however, that the foregoing (a) shall not apply with
respect to any line-of-business in which the Company or its direct or indirect
subsidiaries was not engaged on or before the Expiration Date or the Date of
Termination, as the case may be, and (b)
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shall not prohibit the Executive from owning, or otherwise having an interest
in, less than one percent (1%) of any publicly-owned entity or three percent
(3%) of any private equity fund or similar investment fund that invests in
education companies, provided the Executive has no active role with respect to
any investment by such fund in any Person referred to in this Section 8.3. The
Executive shall not be subject to the covenants contained in this Section 8.3
and such covenants shall not be enforceable against the Executive from and after
the date that the Executive's employment is terminated (i) by the Company
without Cause, (ii) by the Executive for Good Reason or (iii) in anticipation of
or within two (2) years after a Change in Control.
8.4. Non-Solicitation. During the Term of the Executive's Employment
and for a period of one (1) year after the Date of Termination, the Executive
shall not, whether for his own account or for the account of any other Person
(other than the Company or its direct or indirect subsidiaries), intentionally
solicit, endeavor to entice away from the Company or its direct or indirect
subsidiaries, or otherwise interfere with the relationship of the Company or its
direct or indirect subsidiaries with, any person who is employed by the Company
or its direct or indirect subsidiaries (including, but not limited to, any
independent sales representatives or organizations).
8.5. Injunctive Relief. Subject to the exceptions contained in Section
8.3, the Executive acknowledges that a breach of any of the covenants contained
in this Section 8 may result in material, irreparable injury to the Company for
which there is no adequate remedy at law, that it shall not be possible to
measure damages for such injuries precisely and that, in the event of such a
breach or threat of breach, the Company shall be entitled to obtain a temporary
restraining order and/or a preliminary or permanent injunction restraining the
Executive from engaging in activities prohibited by this Section 8 or such other
relief as may be required to specifically enforce any of the covenants in this
Section 8. The Executive agrees and consents that injunctive relief may be
sought in any state or federal court of record in the Commonwealth of
Pennsylvania, or in the state and county in which a violation may occur or in
any other court having jurisdiction, at the election of the Company; to the
extent that the Company seeks a temporary restraining order (but not a
preliminary or permanent injunction), the Executive agrees
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that a temporary restraining order may be obtained ex parte. The Executive
agrees and submits to personal jurisdiction before each and every court
designated above for that purpose.
8.6. Blue-Pencilling. The parties consider the covenants and
restrictions contained in this Section 8 to be reasonable. However, if and when
any such covenant or restriction is found to be void or unenforceable and would
have been valid had some part of it been deleted or had its scope of application
been modified, such covenant or restriction shall be deemed to have been applied
with such modification as would be necessary and consistent with the intent of
the parties to have made it valid, enforceable and effective.
9. Miscellaneous.
9.1. Assignment; Successors; Binding Agreement. This Agreement may not
be assigned by either party, whether by operation of law or otherwise, without
the prior written consent of the other party, except that any right, title or
interest of the Company arising out of this Agreement may be assigned to any
corporation or entity controlling, controlled by, or under common control with
the Company, or succeeding to the business and substantially all of the assets
of the Company or any affiliates for which the Executive performs substantial
services; provided, however, that no such assignment shall relieve the Company
of its obligations hereunder without the express written consent of the
Executive. Subject to the foregoing, this Agreement shall be binding upon and
shall inure to the benefit of the parties and their respective heirs, legatees,
devisees, personal representatives, successors and assigns.
9.2. Modification and Waiver. No provision of this Agreement may be
modified, waived, or discharged unless such waiver, modification or discharge is
duly approved by the Board of Directors of the Company and is agreed to in
writing by the Executive and such officer(s) as may be specifically authorized
by the Board of Directors of the Company to effect it. No waiver by any party of
any breach by any other party of, or of compliance with, any term or condition
of this Agreement to be performed by any other party, at any time, shall
constitute a waiver of similar or dissimilar terms or conditions at that time or
at any prior or subsequent time.
9.3. Entire Agreement. No agreement or representation, oral or
otherwise, express or implied, with respect to the subject matter of this
Agreement, has been made by either party
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<PAGE> 22
which is not set forth expressly in this Agreement. Further, this Agreement
shall amend and supersede any and all previously existing employment or
consulting agreements between the Executive and the Company or any of its direct
or indirect subsidiaries or affiliates.
9.4. Governing Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the Commonwealth
of Pennsylvania other than the conflict of laws provision thereof.
9.5. Arbitration. In the event of any dispute, controversy or claim
between the Company and the Executive arising out of or relating to the
interpretation, application or enforcement of any provision of this Agreement
(other than with respect to provisions under Section 8 of this Agreement),
either the Company or the Executive may, by written notice to the other, require
such dispute or difference to be submitted to arbitration. The arbitrator or
arbitrators shall be selected by agreement of the parties or, if they do not
agree on an arbitrator or arbitrators within 30 days after one party has
notified the other of his or its desire to have the question settled by
arbitration, then the arbitrator or arbitrators shall be selected by the
American Arbitration Association (the "AAA") in Pittsburgh, Pennsylvania. The
determination reached in such arbitration shall be final and binding on all
parties without any right of appeal or further dispute. Execution of the
determination by such arbitrator may be sought in any court of competent
jurisdiction. The arbitrators shall not be bound by judicial formalities and may
abstain from following the strict rules of evidence and shall interpret this
Agreement as an honorable engagement and not merely as a legal obligation.
Unless otherwise agreed by the parties, any such arbitration shall take place in
Pittsburgh, Pennsylvania, and shall be conducted in accordance with the
Commercial Arbitration Rules of the AAA.
9.6. Consent to Jurisdiction and Service of Process. In the event of
any dispute, controversy or claim between the Company and the Executive arising
out of or relating to the interpretation, application or enforcement of the
provisions of Section 8 or Section 9.5, the Company and the Executive agree and
consent to the personal jurisdiction of the Court of Common Pleas for Allegheny
County, Pennsylvania and/or the United States District Court for the Western
District of Pennsylvania for resolution of the dispute, controversy or claim,
and that
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<PAGE> 23
those courts, and only those courts, shall have exclusive jurisdiction to
determine any dispute, controversy or claim related to, arising under or in
connection with Section 8 of this Agreement. The Company and the Executive also
agree that those courts are convenient forums for the parties to any such
dispute, controversy or claim and for any potential witnesses and that process
issued out of any such court or in accordance with the rules of practice of that
court may be served by mail or other forms of substituted service to the Company
at the address of its principal executive offices and to the Executive at his or
her last known address as reflected in the Company's records.
9.7. Withholding of Taxes. The Company shall withhold from any amounts
payable under the Agreement all Federal, state, local or other taxes as legally
shall be required to be withheld.
9.8. Notice. For the purposes of this Agreement, notices and all other
communications to either party provided for in this Agreement shall be furnished
in writing and shall be deemed to have been duly given when delivered or when
mailed if such mailing is by United States certified or registered mail, return
receipt requested, postage prepaid, addressed to such party (notices to the
Company being addressed to the Secretary of the Company) at the Company's
principal executive office, or at other address as either party shall have
designated by giving written notice of such change to the other party at anytime
hereafter.
9.9. Severability. The invalidity or unenforceability of any provision
or provisions of this Agreement shall not affect the validity or enforceability
of any other provision of this Agreement, which shall remain in full force and
effect.
9.10. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
9.11. Headings. The headings used in this Agreement are for convenience
only, do not constitute a part of the Agreement, and shall not be deemed to
limit, characterize, or affect in any way the provisions of the Agreement, and
all provisions of the Agreement shall be construed as if no headings had been
used in the Agreement.
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<PAGE> 24
9.12. Construction. As used in this Agreement, unless the context
otherwise requires: (a) the terms defined herein shall have the meanings set
forth herein for all purposes; (b) references to "Section" are to a section
hereof; (c) all "Schedules" referred to herein are incorporated herein by
reference and made a part hereof; (d) "include," "includes" and "including" are
deemed to be followed by "without limitation" whether or not they are in fact
followed by such words or words of like import; (e) "writing," "written" and
comparable terms refer to printing, typing, lithography and other means of
reproducing words in a visible form; (f) "hereof," "herein," "hereunder" and
comparable terms refer to the entirety of this Agreement and not to any
particular section or other subdivision hereof or attachment hereto; (g)
references to any gender include references to all genders; and (h) references
to any agreement or other instrument or statute or regulation are referred to as
amended or supplemented from time to time (and, in the case of a statute or
regulation, to any successor provision).
IN WITNESS WHEREOF, the parties have duly executed this Agreement on
the date and year first above written.
EDUCATION MANAGEMENT CORPORATION
By: /s/ James J. Burke, Jr.
-------------------------
James J. Burke, Jr.
Chairman of the Compensation Committee
EXECUTIVE
/s/ Robert B. Knutson
-----------------------
Robert B. Knutson
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<PAGE> 1
EXHIBIT 10.10
EMPLOYMENT AGREEMENT
WITH [NAME](1)
September 8, 1999(2)
The parties to this Employment Agreement (this "Agreement") are
Education Management Corporation, a Pennsylvania corporation (the "Company"),
and [Name] (the "Executive"). The Executive is presently the [title] (3) of the
Company and the parties wish to provide for the continued employment of the
Executive as an executive officer of the Company.
Accordingly, the parties, intending to be legally bound, agree as
follows:
1. Position and Duties. During the term of the Executive's employment under this
Agreement, the Company shall employ the Executive and the Executive shall serve
the Company as an executive officer. As of the date of this Agreement, the
Executive is the [title shown in note 3] of the Company. He shall report to the
Chief Executive Officer of the Company and otherwise shall be subject to the
direction and control of the Board of Directors of the Company. The Executive
shall use his best efforts to promote the Company's interests and he shall
perform his duties and responsibilities faithfully, diligently and to the best
of his ability, consistent with sound business practices. The Executive shall
devote his full working time to the business and affairs of the Company, but
may engage in such activities that do not, in the reasonable opinion of the
Board of Directors of the Company, violate Section 8 or materially interfere
with the performance of his obligations to the Company under this Agreement.
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(1) As executed by each of Messrs. Robert P. Gioella, Robert T. McDowell, John
R. McKernan, Jr. and David J. Pauldine in identical form except as
otherwise indicated in these notes.
(2) The date of Mr. McKernan's agreement is June 4, 1999.
(3) Mr. Gioella: President and Chief Operating Officer; Mr. McDowell: Executive
Vice President and Chief Financial Officer; Mr. McKernan: Vice Chairman;
Mr. Pauldine: Executive Vice President.
<PAGE> 2
The Executive shall perform his duties under this Agreement at the Company's
principal executive offices in Pittsburgh, Pennsylvania.(4)
2. Term of Employment. The term of the Executive's employment by the Company or
any direct or indirect subsidiary of the Company under this Agreement shall be
for a period of three (3) years commencing on the date of this Agreement (the
"Effective Date"), subject to earlier termination under Section 5 or Section 6
or extension of such term as described in the next sentence. The Executive's
employment under this Agreement shall renew automatically for successive
one-year periods, unless at least one hundred eighty (180) days prior to the
third or any subsequent anniversary of the Effective Date (each such anniversary
referred to herein as an "Expiration Date") either party shall have given notice
to the other party that the term of employment shall terminate on that
anniversary date. The term during which the Executive is employed pursuant to
this Agreement shall be referred to herein as the "Employment Term."
3. Compensation.
3.1. Base Salary. During the Employment Term, the Executive shall be
entitled to receive a base salary ("Base Salary") at the annual rate of not less
than $_______(5) for services rendered to the Company or any of its direct or
indirect subsidiaries and payable in substantially equal biweekly installments.
The Executive's Base Salary under this Section 3.1 shall be increased on each
July 1 during the Employment Term, beginning on July 1, 2000, by the percentage
increase, if any, in the United States Bureau of Labor Statistics Consumer Price
Index for Urban Wage Earners and Clerical Workers - all items, for the
Pittsburgh Metropolitan Area during the immediately preceding twelve (12)
months. The Executive's Base Salary shall be subject to further increases, if
any, as may be approved at any time by the Board of Directors of the Company in
its discretion, on the recommendation of the Compensation Committee of the Board
of Directors.
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(4) Mr. McKernan's agreement states that he will perform his duties primarily
in Washington, D.C. and Portland, Maine, with the likelihood of substantial
business travel, including regular travel to and from the Company's
principal executive offices in Pittsburgh, Pennsylvania.
(5) Mr. Gioella: $250,000; Mr. McDowell: $200,000; Mr. McKernan: $200,000; Mr.
Pauldine: $200,000.
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<PAGE> 3
3.2. Incentive Compensation. During the Employment Term, the Executive
also shall be entitled to receive incentive compensation (a "Bonus") in such
amounts and at such times as the Board of Directors of the Company (or a duly
authorized Compensation Committee of the Board, if applicable) may determine in
its discretion to award to him under any incentive compensation or other bonus
plan or plans for senior executives of the Company as may be established by the
Company from time to time (collectively, the "Executive Bonus Plan"). The amount
of any Bonus payable to the Executive under the Executive Bonus Plan shall be
paid to the Executive in accordance with the terms of the Executive Bonus Plan.
In accordance with the provisions of the Executive Bonus Plan and generally
subject to the discretion of the Board of Directors, the Executive shall have an
annual target bonus opportunity (a "Bonus Opportunity"). For the Company's
fiscal year ending June 30, 2000, the Executive's Bonus Opportunity shall be not
less than $_______,(6) but the actual bonus amount earned and payable shall be
contingent on the Executive meeting or exceeding performance standards and goals
to be established by the Board of Directors of the Company (or the Compensation
Committee, if applicable). For fiscal years beginning after June 30, 2000, the
Executive's Bonus Opportunity shall be determined by the Board of Directors of
the Company (or a duly authorized Compensation Committee of the Board, if
applicable) in its discretion.
4. Expenses and Other Benefits.
4.1. Reimbursement of Expenses. During the Employment Term, the
Executive shall be entitled to receive prompt reimbursement for all reasonable
expenses incurred by him (in accordance with the policies and practices
presently followed by the Company or as may be established by the Board of
Directors of the Company for its senior executive officers) in performing
services under this Agreement, provided that the Executive properly accounts for
such expenses in accordance with the Company's policies.
4.2. Employee Benefits. During the Employment Term, the Executive shall
be entitled to participate in and to receive benefits as a senior executive
under all of the Company's
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(6) Mr. Gioella: $200,000; Mr. McDowell: $140,000; Mr. McKernan: $150,000; Mr.
Pauldine: $140,000.
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<PAGE> 4
employee benefit plans, programs and arrangements, as they may be duly amended,
approved or adopted by the Board of Directors of the Company as of the Effective
Date and from time to time thereafter, including any retirement plan, profit
sharing plan, savings plan, life insurance plan, health insurance plan,
stock-based compensation or incentive plan, accident or disability insurance
plan and any vacation policy.
5. Termination of Employment.
5.1. Death. The Executive's employment under this Agreement shall
terminate upon his death.
5.2. Termination by the Company.
(a) With or Without Cause. Subject to the provisions of
Section 5.2(b), the Company may terminate the Executive's employment under this
Agreement with or without Cause (as defined below). For purposes of this
Agreement, the Company shall have "Cause" to terminate the Executive's
employment under this Agreement if (i) the Executive willfully, or as a result
of gross negligence on his part, fails substantially to perform and to discharge
his duties and responsibilities under this Agreement for any reason other than
the Executive's Disability (as defined in Section 6) or (ii) the Executive
engages in an action or course of conduct which is unlawful or materially in
violation of his obligations to the Company under this Agreement and which is
demonstrably and substantially injurious to the Company, or (iii) the Executive
deliberately and intentionally violates the provisions of Sections 8.1, 8.2, 8.3
or 8.4. For purposes of this Agreement, a "termination by the Company without
Cause" shall include the termination of the Executive's employment on the
Expiration Date solely as a result of the Company's electing under Section 2 not
to extend the term of the Agreement.
(b) Right to Cure. The Executive shall not be deemed to have
been terminated for Cause unless and until the occurrence of the following two
events:
(i) The Executive is given a notice from the Board of
Directors of the Company that identifies with reasonable specificity the grounds
for the proposed termination of the Executive's employment and notifies the
Executive that he shall have an opportunity to address the Board of Directors
with respect to the alleged grounds for termination at a meeting of
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<PAGE> 5
the Board called and held for the purpose of determining whether the Executive
engaged in conduct described in Section 5.2. The notice shall, except as is
otherwise provided in the last sentence of this Subsection (i), provide the
Executive with thirty (30) days from the day such notice is given to cure the
alleged grounds of termination contained in this Agreement. The Board of
Directors shall determine, reasonably and in good faith, whether the Executive
has effectively cured the alleged grounds of termination. If the grounds for
termination are limited to acts or conduct described in Subsections (ii) or
(iii) of Section 5.2(a), and in the reasonable good faith opinion of the Board
of Directors those grounds may not reasonably be cured by the Executive, then
the notice required by this Section 5.2(b)(i) need not provide for any cure
period; and
(ii) The Executive is given a copy of certified
resolutions, duly adopted by the affirmative vote of not less than a majority of
the entire membership of the Board of Directors (excluding the Executive, if
applicable) at a meeting of the Board of Directors called and held for the
purpose of finding that, in the reasonable good faith opinion of a majority of
the Board of Directors, the Executive was guilty of conduct set forth in Section
5.2, which specify in detail the grounds for termination and indicate that the
grounds for termination have not been cured within the time limits, if any,
specified in the notice referred to in Section 5.2(b)(i).
5.3. Termination by the Executive. The Executive may terminate his
employment under this Agreement with or without Good Reason (as defined below).
If such termination is with Good Reason, the Executive shall give the Company
notice, which shall identify with reasonable specificity the grounds for the
Executive's resignation and provide the Company with thirty (30) days from the
day such notice is given to cure the alleged grounds for resignation contained
in the notice. In the event that the Executive fails to give such notice and the
Executive's employment under this Agreement in fact terminates at the initiation
of the Executive, such termination shall be deemed a termination by the
Executive without Good Reason. For purposes of this Agreement, "Good Reason"
shall mean any of the following to which the Executive shall not consent in
writing: (i) a reduction in the Executive's Base Salary, (ii) a reduction in the
amount of the Executive's annual Bonus Opportunity of more than 20% of
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<PAGE> 6
the Applicable Base Period Bonus Opportunity (as defined below), including a
material change in the individual performance goals applicable to the
Executive's annual Bonus Opportunity that (A) as of the date of such change,
makes achievement of those goals highly unlikely even if the Executive performs
his obligations under this Agreement, and (B) would result in a reduction in the
annual Bonus Opportunity of more than such 20% amount, (iii) a relocation of the
Executive's primary place of employment to a location more than fifty (50) miles
from his place of employment as described in Section 1, (iv) the reassignment of
the Executive to a position that is not an executive officer level position or
the assignment of duties that are not consistent with such a position, or (v) on
or after a Change in Control (as defined in Section 7.3(d)), in addition to
those events stated above, a material reduction in the Executive's actual annual
Bonus or any diminution in offices, titles, status or reporting requirements in
the Executive's specific executive officer position from those in effect as of
one hundred eighty (180) days prior to the Change in Control, other than an
insubstantial and inadvertent act that is remedied by the Company promptly after
receipt of notice given by the Executive. For purposes of this Agreement,
"Applicable Base Period Bonus Opportunity" means (A) with respect to the annual
Bonus Opportunity for any fiscal year ending on or prior to June 30, 2002, the
annual Bonus Opportunity in effect for fiscal year 2000, and (B) with respect to
the annual Bonus Opportunity for any fiscal year ending after June 30, 2002, the
average annual Bonus Opportunity in effect for the three preceding fiscal years.
5.4. Date of Termination. "Date of Termination" shall mean the earlier
of (a) the "Expiration Date" (as defined in Section 2) and (b) if the
Executive's employment is terminated (i) by his death, the date of his death, or
(ii) pursuant to the provisions of Section 5.2 or Section 5.3, as the case may
be, the date on which the Executive's employment with the Company actually
terminates.
6. Disability. The Executive shall be determined to be "Disabled" (and the
provisions of this Section 6 shall be applicable) if the Executive is unable to
perform his duties under this Agreement on essentially a full-time basis for six
(6) consecutive months by reason of a physical or mental condition (a
"Disability") and, within thirty (30) days after the Company gives notice
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<PAGE> 7
to the Executive that it intends to replace him due to his Disability, the
Executive shall not have returned to the performance of his duties on
essentially a full-time basis. Upon a determination that the Executive is
Disabled, the Company may replace the Executive without breaching this
Agreement; provided, however, that this Agreement shall not terminate until the
Expiration Date next following the date that the Executive is determined to be
Disabled. Prior to such Expiration Date, the Executive shall continue to be
entitled to the compensation and benefits provided in Sections 3 and 4;
provided, however, that the Company shall be entitled to offset against the
amounts payable by the Company to the Executive under this Agreement the amount
of benefits received by the Executive from third parties under long-term
disability plans carried by the Company (if any) and that in no event shall the
total annual obligation of the Company under this Agreement to make Base Salary
payments to the Executive during a period of his Disability be greater than an
amount equal to two-thirds (2/3) of the Executive's Base Salary, beginning in
the year in which the Executive is replaced in accordance with this Section 6,
and continuing until the earlier of the year in which the Expiration Date occurs
or the year in which the Executive dies.
7. Compensation Upon Termination.
7.1. Death. If the Executive's employment under this Agreement is
terminated by reason of his death, the Company shall continue to pay the
Executive's Base Salary at the rate in effect at the time of his death to such
person or persons as the Executive shall have designated for that purpose in a
notice filed with the Company, or, if no such person shall have been so
designated, to his estate, for a period of six (6) months after the Executive's
date of death. The Company also shall pay to such person(s) or estate, (a) the
amount of the Executive's Accrued Obligations (as defined below), and (b) an
amount equal to one-twelfth (1/12) of the Executive's average annual Bonus paid
or payable under Section 3.2 with respect to the most recent three (3) full
fiscal years or, if greater, the most recent twelve (12)-month period (in each
case, determined by annualizing the bonus paid or payable with respect to any
partial fiscal year) (the "Average Bonus"), that amount being payable in each of
the six (6) months following the Date of Termination. Any amounts payable under
this Section 7.1 shall be exclusive of and in addition
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<PAGE> 8
to any payments which the Executive's widow, beneficiaries or estate may be
entitled to receive pursuant to any pension plan, profit sharing plan, employee
benefit plan, or life insurance policy maintained by the Company. For purposes
of this Agreement, the Executive's "Accrued Obligations" means, as of the Date
of Termination, any accrued but unpaid Base Salary, accrued Bonus (including (1)
any accrued but unpaid Bonus (if any) with respect to the fiscal year prior to
the year in which the Date of Termination occurs, and (2) the amount of the
Executive's Average Bonus multiplied by a fraction, the numerator of which is
the number of days from the first day of the fiscal year of the Company in which
such termination occurs through and including the Date of Termination and the
denominator of which is 365 (the "Pro Rata Bonus")) and any accrued but unpaid
cash entitlements.
7.2. By the Company for Cause or the Executive Without Good Reason. If
the Executive's employment is terminated by the Company for Cause, or if the
Executive terminates his employment other than for Good Reason, the Company
shall pay to the Executive the amount of any Accrued Obligations within 30 days
of the Date of Termination and the Company thereafter shall have no further
obligation to the Executive under this Agreement, other than for payment of any
amounts accrued and vested under any employee benefit plans or programs of the
Company.
7.3. By the Executive for Good Reason or the Company other than for
Cause.
(a) Termination Prior to a Change in Control.
(i) Severance Benefits. Subject to the provisions of
Section 7.3(a)(ii) and Section 7.3(c), if, prior to (and not in anticipation of)
or more than two (2) years after a Change in Control (as defined in Section
7.3(d)), the Company terminates the Executive's employment without Cause, or the
Executive terminates his employment for Good Reason, then the Executive shall be
entitled to the following benefits (the "Severance Benefits"):
(A) the amount of his Accrued Obligations,
that amount being payable in a single lump sum cash payment within thirty (30)
days of the Date of Termination;
(B) a cash amount equal to the sum of (1)
one-twelfth (1/12) of the Executive's Base Salary at the highest rate in effect
at any time during the twelve (12)-month
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<PAGE> 9
period prior to the Date of Termination, and (2) one-twelfth (1/12) of the
Executive's Average Bonus, that total amount being payable in each of the twelve
(12) months following the month in which the Date of Termination occurs;
(C) all welfare benefits, including (to the
extent applicable) medical, dental, vision, life and disability benefits
pursuant to plans maintained by the Company under which the Executive and/or the
Executive's family is eligible to receive benefits and/or coverage, shall be
continued for the twelve (12)-month period following the Date of Termination,
with such benefits provided to the Executive at no less than the same coverage
level as in effect as of the Date of Termination and the Executive shall pay any
portion of such cost as was required to be borne by key executives of the
Company generally on the Date of Termination; provided, however, that,
notwithstanding the foregoing, the benefits described in this Section
7.3(a)(i)(C) may be discontinued prior to the end of the period provided in this
Subsection (C) to the extent, but only to the extent, that the Executive
receives substantially similar benefits from a subsequent employer;
(D) key executive outplacement services in
accordance with Company policies for senior executives as in effect on the Date
of Termination (or, at the request of the Executive, a lump sum payment in lieu
thereof, in an amount determined by the Company to be equal to the estimated
cost of those services); and
(E) notwithstanding any provisions of any
applicable stock option plan and agreement(s) to the contrary, and, to the
extent necessary, any such plan and agreement(s) are hereby amended such that,
any stock options granted by the Company to the Executive prior to September 10,
1998 and held by the Executive as of the Date of Termination, to the extent
those options were not forfeited under the terms of the applicable plan and
agreement(s) prior to the Date of Termination, that are or would have otherwise
vested pursuant to the vesting schedule applicable to such options on or before
the next applicable vesting date following the Date of Termination shall become
fully vested as of the Date of Termination, and shall be exercisable pursuant to
the provisions of the applicable plan and agreement(s); and
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<PAGE> 10
(F) notwithstanding any provisions of any
applicable stock option plan and agreement(s) to the contrary, and, to the
extent necessary, any such plan and agreement(s) are hereby amended such that,
any stock options granted by the Company to the Executive on September 10, 1998
and held by the Executive as of the Date of Termination, to the extent those
options were not forfeited under the terms of the applicable plan and
agreement(s) prior to the Date of Termination, shall continue to vest (to the
extent those options are not vested as of the Date of Termination) pursuant to
the vesting schedule applicable to such options during the twelve (12)-month
period following the Date of Termination and such options, whether vested or
unvested, shall terminate upon the first anniversary of the Date of Termination
or the last day of the option term under the applicable option agreement,
whichever is earlier (further, any option agreement entered into between the
Company and the Executive after the Effective Date shall contain provisions no
less favorable to the Executive than those contained in this Section
7.3(a)(i)(F)).
(ii) Conditions to Receipt of Severance Benefits
under Section 7.3(a). As a condition to receiving any Severance Benefits (other
than any Accrued Obligations) to which the Executive may otherwise be entitled
under this Section 7.3(a) only, the Executive shall execute a release (the
"Release"), in a form and substance reasonably satisfactory to the Company, of
any claims, whether arising under Federal, state or local statute, common law or
otherwise, against the Company and its direct or indirect subsidiaries which
arise or may have arisen on or before the date of the Release, other than any
claims under this Agreement or any rights to indemnification from the Company
and its direct or indirect subsidiaries pursuant to any provisions of the
Company's (or any of its subsidiaries') articles of incorporation or by-laws or
any directors and officers liability insurance policies maintained by the
Company. If the Executive fails or otherwise refuses to execute a Release within
a reasonable time after the Company's request to do so, the Executive will not
be entitled to any Severance Benefits or any other benefits provided under this
Agreement and the Company shall have no further obligations with respect to the
payment of the Severance Benefits. In addition, if, following a termination of
employment that gives the Executive a right to the payment of Severance Benefits
under Section
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<PAGE> 11
7.3(a), the Executive engages in any activities that would have violated any of
the covenants in Section 8.3 (had those covenants been applicable), the
Executive shall have no further right or claim to any Severance Benefits (other
than any Accrued Obligations) to which the Executive may otherwise be entitled
under this Section 7.3(a) from and after the date on which the Executive engages
in such activities and the Company shall have no further obligations with
respect to the payment of the Severance Benefits.
(b) Termination In Anticipation of or After a Change in
Control.
(i) Change in Control Severance Benefits. Subject to
the provisions of Section 7.3(c), if, in anticipation of (as defined below) or
within a two (2) year period following the occurrence of a Change in Control,
the Company terminates the Executive's employment without Cause, or the
Executive terminates his employment for Good Reason, then the Executive shall be
entitled to the following benefits (the "Change in Control Severance Benefits"):
(A) the sum of his Accrued Obligations, that
amount being payable in a single lump sum cash payment within thirty (30) days
of the Date of Termination;
(B) a cash amount equal to twenty-four (24)
times the sum of (1) one-twelfth (1/12) of the Executive's Base Salary at the
highest rate in effect at any time during the twelve (12)-month period prior to
the Date of Termination, and (2) one-twelfth (1/12) of the Executive's Average
Bonus, that total amount being payable in a single lump sum cash payment within
thirty (30) days of the Date of Termination;
(C) all welfare benefits, including (to the
extent applicable) medical, dental, vision, life and disability benefits
pursuant to plans maintained by the Company under which the Executive and/or the
Executive's family is eligible to receive benefits and/or coverage, shall be
continued for the twenty-four (24) month period following the Date of
Termination, with such benefits provided to the Executive at no less than the
same coverage level as in effect as of the Date of Termination and the Executive
shall pay any portion of such cost as was required to be borne by key executives
of the Company generally on the Date of Termination; provided, however, that,
notwithstanding the foregoing, the benefits described in
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<PAGE> 12
this Section 7.3(b)(i)(C) may be discontinued prior to the end of the period
provided in this Subsection (C) to the extent, but only to the extent, that the
Executive receives substantially similar benefits from a subsequent employer;
(D) key executive outplacement services in
accordance with Company policies for senior executives as in effect on the Date
of Termination (or, at the request of the Executive, a lump sum payment in lieu
thereof, in an amount determined by the Company to be equal to the estimated
cost of those services);
(E) notwithstanding any provisions of any
applicable stock option plan and agreement(s) to the contrary, all unexercised
stock options held by the Executive as of the Date of Termination shall become
fully vested and shall be immediately exercisable by the Executive; and
(F) notwithstanding any provisions of the
Supplemental Executive Retirement Plan ("SERP") in which the Executive is a
participant to the contrary, the Executive shall be deemed fully vested and
entitled to an immediate lump sum distribution of his benefit under the SERP,
calculated as if the Executive had been employed during the twenty-four (24)
month period following the Date of Termination and had received compensation as
provided under Section 3 for that period.
(ii) Definition of In Anticipation Of. For purposes
of this Section 7.3, the termination of the Executive's employment shall be
deemed to have been "in anticipation of" a Change in Control if such termination
(A) was at the request of an unrelated third party who has taken steps
reasonably calculated to effect a Change in Control, or (B) otherwise arose in
connection with a Change in Control.
(c) Superseding Termination. If, subsequent to the giving by
either party of a notice of termination under this Agreement and prior to the
actual Date of Termination pursuant to such notice, the Executive's employment
is properly terminated pursuant to any other provision of this Agreement, the
Executive shall be entitled only to those benefits, if any, arising out of such
subsequent and superseding termination.
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(d) Definition of Change in Control. For purposes of this
Agreement, a "Change in Control" shall mean, and shall be deemed to have
occurred upon the occurrence of, any one of the following events:
(i) The acquisition in one or more transactions by
any individual, entity (including any employee benefit plan or any trust for an
employee benefit plan) or group (within the meaning of Section 13(d)(3) or
14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of shares or other securities (as defined in
Section 3(a)(10) of the Exchange Act) representing 50% or more of either (1) the
shares of common stock of the Company (the "Company Common Stock") or (2) 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): (A) any acquisition by any shareholder or
group consisting solely of shareholders of the Company immediately prior to the
date of this Agreement or (B) any acquisition by the Company so long as such
acquisition does not result in any Person (other than any shareholder or
shareholders of the Company immediately prior to the date of this Agreement),
beneficially owning shares or securities representing 50% or more of either the
Company Common Stock or Company Voting Securities; or
(ii) Any election has occurred of persons to the
Board that causes two-thirds of the Board to consist of persons other than (A)
persons who were members of the Board on the date of this Agreement and (B)
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 date of this Agreement; provided, however, that any person nominated for
election by a Board at least two-thirds of whom constituted persons described in
clauses (A) and/or (B) or by persons who were themselves nominated by such Board
shall, for
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this purpose, be deemed to have been nominated by a Board composed of persons
described in clause (A);
(iii) 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;
(iv) 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 shareholders of the Company immediately prior to such
approval; or
(v) 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 shareholders of the
Company immediately prior to such approval.
7.4. No Mitigation. The Executive shall not be required to mitigate the
amount of any payment or benefit provided for in this Section 7 by seeking other
employment or otherwise, and, except as otherwise expressly provided in Sections
7.3(a)(i)(C) and 7.3(b)(i)(C), the amounts of compensation or benefits payable
or otherwise due to the Executive under this Section 7 or other
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provisions of this Agreement shall not be reduced by compensation or benefits
received by the Executive from any other employment he shall choose to undertake
following termination of his employment under this Agreement; provided, however,
that the Executive's entitlement to Severance Benefits or Change in Control
Severance Benefits, as the case may be, shall be subject to his compliance with
the covenants set forth in Section 8.
7.5. Certain Additional Payments by the Company.
(a) Anything in this Agreement to the contrary
notwithstanding, in the event it shall be determined that any economic benefit,
payment or distribution by the Company to or for the benefit of the Employee,
whether paid, payable, distributed or distributable pursuant to the terms of
this Agreement or otherwise (a "Payment"), would be subject to the excise tax
imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the
"Code"), or any interest or penalties with respect to such excise tax (such
excise tax and any applicable interest and penalties, collectively referred to
in this Agreement as the "Excise Tax"), then the Executive shall be entitled to
receive an additional payment (a "Gross-Up-Payment") in an amount such that
after payment by the Executive of all applicable taxes (including any interest
or penalties imposed with respect to such taxes), the Executive retains an
amount equal to the amount he would have retained had no Excise Tax been imposed
upon the Payment.
(b) Subject to the provisions of Section 7.5(c), all
determinations required to be made under this Section 7.5, including whether a
Gross-Up Payment is required and the amount of such Gross-Up Payment, shall be
made by the Company's regular outside independent public accounting firm (the
"Accounting Firm") which shall provide detailed supporting calculations both to
the Company and the Executive within 15 business days of the Date of
Termination, if applicable, or such earlier time as is requested by the Company.
The initial Gross-Up Payment, if any, as determined pursuant to this Section
7.5, shall be paid to the Executive within 5 business days of the receipt of the
Accounting Firm's determination. If the Accounting Firm determines that no
Excise Tax is payable by the Executive, it shall furnish the Executive with an
opinion that he has substantial authority not to report any Excise Tax on his
federal income tax return. Any determination by the Accounting Firm shall be
binding upon the
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Company and the Executive. As a result of the uncertainty in the application of
Section 4999 of the Code at the time of the initial determination by the
Accounting Firm, it is possible that Gross-Up Payments that have not been made
by the Company should have been made ("Underpayment"), consistent with the
calculations required to be made under this Section 7.5(b). In the event that
the Company exhausts its remedies pursuant to Section 7.5(c) and the Executive
thereafter is required to make a payment of any Excise Tax, the Accounting Firm
shall determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the benefit of the
Executive.
(c) The Executive shall notify the Company of any claim by the
Internal Revenue Service that, if successful, would require the payment by the
Company of the Gross-Up Payment under the terms of this Section 7.5. This notice
shall be given as soon as practicable but no later than ten business days after
the later of either (i) the date the Executive has actual knowledge of the
claim, or (ii) ten days after the Internal Revenue Service issues to the
Executive either a written report proposing imposition of the Excise Tax or a
statutory notice of deficiency with respect to the Excise Tax, and shall apprise
the Company of the nature of the claim and the date on which the claim is
requested to be paid. The Executive shall not pay the claim prior to the
expiration of the thirty-day period following the date on which he gives such
notice to the Company (or such shorter period ending on the date that any
payment of taxes with respect to the claim is due). If the Company notifies the
Executive prior to the expiration of the above period that it desires to contest
the claim, the Executive shall: (A) give the Company any information reasonably
requested by the Company relating to the claim, (B) take such action in
connection with contesting the claim as the Company shall reasonably request in
writing from time to time, including accepting legal representation with respect
to the claim by an attorney reasonably selected by the Company, (C) cooperate
with the Company in good faith in order to effectively contest the claim, (D)
permit the Company to participate in any proceedings relating to the claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold the Executive harmless, on an
after-tax basis, for any Excise Tax or income
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tax, including interest and penalties with respect thereto, imposed as a result
of such representation and payment of costs and expenses. Without limitation of
the foregoing provisions of this Section 7.5(c), the Company shall control all
proceedings taken in connection with such contest and, at its sole option, may
pursue or forego any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of the claim and may, at its
sole option, either direct the Executive to request or accede to a request for
an extension of the statute of limitations with respect only to the tax claimed,
or pay the tax claimed and sue for a refund or contest the claim in any
permissible manner, and the Executive agrees to prosecute such contest to a
determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that if the Company directs the Executive to pay
the claim and sue for a refund, the Company shall advance the amount of the
required payment to the Executive, on an interest-free basis and shall indemnify
and hold the Executive harmless, on an after-tax basis, from any Excise Tax or
income tax, including interest or penalties with respect thereto, imposed with
respect to any advance or with respect to any imputed income in relation to any
advance; and further provided that any extension of the statute of limitations
requested or acceded to by the Executive at the Company's request and relating
to payment of taxes for the taxable year of the Executive with respect to which
the contested amount is claimed to be due is limited solely to the contested
amount. Furthermore, the Company's control of the contest shall be limited to
issues with respect to which a Gross-Up Payment would be payable under the
Agreement and the Executive shall be entitled to settle or contest, as the case
may be, any other issue raised by the Internal Revenue Service or any other
taxing authority.
(d) If, after the receipt by the Executive of an amount
advanced by the Company pursuant to Section 7.5(c), the Executive becomes
entitled to receive any refund with respect to the claim, the Executive shall
(subject to the Company's complying with the requirements of Section 7.5(c))
promptly pay to the Company the amount of that refund (together with any
interest paid or credited thereon after taxes applicable thereto). If, after the
receipt by the Executive of an amount advanced by the Company pursuant to
Section 7.5(c), a
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determination is made that the Executive shall not be entitled to any refund
with respect to the claim and the Company does not notify the Executive of its
intent to contest such denial of refund prior to the expiration of thirty days
after the determination, then the advance shall be forgiven and shall not be
required to be repaid and the amount of the advance shall offset, to the extent
thereof, the amount of Gross-Up Payment required to be paid.
(e) In the event that any state or municipality or subdivision
thereof shall subject any Payment to any special tax which shall be in addition
to the generally applicable income tax imposed by the state, municipality, or
subdivision with respect to receipt of the Payment, the foregoing provisions of
this Section 7.5 shall apply, mutatis mutandis, with respect to such special
tax.
7.6. Severance Benefits Not Includable for Employee Benefits Purposes.
Subject to all applicable federal and state laws and regulations, income
recognized by the Executive pursuant to the provisions of this Section 7 (other
than income accrued but unpaid as of the Date of Termination) shall not be
included in the determination of benefits under any employee benefit plan (as
that term is defined in Section 3(3) of the Employee Retirement Income Security
Act of 1974, as amended) or any other benefit plans, policies or programs
applicable to the Executive that are maintained by the Company or any of its
direct or indirect subsidiaries and the Company shall be under no obligation to
continue to offer or provide such benefits to the Executive after the Date of
Termination other than as provided under this Section 7 or to the extent to
which any benefit under a pertinent plan has accrued as of the Date of
Termination.
7.7. Exclusive Benefits. The Severance Benefits payable under Section
7.3(a) and the Change in Control Severance Benefits payable under Section
7.3(b), if either benefits become applicable under the terms of this Agreement,
shall be mutually exclusive and shall be in lieu of any other severance or
similar benefits that would otherwise be payable under any other agreement,
plan, program or policy of the Company.
8. Restrictive Covenants.
8.1. Confidentiality. The Executive recognizes that the services to be
performed by him under this Agreement are special, unique and extraordinary in
that, by reason of his
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employment with the Company, he may acquire confidential information and trade
secrets concerning the operation of the Company or an Affiliate (as defined
below), the use or disclosure of which could cause the Company or an Affiliate
substantial loss and damages which could not be readily calculated and for which
no remedy at law would be adequate. For purposes of this Section 8, the term
"Affiliate" means any direct or indirect subsidiary of the Company, including
any individual, partnership, firm, corporation or other business organization or
entity that controls, is controlled by, or is under common control with, the
Company. Accordingly, during the Employment Term and at all times thereafter,
the Executive covenants and agrees with the Company that he shall not at any
time, except in the performance of his obligations to the Company under this
Agreement or with the prior written consent of the Board of Directors of the
Company, directly or indirectly, disclose any secret or confidential information
that he may learn or has learned by reason of his association with the Company,
or any predecessors to their business, or use any such information to the
detriment of the Company. The term "confidential information" includes
information not previously disclosed to the public or to the trade by the
Company's management or otherwise known by the public or the trade with respect
to the Company's products, facilities and methods, research and development,
trade secrets and other intellectual property, systems, patents and patent
applications, procedures, manuals, confidential reports, product price lists,
customer lists, financial information (including the revenues, costs or profits
associated with any of the Company's products), business plans, prospects or
opportunities; provided, however, that the term "confidential information" shall
not include, and the Executive shall have no obligation under this Agreement
with respect to, any information that (a) becomes generally available to the
public other than as a result of a disclosure by the Executive or his agent or
other representative or (b) becomes available to the Executive on a
non-confidential basis from a source other than the Company or any Affiliate.
The Executive shall have no obligation under this Agreement to keep confidential
any of the confidential information to the extent that a disclosure of it is
required by law or is consented to by the Company; provided, however, that if
and when such a disclosure is required by law, the Executive promptly
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shall provide the Company with notice of such requirement, so that the Company
may seek an appropriate protective order.
8.2. Exclusive Property. The Executive confirms that all confidential
information is the exclusive property of the Company. All business records,
papers and documents kept or made by the Executive relating to the business of
the Company or its direct or indirect subsidiaries shall be and remain the
property of the Company or the applicable subsidiary during the Employment Term
and at all times thereafter. Upon the termination of his employment with the
Company or upon the request of the Company at any time, the Executive shall
promptly deliver to the Company, and shall retain no copies of, any written
materials, records and documents made by the Executive or coming into his
possession concerning the business or affairs of the Company or its direct or
indirect subsidiaries; provided, however, that the Executive shall be permitted
to retain copies of any documents or materials of a personal nature or otherwise
related to the Executive's rights under this Agreement.
8.3. Non Competition. During the Employment Term and, except as
provided in the last sentence of this Section 8.3, for a period of one (1) year
after the Date of Termination, the Executive shall not, unless he receives the
prior written consent of the Company, directly or indirectly, own an interest
in, manage, operate, join, control, lend money or render financial or other
assistance to, participate in or be connected with, as an officer, employee,
partner, stockholder, consultant or otherwise, or engage in any activity or
capacity (collectively, the "Competitive Activities") with respect to any
individual, partnership, limited liability company, firm, corporation or other
business organization or entity (each, a "Person"), that is engaged directly or
indirectly in the ownership or operation of proprietary post-secondary schools
or that is in competition with any of the business activities of the Company or
its direct or indirect subsidiaries either (i) anywhere in the United States or
(ii) in any other country in which the Company or its direct or indirect
subsidiaries conduct, or actively intend to conduct, business as of the Date of
Termination; provided, however, that the foregoing (a) shall not apply with
respect to any line-of-business in which the Company or its direct or indirect
subsidiaries was not engaged on or before the Expiration Date or the Date of
Termination, as the case may be, and (b)
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shall not prohibit the Executive from owning, or otherwise having an interest
in, less than one percent (1%) of any publicly-owned entity or three percent
(3%) of any private equity fund or similar investment fund that invests in
education companies, provided the Executive has no active role with respect to
any investment by such fund in any Person referred to in this Section 8.3. The
Executive shall not be subject to the covenants contained in this Section 8.3
and such covenants shall not be enforceable against the Executive from and after
the date that the Executive's employment is terminated (i) by the Company
without Cause, (ii) by the Executive for Good Reason or (iii) in anticipation of
or within two (2) years after a Change in Control.
8.4. Non-Solicitation. During the Term of the Executive's Employment
and for a period of one (1) year after the Date of Termination, the Executive
shall not, whether for his own account or for the account of any other Person
(other than the Company or its direct or indirect subsidiaries), intentionally
solicit, endeavor to entice away from the Company or its direct or indirect
subsidiaries, or otherwise interfere with the relationship of the Company or its
direct or indirect subsidiaries with, any person who is employed by the Company
or its direct or indirect subsidiaries (including, but not limited to, any
independent sales representatives or organizations).
8.5. Injunctive Relief. Subject to the exceptions contained in Section
8.3, the Executive acknowledges that a breach of any of the covenants contained
in this Section 8 may result in material, irreparable injury to the Company for
which there is no adequate remedy at law, that it shall not be possible to
measure damages for such injuries precisely and that, in the event of such a
breach or threat of breach, the Company shall be entitled to obtain a temporary
restraining order and/or a preliminary or permanent injunction restraining the
Executive from engaging in activities prohibited by this Section 8 or such other
relief as may be required to specifically enforce any of the covenants in this
Section 8. The Executive agrees and consents that injunctive relief may be
sought in any state or federal court of record in the Commonwealth of
Pennsylvania, or in the state and county in which a violation may occur or in
any other court having jurisdiction, at the election of the Company; to the
extent that the Company seeks a temporary restraining order (but not a
preliminary or permanent injunction), the Executive agrees
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that a temporary restraining order may be obtained ex parte. The Executive
agrees and submits to personal jurisdiction before each and every court
designated above for that purpose.
8.6. Blue-Pencilling. The parties consider the covenants and
restrictions contained in this Section 8 to be reasonable. However, if and when
any such covenant or restriction is found to be void or unenforceable and would
have been valid had some part of it been deleted or had its scope of application
been modified, such covenant or restriction shall be deemed to have been applied
with such modification as would be necessary and consistent with the intent of
the parties to have made it valid, enforceable and effective.
9. Miscellaneous.
9.1. Assignment; Successors; Binding Agreement. This Agreement may not
be assigned by either party, whether by operation of law or otherwise, without
the prior written consent of the other party, except that any right, title or
interest of the Company arising out of this Agreement may be assigned to any
corporation or entity controlling, controlled by, or under common control with
the Company, or succeeding to the business and substantially all of the assets
of the Company or any affiliates for which the Executive performs substantial
services; provided, however, that no such assignment shall relieve the Company
of its obligations hereunder without the express written consent of the
Executive. Subject to the foregoing, this Agreement shall be binding upon and
shall inure to the benefit of the parties and their respective heirs, legatees,
devisees, personal representatives, successors and assigns.
9.2. Modification and Waiver. No provision of this Agreement may be
modified, waived, or discharged unless such waiver, modification or discharge is
duly approved by the Board of Directors of the Company and is agreed to in
writing by the Executive and such officer(s) as may be specifically authorized
by the Board of Directors of the Company to effect it. No waiver by any party of
any breach by any other party of, or of compliance with, any term or condition
of this Agreement to be performed by any other party, at any time, shall
constitute a waiver of similar or dissimilar terms or conditions at that time or
at any prior or subsequent time.
9.3. Entire Agreement. No agreement or representation, oral or
otherwise, express or implied, with respect to the subject matter of this
Agreement, has been made by either party
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which is not set forth expressly in this Agreement. Further, this Agreement
shall amend and supersede any and all previously existing employment or
consulting agreements between the Executive and the Company or any of its direct
or indirect subsidiaries or affiliates.
9.4. Governing Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the Commonwealth
of Pennsylvania other than the conflict of laws provision thereof.
9.5. Arbitration. In the event of any dispute, controversy or claim
between the Company and the Executive arising out of or relating to the
interpretation, application or enforcement of any provision of this Agreement
(other than with respect to provisions under Section 8 of this Agreement),
either the Company or the Executive may, by written notice to the other, require
such dispute or difference to be submitted to arbitration. The arbitrator or
arbitrators shall be selected by agreement of the parties or, if they do not
agree on an arbitrator or arbitrators within 30 days after one party has
notified the other of his or its desire to have the question settled by
arbitration, then the arbitrator or arbitrators shall be selected by the
American Arbitration Association (the "AAA") in Pittsburgh, Pennsylvania. The
determination reached in such arbitration shall be final and binding on all
parties without any right of appeal or further dispute. Execution of the
determination by such arbitrator may be sought in any court of competent
jurisdiction. The arbitrators shall not be bound by judicial formalities and may
abstain from following the strict rules of evidence and shall interpret this
Agreement as an honorable engagement and not merely as a legal obligation.
Unless otherwise agreed by the parties, any such arbitration shall take place in
Pittsburgh, Pennsylvania, and shall be conducted in accordance with the
Commercial Arbitration Rules of the AAA.
9.6. Consent to Jurisdiction and Service of Process. In the event of
any dispute, controversy or claim between the Company and the Executive arising
out of or relating to the interpretation, application or enforcement of the
provisions of Section 8 or Section 9.5, the Company and the Executive agree and
consent to the personal jurisdiction of the Court of Common Pleas for Allegheny
County, Pennsylvania and/or the United States District Court for the Western
District of Pennsylvania for resolution of the dispute, controversy or claim,
and that
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those courts, and only those courts, shall have exclusive jurisdiction to
determine any dispute, controversy or claim related to, arising under or in
connection with Section 8 of this Agreement. The Company and the Executive also
agree that those courts are convenient forums for the parties to any such
dispute, controversy or claim and for any potential witnesses and that process
issued out of any such court or in accordance with the rules of practice of that
court may be served by mail or other forms of substituted service to the Company
at the address of its principal executive offices and to the Executive at his or
her last known address as reflected in the Company's records.
9.7. Resignation from Board. Upon a termination of the Executive's
employment under this Agreement for any reason, the Executive shall, if
requested by the Company's Board of Directors, promptly resign as a member of
the Board of Directors of the Company or its direct or indirect subsidiaries.
9.8. Withholding of Taxes. The Company shall withhold from any amounts
payable under the Agreement all Federal, state, local or other taxes as legally
shall be required to be withheld.
9.9. Notice. For the purposes of this Agreement, notices and all other
communications to either party provided for in this Agreement shall be furnished
in writing and shall be deemed to have been duly given when delivered or when
mailed if such mailing is by United States certified or registered mail, return
receipt requested, postage prepaid, addressed to such party (notices to the
Company being addressed to the Secretary of the Company) at the Company's
principal executive office, or at other address as either party shall have
designated by giving written notice of such change to the other party at anytime
hereafter.
9.10. Severability. The invalidity or unenforceability of any provision
or provisions of this Agreement shall not affect the validity or enforceability
of any other provision of this Agreement, which shall remain in full force and
effect.
9.11. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
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9.12. Headings. The headings used in this Agreement are for convenience
only, do not constitute a part of the Agreement, and shall not be deemed to
limit, characterize, or affect in any way the provisions of the Agreement, and
all provisions of the Agreement shall be construed as if no headings had been
used in the Agreement.
9.13. Construction. As used in this Agreement, unless the context
otherwise requires: (a) the terms defined herein shall have the meanings set
forth herein for all purposes; (b) references to "Section" are to a section
hereof; (c) all "Schedules" referred to herein are incorporated herein by
reference and made a part hereof; (d) "include," "includes" and "including" are
deemed to be followed by "without limitation" whether or not they are in fact
followed by such words or words of like import; (e) "writing," "written" and
comparable terms refer to printing, typing, lithography and other means of
reproducing words in a visible form; (f) "hereof," "herein," "hereunder" and
comparable terms refer to the entirety of this Agreement and not to any
particular section or other subdivision hereof or attachment hereto; (g)
references to any gender include references to all genders; and (h) references
to any agreement or other instrument or statute or regulation are referred to as
amended or supplemented from time to time (and, in the case of a statute or
regulation, to any successor provision).
IN WITNESS WHEREOF, the parties have duly executed this Agreement on
the date and year first above written.
EDUCATION MANAGEMENT CORPORATION
By: /s/ Robert B. Knutson
----------------------------------
Robert B. Knutson
Chairman & Chief Executive Officer
EXECUTIVE
/s/ [Name of Executive]
----------------------------------
[Name of Executive]
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EXHIBIT 10.12
EDUCATION MANAGEMENT CORPORATION
SENIOR MANAGEMENT TEAM
INCENTIVE COMPENSATION PLAN
JULY, 1999
<PAGE> 2
HIGHLIGHTS OF THE MANAGEMENT INCENTIVE COMPENSATION PLAN
- - The plan is designed to reward participants for achievement of desired
results.
- - The plan will help retain key management by tying results achieved by
managers to the incentive compensation received.
- - The plan will be predictable, fair, timely, objective and measurable.
- - The plan retains some flexibility to adjust formula bonus amounts to
reflect current performance, history, past practice, economic factors
and other anomalies.
- - It is designed to be as simple as possible and to provide for relative
administrative ease.
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OVERVIEW
A plan that provides incentive payments to senior management team participants
based on:
- - Reward for performance in key result areas: Earnings, Revenues, Key
Personal Objectives
- - The achievement of at least 97% of a trigger objective composed of our
planned placement rate and average starting salary for our graduates.
- - Target bonus amounts expressed as a specific dollar amount depending on
the position held.
- - Bonuses earned based on performance against two financial targets and
up to three key personal objectives.
- - Weighting of the targets will be assigned to each participant using one
of three weight distributions depending on the position held.
- - Minimum performance in a category is 75% of target. Performance above
or below target will be increased or reduced by 4 percentage points per
each 1% difference between plan and actual performance.
- - The maximum is 150% of target performance in each category.
-3-
<PAGE> 4
TRIGGER
- - The proposed trigger(s) will be the planned placement rate and the average
starting salary of our graduates. School positions will be measured by
their school's planned rates. Positions at the Central Staff or those
operating units without such measurements will be compared to system-wide
targets.
- - The minimum performance will be 97% of the consolidated results for the
operating unit or the company as a whole, compared to the planned targets.
- - If the minimum trigger performance is not met, then bonuses will be
determined only by performance against Key Personal Objectives (Discussed
below). In other words, bonus potential will be dramatically limited if our
trigger measures are not met.
- - Focusing on the results of our placement efforts in this important way will
help ensure that graduate outcomes are realized.
TARGET BONUS AMOUNTS
The target bonus will be expressed as a specific dollar amount. At the beginning
of the plan year each participant will be informed as to what the target bonus
amount will be for the year.
COMPONENTS
1. EARNINGS
- EARNINGS PER SHARE measure will apply to:
- Corporate Officers
- Central Staff Officers
- OPERATING INCOME (Before MICP Expense) measurements will apply to:
- Group Vice Presidents
- Operating Unit Executives
2. REVENUE: Applies to All positions
3. KEY PERSONAL OBJECTIVES (KPO): Up to three weighted objectives.
-4-
<PAGE> 5
- - KPOs will be approved by the EDMC Executive Committee.
- - KPOs for school Executive Committee positions will be approved by the
Operating Unit President and by the respective Central Staff Department
Heads. KPOs for School Presidents will be approved by the School's
Board of Trustees where they exist.
WEIGHTING OF COMPONENTS
All positions will have the measured components weighted according to one of the
following distributions:
- --------------------------------------------------------------------------------
EARNINGS REVENUES KPO POSITIONS
- --------------------------------------------------------------------------------
A 60% 20% 20% EDMC Corporate Officers (EPS for Earnings)
- --------------------------------------------------------------------------------
B 40% 40% 20% Group Vice Presidents and School Presidents
- --------------------------------------------------------------------------------
B 30% 20% 50% Central Staff Officers (EPS for Earnings) and
Operating Unit Executive Committee Members.
- --------------------------------------------------------------------------------
BONUS CALCULATION
- - Performance against financial targets (Earnings/EPS and Revenues) will be
calculated by the Finance Department.
- - Performance against KPOs will be determined by the participant's direct and
indirect supervisors, with concurrence by the EDMC Executive Committee.
- - Minimum performance in a category is 75% of target. Performance below
target will be reduced by 4 percentage points per each 1% miss. Performance
above target will be increased by 4 percentage points per each 1% over
target. KPOs that do not lend themselves to such a measurement should be
assessed more subjectively. In such a case the KPO could be considered
achieved (at 100%) or not achieved (at 0%).
- - A MANAGEMENT DISCRETION FACTOR may be applied to any calculated bonus
amount that may increase or decrease the calculated amount by up to 20%.
This factor will be applied only to adjust a bonus to provide for fairness,
equity, recent performance changes or environmental factors outside the
-5-
<PAGE> 6
participant's control. This factor may be applied only by the EDMC
Executive Committee, or in the case of a school president at Schools where
there is a Board of Trustees, by the Board of Trustees.
- - The maximum payment is 150% of the target in each category and in the
total.
-6-
<PAGE> 7
EXAMPLES:
Dean of Education Jones has a base salary of $60,000 with a target bonus of
$15,000.
In Example 1 below, Dean Jones' bonus would be calculated as 110% of his target
bonus. Since performance ABOVE plan is increased by 4 percentage points for each
1% above plan, his performance for both Earnings and Revenues would be
increased. His bonus would be calculated as $16,500. ($15,000 target x 110%)
Example 1
- ----------------------------------------------------------------------------
School's Targets Actual % Attainment Weight Weighted %
- ----------------------------------------------------------------------------
EARNINGS 1,000,000 1,050,000 105% 30% 36%(1)
- ----------------------------------------------------------------------------
REVENUES 10,000,000 10,500,000 105% 20% 24%(2)
- ----------------------------------------------------------------------------
KPO 100% 50% 50%
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Total 100% 110%
- ----------------------------------------------------------------------------
If, however, Dean Jones had identical results in the financial arena but only
managed to complete 85% of his KPOs, his calculated bonus would be quite
different. (See Example 2 below)
Since performance BELOW plan is reduced by 4 percentage points for each 1% miss,
his calculated attainment for the KPO area would be significantly lower.
In this example, his bonus would be $12,000. ($15,000 target x .80)
Example 2
- ----------------------------------------------------------------------------
School's Targets Actual % Attainment Weight Weighted %
- ----------------------------------------------------------------------------
EARNINGS 1,000,000 1,050,000 105% 30% 36%
- ----------------------------------------------------------------------------
REVENUES 10,000,000 10,500,000 105% 20% 24%
- ----------------------------------------------------------------------------
KPO 85% 50% 20%(3)
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Total 100% 80%
- ----------------------------------------------------------------------------
1 ( (+ 5% x 4) + 100%) x 30% = 36%
2 ( (+ 5% x 4) + 100%) x 20% = 24%
3 ( 100% - (15% x 4) ) x 50% = 20%
-7-
<PAGE> 8
PAYMENT OF BONUSES
- ------------------
Bonuses earned under the plan will be paid to eligible employees in cash
promptly after the bonus amounts have been determined. All bonus payments are
subject to applicable tax withholdings.
To be eligible to receive a payment under this plan, a participant must be
actively employed on the date the payment is made.
The EDMC Executive Committee may grant a payment under this plan to a former or
inactive employee for compelling reasons in its sole discretion.
MISCELLANEOUS PROVISIONS
- ------------------------
CHANGING OR ENDING THE PLAN
It is the intention of the Company that the plan has no expiration date, nor is
it intended to be temporary. However, the Company has the right to change the
plan in any way and at any time and is not required to give a reason for, or
notice of the changes. Any special arrangement made by the Company for an
individual will constitute an amendment to this plan applicable only to that
individual. The Company has the right to end the plan (in whole or in part) at
any time.
GOVERNING LAW
This plan is governed by the internal laws of The Commonwealth of Pennsylvania.
PARTICIPATION IN THE PLAN
Participation in the plan does not constitute a guarantee of employment, nor is
continued participation in the plan guaranteed. Participants will be notified of
their right to participate in the plan on an annual basis.
NO ASSIGNMENT
No person having a benefit under the plan may assign or transfer that benefit.
-8-
<PAGE> 1
EXHIBIT 21.01
MATERIAL SUBSIDIARIES
<TABLE>
<CAPTION>
NAME OF SUBSIDIARY JURISDICTION OF INCORPORATION
- ------------------ -----------------------------
<S> <C>
The Art Institutes International, Inc. Pennsylvania
The Art Institute of Atlanta, Inc. Georgia
The Art Institute of Dallas, Inc. Texas
The Art Institute of Fort Lauderdale, Inc. Florida
The Art Institute of Houston, Inc. Texas
The Illinois Institute of Art, Inc. Illinois
The Illinois Institute of Art at Schaumburg, Inc. Illinois
The Art Institute of Los Angeles, Inc. California
The Art Institute of Los Angeles--Orange County,
Inc. California
The Art Institutes International Minnesota, Inc. Minnesota
The New York Restaurant School, Inc. New York
The Art Institute of Philadelphia, Inc. Pennsylvania
The Art Institute of Phoenix, Inc. Arizona
The Art Institutes International at Portland, Inc. Oregon
The Art Institutes International at San Francisco,
Inc. California
The Art Institute of Seattle, Inc. Washington
The Colorado Institute of Art, Inc. Colorado
The National Center for Professional Development,
Inc. Georgia
NCPT, Inc. Georgia
American Business and Fashion Institute, Inc. North Carolina
Massachusetts Communications College Massachusetts
</TABLE>
<PAGE> 1
EXHIBIT 23.01
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report dated July 28, 1999 included in this Form 10-K into the
Company's previously filed Registration Statements on Form S-8, File Nos.
333-20057 and 333-20073. It should be noted that we have not audited any
financial statements of the Company subsequent to June 30, 1999 or performed
any audit procedures subsequent to the date of our report.
Pittsburgh, Pennsylvania
September 27, 19999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 32,871
<SECURITIES> 0
<RECEIVABLES> 19,467
<ALLOWANCES> (9,367)
<INVENTORY> 2,038
<CURRENT-ASSETS> 55,709
<PP&E> 171,352
<DEPRECIATION> (75,271)
<TOTAL-ASSETS> 178,746
<CURRENT-LIABILITIES> 45,188
<BONDS> 36,500
0
0
<COMMON> 295
<OTHER-SE> 96,510
<TOTAL-LIABILITY-AND-EQUITY> 178,746
<SALES> 260,805
<TOTAL-REVENUES> 260,805
<CGS> 170,742
<TOTAL-COSTS> 229,107
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 5,660
<INTEREST-EXPENSE> (113)
<INCOME-PRETAX> 31,811
<INCOME-TAX> 13,059
<INCOME-CONTINUING> 18,752
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,752
<EPS-BASIC> .64<F1>
<EPS-DILUTED> .61<F1>
<FN>
<F1>On December 2, 1998, the Company's Board of Directors authorized a 2-for-1
stock split effected in the form of a stock dividend. The distribution was made
on December 29, 1998 to shareholders of record as of the close of business on
December 8, 1998. Financial Data Schedules reported prior to the stock split
have not been restated to reflect this stock split.
</FN>
</TABLE>
