0001021408-01-507490.txt : 20011009
0001021408-01-507490.hdr.sgml : 20011009
ACCESSION NUMBER: 0001021408-01-507490
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 5
CONFORMED PERIOD OF REPORT: 20010630
FILED AS OF DATE: 20010928
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: EDUCATION MANAGEMENT CORPORATION
CENTRAL INDEX KEY: 0000880059
STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EDUCATIONAL SERVICES [8200]
IRS NUMBER: 251119571
FISCAL YEAR END: 0630
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-21363
FILM NUMBER: 1748022
BUSINESS ADDRESS:
STREET 1: 300 SIXTH AVENUE
CITY: PITTSBURGH
STATE: PA
ZIP: 15222
BUSINESS PHONE: 4125620900
MAIL ADDRESS:
STREET 1: 300 SIXTH AVE
CITY: PITTSBURGH
STATE: PA
ZIP: 15222
10-K
1
d10k.txt
FORM 10-K
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
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, 2001 Commission File Number: 000-21363
----------------
EDUCATION MANAGEMENT CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1119571
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 Sixth Avenue, Pittsburgh, PA 15222
(Address of principal executive (Zip Code)
offices)
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 11, 2001 was approximately $531,251,190. The
number of shares of Common Stock outstanding on September 11, 2001 was
30,351,322 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 8, 2001 ("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.
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
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
response 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 the
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 enrollment 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 bachelor's and
associate's degree programs and non-degree programs in the areas of design,
media arts, culinary arts and fashion. The Company's Art Institutes have
graduated over 125,000 students. In the fall quarter beginning October 2000,
EDMC's schools had 27,999 students enrolled, representing all 50 states and 97
countries.
As of June 30, 2001, The Art Institutes consisted of 22 schools in 20 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, media arts and animation, multimedia and web
design, video production, interior design, industrial design, culinary arts,
photography, and fashion. These programs typically are completed in 18 to 48
months and culminate in a bachelor's or associate's degree. In the summer
quarter beginning July 2001, 19 Art Institutes offered 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.
The Company offers a culinary arts curriculum at 11 Art Institutes. In
addition, The New York Restaurant School ("NYRS"), a culinary arts and
restaurant management school located in New York City and owned by the
Company, offers an associate's degree program and certificate programs in
these fields.
The Company also owns NCPT (The National Center for Paralegal Training),
which offers paralegal certificate programs. The National Center for
Professional Development (NCPD) maintained consulting relationships with
certain colleges and universities to assist in the development, marketing and
delivery of paralegal, legal nurse consultant and financial planning
certificate programs. As of June 30, 2001, all but one of these relationships
had expired or had been terminated, and the remaining relationship expired on
August 31, 2001.
EDMC's graduates are employed by a broad range of employers nationwide.
Approximately 90.7% of the calendar year 2000 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.
1
The Business of Education
EDMC's primary mission is to promote 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 the Internet, high school visits
and recruitment events, and television and print media advertising. EDMC 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 2001 referrals accounted for 34% of new
student enrollment at The Art Institutes, high school recruitment programs
accounted for 19%, the Company's web sites accounted for 19%, broadcast
advertising accounted for 17%, print media accounted for 6%, direct mail
efforts accounted for 3%, and international marketing accounted for less than
1%. The remainder was classified as miscellaneous.
In fiscal 2001, The Art Institutes' marketing efforts generated inquiries
from approximately 370,000 qualified prospective students. The Art Institutes'
inquiry-to-application conversion ratio decreased from 9.7% in fiscal 2000 to
9.1% in fiscal 2001, and the applicant-to-new student ratio was 63.8% for both
fiscal 2000 and 2001.
The Company also employs approximately 100 representatives who make
presentations at high schools to promote The Art Institutes. Art Institute
representatives also participate in college fairs at which prospective
students can meet with a representative, view artwork and videos, and receive
enrollment information. In fiscal 2001, representatives visited over 12,000
high schools and attended approximately 1,800 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.
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 costs, 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 2001,
approximately 31% of the entering students matriculated directly from high
school, approximately 29% were between the ages of 19 and 21, approximately
28% 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 advising
students regarding academic and financial matters, part-time employment and
housing. Remedial courses are mandated for students with lower 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 64.8% in fiscal 2000 and
65.7% in fiscal 2001.
2
Education Programs
The Art Institutes offer the following degree programs. Not all programs are
offered at each Art Institute. (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
Animation Art & Design Broadcasting
Graphic Design Information Technology &
Interior Design Design
Industrial Design Technology Photography
Multimedia & Web Design
Bachelor's Degree Programs Video Production
Media Arts & Animation
Game Art & Design Bachelor's Degree Programs
Graphic Design Multimedia & Web Design
Interior Design Photography
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
Culinary Management Fashion Design
Fashion Marketing and
Management
NYRS also offers an associate's degree program in culinary arts and
restaurant management and certificate programs in culinary arts, pastry arts,
culinary skills and restaurant management.
Approximately 7.9% of the average quarterly student enrollment at the
Company's schools in fiscal 2001 were in specialized diploma and certificate
programs. Academic credits from the specialized diploma programs at The Art
Institutes and NYRS are generally transferable into bachelor's and associate's
degree programs at those schools. Diploma and certificate programs are
designed for working adults who seek to supplement their education or are
interested in enhancing their marketable skills.
During fiscal 2001, The Illinois Institute of Art at Schaumburg, The Art
Institute of Colorado and The Art Institute of Houston began offering
certificate programs through the Center for Professional Development. The
Center for Professional Development was formed to develop and administer
certificate programs to a wide audience, including alumni seeking advances in
their career fields and professionals in other career fields looking to add
marketable new skill sets. Additionally, the Center for Professional
Development will conduct contract skills training for companies seeking to
update their employees' skills.
3
Graduate Employment
Based on information received from graduating students and employers, the
Company believes that students graduating from the Company's schools during
the five calendar years ended December 31, 2000 obtained employment in fields
related to their programs of study as follows:
Percentage of Available
Number of Graduates Who Obtained
Graduating Classes Available Employment Related to
(Calendar Year) Graduates(1) Program of Study(2)
------------------ ----------- -----------------------
2000.................................. 5,414 90.7%
1999.................................. 5,279 90.1
1998.................................. 4,719 90.9
1997.................................. 4,749 87.3
1996.................................. 4,167 86.4
--------
(1) The term "Available Graduates" refers to all graduates except those who
are pursuing further education, deceased, in active military service, who
have medical conditions that prevent such graduates from working, who are
continuing in a professional unrelated career, or who are international
students no longer residing in the United States.
(2) The information presented reflects employment in fields related to
graduates' programs of study within six months after graduation.
For calendar year 2000, the approximate average starting salaries of
graduates of degree and diploma programs at The Art Institutes were as
follows: The School of Culinary Arts--$25,557; The School of Design--$28,529;
The School of Fashion--$25,861; and The School of Media Arts--$27,719.
Each Art Institute offers career-planning services to all graduating
students through its Career Services department. Specific career advice is
provided during the last two quarters of a student's education. In addition to
individualized training in interviewing and networking techniques and resume-
writing, a Career Development course is required for all students. Students
also receive portfolio counseling where appropriate. The Art Institutes
maintain contact with approximately 40,000 employers nationwide. Career
Services advisors educate employers about the programs at The Art Institutes
and the caliber of their graduates. These advisors also participate in
professional organizations, trade shows and community events to keep apprised
of industry trends and maintain relationships with key employers. Career
Services staff also visit employer sites to learn more about their operations
and better understand their recruiting needs.
Employers of Art Institute graduates include numerous small and medium-sized
companies, as well as larger companies with a national or international
presence. The following companies are representative of the larger companies
that employ Art Institute graduates: AT&T, Microsoft Corporation, Marriott
International, Inc., Home Depot, Viacom, The Gap, Federated Department Stores,
The Boeing Company, Eddie Bauer, Inc., Ethan Allen Interiors, Inc.,
FlightSafety International, Humongous Entertainment, Inc., Kinko's
Corporation, Sodexho, The May Department Stores Company, The Neiman Marcus
Group, Inc., Aramark, Nintendo of America, Nordstrom, Inc., The Ritz-Carlton,
Sears Roebuck and Co., Sierra On-Line, Inc., Starwood Hotels & Resorts, Fox
Entertainment Group, TCI International, Inc., Time Warner, 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.
4
Pursuant to provisions of the Higher Education Act of 1965, as amended
("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.
Seven of the Company's schools are accredited 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, and the accrediting agency (for schools accredited by more
than one recognized accrediting agency, the primary accrediting agency is
listed first).
5
Fiscal Year
Calendar EDMC
Year Acquired/
School Location Established Opened Accrediting Agency
------ -------- ----------- ----------- ------------------------
The Art Institute of Atlanta....................... Atlanta, GA 1949 1971 Commission on Colleges
of the Southern
Association of Colleges
and Schools ("SACS")
The Art Institute of California.................... San Diego, CA 1981 2001 Accrediting Commission
of Career Schools and
Colleges of Technology
("ACCSCT")
The Art Institute of Charlotte..................... Charlotte, NC 1973 2000 Accrediting Council of
Independent Colleges and
Schools ("ACICS")
The Art Institute of Colorado...................... Denver, CO 1952 1976 ACICS
The Art Institute of Dallas........................ Dallas, TX 1964 1985 SACS
The Art Institute of Fort Lauderdale............... Fort Lauderdale, FL 1968 1974 ACICS
The Art Institute of Houston....................... Houston, TX 1974 1979 SACS
The Art Institute of Las Vegas..................... Las Vegas, NV 1983 2001 ACCSCT
The Art Institute of Los Angeles................... Los Angeles, CA 1997 1998 ACCSCT & ACICS (as a
branch of The Art
Institute of Pittsburgh)
The Art Institute of Los Angeles--Orange County.... Orange County, CA 2000 2001 ACICS (as a branch of
The Art Institute of
Colorado)
The Art Institute Online........................... Pittsburgh, PA 1999 2000 Approved to offer
programs as a division
of The Art Institute of
Pittsburgh
The Art Institute of Philadelphia.................. Philadelphia, PA 1971 1980 ACICS
The Art Institute of Phoenix....................... Phoenix, AZ 1995 1996 ACICS (as a branch of
The Art Institute of
Colorado)
The Art Institute of Pittsburgh.................... Pittsburgh, PA 1921 1970 ACCSCT, ACICS
The Art Institute of Portland...................... Portland, OR 1963 1998 Commission on Colleges
of the Northwest
Association of Schools
and Colleges ("NWASC")
The Art Institutes International at San Francisco.. San Francisco, CA 1939 1998 ACICS
The Art Institute of Seattle....................... Seattle, WA 1946 1982 NWASC
The Art Institute of Washington.................... Arlington, VA 2000 2001 SACS (as a branch of The
Art Institute of
Atlanta)
The Art Institutes International Minnesota......... Minneapolis, MN 1964 1997 ACICS
The Illinois Institute of Art at Chicago........... Chicago, IL 1916 1996 ACCSCT
The Illinois Institute of Art at Schaumburg........ Schaumburg, IL 1983 1996 ACCSCT, as a branch of
The Illinois Institute
of Art at Chicago
Massachusetts Communications College (1)........... Boston, MA 1988 2000 New England Association
of Schools and Colleges,
Inc. through its
Commission on Technical
and Career Institutions
NCPT: The National Center for Paralegal Training... Atlanta, GA 1973 1973 ACICS
The New York Restaurant School..................... New York, NY 1980 1997 ACCSCT, ACICS, New York
State Board of Regents
--------
(1) Subsequent to June 30, 2001, the school was renamed The New England
Institute of Art and Communications.
6
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.
Student Financial Assistance
Many students at EDMC's schools must rely, at least in part, on financial
assistance to pay for the cost of their education. The largest source of such
support is the federal programs of student financial assistance under Title IV
of the Higher Education Act (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 of the Company's
schools can 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.
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 2001 equaled approximately 35% 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 2001 equaled
approximately 16% of the Company's net revenues.
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 2001,
Pell grants ranged up to $3,300 per year; beginning on July 1, 2001, the limit
was increased to $3,750 per year. Amounts received by students enrolled in the
Company's schools in fiscal 2001 under the Pell program represented
approximately 6.5% of the Company's net revenues.
7
FSEOG. FSEOG awards are designed to supplement Pell grants for the neediest
students. FSEOG grants generally range in amount from $300 to $1,200 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. 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. Amounts received by students in the Company's
schools under the FSEOG program in fiscal 2001 represented 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
$20,000, 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 2001 the Company collected approximately
$3.5 million from its former students. In fiscal 2001, the Company's required
matching contribution was approximately $187,000. The Perkins loans disbursed
to students in the Company's schools in fiscal 2001 represented approximately
1% of the Company's net revenues. Twelve 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 7% of an institution's FWS
allocation must be used to fund student employment in community service
positions and at least one position must be in a literacy program or as a
reading tutor. In fiscal 2001, FWS funds represented under 1% 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 2001, 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 2001, financial assistance from such federal and state programs equaled
approximately 1% of the Company's net revenues. The Art Institutes also
provide institutional scholarships to qualified students. In fiscal 2001,
institutional scholarships had a value equal to approximately 2.5% 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. In fiscal 2001, alternative loans represented approximately 5%
of the Company's net revenue.
Availability of Lenders
During fiscal 2001, five lending institutions provided over 85% 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
8
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 95% 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 (CDR). Each institution that participates in the FFEL
program must maintain a student loan CDR equal to or less than 25% (15% for
the Perkins program) for three consecutive years or will no longer be eligible
to participate in that program or the Federal Direct Student Loan 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.
None of the Company's schools has had an FFEL cohort default rate of 25% or
greater for any of the last three consecutive federal fiscal years. For
federal fiscal year 1998, the most recent year for which such rates have been
published, the average FFEL cohort default rate for borrowers at all
proprietary institutions was 11.4%. For that year, the combined FFEL cohort
default rate for all borrowers at the Company's schools was 9.9%. For federal
fiscal year 1999, the combined preliminary FFEL cohort default rate for all
borrowers at the Company's schools was 8.4% and its individual schools'
preliminary rates ranged from 0% to 12.3%.
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. Nine 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, 2000, the most recent year for which such
rates have been calculated. For each of those schools, funds from the Perkins
program equaled less than 5% of the school's net revenues in both fiscal 2000
and 2001. To date, only The Art Institute of Portland has been placed on
provisional certification status for this reason, based upon the CDR for
Perkins. 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.
9
Each of the Company's schools maintains 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. All
schools that submitted recertification applications during FY2001 received
recertification.
During fiscal 2002, only The Art Institutes International at San Francisco
is scheduled to apply for recertification.
The Art Institutes International at San Francisco, The Art Institute of
California, The Art Institute of Las Vegas, Massachusetts Communications
College, and The Art Institute of Charlotte are all provisionally certified by
the United States Department of Education due to their recent acquisition by
the Company. The Art Institute of Portland is provisionally certified due to
its Perkins CDR being in excess of 30%. The U.S. Department of Education
stated that when The Art Institute of Portland is below 30%, the Institute can
request to be removed from the provisional status.
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. Many of the accrediting agencies that accredit the
Company's schools will be reviewed by the U.S. Department of Education within
the next two years. While EDMC knows of no reason that any of the
accreditation agencies that its institutions use would not be approved, if an
accreditation agency is not approved by the U.S. Department of Education, the
institutions that are affected are given time to apply for accreditation from
a different agency.
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, 2001, 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, The Art Institute of Los Angeles,
The Art Institute of Los Angeles--Orange County and The Art Institute of
Washington are combined with their main campuses, The Illinois Institute of
Art at Chicago, The Art Institute of Colorado, The Art Institute of
Pittsburgh, The Art Institute of Colorado and The Art Institute of Atlanta
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. Most of a school's change of ownership application can 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
10
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," 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
those schools that disbursed federal financial aid during fiscal 2001, the
percentage of revenues derived from Title IV Programs ranged from
approximately 47% to 74%.
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
enrollment or financial aid to any person or entity engaged in any student
recruitment, admission or financial aid awarding activity. EDMC believes that
its current compensation plans are in substantial compliance with HEA
requirements.
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 its schools is in substantial
compliance with applicable state authorizing and licensure laws.
Employees
As of June 30, 2001, EDMC employed 2,719 full-time and 989 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 superior to
those in 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.
11
Seasonality in Results of Operations
EDMC has experienced seasonality in its results of operations primarily due
to the pattern of student enrollment. 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 enrollment in the fall
quarter (October to December). EDMC expects that this seasonal trend will
continue.
12
ITEM 2--PROPERTIES
As of June 30, 2001, EDMC's schools were located in major metropolitan areas
in 16 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.
The following table sets forth certain information as of June 30, 2001 with
respect to the principal properties used by the Company and its subsidiaries:
Square Feet
--------------
Location (City/State) Leased Owned
--------------------- ------- ------
Phoenix, AZ............ 58,635
Los Angeles, CA........ 56,150
Orange County, CA...... 27,600
San Diego, CA.......... 20,885
San Francisco, CA...... 26,965
Denver, CO............. 35,620 98,840
Ft. Lauderdale, FL(1).. 122,850
Atlanta, GA............ 117,895
Charlotte, NC.......... 16,915
Chicago, IL............ 62,657
Schaumburg, IL......... 42,300
Square Feet
---------------
Location (City/State) Leased Owned
--------------------- ------- -------
Boston, MA............ 57,110
Minneapolis, MN....... 67,750
Las Vegas, NV......... 11,045
New York, NY.......... 42,245
Portland, OR.......... 38,680
Philadelphia, PA(2)... 158,810
Pittsburgh, PA........ 36,930 173,470
Dallas, TX............ 95,420
Houston, TX........... 82,445
Seattle, WA........... 58,975 74,635
Arlington, VA......... 32,330
--------
(1) One of the properties occupied by The Art Institute of Fort Lauderdale is
owned by a limited partnership that includes among its limited partners
one current member of EDMC's management who is also a director.
(2) One of the properties occupied by The Art Institute of Philadelphia is
owned indirectly by a limited partnership that includes among its limited
partners one current member of EDMC's management who is also a director as
well as one other current director of EDMC.
ITEM 3--LEGAL PROCEEDINGS
The Company is a defendant in certain legal proceedings arising out of the
conduct of its business. 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.
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
13
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 11, 2001, there were 30,351,322 shares of
Common Stock outstanding held by 463 holders of record. The prices set forth
below reflect the high and low sales prices for the Company's Common Stock, as
reported in the consolidated transaction reporting system of the Nasdaq
National Market System.
2000 2001
------------- -------------
Three Months Ended High Low High Low
------------------ ------ ------ ------ ------
September 30................................... $21.13 $12.38 $26.94 $17.75
December 31.................................... 14.81 8.69 38.38 24.75
March 31....................................... 14.63 11.00 37.81 26.06
June 30........................................ 18.69 14.88 40.05 28.92
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
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. Most of the summary data presented below is 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, 2000 and 2001 and for each of the three years in the period
ended June 30, 2001 also is filed in response to Item 8 below. The summary
consolidated income statement data for the years ended June 30, 1997 and 1998
and the summary consolidated balance sheet data as of June 30, 1997, 1998 and
1999 are derived from audited financial statements not included herein.
Year ended June 30,
--------------------------------------------
1997 1998 1999 2000 2001
-------- -------- -------- -------- --------
(Dollars in thousands, except per share
amounts)
Income Statement Data:
Net revenues...................... $182,849 $221,732 $260,805 $307,249 $370,681
Net income........................ 9,985 14,322 18,752 22,530 28,978
Dividends on Series A Preferred
Stock(1)......................... 83 -- -- -- --
Other Series A Preferred Stock
Transactions(1).................. 403 -- -- -- --
Per Share Data(1):
Basic:
Net income....................... $ .40 $ .50 $ .64 $ .78 $ .97
Weighted average number of shares
outstanding, in thousands(2).... 23,878 28,908 29,314 28,964 29,742
Diluted:
Net income....................... $ .36 $ .48 $ .61 $ .75 $ .93
Weighted average number of shares
outstanding, in thousands(2).... 27,342 29,852 30,615 29,921 31,016
Other Data:
Capital expenditures(3)........... $ 18,942 $ 18,814 $ 55,892 $ 58,149 $ 38,822
Enrollment at beginning of fall
quarter(4)....................... 15,838 18,763 21,518 24,502 27,999
As of June 30,
--------------------------------------------
1997 1998 1999 2000 2001
-------- -------- -------- -------- --------
(in thousands)
Balance Sheet Data:
Cash and cash equivalents......... $ 33,227 $ 47,310 $ 32,871 $ 39,538 $ 47,290
Receivables, net.................. 10,547 10,292 12,490 14,931 18,945
Current assets.................... 48,886 65,623 55,709 66,713 81,816
Total assets...................... 126,292 148,783 178,746 240,675 283,946
Current liabilities............... 36,178 38,097 45,188 62,891 70,303
Long-term debt (including current
portion)......................... 34,031 38,382 37,231 64,283 53,660
Shareholders' investment.......... 57,756 73,325 96,805 112,950 159,949
--------
(1) 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 in calculating earnings
per share.
(2) The weighted average shares outstanding used to calculate basic income per
share does not include potentially dilutive securities (such as stock
options, warrants and convertible preferred stock). Diluted income 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.
(3) Capital expenditures for fiscal 1999, 2000 and 2001 reflect approximately
$5.1 million, $13.2 million and $4.5 million included in accounts payable
at year-end, respectively.
(4) Excludes students enrolled in programs at those colleges and universities
with which the Company has consulting arrangements.
15
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 among the largest providers of proprietary postsecondary education
in the United States, based on student enrollment and revenues. Through its
main operating unit, 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 and fashion. The Company has provided career-
oriented education programs for over 35 years, and its Art Institutes have
more than 125,000 graduates. As of June 30, 2001, the Company operated 24
schools in 20 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 42.1% to
$370.7 million in 2001 from $260.8 million in 1999. Income before interest and
taxes increased 56.7% to $49.7 million in 2001 from $31.7 million in 1999. Net
income increased by 54.5% to $29.0 million in 2001 from $18.8 million in 1999.
Average quarterly student enrollment at the Company's schools was 25,549 in
2001 compared to 19,325 in 1999. The increase in average enrollment 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 2001, the Company derived 89.8%
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 7% during 2001.
Tuition rates vary by geographic region, but are generally consistent by
program at the respective schools.
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, 2001, approximately
60% of the Company's net revenues were 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
16
costs, bad debt expense and depreciation and amortization of property and
equipment. The Company's faculty comprised approximately 46% full-time and 54%
part-time employees for 2000 and approximately 49% full-time and 51% part-time
employees for 2001.
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 acquisitions of the schools discussed below.
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.
In August 1999, the Company acquired the outstanding stock of the American
Business & Fashion Institute in Charlotte, North Carolina, for $0.5 million in
cash. The school was renamed The Art Institute of Charlotte.
In August 1999, the Company acquired the outstanding stock of Massachusetts
Communications College in Boston, Massachusetts for approximately $7.2 million
in cash. Subsequent to June 30, 2001, the school was renamed The New England
Institute of Art and Communications.
In October 2000, the Company acquired the outstanding stock of The Art
Institute of California located in San Diego, California for approximately
$9.8 million in cash.
In April 2001, the Company acquired the outstanding stock of the Design
Institute located in Las Vegas, Nevada for approximately $2.1 million in cash.
The school was renamed The Art Institute of Las Vegas.
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 $6.7 million and $9.6 million in fiscal 2000 and 2001,
respectively.
Results of Operations
The following table sets forth for the periods indicated the percentage
relationships of certain income statement items to net revenues.
Year ended June
30,
-------------------
1999 2000 2001
----- ----- -----
Net revenues.......................................... 100.0% 100.0% 100.0%
Costs and expenses:
Educational services.................................. 65.5 65.5 65.4
General and administrative............................ 21.9 21.5 20.7
Amortization of intangibles........................... 0.5 0.5 0.5
----- ----- -----
87.8 87.5 86.6
----- ----- -----
Income before interest and taxes...................... 12.2 12.5 13.4
Interest expense, net................................. -- 0.3 0.6
----- ----- -----
Income before income taxes............................ 12.2 12.2 12.8
Provision for income taxes............................ 5.0 4.9 5.0
----- ----- -----
Net income............................................ 7.2% 7.3% 7.8%
===== ===== =====
17
Year Ended June 30, 2001 Compared with Year Ended June 30, 2000
Net Revenues
Net revenues increased by 20.6% to $370.7 million in 2001 from $307.2
million in 2000. The revenue increase was primarily due to an increase in
average quarterly student enrollment ($33.4 million) and tuition increases of
approximately 7.0% ($24.2 million). The average academic year (three academic
quarters) tuition rate for a student attending classes at an Art Institute on
a recommended full schedule increased to $12,584 in 2001 from $11,703 in 2000.
Net housing revenues increased by 20.8% to $21.9 million in 2001 from $18.1
million in 2000 and revenues from the sale of educational materials in 2001
increased by 15.1% to $15.8 million. Both increased primarily as a result of
higher average student enrollment. Refunds increased to $8.9 million in 2001
from $8.6 million in 2000. As a percentage of gross revenue, refunds decreased
from 2000.
Educational Services
Educational services expense increased by $41.1 million, or 20.4%, to $242.3
million in 2001 from $201.2 million in 2000. The increase was primarily due to
additional costs required to service higher student enrollment, accompanied by
normal cost increases for wages and other services at the schools owned by
EDMC prior to 2000 ($26.9 million) and schools added in 2000 and 2001 ($14.9
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 slightly
between years.
General and Administrative
General and administrative expense increased by 15.9% to $76.7 million in
2001 from $66.2 million in 2000 due to the incremental marketing and student
admissions expenses incurred to generate higher student enrollment at the
schools owned by EDMC prior to 2000 ($2.2 million) and additional marketing
and student admissions expenses at the schools added in 2000 and 2001 ($4.6
million). General and administrative expense decreased approximately 80 basis
points as a percentage of net revenues in 2001 compared to 2000, reflecting
operating leverage at the schools operated by EDMC for more than two years.
Amortization of Intangibles
Amortization of intangibles increased by $0.5 million, or 30.8%, to $2.0
million in 2001 from $1.5 million in 2000, as a result of additional
amortization associated with fiscal 2001 acquisitions and on-line curriculum.
Goodwill amortization was approximately $1.0 million for fiscal 2001.
Interest Expense, Net
The Company had net interest expense of $2.3 million in 2001 as compared to
$726,000 in 2000. This change is attributable to increased average borrowings
related primarily to capital expenditures and acquisitions, offset by a lower
effective interest rate. The average outstanding debt balance was
approximately $28.2 million in 2001, up from $15.6 million in 2000.
Additionally, interest incurred in connection with construction of facilities
in Denver and Pittsburgh was capitalized during the respective construction
periods in 2000.
Provision for Income Taxes
The Company's effective tax rate decreased to 38.9% in 2001 from 40.1% in
2000. This reduction primarily reflects a more favorable distribution of
taxable income among the states in which the Company operates and a decrease
in nondeductible 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 income tax purposes.
18
Net Income
Net income increased by $6.5 million or 28.6% to $29.0 million in 2001 from
$22.5 million in 2000. The increase resulted from improved operations at the
Company's schools owned prior to 2000 and a lower effective income tax rate,
offset by increased amortization of intangible and interest expense.
Year Ended June 30, 2000 Compared with Year Ended June 30, 1999
Net Revenues
Net revenues increased by 17.8% to $307.2 million in 2000 from $260.8
million in 1999. The revenue increase was primarily due to an increase in
average quarterly student enrollment ($25.4 million) and tuition increases of
approximately 5% ($16.2 million). The average academic year (three academic
quarters) tuition rate for a student attending classes at an Art Institute on
a recommended full schedule increased to $11,703 in 2000 from $11,262 in 1999.
Net housing revenues increased by 23.2% to $18.1 million in 2000 from $14.7
million in 1999 and revenues from the sale of educational materials in 2000
increased by 11.8% to $13.8 million. Both increased primarily as a result of
higher average student enrollment. Refunds increased from $8.0 million in 1999
to $8.6 million in 2000. As a percentage of gross revenue, refunds decreased
from 1999.
Educational Services
Educational services expense increased by $30.4 million, or 17.8%, to $201.2
million in 2000 from $170.7 million in 1999. The increase was primarily due to
additional costs required to service higher student enrollment, accompanied by
normal cost increases for wages and other services at the schools owned by
EDMC prior to 1999 ($23.0 million) and schools added in 1999 and 2000 ($7.5
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 was consistent
between years at 65.5%. This represents an improvement over the 66.4% of net
revenues in the prior year, primarily a result of margin improvements in
various expenses, such as rent, bad debt, and other operating costs.
General and Administrative
General and administrative expense increased by 15.8% to $66.2 million in
2000 from $57.2 million in 1999 due to the incremental marketing and student
admissions expenses incurred to generate higher student enrollment at the
schools owned by EDMC prior to 1999 ($5.0 million), and additional marketing
and student admissions expenses at the schools added in 1999 and 2000 ($3.1
million). General and administrative expense increased slightly as a
percentage of net revenues in 2000 compared to 1999 as a result of increased
advertising expenditures designed to promote awareness of and generate
inquiries about the newer locations and new program offerings.
Amortization of Intangibles
Amortization of intangibles increased by $0.3 million, or 25.6%, to $1.5
million in 2000 from $1.2 million in 1999, as a result of additional
amortization associated with the fiscal 2000 additions.
Interest Expense (Income), Net
The Company had net interest expense of $726,000 in 2000 as compared to
interest income of $113,000 in 1999. The average outstanding debt balance
increased from $4.6 million in 1999 to $15.6 million in 2000. Accordingly,
more interest cost on borrowings has been offset against interest earned on
investments.
Provision for Income Taxes
The Company's effective tax rate decreased to 40.1% in 2000 from 41.1% in
1999. This reduction reflects a more favorable distribution of taxable income
among the states in which the Company operates and a decrease
19
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 income tax purposes.
Net Income
Net income increased by $3.8 million or 20.1% to $22.5 million in 2000 from
$18.8 million in 1999. The increase resulted from improved operations at the
Company's schools owned prior to 1999 and a lower effective income tax rate.
Seasonality and Other Factors Affecting Quarterly Results
The Company's quarterly revenues and income fluctuate primarily as a result
of the pattern of student enrollment. The Company experiences a seasonal
increase in new enrollment 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 enrollment at the Company's schools is highest in
the fall quarter and lowest in the summer months (fiscal year first quarter).
The Company's costs and expenses, however, do not fluctuate as significantly
as revenues on a quarterly basis. 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 2000 and
2001.
Sept.
30 Dec. 31 Mar. 31 June 30
(Summer) (Fall) (Winter) (Spring)
------- -------- -------- -------
2000 (dollars in thousands, except per
---- share data)
Net revenues............................... $60,850 $ 87,023 $ 83,195 $76,181
Income before interest and taxes........... $ 1,693 $ 19,566 $ 11,968 $ 5,115
Income before income taxes................. $ 1,570 $ 19,247 $ 11,881 $ 4,918
Net income................................. $ 926 $ 11,524 $ 7,113 $ 2,967
Earnings per share
--Basic................................... $ .03 $ .40 $ .25 $ .10
--Diluted................................. $ .03 $ .39 $ .24 $ .10
2001
----
Net revenues............................... $72,561 $103,112 $100,366 $94,642
Income before interest and taxes........... $ 2,511 $ 24,639 $ 16,009 $ 6,516
Income before income taxes................. $ 1,896 $ 23,816 $ 15,570 $ 6,118
Net income................................. $ 1,156 $ 14,531 $ 9,498 $ 3,793
Earnings per share
--Basic................................... $ .04 $ .49 $ .32 $ .13
--Diluted................................. $ .04 $ .47 $ .30 $ .12
Earnings per share amounts for each quarter are required to be calculated
independently and, therefore, may not equal the amount calculated for the
year.
Liquidity and Capital Resources
The Company's cash flow from operations has been the primary source of
financing for capital expenditures and growth. Additionally, the Company
maintains a revolving credit facility. Cash flow from operations was $36.4
million, $47.7 million, and $70.9 million for 1999, 2000, and 2001,
respectively. Cash flow from operating and investing activities does not
reflect capital expenditures of approximately $5.1 million, $13.2 million, and
$4.5 million which are included in accounts payable as of June 30, 1999, 2000
and 2001, respectively.
20
Additionally, cash flows from operating and financing activities does not
reflect income tax deductions related to the exercise of options of $2.7
million, $0.9 million and $9.8 million. These deductions do not effect the
Company's tax provision; the benefit is recorded as additional paid-in capital
in the accompanying consolidated balance sheets. Therefore, the change in the
applicable balance sheet accounts (accounts payable, property and equipment,
accrued liabilities and additional paid in capital) does not directly
correlate to the corresponding amounts in the accompanying statement of cash
flows.
The Company had net working capital of $11.5 million as of June 30, 2001, up
from $3.8 million as of June 30, 2000. This change is due primarily to the
timing of payments made for capital expenditures. As noted above, purchases of
property and equipment included in accounts payable decreased approximately
$8.7 million from June 30, 2000 to June 30, 2001. Advanced payments increased
approximately $8.1 million and $14.9 million as compared to the respective
prior year-end balances at June 30, 2000 and 2001. Increases in enrollment,
tuition and monies received in connection with alternative loan programs
offered to students, as well as arrangements offering incentives for early
tuition payments have all contributed to this increase. Unearned revenue of
approximately $446,000 and $1.7 million was included with advanced payments as
of June 30, 2000 and 2001, respectively.
As of June 30, 2001, gross trade accounts receivable increased by $7.3
million, or 27.9%, to $33.4 million from the prior year primarily due to the
higher enrollment and tuition rates. Additionally, certain recently acquired
schools have not yet been converted to the quarter system used by most of The
Art Institutes and were in session as of year-end. Under the payment terms,
these balances would be reduced by the end of the applicable class sessions.
Although tuition increases have exceeded corresponding increases in federal
financial aid sources, the Company has arranged for alternative financing
sources to manage its credit risk. The allowance for doubtful accounts was
$9.4 million, $14.1 million, and $17.4 million as of June 30, 1999, 2000, and
2001, respectively. This represents increases of 12.6%, 50.4%, and 23.6% in
the allowance for doubtful accounts for 1999, 2000, and 2001, respectively.
The Company determines its reserve for accounts receivable by categorizing
gross receivables based upon the enrollment status of the student (in-school,
out of school, summer leave of absence, and collections) then establishing a
reserve based on the likelihood of collections (in-school receivables being
the lowest percent reserved). The Company provides for extended payment terms
beyond graduation (generally six months). As more students have utilized this
option, the out-of-school category has increased as a percentage of gross
receivables which has resulted in an increase in the corresponding allowance
against these balances. Therefore, the change between years in the allowance
results from both the overall increase in trade receivables as well as changes
in the distribution of gross receivables among the categories.
The Credit Agreement (the "Credit Agreement"), which the Company entered
into during fiscal 2000, currently allows for maximum borrowings of $100.0
million through its expiration on February 18, 2005. Borrowings under this
facility are unsecured and bear interest at one of three rates set forth in
the Credit Agreement, at the election of the Company. Certain outstanding
letters of credit reduce this facility. As of June 30, 2001, the Company had
approximately $45.4 million of borrowing capacity available under the Credit
Agreement. As of June 30, 2001, the Company was in compliance with all
covenants under the Credit Agreement. As of June 30, 2001, the average
interest rate for borrowings under the Credit Agreement was 4.5%.
Borrowings under the Credit Agreement are used by the Company primarily to
fund working capital needs resulting 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.
Subsequent to year-end, the Company and its lenders amended and restated the
Credit Agreement to increase allowable borrowings from $100 million to $200
million. The Amended and Restated Credit Agreement, which will expire
September 20, 2004, is secured by certain assets of the Company and provides
the Company the ability to borrow up to $150 million on a revolving basis and
$50 million in the form of a term loan (collectively, the "Secured Credit
Facilities"). The Secured Credit Facilities contain the customary covenants
that, among other matters, require the Company to meet specified financial
ratios, restrict the repurchase of Common Stock and limit the incurrence of
additional indebtedness.
21
Capital Expenditures
Capital expenditures made during the three years ended June 30, 2001 reflect
the implementation of the Company's initiatives emphasizing the addition of
new schools and education programs and investment in classroom technology. The
Company's capital expenditures (on an accrual basis) were $55.9 million, $58.1
million, and $38.8 million, for 1999, 2000, and 2001, respectively. The
Company expects that total capital spending for 2002 will remain relatively
consistent as a percentage of net revenues, as compared to 2001. The Company
anticipates that these expenditures will be financed primarily through cash
flow from operations and supplemented as needed with borrowings under the
revolving credit facility. The anticipated expenditures relate principally to
the investment in schools acquired or started during the previous several
years and to be added in 2002, continued improvements to current facilities,
additional or replacement school and housing facilities and classroom and
administrative technology.
The Company leases the majority of its facilities. Future commitments on
existing leases will be paid from cash provided by operating activities.
Regulations
The Company indirectly derived approximately 60% of its net revenues from
Title IV Programs in 2001. 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 generally provide loan
funds in multiple disbursements each academic year. 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.
Education institutions participating in Title IV Programs must satisfy a
series of specific standards of financial responsibility. The U.S. Department
of Education has adopted standards to determine an institution's financial
responsibility to participate in Title IV Programs. The regulations establish
three ratios: (i) the equity ratio, intended to measure an institution's
capital resources, ability to borrow and financial viability; (ii) the primary
reserve ratio, intended to measure an institution's ability to support current
operations from expendable resources; and (iii) the net income ratio, intended
to measure 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," 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,
2001.
Effect of Inflation
The Company does not believe its operations have been materially affected by
inflation.
22
Impact of New Accounting Standards
In June 2001, SFAS No. 141, "Business Combinations" was issued. The
statement addresses financial accounting and reporting for business
combinations and supersedes APB Opinion No. 16, "Business Combinations," and
FASB statement No. 38 "Accounting for Preacquisition Contingencies of
Purchased Enterprises." The statement requires that all business combinations
initiated after June 30, 2001 be accounted for using the purchase method. SFAS
141 is effective July 1, 2001. The Company's adoption of SFAS 141 will not
have a material impact on the Company's financial position or results of
operations.
In June 2001, SFAS No. 142 "Goodwill and Other Intangible Assets" was
issued. This Statement addresses financial accounting and reporting for
acquired goodwill and other intangible assets and supersedes APB Opinion No.
17, "Intangible Assets". It addresses how intangible assets that are acquired
individually or with a group of other assets (but not those acquired in a
business combination) should be accounted for in financial statements upon
their acquisition. This Statement also addresses how goodwill and other
intangible assets should be accounted for after they have been initially
recognized in the financial statements. The Company has adopted this standard
as of July 1, 2001. The Company is required to complete a transitional
goodwill impairment test for all goodwill at the reporting unit level by
December 31, 2001 and is currently preparing for this. Adopting SFAS 142 will
affect the financial position and results of operations because goodwill will
no longer be amortized. It is anticipated that the adoption of this standard
in fiscal 2002 will decrease amortization of intangibles expense by
approximately $1 million, reduce the effective tax rate (but not the tax
provision) by less than 1%, and increase diluted earnings per share by
approximately $.03 for the fiscal year.
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 2002 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 continued availability of alternative loan programs to
students at the Company's schools; (iv) the Company's ability to foresee
changes in the skills required of its graduates and to design new courses and
programs to develop those skills in a cost effective and timely manner; (v)
the ability of the Company to gauge successfully which markets are underserved
in the skills that the Company's schools teach; (vi) the Company's ability to
continue to attract and retain students by maintaining the appropriate
capacity and system operations; (vii) security risks that the Company's
computer networks may be vulnerable to which could disrupt operations and
require the Company to expend significant resources; (viii) the Company's
ability to gauge appropriate acquisition and start-up opportunities and to
manage and integrate them successfully, as well as obtain necessary regulatory
approvals for the acquisitions; (ix) the Company's ability to defend
litigation successfully; (x) proprietary rights and intellectual property that
the Company relies upon may not be adequately protected by law; (xi) the
Company's ability to recruit and retain key personnel; (xii) anti-takeover
provisions in the Company's charter documents could disincent a takeover of
the Company or serve as a disincentive; (xiii) competitive pressures from
other education institutions; and (xiv) general economic conditions, including
stock market volatility and uncertainty arising from the terrorist attacks of
September 11, 2001.
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.
23
ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of 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, 2000 and 2001, and the related consolidated statements of income,
shareholders' investment and cash flows for each of the three years in the
period ended June 30, 2001. 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 auditing standards generally
accepted in the United States. 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, 2000 and 2001, and their results
of operations and their cash flows for each of the three years in the period
ended June 30, 2001 in conformity with accounting principles generally
accepted in the United States.
s/ Arthur Andersen LLP
Pittsburgh, Pennsylvania,
July 27, 2001
24
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
As of June 30,
------------------
2000 2001
-------- --------
Assets
Current assets:
Cash and cash equivalents, including restricted balances
of $679 and $218......................................... $ 39,538 $ 47,290
Receivables:
Trade, net of allowances of $14,088 and $17,410.......... 12,057 16,032
Notes, advances and other................................ 2,874 2,913
Inventories............................................... 3,145 3,528
Deferred and prepaid income taxes......................... 4,676 7,350
Other current assets...................................... 4,423 4,703
-------- --------
Total current assets.................................... 66,713 81,816
-------- --------
Property and equipment, net................................ 134,738 149,482
Deferred income taxes and other long-term assets........... 9,156 9,590
Intangible assets, net of amortization of $6,065 and
$8,042.................................................... 30,068 43,058
-------- --------
Total assets............................................ $240,675 $283,946
======== ========
Liabilities and shareholders' investment
Current liabilities:
Current portion of long-term debt......................... $ 16 $ 26
Accounts payable.......................................... 19,898 10,795
Accrued liabilities....................................... 13,062 14,692
Advance payments.......................................... 29,915 44,790
-------- --------
Total current liabilities............................... 62,891 70,303
-------- --------
Long-term debt, less current portion....................... 64,267 53,634
Other long-term liabilities................................ 567 60
Commitments and contingencies
Shareholders' investment:
Common Stock, par value $.01 per share; 60,000,000 shares
authorized; 29,877,025 and 30,479,880 shares issued...... 299 305
Additional paid-in capital................................ 96,585 108,463
Treasury stock, 907,446 and 216,945 shares at cost........ (9,733) (3,596)
Retained earnings......................................... 25,799 54,777
-------- --------
Total shareholders' investment.......................... 112,950 159,949
-------- --------
Total liabilities and shareholders' investment.......... $240,675 $283,946
======== ========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
25
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
For the years ended June
30,
---------------------------
1999 2000 2001
-------- -------- --------
Net revenues...................................... $260,805 $307,249 $370,681
Costs and expenses:
Educational services............................. 170,742 201,187 242,313
General and administrative....................... 57,162 66,209 76,716
Amortization of intangibles...................... 1,203 1,511 1,977
-------- -------- --------
229,107 268,907 321,006
-------- -------- --------
Income before interest and taxes.................. 31,698 38,342 49,675
Interest expense (income), net................... (113) 726 2,275
-------- -------- --------
Income before income taxes........................ 31,811 37,616 47,400
Provision for income taxes....................... 13,059 15,086 18,422
-------- -------- --------
Net income........................................ $ 18,752 $ 22,530 $ 28,978
======== ======== ========
Earnings per share:
Basic........................................... $ .64 $ .78 $ .97
Diluted......................................... $ .61 $ .75 $ .93
Weighted average number of shares outstanding (in
000's):
Basic........................................... 29,314 28,964 29,742
Diluted......................................... 30,615 29,921 31,016
The accompanying notes to consolidated financial statements are an integral
part of these statements.
26
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
For the years ended
June 30,
-------------------------
1999 2000 2001
------- ------- -------
Cash flows from operating activities:
Net income........................................ $18,752 $22,530 $28,978
Adjustments to reconcile net income to net cash
flows
from operating activities:
Depreciation and amortization................... 17,440 21,043 26,055
Deferred credit for income taxes................ (1,992) (1,895) (2,728)
Changes in current assets and liabilities:
Receivables.................................... (3,655) (1,237) (3,263)
Inventories.................................... (105) (978) (383)
Other current assets........................... (650) (1,312) (1,458)
Accounts payable............................... 57 (724) (1,161)
Accrued liabilities............................ 3,940 2,148 11,567
Advance payments............................... 2,571 8,090 13,318
------- ------- -------
Total adjustments............................. 17,606 25,135 41,947
------- ------- -------
Net cash flows from operating activities....... 36,358 47,665 70,925
------- ------- -------
Cash flows from investing activities:
Acquisition of subsidiaries, net of cash ac-
quired............................................ (500) (8,602) (12,065)
Expenditures for property and equipment........... (50,821) (50,059) (47,477)
Other items, net.................................. (389) (1,008) (1,150)
------- ------- -------
Net cash flows from investing activities....... (51,710) (59,669) (60,692)
------- ------- -------
Cash flows from financing activities:
Net activity under revolving credit facilities.... 1,500 27,650 (10,625)
Principal payments on debt........................ (2,651) (1,666) (102)
Net proceeds from issuance of Common Stock........ 2,205 1,925 8,246
Repurchase of shares.............................. (141) (9,238) --
------- ------- -------
Net cash flows from financing activities....... 913 18,671 (2,481)
------- ------- -------
Net change in cash and cash equivalents............ (14,439) 6,667 7,752
Cash and cash equivalents, beginning of year....... 47,310 32,871 39,538
------- ------- -------
Cash and cash equivalents, end of year............. $32,871 $39,538 $47,290
======= ======= =======
The accompanying notes to consolidated financial statements are an integral
part of these statements.
27
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
(Dollars in thousands)
Common
Stock Additional Stock Total
at Par Paid-in Treasury Subscriptions Retained Shareholders'
Value Capital Stock Receivable Earnings Investment
------ ---------- -------- ------------- -------- -------------
Balance, June 30, 1998.. $ 290 $ 88,880 $ (354) $ (8) $(15,483) $ 73,325
Net income............. -- -- -- -- 18,752 18,752
Payments received on
stock subscriptions
receivable........... -- -- -- 8 -- 8
Purchase of Common
Stock.................. -- -- (141) -- -- (141)
Exercise of stock op-
tions.................. 5 4,278 -- -- -- 4,283
Issuance of Common
Stock under
employee stock pur-
chase plan........... -- 578 -- -- -- 578
----- -------- ------- ---- -------- --------
Balance, June 30, 1999.. 295 93,736 (495) -- 3,269 96,805
Net income............. -- -- -- -- 22,530 22,530
Purchase of Common
Stock.................. -- -- (9,238) -- -- (9,238)
Exercise of stock op-
tions.................. 3 2,126 -- -- -- 2,129
Issuance of Common
Stock under
employee stock pur-
chase plan........... 1 723 -- -- 724
----- -------- ------- ---- -------- --------
Balance, June 30, 2000.. 299 96,585 (9,733) -- 25,799 112,950
Net income............. -- -- -- -- 28,978 28,978
Exercise of stock op-
tions.................. 6 11,265 6,017 -- -- 17,288
Issuance of Common
Stock under
employee stock pur-
chase plan........... -- 613 120 -- -- 733
----- -------- ------- ---- -------- --------
Balance, June 30, 2001.. $ 305 $108,463 $(3,596) $ -- $ 54,777 $159,949
===== ======== ======= ==== ======== ========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
28
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 enrollment 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, 2001, EDMC operated 24 schools in 20 major metropolitan areas
throughout the United States. The Company's main operating unit, The Art
Institutes, offers programs designed to provide the knowledge and skills
necessary for entry-level employment in various fields, including graphic
design, media arts & animation, multimedia & web design, video production,
interior design, industrial design, culinary arts, 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, 2001, 19 Art Institutes
offered bachelor's degree programs.
As of June 30, 2001, the Company offered a culinary arts curriculum at 11
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.
NCPT (The National Center for Paralegal Training) offers paralegal
certificate programs. The National Center for Professional Development
maintained consulting relationships with certain colleges and universities to
assist in the development, marketing and delivery of paralegal, legal nurse
consultant and financial planning certificate programs. As of June 30, 2001,
all but one of these relationships had expired or had been terminated, and the
remaining expired on August 31, 2001.
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. The results of operations of
acquired entities are consolidated with those of the Company from the date of
acquisition. All significant intercompany transactions and balances have been
eliminated. The Company operates as one reportable segment in accordance with
the manner in which it makes operating decisions and assesses performance.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 60% of the Company's net revenues in 2001 were 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
29
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 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.
Certain Art Institutes make contributions to Federal Perkins Loan Programs
(the "Funds"). Current contributions to the Funds are made 75% by the federal
government and 25% by the school. 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.
Inventories
Inventories consist mainly of textbooks, art supply kits, and supplies held
for sale to students enrolled in the Company's educational programs.
Inventories are valued at the lower of cost (first-in, first-out) or market.
Acquisitions
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.
On August 17, 1999, the Company acquired the outstanding stock of the
American Business & Fashion Institute in Charlotte, North Carolina, for
$500,000 in cash. The school was renamed The Art Institute of Charlotte.
On August 26, 1999, the Company acquired the outstanding stock of
Massachusetts Communications College in Boston, Massachusetts for
approximately $7.2 million in cash. Subsequent to June 30, 2001, the school
was renamed The New England Institute of Art and Communications.
On October 13, 2000, the Company acquired the outstanding stock of The Art
Institute of California in San Diego, California for approximately $9.8
million in cash.
On April 11, 2001, the Company acquired the outstanding stock of the Design
Institute located in Las Vegas, Nevada for approximately $2.1 million in cash.
The school was renamed The Art Institute of Las Vegas.
30
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.
Intangible Assets
Intangible assets consisted of the following:
As of June 30,
---------------
2000 2001
------- -------
(in thousands)
Goodwill, net of accumulated amortization of $5,211 and
$6,221 (10 to 40 years).................................. $26,588 $36,918
Accreditation, curriculum and other, net of accumulated
amortization of $854 and $1,821 (3 to 22 years).......... 3,480 6,140
------- -------
$30,068 $43,058
======= =======
Lease Arrangements
The Company conducts a major part of its operations from leased facilities.
In addition, the Company leases a portion of its furniture and equipment. In
those cases in which the lease term approximates the useful life of the leased
asset or the lease meets certain other prerequisites, the leasing arrangement
is classified as a capitalized lease. The remaining lease arrangements are
treated as operating leases.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation.
Expenditures for additions and 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 3 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 2001, the Company
derived 89.8% of its net revenues from tuition and fees paid by, or on behalf
of, its students. Net revenues, as presented, are reduced for student refunds
and scholarships. Student supply store and restaurant sales are recognized as
they occur. 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 Company recognizes tuition and housing revenues on a monthly pro rata
basis over the term of instruction, typically an academic quarter. For most
Art Institute programs, the academic and financial quarters are the same;
therefore unearned revenue is not significant at the end of a financial
quarter. However, certain recently acquired schools have programs that have
class starting and ending dates that differ from the financial
31
quarters. Revenue associated with tuition and certain fees is either
recognized within the fiscal quarter to which the applicable service was
rendered, or is deferred over the appropriate period. Unearned tuition revenue
of approximately $446,000 and $1.7 million, related to programs not on the
Company's traditional academic quarters, is included with advanced payments in
the accompanying consolidated balance sheets as of June 30, 2000 and June 30,
2001, respectively. The Company's revenue recognition policies are in
accordance with the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 "Revenue Recognition in Financial Statements."
Refunds are calculated in accordance with federal, state and accrediting
agency standards. Student refunds of approximately $8.6 million and $8.9
million were recorded for 2000 and 2001, respectively, of which approximately
$168,000 and $75,000 are included with accrued liabilities in the accompanying
consolidated balance sheets as of June 30, 2000 and 2001, respectively.
The trade receivable balances are comprised of individually insignificant
amounts due primarily from students throughout the United States. The Company
determines its allowance for doubtful accounts by categorizing gross
receivables based upon the enrollment status of the student (in-school, out of
school, summer leave of absence and collections) and establishing a reserve
based on the likelihood of collections (in-school receivables being the lowest
percent reserved).
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. All advertising costs are expensed in the fiscal year incurred.
Amortization of intangibles relates primarily to the values assigned to
identifiable intangibles and goodwill, which arose principally from the
acquisitions discussed above. These intangible assets are amortized over
periods ranging from 2 to 40 years.
New Accounting Standards
In June 2001, Statement of Financial Accounting Standard (SFAS) No. 141,
"Business Combinations," was issued. The statement addresses financial
accounting and reporting for business combinations and supersedes APB Opinion
No. 16, "Business Combinations," and FASB statement No. 38 "Accounting for
Preacquisition Contingencies of Purchased Enterprises." The statement requires
that all business combinations initiated after June 30, 2001 be accounted for
using the purchase method. SFAS 141 is effective July 1, 2001. The Company "s
adoption of SFAS 141 will not have a material impact on the Company's
financial position or results of operations.
In June 2001, SFAS No. 142 "Goodwill and Other Intangible Assets," was
issued. This Statement addresses financial accounting and reporting for
acquired goodwill and other intangible assets and supersedes Accounting
Pronouncement Bulletin (APB) Opinion No. 17, "Intangible Assets". It addresses
how intangible assets that are acquired individually or with a group of other
assets should be accounted for in financial statements upon their acquisition.
This Statement also addresses how goodwill and other intangible assets should
be accounted for after they have been initially recognized in the financial
statements. The Company has adopted this standard as of July 1, 2001. The
Company is required to complete a transitional goodwill impairment test for
all goodwill at the reporting unit level by December 31, 2001 and is currently
preparing for this. Adopting SFAS 142 will affect
32
the financial position and results of operations because goodwill will no
longer be amortized. It is anticipated that the adoption of this standard in
fiscal 2002 will decrease amortization of intangibles expense by approximately
$1 million, reduce the effective tax rate (but not the tax provision) by less
than 1%, and increase diluted earnings per share by approximately $.03 for the
fiscal year.
Supplemental Disclosures of Cash Flow Information
Year ended June 30,
-----------------------
1999 2000 2001
------- ------- -------
(in thousands)
Cash paid during the period for:
Interest (net of amount capitalized)............ $ 313 $ 175 $ 2,485
Income taxes.................................... 13,846 15,590 11,494
Noncash investing and financing activities:
Expenditures for property and equipment included
in accounts payable............................ 5,071 13,161 4,506
Tax benefit for options exercised............... 2,664 928 9,775
Reclassifications
Certain prior year balances have been reclassified to conform to the current
year presentation.
3.SHAREHOLDERS' INVESTMENT:
Pursuant to the Company's Preferred Share Purchase Rights Plan (the "Rights
Plan"), 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 (fiscal 2007) and are subject to redemption by the Company at $.01 per
Right, subject to adjustment.
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.
Reconciliation of Diluted Shares
Year ended June 30,
--------------------
1999 2000 2001
------ ------ ------
(in thousands)
Basic shares.......................................... 29,314 28,964 29,742
Dilution for stock options............................ 1,301 957 1,274
------ ------ ------
Diluted shares........................................ 30,615 29,921 31,016
====== ====== ======
33
Options to purchase 122,181 and 7,280 shares were excluded from the dilutive
earnings per share calculation because of their antidilutive effect (due to
the exercise price of such options exceeding the average market price for the
period) for fiscal years 2000 and 2001, respectively.
5.PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following as of June 30:
2000 2001
-------- --------
(in thousands)
Assets (asset lives in years)
Land.................................................. $ 4,300 $ 4,300
Buildings and improvements (15 to 30)................. 29,351 51,698
Equipment and furniture (3 to 10)..................... 123,165 136,442
Library books (3)..................................... 3,730 4,979
Leasehold interests and improvements (1 to 20)........ 55,554 60,359
Construction in progress.............................. 19,707 3,064
-------- --------
Total................................................ 235,807 260,842
Less accumulated depreciation......................... 101,069 111,360
-------- --------
$134,738 $149,482
======== ========
6.LONG-TERM DEBT:
The Company and its subsidiaries were indebted under the following
obligations as of June 30:
2000 2001
------- -------
(in thousands)
Revolving credit facilities............................... $64,150 $53,525
Other indebtedness........................................ 133 135
------- -------
64,283 53,660
Less current portion...................................... 16 26
------- -------
$64,267 $53,634
======= =======
The Credit Agreement provides for maximum borrowings of $100 million through
its expiration on February 18, 2005. Borrowings under this facility are
unsecured and bear interest at one of three rates set forth in the Credit
Agreement, at the election of the Company. As of June 30, 2001, the average
interest rate for borrowings under the Credit Agreement was 4.9%. Certain
outstanding letters of credit reduce this facility. The Credit Agreement
contains customary covenants that, among other matters, require the Company to
meet specified interest and leverage ratio requirements, restrict the
repurchase of Common Stock and the incurrence of additional indebtedness. As
of June 30, 2001, the Company was in compliance with all covenants under the
Credit Agreement.
Relevant information regarding borrowings under the revolving credit
facilities under both the Credit Agreement and the prior borrowing agreement
is reflected below:
Year ended June 30,
-------------------------
1999 2000 2001
------- ------- -------
(in thousands)
Outstanding borrowings, end of period......... $36,500 $64,150 $53,525
Approximate average outstanding balance
throughout the period........................ 2,550 15,215 28,048
Approximate maximum outstanding balance during
the period................................... 37,000 79,850 64,150
Weighted average interest rate for the peri-
od........................................... 7.48% 7.45% 6.73%
34
Subsequent to June 30, 2001, the Company and its lenders amended and
restated the Credit Agreement (See Note 14) to provide additional borrowing
availability.
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
September 2020. Rent expense under these leases was approximately $28,250,000,
$33,645,000, and $41,054,000 respectively for 1999, 2000 and 2001. The
approximate minimum future commitments under non-cancelable, long-term
operating leases as of June 30, 2001 are reflected below:
Fiscal Years (in thousands)
------------ -------------
2002........................................................ $ 41,241
2003........................................................ 34,623
2004........................................................ 32,277
2005........................................................ 31,302
2006........................................................ 30,555
Thereafter.................................................. 183,892
--------
$353,890
========
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 is a defendant in certain legal proceedings arising out of the
conduct of its businesses. In the opinion of management, based upon its
investigation of these claims and discussion with legal counsel, the ultimate
outcome of such legal proceedings, 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, a division of The Art Institutes
International, Inc ("Aii"), itself a wholly-owned subsidiary of EDMC, leases
one of the buildings it occupies from a partnership in which the subsidiary
serves as a 1% general partner and an executive officer/director and a
director of EDMC are minority limited partners. The Art Institute of Fort
Lauderdale, Inc., a wholly-owned subsidiary of Aii, leases part of its
facilities from a partnership in which an executive officer/director of EDMC
is a minority limited partner. Total rental payments under these arrangements
were approximately $1,901,000, $2,214,000, and $2,267,000 for the years ended
June 30, 1999, 2000, and 2001, respectively.
9.EMPLOYEE BENEFIT PLANS:
The Company sponsors a retirement plan that 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 $2,198,000, $1,181,000, and $1,939,000 for the
years ended June 30, 1999, 2000, and 2001, respectively.
The Company's retirement plan includes an ESOP, which enables eligible
employees to have stock ownership in the Company. The ESOP provides for the
allocations of forfeited shares and cash to be 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 five-year schedule, which
includes credit for past service. Distribution of shares from the ESOP is made
following the
35
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:
2000 2001
------ ------
(in
thousands)
Investment in Federal Perkins Loan Program, net of allowance
for estimated future loan losses of $1,209 and $1,252...... $2,819 $2,918
Cash value of life insurance, net of loans of $781 each
year; face value of $6,065................................. 2,620 2,935
Deferred income taxes....................................... 2,046 2,067
Other....................................................... 1,671 1,670
------ ------
$9,156 $9,590
====== ======
11.ACCRUED LIABILITIES:
Accrued liabilities consist of the following as of June 30:
2000 2001
------- -------
(in thousands)
Payroll taxes and payroll related......................... $ 7,714 $10,052
Income and other taxes.................................... 404 640
Other..................................................... 4,944 4,000
------- -------
$13,062 $14,692
======= =======
12.INCOME TAXES:
The provision for income taxes includes current and deferred taxes as
reflected below:
Year ended June 30,
-------------------------
1999 2000 2001
------- ------- -------
(in thousands)
Current taxes:
Federal....................................... $11,824 $14,020 $18,129
State......................................... 3,227 2,961 3,021
------- ------- -------
Total current taxes.......................... 15,051 16,981 21,150
------- ------- -------
Deferred taxes................................. (1,992) (1,895) (2,728)
------- ------- -------
Total provision.............................. $13,059 $15,086 $18,422
======= ======= =======
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:
Year ended
June 30,
----------------
1999 2000 2001
---- ---- ----
Federal statutory income tax rate...................... 35.0% 35.0% 35.0%
State and local income taxes, net of federal income tax
benefit 4.9 4.4 3.7
Amortization of goodwill and other intangibles......... .5 .4 .5
Nondeductible expenses................................. .7 .4 .2
Other, net............................................. -- (.1) (.5)
---- ---- ----
Effective income tax rate............................. 41.1% 40.1% 38.9%
==== ==== ====
36
Net deferred income tax assets (liabilities) consist of the following as of
June 30:
1999 2000 2001
------ ------ ------
(in thousands)
Deferred income tax--current...................... $2,476 $2,872 $4,946
Deferred income tax--long term.................... 548 2,046 2,067
------ ------ ------
Net deferred income tax asset.................... $3,024 $4,918 $7,013
====== ====== ======
Consisting of:
Allowance for doubtful accounts................. $3,850 $5,649 $6,766
Assigned asset values in excess of tax basis.... (1,585) (1,767) (1,640)
Depreciation.................................... 1,508 1,687 1,295
Financial reserves and other.................... (749) (651) 592
------ ------ ------
Net deferred income tax asset.................... $3,024 $4,918 $7,013
====== ====== ======
13.STOCK-BASED COMPENSATION:
The Company maintains a Stock Incentive Plan for directors, executive
management and key personnel, which provides for the issuance of stock-based
incentive awards with respect to a maximum of 5,000,000 shares of Common
Stock. Options issued to employees 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. 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 $32.00 per share, representing the fair market value at
the time of the grant.
The Company also has 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
37,620, 59,800, and 31,712 in 1999, 2000 and 2001, respectively.
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:
1999 2000 2001
------- ------- -------
Net income (in 000's):............... As reported $18,752 $22,530 $28,978
Pro forma $16,850 $19,421 $25,402
Basic EPS:........................... As reported $ .64 $ .78 $ .97
Pro forma $ .57 $ .67 $ .85
Diluted EPS:......................... As reported $ .61 $ .75 $ .93
Pro forma $ .55 $ .65 $ .82
37
Summary of Stock Options
1999 2000 2001
------------------ ------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- -------- --------- -------- --------- --------
Outstanding, beginning
of year................ 2,110,240 $ 5.21 2,872,653 $ 10.11 3,768,991 $ 10.25
Granted................. 1,372,523 15.54 1,253,500 9.47 262,000 29.74
Exercised............... 544,610 4.42 270,392 4.44 1,352,519 8.12
Forfeited............... 65,500 13.29 86,770 12.72 110,498 11.47
--------- ------ --------- ------- --------- -------
Outstanding, end of
year................... 2,872,653 $10.11 3,768,991 $ 10.25 2,567,974 $ 13.30
========= ====== ========= ======= ========= =======
Exercisable, end of
year................... 1,031,753 1,403,885 1,122,932
========= ========= =========
Weighted average fair
value of options grant-
ed*.................... $ 7.97 $ 5.58 $ 17.54
========= ========= =========
Options Outstanding Options Exercisable
-------------------------------------------------------------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Contractual Exercise Exercise
Range of Exercise Prices Options Life (years) Price Options Price
------------------------ --------- ----------- --------- --------- ---------
$ 1.75--$ 1.75.......... 12,000 1.00 $ 1.75 12,000 $ 1.75
2.85-- 3.60.......... 78,028 2.56 2.98 78,028 2.98
7.50-- 9.38.......... 1,252,246 7.75 8.97 522,679 8.40
12.38-- 18.50.......... 965,200 7.27 15.38 503,475 15.33
19.38-- 28.00.......... 17,500 7.63 21.35 6,750 19.38
30.13-- 32.00.......... 243,000 9.37 30.68 -- --
--------- ---- ------ --------- ------
2,567,974 7.53 $13.30 1,122,932 $11.12
========= ==== ====== ========= ======
--------
* 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:
1999 2000 2001
---- ---- ----
Risk-free interest rate.................................. 4.97% 6.45% 5.79%
Expected dividend yield.................................. 0 0 0
Expected life of options (years)......................... 6 6 6
Expected volatility rate................................. 46.0% 55.0% 56.0%
14.SUBSEQUENT EVENTS -- (UNAUDITED):
Subsequent to June 30, 2001, the following transactions occurred:
On July 9, 2001, the Company signed a merger agreement with Argosy Education
Group, Inc., a leading provider of postgraduate professional education,
headquartered in Chicago, IL. The merger agreement states that EDMC will
acquire all of the shares of Argosy for $12.00 cash per share for the
approximately 6.5 million shares outstanding. This transaction is expected to
close by the end of calendar year 2001 and is subject to obtaining certain
regulatory approvals.
On July 25, 2001, the Company signed a purchase agreement acquiring the
assets of The International Fine Arts College located in Miami, Florida. This
transaction closed on September 5, 2001 (subject to final approval from the
Department of Education).
38
On September 17, 2001, the Company signed an agreement to purchase certain
assets of ITI Education Corporation (ITI), based in Halifax, Nova Scotia,
Canada. This transaction is expected to close by the end of calendar year 2001
and is subject to obtaining certain regulatory approvals.
The acquisition of these entities will be accounted for in accordance with
SFAS 141.
The Company and its lenders amended and restated the Credit Agreement,
effective September 20, 2001, to increase allowable borrowings from $100
million to $200 million. The Amended and Restated Credit Agreement, which will
expire September 20, 2004, is secured by certain assets of the Company and
provides the Company the ability to borrow up to $150 million on a revolving
basis and $50 million in the form of a term loan (collectively, the "Secured
Credit Facilities"). The Secured Credit Facilities contain the customary
covenants that, among other matters, require the Company to meet specified
financial ratios, restrict the repurchase of Common Stock and limit the
incurrence of additional indebtedness.
ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
39
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
2004 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," "Directors'
Compensation," "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.
40
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 24 through 39 of this Form
10-K.
Report of Independent Public Accountants
Consolidated Balance Sheets for years ended June 30, 2000 and 2001
Consolidated Statements of Income for years ended June 30, 1999, 2000
and 2001
Consolidated Statements of Cash Flows for years ended June 30, 1999,
2000 and 2001
Consolidated Statements of Shareholders' Investment for years ended
June 30, 1999, 2000 and 2001
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, 2001.
41
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, 2001
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.
Signatures Title Date
s/ Robert B. Knutson Chairman and Chief September 28,
------------------------------------- Executive Officer; 2001
Robert B. Knutson Director
s/ Robert P. Gioella President and Chief September 28,
------------------------------------- Operating Officer; 2001
Robert P. Gioella Director
s/ John R. McKernan, Jr. Vice Chairman; September 28,
------------------------------------- Director 2001
John R. McKernan, Jr.
s/ Robert T. McDowell Executive Vice September 28,
------------------------------------- President and Chief 2001
Robert T. McDowell Financial Officer
s/ Robert H. Atwell Director September 28,
------------------------------------- 2001
Robert H. Atwell
s/ James J. Burke, Jr. Director September 28,
------------------------------------- 2001
James J. Burke, Jr.
s/ William M. Campbell, III Director September 28,
------------------------------------- 2001
William M. Campbell, III
s/ Albert Greenstone Director September 28,
------------------------------------- 2001
Albert Greenstone
s/ Miryam L. Knutson Director September 28,
------------------------------------- 2001
Miryam L. Knutson
s/ James S. Pasman, Jr. Director September 28,
------------------------------------- 2001
James S. Pasman, Jr.
s/ Daniel M. Fitzpatrick Vice President and September 28,
------------------------------------- Controller 2001
Daniel M. Fitzpatrick
42
EXHIBIT INDEX
Exhibit
Number Exhibit Method of Filing
------- ------- ------ ----------
3.01 Amended and Restated Articles of Incorporated herein by
Incorporation 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, Incorporated herein by
1997 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, Incorporated herein by
1996, between Education Management reference to Exhibit
Corporation and Mellon Bank, N.A 4.02 to the 1997 Form
10-K
4.03 Amendment No. 1, dated November 9, 1999, to Incorporated herein by
the Rights Agreement dated as of October 1, reference to Exhibit
1996 between the Company and ChaseMellon 4.01 to Quarterly
Shareholder Services, L.L.C., as Rights Agent Report on Form 10-Q for
the quarter ended
September 30, 1999
(the "September 30,
1999 10-Q")
4.04 Letter Agreement dated November 9, 1999 by Incorporated herein by
and among the Company, Baron Capital Group, reference to Exhibit
Inc., BAMCO, Inc., Baron Capital Management 4.02 to the September
Inc. and Ronald Baron 30, 1999 10-Q
4.05 Credit Agreement, dated February 18, 2000, Incorporated herein by
among Education Management Corporation, reference to Exhibit
certain banks, National City Bank of 4.01 to Quarterly
Pennsylvania and First Union National Bank Report on Form 10-Q for
the quarter ended March
31, 2000 (the "March
31, 2000 Form 10-Q")
4.06 First Amendment to Credit Agreement, dated Incorporated herein by
March 31, 2000 among Education Management reference to Exhibit
Corporation, certain banks, National City 4.02 to the March 2000
Bank of Pennsylvania and First Union National Form 10-Q
Bank
10.01 Education Management Corporation Retirement Filed herewith*
Plan, amended and restated as of August 1,
2001
10.02 Education Management Corporation Management Incorporated herein by
Incentive Stock Option Plan, effective reference to Exhibit
November 11, 1993 10.05 to the Form S-1*
E-1
Exhibit
Number Exhibit Method of Filing
----- ------- ----------------
10.03 EMC Holdings, Inc. Management Incentive Stock Incorporated herein by
Option Plan, effective July 1, 1990 reference to Exhibit
10.06 to Amendment No. 1*
10.04 Form of Management Incentive Stock Option Incorporated herein by
Agreement, dated various dates, between EMC reference to Exhibit
Holdings, Inc. and various management 10.07 to Amendment No. 1*
employees
10.05 Form of Amendment to Management Incentive Incorporated herein by
Stock Option Agreement, dated January 19, reference to Exhibit
1995, among Education Management Corporation 10.08 to Amendment No. 1*
and various management employees
10.06 Education Management Corporation Deferred Filed herewith*
Compensation Plan amended and restated as of
April 1, 2000
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 Incorporated herein by
Incentive Plan reference to Exhibit
10.13 to Amendment No. 1*
10.09 Third Amended and Restated Employment Incorporated herein by
Agreement, dated as of September 8, 1999 reference to Exhibit
between Robert B. Knutson and Education 10.09 to the 1999 Form
Management Corporation 10-K*
10.10 Form of Employment Agreement, dated as of Incorporated herein by
June 4 and September 8, 1999, between certain reference to Exhibit
executives and Education Management 10.10 to the 1999 Form
Corporation 10-K*
10.11 Form of EMC-Art Institutes International, Incorporated herein by
Inc. Director's and/or Officer's reference to Exhibit
Indemnification Agreement 10.17 to the Form S-1
10.12 Senior Management Team Incentive Compensation Incorporated herein by
Plan reference to Exhibit
10.12 to the 1999 Form
10-K*
10.13 Common Stock Registration Rights Agreement, Incorporated herein by
dated as of August 15, 1996, among Education reference to Exhibit
Management Corporation and Marine Midland 10.19 to the 1997 Form
Bank, Northwestern Mutual Life Insurance 10-K
Company, National Union Fire Insurance
Company of Pittsburgh, PA, Merrill Lynch
Employees LBO Partnership No. I, L.P.,
Merrill Lynch IBK Positions, Inc., Merrill
Lynch KECALP L.P., 1986, Merrill Lynch
Offshore LBO Partnership No. IV, Merrill
Lynch Capital Corporation, Merrill Lynch
Capital Appreciation Partnership IV, L.P.,
Robert B. Knutson and certain other
individuals
21.01 Material subsidiaries of Education Management Filed herewith
Corporation
23.01 Consent of Arthur Andersen LLP Filed herewith
--------
* Management contract or compensatory plan or arrangement.
E-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
We have audited in accordance with auditing standards generally accepted in
the United States, the consolidated financial statements of Education
Management Corporation and Subsidiaries included in this Form 10-K, and have
issued our report thereon dated July 27, 2001. 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 27, 2001
SCHEDULE II
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
Balance Additions Balance
at Charged at
Beginning to End of
of Period Expenses Deductions Other(a) Period
--------- --------- ---------- ------- ---------
Allowance accounts for:
Year ended June 30, 1999
Uncollectible accounts re-
ceivable.................. $ 8,318 $5,660 $4,611 $ -- $ 9,367
Estimated future loan loss-
es........................ 1,032 123 -- -- 1,155
Year ended June 30, 2000
Uncollectible accounts re-
ceivable.................. $ 9,367 $7,551 $2,986 $156 $ 14,088
Estimated future loan loss-
es........................ 1,155 54 -- -- 1,209
Year ended June 30, 2001
Uncollectible accounts re-
ceivable.................. $14,088 $9,250 $6,109 $181 $ 17,410
Estimated future loan loss-
es........................ 1,209 43 -- -- 1,252
--------
(a) Allowance for uncollectible accounts receivable acquired in connection
with acquisitions of subsidiaries.
S-1
EX-10.01
3
dex1001.txt
CORPORATION RETIREMENT PLAN
Exhibit 10.01
================================================
The
Education Management Corporation
Retirement Plan
================================================
Table of Contents
Quick-Reference Information
Sponsor 1
Other Participating Employers...................................... 1
Plan Administrator................................................. 1
Trustee............................................................ 1
Appeals Authority.................................................. 1
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
Possible but unlikely limit........................................ 7
Matching Contributions
Introduction....................................................... 7
Special eligibility rule........................................... 7
Rate of match...................................................... 7
Form of matching contribution...................................... 8
Reports............................................................ 8
Investment......................................................... 8
Profit Sharing Contributions
Introduction....................................................... 8
Who shares in profit sharing contributions......................... 8
How much you get................................................... 9
Reports............................................................ 9
The Former ESOP and Employer Stock Accounts
Introduction....................................................... 9
Who has an employer stock account.................................. 9
Who would share in ESOP contributions.............................. 9
How much you get................................................... 10
Reports............................................................ 10
Incoming Rollovers
Introduction....................................................... 10
Direct rollover.................................................... 10
Indirect rollover.................................................. 11
Rules applicable to both types of rollover......................... 11
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......................................................... 12
Recordkeeping...................................................... 12
Return of contributions............................................ 12
Making Your Own Investment Decisions
Introduction......................................................... 13
The choices.......................................................... 13
Getting information.................................................. 13
Implementing your choices............................................ 13
Your responsibility.................................................. 13
When You Retire or Terminate Employment
Introduction......................................................... 14
Normal retirement after age 65....................................... 14
Early retirement after age 55........................................ 14
Disability........................................................... 14
Other termination of employment...................................... 14
Forfeitures.......................................................... 15
Some special rules about termination of employment................... 15
When Payment Is Actually Made
Introduction......................................................... 16
General rule......................................................... 16
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................ 18
"Put" option......................................................... 19
How to Claim Your Money or Stock
Introduction......................................................... 20
Pre-approved payments................................................ 20
Making a formal claim................................................ 20
Appeal............................................................... 20
Discretionary authority.............................................. 21
Payment Before Termination of Employment
Introduction......................................................... 21
Withdrawal of after-tax contributions................................ 21
Age 59 1/2........................................................... 21
Age 70 1/2........................................................... 21
Hardship............................................................. 21
Borrowing Money From Your Accounts
Introduction......................................................... 23
Eligibility.......................................................... 23
Number............................................................... 23
Amount............................................................... 23
Promissory note...................................................... 23
Term................................................................. 23
Interest............................................................. 23
Source and application of funds...................................... 23
Repayment............................................................ 24
Security............................................................. 24
Pre-payment.......................................................... 24
Default.............................................................. 24
How to apply......................................................... 24
In Case of Death
Introduction......................................................... 25
If you're married.................................................... 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......................................................... 28
12-Month periods..................................................... 28
Years of service..................................................... 28
Full-time employees.................................................. 28
Part-time faculty.................................................... 28
Other part-time employees............................................ 29
Back pay............................................................. 29
Breaks in service.................................................... 29
How breaks in service cancel years of service........................ 29
Service with related employers....................................... 30
When You Return from Military Service
Introduction......................................................... 30
Break in service..................................................... 31
401(k) contributions................................................. 31
Matching contributions............................................... 31
Profit sharing contributions and ESOP contributions.................. 31
Your "pay"........................................................... 31
Percentage of entitlement to employer accounts....................... 31
Limits and testing................................................... 32
What the Plan Administrator Does
Introduction......................................................... 32
Reporting and disclosure............................................. 32
Bonding.............................................................. 32
Numerical testing.................................................... 33
Prohibited transactions.............................................. 33
Expenses............................................................. 33
Limitation........................................................... 33
What the Employer Does
Introduction......................................................... 33
Establishment........................................................ 33
Contributions........................................................ 33
Employment records................................................... 34
Insurance and indemnification........................................ 34
Changing the plan.................................................... 34
Ending the plan...................................................... 34
Maximum Amount of 401(k) Contributions
Introduction......................................................... 35
$10,500 limit........................................................ 35
If the $10,500 limit is exceeded..................................... 35
Utilization test..................................................... 35
Who the restricted employees are..................................... 36
Performing the utilization test...................................... 36
If the utilization test reveals a problem............................ 38
Returning excess contributions....................................... 38
Combining plans...................................................... 38
Maximum Amount of Matching Contributions
Introduction......................................................... 39
Matching contributions by themselves................................. 39
Matching contributions in combination................................ 39
If this test of matching contributions reveals a problem............. 39
Maximum Amount of Total Contributions
Introduction......................................................... 40
25% of pay limit..................................................... 40
If there's more than one defined contribution plan................... 41
If there's also a defined benefit plan............................... 41
Related employers.................................................... 41
Improvements When The Plan Is Top-Heavy
Introduction......................................................... 42
Who is in the concentration group.................................... 42
Performing the concentration test.................................... 43
Changes if the plan is top-heavy..................................... 44
Special ESOP Provisions
Introduction......................................................... 45
The nature of an ESOP................................................ 45
Investment........................................................... 45
"Employer securities"................................................ 46
Voting............................................................... 47
Diversification...................................................... 47
"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.................................. 52
Merger of plan....................................................... 52
Protection of benefits, rights, and features from previous edition
of plan............................................................ 52
Governing law........................................................ 52
No PBGC Coverage..................................................... 52
"Highly compensated employees."...................................... 52
Statement of ERISA rights............................................ 52
Special Arrangements for New Participating Employers
Introduction......................................................... 54
Illinois Institute of Art............................................ 54
New York Restaurant School........................................... 54
Art Institutes International Portland, Inc........................... 54
Massachusetts Communications College................................. 54
Art Institute of Charlotte........................................... 55
Art Institute of Las Vegas........................................... 55
Art Institute of California.......................................... 55
============================
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
Length Of Service Required For Benefits (Vesting Schedule)
Less than 5 years of service 0%
5 years of service 100%
Because the vesting schedule was different before April 1, 2000, two
special rules apply:
. First, the change in vesting schedule does not have the effect of
reducing anyone's vesting percentage. For example, if you had 3 years
of service before April 1, 2000 and therefore were 20% vested, you
remain 20% vested even under the new schedule.
. Second, if you had at least 3 years of service before April 1, 2000,
you will always get the better of the old schedule or the new schedule.
This means, for example, that after a total of 4 years of service, you
will advance to being 40% vested (according to the old schedule) and
after 5 years of service, you will advance to being 100% vested
(according to the new schedule).
Plan Year Ends Every December 31
Plan Number 001
Page 2 The Education Management Corporation
===============================================
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 (assuming you have completed one year of service, 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.
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.
Retirement Plan Page 3
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 edition of the plan generally takes effect on August 1,
2001 and applies only to participants who have at least one hour of service on
or after that date. We say "generally" because there are a few provisions that
take effect on other dates; when those provisions come along, we will say
exactly when they take effect.
This restatement of the Education Management Corporation Retirement 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.
Page 4 The Education Management Corporation
================================================
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. 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.
. Second, you must be classified by the employer as a salaried, clerical or
hourly employee and must not be (a) matriculated in an employer with an
enrollment agreement (i.e., a student) or (b) a member of a collective
bargaining unit unless the collective bargaining agreement provides for
participation in this plan.
. Third, you must have worked for the employer for 30 days.
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 first of the next month.
Enrollment is automatic; you don't have to fill out any forms just to get into
the plan. But you do have to take action 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 take action to re-start your 401(k)
contributions, as described in the next section.)
Retirement Plan Page 5
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.
============================
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 15% 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, get in touch with Fidelity, using the toll-free
number shown in the materials that you receive from Fidelity. You will authorize
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 enter into an enforceable agreement with the employer to do
this. (This is handled by Fidelity, which forwards your authorization to
the employer to be implemented in the payroll system and sends you a
confirmation in the mail.)
. The agreement only applies to pay that you earn after the agreement is
entered into. (In other words, you can't make this type of contribution
retroactively).
. You can terminate the agreement at any time by notifying Fidelity, 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
Page 6 The Education Management Corporation
forward in the plan, we will call these your "401(k) contributions."
Possible but unlikely limit It is possible, though highly unlikely, that
contributions under this section of the plan would create a situation where
total contributions were greater than the amount permitted as a deduction under
the Code. If that were to happen, contributions under this section would be
limited (or, if already made, would be returned to the employer) beginning with
those that represent the greatest percentage of pay, so that the correction
would have the effect of imposing a maximum permissible percentage somewhat
lower than 15%. If any contributions made on your behalf under this section of
the plan are returned to the employer, of course they will promptly be paid to
you and will be treated as taxable income for the year in which they were
contributed to the plan.
============================
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.
Special eligibility rule Although you are eligible to make 401(k)
contributions on the first of the month after 30 days of employment with the
employer, you are not eligible for matching contributions until the next January
1 or July 1 after you have completed 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 later in the plan under the heading
"How the Length of Your Service Is Calculated."
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% - 15% 4.5%
Matching contributions are made each 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
Retirement Plan Page 7
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.
Form of matching contribution Matching contributions will ordinarily be
made in cash. But there are two possible exceptions. First, the employer is
permitted (but not required) to make matching contributions in employer stock.
Second, if forfeitures from employer stock accounts are used to make the
matching contribution, either in whole or in part, those forfeitures may be
applied either in the form of employer stock or by selling the stock and
applying them in cash.
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
periodic statements from the trustee, Fidelity.
Investment To the extent that the matching contribution is made in employer
stock, your match account will be shown as invested in employer stock. Keep in
mind that this is still your match account, not an "employer stock account,"
which is something different that is explained later in the plan in the section
called "The Former ESOP and Employer Stock Accounts." You can direct that the
employer stock in your match account be sold and the proceeds invested in one or
more of the available investment options, as explained later in the section
called "Making Your Own Investment Decisions."
============================
Profit Sharing
Contributions
============================
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. 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, 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 all three of these requirements:
. you have become eligible to receive matching contributions by the last
day of that plan year and
. 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
Page 8 The Education Management Corporation
. 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 become eligible for matching
contributions are entitled to share in profit sharing contributions. If you do
not become eligible for matching contributions until January 1, you do not share
in the profit sharing contributions for the preceding year.
How much you get Profit sharing contributions 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 is added to your
profit sharing account. When the employer contributes in this manner, you will
see it on your periodic statements from the trustee, Fidelity.
============================
The Former ESOP and
Employer Stock Accounts
============================
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 participants may still have
employer stock accounts, reflecting contributions to the ESOP when it was a
separate plan, so it is useful to describe employer stock accounts.
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 received an allocation of ESOP contributions or forfeitures
through the end of 1999 or receives an allocation of ESOP forfeitures after
1999 also has an employer stock account, in which those ESOP contributions
or forfeitures are held.
Who would share in ESOP contributions . Though no more employer
contributions are contemplated for the ESOP portion of the plan, this section
describes how an employer contribution would be allocated among participants if
it were to be made. ESOP contributions would be 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 all of these requirements:
. You were employed on the last day of the plan year by an employer that
participates in
Retirement Plan Page 9
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 have become eligible to receive matching contributions by the last
day of that year.
. 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 become eligible for matching
contributions are entitled to share in ESOP contributions. If you do not become
eligible for matching contributions until January 1, you do not share in any
ESOP contributions for the preceding year.
How much you get ESOP contributions would be divided in proportion to each
eligible employee's pay from the employer during that year -- so everybody would
get 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 would be 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 would be taken into account for this purpose.)
Reports . Your share of ESOP contributions would be added to your employer
stock account as of the last day of the plan year. You would see the amount on
your statements from the trustee, Fidelity.
============================
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.")
Page 10 The Education Management Corporation
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 the trustee (Fidelity), which 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.
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 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.
Retirement Plan Page 11
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.
. 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.
Page 12 The Education Management Corporation
================================
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.
Please note: If matching contributions are made in employer stock,
your match account will be invested in employer stock to that extent,
rather than in any of the investments shown on Appendix B. But you may
direct the trustee at any time to sell the employer stock and re-
invest the proceeds in one or more of the investments shown on
Appendix B, as explained below under the heading "Implementing your
choices." Just remember that employer stock is not one of the
investment options on Appendix B, so you can never move your money in
the other direction -- that is, you can never go from any of the
investments shown on Appendix B into employer stock.
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 make
your investment choices by contacting the trustee, Fidelity, at the toll-free
number shown in the materials that you receive from Fidelity. After joining the
plan, you can change your investment choices whenever you like during normal
business hours. Just call Fidelity at the toll-free number shown in the
materials that you receive from Fidelity. 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).
Your responsibility In return for complete freedom to choose how your
accounts are invested
Retirement Plan Page 13
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 5 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 totally and permanently 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 account, and your employer stock account
(if you have them) if you completed enough years of
Page 14 The Education Management Corporation
service to become vested. 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 Any portion of your accounts that you are not entitled to when
your employment terminates is forfeited. If you are not vested at all,
forfeiture occurs when your employment terminates, because you are considered to
have taken your entitlement (which is zero) at that time. If you are partially
vested, forfeiture occurs (a) whenever you take the portion that you are
entitled to or (b) otherwise when you have five consecutive break in service
years. (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, to the extent that
such forfeitures are available. If not, forfeitures from different types of
accounts may be used. If forfeitures in total are inadequate, the employer will
contribute the balance in cash. Effective January 1, 2000, any balance of
forfeitures during a plan year in excess of what is necessary to restore
accounts during that year will be applied as follows:
. Forfeitures from profit sharing accounts will be applied toward the
employer's obligation to contribute under the plan and allocated in the
same manner as required employer contributions, thus reducing the amount of
cash contribution necessary from the employer to make the required
contributions. (This change was previously made effective December 28,
1999.)
. Forfeitures from matching accounts and employer stock accounts will be
applied in one of the following two ways: (i) forfeitures from both types
of accounts will be applied toward the employer's obligation to contribute
under the plan and allocated in the same manner as required employer
contributions, thus reducing the amount of cash contribution necessary from
the employer to make the required contributions or (ii) 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, and forfeitures from employer
stock accounts will be allocated as if they were ESOP contributions. For
the 2000 plan year, method (i) will be used. For plan year 2001 and future
years, the Retirement Committee will decide before the plan year begins
whether method (i) or method (ii) will be used for that plan year. (The
Retirement Committee will be exercising its authority to change the plan,
as described in the section called "What the Employer Does," under the
heading "Changing the plan.") For plan year 2001 and future years, if for
any reason the Retirement Committee has not acted before the plan year
begins, method (ii) will be used for that plan year.
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.
Retirement Plan Page 15
================================
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.
General rule Payment is made as soon as administratively possible after
your termination of employment. If payment is made because you have become
totally and permanently disabled (as described in the preceding section),
payment is made as soon as it is determined that you have suffered total and
permanent disability. This applies to all your accounts: your 401(k) account,
after-tax account, and rollover account (if you have them), as well as your
match account, profit sharing account, and employer stock account (to the extent
you are vested, of course).
As an exception to the general rule that this edition of the plan applies
only to participants who complete at least one hour of service on or after
August 1, 2001, this section of the plan will be applied to all participants who
have not yet received distribution of their employer stock accounts as of August
1, 2001, no matter when their employment terminated.
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.
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 process is described later
in the plan in the section called "How to Claim Your 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 1/2, you must at
least begin to take the money by April 1 of the following year (that is,
Page 16 The Education Management Corporation
April 1 of the year following the year in which your employment with the
employer terminates or you attain age 70 1/2, 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 1/2; 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 1/2 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 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. (If any of your match account remains
invested in employer stock, the trustee will sell the stock and distribute the
cash.)
Please note: Before August 1, 2001, there was an alternative available for
those who were members of the Retirement Plan before May 1, 1992, namely,
the purchase of an annuity contract. Due to a change in the regulations,
that alternative is eliminated from this edition of the plan, effective
with respect to annuity starting dates later than 90 days after you receive
notification of this change by way of a "summary of material modifications"
(or annuity starting dates on or after January 1, 2003, if that comes
first). If that alternative still applies to you and you would like to
receive your benefit in the form of an annuity, see the previous edition of
the plan in the section called "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 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,
Retirement Plan Page 17
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.)
There is one possible exception to the rule that payment of your employer
stock account is made in the same form in which your account is invested. If you
are required to take part of your account out of the plan because of the rules
explained in the previous section under the heading "Latest possible date to
take the money (or stock)," the requirement will be met first by taking money
out of accounts other than your employer stock account. But if the requirement
cannot be satisfied without taking stock out of your employer stock account, you
will be offered the opportunity to take the amount of stock necessary to satisfy
the requirement. If you do not do so, however, the trustee will be forced to
sell enough stock to satisfy the requirement and then will pay you in cash. (As
an exception to the general rule that this edition of the plan applies only to
participants who complete at least one hour of service on or after August 1,
2001, this paragraph will be applied to all participants who are required to
take distributions on or after August 1, 2001, no matter when their employment
terminated.)
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 1/2,
Page 18 The Education Management Corporation
. 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 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.
Retirement Plan Page 19
================================
How to Claim Your Money
or Stock
================================
Introduction This section of the plan describes how to get your money when
the time comes.
Pre-approved payments The plan administrator keeps the trustee (Fidelity)
up to date about the employment status, vesting status, etc., of participants in
the plan. That means, when the time comes for you to get your money, you can
(and should) simply call Fidelity.
Based on the information already in your file from the plan administrator,
Fidelity will talk with you about the options that are available. When you
decide what you would like to do, Fidelity will provide you with the application
forms. Complete and return them to Fidelity. If the information on file at
Fidelity shows that you are entitled to payment, Fidelity will simply make the
payment:
. For all accounts other than your employer stock account, you can expect
to receive payment from Fidelity within 7 to 10 days.
. For your employer stock account, payments will be processed on the 15th
of each month and again on the last day of each month. It takes Fidelity
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 Fidelity
whether wire transfers are available. If so, Fidelity will provide you with
the necessary information. Wire transfers (if available) can be made in 7
to 10 days.
Making a formal claim If for any reason Fidelity does not give you a
payment that you believe you are entitled to, or if you have any other type of
claim under the plan, you need to make a formal claim to the plan administrator.
Write to the plan administrator at the address shown at the beginning of the
plan in the section called "Quick-Reference Information" explaining what you
want and why you believe you are entitled to it.
If your claim is granted, the plan administrator will get in touch with
Fidelity to make sure that payment is made. 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
Page 20 The Education Management Corporation
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.
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 1/2 When you reach age 59 1/2, 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 1/2 After you reach age 70 1/2, 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.
Retirement Plan Page 21
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 $10,500 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 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, call the trustee (Fidelity). Fidelity
will review your circumstances against the requirements of the plan and let you
know whether a hardship withdrawal is available and, if so, how much. If you
wish to proceed, Fidelity will then provide you with the appropriate forms. Just
complete the forms and return them to Fidelity.
Page 22 The Education Management Corporation
=================================
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.
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.
Retirement Plan Page 23
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.
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 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 take 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 (Fidelity) 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. Fidelity
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, Fidelity will generate
the loan application and send it to you. All you have to do is sign where
indicated and return it to Fidelity. 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.
Page 24 The Education Management Corporation
=================================
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."
If you're married If you were married at the time of your death, 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.
Please note: There is a temporary exception for participants who were
members of this plan (that is, the Retirement Plan) before May 1, 1992 and who
are married when they die and who die within a certain period. That period ends
90 days after you are notified of the elimination of the option to receive
benefits in the form of an annuity (or on January 1, 2003, if that comes first),
as provided in this edition of the plan. If you are described in this paragraph
and die within that period, your death benefits are governed by the previous
edition of the plan, under which some of your accounts are subject to spousal
consent and some are not.
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. (This function is not
handled by Fidelity.) Your beneficiary is whomever you last named on the records
of the plan administrator.
Retirement Plan Page 25
Please note: Only you can change your beneficiary, and you can only do
it by filing a new beneficiary designation with the plan administrator.
In particular, death or divorce does not automatically change your
beneficiary. Whenever there are major changes in your life such as
death or divorce, you are well advised to double-check your beneficiary
designation with the plan administrator to assure that it remains as
you intend.
If you have named a beneficiary in place of your surviving husband or
wife, your choice of beneficiary will not be honored 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.
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.
Page 26 The Education Management Corporation
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.
Retirement Plan Page 27
=================================
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 becoming eligible for matching contributions 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.
Becoming eligible for matching contributions. For the purpose of becoming
eligible for matching contributions, 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.
Page 28 The Education Management Corporation
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.
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
Retirement Plan Page 29
. the number of break in service years is at least equal to your prior
years of service.
EXAMPLE: You accumulate 2 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 2 years, and you have credit for a total of 3 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
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.
Page 30 The Education Management Corporation
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 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."
Retirement Plan Page 31
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
$10,500 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.
===============================
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.
Page 32 The Education Management Corporation
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 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 "The Former ESOP
and Stock Accounts." 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.
Retirement Plan Page 33
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.
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, 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.
Page 34 The Education Management Corporation
===============================
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.
$10,500 limit Contributions that you cause the employer to make by trading
off your pay cannot be more than $10,500 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 $10,500 figure applies to the year 2001. But the IRS changes it from
time to time according to the cost-of-living, and the new figure automatically
applies here. The plan administrator can tell you what the exact figure is for
each year. In the paragraphs that follow, however, we'll keep saying "$10,500"
just because it's easier that way.
If the $10,500 limit is exceeded There are two ways in which the $10,500
limit might be exceeded. First, although this plan prohibits 401(k)
contributions of more than $10,500, 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 $10,500 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
$10,500, 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 $10,500. 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."
Retirement Plan Page 35
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 $85,000. (That's the figure for
2001. The figure changes slightly from year to year according to the cost-of-
living. The plan administrator can tell you what the exact figure is each 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, 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, for plan years beginning after 1998, 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, as long as the coverage rules of
section 410(b) of the Code can be met without taking those individuals into
account. 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 1/2 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.
Page 36 The Education Management Corporation
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 totaling 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 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.
Retirement Plan Page 37
Returning excess contributions The concept of returning any excess
contributions (due to either the $10,500 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 $10,500 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.
Page 38 The Education Management Corporation
===============================
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 only those employees who have satisfied the special eligibility rule for
matching contributions and 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.
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, as long as those contributions
satisfy the requirements of Reg. (S) 1.401(m)-1(b)(5).
Retirement Plan Page 39
===============================
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. (S) 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.
Page 40 The Education Management Corporation
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 Due to a change in the law, this
section no longer applies, beginning with the 2000 plan and limitation year.
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).
Retirement Plan Page 41
===============================
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 1/2 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 1/2 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.
Page 42 The Education Management Corporation
1/2% Owners. Separately for each of the five preceding years, list all
employees who owned more than 1/2% 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 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.
Retirement Plan Page 43
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 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 900 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. Due to a change in the law, this
subsection no longer applies, effective with the 2000 plan and limitation year.
Page 44 The Education Management Corporation
===============================
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.
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.
Retirement Plan Page 45
"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.
"(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)
Page 46 The Education Management Corporation
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. This section applies equally to any
beneficiary of yours who may have an account under the plan. 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."
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.
Retirement Plan Page 47
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 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.
Page 48 The Education Management Corporation
"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.
Retirement Plan Page 49
=============================
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
labeled "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 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).
"Pay" or "compensation" also includes salary reduction for qualified
transportation fringes (Code section 132(f)) effective January 1, 2001 for the
purpose of the limit described under the heading "Maximum Amount of Total
Contributions" and for the purpose of the rules described under the heading
"Improvements When the Plan Is Top-Heavy" and effective January 1, 2002 for all
other purposes.
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.
$170,000 limit on compensation. As required by section 401(a)(17) of
the Code, compensation in excess of $170,000 (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.
Page 50 The Education Management Corporation
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 With the two exceptions provided here, 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, and apply just as broadly and as stringently as,
section 206(d) of ERISA and section 401(a)(13) of the Code.
The first exception is qualified domestic relations orders described in
the section entitled "Child Support, Alimony and Division of Property in
Divorce." The second exception is that, effective August 5, 1997, the plan may
offset against your benefit any amount that you are ordered or required to pay
to the plan in the circumstances set forth in section 206(d)(4) of ERISA.
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.
Retirement Plan Page 51
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 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.
"Highly compensated employees." In the section called "Maximum Amount of
Total Contributions," under the heading "25% of pay limit," reference is made to
"highly compensated employees." That phrase means any employee who owned 5% or
more of the employer during the year in question or the preceding year, as well
as any employee who had compensation from the employer during the preceding year
of more than $85,000. (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.) Non-resident aliens who have no U.S.-source
income are not taken into account when applying this definition.
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:
Page 52 The Education Management Corporation
"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 statement or about your rights
under ERISA, you should contact the nearest office of the Pension and Welfare
Benefits Administration, U. S. Department of Labor, listed in your telephone
directory, or the Division of Technical Assistance and Inquiries, Pension and
Welfare Benefits Administration, U. S. Department of Labor, 200 Constitution
Avenue N.W., Washington, D.C. 20210."
Service of legal process may be made on the plan administrator or any
trustee.
Retirement Plan Page 53
=============================
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.
Massachusetts Communications College The requirement of one year of service
in order to join this plan (that is, the Retirement Plan) shall not apply to any
employee who, immediately prior to January 1, 2000, was an employee of
Massachusetts Communications College and a participant in the Massachusetts
Communications College 401(k) Plan and Trust.
In addition, in determining the length of your service for getting into
this plan (that is, the Retirement Plan) effective January 1, 2000 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 Massachusetts Communications College
from January 1, 1999 through December 31, 1999 are taken into account as hours
of service under the plan to the same extent as if Massachusetts Communications
College had been a participating employer during that period.
Page 54 The Education Management Corporation
In addition, if hours of service by employees of Massachusetts
Communications College for years before 1999 can be substantiated by December
31, 2000, then in determining the length of your service for deciding what
portion of your account you are entitled to if you leave before age 65, hours of
service in the employ of Massachusetts Communications College for years before
1999 will be taken into account as hours of service under the plan to the same
extent as if Massachusetts Communications College had been a participating
employer during that period. As an exception, no more than five years of service
will be credited under this paragraph to any employee who upon entering this
plan is a "restricted employee" as described in the section called "Maximum
Amount of 401(k) Contributions."
Art Institute of Charlotte The requirement of one year of service in order
to join this plan (that is, the Retirement Plan) shall not apply to any employee
who, immediately prior to January 1, 2000, was an employee of the American
Business & Fashion Institute, Inc. and a participant in the American Business &
Fashion Institute, Inc. 401(k) Profit Sharing Plan.
In addition, in determining the length of your service for getting into
this plan (that is, the Retirement Plan) effective January 1, 2000 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 the American Business & Fashion
Institute, Inc. from January 1, 1999 through December 31, 1999 are taken into
account as hours of service under the plan to the same extent as if the American
Business & Fashion Institute, Inc. had been a participating employer during that
period.
In addition, if hours of service by employees of the American Business &
Fashion Institute, Inc. for years before 1999 can be substantiated by December
31, 2000, then in determining the length of your service for deciding what
portion of your account you are entitled to if you leave before age 65, hours of
service in the employ of the American Business & Fashion Institute, Inc. for
years before 1999 will be taken into account as hours of service under the plan
to the same extent as if the American Business & Fashion Institute, Inc. had
been a participating employer during that period. As an exception, no more than
five years of service will be credited under this paragraph to any employee who
upon entering this plan is a "restricted employee" as described in the section
called "Maximum Amount of 401(k) Contributions."
Art Institute of Las Vegas In determining the length of your service for
the purpose of eligibility to receive matching contributions 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 the Interior Design Institute, Inc. before it
was acquired by Education Management Corporation are taken into account as hours
of service under the plan to the same extent as if the Interior Design
Institute, Inc. had been a participating employer during that period. As an
exception, no more than five years of service will be credited under this
paragraph to any employee who upon entering this plan is a "restricted employee"
as described in the section called "Maximum Amount of 401(k) Contributions."
Art Institute of California . In determining the length of your service for
the purpose of eligibility to receive matching contributions 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 LJAAA, Inc. before it was acquired by
Education Management Corporation are taken into account as hours of service
under the plan to the same extent as if LJAAA, Inc. had been a participating
employer during that period. As an exception, no more than five years of service
will be credited under this paragraph to any employee who upon entering this
plan is a "restricted employee" as described in the section called "Maximum
Amount of 401(k) Contributions."
Retirement Plan Page 55
Appendix A to the
Education Management Corporation
Retirement Plan
Participating Employers As of August 1, 2001
(* denotes employer that does not participate in ESOP feature)
The Art Institute of Atlanta, Inc. The Art Institute of Las Vegas, Inc.*
6600 Peachtree Dunwoody Road 4225 S. Eastern Avenue, Suite 4
100 Embassy Row Las Vegas, NV 89119
Atlanta, GA 30328 (effective July 1, 2001)
TAIC, Inc.* The Art Institute of Los Angeles, Inc.*
d/b/a The Art Institute of California Santa Monica Business Park, Building S
10025 Mesa Rim Road 2900 31st Street, Suite 150
San Diego, CA 92121 Santa Monica, CA 90405
(effective January 1, 2001) (effective January 13, 1997)
The Art Institute of Charlotte, Inc.* The Art Institute of Los Angeles
1515 Mockingbird Lane, Suite 600 - Orange County, Inc.*
Charlotte, NC 28209 3601 West Sunflower Avenue
(effective January 1, 2000) Santa Ana, CA 92704
(effective January 1, 2000)
The Art Institute of Colorado, Inc. The Art Institutes International Minnesota, Inc.*
1200 Lincoln Street 15 South 9th Street
Denver, CO 80203 LaSalle Building
Minneapolis, MN 55402
(effective January 28, 1997)
The Art Institute of Dallas, Inc. The Art Institute of Pittsburgh
8080 Park Lane, Suite 100 420 Boulevard of the Allies
Dallas, TX 75231 Pittsburgh, PA 15219
The Art Institute of Ft. Lauderdale, Inc. The Art Institute of Philadelphia, Inc.
1799 SE 17th Street 1622 Chestnut Street
Ft. Lauderdale, FL 33316 Philadelphia, PA 19103
The Art Institute of Houston, Inc. The Art Institute of Phoenix, Inc.*
1900 Yorktown 2233 West Dunlap Avenue
Houston, TX 77056 Phoenix, AZ 85021
The Art Institutes International
at San Francisco, Inc.*
1170 Market StreetSan Francisco, CA 94102
(effective December 19, 1997)
Page 56 The Education Management Corporation
The Art Institute of Portland, Inc.* 1000 Plaza Drive, Suite 1000
2000 Southwest Fifth Avenue Schaumburg, IL 60173
Portland, OR 97201
(effective April 1, 1998)
Massachusetts Communications College*
The Art Institute of Seattle, Inc. 142 Berkeley Street
2323 Elliott Avenue Boston, MA 02116
Seattle, WA 98121 (effective January 1, 2000)
NCPT, Inc.
The Art Institute of Washington, Inc.* 6600 Peachtree Dunwoody Road
The Ames Center 100 Embassy Row
1820 N. Fort Meyer Drive Atlanta, GA 30328
Arlington, VA 22209
(effective January 1, 2000)
The National Center for Professional Development
The Art Institute OnLine, Inc.* - University Division, Inc.
420 Boulevard of the Allies 6600 Peachtree Dunwoody Road
Pittsburgh, PA 15219 100 Embassy Row
Atlanta, GA 30328
The New York Restaurant School, Inc.*
The Illinois Institute of Art, Inc.* 75 Varick Street, 16th Floor
350 North Orleans, Suite 136-L New York, NY 10013
Chicago, IL 60654
The Illinois Institute of Art at Schaumburg, Inc.*
Retirement Plan Page 57
Appendix B to the
Education Management Corporation
Retirement Plan
Investment Options Effective July 6, 2001
-----------------------------------------
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.
Invesco Equity Income Fund This is a mutual fund that seeks to provide
current income. Capital growth is an additional, but secondary, objective of the
fund. Normally, at least 65% of the fund's assets are invested in dividend-
paying common stocks. Up to 10% of its assets may be invested in stocks which do
not pay dividends. The rest may be invested in corporate and other types of
bonds.
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 Freedom Funds These are mutual funds that invest in a combination
of Fidelity equity, fixed-income, and money market funds. They allocate their
assets among those funds according to an asset allocation strategy that becomes
increasingly conservative as each Freedom Fund approaches its target retirement
date. The Freedom Funds are:
Fidelity Freedom 2000 Fund -- targeted to investors expecting to retire
around 2000.
Fidelity Freedom 2010 Fund -- targeted to investors expecting to retire
around 2010.
Fidelity Freedom 2020 Fund -- targeted to investors expecting to retire
around 2020.
Fidelity Freedom 2030 Fund -- targeted to investors expecting to retire
around 2030.
Fidelity Freedom 2040 Fund -- targeted to investors expecting to retire
around 2040.
Fidelity Freedom Income Fund -- targeted to investors who have retired.
Please note: The Fidelity Freedom Funds replace three other Fidelity funds
that were previously available -- Fidelity Asset Manager, Fidelity Asset
Manager: Growth, and Fidelity Asset Manager: Income. Effective July 6,
2001, no money may be contributed or transferred to those three Asset
Manager funds.
Please note also: If you have chosen any of those three Asset Manager
funds --Fidelity Asset Manager, Fidelity Asset Manager: Growth, or Fidelity
Asset Manager: Income -- as the destination for new contributions going
into the plan, then effective July 6, 2001, those new contributions will
automatically be re-directed by Fidelity into the Fidelity Freedom Fund
that corresponds to your birth date, as shown on the table in the following
paragraph.
Page 58 The Education Management Corporation
Please note, finally: Participants with money in any of those Asset Manager
funds --Fidelity Asset Manager, Fidelity Asset Manager: Growth, and
Fidelity Asset Manager: Income -- are urged to move the money into other
investment options available under the plan. Any money remaining in any of
those three Asset Manager funds at September 30, 2001 (that is, 90 days
later) will automatically be transferred by Fidelity into the Fidelity
Freedom Fund that corresponds to your birth date, as shown on this table:
Year of Birth Fidelity Freedom Fund
------------- ---------------------
1900-1934 Freedom Income
1935-1940 Freedom 2000
1941-1950 Freedom 2010
1951-1960 Freedom 2020
1961-1970 Freedom 2030
1971-1980 Freedom 2040
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.
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 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.
Ariel Fund This is a mutual fund managed by Ariel Capital Management, Inc.
It seeks long-term capital appreciation. It normally invests 80% of its assets
in equity securities with market capitalizations under $1.5 billion. It may
invest the remaining 20% in investment grade debt securities. It seeks
environmentally responsible companies; it may not invest in issuers primarily
involved in the manufacture of weapons systems, nuclear energy or tobacco.
Franklin Small Cap Growth Fund A This is a mutual fund managed by Franklin
Advisers, Inc. It seeks to increase the value of investments over the long term
through capital growth. It invests primarily in equity securities of small
capitalization growth companies, which generally have market capitalizations of
less than $1.5 billion at the time of the investment. The fund may also invest
up to 25% of its assets in foreign securities, which involve special risks,
including economic and political uncertainty and currency fluctuation.
Fidelity Diversified International Fund This is a mutual fund whose
objective is capital growth. It normally invests at least 65% of total assets in
foreign securities. It normally invests primarily in common stocks. Stocks are
selected by using a computer-aided quantitative analysis supported by
fundamental analysis. In exchange for greater potential rewards, foreign
investments, especially in emerging markets, involve greater risks than U. S.
investments and as with any investment, share price and return will fluctuate.
The risks in foreign investments include political and economic uncertainties of
foreign countries, as well as the risk of currency fluctuations.
Retirement Plan Page 59
EX-10.06
4
dex1006.txt
CORPORATE DEFERRED COMPENSATION PLAN
Exhibit 10.06
==========================================
The Education Management Corporation
Deferred Compensation Plan
==========================================
=========================================
Table of Contents
=========================================
Welcome to the Plan!............................. 1
Participation.................................... 1
Salary Deferrals................................. 3
Company Credits.................................. 4
Investment Credits............................... 6
Lack of Funding.................................. 7
Payment of Benefits.............................. 8
Hardship Withdrawals............................. 11
Administration, Claims and Appeals............... 12
Miscellaneous.................................... 13
==========================
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
April 1, 2000. This amendment and restatement does not attempt to describe the
rules that were in effect under the plan before April 1, 2000 and therefore does
not apply to any participant whose employment with the employer terminated
before April 1, 2000 (any such participant's rights being governed by the terms
of the plan as in effect when his termination of employment occurred).
==========================
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,
. member of the executive committee of an operating division of the
company, or
. chief executive of an operating unit.
Legal limitation. Despite the discretion of the Retirement Committee
and the current criteria just
Deferred Compensation Plan Page 1
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 initial choice with regard to
investment credits on any company credits that may be made, (iii) indicate your
choice as to the form of payment 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.
Changing your participation agreement. Except for changes with regard
to investment credits (which we will explain in just a moment), you change your
participation agreement by completing and filing a new one with the
administrator of the plan. Changes reflected in a new participation agreement
will take effect as follows:
. A change in the amount of salary deferrals, if filed with the
administrator by December 15 of one calendar year, will take effect with the
following calendar year (otherwise, with the second following calendar year).
. A change in the form of payment will take effect with respect to
amounts credited to you in calendar years after the calendar year in which the
change is filed with the administrator.
. A change of beneficiary will take effect immediately upon filing
with the administrator.
With regard to investment credits, you change your choices in the same
manner as under the Retirement Plan--by calling Fidelity at (800) 835-5092
during normal business hours--and the changes take effect as soon as Fidelity
processes them.
Page 2 The Education Management Corporation
==========================
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 15% of your compensation. Alternatively, you may defer a fixed dollar
amount, as long as the amount is within those limits.
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
Deferred Compensation Plan Page 3
be returned under the Retirement Plan, the timing may require more explanation.
An election made by December 15 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 401(a)(17) of the Code (which limits compensation taken
into account under the Retirement Plan to a stated amount, which is $170,000 in
2000, for example) or
. by section 402(g) of the Code (which limits elective contributions
under the Retirement Plan to a stated amount, which is $10,500 in 2000, 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--Not eligible for company matching credit. It is 2000. Your
compensation is $200,000 (although only $170,000 can be taken into
account under the Retirement Plan). 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
Page 4 The Education Management Corporation
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 2--Eligible and limited by 401(a)(17). It is 2000. Your
compensation is $200,000 (although only $170,000 can be taken into
account under the Retirement Plan). You make elective contributions
under the Retirement Plan of 6% of compensation, which generate the
maximum matching contribution of 4.5% (that is, 4.5% of $170,000, which
is $7,650). If the compensation that is taken into account under the
Retirement Plan were not limited to $170,000, your matching
contribution would have been $9,000 (that is, 4.5% of $200,000).
Therefore, under this section of this plan, you receive a company
credit equal to the difference--$9,000 minus $7,650, or $1,350.
EXAMPLE 3--Eligible and limited by 402(g). It is 2000. Your
compensation is $170,000. You make elective contributions under the
Retirement Plan of 10% of compensation, a percentage calculated to
generate the maximum matching contribution. But your elective
contributions reach the limit of $10,500 well before the end of the
year (whenever your cumulative compensation during the year reaches
$105,000), at which point they stop. When your elective contributions
stop, so do the matching contributions, which up to that point have
accumulated to $4,725. Effective January 1, 1999, under the Retirement
Plan a "catch-up" matching contribution is made at the end of the year
to bring your matching contributions up to the maximum of $7,650; that
adjustment relieves you of the effect of your elective contributions
stopping before the end of the year. But before 1999 (and if that
"catch-up" provision is ever eliminated), you would get a credit under
this section equal to the "catch-up" amount (that is, the maximum of
$7,650 minus your actual matching contributions of $4,725, or 2,925).
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 (in 2000, $170,000) and the limit under section 415 of
the Code on total allocations of contributions and forfeitures. 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. (These are credits of cash, not stock, even
if they relate to forfeitures from employer stock accounts under the Retirement
Plan.)
Deferred Compensation Plan Page 5
====================================
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 are shown on Appendix B 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.
As noted above, you may change your choice with regard to investment
credits at any time by calling Fidelity during normal business hours at (800)
835-5092.
Page 6 The Education Management Corporation
Statements. The administrator of the plan will provide annual 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. But you may inquire about your balance or get a statement at
any time by calling Fidelity at (800) 835-5092. Or you can visit the Fidelity
website at www.401k.com.
=======================================
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.
. The company contributes cash to the rabbi trust at whatever times and
in whatever amounts it
Deferred Compensation Plan Page 7
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.
The trustee of the rabbi trust is Fidelity Management Trust Company,
which is why the plan refers you to Fidelity for information about your account
and to change your choices about investment credits.
=======================================
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 5 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.
Page 8 The Education Management Corporation
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. You are also entitled to receive all of the company
credits and investment credits on them if you have completed at least 5 years of
service (within the meaning of the Retirement Plan).
If you have not completed at least 5 years of service (within the meaning
of the Retirement Plan), you are not entitled to receive any of the company
credits and investment credits on them, with one exception. As an exception, if
you had completed at least 3 years of service (within the meaning of the
Retirement Plan) by April 1, 2000, then you are entitled to 20% of the company
credits and investment credits on them (if you have completed only 3 years of
service at the time of your termination) or 40% of the company credits and
investment credits on them (if you have completed only 4 years of service at the
time of your termination).
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.
Deferred Compensation Plan Page 9
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 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.
Page 10 The Education Management Corporation
=======================================
Hardship Withdrawals
=======================================
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.
Deferred Compensation Plan 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.
Page 12 The Education Management Corporation
=======================================
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 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.
Deferred Compensation Plan Page 13
EX-21.01
5
dex2101.txt
MATERIAL SUBSIDIARIES
EXHIBIT 21.01
MATERIAL SUBSIDIARIES
Name of Subsidiary Jurisdiction of Incorporation
------------------ -----------------------------
The Art Institutes International, Inc. Pennsylvania
The Art Institute of Atlanta, Inc. Georgia
TAIC, Inc. d/b/a The Art Institute of California California
The Art Institute of Charlotte, Inc. North Carolina
The Art Institute of Colorado, Inc. Colorado
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 Las Vegas, Inc. Nevada
The Art Institute of Los Angeles, Inc. California
The Art Institute of Los Angeles - Orange County, Inc. California
Massachusetts Communications College Massachusetts
The Art Institutes International Minnesota, Inc. Minnesota
The New York Restaurant School, Inc. New York
The Art Institute Online, Inc. Arizona
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 Art Institute of Washington, Inc. District of Columbia
The National Center for Professional Development, Inc. Georgia
NCPT, Inc. Georgia
EX-23.01
6
dex2301.txt
CONSENT OF ARTHUR ANDERSEN LLP
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 27, 2001 included in this Form 10-K into the
Company's previously filed Registration Statements on Form S-8, File Nos. 333-
20057, 333-20073 and 333-31398. It should be noted that we have not audited any
financial statements of the Company subsequent to June 30, 2001 or performed any
audit procedures subsequent to the date of our report.
/s/ ARTHUR ANDERSEN
Pittsburgh, Pennsylvania
September 28, 2001