<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED: SEPTEMBER 30, 1999 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 offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (412) 562-0900
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(Title of class)
PREFERRED SHARE PURCHASE RIGHTS
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
The number of shares outstanding of the registrant's Common Stock as of
September 30, 1999 was 29,182,876.
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INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
<S> <C> <C>
ITEM 1 - CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)...........................................................3-6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION...................................7-10
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS.................................................................11
ITEM 2 - CHANGES IN SECURITIES.............................................................11
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES...................................................11
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS..................................................................11
ITEM 5 - OTHER INFORMATION.................................................................11
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K..................................................11
SIGNATURES....................................................................................................12
</TABLE>
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PART I
ITEM 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
EDUCATION MANAGEMENT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30, SEPTEMBER 30,
1998 1999 1999
------------- -------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents, including restricted balances..... $ 7,125 $ 32,871 $ 5,078
Receivables.................................................. 10,794 15,333 17,401
Inventories.................................................. 3,143 2,038 3,423
Deferred income taxes........................................ 2,361 2,476 2,476
Other current assets......................................... 6,373 2,991 5,682
-------- -------- --------
Total current assets.................................... 29,796 55,709 34,060
-------- -------- --------
PROPERTY AND EQUIPMENT, NET.................................... 73,835 96,081 98,610
DEFERRED INCOME TAXES AND OTHER LONG-TERM ASSETS............... 6,203 7,514 7,953
INTANGIBLE ASSETS, NET OF AMORTIZATION ........................ 19,443 19,442 27,918
-------- -------- --------
TOTAL ASSETS............................................ $129,277 $178,746 $168,541
======== ======== ========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Current portion of long-term debt............................ $ 745 $ 731 $ 292
Accounts payable............................................. 5,753 12,110 6,108
Accrued liabilities.......................................... 10,155 11,438 12,085
Advance payments............................................. 34,739 20,909 40,807
-------- -------- --------
Total current liabilities............................... 51,392 45,188 59,292
-------- -------- --------
LONG-TERM DEBT, LESS CURRENT PORTION........................... 1,832 36,500 14,903
DEFERRED INCOME TAXES AND OTHER LONG-TERM LIABILITIES.......... 1,631 253 274
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' INVESTMENT:
Common Stock................................................. 292 295 296
Additional paid-in capital................................... 89,542 93,736 93,954
Treasury stock, at cost...................................... (354) (495) (4,373)
Retained earnings (accumulated deficit)...................... (15,058) 3,269 4,195
-------- -------- --------
TOTAL SHAREHOLDERS' INVESTMENT.......................... 74,422 96,805 94,072
-------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT.......... $129,277 $178,746 $168,541
======== ======== ========
</TABLE>
The accompanying notes to condensed consolidated financial statements are
an integral part of these statements.
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EDUCATION MANAGEMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED SEPTEMBER 30,
-------------------------
1998 1999
------------ -----------
<S> <C> <C>
NET REVENUES................................................ $50,079 $60,850
COSTS AND EXPENSES:
Educational services...................................... 37,014 44,520
General and administrative................................ 12,073 14,305
Amortization of intangibles............................... 294 332
------- -------
49,381 59,157
INCOME BEFORE INTEREST AND TAXES............................ 698 1,693
Interest expense (income), net............................ (34) 123
------- -------
INCOME BEFORE INCOME TAXES.................................. 732 1,570
Provision for income taxes................................ 307 644
------- -------
NET INCOME.................................................. $ 425 $ 926
======= =======
EARNINGS PER SHARE:
Basic................................................... $ .01 $ .03
======= =======
Diluted................................................. $ .01 $ .03
======= =======
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (000's):
Basic................................................... 29,074 29,340
Diluted................................................. 30,258 30,109
</TABLE>
The accompanying notes to condensed consolidated financial statements are
an integral part of these statements.
4
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EDUCATION MANAGEMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED SEPTEMBER 30,
--------------------
1998 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................... $ 425 $ 926
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH FLOWS
FROM OPERATING ACTIVITIES:
Depreciation and amortization..................... 3,671 4,638
Changes in current assets and liabilities:
Receivables.................................... 884 (1,903)
Inventories.................................... (1,210) (1,256)
Other current assets........................... (4,032) (2,371)
Accounts payable............................... (1,229) (6,424)
Accrued liabilities............................ (7) 242
Advance payments............................... 16,401 18,982
-------- --------
Total adjustments............................ 14,478 11,908
-------- --------
Net cash flows from operating activities..... 14,903 12,834
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiaries, net of cash acquired...... -- (997)
Expenditures for property and equipment................ (19,902) (5,415)
Other, net............................................. (53) 26
-------- --------
Net cash flows from investing activities..... (19,955) (6,386)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt............................. (35,805) (30,581)
Repurchase of Common Stock............................. -- (3,878)
Net proceeds from issuance of Common Stock............. 664 218
Other capital stock transactions, net.................. 8 --
-------- --------
Net cash flows from financing activities..... (35,133) (34,241)
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS.................. (40,185) (27,793)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........... 47,310 32,871
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD................. $ 7,125 $ 5,078
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of amount capitalized)................... $ 182 $ 14
Income taxes........................................... 466 117
NONCASH INVESTING AND FINANCING ACTIVITIES
Acquisition of subsidiary with note payable............ $ -- $ 7,050
</TABLE>
The accompanying notes to condensed consolidated financial statements are
an integral part of these statements.
5
<PAGE> 6
EDUCATION MANAGEMENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying condensed consolidated financial statements should
be read in conjunction with the Notes to Consolidated Financial
Statements included in the Company's 1999 Annual Report on Form 10-K.
The accompanying condensed consolidated balance sheet as of June 30,
1999 has been derived from the audited balance sheet included in the
Company's 1999 Annual Report on Form 10-K. The accompanying interim
financial statements are unaudited; however, management believes that
all adjustments necessary for a fair presentation have been made and
all adjustments are normal, recurring adjustments. The results for the
three months ended September 30, 1999 are not necessarily indicative of
the results to be expected for the full fiscal year. Unless otherwise
noted, references to 1999 and 2000 refer to the three-month periods
ended September 30, 1998 and 1999, respectively.
2. Education Management Corporation ("EDMC" or the "Company") is one
of the largest providers of proprietary postsecondary education in the
United States, based on student enrollments and revenues. Through its
operating units, primarily the Art Institutes ("the 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.
3. Reflected below is a summary of the Company's capital stock:
<TABLE>
<CAPTION>
PAR VALUE AUTHORIZED SEPTEMBER 30, 1998 JUNE 30, 1999 SEPTEMBER 30, 1999
<S> <C> <C> <C> <C> <C>
ISSUED:
Preferred Stock $ .01 10,000,000 - - -
Common Stock $ .01 60,000,000 29,185,060 29,546,833 29,570,022
HELD IN TREASURY:
Common Stock N/A N/A 78,803 85,646 387,146
</TABLE>
On August 3, 1999, the Board of Directors authorized the Company to
repurchase up to $10 million of its currently outstanding Common Stock.
Management will determine the quantity and timing of such purchases
based upon market conditions and other factors. Through September
30, 1999, the Company had repurchased 301,500 shares at an approximate
cost of $3.9 million.
4. On August 17, 1999, the Company acquired the outstanding stock of
the American Business & Fashion Institute in Charlotte, North
Carolina. On August 26, 1999, the Company acquired the outstanding
stock of Massachusetts Communications College in Boston, Massachusetts.
The Company's acquisitions have been 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 condensed
consolidated financial statements would not materially impact the
reported results.
5. Reconciliation of diluted shares (000's):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1998 1999
----------- ----------
<S> <C> <C>
Basic shares........................... 29,074 29,340
Dilution for stock options............. 1,184 769
------ ------
Diluted shares......................... 30,258 30,109
====== ======
</TABLE>
Options to purchase 226,388 shares were excluded from the diluted
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 the period ended September 30, 1999.
6. Certain prior period balances have been reclassified to conform to
the current period presentation.
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<PAGE> 7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
This Quarterly Report on Form 10-Q 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 the use of forward-looking terminology 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
Quarterly Report. Any such forward-looking statements are not
guarantees of future performance and may involve risks and
uncertainties that are outside the control of the Company. 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. The Company
expressly disclaims any obligation or understanding to release publicly
any updates or revisions to any forward-looking statement contained
herein to reflect any change in the Company's expectations with regard
thereto or any change in events, conditions or circumstances on which
any such statement is based. The following discussion of the Company's
results of operations and financial condition should be read in
conjunction with the interim unaudited condensed consolidated financial
statements of the Company and the notes thereto, included herein.
Unless otherwise noted, references to 1999 and 2000 are to the
three-month periods ended September 30, 1998 and 1999, respectively.
RESULTS OF OPERATIONS
Net revenues increased by 21.5% to $60.8 million in 2000 from $50.1
million in 1999 due primarily to a 16.2% increase in student enrollments,
accompanied by a tuition increase. Total student enrollment at the Company's
schools increased from 15,672 in 1999 to 18,208 in 2000, including enrollment
growth of approximately 12.3% at the schools that have been operated by the
Company for 24 months or more. The Company acquired both the American Business
and Fashion Institute and Massachusetts Communications College in August 1999.
Educational services expense increased by $7.5 million, or 20.3%, to
$44.5 million in 2000 from $37.0 million in 1999, due primarily to the
incremental costs to support higher student enrollments. As a percentage of net
revenues, educational services expense decreased from 73.9% to 73.2%, for the
respective quarters, reflecting leverage on fixed costs.
General and administrative expense was $14.3 million in 2000, up 18.5%
from $12.1 million in 1999. The increase over the comparable quarter in the
prior year reflects higher marketing and student admissions expense, resulting
from increased employee compensation and media advertising costs. General and
administrative expense as a percent of net revenues decreased from 24.1% in the
first quarter of fiscal 1999, to 23.5% this year, reflecting improved operating
leverage. Expenses related to centralized support functions as a percentage of
net revenues decreased slightly, as compared to those incurred during the three
months ended September 30, 1998.
Amortization of intangibles increased by 12.9%, to $332,000 in 2000
from $294,000 in 1999, resulting primarily from the amortization of the
intangible assets associated with the acquisition of subsidiaries in August,
1999, discussed above.
The Company had net interest expense of $123,000 for 2000, as compared
to net interest income of $34,000 for 1999. This change was mainly attributable
to an increase in the average outstanding borrowings, related to capital
expenditures, acquisitions and the repurchase of shares.
The Company's effective tax rate decreased from 41.9% in 1999 to 41.0%
in 2000. This decrease reflects a change in the distribution of taxable income
among the states in which the Company operates, and differs from the combined
federal and state statutory rates due to expenses that are nondeductible for tax
purposes.
Net income increased by $501,000 to $926,000 in 2000 from $425,000 in
1999. The increase is attributable to improved results from operations at the
Company's schools, partially offset by higher amortization of intangibles and
interest expense.
SEASONALITY AND OTHER FACTORS AFFECTING QUARTERLY RESULTS
The Company's quarterly revenues and income fluctuate primarily as a
result of the pattern of student enrollments. The Company experiences a seasonal
increase in new enrollments in the fall (fiscal year second quarter), which is
traditionally when the largest number of new high school graduates begin
postsecondary education. Some students choose not to attend classes during
summer months, although the Company's schools encourage year-round attendance.
As a result, total student enrollments at the Company's schools are highest in
the fall quarter and lowest in the summer months (fiscal year first quarter).
The Company's costs and expenses,
7
<PAGE> 8
however, do not fluctuate as significantly as revenues on a quarterly basis.
Historically, the Company's profitability has been lowest in its fiscal first
quarter due to lower revenues combined with expenses incurred in preparation for
the peak enrollments in the fall quarter. The Company anticipates that the
seasonal pattern in revenues and earnings will continue in the future.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated positive cash flow from operating activities of
$14.9 million and $12.8 million for the three months ended September 30, 1998
and 1999, respectively. The decrease between years results mainly from
approximately $5.1 million of cash payments made during the three months ended
September 30, 1999, related to capital expenditures made prior to June 30, 1999,
that were included in accounts payable at year-end.
As of September 30, 1999, the Company had a working capital deficit of
$25.2 million, as compared to $10.5 million of working capital as of June 30,
1999. The decrease in working capital was due primarily to $30.6 million in debt
repayments under the Amended and Restated Credit Agreement dated March 16, 1995
(the "Revolving Credit Agreement") and capitalized leases. Net trade receivables
increased by $1.3 million from June 30, 1999. This increase matches the net
trade receivables of the schools acquired during the period. As compared to
September 30,1998, net trade receivables increased primarily as a result of the
enrollment and corresponding revenue increase, acquisitions and the timing of
the class starts.
Borrowings under the Revolving Credit Agreement are used by the Company
primarily to fund its occasional working capital needs arising from the
seasonal pattern of cash receipts throughout the year. The level of accounts
receivable reaches a peak immediately after the billing of tuition and fees at
the beginning of each academic quarter. Collection of these receivables is
heaviest at the start of each academic quarter.
The Company believes that cash flow from operations, supplemented from
time to time by borrowings under the Revolving Credit Agreement, will provide
adequate funds for ongoing operations, planned expansion to new locations,
planned capital expenditures and debt service during the term of the Revolving
Credit Agreement.
Capital expenditures were $19.9 million and $5.4 million, in 1999 and
2000, respectively. The 1999 expenditures included approximately $15.5 million,
attributable to real estate acquisitions.
The Company anticipates its capital spending for 2000 will be
approximately equivalent to the 1999 level of expenditures. The 2000 additions
will be primarily related to the introduction and expansion of culinary
programs, further investment in schools acquired or started during the current
and previous four years, continued improvements to the facilities under
construction, additional or replacement school and housing facilities and
classroom technology.
The majority of the Company's facilities are leased. Future commitments
on existing leases will be paid from cash provided from operating activities.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. The statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value.
Additionally, SFAS No. 133 requires that changes in a derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. This statement has been amended by SFAS No. 137 "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the effective date of SFAS No.
133." SFAS No. 137 will be effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. The Company does not anticipate that this
standard will have a significant impact on its financial statements.
YEAR 2000 ISSUES
THE PROBLEM
The Year 2000 problem arises from the fact that many existing
information technology ("IT") hardware and software systems and non-information
technology ("non-IT") products containing embedded microchip processors were
originally programmed to represent any date with six digits (e.g., 12/31/99), as
opposed to eight digits (e.g., 12/31/1999). Accordingly, problems may arise for
many such products and systems when attempting to process information containing
dates that fall after December 31, 1999. As a result, many such products and
systems could experience miscalculations, malfunctions or disruptions. This
problem is commonly referred to as the "Year 2000" problem, and the acronym
"Y2K" is commonly substituted for the phrase "Year 2000."
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<PAGE> 9
At this time, the Company believes that all of the significant internal
IT and non-IT systems with potential Y2K problems have been repaired, replaced
or upgraded in order to avoid any major business interruption from Y2K issues.
THE COMPANY'S STATE OF READINESS FOR ITS YEAR 2000 ISSUES
As a result of the Company's software upgrades and computer system
purchases over the past few years, substantially all of EDMC's computer systems
are anticipated to be Y2K-compliant. The Company created a task force (the "Y2K
Task Force") which has members from its significant operating areas. The Y2K
Task Force implemented a program to assess the potential exposure of each such
area, evaluate whether such potential exposure would result in a problem that
would require remediation, determine the best course of action to, implement the
solution and develop contingency plans to the extent possible and necessary, and
arrange for independent and coordinated testing to ensure Y2K compliance in each
operating area. This program covers Y2K problems in either IT or non-IT systems.
Testing of EDMC's most critical IT systems has been completed. The Y2K
Task Force has also completed its identification of non-IT systems that may have
Y2K problems, and has sent inquiries to the entities that own or control any of
those non-IT systems, including elevators, electricity, telephones, security
systems and HVAC systems, that could have a material impact on the Company's
operations, such as the owners of the buildings and other facilities that house
or service the Company's schools and administrative offices. Additionally, the
Y2K Task Force identified those third parties, such as governmental and other
regulatory agencies, guaranty agencies, software and hardware suppliers,
telephone companies, significant vendors and external file exchange system
providers, whose Y2K compliance or lack thereof could pose problems for the
Company. These third parties were contacted and have responded with Y2K
compliance plans that appear to be adequate. However, the Company cannot
independently verify the adequacy of such plans.
THE COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES
To date, the Company has incurred approximately $250,000 of costs
directly associated with its efforts to address its Y2K issues. This amount does
not include an allocation of salaries of EDMC personnel participating in this
effort. Nor does it include recent hardware, software, or systems purchases
which are, or have been, warranted to be Y2K-compliant. Based upon its current
understanding of the Company's Y2K issues, the Y2K Task Force anticipates
additional direct costs of approximately $300,000, will be incurred to address
these issues. Of the remaining cost to be incurred, approximately $200,000 will
be used, if necessary, to replace technology hardware and software at Company
schools; $100,000 is budgeted for contingency plan implementation, if necessary.
All Y2K-related expenditures are expensed as incurred.
The Company has shifted resources to the resolution of Y2K issues. This
has resulted in the deferral of some existing or contemplated projects,
particularly computer-system oriented projects. Management believes that the
cost of remediating the Company's internal Y2K problems will not have a material
adverse impact upon its business, results of operations, liquidity or financial
condition.
RISKS RELATED TO THE COMPANY'S YEAR 2000 ISSUES
The Company has identified several possible worst-case scenarios that
could arise because of Y2K issues; however, at this time, the Company does not
have sufficient information to make an assessment of the likelihood of any of
these worst-case scenarios. It should be noted that the Company's schools will
not be in session on December 31, 1999 or January 1, 2000, with classes resuming
in mid-January 2000.
Because the Company is in a regulated industry and relies, indirectly,
on only a few sources for a substantial portion of its revenues, EDMC's business
is very dependent upon those entities' efforts to address their own Y2K issues.
The Y2K Task Force has identified those third parties whose failure to resolve
their own Y2K issues could have a material impact upon the Company's operations,
and is taking steps it currently believes appropriate to analyze both such
parties' Y2K status and the Company's options in the event that any such party
is not Y2K-compliant in sufficient time prior to December 31, 1999. Should any
such third parties experience Y2K-related disruptions, it could have a material
adverse impact on the Company's business, results of operations, liquidity or
financial condition.
9
<PAGE> 10
For example, as with all postsecondary education-oriented businesses
whose students receive governmental financial aid, the Company's operations and
liquidity depend upon the student funding provided by Title IV programs for its
students. The U.S. Department of Education's computer systems handle processing
of applications for this funding. The U.S. Department of Education has stated
that its systems are Y2K-compliant. The Company has successfully completed file
exchange tests with the U.S. Department of Education. Any problems with the U.S.
Department of Education's systems could result in an interruption in the funding
for students nationwide, including the Company's students. Any prolonged
interruption could have a material adverse impact upon the education industry
and, accordingly, upon the Company's business, results of operations, liquidity
and financial condition.
Similarly, the Company's schools are licensed by one or more agencies
in the states in which they are based and accredited by one or more accrediting
bodies that are recognized by the U.S. Department of Education. The Company
continues to assess the Y2K-readiness of these agencies and bodies. In the event
that any of these entities are unable, due to Y2K problems, to renew a school's
license or accreditation, an interruption in such school's operations could
occur. Depending upon the school involved, a prolonged interruption could have a
material adverse impact upon the Company's business, results of operations,
liquidity and financial condition.
Five guaranty agencies provide the vast majority of the guarantees for
the loans issued to the Company's students under Title IV Programs. The Company
has completed file exchange tests successfully with the agency that accounts for
approximately 85% of those guarantees. As with the U.S. Department of Education,
the Company is unable to assess independently the readiness of any of these
agencies at the present time, although all such agencies have reported that they
are Y2K-compliant. The majority of the Title IV Program loans to the Company's
students are funded through six banks, five of which work with the Company's
primary guaranty agency. The five lenders that work with that agency use an
affiliate of that agency to disburse and service their loans, and the Company
has successfully completed file exchange tests with the affiliated agency.
The Company has also reviewed the Y2K compliance efforts of its
transfer agent and of the NASDAQ National Market System and does not anticipate
any serious disruptions in service from these providers.
The Y2K Task Force has made inquiries of the major financial
institutions and utilities that provide services to the Company and continues to
assess the potential effects of those entities' failures to become Y2K-compliant
within the time remaining. If, notwithstanding any such entity's representations
that it will be Y2K-compliant in time, it is not compliant, the Company's
business, results of operations, liquidity and financial condition could be
adversely affected.
CONTINGENCY PLANS
The Y2K Task Force's responsibilities include development of
contingency plans for each of EDMC's significant operating areas. These
contingency plans would be utilized in the event that, despite the Company's
best efforts, or due to the Company's lack of control over certain third
parties, a system is not Y2K-compliant and EDMC's business is adversely
affected. Each operating area has prepared a contingency plan to operate for up
to three consecutive days without standard computer support. In addition, the
Company maintains a "hot site" contract with Hewlett-Packard that allows it to
run its day-to-day central computer operations from a remote location in
Washington State. The "hot site" is a contingency against a regional Y2K failure
that would cause business interruptions at the Company's corporate offices in
Pittsburgh, Pennsylvania. The Y2K Task Force expects to have substantially all
of its contingency plans in place by December 1, 1999.
10
<PAGE> 11
PART II
ITEM 1 - LEGAL PROCEEDINGS
EDMC and its wholly-owned subsidiaries, The Art Institutes
International, Inc. and The Art Institute of Houston, Inc. are
defendants in a suit in the District Court of Harris County, Texas,
filed on June 30, 1999 by 145 former and current students of The Art
Institute of Houston and subsequently amended to add 90 more mostly
former students. On November 5, 1999, the complaint was further amended
to add an additional 90 plaintiffs, most of whom are former students.
Plaintiffs claim, among other things, that they were misled about the
nature, quality and utility of the education they would receive at The
Art Institute of Houston. The complaint seeks unspecified compensatory
and consequential damages, exemplary or punitive damages, additional
damages under the Texas Deceptive Trade Practices Act, and attorneys'
fees, expenses and interest. The litigation is at a preliminary stage,
and discovery has not yet begun. Given the preliminary stage of the
case, the nature of plaintiffs' claims and the inherent uncertainties
of litigation, management is unable to predict the ultimate number,
scope or duration of any such claims or the eventual outcome or costs
of defending any such claims.
ITEM 2 - CHANGES IN SECURITIES
Not Applicable
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5 - OTHER INFORMATION
On November 9, 1999, the Company amended its Rights Agreement dated as
of October 1, 1996 (the "Rights Agreement") solely for the purpose of
adding an exception to the definition of "Acquiring Person" to permit
Baron Capital Group, Inc., BAMCO, Inc., Baron Capital Management, Inc.,
Baron Asset Fund (or any other fund or funds managed by an entity
controlled by Ronald Baron), or Ronald Baron (collectively, the "Baron
Holders") to own in the aggregate up to 5,922,600 Common Shares of the
Company without being deemed to be an "Acquiring Person." In connection
with the amendment, the Baron Holders confirmed that the Common Shares
they beneficially own are being held for investment purposes only and
agreed not to become an "Acquiring Person" during the term of the
Rights Agreement.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(4.01) Amendment No. 1, dated November 9, 1999, to the Rights
Agreement dated as of October 1, 1996 between the
Company and ChaseMellon Shareholder Services, L.L.C., as
Rights Agent.
(4.02) Letter Agreement dated November 9, 1999 by and among the
Company, Baron Capital Group, Inc., BAMCO, Inc., Baron
Capital Management, Inc. and Ronald Baron.
(15) Report of Independent Public Accountants.
(27) Financial Data Schedule submitted to the Securities
and Exchange Commission in electronic format, filed
herewith.
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the three months ended
September 30, 1999.
11
<PAGE> 12
SIGNATURES
Pursuant to the requirements 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
(Registrant)
Date: November 15, 1999
/s/ Robert B. Knutson
------------------------------------
Robert B. Knutson
Chairman and Chief Executive Officer
/s/ Robert T. McDowell
------------------------------------
Robert T. McDowell
Executive Vice President and
Chief Financial Officer
12
<PAGE> 1
EXHIBIT 4.01
AMENDMENT NO. 1
TO RIGHTS AGREEMENT
AMENDMENT NO. 1, dated as of November 9, 1999 ("Amendment No. 1"), to
the Rights Agreement, dated as of October 1, 1996 (the "Rights Agreement")
between Education Management Corporation, a Pennsylvania corporation, and
ChaseMellon Shareholder Services, L.L.C., a New Jersey limited liability
company, successor to Mellon Bank, N.A., a national banking association, as
Rights Agent (the "Rights Agent").
WHEREAS, the Company and the Rights Agent previously entered into the
Rights Agreement;
WHEREAS, pursuant to Section 27 of the Rights Agreement, the Company
may from time to time supplement or amend any provision of the Rights Agreement
in accordance with the terms of such Section 27; and
WHEREAS, the Company has determined that it is desirable to amend the
Rights Agreement as provided herein.
NOW, THEREFORE, accordingly the Rights Agreement is amended as follows:
1. The first sentence of Section 1(a) is hereby deleted in its
entirety, and the following new sentence is hereby inserted in lieu thereof:
"Acquiring Person" shall mean any Person (as hereinafter defined) who
or which, together with all Affiliates and Associates (as such terms
are hereinafter defined) of such Person, shall be the Beneficial Owner
(as hereinafter defined) of 17.5% or more of the Common Shares of the
Company then outstanding, but shall not include (i) the Company, (ii)
any Subsidiary (as hereinafter defined) of the Company, (iii) any
employee benefit plan of the Company or of any Subsidiary of the
Company, or any entity holding Common Shares for or pursuant to the
terms of any such plan, (iv) a Person who or which shall become the
Beneficial Owner of 17.5% or more of the Common Shares then
outstanding, if the transaction in which such Person became the
Beneficial Owner of 17.5% or more of the Common Shares then outstanding
had received prior approval of a majority of the Board of Directors or
(v) Baron Capital Group, Inc., BAMCO, Inc., Baron Capital Management,
Inc., Baron Asset Fund (or any other fund or funds managed by an entity
controlled by Ronald Baron) or Ronald Baron (collectively, the "Baron
Holders"); provided, however, that the foregoing exception for the
Baron Holders shall be effective only for so long as the Baron Holders
and their respective Affiliates and Associates do not in the aggregate
beneficially own more than 5,922,600 Common Shares of the Company, such
number to be appropriately adjusted to reflect any stock split, stock
dividend, reclassification, subdivision, consolidation or combination
of the Common Shares after November 9, 1999 or the exercise of any
Rights issued to the Baron Holders pursuant to this Agreement.
<PAGE> 2
IN WITNESS WHEREOF, the parties have executed this Amendment No. 1 as
of the date first written above.
EDUCATION MANAGEMENT CORPORATION
Attest:
By: /s/ Kathleen Clover By: /s/ Robert T. McDowell
-------------------------- ---------------------------------
Kathleen Clover Name: Robert T. McDowell
Assistant Secretary Title: Executive Vice President and
Chief Financial Officer
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
Attest:
By: /s/ Rita A. Swartz By: /s/ Anita Landreau
-------------------------- ---------------------------------
Rita A. Swartz Name: Anita Landreau
Vice President Title: Assistant Vice President
2
<PAGE> 1
EXHIBIT 4.02
November 9, 1999
Education Management Corporation
300 Sixth Avenue
Pittsburgh, PA 15222
Attention: Robert T. McDowell
Ladies and Gentlemen:
Reference is made to the Rights Agreement dated as of October 1, 1996
(as amended from time to time, the "Rights Agreement") between Education
Management Corporation, a Pennsylvania corporation (the "Company") and
ChaseMellon Shareholder Services, L.L.C., as successor to Mellon Bank, N.A., a
national banking association, as Rights Agent. Capitalized terms used but not
otherwise defined herein shall have the meanings given to them in the Rights
Agreement. To induce the Company to effect Amendment No. 1 to the Rights
Agreement in substantially the form attached hereto as Exhibit A, each of the
undersigned, intending to be legally bound hereby, agrees for the benefit of the
Company and its successors and assigns as follows:
1. The undersigned represent and warrant that they, together with any
of their respective Affiliates and Associates, are deemed to be the Beneficial
Owners of 5,922,600 Common Shares of the Company in the aggregate as of the date
hereof, and that such Common Shares are being held for investment purposes only.
None of the undersigned has the present intention of seeking to change or
influence control of the Company. Baron Capital Group, Inc. and Ronald Baron
disclaim beneficial ownership of shares held by their controlled entities (or
the investment advisory clients thereof) to the extent such shares are held by
persons other than Baron Capital Group, Inc. and Ronald Baron. BAMCO, Inc. and
Baron Capital Management, Inc. disclaim beneficial ownership of shares held by
their investment advisory clients to the extent such shares are held by persons
other than BAMCO, Inc., Baron Capital Management, Inc. and their Affiliates.
2. During the term of the Rights Agreement, the undersigned will not,
directly or indirectly (through any Affiliate, Associate or client of the
undersigned), acquire, offer to acquire or agree to acquire by purchase or
otherwise any additional Common Shares or other securities of the Company, if
immediately before or after giving effect to the consummation of such
acquisition, any of the undersigned or their respective Affiliates or Associates
is or would become an Acquiring Person.
<PAGE> 2
Education Management Corporation
November 9, 1999
Page 2
3. During the term of the Rights Agreement, the undersigned will not,
directly or indirectly (through any Affiliate, Associate or client), seek to
have this letter agreement or the Rights Agreement (including any amendment
thereto) declared terminated, inapplicable to the undersigned, or unenforceable.
4. Each of the undersigned acknowledges that monetary damages would not
be a sufficient remedy for any breach of this letter agreement by the
undersigned or its or his respective Affiliates, Associates or representatives
and that the Company shall be entitled to specific performance and injunctive
relief as remedies for any such breach. Such remedies shall not be deemed to be
the exclusive remedies for the breach of this letter agreement by the
undersigned or its or his respective Affiliates, Associates or representatives,
but shall be in addition to all other remedies available at law or in equity to
the Company. This letter agreement shall be governed by and construed in
accordance with the internal laws of the Commonwealth of Pennsylvania applicable
to agreements made and wholly performed in the Commonwealth of Pennsylvania.
Each of the undersigned hereby irrevocably submits itself or himself to the
exclusive jurisdiction of the United States District Court located in the
Western District of Pennsylvania, or the state courts of the Commonwealth of
Pennsylvania located in Pittsburgh, Pennsylvania, for the purpose of any
proceeding in connection with this letter agreement or to enforce a resolution,
settlement, order or award made regarding this letter agreement.
Very truly yours,
/s/ Ronald Baron
-----------------------------------
Ronald Baron, in his individual
capacity and as Chairman and
Chief Executive Officer of
BARON CAPITAL GROUP, INC.
BAMCO, INC.
BARON CAPITAL MANAGEMENT, INC.
Accepted:
EDUCATION MANAGEMENT CORPORATION
By: /s/ Robert T. McDowell
----------------------------------
Robert T.. McDowell
Executive Vice President and
Chief Financial Officer
Date: November 9, 1999
<PAGE> 1
Exhibit 15
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Education Management Corporation and Subsidiaries:
We have reviewed the accompanying condensed consolidated balance sheet of
Education Management Corporation (a Pennsylvania corporation) and Subsidiaries
as of September 30, 1999, and the related condensed consolidated statements of
income and cash flows for the three-month periods ended September 30, 1999 and
1998. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Education Management Corporation
and Subsidiaries as of June 30, 1999 (not presented herein), and, in our report
dated July 28, 1999, we expressed an unqualified opinion on that statement. In
our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of June 30, 1999, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
/s/ ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania,
October 20, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BLANCE SHEET AND CONSENSED CONSOLIDATED STATEMENT OF
INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 5,078
<SECURITIES> 0
<RECEIVABLES> 27,885
<ALLOWANCES> (10,484)
<INVENTORY> 3,423
<CURRENT-ASSETS> 34,060
<PP&E> 178,832
<DEPRECIATION> (80,222)
<TOTAL-ASSETS> 168,541
<CURRENT-LIABILITIES> 59,292
<BONDS> 14,903
0
0
<COMMON> 296
<OTHER-SE> 93,776
<TOTAL-LIABILITY-AND-EQUITY> 168,541
<SALES> 60,850
<TOTAL-REVENUES> 60,850
<CGS> 44,520
<TOTAL-COSTS> 59,157
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 881
<INTEREST-EXPENSE> 123
<INCOME-PRETAX> 1,570
<INCOME-TAX> 644
<INCOME-CONTINUING> 926
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 926
<EPS-BASIC> .03
<EPS-DILUTED> .03
</TABLE>
