<PAGE> 1
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: DECEMBER 31, 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 of the registrant's Common Stock outstanding as of December
31, 1999 was 28,754,442.
<PAGE> 2
INDEX
PART I - FINANCIAL INFORMATION PAGE
ITEM 1 - CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)...................................3-6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION............7-9
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS.........................................10
ITEM 2 - CHANGES IN SECURITIES.....................................10
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES...........................10
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS..........................................10
ITEM 5 - OTHER INFORMATION.........................................11
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K..........................11
SIGNATURES...................................................................12
2
<PAGE> 3
PART I
ITEM 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
EDUCATION MANAGEMENT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, DECEMBER 31,
1998 1999 1999
--------- --------- ---------
(unaudited) (unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents, including restricted
balances.............................................. $ 3,250 $ 32,871 $ 30,470
Receivables ............................................ 14,552 15,333 17,741
Inventories ............................................ 2,210 2,038 2,620
Deferred income taxes .................................. 2,361 2,476 2,476
Other current assets ................................... 5,103 2,991 5,620
--------- --------- ---------
Total current assets .............................. 27,476 55,709 58,927
--------- --------- ---------
PROPERTY AND EQUIPMENT, NET .............................. 82,992 96,081 107,385
DEFERRED INCOME TAXES AND OTHER LONG-TERM ASSETS ......... 6,689 7,514 7,979
INTANGIBLE ASSETS, NET OF AMORTIZATION .................. 19,786 19,442 27,661
--------- --------- ---------
TOTAL ASSETS ...................................... $ 136,943 $ 178,746 $ 201,952
========= ========= =========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Current portion of long-term debt ...................... $ 454 $ 731 $ 173
Accounts payable ....................................... 2,539 12,110 3,129
Accrued liabilities .................................... 15,094 11,438 13,453
Advance payments ....................................... 14,783 20,909 47,913
--------- --------- ---------
Total current liabilities ......................... 32,870 45,188 64,668
--------- --------- ---------
LONG-TERM DEBT, LESS CURRENT PORTION ..................... 17,499 36,500 35,727
DEFERRED INCOME TAXES AND OTHER LONG-TERM LIABILITIES .... 1,486 253 602
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' INVESTMENT:
Common stock ........................................... 293 295 296
Additional paid-in capital ............................. 90,458 93,736 94,178
Treasury stock, at cost ................................ (354) (495) (9,238)
Retained earnings (accumulated deficit) ................ (5,309) 3,269 15,719
--------- --------- ---------
TOTAL SHAREHOLDERS' INVESTMENT .................... 85,088 96,805 100,955
--------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT .... $ 136,943 $ 178,746 $ 201,952
========= ========= =========
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
3
<PAGE> 4
EDUCATION MANAGEMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
1998 1999 1998 1999
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
NET REVENUES .......................................... $74,986 $ 87,023 $125,065 $147,873
COSTS AND EXPENSES:
Educational services ................................ 42,780 49,907 79,793 94,427
General and administrative .......................... 15,266 17,161 27,340 31,466
Amortization of intangibles ......................... 294 389 587 721
------- -------- -------- --------
58,340 67,457 107,720 126,614
------- -------- -------- --------
INCOME BEFORE INTEREST AND TAXES ...................... 16,646 19,566 17,345 21,259
Interest expense, net ............................... 103 319 70 442
------- -------- -------- --------
INCOME BEFORE INCOME TAXES ............................ 16,543 19,247 17,275 20,817
Provision for income taxes .......................... 6,794 7,723 7,101 8,367
------- -------- -------- --------
NET INCOME ............................................ $ 9,749 $ 11,524 $ 10,174 $ 12,450
======= ======== ======== ========
EARNINGS PER SHARE:
Basic ............................................. $ .33 $ .40 $ .35 $ .43
======= ======== ======== ========
Diluted ........................................... $ .32 $ .39 $ .33 $ .42
======= ======== ======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (000's):
Basic ............................................. 29,255 28,809 29,164 29,080
Diluted ........................................... 30,661 29,489 30,459 29,772
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
4
<PAGE> 5
EDUCATION MANAGEMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED DECEMBER 31,
------------------------
1998 1999
-------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................... $ 10,174 $ 12,450
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH FLOWS FROM
OPERATING ACTIVITIES:
Depreciation and amortization ....................... 7,344 9,297
Changes in current assets and liabilities:
Receivables ...................................... (2,874) (2,243)
Inventories ...................................... (277) (453)
Other current assets ............................. (2,762) (2,509)
Accounts payable ................................. (4,443) (9,402)
Accrued liabilities .............................. 4,932 1,610
Advance payments ................................. (3,555) 26,088
-------- --------
Total adjustments .............................. (1,635) 22,388
-------- --------
Net cash flows from operating activities ....... 8,539 34,838
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiaries, net of cash acquired ........ (500) (8,047)
Expenditures for property and equipment .................. (32,550) (18,725)
Other, net ............................................... (709) (74)
-------- --------
Net cash flows from investing activities ....... (33,759) (26,846)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt ............................... (20,429) (2,092)
Repurchase of Common Stock ............................... -- (8,743)
Net proceeds from issuance of Common Stock ............... 1,581 442
Other capital stock transactions, net .................... 8 --
-------- --------
Net cash flows from financing activities ....... (18,840) (10,393)
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS .................... (44,060) (2,401)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ............. 47,310 32,871
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD ................... $ 3,250 $ 30,470
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of amount capitalized) ..................... $ 122 $ 27
Income taxes ............................................. 1,012 747
</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 such adjustments are normal, recurring adjustments. The results for
the three-month and six-month periods ended December 31, 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 periods ended December 31, 1998 and 1999, respectively.
Certain prior period balances have been reclassified to conform to
the current period presentation.
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 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 DECEMBER 31, 1998 JUNE 30, 1999 DECEMBER 31, 1999
<S> <C> <C> <C> <C> <C>
ISSUED:
Preferred Stock $ .01 10,000,000 -- -- --
Common Stock $ .01 60,000,000 29,323,046 29,546,833 29,626,588
HELD IN TREASURY:
Common Stock N/A N/A 78,803 85,646 872,146
</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 December 31,
1999, the Company had repurchased approximately 786,000 shares at an
approximate aggregate cost of $8.7 million.
4. On August 17, 1999, the Company acquired the outstanding stock of
the American Business & Fashion Institute in Charlotte, North Carolina,
which has been renamed The Art Institute of Charlotte. 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 DECEMBER 31, SIX MONTHS ENDED DECEMBER 31,
------------------------------- -----------------------------
1998 1999 1998 1999
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Basic shares........................... 29,255 28,809 29,164 29,080
Dilution for stock options............. 1,406 680 1,295 692
------------ ------------ ------------ ------------
Diluted shares......................... 30,661 29,489 30,459 29,772
============ ============ ============ ============
</TABLE>
For the period ended December 31, 1999, options to purchase
approximately 579,000 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).
6
<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. Those
statements are based on the intent, belief or expectation of 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 periods ended December 31, 1998 and 1999,
respectively.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THE THREE MONTHS ENDED DECEMBER
31, 1998
Net revenues increased by 16.1% to $87.0 million in 2000 from $75.0
million in the second quarter of 1999 due primarily to a 13.9% increase in
student enrollments, accompanied by a tuition increase of approximately 4%.
Total student enrollment at the Company's schools increased from 21,518 in 1999
to 24,502 in 2000, including enrollment growth of approximately 8.9% 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 (since renamed
The Art Institute of Charlotte) and Massachusetts Communications College in
August 1999.
Educational services expense increased by $7.1 million, or 16.7%, to $49.9
million in 2000 from $42.8 million in 1999, due primarily to the incremental
costs incurred to support higher student enrollments. As a percentage of net
revenues, educational services expense increased slightly from 57.1% to 57.3%
for the respective quarters.
General and administrative expense was $17.2 million in 2000, up 12.4%
from $15.3 million in 1999. The increase over the comparable quarter in the
prior year primarily 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
20.4% in the second quarter of fiscal 1999 to 19.7% this year, reflecting
improved operating leverage related to marketing and admissions and centralized
support functions.
Amortization of intangibles increased by 32.3%, to $389,000 in 2000 from
$294,000 in 1999, resulting primarily from the amortization of the intangible
assets associated with the August 1999 acquisitions, discussed above.
The Company had net interest expense of $319,000 for 2000, as compared to
$103,000 for 1999. This change was attributable to an increase in the average
outstanding borrowings, primarily related to capital expenditures, acquisitions
and the repurchase of shares.
The Company's effective tax rate was 40.1% in 2000 and 41.1% in 1999. This
decrease reflects a change in the 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 $1.8 million to $11.5 million in 2000 from $9.7
million in 1999. The increase is attributable to improved results from
operations at the Company's schools and a lower effective tax rate, partially
offset by higher amortization of intangibles and interest expense.
7
<PAGE> 8
SIX MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THE SIX MONTHS ENDED DECEMBER 31,
1998
Net revenues increased by 18.2% to $147.9 million for the first six months
of fiscal 2000 from $125.1 million for the comparable period in fiscal 1999.
Average enrollment at the Company's schools increased from 18,595 in 1999 to
21,355 in 2000, or 14.8%. The enrollment growth and higher tuition rates
resulted in greater net revenues. Net revenues for 2000 include four months of
revenue for recently acquired schools: American Business and Fashion Institute
(since renamed The Art Institute of Charlotte) and Massachusetts Communication
College.
Educational services expense increased by $14.6 million, or 18.3%, to
$94.4 million in 2000 from $79.8 million in 1999, due primarily to the
incremental costs to support higher student enrollments. As a percentage of net
revenues, educational services expense increased slightly to 63.9% in 2000 from
63.8% in 1999.
General and administrative expense was $31.5 million in 2000, up 15.1%
from $27.3 million in 1999. The increase over the comparable period in the prior
year primarily 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
21.9% in the first six months of fiscal 1999 to 21.3% in 2000, reflecting
operating leverage related to marketing and admission and centralized support
functions.
Amortization of intangibles increased by 22.8%, to $721,000 in 2000 from
$587,000 in 1999, resulting primarily from the amortization of the intangible
assets associated with the acquisition of subsidiaries in August 1999.
The Company had net interest expense of $442,000 for 2000, as compared to
$70,000 for 1999. This change was attributable to an increase in the average
outstanding borrowings, primarily related to capital expenditures, acquisitions
and the repurchase of shares.
The Company's effective tax rate decreased from 41.1% in 1999 to 40.2% in
2000. This decrease reflects a change in the 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 $2.3 million to $12.5 million in 2000 from $10.2
million in 1999. The increase is attributable to improved results from
operations at the Company's schools and a lower effective tax rate, 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, 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 $8.5
million and $34.8 million for the six months ended December 31, 1998 and 1999,
respectively. The year-to-year improvement reflects the increase in net income
and non-cash charges, as well as the timing of receipts of financial aid funds.
The Company had a $5.7 million working capital deficit as of December 31,
1999 as compared to $10.5 million of working capital as of June 30, 1999. The
decrease in working capital primarily reflects the cash used for capital
expenditures, acquisitions and repurchase of shares with no increased
borrowings, as compared to June 30, 1999. Net trade receivables increased $2.4
million from June 30, 1999 and $3.2 million from December 31, 1998, primarily as
a result of the enrollment and corresponding revenue increase, acquisitions and
the timing of the class starts.
Borrowings under the Company's Amended and Restated Credit Agreement dated
March 16, 1995 have been 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.
8
<PAGE> 9
Collection of these receivables is heaviest at the start of each academic
quarter.
The Company is currently negotiating a new credit agreement that will
provide for borrowings in excess of the limits provided under its current
arrangement. The Company has received a commitment letter for borrowings in
excess of the outstanding balance under its existing facility. The Company
believes that cash flow from operations, supplemented from time to time by
borrowings under this agreement, will provide adequate funds for ongoing
operations, planned expansion to new locations, planned capital expenditures and
debt service during the term of the agreement.
The Company's capital expenditures were $18.7 million and $32.6 million in
2000 and 1999, respectively. The 1999 expenditures included approximately $20.5
million attributable to real estate acquisitions and subsequent improvements.
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 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 is currently evaluating the effects
of SFAS No. 133 and does not believe that the adoption of this standard will
have a material effect on the financial statements or results of operations of
the Company.
YEAR 2000 ISSUES
The Year 2000 problem arose 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 could 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."
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
were deemed to be Y2K-compliant. Additionally, the Company created a task force
to evaluate exposure from potential Y2K problems in all other IT or non-IT
systems. Based on the efforts of the task force, the Company either repaired,
replaced or upgraded all significant internal IT and non-IT systems with
potential Y2K problems. Additionally, the task force identified those third
parties 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 appeared to be adequate. As a result of the Company's Y2K
preparation efforts, it has experienced no business interruptions from Y2K
issues.
To date, the Company has experienced no significant effects from Y2K
problems. Other than costs incurred specifically related to Y2K expenditures,
the level or timing of expenditures was not impacted. Additionally, no impact on
inquiries or revenues was identified in connection with Y2K matters.
The Company has incurred approximately $300,000 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. The Company expects to
incur minimal additional direct costs related to Y2K issues. All Y2K-related
expenditures are expensed as incurred.
9
<PAGE> 10
PART II
ITEM 1 - LEGAL PROCEEDINGS
Not Applicable
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
On November 4, 1999, the annual meeting of the shareholders of the
Company was held for the election of directors and so that the
shareholders could vote upon two proposals set forth below.
(i) Election of directors (Class III):
SHARES
Robert B. Knutson:
For 26,694,809
Withheld 231,617
John R. McKernan, Jr.:
For 26,687,423
Withheld 239,003
James S. Pasman, Jr.:
For 26,713,764
Withheld 212,662
(ii) Approval of the retention of Arthur Andersen LLP as the Company's
independent auditors:
SHARES
For 26,790,460
Against 42,191
Abstain 93,775
10
<PAGE> 11
(iii) Amendment of the 1996 Stock Incentive Plan:
SHARES
For 23,895,069
Against 1,303,205
Abstain 230,460
ITEM 5 - OTHER INFORMATION
Not Applicable
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(15) Report of Independent Public Accountants
(27) Financial Data Schedule submitted to the Securities
and Exchange Commission in electronic format.
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the three months ended
December 31, 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: February 14, 2000
/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 15
[ARTHUR ANDERSEN LOGO]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Education Management Corporation and Subsidiaries
We have reviewed the accompanying condensed consolidated balance sheets of
Education Management Corporation (a Pennsylvania corporation) and Subsidiaries
as of December 31, 1999 and 1998, the related condensed consolidated statements
of income for the three and six-month periods ended December 31, 1999 and 1998
and the condensed consolidated statements of cash flow for the six-month
periods ended December 31, 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 the 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 form which
it has been derived.
/s/ ARTHUR ANDERSEN
Pittsburgh, Pennsylvania
January 25, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND CONDENSED 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> OCT-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 30,470
<SECURITIES> 0
<RECEIVABLES> 29,157
<ALLOWANCES> (11,416)
<INVENTORY> 2,620
<CURRENT-ASSETS> 58,927
<PP&E> 190,037
<DEPRECIATION> (82,652)
<TOTAL-ASSETS> 201,952
<CURRENT-LIABILITIES> 64,668
<BONDS> 35,900
0
0
<COMMON> 296
<OTHER-SE> 100,659
<TOTAL-LIABILITY-AND-EQUITY> 201,952
<SALES> 87,023
<TOTAL-REVENUES> 87,023
<CGS> 49,907
<TOTAL-COSTS> 67,457
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 898
<INTEREST-EXPENSE> 319
<INCOME-PRETAX> 19,247
<INCOME-TAX> 7,723
<INCOME-CONTINUING> 11,524
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,524
<EPS-BASIC> 0.40
<EPS-DILUTED> 0.39
</TABLE>
