-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MkVnfdZwDVnkA3zqE5aiqtCl+1CH9x13JsSrn5BdNrOVfedGpZGyARJYLGHEohRs wv+SuPcm40FCacYp3ygSOA== 0000950128-98-001158.txt : 19981118 0000950128-98-001158.hdr.sgml : 19981118 ACCESSION NUMBER: 0000950128-98-001158 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 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-Q SEC ACT: SEC FILE NUMBER: 000-21363 FILM NUMBER: 98752200 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-Q 1 EDUCATION MANAGEMENT CORPORATION 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: SEPTEMBER 30, 1998 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 shares outstanding of the registrant's Common Stock as of September 30, 1998 was 14,592,530 ================================================================================ 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..............7-10 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
2 3 PART I ITEM 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS EDUCATION MANAGEMENT CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
SEPTEMBER 30, JUNE 30, SEPTEMBER 30, 1997 1998 1998 ------------ ------- --------- (unaudited) (unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents.................................... $ 8,793 $ 46,533 $ 6,150 Restricted cash.............................................. 586 777 975 -------- -------- -------- Total cash and cash equivalents......................... 9,379 47,310 7,125 Receivables: Trade, net of allowances .................................. 8,516 7,689 5,684 Notes, advances and other.................................. 1,616 3,989 5,110 Inventories.................................................. 2,604 1,933 3,143 Deferred income taxes........................................ 1,509 2,361 2,361 Other current assets......................................... 4,477 2,341 6,373 -------- -------- -------- Total current assets.................................... 28,101 65,623 29,796 -------- -------- -------- PROPERTY AND EQUIPMENT, NET.................................... 52,791 57,420 73,835 OTHER ASSETS................................................... 6,142 6,287 6,339 GOODWILL, NET OF AMORTIZATION ................................. 18,318 19,453 19,307 --------- --------- --------- TOTAL ASSETS............................................ $105,352 $148,783 $129,277 ======== ======== ======== LIABILITIES AND SHAREHOLDERS' INVESTMENT CURRENT LIABILITIES: Current portion of long-term debt............................ $ 3,400 $ 2,615 $ 745 Accounts payable............................................. 4,185 6,982 5,753 Accrued liabilities.......................................... 8,130 10,162 10,155 Advance payments............................................. 26,826 18,338 34,739 -------- -------- -------- Total current liabilities............................... 42,541 38,097 51,392 -------- -------- -------- LONG-TERM DEBT, LESS CURRENT PORTION........................... 2,679 35,767 1,832 DEFERRED INCOME TAXES AND OTHER LONG-TERM LIABILITIES.......... 1,959 1,594 1,631 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' INVESTMENT: Common Stock................................................. 144 145 146 Additional paid-in capital................................... 88,091 89,025 89,688 Treasury stock, 39,401 shares at cost........................ (354) (354) (354) Stock subscriptions receivable............................... (8) (8) - Accumulated deficit.......................................... (29,700) (15,483) (15,058) -------- -------- -------- TOTAL SHAREHOLDERS' INVESTMENT.......................... 58,173 73,325 74,422 -------- -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT.......... $105,352 $148,783 $129,277 ======== ======== ========
The accompanying notes to condensed consolidated financial statements are an integral part of these statements. 3 4 EDUCATION MANAGEMENT CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, ------------------------- 1997 1998 ---------- ---------- NET REVENUES................................................ $ 43,176 $ 50,079 COSTS AND EXPENSES: Educational services...................................... 31,684 37,014 General and administrative................................ 10,728 12,073 Amortization of intangibles............................... 536 294 -------- -------- 42,948 49,381 -------- -------- INCOME BEFORE INTEREST AND TAXES............................ 228 698 Interest expense (income), net............................ 47 (34) -------- -------- INCOME BEFORE INCOME TAXES.................................. 181 732 Provision for income taxes................................ 76 307 -------- -------- NET INCOME.................................................. $ 105 $ 425 ======== ======== EARNINGS PER SHARE: Basic................................................... $ .01 $ .03 ======== ======== Diluted................................................. $ .01 $ .03 ======== ======== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (000's): Basic................................................... 14,429 14,537 Diluted................................................. 14,855 15,129
The accompanying notes to condensed consolidated financial statements are an integral part of these statements. 4 5 EDUCATION MANAGEMENT CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, ------------------------ 1997 1998 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income....................................... $ 105 $ 425 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH FLOWS FROM OPERATING ACTIVITIES: Depreciation and amortization..................... 3,361 3,671 Changes in current assets and liabilities: Restricted cash................................ (5) (198) Receivables.................................... 415 884 Inventories.................................... (1,248) (1,210) Other current assets........................... (2,230) (4,032) Accounts payable............................... (1,720) (1,229) Accrued liabilities............................ (1,659) (7) Advance payments............................... 10,994 16,401 -------- -------- Total adjustments............................ 7,908 14,280 -------- -------- Net cash flows from operating activities..... 8,013 14,705 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Expenditures for property and equipment................ (4,177) (19,902) Other, net............................................. (51) (53) --------- -------- Net cash flows from investing activities..... (4,228) (19,955) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on debt............................. (27,952) (35,805) Net proceeds from issuance of Common Stock............. 134 664 Other capital stock transactions, net.................. 180 8 -------- -------- Net cash flows from financing activities..... (27,638) (35,133) --------- --------- NET CHANGE IN CASH AND CASH EQUIVALENTS.................. (23,853) (40,383) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........... 32,646 46,533 -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD................. $ 8,793 $ 6,150 ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for: Interest............................................... $ 221 $ 182 Income taxes........................................... 1,129 466
The accompanying notes to condensed consolidated financial statements are an integral part of these statements. 5 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 1998 Annual Report on Form 10-K. The accompanying condensed consolidated balance sheet as of June 30, 1998 has been derived from the audited balance sheet included in the Company's 1998 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, 1998 are not necessarily indicative of the results to be expected for the full fiscal year. Unless otherwise noted, references to 1998 and 1999 refer to the three-month periods ended September 30, 1997 and 1998, respectively. 2. Education Management Corporation ("EDMC" or the "Company") is among the largest providers of proprietary postsecondary education in the United States, based on student enrollments and revenues. Through its operating units, the Art Institutes ("The Art Institutes"), The New York Restaurant School ("NYRS"), NCPT, and The National Center for Professional Development ("NCPD"), the Company offers associate's and bachelor's degree programs and non-degree programs in the areas of design, media arts and technology, culinary arts, fashion and professional development. The Company has provided career oriented education programs since 1962. 3. Reflected below is a summary of the Company's authorized and outstanding capital stock:
OUTSTANDING --------------------------------------------------------------- CAPITAL STOCK PAR VALUE AUTHORIZED SEPTEMBER 30, 1997 JUNE 30, 1998 SEPTEMBER 30, 1998 ------------------- -------------- -------------- ------------------- --------------- ------------------- Preferred Stock $ .01 10,000,000 - - - Common Stock $ .01 60,000,000 14,434,737 14,499,446 14,592,530
Effective September 10, 1998, additional options to purchase 585,200 shares of the Company's Common Stock were granted to executive management and key personnel. These options vest over four years and provide for an average exercise price of $29.91, based upon the market value of the shares as of the grant date. 4. On December 19, 1997, the Company acquired the assets (principally accounts receivable and equipment) of The Louise Salinger School in San Francisco, California, for $600,000 in cash. The school was renamed The Art Institutes International at San Francisco and in April 1998 regained eligibility to participate in various federal student financial assistance programs ("Title IV Programs") under Title IV of the Higher Education Act of 1965, as amended. On February 26, 1998, the Company acquired certain assets related to the operations of Bassist College in Portland, Oregon, for approximately $900,000 in cash. The purchase agreement provides for certain adjustments, based upon the resolution of certain liabilities and additional consideration, based upon a specified percentage of gross revenues over the next five years. The assets acquired were principally accounts receivable and equipment. The school regained eligibility to participate in Title IV Programs in April 1998 and was renamed The Art Institutes International at Portland. 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:
THREE MONTHS ENDED SEPTEMBER 30, -------------------------------- 1997 1998 ------------- ----------- Basic shares........................... 14,429 14,537 Dilution for stock options............. 426 592 ----------- ----------- Diluted shares......................... 14,855 15,129 =========== ===========
6 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 1998 and 1999 are to the three-month periods ended September 30, 1997 and 1998, respectively. RESULTS OF OPERATIONS Net revenues increased by 16.0% to $50.1 million in 1999 from $43.2 million in 1998 due primarily to a 13.8% increase in student enrollments, accompanied by an approximate 5% tuition price increase. Total student enrollment at the Company's schools increased from 13,775 in 1998 to 15,672 in 1999, including enrollment growth of approximately 11.3% at the schools that have been operated by the Company for 24 months or more. The Art Institute of Los Angeles ("AILA") commenced classes in October 1997. The Company acquired the Louise Salinger School in December 1997 and Bassist College in February 1998. These schools were renamed The Art Institutes International at San Francisco ("AISF") and The Art Institutes International at Portland ("AIPD"), respectively. Educational services expense increased by $5.3 million, or 16.8%, to $37.0 million in 1999 from $31.7 million in 1998, due primarily to the incremental costs to support higher student enrollments. As a percentage of net revenues, educational services expense increased from 73.4% to 73.9%, for the respective quarters, reflecting mainly additional salaries and facility expenses related to the new locations and costs related to the development of new education programs. Generally, during the initial two years of operations of start-ups and smaller acquisitions, revenue growth trails the increase in such expenses. General and administrative expense was $12.1 million in 1999, up 12.5% from $10.7 million in 1998. 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 to 24.8% in the first quarter of fiscal 1998, to 24.1% this year, reflecting improved operating leverage. Costs related to centralized functions decreased slightly, as compared to those incurred during the three months ended September 30, 1997. Amortization of intangibles decreased by 45.1%, to $294,000 in 1999 from $536,000 in 1998, as a result of certain intangible assets becoming fully amortized. The Company had net interest income of $34,000 for 1999, as compared to net interest expense of $47,000 for 1998. This change was mainly attributable to a decrease in the average outstanding debt balance. The Company's effective tax rate was 42.0% in 1999 and 1998, and differed from the combined federal and state statutory rates due to expenses that are nondeductible for tax purposes. Net income increased by $320,000 to $425,000 in 1999 from $105,000 in 1998. The increase resulted from improved operations at the Company's schools owned for more than two years and reduced net interest expense, partially offset by a higher provision for income taxes. SEASONALITY AND OTHER FACTORS AFFECTING QUARTERLY RESULTS The Company's quarterly revenues and income fluctuate primarily as a result of the pattern of student enrollments. The Company experiences a seasonal increase in new enrollments in the fall (fiscal year second quarter), which is traditionally when the largest number of new high school graduates begin postsecondary education. Some students choose not to attend classes during summer months, although the Company's schools encourage year-round attendance. As a result, total student enrollments at the Company's 7 8 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 $8.0 million and $14.7 million for the three months ended September 30, 1997 and 1998, respectively. The year-to-year improvement relates to the acceleration of receipt of advance tuition payments for the fall quarter at the Company's schools, resulting primarily from streamlining the processing of electronic funds transfers under Title IV Programs. The Company had a $21.6 million working capital deficit as of September 30, 1998 as compared to $27.5 million of working capital as of June 30, 1998. The decrease in working capital was due primarily to $35.8 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 have decreased by $2.0 million from June 30, 1998. Borrowings under the Revolving 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. 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. The Company's capital expenditures were $4.2 million and $19.9 million, in 1998 and 1999, respectively. The increase is attributable to the acquisition of The Art Institute of Seattle's main facility and a dormitory facility in Ft. Lauderdale. The combined investment in these two previously leased facilities is approximately $15.5 million. Subsequent to September 30, 1998, the Company acquired a building in Denver for approximately $5.0 million. This acquisition will enable The Colorado Institute of Art to consolidate operations that now occupy three facilities (two leased, one owned) into one building. Additionally, the assets of Socrates Distance Learning Technologies Group (Socrates) were purchased for approximately $0.5 million to further the development of the Company's distance learning capabilities. The previous owners will continue to be employed by the Company under two-year employment and non-compete arrangements. The Company anticipates increased capital spending for 1999, principally related to the introduction and expansion of culinary arts programs, further investment in schools acquired or started during the previous three years, additional or replacement school and housing facilities and classroom technology. The Company leases most of its facilities. Future commitments on existing leases will be paid from cash provided from operating activities. IMPACT OF NEW ACCOUNTING STANDARDS In June 1998, the Statement of Financial Accounting Standards ("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. SFAS No. 133 is effective for years beginning after June 15, 1999. YEAR 2000 ISSUES THE PROBLEM The Year 2000 problem arises from the fact that many existing information technology ("IT") hardware and software systems and 8 9 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. Additionally, such products and systems may experience miscalculations, malfunctions or disruptions caused by other dates, such as September 9, 1999 (9/9/99), which was a date traditionally used as a default date by computer programmers. This problem is commonly referred to as the "Year 2000" problem, and the acronym "Y2K" is commonly substituted for the phrase "Year 2000." Although the Company is unable at this time to assess the possible impact on its results of operations, liquidity or financial condition of any Y2K-related disruptions to its business caused by the malfunctioning of any IT or non-IT system and products that it uses or that third parties with which it has material relationships use, management does not believe at the current time that the cost of remediating the Company's internal Y2K problems will have a material adverse impact upon its business, results of operations, liquidity or financial condition. THE COMPANY'S STATE OF READINESS FOR ITS YEAR 2000 ISSUES The Company has created a task force (the "Y2K Task Force") which includes members from the Company's significant operating areas. To date, the Y2K Task Force has implemented a program, the goal of which is to assess the potential exposure of each such area to the Y2K problem, which is the first phase of EDMC's overall Y2K program, and, as the second phase thereof, has designed a coordinated plan to determine whether any such potential exposure would result in a problem that would require some remediation. As each such area's Y2K problems are identified, the third phase will be to formulate proposals to determine the best course of action to address each such problem and to address each such problem, and contingency plans will be developed, to the extent possible and necessary. The final phase of the overall Y2K program will be both independent and coordinated testing to ensure Y2K compliance in each operating area. The Company believes that the Y2K Task Force has identified all material IT and non-IT systems owned or operated by EDMC that require a Y2K compliance review. The Y2K Task Force remains on track to complete the assessment/inventory phase by January 30, 1999. As part of such phase, the Y2K Task Force successfully completed its first test of the school administrative system in October 1998. Responses to the Y2K Task Force's inquiries to third parties regarding Y2K readiness has been slower than expected. Therefore, the Y2K Task Force now expects to continue receiving responses though December 1998. Of those third parties responding, each entity has made representations that it is, or will be, Y2K compliant in a timely fashion. THE COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES Based upon its current understanding of the Company's Y2K issues, the Y2K Task Force's estimate for the direct costs of implementing its investigation and remediation plans is between $250,000 and $750,000, although additional information must be obtained to determine, for example, whether to recommend the replacement of older hardware and software systems or to expend the resources to bring those systems into Y2K compliance. RISKS RELATED TO THE COMPANY'S YEAR 2000 ISSUES The Company has begun to outline 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. On the other hand, 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. Should any such third parties experience Y2K-related disruptions, it could have a material adverse impact on the Company's business, results of operations, liquidity or financial condition. For example, as with all postsecondary education-oriented businesses whose students receive governmental financial aid, the Company's operations and liquidity depend upon the student funding provided by Title IV Programs for its students. Processing of applications for this funding is handled by the U.S. Department of Education's computer systems. The U.S. Department of Education has stated that its systems will be Y2K-compliant in early calendar year 1999 and that various schools will be able to run tests of the remediated systems during the first half of calendar year 1999. 9 10 Similarly, five guaranty agencies provide a substantial majority of the guarantees for the loans issued to the Company's students pursuant to Title IV programs. The Company completed testing with its largest guaranty agency (which accounts for approximately 85% of its total guarantees) in November 1998, with no significant problems encountered. CONTINGENCY PLANS The Y2K Task Force will be developing contingency plans for each of EDMC's significant operating areas. These contingency plans would be utilized in the event that, despite the Company's best efforts, or due to the Company's lack of control over certain third parties, a system is not Y2K-compliant and EDMC's business is adversely affected. A more complete discussion of the Company's Y2K issues is contained in the Company's 1998 Annual Report on Form 10-K. 10 11 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 Not Applicable ITEM 5 - OTHER INFORMATION In September 1998, the faculty of The New York Restaurant School voted to join a collective bargaining unit. The United Federation of Teachers will represent the faculty members, who number approximately 40. 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, filed herewith (b) Reports on Form 8-K No reports on Form 8-K were filed for the three months ended September 30, 1998. 11 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 16, 1998 /s/ ROBERT B. KNUTSON ------------------------------------------------ Robert B. Knutson Chairman and Chief Executive Officer /s/ ROBERT T. MCDOWELL ------------------------------------------------ Robert T. McDowell Senior Vice President and Chief Financial Officer 12 EX-15 2 EDUCATION MANAGEMENT CORPORATION 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, 1998, and the related condensed consolidated statements of income and cash flows for the three-month periods ended September 30, 1998 and 1997. 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, 1998 (not presented herein), and, in our report dated August 4, 1998, 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, 1998, 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, November 2, 1998 EX-27 3 EDUCATION MANAGEMENT CORPORATION
5 1,000 3-MOS JUN-30-1999 JUL-01-1998 SEP-30-1998 7,125 0 14,169 (8,485) 3,143 29,796 137,713 (63,878) 129,277 51,392 2,577 0 0 146 74,276 129,277 50,079 50,079 37,014 49,381 0 0 (34) 732 307 425 0 0 0 425 .03 .03
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