-----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, NLxnRumJB9p90YTaGJaKlR8Pas2OaJZpk6mHKLrPN5Tcj20ctQEDMYEHjW2qTdwf YV3oFC5YNgDhePVpVbiCSQ== 0000950128-00-000431.txt : 20000215 0000950128-00-000431.hdr.sgml : 20000215 ACCESSION NUMBER: 0000950128-00-000431 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000214 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: 542220 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: 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. 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 3 PART I ITEM 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS EDUCATION MANAGEMENT CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
DECEMBER 31, JUNE 30, DECEMBER 31, 1998 1999 1999 --------- --------- --------- (unaudited) (unaudited) 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 ========= ========= =========
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 FOR THE SIX MONTHS ENDED DECEMBER 31, ENDED DECEMBER 31, 1998 1999 1998 1999 ----------- ----------- ----------- ---------- 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
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 SIX MONTHS ENDED DECEMBER 31, ------------------------ 1998 1999 -------- ------- 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
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 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:
PAR VALUE AUTHORIZED DECEMBER 31, 1998 JUNE 30, 1999 DECEMBER 31, 1999 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
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):
THREE MONTHS ENDED DECEMBER 31, SIX MONTHS ENDED DECEMBER 31, ------------------------------- ----------------------------- 1998 1999 1998 1999 ------------- ------------ ------------ ------------ 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 ============ ============ ============ ============
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 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 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 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 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 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 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 EX-15 2 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 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 EX-27 3 FINANCIAL DATA SCHEDULE
5 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. 1,000 3-MOS JUN-30-2000 OCT-01-1999 DEC-31-1999 30,470 0 29,157 (11,416) 2,620 58,927 190,037 (82,652) 201,952 64,668 35,900 0 0 296 100,659 201,952 87,023 87,023 49,907 67,457 0 898 319 19,247 7,723 11,524 0 0 0 11,524 0.40 0.39
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