-----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, JyBBchoFC+DgDYue1o3H/U40wpcO20X9/koXkBZDuebKHmOcK4THUc3Hr4N6he4m 0LDcWRzGnjLjcrdBuScrVg== 0000950128-99-001134.txt : 19991117 0000950128-99-001134.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950128-99-001134 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 99755771 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 CORP FORM 10-Q 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, 1999 COMMISSION FILE NUMBER: 000-21363 --------------- EDUCATION MANAGEMENT CORPORATION (Exact name of registrant as specified in its charter) PENNSYLVANIA 25-1119571 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 300 SIXTH AVENUE, PITTSBURGH, PA 15222 (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (412) 562-0900 SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $.01 PAR VALUE (Title of class) PREFERRED SHARE PURCHASE RIGHTS (Title of class) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- The number of shares outstanding of the registrant's Common Stock as of September 30, 1999 was 29,182,876. ================================================================================ 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, 1998 1999 1999 ------------- -------- ------------- (unaudited) (unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents, including restricted balances..... $ 7,125 $ 32,871 $ 5,078 Receivables.................................................. 10,794 15,333 17,401 Inventories.................................................. 3,143 2,038 3,423 Deferred income taxes........................................ 2,361 2,476 2,476 Other current assets......................................... 6,373 2,991 5,682 -------- -------- -------- Total current assets.................................... 29,796 55,709 34,060 -------- -------- -------- PROPERTY AND EQUIPMENT, NET.................................... 73,835 96,081 98,610 DEFERRED INCOME TAXES AND OTHER LONG-TERM ASSETS............... 6,203 7,514 7,953 INTANGIBLE ASSETS, NET OF AMORTIZATION ........................ 19,443 19,442 27,918 -------- -------- -------- TOTAL ASSETS............................................ $129,277 $178,746 $168,541 ======== ======== ======== LIABILITIES AND SHAREHOLDERS' INVESTMENT CURRENT LIABILITIES: Current portion of long-term debt............................ $ 745 $ 731 $ 292 Accounts payable............................................. 5,753 12,110 6,108 Accrued liabilities.......................................... 10,155 11,438 12,085 Advance payments............................................. 34,739 20,909 40,807 -------- -------- -------- Total current liabilities............................... 51,392 45,188 59,292 -------- -------- -------- LONG-TERM DEBT, LESS CURRENT PORTION........................... 1,832 36,500 14,903 DEFERRED INCOME TAXES AND OTHER LONG-TERM LIABILITIES.......... 1,631 253 274 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' INVESTMENT: Common Stock................................................. 292 295 296 Additional paid-in capital................................... 89,542 93,736 93,954 Treasury stock, at cost...................................... (354) (495) (4,373) Retained earnings (accumulated deficit)...................... (15,058) 3,269 4,195 -------- -------- -------- TOTAL SHAREHOLDERS' INVESTMENT.......................... 74,422 96,805 94,072 -------- -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT.......... $129,277 $178,746 $168,541 ======== ======== ========
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, ------------------------- 1998 1999 ------------ ----------- NET REVENUES................................................ $50,079 $60,850 COSTS AND EXPENSES: Educational services...................................... 37,014 44,520 General and administrative................................ 12,073 14,305 Amortization of intangibles............................... 294 332 ------- ------- 49,381 59,157 INCOME BEFORE INTEREST AND TAXES............................ 698 1,693 Interest expense (income), net............................ (34) 123 ------- ------- INCOME BEFORE INCOME TAXES.................................. 732 1,570 Provision for income taxes................................ 307 644 ------- ------- NET INCOME.................................................. $ 425 $ 926 ======= ======= EARNINGS PER SHARE: Basic................................................... $ .01 $ .03 ======= ======= Diluted................................................. $ .01 $ .03 ======= ======= WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (000's): Basic................................................... 29,074 29,340 Diluted................................................. 30,258 30,109
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, -------------------- 1998 1999 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income....................................... $ 425 $ 926 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH FLOWS FROM OPERATING ACTIVITIES: Depreciation and amortization..................... 3,671 4,638 Changes in current assets and liabilities: Receivables.................................... 884 (1,903) Inventories.................................... (1,210) (1,256) Other current assets........................... (4,032) (2,371) Accounts payable............................... (1,229) (6,424) Accrued liabilities............................ (7) 242 Advance payments............................... 16,401 18,982 -------- -------- Total adjustments............................ 14,478 11,908 -------- -------- Net cash flows from operating activities..... 14,903 12,834 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of subsidiaries, net of cash acquired...... -- (997) Expenditures for property and equipment................ (19,902) (5,415) Other, net............................................. (53) 26 -------- -------- Net cash flows from investing activities..... (19,955) (6,386) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on debt............................. (35,805) (30,581) Repurchase of Common Stock............................. -- (3,878) Net proceeds from issuance of Common Stock............. 664 218 Other capital stock transactions, net.................. 8 -- -------- -------- Net cash flows from financing activities..... (35,133) (34,241) --------- --------- NET CHANGE IN CASH AND CASH EQUIVALENTS.................. (40,185) (27,793) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........... 47,310 32,871 -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD................. $ 7,125 $ 5,078 ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for: Interest (net of amount capitalized)................... $ 182 $ 14 Income taxes........................................... 466 117 NONCASH INVESTING AND FINANCING ACTIVITIES Acquisition of subsidiary with note payable............ $ -- $ 7,050
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 adjustments are normal, recurring adjustments. The results for the three months ended September 30, 1999 are not necessarily indicative of the results to be expected for the full fiscal year. Unless otherwise noted, references to 1999 and 2000 refer to the three-month periods ended September 30, 1998 and 1999, respectively. 2. Education Management Corporation ("EDMC" or the "Company") is one of the largest providers of proprietary postsecondary education in the United States, based on student enrollments and revenues. Through its operating units, primarily the Art Institutes ("the Art Institutes"), the Company offers bachelor's and associate's degree programs and non-degree programs in the areas of design, media arts, culinary arts, fashion and paralegal studies. The Company has provided career-oriented education programs for over 35 years. 3. Reflected below is a summary of the Company's capital stock:
PAR VALUE AUTHORIZED SEPTEMBER 30, 1998 JUNE 30, 1999 SEPTEMBER 30, 1999 ISSUED: Preferred Stock $ .01 10,000,000 - - - Common Stock $ .01 60,000,000 29,185,060 29,546,833 29,570,022 HELD IN TREASURY: Common Stock N/A N/A 78,803 85,646 387,146
On August 3, 1999, the Board of Directors authorized the Company to repurchase up to $10 million of its currently outstanding Common Stock. Management will determine the quantity and timing of such purchases based upon market conditions and other factors. Through September 30, 1999, the Company had repurchased 301,500 shares at an approximate cost of $3.9 million. 4. On August 17, 1999, the Company acquired the outstanding stock of the American Business & Fashion Institute in Charlotte, North Carolina. On August 26, 1999, the Company acquired the outstanding stock of Massachusetts Communications College in Boston, Massachusetts. The Company's acquisitions have been accounted for using the purchase method of accounting, with the excess of the purchase price over the fair value of the assets acquired being assigned to identifiable intangible assets and goodwill. The results of the acquired entities have been included in the Company's results from the respective dates of acquisition. The pro forma effects, individually and collectively, of the acquisitions in the Company's condensed consolidated financial statements would not materially impact the reported results. 5. Reconciliation of diluted shares (000's):
THREE MONTHS ENDED SEPTEMBER 30, -------------------------------- 1998 1999 ----------- ---------- Basic shares........................... 29,074 29,340 Dilution for stock options............. 1,184 769 ------ ------ Diluted shares......................... 30,258 30,109 ====== ======
Options to purchase 226,388 shares were excluded from the diluted earnings per share calculation because of their antidilutive effect (due to the exercise price of such options exceeding the average market price for the period) for the period ended September 30, 1999. 6. Certain prior period balances have been reclassified to conform to the current period presentation. 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 1999 and 2000 are to the three-month periods ended September 30, 1998 and 1999, respectively. RESULTS OF OPERATIONS Net revenues increased by 21.5% to $60.8 million in 2000 from $50.1 million in 1999 due primarily to a 16.2% increase in student enrollments, accompanied by a tuition increase. Total student enrollment at the Company's schools increased from 15,672 in 1999 to 18,208 in 2000, including enrollment growth of approximately 12.3% at the schools that have been operated by the Company for 24 months or more. The Company acquired both the American Business and Fashion Institute and Massachusetts Communications College in August 1999. Educational services expense increased by $7.5 million, or 20.3%, to $44.5 million in 2000 from $37.0 million in 1999, due primarily to the incremental costs to support higher student enrollments. As a percentage of net revenues, educational services expense decreased from 73.9% to 73.2%, for the respective quarters, reflecting leverage on fixed costs. General and administrative expense was $14.3 million in 2000, up 18.5% from $12.1 million in 1999. The increase over the comparable quarter in the prior year reflects higher marketing and student admissions expense, resulting from increased employee compensation and media advertising costs. General and administrative expense as a percent of net revenues decreased from 24.1% in the first quarter of fiscal 1999, to 23.5% this year, reflecting improved operating leverage. Expenses related to centralized support functions as a percentage of net revenues decreased slightly, as compared to those incurred during the three months ended September 30, 1998. Amortization of intangibles increased by 12.9%, to $332,000 in 2000 from $294,000 in 1999, resulting primarily from the amortization of the intangible assets associated with the acquisition of subsidiaries in August, 1999, discussed above. The Company had net interest expense of $123,000 for 2000, as compared to net interest income of $34,000 for 1999. This change was mainly attributable to an increase in the average outstanding borrowings, related to capital expenditures, acquisitions and the repurchase of shares. The Company's effective tax rate decreased from 41.9% in 1999 to 41.0% in 2000. This decrease reflects a change in the distribution of taxable income among the states in which the Company operates, and differs from the combined federal and state statutory rates due to expenses that are nondeductible for tax purposes. Net income increased by $501,000 to $926,000 in 2000 from $425,000 in 1999. The increase is attributable to improved results from operations at the Company's schools, partially offset by higher amortization of intangibles and interest expense. SEASONALITY AND OTHER FACTORS AFFECTING QUARTERLY RESULTS The Company's quarterly revenues and income fluctuate primarily as a result of the pattern of student enrollments. The Company experiences a seasonal increase in new enrollments in the fall (fiscal year second quarter), which is traditionally when the largest number of new high school graduates begin postsecondary education. Some students choose not to attend classes during summer months, although the Company's schools encourage year-round attendance. As a result, total student enrollments at the Company's schools are highest in the fall quarter and lowest in the summer months (fiscal year first quarter). The Company's costs and expenses, 7 8 however, do not fluctuate as significantly as revenues on a quarterly basis. Historically, the Company's profitability has been lowest in its fiscal first quarter due to lower revenues combined with expenses incurred in preparation for the peak enrollments in the fall quarter. The Company anticipates that the seasonal pattern in revenues and earnings will continue in the future. LIQUIDITY AND CAPITAL RESOURCES The Company generated positive cash flow from operating activities of $14.9 million and $12.8 million for the three months ended September 30, 1998 and 1999, respectively. The decrease between years results mainly from approximately $5.1 million of cash payments made during the three months ended September 30, 1999, related to capital expenditures made prior to June 30, 1999, that were included in accounts payable at year-end. As of September 30, 1999, the Company had a working capital deficit of $25.2 million, as compared to $10.5 million of working capital as of June 30, 1999. The decrease in working capital was due primarily to $30.6 million in debt repayments under the Amended and Restated Credit Agreement dated March 16, 1995 (the "Revolving Credit Agreement") and capitalized leases. Net trade receivables increased by $1.3 million from June 30, 1999. This increase matches the net trade receivables of the schools acquired during the period. As compared to September 30,1998, net trade receivables increased primarily as a result of the enrollment and corresponding revenue increase, acquisitions and the timing of the class starts. Borrowings under the Revolving Credit Agreement are used by the Company primarily to fund its occasional working capital needs arising from the seasonal pattern of cash receipts throughout the year. The level of accounts receivable reaches a peak immediately after the billing of tuition and fees at the beginning of each academic quarter. Collection of these receivables is heaviest at the start of each academic quarter. The Company believes that cash flow from operations, supplemented from time to time by borrowings under the Revolving Credit Agreement, will provide adequate funds for ongoing operations, planned expansion to new locations, planned capital expenditures and debt service during the term of the Revolving Credit Agreement. Capital expenditures were $19.9 million and $5.4 million, in 1999 and 2000, respectively. The 1999 expenditures included approximately $15.5 million, attributable to real estate acquisitions. The Company anticipates its capital spending for 2000 will be approximately equivalent to the 1999 level of expenditures. The 2000 additions will be primarily related to the introduction and expansion of culinary programs, further investment in schools acquired or started during the current and previous four years, continued improvements to the facilities under construction, additional or replacement school and housing facilities and classroom technology. The majority of the Company's facilities are leased. Future commitments on existing leases will be paid from cash provided from operating activities. IMPACT OF NEW ACCOUNTING STANDARDS In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued. The statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. Additionally, SFAS No. 133 requires that changes in a derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. This statement has been amended by SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities - Deferral of the effective date of SFAS No. 133." SFAS No. 137 will be effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company does not anticipate that this standard will have a significant impact on its financial statements. YEAR 2000 ISSUES THE PROBLEM The Year 2000 problem arises from the fact that many existing information technology ("IT") hardware and software systems and non-information technology ("non-IT") products containing embedded microchip processors were originally programmed to represent any date with six digits (e.g., 12/31/99), as opposed to eight digits (e.g., 12/31/1999). Accordingly, problems may arise for many such products and systems when attempting to process information containing dates that fall after December 31, 1999. As a result, many such products and systems could experience miscalculations, malfunctions or disruptions. This problem is commonly referred to as the "Year 2000" problem, and the acronym "Y2K" is commonly substituted for the phrase "Year 2000." 8 9 At this time, the Company believes that all of the significant internal IT and non-IT systems with potential Y2K problems have been repaired, replaced or upgraded in order to avoid any major business interruption from Y2K issues. THE COMPANY'S STATE OF READINESS FOR ITS YEAR 2000 ISSUES As a result of the Company's software upgrades and computer system purchases over the past few years, substantially all of EDMC's computer systems are anticipated to be Y2K-compliant. The Company created a task force (the "Y2K Task Force") which has members from its significant operating areas. The Y2K Task Force implemented a program to assess the potential exposure of each such area, evaluate whether such potential exposure would result in a problem that would require remediation, determine the best course of action to, implement the solution and develop contingency plans to the extent possible and necessary, and arrange for independent and coordinated testing to ensure Y2K compliance in each operating area. This program covers Y2K problems in either IT or non-IT systems. Testing of EDMC's most critical IT systems has been completed. The Y2K Task Force has also completed its identification of non-IT systems that may have Y2K problems, and has sent inquiries to the entities that own or control any of those non-IT systems, including elevators, electricity, telephones, security systems and HVAC systems, that could have a material impact on the Company's operations, such as the owners of the buildings and other facilities that house or service the Company's schools and administrative offices. Additionally, the Y2K Task Force identified those third parties, such as governmental and other regulatory agencies, guaranty agencies, software and hardware suppliers, telephone companies, significant vendors and external file exchange system providers, whose Y2K compliance or lack thereof could pose problems for the Company. These third parties were contacted and have responded with Y2K compliance plans that appear to be adequate. However, the Company cannot independently verify the adequacy of such plans. THE COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES To date, the Company has incurred approximately $250,000 of costs directly associated with its efforts to address its Y2K issues. This amount does not include an allocation of salaries of EDMC personnel participating in this effort. Nor does it include recent hardware, software, or systems purchases which are, or have been, warranted to be Y2K-compliant. Based upon its current understanding of the Company's Y2K issues, the Y2K Task Force anticipates additional direct costs of approximately $300,000, will be incurred to address these issues. Of the remaining cost to be incurred, approximately $200,000 will be used, if necessary, to replace technology hardware and software at Company schools; $100,000 is budgeted for contingency plan implementation, if necessary. All Y2K-related expenditures are expensed as incurred. The Company has shifted resources to the resolution of Y2K issues. This has resulted in the deferral of some existing or contemplated projects, particularly computer-system oriented projects. Management believes that the cost of remediating the Company's internal Y2K problems will not have a material adverse impact upon its business, results of operations, liquidity or financial condition. RISKS RELATED TO THE COMPANY'S YEAR 2000 ISSUES The Company has identified several possible worst-case scenarios that could arise because of Y2K issues; however, at this time, the Company does not have sufficient information to make an assessment of the likelihood of any of these worst-case scenarios. It should be noted that the Company's schools will not be in session on December 31, 1999 or January 1, 2000, with classes resuming in mid-January 2000. Because the Company is in a regulated industry and relies, indirectly, on only a few sources for a substantial portion of its revenues, EDMC's business is very dependent upon those entities' efforts to address their own Y2K issues. The Y2K Task Force has identified those third parties whose failure to resolve their own Y2K issues could have a material impact upon the Company's operations, and is taking steps it currently believes appropriate to analyze both such parties' Y2K status and the Company's options in the event that any such party is not Y2K-compliant in sufficient time prior to December 31, 1999. Should any such third parties experience Y2K-related disruptions, it could have a material adverse impact on the Company's business, results of operations, liquidity or financial condition. 9 10 For example, as with all postsecondary education-oriented businesses whose students receive governmental financial aid, the Company's operations and liquidity depend upon the student funding provided by Title IV programs for its students. The U.S. Department of Education's computer systems handle processing of applications for this funding. The U.S. Department of Education has stated that its systems are Y2K-compliant. The Company has successfully completed file exchange tests with the U.S. Department of Education. Any problems with the U.S. Department of Education's systems could result in an interruption in the funding for students nationwide, including the Company's students. Any prolonged interruption could have a material adverse impact upon the education industry and, accordingly, upon the Company's business, results of operations, liquidity and financial condition. Similarly, the Company's schools are licensed by one or more agencies in the states in which they are based and accredited by one or more accrediting bodies that are recognized by the U.S. Department of Education. The Company continues to assess the Y2K-readiness of these agencies and bodies. In the event that any of these entities are unable, due to Y2K problems, to renew a school's license or accreditation, an interruption in such school's operations could occur. Depending upon the school involved, a prolonged interruption could have a material adverse impact upon the Company's business, results of operations, liquidity and financial condition. Five guaranty agencies provide the vast majority of the guarantees for the loans issued to the Company's students under Title IV Programs. The Company has completed file exchange tests successfully with the agency that accounts for approximately 85% of those guarantees. As with the U.S. Department of Education, the Company is unable to assess independently the readiness of any of these agencies at the present time, although all such agencies have reported that they are Y2K-compliant. The majority of the Title IV Program loans to the Company's students are funded through six banks, five of which work with the Company's primary guaranty agency. The five lenders that work with that agency use an affiliate of that agency to disburse and service their loans, and the Company has successfully completed file exchange tests with the affiliated agency. The Company has also reviewed the Y2K compliance efforts of its transfer agent and of the NASDAQ National Market System and does not anticipate any serious disruptions in service from these providers. The Y2K Task Force has made inquiries of the major financial institutions and utilities that provide services to the Company and continues to assess the potential effects of those entities' failures to become Y2K-compliant within the time remaining. If, notwithstanding any such entity's representations that it will be Y2K-compliant in time, it is not compliant, the Company's business, results of operations, liquidity and financial condition could be adversely affected. CONTINGENCY PLANS The Y2K Task Force's responsibilities include development of contingency plans for each of EDMC's significant operating areas. These contingency plans would be utilized in the event that, despite the Company's best efforts, or due to the Company's lack of control over certain third parties, a system is not Y2K-compliant and EDMC's business is adversely affected. Each operating area has prepared a contingency plan to operate for up to three consecutive days without standard computer support. In addition, the Company maintains a "hot site" contract with Hewlett-Packard that allows it to run its day-to-day central computer operations from a remote location in Washington State. The "hot site" is a contingency against a regional Y2K failure that would cause business interruptions at the Company's corporate offices in Pittsburgh, Pennsylvania. The Y2K Task Force expects to have substantially all of its contingency plans in place by December 1, 1999. 10 11 PART II ITEM 1 - LEGAL PROCEEDINGS EDMC and its wholly-owned subsidiaries, The Art Institutes International, Inc. and The Art Institute of Houston, Inc. are defendants in a suit in the District Court of Harris County, Texas, filed on June 30, 1999 by 145 former and current students of The Art Institute of Houston and subsequently amended to add 90 more mostly former students. On November 5, 1999, the complaint was further amended to add an additional 90 plaintiffs, most of whom are former students. Plaintiffs claim, among other things, that they were misled about the nature, quality and utility of the education they would receive at The Art Institute of Houston. The complaint seeks unspecified compensatory and consequential damages, exemplary or punitive damages, additional damages under the Texas Deceptive Trade Practices Act, and attorneys' fees, expenses and interest. The litigation is at a preliminary stage, and discovery has not yet begun. Given the preliminary stage of the case, the nature of plaintiffs' claims and the inherent uncertainties of litigation, management is unable to predict the ultimate number, scope or duration of any such claims or the eventual outcome or costs of defending any such claims. ITEM 2 - CHANGES IN SECURITIES Not Applicable ITEM 3 - DEFAULTS UPON SENIOR SECURITIES Not Applicable ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable ITEM 5 - OTHER INFORMATION On November 9, 1999, the Company amended its Rights Agreement dated as of October 1, 1996 (the "Rights Agreement") solely for the purpose of adding an exception to the definition of "Acquiring Person" to permit Baron Capital Group, Inc., BAMCO, Inc., Baron Capital Management, Inc., Baron Asset Fund (or any other fund or funds managed by an entity controlled by Ronald Baron), or Ronald Baron (collectively, the "Baron Holders") to own in the aggregate up to 5,922,600 Common Shares of the Company without being deemed to be an "Acquiring Person." In connection with the amendment, the Baron Holders confirmed that the Common Shares they beneficially own are being held for investment purposes only and agreed not to become an "Acquiring Person" during the term of the Rights Agreement. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: (4.01) Amendment No. 1, dated November 9, 1999, to the Rights Agreement dated as of October 1, 1996 between the Company and ChaseMellon Shareholder Services, L.L.C., as Rights Agent. (4.02) Letter Agreement dated November 9, 1999 by and among the Company, Baron Capital Group, Inc., BAMCO, Inc., Baron Capital Management, Inc. and Ronald Baron. (15) Report of Independent Public Accountants. (27) Financial Data Schedule submitted to the Securities and Exchange Commission in electronic format, filed herewith. (b) Reports on Form 8-K No reports on Form 8-K were filed for the three months ended September 30, 1999. 11 12 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. EDUCATION MANAGEMENT CORPORATION (Registrant) Date: November 15, 1999 /s/ Robert B. Knutson ------------------------------------ Robert B. Knutson Chairman and Chief Executive Officer /s/ Robert T. McDowell ------------------------------------ Robert T. McDowell Executive Vice President and Chief Financial Officer 12 EX-4.1 2 AMENDMENT NO. 1 TO RIGHTS AGREEMENT 1 EXHIBIT 4.01 AMENDMENT NO. 1 TO RIGHTS AGREEMENT AMENDMENT NO. 1, dated as of November 9, 1999 ("Amendment No. 1"), to the Rights Agreement, dated as of October 1, 1996 (the "Rights Agreement") between Education Management Corporation, a Pennsylvania corporation, and ChaseMellon Shareholder Services, L.L.C., a New Jersey limited liability company, successor to Mellon Bank, N.A., a national banking association, as Rights Agent (the "Rights Agent"). WHEREAS, the Company and the Rights Agent previously entered into the Rights Agreement; WHEREAS, pursuant to Section 27 of the Rights Agreement, the Company may from time to time supplement or amend any provision of the Rights Agreement in accordance with the terms of such Section 27; and WHEREAS, the Company has determined that it is desirable to amend the Rights Agreement as provided herein. NOW, THEREFORE, accordingly the Rights Agreement is amended as follows: 1. The first sentence of Section 1(a) is hereby deleted in its entirety, and the following new sentence is hereby inserted in lieu thereof: "Acquiring Person" shall mean any Person (as hereinafter defined) who or which, together with all Affiliates and Associates (as such terms are hereinafter defined) of such Person, shall be the Beneficial Owner (as hereinafter defined) of 17.5% or more of the Common Shares of the Company then outstanding, but shall not include (i) the Company, (ii) any Subsidiary (as hereinafter defined) of the Company, (iii) any employee benefit plan of the Company or of any Subsidiary of the Company, or any entity holding Common Shares for or pursuant to the terms of any such plan, (iv) a Person who or which shall become the Beneficial Owner of 17.5% or more of the Common Shares then outstanding, if the transaction in which such Person became the Beneficial Owner of 17.5% or more of the Common Shares then outstanding had received prior approval of a majority of the Board of Directors or (v) Baron Capital Group, Inc., BAMCO, Inc., Baron Capital Management, Inc., Baron Asset Fund (or any other fund or funds managed by an entity controlled by Ronald Baron) or Ronald Baron (collectively, the "Baron Holders"); provided, however, that the foregoing exception for the Baron Holders shall be effective only for so long as the Baron Holders and their respective Affiliates and Associates do not in the aggregate beneficially own more than 5,922,600 Common Shares of the Company, such number to be appropriately adjusted to reflect any stock split, stock dividend, reclassification, subdivision, consolidation or combination of the Common Shares after November 9, 1999 or the exercise of any Rights issued to the Baron Holders pursuant to this Agreement. 2 IN WITNESS WHEREOF, the parties have executed this Amendment No. 1 as of the date first written above. EDUCATION MANAGEMENT CORPORATION Attest: By: /s/ Kathleen Clover By: /s/ Robert T. McDowell -------------------------- --------------------------------- Kathleen Clover Name: Robert T. McDowell Assistant Secretary Title: Executive Vice President and Chief Financial Officer CHASEMELLON SHAREHOLDER SERVICES, L.L.C. Attest: By: /s/ Rita A. Swartz By: /s/ Anita Landreau -------------------------- --------------------------------- Rita A. Swartz Name: Anita Landreau Vice President Title: Assistant Vice President 2 EX-4.2 3 LETTER AGREEMENT 1 EXHIBIT 4.02 November 9, 1999 Education Management Corporation 300 Sixth Avenue Pittsburgh, PA 15222 Attention: Robert T. McDowell Ladies and Gentlemen: Reference is made to the Rights Agreement dated as of October 1, 1996 (as amended from time to time, the "Rights Agreement") between Education Management Corporation, a Pennsylvania corporation (the "Company") and ChaseMellon Shareholder Services, L.L.C., as successor to Mellon Bank, N.A., a national banking association, as Rights Agent. Capitalized terms used but not otherwise defined herein shall have the meanings given to them in the Rights Agreement. To induce the Company to effect Amendment No. 1 to the Rights Agreement in substantially the form attached hereto as Exhibit A, each of the undersigned, intending to be legally bound hereby, agrees for the benefit of the Company and its successors and assigns as follows: 1. The undersigned represent and warrant that they, together with any of their respective Affiliates and Associates, are deemed to be the Beneficial Owners of 5,922,600 Common Shares of the Company in the aggregate as of the date hereof, and that such Common Shares are being held for investment purposes only. None of the undersigned has the present intention of seeking to change or influence control of the Company. Baron Capital Group, Inc. and Ronald Baron disclaim beneficial ownership of shares held by their controlled entities (or the investment advisory clients thereof) to the extent such shares are held by persons other than Baron Capital Group, Inc. and Ronald Baron. BAMCO, Inc. and Baron Capital Management, Inc. disclaim beneficial ownership of shares held by their investment advisory clients to the extent such shares are held by persons other than BAMCO, Inc., Baron Capital Management, Inc. and their Affiliates. 2. During the term of the Rights Agreement, the undersigned will not, directly or indirectly (through any Affiliate, Associate or client of the undersigned), acquire, offer to acquire or agree to acquire by purchase or otherwise any additional Common Shares or other securities of the Company, if immediately before or after giving effect to the consummation of such acquisition, any of the undersigned or their respective Affiliates or Associates is or would become an Acquiring Person. 2 Education Management Corporation November 9, 1999 Page 2 3. During the term of the Rights Agreement, the undersigned will not, directly or indirectly (through any Affiliate, Associate or client), seek to have this letter agreement or the Rights Agreement (including any amendment thereto) declared terminated, inapplicable to the undersigned, or unenforceable. 4. Each of the undersigned acknowledges that monetary damages would not be a sufficient remedy for any breach of this letter agreement by the undersigned or its or his respective Affiliates, Associates or representatives and that the Company shall be entitled to specific performance and injunctive relief as remedies for any such breach. Such remedies shall not be deemed to be the exclusive remedies for the breach of this letter agreement by the undersigned or its or his respective Affiliates, Associates or representatives, but shall be in addition to all other remedies available at law or in equity to the Company. This letter agreement shall be governed by and construed in accordance with the internal laws of the Commonwealth of Pennsylvania applicable to agreements made and wholly performed in the Commonwealth of Pennsylvania. Each of the undersigned hereby irrevocably submits itself or himself to the exclusive jurisdiction of the United States District Court located in the Western District of Pennsylvania, or the state courts of the Commonwealth of Pennsylvania located in Pittsburgh, Pennsylvania, for the purpose of any proceeding in connection with this letter agreement or to enforce a resolution, settlement, order or award made regarding this letter agreement. Very truly yours, /s/ Ronald Baron ----------------------------------- Ronald Baron, in his individual capacity and as Chairman and Chief Executive Officer of BARON CAPITAL GROUP, INC. BAMCO, INC. BARON CAPITAL MANAGEMENT, INC. Accepted: EDUCATION MANAGEMENT CORPORATION By: /s/ Robert T. McDowell ---------------------------------- Robert T.. McDowell Executive Vice President and Chief Financial Officer Date: November 9, 1999 EX-15 4 REPORT OF INDEPENDANT PUBLIC ACCOUNTANTS 1 Exhibit 15 ARTHUR ANDERSEN LLP REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Education Management Corporation and Subsidiaries: We have reviewed the accompanying condensed consolidated balance sheet of Education Management Corporation (a Pennsylvania corporation) and Subsidiaries as of September 30, 1999, and the related condensed consolidated statements of income and cash flows for the three-month periods ended September 30, 1999 and 1998. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Education Management Corporation and Subsidiaries as of June 30, 1999 (not presented herein), and, in our report dated July 28, 1999, we expressed an unqualified opinion on that statement. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of June 30, 1999, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ ARTHUR ANDERSEN LLP Pittsburgh, Pennsylvania, October 20, 1999 EX-27 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BLANCE SHEET AND CONSENSED CONSOLIDATED STATEMENT OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS JUN-30-2000 JUL-01-1999 SEP-30-1999 5,078 0 27,885 (10,484) 3,423 34,060 178,832 (80,222) 168,541 59,292 14,903 0 0 296 93,776 168,541 60,850 60,850 44,520 59,157 0 881 123 1,570 644 926 0 0 0 926 .03 .03
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