UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): November 28, 2001
Education Management Corporation
--------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 000-21363 25-1119571
------------ --------- ----------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
300 Sixth Avenue, Suite 800, Pittsburgh, PA 15222
--------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (412) 562-0900
Item 5. Other Events
Education Management Corporation hereby files the audited financial
statements of Argosy Education Group, Inc. ("Argosy") set forth below for
Argosy's fiscal year ended August 31, 2001.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Argosy Education Group, Inc.:
We have audited the accompanying consolidated balance sheets of ARGOSY
EDUCATION GROUP, INC. (an Illinois corporation) AND SUBSIDIARIES as of August
31, 2001 and 2000, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended August 31, 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Argosy Education Group,
Inc. and Subsidiaries as of August 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
August 31, 2001 in conformity with accounting principles generally accepted in
the United States.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules included in Footnote 15 to
the financial statements are presented for purposes of complying with the
Securities and Exchange Commission's rules and are not part of the basic
financial statements. These schedules have been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly state in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
Arthur Andersen LLP
Chicago, Illinois
November 19, 2001
F-1
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
August 31,
----------------
2001 2000
------- -------
ASSETS
Current Assets:
Cash and cash equivalents............................................................... $11,803 $ 8,112
Short-term investments.................................................................. 37 7,787
Receivables--
Students, net of allowance for doubtful accounts of $712 and $311 at August 31,
2001 and 2000, respectively....................................................... 3,295 2,178
Other............................................................................... 361 507
Due from related entity................................................................. -- 49
Prepaid taxes........................................................................... 2,117 215
Prepaid expenses and other current assets............................................... 401 409
Deferred tax assets..................................................................... 1,143 286
------- -------
Total current assets............................................................. 19,157 19,543
------- -------
------- -------
Property and equipment, net................................................................ 22,387 6,307
------- -------
Other assets:
Non-current investments................................................................. 2,505 200
Deposits and other long term assets..................................................... 926 159
Deferred tax assets..................................................................... -- 1,680
Advances to John Marshall............................................................... -- 724
Intangibles, net........................................................................ 10,734 6,687
------- -------
Total other assets............................................................... 14,165 9,450
------- -------
Total assets..................................................................... $55,709 $35,300
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt.................................................... $ 738 $ 796
Accounts payable........................................................................ 1,933 1,162
Accrued payroll and related expenses.................................................... 2,415 634
Accrued expenses........................................................................ 1,940 584
Deferred revenue........................................................................ 6,940 2,760
------- -------
Total current liabilities........................................................ 13,966 5,936
------- -------
Long-term debt, less current maturities.................................................... 14,497 2,604
Deferred rent.............................................................................. 997 710
Deferred taxes............................................................................. 2,034 --
Commitments and contingencies..............................................................
Shareholders' equity:
Class A common stock--30,000,000 shares authorized, $.01 par value, 2,076,449 and
2,059,417 issued and outstanding at August 31, 2001 and 2000, respectively............ 21 21
Class B common stock--10,000,000 shares authorized, $.01 par value, 4,900,000
shares issued and outstanding at August 31, 2001 and 2000, respectively............... 49 49
Stock warrants.......................................................................... 860 --
Additional paid-in capital.............................................................. 25,230 25,131
Accumulated other comprehensive income.................................................. -- 1,102
Purchase price in excess of predecessor carry over basis................................ (720) (720)
Treasury stock (482,000 shares of Class A common stock at August 31, 2001 and
2000)................................................................................. (2,131) (2,131)
Retained earnings....................................................................... 906 2,598
------- -------
Total shareholders' equity....................................................... 24,215 26,050
------- -------
Total liabilities and shareholders' equity....................................... $55,709 $35,300
======= =======
The accompanying notes are an integral part of these consolidated statements
F-2
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in thousands)
Years Ended August 31,
-------------------------
2001 2000 1999
------- ------- -------
Net Revenue................................................................. $58,170 $44,058 $36,866
Operating expenses:
Cost of education........................................................ 29,048 20,746 18,489
Selling expenses......................................................... 6,329 3,837 1,616
General and administrative expenses...................................... 22,622 15,107 11,588
Impairment charge related to business dispositions....................... 1,499 -- --
Related party general and administrative expense......................... -- -- 668
------- ------- -------
Total operating expenses............................................. 59,498 39,690 32,361
------- ------- -------
Income (loss) from operations........................................ (1,328) 4,368 4,505
------- ------- -------
Other income (expense):
Losses attributable to John Marshall..................................... (872) (1,925) --
Interest income.......................................................... 643 854 695
Interest expense......................................................... (596) (300) (567)
Other income (expense), net.............................................. 9 (73) (6)
------- ------- -------
Total other income (expense), net.................................... (816) (1,444) 122
------- ------- -------
Income (loss) before provision for income taxes...................... (2,144) 2,924 4,627
Income Taxes:
Income tax provision on C corporation income subsequent to March 8, 1999. (452) 1,263 746
Income tax provision on S corporation income prior to March 8, 1999...... -- -- 62
Deferred income taxes recorded in conjunction with termination of S
corporation election on March 8, 1999.................................. -- -- (764)
------- ------- -------
Total income taxes................................................... (452) 1,263 44
------- ------- -------
Net income (loss)........................................................... $(1,692) $ 1,661 $ 4,583
------- ------- -------
Earnings (loss) per share:
Basic.................................................................... $ (0.26) $ 0.25 $ 0.78
------- ------- -------
Weighted average shares outstanding--basic............................... 6,483 6,529 5,870
======= ======= =======
Diluted.................................................................. $ (0.26) $ 0.25 $ 0.78
======= ======= =======
Weighted average shares outstanding--diluted............................. 6,483 6,530 5,870
======= ======= =======
The accompanying notes are an integral part of these consolidated statements
F-3
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years Ended August 31,
---------------------------
2001 2000 1999
-------- ------- --------
Cash flows from operating activities:
Net income(loss)................................................................... $ (1,692) $ 1,661 $ 4,583
Adjustments to reconcile net income to net cash provided by operating activities--
Depreciation and amortization..................................................... 2,231 1,554 1,405
Deferred taxes.................................................................... (378) (1,124) (842)
Losses attributable to John Marshall.............................................. 872 1,925 --
Issuance of stock performance grants.............................................. -- 232 --
Issuance of stock warrants........................................................ 860 -- --
Impairment charge related to business dispositions................................ 1,499 -- --
Changes in operating assets and liabilities, net of acquired businesses--
Receivables, net................................................................. 17 (1,092) (579)
Inventories...................................................................... 12 (15) 94
Prepaid expenses................................................................. (135) 392 (438)
Deposits......................................................................... (106) 7 72
Accounts payable................................................................. 870 53 (215)
Accrued payroll and related expenses............................................. 712 87 (281)
Accrued expenses................................................................. (1,235) 167 (367)
Deferred revenue................................................................. 1,504 212 151
Deferred rent.................................................................... 321 100 130
-------- ------- --------
Net cash provided by operating activities...................................... 5,352 4,159 3,713
-------- ------- --------
Cash flows from investing activities:
Purchase of property and equipment, net............................................ (1,808) (1,875) (1,889)
Sale (purchase) of investments, net................................................ 4,333 1,449 (3,363)
Business acquisitions, net of cash acquired........................................ (11,013) (247) (186)
Advances to John Marshall.......................................................... (959) (2,149) (500)
-------- ------- --------
Net cash used in investing activities.......................................... (9,447) (2,822) (5,938)
-------- ------- --------
Cash flows from financing activities:
Issuance of common stock........................................................... 99 29 26,040
Offering costs..................................................................... -- -- (1,149)
Purchase of treasury stock......................................................... -- (2,131) --
Proceeds from issuance of long-term debt........................................... 8,500 380 150
Payments of long-term debt......................................................... (744) (463) (5,385)
Borrowings from (payments to) related entities, net................................ -- -- 57
Shareholder distributions.......................................................... -- -- (14,215)
Shareholder note receivable........................................................ -- -- 3,278
Payments to former owners of acquired businesses................................... -- -- (268)
-------- ------- --------
Net cash provided by (used in) financing activities............................ 7,855 (2,185) 8,508
-------- ------- --------
Effective exchange rate changes on cash.............................................. (67) (20) (15)
-------- ------- --------
Net increase (decrease) in cash and cash equivalents................................. 3,691 (868) 6,268
Cash and cash equivalents, beginning of year......................................... 8,112 8,980 2,712
-------- ------- --------
Cash and cash equivalents, end of year............................................... 11,803 8,112 8,980
-------- ------- --------
Supplemental disclosures of cash flow information:
Cash paid for--
Interest.......................................................................... $ 653 $ 297 $ 584
Taxes............................................................................. 1,861 1,989 1,524
======== ======= ========
Supplemental disclosure of non-cash investing and financing activities:
Acquisitions of various schools and businesses--
Fair value of assets acquired..................................................... $ 12,038 $ 100 $ 1,561
Net cash used in acquisitions..................................................... (11,013) (247) (186)
-------- ------- --------
Liabilities assumed or incurred................................................ $ 1,025 $ (147) $ 1,375
======== ======= ========
Supplemental disclosure of non-cash shareholder activities:
During 1999, the Company received marketable securities with a fair market
value of approximately $2,722,000 from the shareholder for partial repayment of
the shareholder note receivable.
The accompanying notes are an integral part of these consolidated statements.
F-4
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands)
Class A Class B
Common Stock Common Stock
$.01 par value, $.01 par value,
30,000,000 shares 10,000,000 shares
authorized authorized
------------------ ------------------ Additional
Comprehensive Shares Shares Stock Paid-in
Income Outstanding Amount Outstanding Amount Warrants Capital
------------- ----------- ------ ----------- ------ -------- ----------
BALANCE, August 31, 1998.......... -- -- 4,900 $49 -- $ 6,456
Net income........................ $ 4,583 -- -- -- -- -- --
Unrealized gain on investments.... 445 -- -- -- -- -- --
-------
Comprehensive income.............. $ 5,028
=======
Shareholder distribution.......... -- -- -- -- -- (6,456)
Issuance of stock................. 2,000 $20 -- -- -- 24,871
----- --- ----- --- --- -------
BALANCE, August 31, 1999.......... 2,000 20 4,900 49 -- 24,871
----- --- ----- --- --- -------
Net income........................ $ 1,661 -- -- -- -- -- --
Foreign translation adjustment.... (9) -- -- -- -- -- --
Unrealized gain on investments.... 664 -- -- -- -- -- --
-------
Comprehensive income.............. $ 2,316
=======
Purchase of treasury stock........ -- -- -- -- -- --
Issuance of class A common stock
for stock performance grants..... 51 1 -- -- -- 231
Issuance of class A common stock
under employee stock purchase
plan............................. 8 -- -- -- 29
----- --- ----- --- --- -------
BALANCE, August 31, 2000.......... 2,059 21 4,900 49 -- 25,131
Net loss.......................... $(1,692) -- -- -- -- -- --
Foreign translation adjustment.... (64) -- -- -- -- -- --
Unrealized loss on investments.... (1,118) -- -- -- -- -- --
-------
Comprehensive loss................ $(2,874)
=======
Issuance of stock warrants........ -- -- -- -- 860 --
Issuance of class A common stock
for stock performance grants..... 9 -- -- -- -- 60
Issuance of class A common stock
under employee stock purchase
plan............................. 8 -- -- -- -- 39
Elimination of foreign translation
adjustment due to planned sale
of PrimeTech..................... -- -- -- -- -- --
----- --- ----- --- --- -------
BALANCE, August 31, 2001.......... 2,076 $21 4,900 $49 860 $25,230
===== === ===== === === =======
The accompanying notes are an integral part of these consolidated statements.
F-5
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY--(Continued)
(Dollars in thousands)
Purchase
Price in
Accumulated Excess of Treasury Stock
Other Predecessor ----------------- Total
Comprehensive Carryover Shares Retained Shareholders'
Income Basis Purchased Amount Earnings Equity
------------- ----------- --------- ------- -------- -------------
BALANCE, August 31, 1998............................. $ 2 $(720) -- $ -- $ 3,135 $ 8,922
Net income........................................... -- -- -- -- 4,583 4,583
Unrealized gain on investments....................... 445 -- -- -- -- 445
Comprehensive income.................................
Shareholder distribution............................. -- -- -- -- (6,781) (13,237)
Issuance of stock.................................... -- -- -- -- -- 24,891
------- ----- ---- ------- ------- --------
BALANCE, August 31, 1999............................. 447 (720) -- -- 937 25,604
------- ----- ---- ------- ------- --------
Net income........................................... -- -- -- -- 1,661 1,661
Foreign translation adjustment....................... (9) -- -- -- -- (9)
Unrealized gain on investments....................... 664 -- -- -- -- 664
Comprehensive income.................................
Purchase of treasury stock........................... -- -- 482 (2,131) -- (2,131)
Issuance of class A common stock for stock
performance grants.................................. -- -- -- -- -- 232
Issuance of class A common stock under
employee stock purchase plan........................ -- -- -- -- -- 29
------- ----- ---- ------- ------- --------
BALANCE, August 31, 2000............................. 1,102 (720) 482 (2,131) 2,598 26,050
Net loss............................................. (1,692) (1,692)
Foreign translation adjustment....................... (64) -- -- -- -- (64)
Unrealized loss on investments....................... (1,118) -- -- -- -- (1,118)
Comprehensive loss................................... --
Issuance of stock warrants........................... -- -- -- -- -- 860
Issuance of class A common stock for stock
performance grants.................................. -- -- -- -- -- 60
Issuance of class A common stock under
employee stock purchase plan........................ -- -- -- -- -- 39
Elimination of foreign translation adjustment due
to planned sale of PrimeTech........................ 80 -- -- -- -- 80
------- ----- ---- ------- ------- --------
BALANCE, August 31, 2001............................. $ -- $(720) $482 $(2,131) $ 906 $ 24,215
======= ===== ==== ======= ======= ========
The accompanying notes are an integral part of these consolidated statements.
F-6
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2001, 2000 AND 1999
1. Description of the Business and Basis of Presentation
The consolidated financial statements of Argosy Education Group, Inc.
(formerly known as American Schools of Professional Psychology, Inc. ("ASPP"))
(the "Company") include the accounts of the Company and its wholly-owned
subsidiaries, University of Sarasota, Inc. ("U of S"), Argosy International,
Inc. ("Ventura"), the Medical Institutes of America, Inc. ("MIA") and PrimeTech
Canada Inc., ("PrimeTech"), The Connecting Link ("TCL"), Western State
University College of Law ("WSU"), and John Marshall Law School ("JMLS"). Prior
to being subsidiaries of the Company, the companies, other than PrimeTech, were
separate entities owned by the same shareholder and John Marshall was a not-for
profit organization. Through various transactions, these companies were
contributed by the shareholder to the Company. On November 30, 1998, the
Company acquired 100% of the outstanding stock of PrimeTech. The Company
continues to conduct business under its historical name, ASPP.
The Company provides programs in psychology, education, business, law,
allied health professions, network engineering and software programming and
offers courses and materials for post-graduate psychology license examinations
in the United States. The Company operates through four business units and is
approved and accredited to offer doctoral, master's, bachelor's and associate
degrees as well as to award diplomas and non degree certificates through 17
campuses in nine states and Ontario, Canada.
The contribution by the shareholder of businesses under common control and,
as described in Note 3, the Company's purchase of MCM University Plaza, Inc.'s
stock from its shareholder have been accounted for in a manner similar to a
pooling of interests.
On March 8, 1999, the Company completed an initial public offering of Common
Stock (the "Offering"). Prior to the Offering, the Company had one class of
common stock outstanding. In connection with the Offering, the Company's
existing common stock underwent an approximate 2,941-for-one stock split which
was then converted into 4,900,000 shares of Class B Common Stock. The Company
authorized 30,000,000 shares of Class A Common Stock. The effect of the stock
split has been retroactively reflected for all periods presented in the
accompanying consolidated financial statements. The Company also authorized
5,000,000 shares of its Preferred Stock. There was no Preferred Stock issued or
outstanding as of August 31, 2001 and 2000.
In the Offering, the Company issued and sold 2,000,000 shares of Class A
Common Stock at a price of $14.00 per share. The Company received total net
proceeds, after deduction of underwriting discounts and offering costs, of
approximately $25.0 million. The net proceeds from the Offering were used to
repay $4.7 million of the Company's indebtedness, pay a distribution to the
Company's majority shareholder of $13.2 million and repay $0.9 million of
indebtedness due to the Company's shareholder in connection with the
acquisitions of MCM Plaza and PrimeTech. The remaining $6.2 million of proceeds
is available for working capital and general corporate purposes.
2. Significant Accounting Policies
The principal accounting policies of the Company are as follows:
Principles of Consolidation
The consolidated financial statements include the accounts of Argosy
Education Group, Inc. and its wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
The results of operations of all acquired businesses have been consolidated for
all periods subsequent to the date of acquisition.
F-7
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Advances to John Marshall
On March 1, 2001, the Company exercised its option to purchase all of the
operating assets and assumed the liabilities of John Marshall Law School ("John
Marshall") for cash of $0.1 million and net advances of $0.7 million
contributed to John Marshall before the acquisition (Note 3). Prior to the
Company's acquisition of John Marshall, the Company accounted for the advances
it made to John Marshall, under the equity method of accounting. For the year
ended August 31, 2001 and August 31, 2000, losses of John Marshall, excluding
intercompany transactions (Note 11), of approximately $0.9 million and $1.9
million have been included as other expenses in the Company's statement of
operations. These losses have been reflected as a reduction in the cash
advances made to John Marshall.
Concentration of Credit Risk
The Company extends unsecured credit for tuition to a significant portion of
the students who are in attendance at its schools. A substantial portion of
credit extended to students is repaid through the students' participation in
various federally funded financial aid programs under Title IV of the Higher
Education Act of 1965, as amended (the "Title IV Programs"). The following
table presents the amount and percentage of the Company's cash receipts
collected from the Title IV Programs for the years ended August 31, 2001, 2000
and 1999 (dollars in thousands). Such amounts were determined based upon each
U.S. institution's cash receipts for the twelve-month period ended August 31,
pursuant to the regulations of the United States Department of Education
("DOE") at 34 C.F.R. (S) 600.5:
For the Years Ended August 31,
-----------------------------
2001 2000 1999
------- ------- -------
Total Title IV funding....................................... $37,608 $20,898 $16,823
Total cash receipts.......................................... $55,977 $37,673 $31,937
------- ------- -------
Total Title IV funding as a percentage of total cash receipts 67% 55% 53%
======= ======= =======
Transfers of funds from the financial aid programs to the Company are made
in accordance with the United States DOE requirements. Changes in DOE funding
of federal Title IV Programs could impact the Company's ability to attract
students.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash in banks, highly liquid money
market accounts and commercial paper with maturities of less than three months.
Restricted Cash
Cash recieved from the U.S. Government under various student aid grant and
loan programs is considered to be restricted. Restricted cash is held in
separate bank accounts and does not become available for general use by the
Company until the financial aid is credited to the accounts of students and the
cash is transferred to an operating account. Restricted cash is not included in
the accounts of the Company and was immaterial at
August 31, 2001 and 2000.
Investments
The Company invests excess cash in investments consisting primarily of
equity securities, corporate bonds (maturing in less than one month), municipal
bonds (maturing from three to 30 years) and U.S. Government treasury notes
(maturing from one to 17 months). The investments are considered available for
sale, stated at their fair market value and classified based upon their
maturity dates.
F-8
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At August 31, 2001 and 2000, investments consisted of the following (dollars
in thousands):
August 31,
--------------
2001 2000
------ -------
Fair value--
Equity securities....................... $ -- $ 3,514
Corporate bonds......................... -- 1,500
U.S. Government treasury notes.......... -- 2,935
Municipal and provincial bonds.......... 2,505
Term deposits........................... -- 38
------ -------
Total investments at fair value..... 2,505 7,987
Unrealized gain (loss).................. -- (1,111)
------ -------
Total investments at cost........... 2,505 $ 6,876
====== =======
Sales and maturities of investments net of purchases totaled $4.3 million
for fiscal 2001 sales and maturities of investments provided proceeds of $28.3
million and a net realized gain of $21,000.
Advertising and Marketing Costs
Advertising and marketing costs are expensed as incurred and are included in
selling expenses in the accompanying consolidated statements of operations.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
recognized utilizing both accelerated and straight-line methods. Leasehold
improvements are amortized over their estimated useful lives or lease terms,
whichever is shorter. Maintenance, repairs and minor renewals and betterments
are expensed; major improvements are capitalized. The estimated useful lives
and cost basis of property and equipment at August 31, 2001 and 2000, are as
follows (dollars in thousands):
August 31,
---------------
2001 2000 Life
------- ------- ----------
Land........................................... $ 3,677 $ 517
Building and improvements...................... 13,347 2,307 40 years
Office equipment............................... 1,359 1,390 3-7 years
Furniture and fixtures......................... 1,060 681 5-7 years
Leasehold improvements......................... 1,360 1,106 4-10 years
Computer equipment and software................ 3,196 3,007 3-5 years
Instructional equipment and materials.......... 3,306 1,103 3-7 years
------- -------
27,305 10,111
Less--Accumulated depreciation and amortization 4,918 3,804
------- -------
$22,387 $ 6,307
======= =======
Net book value of assets under capital leases is not significant as of
August 31, 2001.
F-9
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Intangible Assets
Intangible assets include goodwill, intellectual property and covenants
not-to-compete related to business acquisitions and the buyout of a former
shareholder. Intangible assets are being amortized on a straight-line basis
over their estimated useful lives. At August 31, 2001 and 2000, the cost basis
and useful lives of intangible assets consist of the following (dollars in
thousands):
August 31,
--------------
2001 2000 Life
------- ------ -----------
Goodwill...................... $12,114 $7,552 15-40 years
Intellectual property......... 210 776 2-4 years
Covenants not-to-compete...... 252 252 5-10 years
------- ------
12,576 8,580
Less--Accumulated amortization 1,842 1,893
------- ------
$10,734 $6,687
======= ======
On an ongoing basis, the Company reviews intangible assets and other
long-lived assets for impairment whenever events or circumstances indicate that
carrying amounts may not be recoverable. To date, no such events or changes in
circumstances have occurred, other than the planned sale of John Marshall and
Primetech (see Note 15). If such events or changes in circumstances occur, the
Company will recognize an impairment loss if the undiscounted future cash flows
expected to be generated by the asset (or acquired business) are less than the
carrying value of the related asset. The impairment loss would adjust the asset
to its fair value.
Revenue Recognition
Revenue consists primarily of tuition revenue from courses taught at the
schools and workshop fees and sales of related materials. Tuition revenue from
courses taught is recognized on a straight-line basis over the length the
applicable course is taught. Revenue from workshops is recognized on the date
of the workshop. If a student withdraws, future revenue is reduced by the
amount of refund due to the student. Refunds are calculated in accordance with
federal, state and accrediting agency standards. Revenue from rental of the
Company's owned facility is recognized on a straight-line basis over the life
of the leases. Textbook sales are recorded upon shipment. Revenue from rent,
workshop materials, and textbook sales represents less than 6%, 7%, and 10% of
the Company's net revenue for the fiscal years ended August 31, 2001, 2000 and
1999, respectively. Revenue is stated net of scholarships and grants given to
the students, which totaled approximately $1,233,000 $726,000, and $657,000 for
the fiscal years ended August 31, 2001, 2000 and 1999, respectively. Deferred
revenue represents the portion of payments received but not earned and is
reflected as a current liability in the accompanying consolidated balance
sheets as such amount is expected to be earned within the next year.
SAB 101 Revenue Recognition
On December 3, 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition, to provide guidance
on the recognition, presentation, and disclosure of revenue in financial
statements. The SAB outlines basic criteria that must be met before registrants
may recognize revenue, including persuasive evidence of the existence of an
arrangement, the delivery of products or services, a fixed and determinable
sales price, and reasonable assurance of collection. SAB 101 is effective
beginning the first fiscal quarter of the first fiscal year beginning after
December 15, 1999. Through August 31, 2000, the Company has recognized
application, technology and registration fees as revenue upon receipt. Prior to
the release of SAB 101, the Company's revenue recognition policy was in
compliance with generally accepted
F-10
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
accounting principles. The Company reviewed its revenue recognition policy
related to the revenue for application, registration, and technology fees and
determined that revenue generated from these fees is diminimus and that the
cost of administering the services related to these fees approximates the cost
incurred. As a result, the company continues to recognize the revenue generated
from these fees upon receipt.
Management's Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
certain estimates and assumptions that affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements and reported amounts of revenues and expenses
during the reported period. Actual results could differ from those estimates.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," ("SFAS No. 123") related to options issued to employees and
directors.
Financial Instruments
The carrying value of current assets and liabilities reasonably approximates
their fair value due to their short maturity periods. The carrying value of the
Company's debt obligations reasonably approximates their fair value as the
stated interest rate approximates current market interest rates of debt with
similar terms.
Foreign Currency Translation
The Company acquired PrimeTech, an entity with operations in Canada, on
November 30, 1998. For the years ending August 31, 2001, 2000, and 1999, and
revenues and expenses related to these operations have been translated at
average exchange rates in effect at the time the underlying transactions
occurred. Transaction gains and losses are included in income. Assets and
liabilities of this subsidiary have been translated at the year-end exchange
rate, with gains and losses resulting from such translation being included in
accumulated other comprehensive income.
Earnings Per Share
The Company had 478,550, 433,800 and 381,900 shares of its Class A common
stock under stock options at August 31, 2001, 2000 and 1999, respectively. In
addition, the Company had outstanding stock warrants of 200,000 at August 31,
2001. No shares under stock options were included in the computation of diluted
earnings per share for the year ended August 31, 2001 because the Company
incurred a loss and common stock equivalents resulting from stock options and
warrants are anti-dilutive. Of the stock options outstanding at August 31,
2000, 44,283 shares under option were deemed exercisable under the treasury
stock method where the average market price exceeded their exercise price. As a
result, 140 net shares were added to the calculation of diluted shares
outstanding at August 31, 2000. On the other hand, no shares under stock
options were included in the computation of diluted earnings per share for the
year ended August 31, 1999 because the exercise price was greater than the
average market price of the common shares.
Comprehensive Income
As of August 31, 2001 and 2000, accumulated other comprehensive income, net
of tax, was zero and $661,000, respectively. The change in other comprehensive
income relates to an unrealized holding loss of approximately $600,000 on
securities held during the year, an immaterial realized gain on the sale of
securities during the year, and the inclusion of the foreign translation
adjustment as a component of the impairment loss on the disposal of PrimeTech.
F-11
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Recent Accounting Pronouncements
In June 2001, Statement of Financial Accounting Standard (SFAS) No. 141,
"Business Combinations," was issued. The statement addresses financial
accounting and reporting for business combinations and supersedes APB Opinion
No. 16, "Business Combinations," and FASB statement No. 38 "Accounting for
Preacquisition Contingencies of Purchased Enterprises." The statement requires
that all business combinations initiated after June 30, 2001 be accounted for
using the purchase method. SFAS 141 is effective July 1, 2001. The Company's
adoption of SFAS 141 will not have a material impact on the Company's financial
position or results of operations.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 142,
"Goodwill and Other Intangible Assets", which addresses financial accounting
and reporting for acquired goodwill and other intangible assets. SFAS No. 142
addresses how intangible assets that are acquired in an acquisition should be
recognized and, if necessary, amortized. It also requires that goodwill and
intangible assets that have indefinite useful lives not be amortized, but
rather tested at least annually for impairment using a fair-value-based test,
and intangible assets that have definitive useful lives be amortized over their
useful lives. In addition, SFAS No. 142 expands the disclosure requirements
about goodwill and other intangible assets in the years subsequent to their
acquisition. The Company must adopt SFAS No. 142 in fiscal year 2003, with
early adoption permitted in fiscal year 2002. Impairment losses for goodwill
and indefinite-life intangible assets that arise due to the initial application
of SFAS No. 142, if any, are to be reported as a cumulative affect of a change
in accounting principle. Goodwill and intangible assets acquired after June 30,
2001 are subject immediately to the provisions of SFAS No. 142. The Company is
in the process of determining the full impact that adoption will have on the
consolidated financial statements as well as determining when to adopt.
Goodwill amortization under the provision of SFAS No. 142, will no longer be
recorded in the Company's results of operations upon adoption of the new
standard. During fiscal 2001, the Company recorded $0.5 million of amortization
expense related to intangible assets affected by this pronouncement.
Derivative Instruments
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, as amended by SFAS No. 137 "Accounting
for Derivative Instruments and Hedging Activities." The statement requires the
recognition of all derivatives as either assets or liabilities in the balance
sheet and the measurement of those instruments at fair value, and was effective
for the Company on September 1, 2000. The Company did not hold derivative
instruments or participate in hedging activities during the fiscal year ended
August 31, 2001. Therefore, the adoption of FAS 133 had no effect on the
operating results or financial position of the Company for the year ended
August 31, 2001.
3. Business Acquisitions
Western State
On March 1, 2001, the Company completed its acquisition of Western State
University College of Law, in Fullerton, California (''Western State'')
pursuant to the terms of the Stock Purchase Agreement dated as of November 14,
2000, between Argosy and Western State. Consideration for the purchase
consisted of $9.4 million in cash and the assumption of $3.9 million in debt,
and certain purchase price adjustments, as provided for in the purchase
agreement. This transaction was accounted for as a purchase business
combination in accordance with Accounting Principles Board ("APB") Opinion No.
16, "Business Combinations," and, accordingly, the results of operations of
Western State have been included in the Company's financial statements from
March 1, 2001.
F-12
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The purchase price was preliminarily allocated to the following (in
thousands):
Fair value of assets acquired and liabilities assumed $6,180
Goodwill............................................. 3,230
------
Total............................................. $9,410
======
The goodwill amount included above is being amortized over the estimated
useful life of 15 years.
John Marshall
The acquisition of John Marshall was made through a purchase of the assets
of John Marshall on March 1, 2001. The Company exercised its option to purchase
all of the operating assets and assumed the liabilities of John Marshall Law
School for cash of $0.1 million and net advances of $0.7 million contributed to
John Marshall before the acquisition. This transaction was accounted for as a
purchase business combination in accordance with APB Opinion No. 16, "Business
Combinations," and, accordingly, the results of operations of John Marshall
have been included in the Company's financial statements from March 1, 2001.
The preliminary purchase price allocation resulted in negative goodwill of $0.1
million. This negative goodwill was subsequently allocated to write down the
long-lived assets of John Marshall.
As of September 1, 1999, the Company had entered into an agreement to manage
John Marshall. The agreement was for 10 years and included an option to
purchase John Marshall which was exercisable at the Company's discretion. In
addition, a line of credit of $0.6 million was established between the Company
and John Marshall. Prior to the acquisition on March 1, 2001, the Company
advanced $0.5 million under the line of credit and approximately $3.1 million
to fund operations.
The Connecting Link
Also on March 1, 2001, the Company acquired all of the outstanding common
stock of The Connecting Link, a privately held provider of continuing
professional education for kindergarten to grade 12 teachers for a purchase
price of approximately $1.8 million in cash. This transaction was accounted for
as a purchase business combination in accordance with APB Opinion No. 16,
"Business Combinations," and, accordingly, the results of operations of
Connecting Link have been included in the Company's financial statements from
March 1, 2001. The acquisition resulted in $1.9 million of goodwill, which is
being amortized over the estimated useful life of 15 years.
The following unaudited pro forma financial information presents the
combined results of operations of the Company and Western State, John Marshall,
and Connecting Link as if the acquisitions had occurred as of the beginning of
fiscal 2001 and 2000, after giving effect to certain adjustments, including
amortization of goodwill, and related income tax effects. The pro forma
financial information does not necessarily reflect the results of operations
that would have occurred had the acquisitions of Western State, John Marshall,
and The Connecting Link occurred at the beginning of fiscal 2001 and 2000.
Year ended
August 31,
----------------
2001 2000
------- -------
(unaudited)
(in thousands)
Pro Forma
Revenue........................ $63,454 $57,115
Net income..................... $(1,657) $ 1,167
Diluted (loss) income per share $ (0.26) $ $0.18
F-13
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Debt
Debt of the Company at August 31, 2001 and 2000, consists of the following:
August 31,
----------------------
2001 2000
------- ------
(dollars in thousands)
Borrowings under credit agreement expiring July 20, 2003......................... $ 8,850 $ 350
Mortgage debt, bearing interest at 9%, requiring monthly principal and interest
payments of $18,378 through March 31, 2007 and a final payment of
$1,830,368 on April 30, 2007, secured by related real estate................... 2,065 2,099
Promissory note with the former owner of AATBS (being operated by the
Company under the name Ventura), bearing interest at 6.25% quarterly
principal and interest payments of $75,000 through October 1, 2002 and a final
payment of $375,000 on January 1, 2002, secured by the assets of AATBS......... 393 655
Promissory note with the former owner of MIM, bearing interest at 8%, requiring
monthly principal and interest payments of $9,426 through May 31, 2001,
unsecured...................................................................... -- 90
Bank note payable, bearing interest at 9%, requiring monthly principal and
interest payments of $1,462 through May 18, 2008, secured by real estate....... 89 97
Business improvement loans, bearing interest at the prime rate plus 1.5% (10.5%
at August 31, 2001), requiring monthly principal payments of $4,810 through
2002........................................................................... -- 50
Promissory note payable, bearing interest at 9.64% with monthly installments of
principal of $14,815 at August 31, 2001........................................ 138 --
Promissory note for real estate, bearing interest at 6.88% with monthly principal
and interest payments of $26,445 through March 1, 2001......................... 3,635 --
Other............................................................................ 65 59
------- -----
15,235 3,400
Less--Current maturities......................................................... 738 796
------- ------
$14,497 $2,604
======= ======
During 1999, the Company entered into a credit agreement with a syndicate of
banks ("Credit Agreement"), which provides for revolving credit borrowings of
up to $20 million. On July 20, 2001 the credit agreement was amended to reduce
available borrowings to $12.5 million and some of the other terms were amended.
Borrowings under the Credit Agreement bear interest at a variable rate equal to
(at the Company's option) the principal lender's prime rate as in effect from
time to time or the London Inter-Bank Offered Rate plus, in each case, a margin
of between 50 and 250 basis points, depending on the type of loan and the
Company's ratio of funded debt to EBITDA. The interest rate being charged on
amounts outstanding at August 31, 2001 was 8%. In addition, the Credit
Agreement provides for an unused commitment fee of 37.5 basis points on
commitments available but unused under the Credit Agreement, as well as certain
other customary fees. The Credit Agreement provides for a blanket lien on all
material assets of the Company and a pledge of the capital stock of all the
Company's material subsidiaries, as well as guarantees from all such
subsidiaries. The Credit Agreement restricts the Company and its subsidiaries'
ability to take certain actions, including incurring additional indebtedness or
altering the Company's current method of doing business. The Credit Agreement
also contains certain financial covenants and ratios that may have the effect
of restricting the Company's ability to take certain actions in light of their
impact on the Company's financial condition or results of operations. The
Credit Agreement terminates on July 20, 2003. As of August 31, 2001 and August
2000, outstanding borrowings under this Credit Agreement totaled approximately
$8,850,000 and $350,000, respectively.
F-14
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of August 31, 2001, the Company was not in compliance with certain
financial covenants and ratios required to be maintained by the Credit
Agreement. The Company has obtained a waiver to the credit agreement from the
bank modifying the financial covenants and ratios to allow the Company to
maintain compliance under its credit agreement.
At August 31, 2001, future annual principal payments of long-term debt are
as follows (dollars in thousands):
August 31--
2002............... $ 738
2003............... 9,421
2004............... 372
2005............... 2,743
2006............... 66
2007 and thereafter 1,895
-------
$15,235
=======
5. Income Taxes
Prior to the initial public offering of the Company's common shares
completed on March 8, 1999, the Company included its income and expenses with
those of its shareholder for Federal and certain State income tax purposes (an
S Corporation election). Accordingly, the consolidated statements of operations
for the fiscal year ended August 31, 1999 do not include a provision for
Federal income taxes for the period from September 1, 1998 to March 7, 1999. In
connection with the Company's initial public offering, the Company terminated
its S Corporation election and recorded a deferred income tax asset and
corresponding income tax benefit of $764,222, arising from a change in the
Company's tax status. Beginning March 8, 1999, the Company provides for
deferred income taxes under the asset and liability method of accounting. This
method requires the recognition of deferred income taxes based upon the tax
consequences of "temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax basis of existing assets and liabilities.
In connection with the initial public offering, the Company and its majority
shareholder entered into a tax indemnification agreement. The agreement
provides that the Company will indemnify the majority shareholder against
additional income taxes resulting from adjustments made (as determined by an
appropriate tax authority) to the taxable income reported by the Company as an
S Corporation for the periods prior to the initial public offering, but only to
the extent those adjustments provide a tax benefit to the Company.
F-15
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The provision for income taxes for the years ended August 31, 2001, 2000 and
1999 consists of the following (dollars in thousands):
2001 2000 1999
----- ------- -----
Current:
Federal.............................................................. $(408) $ 1,955 $ 676
State................................................................ 250 432 210
----- ------- -----
Total current provision.......................................... (158) 2,387 886
Deferred:
Federal.............................................................. (581) (601) 51
State................................................................ (125) (175) 3
Foreign.............................................................. 412 (348) (132)
----- ------- -----
Total deferred benefit........................................... (294) (1,124) (78)
Initial recognition of deferred income tax benefit resulting from change
in tax status......................................................... -- -- (764)
----- ------- -----
Total income tax provision....................................... $(452) $ 1,263 $ 44
===== ======= =====
A reconciliation of the statutory Federal tax rate to the actual effective
income tax rate for the years ended August 31, 2001 and 2000, is as follows:
2001 2000
----- ----
Statutory Federal income tax rate................ 34.0% 34.0%
State income taxes, net of federal benefit....... (4.0) 4.9%
Foreign tax rate differences..................... 9.2 1.6%
Non-deductible stock warrants.................... (13.6) --
Non-deductible acquisition costs................. (3.8) --
Impact of business dispositions.................. 71.6% --
Change in valuation allowance.................... (69.8)% --
Non-deductible goodwill and other permanent items (2.5)% 2.7%
----- ----
21.1% 43.2%
===== ====
The significant components of deferred income tax assets and liabilities as
of August 31, 2001 and 2000 are as follows (dollars in thousands):
2001 2000
------- ------
Deferred income tax assets:
Canadian Tax net operating loss carryforward........ $ 1,308 $ 488
Capital loss carryforward........................... 189 --
John Marshall basis difference...................... 1,261 902
Payroll and related benefits........................ 741 160
Allowance for doubtful accounts..................... 400 123
Deferred rent....................................... 404 279
Property and equipment basis difference............. -- 97
Valuation allowance................................. (1,497) --
Other............................................... 1 3
------- ------
Total deferred income tax assets, net........... 2,807 2,052
Deferred income tax liabilities:
Property and equipment basis difference................ (3,600) --
Other............................................... (99) (86)
------- ------
Total net deferred tax assets (liabilities)..... $ (892) $1,966
======= ======
F-16
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has a net operating loss carryforward of approximately
$3,000,000 as of August 31, 2001, related to the operating losses of PrimeTech,
a Canadian entity. A deferred tax asset of $1,308,000 has been recorded as a
result of this net operating loss carryforward. A capital loss of approximately
$472,000 is expected as a result of the loss on the sale of PrimeTech and a
related deferred tax asset of $189,000 has been recorded. A valuation allowance
of $1,497,000 has been recorded against these deferred tax assets as of August
31, 2001, as it is more likely than not that the Company will not be able to
benefit from these losses in the future.
6. Shareholders' Equity
In fiscal 2000, the Company adopted a repurchase program for the Company's
Class A Common Stock of up to 500,000 shares. Shares of Class A Common Stock
will be purchased by the Company from time to time through open market
purchases and private purchase, as available. Under this program, the Company
has repurchased 482,000 shares through August 31, 2001, at a total cost of
approximately $2,131,000.
Class A common stock and Class B common stock have identical rights except
that each share of Class B common stock is entitled to ten votes on all matters
submitted to a vote of shareholders as compared to one vote for each share of
Class A common stock and Class B common stock may be (and in certain cases are
required to be) converted into Class A common stock on a share-for-share basis.
On September 1, 2000, the Company entered into a Consulting Agreement with
Leeds Equity Associates, L.P. This partnership includes as a partner Jeffrey
Leeds, a member of the Company's board of directors. This Agreement encompasses
the performance of Company requested services over the six-month term of the
Agreement. Payment is represented by a stock purchase warrant providing for the
purchase of 200,000 shares of the Company's Class A common stock at a purchase
price of $6.48 per share and with a seven year exercise period. The warrants
are immediately exercisable and based upon the Black Scholes pricing model
valued at $860,000. The warrant value was expensed over the service period
resulting in half of the charge being recorded in the first fiscal quarter of
2001 and the remaining charge being recorded in the second quarter of 2001. No
tax benefit has been recorded as a result of this charge.
7. Stock Plans
During 1999, the Company adopted the 1999 Stock Incentive Plan. Under this
plan the Company can grant up to 750,000 options exercisable into shares of
Class A common stock to certain members of management. Most of the options vest
and become exercisable in three equal annual installments commencing with their
issuance and at the next two anniversary dates. Some options are vested at the
date of grant based on determinations made by the Company's board of directors.
The stock options expire ten years from the date of grant.
Pursuant to the terms of the merger agreement (See Note 14.) all options
granted under the Argosy Education Group, Inc. 1999 Stock Incentive Plan to
employees and directors will automatically convert at the effective time of the
merger into options to receive EDMC common stock in accordance with a
conversion formula defined within the merger agreement between the Company and
EDMC.
The following table summarizes stock option activity under the Plan:
August 31, 2001 August 31, 2000 August 31, 1999
----------------- ----------------- ----------------
Weighted Weighted Weighted
Average Average Average
Shares Price Shares Price Shares Price
------- -------- ------- -------- ------- --------
Outstanding at beginning of year 433,800 $11.84 381,900 $13.54 -- --
Granted......................... 54,750 7.15 97,500 6.17 381,900 $13.54
Exercised....................... (8,500) 6.81 -- -- -- --
Canceled........................ (1,500) 5.75 (45,600) 14.00 -- --
------- ------ ------- ------ ------- ------
Outstanding at end of year...... 478,550 $11.89 433,800 $11.84 381,900 $13.54
======= ====== ======= ====== ======= ======
Options exercisable at year-end. 364,919 $12.64 301,600 $12.37 163,300 $12.93
F-17
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about stock options outstanding
at August 31, 2001:
Options Outstanding Options Exercisable
------------------- --------------------------------------
Weighted-
Average
Range of Weighted Avg. Remaining Avg. Exercise Weighted-Average
Exercise Prices Exercise Price Shares Life Shares Price Remaining Life
- --------------- -------------- ------- --------- ------- ------------- ----------------
$5.375-$7.25 $ 8.39 176,250 8.61 112,619 $9.78 8.41
$11.70 11.70 10,000 10.00 10,000 11.70 10.00
$14.00 14.00 292,300 7.55 242,300 $14.00 7.55
The Company also adopted the Employee Stock Discount Purchase Plan ("Stock
Purchase Plan") during 1999. The Stock Purchase Plan allows full-time employees
to purchase shares of Class A Common Stock through payroll deductions of up to
10% of gross pay, at a cost per share of 90% of the lowest closing price of the
stock on the Nasdaq National Market during the Plan quarter. The Company has
reserved 375,000 shares of Class A Common Stock for issuance in connection with
the Stock Purchase Plan. Through August 31, 2001, 16,831 shares of Class A
Common Stock have been issued under this Plan.
The weighted average fair value of options issued during 2001, 2000 and 1999
was $4.769, $3.642 and $9.703 and was estimated on the date of grant based on
the Black-Scholes option pricing model assuming, among other things, a
risk-free interest rate of 5.50% for 2001, 6.02% for 2000 and 5.81% for 1999;
no dividend yield; expected volatility of 78% for 2001, 63% for 2000 and 70%
for 1999 and an expected life of five years for 2001 and 2000 and 10 years for
1999. Had compensation costs for options been determined in accordance with
SFAS 123, the Company's proforma net income (loss) for the years ended August
31, 2001, 2000 and 1999 would have been approximately $(1,848,000), $764,000
and $2,783,000, respectively; and proforma diluted earnings per share would
have been $(0.29), $0.12, and $0.47, respectively for the years ended.
The pro forma disclosure is not likely to be indicative of pro forma results
which may be expected in future years. Furthermore, the compensation cost is
dependent on the number of options granted for 2001, which may vary in future
periods.
8. Leases
Facilities and Equipment Leases
The Company maintains operating leases for its educational and office
facilities and for certain office and computer equipment. The facility leases
generally require the Company to pay for pro rata increases in property taxes,
maintenance and certain operating expenses. Rent expense under operating
leases, recognized on a straight-line basis over the term of the lease
(excluding property taxes, maintenance and operation costs), totaled,
$3,647,000, $3,101,000 and $2,811,000 for the fiscal years ended August 31,
2001, 2000 and 1999, respectively.
Real Estate Rental Income
The Company leases certain space of its building owned by MCM University
Plaza, Inc. in Sarasota, Florida, to outside parties under noncancellable
operating leases.
F-18
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At August 31, 2001, the approximate future minimum rental income and
commitments under operating leases that have initial or remaining
noncancellable lease terms in excess of one year are as follows (dollars in
thousands):
Real Estate
And Total
Lease Sublease Operating
Commitments Income Leases
----------- ----------- ---------
For the year ended August 31,
2002...................... $ 2,473 $(205) $ 2,268
2003...................... 2,567 (193) 2,374
2004...................... 2,567 (92) 2,475
2005...................... 2,015 (65) 1,950
2006...................... 1,650 (42) 1,608
2007 and thereafter....... 3,734 (169) 3,565
------- ----- -------
$15,006 $(766) $14,240
------- ----- -------
9. Commitments and Contingencies
Letters of Credit
The Company has outstanding irrevocable letters of credit totaling
approximately $380,000 as of August 31, 2001, which were primarily issued in
connection with leases for office facilities.
Litigation
From time to time, the Company is subject to occasional lawsuits,
investigations and claims arising out of the normal conduct of business.
Management does not believe the outcome of any pending claims will have a
material adverse impact on the Company's consolidated financial position or
consolidated results of operations.
10. Regulatory
The Company and its U.S. schools are subject to extensive regulation by
federal and state governmental agencies and accrediting bodies. In particular,
the Higher Education Act of 1965, as amended (the "HEA") and the regulations
promulgated thereunder by the DOE subject the Company's U.S. schools to
significant regulatory scrutiny on the basis of numerous standards that schools
must satisfy in order to participate in the various federal student financial
assistance programs under the Title IV Programs.
The standards employ a ratio methodology under which an institution need
only satisfy a single standard--the composite score standard. The ratio
methodology takes into account an institution's total financial resources and
provides a combined score of the measures of those resources along a common
scale (from negative 1.0 to positive 3.0). It allows a relative strength in one
measure to mitigate a relative weakness in another measure.
If an institution achieves a composite score of at least 1.5, it is
financially responsible without further oversight. If an institution achieves a
composite score from 1.0 to 1.4, it is in the "zone," is subject to additional
monitoring, and may continue to participate as a financially responsible
institution for up to three years. Additional monitoring may require the school
to (1) notify the DOE, within 10 days of certain changes, such as an adverse
accrediting action; (2) file its financial statements earlier than the
six-month requirement following
F-19
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the close of the fiscal year and (3) subject the school to a cash monitoring
payment method. If an institution achieves a composite score below 1.0, it
fails to meet the financial responsibility standards unless it qualifies under
the provisions of an alternative standard (i.e., letter of credit equal to 50%
of the Title IV program funds expended from the prior fiscal year or equal to
at least 10% of the Title IV program funds expended from the prior fiscal year
and provisional certification status). The institution may also be placed on
the cash monitoring payment method or the reimbursement payment method. Based
upon the companies financial statements as of August 31, 2001, the Company
believes that on a stand alone bases, the composite score for each of ASPP, UOS
and MIM exceeds 1.5 and that the composite score for WSU exceeds 1.0.
On October 1, 1998, legislation was enacted which reauthorized the student
financial assistance programs of the HEA ("1998 Amendments"). The 1998
Amendments continue many of the current requirements for student and
institutional participation in the Title IV Programs. The 1998 Amendments also
changed or modified some requirements. These changes and modifications include
increasing the revenues that an institution may derive from Title IV funds from
85% to 90% and revising the requirements pertaining to the manner in which
institutions must calculate refunds to students. The 1998 Amendments also
prohibit institutions that are ineligible for participation in Title IV loan
programs due to student default rates in excess of applicable thresholds from
participating in the Pell Grant program. Other changes expand participating
institutions' ability to appeal loss of eligibility owing to such default
rates. The 1998 Amendments further permit an institution to avoid the
interruption of eligibility for the Title IV Programs upon a change in
ownership, which results in a change of control by submitting a materially
complete application for decertification of eligibility within 10 business days
of such a change of ownership. None of the Company's institutions derives more
than 80% of its revenue from Title IV funds and no institution has student loan
default rates in excess of current thresholds.
The process of reauthorizing the HEA by the U.S. Congress takes place
approximately every five years. The Title IV Programs are subject to
significant political and budgetary pressures during and between
reauthorization processes.
There can be no assurance that government funding for the Title IV Programs
will continue to be available or maintained at current levels. A reduction in
government funding levels could lead to lower enrollments at the Company's
schools and require the Company to seek alternative sources of financial aid
for students enrolled in its schools. Given the significant percentage of the
Company's net revenue that is indirectly derived from the Title IV Programs,
the loss of or a significant reduction in Title IV Program funds available to
students at the Company's schools would have a material adverse effect on the
Company's business, results of operations and financial condition. In addition,
there can be no assurance that current requirements for student and
institutional participation in the Title IV Programs will not change or that
one or more of the present Title IV Programs will not be replaced by other
programs with materially different student or institutional eligibility
requirements.
In order to operate and award degrees, diplomas and certificates and to
participate in the Title IV Programs, a campus must be licensed or authorized
to offer its programs of instruction by the relevant agency of the state in
which such campus is located. Each of the Company's campuses is licensed or
authorized by the relevant agency of the state in which such campus is located.
In addition, in order to participate in the Title IV Programs, an institution
must be accredited by an accrediting agency recognized by the DOE. Each of the
Company's schools is accredited by an accrediting agency recognized by the DOE.
In addition, Western State is provisionally accredited by the American Bar
Association ("ABA") and must satisfy the standards of the ABA to become fully
accredited. Western State must also respond to certain deficiencies in the
school that were identified during the ABA's most recent annual inspection of
the school in March 2001. Management does not anticipate that its provisional
accreditation will be withdrawn as a result of these deficiencies.
F-20
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
With each acquisition of an institution that is eligible to participate in
the Title IV Programs, that institution may undergo a change in ownership that
results in a change of control, as defined in the HEA and applicable
regulations. In such event, that institution becomes ineligible to participate
in the Title IV Programs and may receive and disburse only previously committed
Title IV Program funds to its students until it has applied for and received
the DOE recertification under the Company's ownership, although the
interruption in Title IV funding may be avoided if the institution submits to
the DOE a materially complete application for approval of the change in
ownership within ten days of the closing on the transaction.
11. Related-Party Transactions
Prior to the Offering, a company owned by the majority shareholder and
Chairman of the Company provided management services for the Company and its
schools. For the year ended August 31, 1999 the Company incurred and paid
expenses totaling $667,849 related to such services. Subsequent to the
Offering, such services are no longer provided by the affiliated company.
The Company paid certain administrative and other expenses on behalf of an
entity partially owned by the majority shareholder of the Company. The total
amount owed to the Company from this entity for such advances was approximately
$49,000 at August 31, 2000 and 1999. The affiliated entity paid a management
fee to the Company of approximately $72,000 during fiscal 1999. No fees were
paid in fiscal year ended August 31, 2000 and 2001. This arrangement was
terminated upon the initial public offering in March, 1999.
As of September 1, 1999, the Company entered into an agreement to manage
John Marshall. The agreement was for 10 years and included an option to
purchase John Marshall (the purchase option was exercised on March 1, 2001 (see
Note 3). A line of credit of $0.6 million was established between the Company
and John Marshall. As of February 28, 2001, the Company advanced $0.5 million
under the line of credit and approximately $3.6 million to fund operations. For
the year ended August 31, 2001, and 2000, the losses for John Marshall,
excluding intercompany transactions, of $0.9 million and $1.9 million,
respectively, have been included as other expenses in the Company's statements
of operations and have been reflected as a reduction of the advances made to
John Marshall.
On September 1, 2000, the Company entered into a Consulting Agreement with
Leeds Equity Associates, L.P. Jeffrey Leeds, a director of the Company, is a
partner in Leeds Equity and has a pecuniary interest in such entity. The
agreement encompassed the performance of certain services requested by the
Company over the six month term of the agreement. Payment is represented by a
stock purchase warrant valued at $860,000, providing for the purchase of
200,000 shares of the Company's common stock at a purchase price of $6.48 per
share and with a seven year exercise period.
12. Profit-Sharing Plan
The Company maintains a 401(k) profit-sharing plan that covers full-time
employees. Employees can contribute up to 15% of their salary to the plan.
Contributions to the plan are made at the discretion of the Board of Directors
as well as by employees in lieu of current salary. Contributions by the Company
totaled $825,000, $713,000, and $585,000 for the years ended August 31, 2001,
2000 and 1999, respectively.
13. Segment Reporting
In accordance with, the Statement of Financial Accounting Standards Board
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information" ("SFAS No. 131"), operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the Company in deciding how to allocate resources and in
assessing performance.
F-21
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has two business segments: 1) Schools and 2) Test Preparation
Materials and Workshops ("Test Preparation"). These segments are managed as
separate strategic business units due to the distinct nature of their
operations. The Schools Segment, which represents the operations of ASPP, U of
S, MIM and PrimeTech, Western State and The Connecting Link provides programs
in psychology, education, business, allied health professions, network
engineering and software programming. All operations of the Schools Segment are
located in the United States with the exception of PrimeTech, which is located
in Canada. The Test Preparation Segment offers courses and materials for
post-graduate psychology license examinations in the United States. For the
year ended August 31, 2001 an impairment charge of $1.4 million was charged to
the operations of the Schools Segment relating to the disposition of John
Marshall and PrimeTech (see Note 14 for further discussion).
The following table presents financial data for the years ended August 31,
2001, 2000 and 1999, for these segments (dollars in thousands):
Schools Test Preparation Consolidated
------- ---------------- ------------
2001
Revenue...................... $54,485 $3,685 58,170
Income from operations....... (2,272) 944 (1,328)
Depreciation and amortization 2,067 165 2,231
Interest revenue............. 643 -- 643
Interest expense............. 561 35 596
Net income................... (2,173) 545 (1,692)
Total assets................. 50,014 5,695 55,709
Capital expenditures......... 1,880 9 1,808
Long-lived assets............ 29,727 3,393 33,120
2000
Revenue...................... $40,529 $3,529 $44,058
Income from operations....... 3,331 1,037 4,368
Depreciation and amortization 1,369 185 1,554
Interest revenue............. 854 -- 854
Interest expense............. 248 52 300
Net income................... 1,166 495 1,661
Total assets................. 30,242 5,058 35,300
Capital expenditures......... 1,872 3 1,875
Long-lived assets............ 9,444 3,550 12,994
1999
Revenue...................... $33,176 $3,690 $36,866
Income from operations....... 3,469 1,036 4,505
Depreciation and amortization 1,028 377 1,405
Interest revenue............. 695 -- 695
Interest expense............. 401 166 567
Net income................... 3,796 787 4,583
Total assets................. 30,233 4,086 34,319
Capital expenditures......... 1,860 29 1,889
Long-lived assets............ 8,684 3,732 12,416
F-22
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. EDMC Acquisition
On July 9, 2001, the Company entered into an Agreement and Plan of Merger
with Education Management Corporation ("EDMC") and HAC, Inc., a wholly-owned
subsidiary of EDMC, pursuant to which HAC, Inc. will merge with and into the
Company, with the Company continuing as the surviving corporation. In the
merger, holders of the Company's common stock will receive $12.00 per share,
without interest, for each share of all the Company's outstanding common stock.
EDMC also entered into a Stock Purchase Agreement with Dr. Markovitz providing
for the purchase of his shares of Argosy common stock at $12.00 per share,
subject to rescission if the merger contemplated by the Merger Agreement is not
consummated by December 31, 2001. The purchase of Dr. Markovitz's shares was
completed on September 26, 2001.
On October 31, 2001, the Company announced its shareholders voted in favor
of the Agreement and Plan of Merger by and among the Company, EDMC and HAC
Inc., a wholly-owned subsidiary of EDMC. The agreement was approved at a
special shareholder meeting.
There are approximately 6.5 million AEG shares outstanding. The merger is
expected to close in December and is subject to customary conditions, including
regulatory approvals of the U.S. Department of Education and other accrediting
agencies such as the American Bar Association. At the effective time of the
merger, the separate corporate existence of HAC, Inc. will cease and the
Company will continue as a wholly-owned subsidiary of EDMC.
Under the EDMC Merger Agreement, EDMC retained the ability, at their
election and upon notice to the Company, to cause the Company to dispose of
John Marshall Law School and/or PrimeTech (the "Excluded Operations"). EDMC has
so elected. Under the Stock Purchase Agreement, Dr. Markovitz agreed, upon the
Company's request, to purchase the Excluded Operations for nominal
consideration. The Company has so requested. Dr. Markovitz purchased PrimeTech
for $1.00 effective October 31, 2001 and is expected to purchase John Marshall
for $1.00 effective November 30, 2001. As a result:
. the net assets of the Excluded Operations are considered to be
impaired,
. the net assets of the Excluded Operations were adjusted to the
purchase price of $1.00 each as of August 31, 2001, and
. an impairment charge of $1.5 million ($1.0 million for PrimeTech;
$0.5 million for John Marshall) was recorded in operations in the
fourth quarter of fiscal 2001.
F-23
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
15. Valuation and Qualifying Accounts
The following summarizes the activity of the allowance for doubtful accounts
(dollars in thousands):
Net
Balance at Charges to Increase Balance at
Beginning Operating Due to Disposal of End of
of Period Expenses Acquisitions Assets Period
---------- ---------- ------------ ----------- ----------
Student receivable allowance activity for
the year ended August 31, 1999......... $230 $ 47 $ 39 $ -- $316
Student receivable allowance activity for
the year ended August 31, 2000......... $316 $ (5) $ -- $ -- $311
Student receivable allowance activity for
the year ended August 31, 2001......... $311 $606 $335 $(540) $712
The following summarizes the activity of the valuation allowance against
deferred tax assets (dollars in thousands):
Balance at Net Charges Balance at
Beginning to Income End of
of Period Tax Provision Period
- - ---------- ------------- ----------
Deferred tax valuation allowance activity for the year ended
August 31, 2001(1)........................................ -- $1,497 $1,497
- --------
(1) There was no valuation allowance for the year ended August 31, 1999 and
2000.
F-24
Item 7. Financial Statements and Exhibits
(a) Financial Statements
Not applicable.
(b) Pro Forma Financial information
Not applicable.
(c) Exhibits
Exhibit
Number Description
- ------ -----------
23.1 Consent of Arthur Andersen LLP, independent
public accountants for Argosy Education
Group, Inc., filed herewith.
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
/s/ Robert T. McDowell
-------------------------------------
By: Robert T. McDowell
Its: Executive Vice President
and Chief Financial Officer
Date: November 27, 2001
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
23.1 Consent of Arthur Andersen LLP, independent public accountants for
Argosy Education Group Inc., filed herewith.