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: MARCH 31, 2000 COMMISSION FILE NUMBER: 000-21363
---------------
EDUCATION MANAGEMENT CORPORATION
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1119571
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 SIXTH AVENUE, PITTSBURGH, PA 15222
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (412) 562-0900
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(Title of class)
PREFERRED SHARE PURCHASE RIGHTS
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
The number of shares of the registrant's Common Stock outstanding as of March
31, 2000 was 28,851,548.
================================================================================
2
INDEX
PART I - FINANCIAL INFORMATION PAGE
ITEM 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)...3-6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION.............7-9
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS..........................................10
ITEM 2 - CHANGES IN SECURITIES......................................10
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES............................10
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........10
ITEM 5 - OTHER INFORMATION..........................................10
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K...........................10
SIGNATURES....................................................................11
2
3
PART I
ITEM 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
EDUCATION MANAGEMENT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
MARCH 31, JUNE 30, MARCH 31,
1999 1999 2000
-------- -------- --------
(unaudited) (unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents, including restricted
balances.............................................. $ 13,254 $ 32,871 $ 715
Receivables ............................................ 9,855 15,333 11,731
Inventories ............................................ 2,094 2,038 2,479
Deferred income taxes .................................. 2,361 2,476 2,476
Other current assets ................................... 4,043 2,991 4,640
-------- -------- --------
Total current assets .............................. 31,607 55,709 22,041
-------- -------- --------
PROPERTY AND EQUIPMENT, NET .............................. 83,166 96,081 120,177
DEFERRED INCOME TAXES AND OTHER LONG-TERM ASSETS ......... 6,830 7,514 8,263
INTANGIBLE ASSETS, NET OF AMORTIZATION ................... 19,607 19,442 28,533
-------- -------- --------
TOTAL ASSETS ...................................... $141,210 $178,746 $179,014
======== ======== ========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Current portion of long-term debt ...................... $ 1,346 $ 731 $ 16
Accounts payable ....................................... 3,674 12,110 4,732
Accrued liabilities .................................... 10,204 11,438 9,960
Advance payments ....................................... 32,974 20,909 40,242
-------- -------- --------
Total current liabilities ......................... 48,198 45,188 54,950
-------- -------- --------
LONG-TERM DEBT, LESS CURRENT PORTION ..................... -- 36,500 14,621
DEFERRED INCOME TAXES AND OTHER LONG-TERM LIABILITIES..... 1,501 253 986
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' INVESTMENT:
Common stock ........................................... 295 295 297
Additional paid-in capital ............................. 90,774 93,736 94,838
Treasury stock, at cost ................................ (354) (495) (9,510)
Retained earnings ...................................... 796 3,269 22,832
-------- -------- --------
TOTAL SHAREHOLDERS' INVESTMENT .................... 91,511 96,805 108,457
-------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT .... $141,210 $178,746 $179,014
======== ======== ========
The accompanying notes to condensed consolidated financial statements are
an integral part of these statements.
3
4
EDUCATION MANAGEMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
1999 2000 1999 2000
--------- ---------- ----------- ----------
NET REVENUES .......................................... $70,575 $83,195 $195,640 $231,068
COSTS AND EXPENSES:
Educational services ................................ 45,122 53,342 124,915 147,769
General and administrative .......................... 14,890 17,491 42,230 48,957
Amortization of intangibles ......................... 314 394 901 1,115
------- ------- -------- --------
60,326 71,227 168,046 197,841
------- ------- -------- --------
INCOME BEFORE INTEREST AND TAXES ...................... 10,249 11,968 27,594 33,227
Interest expense (income), net ...................... (116) 87 (46) 529
------- ------- -------- --------
INCOME BEFORE INCOME TAXES ............................ 10,365 11,881 27,640 32,698
Provision for income taxes .......................... 4,260 4,768 11,361 13,135
------- ------- -------- --------
NET INCOME ............................................ $ 6,105 $ 7,113 $ 16,279 $ 19,563
======= ======= ======== ========
EARNINGS PER SHARE:
Basic ............................................. $ .21 $ .25 $ .56 $ .68
======= ======= ======== ========
Diluted ........................................... $ .20 $ .24 $ .53 $ .66
======= ======= ======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (000's):
Basic ............................................. 29,414 28,786 29,248 28,921
Diluted ........................................... 30,867 29,733 30,596 29,779
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 NINE MONTHS
ENDED MARCH 31,
1999 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ....................................... $ 16,279 $ 19,563
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
FLOWS FROM OPERATING ACTIVITIES:
Depreciation and amortization................ 12,126 14,694
Changes in current assets and liabilities:
Receivables............................... 1,823 3,767
Inventories............................... (161) (312)
Other current assets ..................... (1,702) (1,529)
Accounts payable.......................... (3,308) (7,799)
Accrued liabilities....................... 42 (1,549)
Advance payments.......................... 14,636 18,417
-------- --------
Total adjustments....................... 23,456 25,689
-------- --------
Net cash flows from operating activities 39,735 45,252
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiaries, net of cash acquired (500) (8,047)
Expenditures for property and equipment........... (37,304) (36,666)
Other, net........................................ (858) (1,140)
-------- --------
Net cash flows from investing activities (38,662) (45,853)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt........................ (37,036) (23,644)
Repurchase of Common Stock........................ -- (9,015)
Net proceeds from issuance of Common Stock ....... 1,899 1,104
Other capital stock transactions, net ............ 8 --
-------- --------
Net cash flows from financing activities (35,129) (31,555)
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS............. (34,056) (32,156)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD...... 47,310 32,871
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD............ $ 13,254 $ 715
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of amount capitalized).............. $ 229 $ 31
Income taxes...................................... 9,933 12,023
The accompanying notes to condensed consolidated financial statements are
an integral part of these statements.
5
6
EDUCATION MANAGEMENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying condensed consolidated financial statements should be
read in conjunction with the Notes to Consolidated Financial Statements
included in the Company's 1999 Annual Report on Form 10-K. The accompanying
condensed consolidated balance sheet as of June 30, 1999 has been derived
from the audited balance sheet included in the Company's 1999 Annual Report
on Form 10-K. The accompanying interim financial statements are unaudited;
however, management believes that all adjustments necessary for a fair
presentation have been made and all such adjustments are normal, recurring
adjustments. The results for the three-month and nine-month periods ended
March 31, 2000 are not necessarily indicative of the results to be expected
for the full fiscal year. Unless otherwise noted, references to 1999 and
2000 refer to the periods ended March 31, 1999 and 2000, respectively.
Certain prior period balances have been reclassified to conform to the
current period presentation.
2. Education Management Corporation ("EDMC" or the "Company") is among
the largest providers of proprietary postsecondary education in the United
States, based on student enrollment and revenues. Through its operating
units, primarily the Art Institutes, the Company offers bachelor's and
associate's degree programs and non-degree programs in the areas of design,
media arts, culinary arts, fashion and paralegal studies. The Company has
provided career-oriented education programs for over 35 years.
3. Reflected below is a summary of the Company's capital stock:
PAR VALUE AUTHORIZED MARCH 31, 1999 JUNE 30, 1999 MARCH 31, 2000
ISSUED:
Preferred Stock $ .01 10,000,000 -- -- --
Common Stock $ .01 60,000,000 29,485,434 29,546,833 29,743,992
HELD IN TREASURY:
Common Stock N/A N/A 78,802 85,646 892,446
On August 3, 1999, the Board of Directors authorized the Company to
repurchase up to $10 million of its currently outstanding Common Stock. The
quantity and timing of such purchases are determined by management, based
upon market conditions and other factors. Through March 31, 2000, the
Company had repurchased approximately 807,000 shares at an approximate
aggregate cost of $9 million.
4. On August 17, 1999, the Company acquired the outstanding stock of the
American Business & Fashion Institute in Charlotte, North Carolina, since
renamed The Art Institute of Charlotte. On August 26, 1999, the Company
acquired the outstanding stock of Massachusetts Communications College in
Boston, Massachusetts.
The Company's acquisitions have been accounted for using the purchase
method of accounting, with the excess of the purchase price over the fair
value of the assets acquired being assigned to identifiable intangible
assets and goodwill. The results of the acquired entities have been
included in the Company's results from the respective dates of acquisition.
The pro forma effects, individually and collectively, of the acquisitions
in the Company's condensed consolidated financial statements would not
materially impact the reported results.
5. Reconciliation of diluted shares (000's):
THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31,
---------------------------- ----------------------------
1999 2000 1999 2000
-------- -------- -------- --------
Basic shares........................... 29,414 28,786 29,248 28,921
Dilution for stock options............. 1,453 947 1,348 858
-------- -------- -------- --------
Diluted shares......................... 30,867 29,733 30,596 29,779
======== ======== ======== ========
For the period ended March 31, 2000, options to purchase approximately
197,000 shares were excluded from the diluted earnings per share
calculation because of their antidilutive effect (due to the exercise price
of such options exceeding the average market price for the period).
6
7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
This Quarterly Report on Form 10-Q contains statements that may be
forward-looking statements within the meaning of the U.S. Private Securities
Litigation Reform Act of 1995. Those statements can be identified by the use
of forward-looking terminology such as "believes," "estimates,"
"anticipates," "continues," "contemplates," "expects," "may," "will,"
"could," "should" or "would" or the negatives thereof. Those statements are
based on the intent, belief or expectation of the Company as of the date of
this Quarterly Report. Any such forward-looking statements are not
guarantees of future performance and may involve risks and uncertainties
that are outside the control of the Company. Results may vary materially
from the forward-looking statements contained herein as a result of changes
in United States or international economic conditions, governmental
regulations and other factors. The Company expressly disclaims any
obligation or understanding to release publicly any updates or revisions to
any forward-looking statement contained herein to reflect any change in the
Company's expectations with regard thereto or any change in events,
conditions or circumstances on which any such statement is based. The
following discussion of the Company's results of operations and financial
condition should be read in conjunction with the interim unaudited condensed
consolidated financial statements of the Company and the notes thereto,
included herein. Unless otherwise noted, references to 1999 and 2000 are to
the periods ended March 31, 1999 and 2000, respectively.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1999
Net revenues increased by 17.9% to $83.2 million in 2000 from $70.6 million
in the third quarter of 1999 due primarily to a 15.7% increase in student
enrollment, accompanied by a tuition increase of approximately 4%. Total student
enrollment at the Company's schools increased from 20,711 in 1999 to 23,956 in
2000, including enrollment growth of approximately 10.8% at the schools that
have been operated by the Company for 24 months or more. The Company acquired
both the American Business and Fashion Institute (since renamed The Art
Institute of Charlotte) and Massachusetts Communications College in August 1999.
Educational services expense increased by $8.2 million, or 18.2%, to $53.3
million in 2000 from $45.1 million in 1999, due primarily to the incremental
costs to support higher student enrollment. Educational services expense
represented 64.1% and 63.9% of net revenues for 2000 and 1999, respectively.
General and administrative expense was $17.5 million in 2000, up 17.5% from
$14.9 million in 1999. The increase over the comparable quarter in the prior
year reflects higher marketing and student admissions expense, resulting
primarily from increased employee compensation and media advertising costs.
General and administrative expense, as a percent of net revenues, decreased
slightly as compared to the third quarter of fiscal 1999.
Amortization of intangibles increased by $80,000, to $394,000 in 2000,
resulting primarily from the amortization of intangibles associated with the
August 1999 acquisitions, discussed above.
The Company had net interest expense of $87,000 in 2000, as compared to net
interest income of $116,000 in 1999. This change was attributable to an increase
in the average outstanding borrowings, primarily related to capital
expenditures, acquisitions, and the repurchase of shares of Common Stock.
The Company's effective tax rate was 40.1% in 2000 and 41.1% in 1999. The
effective rates differed from the combined federal and state statutory rates due
to expenses that are nondeductible for tax purposes.
Net income increased by $1.0 million to $7.1 million in 2000 from $6.1
million in 1999, due to the factors described above.
7
8
NINE MONTHS ENDED MARCH 31, 2000 COMPARED TO THE NINE MONTHS ENDED MARCH 31,
1999
Net revenues increased by 18.1% to $231.1 million for the first nine months
of fiscal 2000 from $195.6 million for the comparable period in fiscal 1999.
Average student enrollment at the Company's schools increased from 19,300 in
1999 to 22,222 in 2000, or 15.1%. The enrollment growth and an approximate 4%
tuition increase resulted in greater net revenues.
Educational services expense increased by $22.9 million, or 18.3%, to $147.8
million in 2000 from $124.9 million in 1999, due primarily to the incremental
costs to support higher student enrollments. As a percentage of net revenues,
educational services expense increased from 63.8% to 64.0%, for the respective
periods.
General and administrative expense was $49.0 million in 2000, up 15.9% from
$42.2 million in 1999. The increase over the comparable period in the prior year
reflects higher marketing and student admissions expense, resulting primarily
from increased employee compensation and media advertising costs. General and
administrative expense represented 21.6% and 21.2% of net revenues in the first
nine months of fiscal 1999, and fiscal 2000, respectively.
Amortization of intangibles increased by 23.8% to $1.1 million in 2000 from
$901,000 in 1999, resulting primarily from the amortization of intangibles
associated with the August 1999 acquisitions discussed above.
The Company had net interest expense of $529,000 in 2000 as compared to net
interest income of $46,000 in 1999. This change was attributable to an increase
in the average outstanding borrowings, primarily related to capital
expenditures, acquisitions, and the repurchase of shares of Common Stock.
The Company's effective tax rate was 40.2% in 2000 and 41.1% in 1999. The
effective rates differed from the combined federal and state statutory rates due
to expenses that are nondeductible for tax purposes.
Net income increased by $3.3 million or 20.2% to $19.6 million in 2000 from
$16.3 million in 1999, due to the factors described above.
SEASONALITY AND OTHER FACTORS AFFECTING QUARTERLY RESULTS
The Company's quarterly revenues and income fluctuate primarily as a result
of the pattern of student enrollments. The Company experiences a seasonal
increase in new enrollments in the fall (fiscal year second quarter), which is
traditionally when the largest number of new high school graduates begin
postsecondary education. Some students choose not to attend classes during
summer months, although the Company's schools encourage year-round attendance.
As a result, total student enrollments at the Company's schools are highest in
the fall quarter and lowest in the summer months (fiscal year first quarter).
The Company's costs and expenses, however, do not fluctuate as significantly as
revenues on a quarterly basis. Historically, the Company's profitability has
been lowest in its fiscal first quarter due to lower revenues combined with
expenses incurred in preparation for the peak enrollments in the fall quarter.
The Company anticipates that the seasonal pattern in revenues and earnings will
continue in the future.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated positive cash flow from operating activities of $45.3
million for the nine months ended March 31, 2000, an increase of $5.5 million
over the comparable period for 1999. The year-to-year improvement results
primarily from the increases in net income and non-cash charges.
The Company had a $32.9 million working capital deficit as of March 31, 2000
as compared to $10.5 million of working capital as of June 30, 1999. The
decrease in working capital was due primarily to cash used for capital
expenditures of $36.7 million and for $23.6 million in debt repayments.
During the quarter, the Company entered into a Credit Agreement (the "Credit
Agreement") which provides for borrowings up to $100.0 million. Borrowings under
this facility bear interest at one of three rates set forth in the Credit
Agreement, at the election of the Company. Certain outstanding letters of credit
reduce this facility. As of March 31, 2000, the Company had approximately $ 85.1
million of borrowing capacity available under the Credit Agreement. The Credit
Agreement contains customary covenants that, among other matters, require the
Company to meet specified interest and leverage ratio requirements, restrict the
repurchase of Common Stock and the incurrence of additional indebtedness. As of
March 31, 2000, the Company was in compliance with all covenants under the
Credit Agreement.
8
9
Borrowings under the Credit Agreement are used by the Company primarily to
fund working capital needs, resulting from the seasonal pattern of cash receipts
throughout the year. The level of accounts receivable reaches a peak immediately
after the billing of tuition and fees at the beginning of each academic quarter.
Collection of these receivables is heaviest at the start of each academic
quarter.
The Company believes that cash flow from operations, supplemented from time
to time by borrowings under the 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 Credit Agreement.
The Company anticipates its capital spending for 2000 will be approximately
equivalent to the 1999 level of expenditures. The 2000 additions will be
primarily related to the further investment in schools acquired or started
during the current and previous four years, continued improvements to the
facilities under construction, additional or replacement school and housing
facilities and classroom technology.
The majority of the Company's facilities are leased. Future commitments on
existing leases will be paid from cash provided from operating activities.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. The statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value.
Additionally, SFAS No. 133 requires that changes in a derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. This statement has been amended by SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the effective date of SFAS No.
133." SFAS No. 137 will be effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. The Company is currently evaluating the effects
of SFAS No. 133 and does not believe that the adoption of this standard will
have a material effect on the financial statements or results of operations of
the Company.
9
10
PART II
ITEM 1 - LEGAL PROCEEDINGS
Not Applicable
ITEM 2 - CHANGES IN SECURITIES
Not Applicable
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5 - OTHER INFORMATION
Not Applicable
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(4.01) Credit Agreement, dated February 18, 2000, among the
Company, certain banks, National City Bank of Pennsylvania
and First Union National Bank
(4.02) First Amendment to Credit Agreement, dated March 31, 2000,
among the Company, certain banks, National City Bank of
Pennsylvania and First Union National Bank
(15) Report of Independent Public Accountants
(27) Financial Data Schedule submitted to the Securities and
Exchange Commission in electronic format.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed for the three months ended
March 31, 2000.
10
11
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: May 15, 2000
/s/ Robert B. Knutson
-----------------------------------------
Robert B. Knutson
Chairman and Chief Executive Officer
/s/ Robert T. McDowell
-----------------------------------------
Robert T. McDowell
Executive Vice President and Chief Financial Officer
11