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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 2001 COMMISSION FILE NUMBER: 000-21363
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EDUCATION MANAGEMENT CORPORATION
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(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1119571
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
300 SIXTH AVENUE, PITTSBURGH, PA 15222
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(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
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(Title of class)
PREFERRED SHARE PURCHASE RIGHTS
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(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 __
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The number of shares of the registrant's Common Stock outstanding as of
March 31, 2001 was 30,157,456.
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INDEX
PAGE
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PART I - FINANCIAL INFORMATION
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
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PART I
ITEM 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
EDUCATION MANAGEMENT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
MARCH 31, JUNE 30, MARCH 31,
2000 2000 2001
----------- -------- -----------
(unaudited) (unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents, including restricted balances...... $ 715 $ 39,538 $ 9,216
Receivables .................................................. 11,731 16,735 18,140
Inventories .................................................. 2,479 3,145 3,380
Deferred income taxes ........................................ 2,476 2,872 2,845
Other current assets ......................................... 4,640 4,423 5,199
-------- -------- --------
TOTAL CURRENT ASSETS .................................... 22,041 66,713 38,780
-------- -------- --------
PROPERTY AND EQUIPMENT, NET .................................... 120,177 135,358 147,468
DEFERRED INCOME TAXES AND OTHER LONG-TERM ASSETS ............... 8,263 10,677 10,825
INTANGIBLE ASSETS, NET OF AMORTIZATION ......................... 28,533 27,927 38,971
-------- -------- --------
TOTAL ASSETS............................................. $179,014 $240,675 $236,044
======== ======== ========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Current portion of long-term debt ............................ $ 16 $ 16 $ 33
Accounts payable ............................................. 4,732 19,898 5,224
Accrued liabilities .......................................... 9,960 13,062 14,936
Advance payments ............................................. 40,242 29,915 58,464
-------- -------- --------
TOTAL CURRENT LIABILITIES ............................... 54,950 62,891 78,657
-------- -------- --------
LONG-TERM DEBT, LESS CURRENT PORTION ........................... 14,621 64,267 12,246
OTHER LONG-TERM LIABILITIES .................................... 986 567 34
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' INVESTMENT:
Common Stock ................................................. 297 299 305
Additional paid-in capital ................................... 94,838 96,585 99,162
Treasury stock, at cost ...................................... (9,510) (9,733) (5,344)
Retained earnings ............................................ 22,832 25,799 50,984
-------- -------- --------
TOTAL SHAREHOLDERS' INVESTMENT .......................... 108,457 112,950 145,107
-------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT........... $179,014 $240,675 $236,044
======== ======== ========
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
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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,
2000 2001 2000 2001
------- -------- -------- --------
NET REVENUES .......................................... $83,195 $100,366 $231,068 $276,039
COSTS AND EXPENSES:
Educational services ................................ 53,342 64,226 147,769 175,317
General and administrative .......................... 17,491 19,662 48,957 56,299
Amortization of intangibles ......................... 394 469 1,115 1,264
------- -------- -------- --------
71,227 84,357 197,841 232,880
------- -------- -------- --------
INCOME BEFORE INTEREST AND TAXES ...................... 11,968 16,009 33,227 43,159
Interest expense, net ............................... 87 439 529 1,877
------- -------- -------- --------
INCOME BEFORE INCOME TAXES ............................ 11,881 15,570 32,698 41,282
Provision for income taxes .......................... 4,768 6,072 13,135 16,097
------- -------- -------- --------
NET INCOME ............................................ $ 7,113 $ 9,498 $ 19,563 $ 25,185
======= ======== ======== ========
EARNINGS PER SHARE:
Basic ............................................. $ .25 $ .32 $ .68 $ .85
======= ======== ======== ========
Diluted ........................................... $ .24 $ .30 $ .66 $ .82
======= ======== ======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (000's):
Basic ............................................. 28,786 30,124 28,921 29,605
Diluted ........................................... 29,733 31,535 29,779 30,830
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
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EDUCATION MANAGEMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
FOR THE NINE MONTHS
ENDED MARCH 31,
2000 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................... $ 19,563 $ 25,185
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH FLOWS FROM
OPERATING ACTIVITIES:
Depreciation and amortization ....................... 14,694 18,330
Changes in current assets and liabilities:
Receivables ...................................... 3,767 (1,324)
Inventories ...................................... (312) (235)
Other current assets ............................. (1,529) (771)
Accounts payable ................................. (7,799) (1,569)
Accrued liabilities .............................. (1,549) 631
Advance payments ................................. 18,417 27,731
-------- --------
Total adjustments .............................. 25,689 42,793
-------- --------
Net cash flows from operating activities ....... 45,252 67,978
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiaries, net of cash acquired ........ (8,047) (9,677)
Expenditures for property and equipment .................. (36,666) (42,004)
Other, net ............................................... (1,140) (2,586)
-------- --------
Net cash flows from investing activities ....... (45,853) (54,267)
CASH FLOWS FROM FINANCING ACTIVITIES:
Revolving credit facility activity, net .................. (22,000) (52,000)
Principal payments on debt ............................... (1,644) (62)
Proceeds from exercise of stock options and issuance of
Common Stock .......................................... 1,104 8,029
Repurchase of Common Stock ............................... (9,015) --
-------- --------
Net cash flows from financing activities ....... (31,555) (44,033)
NET CHANGE IN CASH AND CASH EQUIVALENTS .................... (32,156) (30,322)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ............. 32,871 39,538
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD ................... $ 715 $ 9,216
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of amount capitalized) ..................... $ 31 $ 2,046
Income taxes ............................................. 12,023 10,008
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
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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 Fiscal 2000 Annual Report on Form 10-K of Education Management
Corporation ("EDMC" or the "Company"). The accompanying condensed
consolidated balance sheet as of June 30, 2000 has been derived from the
audited balance sheet included in the Company's Fiscal 2000 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, 2001 are not necessarily indicative of the results to be expected
for the full fiscal year. Unless otherwise noted, references to 2000 and
2001 refer to the periods ended March 31, 2000 and 2001, respectively.
Certain prior period balances have been reclassified to conform to the
current period presentation.
2. 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, 2000 JUNE 30, 2000 MARCH 31, 2001
--------- ---------- -------------- ------------- --------------
ISSUED:
Preferred Stock $ .01 10,000,000 -- -- --
Common Stock $ .01 60,000,000 29,743,992 29,877,025 30,479,880
HELD IN TREASURY:
Common Stock N/A N/A 892,446 907,446 322,424
For the three-month period ended March 31, 2001, 221,917 shares held by the
Company in treasury were released for the exercise of stock options.
4. The Company began operations at two new locations in July 2000, The Art
Institute of Washington (located in Arlington, VA) and The Art Institute of
Los Angeles - Orange County. Additionally, in October 2000 the Company
acquired the outstanding stock of The Art Institute of California located
in San Diego, California. This acquisition was 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 Art Institute of
California have been included in the Company's results from the date of
acquisition. The pro forma effects of the acquisition 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,
------------------------------ -----------------------------
2000 2001 2000 2001
------ ------ ------ ------
Basic shares........................... 28,786 30,124 28,921 29,605
Dilution for stock options............. 947 1,411 858 1,225
------ ------ ------ ------
Diluted shares......................... 29,733 31,535 29,779 30,830
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For the period ended March 31, 2000, options to purchase 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. Subsequent to March 31, 2001, the company acquired the outstanding stock of
The Design Institute located in Las Vegas, Nevada, which has since been
renamed The Art Institute of Las Vegas.
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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. Actual 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
2000 and 2001 are to the periods ended March 31, 2000 and 2001,
respectively.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2000
Net revenues increased by 20.6% to $100.4 million in 2001 from $83.2
million in the third quarter of 2000 due primarily to a 13.8% increase in
student enrollment, accompanied by a tuition increase of approximately 7% over
the prior year. Total student enrollment at the Company's schools increased from
23,956 in 2000 to 27,260 in 2001, including enrollment growth of approximately
8.9% at the schools that have been operated by the Company for 24 months or
more. The Company acquired The Art Institute of California in October 2000.
These results include revenue from The Art Institute of California, The Art
Institute of Washington, and The Art Institute of Los Angeles, Orange County
which all began operations in fiscal 2001.
Educational services expense increased by $10.9 million, or 20.4%, to $64.2
million in 2001 from $53.3 million in 2000, due primarily to the incremental
costs incurred to support higher student enrollment. These costs include
increased salaries and operating expenses as well as increased depreciation and
amortization associated with recent capital expenditures. Educational services
expense as a percent of revenue decreased from 64.1% in fiscal 2000 to 64.0% in
2001. This change reflects the operating leverage at locations that have been
operated by the Company 24 months or more.
General and administrative expense was $19.7 million in 2001, up 12.4% from
$17.5 million in 2000. The increase over the comparable quarter in the prior
year reflects increased advertising and recruiting costs as well as increased
employee compensation. In addition, the three locations that were opened or
acquired during the past 12 months have contributed to the rise in general and
administrative costs. As a percent of net revenues, general and administrative
expense decreased by 1.4% to 19.6% as compared to the third quarter of fiscal
2000, reflecting operating leverage at established school locations, marketing
and admissions costs, and centralized support functions.
Amortization of intangibles increased by $75,000 to $469,000 in 2001, as
compared to the third quarter of fiscal 2000. This increase is a result of the
amortization of intangibles associated with the purchase of The Art Institute of
California in October 2000.
Net interest expense was $439,000 in 2001, as compared to $87,000 in 2000.
This change was attributable to borrowings associated with capital expenditures
and acquisitions. In addition, interest incurred in connection with construction
of the facilities in Denver and Pittsburgh was capitalized during the respective
construction periods in fiscal 2000.
The Company's effective tax rate declined 1.1% to 39.0% in 2001 from 40.1%
in 2000, primarily due to the reduced impact of nondeductible expenses as a
percent of income before income taxes. 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 $2.4 million to $9.5 million in 2001 from $7.1
million in 2000. The increase is attributable to improved results from
operations at the Company's schools and a lower effective tax rate, partially
offset by higher amortization of intangibles and interest expense.
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NINE MONTHS ENDED MARCH 31, 2001 COMPARED TO THE NINE MONTHS ENDED MARCH 31,
2000
Net revenues increased by 19.5% to $276.0 million for the first nine months
of fiscal 2001 from $231.1 million for the comparable period in fiscal 2000.
Average enrollment at the Company's schools increased 14.4% from 22,222 in 2000
to 25,417 in 2001. The enrollment growth and higher tuition rates (an increase
of approximately 6% over 2000) resulted in greater net revenues for 2001. Net
revenues for 2001 include approximately five months of revenue for the recently
acquired Art Institute of California and nine months for The Art Institute of
Washington and The Art Institute of Los Angeles, Orange County.
Educational services expense increased by $27.6 million, or 18.6%, to
$175.3 million in 2001 from $147.8 million in 2000, due primarily to the
incremental costs incurred to support higher student enrollment such as
salaries, depreciation, and operating expenditures. Educational services expense
represented 64.0% and 63.5% of net revenues for 2000 and 2001, respectively. The
margin improvement of 0.5% results primarily from operating leverage at
locations that have been operated by the Company 24 months or more, offset by
higher facility and depreciation costs at newer locations.
General and administrative expense was $56.3 million in 2001, up 15.0% from
$49.0 million in 2000. The increase over the comparable period in the prior year
reflects increased marketing and admissions, student recruiting, and employee
compensation costs. General and administrative expense, as a percent of net
revenues, decreased from 21.2% in the first nine months of fiscal 2000 to 20.4%
in 2001, the improvement of 0.8% reflects containment of administrative costs at
established school locations, offset by increased costs for newer locations.
Amortization of intangibles increased by $149,000, to $1.3 million in 2001,
resulting primarily from amortization of the intangible assets associated with
the purchase of The Art Institute of California in October 2000 and nine months
of amortization of the intangibles associated with acquisitions made during the
first quarter of fiscal 2000.
Net interest expense was $1.9 million in 2001, as compared to $529,000 in
2000. This change was attributable to an increase in borrowings associated with
acquisitions and capital purchases made in fiscal 2001. Additionally, interest
incurred in connection with construction of the facilities in Denver and
Pittsburgh was capitalized during the respective construction periods.
The Company's effective tax rate was 39.0% in 2001 and 40.1% in 2000,
primarily due to the reduced impact of nondeductible expenses as percent of
income before income taxes. 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 $5.6 million to $25.2 million in 2001 from $19.6
million in 2000. The increase is attributable to improved results from
operations at the Company's schools and a lower effective tax rate, partially
offset by higher amortization of intangibles and interest expense.
SEASONALITY AND OTHER FACTORS AFFECTING QUARTERLY RESULTS
The Company's quarterly revenues and income fluctuate primarily as a result
of the pattern of student enrollments. The Company experiences a seasonal
increase in new enrollments in the fall (fiscal year second quarter), which is
traditionally when the largest number of new high school graduates begin
postsecondary education. Some students choose not to attend classes during
summer months, although the Company's schools encourage year-round attendance.
As a result, total student enrollments at the Company's schools are highest in
the fall quarter and lowest in the summer months (fiscal year first quarter).
The Company's costs and expenses, however, do not fluctuate as significantly as
revenues on a quarterly basis. Historically, the Company's profitability has
been lowest in its fiscal first quarter due to lower revenues combined with
expenses incurred in preparation for the peak enrollments in the fall quarter.
The Company anticipates that the seasonal pattern in revenues and earnings will
continue in the future.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated positive cash flow from operating activities of $68.0
million for the nine months ended March 31, 2001, an increase of $22.7 million
over the comparable period for fiscal 2000, due to an increase in net income and
non-cash charges, as well as timing of receipts of financial aid funds and
alternative loan programs.
The Company had working capital deficits of $39.9 million and $32.9 million
as of March 31, 2001 and 2000, respectively, as compared to $3.8 million of
working capital as of June 30, 2000. The decrease in working capital from June
30, 2000 was due primarily to cash used for capital expenditures of $42.0
million and for $52.0 million in debt repayments. Net receivables increased $1.4
million from June 30, 2000 and $6.4 million from March 31, 2000, primarily as a
result of the enrollment and corresponding revenue increase, acquisitions and
the timing of the class starts.
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Borrowings under the Credit Agreement dated February 18, 2000 (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 total capital spending for fiscal 2001 will
decrease as compared to the prior year. The 2001 expenditures relate principally
to the investment in schools acquired or started during the previous several
years and added in 2001, continued improvements to current facilities,
additional or replacement school and housing facilities and classroom and
administrative 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 December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101, Revenue Recognition ("SAB No. 101"), to provide
guidance on the recognition, presentation and disclosure of revenue in financial
statements. SAB No. 101 explains the SEC staff's general framework for revenue
recognition. SAB No. 101 does not change existing literature on revenue
recognition, but rather clarifies the SEC's position on pre-existing literature.
SAB No. 101 did not require the Company to change existing revenue recognition
policies and, therefore, had no impact on the Company's financial position or
results of operations.
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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:
(15) Report of Independent Public Accountants
(b) Reports on Form 8-K:
No reports on Form 8-K were filed for the three months ended
March 31, 2001.
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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, 2001
/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
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