1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ending: March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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, PENNSYLVANIA 15222
(Address of principal executive offices, including zip code)
(412) 562-0900
(Registrant's telephone number, including area code)
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.
[X] Yes [ ] No
SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK
As of March 31, 1997
Common Stock: 14,391,051 Shares
2
INDEX
PART I -- FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements..................................................................................3-8
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition................................................................9-12
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings......................................................................................13
Item 2. Changes in Securities..................................................................................13
Item 3. Defaults Upon Senior Securities........................................................................13
Item 4. Submission of Matters to a Vote of Security Holders....................................................13
Item 5. Other Information......................................................................................13
Item 6. Exhibits and Reports on Form 8-K.......................................................................13
SIGNATURES ......................................................................................................14
3
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
MARCH 31, JUNE 30, MARCH 31,
ASSETS 1996 1996 1997
- ------ ---- ---- ----
(Unaudited) (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 2,077 $ 26,162 $ 11,592
Restricted cash 4,144 1,237 1,958
-------- -------- --------
Total cash and cash equivalents 6,221 27,399 13,550
Receivables:
Trade, net of allowances 5,413 5,680 7,683
Notes, advances and other 2,418 2,492 4,398
Inventories 1,139 1,271 1,541
Other current assets 3,804 3,016 4,289
-------- -------- --------
Total current assets 18,995 39,858 31,461
-------- -------- --------
PROPERTY AND EQUIPMENT, NET 40,005 41,174 49,179
OTHER ASSETS 5,187 5,837 6,525
GOODWILL, NET OF AMORTIZATION 14,638 14,543 18,580
-------- -------- --------
$ 78,825 $101,412 $105,745
-------- -------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 5,176 $ 3,890 $ 3,551
Accounts payable 1,299 4,776 1,691
Accrued liabilities 8,549 7,355 10,683
Advance payments 24,916 11,243 26,902
-------- -------- --------
Total current liabilities 39,940 27,264 42,827
-------- -------- --------
LONG-TERM DEBT, LESS CURRENT PORTION 28,344 62,029 4,418
DEFERRED INCOME TAXES AND
OTHER LONG-TERM LIABILITIES 2,264 2,463 2,505
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Capital stock:
Preferred stock, Series A, at paid-in value 22,075 22,075 --
Common stock 1 1 15
Warrants outstanding 7,683 7,683 --
Additional paid-in capital 19,628 19,742 87,497
Deferred compensation related to ESOP (1,593) -- --
Treasury stock (99) (99) (354)
Stock subscriptions receivable (447) (442) (171)
Accumulated deficit (38,971) (39,304) (30,992)
-------- -------- --------
TOTAL SHAREHOLDERS' EQUITY 8,277 9,656 55,995
-------- -------- --------
$ 78,825 $101,412 $105,745
-------- -------- --------
The accompanying notes to consolidated financial statements are an integral
part of these statements.
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EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
1996 1997 1996 1997
---- ---- ---- ----
(unaudited) (unaudited)
NET REVENUES $ 39,637 $ 50,696 $ 110,605 $ 136,120
COSTS AND EXPENSES:
Educational services 25,364 32,346 72,109 87,320
General and administrative 8,651 11,409 23,778 30,562
Amortization of intangibles 265 540 795 1,533
ESOP expense 239 -- 715 --
----------- ----------- ----------- -----------
34,519 44,295 97,397 119,415
----------- ----------- ----------- -----------
INCOME BEFORE INTEREST AND TAXES 5,118 6,401 13,208 16,705
Interest expense, net 879 96 2,688 1,647
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 4,239 6,305 10,520 15,058
Provision for income taxes 1,571 2,650 3,902 6,329
----------- ----------- ----------- -----------
INCOME BEFORE EXTRAORDINARY ITEM 2,668 3,655 6,618 8,729
Extraordinary loss on early extinguishment of debt -- -- 926 --
----------- ----------- ----------- -----------
NET INCOME $ 2,668 $ 3,655 $ 5,692 $ 8,729
----------- ----------- ----------- -----------
EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE
PRIMARY
INCOME BEFORE EXTRAORDINARY ITEM $ .21 $ .25 $ .48 $ .65
----------- ----------- ----------- -----------
NET INCOME $ .21 $ .25 $ .39 $ .65
----------- ----------- ----------- -----------
ASSUMING FULL DILUTION
INCOME BEFORE EXTRAORDINARY ITEM $ .18 $ .25 $ .42 $ .65
----------- ----------- ----------- -----------
NET INCOME $ .18 $ .25 $ .34 $ .65
----------- ----------- ----------- -----------
WEIGHTED AVERAGE SHARES OUTSTANDING (FULLY DILUTED) 11,879,674 14,765,530 11,874,317 13,304,743
----------- ----------- ----------- -----------
The accompanying notes to consolidated financial statements are an integral
part of these statements.
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EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED MARCH 31,
1996 1997
---- ----
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 5,692 $ 8,729
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH FLOWS FROM OPERATING ACTIVITIES-
Depreciation and amortization 6,369 9,120
ESOP expense 715 --
Vesting of compensatory stock options 348 375
Changes in current assets and liabilities-
Restricted cash 3,359 (721)
Receivables (417) (3,890)
Inventories (147) (269)
Other current assets (2,171) (1,268)
Accounts payable (5,457) (3,085)
Accrued liabilities 161 3,369
Advance payments 11,753 15,658
-------- --------
Total adjustments 14,513 19,289
-------- --------
Net cash flows from operating activities 20,205 28,018
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiaries (450) (9,753)
Expenditures for property and equipment (11,112) (12,089)
Other items, net (1,184) (175)
-------- --------
Net cash flows from investing activities (12,746) (22,017)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from public stock offering, net -- 44,969
Principal payments on debt, net (36,290) (57,950)
Dividends paid to ESOP (1,126) (83)
Capital stock transactions, net (86) (7,507)
-------- --------
Net cash flows from financing activities (37,502) (20,571)
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (30,043) (14,570)
-------- --------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 32,120 26,162
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,077 $ 11,592
-------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 2,829 $ 1,975
Income taxes $ 2,098 $ 4,766
The accompanying notes to consolidated financial statements are an integral
part of these statements.
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EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The interim consolidated financial statements consist of the accounts of
Education Management Corporation (the "Company") and its wholly owned
subsidiaries, which include The Art Institutes International ("AII"), The
New York Restaurant School ("NYRS"), The National Center for Paralegal
Training ("NCPT") and The National Center for Professional Development
("NCPD"). The Company's schools offer associate's and bachelor'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 nearly 35 years. Unless otherwise
noted, references to the years 1996 and 1997 refer to the periods ended
March 31, 1996 and 1997, respectively. The results of operations for the
three and nine-month periods ended March 31, 1996 and 1997 are not
necessarily indicative of the results to be expected for fiscal 1997.
2. The interim consolidated financial statements contained herein should be
read in conjunction with the consolidated financial statements and notes
thereto for the fiscal year ended June 30, 1996 included in the Company's
Registration Statement on Form S-1 as filed with the Securities and
Exchange Commission on August 19, 1996 and the amendments thereto. The
accompanying unaudited interim consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions for Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
disclosures for complete financial statements. This financial information
reflects all adjustments, consisting only of normal recurring adjustments,
that are, in the opinion of management, necessary to present fairly the
financial condition and results of operations for the interim periods
presented. Fiscal year 1997 interim financial information was reviewed by
Arthur Andersen LLP as set forth in their report included in this document.
The 1996 interim financial information was not reviewed by the Company's
independent accountants in accordance with the standards established for
such reviews.
3. On November 5, 1996, the Company completed the initial public offering (the
"Offering") of 5,073,600 shares of its Common Stock, $.01 par value (the
"Common Stock"), including 1,701,391 shares sold by certain shareholders,
at a price of $15 per share. Since that date, the authorized capital stock
of the Company has consisted of the Common Stock and Preferred Stock, $.01
par value (the "Preferred Stock").
From 1989 until immediately prior to the completion of the Offering, the
Company's outstanding capital stock consisted of Class A Common Stock,
$.0001 par value ("Class A Stock"), Class B Common Stock, $.0001 par value
("Class B Stock"), and Series A 10.19% Convertible Preferred Stock, $.0001
par value (the "Series A Preferred Stock"). All the outstanding shares of
Series A Preferred Stock were owned by the Education Management Corporation
Employee Stock Ownership Plan and Trust (the "ESOP"). In addition, warrants
to purchase shares of Class B Stock were outstanding.
Immediately prior to the completion of the Offering, the following
occurred: (i) the warrants to purchase 5,956,079 shares of Class B Stock
were exercised, (ii) the ESOP converted all the outstanding shares of
Series A Preferred Stock into 2,249,954 shares of Class A Stock, (iii) the
Company's Articles of Incorporation were amended and restated to authorize
the Common Stock and Preferred Stock, and (iv) all outstanding shares of
Class A Stock and Class B Stock (including the shares resulting from the
exercise of the warrants and the conversion of the Series A Preferred
Stock) were reclassified into shares of Common Stock on a one-for-two basis
(also referred to as a one-for-two reverse stock split).
For the purpose of presenting comparable financial information in this
report for 1996 and 1997, the per share amounts, the number of shares of
Class A Stock and Class B Stock, the conversion ratio for the Series A
Preferred Stock and the exercise price for the warrants have been restated
to reflect the one-for-two reverse stock split.
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4. In the Offering, the Company received total net proceeds, after deduction
of expenses and underwriting discounts payable by the Company, of
approximately $45 million. On the date the Offering closed, $38.5 million
of those proceeds were used to repay the outstanding indebtedness under the
Company's amended and restated credit facility dated March 16, 1995 (the
"Revolving Credit Agreement"). The remaining proceeds were used for general
corporate purposes.
5. The Company provides an ESOP for certain of its employees. In connection
with establishing the ESOP, the borrowings under a senior term loan
financing ("ESOP Term Loan") were loaned to the ESOP on the same terms.
This loan was recorded as "deferred compensation related to ESOP" and is
shown as a reduction in shareholders' equity in the accompanying
consolidated financial statements.
As the ESOP Term Loan was repaid, shares were released from pledge and
allocated to ESOP participants' accounts. ESOP expense primarily represents
the difference between the cost of shares released to ESOP participants'
accounts and the dividends used by the ESOP for principal and interest
repayment on its loan. The dividends paid to the ESOP on the Series A
Preferred Stock were used by the ESOP trustee to pay the Company principal
and interest due on the ESOP's loan from the Company. As of June 30, 1996,
the ESOP term loan was repaid, as was the loan due from the ESOP to the
Company. There will be no future ESOP expense attributable to the repayment
of this loan.
6. Effective August 1, 1996, the Company acquired certain net assets of NYRS
for $9.5 million in cash. The Company acquired principally accounts
receivable, property and equipment, certain contracts and student
agreements, curriculum, trade names, goodwill and certain other assets. The
allocation of final values among those assets will be determined based upon
the resolution of certain pre-acquisition contingencies. In December 1996,
the Company received the necessary regulatory approvals for the acquisition
of NYRS.
On January 30, 1997 the company acquired the assets of Lowthian College,
located in Minneapolis, Minnesota for $200,000 in cash and approximately
$200,000 of assumed liabilities. The company acquired principally, accounts
receivable, equipment, certain contracts and student agreements, goodwill
and certain other assets. This acquisition was subject to certain
regulatory approvals, the last approval was received in April 1997. The
school was renamed the Art Institute of Minnesota (AIM).
7. On August 9, 1996, the Company redeemed 75,000 shares of Series A Preferred
Stock from the ESOP at $101.43 per share, plus accrued and unpaid
dividends. The redemption was funded through borrowings of $7.6 million
under the Revolving Credit Agreement.
8. Pursuant to a Preferred Share Purchase Rights Plan (the "Rights Plan")
approved by the Company's Board of Directors, which became effective upon
the consummation of the Offering, one Preferred Share Purchase Right (a
"Right") is associated with each outstanding share of Common Stock. Each
Right entitles its holder to buy one one-hundredth of a share of Series A
Junior Participating Preferred Stock, $.01 par value, at an exercise price
of $50, subject to adjustment (the "Purchase Price"). The Rights Plan is
not subject to shareholder approval.
The Rights will become exercisable following a public announcement of a
person or group of persons (an "Acquiring Person") acquiring or intending
to make a tender offer for 17.5% or more of the outstanding shares of
Common Stock. If an Acquiring Person acquires 17.5% or more of the Common
Stock, each Right will entitle the shareholders, except the Acquiring
Person, to acquire upon exercise a number of shares of Common Stock having
a market value of two times the Purchase Price. In the event that the
Company is acquired in a merger or other business combination transaction
or 50% or more of its consolidated assets or earning power are sold after a
person or group of persons becomes an Acquiring Person, each Right will
entitle its holder to purchase, at the Purchase Price, that number of
shares of the acquiring company having a market value of two times the
Purchase Price. The Rights will expire on the tenth anniversary of the
closing of the Offering and are subject to redemption by the Company at
$.01 per Right, subject to adjustment.
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9. In connection with the Offering, the Company, granted options to purchase
up to 623,000 shares of Common Stock to Company management and
non-employee directors. These options were granted effective with the
date of the Offering at the initial offering price of $15.00 and are
subject to certain vesting and other requirements.
10. Reconciliation of Income Available for Common Shareholders
Dollars in thousands, except for share data
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
1996 1997 1996 1997
---- ---- ---- ----
INCOME BEFORE EXTRAORDINARY ITEM $2,668 $3,655 $6,618 $8,729
Dividends paid on Series A Preferred Stock (562) -- (1,688) --
Redemption premium on Series A Preferred Stock -- -- -- (107)
------- ------- ------- -------
INCOME BEFORE EXTRAORDINARY ITEM AVAILABLE TO
COMMON SHAREHOLDERS ASSUMING FULL DILUTION 2,106 3,655 4,930 8,622
Dividends paid on Series A Preferred Stock -- -- -- (83)
Dividends accruable, but not paid on Series A -- -- -- (296)
Preferred Stock ------- ------- ------- -------
INCOME BEFORE EXTRAORDINARY ITEM
AVAILABLE TO COMMON SHAREHOLDERS $2,106 $3,655 $4,930 $8,243
====== ====== ====== ======
WEIGHTED AVERAGE SHARES FOR PRIMARY
EARNINGS PER SHARE 10,175,806 14,748,663 10,170,449 12,706,213
---------- ---------- ---------- ----------
11. In February 1997, the Financial Accounting Standards Board issued
Financial Accounting Standard #128 ("FAS #128"), addressing earnings per
Share ("EPS"). FAS #128 changes the methodology of calculating EPS and
renames the two calculations, Basic (currently Primary) and Diluted
(currently Fully Diluted) Earnings per Share. The calculations differ by
eliminating any common stock equivalents (such as stock options,
warrants and convertible Preferred Stock) from Basic Earnings per Share
and changes certain calculations when computing Diluted Earnings per
Share. FAS #128 is effective for reporting periods ending after
December 15, 1997, early adoption is prohibited. However, if FAS #128
were in effect, the new EPS calculations would be as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
1996 1997 1996 1997
---- ---- ---- ----
BASIC
INCOME BEFORE EXTRAORDINARY ITEM $ .30 $ .25 $ .71 $ .74
NET INCOME $ .30 $ .25 $ .58 $ .74
DILUTED
INCOME BEFORE EXTRAORDINARY ITEM $ .18 $ .25 $ .42 $ .65
NET INCOME $ .18 $ .25 $ .34 $ .65
AVERAGE SHARES OUTSTANDING
BASIC 6,918,018 14,389,343 6,912,661 11,117,102
--------- ---------- --------- ----------
DILUTED 11,879,674 14,748,633 11,840,138 13,287,647
---------- ---------- ---------- ----------
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PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
The following discussion of the Company's results of operations and
financial condition should be read in conjunction with the interim consolidated
financial statements of the Company and the notes thereto.
RESULTS OF OPERATIONS
For the three months ended March 31, 1997 compared to the three months ended
March 31, 1996:
Net revenues increased by 27.9% to $50.7 million in 1997 from $39.6 million
in 1996 due primarily to a 21.5% increase in student enrollments at
company-owned schools, accompanied by a average 5.5% tuition price increase at
company owned schools in the fall quarter of 1997. Total student enrollment at
the Company's schools increased from 12,964 in 1996 to 15,746 in 1997, including
growth of approximately 10.1% at the schools that have been operated by the
Company for 24 months or more. In November 1995, two schools were acquired and
renamed The Illinois Institute of Art at Chicago and The Illinois Institute of
Art at Schaumburg. A new school, The Art Institute of Phoenix, commenced classes
in January 1996, The New York Restaurant School (NYRS) was acquired in August
1996 and Lowthian College in Minneapolis, Minnesota (AIM) was acquired in
January 1997.
Educational services expense increased by $6.9 million, or 27.5%, to $32.3
million in 1997 from $25.4 million in 1996. The increase was primarily the
result of the additional costs required to service higher student enrollments at
The Art Institutes, the addition of NYRS and AIM, and normal inflationary
cost increases for wages and other services. Educational services expense as a
percentage of revenue for these new schools is significantly higher than the
overall consolidated percentage. Educational services expense in the third
quarter of fiscal 1997 was 63.8% of net revenues, compared to 64.0% in the same
period last year.
General and administrative expense increased by $2.7 million, or 31.9%, to
$11.4 million in 1997 from $8.7 million in 1996 primarily because of higher
marketing and student admissions expense, including the addition of
approximately $900,000 of such expenses at the five new schools, and normal
inflationary cost increases for wages and media advertising. As a result of the
above factors, general and administrative expense as a percent of revenue
increased to 22.5% in the third quarter of fiscal 1997, compared to 21.8% in the
same period last year.
Amortization of intangibles increased by 103.8%, to $540,000 in 1997 from
$265,000 in 1996. The increase in amortization expense primarily resulted from
the acquisition of NYRS and AIM. ESOP expense was zero in 1997 compared to
$239,000 in 1996 because the entire ESOP Term Loan was repaid as of June 30,
1996. Accordingly, the Company will incur no ESOP expense subsequent to
June 30, 1996 resulting from the repayment of the ESOP term loan.
Net interest expense decreased to $96,000 in 1997 from $879,000 in 1996.
The lower interest expense was primarily attributable to a decrease in the
average outstanding indebtedness from $36.1 million in 1996 to $8.5 million in
1997. The Company repaid the outstanding indebtedness under the Revolving Credit
Agreement with proceeds from the Offering on November 5, 1996.
The Company's effective tax rate increased from 37.1% in 1996 to 42.0% in
1997. The effective rate in fiscal 1996 was lower than the combined federal and
state statutory rate due to the tax deductibility of dividends on the Series A
Preferred Stock paid to the ESOP in 1996 and used for ESOP Term Loan repayment.
Income before extraordinary item for the quarter increased by 37.0% to $3.7
million in 1997 from $2.7 million in 1996, primarily as a result of increased
enrollment at Company-owned schools and lower interest expense, partially offset
by a higher effective income tax rate.
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RESULTS OF OPERATIONS
For the nine months ended March 31, 1997 compared to the nine months ended
March 31, 1996:
Net revenues increased by 23.1% to $136.1 million in 1997 from $110.6
million in 1996 due primarily to a 18.1% increase in average student
enrollments at Company-owned schools, accompanied by an average 5.7% tuition
price increase at The Art Institutes. Average starting student enrollment over
the three quarters at the Company's schools increased from 12,105 in 1996 to
14,296 in 1997. In November 1995, two schools were acquired and renamed The
Illinois Institute of Art at Chicago and The Illinois Institute of Art at
Schaumburg. A new school, The Art Institute of Phoenix, commenced classes in
January 1996, The New York Restaurant School (NYRS) was acquired in August 1996
and The Art Institute of Minnesota (AIM) was acquired in January 1997.
Educational services expense increased by $15.2 million, or 21.1%, to
$87.3 million in 1997 from $72.1 million in 1996. The increase was primarily
the result of the additional costs required to service higher student
enrollments at The Art Institutes, the addition of NYRS and AIM, and
normal inflationary cost increases for wages and other services. As a
percentage of net revenues, educational services expense declined from 65.2% in
1996 to 64.1% in 1997 primarily because of operating leverage associated with
the increased average student enrollment during the first nine months of fiscal
1997.
General and administrative expense increased by $6.8 million, or 28.6%, to
$30.6 million in 1997 from $23.8 million in 1996 primarily because of higher
marketing and student admissions expense, including the addition of $2.8
million of such expenses at the five new schools, and normal inflationary cost
increases for wages and media advertising. As a result of the above factors,
general and administrative expense as a percent of revenue increased to 22.5%
for the nine-month period of fiscal 1997, compared to 21.5% in the same period
last year.
Amortization of intangibles increased by 88.7%, to $1.5 million in 1997
from $795,000 in 1996. The increase in amortization expense resulted from the
acquisition of the two Illinois Institutes of Art, NYRS and AIM. ESOP expense
was zero in 1997 compared to $715,000 in 1996 because the entire ESOP Term Loan
was repaid as of June 30, 1996. Accordingly, the Company will incur no ESOP
expense subsequent to June 30, 1996 resulting from the repayment of such loan.
Net interest expense decreased by 38.7%, or $1.0 million, to $1.7 million
in 1997 from $2.7 million in 1996. The lower interest expense was primarily
attributable to an decrease in the average outstanding indebtedness from $38.6
million in 1996 to $27.3 million in 1997. The Company repaid the outstanding
indebtedness under the Revolving Credit Agreement with proceeds from the
Offering on November 5, 1996.
The Company's effective tax rate increased from 37.1% in 1996 to 42.0% in
1997. The rate in fiscal 1996 was lower than the combined federal and state
statutory rate due to the tax deductibility of dividends on the Series A
Preferred Stock paid to the ESOP in 1996 and used for ESOP Term Loan repayment.
Income before extraordinary item for the period increased by $2.1 million
or 31.9% to $8.7 million in 1997 from $6.6 million in 1996. This increase was
primarily the result of growing enrollments at Company-owned schools and lower
interest expense, partially offset by a higher effective income tax rate.
In October 1995, the Company prepaid in full $25 million of 13.25%
subordinated notes, resulting in a $926,000 (net of tax) prepayment penalty.
This loss was treated as an extraordinary item in the consolidated income
statement.
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
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quarter), 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 Art Institutes and NYRS 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated positive cash flow from operating activities for the
nine months ended March 31, 1996 and 1997, respectively. Cash flow from
operations was $20.2 million and $28.0 million for 1996 and 1997, respectively.
The Company had a $11.4 million working capital deficit as of March 31,
1997 as compared to $12.6 million of working capital as of June 30, 1996. The
decrease in working capital was due primarily to $58.0 million in debt
repayments under the Revolving Credit Agreement and capitalized leases. Trade
accounts receivable have increased by $2.0 million from June 30, 1996. This
increase is attributable to the acquisition of NYRS and AIM, accompanied by
increasing enrollment at the Company's schools.
Effective October 13, 1995, the Company and its lenders amended the
Revolving Credit Agreement in order to increase the amount of the facility
thereunder to $70.0 million and to extend its term to October 13, 2000.
Borrowings under the Revolving Credit Agreement bear interest at one of three
rates set forth in the Revolving Credit Agreement at the election of the
Company. As of March 31, 1997, the Company was in compliance with all covenants
and had $70.0 million of borrowing capacity available under the Revolving
Credit Agreement.
Borrowings under the Revolving Credit Agreement are used by the Company
primarily to fund its capital investment program, finance acquisitions and meet
working capital needs. The pattern of cash receipts is seasonal 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.
Following the consummation of the Offering, $38.5 million of the net
proceeds received by the Company was used to repay indebtedness under the
Revolving Credit Agreement. It is expected that the Company's interest expense
in periods following the Offering will be lower and will have a lesser
proportionate impact on net income in comparison to periods prior to the
Offering.
The Company believes that cash flow from operations, supplemented from
time to time by borrowings under the Revolving Credit Agreement, will provide
adequate funds for ongoing operations, planned expansion of new locations,
planned capital expenditures and debt service during the term of the Revolving
Credit Agreement.
The Company's capital expenditures were $11.1 million and $12.1 million for
the nine months ended March 31, 1996 and 1997, respectively. The Company
anticipates increased capital spending for 1997, principally related to the
introduction and expansion of culinary and other programs, further investment in
schools acquired during 1996 and 1997 and additional investment in classroom
technology.
The Company leases nearly all of its facilities. Future commitments on
existing leases will be paid from cash provided by operating activities.
CHANGES IN ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Financial
Accounting Standard #128 ("FAS #128"), addressing earnings per share ("EPS").
FAS #128 changes the methodology of calculating Earnings per Share and renames
the two calculations, Basic (currently Primary) and Diluted (currently Fully
Diluted)
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Earnings per Share. The calculations differ by eliminating any common stock
equivalents (such as stock options, warrants and convertible preferred stock)
from Basic Earnings per share and changes certain calculations when computing
Diluted Earnings per Share.
For the three months ended March 31, 1996, Basic EPS is $.30 per share compared
to a Primary EPS of $.21 per share. This difference is related to the inclusion
of Common Stock equivalents (stock options and convertible preferred stock) of
3,275,788 in the Primary EPS calculations. Such common stock equivalents are
not reflected in the Basic EPS calculation.
For the three months ended March 31, 1997, there is no difference between the
Basic and Primary EPS calculations. This is due to the fact that the warrants
and convertible Preferred Stock were converted coincident with The Offering.
The unexercised stock options outstanding were not significant enough to create
a difference between Basic and Primary EPS.
For the nine months March 31, 1996, the impact of FAS #128 increases Basic EPS
to $.71 per share compared to a Primary EPS of $.48 per share. The difference
is caused by the inclusion of 3,275,788 of common stock equivalents in the
Primary EPS calculations. Such common stock equivalents are not reflected in
the Basic EPS calculation.
For the nine months ended March 31, 1997, Basic EPS is $.74 compared to Primary
EPS of $.65. This difference is a result of the warrants and convertible
Preferred Stock being converted coincident with The Offering.
For the three and nine month periods ending March 31, 1996 and 1997, there are
no differences between Diluted and Fully Diluted EPS, since both calculations
included all of the Company's dilutive common stock equivalents.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.......................................None
Item 2. Changes in Securities...................................None
Item 3. Defaults Upon Senior Securities.........................None
Item 4. Submission of Matters to a Vote
of Security Holders..................................None
Item 5. Other Information
On March 10, 1997, the Company's wholly owned subsidiary, The Art
Institute of Los Angeles (AILA) obtained its license to operate in
the State of California. In connection with AILA's startup, it
entered into a twelve-year lease for a school facility in Santa
Monica, California. Necessary local zoning approval was received and
marketing and student recruiting activities commenced in April 1997.
The school expects to begin classes sometime in the first four months
of fiscal year 1998.
The Company's management is saddened to report that Mr. Harvey
Sanford, a Company Director died in April 1997. Mr. Sanford's term as
a director was due to expire in 1999.
The U.S. Department of Education recently notified post secondary
educational institutions of their 1995 Draft Cohort Default Rate
("CDR") for the Federal Family Education Loan ("FFEL") program. The
Draft CDR was previously called the "Prepublication" CDR. The Draft
CDRs for all Company-owned schools averaged 17.2%, as compared to an
average official CDR for fiscal 1994 of 18.4%. Draft CDRs are subject
to revision prior to publication as official CDRs, however the
Company does not anticipate that the rates will increase
significantly.
The Art Institute of Houston's 1995 Draft CDR is 20.3%. While The Art
Institute of Houston's CDR for fiscal 1992 was under 20%, its
official CDRs for 1993 and 1994 were 25.8% and 29.7%, respectively. A
school, after exhausting its appeal rights, loses eligibility for its
students to participate in the Federal Family Education Loan program
if its official CDR is 25% or above for 3 consecutive years.
(a) Exhibits:
(3)(a) Amended and Restated Articles of Incorporation (1)
(3)(b) Restated Bylaws (1)
(4) Rights Agreement, dated October 1, 1996, between Education
Management Corporation and Mellon Bank, N.A. (1)
(15) Report of Independent Public Accountants
(27) Financial Data Schedules
(99) William M. Webster, IV Agreement
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(1) The form of this document is an exhibit to the Company's registration
statement on Form S-1 (Registration No. 333-10385) filed on
August 19, 1996 and incorporated herein by reference.
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the three months ended March 31, 1997.
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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:
/s/ ROBERT B. KNUTSON
-------------------------------------
Robert B. Knutson
Chairman and Chief Executive Officer
/s/ ROBERT T. MCDOWELL
-------------------------------------
Robert T. McDowell
Senior Vice President and
Chief Financial Officer
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