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: September 30, 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 September 30, 1997
Common Stock: 14,434,737 Shares
2
INDEX
PART I -- FINANCIAL INFORMATION PAGE
Item 1. Financial Statements................................................................................ 3-7
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition....................................................... 8-10
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings................................................................................... 11
Item 2. Changes in Securities............................................................................... 11
Item 3. Defaults Upon Senior Securities..................................................................... 11
Item 4. Submission of Matters to a Vote of Security Holders................................................. 11
Item 5. Other Information................................................................................... 11
Item 6. Exhibits and Reports on Form 8-K.................................................................... 11
SIGNATURES........................................................................................................ 12
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PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, JUNE 30, SEPTEMBER 30,
ASSETS 1996 1997 1997
- ------ -------------- -------------- -------------
(unaudited) (unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 5,096 $ 32,646 $ 8,793
Restricted cash 1,086 581 586
------- -------- --------
Total cash and cash equivalents 6,182 33,227 9,379
Receivables:
Trade, net of allowances 6,763 8,706 8,516
Notes, advances and other 2,566 1,841 1,616
Inventories 2,080 1,356 2,604
Deferred income taxes 381 1,509 1,509
Other current assets 5,758 2,247 4,477
------- -------- --------
Total current assets 23,730 48,886 28,101
------- -------- --------
PROPERTY AND EQUIPMENT, NET 46,497 52,571 52,791
OTHER ASSETS 7,210 6,381 6,142
GOODWILL, NET OF AMORTIZATION 18,358 18,454 18,318
------- -------- --------
$95,795 $126,292 $105,352
------- -------- --------
LIABILITIES AND SHAREHOLDERS' INVESTMENT
- ----------------------------------------
CURRENT LIABILITIES:
Current portion of long-term debt $ 3,814 $ 3,637 $ 3,400
Accounts payable 2,979 6,931 4,185
Accrued liabilities 7,332 9,778 8,130
Advance payments 30,533 15,832 26,826
------- -------- --------
Total current liabilities 44,658 36,178 42,541
------- -------- --------
LONG-TERM DEBT, LESS CURRENT PORTION 47,159 30,394 2,679
DEFERRED INCOME TAXES AND
OTHER LONG-TERM LIABILITIES 2,488 1,964 1,959
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' INVESTMENT:
Capital stock:
Series A 10.19%, Convertible Preferred Stock at paid-in value 14,575 - -
Common stock, Class A,
par value $.0001 per share - - -
Common stock, Class B,
par value $.0001 per share 1 - -
Common stock, par value
$.01 per share, 14,434,737 issued and outstanding - 144 144
Warrants outstanding 7,683 - -
Additional paid-in capital 20,113 87,893 88,091
Treasury stock, 39,401 shares at cost (359) (354) (354)
Stock subscriptions receivable (171) (122) (8)
Accumulated deficit (40,352) (29,805) (29,700)
TOTAL SHAREHOLDERS' INVESTMENT 1,490 57,756 58,173
------- -------- --------
$95,795 $126,292 $105,352
------- -------- --------
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 SEPTEMBER 30,
------------------------------------
1996 1997
------------ -----------
(unaudited) (unaudited)
NET REVENUES $33,410 $43,176
COSTS AND EXPENSES:
Educational services 24,745 31,684
General and administrative 8,361 10,728
Amortization of intangibles 447 536
------- -------
33,553 42,948
------- -------
INCOME (LOSS) BEFORE INTEREST
AND TAXES (143) 228
Interest expense, net 952 47
------- -------
Income (loss) before income taxes (1,095) 181
PROVISION (CREDIT) FOR INCOME TAXES (460) 76
------- -------
NET INCOME (LOSS) $ (635) $ 105
------- -------
NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE:
Primary $ (0.15) $ 0.01
------- -------
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)
THREE MONTHS
ENDED SEPTEMBER 30,
-------------------------------------
1996 1997
------------- ------------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ (635) $ 105
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO
NET CASH FLOWS FROM OPERATING ACTIVITIES-
Depreciation and amortization 2,739 3,361
Vesting of compensatory stock options 375 -
Changes in current assets and liabilities-
Restricted cash 151 (5)
Receivables (1,157) 415
Inventories (809) (1,248)
Other current assets (3,123) (2,230)
Accounts payable (1,797) (1,720)
Accrued liabilities (246) (1,659)
Advance payments 19,290 10,994
-------- --------
Total adjustments 15,423 7,908
-------- --------
Net cash flows from operating activities 14,788 8,013
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiaries (9,553) -
Expenditures for property and equipment (2,488) (4,177)
Other items, net (1,184) (51)
-------- --------
Net cash flows from investing activities (13,225) (4,228)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt (14,946) (27,952)
Dividends paid to ESOP (83) -
Capital stock transactions, net (7,600) 314
-------- --------
Net cash flows from financing activities (22,629) (27,638)
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (21,066) (23,853)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 26,162 32,646
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,096 $ 8,793
-------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 1,028 $ 221
Income taxes 111 1,129
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 professional development. The Company has
provided career-oriented education programs for 35 years. Unless otherwise
noted, references to the years 1997 and 1998 refer to the periods ended
September 30, 1996 and 1997, respectively.
2. The results of operations for the three months ended September 30, 1996 and
1997 are not necessarily indicative of the results to be expected for the
entire fiscal year. The interim consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes
thereto for the fiscal year ended June 30, 1997 included in the Company's
Annual Report on Form 10-K as filed with the Securities and Exchange
Commission. The accompanying unaudited condensed 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. First quarter fiscal year
1997 and 1998 interim financial information was reviewed by Arthur Andersen
LLP as set forth in their report included in this document.
3. In November 1996, the Company completed an initial public offering (the
"Offering") of 5,073,600 shares of its Common Stock, $.01 par value (the
"Common Stock"). Upon the closing of the Offering, the right of the holders
of the Company's equity securities to require the Company under certain
circumstances, the Company to repurchase such securities expired.
Accordingly the term "redeemable" that appeared on the September 30, 1996
balance sheet with respect to shareholders' investment has been eliminated.
For 1997, the weighted average number of common shares and common
equivalent shares does not include the exercise of any stock options or
warrants or the conversion of any shares of Series A 10.19% Convertible
Preferred Stock, $.0001 par value (the "Series A Preferred Stock"), as the
effect would have been antidilutive. For 1997, the net loss allocable to
common shareholders was increased by the dividends on the Series A
Preferred Stock in the computation of earnings per share. However,
dividends accrued but not payable reflected in the net loss applicable to
common shareholders were not paid because the Series A Preferred Stock was
converted into Common Stock immediately prior to the consummation of the
Offering.
As of September 30, 1997 and 1996, the Company's authorized and outstanding
capital stock was as follows:
1998 AUTHORIZED OUTSTANDING
---- ---------- -----------
Preferred Stock.......................................................10,000,000 -
Common Stock..........................................................60,000,000 14,434,737
1997 AUTHORIZED OUTSTANDING
---- ---------- -----------
Series A Preferred Stock...............................................1,000,000 145,750
Class A Stock.........................................................25,000,000 1,842,802
Class B Stock.........................................................17,000,000 5,064,315
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4. Effective August 1, 1996, the Company acquired certain net assets of NYRS
for $9.5 million in cash. The Company acquired principally current assets
net of specified current liabilities, property and equipment, student
enrollment agreements, curriculum and trade names. The excess of the
purchase price over the fair value of the assets acquired has been
assigned to goodwill. This transaction was accounted for as a purchase.
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 and student enrollment agreements. The excess of the
purchase price over the fair value of the assets acquired has been
assigned to goodwill. The school was renamed The Art Institute of
Minnesota. This transaction was accounted for as a purchase.
In March 1997, the Company's newest school, The Art Institute of Los
Angeles ("AILA"), became licensed in the state of California. Coincident
with receiving that license, AILA began student recruiting and school
startup activities. Classes commenced at AILA in October 1997. All costs
associated with AILA's startup have been expensed as incurred and are
reflected in the results of operations.
5. Reconciliation of net income available for common shareholders:
(Dollars and shares in thousands) THREE MONTHS ENDED
SEPTEMBER 30
----------------------
1996 1997
Net income (loss) $(635) $105
Dividends paid on Series A Preferred Stock (83) -
Redemption premium on Series A Preferred Stock (107)
-
Dividends accrued, but not payable, on Series A Preferred Stock (223)
------- ------
-
Net income (loss) available to common shareholders $(1,048) $105
------- ------
Weighted average shares 6,922 14,855
6. On October 8, 1997, the Company filed a registration statement on Form S-1
with the Securities and Exchange Commission for the proposed public
offering of shares of Common Stock by certain principal shareholders.
Pursuant to a prospectus dated November 10, 1997, those principal
shareholders are offering 2,833,409 shares of Common Stock and will
reimburse the Company for all out-of-pocket expenses related to this
offering. The Company will not receive any proceeds from this offering. In
addition, the selling shareholders have granted the underwriters an option
to purchase an additional 283,481 shares to cover over-allotments, if any.
7. On August 9, 1996 the Company redeemed 75,000 shares of Series A Preferred
Stock from the Education Management Corporation Employee Stock Ownership
Plan and Trust (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.
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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
unaudited consolidated financial statements of the Company and the notes
thereto.
RESULTS OF OPERATIONS
For the 3 months ended September 30, 1997 compared to the 3 months ended
September 30, 1996:
Net revenues increased by 29.2 % to $43.2 million in 1998 from $33.4
million in 1997 due primarily to a 21.9% increase in student enrollments at
Company-owned schools, accompanied by an average 5.5% tuition price increase at
Company-owned schools in the second fiscal quarter of 1997. Total student
enrollment at the Company's schools increased from 11,303 in 1997 to 13,775 in
1998, including growth of approximately 14.4% at the schools that have been
operated by the Company for 24 months or more. The New York Restaurant School
("NYRS") was acquired in August 1996 and Lowthian College in Minneapolis,
Minnesota was acquired in January 1997and renamed The Art Institute of
Minnesota ("AIM"). The Art Institute of Los Angeles ("AILA") commenced classes
in October, 1997.
Educational services expense increased by $7.0 million, or 28.3%, to $31.7
million in 1998 from $24.7 million in 1997. The increase was primarily the
result of the additional costs required to service higher student enrollments
at The Art Institutes, the addition of AIM and AILA, and normal cost increases
for wages, supplies expense and other services. Educational services expense in
the first quarter of fiscal 1998 was 73.4% of net revenues, compared to 74.1%
in the same period last year. This reduction is the result of greater
efficiency at the schools owned prior to 1997. Educational services expense
as a percentage of revenue for new schools, such as AILA and AIM, is
significantly higher than the overall consolidated percentage.
General and administrative expense increased by $2.3 million, or 27.4%, to
$10.7 million in 1998 from $8.4 million in 1997 primarily because of higher
marketing and student admissions expense, including the addition of
approximately $0.4 million of such expenses at AIM and AILA, and normal cost
increases for wages and media advertising. General and administrative expense
as a percent of net revenues decreased slightly to 24.8% in the first quarter
of fiscal 1998, compared to 25.0% in the same period last year.
Amortization of intangibles increased by 19.9%, to $536,000 in 1998 from
$447,000 in 1997. The increase in amortization expense primarily resulted from
the inclusion of NYRS for a full three months of operations in 1998 compared to
two months in 1997, and the acquisition of AIM.
Net interest expense decreased to $47,000 in 1998 from $952,000 in 1997.
The lower interest expense was primarily attributable to a decrease in the
average outstanding indebtedness from $49.3 million in 1997 to $6.8 million in
1998. In 1997, the Company had average outstanding indebtedness under its
revolving credit agreement of $39.0 million compared to $301,000 in 1998. This
indebtedness was repaid with proceeds from the Offering in November 1996. The
outstanding debt of the Company at September 30, 1997 consisted entirely of
capitalized lease obligations.
The Company's effective tax rate has remained constant at 42.0% in 1998
compared to 1997.
Net income for the quarter increased to $105,000 in 1998 compared to a net loss
of $635,000 in 1997. This improvement is the result of increased revenues,
improved operating efficiencies and lower net interest expense.
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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 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. Historically, the Company's
profitability has been lowest (often resulting in losses) in its fiscal first
quarter ending September 30 due to lower revenues combined with expenses
incurred in preparation for the peak enrollments in the fall quarter.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated positive cash flow from operating activities for the
three months ended September 30, 1996 and 1997, respectively. Cash flow from
operations was $14.8 million and $8.0 million for 1997 and 1998, respectively.
Lower cash flow from operations in 1998 was the result of a decrease in advance
tuition payments related to the later fall quarter start at The Art Institutes.
The fall quarter began October 6 this year compared to October 1 last year.
The Company had a $14.4 million working capital deficit as of September
30, 1997 as compared to $12.7 million of working capital as of June 30, 1997.
The decrease in working capital was due primarily to $28.0 million in debt
repayments under its revolving credit agreement and capitalized leases. Trade
accounts receivable have increased slightly by $100,000 from June 30, 1997.
Effective October 13, 1995, the Company and its lenders amended its
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. This facility is reduced by outstanding letters of credit. As of
September 30, 1997, the Company was in compliance with all covenants and had
$69.5 million of borrowing capacity available under the revolving credit
agreement. In accordance with the terms of that agreement, the facility was
reduced to $65 million on October 13, 1997.
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.
The Company believes that cash flow from operations, supplemented from
time to time by borrowings under its 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 $2.5 million and $4.2 million for
the three months ended September 30, 1996 and 1997, respectively. The Company
anticipates increased capital spending for 1998, principally related to the
introduction and expansion of culinary and other programs, continued investment
in schools acquired or opened during 1997 and 1998 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.
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CHANGES IN ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued
Financial Accounting Standard #128 ("FAS #128"). FAS #128 changes the
methodology of calculating earning per share ("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
SEPTEMBER 30,
----------------------------
1996 1997
---- ----
NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE:
Basic $(.15) $.01
------ ----
Diluted $(.15) $.01
------ ----
WEIGHTED AVERAGE SHARES OUTSTANDING (IN 000'S)
Basic 6,922 14,429
----- ------
Diluted 6,922 14,855
----- ------
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PART II -- OTHER INFORMATION
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
(27) Financial Data Schedules
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the three months ended September 30, 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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