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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K /A
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended August 31, 2000
Commission file number 000-29820
Argosy Education Group, Inc.
(Exact name of registrant as specified in its charter)
Illinois 36-2855674
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Two First National Plaza, 20 South Clark Street, Suite 2800, Chicago, Illinois
60603
(Former Address: Two First National Plaza, 20 South Clark Street, 3rd Floor,
Chicago, Illinois 60603)
(Address of principal executive offices)
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Registrant's telephone number, including area code: (312) 899-9900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock
(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 required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of the registrant's voting stock held by non-
affiliates of the registrant, based upon the $5.94 per share closing sale
price of the registrant's Common Stock on November 21, 2000, was approximately
$9,376,848. For purposes of this calculation, the Registrant's directors and
executive officers have been assumed to be affiliates.
The number of shares outstanding of the registrant's Class A and Class B
Common Stock, par value $.01, as of November 21, 2000 was 6,478,594.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of our Notice of Annual Meeting and Proxy Statement for our Annual
Meeting of Stockholders, is scheduled to be held on January 26, 2001, are
incorporated by reference into Part III of this Report.
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ARGOSY EDUCATION GROUP, INC.
FORM 10-K
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business...................................................... 1
Item 2. Properties.................................................... 21
Item 3. Legal Proceedings............................................. 22
Item 4. Submission of Matters to a Vote of Security Holders........... 22
PART II
Market for Registrant's Common Equity and Related Stockholder
Item 5. Matters....................................................... 22
Item 6. Selected Historical Consolidated Financial Data............... 24
Management's Discussion and Analysis of Financial Condition
Item 7. and Results of Operations..................................... 25
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.... 32
Item 8. Financial Statements and Supplementary Data................... 32
Changes in and Disagreements with Accountants on Accounting
Item 9. and Financial Disclosure...................................... 33
PART III
Item 10. Directors and Executive Officers of the Registrant............ 33
Item 11. Executive Compensation........................................ 33
Security Ownership of Certain Beneficial Owners and
Item 12. Management.................................................... 33
Item 13. Certain Relationships and Related Transactions................ 33
PART IV
Exhibits, Financial Statement Schedules, and Reports on Form
Item 14. 8-K........................................................... 33
Special Note Regarding Forward-Looking Statements:
This Form 10-K contains certain statements which reflect our expectations
regarding our future growth, results of operation, performance and business
prospects and opportunities. Wherever possible, words such as "anticipate,"
"believe," "plan," "expect" and similar expressions have been used to identify
these "forward-looking" statements as such terms are defined in Section 21E of
the Securities Exchange Act of 1934, as amended. These statements reflect our
current beliefs and are based on information currently available to us.
Accordingly, these statements are subject to risks and uncertainties which
could cause our actual growth, results, performance and business prospects and
opportunities to differ from those expressed in, or implied by, these
statements. These risks and uncertainties include implementation of our
operating and growth strategy, risks inherent in operating private for-profit
postsecondary education institutions, risks associated with general economic
and business conditions, charges and costs related to acquisitions, and our
ability to: successfully integrate our acquired institutions and continue our
acquisition strategy, attract and retain students at our institutions, meet
regulatory and accrediting agency requirements, compete with enhanced
competition and new competition in the education industry, and attract and
retain key employees and faculty. We are not obligated to update or revise
these forward-looking statements to reflect new events or circumstances.
PART I
ITEM 1. BUSINESS
General Overview
The Company is the nation's largest for-profit provider of doctoral level
programs. The Company's mission is to provide academically-oriented,
practitioner-focused education in fields with numerous employment
opportunities and strong student demand. In addition to doctoral and masters
degrees in psychology, education and business, the Company also awards
bachelor's degrees in business, associate degrees in allied health professions
and diplomas in information technology. For the 1999-2000 school year,
approximately 59% of the Company's students were enrolled in doctoral
programs. In 1999, the Company graduated approximately 225 clinical psychology
doctoral students out of approximately 4,000 psychology doctoral degrees
conferred nationwide. The Company operates 17 campuses in nine states and the
Province of Ontario, Canada, and had a total of approximately 5,400 students,
representing 50 states and 20 foreign countries, enrolled for the 1999-2000
school year.
The Company was founded in 1975, when the Company's Chairman, Michael C.
Markovitz, Ph.D., recognized a demand for a non-research oriented professional
school that would educate and prepare students for careers as clinical
psychology practitioners. To address this demand, the Company started the
Illinois School of Professional Psychology in Chicago, Illinois in 1976 and,
in its first year of operations, received several thousand inquiries for
admission to a class of 70 students for the PsyD degree. The continuing demand
for high quality, practitioner-focused psychology postgraduate education led
the Company to expand the renamed American Schools of Professional Psychology
to ten campuses located across the United States. In response to a broader
demand for quality career education, the Company has expanded beyond the
psychology curriculum with the acquisitions of (i) the University of Sarasota,
a degree-granting institution focusing primarily on postgraduate business and
education (March 1992); (ii) the Medical Institute of Minnesota, a degree-
granting institution focusing on a variety of allied health professions
(February 1998); and (iii) PrimeTech Institute, an institution granting
diplomas in computer programming and other aspects of information technology
and in paralegal studies (November 1998). In addition, the Company became the
largest provider of postgraduate psychology license examination preparation
courses and materials in the United States by its acquisition of Ventura in
August 1997. Through Ventura, the Company also provides professional licensure
examination materials and workshops for social work; marriage, family and
child counseling; marriage and family therapy; and counseling certification
examinations nationwide.
The Company operates the following schools:
. American Schools of Professional Psychology ("ASPP") grants doctoral and
master's degrees in clinical psychology and related disciplines at ten
campuses located in Illinois (2), Minnesota, Georgia, Virginia, Hawaii,
Arizona, Florida, California and Washington. ASPP is accredited by the
North Central Association of Colleges and Schools ("NCA"), and six of its
campuses are accredited by the American Psychological Association
("APA").
. University of Sarasota ("U of S") grants doctoral, master's and
bachelor's degrees at three campuses located in Sarasota, Florida, Tampa,
Florida and Orange, California. U of S is accredited by the Southern
Association of Colleges and Schools ("SACS").
. Medical Institute of Minnesota ("MIM") grants associate degrees at one
campus in Minneapolis, Minnesota. MIM is institutionally accredited by
the Accrediting Bureau of Health Education Schools ("ABHES"), and
additionally holds individual programmatic accreditation appropriate to
each degree program offered.
. PrimeTech Institute ("PrimeTech") awards diplomas at three campuses in
Ontario, Canada.
In addition, Ventura publishes materials and holds workshops in select
cities across the United States to prepare individuals to take various
national and state administered oral and written health care licensure
examinations in psychology and other mental health disciplines.
1
As of September 1, 1999 the Company entered into a long term agreement to
manage the John Marshall Law School of Atlanta, Georgia ("John Marshall"). The
agreement includes a 10-year option to purchase John Marshall. The right can
be exercised at the Company's discretion. The Company is accounting for its
advances to John Marshall as an equity method investment. Throughout its 67-
year history, John Marshall has operated with the approval of the Georgia
Supreme Court but without American Bar Association accreditation. In 1987,
however, the court mandated that John Marshall must earn ABA accreditation
prior to 2003 or close. Because of the Company's demonstrated expertise in
working with accrediting bodies, the Company was chosen to manage John
Marshall on a contractual basis.
The following table sets forth certain additional information regarding the
Company's schools and their various campuses:
Year Date
School and Campus Locations Opened Acquired Accreditation
--------------------------- ------ ---------- -------------
American Schools of
Professional Psychology NCA
Illinois School of
Professional
Psychology/Chicago...... Chicago, IL 1976 -- APA
Illinois School of
Professional
Psychology/Chicago
Northwest............... Rolling Meadows, IL 1979 March 1994 APA
Minnesota School of
Professional
Psychology.............. Minneapolis, MN 1987 -- APA
Georgia School of
Professional
Psychology.............. Atlanta, GA 1990 -- APA
American School of
Professional
Psychology/Virginia..... Arlington, VA 1994 -- APA
American School of
Professional
Psychology/Hawaii....... Honolulu, HI 1979 March 1994 APA
Arizona School of
Professional
Psychology.............. Phoenix, AZ 1997 --
Florida School of
Professional
Psychology(1)........... Tampa, FL 1995 Sept. 1998
American School of
Professional Psychology/
San Francisco Bay Area
Point................... Richmond, CA 1998 Sept. 1998
Washington School of
Professional
Psychology.............. Seattle, WA 1997 Sept. 1999
University of Sarasota SACS
University of
Sarasota/Honore......... Sarasota, FL 1969 March 1992
University of
Sarasota/Tampa.......... Tampa, FL 1997 --
University of
Sarasota/California..... Orange, CA 1999 --
Medical Institute of
Minnesota............... Minneapolis, MN 1961 Feb. 1998 ABHES
PrimeTech Institute
PrimeTech Institute/North
York.................... North York, Ontario 1989 Nov. 1998
PrimeTech Institute/City
Campus.................. Toronto, Ontario 1995 Nov. 1998
PrimeTech
Institute/Scarborough... Scarborough, Ontario 1999 --
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(1) Historically operated as a unit of the University of Sarasota.
In February, 2000, MIM was granted candidate status for accreditation by
NCA MIM will continue its efforts towards full accredidation which can take at
least one or two years. In addition, the Florida School of Professional
Psychology will host the APA on a site visit which is a preliminary step to
potentially full accreditation.
Industry Overview
According to the National Center for Education Statistics (the "NCES") of
the United States Department of Education ("DOE"), education is the second
largest sector of the U.S. economy, accounting for approximately 8% of gross
domestic product in 1997, or over $600 billion. The Company's schools are part
of the postsecondary education market, which accounts for approximately one-
third of the total sector. Of the
2
approximately 6,000 postsecondary schools that are eligible to participate in
the student financial aid programs ("Title IV Programs") administered by DOE
under the Higher Education Act of 1965, as amended ("HEA"), approximately 500
are proprietary degree-granting institutions such as the Company's schools.
The NCES estimates that by the year 2009 the number of students enrolled in
higher education institutions will increase from current estimated levels by
more than 1.5 million, to over 16 million students. The Company believes that
a significant portion of this growth in the postsecondary education market
will result from an increase in the number of new high school graduates, an
increase in the number of college graduates attending postgraduate
institutions and the increased enrollment by working adults in postsecondary
and postgraduate institutions. According to the NCES, the number of new high
school graduates per year is expected to increase by approximately 24%, from
2.5 million graduates in 1994 to 3.1 million graduates in 2004. Over the same
period, the number of college graduates attending postgraduate institutions is
expected to increase by approximately 100,000 students. The NCES estimates
that, over the next several years, initial enrollments in postsecondary
education institutions by working adults will increase more rapidly than
initial enrollments of recent high school graduates.
The postsecondary education industry generally is expected to benefit from
the public's increased recognition of the value of a postsecondary education.
According to the NCES, the percentage of recent high school graduates who
continued their education after graduation increased from approximately 53% in
1983 to approximately 65% in 1996. The percentage of college graduates
continuing to postgraduate institutions remained relatively constant, at 11%,
over the same period. The Company believes that students pursue higher
education for a variety of reasons, including the increased prestige
associated with academic credentials, career change and development,
intellectual curiosity and the income premium associated with higher
education. According to Census Bureau data, in 1997 the income premiums over
comparable workers with high school diplomas for associate, bachelor's,
master's and doctoral degree holders were 26%, 57%, 103% and 175%,
respectively.
Business Strategy
The Company's mission is to provide academically-oriented, practitioner-
focused education in fields with numerous employment opportunities and strong
student demand. The key elements of the Company's business strategy are as
follows:
Focusing on Advanced Degrees. Approximately 62% of the Company's students
are enrolled in doctoral programs, with an additional 17% pursuing master's
degrees and the remainder pursuing bachelor's or associate degrees or
diplomas. Management believes that the Company's emphasis on advanced degree
programs provides greater predictability of tuition revenue and reduces
recruitment cost per enrolled student, as compared to lower level degree
programs, due to a number of factors, including the longer term of most
advanced degree programs, the higher student retention rates experienced in
more advanced degree programs and the narrower target markets for advanced
degree programs. Consistent with this philosophy, the Company plans to expand
some of its associate degree programs, such as those offered by MIM, to
bachelor's degree programs. By offering more advanced degree programs, the
Company can also take advantage of the tendency of many graduates of master's,
bachelor's and associate degree programs to continue their education at the
same institution if appropriate advanced degree programs are offered.
Focusing on Curricula with Practical Professional Applications. The Company
was founded to respond to a demand for postgraduate education which focuses on
practical professional applications instead of research. The Company's
academic programs are designed to prepare students to work in their chosen
professions immediately upon graduation. Psychology graduate students, for
example, gain significant practical professional experience through a required
internship program. Similarly, MIM requires all of its students to participate
in a field-based internship. The Company's programs for professional educators
also focus on practical benefits by offering the academic credentials and
skills in discrete sub-specialties required for promotion and increased
3
compensation. This practitioner-focused approach provides the additional
benefits of attracting highly motivated students and increasing student
retention and graduate employment. The Company's professional test preparation
business provides it with another means of participating in the practical
education needed for graduates in many fields to become practitioners.
Refining and Adapting Educational Programs. Each of the Company's schools
strives to meet the changing needs of its students and changes in the
employment markets by regularly refining and adapting its existing educational
programs. To do so, the Company has implemented its Program for Institutional
Effectiveness Review. PIER is designed to provide periodic feedback from
senior management, faculty and students with a view toward consistently
improving the quality of each school's academic programs. Through PIER, the
Company solicits the views of each of these participants in the educational
process on quality improvement issues such as curriculum innovations which can
meet existing or expected employment and student demands and class scheduling
and other program administrative improvements which can improve the students'
educational experience.
Emphasizing School Management Autonomy and Accountability. The Company
operates with a decentralized management structure in which local campus
management is empowered to make most of the day-to-day operating decisions at
each campus and is primarily responsible for the profitability and growth of
that campus. Appropriate performance-based incentive compensation arrangements
have been implemented by the Company to reinforce the accountability of local
campus management under this structure. At the same time, the Company provides
each of its schools with certain services that it believes can be performed
most efficiently and cost-effectively by a centralized office. Such services
include marketing, accounting, information systems, financial aid processing
and administration of regulatory compliance. The Company believes this
combination of decentralized management and certain centralized services
significantly increases its operational efficiency.
Growth Strategy
The Company's objective is to achieve growth in revenue and profits while
consistently maintaining the integrity and quality of its academic programs.
The key elements of the Company's growth strategy are as follows:
The Argosy University Concept. The Company is instituting the Argosy
University restructuring initiative. Under this plan, all Argosy Education
Group, Inc. schools will ultimately be represented under the single banner,
Argosy University. Among the strategic advantages identified are the
following:
. Economies of scale--Operating as one entity will allow efficiencies in
facilities, student recruitment, marketing, advertising and other
communications, information technology, student financial aid and a host
of other administrative functions.
. Clearer investor identity--Communicating one brand consistently to all
audiences will raise awareness and create greater understanding among
current and prospective investors about the inherent value of the Argosy
franchise.
. Simplified accrediting and regulatory relationships--Argosy University
and all its campuses will be accredited by the North Central Association
of Schools and Colleges. Today, our campuses hold accreditation from
three regional accrediting bodies, each with their own unique
requirements. Managing state and federal regulatory affairs also will
become less burdensome.
. Streamlined corporate governance--Under the Argosy University structure,
the need for school-specific boards eventually will be eliminated.
Such an endeavor represents a major undertaking that will require the focus
and dedication of all management disciplines. Each campus will continue to
offer its current curricular programs, and over time will add additional
programs in Argosy's core disciplines of psychology, education, information
technology, healthcare and law. This approach will ultimately lead to a
nationwide network of full-service Argosy university
4
campuses offering both graduate and undergraduate degree programs. To move the
process forward, integration teams were established to address nine key
operational areas: academic departments and faculty, financial aid,
institutional effectiveness, library services, marketing, policy integration,
recruiting, student services, and Web services and technology. Team members
include representatives from the central office staff as well as campus deans
and faculty members. Accordingly, this initiative is scheduled for initial
phased implementation during the fiscal year starting September 1, 2001.
Emphasizing Student Recruitment and Retention. The Company believes that it
can increase total enrollment at its campuses through the implementation of an
integrated marketing program that utilizes direct response marketing and
direct sales to college and high school counselors. The Company has hired a
marketing professional at each of its campuses to focus both the marketing
campaign and overall recruitment effort of each campus within its targeted
market. The Company also believes it can increase its profitability through
improvements in student retention rates, as the cost of efforts to keep
current students in school are less than the expense of attracting new
students.
Expanding Program Offerings. The Company regularly engages in the
development of new, and the expansion of existing, curricular offerings at the
doctoral, master's, bachelor's, associate and certificate levels. Of the 18
degree-granting programs currently offered by the Company, five have been
introduced since 1995. In 1999 the Company began offering courses in its new
sports psychology program. In 2000, the Company initiated master's of arts
("MA") in forensic psychology and a specialist degree in professional
counseling. The Company believes that there are significant opportunities to
develop additional new programs, such as its new program in pastoral
counseling at U of S and its proposed programs in dental hygienics and
radiation therapy at MIM. Once new programs have proven successful at one
school, the Company seeks to expand them to its other schools which offer
related programs. For example, ASPP currently offers an MA degree in
counseling at six of its campuses and is in the process of making this program
available at the remaining ASPP campuses.
The Company believes that significant opportunities exist in providing
educational services that are related to its current program offerings.
Through Ventura, the Company has become a leading provider of test preparation
programs for psychology licensure examinations. These programs bring the
Company in contact with a significant number of current and future psychology
practitioners, which the Company believes can offer an opportunity to market
additional educational programs in the future. For example, the Company
believes that non-degree continuing education programs will increasingly be
mandated by state licensing authorities; this represents an opportunity for
the Company to provide services not only for the graduates of its schools, but
also for the broader universe of licensed health care providers to which it
gains access through its Ventura test preparation programs.
Adding New Campuses. The Company seeks to expand its presence into new
geographic locations. Nine of the Company's 17 campuses were developed by the
Company internally. The Company regularly evaluates new locations for
developing additional campuses and believes that significant opportunities
exist for doing so. Accordingly, the Company plans on adding two ASPP campuses
during the next fiscal year. Of the 21 metropolitan areas in the United States
with a population in excess of two million persons, nine do not have a
graduate school of professional psychology that awards the PsyD degree.
Acquisitions. Based on recent experience and internal research, the Company
believes that, in both the for-profit and not-for-profit postgraduate
education industry, most schools are small, stand-alone entities without the
benefits of centralized professional management, scale economies in purchasing
and advertising or the financial strength of a well-capitalized parent
company. The Company intends to capitalize on this fragmentation by acquiring
and consolidating attractive schools and educational programs. The Company has
acquired eight of its 17 campuses, four of which were for-profit and four of
which were originally not-for-profit, and the Ventura test preparation
business. The Company believes there are significant opportunities to acquire
schools which can serve as platforms for program and campus expansion. Prime
acquisition candidates are those that have the potential to be quickly
developed into profitable, accredited degree-granting schools offering
programs consistent with the Company's mission.
5
The Company announced on November 16, 2000, that it has entered into an
agreement to purchase Western State University College of Law, in Fullerton,
California ("Western State") for approximately $13 million less certain
deductions as provided for in the Agreement. The proposed transaction is
subject to approval by accrediting and regulatory entities, including the
Western Association of Schools and Colleges, the American Bar Association and
the U.S. Department of Education. Western State has an enrollment of 501
students in both full and part-time programs. Since its founding in 1966, the
school has graduated more than 10,000 students. Approximately 25 percent of
the lawyers practicing in Orange County and 15 percent of those practicing in
the Inland Empire and the Long Beach area are Western State University
graduates. The college is accredited by the Western Association of Schools and
Colleges and provisionally approved by the American Bar Association. Western
State will continue to operate under its current name and management following
closing of the purchase, which is anticipated in the first quarter of 2001.
Programs of Study
ASPP. ASPP grants postgraduate level degrees in a variety of specialties
within the field of clinical psychology. The Company offers a doctorate in
clinical psychology, master's of arts degrees in clinical psychology and
professional counseling and a master's of science degree in health services
administration. ASPP also offers a postdoctoral program in clinical
psychopharmacology. Approximately 70% of ASPP's students are enrolled in the
PsyD program in various specialties and, of the students enrolled in the
clinical MA program, historically more than 60% continue in the PsyD program.
The Company was among the first academic programs in the United States to
offer the practitioner-focused PsyD degree, as compared to the research-
oriented PhD degree. The PsyD is a four year program consisting of one year of
classroom training, two years divided between classroom training and fieldwork
practicum and a fourth year consisting of a paid internship. The program
focuses on practical issues in clinical psychology as compared to abstract
research topics. For example, fourth year students prepare a case study as
their final project, rather than a doctoral dissertation. Clinical MA students
complete a two year program, all of which can be carried over into the PsyD
program.
In connection with its emphasis on a practitioner-focused education, ASPP
offers a variety of minors to be pursued in connection with the PsyD program.
For example, the Chicago campus offers minors in the areas of Family
Psychology, Ethnic Racial Psychology, Psychoanalytic Psychology, Sexual Abuse
Psychology, Health Psychology and Psychology and Religion. The Minnesota
campus also offers the Health Psychology and Psychology and Religion
subspecialties, as well as a minor in Child and Family Psychology.
The master's of arts program in professional counseling is a two year
program combining classroom training and fieldwork. Typically offered in the
evening and on weekends, this program aims to provide the skills and training
needed by individuals to practice as licensed professional counselors in a
wide variety of governmental, community and private settings.
ASPP's academic programs are highly respected in the field. Since its
inception in 1976, ASPP has graduated over 2,800 students. While its focus is
on practice rather than research, its graduates also include PsyDs who now
serve as tenured faculty members at Harvard University and Northwestern
University.
U of S. U of S grants postgraduate and bachelor's level degrees in
education, business and behavioral science. In education, U of S offers a
doctorate in education ("EdD"), a master's of arts in education ("MEd") and an
educational specialist degree ("EdS"), each with various majors or
concentrations, such as curriculum and instruction, human services
administration, counseling psychology and educational leadership. In business,
U of S offers a doctorate in business administration ("DBA"), a master's of
business administration ("MBA") and a bachelor's of science in business
administration ("BSBA"), each with various majors or concentrations, such as
information systems, international business, management and marketing. In
behavioral science, U of S offers a master's of arts in counseling.
6
The EdD, MAEd and EdS programs are offered to professional educators from
across the U.S. The programs consist of an innovative combination of distance
learning and personal interaction, allowing students to complete a significant
percentage of the preparatory work for each course at home in advance of an
intensive in-person instructional period, typically scheduled during breaks in
the academic year. The Company believes that an important aspect of the
learning experience is the student's interaction with faculty and other
students. The EdD is a three year program, and the MAEd and EdS are two year
programs.
The DBA, MBA and BSBA degrees are offered both part-time and full-time and
consist of classes in disciplines such as statistics, economics, accounting
and finance. The DBA is a three year program; the MBA is a two year program,
which may count towards two of the three years required for the DBA; and the
BSBA is a two year degree completion program.
MIM. MIM offers associate degrees ("AA") in a variety of allied health care
fields. MIM offers programs leading to certification as a veterinary
technician, diagnostic medical sonographer, histotechnician, medical
assistant, medical laboratory technician or radiologic technologist.
Currently, approximately 60% of the students are enrolled in the veterinary
technician program. The programs typically consist of 12-15 months of full-
time classroom training and two to six additional months of internship.
PrimeTech. PrimeTech offers diploma programs in network engineering,
internet engineering, software programming and paralegal studies. The programs
typically consist of 12-18 months of full-time course work, which can be taken
on a part-time basis and which is completed on-site.
Ventura. Ventura publishes materials and holds workshops in select cities
across the United States to prepare individuals to take various national and
state administered oral and written health care licensure examinations in the
fields of psychology, social work, counseling, marriage and family therapy,
and marriage, family and child counseling. The programs typically last three
to four days and are conducted at various locations throughout the United
States.
Student Body
Recruitment
The Company seeks to attract students with both the motivation and ability
to complete the programs offered by its schools. To generate interest, the
Company engages in a broad range of activities to inform potential students
and their parents about its schools and programs of study.
The general reputation of the Company's schools and referrals from current
students, alumni and employers are the largest sources of new students. The
Company believes that the majority of ASPP's students for the 1999 fiscal year
were enrolled through referrals from current and former students as well as
employees and others who have worked with ASPP's graduates. The Company also
employs marketing tools such as its web sites and creates publications and
other promotional materials for the Company's schools, participates in school
fairs and uses other traditional recruitment techniques common to
undergraduate and postgraduate institutions. The goal of the Company's
recruitment efforts is to increase awareness of the Company's schools among
potential applicants in a cost-effective and dignified manner.
ASPP and U of S operate in a different marketing environment than MIM and
PrimeTech. ASPP and U of S seek to appeal to academically-oriented students,
students who might otherwise elect to attend a state-sponsored or private
university and who expect to see recruitment efforts and materials consistent
with such universities, such as course catalogs and participation in student
fairs. MIM and PrimeTech seek to appeal to students who are strictly seeking
career-enhancing education and students who may not have college or university
experience. These students typically respond to more traditional commercial
marketing efforts. Ventura markets its programs directly to graduates of
postgraduate psychology schools that have registered to take postgraduate
licensure exams.
7
The following table sets forth certain statistics regarding the student
body at each of the Company's schools for the 1999-2000 academic year:
Number of Average
School Students Age % Postgraduate
------ --------- ------- --------------
American Schools of Professional
Psychology.............................. 2,350 32 100%
University of Sarasota................... 2,096 41 98%
Medical Institute of Minnesota........... 626 26 0%
PrimeTech Institute...................... 272 30 0%
Admission
The Company's admissions objective is to achieve controlled student
enrollment growth while consistently maintaining the integrity and quality of
its academic programs. At each of the Company's schools, student admissions
are overseen by a committee, comprised principally of members of the faculty,
that reviews each application and makes admissions decisions. Differing
programs within the Company operate with differing degrees of selectivity.
Some of the Company's programs, particularly its postgraduate psychology
programs, receive many more applications for admission than can be
accommodated. Admissions criteria for such programs include a combination of
prior academic record, performance on an admissions essay and work experience.
The Company believes that other of its programs are beneficial to anyone who
possesses the necessary qualifications and chooses to enroll. Such programs
tend to be less selective; however, the Company does screen students both for
their commitment to completing a particular program of study and their
aptitude for the academic subject matter of their chosen program. Upon passing
the various screens of the admissions process, successful applicants are
notified of acceptance into the program of their choice. All of the Company's
schools use a rolling admissions format.
Retention
The Company recognizes that the ability to retain students until graduation
is an important indicator of the success of its schools and of its students.
As with other postsecondary institutions, students at the Company's schools
may fail to finish their programs for a variety of personal, financial or
academic reasons. While ASPP doctoral students have seven years to complete
their studies, students generally complete the program in approximately five
and one-half years. Over 62% of the members of ASPP's 1993 entering doctoral
class graduated in 1998, and historically approximately 70% of ASPP's students
ultimately complete their degree. U of S, MIM and PrimeTech have historically
had completion rates similar to those of ASPP, although MIM and PrimeTech have
substantially shorter programs. The Company believes MIM's and PrimeTech's
completion rates are higher than those of many other associate degree and
diploma programs. To reduce the risk of student withdrawals, the Company
counsels students early in the application process to gauge their commitment
to completing their chosen course of study.
Student retention is considered an entire school's responsibility, from
admissions to faculty and administration to career counseling services. To
minimize student withdrawals, faculty and staff members at each of the
Company's campuses strive to establish personal relationships with students.
Each campus devotes staff resources to advising students regarding academic
and financial matters, part-time employment and other matters that may affect
their success. However, while there may be many contributors, each campus has
one administrative employee specifically responsible for monitoring and
coordinating the student retention efforts. In addition, the Company's senior
management regularly tracks retention rates at each campus and provides
feedback and support to local campus administrators.
Tuition and Fees
The Company's schools invoice students for tuition and other institutional
charges by the term of instruction. Each school's refund policies meet the
requirements of the DOE and such school's state and accrediting agencies.
8
Generally, if a student ceases attendance during the first 60% of any term for
which he or she received Title IV Program funds, the applicable school will
refund institutional charges based on the number of days remaining in that
term. After a student has attended 60% of that term, the school generally is
allowed to retain 100% of the institutional charges.
The Company has historically implemented tuition increases each year at or
above the rate of inflation. Average tuition increases at the Company's
schools for fiscal 1998, 1999 and 2000 were 5.1%, 5.2% and 5.1%, respectively.
The following table sets forth the average total tuition to complete a
degree at each of the Company's schools, based on tuition rates for the 1999-
2000 academic year:
Average
Total Length of
School Tuition Program
------ ------- ---------
American Schools of Professional Psychology
PsyD.................................................... $55,320 4 years
MA (Clinical)........................................... 26,280 2 years
MA (Counseling)......................................... 20,060 2 years
University of Sarasota....................................
DBA, EdD................................................ $22,260 3 years
MAEd.................................................... 14,470 2 years
EdS..................................................... 11,130 2 years
MBA..................................................... 10,110 2 years
MA...................................................... 17,810 2 years
BSBA.................................................... 14,820 2 years
Medical Institute of Minnesota
Veterinary Technician, Radiologic Technologist, Medical
Lab Technician, Diagnostic Medical Sonographer......... $22,820 18 months
Histotechnician, Medical Assistant...................... 20,870 18 months
PrimeTech Institute (Canadian $)
Software Programming Engineer........................... $14,700 18 months
Software Programmer..................................... 11,900 13 months
PC/LAN.................................................. 7,000 12 months
Internet Service/Support Engineer....................... 6,150 12 months
Legal Secretary......................................... 5,800 12 months
LAN Professional, Paralegal............................. 5,500 12 months
Microcomputer Business Application Administration....... 4,300 12 months
Desktop Publishing Specialist........................... 3,950 12 months
Accounting Assistant.................................... 3,500 12 months
Graduate Employment
The Company believes that employment of its graduates in occupations
related to their fields of study is critical to the ability of its schools to
continue to recruit students successfully. Based on information received from
graduating students and employers, the Company believes that students
graduating from the Company's schools enjoy considerable professional success.
ASPP's graduating class for the 1998-1999 school year, for example, reported a
93% employment rate in their area of study within six months after graduation.
U of S's education students are primarily working professional educators, and
thus by definition, have a significant graduate employment rate. The success
of their educational experience is measured by continued and accelerated
success in their field. MIM and PrimeTech each provide academic programs
specifically tailored to a student's career goals. MIM's and PrimeTech's
graduating classes for the 1998-1999 school year reported employment rates in
their relevant fields of study within six months of graduation of 85% and 75%,
respectively.
9
Faculty
The Company seeks to attract and retain faculty with outstanding
credentials in their respective fields for each of its schools. Each of the
Company's schools attempts to employ faculty members who are dedicated to the
teaching profession and to provide such faculty members with a stimulating and
professional academic environment and competitive compensation package. The
Company emphasizes a core staff of full-time faculty members to maintain
continuity and consistency across its academic programs, augmented by part-
time adjunct faculty with significant industry experience. The Company's
schools each employ dedicated faculty with significant experience and
credentials in their respective fields to provide the personal interaction
that is critical to the academic experience. The Company also encourages its
full-time faculty members to engage in meaningful outside professional
activities to retain current practical experience. The Company has implemented
its PIER program providing periodic feedback to faculty from senior
management, faculty peers and students with a view toward consistently
improving the quality of each school's academic programs.
The following table sets forth certain information regarding the faculty at
each of the Company's schools as of August 31, 2000:
Adjunct Highest Degree of Full-Time
School Faculty Faculty(1) Faculty
------ ------- ---------- ------------------------------
American Schools of
Professional Psychology.... 95 89 100% Doctoral (PhD or PsyD)
University of Sarasota...... 32 32 97% Doctoral, 3% Master's
Medical Institute of 25 33 9% Doctoral, 14% Master's,
Minnesota.................. 35% Bachelor's, 10% Associate,
32% Certificate
PrimeTech Institute......... 15 31 12% Doctoral, 38% Master's,
50% Bachelor's
- --------
(1) Represents faculty members teaching at least one class during the 1999-
2000 academic year.
Governance of the Company's Schools
Each ASPP campus is managed locally by a Dean who reports either to a
regional Vice President (Joseph Bascuas, PhD and Cynthia Baum, PhD) or
directly to the Argosy Chief Operating Officer (Jim Otten, PhD). U of S is
headed by a Provost (Bill Pepicello, PhD) who reports to the Board of U of S.
Both PrimeTech and MIM are headed by Unit Presidents (Roy Rintoul and Scott
Tjaden, PhD, respectively) each of whom reports to his respective board of
directors. Each of these Provosts and Unit Presidents also consult with the
President of the Company (Jim Otten). Scott Ables, General Manager of Ventura,
also reports to the President of the Company.
U of S and MIM each has an independent Board of Directors, separate from
the Company's Board but elected by the Company as sole shareholder. These
local boards of directors independently make and approve policies and budgets.
Competition
The postsecondary education market in the United States is highly
fragmented and competitive, with no private or public institution enjoying a
significant market share. The Company competes for students with postgraduate,
four year and two year degree-granting institutions, which include non-profit
public and private colleges, universities and proprietary institutions. An
attractive employment market also reduces the number of students seeking
postgraduate degrees, thereby increasing competition for potential
postgraduate students. Management believes that competition among educational
institutions is based on the quality of educational programs, location,
perceived reputation of the institution, cost of the programs and employment
opportunities for graduates. Certain public and private colleges and
universities may offer programs similar to those of the Company at a lower
tuition cost due in part to governmental subsidies, government and foundation
grants, tax
10
deductible contributions or other financial resources not available to
proprietary institutions. Other proprietary institutions also offer programs
that compete with those of the Company. Moreover, there is an increase in
competition in the specific educational markets served by the Company. For
example, excluding PsyD programs offered by the Company, in the 1992 academic
year there were 36 PsyD programs existing in the United States, while in the
1997 academic year there were 54 PsyD programs in the United States. Certain
of the Company's competitors in both the public and private sector have
greater financial and other resources than the Company.
PrimeTech operates in the Province of Ontario, Canada where a number of
competing programs exist, both in the public and private sectors, which offer
a broad spectrum of content and pricing.
Employees
As of August 31, 2000, the Company employed 355 persons. Of this number, 38
were employed in the Company's corporate headquarters, 167 were full-time or
permanent part-time faculty members and 150 were working as administrative or
support staff deployed at the various Company locations. None of the Company's
employees are unionized. The Company believes its relations with its employees
are generally good.
11
FINANCIAL AID AND REGULATION
Accreditation
Accreditation is a non-governmental process through which an institution
voluntarily submits itself to qualitative review by an organization of peer
institutions. The three types of accrediting agencies are (i) national
accrediting agencies, which accredit institutions on the basis of the overall
nature of the institutions without regard to their locations, (ii) regional
accrediting agencies, which accredit institutions located within their
geographic areas, and (iii) programmatic accrediting agencies, which accredit
specific educational programs offered by an institution. Accrediting agencies
primarily examine the academic quality of the instructional programs of an
institution, and a grant of accreditation is generally viewed as certification
that an institution's programs meet generally accepted academic standards.
Accrediting agencies also review the administrative and financial operations
of the institutions they accredit to ensure that each institution has the
resources to perform its educational mission.
Pursuant to provisions of the HEA, the DOE relies in part on accrediting
agencies to determine whether an institution and its educational programs
qualify to participate in the Title IV Programs. The HEA specifies certain
standards that all recognized accrediting agencies must adopt in connection
with their review of postsecondary institutions. Accrediting agencies that
meet the DOE standards are recognized as reliable arbiters of educational
quality. The HEA requires each recognized accrediting agency to submit to a
periodic review of its procedures and practices by the DOE as a condition of
its continued recognition.
All of the Company's U.S. campuses are accredited by an accrediting agency
recognized by the DOE. These accrediting agencies are the North Central
Association of Colleges and Schools ("NCA"), the Southern Association of
Colleges and Schools ("SACS"), the Accrediting Bureau of Health Education
Schools/Programs ("ABHES") and the American Psychological Association ("APA").
NCA, SACS and ABHES are institutional accrediting bodies which accredit the
entire institution. The APA is a programmatic accrediting body which does not
accredit the entire institution, but only specific programs offered by the
institution. ASPP is institutionally accredited by NCA to offer both doctoral
and master's degrees at all of its campuses. ASPP's Chicago, Minneapolis,
Atlanta, Hawaii, Rolling Meadows and Virginia campuses also have programmatic
accreditation by the APA for the PsyD degree. Currently, ASPP's Florida campus
is hosting the APA on a site visit which is a preliminary step to potentially
full accreditation. Although APA accreditation is not currently required,
failure to obtain such accreditation could adversely affect state
authorization of this campus in future periods or the ability of graduates of
this campus to obtain state licenses to practice. U of S is institutionally
accredited by SACS to award doctoral, master's and bachelor's degrees in
business, doctoral and master's degrees in education and doctoral and master's
degrees in psychology. MIM is institutionally accredited by ABHES, a
nationally recognized accreditor of allied health care institutions, and
additionally holds individual programmatic accreditation appropriate to each
degree program offered. MIM has been granted the status as a a candidate for
accreditation by the NCA. MIM will continue its efforts towards full
accreditation which normally takes at least one to two years. PrimeTech is
approved as a private vocational school in the Province of Ontario, Canada, to
award diplomas upon successful completion of the following main programs:
network engineering, internet engineering, software programming and paralegal
studies.
Each of the institutional accrediting agencies that accredits the Company's
campuses has standards pertaining to areas such as curricula, institutional
objectives, long-range planning, faculty, administration, admissions, record-
keeping, library resources, facilities, finances and student refunds, among
others. Certain institutional substantive changes, including changes of
ownership and the addition of new facilities and programs may require review
and approval from accrediting agencies. Institutions which apply for
accreditation typically receive a visiting team which reviews the
institution's compliance with these standards. Based on the team's report and
the institution's response, the accrediting agency grants or denies
accreditation. The accrediting agencies which accredit the institution's
campuses assess annual fees and require that institutions pay for the
12
costs associated with team visits and other substantive reviews of the
institution resulting from changes to the institution or its curricula. The
Company believes that it incurred costs of approximately $69,000 in fiscal
2000 directly related to accreditation.
The HEA requires accrediting agencies recognized by the DOE to review many
aspects of an institution's operations to ensure that the education or
training offered by the institution is of sufficient quality to achieve, for
the duration of the accreditation period, the stated objective for which the
education or training is offered. Under the HEA, a recognized accrediting
agency must perform regular inspections and reviews of institutions of higher
education. An accredited institution must meet or exceed an accrediting
agency's standards throughout its period of accreditation. An accrediting
agency may place an institution on probation or similar warning status or
direct the institution to show cause why its accreditation should not be
revoked if the accrediting agency believes an institution may be out of
compliance with accrediting standards. It may also place an institution on
"reporting" status in order to monitor one or more specified areas of the
institution's performance. An institution placed on reporting status is
required to report periodically to its accrediting agency on that
institution's performance in the specified areas. While on reporting status,
an institution may be required to seek the permission of its accrediting
agency to open and commence instruction at new locations. None of the
Company's schools are on probation, show cause or reporting status.
Student Financial Assistance
Students attending the Company's schools finance their education through a
combination of individual resources (including earnings from full or part-time
employment), government-sponsored financial aid and other sources, including
family contributions and scholarships provided by the Company. The Company
estimates that over 60% of the students at its U.S. schools receive some
government-sponsored (federal or state) financial aid. For fiscal 2000,
approximately 55% of the Company's net tuition revenue (on a cash basis) was
derived from some form of such government-sponsored financial aid received by
the students enrolled in its schools. In addition, approximately 65% of the
students attending PrimeTech receive Canadian government-sponsored financial
aid.
To provide students access to financial assistance available through the
Title IV Programs, an institution, including its additional locations, must be
(i) authorized to offer its programs of instruction by the relevant agencies
of the state in which it and its additional campuses, if any, are located,
(ii) accredited by an accrediting agency recognized by the DOE and (iii)
certified as eligible by the DOE. In addition, the institution must ensure
that Title IV Program funds are properly accounted for and disbursed to
eligible students.
Under the HEA and its implementing regulations, each of the Company's
campuses that participates in the Title IV Programs must comply with certain
standards on an institutional basis, as more specifically identified below.
For purposes of these standards, the regulations define an institution as a
main campus and its additional locations, if any. Under this definition, each
of the Company's U.S. schools is a separate institution.
Nature of Federal Support for Postsecondary Education in the United States
While many states support public colleges and universities primarily
through direct state subsidies, the federal government provides a substantial
part of its support for postsecondary education in the form of grants and
loans to students who can use this support at any institution that has been
certified as eligible by the DOE. The Title IV Programs have provided aid to
students for more than 30 years, and, since the mid-1960's, the scope and size
of such programs have steadily increased. Since 1972, Congress has expanded
the scope of the HEA to provide for the needs of the changing national student
population by, among other things, (i) providing that students at proprietary
institutions, such as the Company's institutions, are eligible for assistance
under the Title IV Programs, (ii) establishing a program for loans to parents
of eligible students, (iii) opening the Title IV Programs to part-time
students and (iv) increasing maximum loan limits and in some cases eliminating
the requirement that students demonstrate financial need to obtain federally
guaranteed student loans. Most recently, the Federal Direct Loan program was
enacted, enabling students to obtain loans from the federal government rather
than from commercial lenders.
13
On October 1, 1998, legislation was enacted which reauthorized the student
financial assistance programs of the HEA. The 1998 Amendments continued many
of the then-current requirements for student and institutional participation
in the Title IV Programs. The 1998 Amendments also changed or modified some
requirements. These changes and modifications included increasing the
percentage of its revenues that an institution may derive from Title IV funds
from 85% to 90% and revising the requirements pertaining to the manner in
which institutions must calculate refunds to students. The 1998 Amendments
also prohibit institutions that are ineligible for participation in Title IV
loan programs due to student default rates in excess of applicable thresholds
from participating in the Pell Grant program. Other changes expanded
participating institutions' ability to appeal loss of eligibility owing to
such default rates. The 1998 Amendments permit an institution to avoid the
interruption of eligibility for the Title IV Programs upon a change of
ownership which results in a change of control by submitting a materially
complete application for recertification of eligibility within 10 business
days of such a change of ownership. Regulations concerning a school's
calculation of refunds to students took effect in October 2000, and
regulations to implement the remaining portions of the 1998 Amendments are
scheduled to become effective on July 1, 2001. The Company does not believe
that the 1998 Amendments will adversely or materially affect its business
operations. None of the Company's institutions derives more than 80% of its
revenue from Title IV funds and no institution has student loan default rates
in excess of current thresholds. The Company also believes that its current
refund policy satisfies the new refund requirements.
Students at the Company's institutions receive grants, loans and work
opportunities to fund their education under several of the Title IV Programs,
of which the two largest are the FFEL program and the Federal Pell Grant
("Pell") program. Some of the Company's institutions participate in the
Perkins program and the Federal Work-Study ("FWS") program. In addition, the
Company's institutions are eligible to participate in the Federal Supplemental
Educational Opportunity Grant ("FSEOG") program.
Most aid under the Title IV Programs is awarded on the basis of financial
need, generally defined under the HEA as the difference between the cost of
attending an educational program and the amount a student can reasonably
contribute to that cost. All recipients of Title IV Program funds must
maintain a satisfactory grade point average and progress in a timely manner
toward completion of their program of study.
Pell. Pell grants are the primary component of the Title IV Programs under
which the DOE makes grants to students who demonstrate financial need. Every
eligible student is entitled to receive a Pell grant; there is no
institutional allocation or limit, although there is a limit for each eligible
student, depending on need. For the 1999 federal fiscal year, the maximum
individual Pell grant was $3,125. For the 2000, federal fiscal year, the
maximum Pell grant increased to $3,300, and no determination has been made, as
yet, for the 2001 federal fiscal year.
FSEOG. FSEOG awards are designed to supplement Pell grants for the neediest
students. FSEOG grants generally range in amount from $100 to $4,000 per year;
however, the availability of FSEOG awards is limited by the amount of funds
allocated to an institution under a formula that takes into account the size
of the institution, its costs and the income levels of its students. The
Company is required to make a 25% matching contribution for all FSEOG program
funds disbursed. Resources for this institutional contribution may include
institutional grants, scholarships and other eligible funds (i.e., funds from
foundations and other charitable organizations) and, in certain states,
portions of state scholarships and grants. At this time, MIM and U of S
participates in the FSEOG program.
FFEL. The FFEL program consists of two types of loans, Stafford loans,
which are made available to students, and PLUS loans, which are made available
to parents of students classified as dependents. Under the Stafford loan
program, a student may borrow up to $2,625 for the first academic year, $3,500
for the second academic year and, in some educational programs, $5,500 for
each of the third and fourth academic years. Graduate and professional
students may borrow up to $8,500 per academic year. Students with financial
need may qualify for interest subsidies while in school and during grace
periods. Students who are classified as independent can increase their
borrowing limits and receive additional unsubsidized Stafford loans. Such
students can obtain up to an additional $4,000 for each of the first and
second academic years and, depending upon the
14
educational program, an additional $5,000 for each of the third and fourth
academic years. Graduate and professional students may borrow up to an
additional $10,000 per academic year. The obligation to begin repaying
Stafford loans does not commence until six months after a student ceases to be
enrolled on at least a half-time basis. Amounts received by students in the
Company's institutions under the Stafford program in fiscal 2000 equaled
approximately 55% of the Company's net tuition revenue (on a cash basis).
Under the PLUS loan program, the parents of a dependent student may obtain a
loan in an amount not to exceed the difference between the total cost of that
student's education (including allowable expenses) and other aid to which that
student is entitled. At this time, of the Company's institutions, only MIM
participates in the PLUS program.
The Company's schools and their students use a wide variety of lenders and
guaranty agencies and have not experienced difficulties in identifying lenders
and guaranty agencies willing to make federal student loans. The HEA requires
the establishment of lenders of last resort in every state to ensure that
students at any institution that cannot identify such lenders will have access
to the FFEL program loans.
Perkins. Eligible undergraduate students may borrow up to $4,000 under the
Perkins loan program during each academic year, with an aggregate maximum of
$20,000, at a 5% interest rate and with repayment delayed until nine months
after the borrower ceases to be enrolled on at least a half-time basis.
Perkins loans are made available to those students who demonstrate the
greatest financial need. Perkins loans are made from a revolving account, 75%
of which was initially capitalized by the DOE. Subsequent federal capital
contributions, with an institutional match in the same proportion, may be
received if an institution meets certain requirements. Each institution
collects payments on Perkins loans from its former students and loans those
funds to currently enrolled students. Collection and disbursement of Perkins
loans is the responsibility of each participating institution. During the
1999-2000 award year, the Company collected approximately $56,100 from its
former students in repayment of Perkins loans. In the 1999-2000 award year,
the Company's required matching contribution was approximately $5,600. The
Perkins loans disbursed to students in the Company's institutions in the 1999-
2000 award year represented less than 1% of the Company's net U.S. tuition
revenue.
FWS. Under the FWS program, federal funds are made available to pay up to
75% of the cost of part-time employment of eligible students, based on their
financial need, to perform work for the institution or for off-campus public
or non-profit organizations. During the 1999-2000 award year, the Company's
institutions and other organizations provided matching contributions totaling
approximately $70,000. At least 5% of an institution's FWS allocation must be
used to fund student employment in community service positions. FWS earnings
are not restricted to tuition and fees. However, in the 1999-2000 award year,
the federal share of FWS earnings represented less than 1% of the Company's
net U.S. tuition revenue.
Federal Oversight of the Title IV Programs
The substantial amount of federal funds disbursed through the Title IV
Programs coupled with the large numbers of students and institutions
participating in those programs have led to an increased level of DOE
regulatory oversight of institutions. If an institution's cohort default rate
(the percentage of its students or former students who default on their
student loans within approximately 18 months of being required to commence
repayment) exceeds 25 percent for three consecutive federal fiscal years, the
institution, with limited exceptions, becomes ineligible to participate in the
Title IV Programs. Each institution which participates in the Title IV
Programs must annually submit to the DOE an audit by an independent accounting
firm of that institution's compliance with Title IV Program requirements, as
well as audited financial statements. The DOE also conducts compliance
reviews, which include on-site evaluations of several hundred institutions
each year, and directs student loan guaranty agencies to conduct additional
reviews relating to the FFEL programs. In addition, the Office of the
Inspector General of the DOE conducts audits and investigations of
institutions in certain circumstances. Under the HEA, accrediting agencies and
state licensing agencies also have responsibilities for overseeing
institutions' compliance with Title IV Program requirements. As a result, each
participating institution, including each of the Company's institutions, is
subject to frequent and detailed oversight and must comply with a complex
framework of laws and regulations or risk being required to repay funds, to
pay civil penalties, or be declared ineligible to participate in the Title IV
Programs. In addition, because the HEA is subject
15
to amendment by Congress, and because DOE periodically revises its regulations
(e.g., in November 1997, the DOE published new regulations with respect to
financial responsibility standards which took effect July 1, 1998) and may
announce new or changed interpretation of existing laws and regulations, there
can be no assurance that the legal requirements for participation in the Title
IV Programs will remain the same in the future or that DOE will agree with the
Company's current understanding of each Title IV Program requirement.
Largely as a result of this increased oversight, the DOE has reported that
over 1,000 institutions have either ceased to be eligible for or have
voluntarily relinquished their participation in some or all of the Title IV
Programs since October 1, 1992. This has reduced competition among
institutions with respect to certain markets and educational programs.
Cohort Default Rates. A significant component of the increased regulatory
oversight has been the imposition of limitations on participation in the Title
IV Programs by institutions whose former students defaulted on the repayment
of federally guaranteed or funded student loans at an "excessive" rate. Since
the DOE began to impose sanctions on institutions with cohort default rates
above certain levels, the DOE has reported that over 1,000 institutions have
lost their eligibility to participate in some or all of the Title IV Programs.
However, many institutions, including all of the Company's institutions, have
responded by implementing aggressive student loan default management programs
aimed at reducing the likelihood of students failing to repay their loans in a
timely manner. An institution's cohort default rates under the FFEL programs
are calculated on an annual basis as the rate at which student borrowers
scheduled to begin repayment on their loans in one federal fiscal year default
on those loans by the end of the next federal fiscal year. Any institution
whose cohort default rate equals or exceeds 25% for any one of the three most
recent federal fiscal years may be found by the DOE to lack administrative
capability and, on that basis, placed on provisional certification status for
up to three years. Provisional certification status does not limit an
institution's access to Title IV Program funds but does subject that
institution to closer review by the DOE and possible summary adverse action if
that institution commits violations of Title IV Program requirements. Any
institution whose cohort default rates equal or exceed 25% for three
consecutive years will no longer be eligible to participate in the FFEL
programs for the remainder of the federal fiscal year in which the DOE
determines that such institution has lost its eligibility and for the two
subsequent federal fiscal years. In addition, an institution whose cohort
default rate for any federal fiscal year exceeds 40% may have its eligibility
to participate in all of the Title IV Programs limited, suspended or
terminated. Since the calculation of cohort default rates involves the
collection of data from many non-governmental agencies (i.e., lenders, private
guarantors or services), as well as the DOE, the HEA provides a formal process
for the review and appeal of the accuracy of cohort default rates before the
DOE takes any action against an institution based on such rates. In addition
to the foregoing, if an institution's cohort default rate for loans under the
Perkins program exceeds 15% for any federal award year (i.e., July 1 through
June 30), that institution may be placed on provisional certification status
for up to three years. Furthermore, as a result of the 1998 Amendments to the
HEA, institutions that are ineligible to participate in the Title IV loan
program due to student loan default rates will also become ineligible to
participate in the Pell Grant Program.
The DOE's published federal fiscal year 1998 cohort default rates for all
proprietary institutions is 11.4% and for proprietary institutions offering 4
year degrees is 9.6%. For the last three years, none of the Company's
institutions had a cohort default rate above 9%. The specific cohort default
rate percentages for the Company's institutions are as follows:
DOE fiscal year: ASPP U of S MIM
---------------- ---- ------ ---
1996..................................................... 2.7% 0.0% 8.6%
1997..................................................... 2.2% 4.9% 7.0%
1998..................................................... 0.8% 2.6% 6.8%
Financial Responsibility Standards. All institutions participating in the
Title IV Programs must satisfy a series of specific standards of financial
responsibility. Institutions are evaluated for compliance with those
requirements in several circumstances, including as part of the DOE's
recertification process, on an annual basis
16
as each institution submits its audited financial statements to the DOE, and
in connection with a change of ownership resulting in a change of control of
an institution. Under standards in effect prior to July 1, 1998, (and still in
effect with respect to financial review upon a change in ownership), each
institution's audited balance sheet must demonstrate an acid test ratio
(defined as the ratio of cash, cash equivalents and current accounts
receivable to current liabilities) of at least 1:1 at the end of each fiscal
year. Another standard requires that each institution have a positive tangible
net worth at the end of each fiscal year. A third standard prohibits any
institution from having a cumulative net operating loss during its two most
recent fiscal years that results in a decline of more than 10% of that
institution's tangible net worth as measured at the beginning of that two-year
period. The DOE measures an institution's compliance with the financial
responsibility standards on the basis of the audited financial statements of
the institution itself, but it may request the financial statements of the
institution's parent company or other related entities in performing its
financial responsibility review.
An institution that is determined by the DOE not to meet any one of the
standards of financial responsibility is nonetheless entitled to participate
in the Title IV Programs if it can demonstrate to the DOE that it is
financially responsible on an alternative basis. An institution may do so by
posting surety either in an amount equal to 50% (or greater, as the DOE may
require) of total Title IV Program funds received by students enrolled at such
institution during the prior year or in an amount equal to 10% (or greater, as
the DOE may require) of such prior year's funds if the institution also agrees
to provisional certification and to transfer to the reimbursement or cash
monitoring system of payment for its Title IV Program funds. The DOE has
interpreted this surety condition to require the posting of an irrevocable
letter of credit in favor of the DOE. Alternatively, an institution may
demonstrate, with the support of a statement from a certified public
accountant and other information specified in the regulations, that it was
previously in compliance with the numeric standards and that its continued
operation is not jeopardized by its financial condition. Under a separate
standard of financial responsibility, if an institution has made late Title IV
Program refunds to students in its prior two years, the institution is
required to post a letter of credit in favor of the DOE in an amount equal to
25% of total Title IV Program refunds paid by the institution in its prior
fiscal year.
In November 1997, the DOE issued new regulations, which took effect July 1,
1998 and revised the DOE's standards of financial responsibility as applied to
an institution's annual audited financial statements. These new standards
replace the numeric tests described above with three ratios: an equity ratio,
a primary reserve ratio and a net income ratio, which are weighted and added
together to produce a composite score for the institution.
Under the new standards, an institution need only satisfy a composite score
standard. The ratio methodology of these standards takes into account an
institution's total financial resources and determines a combined score of the
measures of those resources along a common scale (from negative 1.0 to
positive 3.0). It allows a relative strength in one measure to mitigate a
relative weakness in another measure.
If an institution achieves a composite score of at least 1.5, it is
financially responsible without further oversight. If an institution achieves
a composite score from 1.0 to 1.4, it is in the "zone" and is subject to
additional monitoring, but may continue to participate as a financially
responsible institution, for up to three years. Additional monitoring may
require the school to (i) notify the DOE, within 10 days of certain changes,
such as an adverse accrediting action; (ii) file its financial statements
earlier than the six month requirement following the close of the fiscal year;
and (iii) subject the school to a cash monitoring payment method. If an
institution has a composite score below 1.0, it fails to meet the financial
responsibility standards unless it qualifies under an alternative standard
(i.e., (i) a letter of credit equal to 50% of the Title IV Program funds
expended from the prior fiscal year or (ii) a letter of credit equal to at
least 10% of the Title IV Program funds expended from the prior fiscal year
plus provisional certification status and either or the reimbursement payment
of Title IV funds or heightened cash monitoring).
The Company has applied these new regulations to its financial statements
as of August 31, 2000, the end of the Company's most recently completed fiscal
year, and has determined that the Company and each of its institutions
satisfied the new standards as of that date.
17
Restrictions on Acquiring or Opening Additional Schools and Adding
Educational Programs. An institution which undergoes a change of ownership
resulting in a change in control must be reviewed and recertified for
participation in the Title IV Programs under its new ownership. Pending
recertification, the DOE suspends Title IV Program funding to that
institution's students, except for certain Title IV Program funds that were
committed under the prior owner, although such suspension can be avoided if
the institution submits a materially complete application for approval within
ten business days of closing on the transaction. If an institution is
recertified following a change of ownership, it may be on a provisional basis.
During the time an institution is provisionally certified, it may be subject
to closer review by the DOE and to summary adverse action for violations of
Title IV Program requirements, but provisional certification does not
otherwise limit an institution's access to Title IV Program funds.
In addition, the HEA generally requires that proprietary institutions be
fully operational for two years before applying to participate in the Title IV
Programs. However, under the HEA and applicable regulations, an institution
that is certified to participate in the Title IV Programs may establish an
additional location and apply to participate in the Title IV Programs at that
location without reference to the two-year requirement, if such additional
location satisfies all other applicable eligibility requirements, including
that the additional location be approved by the institution's accrediting
agency and by the appropriate government licensing agency in the state where
the additional location is located. The Company's expansion plans are based,
in large part, on its ability to acquire schools that can be recertified and
to open additional locations as part of its existing institutions. The Company
believes that its ability to open additional locations as part of existing
institutions is the most feasible means of expansion, because its existing
institutions are currently certified as eligible to participate in Title IV
Programs and students enrolled at the new additional locations will have more
ready access to Title IV Program funds. In addition, pursuant to regulations
scheduled to take effect July 1, 2000, institutions no longer will be
required, under most circumstances, to obtain DOE approval of an additional
location before disbursing Title IV Program funds to eligible students at
those locations.
Generally, if an institution eligible to participate in the Title IV
Programs adds an educational program after it has been designated as an
eligible institution, the institution must apply to the DOE to have the
additional program designated as eligible. However, an institution is not
obligated to obtain DOE approval of an additional program that leads to a
professional, graduate, bachelor's or associate degree or which prepares
students for gainful employment in the same or related recognized occupation
as an educational program that has previously been designated as an eligible
program at that institution and meets certain minimum length requirements.
Furthermore, short-term educational programs, which generally consist of those
programs that provide at least 300 but less than 600 clock hours of
instruction, are eligible only for FFEL funding and only if they have been
offered for a year and the institution can demonstrate, based on an
attestation by an independent auditor, that 70% of all students who enroll in
such programs complete them within a prescribed time and 70% of those students
who graduate from such programs obtain employment in the recognized occupation
for which they were trained within a prescribed time. In the event that an
institution erroneously determines that an educational program is eligible for
purposes of the Title IV Programs without the DOE's express approval, the
institution would likely be liable for repayment of Title IV Program funds
provided to students in that educational program. The Company does not believe
that the DOE's regulations will create significant obstacles to its plans to
add new programs because any new programs offered by its campuses will lead to
professional, graduate, bachelor's or associate degrees or prepare students
for gainful employment in the same or related recognized occupation as
education programs which were previously offered by the Company's campuses.
Certain of the state authorizing agencies, the Ontario Student Assistance
Plan ("OSAP"), and accrediting agencies with jurisdiction over the Company's
campuses also have requirements that may, in certain instances, limit the
ability of the Company to open a new campus, acquire an existing campus,
establish an additional location of an existing institution or begin offering
a new educational program. The Company does not believe that such standards
will have a material adverse effect on the Company or its expansion plans,
because the standards for approval of new programs or expanding institutions
are generally no more stringent than the standards applied by the states, OSAP
and accrediting agencies in originally granting accreditation and licensure
18
to the campuses. Compliance with state and OSAP standards generally requires
notification of the proposed change and, in some states, approval by the
accrediting agency. Based on its current practice of meeting or exceeding both
state and accrediting agency standards, the Company believes that it will be
able to obtain any accreditation or state approvals to initiate new programs
or expand its campuses. If the Company were unable to meet those standards,
its ability to add programs or expand its campuses would be materially
adversely affected.
The "90/10 Rule" (formerly the "85/15 Rule"). Under a provision of the HEA
commonly referred to as the "90/10 Rule," a proprietary institution, such as
each of the Company's U.S. institutions, would cease being eligible to
participate in the Title IV Programs if, on a cash accounting basis, more than
90% of its net revenues for the prior fiscal year was derived from the Title
IV Programs. Prior to the 1998 Amendments to the HEA, the allowable portion of
cash revenues derived from Title IV programs could not exceed 85%. Any
institution that violates this rule immediately becomes ineligible to
participate in the Title IV Programs and is unable to apply to regain its
eligibility until the following fiscal year. The Company has calculated that,
since this requirement took effect in 1995, none of the Company's U.S.
institutions derived more than 80% of its net revenue (on a cash basis) from
the Title IV Programs for any award year, and that for fiscal 2000 the range
for the Company's U.S. institutions was from approximately 48% to
approximately 59%. The Company regularly monitors compliance with this
requirement in order to minimize the risk that any of its U.S. institutions
would derive more than the maximum allowed percentage of its revenue from the
Title IV Programs for any fiscal year. If an institution appeared likely to
approach the maximum percentage threshold in any given fiscal year, the
Company would evaluate the appropriateness of making changes in student
funding and financing to ensure compliance with the Rule.
Restrictions on Payment of Bonuses, Commissions or Other Incentives. The
HEA prohibits an institution from providing any commission, bonus or other
incentive payment based directly or indirectly on success in securing
enrollments or financial aid to any person or entity engaged in any student
recruitment, admission or financial aid awarding activity for programs
eligible for Title IV Program funds. The Company believes that its current
compensation plans are in compliance with HEA standards.
State Authorization in the United States
Each of the Company's campuses is authorized to offer educational programs
and grant degrees or diplomas by the state in which such campus is located.
The level of regulatory oversight varies substantially from state to state.
State laws establish standards for instruction, qualifications of faculty,
location and nature of facilities, financial policies and responsibility and
other operational matters. State laws and regulations may limit the ability of
the Company to obtain authorization to operate in certain states, to award
degrees or diplomas or offer new degree programs. Certain states prescribe
standards of financial responsibility that are different from those prescribed
by the DOE. The Company believes that each of its campuses is in substantial
compliance with state authorizing and licensure laws.
Canadian Regulation
The Ontario Ministry of Education and Training ("OMET") provides financial
assistance to eligible students through OSAP, which includes two main
components, the CSL program and the Ontario Student Loans Program ("OSLP")
program. To maintain its right to administer OSAP, an institution, such as the
PrimeTech campuses in Toronto, must, among other things, be registered and in
good standing under the PVSA and abide by the rules, regulations and
administrative manuals of the CSL, OSLP and other OSAP-related programs. In
order to attain initial eligibility, an institution must establish, among
other things, that it has been in good standing under the PVSA for at least 12
months, that it has offered an eligible program for at least 12 months and
that it has graduated at least one class in an eligible program that satisfies
specific requirements with respect to class size and graduation rate. In
addition, the institution must offer full-time programs at the postsecondary
level, award a diploma or certificate upon successful completion of the
program, have minimum admission requirements for entering students, require
students to participate fully in their studies, monitor students' progress and
maintain academic records, and advise OMET before taking any action that could
result in its failing to meet
19
OMET's requirements. When applying for initial eligibility an institution must
also file with OMET a request for OSAP designation with a description of the
procedures to be implemented to administer the OSAP financial aid office.
During the first two years of initial eligibility, the institution must have
its administration of OSAP independently audited, and full eligibility will
not be granted unless these audits establish that the institution has properly
administered OSAP. The institution can only administer CSL funds, and cannot
administer OSLP funds, until it has gained full eligibility. Once an
institution has gained OSAP eligibility, the institution must advise OMET
before it takes any material action that may result in its failure or
inability to meet any rules, regulations or requirements related to OSAP. All
of the Company's Canadian campuses are fully eligible to administer CSL and
OSLP Funds.
In order for an OSAP-eligible institution to establish a new branch of an
existing eligible institution, it must obtain an OSAP-designation from OMET,
either as a separate institution if the branch administers OSAP without the
involvement of the main campus, or as part of the same institution, if OSAP is
administered through the main campus of the institution. The Company does not
believe that OSAP's requirements will create significant obstacles to its
plans to acquire additional institutions or open new branches in Ontario.
Institutions participating in OSAP, such as the PrimeTech campuses in
Ontario, cannot submit applications for loans to students enrolled in
educational programs that have not been designated as OSAP-eligible by OMET.
To be eligible, among other things, a program must be registered with the
Private Vocational Schools Unit, must be of a certain minimum length and must
lead to a diploma or certificate. Each of the PrimeTech educational programs
has been designated OSAP eligible by OMET and the Company does not anticipate
that these program approval requirements will create significant problems with
respect to its plans to add new educational programs.
An institution cannot automatically acquire OSAP-designation through
acquisition of other OSAP-eligible institutions. When there is a change of
ownership, including a change in controlling interest, in a non-incorporated
OSAP-eligible institution, OMET will require evidence of the institution's
continued capacity to properly administer the program before extending OSAP
designation to the new owner. Under OSAP regulations, a change or
reorganization which significantly affects the institution's administration of
OSAP funds such that the institution's prior record of administering such
funds is no longer relevant results in the OMET considering the institution to
be a new institution. Given that OMET periodically revises its regulations and
other requirements and changes its interpretations of existing laws and
regulations, there can be no assurance that OMET will agree with the Company's
understanding of each OMET requirement.
PrimeTech is required to audit its OSAP administration annually, and OMET
is authorized to conduct its own audits of the administration of the OSAP
programs by any OSAP-eligible institution. The Company has complied with these
requirements on a timely basis. Based on its most recent annual compliance
audits, PrimeTech has been found to be in substantial compliance with the
requirements of OSAP, and the Company believes that it continues to be in
substantial compliance with these requirements. OMET has the authority to take
any measures it deems necessary to protect the integrity of the administration
of OSAP. If OMET deems a failure to comply to be minor, OMET will advise the
institution of the deficiency and provide the institution with the opportunity
to remedy the asserted deficiency. If OMET deems the failure to comply to be
serious in nature, OMET has the authority to: (i) condition the institution's
continued OSAP designation upon the institution's meeting specific
requirements during a specific time frame; (ii) refuse to extend the
institution's OSAP eligibility to the OSLP program; (iii) suspend the
institution's OSAP designation; or (iv) revoke the institution's OSAP
designation. In addition, when OMET determines that any non-compliance in an
institution's OSAP administration is serious, OMET has the authority to
contract with an independent auditor, at the expense of the institution, to
conduct a full audit in order to quantify the deficiencies and to require
repayment of all loan amounts. In addition, OMET may impose a penalty up to
the amount of the damages assessed in the independent audit.
As noted above, PrimeTech is subject to the PVSA. The Company may not
operate a private vocational school in the province of Ontario unless such
school is registered under the PVSA. Upon payment of the prescribed fee and
satisfaction of the conditions prescribed by the regulations under the PVSA
and by the Private
20
Vocational Schools Unit of the OMET, an applicant or registrant such as
PrimeTech is entitled to registration or renewal of registration to conduct or
operate a private vocational school unless: (1) it cannot reasonably be
expected to be financially responsible in the conduct of the private
vocational school; (2) the past conduct of the officers or directors provides
reasonable grounds for belief that the operations of the campus will not be
carried on in accordance with relevant law and with integrity and honesty; (3)
it can reasonably be expected that the course or courses of study or the
method of training offered by the private vocational school will not provide
the skill and knowledge requisite for employment in the vocation or vocations
for which the applicant or registrant is offering instruction; or (4) the
applicant is carrying on activities that are, or will be, if the applicant is
registered, in contravention of the PVSA or the regulations under the PVSA. An
applicant for registration to conduct or operate a private vocational school
is required to submit with the application a bond in an amount determined in
accordance with the regulations under the PVSA. PrimeTech is currently
registered under the PVSA at all of its campuses, and the Company does not
believe that there will be any impediment to renewal of such registrations on
an annual basis.
The PVSA provides that a "registration" is not transferable. However, the
Private Vocational Schools Unit of OMET takes the position that a purchase of
shares of a private vocational school does not invalidate the school's
registration under the PVSA. The Company does not believe that the Offering
will invalidate the registration of PrimeTech.
If a corporation is convicted of violating the PVSA or the regulations
under the PVSA, the maximum penalty that may be imposed on the corporation is
$25,000.
The legislative, regulatory and other requirements relating to student
financial assistance programs in Ontario are subject to change by applicable
governments due to political and budgetary pressures, and any such change may
affect the eligibility for student financial assistance of the students
attending PrimeTech, which, in turn, could materially adversely affect the
Company's business, results of operations or financial condition.
ITEM 2. PROPERTIES
Our corporate headquarters are located in Chicago, Illinois, and our 17
campuses are located in 9 states and one Canadian province. Each campus
contains teaching facilities, including modern classrooms. Admissions and
administrative offices are also located at each campus.
We lease all of our facilities, except the primary University of Sarasota
facility in Sarasota, Florida, which we own. As of August 31, 2000 we owned
approximately 42,000 square feet and leased approximately 275,000 square feet.
The leases have remaining terms ranging from two years to nine years.
We actively monitor facility capacity in light of our current utilization
and projected enrollment growth. We believe that our schools can acquire any
necessary additional capacity on reasonably acceptable terms. We devote
capital resources to facility improvements and expansions as necessary.
21
The following table sets forth certain information as of August 31, 2000
with respect to the principal properties of the Company and its subsidiaries.
The Company believes that its facilities are in substantial compliance with
applicable environmental laws and with the Americans With Disabilities Act.
Square
Campus Footage
------ -------
American Schools of
Professional Psychology
Illinois School of
Professional
Psychology/Chicago..... 37,381
Illinois School of
Professional
Psychology/Chicago
Northwest.............. 10,469
Minnesota School of
Professional
Psychology............. 11,762
Georgia School of
Professional
Psychology............. 13,274
American School of
Professional
Psychology/Virginia.... 13,437
American School of
Professional
Psychology/Hawaii...... 11,566
Arizona School of
Professional
Psychology............. 13,399
Florida School of
Professional
Psychology............. 6,632
American School of
Professional
Psychology/San
Francisco Bay Area .... 10,226
Washington School of
Professional
Psychology............. 10,273
University of Sarasota
University of
Sarasota/Honore
Campus................. 22,152
University of
Sarasota/Tampa Campus.. 6,632
University of
Sarasota/Orange Campus
....................... 10,829
Medical Institute of
Minnesota ............. 57,316
PrimeTech Institute
PrimeTech
Institute/North York... 9,199
PrimeTech Institute/City
Campus................. 8,681
PrimeTech
Institute/Scarborough.. 13,289
Ventura ................ 9,040
ITEM 3. LEGAL PROCEEDINGS
The Company, Dr. Markovitz and certain other companies in which Dr.
Markovitz has an interest had been named as defendants in Charlena Griffith,
et al. v. University Hospital, L.L.C. et al., a class action lawsuit filed in
November 1997 and in the United States District Court for the Northern
District of Illinois, Eastern Division. This lawsuit was settled between the
parties at no cost to the Company.
The Company is not party to any other legal proceedings that it believes
would, individually or in the aggregate, have a material adverse effect on its
consolidated results of operations or consolidated financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the
fourth quarter of 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Class "A" Common Stock has been quoted on the Nasdaq National Market
(the "National Market") under the symbol "ARGY" since March 9, 1999.
22
The following table sets forth the range of high and low sales prices per
share for our Class "A" Common Stock as reported on The Nasdaq National
Market, where the stock trades under the symbol "ARGY," for the periods
indicated. The initial public offering price of our Class "A" Common Stock on
March 8, 1999 was $14.00 per share.
High Low
------ -----
1998-1999
Third Quarter (from March 8, 1999)............................ 14.375 6.625
Fourth Quarter................................................ 9.000 6.125
1999-2000
First Quarter................................................. 9.000 3.531
Second Quarter................................................ 6.125 4.125
Third Quarter................................................. 7.500 4.813
Fourth Quarter................................................ 8.750 5.188
2000-2001
First Quarter (through November 21, 2000)..................... 7.750 5.750
The closing price of our Class "A" Common Stock as reported on the National
Market on November 21, 2000 was $5.94 per share. As of November 21, 2000,
there were 5 holders of record of our Common Stock.
Dividend Policy
The Company intends to retain future earnings to finance its growth and
development and therefore does not anticipate paying any cash dividends in the
foreseeable future. Payment of future dividends, if any, will be at the
discretion of the Board after taking into account various factors, including
the Company's financial condition, operating results, current and anticipated
cash needs and plans for expansion. In addition, if the Company is required to
satisfy DOE financial responsibility standards on a consolidated basis, the
Company may need to restrict or withhold payment of dividends or refrain from
obtaining dividends or other funds from its subsidiaries in order to meet DOE
standards.
23
ITEM 6. SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following selected historical consolidated financial and other data are
qualified by reference to, and should be read in conjunction with, our
consolidated financial statements and the related notes thereto appearing
elsewhere herein and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Our selected statement of operations
data set forth below for the five years in the period ended August 31, 2000,
and the balance sheet data as of August 31, 2000, 1999, 1998, 1997 and 1996
are derived from our audited consolidated financial statements.
Years Ended August 31,
-------------------------------------------
2000(1) 1999 1998 1997 1996
------- ------- ------- ------- -------
(dollars in thousands)
Statement of Operations Data:
Net revenue....................... $44,058 $36,866 $29,352 $20,460 $17,840
------- ------- ------- ------- -------
Operating expenses:
Cost of education............... 20,746 18,489 15,075 10,661 9,370
Selling expenses................ 3,837 1,616 1,102 516 263
General and administrative
expenses....................... 15,107 11,588 9,104 5,432 5,174
Related party general and
administrative expense(2)...... -- 668 2,271 993 1,710
------- ------- ------- ------- -------
Total operating expenses...... 39,690 32,361 27,552 17,602 16,517
------- ------- ------- ------- -------
Income from operations............ 4,368 4,505 1,800 2,858 1,323
Loss attributable to John
Marshall......................... (1,925) -- -- -- --
Interest income................... 854 695 357 497 304
Interest expense.................. (300) (567) (601) (107) (55)
Other income (expense), net....... (73) (6) (12) (48) 21
------- ------- ------- ------- -------
Total other income (expense),
net.............................. (1,444) 122 (256) 342 270
------- ------- ------- ------- -------
Income before provision for income
taxes............................ 2,924 4,627 1,544 3,200 1,593
Provision for income taxes........ 1,263 44 29 37 30
------- ------- ------- ------- -------
Net income........................ $ 1,661 $ 4,583 $ 1,515 $ 3,163 $ 1,563
======= ======= ======= ======= =======
Basic and diluted earning per
share............................ $ 0.25 $ 0.78 $ 0.31 $ 0.65 $ 0.32
======= ======= ======= ======= =======
Other Data:
EBITDA(3)......................... $ 5,922 $ 5,910 $ 2,738 $ 3,296 $ 1,722
EBITDA margin(3).................. 13.4% 16.0% 9.3% 16.1% 9.7%
Cash flows from:
Operating activities............ $ 4,159 $ 3,713 $ 2,582 $ 3,908 $ 2,736
Investing activities............ (2,822) (5,438) (731) (9,123) (392)
Financing activities............ (2,185) 8,008 (3,348) 5,193 (124)
Capital expenditures, net......... 1,875 1,889 597 341 404
Student population(4)............. 5,344 4,542 4,514 3,253 2,858
Number of campuses(5)............. 17 17 10 8 8
As of August 31,
-------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
(dollars in thousands)
Balance Sheet Data:
Cash, cash equivalents and short-
term investments................. $15,899 $15,007 $ 3,843 $ 6,728 $ 5,384
Working capital................... 13,607 12,817 2,459 4,412 3,316
Total assets...................... 35,300 34,319 23,475 17,580 8,336
Long-term debt (excluding current
maturities)...................... 2,604 2,998 5,165 6,354 243
Shareholders' equity.............. 26,050 25,604 8,922 7,448 5,236
- -------------------------
(1) As restated. See Note 2 to the Consolidated Financial Statements.
24
(2) Represents amounts paid to Management Corp., an affiliate of Dr.
Markovitz, for services rendered by Dr. Markovitz during the period
presented. Dr. Markovitz is the sole shareholder and employee of
Management Corp. Prior to the initial public offering, Dr. Markovitz did
not receive any compensation for services rendered to the Company, other
than through this management fee. Upon completion of the offering, the
relationship with Management Corp. was terminated, and Dr. Markovitz has
become an employee of the Company. Dr. Markovitz has entered into an
employment agreement that provides for an initial annual base salary of
$200,000 plus performance-based compensation, which is to be paid in the
form of stock options. Although this represents a significant change in
the way Dr. Markovitz is compensated for the services he provides to the
Company, the nature of the services provided by Dr. Markovitz has not
changed.
(3) "EBITDA" equals income from operations (which excludes losses attributable
to John Marshall) plus depreciation and amortization. EBITDA margin is
EBITDA as a percentage of net revenue. EBITDA and EBITDA margin are
presented because such data is used by certain investors to assess
liquidity and ability to generate cash. The Company considers EBITDA to be
an indicative measure of the Company's operating performance because
EBITDA can be used to measure the Company's ability to service debt, fund
capital expenditures and expand its business; however, such information
should not be considered as an alternative to net income, operating
profit, cash flows from operations, or any other operating or liquidity
performance measure provided by GAAP. Cash advances to John Marshall and
cash expenditures for various long-term assets, interest expense and
income taxes that have been and will be incurred are not reflected in the
EBITDA presentation and could be material to an investor's understanding
of the Company's liquidity and profitability. The Company's method of
calculating of EBITDA may not be comparable to that of other companies.
(4) Reflects actual student population as of the beginning of the Fall school
year, not including participants in Ventura test preparation programs.
(5) Reflects the total number of campuses operated by the Company as of the
end of the period indicated.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Selected Historical Consolidated Financial Data and the Company's
consolidated financial statements and notes thereto appearing elsewhere
herein.
As more fully described in Note 2. to the Consolidated Financial Statements
certain financial information in the filing has been restated to correct
previously issued financial statements. The discussion in this item reflects
those restatements.
Background and Overview
The Company provides for-profit postgraduate education with a primary focus
on doctoral level programs. For the 1999-2000 school year, the Company's
schools had approximately 5,400 students enrolled representing 50 states and
20 foreign countries. The Company's schools offer programs in clinical
psychology, education, business, allied health professions and information
technology and are approved and accredited to offer doctoral, master's,
bachelor's and associate degrees as well as to award diplomas. Approximately
62% of the Company's students are enrolled in doctoral programs. The Company
operates 17 campuses in nine states and the Province of Ontario, Canada.
The Company's principal sources of revenue are tuition, workshop fees and
sales of related study materials. Students attending the Company's schools
finance their education through a combination of individual resources
(including earnings from full or part-time employment), government-sponsored
financial aid and other sources, including family contributions and
scholarships provided by the Company. During fiscal 2000, approximately 55% of
the Company's net cash receipts were derived indirectly from the Title IV
Programs.
25
The Company derived approximately 93% and 88% of its net revenue from
tuition in fiscal 2000 and in fiscal 1999, respectively. Tuition payments are
made at the beginning of each term, and the start date for each term varies by
school and program. Payment of each term's tuition may be made by cash or
financial aid. If a student withdraws from school prior to the completion of
the term, the Company refunds a portion of the tuition already paid, based
upon the number of classes the student has attended. For students receiving
financial aid, the timing of the refunds for withdrawal is based on federal,
state and accrediting agency standards. The scholarships that the Company
grants to certain students are recorded as a reduction of tuition revenue.
Tuition revenue is recognized ratably over the term of each program. Revenue
from Ventura workshops is recognized on the date of the workshops. Revenue
from sales of related study materials is recognized on the date of shipment.
The Company's schools charge tuition at varying amounts, depending not only
on the particular school, but also upon the type of program and the specific
curriculum. Each of the Company's schools typically implements a tuition
increase annually. The size of these increases differs from year to year and
among campuses and programs. Tuition for the Company's schools as of September
1, 1999 represents an approximate increase of 5.1% over the same date in 1998.
The Company also generates revenue from textbook sales and property rental.
In both fiscal 2000 and fiscal 1999, less than 10% of the Company's net
revenue was derived from these sources.
The Company categorizes its expenses as cost of education, selling, general
and administrative and related party general and administrative. Cost of
education expenses generally consists of expenses directly attributable to the
educational activity at the schools. These include salaries and benefits of
faculty and student support personnel, the cost of educational supplies and
facilities (including rents on school leases), and all other school occupancy
costs. Selling expenses include recruiters salaries and benefits and direct
and indirect marketing and advertising expenses.
General and administrative expenses include salaries and benefits of
personnel in accounting, human resources, corporate and school administration
functions and all corporate office expenses. Also included in general and
administrative expenses are depreciation expense associated with computer
laboratories, equipment, furniture and fixtures, and amortization expense
associated with intangible assets, consisting primarily of goodwill,
intellectual property and covenants not-to-compete with previous owners of the
schools or campuses.
The related party general and administrative expense represented a
management fee paid to MCM Management Corp. Dr. Markovitz is the sole
shareholder and employee of MCM Management Corp. Prior to the initial public
offering, Dr. Markovitz did not receive any compensation for services rendered
to the Company, other than through the management fee. Upon completion of the
Offering, the relationship with MCM Management Corp. was terminated, and Dr.
Markovitz has become an employee of the Company. Dr. Markovitz has entered
into an employment agreement with the Company that provides for an initial
annual base salary of $200,000 plus performance-based compensation, which is
to be paid in the form of stock options. Although this represents a
significant change in the way Dr. Markovitz is compensated for the services he
provides to the Company, the nature of the services provided by Dr. Markovitz
has not changed.
The Company has two business segments: 1) Schools and 2) Test Preparation
Materials and Workshops ("Test Preparation"). These segments are managed as
separate strategic business units due to the distinct nature of their
operations. The Schools Segment, which represents the operations of ASPP, U of
S, MIM and PrimeTech, provides programs in psychology, education, business,
allied health professions, network engineering and software programming. All
operations of the Schools Segment are located in the United States with the
exception of PrimeTech which is located in Canada. The Test Preparation
Segment offers courses and materials for post-graduate psychology license
examinations in the United States.
Recent Acquisitions
On February 3, 1998, the Company acquired MIM for an aggregate purchase
price of $2.4 million. This acquisition was accounted for as a purchase.
26
On August 31, 1998, U of S acquired the stock of MCM Plaza. The purchase
was accounted for in a manner similar to a pooling of interests, resulting in
the Company including the results of operations of MCM Plaza for all periods
subsequent to April 30, 1997, the date Dr. Markovitz acquired MCM Plaza. The
purchase price of approximately $3.3 million, based upon an independent third
party appraisal, exceeded the historical book value of the underlying net
assets by approximately $0.7 million, resulting in a reduction in the
Company's shareholders' equity by such amount.
On November 30, 1998, the Company acquired 100% of the outstanding stock of
PrimeTech, which owned two Canadian schools that award non-degree certificates
in network engineering and software programming. Prior to that acquisition the
majority shareholder of the Company owned a one-third interest in PrimeTech.
Under the acquisition agreement, the Company was required to pay the former
owners, consisting of Dr. Markovitz and two operating managers, a total of
$500,000 (Canadian Dollars) upon closing and is obligated to issue shares of
the Company's common stock, the fair value of which is equal to 102% of
PrimeTech's net income, as defined in such agreement, in each of PrimeTech's
next three fiscal years. The Company has negotiated agreements with the two
operating managers in lieu of future stock issuance as provided for in the
acquisition agreement. The agreements specify an aggregate payout of
approximately $150,000 (US Dollars) which was paid during fiscal 2000 prior to
May 31, 2000.
In April 2000, the Washington School of Professional Psychology (WSPP)
gained its regional accreditation from the North Central Association of
Colleges and Schools (NCA) and officially became a regionally accredited
campus. This was the final step in a purchase agreement for WSPP and resulted
in a payment of approximately $100,000 to the former owner.
The Company announced on November 16, 2000, that it has entered into an
agreement to purchase Western State University College of Law, in Fullerton,
California ("Western State") for approximately $13 million less certain
deductions as provided for in the agreement. The proposed transaction is
subject to approval by accrediting and regulatory entities, including the
Western Association of Schools and Colleges, the American Bar Association and
the U.S. Department of Education. Western State has an enrollment of 501
students in both full and part-time programs. Since its founding in 1966, the
school has graduated more than 10,000 students. Approximately 25 percent of
the lawyers practicing in Orange County and 15 percent of those practicing in
the Inland Empire and the Long Beach area are Western State University
graduates. The college is accredited by the Western Association of Schools and
Colleges and provisionally approved by the American Bar Association. Western
State will continue to operate under its current name and management following
closing of the purchase, which is anticipated in the first quarter of fiscal
2001.
Results of Operations
The following table summarizes the Company's operating results as a
percentage of net revenue for the period indicated:
Year Ended August
31,
-------------------
2000 1999 1998
----- ----- -----
Statement of Operations Data:
Net revenue............................................. 100.0% 100.0% 100.0%
Operating expenses:
Cost of education..................................... 47.0 50.2 51.4
Selling expenses...................................... 8.7 4.4 3.8
General and administrative expenses................... 34.3 31.4 31.0
Related party general and administrative expense...... -- 1.8 7.7
----- ----- -----
Total operating expenses............................ 90.0 87.8 93.9
----- ----- -----
Income from operations.................................. 10.0 12.2 6.1
Interest/other income (expense), net.................... (3.3) 0.3 (0.9)
----- ----- -----
Income before provision for income taxes................ 6.7 12.5 5.2
Provision for income taxes.............................. 2.9 0.1 0.0
----- ----- -----
Net income.............................................. 3.8% 12.4% 5.2%
===== ===== =====
27
Year Ended August 31, 2000 Compared to Year Ended August 31, 1999
Net Revenue. Net revenues increased 19.5% from $36.9 million in fiscal 1999
to $44.1 million in fiscal 2000, primarily due to increased revenue at all
schools owned in both fiscal 1999 and 2000. For schools owned by the Company
during fiscal 1999, revenue increased by 16.1% primarily due to internal
growth. Additional revenue was recognized from tuition increases and the
addition of new satellite campus and new programs. Also, the fiscal 1999
totals include revenue from PrimeTech only for the nine months following its
acquisition as compared to twelve months of revenues in fiscal 2000.
Cost of Education. Cost of education increased 12.2% from $18.5 million in
fiscal 1999 to $20.7 million in fiscal 2000, due to additional teaching costs
to meet the growth in the number of students attending the schools, the
development of new satellite campuses and programs and the acquisition of
PrimeTech. As a percentage of net revenue, cost of education decreased from
50.2% in fiscal 1999 to 47.0% in fiscal 2000 due to efficiencies in the
student services area.
Selling Expenses. Selling expenses increased 137.4% from $1.6 million in
fiscal 1999 to $3.8 million in fiscal 2000. As a percentage of revenue,
selling expenses increased from 4.4% to 8.7% due to the addition of recruiters
in all of the Argosy schools and a more aggressive marketing strategy. In
addition, the acquisition of PrimeTech in the early part of fiscal 1999 has
three more months of selling expenses in fiscal 2000 and generally requires
more costly advertising media than the other Argosy companies.
General and Administrative Expenses. General and administrative expenses
increased 30.4% from $11.6 million in fiscal 1999 to $15.1 million in fiscal
2000 and, as a percentage of net revenue, general and administrative expenses
increased from 31.4% to 34.3%. The increase is primarily due to increases in
payroll costs, additional expenses incurred as a public company, additional
costs of start up operations, and additional depreciation expense due to the
continued investment in the Company's equipment and computer systems. In
addition, charges totaling $0.2 million were recorded in relation to the final
settlement of matters arising in connection with the purchase of MIM and a
settlement of a minor dispute.
Related Party General and Administrative Expense. Related party general and
administrative expenses, which represents amounts paid to a company owned by
the majority shareholder that provided management services for the Company and
its schools, was $0.7 million in fiscal 1999. Upon consummation of the initial
public offering, the relationship with the related company was terminated.
Interest/Other Income (Expense), Net. Interest/other income (expense), net,
changed from income of $0.1 million for fiscal 1999 to $1.4 million of net
expense for fiscal 2000 and, as a percentage of net revenue, decreased from
0.3% to (3.3)%. This increase in expense was due primarily to $1.9 million of
equity losses resulting from the Company's investment in John Marshall.
Interest income increased from $0.7 million for fiscal 1999 to $0.9 million
for fiscal 2000 primarily as a result of a full year of use of the proceeds
from the initial public offering that increased cash and investments. Interest
expense decreased 47.1% from fiscal 1999 to fiscal 2000 due to the pay down of
certain debts and the implementation of a credit agreement at more favorable
rates than the facilities it replaced.
Provision for Income Taxes. The provision for income taxes increased from
$0.04 million in fiscal 1999 to $1.3 million in fiscal 2000, due to the
Company's change to a C Corporation on March 8, 1999. Upon the termination of
its S Corporation status in the third quarter of 1999, the Company recorded a
deferred income tax asset and corresponding reduction of income tax expense of
$0.8 million. In addition, there was a negligible tax charge for the first
half of fiscal 1999 while the Company was an S Corporation.
Net Income. Net income decreased 63.8% from $4.6 million in fiscal 1999 to
$1.7 million in fiscal 2000 due primarily to the increase in income taxes of
$1.2 million and equity losses of $1.9 million resulting from losses relating
to the Company's investment in John Marshall.
Year Ended August 31, 1999 Compared to Year Ended August 31, 1998
Net Revenue. Net revenue increased 25.6% from $29.4 million for fiscal 1998
to $36.9 million for fiscal 1999, primarily due to additional net revenue of
$3.7 million from the acquisitions of MIM and PrimeTech. For entities owned by
the Company during fiscal 1998 revenues increased by 14.3%.
28
Cost of Education. Cost of education increased 22.6% from $15.1 million for
fiscal 1998 to $18.5 million for fiscal 1999, due to additional teaching costs
to meet the growth in the number of students attending the schools, the
development of new programs and the acquisitions of MIM and PrimeTech. As a
percentage of net revenue, cost of education decreased slightly from 51.4% in
1998 to 50.2% in 1999.
Selling Expenses. Selling expenses increased 46.6% from $1.1 million for
fiscal 1998 to $1.6 million for fiscal 1999 and, as a percentage of net
revenue, increased from 3.8% to 4.4%, primarily due to the acquisitions of MIM
and PrimeTech, which require the use of more costly advertising media than
each of ASPP and U of S.
General and Administrative Expenses. General and administrative expenses
increased 27.3% from $9.1 million for fiscal 1998 to $11.6 million for fiscal
1999 and, as a percentage of net revenue, increased from 31.0% to 31.4%.
Related Party General and Administrative Expense. Related party general and
administrative expense decreased 70.6% from $2.3 million for fiscal 1998 to
$0.7 million for fiscal 1999 and, as a percentage of net revenue, decreased
from 7.7% to 1.8%. The decrease is due to the termination of the Company's
management contract with MCM Management Corporation as of March 9, 1999.
Interest/Other Income (Expense), Net. Interest/other income (expense), net,
increased 147.8% from $(0.3) million for fiscal 1998 to $0.1 million for
fiscal 1999 and, as a percentage of net revenue, increased from (0.9)% to .3%.
Interest income increased from $0.4 million for fiscal 1998 to $0.7 million
for fiscal 1999 primarily as a result of the proceeds from the initial public
offering increasing the cash and investments. Interest expense decreased 5.7%
from fiscal 1998 to fiscal 1999 due to the pay down of certain debts with the
initial public offering proceeds.
Provision for Income Taxes. The provision for income taxes for fiscal 1999
is mainly limited to tax liability as of March 8, 1999 which was calculated at
a 40% effective rate plus deferred tax adjustments to coincide with the
Company's change to a C Corporation. There was a negligible tax charge for
fiscal 1998.
Net Income. Net income increased 202.5% from $1.5 million for fiscal 1998
to $4.6 million for fiscal 1999, due primarily to a decrease in related party
general and administrative expense, increased profitability at all schools and
a one time deferred tax asset due to the termination of the S Corporation on
March 8, 1999. These increases were offset by the tax provision recorded by
the Company as a C Corporation.
Seasonality; Variations in Quarterly Results of Operations
The Company has experienced seasonality in its results of operations
primarily due to the pattern of student enrollments at most of the Company's
schools. Historically, the Company's lowest quarterly net revenue and income
have been in the fourth fiscal quarter (June through August) due to lower
student enrollment during the summer months at most of the Company's schools,
while the Company's expenses remain relatively constant over the course of a
year. The Company expects that this seasonal trend will continue.
The following table sets forth unaudited quarterly financial data for the
fiscal years ended August 31, 2000 and 1999 and, for the fiscal years, such
data expressed as a percentage of the Company's totals with respect to such
information for the applicable quarters. The Company believes that this
information includes all adjustments (consisting solely of normal recurring
adjustments) necessary for a fair presentation of such quarterly information
when read in conjunction with the consolidated financial statements included
elsewhere herein. The operating results for any quarter are not necessarily
indicative of the results for any future period.
Fiscal Year Ended August 31, Fiscal Year Ended August 31,
2000 1999
---------------------------------- ---------------------------------
1st
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Qtr 2nd Qtr 3rd Qtr 4th Qtr
------- ------- ------- ------- ------ ------- ------- -------
(dollars in thousands)
Net revenue............. $11,614 $10,576 $12,617 $ 9,251 $9,341 $9,079 $10,695 $ 7,751
% of fiscal year total.. 26.4% 24.0% 28.6% 21.0% 25.4% 24.6% 29.0% 21.0%
Income from operations.. $ 1,587 $ 1,266 $ 2,649 $(1,134) $1,818 $ 917 $ 2,930 $(1,160)
% of fiscal year total.. 36.3% 29.0% 60.7% (26.0)% 40.4% 20.4% 65.0% (25.8)%
29
Liquidity and Capital Resources
Since its formation, the Company has financed its operating activities
primarily through cash generated from operations. Acquisitions have been
financed primarily through debt instruments. Net cash provided by operating
activities increased from $3.7 million in fiscal 1999 to $4.2 million in
fiscal 2000. The Company had $13.6 million of working capital as of August 31,
2000 compared to $12.8 million of working capital as of August 31, 1999.
Capital expenditures were $1.9 million in both fiscal 1999 and fiscal 2000.
The Company continues to invest in upgrading school equipment and facilities
and enhancing the capabilities of the Company's computer system. Capital
expenditures are expected to continue to increase as the student population
increases and the Company continues to upgrade and expand current facilities
and equipment. The Company has no other commitments for material capital
expenditures.
The Company entered into the Credit Agreement with The Bank of America
providing for revolving credit borrowings of up to $20 million. Borrowings
under the Credit Agreement bear interest at a variable rate equal to (at the
Company's option) the principal lender's prime rate as in effect from time to
time or the London Inter-Bank Offered Rate plus, in each case, a margin of
between 25 and 250 basis points, depending on the type of loan and the
Company's ratio of funded debt to EBITDA. In addition, the Credit Agreement
provides for an unused commitment fee of 37.5 basis points on commitments
available but unused under the Credit Agreement, as well as certain other
customary fees. The Credit Agreement provides for a blanket lien on all
material assets of the Company and a pledge of the capital stock of all the
Company's material subsidiaries, as well as upstream guarantees from all such
subsidiaries. The Credit Agreement restricts the Company and its subsidiaries'
ability to take certain actions, including incurring additional indebtedness
or altering the Company's current method of doing business. The Credit
Agreement also contains certain financial covenants and ratios that may have
the effect of restricting the Company's ability to take certain actions in
light of their impact on the Company's financial condition or results of
operations. As of August 31, 2000 the Company was in compliance with its
covenants or obtained a waiver. The Credit Agreement will terminate on May 21,
2001, unless extended. As of August 31, 2000, the Company had outstanding
borrowings of $350,000 under this Agreement.
The Company's cash flow from operations on a long-term basis is dependent
on the receipt of funds from the Title IV Programs. For fiscal 2000, the
Company's U.S. institutions derived approximately 48% to approximately 59% of
their respective net revenue (on a cash basis) from the Title IV Programs. The
HEA and its implementing regulations establish specific standards of financial
responsibility, administrative capability and other requirements that must be
satisfied in order to qualify for participation in the Title IV Programs.
The DOE requires that Title IV Program funds collected by an institution
for unbilled tuition be kept in separate cash or cash equivalent accounts
until the students are billed for the portion of their program related to
these Title IV Program funds. In addition, all funds transferred to the
Company through electronic funds transfer programs are held in a separate cash
account until certain conditions are satisfied. As of August 31, 2000, the
Company held an immaterial amount of funds in these separate accounts. The
restrictions on any cash held in these accounts have not significantly
affected the Company's ability to fund daily operations.
The Company entered into a long-term management arrangement with John
Marshall Law of Atlanta, Georgia in September 1999. As of August 31, 2000, the
Company has advanced approximately $2.6 million to the John Marshall Law
School in connection with that arrangement. The arrangement includes a
management agreement, a 10-year option to purchase John Marshall exercisable
at the Company's discretion and a line of credit of $600,000 between the
Company and John Marshall. As of August 31, 2000, the Company had advanced
approximately $500,000 under the line of credit and approximately $2,149,000
operating cash under the management agreement. These advances, net of John
Marshall operating losses totalling $1.9 million are included in other long-
term assets. The Company has also committed to advance an additional $1.5
million for John Marshall in fiscal 2001, if needed.
30
In 1987, the Georgia Supreme Court mandated that John Marshall obtain
American Bar Association ("ABA") accreditation before 2003. The ABA has to
date refused such accreditation. On September 5, 2000, John Marshall filed an
appeal regarding its accreditation, which is scheduled to be heard in
February, 2001. If the appeal is successful, the Company has been advised that
the ABA will send a two person team to inspect the school and verify that
shortcomings noted in previous inspections have been addressed. If the appeal
proves unsuccessful, John Marshall can begin the accreditation process again
with a new application filing in the Fall of 2001. Though the Company believes
that accreditation can be achieved before the 2003 deadline, there exist a
myriad of circumstances that cannot be foreseen and over which the Company has
no control that could interfere with the granting of accreditation status to
John Marshall; thus, there can be no assurance that accreditation will be
received which could impact the Company's ability to recover its $2.6 million
of advances made to John Marshall through August 31, 2000.
The Company adopted a repurchase program for the Company's Class A Common
Stock of up to 500,000 shares. Shares of Class A Common Stock will be
purchased by the Company from time to time through open market purchases and
private purchase, as available. Under this program, the Company has
repurchased 482,000 shares as of August 31, 2000 at a total cost of
approximately $2,131,000.
Year 2000 Problem
The "Year 2000 Problem" is the potential for computer processing errors
resulting from the use of computer programs that have been written using two
digits, rather than four, to denote a year (e.g., using the digits "99" to
denote 1999). Computer programs using this nomenclature can misidentify
references to dates after 1999 as meaning dates early in the twentieth century
(e.g., "1902" rather than "2002"). The Year 2000 Problem is commonly
considered to be prevalent in computer programs written as recently as the
mid-1990s, and can cause such programs to generate erroneous information, to
otherwise malfunction or to cease operations altogether.
The Company has installed a new management information system in its
corporate headquarters. In addition, the Company's schools each have stand-
alone computer systems and networks for internal use and for communication
with its students and with corporate headquarters. Since January 1, 2000,
there have been no material adverse effects related to the Year 2000 Problem.
However, there can be no assurance that this new computer system will not
still be affected by the Year 2000 Problem and that the Company's existing
systems will not still be affected by the Year 2000 Problem, or that a failure
of any other parties, such as the DOE or other government agencies on which
the Company depends for student financial assistance or the financial
institutions involved in the processing of student loans, to address the Year
2000 Problem will not have a material adverse effect on the Company's
business, results of operations or financial condition. In particular, there
can be no assurance that malfunctions relating to the Year 2000 Problem will
not result in the misreporting of financial information by the Company. The
Company has made inquiries of substantially all of its material vendors
regarding the Year 2000 Problem and has not detected any significant issues
relating to the Year 2000 Problem. However, the Company has not made a formal
assessment of the computer programs used by government agencies or other first
parties with which the Company interacts, or an assessment of its own
vulnerability to the failure of such programs to be free of the Year 2000
Problem. The Company does not have any formal contingency plans relating to
the Year 2000 Problem.
The Company believes that the most reasonably likely worst case scenario
for the Company regarding the Year 2000 Problem is a failure of the DOE to
adequately ensure payment of financial aid amounts. The 1998 Amendments
require the DOE to take steps to ensure that the processing, delivery and
administration of grant, loan and work assistance provided under the Title IV
Programs are not interrupted because of the Year 2000 Problem. This
legislation also authorizes the DOE to postpone certain HEA requirements to
avoid overburdening institutions and disrupting the delivery of student
financial assistance as a consequence of this problem. To date, we do not
believe that the DOE has experienced any disruptions associated with the Year
2000 Problem, and our students have not experienced any delays in tuition
payments as a result of the Year 2000 Problem. There can be no assurance,
however, that assistance will not be interrupted or that any DOE requirements
would be postponed so that there would be no material adverse effect on the
Company's schools.
31
Recent Accounting Pronouncements
On December 3, 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition, to provide
guidance on the recognition, presentation, and disclosure of revenue in
financial statements. The SAB outlines basic criteria that must be met before
registrants may recognize revenue, including persuasive evidence of the
existence of an arrangement, the delivery of products or services, a fixed and
determinable sales price, and reasonable assurance of collection. SAB 101 is
effective beginning the first fiscal quarter of the first fiscal year
beginning after December 15, 1999. Through August 31, 2000, the Company has
recognized application, technology and registration fees as revenue upon
receipt. Prior to the release of SAB 101, the Company's revenue recognition
policy was in compliance with generally accepted accounting principles.
Effective in the fourth quarter of fiscal 2001, we will adopt a change in
accounting principle to comply with the specific provisions and guidance of
SAB 101. SAB 101 will require the Company to recognize revenue related to
application, technology, and registration fees over the contract period. The
adoption of SAB 101 will not have a material effect on the Company's financial
position or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, as amended by SFAS No. 137 "Accounting
for Derivative Instruments and Hedging Activities." The statement requires the
recognition of all derivatives as either assets or liabilities in the balance
sheet and the measurement of those instruments at fair value, and based on the
amendment, effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000, which, therefore, would require the Company to adopt such
statement on September 1, 2000. The impact of adopting the standard will not
have a material effect on the consolidated operations of the Company beginning
September 1, 2000.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to the impact of interest rate changes, foreign
currency fluctuations and changes in the market value of its investments. The
Company does not utilize interest rate swaps, forward or option contracts on
foreign currencies or commodities, or other types of derivative financial
instruments. The Company has debt with fixed annual rates of interest ranging
from 6.25% to 10.50% totaling $3.4 million at August 31, 2000. The Company
estimates that the fair value of each of its debt instruments approximated its
market value on August 31, 2000.
The Company is subject to fluctuations in the value of the Canadian dollar
vis-a-vis the U.S. dollar. Its investment in its Canadian operations is
approximately $1.0 million at August 31, 2000 and the fair value of the assets
and liabilities of these operations approximated current market rates at this
date.
From time to time, the Company invests excess cash in marketable
securities. These investments principally consist of U.S. Treasury notes,
corporate bonds, short-term commercial paper and money market accounts, the
fair value of which approximated current market rates at August 31, 2000.
Inflation
The Company has historically implemented tuition increases each year at or
above the rate of inflation. Average tuition increases at the Company's
schools for fiscal 2000, 1999 and 1998 were 5.1%, 5.2% and 5.1%, respectively.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated balance sheets are as of August 31, 2000 and 1999 and the
consolidated statements of operations, shareholders' equity and cash flows are
for each of the years ended August 31, 2000, 1999 and 1998:
Report of Independent Public Accountants, page F-1.
Consolidated Balance Sheets, page F-2.
Consolidated Statements of Operations, page F-3.
32
Consolidated Statements of Cash Flows, page F-4.
Consolidated Statements of Shareholders' Equity, page F-5.
Notes to Consolidated Financial Statements, page F-7.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information in response to this item is incorporated by reference from
the sections captioned "PROPOSAL NO. 1--ELECTION OF DIRECTORS" and "EXECUTIVE
OFFICERS" of the definitive Proxy Statement to be filed in connection with our
2001 Annual Meeting of Stockholders (the "2001 Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information in response to this item is incorporated by reference from
the section of the 2001 Proxy Statement captioned "EXECUTIVE COMPENSATION AND
CERTAIN TRANSACTIONS."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information in response to this item is incorporated by reference from
the section of the 2001 Proxy Statement captioned "SECURITY OWNERSHIP OF
MANAGEMENT AND PRINCIPAL STOCKHOLDERS."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in response to this item is incorporated by reference from
the sections of the 2001 Proxy Statement captioned "EXECUTIVE COMPENSATION AND
CERTAIN TRANSACTIONS" and "COMPENSATION COMMITTEE INTERLOCKS AND INSIDER
PARTICIPATION."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K or
incorporated by reference as set forth below:
1 and 2. Financial Statements of Argosy Education Group, Inc. and
subsidiaries
Page
----
Report of Independent Public Accountants................................ F-1
Consolidated Balance Sheets as of August 31, 2000 and 1999.............. F-2
Consolidated Statements of Operations for the years ended August 31,
2000, 1999 and 1998.................................................... F-3
Consolidated Statements of Cash Flows for the years ended August 31,
2000, 1999 and 1998.................................................... F-4
Consolidated Statements of Shareholders' Equity for the years ended
August 31, 2000, 1999 and 1998......................................... F-5
Notes to Consolidated Financial Statements.............................. F-7
33
3. Exhibits:
3.1 Articles of Incorporation of the Company, Incorporated by Reference to the
Company's Registration Statement on Form S-1.
3.2 By-laws of the Company, Incorporated by Reference to the Company's Registration
Statement on Form S-1.
10.1 Argosy Education Group, Inc. 1999 Stock Incentive Plan, Incorporated by Reference
to the Company's Registration Statement on Form S-1.
10.2 Argosy Education Group, Inc. Employee Stock Discount Purchase Plan, Incorporated
by Reference to the Company's Registration Statement on Form S-1.
10.3 Tax Indemnification Agreement, dated February 10, 1999, between the Company and
Dr. Markovitz, Incorporated by Reference to the Company's Registration Statement
on Form S-1.
10.4 Term Note of Academic Review, Inc. dated August 27, 1997, in favor of Northern
Trust Company, Incorporated by Reference to the Company's Registration Statement
on Form S-1.
10.5 Real Estate Mortgage and Security Agreement, dated April 30, 1997, among MCM
University Plaza, Inc. and Northern Trust Bank of Florida, N.A., Incorporated by
Reference to the Company's Registration Statement on Form S-1.
10.6 Lease Agreement, dated July 21, 1995, between Park Central Corp. and U of S,
Incorporated by Reference to the Company's Registration Statement on Form S-1.
10.7 Standard Tenancy Agreement, dated December 10, 1992, between Lakeside Commons
Partners and the Company, as amended by Lease Amendment, dated March 17, 1994
between Lakeside Commons Partners and the Company, Incorporated by Reference to
the Company's Registration Statement on Form S-1.
10.8 Tenant Lease, dated June 21, 1995, between CKSS Associates and the Company,
Incorporated by Reference to the Company's Registration Statement on Form S-1.
10.10 Lease, dated September 8, 1994, between American National Bank and Trust Company
of Chicago and The Company, as amended by Amendment to Lease, dated November 28,
1997, between American National Bank and Trust Company of Chicago and the
Company, Incorporated by Reference to the Company's Registration Statement on
Form S-1.
10.11 Lease Agreement, dated July 3, 1996, between Continental Offices Ltd. and the
Company, as amended by First Amendment, to Lease Agreement, dated July 3, 1996,
between Continental Offices Ltd. and the Company, Incorporated by Reference to
the Company's Registration Statement on Form S-1.
10.12 Office Lease, dated May 28, 1997, between Presson Advisory, L.L.C. and the
Company, Incorporated by Reference to the Company's Registration Statement on
Form S-1.
10.13 Lease, dated May 3, 1997, between Control Data Corporation and the Company, and
amended by Letter Agreement, dated December 8, 1994, Incorporated by Reference to
the Company's Registration to Statement on Form S-1.
10.14 Lease, dated August 1, 1997, between Oneida Realty Company and the Company,
Incorporated by Reference to the Company's Registration Statement on Form S-1.
10.15 Lease Agreement, dated May 3, 1994, between Arlington Park Realty Corporation and
the Company, Incorporated by Reference to the Company's Registration Statement on
Form S-1.
10.16 Standard Industrial/Commercial Multi-Tenant Lease--Modified Net, dated November
3, 1995, between the Gordon Family Trust and AATBS, and addenda and amendments
thereto, Incorporated by Reference to the Company's Registration Statement on
Form S-1.
34
10.17 Lease, dated October 11, 1991, between MEPC American Properties Incorporated and
Medical Institute of Minnesota, Inc. and amendments thereto, Incorporated by
Reference to the Company's Registration Statement on Form S-1.
10.18 Indenture of Sublease, dated June 9, 1997, between Royal Bank of Canada and
PrimeTech Corporation, Incorporated by Reference to the Company's Registration
Statement on Form S-1.
10.19 Lease, dated March 14, 1997, between Cumberland-Bellair Investment, Inc. and
1184266 Ontario Inc., Incorporated by Reference to the Company's Registration
Statement on Form S-1.
10.20 Stock Purchase Agreement, dated April 15, 1998, among PrimeTech Canada Inc.,
George Schwartz, P.M.T. Holdings Inc. and Michael Markovitz, Incorporated by
Reference to the Company's Registration Statement on Form S-1.
10.21 Stock Purchase Agreement, dated February 3, 1998, between Medical Institutes of
America, Inc. and Phillip Miller, Incorporated by Reference to the Company's
Registration Statement on Form S-1.
10.22 Agreement to Purchase and Redeem Stock, dated August 26, 1997, among Ventura,
Steven H. Santini and Association for Advanced Training in the Behavioral
Sciences, Incorporated by Reference to the Company's Registration Statement on
Form S-1.
10.23 Agreement to Purchase Assets, dated August 26, 1997, among Academic Review, Inc.,
an Illinois corporation, Academic Review, Inc., a California corporation and
Steven H. Santini, Incorporated by Reference to the Company's Registration
Statement on Form S-1.
10.24 Purchase and Sale Agreement, dated August 31, 1998, between University of
Sarasota, Inc. and Michael C. Markovitz, Incorporated by Reference to the
Company's Registration Statement on Form S-1.
10.25 Software License and Service Agreement, dated March 31, 1998, between SCT
Software & Resource Management Corporation and the Company, Incorporated by
Reference to the Company's Registration Statement on Form S-1.
10.26 Purchase of Services Agreement, dated January 1, 1998, between Illinois
Alternatives, Inc. and the Company, Incorporated by Reference to the Company's
Registration Statement on Form S-1.
10.27 Form of Distribution Loan Note, Incorporated by Reference to the Company's
Registration Statement on Form S-1.
10.28 Employment Agreement, dated February 10, 1999, between the Company and Dr.
Markovitz, Incorporated by Reference to the Company's Registration Statement on
Form S-1.
10.29 Indemnification Agreement, dated February 10, 1999, between the Company and Dr.
Markovitz, Incorporated by Reference to the Company's Registration Statement on
Form S-1.
10.30 Management Agreement between Argosy Education Group, Inc. and John Marshall Law
School of Georgia.*
10.31 Consulting Agreement, dated September 1, 2000, between the Company and Leeds
Equity Associates, L.P.*
10.32 Registration Agreement, dated September 1, 2000, between the Company and Leeds
Equity Associates, L.P.*
10.33 Stock Purchase Warrant, dated September 1, 2000, between the Company and Leeds
Equity Associates, L.P.*
23.1 Consent of Arthur Andersen LLP with respect to financial statements of Argosy
Education Group, Inc.
- --------
* Filed previously.
(b) Reports on Form 8-K.
During the last quarter of the period covered by this Form 10-K, the Company
did not file any current reports on Form 8-K.
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 18th day of
March, 1999.
Argosy Education Group, Inc.
/s/ Charles T. Gradowski
By: _________________________________
Charles T. Gradowski
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated.
Signature Title Date
--------- ----- ----
/s/ James Otten President March 26, 2001
____________________________________
James Otten
/s/ Michael C. Markovitz Chairman of the Board March 26, 2001
____________________________________
Michael C. Markovitz
/s/ Charles T. Gradowski Chief Financial Officer March 26, 2001
____________________________________ (Principal Financial and
Charles T. Gradowski Accounting Officer)
/s/ Karen M. Knab Director March 26, 2001
____________________________________
Karen M. Knab
/s/ Jeffrey Leeds Director March 26, 2001
____________________________________
Jeffrey Leeds
/s/ Michael W. Mercer Director March 26, 2001
____________________________________
Michael W. Mercer
/s/ Harold J. O'Donnell Director March 26, 2001
____________________________________
Harold J. O'Donnell
/s/ Kalman K. Shiner Director March 26, 2001
____________________________________
Kalman K. Shiner
/s/ Leslie M. Simmons Director March 26, 2001
____________________________________
Leslie M. Simmons
36
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Argosy Education Group, Inc.:
We have audited the accompanying consolidated balance sheets of ARGOSY
EDUCATION GROUP, INC. (an Illinois corporation) AND SUBSIDIARIES as of August
31, 2000 and 1999 and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended August 31, 2000 (as restated --see Note 2). These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Argosy
Education Group, Inc. and Subsidiaries as of August 31, 2000 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended August 31, 2000 in conformity with accounting
principles generally accepted in the United States.
Arthur Andersen LLP
Chicago, Illinois
March 1, 2001
F-1
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
August 31,
--------------------
2000 1999
ASSETS ------------ -------
As Restated,
See Note 2
------------
Current Assets:
Cash and cash equivalents.............................. $ 8,112 $ 8,980
Short-term investments................................. 7,787 6,027
Receivables--
Students, net of allowance for doubtful accounts of
$311 and $316 at August 31, 2000 and 1999,
respectively........................................ 2,178 988
Other................................................ 507 605
Due from related entity................................ 49 49
Prepaid taxes.......................................... 215 614
Prepaid expenses....................................... 409 387
Deferred tax assets.................................... 286 274
------- -------
Total current assets............................... 19,543 17,924
------- -------
Property and equipment, net.............................. 6,307 5,617
------- -------
Other assets:
Non-current investments................................ 200 2,745
Deposits............................................... 159 166
Deferred tax assets.................................... 1,680 568
Advances to John Marshall.............................. 724 500
Intangibles, net....................................... 6,687 6,799
------- -------
Total other assets................................. 9,450 10,778
------- -------
Total assets....................................... $35,300 $34,319
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt................... $ 796 $ 486
Accounts payable....................................... 1,162 1,109
Accrued payroll and related expenses................... 634 547
Accrued expenses....................................... 584 417
Deferred revenue....................................... 2,760 2,548
------- -------
Total current liabilities.......................... 5,936 5,107
------- -------
Long-term debt, less current maturities.................. 2,604 2,998
Deferred rent............................................ 710 610
Commitments and contingencies
Shareholders' equity:
Class A common stock--30,000,000 shares authorized,
$.01 par value, 2,059,417 and 2,000,000 issued and
outstanding at August 31, 2000 and 1999,
respectively.......................................... 21 20
Class B common stock--10,000,000 shares authorized,
$.01 par value, 4,900,000 shares issued and
outstanding at August 31, 2000 and 1999,
respectively.......................................... 49 49
Additional paid-in capital............................. 25,131 24,871
Accumulated other comprehensive income................. 1,102 447
Purchase price in excess of predecessor carry over
basis................................................. (720) (720)
Treasury stock (482,000 shares of Class A common stock
at August 31, 2000)................................... (2,131) --
Retained earnings...................................... 2,598 937
------- -------
Total shareholders' equity......................... 26,050 25,604
------- -------
Total liabilities and shareholders' equity......... $35,300 $34,319
======= =======
The accompanying notes are an integral part of these consolidated statements.
F-2
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
Years Ended August 31,
-----------------------------
2000 1999 1998
------------ ------- -------
As Restated,
See Note 2
------------
Net revenue .................................... $44,058 $36,866 $29,352
------- ------- -------
Operating expenses:
Cost of education............................. 20,746 18,489 15,075
Selling expenses.............................. 3,837 1,616 1,102
General and administrative expenses........... 15,107 11,588 9,104
Related party general and administrative
expense...................................... -- 668 2,271
------- ------- -------
Total operating expenses.................... 39,690 32,361 27,552
------- ------- -------
Income from operations...................... 4,368 4,505 1,800
------- ------- -------
Other income (expense):
Losses attributable to John Marshall.......... (1,925) -- --
Interest income............................... 854 695 357
Interest expense.............................. (300) (567) (601)
Other expense................................. (73) (6) (12)
------- ------- -------
Total other income (expense), net........... (1,444) 122 (256)
------- ------- -------
Income before provision for income taxes.... 2,924 4,627 1,544
Income Taxes:
Income tax provision on C corporation income
subsequent to March 8, 1999.................. 1,263 746 --
Income tax provision on S corporation income
prior to March 8, 1999....................... -- 62 29
Deferred income taxes recorded in conjunction
with termination of S corporation election on
March 8, 1999................................ -- (764) --
------- ------- -------
Total income taxes.......................... 1,263 44 29
------- ------- -------
Net income...................................... $ 1,661 $ 4,583 $ 1,515
======= ======= =======
Earnings per share:
Basic......................................... $ 0.25 $ 0.78 $ 0.31
======= ======= =======
Weighted average shares outstanding--basic.... 6,529 5,870 4,900
======= ======= =======
Diluted....................................... $ 0.25 $ 0.78 $ 0.31
======= ======= =======
Weighted average shares outstanding--diluted.. 6,530 5,870 4,900
======= ======= =======
The accompanying notes are an integral part of these consolidated statements.
F-3
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years Ended August 31,
----------------------------
2000 1999 1998
------------ ------- ------
As Restated,
See Note 2
------------
Cash flows from operating activities:
Net income...................................... $1,661 $ 4,583 $1,515
Adjustments to reconcile net income to net cash
provided by operating activities--
Depreciation and amortization................... 1,554 1,405 938
Deferred taxes.................................. (1,124) (842) --
Losses attributable to John Marshall............ 1,925 -- --
Issuance of stock performance grants............ 232 -- --
Changes in operating assets and liabilities,
net of acquired businesses--
Receivables, net............................... (1,092) (579) 1
Inventories.................................... (15) 94 67
Prepaid expenses............................... 392 (438) (354)
Deposits....................................... 7 72 (65)
Accounts payable............................... 53 (215) 231
Accrued payroll and related expenses........... 87 (281) 256
Accrued expenses............................... 167 (367) 284
Deferred revenue............................... 212 151 (384)
Deferred rent.................................. 100 130 93
------ ------- ------
Net cash provided by operating activities..... 4,159 3,713 2,582
------ ------- ------
Cash flows from investing activities:
Purchase of property and equipment, net......... (1,875) (1,889) (597)
Sale (purchase) of investments, net............. 1,449 (3,363) 1,784
Business acquisitions, net of cash acquired..... (247) (186) (1,918)
Advances to John Marshall....................... (2,149) (500) --
------ ------- ------
Net cash used in investing activities......... (2,822) (5,938) (731)
------ ------- ------
Cash flows from financing activities:
Issuance of common stock........................ 29 26,040 --
Offering costs.................................. -- (1,149) --
Purchase of treasury stock...................... (2,131) -- --
Proceeds from issuance of long-term debt........ 380 150 3,029
Payments of long-term debt...................... (463) (5,385) (1,271)
Borrowings from (payments to) related entities,
net............................................ -- 57 (271)
Shareholder distributions....................... -- (14,215) (5,340)
Shareholder note receivable..................... -- 3,278 505
Payments to former owners of acquired
businesses..................................... -- (268) --
------ ------- ------
Net cash provided by (used in) financing
activities................................... (2,185) 8,508 (3,348)
------ ------- ------
Effective exchange rate changes on cash.......... (20) (15) --
------ ------- ------
Net increase (decrease) in cash and cash
equivalents..................................... (868) 6,268 (1,497)
Cash and cash equivalents, beginning of year..... 8,980 2,712 4,209
------ ------- ------
Cash and cash equivalents, end of year........... $8,112 $ 8,980 $2,712
====== ======= ======
Supplemental disclosures of cash flow
information:
Cash paid for--
Interest........................................ $ 297 $ 584 $ 549
Taxes........................................... 1,989 1,524 41
====== ======= ======
Supplemental disclosure of non-cash investing and
financing activities:
Acquisitions of various schools and businesses--
Fair value of assets acquired................... $ 100 $ 1,561 $3,346
Net cash used in acquisitions................... (247) (186) (1,918)
------ ------- ------
Liabilities assumed or incurred............... $ (147) $ 1,375 $1,428
====== ======= ======
Supplemental disclosure of non-cash shareholder activities:
On August 30, 1998, the shareholder of the Company issued a note to the
Company in the form of a capital contribution totaling $6,000,000.
During 1999, the Company received marketable securities with a fair market
value of approximately $2,722,000 from the shareholder for partial repayment
of the shareholder note receivable.
The accompanying notes are an integral part of these consolidated statements.
F-4
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands)
Class A Class B
------------------ ------------------
Common Stock $.01 Common Stock $.01
par value, par value,
30,000,000 shares 10,000,000 shares
authorized authorized Accumulated
------------------ ------------------ Additional Other
Comprehensive Shares Shares Paid-in Comprehensive
Income Outstanding Amount Outstanding Amount Capital Income
------------- ----------- ------ ----------- ------ ---------- -------------
BALANCE, August 31,
1997................... -- $-- 4,900 $49 $ 456 $ (17)
Net income.............. $1,515 -- -- -- -- -- --
Unrealized gain on
investments............ 19 -- -- -- -- -- 19
------
Comprehensive income.... $1,534
======
Shareholder
distributions.......... -- -- -- -- -- --
Shareholder
contribution........... -- -- -- -- 6,000 --
Purchase price in excess
of predecessor
carryover basis........ -- -- -- -- -- --
----- ---- ----- --- ------- ------
BALANCE, August 31,
1998................... -- -- 4,900 49 6,456 2
Net income.............. $4,583 -- -- -- -- -- --
Unrealized gain on
investments............ 445 -- -- -- -- -- 445
------
Comprehensive income.... $5,028
======
Shareholder
distribution........... -- -- -- -- (6,456) --
Issuance of stock....... 2,000 20 -- -- 24,871 --
----- ---- ----- --- ------- ------
BALANCE, August 31,
1999................... 2,000 20 4,900 49 24,871 447
Net income (as restated,
see
note 14)............... $1,661 -- -- -- -- -- --
Foreign translation
adjustment............. (9) -- -- -- -- -- (9)
Unrealized gain on
investments............ 664 -- -- -- -- -- 664
------
Comprehensive income.... $2,316
======
Purchase of treasury
stock.................. -- -- -- -- -- --
Issuance of class A
common stock for stock
performance grants..... 51 1 -- -- 231 --
Issuance of class A
common stock under
employee stock purchase
plan................... 8 -- -- -- 29 --
----- ---- ----- --- ------- ------
BALANCE, August 31, 2000
(as restated, see Note
2)..................... 2,059 $ 21 4,900 $49 $25,131 $1,102
===== ==== ===== === ======= ======
The accompanying notes are an integral part of these consolidated statements.
F-5
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY--(Continued)
(Dollars in thousands)
Purchase
Price in
Excess of Treasury Stock
Predecessor ----------------- Total
Carryover Shares Retained Shareholders'
Basis Purchased Amount Earnings Equity
----------- --------- ------- -------- -------------
BALANCE, August 31,
2000....................
BALANCE, August 31,
1997.................... $ -- -- $ -- $6,960 $ 7,448
Net income............... -- -- -- 1,515 1,515
Unrealized gain on
investments............. -- -- -- 19
Comprehensive income.....
Shareholder
distributions........... -- -- -- (5,340) (5,340)
Shareholder
contribution............ -- -- -- -- 6,000
Purchase price in excess
of predecessor carryover
basis................... (720) -- -- -- (720)
----- --- ------- ------ -------
BALANCE, August 31,
1998.................... (720) -- -- 3,135 8,922
Net income............... -- -- -- 4,583 4,583
Unrealized gain on
investments............. -- -- -- -- 445
Comprehensive income.....
Shareholder
distribution............ -- -- -- (6,781) (13,237)
Issuance of stock........ -- -- -- -- 24,891
----- --- ------- ------ -------
BALANCE, August 31,
1999.................... -- -- -- 937 25,604
Net income...............
(as restated, see Note
2)...................... -- -- -- 1,661 1,661
Foreign translation
adjustment.............. -- -- -- -- (9)
Unrealized gain on
investments............. -- -- -- -- 664
Comprehensive income.....
Purchase of treasury
stock................... -- 482 (2,131) -- (2,131)
Issuance of class A
common stock for stock
performance grants...... -- -- -- -- 232
Issuance of class A
common stock under
employee stock purchase
plan.................... -- -- -- -- 29
----- --- ------- ------ -------
BALANCE, August 31, 2000
(as restated, see
Note 2)................. $(720) 482 $(2,131) $2,598 $26,050
===== === ======= ====== =======
The accompanying notes are an integral part of these consolidated statements.
F-6
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2000, 1999 AND 1998
1. Description of the Business and Basis of Presentation
The consolidated financial statements of Argosy Education Group, Inc.
(formerly known as American Schools of Professional Psychology, Inc. ("ASPP"))
(the "Company") include the accounts of the Company and its wholly-owned
subsidiaries, University of Sarasota, Inc. ("U of S"), Argosy International,
Inc. ("Ventura"), the Medical Institutes of America, Inc. ("MIA") and
PrimeTech Canada Inc., ("PrimeTech"). Prior to being subsidiaries of the
Company, the companies, other than PrimeTech, were separate entities owned by
the same shareholder. Through various transactions, these companies were
contributed by the shareholder to the Company. On November 30, 1998, the
Company acquired 100% of the outstanding stock of PrimeTech. The Company
continues to conduct business under its historical name, ASPP.
The Company provides programs in psychology, education, business, allied
health professions, network engineering and software programming and offers
courses and materials for post-graduate psychology license examinations in the
United States. The Company operates through four business units and is
approved and accredited to offer doctoral, master's, bachelor's and associate
degrees as well as to award diplomas and non degree certificates through 17
campuses in nine states and Ontario, Canada.
The contribution by the shareholder of businesses under common control and,
as described in Note 3, the Company's purchase of MCM University Plaza, Inc.'s
stock from its shareholder have been accounted for in a manner similar to a
pooling of interests.
On March 8, 1999 the Company completed an initial public offering of Common
Stock (the "Offering"). Prior to the Offering, the Company had one class of
common stock outstanding. In connection with the Offering, the Company's
existing common stock underwent an approximate 2,941-for-one stock split which
was then converted into 4,900,000 shares of Class B Common Stock. The Company
authorized 30,000,000 shares of Class A Common Stock. The effect of the stock
split has been retroactively reflected for all periods presented in the
accompanying consolidated financial statements. The Company also authorized
5,000,000 shares of Preferred Stock. There was no Preferred Stock issued or
outstanding as of August 31, 2000 and 1999.
In the Offering, the Company issued and sold 2,000,000 shares of Class A
Common Stock at a price of $14.00 per share. The Company received total net
proceeds, after deduction of underwriting discounts and offering costs, of
approximately $25.0 million. The net proceeds from the Offering were used to
repay $4.7 million of the Company's indebtedness, pay a distribution to the
Company's majority shareholder of $13.2 million and repay $0.9 million of
indebtedness due to the Company's shareholder in connection with the
acquisitions of MCM Plaza and PrimeTech. The remaining $6.2 million of
proceeds is available for working capital and general corporate purposes.
2. Restatements
Subsequent to the issuance of the Company's consolidated financial
statements for the fiscal year ended August 31, 2000, it was determined that
the previously reported operating results for 2000 were overstated. The
accompanying financial statements have been revised primarily to reflect
adjustments to reduce the carrying value of the Company's advances to John
Marshall Law School. It was determined that the more appropriate accounting
for the advances to John Marshall is to treat this as an equity method
investment. The accounting for the advances to John Marshall has been revised
to reduce the amount of the advances to John Marshall to reflect John
Marshall's operating losses during 2000. The 2000 financial statements were
restated to give effect to the revised accounting for the John Marshall
advances from the point in time that the management agreement (Note 12) was in
place (September 1, 1999).
F-7
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of the effects of the restatements follows (dollars in thousands):
For the year ended
August 31, 2000
-------------------
As
Previously As
Reported Restated
---------- --------
Net Revenue............................................. $44,171 $44,058
------- -------
Operating expenses:
Cost of education..................................... 20,746 20,746
Selling expenses...................................... 3,837 3,837
General and administrative expenses................... 14,713 15,107
------- -------
Total operating expenses............................ 39,296 39,690
------- -------
Income from operations.............................. 4,875 4,368
------- -------
Other income (expense):
Losses attributable to John Marshall.................. -- (1,925)
Interest income....................................... 854 854
Interest expense...................................... (300) (300)
Other expense......................................... (73) (73)
------- -------
Total other income (expense), net................... 481 (1,444)
------- -------
Income before provision for income taxes............ 5,356 2,924
Income taxes............................................ 2,236 1,263
------- -------
Net income.............................................. $ 3,120 $ 1,661
======= =======
Earnings per share
Basic................................................... $ 0.48 $ 0.25
======= =======
Weighted average shares outstanding--basic.............. 6,529 6,529
======= =======
Diluted................................................. $ 0.48 $ 0.25
======= =======
Weighted average shares outstanding--diluted............ 6,530 6,530
======= =======
F-8
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
August 31, 2000
-------------------------
As Previously
Reported As Restated
ASSETS ------------- -----------
Current Assets:
Cash and cash equivalents........................... $ 8,115 $ 8,112
Short-term investments.............................. 7,787 7,787
Receivables--
Students, net of allowance for doubtful accounts
of $311, at August 31, 2000...................... 2,178 2,178
Other............................................. 586 507
Due from related entity............................. 49 49
Prepaid taxes....................................... 160 215
Prepaid expenses.................................... 429 409
Deferred tax assets................................. 270 286
------- -------
Total current assets............................ 19,574 19,543
------- -------
Property and equipment, net........................... 6,307 6,307
------- -------
Other Assets:
Non-current investments............................. 200 200
Deposits............................................ 159 159
Deferred tax assets................................. 778 1,680
Advances to John Marshall........................... 2,979 724
Intangibles, net.................................... 6,687 6,687
------- -------
Total other assets.............................. 10,803 9,450
------- -------
Total Assets.......................................... $36,684 $35,300
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities on long-term debt................ $ 796 $ 796
Accounts payable.................................... 1,162 1,162
Accrued payroll and related expenses................ 634 634
Accrued expenses.................................... 543 584
Deferred revenue.................................... 2,726 2,760
------- -------
Total current liabilities....................... 5,861 5,936
------- -------
Long-term debt, less current maturities............... 2,604 2,604
------- -------
Deferred rent......................................... 710 710
------- -------
Commitments and contingencies
Shareholders' equity:
Class A common stock................................ 21 21
Class B common stock................................ 49 49
Additional paid-in capital.......................... 25,131 25,131
Accumulated other comprehensive income.............. 1,102 1,102
Purchase price in excess of predecessor carryover
basis.............................................. (720) (720)
Treasury stock...................................... (2,131) (2,131)
Retained earnings................................... 4,057 2,598
------- -------
Total shareholders' equity...................... 27,509 26,050
------- -------
Total liabilities and shareholders' equity............ $36,684 $35,300
======= =======
F-9
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Significant Accounting Policies
The principal accounting policies of the Company are as follows:
Principles of Consolidation
The consolidated financial statements include the accounts of Argosy
Education Group, Inc. and its wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
The results of operations of all acquired businesses have been consolidated
for all periods subsequent to the date of acquisition.
Advances to John Marshall
The Company has accounted for the advances it has made to John Marshall Law
School ("John Marshall") of Atlanta, Georgia, under the equity method of
accounting. For the year ended August 31, 2000, losses of John Marshall,
excluding intercompany transactions (Note 12), of approximately $1.9 million
have been included as other expenses in the Company's statement of operations.
These losses have been reflected as a reduction in the cash advances made to
John Marshall.
Concentration of Credit Risk
The Company extends unsecured credit for tuition to a significant portion
of the students who are in attendance at its schools. A substantial portion of
credit extended to students is repaid through the students' participation in
various federally funded financial aid programs under Title IV of the Higher
Education Act of 1965, as amended (the "Title IV Programs"). The following
table presents the amount and percentage of the Company's cash receipts
collected from the Title IV Programs for the years ended August 31, 2000, 1999
and 1998 (dollars in thousands). Such amounts were determined based upon each
U.S. institution's cash receipts for the twelve-month period ended August 31,
pursuant to the regulations of the United States Department of Education
("DOE") at 34 C.F.R. (S) 600.5:
For the Years Ended
August 31,
-------------------------
2000 1999 1998
------- ------- -------
Total Title IV funding.......................... $20,898 $16,823 $13,011
Total cash receipts............................. $37,673 $31,937 $28,514
Total Title IV funding as a percentage of total
cash Receipts.................................. 55% 53% 46%
======= ======= =======
Transfers of funds from the financial aid programs to the Company are made
in accordance with the United States DOE requirements. Changes in DOE funding
of federal Title IV Programs could impact the Company's ability to attract
students.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash in banks, highly liquid money
market accounts and commercial paper with maturities of less than three
months.
Restricted Cash
Cash received from the U.S. Government under various student aid grant and
loan programs is considered to be restricted. Restricted cash is held in
separate bank accounts and does not become available for general use by the
Company until the financial aid is credited to the accounts of students and
the cash is transferred to an
F-10
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
operating account. Restricted cash is not included in the accounts of the
Company and was immaterial at August 31, 2000 and 1999.
Investments
The Company invests excess cash in investments consisting primarily of
equity securities, corporate bonds (maturing in less than one month) and U.S.
Government treasury notes (maturing from one to 17 months). The investments
are considered available for sale, stated at their fair market value and
classified based upon their maturity dates.
At August 31, 2000 and 1999, investments consisted of the following
(dollars in thousands):
August 31,
-------------
2000 1999
------ ------
Fair value--
Equity securities........................................... $3,514 $2,770
Corporate bonds............................................. 1,500 3,125
U.S. Government treasury notes.............................. 2,935 2,839
Term deposits............................................... 38 38
------ ------
Total investments at fair value........................... 7,987 8,772
Unrealized gain............................................... 1,111 447
------ ------
Total investments at cost................................. $6,876 $8,325
====== ======
Advertising and Marketing Costs
Advertising and marketing costs are expensed as incurred and are included
in selling expenses in the accompanying consolidated statements of operations.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization
are recognized utilizing both accelerated and straight-line methods. Leasehold
improvements are amortized over their estimated useful lives or lease terms,
whichever is shorter. Maintenance, repairs and minor renewals and betterments
are expensed; major improvements are capitalized. The estimated useful lives
and cost basis of property and equipment at August 31, 2000 and 1999, are as
follows (dollars in thousands):
August 31,
-------------
2000 1999 Life
------ ------ ----------
Land............................................... $ 517 $ 517
Building and improvements.......................... 2,307 2,307 40 years
Office equipment................................... 1,390 1,075 3-7 years
Furniture and fixtures............................. 681 424 5-7 years
Leasehold improvements............................. 1,106 837 4-10 years
Computer equipment and software.................... 3,007 2,134 3-5 years
Instructional equipment and materials.............. 1,103 938 3-7 years
------ ------
10,111 8,232
Less--Accumulated depreciation and amortization.... 3,804 2,615
------ ------
$6,307 $5,617
====== ======
F-11
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Intangible Assets
Intangible assets include goodwill, intellectual property and covenants
not-to-compete related to business acquisitions and the buyout of a former
shareholder. Intangible assets are being amortized on a straight-line basis
over their estimated useful lives. At August 31, 2000 and 1999, the cost basis
and useful lives of intangible assets consist of the following (dollars in
thousands):
August 31,
-------------
2000 1999 Life
------ ------ -----------
Goodwill........................................... $7,552 $7,300 15-40 years
Intellectual property.............................. 776 776 2-4 years
Covenants not-to-compete........................... 252 252 5-10 years
------ ------
8,580 8,328
Less--Accumulated amortization..................... 1,893 1,529
------ ------
$6,687 $6,799
====== ======
On an ongoing basis, the Company reviews intangible assets and other long-
lived assets for impairment whenever events or circumstances indicate that
carrying amounts may not be recoverable. To date, no such events or changes in
circumstances have occurred. If such events or changes in circumstances occur,
the Company will recognize an impairment loss if the undiscounted future cash
flows expected to be generated by the asset (or acquired business) are less
than the carrying value of the related asset. The impairment loss would adjust
the asset to its fair value.
Revenue Recognition
Revenue consists primarily of tuition revenue from courses taught at the
schools and workshop fees and sales of related materials. Tuition revenue from
courses taught is recognized on a straight-line basis over the length the
applicable course is taught. Revenue from workshops is recognized on the date
of the workshop. If a student withdraws, future revenue is reduced by the
amount of refund due to the student. Refunds are calculated in accordance with
federal, state and accrediting agency standards. Revenue from rental of the
Company's owned facility is recognized on a straight-line basis over the life
of the leases. Textbook sales are recorded upon shipment. Revenue from rent
and textbook sales represents less than 7%, 10% and 13% of the Company's net
revenue for the fiscal years ended August 31, 2000, 1999 and 1998,
respectively. Revenue is stated net of scholarships and grants given to the
students, which totaled approximately $726,000, $657,000 and $705,000 for the
fiscal years ended August 31, 2000, 1999 and 1998, respectively. Deferred
revenue represents the portion of payments received but not earned and is
reflected as a current liability in the accompanying consolidated balance
sheets as such amount is expected to be earned within the next year.
SAB 101 Revenue Recognition
On December 3, 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition, to provide
guidance on the recognition, presentation, and disclosure of revenue in
financial statements. The SAB outlines basic criteria that must be met before
registrants may recognize revenue, including persuasive evidence of the
existence of an arrangement, the delivery of products or services, a fixed and
determinable sales price, and reasonable assurance of collection. SAB 101 is
effective beginning the first fiscal quarter of the first fiscal year
beginning after December 15, 1999. Through August 31, 2000, the Company has
recognized application, technology and registration fees as revenue upon
receipt. Prior to the release of SAB 101, the Company's revenue recognition
policy was in compliance with generally accepted accounting principles.
Effective September 1, 2000, the Company will adopt a change in accounting
principle to
F-12
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
comply with the specific provisions and guidance of SAB 101. SAB 101 will
require the Company to recognize revenue related to application, technology,
and registration fees over the contract period. The adoption of SAB 101 will
not have a material effect on the Company's financial position or results of
operations.
Management's Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
certain estimates and assumptions that affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements and reported amounts of revenues and expenses
during the reported period. Actual results could differ from those estimates.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," ("SFAS No. 123") related to options issued to employees and
directors.
Financial Instruments
The carrying value of current assets and liabilities reasonably
approximates their fair value due to their short maturity periods. The
carrying value of the Company's debt obligations reasonably approximates their
fair value as the stated interest rate approximates current market interest
rates of debt with similar terms.
Foreign Currency Translation
The Company acquired PrimeTech, an entity with operations in Canada, on
November 30, 1998. At August 31, 2000 and 1999 revenues and expenses related
to these operations have been translated at average exchange rates in effect
at the time the underlying transactions occurred. Transaction gains and losses
are included in income. Assets and liabilities of this subsidiary have been
translated at the year-end exchange rate, with gains and losses resulting from
such translation being included in accumulated other comprehensive income at
August 31, 2000 and 1999.
Earnings Per Share
The Company had 433,800 and 381,900 shares of its Class A common stock
under stock options at August 31, 2000 and 1999, respectively. Of the stock
options outstanding at August 31, 2000, 44,283 shares under option were deemed
exercisable under the treasury stock method where the average market price
exceeded their exercise price. As a result, 140 net shares were added to the
calculation of diluted shares outstanding at August 31, 2000. On the other
hand, no shares under stock options were included in the computation of
diluted earnings per share for the year ended August 31, 1999 because the
exercise price was greater than the average market price of the common shares.
Comprehensive Income
For the periods ended August 31, 2000 and 1999, accumulated other
comprehensive income net of tax, was approximately $661,000 and $268,000,
respectively. The tax effect of changes in other comprehensive income items
for each year would have resulted in a reduction of comprehensive income.
F-13
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Start-Up Costs
The Company expenses all start-up and organization costs as incurred.
Derivative Instruments
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, as amended by SFAS No. 137 "Accounting
for Derivative Instruments and Hedging Activities." The statement requires the
recognition of all derivatives as either assets or liabilities in the balance
sheet and the measurement of those instruments at fair value, and based on the
amendment, effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000, which, therefore, would require the Company to adopt such
statement on September 1, 2000. The impact of adopting the standard will not
have a material effect on the consolidated operations of the Company beginning
September 1, 2000.
4. Business Acquisitions
Real Estate Operation
On August 31, 1998, the Company purchased 100% of the stock of MCM
University Plaza, Inc. from the Company's shareholder at its appraised value
of approximately $3.3 million less assumed obligations of approximately $2.6
million. MCM University Plaza, Inc. owns real estate occupied by U of S, and
was originally acquired by the Company's shareholder on April 30, 1997 for
approximately $2.2 million with funds obtained from a mortgage (Note 4). The
assets, liabilities and operations of the real estate are included in the
Company's financial statements subsequent to April 30, 1997, the date the
Company's shareholder purchased the real estate, in a manner similar to a
pooling of interests because the August 1998 transaction was between two
parties controlled by the Company's shareholder. The purchase price of MCM
University Plaza, Inc.'s stock in excess of the historical book value of the
underlying net assets acquired, totaling approximately $720,000, is reflected
as a reduction of shareholders' equity.
MIA
On February 3, 1998, MIA purchased 100% of the capital stock of MIM for a
purchase price of approximately $2,368,000. The acquisition was accounted for
as a purchase and, accordingly, the acquired assets and assumed liabilities
have been recorded at their estimated fair value at the date of the
acquisition. The purchase price exceeded the fair market value of net assets
acquired resulting in goodwill of approximately $1,962,000. During fiscal
2000, the Company negotiated a final purchase price adjustment with the former
owner resulting in a payment of approximately $0.1 million; such amount was
expensed in fiscal 2000. The purchase price was financed with approximately
$2,068,000 in short-term borrowings and cash from operations.
PrimeTech
On November 30, 1998, the Company acquired 100% of the outstanding stock of
PrimeTech, which owns two Canadian schools that award non-degree certificates
in network engineering and software programming. Prior to that acquisition the
majority shareholder of the Company owned a one-third interest in PrimeTech.
Under the acquisition agreement, the Company was required to pay the former
owners, consisting of Dr. Markovitz and two operating managers, a total of
$500,000 (Canadian Dollars) upon closing and is obligated to issue shares of
the Company's common stock, the fair value of which is equal to 102% of
PrimeTech's net income, as defined in such agreement, in each of PrimeTech's
next three fiscal years. The Company has negotiated agreements with
F-14
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the two operating managers in lieu of future stock issuance as provided for in
the acquisition agreement. The agreements specify an aggregate payout of
approximately $150,000 (US Dollars) to the two operating managers which was
paid in fiscal 2000.
5. Debt
Debt of the Company at August 31, 2000 and 1999, consists of the following:
August 31,
-------------
2000 1999
------ ------
(dollars in
thousands)
Borrowings under credit agreement............................ $ 350 $ --
Mortgage debt, bearing interest at 9%, requiring monthly
principal and interest payments of $18,378 through March 31,
2007 and a final payment of $1,830,368 on April 30, 2007,
secured by related real estate.............................. 2,099 2,129
Promissory note with the former owner of AATBS (being
operated by the Company under the name Ventura), bearing
interest at 6.25%, requiring an initial payment of $400,000
on January 1, 1998, quarterly principal and interest
payments of $75,000 through October 1, 2002 and a final
payment of $375,000 on January 1, 2002, secured by the
assets of AATBS............................................. 655 901
Promissory note with the former owner of MIM, bearing
interest at 8%, requiring monthly principal and interest
payments of $9,426 through May 31, 2001, unsecured.......... 90 191
Bank note payable, bearing interest at 9%, requiring monthly
principal and interest payments of $1,462 through May 18,
2008, secured by real estate................................ 97 106
Business improvement loans, bearing interest at the prime
rate plus 1.5% (10.5% at August 31, 2000), requiring monthly
principal payments of $4,810 through 2002................... 50 103
Other........................................................ 59 54
------ ------
3,400 3,484
Less--Current maturities..................................... 796 486
------ ------
$2,604 $2,998
====== ======
During 1999, the Company entered into a credit agreement with a syndicate
of banks ("Credit Agreement"), which provides for revolving credit borrowings
of up to $20 million. Borrowings under the Credit Agreement bear interest at a
variable rate equal to (at the Company's option) the principal lender's prime
rate as in effect from time to time or the London Inter-Bank Offered Rate
plus, in each case, a margin of between 25 and 250 basis points, depending on
the type of loan and the Company's ratio of funded debt to EBITDA. The
interest rate being charged on amounts outstanding at August 31, 2000 was
9.75%. In addition, the Credit Agreement provides for an unused commitment fee
of 37.5 basis points on commitments available but unused under the Credit
Agreement, as well as certain other customary fees. The Credit Agreement
provides for a blanket lien on all material assets of the Company and a pledge
of the capital stock of all the Company's material subsidiaries, as well as
guarantees from all such subsidiaries. The Credit Agreement restricts the
Company and its subsidiaries' ability to take certain actions, including
incurring additional indebtedness or altering the Company's current method of
doing business. The Credit Agreement also contains certain financial covenants
and ratios that may have the effect of restricting the Company's ability to
take certain actions in light of their impact on the Company's financial
condition or results of operations. The Credit Agreement terminates on May 21,
2001. As of August 31, 2000 and 1999, outstanding borrowings under this Credit
Agreement totaled approximately $350,000 and $0, respectively.
F-15
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At August 31, 2000, future annual principal payments of long-term debt are
as follows (dollars in thousands):
August 31--
2001................................................................ $ 796
2002................................................................ 492
2003................................................................ 50
2004................................................................ 55
2005................................................................ 60
2006 and thereafter................................................. 1,947
------
$3,400
======
6. Income Taxes
Prior to the initial public offering of the Company's common shares
completed on March 8, 1999, the Company included its income and expenses with
those of its shareholder for Federal and certain state income tax purposes (an
S Corporation election). Accordingly, the consolidated statements of
operations for the fiscal year ended August 31, 1998 does not include a
provision for Federal income taxes. In connection with the Company's initial
public offering, the Company terminated its S Corporation election and
recorded a deferred income tax asset and corresponding income tax benefit of
$764,222, arising from a change in the Company's tax status. Beginning March
8, 1999, the Company provides for deferred income taxes under the asset and
liability method of accounting. This method requires the recognition of
deferred income taxes based upon the tax consequences of "temporary
differences" by applying enacted statutory tax rates applicable to future
years to differences between the financial statement carrying amounts and the
tax basis of existing assets and liabilities.
In connection with the initial public offering, the Company and its
majority shareholder entered into a tax indemnification agreement. The
agreement provides that the Company will indemnify the majority shareholder
against additional income taxes resulting from adjustments made (as determined
by an appropriate tax authority) to the taxable income reported by the Company
as an S Corporation for the periods prior to the initial public offering, but
only to the extent those adjustments provide a tax benefit to the Company.
The provision for income taxes for the years ended August 31, 2000, 1999
and 1998 consists of the following (dollars in thousands):
2000 1999 1998
------- ---- ----
Current:
Federal.............................................. $ 1,955 $676 $--
State................................................ 432 210 29
------- ---- ----
Total current provision............................ 2,387 886 29
Deferred:
Federal.............................................. (601) 51 --
State................................................ (175) 3 --
Foreign.............................................. (348) (132) --
------- ---- ----
Total deferred benefit............................. (1,124) (78) --
Initial recognition of deferred income tax benefit
resulting from change in tax status................... -- (764) --
------- ---- ----
Total income tax provision......................... $ 1,263 $ 44 $ 29
======= ==== ====
F-16
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of the statutory Federal tax rate to the actual effective
income tax rate for the years ended August 31, 2000 and 1999, is as follows
(tax provision for 1998 relates to only the S Corporation taxes):
2000 1999
---- -----
Statutory Federal income tax rate............................. 34.0% 34.0%
Foreign taxes................................................. 1.6 (0.2)
State income taxes, net of federal benefit.................... 4.9 4.6
Income tax benefit recognized as a result of change in tax
status....................................................... -- (16.5)
S Corporation income taxes to its shareholder................. -- (25.4)
Permanent and other........................................... 2.7 4.5
---- -----
Effective rate.............................................. 43.2% 1.0%
==== =====
The significant components of deferred income tax assets and liabilities as
of August 31, 2000 and 1999 are as follows (dollars in thousands):
2000 1999
------ ----
Deferred income tax assets:
Canadian Tax net operating loss carryforward................. $ 488 $122
John Marshall basis difference............................... 902 --
Payroll and related benefits................................. 160 149
Allowance for doubtful accounts.............................. 123 122
Fixed assets................................................. 97 105
Deferred rent................................................ 279 241
Other........................................................ 3 137
------ ----
Total deferred income tax assets........................... 2,052 876
Deferred income tax liabilities:
Other........................................................ (86) (34)
------ ----
Total net deferred tax assets.............................. $1,966 $842
====== ====
No valuation allowance for deferred income tax assets at August 31, 2000
and 1999 has been recorded as the Company believes that it is more likely than
not that the deferred tax assets will be realized in the future.
7. Shareholders' Equity
The Company adopted a repurchase program for the Company's Class A Common
Stock of up to 500,000 shares. Shares of Class A Common Stock will be
purchased by the Company from time to time through open market purchases and
private purchase, as available. Under this program, the Company has
repurchased 482,000 shares as of August 31, 2000 at a total cost of
approximately $2,131,000.
Class A common stock and Class B common stock have identical rights except
that each share of Class B common stock is entitled to ten votes on all
matters submitted to a vote of shareholders as compared to one vote for each
share of Class A common stock and Class B common stock may be (and in certain
cases are required to be) converted into Class A common stock on a share-for-
share basis.
8. Stock Plans
During 1999, the Company adopted the 1999 Stock Incentive Plan. Under this
plan the Company can grant up to 750,000 options exercisable into shares of
Class A common stock to certain members of management. Most of the options
vest and become exercisable in three equal annual installments commencing with
their
F-17
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
issuance and at the next two anniversary dates. Some options are vested at the
date of grant based on determinations made by the Company's board of
directors. The stock options expire ten years from the date of grant.
The following table summarizes stock option activity under the Plan:
August 31, 2000 August 31, 1999
----------------- ----------------
Weighted Weighted
Average Average
Shares Price Shares Price
------- -------- ------- --------
Outstanding at beginning of year............. 381,900 $13.54 -- $ --
Granted...................................... 97,500 6.17 381,900 13.54
Exercised.................................... -- -- -- --
Canceled..................................... (45,600) 14.00 -- --
------- ------ ------- ------
Outstanding at end of year................... 433,800 $11.84 381,900 $13.54
======= ====== ======= ======
Options exercisable at year-end.............. 301,600 $12.37 163,300 $12.93
======= ====== ======= ======
The following table summarizes information about stock options outstanding
at August 31, 2000:
Options Outstanding Options Exercisable
----------------------------------- -----------------------------------
Weighted- Weighted-
Range of Average Average
Exercise Remaining Remaining
Prices Shares Life Shares Life
-------- ------ --------- ------ ---------
$5.375-$7.500 124,500 9.62 70,500 9.59
$14.00 309,300 8.55 231,100 8.55
The Company also adopted the Employee Stock Discount Purchase Plan ("Stock
Purchase Plan") during 1999. The Stock Purchase Plan allows full-time
employees to purchase shares of Class A Common Stock through payroll
deductions of up to 10% of gross pay, at a cost per share of 90% of the lowest
closing price of the stock on the Nasdaq National Market during the Plan
quarter. The Company has reserved 375,000 shares of Class A Common Stock for
issuance in connection with the Stock Purchase Plan. Through August 31, 2000,
8,299 shares of Class A Common Stock have been issued under this Plan.
The weighted average fair value of options issued during 2000 and 1999 was
$3.642 and $9.703 and was estimated on the date of grant based on the Black-
Scholes option pricing model assuming, among other things, a risk-free
interest rate of 6.02% for 2000 and 5.81% for 1999; no dividend yield;
expected volatility of 63% for 2000 and 70% for 1999 and an expected life of
five years for 2000 and 10 years for 1999. Had compensation costs for options
been determined in accordance with SFAS 123, the Company's net income for the
years ended August 31, 2000 and 1999 would have been approximately $764,000
and $2,783,000, respectively.
The pro forma disclosure is not likely to be indicative of pro forma
results which may be expected in future years. This primarily relates to the
fact that options vest over several years and pro forma compensation cost is
recognized as the options vest. Furthermore, the compensation cost is
dependent on the number of options granted, which may vary in future periods.
9. Leases
Facilities and Equipment Leases
The Company maintains operating leases for its educational and office
facilities and for certain office and computer equipment. The facility leases
generally require the Company to pay for pro rata increases in property
F-18
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
taxes, maintenance and certain operating expenses. Rent expense under
operating leases, recognized on a straight-line basis over the term of the
lease (excluding property taxes, maintenance and operation costs), totaled,
$3,101,302, $2,811,567 and $1,617,784 for the fiscal years ended August 31,
2000, 1999 and 1998, respectively.
Real Estate Rental Income
The Company leases certain space of its building owned by MCM University
Plaza, Inc. in Sarasota, Florida, to outside parties under noncancellable
operating leases.
At August 31, 2000, the approximate future minimum rental income and
commitments under operating leases that have initial or remaining
noncancellable lease terms in excess of one year are as follows (dollars in
thousands):
Real Estate
Lease and Total
Commitments Sublease Income Operating Leases
----------- --------------- ----------------
For the year ended August 31,
2001........................ $ 3,064 $(298) $ 2,766
2002........................ 3,211 (164) 3,047
2003........................ 3,241 (122) 3,119
2004........................ 2,971 (24) 2,947
2005........................ 2,919 (8) 2,911
2006 and thereafter......... 8,234 -- 8,234
------- ----- -------
$23,640 $(616) $23,024
======= ===== =======
10. Commitments and Contingencies
Letters of Credit
The Company has outstanding irrevocable letters of credit totaling
approximately $962,000 as of August 31, 2000, which were primarily issued in
connection with leases for office facilities.
Litigation
The Company, Dr. Markovitz and certain other companies in which Dr.
Markovitz has an interest had been named as defendants in Charlena Griffith,
et al. v. University Hospital, L.L.C. et al., a class action lawsuit filed in
November 1997 and in the United States District Court for the Northern
District of Illinois, Eastern Division. This lawsuit was settled between the
parties at no cost to the Company.
From time to time, the Company is subject to occasional lawsuits,
investigations and claims arising out of the normal conduct of business.
Management does not believe the outcome of any pending claims will have a
material adverse impact on the Company's consolidated financial position or
consolidated results of operations.
11. Regulatory
The Company and its U.S. schools are subject to extensive regulation by
federal and state governmental agencies and accrediting bodies. In particular,
the Higher Education Act of 1965, as amended (the "HEA") and the regulations
promulgated thereunder by the DOE subject the Company's U.S. schools to
significant regulatory scrutiny on the basis of numerous standards that
schools must satisfy in order to participate in the various federal student
financial assistance programs under the Title IV Programs.
The standards employ a ratio methodology under which an institution need
only satisfy a single standard--the composite score standard. The ratio
methodology takes into account an institution's total financial resources
F-19
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and provides a combined score of the measures of those resources along a
common scale (from negative 1.0 to positive 3.0). It allows a relative
strength in one measure to mitigate a relative weakness in another measure.
If an institution achieves a composite score of at least 1.5, it is
financially responsible without further oversight. If an institution achieves
a composite score from 1.0 to 1.4, it is in the "zone," is subject to
additional monitoring, and may continue to participate as a financially
responsible institution for up to three years. Additional monitoring may
require the school to (1) notify the DOE, within 10 days of certain changes,
such as an adverse accrediting action; (2) file its financial statements
earlier than the six month requirement following the close of the fiscal year
and (3) subject the school to a cash monitoring payment method. If an
institution achieves a composite score below 1.0, it fails to meet the
financial responsibility standards unless it qualifies under the provisions of
an alternative standard (i.e., letter of credit equal to 50% of the Title IV
program funds expended from the prior fiscal year or equal to at least 10% of
the Title IV program funds expended from the prior fiscal year and provisional
certification status). The institution may also be placed on the cash
monitoring payment method or the reimbursement payment method. The Company
applied these regulations to its financial statements as of August 31, 2000
and has determined that the Company and each of its institutions satisfied the
standards based upon their composite scores.
On October 1, 1998, legislation was enacted which reauthorized the student
financial assistance programs of the HEA ("1998 Amendments"). The 1998
Amendments continue many of the current requirements for student and
institutional participation in the Title IV Programs. The 1998 Amendments also
change or modify some requirements. These changes and modifications include
increasing the revenues that an institution may derive from Title IV funds
from 85% to 90% and revising the requirements pertaining to the manner in
which institutions must calculate refunds to students. The 1998 Amendments
also prohibit institutions that are ineligible for participation in Title IV
loan programs due to student default rates in excess of applicable thresholds
from participating in the Pell Grant program. Other changes expand
participating institutions' ability to appeal loss of eligibility owing to
such default rates. The 1998 Amendments further permit an institution to avoid
the interruption of eligibility for the Title IV Programs upon a change in
ownership which results in a change of control by submitting a materially
complete application for recertification of eligibility within 10 business
days of such a change of ownership. None of the Company's institutions derives
more than 80% of its revenue from Title IV funds and no institution has
student loan default rates in excess of current thresholds.
The process of reauthorizing the HEA by the U.S. Congress takes place
approximately every five years. The Title IV Programs are subject to
significant political and budgetary pressures during and between
reauthorization processes. There can be no assurance that government funding
for the Title IV Programs will continue to be available or maintained at
current levels. A reduction in government funding levels could lead to lower
enrollments at the Company's schools and require the Company to seek
alternative sources of financial aid for students enrolled in its schools.
Given the significant percentage of the Company's net revenue that is
indirectly derived from the Title IV Programs, the loss of or a significant
reduction in Title IV Program funds available to students at the Company's
schools would have a material adverse effect on the Company's business,
results of operations and financial condition. In addition, there can be no
assurance that current requirements for student and institutional
participation in the Title IV Programs will not change or that one or more of
the present Title IV Programs will not be replaced by other programs with
materially different student or institutional eligibility requirements.
In order to operate and award degrees, diplomas and certificates and to
participate in the Title IV Programs, a campus must be licensed or authorized
to offer its programs of instruction by the relevant agency of the state in
which such campus is located. Each of the Company's campuses is licensed or
authorized by the relevant agency of the state in which such campus is
located. In addition, in order to participate in the Title IV Programs,
F-20
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
an institution must be accredited by an accrediting agency recognized by the
DOE. Each of the Company's schools is accredited by an accrediting agency
recognized by the DOE.
With each acquisition of an institution that is eligible to participate in
the Title IV Programs, that institution may undergo a change in ownership that
results in a change of control, as defined in the HEA and applicable
regulations. In such event, that institution becomes ineligible to participate
in the Title IV Programs and may receive and disburse only previously
committed Title IV Program funds to its students until it has applied for and
received the DOE recertification under the Company's ownership, although the
interruption in Title IV funding may be avoided if the institution submits to
the DOE a materially complete application for approval of the change in
ownership within ten days of the closing on the transaction.
12. Related-Party Transactions
On August 30, 1998, the majority shareholder of the Company issued a note
to the Company in the form of a capital contribution totaling $6,000,000. The
principal and accrued interest thereon was repaid in full during 1999.
Prior to the Offering, a company owned by the majority shareholder of the
Company provides management services for the Company and its schools. For the
years ended August 31, 1999 and 1998, the Company incurred and paid expenses
totaling $667,849 and $2,271,232, respectively, related to such services.
Subsequent to the Offering, such services are no longer provided by the
affiliated company.
The Company paid certain administrative and other expenses on behalf of an
entity partially owned by the majority shareholder of the Company. The total
amount owed to the Company from this entity for such advances was
approximately $49,000 at August 31, 2000 and 1999. The affiliated entity paid
a management fee to the Company of approximately $72,000 during fiscal 1999
related to such services. This arrangement was terminated upon the initial
public offering in March, 1999.
John Marshall Law School
The Company entered into a long-term management arrangement with John
Marshall in September 1999. The arrangement includes a management agreement,
an option to purchase John Marshall exercisable at the Company's discretion
over a 10-year period and a line of credit of $600,000 between the Company and
John Marshall. The line of credit is secured by essentially all of the assets
of John Marshall. The principal and any interest are due in 2003. As of August
31, 2000, the Company had advanced approximately $500,000 under the line of
credit. As provided for under the agreement, the Company receives a management
fee based upon John Marshall's net revenue. The management fee has been
eliminated from the consolidated financial statements. The Company has
advanced $2,149,000 to fund operating activities of John Marshall during
fiscal 2000 and has committed to advance an additional $1.5 million during
fiscal 2001, if needed. Amounts owed from John Marshall, net of any losses
attributable to its operations, are included in other long-term assets.
In 1987, the Georgia Supreme Court mandated that John Marshall obtain
American Bar Association ("ABA") accreditation before 2003. The ABA has to
date refused such accreditation. On September 5, 2000, John Marshall filed an
appeal regarding its accreditation, which is scheduled to be heard in February
2001. If the appeal is successful, the Company has been advised that the ABA
will send a two-person team to inspect the school and verify that shortcomings
noted in previous inspections have been addressed. If the appeal proves
unsuccessful, John Marshall can begin the accreditation process again with a
new application filing in the Fall of 2001. Though the Company believes that
accreditation can be achieved before the 2003 deadline, there exist a myriad
of circumstances that cannot be foreseen and over which the Company has no
control that could interfere
F-21
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
with the granting of accreditation status to John Marshall; thus, there can be
no assurance that accreditation will be received. This could affect the
Company's ability to fully realize amounts it has advanced to John Marshall.
13. Profit-Sharing Plan
The Company maintains a 401(k) profit-sharing plan that covers full-time
employees. Employees can contribute up to 15%. Contributions to the plan are
made at the discretion of the Board of Directors as well as by employees in
lieu of current salary. Contributions by the Company totaled $713,235,
$585,423 and $455,778 for the years ended August 31, 2000, 1999 and 1998,
respectively.
14. Segment Reporting
In accordance with, the Financial Accounting Standards Board SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information" ("SFAS
No. 131"), operating segments are components of an enterprise about which
separate financial information is available that is evaluated regularly by the
Company in deciding how to allocate resources and in assessing performance.
The Company has two business segments: 1) Schools and 2) Test Preparation
Materials and Workshops ("Test Preparation"). These segments are managed as
separate strategic business units due to the distinct nature of their
operations. The Schools Segment, which represents the operations of ASPP, U of
S, MIA and PrimeTech, provides programs in psychology, education, business,
allied health professions, network engineering and software programming. All
operations of the Schools Segment are located in the United States with the
exception of PrimeTech which is located in Canada. The Test Preparation
Segment offers courses and materials for post-graduate psychology license
examinations in the United States.
F-22
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents financial data for the years ended August 31,
2000, 1999 and 1998, for these segments (dollars in thousands):
Test
Schools Preparation Consolidated
------- ----------- ------------
2000
Revenue..................................... $40,529 $3,529 $44,058
Income from operations...................... 3,331 1,037 4,368
Depreciation and amortization............... 1,369 185 1,554
Interest revenue............................ 854 -- 854
Interest expense............................ 248 52 300
Net income.................................. 1,166 495 1,661
Total assets................................ 30,242 5,058 35,300
Capital expenditures........................ 1,872 3 1,875
Long-lived assets........................... 9,444 3,550 12,994
1999
Revenue..................................... $33,176 $3,690 $36,866
Income from operations...................... 3,469 1,036 4,505
Depreciation and amortization............... 1,028 377 1,405
Interest revenue............................ 695 -- 695
Interest expense............................ 401 166 567
Net income.................................. 3,796 787 4,583
Total assets................................ 30,233 4,086 34,319
Capital expenditures........................ 1,860 29 1,889
Long-lived assets........................... 8,684 3,732 12,416
1998
Revenue..................................... $25,597 $3,755 $29,352
Income from operations...................... 785 1,015 1,800
Depreciation and amortization............... 565 373 938
Interest revenue............................ 357 -- 357
Interest expense............................ 308 293 601
Net income.................................. 805 710 1,515
Total assets................................ 18,591 4,884 23,475
Capital expenditures........................ 579 18 597
Long-lived assets........................... 6,480 4,081 10,561
15. Valuation and Qualifying Accounts
The following summarizes the activity of the allowance for doubtful
accounts (dollars in thousands):
Net
Balance at Charges to Increase Due Balance at
Beginning Operating to End of
of Period Expenses Acquisitions Period
---------- ---------- ------------ ----------
Student receivable allowance
activity for the year ended
August 31, 1998............. $ 30 $177 $ 23 $230
Student receivable allowance
activity for the year ended
August 31, 1999............. $230 $ 47 $ 39 $316
Student receivable allowance
activity for the year ended
August 31, 2000............. $316 $(5) $-- $311
F-23
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
16. Subsequent Events
On September 1, 2000, the Company entered into a Consulting Agreement with
Leeds Equity Associates, L.P. This partnership includes as a partner Jeffrey
Leeds, a member of the Company's board of directors. This Agreement
encompasses the performance of Company requested services over the six month
term of the Agreement. Payment is represented by a stock purchase warrant
providing for the purchase of 200,000 shares of the Company's Class A common
stock at a purchase price of $6.48 per share and with a seven year exercise
period. The Company has estimated the value of the warrant to be approximately
$860,000. The value of the warrant will be charged to expense over the next
six month period.
On March 1, 2001, the Company completed its acquisition of Western State
University College of Law, in Fullerton California ("Western State") pursuant
to the terms of the Stock Purchase Agreement dated as of November 14, 2000,
between Argosy and Western State. The Company purchased all of the outstanding
common stock of Western State for approximately $13.0 million. Consideration
for the purchase consisted of $8.6 million in cash and the assumption of $4.0
million in debt.
On March 1, 2001, the Company exercised its option to purchase all of the
operating assets of John Marshall Law School for $0.1 million.
On March 1, 2001, the Company acquired the Connecting Link, a privately
held provider of continuing professional education for grade kindergarten to
grade 12 teachers, for $1.8 million.
F-24