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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period ended: September 30, 2001 Commission File Number: 000-21363
_______________
EDUCATION MANAGEMENT CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1119571
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
300 Sixth Avenue, Pittsburgh, PA 15222
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (412) 562-0900
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of class)
Preferred Share Purchase Rights
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No __
---
The number of shares of the registrant's Common Stock outstanding as of
September 30, 2001 was 30,354,222.
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INDEX
PART I - FINANCIAL INFORMATION PAGE
ITEM 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)....................... 3-7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION............................................ 8-9
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS............................................................. 10
ITEM 2 - CHANGES IN SECURITIES......................................................... 10
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES............................................... 10
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS.............................................................. 10
ITEM 5 - OTHER INFORMATION............................................................. 10
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K.............................................. 10
SIGNATURES....................................................................................... 11
2
PART I
ITEM 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
EDUCATION MANAGEMENT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
September 30, June 30, September 30,
2000 2001 2001
------------- ------------ -------------
(unaudited) (unaudited)
Assets
Current assets:
Cash and cash equivalents, including restricted balances.................. $ 5,938 $ 47,290 $ 6,974
Receivables............................................................... 20,928 18,945 23,948
Inventories............................................................... 4,397 3,528 5,248
Deferred and prepaid income taxes......................................... 2,872 7,350 4,946
Other current assets...................................................... 8,293 4,703 9,081
-------- -------- --------
Total current assets.................................................... 42,428 81,816 50,197
-------- -------- --------
Property and equipment, net................................................. 137,841 149,482 158,564
Deferred income taxes and other long-term assets............................ 9,867 9,590 11,935
Intangible assets, net of amortization...................................... 30,207 43,058 68,493
-------- -------- --------
Total assets............................................................ $220,343 $283,946 $289,189
======== ======== ========
Liabilities and shareholders' investment
Current liabilities:
Current portion of long-term debt......................................... $ 16 $ 26 $ 47
Accounts payable.......................................................... 7,662 10,795 16,575
Accrued liabilities....................................................... 12,437 14,692 13,601
Advance payments.......................................................... 52,780 44,790 66,471
-------- -------- --------
Total current liabilities... ......................................... 72,895 70,303 96,694
-------- -------- --------
Long-term debt, less current portion........................................ 31,225 53,634 29,360
Other long-term liabilities................................................. 234 60 61
Commitments and contingencies
Shareholders' investment:
Common Stock.............................................................. 301 305 305
Additional paid-in capital................................................ 98,466 108,463 108,092
Treasury stock, at cost................................................... (9,733) (3,596) (2,083)
Retained earnings......................................................... 26,955 54,777 56,760
-------- -------- --------
Total shareholders' investment.......................................... 115,989 159,949 163,074
-------- -------- --------
Total liabilities and shareholders' investment.......................... $220,343 $283,946 $289,189
======== ======== ========
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
3
EDUCATION MANAGEMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollars in thousands, except per share amounts)
For the three months
ended September 30,
2000 2001
-------- --------
Net revenues....................................................... $ 72,561 $ 91,874
Costs and expenses:
Educational services............................................. 52,996 67,132
General and administrative....................................... 16,686 20,724
Amortization of intangibles...................................... 368 309
-------- --------
70,050 88,165
-------- --------
Income before interest and taxes................................... 2,511 3,709
Interest expense, net............................................ 615 479
-------- --------
Income before income taxes......................................... 1,896 3,230
Provision for income taxes....................................... 740 1,247
-------- --------
Net income......................................................... $ 1,156 $ 1,983
======== ========
Earnings per share:
Basic............................................................ $ .04 $ .07
======== ========
Diluted.......................................................... $ .04 $ .06
======== ========
Weighted average number of shares outstanding (000's):
Basic............................................................ 29,076 30,336
Diluted.......................................................... 30,778 32,134
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
4
EDUCATION MANAGEMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
For the three months
ended September 30,
2000 2001
-------- --------
Cash flows from operating activities:
Net income................................................................. $ 1,156 $ 1,983
Adjustments to reconcile net income to net cash flows
from operating activities:
Depreciation and amortization......................................... 5,780 6,853
Changes in current assets and liabilities:
Receivables........................................................ (4,193) (5,003)
Inventories........................................................ (1,252) (1,720)
Other current assets............................................... (3,870) (4,357)
Accounts payable................................................... 925 10,286
Accrued liabilities................................................ (625) 1,313
Advance payments................................................... 22,865 21,681
-------- --------
Total adjustments................................................ 19,630 29,053
-------- --------
Net cash flows from operating activities......................... 20,786 31,036
-------- --------
Cash flows from investing activities:
Acquisition of subsidiaries, net of cash acquired.......................... - (25,325)
Expenditures for property and equipment.................................... (21,379) (20,132)
Other items, net........................................................... (1,848) (2,784)
-------- --------
Net cash flows from investing activities......................... (23,227) (48,241)
-------- --------
Cash flows from financing activities:
Revolving credit facility activity, net.................................... (33,025) (24,225)
Principal payments on debt................................................. (17) (28)
Proceeds from issuance of Common Stock..................................... 1,883 1,142
-------- --------
Net cash flows from financing activities......................... (31,159) (23,111)
-------- --------
Net change in cash and cash equivalents...................................... (33,600) (40,316)
Cash and cash equivalents, beginning of period............................... 39,538 47,290
-------- --------
Cash and cash equivalents, end of period..................................... $ 5,938 $ 6,974
======== ========
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest................................................................... $ 644 $ 469
Income taxes............................................................... 133 152
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
5
EDUCATION MANAGEMENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying condensed consolidated financial statements should be
read in conjunction with the notes to consolidated financial statements
included in the Fiscal 2001 Annual Report on Form 10-K of Education
Management Corporation ("EDMC" or the "Company"). The accompanying
condensed consolidated balance sheet as of June 30, 2001 has been derived
from the audited balance sheet included in the Company's Fiscal 2001 Annual
Report on Form 10-K. The accompanying interim financial statements are
unaudited; however, management believes that all adjustments necessary for
a fair presentation have been made and all such adjustments are normal,
recurring adjustments. The results for the three-month period ended
September 30, 2001 are not necessarily indicative of the results to be
expected for the full fiscal year. Unless otherwise noted, references to
2001 and 2002 refer to the periods ended September 30, 2000 and 2001,
respectively.
Certain prior period balances have been reclassified to conform to the
current period presentation.
2. The Company is among the largest providers of proprietary
postsecondary education in the United States, based on student enrollment
and revenues. Through its operating units, primarily the Art Institutes,
the Company offers master's, bachelor's and associate's degree programs and
non-degree programs in the areas of design, media arts, culinary arts and
fashion. The Company has provided career-oriented education programs for
over 35 years.
3. Reflected below is a summary of the Company's capital stock:
Par Value Authorized September 30, 2000 June 30, 2001 September 30, 2001
Issued:
Preferred Stock $ .01 10,000,000 - - -
Common Stock $ .01 60,000,000 30,069,582 30,479,880 30,479,880
Held in treasury:
Common Stock N/A N/A 907,446 216,945 125,658
For the three-month period ended September 30, 2001, 91,287 shares
held in treasury were released in connection with the exercise of stock
options and shares purchased under an employee stock purchase plan.
4. On July 9, 2001, the Company signed a merger agreement with Argosy
Education Group, Inc. ("Argosy"), a leading private provider of
postgraduate professional education, headquartered in Chicago, Illinois.
The merger agreement provides that EDMC will acquire all of the shares of
Argosy for $12.00 cash per share for the approximately 6.5 million shares
outstanding. On September 27, 2001, the Company closed in escrow its
purchase of 4.9 million shares of Class A Common Stock, $.01 par value per
share of Argosy pursuant to the terms and conditions of the Stock Purchase
Agreement dated July 9, 2001 and the Joinder Agreement dated September 26,
2001. The aggregate cash purchase price for the shares was $58.8 million,
for which the Company signed a letter of credit. This transaction is
expected to close by the end of calendar year 2001 and is subject to
obtaining certain regulatory approvals.
On July 25, 2001, the Company signed a purchase agreement acquiring
the assets of International Fine Arts College, located in Miami, Florida.
This transaction closed on September 4, 2001, subject to final approval
from the Department of Education.
On September 17, 2001, the Company signed an agreement to purchase
certain assets of ITI Education Corporation (ITI), based in Halifax, Nova
Scotia, Canada. This transaction is expected to close by the end of
calendar year 2001 and is subject to obtaining certain court approvals.
The Company accounts for acquisitions in accordance with SFAS No. 141,
"Business Combinations" (SFAS 141).
5. Reconciliation of diluted shares (000's):
Three months ended September 30,
--------------------------------
2000 2001
---------- ----------
Basic shares................... 29,076 30,336
Dilution for stock options..... 1,702 1,798
---------- ----------
Diluted shares................. 30,778 32,134
========== ==========
6
6. In June 2001, SFAS 141 was issued. The statement addresses financial
accounting and reporting for business combinations and supersedes APB
Opinion No. 16, "Business Combinations," and FASB Statement No. 38
"Accounting for Preacquisition Contingencies of Purchased Enterprises." The
statement requires that all business combinations initiated after June 30,
2001 be accounted for using the purchase method. SFAS 141 became effective
and was adopted by the Company on July 1, 2001. The Company's adoption of
SFAS 141 does not have a material impact on its financial position or
results of operations.
In June 2001, SFAS No. 142, "Goodwill and Other Intangible Assets,"
(SFAS 142) was issued. This statement addresses financial accounting and
reporting for acquired goodwill and other intangible assets and supersedes
APB Opinion No. 17, "Intangible Assets." It addresses how intangible assets
that are acquired individually or with a group of other assets (but not
those acquired in a business combination) should be accounted for in
financial statements upon their acquisition. This statement also addresses
how goodwill and other intangible assets should be accounted for after they
have been initially recognized in financial statements. The Company has
adopted this standard as of July 1, 2001. The Company is required to
complete a transitional goodwill impairment test for all goodwill at the
reporting unit level by December 31, 2001. This test is currently in
process. Adopting SFAS 142 has affected the financial position and results
of operations because goodwill is no longer amortized.
7. Subsequent to September 30, 2001, the Company filed a registration
statement with the Securities and Exchange Commission for a public offering
of its Common Stock. It is expected that a total of 4,500,000 shares will
be offered, including 3,634,133 newly issued shares to be sold by the
Company and 865,867 shares to be sold by members of the Company's senior
management and board of directors. The Company and the selling shareholders
have granted the underwriters an option for a period of 30 days to
purchase up to a total of 675,000 additional shares of Common Stock.
7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
This Quarterly Report on Form 10-Q contains statements that may be forward-
looking statements within the meaning of the U.S. Private Securities
Litigation Reform Act of 1995. Those statements can be identified by the
use of forward-looking terminology such as "believes," "estimates,"
"anticipates," "continues," "contemplates," "expects," "may," "will,"
"could," "should" or "would" or the negatives thereof. Those statements are
based on the intent, belief or expectation of the Company as of the date of
this Quarterly Report. Any such forward-looking statements are not
guarantees of future performance and may involve risks and uncertainties
that are outside the control of the Company. Actual results may vary
materially from the forward-looking statements contained herein as a result
of changes in United States or international economic conditions,
governmental regulations and other factors. The Company expressly disclaims
any obligation or understanding to release publicly any updates or
revisions to any forward-looking statement contained herein to reflect any
change in the Company's expectations with regard thereto or any change in
events, conditions or circumstances on which any such statement is based.
The following discussion of the Company's results of operations and
financial condition should be read in conjunction with the interim
unaudited condensed consolidated financial statements of the Company and
the notes thereto, included herein. Unless otherwise noted, references to
2001 and 2002 are to the periods ended September 30, 2000 and 2001,
respectively.
Results of Operations
Three months ended September 30, 2001 compared to the three months ended
September 30, 2000
Net revenues increased by 26.6% to $91.9 million in 2002 from $72.6 million
in the first quarter of 2001 due primarily to a 17.8% increase in student
enrollment, accompanied by a tuition increase of approximately 7% over the prior
year. Total student enrollment at the Company's schools increased from 20,991 in
2001 to 24,735 in 2002, including enrollment growth of approximately 10.3% at
the schools that have been operated by the Company for 24 months or more. The
first quarter's results include one month of revenue for International Fine Arts
College, which was acquired on September 4, 2001.
Educational services expense increased by $14.1 million, or 26.7%, to $67.1
million in 2002 from $53.0 million in 2001, due primarily to the incremental
costs incurred to support higher student enrollment. These costs include
increased salaries and operating expenses as well as increased depreciation and
amortization associated with recent capital expenditures. Educational services
expense as a percent of revenue increased slightly from 73.0% in fiscal 2001 to
73.1% in 2002. This change reflects the fact that we have more schools in the
new school category for the first quarter of this fiscal year as compared to the
prior year.
General and administrative expense was $20.7 million in 2002, up 24.2% from
$16.7 million in 2001. The increase over the comparable quarter in the prior
year reflects increased advertising and recruiting costs as well as increased
employee compensation. In addition, the three locations that were opened or
acquired during the past 12 months have contributed to the rise in general and
administrative costs. As a percent of net revenues, general and administrative
expense decreased by 0.4% to 22.6% as compared to the first quarter of fiscal
2001, reflecting improved operating leverage at established school locations.
Additonally marketing and admissions costs and centralized support expense
decreased as a percentage of net revenues as compared to those incurred in the
three months ended September 30, 2002.
Amortization of intangibles decreased by $59,000 to $309,000 in 2002, as
compared to the first quarter of fiscal 2001. This decrease (approximately
$209,000) is a result of the Company's adoption of SFAS 142, "Goodwill and Other
Intangible Assets," partially offset by additional amortization associated with
intangibles acquired in conjunction with the purchases of The Art Institute of
California, The Art Institute of Las Vegas, International Fine Arts College, and
amortization of ongoing curriculum development at The Art Institute Online.
Net interest expense was $479,000 in 2002, as compared to $615,000 in 2001.
This decrease is attributable to a decrease in average borrowings for the
quarter ended September 30, 2001, as well as an approximate 300 basis point
decrease in our weighted average borrowing rate.
The Company's effective tax rate declined 0.4% to 38.6% in 2002 from 39.0%
in 2001, primarily due to the reduced impact of nondeductible expenses as a
percent of income before income taxes. The effective rates differed from the
combined federal and state statutory rates due to expenses that are
nondeductible for tax purposes.
Net income increased by $827,000 to $2.0 million in 2002 from $1.2 million
in 2001. The increase is attributable to improved results from operations at the
Company's schools, a lower effective tax rate, and a reduction in amortization
of intangibles.
8
Seasonality and Other Factors Affecting Quarterly Results
The Company's quarterly revenues and income fluctuate primarily as a result
of the pattern of student enrollments. The Company experiences a seasonal
increase in new enrollments in the fall (fiscal year second quarter), which is
traditionally when the largest number of new high school graduates begin
postsecondary education. Some students choose not to attend classes during
summer months, although the Company's schools encourage year-round attendance.
As a result, total student enrollments at the Company's schools are highest in
the fall quarter and lowest in the summer months (fiscal year first quarter).
The Company's costs and expenses, however, do not fluctuate as significantly as
revenues on a quarterly basis. Historically, the Company's profitability has
been lowest in its fiscal first quarter due to lower revenues combined with
expenses incurred in preparation for the peak enrollments in the fall quarter.
The Company anticipates that the seasonal pattern in revenues and earnings will
continue in the future.
Liquidity and Capital Resources
The Company generated positive cash flow from operating activities of $31.0
million for the three months ended September 30, 2001, an increase of $10.3
million over the comparable period for fiscal 2001, due to an increase in net
income and non-cash charges, as well as timing of accounts payable.
The Company had working capital deficits of $46.5 million and $30.5 million
as of September 30, 2001 and 2000, respectively, as compared to $11.5 million of
working capital as of June 30, 2001. The decrease in working capital from June
30, 2001 was due primarily to cash used for acquisitions of $25.3 million, for
capital expenditures of $20.1 million, and for $24.3 million in debt repayments.
Net receivables increased $5.0 million from June 30, 2001 and $3.0 million from
September 30, 2000, primarily as a result of the enrollment and corresponding
revenue increase and the acquisition that occurred in the first quarter.
The Company and its lenders amended and restated their Credit Agreement,
effective September 20, 2001, to increase allowable borrowings from $100 million
to $200 million. The Amended and Restated Credit Agreement, which will expire
September 20, 2004, is secured by certain assets of the Company and provides the
Company the ability to borrow up to $150 million on a revolving basis and $50
million in the form of a term loan (collectively, the "Secured Credit
Facilities"). The Amended and Restated Credit Agreement contains the customary
covenants that, among other matters, require the Company to meet specified
financial ratios, restrict the repurchase of Common Stock and limit the
incurrence of additional indebtedness. As of September 30, 2001, the Company
was in compliance with all covenants under the Amended and Restated Credit
Agreement.
Borrowings under the Amended and Restated Credit Agreement are used by the
Company primarily to finance acquisitions and fund working capital needs
resulting from the seasonal pattern of cash receipts throughout the year. The
level of accounts receivable reaches a peak immediately after the billing of
tuition and fees at the beginning of each academic quarter. Collection of these
receivables is heaviest at the start of each academic quarter.
The Company believes that cash flow from operations, supplemented from time
to time by borrowings under the Amended and Restated Credit Agreement, will
provide adequate funds for ongoing operations, planned expansion to new
locations, planned capital expenditures and debt service during the term of the
Amended and Restated Credit Agreement.
The Company anticipates its total capital spending for fiscal 2002 will
increase as compared to the prior year. The 2002 expenditures relate
principally to the investment in schools acquired or started during the previous
several years and those added in 2002, continued improvements to current
facilities, additional or replacement school and housing facilities and
classroom and administrative technology.
The majority of the Company's facilities are leased. Future commitments on
existing leases will be paid from cash provided from operating activities.
Impact of New Accounting Standards
In August 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," was issued. This statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
statement supersedes FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," APB Opinion No.
30, "Reporting the Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" and APB No. 51, "Consolidated Financial Statements."
This statement is effective for fiscal years beginning after December 15, 2001,
and interim periods within those fiscal years. The Company is currently
evaluating the impact of this statement on its financial position and results of
operations.
9
PART II
ITEM 1 LEGAL PROCEEDINGS
Not Applicable
ITEM 2 - CHANGES IN SECURITIES
Not Applicable
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5 - OTHER INFORMATION
Not Applicable
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(15) Report of Independent Public Accountants
(b) Reports on Form 8-K:
No reports on Form 8-K were filed for the three months ended
September 30, 2001.
10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EDUCATION MANAGEMENT CORPORATION
(Registrant)
Date: November 14, 2001
/s/ Robert B. Knutson
-----------------------------------------
Robert B. Knutson
Chairman and Chief Executive Officer
/s/ Robert T. McDowell
------------------------------------------
Robert T. McDowell
Executive Vice President and Chief Financial
Officer
11