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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: March 31, 2002 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 March
31, 2002 was 34,994,012.
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INDEX
PART I - FINANCIAL INFORMATION PAGE
ITEM 1 - CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)....................... 3-9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION 10-13
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK.................................. 13
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS............................ 14
ITEM 2 - CHANGES IN SECURITIES........................ 14
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES.............. 14
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS............................. 14
ITEM 5 - OTHER INFORMATION............................ 14
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K............. 14
SIGNATURES...................................................... 15
2
PART I
ITEM 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
EDUCATION MANAGEMENT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31, June 30, March 31,
-------------- ------------- --------------
2001 2001 2002
Assets (unaudited) (unaudited)
Current assets:
Cash and cash equivalents, including restricted balances.................. $ 9,216 $ 47,290 $ 60,116
Receivables............................................................... 24,879 18,945 36,244
Inventories............................................................... 3,380 3,528 3,872
Deferred and prepaid income taxes......................................... 2,845 7,350 6,785
Other current assets...................................................... 5,199 4,703 12,412
------------- ------------- --------------
Total current assets................................................. 45,519 81,816 119,429
------------- ------------- --------------
Property and equipment, net................................................. 147,196 149,482 182,926
Deferred income taxes and other long-term assets............................ 9,209 9,590 5,207
Intangible assets, net of amortization...................................... 40,859 43,058 151,266
------------- ------------- --------------
Total assets......................................................... $242,783 $283,946 $458,828
============= ============= ==============
Liabilities and shareholders' investment
Current liabilities:
Current portion of long-term debt......................................... $ 33 $ 26 $ 155
Accounts payable.......................................................... 5,224 10,795 7,340
Accrued liabilities....................................................... 14,936 14,692 20,614
Advance payments.......................................................... 65,203 44,790 88,117
------------- ------------- --------------
Total current liabilities............................................ 85,396 70,303 116,226
------------- ------------- --------------
Long-term debt, less current portion........................................ 12,246 53,634 3,541
Deferred income taxes....................................................... - - 4,657
Other long-term liabilities................................................. 34 60 1,572
Shareholders' investment:
Common stock.............................................................. 305 305 351
Additional paid-in capital................................................ 99,162 108,463 242,982
Treasury stock, at cost................................................... (5,344) (3,596) (1,495)
Retained earnings......................................................... 50,984 54,777 90,977
Accumulated other comprehensive income.................................... - - 17
------------- ------------- --------------
Total shareholders' investment....................................... 145,107 159,949 332,832
------------- ------------- --------------
Total liabilities and shareholders' investment....................... $242,783 $283,946 $458,828
============= ============= ==============
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 For the nine months
ended March 31, ended March 31,
2001 2002 2001 2002
-------------- -------------- -------------- --------------
Net revenues................................................ $100,366 $145,710 $276,039 $367,074
Costs and expenses:
Educational services...................................... 64,131 91,251 175,200 232,709
General and administrative................................ 19,662 29,703 56,299 73,106
Amortization of intangibles............................... 564 1,378 1,381 2,217
------------- -------------- -------------- --------------
84,357 122,332 232,880 308,032
------------- -------------- -------------- --------------
Income before interest and taxes............................ 16,009 23,378 43,159 59,042
Interest expense, net..................................... 439 278 1,877 1,305
------------- -------------- -------------- --------------
Income before income taxes.................................. 15,570 23,100 41,282 57,737
Provision for income taxes................................ 6,072 8,167 16,097 21,537
------------- -------------- -------------- --------------
Net income.................................................. $ 9,498 $ 14,933 $ 25,185 $ 36,200
============= ============== ============== ==============
Earnings per share:
Basic................................................... $.32 $.43 $.85 $1.12
============= ============== ============== ==============
Diluted................................................. $.30 $.41 $.82 $1.07
============= ============== ============== ==============
Weighted average number of shares outstanding (000's):
Basic................................................... 30,124 34,862 29,605 32,352
Diluted................................................. 31,535 36,361 30,830 33,796
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 nine months ended
March 31,
2001 2002
-------------- --------------
Cash flows from operating activities:
Net income........................................................................ $ 25,185 $ 36,200
Adjustments to reconcile net income to net cash flows
from operating activities:
Depreciation and amortization................................................ 19,083 24,361
Changes in current assets and liabilities:
Receivables............................................................... (1,324) (10,669)
Inventories............................................................... (235) (146)
Other current assets...................................................... (771) (2,284)
Accounts payable.......................................................... (1,569) (2,589)
Accrued liabilities....................................................... 631 6,304
Advance payments.......................................................... 27,731 34,396
------------- --------------
Total adjustments....................................................... 43,546 49,373
------------- --------------
Net cash flows from operating activities................................ 68,731 85,573
------------- --------------
Cash flows from investing activities:
Acquisition of subsidiaries, net of cash acquired................................. (9,677) (105,696)
Expenditures for property and equipment........................................... (42,004) (37,059)
Other items, net.................................................................. (3,339) (2,278)
------------- --------------
Net cash flows from investing activities................................ (55,020) (145,033)
------------- --------------
Cash flows from financing activities:
Revolving credit facility activity, net........................................... (52,000) (53,525)
Principal payments on debt........................................................ (62) (8,636)
Proceeds from issuance of Common Stock............................................ 8,029 134,430
------------- --------------
Net cash flows from financing activities................................ (44,033) 72,269
------------- --------------
Effective exchange rate changes on cash............................................. - 17
------------- --------------
Net change in cash and cash equivalents............................................. (30,322) 12,826
Cash and cash equivalents, beginning of period...................................... 39,538 47,290
------------- --------------
Cash and cash equivalents, end of period............................................ $ 9,216 $ 60,116
============= ==============
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest.......................................................................... $ 2,046 $ 1,022
Income taxes...................................................................... 10,008 15,571
Noncash investing and financing activities:
Options exchanged in connection with acquisition of subsidiary.................... - 2,279
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. BASIS OF PRESENTATION:
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- and nine-month periods ended March 31, 2002 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 March
31, 2001 and 2002, respectively.
Certain prior period balances have been reclassified to conform to the
current period presentation.
2. NATURE OF OPERATIONS:
The Company is among the largest providers of private proprietary
postsecondary education in North America, based on student enrollment and
revenue, through its primary operating units, The Art Institutes and Argosy.
The Art Institutes offer master's, bachelor's, associate's degree and non-
degree programs in the areas of design, media arts, fashion, and culinary
arts. Argosy Education Group, Inc. ("Argosy") provides doctoral, master's,
bachelor's, and associate's degree programs in behavioral sciences, education,
business, and health sciences fields, and offers legal studies, graduate
technology programs, test preparation courses and programs for employed
educators. The Company has provided career-oriented education for 40 years.
3. PUBLIC OFFERING OF COMMON STOCK:
On December 4, 2001, a public offering of the Company's Common Stock (the
"Offering") closed at $32.50 per share. A total of 5,175,000 shares were sold,
including 4,164,681 newly-issued shares sold by the Company and 1,010,319
shares sold by members of the Company's senior management and board of
directors.
In the Offering, the Company received total net proceeds, after deduction
of expenses and underwriting discounts payable by the Company, of
approximately $127.6 million. On the date the Offering closed, $39.5 million
of the proceeds were used to repay the outstanding indebtedness under the
Company's Amended and Restated Credit Agreement (the "Credit Agreement"). The
remaining proceeds were used to fund the acquisition of Argosy (see Note 5)
and for general corporate purposes.
4. CAPITAL STOCK:
Reflected below is a summary of the Company's capital stock:
Par Value Authorized March 31, 2001 June 30, 2001 March 31, 2002
Issued:
Preferred Stock $.01 10,000,000 - - -
Common Stock $.01 60,000,000 30,479,880 30,479,880 35,084,194
Held in treasury:
Common Stock N/A N/A 322,424 216,945 90,182
For the nine-month period ended March 31, 2002, 126,763 shares held in
treasury were sold in connection with the exercise of stock options and shares
purchased under an employee stock purchase plan.
5. BUSINESS ACQUISITIONS:
On December 21, 2001, the Company completed its acquisition of Argosy, a
leading private provider of postgraduate professional education, headquartered
in Chicago, Illinois. In September 2001, the Company closed in escrow its
purchase of 4.9 million shares of Argosy from its controlling shareholder. The
aggregate cash purchase price for these shares was $58.8 million. The Company
acquired the approximately 1.6 million remaining Argosy shares outstanding for
$12.00 per share at the closing of
6
the merger with Argosy in December. The acquisition of Argosy broadens EDMC's
presence in the higher education market by expanding education program
offerings and adding school locations.
On July 25, 2001, the Company signed an agreement to purchase the assets of
International Fine Arts College ("IFAC"), located in Miami, Florida. This
transaction closed in September 2001, subject to final approval from the
United States Department of Education, which was received in January 2002.
On September 17, 2001, the Company signed an agreement to purchase certain
assets of ITI Information Technology Institute, Inc. ("ITI"), based in
Halifax, Nova Scotia, Canada from ITI's court-appointed receiver. ITI was
placed into receivership as of August 16, 2001. This transaction closed on
November 23, 2001.
These acquisitions were accounted for as purchases in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" ("SFAS 141"), which the Company adopted in the first quarter of
fiscal 2002. The aggregate purchase price of Argosy was approximately $85.2
million. Combined with the other two entities acquired during the nine-month
period, the aggregate purchase price of the acquisitions was approximately
$116.6 million, which resulted in goodwill of $61.3 million and other
intangibles of approximately $13.8 million. The Company is in the process of
finalizing third-party valuations of certain tangible and intangible assets
for these acquisitions; therefore, the allocation of the purchase price is
subject to refinement.
The Company has consolidated the results of operations for each of the
acquired entities as of the respective closing date. The following table
reports pro forma information as if the acquisition of Argosy had been
completed at the beginning of the stated periods (unaudited, in thousands,
except per share amounts):
Three months ended March 31, Nine months ended March 31,
--------------------------------- ---------------------------------
2001 2002 2001 2002
-------------- -------------- -------------- --------------
Revenue As reported $ 100,366 $ 145,710 $ 276,039 $ 367,074
Pro forma 115,019 145,710 310,980 397,532
Net income As reported $ 9,498 $ 14,933 $ 25,185 $ 36,200
Pro forma 10,420 14,933 25,314 34,315
Diluted earnings per share As reported $ .30 $ .41 $ .82 $ 1.07
Pro forma .33 .41 .82 1.02
The fiscal 2002 results above include combined net revenue from IFAC and
ITI of approximately $6.8 million and $13.0 million for the three- and nine-
month periods ended March 31, 2002, respectively. Net income from these
entities was approximately $495,000 and $1.3 million for the respective fiscal
2002 periods. Therefore, the results of these entities had a one- and four-
cent impact on diluted earnings per share for the three- and nine-month
periods, respectively.
Two of Argosy's businesses, Western State University College of Law and The
Connecting Link, were acquired on March 1, 2001, and are included in the
fiscal 2001 data above from their acquisition date.
6. EARNINGS PER SHARE:
Reconciliation of diluted shares (in thousands):
Three months ended Nine months ended
March 31, March 31,
---------------------------------- ----------------------------------
2001 2002 2001 2002
--------------- -------------- --------------- --------------
Basic shares............................. 30,124 34,862 29,605 32,352
Dilution for stock options............... 1,411 1,499 1,225 1,444
-------------- -------------- --------------- --------------
Diluted shares........................... 31,535 36,361 30,830 33,796
============== ============== =============== ==============
For the quarter ended March 31, 2002, options to purchase 97,096 shares
were excluded from the diluted earnings per share calculation because of their
antidilutive effect (due to the exercise price of such options exceeding the
average market price for the period).
7. COMPREHENSIVE INCOME:
Comprehensive income consisted of the following (in thousands):
Three months ended Nine months ended
March 31, March 31,
---------------------------------- ----------------------------------
2001 2002 2001 2002
--------------- -------------- --------------- --------------
Net income............................. $ 9,498 $ 14,933 $ 25,185 $ 36,200
Other comprehensive:
Foreign currency translation....... - 43 - 17
--------------- -------------- --------------- --------------
Comprehensive Income................... $ 9,498 $ 14,976 $ 25,185 $ 36,217
=============== ============== =============== ==============
Accumulated other comprehensive income (loss) represents only the
foreign currency translation adjustment of approximately $17,000 as of
March 31, 2002.
7
8. NEW ACCOUNTING STANDARDS:
In August 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS 144"), was issued. This statement addresses
financial accounting and reporting for the impairment or disposal of long-
lived assets. This statement supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("SFAS 121"), Accounting Principles Board ("APB") 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" ("APB 30") and APB No. 51, "Consolidated Financial Statements"
("APB 51"). 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 but does not anticipate
that the adoption of SFAS 144 will have a material impact on the consolidated
Company's financial position and results of operations.
9. SEGMENT REPORTING:
The Company's principal business is providing post-secondary education. The
services of EDMC's operations are discussed in more detail under Note 2,
"Nature of Operations." In accordance with SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"), EDMC manages
its business according to two segments: The Art Institutes and Argosy
(including ITI). Corporate information is included where it is needed to
reconcile segment data to the consolidated financial statements. These
segments are based upon the method by which management makes operating
decisions and assesses performance.
Summary information by reportable segment is as follows (in thousands):
Three months ended Nine months ended
March 31, March 31,
---------------------------------- ----------------------------------
2001 2002 2001 2002
--------------- -------------- --------------- --------------
Net revenue
Art Institutes..................... $ 100,366 $ 124,284 $ 276,039 $ 344,193
Argosy............................. - 21,426 - 22,881
Income before interest and taxes
Art Institutes..................... $ 16,009 $ 20,548 $ 43,159 $ 56,152
Argosy............................. - 2,830 - 2,890
As of March 31,
--------------------------
2001 2002
------- -------
Total assets
Art Institutes........................... $226,367 $261,247
Argosy................................... -- 118,481
-------- --------
Total.................................. 226,367 379,728
Corporate................................ 16,416 79,100
-------- --------
Consolidated............................. $242,783 $458,828
======== ========
10. INTANGIBLE ASSETS:
In the first quarter of fiscal 2002, the Company adopted SFAS No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"), under which goodwill is
no longer amortized. As required by SFAS 142, an independent appraisal company
evaluated the intangible assets for impairment as of July 1, 2001 and no
impairment existed. In addition, each year the Company will evaluate the
intangible assets for impairment annually (or more frequently, if needed),
with any resulting impairment reflected as an operating expense.
Amortization of intangible assets for the three and nine months ended March
31, 2002 was approximately $1.4 million and $2.2 million, respectively.
Estimated amortization expense for amortized intangible assets for the next
five fiscal years ending June 30, is as follows:
Fiscal years (in thousands)
------------------- -------------------
2002 (remainder) $ 974
2003 3,983
2004 4,176
2005 3,663
2006 3,065
8
Intangible assets consisted of the following (in thousands):
As of June 30, 2001 As of March 31, 2002
------------------------------------ ------------------------------------ Weighted
Gross Gross Average
Carrying Accumulated Carrying Accumulated Amortization
Amount Amortization Amount Amortization Period (years)
--------------- ------------------- -------------- ------------------- ------------------
Curriculum........................ $2,446 $ (663) $ 6,905 $(1,323) 7
Accreditation..................... 1,646 (195) 3,486 (363) 12
Bachelors' program................ 1,100 (52) 1,100 (107) 15
Student contracts and
applications.................... - - 6,924 (819) 3
Software.......................... - - 246 (32) 3
Title IV.......................... - - 750 (19) 16
Tradename......................... - - 500 - -
Other............................. 2,768 (911) 2,715 (1,035) 13
------------ ------------------- --------------- ------------------- ------------------
Total.......................... $7,960 $(1,821) $22,626 $(3,698) 6
============ =================== =============== =================== ==================
The changes in the carrying amount of goodwill, by reporting segment, for
the nine months ended March 31, 2002, are as follows (in thousands):
Art
Institutes Argosy Total
--------------- -------------- -------------
Balance as of June 30, 2001........ $36,919 $ -- $ 36,919
Goodwill related to acquisitions
and earnout payments during the
current fiscal year.............. 22,015 73,694 95,709
Goodwill written off
related to closure of NCPT....... (290) -- (290)
------------- -------------- -------------
Balance as of March 31, 2002....... $58,644 $73,694 $132,338
============= ============== =============
The following table is the Company's disclosure of what reported net
income, basic earnings per share, and diluted earnings per share would have
been if the non-amortization provisions of SFAS 142 had been adopted in all
periods presented (in thousands except per share amounts):
Three months ended Nine months ended
March 31, March 31,
--------------------------------- ----------------------------------
2001 2002 2001 2002
-------------- -------------- --------------- --------------
Reported net income................... $9,498 $14,933 $25,185 $36,200
Goodwill amortization............. 242 - 657 -
Adjusted net income................... $9,740 $14,933 $25,842 $36,200
============ ============== =============== ==============
Basic earnings per share.............. $ .32 $ .43 $ .85 $ 1.12
Goodwill amortization............. - - .02 -
Adjusted basic earnings per share..... $ .32 $ .43 $ .87 $ 1.12
============ ============== =============== ==============
Diluted earnings per share............ $ .30 $ .41 $ .82 $ 1.07
Goodwill amortization............. .01 - .02 -
Adjusted diluted earnings per share... $ .31 $ .41 $ .84 $ 1.07
============ ============== =============== ==============
9
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 March 31, 2001 and 2002, respectively.
Results of Operations
Three months ended March 31, 2002 compared to the three months ended
March 31,2001
Net revenues increased by 45.2% to $145.7 million in 2002 from $100.4 million
in the third quarter of 2001 primarily due to an increase in student enrollment
to 37,658 from 26,997 in the prior year accompanied by tuition increases.
Art Institute net revenues increased by 23.8% to $124.3 million in 2002 from
$100.4 million in the third quarter of 2001. Total student enrollment at the Art
Institutes increased 15.8% over the prior year to 31,272 from 26,997,
accompanied by a tuition increase of approximately 7% over the prior year.
Enrollment at locations operated by the Company for 24 months or more increased
7.3% to 27,962 compared to 26,050 in the prior year. In addition to growth at
mature locations, fiscal 2002 includes a full quarter of revenue for The Art
Institute of Las Vegas ("AiLV") and International Fine Arts College ("IFAC")
that the Company did not own in the comparable prior quarter of approximately
$5.9 million.
Argosy's net revenues were approximately $21.4 million for the three-month
period ended March 31, 2002. Argosy's enrollment for this period was 6,386. The
Company did not own Argosy in the comparable prior quarter.
Educational services expense increased by $27.1 million, or 42.3%, to $91.3
million in 2002 from $64.1 million in 2001, due primarily to the incremental
costs incurred to support higher student enrollment. These costs include
employee compensation, rent and related operating costs, and depreciation and
amortization. Educational services expense as a percent of revenue decreased 130
basis points from 63.9% in fiscal 2001 to 62.6% in 2002. The decrease reflects
improvements in several cost categories as a percent of revenue, including
consulting, partially offset by increases in depreciation and amortization and
supplies. Additionally, Argosy's educational services expenses as a percent of
revenue are typically lower than the Art Institutes.
General and administrative expense was $29.7 million in 2002, up 51.1% from
$19.7 million in 2001. The increase over the comparable quarter in the prior
year primarily reflects increases in costs related to newly acquired entities.
The four acquisitions made during the past 12 months have contributed
approximately $7.4 million to the rise in general and administrative costs. As
a percent of net revenues, general and administrative expense increased 80 basis
points to 20.4% as compared to the third quarter of fiscal 2001. The fluctuation
in this margin reflects timing of marketing and advertising spending combined
with less leverage on central support costs at Argosy.
Amortization of intangibles increased by $814,000 to $1.4 million in 2002, as
compared to the third quarter of fiscal 2001. This increase results from
amortization of intangibles associated with the acquisitions of AiLV, IFAC, ITI,
Argosy, and the amortization of ongoing curriculum development at The Art
Institute Online. Additionally, approximately $290,000 of goodwill was written
off in connection with the planned closure of The National Center for
Paralegal Training ("NCPT"). The effect of these increases for the quarter was
partially offset by a decrease of approximately $266,000 in amortization of
goodwill as a result of the Company's adoption of SFAS 142.
Art Institute EBIT increased $4.5 million to $20.5 million for the three
months ended March 31, 2002 as compared to $16.0 million in the prior year. The
EBIT margin increased to 16.5% for the quarter as compared to 16.0% for the
prior year. Increases in revenue and margin improvements in general and
administrative costs at the Art Institutes offset increases in educational
services expenses as a percent of revenue as well as costs associated with the
closure of NCPT.
10
Argosy's EBIT was $2.8 million or 13.2% of their net revenues for the three
months ended March 31, 2002. The Company did not own Argosy for the comparable
quarter in the prior year.
Net interest expense was $278,000 in 2002, as compared to $439,000 in 2001.
The Company's outstanding borrowings were reduced significantly at the end of
the second quarter due to the cash received in the stock offering.
The Company's effective tax rate was 35.4% for the third quarter of fiscal
2002, as compared to 39.0% in the prior year. The income tax provision for this
quarter was reduced by approximately $750,000 resulting from a one-time tax
credit for the rehabilitation of the building occupied by The Art Institute of
Pittsburgh. Without this non-recurring credit, the effective rate would have
been 38.6% for the third quarter. The improvement in the rate as compared to the
prior year is primarily due to the reduced impact of non-deductible 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 non-
deductible for tax purposes.
Net income increased by $5.4 million to $14.9 million in 2002 from $9.5
million in 2001. The increase is attributable to improved results from
operations at the Company's schools, the impact of the Argosy acquisition, lower
interest costs, and a lower tax provision, offset by an increase in amortization
of intangibles.
Nine months ended March 31, 2002 compared to the nine months ended
March 31, 2001
Net revenues increased by 33.0% to $367.1 million for the first nine months of
fiscal 2002 from $276.0 million for the comparable period in fiscal 2001. This
$91.0 million increase is driven primarily through increases in average
enrollment and tuition rates. The results of operations for IFAC, ITI, and
Argosy are included in EDMC's results from the respective acquisition dates of
September 4, 2001, November 23, 2001, and December 21, 2001.
Art Institute net revenues increased by 24.7% to $344.2 million in 2002 from
$276.0 million in 2001. Average student enrollment for the year-to-date period
increased 16.7% to 29,334 from 25,141 in the prior year, and tuition rates
increased approximately 7%. Approximately $17.5 million of The Art Institutes'
nine-month revenue increase is attributable to the following newly acquired
entities that did not have a full nine months of revenue in the prior year:
AiLV, IFAC, and The Art Institute of California - San Diego ("AiCASD").
Argosy's net revenues were $22.9 million for the nine-month period ended March
31, 2002. The Company did not own Argosy for the comparable prior period.
Educational services expense increased by $57.5 million, or 32.8%, to $232.7
million in 2002 from $175.2 million in 2001, due primarily to the incremental
costs incurred to support higher student enrollment. These costs include
increased employee compensation, rent, and depreciation and amortization.
Educational services expense as a percent of revenue decreased approximately 10
basis points from 63.5% in fiscal 2001 to 63.4% in 2002. The decrease in this
margin reflects Argosy's lower cost of education offset by slightly higher
expenses as a percent of revenue for the Art Institutes in several expense
categories, including depreciation and amortization.
General and administrative expense increased by $16.8 million to $73.1 million
in 2002, up 29.8% from $56.3 million in 2001. The increase over the comparable
period in the prior year primarily reflects costs associated with newly acquired
entities. The four acquisitions made during the past 12 months have contributed
$7.8 million to the rise in general and administrative costs. As a percent of
net revenues, general and administrative expense decreased 50 basis points to
19.9% as compared to the comparable nine months of fiscal 2001 due to reductions
in legal costs, and marketing and advertising as a percent of revenue.
Amortization of intangibles increased by approximately $836,000 to $2.2
million in 2002. The increase is due to the incremental amortization of
intangibles associated with recent acquisitions, along with amortization of
ongoing curriculum development at The Art Institute Online and the goodwill
write-off associated with the planned closure of NCPT. Combined, these factors
increased amortization by approximately $1.5 million. This increase is partially
offset by the Company's adoption of SFAS 142, (a reduction of approximately
$730,000).
Art Institute EBIT for the nine months ended March 31, 2002 was $56.2 million
as compared to $43.2 million in the comparable period. Revenue growth and
leverage on general and administrative costs produced an EBIT margin of 16.3%,
an improvement of 70 basis points over 15.6% in the prior year.
Argosy's EBIT for the nine-month period ended March 31, 2002 was $2.9 million,
which represents 12.6% of net revenue. The Company did not own Argosy for the
comparable prior period.
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Net interest expense was $1.3 million in 2002, as compared to $1.9 million in
2001. The decrease of approximately $572,000 is attributable to a decrease in
average borrowings for the nine months ended March 31, 2002, as well as an
approximate 3% decrease in the Company's weighted average borrowing rate for the
nine-month period.
The Company's effective tax rate was 37.3% for the nine-month period ended
March 31, 2002 as compared to 39.0% in 2001. The income tax provision for the
year-to-date period was reduced by approximately $750,000 resulting from a one-
time tax credit for the rehabilitation of the building occupied by The Art
Institute of Pittsburgh. Without this non-recurring credit, the effective tax
rate would have been 38.6% for the nine-month period. The reduction over the
prior year is primarily due to the reduced impact of non-deductible 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 non-
deductible for tax purposes.
Net income increased by $11.0 million to $36.2 million in 2002 from $25.2
million in 2001. The increase is attributable to improved results from
operations at the Company's schools, the impact of the Argosy acquisition, lower
interest costs, and a reduction in the tax provision.
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
As of March 31, 2002, the Company's cash balance was $60.1 million, an
increase of $12.8 million from $47.3 million at June 30, 2001. The cash balance
of $73.9 million presented in the Company's May 1, 2002 earnings release did not
reflect a March income tax payment of approximately $13.8 million. Accordingly,
both cash and current liabilities have been reduced in the accompanying
condensed consolidated balance sheet to reflect this payment.
The Company generated positive cash flow from operating activities of $76.7
million for the nine months ended March 31, 2002, an increase of $8.0 million
over the comparable period for fiscal 2001, due to increases in net income, non-
cash charges, and increases in advanced payments from students.
The Company had working capital of $3.2 million and a deficit of $39.9 million
as of March 31, 2002 and 2001, respectively, as compared to $11.5 million of
working capital as of June 30, 2001. The increase in working capital over the
prior year reflects the cash infusion from the Offering. The decrease in working
capital from June 30, 2001 reflects the net effects of the Offering and advanced
payments, offset by funds used for acquisitions, retirement of debt, and capital
expenditures. Net receivables increased $17.3 million from June 30, 2001 and
$11.4 million from March 31, 2001, primarily as a result of the acquisitions
that occurred during the nine months ended March 31, 2002 in addition to overall
higher student enrollment and the corresponding revenue increases.
The Offering generated a net $127.6 million that the Company received at the
beginning of December 2001. Approximately $39.5 million of the cash was used to
repay borrowings under the Credit Agreement. At the closing of the Argosy
transaction on December 21, 2001, the remaining portion of the proceeds was used
to complete the purchase of Argosy and retire a portion of its outstanding debt.
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 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. The Credit Agreement contains
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 March 31, 2002, the Company
had no borrowings under this facility and was in compliance with all covenants
under the Credit Agreement.
Borrowings under the 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. Additionally, Title IV proceeds for
continung students can be received up to ten days prior to the start of an
academic quarter. For many of the Company's schools the academic and finacial
quarters coincide.
The Company believes that cash flow from operations, supplemented from time to
time by borrowings under the Credit Agreement, will provide adequate funds for
ongoing operations, planned expansion to new locations, planned capital
expenditures and debt service during the term of the Credit Agreement.
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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 144 was issued. This statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement supersedes SFAS 121, APB 30, and APB 51. 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 but does not anticipate that the adoption of SFAS 144
will have a material impact on the consolidated Company's financial position and
results of operations.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risks in the ordinary course of business
that include foreign currency exchange rates. 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 is
subject to fluctuations in the value of the Canadian dollar relative to the U.S.
dollar. The Company does not believe it is subject to material risks from
reasonably possible near-term change in exchange rates.
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PART II
ITEM 1 - LEGAL PROCEEDINGS
Not Applicable
ITEM 2 - CHANGES IN SECURITIES
Not Applicable
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5 - OTHER INFORMATION
Not Applicable
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(15) Report of Independent Public Accountants
(99) Statement regarding Western State University College of Law
(b) Reports on Form 8-K:
A report on Form 8-K dated January 3, 2002 reporting the closing
of the previously announced acquisition of Argosy Education Group,
Inc. ("Argosy"). The items listed were Item 2, Acquisition of
Assets and Item 7, Exhibits.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EDUCATION MANAGEMENT CORPORATION
(Registrant)
Date: May 14, 2002
/s/ Robert B. Knutson
--------------------------------------------
Robert B. Knutson
Chairman and Chief Executive Officer
/s/ Robert T. McDowell
--------------------------------------------
Robert T. McDowell
Executive Vice President and Chief Financial Officer
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