UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------------
FORM 8-K/A
AMENDMENT NO. 1 TO
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): September 26, 2001
Education Management Corporation
--------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 000-21363 25-1119571
---------------------------- ------------ -------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
300 Sixth Avenue, Suite 800, Pittsburgh, PA 15222
---------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (412) 562-0900
On October 11, 2001, Education Management Corporation ("EDMC") filed an
initial Current Report on Form 8-K with the Securities and Exchange Commission,
reporting the closing in escrow of its purchase of 4.9 million shares of Class A
Common Stock, $.01 par value per share of Argosy Education Group Inc.
("Argosy"). This report amends Item 7, Financial Statements and Exhibits, to
include the historical financial statements of Argosy and the
pro forma financial information, as required by Item 7.
Item 7. Financial Statements and Exhibits
(a) Financial Statements of Businesses Acquired PAGE
(i) Report of Independent Public Accountants F-1
(ii) Consolidated Balance Sheets
as of August 31, 1999 and 2000 (audited) F-2
(iii) Consolidated Statements of Operations for the
years ended August 31, 1998, 1999, and 2000 (audited) F-3
(iv) Consolidated Statements of Cash Flows for the years
ended August 31, 1998, 1999, and 2000 (audited) F-4
(v) Consolidated Statements of Shareholders' Equity
for the years ended August 31, 1998, 1999, and 2000
(audited) F-5
(vi) Notes to Consolidated Financial Statements F-7
(vii) Condensed Consolidated Balance Sheets as of
May 31, 2001 (unaudited) and August 31, 2000 (audited) F-25
(viii) Condensed Consolidated Statements of Operations
for the three months and nine months ended May 31, 2000
and 2001 (unaudited) F-26
(ix) Condensed Consolidated Statements of Cash Flows
for the nine months ended May 31, 2000 and 2001 (unaudited) F-27
(x) Notes to Condensed Financial Statements F-28
(b) Pro forma financial information (unaudited)
(i) Pro Forma Condensed Consolidated Balance Sheet F-35
(ii) Pro Forma Consolidated Statement of Income F-36
(c) Exhibits
Exhibit
Number Description
------ -----------
2.1 Stock Purchase Agreement dated July 9, 2001, by and between
Education Management Corporation and Michael C. Markovitz
(incorporated herein by reference to Exhibit 2.2 to the Quarterly
Report on Form 10-Q filed by Argosy Education Group, Inc. filed
for the quarterly period ended May 31, 2001).
2.2 Joinder Agreement dated September 26, 2001, by and between
Education Management Corporation, Michael C. Markovitz, The MCM
Trust and the Michael C. Markovitz Dynastic Trust (incorporated
herein by reference to Exhibit 2.2 to the Current Report on Form
8-K filed by Argosy Education Group, Inc. to report an event
dated September 26, 2001).
2.3 Agreement and Plan of Merger dated July 9, 2001, among Argosy
Education Group, Inc., Education Management Corporation and HAC
Inc. (incorporated herein by reference to Exhibit 2.1 of Argosy
Education Group, Inc.'s Quarterly Report on Form 10-Q filed for
the quarterly period ended May 31, 2001).
2.4 Irrevocable Proxy and Power of Attorney given by Dr. Markovitz to
Education Management Corporation (incorporated herein by
reference to Exhibit 6 of Education Management Corporation's
Schedule 13D filed on October 9, 2001).
23.1 Consent of Arthur Andersen LLP, independent public accountants for
Argosy Education Group, Inc., filed herewith.
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.................... (720) -- -- 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
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
(Unaudited)
May 31, 2001 August 31, 2000
-------------- ---------------
As Restated
See Note 2.
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 14,078 $ 8,112
Short-term investments 538 7,787
Receivables, net 3,744 2,685
Prepaid expenses and other current assets 1,717 959
--------------- ---------------
Total current assets 20,077 19,543
PROPERTY AND EQUIPMENT, net 23,895 6,307
NON-CURRENT INVESTMENTS - 200
OTHER ASSETS 1,438 159
ADVANCES TO JOHN MARSHALL - 724
DEFERRED TAX ASSET LONG TERM 2,559 1,680
INTANGIBLES, net 11,807 6,687
--------------- ---------------
TOTAL ASSETS $ 59,776 $ 35,300
=============== ===============
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 6,221 $ 796
Accounts payable 2,158 1,162
Accrued payroll and other related liabilities 2,555 634
Accrued expenses 2,393 584
Deferred revenue and student deposits 8,097 2,760
--------------- ---------------
Total current liabilities 21,424 5,936
--------------- ---------------
LONG-TERM DEBT, less current maturities 6,059 2,604
DEFERRED TAXES 3,819 -
DEFERRED RENT 1,000 710
COMMITMENTS & CONTINGENCIES
STOCKHOLDERS' EQUITY:
Class A common stock - 30,000,000 shares authorized,
$.01 par value, 2,063,062 shares issued and outstanding,
including 482,000 treasury shares 21 21
Class B common stock - 10,000,000 shares authorized,
$.01 par value, 4,900,000 shares issued and outstanding 49 49
Additional paid-in capital 25,131 25,131
Treasury Stock-at cost: 482,000 shares at cost (2,131) (2,131)
Stock Warrants 860 -
Accumulated other comprehensive income (70) 1,102
Purchase price in excess of predecessor carryover (720) (720)
Retained earnings 4,334 2,598
--------------- ---------------
Total stockholders' equity 27,474 26,050
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 59,776 $ 35,300
=============== ================
F-25
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
May 31, May 31, May 31, May 31,
------- ------- ------- -------
2001 2000 2001 2000
---- ---- ---- ----
As Restated As Restated
See Note 2. See Note 2.
Revenues:
Tuition and fees, net $ 16,006 $ 11,928 $ 40,368 $ 32,552
Other 763 689 2,232 2,255
--------- -------- -------- ---------
Total revenues, net 16,769 12,617 42,600 34,807
--------- -------- -------- ---------
Operating expenses:
Cost of education 7,626 5,285 18,910 15,276
Selling expenses 1,824 900 4,560 2,733
General and administrative expenses 5,415 3,783 14,960 11,296
--------- -------- -------- ---------
Total operating expenses 14,865 9,968 38,430 29,305
--------- -------- -------- ---------
Income from operations 1,904 2,649 4,170 5,502
Other income (expense):
Losses attributable to John Marshall -- (442) (872) (1,191)
Interest income 128 206 520 649
Interest expense (249) (79) (400) (221)
Other income (expense) 29 (15) 20 (64)
--------- -------- -------- ---------
Total other income (expense), net (92) (330) (732) (827)
--------- -------- -------- ---------
Income before provision for income taxes 1,812 2,319 3,438 4,675
Income taxes:
Total provision for income taxes 715 956 1,689 1,936
--------- -------- -------- ---------
Net income $ 1,097 $ 1,363 $ 1,749 $ 2,739
========= ======== ======== =========
Net income per share:
Basic $ 0.17 $ 0.21 $ 0.27 $ 0.42
========= ======== ======== =========
Diluted $ 0.17 $ 0.21 $ 0.27 $ 0.42
========= ======== ======== =========
Weighted average shares outstanding:
Basic 6,483 6,476 6,481 6,547
========= ======== ======== =========
Diluted 6,484 6,478 6,490 6,547
========= ======== ======== =========
F-26
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Nine Months Ended
May 31, May 31,
2001 2000
---- ----
As Restated
See Note 2.
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,749 $ 2,739
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation and amortization 1,509 1,103
Deferred taxes (932) (246)
Issuance of stock performance grants and warrants 860 228
Losses attributable to John Marshall 872 1,191
Changes in operating assets and liabilities 5,177 1,344
-------- --------
Net cash provided by operating activities 9,235 6,359
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net (1,648) (1,600)
Business acquisition, net of cash (10,974) (247)
Sale (purchase) of investments, net 5,832 560
Advances to John Marshall (959) (1,498)
-------- --------
Net cash used in investing activities (7,749) (2,785)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock -- (2,131)
Borrowing of long-term debt 5,083 480
Payments of long-term debt (532) (351)
-------- --------
Net cash (used in) provided by financing activities 4,551 (2,002)
-------- --------
EFFECTIVE EXCHANGE RATE CHANGES ON CASH (71) (22)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS
5, 966 1,550
CASH AND CASH EQUIVALENTS, beginning of period 8,112 8,980
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 14,078 $ 10,530
======== ========
F-27
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - The Company and Basis of Presentation
Argosy Education Group, Inc. (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. The Company operates degree
and non-degree granting private, for-profit post-secondary schools devoted to
awarding doctoral and master's degrees in psychology, education, business, and
law as well as bachelor's degrees in business, associate degrees in allied
health professions and diplomas in information technology.
The accompanying unaudited condensed consolidated financial statements have
been prepared on the same basis as the annual consolidated financial statements
and, in the opinion of management, reflect all adjustments, which include only
normal recurring adjustments, necessary to present fairly the financial
condition and results of operations of the Company. These consolidated financial
statements and notes thereto are unaudited and should be read in conjunction
with the Company's audited financial statements included in the Company's report
on Form 10K/A for the year ended August 31, 2000, as restated, as filed with the
Securities and Exchange Commission. The results of operations for the nine
months ended May 31, 2001 are not necessarily indicative of results that could
be expected for the entire fiscal year.
The condensed consolidated financial statements as of May 31, 2001 and the
nine months ended May 31, 2001 and 2000 include the accounts of the Company and
its wholly owned subsidiaries, and John Marshall Law School on the equity method
of accounting from September 1, 1999 through March 1, 2001, the date of
acquisition of John Marshall. All intercompany balances and transactions have
been eliminated in consolidation.
Note 2. Restatements
Subsequent to the issuance of the Company's consolidated financial
statements for the quarterly period ended May 31, 2000, it was determined that
the previously reported operating results for the three and nine month periods
ended May 31, 2000 were overstated. The accompanying financial statements
relating to the three and nine month periods ended May 31, 2000 reflect
adjustments (consistent with the Company's reports on Form 10 Q/A for the
quarterly periods ended February 29, 2000, May 31, 2000, and November 30, 2000
and the annual report on Form 10K/A for the year ended August 31, 2000)
primarily 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 was to treat this as an equity method investment.
The accounting for the advances to John Marshall had been revised to reduce the
amount of the advances to John Marshall to reflect John Marshall's operating
losses during the three and nine months ended May 31, 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 6)
was in place (September 1, 1999). Additionally, the financial statements for the
quarter ended November 30, 2000, were restated to eliminate a tax benefit of
$0.2 million associated with the charge recorded for the Leeds Warrant.
F-28
Note 3: Business Combinations
Western State
-------------
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. Consideration for the purchase consisted of
$9.4 million in cash and the assumption of $3.9 million in debt, and certain
other deductions as provided for in the purchase agreement. This transaction was
accounted for as a purchase business combination in accordance with Accounting
Principles Board ("APB") Opinion No. 16, "Business Combinations," and,
accordingly, the results of operations of Western State have been included in
the Company's financial statements from March 1, 2001.
The purchase price was preliminarily allocated to the following (in thousands):
Fair value of assets acquired and liabilities
assumed $ 6,180
Goodwill 3,230
---------
Total $ 9,410
=========
The goodwill amount included above is being amortized over the estimated
useful life of 15 years.
John Marshall
-------------
The acquisition of John Marshall was made through a purchase of the assets
of John Marshall on March 1, 2001. The Company exercised its option to purchase
all of the operating assets and assumed the liabilities of John Marshall Law
School for cash of $0.1 million and net advances of $0.7 million contributed to
John Marshall before the acquisition. This transaction was accounted for as a
purchase business combination in accordance with Accounting Principles Board
("APB") Opinion No. 16, "Business Combinations," and, accordingly, the results
of operations of John Marshall have been included in the Company's financial
statements from March 1, 2001. The preliminary purchase price allocation
resulted in negative goodwill of $0.1 million. This negative goodwill was
subsequently allocated to write down the long-lived assets of John Marshall.
As of September 1, 1999 the Company entered into an agreement to manage
John Marshall. The agreement was for 10 years and included an option to purchase
John Marshall which was exercisable at the Company's discretion. In addition, a
line of credit of $0.6 million was established between the Company and John
Marshall. Prior to the acquisition on March 1, 2001, the Company advanced $0.5
million under the line of credit and approximately $3.1 million to fund
operations.
The Connecting Link
-------------------
Also on March 1, 2001 the Company acquired all of the outstanding common
stock of The Connecting Link, a privately held provider of continuing
professional education for kindergarten to grade 12 teachers for a purchase
price of approximately $1.8 million in cash. This transaction was accounted for
as a purchase business combination in accordance with Accounting Principles
Board ("APB") Opinion No. 16, "Business Combinations," and, accordingly, the
results of operations of Connecting Link have been included in the Company's
financial statements from March 1, 2000.
F-29
The purchase price was preliminarily allocated to the following (in thousands):
Fair value of assets acquired and liabilities
assumed $ (125)
Goodwill 1,941
----------
Total $ 1,816
==========
The goodwill amount included above is being amortized over the estimated
useful life of 15 years.
The following unaudited pro forma financial information presents the
combined results of operations of the Company and Western State, John Marshall,
and Connecting Link as if the acquisitions had occurred as of the beginning of
fiscal 2001 and 2000, after giving effect to certain adjustments, including
amortization of goodwill, and related income tax effects. The pro forma
financial information does not necessarily reflect the results of operations
that would have occurred had the acquisitions of Western State, John Marshall,
and The Connecting Link occurred at the beginning of fiscal 2001 and 2000.
Nine months ended
May 31,
------------------------
(unaudited)
(in thousands)
Pro Forma 2001 2000
-------------------------------- ----------- -----------
Revenue $ 49,281 $ 43,489
Net income $ 1,319 $ 2,516
Basic and diluted loss per share $ 0.20 $ 0.39
Note 4 - Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin 101 ("SAB 101"). SAB 101 requires deferral of certain
revenue items over the period that the related service is provided. Adoption of
SAB 101 is required by the Company's fourth quarter of fiscal 2001. The SEC has
issued interpretive guidance on the implementation of this bulletin, and the
Company is completing an evaluation of its effects. SAB 101 requires the
deferral of certain fees and other charges over the period of service (student
enrollment); however, based on preliminary analysis, the Company does not expect
SAB 101 to have a significant effect on its consolidated results of operations,
financial position and cash flow.
Note 5: Shareholders' Equity
In the first fiscal quarter of 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 have been and maybe 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 May 31, 2001 at a
total cost of approximately $2,131,000.
F-30
Note 6: Related-Party Transactions
As of September 1, 1999 the Company entered into an agreement to manage
John Marshall. The agreement was for 10 years and includes an option to purchase
John Marshall (the purchase option was exercised on March 1, 2001 - See Footnote
3. Business Combinations). A line of credit of $0.6 million was established
between the Company and John Marshall. As of February 28, 2001, the Company
advanced $0.5 million under the line of credit and approximately $3.1 million to
fund operations. For the six months ended February 28, 2001 and the nine months
ended May 31, 2000, the losses for John Marshall, excluding intercompany
transactions, of $0.9 million and $1.2 million, respectively, have been included
as other expenses in the Company's statements of operations and have been
reflected as a reduction of the advances made to John Marshall.
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 warrants are
immediately exercisable and based upon the Black Scholes pricing model valued at
$860,000. The warrant value was expensed over the service period resulting in
half of the charge being recorded in the first fiscal quarter of 2001 and the
remaining charge being recorded in the second quarter of 2001. No tax benefit
has been recorded as a result of this charge.
Note 7: Comprehensive Income
On September 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"), which
requires companies to report all changes in equity during a period, except those
resulting from investment by owners and distributions to owners, in a financial
statement for the period in which they are recognized. The disclosure of
comprehensive income and accumulated other comprehensive income is as follows:
Three Months Ended Nine Months Ended
------------------ -----------------
May 31, 2001 May 31, 2000 May 31, 2001 May 31, 2000
------------ ------------ ------------ ------------
Net income $ 1,097 $ 1,363 $ 1,749 $ 2,739
Other comprehensive income:
Unrealized gain/(loss) on investments (285) (170) (1,115) 280
Foreign currency translation adjustment 2 (9) (54) (30)
-------------------------------- -------------------------------
Total other comprehensive income (283) (179) (1,169) 250
-------------------------------- -------------------------------
Comprehensive income $ 814 $ 1,184 $ 580 $ 2,989
================================ ===============================
As of May 31, 2001 and 2000 Accumulated Other Comprehensive Income
(Expense), net of tax, was approximately $ (42,000) of expense and $418,000 of
income, respectively.
F-31
Note 8: Segment Reporting
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, PrimeTech, John Marshall, Western State University and The Connecting
Link provides programs in psychology, education, business, allied health
professions, network engineering, software programming and law. 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 and counseling license
examinations and is located in the United States.
The following table presents financial data for the three and nine months
ended May 31, 2001 and May 31, 2000 for these segments (dollars in thousands):
Schools Test Preparation Consolidated
------- ---------------- ------------
Three Months Ended
May 31, 2001
------------
Revenue $15,812 $ 957 $16,769
Income from operations 1,648 256 1,904
Net Income 949 148 1,097
Total Assets 54,367 5,409 59,776
Three Months Ended
May 31, 2000
------------
Revenue $11,697 $ 920 $12,617
Income from operations 2,339 310 2,649
Net Income 1,209 154 1,363
Total Assets 34,787 3,802 38,589
Nine Months Ended
May 31, 2001
Revenue $39,903 $ 2,697 $42,600
Income from operations 3,470 700 4,170
Net Income 1,346 403 1,749
Total Assets 54,367 5,409 59,776
Nine Months Ended
May 31, 2000
Revenue $32,155 $ 2,652 $34,807
Income from operations 4,723 779 5,502
Net Income 2,320 419 2,739
Total Assets 34,787 3,802 38,589
F-32
Note 9. Subsequent Event
On July 9, 2001, Argosy entered into an Agreement and Plan of Merger
with Education Management Corporation ("EDMC") and HAC, Inc., a wholly-owned
subsidiary of EDMC, pursuant to which HAC will merge with and into Argosy, with
Argosy continuing as the surviving corporation. In the merger, holders of Argosy
common stock will receive $12.00 per share, without interest, for each share of
Argosy common stock. EDMC also entered into a Stock Purchase Agreement with Dr.
Markovitz providing for the purchase of his shares of Argosy common stock at the
same price per share.
Consummation of the merger and the stock purchase is subject to a
number of conditions precedent described in the Agreement and Plan of Merger and
the Stock Purchase Agreement, including approval by Argosy stockholders and
certain regulatory approvals.
F-33
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma consolidated statement of income combines EDMC's and
Argosy's historical consolidated statements of income, giving effect to the
merger as if it had occurred on July 1, 2000. The unaudited pro forma condensed
consolidated balance sheet combines EDMC's historical consolidated balance sheet
and the historical consolidated balance sheet of Argosy, giving effect to the
merger as if it had occurred on June 30, 2001. Since Argosy has a fiscal year
end of August 31, the historical information included in the pro forma combined
statement of income has been derived from Argosy's operating results for the
twelve months ended May 31, 2001.
The pro forma financial information reflects the purchase method of
accounting for the acquisition of Argosy, and accordingly is based on estimated
purchase accounting adjustments that are subject to further revision depending
upon completion of appraisals of the fair value of Argosy's assets and
liabilities.
This information should be read in conjunction with:
. the accompanying notes to the unaudited pro forma consolidated financial
statements; and
. the separate historical financial statements of Argosy as of and for
the year ended August 31, 2000, and as of and for the nine months ended
May 31, 2001.
The pro forma data is not necessarily indicative of the results of
operations and financial position that would have been achieved had the merger
been completed on the dates indicated or of future operations of the combined
company.
F-34
Pro Forma Condensed Consolidated Balance Sheet (unaudited)
Adjustments
for Assets Pro Forma
EDMC As Argosy Not Acquired Consolidated
of As of by Acquisition EDMC and
6/30/01 5/31/01 EDMC (1) Adjustments(2) Argosy
--------- -------- ----------- -------------- ---------
(in thousands)
Assets:
Cash and cash
equivalents........... $ 47,290 $14,616 $ (149) $ -- $ 61,757
Receivables, net....... 18,945 3,744 (1,251) -- 21,438
Other current assets... 15,581 1,717 (127) -- 17,171
-------- ------- ------- -------- --------
Total current assets... 81,816 20,077 (1,527) -- 100,366
-------- ------- ------- -------- --------
Property and equipment,
net................... 149,482 23,895 (1,312) -- 172,065
Deferred income taxes
and other long-term
assets................ 9,590 3,997 (1,253) -- 12,334
Intangible assets...... 6,140 173 (46) 8,873 15,140
Goodwill............... 36,918 11,634 (584) 46,859 94,827
-------- ------- ------- -------- --------
Total assets........... $283,946 $59,776 $(4,722) $ 55,732 $394,732
======== ======= ======= ======== ========
Liabilities and
Shareholders'
Investment:
Current liabilities.... $ 70,303 $21,424 $(1,112) $ -- $ 90,615
Long-term debt, less
current portion....... 53,634 6,059 (148) 79,822 139,367
Other long-term
liabilities........... 60 4,819 (78) -- 4,801
-------- ------- ------- -------- --------
Total liabilities...... 123,997 32,302 (1,338) 79,822 234,783
Shareholders'
investment............. 159,949 27,474 (3,384) (24,090) 159,949
-------- ------- ------- -------- --------
Total liabilities and
shareholders'
investment............ $283,946 $59,776 $(4,722) $ 55,732 $394,732
======== ======= ======= ======== ========
-------
(1) The assets and liabilities of John Marshall School of Law and PrimeTech
Institute have been eliminated because EDMC is not acquiring these entities
in the Argosy transaction.
(2) The preliminary allocation of estimated purchase price to assets acquired
and liabilities assumed as of June 30, 2001 is as follows:
Purchase price....................................................... $79,072
Estimated acquisition cost........................................... 750
-------
$79,822
=======
Net book value of assets acquired.................................... $24,090
Less: Intangible assets of Argosy.................................... (11,177)
Adjustments to fair value:
Identifiable intangible assets..................................... 9,000
Goodwill........................................................... 57,909
-------
$79,822
=======
F-35
Pro Forma Consolidated Statement of Income (unaudited)
Argosy Adjustments
Twelve for Assets Pro Forma
EDMC Year Months Not Acquired Consolidated
Ended Ended by Acquisition EDMC and
6/30/01 5/31/01 EDMC Adjustments Argosy
--------- -------- ----------- ----------- ---------
(in thousands, except per share amounts)
Net Revenues........... $370,681 $51,855 $(2,598) $ -- $419,938
Costs and expenses:
Educational
services............. 242,313 24,381 (2,008) 13,472 (4) 278,158
General and
administrative....... 76,716 24,042 (1,962) (13,434)(4) 85,362
Amortization of
intangibles.......... 1,977(1) 391 -- 1,409 (5)(6) 3,777
-------- ------- ------- -------- --------
321,006 48,814 (3,970) 1,447 367,297
-------- ------- ------- -------- --------
Income from
operations............ 49,675 3,041 1,372 (1,447) 52,641
Losses attributable to
John Marshall School
of Law................ -- 1,605 (1,605) -- --
Other expense
(income).............. -- (3) 41 (38)(4) --
-------- ------- ------- -------- --------
Income before interest
and taxes............. 49,675 1,439 2,936 (1,409) 52,641
Interest expense
(income), net......... 2,275 (249) (11) 6,205 (7) 8,220
-------- ------- ------- -------- --------
Income before income
taxes................. 47,400 1,688 2,947 (7,614) 44,421
Provision for income
taxes................. 18,422 1,017 1,149 (3) (2,969)(3) 17,619
-------- ------- ------- -------- --------
Net income............. $ 28,978 $ 671 $ 1,798 $ (4,645) $ 26,802
======== ======= ======= ======== ========
Per Share Data:
Basic:
Net income........... $ .97 $ .90
======== ========
Weighted average
number of shares
outstanding......... 29,742 29,742
Diluted:
Net income........... $ .93 $ .86
======== ========
Weighted average
number of shares
outstanding......... 31,106 31,106
-------
(1) Annual goodwill amortization expense will decrease by approximately $1.1
million upon the adoption of SFAS 142, "Goodwill and Other Intangible
Assets."
(2) The historical results of John Marshall School of Law and PrimeTech
Institute have been eliminated because EDMC is not acquiring these entities
in the Argosy acquisition.
(3) A 39.0% combined state and federal statutory rate was assumed in calculating
the income tax effect of the pro forma adjustments.
(4) The Argosy results have been reclassified to conform with EDMC's
presentation.
(5) The historical amortization of intangibles of Argosy has been eliminated
because new values were assigned to intangible assets and goodwill at the
acquisition date. Under SFAS 142, "Goodwill and Other Intangible Assets",
the goodwill that resulted from the Argosy acquisition will not be
amortized.
(6) EDMC's pro forma statements have been adjusted to reflect one full year of
amortization of intangibles based on the new values and useful lives
assigned at the time of the Argosy acquisition. Subject to the finalization
of an appraisal, the excess of the purchase price over the value of
Argosy's tangible assets has been assigned to intangible assets and
goodwill. These intangible assets have a value of approximately $9.0 million
and have an average useful life of five years.
(7) EDMC's pro forma statements have been adjusted to reflect the additional
interest expense from the borrowings required for the Argosy acquisition of
approximately $79.8 million at an interest rate of 6.73%, EDMC's weighted
average interest rate paid on its borrowings under the credit facility
during fiscal 2001. As of October 1, 2001, the average interest rate
borrowings under the credit facility was 5.23%.
F-36
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
/s/ Robert T. McDowell
---------------------------------
By: Robert T. McDowell
Its: Executive Vice President
and Chief Financial Officer
Date: October 30, 2001
INDEX TO EXHIBITS
Exhibit
Number Description
------ -----------
2.1 Stock Purchase Agreement dated July 9, 2001, by and between
Education Management Corporation and Michael C. Markovitz
(incorporated herein by reference to Exhibit 2.2 to the Quarterly
Report on Form 10-Q filed by Argosy Education Group, Inc. for the
quarterly period ended May 31, 2001).
2.2 Joinder Agreement dated September 26, 2001, by and between Education
Management Corporation, Michael C. Markovitz, The MCM Trust and the
Michael C. Markovitz Dynastic Trust (incorporated herein by
reference to Exhibit 2.2 to the Current Report on Form 8-K filed by
Argosy Education Group, Inc. to report an event dated September 26,
2001).
2.3 Agreement and Plan of Merger dated July 9, 2001, among Argosy
Education Group, Inc., Education Management Corporation and HAC Inc.
(incorporated herein by reference to Exhibit 2.1 of Argosy Education
Group, Inc.'s Quarterly Report on Form 10-Q filed for the quarterly
period ended May 31, 2001).
2.4 Irrevocable Proxy and Power of Attorney given by Dr. Markovitz to
Education Management Corporation (incorporated herein by reference
to Exhibit 6 of Education Management Corporation's Schedule 13D
filed on October 9, 2001).
23.1 Consent of Arthur Andersen LLP, independent public accountants for
Argosy Education Group, Inc., filed herewith.