UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): December 21, 2001
Education Management Corporation
--------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 000-21363 25-1119571
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(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
300 Sixth Avenue, Suite 800, Pittsburgh, PA 15222
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (412) 562-0900
Item 2. Acquisition or Disposition of Assets.
On December 21, 2001, Education Management Corporation ("EDMC") completed
its previously-announced acquisition of Argosy Education Group, Inc. ("Argosy").
EDMC, Argosy and a wholly-owned subsidiary of EDMC had entered into a merger
agreement dated July 9, 2001 (the "Merger Agreement"). The Merger Agreement
provided that at the effective time of the merger provided for therein (the
"Merger"), a wholly-owned subsidiary of EDMC would be merged with and into
Argosy, the separate corporate existence of the EDMC subsidiary would cease, and
Argosy would continue as a wholly-owned subsidiary of EDMC. At the effective
time of the Merger, each share of Class A Common Stock, $.01 par value per share
of Argosy ("Argosy Common Stock"), other than Argosy Common Stock held in the
treasury of Argosy or by EDMC, by virtue of the Merger and without any action on
the part of the holder of each share of Argosy Common Stock, was converted into
the right to receive $12.00 per share in cash, without interest. The aggregate
consideration under the Merger Agreement was approximately $20.5 million,
including consideration of approximately $1.1 million in connection with the
termination of certain warrants to acquire Argosy Common Stock, and was paid
with a portion of the net proceeds EDMC received from the sale of its common
stock in a public offering which was closed on December 4, 2001.
As previously announced, on September 27, 2001, EDMC closed in escrow its
purchase of 4.9 million shares (the "Shares") of Argosy Common Stock pursuant to
the terms and conditions of the Stock Purchase Agreement dated July 9, 2001 (the
"Stock Purchase Agreement") and the Joinder Agreement dated September 26, 2001
between EDMC and Michael C. Markovitz ("Dr. Markovitz"), Argosy's chairman and
chief executive officer. The aggregate cash purchase price for the Shares,
which represented approximately 75% of the outstanding shares of Argosy Common
Stock, was $58.8 million. The Shares and the purchase price were held in escrow
pending consummation of the transactions contemplated by the Merger Agreement
and the satisfaction of certain conditions, including the receipt of required
regulatory approvals and approval by Argosy's shareholders of the Merger
Agreement. The Shares and the purchase price under the Stock Purchase Agreement
were released to the respective parties on December 21, 2001 concurrently with
the closing under the Merger Agreement. EDMC had deposited a letter of credit
in escrow to fund its obligations under the Stock Purchase Agreement. Upon
release of the escrow arrangement, the purchase price of $58.8 million under the
Stock Purchase Agreement was paid with a portion of the net proceeds from EDMC's
recent public offering of its common stock and the letter of credit was released
from escrow and cancelled. The purchase price under the Stock Purchase
Agreement and the consideration under the Merger Agreement were determined in
arm's length negotiations.
Argosy is a for-profit provider of doctoral level and other educational
programs. Under the terms of the Merger Agreement, EDMC had the ability to
cause Argosy to dispose of either or both of John Marshall Law School ("JMLS")
and PrimeTech Canada, Inc. ("PrimeTech"), two operations that have been
incurring operating losses, and EDMC directed Argosy to dispose of each of these
operations. Dr. Markovitz purchased the stock of JMLS and PrimeTech upon
receiving notice from Argosy to do so. In addition, the American Bar
Association ("ABA"), an accrediting body for Western State University College
-2-
of Law ("Western State"), one of the schools acquired in the Argosy acquisition,
has not yet approved the change of control of Western State resulting from the
Merger. Argosy has the right to put Western State to Dr. Markovitz for aggregate
consideration of $1.00, subject to U.S. Department of Education approval, in the
event that ABA has not issued its approval of the change of control of Western
State on or before April 15, 2002. Prior to any sale of Western State to Dr.
Markovitz, Western State would transfer or dividend all of its real property
(including buildings and improvements) to Argosy, subject to the related
mortgage indebtedness and Argosy would agree to lease the real property to
Western State at commercially reasonable market rental rates until August 31,
2004. Except as otherwise described herein, EDMC intends to continue Argosy's
programs.
Item 7. Financial Statements and Exhibits.
(a) Financial Statements of Businesses Acquired PAGE
Argosy Education Group, Inc. Consolidated Financial Statements
(i) Report of Independent Public Accountants *
(ii) Consolidated Balance Sheets as of
August 31, 2000 and 2001 (audited) *
(iii) Consolidated Statements of Operations for the
years ended August 31, 1999, 2000 and 2001 (audited) *
(iv) Consolidated Statements of Cash Flows for the years
ended August 31, 1999, 2000 and 2001 (audited) *
(v) Consolidated Statements of Shareholders' Equity
for the years ended August 31, 1999, 2000 and 2001
(audited) *
* Incorporated herein by reference to Item 5 of the Current Report on Form 8-
K filed by Education Management Corporation on November 28, 2001
(b) Pro Forma Financial Information (unaudited) PAGE
Pro Forma Financial Statements of Education Management Corporation
(i) Pro Forma background and introduction F-1
(ii) Pro Forma Condensed Consolidated Balance Sheet of F-2
Education Management Corporation as of September 30, 2001
and for Argosy Education Group, Inc. as of August 31, 2001
-3-
(iii) Pro Forma Consolidated Statement of Income of F-3
Education Management Corporation for the year ended
June 30, 2001 and for Argosy Education Group, Inc. for
the twelve months ended May 31, 2001
(iv) Pro Forma Consolidated Statement of Income of F-4
Education Management Corporation for the three
months ended September 30, 2001 and for
Argosy Education Group, Inc. for the
three months ended August 31, 2001
(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. 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).
23.1 Consent of Arthur Andersen LLP, independent public accountants for
Argosy Education Group, Inc. (filed herewith).
23.2 Consent of Arthur Andersen LLP, independent public accountants for
Education Management Corporation (filed herewith).
99.1 Press Release dated December 21, 2001 (filed herewith).
-4-
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Background and Introduction
The unaudited pro forma consolidated statements of income combine EDMC's
and Argosy's historical consolidated statements of income, giving effect to the
merger as if it had occurred on the first day of the period for which the
income statement is presented. 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 September 30, 2001. Since Argosy has a fiscal year end of
August 31, the historical information included in the pro forma combined
statements of income has been derived from Argosy's operating results for the
twelve months ended May 31, 2001 and the three months ended August 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 seperate historical financial statements of EDMC as of and for the
year ended June 30, 2001, and as of and for the three months ended
September 30, 2001.
. the separate historical financial statements of Argosy as of and for the
year ended August 31, 2001, 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-1
Pro Forma Condensed Consolidated Balance Sheet
Adjustments
for Assets Pro Forma
Not Consolidated
EDMC Argosy Acquired by Acquisition EDMC and
As of 9/30/01 As of 8/31/01 EDMC(1) Adjustments(2) Argosy
------------- ------------- ----------- -------------- -----------
(in thousands)
Assets:
Cash and cash
equivalents........... $ 6,974 $11,840 $ -- $ -- $ 18,814
Receivables, net....... 23,948 3,656 (482) -- 27,122
Other current assets... 19,275 3,661 (42) -- 22,894
-------- ------- ------- --------- --------
Total current assets... 50,197 19,157 (524) -- 68,830
-------- ------- ------- --------- --------
Property and equipment,
net................... 158,564 22,387 (1,115) -- 179,836
Deferred income taxes
and other long-term
assets................ 11,934 3,431 (1,669) -- 13,696
Intangible assets...... 12,251 141 (34) 8,893 21,251
Goodwill............... 56,243 10,593 (581) 49,977 116,232
-------- ------- ------- --------- --------
Total assets........... $289,189 $55,709 $(3,923) $ 58,870 $399,845
======== ======= ======= ========= ========
Liabilities and
Shareholders'
Investment:
Current liabilities.... $ 96,694 $13,966 $ (984) $ -- $109,676
Long-term debt, less
current portion....... 29,360 14,497 (95) 80,276 124,038
Other long-term
liabilities........... 61 3,031 (35) -- 3,057
-------- ------- ------- --------- --------
Total liabilities...... 126,115 31,494 (1,114) 80,276 236,771
Shareholders'
investment............. 163,074 24,215 (2,809) (21,406) 163,074
-------- ------- ------- --------- --------
Total liabilities and
shareholders'
investment............ $289,189 $55,709 $(3,923) $ 58,870 $399,845
======== ======= ======= ========= ========
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(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 the estimated purchase price to assets
acquired and liabilities assumed as of September 30, 2001 is as follows:
Purchase price.......................................... $79,276
Estimated acquisition cost.............................. 1,000
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$80,276
=======
Net book value of assets acquired....................... $21,406
Less: Intangible assets of Argosy....................... (10,119)
Adjustments to fair value:
Identifiable intangible assets........................ 9,000
Goodwill.............................................. 59,989
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$80,276
=======
F-2
Pro Forma Consolidated Statement of Income
Adjustments
Argosy for Assets Pro Forma
EDMC Twelve Not Consolidated
Year Ended Months Ended Acquired by Acquisition EDMC and
6/30/01 5/31/01 EDMC(2) 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 (3) 278,158
General and
administrative....... 76,716 24,042 (1,903) (13,493)(3) 85,362
Amortization of
intangibles.......... 1,977(1) 391 (59) 1,468 (4)(5) 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)(3) --
-------- ------- ------- -------- --------
Income before interest
and taxes............. 49,675 1,439 2,936 (1,409) 52,641
Interest expense
(income), net......... 2,275 (249) (11) 6,236 (6) 8,251
-------- ------- ------- -------- --------
Income before income
taxes................. 47,400 1,688 2,947 (7,645) 44,390
Provision for income
taxes................. 18,422 1,017 1,149 (2,982)(7) 17,606
-------- ------- ------- -------- --------
Net income............. $ 28,978 $ 671 $ 1,798 $ (4,663) $ 26,784
======== ======= ======= ======== ========
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(8)...... 31,106 31,106
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(1) Annual goodwill amortization expense will decrease by approximately $1.0
million upon the adoption of SFAS No. 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 transaction.
(3) The Argosy results have been reclassified to conform with EDMC's
presentation.
(4) 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 No. 142, "Goodwill and Other Intangible
Assets," the goodwill that resulted from the Argosy acquisition will not be
amortized.
(5) 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.
(6) EDMC's pro forma statements have been adjusted to reflect the additional
interest expense related to the Argosy acquisition at an interest rate of
6.73%, the weighted average interest rate paid on borrowings under the
credit facility during fiscal 2001. As of October 1, 2001, the average
interest rate on borrowings under the credit facility was 5.25%.
(7) A 39.0% combined state and federal statutory rate was assumed in
calculating the income tax effect of the pro forma adjustments.
(8) The weighted average shares outstanding for the diluted earnings per share
calculation include the impact of outstanding options, where dilutive.
F-3
Pro Forma Consolidated Statement of Income
EDMC Argosy Adjustments
Three Three for Assets Pro Forma
Months Months Not Consolidated
Ended Ended Acquired by Acquisition EDMC and
9/30/01 8/31/01 EDMC(1) Adjustments Argosy
------- ------- ----------- ------------- -----------
(in thousands, except per share amounts)
Net Revenues........... $91,874 $15,570 $ (261) $ -- $107,183
Costs and expenses:
Educational
services............. 67,132 10,138 (1,168) 5,106 (2) 81,208
General and
administrative....... 20,724 10,724 (2,515) (5,095)(2) 23,838
Amortization of
intangibles.......... 309 206 (21) 265 (3)(4) 759
------- ------- ------- ------- --------
88,165 21,068 (3,704) 276 105,805
------- ------- ------- ------- --------
Income from
operations............ 3,709 (5,498) 3,443 (276) 1,378
Other expense
(income).............. -- 11 -- (11)(2) --
------- ------- ------- ------- --------
Income before interest
and taxes............. 3,709 (5,509) 3,443 (265) 1,378
Interest expense
(income), net......... 479 73 2 1,119 (5) 1,673
------- ------- ------- ------- --------
Income (loss) before
income taxes.......... 3,230 (5,582) 3,441 (1,384) (295)
Provision (credit) for
income taxes.......... 1,247 (2,141) 1,422 (540)(6) (12)
------- ------- ------- ------- --------
Net income (loss)...... $ 1,983 $(3,441) $ 2,019 $ (844) $ (283)
======= ======= ======= ======= ========
Per Share Data:
Basic:
Net income (loss).... $ .07 $ (.01)
======= ========
Weighted average
number of shares
outstanding......... 30,336 30,336
Diluted:
Net income (loss).... $ .06 $ (.01)
======= ========
Weighted average
number of shares
outstanding(7)...... 32,134 30,336
- -------
(1) 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 transaction.
(2) The Argosy results have been reclassified to conform with EDMC's
presentation.
(3) 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 No. 142, "Goodwill and Other Intangible
Assets," the goodwill that resulted from the Argosy acquisition will not be
amortized.
(4) EDMC's pro forma statements have been adjusted to reflect three months 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.
(5) EDMC's pro forma statements have been adjusted to reflect the additional
interest expense related to the Argosy acquisition at an interest rate of
4.54%, the weighted average interest rate paid on borrowings under the
credit facility during the three months ended September 30, 2001.
(6) A 39.0% combined state and federal statutory rate was assumed in
calculating the income tax effect of the pro forma adjustments.
(7) The weighted average shares outstanding for the diluted earnings per share
calculation include the impact of outstanding options, where dilutive.
F-4
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: January 3, 2002
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).
23.1 Consent of Arthur Andersen LLP, independent public accountants for
Argosy Education Group, Inc. (filed herewith).
23.2 Consent of Arthur Andersen LLP, independent public accountants for
Education Management Corporation (filed herewith).
99.1 Press Release dated December 21, 2001 (filed herewith).