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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended August 31, 1999
Commission file number 000-29820
ARGOSY EDUCATION GROUP, INC.
(Exact name of registrant as specified in its charter)
Illinois 36-2855674
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Two First National Plaza, 20 South Clark Street, 3rd Floor, Chicago, Illinois
60603
(Address of principal executive offices)
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Registrant's telephone number, including area code: (312) 899-9900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X]NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the registrant's voting stock held by non-
affiliates of the registrant, based upon the $4,4375 per share closing sale
price of the registrant's Common Stock on November 23, 1999, was approximately
$6,882,793. For purposes of this calculation, the Registrant's directors and
executive officers have been assumed to be affiliates.
The number of shares outstanding of the registrant's Class A and Class B
Common Stock, par value $.01, as of November 23, 1999 was 6,466,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of our Notice of Annual Meeting and Proxy Statement for our Annual
Meeting of Stockholders, scheduled to be held on are incorporated
by reference into Part III of this Report.
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ARGOSY EDUCATION GROUP, INC.
FORM 10-K
TABLE OF CONTENTS
<TABLE>
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Page
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PART I
ITEM 1. BUSINESS................................................... 1
ITEM 2. PROPERTIES................................................. 20
ITEM 3. LEGAL PROCEEDINGS.......................................... 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........ 21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS........................................ 21
ITEM 6. SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA............ 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................. 24
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................ 31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE................................... 32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......... 32
ITEM 11. EXECUTIVE COMPENSATION..................................... 32
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................. 32
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............. 32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K................................................... 33
</TABLE>
Special Note Regarding Forward-Looking Statements:
This Form 10-K contains certain statements which reflect our expectations
regarding our future growth, results of operation, performance and business
prospects and opportunities. Wherever possible, words such as "anticipate,"
"believe," "plan," "expect" and similar expressions have been used to identify
these "forward-looking" statements as such terms are defined in Section 21E of
the Securities Exchange Act of 1934, as amended. These statements reflect our
current beliefs and are based on information currently available to us.
Accordingly, these statements are subject to risks and uncertainties which
could cause our actual growth, results, performance and business prospects and
opportunities to differ from those expressed in, or implied by, these
statements. These risks and uncertainties include implementation of our
operating and growth strategy, risks inherent in operating private for-profit
postsecondary education institutions, risks associated with general economic
and business conditions, charges and costs related to acquisitions, and our
ability to: successfully integrate our acquired institutions and continue our
acquisition strategy, attract and retain students at our institutions, meet
regulatory and accrediting agency requirements, compete with enhanced
competition and new competition in the education industry, and attract and
retain key employees and faculty. We are not obligated to update or revise
these forward-looking statements to reflect new events or circumstances.
<PAGE>
PART I
ITEM 1. BUSINESS
General Overview
The Company is the nation's largest for profit provider of doctoral level
programs. The Company's mission is to provide academically-oriented,
practitioner-focused education in fields with numerous employment
opportunities and strong student demand. In addition to doctoral and masters
degrees in psychology, education and business, the Company also awards
bachelor's degrees in business, associate degrees in allied health professions
and diplomas in information technology. At August 31, 1999, approximately 63%
of the Company's students were enrolled in doctoral programs. In 1998, the
Company graduated approximately 360 clinical psychology doctoral students out
of approximately 4,000 psychology doctoral degrees conferred nationwide. The
Company operates 17 campuses in nine states and the Province of Ontario,
Canada, and had a total of approximately 4,500 students, representing 48
states and 30 foreign countries, enrolled as of August 31, 1999.
The Company was founded in 1975, when the Company's Chairman, Michael C.
Markovitz, Ph.D., recognized a demand for a non-research oriented professional
school that would educate and prepare students for careers as clinical
psychology practitioners. To address this demand, the Company started the
Illinois School of Professional Psychology in Chicago, Illinois in 1976 and,
in its first year of operations, received several thousand inquiries for
admission to a class of 70 students for the PsyD degree. The continuing demand
for high quality, practitioner-focused psychology postgraduate education led
the Company to expand the renamed American Schools of Professional Psychology
to ten campuses located across the United States. In response to a broader
demand for quality career education, the Company has expanded beyond the
psychology curriculum with the acquisitions of (i) the University of Sarasota,
a degree-granting institution focusing primarily on postgraduate business and
education (March 1992); (ii) the Medical Institute of Minnesota, a degree-
granting institution focusing on a variety of allied health professions
(February 1998); and (iii) PrimeTech Institute, an institution granting
diplomas in computer programming and other aspects of information technology
and in paralegal studies (November 1998). In addition, the Company became the
largest provider of postgraduate psychology license examination preparation
courses and materials in the United States by its acquisition of Ventura in
August 1997. Through Ventura, the Company also provides professional licensure
examination materials and workshops for social work; marriage, family and
child counseling; marriage and family therapy; and counseling certification
examinations nationwide.
The Company operates the following schools:
. American Schools of Professional Psychology (" ASPP") grants doctoral and
master's degrees in clinical psychology and related disciplines at ten
campuses located in Illinois (2), Minnesota, Georgia, Virginia, Hawaii,
Arizona, Florida, California and Washington. ASPP is accredited by the
North Central Association of Colleges and Schools ("NCA"), and five of
its campuses are accredited by the American Psychological Association
("APA").
. University of Sarasota ("U of S") grants doctoral, master's and
bachelor's degrees at three campuses located in Sarasota, Florida, Tampa,
Florida and Orange, California. U of S is accredited by the Southern
Association of Colleges and Schools ("SACS").
. Medical Institute of Minnesota ("MIM") grants associate degrees at one
campus in Minneapolis, Minnesota. MIM is institutionally accredited by
Accrediting Bureau of Health Education Schools ("ABHES"), and
additionally holds individual programmatic accreditation appropriate to
each degree program offered.
. PrimeTech Institute (PrimeTech") awards diplomas at three campuses in
Ontario, Canada.
In addition, Ventura publishes materials and holds workshops in select
cities across the United States to prepare individuals to take various
national and state administered oral and written health care licensure
examinations in psychology and other mental health disciplines.
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As of September 1, 1999 the Company entered into a long term agreement to
manage the John Marshall Law School of Atlanta, Georgia. The agreement
includes an option to purchase John Marshall. The right can be exercised at
the Company's discretion. Throughout its 67-year history, John Marshall Law
School in Atlanta has operated with the approval of the Georgia Supreme Court
but without American Bar Association accreditation. In 1987, however, the
court mandated that John Marshall must earn ABA accreditation prior to 2003 or
close.
Because of the Company's demonstrated expertise in working with accrediting
bodies, the Company was chosen to manage John Marshall on a contract basis.
The management agreement also includes a 10-year purchase option on the
school.
The following table sets forth certain additional information regarding the
Company's schools and their various campuses:
<TABLE>
<CAPTION>
Year Date
School and Campus Locations Opened Acquired Accreditation
--------------------------- ------ ---------- -------------
<S> <C> <C> <C> <C>
American Schools of
Professional Psychology NCA
Illinois School of
Professional
Psychology/Chicago....... Chicago, IL 1976 -- APA
Illinois School of
Professional
Psychology/Meadows....... Rolling Meadows, IL 1979 March 1994 APA
Minnesota School of
Professional Psychology.. Minneapolis, MN 1987 -- APA
Georgia School of
Professional Psychology.. Atlanta, GA 1990 -- APA
American School of
Professional
Psychology/Virginia...... Arlington, VA 1994 --
American School of
Professional
Psychology/Hawaii........ Honolulu, HI 1979 March 1994 APA
Arizona School of
Professional Psychology.. Phoenix, AZ 1997 --
Florida School of
Professional Psychology
(1)...................... Tampa, FL 1995 Sept. 1998
American School of
Professional
Psychology/San Francisco
Bay Area................. Point Richmond, CA 1998 Sept. 1998
Washington School of
Professional Psychology.. Seattle, WA 1997 Sept. 1999
University of Sarasota SACS
University of
Sarasota/Honore.......... Sarasota, FL 1969 March 1992
University of
Sarasota/Tampa........... Tampa, FL 1997 --
University of
Sarasota/California...... Orange, CA 1999 --
Medical Institute of
Minnesota................ Minneapolis, MN 1961 Feb. 1998 ABHES
PrimeTech Institute
PrimeTech Institute/North
York..................... North York, Ontario 1989 Nov. 1998
PrimeTech Institute/City
Campus................... Toronto, Ontario 1995 Nov. 1998
PrimeTech
Institute/Scarborough.... Scarborough, Ontario 1999 --
</TABLE>
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(1) Historically operated as a unit of the University of Sarasota.
Industry Overview
According to the National Center for Education Statistics (the "NCES") of
the United States Department of Education ("DOE"), education is the second
largest sector of the U.S. economy, accounting for approximately 8% of gross
domestic product in 1997, or over $600 billion. The Company's schools are part
of the postsecondary education market, which accounts for approximately one-
third of the total sector. Of the approximately 6,000 postsecondary schools
that are eligible to participate in the student financial aid programs ("Title
IV Programs") administered by DOE under the Higher Education Act of 1965, as
amended ("HEA"), approximately 500 are proprietary degree-granting
institutions such as the Company's schools.
The NCES estimates that by the year 2001 the number of students enrolled in
higher education institutions will increase by more than 1.5 million, to over
16 million students. The Company believes that a significant portion of this
growth in the postsecondary education market will result from an increase in
the number of new high school graduates, an increase in the number of college
graduates attending postgraduate institutions and the increased enrollment by
working adults in postsecondary and postgraduate institutions. According to
the NCES,
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the number of new high school graduates per year is expected to increase by
approximately 24%, from 2.5 million graduates in 1994 to 3.1 million graduates
in 2004. Over the same period, the number of college graduates attending
postgraduate institutions is expected to increase by approximately 100,000
students. The NCES estimates that, over the next several years, initial
enrollments in postsecondary education institutions by working adults will
increase more rapidly than initial enrollments of recent high school
graduates.
The postsecondary education industry generally is expected to benefit from
the public's increased recognition of the value of a postsecondary education.
According to the NCES, the percentage of recent high school graduates who
continued their education after graduation increased from approximately 53% in
1983 to approximately 65% in 1996. The percentage of college graduates
continuing to postgraduate institutions remained relatively constant, at 11%,
over the same period. The Company believes that students pursue higher
education for a variety of reasons, including the increased prestige
associated with academic credentials, career change and development,
intellectual curiosity and the income premium associated with higher
education. According to Census Bureau data, in 1995 the income premiums over
comparable workers with high school diplomas for associate, bachelor's,
master's and doctoral degree holders were 25%, 55%, 91% and 127%,
respectively.
Business Strategy
The Company's mission is to provide academically-oriented, practitioner-
focused education in fields with numerous employment opportunities and strong
student demand. The key elements of the Company's business strategy are as
follows:
Focusing on Advanced Degrees. Approximately 62% of the Company's students
are enrolled in doctoral programs, with an additional 17% pursuing master's
degrees and the remainder pursuing bachelor's or associate degrees or
diplomas. Management believes that the Company's emphasis on advanced degree
programs provides greater predictability of tuition revenue and reduces
recruitment cost per enrolled student, as compared to lower level degree
programs, due to a number of factors, including the longer term of most
advanced degree programs, the higher student retention rates experienced in
more advanced degree programs and the narrower target markets for advanced
degree programs. Consistent with this philosophy, the Company plans to expand
some of its associate degree programs, such as those offered by MIM, to
bachelor's degree programs. By offering more advanced degree programs, the
Company can also take advantage of the tendency of many graduates of master's,
bachelor's and associate degree programs to continue their education at the
same institution if appropriate advanced degree programs are offered.
Focusing on Curricula with Practical Professional Applications. The Company
was founded to respond to a demand for postgraduate education which focuses on
practical professional applications instead of research. The Company's
academic programs are designed to prepare students to work in their chosen
professions immediately upon graduation. Psychology graduate students, for
example, gain significant practical professional experience through a required
internship program. Similarly, MIM requires all of its students to participate
in a field-based internship. The Company's programs for professional educators
also focus on practical benefits by offering the academic credentials and
skills in discrete sub-specialties required for promotion and increased
compensation. This practitioner-focused approach provides the additional
benefits of attracting highly motivated students and increasing student
retention and graduate employment. The Company's professional test preparation
business provides it with another means of participating in the practical
education needed for graduates in many fields to become practitioners.
Refining and Adapting Educational Programs. Each of the Company's schools
strives to meet the changing needs of its students and changes in the
employment markets by regularly refining and adapting its existing educational
programs. To do so, the Company has implemented its Program for Institutional
Effectiveness Review. PIER is designed to provide periodic feedback from
senior management, faculty and students with a view toward consistently
improving the quality of each school's academic programs. Through PIER, the
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Company solicits the views of each of these participants in the educational
process on quality improvement issues such as curriculum innovations which can
meet existing or expected employment and student demands and class scheduling
and other program administrative improvements which can improve the students'
educational experience.
Emphasizing School Management Autonomy and Accountability. The Company
operates with a decentralized management structure in which local campus
management is empowered to make most of the day-to-day operating decisions at
each campus and is primarily responsible for the profitability and growth of
that campus. Appropriate performance-based incentive compensation arrangements
have been implemented by the Company to reinforce the accountability of local
campus management under this structure. At the same time, the Company provides
each of its schools with certain services that it believes can be performed
most efficiently and cost-effectively by a centralized office. Such services
include marketing, accounting, information systems, financial aid processing
and administration of regulatory compliance. The Company believes this
combination of decentralized management and certain centralized services
significantly increases its operational efficiency.
Growth Strategy
The Company's objective is to achieve growth in revenue and profits while
consistently maintaining the integrity and quality of its academic programs.
The key elements of the Company's growth strategy are as follows:
Expanding Program Offerings. The Company regularly engages in the
development of new, and the expansion of existing, curricular offerings at the
doctoral, master's, bachelor's, associate and diploma levels. Of the 18
degree-granting programs currently offered by the Company, five have been
introduced since 1995. For example, in 1995 the Company introduced its
doctorate in business administration ("DBA") program to provide students with
advanced level business training and in 1997 the Company initiated its
master's of science in health services administration ("MSHSA") program to
provide students with training and problem solving skills from the areas of
both business and social sciences. In 1999 the Company began offering courses
in its new sports psychology program. The Company believes that there are
significant opportunities to develop additional new programs, such as its new
program in pastoral counseling at U of S and its proposed programs in dental
hygienics and radiation therapy at MIM. Once new programs have proven
successful at one school, the Company seeks to expand them to its other
schools which offer related programs. For example, ASPP currently offers a
master's of arts ("MA") degree in counseling at six campuses and is in the
process of making this program available at the remaining ASPP campuses.
Adding New Campuses. The Company seeks to expand its presence into new
geographic locations. Nine of the Company's 17 campuses were developed by the
Company internally. The Company regularly evaluates new locations for
developing additional campuses and believes that significant opportunities
exist for doing so. For example, of the 21 metropolitan areas in the United
States with a population in excess of two million persons, nine do not have a
graduate school of professional psychology that awards the PsyD degree.
Emphasizing Student Recruitment and Retention. The Company believes that it
can increase total enrollment at its campuses through the implementation of an
integrated marketing program that utilizes direct response marketing and
direct sales to college and high school counselors. The Company has hired a
marketing professional at each of its campuses to focus both the marketing
campaign and overall recruitment effort of each campus within its targeted
market. The Company also believes it can increase its profitability through
improvements in student retention rates, as the cost of efforts to keep
current students in school are less than the expense of attracting new
students.
Expanding into Related Educational Services. The Company believes that
significant opportunities exist in providing educational services that are
related to its current program offerings. Through Ventura, the Company has
become a leading provider of test preparation programs for psychology
licensure examinations. These
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programs bring the Company in contact with a significant number of current and
future psychology practitioners, which the Company believes can offer an
opportunity to market additional educational programs in the future. For
example, the Company believes that non-degree continuing education programs
will increasingly be mandated by state licensing authorities; this represents
an opportunity for the Company to provide services not only for the graduates
of its schools, but also for the broader universe of licensed health care
providers to which it gains access through its Ventura test preparation
programs.
Acquisitions. Based on recent experience and internal research, the Company
believes that, in both the for-profit and not-for-profit postgraduate
education industry, most schools are small, stand-alone entities without the
benefits of centralized professional management, scale economies in purchasing
and advertising or the financial strength of a well-capitalized parent
company. The Company intends to capitalize on this fragmentation by acquiring
and consolidating attractive schools and educational programs. The Company has
acquired eight of its 17 campuses, four of which were for-profit and four of
which were originally not-for-profit, and the Ventura test preparation
business. The Company believes there are significant opportunities to acquire
schools which can serve as platforms for program and campus expansion. Prime
acquisition candidates are those that have the potential to be quickly
developed into profitable, accredited degree-granting schools offering
programs consistent with the Company's mission.
Programs of Study
ASPP. ASPP grants postgraduate level degrees in a variety of specialties
within the field of clinical psychology. The Company offers a doctorate in
clinical psychology, master's of arts degrees in clinical psychology and
professional counseling and a master's of science degree in health services
administration. ASPP also offers a postdoctoral program in clinical
psychopharmacology. Approximately 68% of ASPP's students are enrolled in the
PsyD program in various specialties and, of the students enrolled in the
clinical MA program, historically more than 50% continue in the PsyD program.
The Company was among the first academic programs in the United States to
offer the practitioner-focused PsyD degree, as compared to the research-
oriented PhD degree. The PsyD is a four year program consisting of one year of
classroom training, two years divided between classroom training and fieldwork
practicum and a fourth year consisting of a paid internship. The program
focuses on practical issues in clinical psychology as compared to abstract
research topics. For example, fourth year students prepare a case study as
their final project, rather than a doctoral dissertation. Clinical MA students
complete a two year program, all of which can be carried over into the PsyD
program.
In connection with its emphasis on a practitioner-focused education, ASPP
offers a variety of minors to be pursued in connection with the PsyD program.
For example, the Chicago campus offers minors in the areas of Family
Psychology, Ethnic Racial Psychology, Psychoanalytic Psychology, Sexual Abuse
Psychology, Health Psychology and Psychology and Religion. The Minnesota
campus also offers the Health Psychology and Psychology and Religion
subspecialties, as well as a minor in Child and Family Psychology.
The master's of arts program in professional counseling is a two year
program combining classroom training and fieldwork. Typically offered in the
evening and on weekends, this program aims to provide the skills and training
needed by individuals to practice as licensed professional counselors in a
wide variety of governmental, community and private settings.
The MSHSA degree is designed to provide students with training and problem
solving skills from the areas of both business and social sciences. Students
learn about business principles and their application to health care as well
as clinical training methods and behavior theories applicable to the health
care field. The program focuses on innovative solutions to health care
delivery problems by drawing on both business and interpersonal behavior
theory.
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ASPP's academic programs are highly respected in the field. Since its
inception in 1976, ASPP has graduated over 2,700 students. While its focus is
on practice rather than research, its graduates also include PsyDs who now
serve as tenured faculty members at Harvard University and Northwestern
University.
U of S. U of S grants postgraduate and bachelor's level degrees in
education, business and behavioral science. In education, U of S offers a
doctorate in education ("EdD"), a master's of arts in education ("MEd") and an
educational specialist degree ("EdS"), each with various majors or
concentrations, such as curriculum and instruction, human services
administration, counseling psychology and educational leadership. In business,
U of S offers a doctorate in business administration ("DBA"), a master's of
business administration ("MBA") and a bachelor's of science in business
administration ("BSBA"), each with various majors or concentrations, such as
information systems, international business, management and marketing. In
behavioral science, U of S offers a master's of arts in counseling.
The EdD, MEd and EdS programs are offered to professional educators from
across the U.S. The programs consist of an innovative combination of distance
learning and personal interaction, allowing students to complete a significant
percentage of the preparatory work for each course at home in advance of an
intensive in-person instructional period, typically scheduled during breaks in
the academic year. The Company believes that an important aspect of the
learning experience is the student's interaction with faculty and other
students. The EdD is a three year program, and the MEd and EdS are two year
programs.
The DBA, MBA and BSBA degrees are offered both part-time and full-time and
consist of classes in disciplines such as statistics, economics, accounting
and finance. The DBA is a three year program; the MBA is a two year program,
which may count towards two of the three years required for the DBA; and the
BSBA is a two year degree completion program.
MIM. MIM offers associate degrees ("AA") in a variety of allied health care
fields. MIM offers programs leading to certification as a veterinary
technician, diagnostic medical sonographer, histotechnician, medical
assistant, medical laboratory technician or radiologic technologist.
Currently, approximately 60% of the students are enrolled in the veterinary
technician program. The programs typically consist of 12-15 months of full-
time classroom training and two to six additional months of internship.
PrimeTech. PrimeTech offers diploma programs in network engineering,
internet engineering, software programming and paralegal studies. The programs
typically consist of 12-18 months of full-time course work, which can be taken
on a part-time basis and which is completed on-site.
Ventura. Ventura publishes materials and holds workshops in select cities
across the United States to prepare individuals to take various national and
state administered oral and written health care licensure examinations in the
fields of psychology, social work, counseling, marriage and family therapy,
and marriage, family and child counseling. The programs typically last three
to four days and are conducted at various locations throughout the United
States.
Student Body
Recruitment
The Company seeks to attract students with both the motivation and ability
to complete the programs offered by its schools. To generate interest, the
Company engages in a broad range of activities to inform potential students
and their parents about its schools and programs of study.
The general reputation of the Company's schools and referrals from current
students, alumni and employers are the largest sources of new students. The
Company believes that over 60% of ASPP's students for the 1998 fiscal year
were enrolled through referrals from current and former students as well as
employees and others who have worked with ASPP's graduates. The Company also
employs marketing tools such as its web sites and
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creates publications and other promotional materials for the Company's
schools, participates in school fairs and uses other traditional recruitment
techniques common to undergraduate and postgraduate institutions. The goal of
the Company's recruitment efforts is to increase awareness of the Company's
schools among potential applicants in a cost-effective and dignified manner.
ASPP and U of S operate in a different marketing environment than MIM and
PrimeTech. ASPP andU of S seek to appeal to academically-oriented students,
students who might otherwise elect to attend a state-sponsored or private
university and who expect to see recruitment efforts and materials consistent
with such universities, such as course catalogs and participation in student
fairs. MIM and PrimeTech seek to appeal to students who are strictly seeking
career-enhancing education and students who may not have college or university
experience. These students typically respond to more traditional commercial
marketing efforts. Ventura markets its programs directly to graduates of
postgraduate psychology schools that have registered to take postgraduate
licensure exams.
The following table sets forth certain statistics regarding the student
body at each of the Company's schools for the 1998-99 academic year:
<TABLE>
<CAPTION>
Number of Average
School Students Age % Postgraduate
------ --------- ------- --------------
<S> <C> <C> <C>
American Schools of Professional
Psychology............................ 2,043 33 100%
University of Sarasota................. 1,649 41 98%
Medical Institute of Minnesota......... 567 27 0%
PrimeTech Institute.................... 283 30 0%
</TABLE>
Admission
The Company's admissions objective is to achieve controlled student
enrollment growth while consistently maintaining the integrity and quality of
its academic programs. At each of the Company's schools, student admissions
are overseen by a committee, comprised principally of members of the faculty,
that reviews each application and makes admissions decisions. Differing
programs within the Company operate with differing degrees of selectivity.
Some of the Company's programs, particularly its postgraduate psychology
programs, receive many more applications for admission than can be
accommodated. Admissions criteria for such programs include a combination of
prior academic record, performance on an admissions essay and work experience.
The Company believes that other of its programs are beneficial to anyone who
possesses the necessary qualifications and chooses to enroll. Such programs
tend to be less selective; however, the Company does screen students both for
their commitment to completing a particular program of study and their
aptitude for the academic subject matter of their chosen program. Upon passing
the various screens of the admissions process, successful applicants are
notified of acceptance into the program of their choice. All of the Company's
schools use a rolling admissions format.
Retention
The Company recognizes that the ability to retain students until graduation
is an important indicator of the success of its schools and of its students.
As with other postsecondary institutions, students at the Company's schools
may fail to finish their programs for a variety of personal, financial or
academic reasons. While ASPP doctoral students have seven years to complete
their studies, students generally complete the program in approximately five
and one-half years. Over 62% of the members of ASPP's 1992 entering doctoral
class graduated in 1997, and historically approximately 70% of ASPP's students
ultimately complete their degree.U of S, MIM and PrimeTech have historically
had completion rates similar to those of ASPP, although MIM and PrimeTech have
substantially shorter programs. The Company believes MIM's and PrimeTech's
completion rates are higher than those of many other associate degree and
diploma programs. To reduce the risk of student withdrawals, the Company
counsels students early in the application process to gauge their commitment
to completing their chosen course of study.
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Student retention is considered an entire school's responsibility, from
admissions to faculty and administration to career counseling services. To
minimize student withdrawals, faculty and staff members at each of the
Company's campuses strive to establish personal relationships with students.
Each campus devotes staff resources to advising students regarding academic
and financial matters, part-time employment and other matters that may affect
their success. However, while there may be many contributors, each campus has
one administrative employee specifically responsible for monitoring and
coordinating the student retention efforts. In addition, the Company's senior
management regularly tracks retention rates at each campus and provides
feedback and support to local campus administrators.
Tuition and Fees
The Company's schools invoice students for tuition and other institutional
charges by the term of instruction. Each school's refund policies meet the
requirements of the DOE and such school's state and accrediting agencies.
Generally, if a student ceases attendance during the first 60% of his or her
first term, the applicable school will refund institutional charges based on
the number of weeks remaining in that term. After a student has attended 60%
of that term, the school generally is allowed to retain 100% of the
institutional charges. After a student's first term, the school refunds
institutional charges based on the number of weeks attended in the term in
which the student withdraws. Generally, after six weeks of a term, the school
will retain 100% of the institutional charges for that academic period.
The Company has historically implemented tuition increases each year at or
above the rate of inflation. Average tuition increases at the Company's
schools for fiscal 1997, 1998 and 1999 were 5.1%, 5.1% and 5.2%, respectively.
The following table sets forth the average total tuition to complete a
degree at each of the Company's schools, based on tuition rates for the 1998-
99 academic year:
<TABLE>
<CAPTION>
Average Total Length of
School Tuition program
------ ------------- ---------
<S> <C> <C>
American Schools of Professional Psychology
PsyD........................................... $52,440 4 years
MA (Clinical).................................. 24,908 2 years
MA (Counseling)................................ 19,008 2 years
MSHSA.......................................... 22,500 2 years
University of Sarasota
DBA, EdD....................................... $21,180 3 years
Med............................................ 15,650 2 years
Eds............................................ 10,590 2 years
MBA............................................ 9,640 2 years
MA............................................. 16,600 2 years
BSBA........................................... 14,250 2 years
Medical Institute of Minnesota
Veterinary Technician, Radiologic Technologist,
Medical Lab Technician, Diagnostic Medical
Sonographer................................... $18,900 18 months
Histotechnician, Medical Assistant............. 16,250 18 months
PrimeTech Institute
Software Programming Engineer.................. $14,500 18 months
Software Programmer............................ 11,600 13 months
PC/LAN......................................... 7,000 12 months
Internet Service/Support Engineer.............. 6,150 12 months
Legal Secretary................................ 6,000 12 months
LAN Professional, Paralegal.................... 5,500 12 months
Microcomputer Business Application
Administration................................ 4,500 12 months
Desktop Publishing Specialist.................. 4,000 12 months
Accounting Assistant........................... 3,700 12 months
</TABLE>
8
<PAGE>
Graduate Employment
The Company believes that employment of its graduates in occupations
related to their fields of study is critical to the ability of its schools to
continue to recruit students successfully. Based on information received from
graduating students and employers, the Company believes that students
graduating from the Company's schools enjoy considerable professional success.
ASPP's graduating class of 1997, for example, reported a 95% employment rate
in their area of study within six months after graduation. U of S's education
students are primarily working professional educators, and thus by definition,
have a significant graduate employment rate. The success of their educational
experience is measured by continued and accelerated success in their field.
MIM and PrimeTech each provide academic programs specifically tailored to a
student's career goals. MIM's and PrimeTech's graduating classes of 1997
reported employment rates in their relevant fields of study within six months
of graduation of 85% and 81%, respectively.
Faculty
The Company seeks to attract and retain faculty with outstanding
credentials in their respective fields for each of its schools. Each of the
Company's schools attempts to employ faculty members who are dedicated to the
teaching profession and to provide such faculty members with a stimulating and
professional academic environment and competitive compensation package. The
Company emphasizes a core staff of full-time faculty members to maintain
continuity and consistency across its academic programs, augmented by part-
time adjunct faculty with significant industry experience. The Company's
schools each employ dedicated faculty with significant experience and
credentials in their respective fields to provide the personal interaction
that is critical to the academic experience. The Company also encourages its
full-time faculty members to engage in meaningful outside professional
activities to retain current practical experience. The Company has implemented
its PIER program providing periodic feedback to faculty from senior
management, faculty peers and students with a view toward consistently
improving the quality of each school's academic programs.
The following table sets forth certain information regarding the faculty at
each of the Company's schools as of August 31, 1999:
<TABLE>
<CAPTION>
Full-
Time Adjunct
School Faculty Faculty(1) Highest Degree of Full-Time Faculty
------------------------------- ------- --------- ------------------------------------------
<S> <C> <C> <C>
American Schools of
Professional Psychology....... 85 166 100% Doctoral (PhD or PsyD)
University of Sarasota......... 32 11 95% Doctoral, 5% Master's
Medical Institute of Minnesota. 23 26 9% Doctoral, 13% Master's, 43% Bachelor's,
9% Associate, 26% Certificate
PrimeTech Institute............ 15 2 12% Doctoral, 38% Master's, 50% Bachelor's
</TABLE>
- --------
(1) Represents faculty members teaching at least one class during the 1998-99
academic year.
Governance of the Company's Schools
Each ASPP campus is managed locally by a Dean who reports to the Provost of
ASPP (John E. Sites). U of S is headed by a Provost (Dale Bower) who reports
to the Board of U of S. Both PrimeTech and MIM are headed by Unit Presidents
(Roy Rintoul and Scott Tjaden, respectively) each of whom reports to his
respective board of directors. Each of these Provosts and Unit Presidents also
consult with the President of the Company (Harold J. O'Donnell). Scott Ables,
General Manager of Ventura, reports to the President of the Company.
U of S and MIM each has an independent Board of Directors, separate from
the Company's Board but elected by the Company as sole shareholder. These
local boards of directors independently make and approve policies and budgets.
9
<PAGE>
Competition
The postsecondary education market in the United States is highly
fragmented and competitive, with no private or public institution enjoying a
significant market share. The Company competes for students with postgraduate,
four year and two year degree-granting institutions, which include non-profit
public and private colleges, universities and proprietary institutions. An
attractive employment market also reduces the number of students seeking
postgraduate degrees, thereby increasing competition for potential
postgraduate students. Management believes that competition among educational
institutions is based on the quality of educational programs, location,
perceived reputation of the institution, cost of the programs and employment
opportunities for graduates. Certain public and private colleges and
universities may offer programs similar to those of the Company at a lower
tuition cost due in part to governmental subsidies, government and foundation
grants, tax deductible contributions or other financial resources not
available to proprietary institutions. Other proprietary institutions also
offer programs that compete with those of the Company. Moreover, there is an
increase in competition in the specific educational markets served by the
Company. For example, excluding PsyD programs offered by the Company, in the
1992 academic year there were 36 PsyD programs existing in the United States,
while in the 1997 academic year there were 54 PsyD programs in the United
States. Certain of the Company's competitors in both the public and private
sector have greater financial and other resources than the Company.
Employees
As of August 31, 1999, the Company employed 357 persons. Of this number, 36
were employed in the Company's corporate headquarters, 155 were full-time or
permanent part-time faculty members and 166 were working as administrative or
support staff deployed at the various Company locations. None of the Company's
employees are unionized. The Company believes its relations with its employees
are generally good.
FINANCIAL AID AND REGULATION
Accreditation
Accreditation is a non-governmental process through which an institution
voluntarily submits itself to qualitative review by an organization of peer
institutions. The three types of accrediting agencies are (i) national
accrediting agencies, which accredit institutions on the basis of the overall
nature of the institutions without regard to their locations, (ii) regional
accrediting agencies, which accredit institutions located within their
geographic areas, and (iii) programmatic accrediting agencies, which accredit
specific educational programs offered by an institution. Accrediting agencies
primarily examine the academic quality of the instructional programs of an
institution, and a grant of accreditation is generally viewed as certification
that an institution's programs meet generally accepted academic standards.
Accrediting agencies also review the administrative and financial operations
of the institutions they accredit to ensure that each institution has the
resources to perform its educational mission.
Pursuant to provisions of the HEA, the DOE relies in part on accrediting
agencies to determine whether institutions' educational programs qualify them
to participate in the Title IV Programs. The HEA specifies certain standards
that all recognized accrediting agencies must adopt in connection with their
review of postsecondary institutions. Accrediting agencies that meet the DOE
standards are recognized as reliable arbiters of educational quality. The HEA
requires each recognized accrediting agency to submit to a periodic review of
its procedures and practices by the DOE as a condition of its continued
recognition.
All of the Company's U.S. campuses are accredited by an accrediting agency
recognized by the DOE. These accrediting agencies are the North Central
Association of Colleges and Schools ("NCA"), the Southern Association of
Colleges and Schools ("SACS"), the Accrediting Bureau of Health Education
Schools/Programs
10
<PAGE>
("ABHES") and the American Psychological Association ("APA"). NCA, SACS and
ABHES are institutional accrediting bodies which accredit the entire
institution. The APA is a programmatic accrediting body which does not
accredit the entire institution, but only specific programs offered by the
institution. ASPP is institutionally accredited by NCA to offer both doctoral
and master's degrees at its campuses in Illinois, Minnesota, Georgia,
Virginia, Hawaii, Arizona, California and Florida. ASPP's Chicago,
Minneapolis, Atlanta, Hawaii and Rolling Meadows campuses also have
programmatic accreditation by the APA. U of S is institutionally accredited by
SACS to award doctoral, master's and bachelor's degrees in business, doctoral
and master's degrees in education and doctoral and master's degrees in
psychology. MIM is approved by the State of Minnesota to award associate
degrees in a variety of allied health fields, is institutionally accredited by
ABHES, a nationally recognized accreditor of allied health care institutions,
and additionally holds individual programmatic accreditation appropriate to
each degree program offered. The Company is seeking APA accreditation for
programs at its Florida and Virginia campuses. Although accreditation is not
currently required, failure to obtain such accreditation could adversely
affect state authorization of these campuses in future periods or the ability
of graduates of these campuses to obtain state licenses to practice. PrimeTech
is approved as a private vocational school in the Province of Ontario, Canada,
to award diplomas upon successful completion of the following main programs:
network engineering, internet engineering, software programming and paralegal
studies.
Each of the institutional accrediting agencies that accredits the Company's
campuses has standards pertaining to areas such as curricula, institutional
objectives, long-range planning, faculty, administration, admissions, record-
keeping, library resources, facilities, finances and student refunds, among
others. Certain institutional substantive changes, including changes of
ownership and the addition of new facilities and programs may require review
and approval from accrediting agencies. Institutions which apply for
accreditation typically receive a visiting team which reviews the
institution's compliance with these standards. Based on the team's report and
the institution's response, the accrediting agency grants or denies
accreditation. The accrediting agencies which accredit the institution's
campuses assess annual fees and require that institutions pay for the costs
associated with team visits and other substantive reviews of the institution
resulting from changes to the institution or its curricula. The Company
believes that it incurred costs of approximately $46,000 in fiscal 1999
directly related to accreditation.
The HEA requires accrediting agencies recognized by the DOE to review many
aspects of an institution's operations to ensure that the education or
training offered by the institution is of sufficient quality to achieve, for
the duration of the accreditation period, the stated objective for which the
education or training is offered. Under the HEA, a recognized accrediting
agency must perform regular inspections and reviews of institutions of higher
education. An accredited institution must meet or exceed an accrediting
agency's standards throughout its period of accreditation. An accrediting
agency may place an institution on probation or similar warning status or
direct the institution to show cause why its accreditation should not be
revoked if the accrediting agency believes an institution may be out of
compliance with accrediting standards. It may also place an institution on
"reporting" status in order to monitor one or more specified areas of the
institution's performance. An institution placed on reporting status is
required to report periodically to its accrediting agency on that
institution's performance in the specified areas. While on reporting status,
an institution may be required to seek the permission of its accrediting
agency to open and commence instruction at new locations. None of the
Company's schools are on probation, show cause or reporting status.
Student Financial Assistance
Students attending the Company's schools finance their education through a
combination of individual resources (including earnings from full or part-time
employment), government-sponsored financial aid and other sources, including
family contributions and scholarships provided by the Company. The Company
estimates that over 51% of the students at its U.S. schools receive some
government-sponsored (federal or state) financial aid. For fiscal 1999,
approximately 53% of the Company's net tuition revenue (on a cash basis) was
derived from some form of such government-sponsored financial aid received by
the students enrolled in its schools. In addition, approximately 70% of the
students attending PrimeTech receive Canadian government-sponsored financial
aid.
11
<PAGE>
To provide students access to financial assistance available through the
Title IV Programs, an institution, including its additional locations, must be
(i) authorized to offer its programs of instruction by the relevant agencies
of the state in which it and its additional campuses, if any, are located,
(ii) accredited by an accrediting agency recognized by the DOE and (iii)
certified as eligible by the DOE. In addition, the institution must ensure
that Title IV Program funds are properly accounted for and disbursed to
eligible students.
Under the HEA and its implementing regulations, each of the Company's
campuses that participates in the Title IV Programs must comply with certain
standards on an institutional basis, as more specifically identified below.
For purposes of these standards, the regulations define an institution as a
main campus and its additional locations, if any. Under this definition, each
of the Company's U.S. schools is a separate institution.
Nature of Federal Support for Postsecondary Education in the United States
While many states support public colleges and universities primarily
through direct state subsidies, the federal government provides a substantial
part of its support for postsecondary education in the form of grants and
loans to students who can use this support at any institution that has been
certified as eligible by the DOE. The Title IV Programs have provided aid to
students for more than 30 years, and, since the mid-1960's, the scope and size
of such programs have steadily increased. Since 1972, Congress has expanded
the scope of the HEA to provide for the needs of the changing national student
population by, among other things, (i) providing that students at proprietary
institutions, such as the Company's institutions, are eligible for assistance
under the Title IV Programs, (ii) establishing a program for loans to parents
of eligible students, (iii) opening the Title IV Programs to part-time
students and (iv) increasing maximum loan limits and in some cases eliminating
the requirement that students demonstrate financial need to obtain federally
guaranteed student loans. Most recently, the Federal Direct Loan program was
enacted, enabling students to obtain loans from the federal government rather
than from commercial lenders.
On October 1, 1998, legislation was enacted which reauthorized the student
financial assistance programs of the HEA. 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
permit an institution to avoid the interruption of eligibility for the Title
IV Programs upon a change of ownership which results in a change of control by
submitting a materially complete application for recertification of
eligibility within 10 business days of such a change of ownership. Regulations
concerning a school's calculation of refunds to students are scheduled to take
effect in October 2000, and regulations to implement the remaining portions of
the 1998 Amendments are scheduled to become effective on July 1, 2000. The
Company does not believe that the 1998 Amendments will adversely or materially
affect its business operations. None of the Company's institutions derives
more than 80% of its revenue from Title IV funds and no institution has
student loan default rates in excess of current thresholds. The Company also
believes that its current refund policy satisfies the new refund requirements.
Students at the Company's institutions receive grants, loans and work
opportunities to fund their education under several of the Title IV Programs,
of which the two largest are the FFEL program and the Federal Pell Grant
("Pell") program. Some of the Company's institutions participate in the
Perkins program and the Federal Work-Study ("FWS") program. In addition, the
Company's institutions are eligible to participate in the Federal Supplemental
Educational Opportunity Grant ("FSEOG") program.
Most aid under the Title IV Programs is awarded on the basis of financial
need, generally defined under the HEA as the difference between the cost of
attending an educational program and the amount a student can reasonably
contribute to that cost. All recipients of Title IV Program funds must
maintain a satisfactory grade point average and progress in a timely manner
toward completion of their program of study.
12
<PAGE>
Pell. Pell grants are the primary component of the Title IV Programs under
which the DOE makes grants to students who demonstrate financial need. Every
eligible student is entitled to receive a Pell grant; there is no
institutional allocation or limit, although there is a limit for each eligible
student, depending on need. For the 1998 federal fiscal year, the maximum
individual Pell grant was $3,000; for the 1999 federal fiscal year, the
maximum was $3,125. For the 2000, federal fiscal year, the maximum Pell grant
increased to $3,300.
FSEOG. FSEOG awards are designed to supplement Pell grants for the neediest
students. FSEOG grants generally range in amount from $100 to $4,000 per year;
however, the availability of FSEOG awards is limited by the amount of funds
allocated to an institution under a formula that takes into account the size
of the institution, its costs and the income levels of its students. The
Company is required to make a 25% matching contribution for all FSEOG program
funds disbursed. Resources for this institutional contribution may include
institutional grants, scholarships and other eligible funds (i.e., funds from
foundations and other charitable organizations) and, in certain states,
portions of state scholarships and grants. At this time, only MIM participates
in the FSEOG program.
FFEL. The FFEL program consists of two types of loans, Stafford loans,
which are made available to students, and PLUS loans, which are made available
to parents of students classified as dependents. Under the Stafford loan
program, a student may borrow up to $2,625 for the first academic year, $3,500
for the second academic year and, in some educational programs, $5,500 for
each of the third and fourth academic years. Graduate and professional
students may borrow up to $8,500 per academic year. Students with financial
need may qualify for interest subsidies while in school and during grace
periods. Students who are classified as independent can increase their
borrowing limits and receive additional unsubsidized Stafford loans. Such
students can obtain up to an additional $4,000 for each of the first and
second academic years and, depending upon the educational program, an
additional $5,000 for each of the third and fourth academic years. Graduate
and professional students may borrow up to an additional $10,000 per academic
year. The obligation to begin repaying Stafford loans does not commence until
six months after a student ceases to be enrolled on at least a half-time
basis. Amounts received by students in the Company's institutions under the
Stafford program in fiscal 1999 equaled approximately 45% of the Company's net
tuition revenue (on a cash basis). Under the PLUS loan program, the parents of
a dependent student may obtain a loan in an amount not to exceed the
difference between the total cost of that student's education (including
allowable expenses) and other aid to which that student is entitled. At this
time, none of the Company's institutions participates in the PLUS program.
The Company's schools and their students use a wide variety of lenders and
guaranty agencies and have not experienced difficulties in identifying lenders
and guaranty agencies willing to make federal student loans. The HEA requires
the establishment of lenders of last resort in every state to ensure that
students at any institution that cannot identify such lenders will have access
to the FFEL program loans.
Perkins. Eligible undergraduate students may borrow up to $3,000 under the
Perkins loan program during each academic year, with an aggregate maximum of
$15,000, at a 5% interest rate and with repayment delayed until nine months
after the borrower ceases to be enrolled on at least a half-time basis.
Perkins loans are made available to those students who demonstrate the
greatest financial need. Perkins loans are made from a revolving account, 75%
of which was initially capitalized by the DOE. Subsequent federal capital
contributions, with an institutional match in the same proportion, may be
received if an institution meets certain requirements. Each institution
collects payments on Perkins loans from its former students and loans those
funds to currently enrolled students. Collection and disbursement of Perkins
loans is the responsibility of each participating institution. During the
1998-99 award year, the Company collected approximately $36,600 from its
former students in repayment of Perkins loans. In the 1998-99 award year, the
Company's required matching contribution was approximately $7,600. The Perkins
loans disbursed to students in the Company's institutions in the 1998-99 award
year represented less than 1% of the Company's net U.S. tuition revenue.
FWS. Under the FWS program, federal funds are made available to pay up to
75% of the cost of part-time employment of eligible students, based on their
financial need, to perform work for the institution or for off-campus public
or non-profit organizations. During the 1998-99 award year, the Company's
institutions and other
13
<PAGE>
organizations provided matching contributions totaling approximately $80,600.
At least 5% of an institution's FWS allocation must be used to fund student
employment in community service positions. FWS earnings are not used for
tuition and fees. However, in the 1998-99 award year, the federal share of FWS
earnings represented less than 1% of the Company's net U.S. tuition revenue.
Federal Oversight of the Title IV Programs
The substantial amount of federal funds disbursed through the Title IV
Programs coupled with the large numbers of students and institutions
participating in those programs have led to an increased level of DOE
regulatory oversight of institutions. If an institution's cohort default rate
(the percentage of its students or former students who default on their
student loans within approximately 18 months of being required to commence
repayment) exceeds 25 percent for three consecutive federal fiscal years, the
institution, with limited exceptions, becomes ineligible to participate in the
Title IV Programs. Each institution which participates in the Title IV
Programs must annually submit to the DOE an audit by an independent accounting
firm of that institution's compliance with Title IV Program requirements, as
well as audited financial statements. The DOE also conducts compliance
reviews, which include on-site evaluations of several hundred institutions
each year, and directs student loan guaranty agencies to conduct additional
reviews relating to the FFEL programs. In addition, the Office of the
Inspector General of the DOE conducts audits and investigations of
institutions in certain circumstances. Under the HEA, accrediting agencies and
state licensing agencies also have responsibilities for overseeing
institutions' compliance with Title IV Program requirements. As a result, each
participating institution, including each of the Company's institutions, is
subject to frequent and detailed oversight and must comply with a complex
framework of laws and regulations or risk being required to repay funds, to
pay civil penalties, or be declared ineligible to participate in the Title IV
Programs. In addition, because the DOE periodically revises its regulations
(e.g., in November 1997, the DOE published new regulations with respect to
financial responsibility standards which took effect July 1, 1998) and changes
its interpretation of existing laws and regulations, there can be no assurance
that the DOE will agree with the Company's understanding of each Title IV
Program requirement.
Largely as a result of this increased oversight, the DOE has reported that
1,500 institutions have either ceased to be eligible for or have voluntarily
relinquished their participation in some or all of the Title IV Programs since
October 1, 1992. This has reduced competition among institutions with respect
to certain markets and educational programs.
Cohort Default Rates. A significant component of the increased regulatory
oversight has been the imposition of limitations on participation in the Title
IV Programs by institutions whose former students defaulted on the repayment
of federally guaranteed or funded student loans at an "excessive" rate. Since
the DOE began to impose sanctions on institutions with cohort default rates
above certain levels, the DOE has reported that over 1,000 institutions have
lost their eligibility to participate in some or all of the Title IV Programs.
However, many institutions, including all of the Company's institutions, have
responded by implementing aggressive student loan default management programs
aimed at reducing the likelihood of students failing to repay their loans in a
timely manner. An institution's cohort default rates under the FFEL programs
are calculated on an annual basis as the rate at which student borrowers
scheduled to begin repayment on their loans in one federal fiscal year default
on those loans by the end of the next federal fiscal year. Any institution
whose cohort default rate equals or exceeds 25% for any one of the three most
recent federal fiscal years may be found by the DOE to lack administrative
capability and, on that basis, placed on provisional certification status for
up to three years. Provisional certification status does not limit an
institution's access to Title IV Program funds but does subject that
institution to closer review by the DOE and possible summary adverse action if
that institution commits violations of Title IV Program requirements. Any
institution whose cohort default rates equal or exceed 25% for three
consecutive years will no longer be eligible to participate in the FFEL
programs for the remainder of the federal fiscal year in which the DOE
determines that such institution has lost its eligibility and for the two
subsequent federal fiscal years. In addition, an institution whose cohort
default rate for any federal fiscal year exceeds 40% may have its eligibility
to participate in all of the Title IV Programs limited, suspended or
terminated. Since the calculation of cohort default rates involves the
collection of data from many non-governmental agencies (i.e., lenders, private
14
<PAGE>
guarantors or services), as well as the DOE, the HEA provides a formal process
for the review and appeal of the accuracy of cohort default rates before the
DOE takes any action against an institution based on such rates. In addition
to the foregoing, if an institution's cohort default rate for loans under the
Perkins program exceeds 15% for any federal award year (i.e., July 1 through
June 30), that institution may be placed on provisional certification status
for up to three years. Furthermore, as a result of the 1998 Amendments to the
HEA, institutions that are ineligible to participate in the Title IV loan
program due to student loan default rates will also become ineligible to
participate in the Pell Grant Program.
None of the Company's institutions has had a published FFEL or Perkins
cohort default rate of 15% or greater for any of the past three federal fiscal
years. The Company's overall average cohort default rates for fiscal 1993,
1994 and 1995 were 0.4%, 2.9% and 7.9%, respectively. The average cohort
default rates for proprietary institutions nationally for federal fiscal years
1993, 1994 and 1995 were 23.9%, 21.1% and 19.9%, respectively. The Company's
overall average cohort default rate for fiscal 1996 was 4.6%.
Financial Responsibility Standards. All institutions participating in the
Title IV Programs must satisfy a series of specific standards of financial
responsibility. Institutions are evaluated for compliance with those
requirements in several circumstances, including as part of the DOE's
recertification process, on an annual basis as each institution submits its
audited financial statements to the DOE, and in connection with a change of
ownership resulting in a change of control of an institution. Under standards
in effect prior to July 1, 1998, (and still in effect with respect to
financial review upon a change in ownership), each institution's audited
balance sheet must demonstrate an acid test ratio (defined as the ratio of
cash, cash equivalents and current accounts receivable to current liabilities)
of at least 1:1 at the end of each fiscal year. Another standard requires that
each institution have a positive tangible net worth at the end of each fiscal
year. A third standard prohibits any institution from having a cumulative net
operating loss during its two most recent fiscal years that results in a
decline of more than 10% of that institution's tangible net worth as measured
at the beginning of that two-year period. The DOE measures an institution's
compliance with the financial responsibility standards on the basis of the
audited financial statements of the institution itself, but it may request the
financial statements of the institution's parent company or other related
entities in performing its financial responsibility review.
An institution that is determined by the DOE not to meet any one of the
standards of financial responsibility is nonetheless entitled to participate
in the Title IV Programs if it can demonstrate to the DOE that it is
financially responsible on an alternative basis. An institution may do so by
posting surety either in an amount equal to 50% (or greater, as the DOE may
require) of total Title IV Program funds received by students enrolled at such
institution during the prior year or in an amount equal to 10% (or greater, as
the DOE may require) of such prior year's funds if the institution also agrees
to provisional certification and to transfer to the reimbursement or cash
monitoring system of payment for its Title IV Program funds. The DOE has
interpreted this surety condition to require the posting of an irrevocable
letter of credit in favor of the DOE. Alternatively, an institution may
demonstrate, with the support of a statement from a certified public
accountant and other information specified in the regulations, that it was
previously in compliance with the numeric standards and that its continued
operation is not jeopardized by its financial condition. Under a separate
standard of financial responsibility, if an institution has made late Title IV
Program refunds to students in its prior two years, the institution is
required to post a letter of credit in favor of the DOE in an amount equal to
25% of total Title IV Program refunds paid by the institution in its prior
fiscal year.
In November 1997, the DOE issued new regulations, which took effect July 1,
1998 and revised the DOE's standards of financial responsibility as applied to
an institution's annual audited financial statements. These new standards
replace the numeric tests described above with three ratios: an equity ratio,
a primary reserve ratio and a net income ratio, which are weighted and added
together to produce a composite score for the institution. Institutions such
as the Company have the choice of meeting the new standards or the old
standards for fiscal years that began on or after July 1, 1997, but before
June 30, 1998.
15
<PAGE>
Under the new standards, an institution need only satisfy a composite score
standard. The ratio methodology of these standards takes into account an
institution's total financial resources and determines a combined score of the
measures of those resources along a common scale (from negative 1.0 to
positive 3.0). It allows a relative strength in one measure to mitigate a
relative weakness in another measure.
If an institution achieves a composite score of at least 1.5, it is
financially responsible without further oversight. If an institution achieves
a composite score from 1.0 to 1.4, it is in the "zone" and is subject to
additional monitoring, but may continue to participate as a financially
responsible institution, for up to three years. Additional monitoring may
require the school to (i) notify the DOE, within 10 days of certain changes,
such as an adverse accrediting action; (ii) file its financial statements
earlier than the six month requirement following the close of the fiscal year;
and (iii) subject the school to a cash monitoring payment method. If an
institution has a composite score below 1.0, it fails to meet the financial
responsibility standards unless it qualifies under an alternative standard
(i.e., (i) a letter of credit equal to 50% of the Title IV Program funds
expended from the prior fiscal year or (ii) a letter of credit equal to at
least 10% of the Title IV Program funds expended from the prior fiscal year
plus provisional certification status and either or the reimbursement payment
of Title IV funds or heightened cash monitoring).
The Company has applied these new regulations to its financial statements
as of August 31, 1999, the end of the Company's most recently completed fiscal
year, and has determined that the Company and each of its institutions
satisfied the new standards as of that date.
Restrictions on Acquiring or Opening Additional Schools and Adding
Educational Programs. An institution which undergoes a change of ownership
resulting in a change in control must be reviewed and recertified for
participation in the Title IV Programs under its new ownership. Pending
recertification, the DOE suspends Title IV Program funding to that
institution's students, except for certain Title IV Program funds that were
committed under the prior owner, although such suspension can be avoided if
the institution submits a materially complete application for approval within
ten business days of closing on the transaction. If an institution is
recertified following a change of ownership, it may be on a provisional basis.
During the time an institution is provisionally certified, it may be subject
to closer review by the DOE and to summary adverse action for violations of
Title IV Program requirements, but provisional certification does not
otherwise limit an institution's access to Title IV Program funds.
In addition, the HEA generally requires that proprietary institutions be
fully operational for two years before applying to participate in the Title IV
Programs. However, under the HEA and applicable regulations, an institution
that is certified to participate in the Title IV Programs may establish an
additional location and apply to participate in the Title IV Programs at that
location without reference to the two-year requirement, if such additional
location satisfies all other applicable eligibility requirements, including
that the additional location be approved by the institution's accrediting
agency and by the appropriate government licensing agency in the state where
the additional location is located. The Company's expansion plans are based,
in large part, on its ability to acquire schools that can be recertified and
to open additional locations as part of its existing institutions. The Company
believes that its ability to open additional locations as part of existing
institutions is the most feasible means of expansion, because its existing
institutions are currently certified as eligible to participate in Title IV
Programs and students enrolled at the new additional locations will have more
ready access to Title IV Program funds.
Generally, if an institution eligible to participate in the Title IV
Programs adds an educational program after it has been designated as an
eligible institution, the institution must apply to the DOE to have the
additional program designated as eligible. However, an institution is not
obligated to obtain DOE approval of an additional program that leads to a
professional, graduate, bachelor's or associate degree or which prepares
students for gainful employment in the same or related recognized occupation
as an educational program that has previously been designated as an eligible
program at that institution and meets certain minimum length requirements.
Furthermore, short-term educational programs, which generally consist of those
programs that provide at least 300 but less than 600 clock hours of
instruction, are eligible only for FFEL funding and only if they have been
16
<PAGE>
offered for a year and the institution can demonstrate, based on an
attestation by its independent auditor, that 70% of all students who enroll in
such programs complete them within a prescribed time and 70% of those students
who graduate from such programs obtain employment in the recognized occupation
for which they were trained within a prescribed time. In the event that an
institution erroneously determines that an educational program is eligible for
purposes of the Title IV Programs without the DOE's express approval, the
institution would likely be liable for repayment of Title IV Program funds
provided to students in that educational program. The Company does not believe
that the DOE's regulations will create significant obstacles to its plans to
add new programs because any new programs offered by its campuses will lead to
professional, graduate, bachelor's or associate degrees or prepare students
for gainful employment in the same or related recognized occupation as
education programs which were previously offered by the Company's campuses.
Certain of the state authorizing agencies, the Ontario Student Assistance
Plan ("OSAP"), and accrediting agencies with jurisdiction over the Company's
campuses also have requirements that may, in certain instances, limit the
ability of the Company to open a new campus, acquire an existing campus,
establish an additional location of an existing institution or begin offering
a new educational program. The Company does not believe that such standards
will have a material adverse effect on the Company or its expansion plans,
because the standards for approval of new programs or expanding institutions
are generally no more stringent than the standards applied by the states, OSAP
and accrediting agencies in originally granting accreditation and licensure to
the campuses. Compliance with state and OSAP standards generally requires
notification of the proposed change and, in some states, approval by the
accrediting agency. Based on its current practice of meeting or exceeding both
state and accrediting agency standards, the Company believes that it will be
able to obtain any accreditation or state approvals to initiate new programs
or expand its campuses. If the Company were unable to meet those standards,
its ability to add programs or expand its campuses would be materially
adversely affected.
The "85/15 Rule." Under a provision of the HEA commonly referred to as the
"85/15 Rule," a proprietary institution, such as each of the Company's U.S.
institutions, would cease being eligible to participate in the Title IV
Programs if, on a cash accounting basis, more than 85% of its net revenues for
the prior fiscal year was derived from the Title IV Programs. As discussed
above, Congress recently amended the 85/15 Rule to a 90/10 Rule in the 1998
Amendments to the HEA. Any institution that violates this rule immediately
becomes ineligible to participate in the Title IV Programs and is unable to
apply to regain its eligibility until the following fiscal year. The Company
has calculated that, since this requirement took effect in 1995, none of the
Company's U.S. institutions derived more than 80% of its net revenue (on a
cash basis) from the Title IV Programs for any award year, and that for fiscal
1999 the range for the Company's U.S. institutions was from approximately 43%
to approximately 69%. For 1998, the independent auditors of the Company or the
institution, if applicable, examined management's assertion that each of the
Company's U.S. institutions complied with these requirements and opined that
such assertion was fairly stated in all material respects. The Company
regularly monitors compliance with this requirement in order to minimize the
risk that any of its U.S. institutions would derive more than the maximum
allowed percentage of its revenue from the Title IV Programs for any fiscal
year. If an institution appears likely to approach the maximum percentage
threshold, the Company would evaluate the appropriateness of making changes in
student funding and financing to ensure compliance with the Rule.
Restrictions on Payment of Bonuses, Commissions or Other Incentives. The
HEA prohibits an institution from providing any commission, bonus or other
incentive payment based directly or indirectly on success in securing
enrollments or financial aid to any person or entity engaged in any student
recruitment, admission or financial aid awarding activity for programs
eligible for Title IV Program funds. The Company believes that its current
compensation plans are in compliance with HEA standards.
State Authorization in the United States
Each of the Company's campuses is authorized to offer educational programs
and grant degrees or diplomas by the state in which such campus is located.
The level of regulatory oversight varies substantially from state to state. In
some states, the campuses are subject to licensure by the state education
agency and also by a separate higher education agency. State laws establish
standards for instruction, qualifications of faculty, location and
17
<PAGE>
nature of facilities, financial policies and responsibility and other
operational matters. State laws and regulations may limit the ability of the
Company to obtain authorization to operate in certain states, to award degrees
or diplomas or offer new degree programs. Certain states prescribe standards
of financial responsibility that are different from those prescribed by the
DOE. The Company believes that each of its campuses is in substantial
compliance with state authorizing and licensure laws. Program approval for the
Company's doctor of clinical psychology program in the State of Virginia
recently expired, and an application to extend the approval is pending.
The Company derived 23.2% and 20.4% of its fiscal 1999 revenues from its
operations in Illinois and Minnesota, respectively. The Illinois Board of
Higher Education, the entity which authorizes the Illinois ASPP campuses to
offer degrees, and the Minnesota Higher Education Services Office, the entity
which authorizes the MIM and Minnesota ASPP campus to offer degrees, regulate
all non-public degree granting institutions within the corresponding states.
The Boards require ASPP and MIM to demonstrate compliance with regulations in
areas such as admissions, curriculum, facilities, equipment, instructional
materials, qualifications of school personnel, fiscal resources, tuition and
refund policy, record-keeping and recruitment. The Company believes its
campuses are fully authorized to offer degrees in the states of Illinois and
Minnesota. No other state accounted for 20% or more of the Company's revenue
in fiscal 1999.
Canadian Regulation
The Ontario Ministry of Education and Training ("OMET") provides financial
assistance to eligible students through OSAP, which includes two main
components, the CSL program and the Ontario Student Loans Program ("OSLP")
program. To maintain its right to administer OSAP, an institution, such as the
PrimeTech campuses in Toronto, must, among other things, be registered and in
good standing under the PVSA and abide by the rules, regulations and
administrative manuals of the CSL, OSLP and other OSAP-related programs. In
order to attain initial eligibility, an institution must establish, among
other things, that it has been in good standing under the PVSA for at least 12
months, that it has offered an eligible program for at least 12 months and
that it has graduated at least one class in an eligible program that satisfies
specific requirements with respect to class size and graduation rate. In
addition, the institution must offer full-time programs at the postsecondary
level, award a diploma or certificate upon successful completion of the
program, have minimum admission requirements for entering students, require
students to participate fully in their studies, monitor students' progress and
maintain academic records, and advise OMET before taking any action that could
result in its failing to meet OMET's requirements. When applying for initial
eligibility an institution must also file with OMET a request for OSAP
designation with a description of the procedures to be implemented to
administer the OSAP financial aid office. During the first two years of
initial eligibility, the institution must have its administration of OSAP
independently audited, and full eligibility will not be granted unless these
audits establish that the institution has properly administered OSAP. The
institution can only administer CSL funds, and cannot administer OSLP funds,
until it has gained full eligibility. Once an institution has gained OSAP
eligibility, the institution must advise OMET before it takes any material
action that may result in its failure or inability to meet any rules,
regulations or requirements related to OSAP. Both of the Company's Canadian
campuses are fully eligible to administer CSL and OSLP Funds.
In order for an OSAP-eligible institution to establish a new branch of an
existing eligible institution, it must obtain an OSAP-designation from OMET,
either as a separate institution if the branch administers OSAP without the
involvement of the main campus, or as part of the same institution, if OSAP is
administered through the main campus of the institution. The Company does not
believe that OSAP's requirements will create significant obstacles to its
plans to acquire additional institutions or open new branches in Ontario.
Institutions participating in OSAP, such as the PrimeTech campuses in
Toronto, cannot submit applications for loans to students enrolled in
educational programs that have not been designated as OSAP-eligible by OMET.
To be eligible, among other things, a program must be registered with the
Private Vocational Schools Unit, must be of a certain minimum length and must
lead to a diploma or certificate. Each of the PrimeTech educational programs
has been designated OSAP eligible by OMET and the Company does not anticipate
that these program approval requirements will create significant problems with
respect to its plans to add new educational programs.
18
<PAGE>
An institution cannot automatically acquire OSAP-designation through
acquisition of other OSAP-eligible institutions. When there is a change of
ownership, including a change in controlling interest, in a non-incorporated
OSAP-eligible institution, OMET will require evidence of the institution's
continued capacity to properly administer the program before extending OSAP
designation to the new owner. Under OSAP regulations, a change or
reorganization which significantly affects the institution's administration of
OSAP funds such that the institution's prior record of administering such
funds is no longer relevant results in the OMET considering the institution to
be a new institution. Given that OMET periodically revises its regulations and
other requirements and changes its interpretations of existing laws and
regulations, there can be no assurance that OMET will agree with the Company's
understanding of each OMET requirement.
PrimeTech is required to audit its OSAP administration annually, and OMET
is authorized to conduct its own audits of the administration of the OSAP
programs by any OSAP-eligible institution. The Company has complied with these
requirements on a timely basis. Based on its most recent annual compliance
audits, PrimeTech has been found to be in substantial compliance with the
requirements of OSAP, and the Company believes that it continues to be in
substantial compliance with these requirements. OMET has the authority to take
any measures it deems necessary to protect the integrity of the administration
of OSAP. If OMET deems a failure to comply to be minor, OMET will advise the
institution of the deficiency and provide the institution with the opportunity
to remedy the asserted deficiency. If OMET deems the failure to comply to be
serious in nature, OMET has the authority to: (i) condition the institution's
continued OSAP designation upon the institution's meeting specific
requirements during a specific time frame; (ii) refuse to extend the
institution's OSAP eligibility to the OSLP program; (iii) suspend the
institution's OSAP designation; or (iv) revoke the institution's OSAP
designation. In addition, when OMET determines that any non-compliance in an
institution's OSAP administration is serious, OMET has the authority to
contract with an independent auditor, at the expense of the institution, to
conduct a full audit in order to quantify the deficiencies and to require
repayment of all loan amounts. In addition, OMET may impose a penalty up to
the amount of the damages assessed in the independent audit.
As noted above, PrimeTech is subject to the PVSA. The Company may not
operate a private vocational school in the province of Ontario unless such
school is registered under the PVSA. Upon payment of the prescribed fee and
satisfaction of the conditions prescribed by the regulations under the PVSA
and by the Private Vocational Schools Unit of the OMET, an applicant or
registrant such as PrimeTech is entitled to registration or renewal of
registration to conduct or operate a private vocational school unless: (1) it
cannot reasonably be expected to be financially responsible in the conduct of
the private vocational school; (2) the past conduct of the officers or
directors provides reasonable grounds for belief that the operations of the
campus will not be carried on in accordance with relevant law and with
integrity and honesty; (3) it can reasonably be expected that the course or
courses of study or the method of training offered by the private vocational
school will not provide the skill and knowledge requisite for employment in
the vocation or vocations for which the applicant or registrant is offering
instruction; or (4) the applicant is carrying on activities that are, or will
be, if the applicant is registered, in contravention of the PVSA or the
regulations under the PVSA. An applicant for registration to conduct or
operate a private vocational school is required to submit with the application
a bond in an amount determined in accordance with the regulations under the
PVSA. PrimeTech is currently registered under the PVSA at both of its
buildings, and the Company does not believe that there will be any impediment
to renewal of such registrations on an annual basis.
The PVSA provides that a "registration" is not transferable. However, the
Private Vocational Schools Unit of OMET takes the position that a purchase of
shares of a private vocational school does not invalidate the school's
registration under the PVSA. The Company does not believe that the Offering
will invalidate the registration of PrimeTech.
If a corporation is convicted of violating the PVSA or the regulations
under the PVSA, the maximum penalty that may be imposed on the corporation is
$25,000.
19
<PAGE>
The legislative, regulatory and other requirements relating to student
financial assistance programs in Ontario are subject to change by applicable
governments due to political and budgetary pressures, and any such change may
affect the eligibility for student financial assistance of the students
attending PrimeTech, which, in turn, could materially adversely affect the
Company's business, results of operations or financial condition.
ITEM 2. PROPERTIES
Our corporate headquarters are located in Chicago, Illinois, and our 17
campuses are located in 9 states and one Canadian province. Each campus
contains teaching facilities, including modern classrooms. Admissions and
administrative offices are also located at each campus.
We lease all of our facilities, except the primary University of Sarasota
facility in Sarasota, Florida, which we own. As of August 31, 1999 we owned
approximately 42,000 square feet and leased approximately 259,000 square feet.
The leases have remaining terms ranging from two years to ten years.
We actively monitor facility capacity in light of our current utilization
and projected enrollment growth. We believe that our schools can acquire any
necessary additional capacity on reasonably acceptable terms. We devote
capital resources to facility improvements and expansions as necessary.
The following table sets forth certain information as of August 31, 1999
with respect to the principal properties of the Company and its subsidiaries.
The Company believes that its facilities are in substantial compliance with
applicable environmental laws and with the Americans With Disabilities Act.
<TABLE>
<CAPTION>
Campus Square Footage
------ --------------
<S> <C>
American Schools of Professional Psychology
Illinois School of Professional Psychology/Chicago........ 37,831
Illinois School of Professional Psychology/Meadows........ 10,469
Minnesota School of Professional Psychology............... 9,457
Georgia School of Professional Psychology................. 13,274
American School of Professional Psychology/Virginia....... 13,437
American School of Professional Psychology/Hawaii......... 6,596
Arizona School of Professional Psychology................. 13,399
Florida School of Professional Psychology................. 6,632
American School of Professional Psychology/San Francisco
Bay Area................................................. 10,226
Washington School of Professional Psychology.............. 10,273
University of Sarasota
University of Sarasota/Honore Campus...................... 22,152
University of Sarasota/Tampa Campus....................... 6,632
University of Sarasota/Orange Campus...................... 10,829
Medical Institute of Minnesota............................ 62,300
PrimeTech Institute
PrimeTech Institute/North York............................ 9,199
PrimeTech Institute/City Campus........................... 8,681
PrimeTech Institute/Scarborough........................... 13,289
Ventura................................................... 15,540
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
The Company, Dr. Markovitz and certain other companies in which Dr.
Markovitz has an interest have 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 currently pending in the United States District Court for
the Northern District of Illinois,
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<PAGE>
Eastern Division. No specific amount of damages is sought by the plaintiffs.
This lawsuit arose in connection with the closing of a for-profit psychiatric
hospital located in Chicago, which was established in 1989 by Dr. Markovitz
and operated under the name University Hospital ("University Hospital").
University Hospital was substantially dependent on Medicare reimbursement for
its revenues. In May 1997, after continued Medicare reimbursement to
University Hospital was effectively terminated, University Hospital ceased
operations and made an assignment for the benefit of its creditors, which is
ongoing. The Company owned a 95% equity interest in University Hospital at the
time of the assignment for the benefit of its creditors.
The plaintiffs in the lawsuit, former employees of University Hospital,
allege that (i) the hospital was closed without proper notice to employees in
violation of the Worker Adjustment and Retraining Notification Act; (ii)
employee contributions to the hospital's profit sharing plan made prior to the
hospital closing were not delivered to the plan in violation of the Employee
Retirement Income Security Act of 1974; (iii) the hospital failed to pay the
final compensation due its employees prior to the hospital closing in
violation of the Illinois Wage Payment and Collection Act; and (iv) the
defendants converted for their own use and benefit the amount of the
plaintiffs' last paycheck, accrued vacation, profit sharing contributions and
credit union contributions. The Company and Dr. Markovitz have been named as
defendants in this lawsuit based upon an allegation that they are alter egos
of University Hospital.
The Company, Dr. Markovitz and the other defendants in this lawsuit deny
all claims asserted and are vigorously defending themselves. The cost of
defense has not been borne by the Company. Dr. Markovitz has entered into an
indemnification agreement with the Company providing that the cost of the
defense and any settlement amounts or damage awards will be paid by Dr.
Markovitz. The Company believes that the potential loss, as it relates to this
matter, is not probable and that an estimate of the potential settlement
amounts or damage awards cannot be made at this time. However, the Company
does not expect the ultimate outcome of this matter to have a material adverse
effect on its results of operations or financial condition.
The Company is not party to any other legal proceedings that it believes
would, individually or in the aggregate, have a material adverse effect on its
results of operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the
fourth quarter of 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Class "A"Common Stock has been quoted on the Nasdaq National Market
(the "National Market") under the symbol "ARGY" since March 9, 1999.
The following table sets forth the range of high and low sales prices per
share for our Class "A" Common Stock as reported on The Nasdaq National
Market, where the stock trades under the symbol "ARGY," for the periods
indicated. The initial public offering price of our Class "A" Common Stock on
March 8, 1999 was $14.00 per share.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
1998-1999:
Third Quarter (from March 8, 1999)......................... 14.375 6.625
Fourth Quarter............................................. 9.000 6.125
1999-2000
First Quarter (through November 23, 1999).................. 9.000 3.531
</TABLE>
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<PAGE>
The closing price of our Class "A" Common Stock as reported on the National
Market on November 23, 1999 was $4.4375 per share. As of November 23, 1999,
there were 5 holders of record of our Common Stock.
DIVIDEND POLICY
The Company intends to retain future earnings to finance its growth and
development and therefore does not anticipate paying any cash dividends in the
foreseeable future, other than the Distribution. See "The Company." Payment of
future dividends, if any, will be at the discretion of the Board after taking
into account various factors, including the Company's financial condition,
operating results, current and anticipated cash needs and plans for expansion.
In addition, if the Company is required to satisfy DOE financial
responsibility standards on a consolidated basis, the Company may need to
restrict or withhold payment of dividends or refrain from obtaining dividends
or other funds from its subsidiaries in order to meet DOE standards.
22
<PAGE>
ITEM 6. SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following selected historical consolidated financial and other data are
qualified by reference to, and should be read in conjunction with, our
consolidated financial statements and the related notes thereto appearing
elsewhere herein and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Our selected statement of operations
data set forth below for the years ended August 31, 1999, 1998, 1997, 1996 and
the eleven months ended August 31, 1995 and the balance sheet data as of
August 31, 1999, 1998, 1997, 1996 and 1995 are derived from our audited
consolidated financial statements.
<TABLE>
<CAPTION>
Eleven
Months
Year Ended August 31, Ended,
1999 1998 1997 1996 August 31, 1995(1)
------- ------- ------- ------- -------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenue............. $36,866 $29,352 $20,460 $17,840 $ 14,041
Operating expenses:
Cost of education..... 18,489 15,075 10,661 9,370 7,251
Selling expenses...... 1,616 1,102 516 263 325
General and
administrative
expenses............. 11,588 9,104 5,432 5,174 3,763
Related party general
and administrative
Expense (2).......... 668 2,271 993 1,710 1,244
------- ------- ------- ------- --------
Total operating
expenses........... 32,361 27,552 17,602 16,517 12,583
------- ------- ------- ------- --------
Income from operations.. 4,505 1,800 2,858 1,323 1,458
Interest income......... 695 357 497 304 123
Interest expense........ (567) (601) (107) (55) (1)
Other income (expense),
net.................... (6) (12) (48) 21 --
------- ------- ------- ------- --------
Income before provision
for income taxes as
reported............... 4,627 1,544 3,200 1,593 1,580
Provision for income
taxes.................. 44 29 37 30 30
------- ------- ------- ------- --------
Net income.............. $ 4,583 $ 1,515 $ 3,163 $ 1,563 $ 1,550
======= ======= ======= ======= ========
Earning per share basic
and diluted............ $ 0.78 $ 0.31 $ 0.65 $ 0.32 $ 0.32
======= ======= ======= ======= ========
Other Data:
EBITDA (3).............. $ 5,910 $ 2,738 $ 3,296 $ 1,722 $ 1,748
EBITDA margin (3)....... 16.0% 9.3% 16.1% 9.7% 12.4%
Cash flows from:
Operating activities.. $ 3,713 $ 2,582 $ 3,908 $ 2,736 $ 1,638
Investing activities.. (5,438) (226) (9,123) (392) (2,531)
Financing activities.. 8,008 (3,853) 5,193 (124) 371
Capital expenditures,
net.................... 1,889 597 341 404 195
Student population (4).. 4,542 4,514 3,253 2,858 2,644
Number of campuses (5).. 17 10 8 8 7
<CAPTION>
As of August 31,
----------------------------------
1999 1998 1997 1996 1995(1)
------- ------- ------- ------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance sheet data:
Cash, cash equivalents
and short-term
investments............ $15,007 $ 3,843 $ 6,728 $ 5,384 $ 3,596
Working capital......... 12,817 2,459 4,412 3,316 1,848
Total assets............ 34,319 23,475 17,580 8,336 6,452
Long-term debt
(excluding current
maturities)............ 2,998 5,165 6,354 243 292
Shareholder's equity.... 25,604 8,922 7,448 5,236 3,830
</TABLE>
23
<PAGE>
- --------
(1) Prior to fiscal 1995, the Company's fiscal year end was September 30.
During fiscal 1995, the Company changed its year end to August 31. Fiscal
1995 represents the Company's results of operations for the eleven months
ended August 31, 1995. All fiscal years subsequent to 1995 represent the
twelve months ended August 31 of the year indicated.
(2) Represents amounts paid to Management Corp., an affiliate of Dr.
Markovitz, for services rendered by Dr. Markovitz during the period
presented. Dr. Markovitz is the sole shareholder and employee of
Management Corp. Prior to the initial public offering, Dr. Markovitz did
not receive any compensation for services rendered to the Company, other
than through this management fee. Through Management Corp., Dr. Markovitz
provided services characteristic of a principal executive officer,
including strategic direction and oversight for the Company, daily
management oversight, consultation on business acquisitions and other
corporate business matters. Upon completion of the offering, the
relationship with Management Corp. was terminated, and Dr. Markovitz has
become an employee of the Company. Dr. Markovitz has entered into an
employment agreement that provides for an initial annual base salary of
$200,000 plus performance-based compensation, which is currently expected
to be paid in the form of stock options. Although this represents a
significant change in the way Dr. Markovitz is compensated for the
services he provides to the Company, the nature of the services provided
by Dr. Markovitz will not change. The Company has not required additional
services (beyond those to be rendered by Dr. Markovitz under his
employment agreement) or incurred additional costs (beyond the
compensation payable to Dr. Markovitz under his employment agreement)
because of the termination of its relationship with Management Corp.
(3) "EBITDA" equals income from operations plus depreciation and amortization.
EBITDA margin is EBITDA as a percentage of net revenue. EBITDA and EBITDA
margin are presented because such data is used by certain investors to
assess liquidity and ability to generate cash. The Company considers
EBITDA to be an indicative measure of the Company's operating performance
because EBITDA can be used to measure the Company's ability to service
debt, fund capital expenditures and expand its business; however, such
information should not be considered as an alternative to net income,
operating profit, cash flows from operations, or any other operating or
liquidity performance measure provided by GAAP. Cash expenditures for
various long-term assets, interest expense and income taxes that have been
and will be incurred are not reflected in the EBITDA presentation and
could be material to an investor's understanding of the Company's
liquidity and profitability. The Company's method of calculating of EBITDA
may not be comparable to that of other companies.
(4) Reflects actual student population as of the end of the period indicated,
not including participants in Ventura test preparation programs.
(5) Reflects the total number of campuses operated by the Company as of the
end of the period indicated.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Selected Historical Consolidated Financial and Other Data and the
Company's consolidated financial statements and notes thereto appearing
elsewhere herein.
Background and Overview
The Company provides for-profit postgraduate education with a primary focus
on doctoral level programs. As of August 31, 1999, the Company's schools had
approximately 4,500 students enrolled representing 48 states and 30 foreign
countries. The Company's schools offer programs in clinical psychology,
education, business, allied health professions and information technology and
are approved and accredited to offer doctoral, master's, bachelor's and
associate degrees as well as to award diplomas. Approximately 62% of the
Company's students are enrolled in doctoral programs. The Company operates 17
campuses in nine states and the Province of Ontario, Canada.
24
<PAGE>
The Company's principal sources of revenue are tuition, workshop fees and
sales of related study materials. Students attending the Company's schools
finance their education through a combination of individual resources
(including earnings from full or part-time employment), government-sponsored
financial aid and other sources, including family contributions and
scholarships provided by the Company. During fiscal 1999, approximately 53% of
the Company's net cash receipts were derived indirectly from the Title IV
Programs.
The Company derived approximately 88% and 84% of its net revenue from
tuition in fiscal 1999 and in fiscal 1998, respectively. Tuition payments are
made at the beginning of each term, and the start date for each term varies by
school and program. Payment of each term's tuition may be made by cash or
financial aid. If a student withdraws from school prior to the completion of
the term, the Company refunds a portion of the tuition already paid, based
upon the number of classes the student has attended. For students receiving
financial aid, the timing of the refunds for withdrawal is based on federal,
state and accrediting agency standards. The scholarships that the Company
grants to certain students are recorded as a reduction of tuition revenue.
Tuition revenue is recognized ratably over the term of each program, while
fees for the three to four day workshops held by Ventura are recognized on the
first day of the workshop. Revenue from sales of related study materials is
recognized on the date of shipment.
The Company's schools charge tuition at varying amounts, depending not only
on the particular school, but also upon the type of program and the specific
curriculum. Each of the Company's schools typically implements one or more
tuition increases annually. The size of these increases differs from year to
year and among campuses and programs. Tuition for the Company's schools as of
September 1, 1998 represents an approximate increase of 5.1% over the same
date in 1997.
The Company also generates revenue from textbook sales and property rental.
In fiscal 1999 and fiscal 1998, less than 10% and 13%, respectively, of the
Company's net revenue was derived from these sources, respectively.
The Company categorizes its expenses as cost of education, selling, general
administrative and related party general and administrative. Cost of education
expenses generally consists of expenses directly attributable to the
educational activity at the schools. These include salaries and benefits of
faculty and student support personnel, the cost of educational supplies and
facilities (including rents on school leases), and all other school occupancy
costs. Selling expenses include direct and indirect marketing and advertising
expenses.
General and administrative expenses include salaries and benefits of
personnel in accounting, human resources, corporate and school administration
functions and all corporate office expenses. Also included in general and
administrative expenses are depreciation expense associated with computer
laboratories, equipment, furniture and fixtures, and amortization expense
associated with intangible assets, consisting primarily of goodwill,
intellectual property and covenants not-to-compete with previous owners of the
schools or campuses.
The related party general and administrative expense is a management fee
paid to MCM Management Corp. Dr. Markovitz is the sole shareholder and
employee of MCM Management Corp. Prior to the initial public offering, Dr.
Markovitz did not receive any compensation for services rendered to the
Company, other than through the management fee. Through MCM Management Corp.,
Dr. Markovitz provided services characteristic of a principal executive
officer, including strategic direction and oversight for the Company, daily
management oversight, consultation on business acquisitions and other
corporate business matters. Upon completion of the Offering, the relationship
with MCM Management Corp. was terminated, and Dr. Markovitz has become an
employee of the Company. Dr. Markovitz has entered into an employment
agreement with the Company that provides for an initial annual base salary of
$200,000 plus performance-based compensation, which is currently expected to
be paid in the form of stock options. Although this represents a significant
change in the way Dr. Markovitz is compensated for the services he provides to
the Company, the nature of the services provided by Dr. Markovitz has not
changed. The Company has not required additional services (beyond those
rendered by Dr. Markovitz under his employment agreement) or incurred
additional costs (beyond the compensation payable to Dr. Markovitz under his
employment agreement) because of the termination of the relationship with MCM
Management Corp.
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,
25
<PAGE>
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.
Prior to fiscal 1995, the Company's fiscal year end was September 30.
During fiscal 1995, the Company changed its year end to August 31. Fiscal 1995
represents the Company's results of operations for the eleven months ended
August 31, 1995. All fiscal years subsequent to 1995 represent the twelve
months ended August 31 of the year indicated.
Recent Acquisitions
On August 26, 1997, the Company acquired Ventura for an aggregate purchase
price of $4.1 million, and, on February 3, 1998, the Company acquired MIM for
an aggregate purchase price of $2.4 million. Both acquisitions were accounted
for as purchases.
On August 31, 1998, U of S acquired the stock of MCM Plaza. The purchase
was accounted for in a manner similar to a pooling of interests, resulting in
the Company including the results of operations of MCM Plaza for all periods
subsequent to April 30, 1997, the date Dr. Markovitz acquired MCM Plaza. The
purchase price of approximately $3.3 million, based upon an independent third
party appraisal, exceeded the historical book value of the underlying net
assets by approximately $0.7 million, resulting in a reduction in the
Company's shareholder's equity by such amount.
On November 30, 1998, the Company completed its acquisition of PrimeTech.
Dr. Markovitz initially acquired a one-third interest in PrimeTech in November
1995 and, together with the other owners, sold his interest to the Company on
November 30, 1998. Under the acquisition agreement, the Company was required
to pay the former owners 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. Dr. Markovitz
received a note from the Company for his pro rata share of the initial payment
$166,666 (Canadian Dollars); the other owners received cash. The note was
subsequently repaid with the proceeds from the initial public offering. The
acquisition was accounted for as a purchase. The purchase price was determined
by arms-length negotiations between the other owners on behalf of themselves
and Dr. Markovitz, on the one hand, and representatives of the Company (other
than Dr. Markovitz), on the other hand.
Results of Operations
The following table summarizes the Company's operating results as a
percentage of net revenue for the period indicated:
<TABLE>
<CAPTION>
Year Ended August
31,
-------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Statement of Operations Data:
Net revenue.......................................... 100.0% 100.0% 100.0%
Operating expenses:
Cost of education.................................. 50.2 51.4 52.1
Selling expenses................................... 4.4 3.8 2.5
General and administrative expenses................ 31.4 31.0 26.5
Related party general and administrative expense... 1.8 7.7 4.9
----- ----- -----
Total operating expenses......................... 87.8 93.9 86.0
----- ----- -----
Income from operations............................... 12.2 6.1 14.0
Interest/other income (expense), net................. 0.3 (0.9) 1.7
----- ----- -----
Income before provision for income taxes............. 12.5 5.2 15.7
Provision for income taxes........................... 0.1 0.0 0.2
----- ----- -----
Net income........................................... 12.4% 5.2% 15.5%
===== ===== =====
</TABLE>
26
<PAGE>
Year Ended August 31, 1999 Compared to Year Ended August 31, 1998
Net Revenue. Net revenue increased 25.6% from $29.4 million for fiscal 1998
to $36.9 million for fiscal 1999, primarily due to additional net revenue of
$3.7 million from the acquisitions of MIM and PrimeTech. For entities owned by
the Company during fiscal 1998 revenues increased by 14.3%.
Cost of Education. Cost of education increased 22.6% from $15.1 million for
fiscal 1998 to $18.5 million for fiscal 1999, due to additional teaching costs
to meet the growth in the number of students attending the schools, the
development of new programs and the acquisitions of MIM and PrimeTech. As a
percentage of net revenue, cost of education decreased slightly from 51.4% in
1998 to 50.2% in 1999.
Selling Expenses. Selling expenses increased 46.6% from $1.1 million for
fiscal 1998 to $1.6 million for fiscal 1999 and, as a percentage of net
revenue, increased from 3.8% to 4.4%, primarily due to the acquisitions of MIM
and PrimeTech, which require the use of more costly advertising media than
each of ASPP and U of S.
General and Administrative Expenses. General and administrative expenses
increased 27.3% from $9.1 million for fiscal 1998 to $11.6 million for fiscal
1999 and, as a percentage of net revenue, increased from 31.0% to 31.4%.
Related Party General and Administrative Expense. Related party general and
administrative expense decreased 70.6% from $2.3 million for fiscal 1998 to
$0.7 million for fiscal 1999 and, as a percentage of net revenue, decreased
from 7.7% to 1.8%. The decrease is due to the termination of the Company's
management contract with MCM Management Corporation as of March 9, 1999.
Interest/Other Income (Expense), Net. Interest/other income (expense), net,
increased 147.8% from $(0.3) million for fiscal 1998 to $0.1 million for
fiscal 1999 and, as a percentage of net revenue, increased from (0.9)% to .3%.
Interest income increased from $0.4 million for fiscal 1998 to $0.7 million
for fiscal 1999 primarily as a result of the proceeds from the initial public
offering increasing the cash and investments. Interest expense decreased 5.7%
from fiscal 1998 to fiscal 1999 due to the pay down of certain debts with the
initial public offering proceeds.
Provision for Income Taxes. The provision for income taxes for fiscal 1999
is mainly limited to tax liability as of March 8, 1999 which was calculated at
a 40% effective rate plus deferred tax adjustments to coincide with the
Company's change to a C Corporation. There was a negligible tax charge for
fiscal 1998.
Net Income. Net income increased 202.5% from $1.5 million for fiscal 1998
to $4.6 million for fiscal 1999, due primarily to a decrease in related party
general and administrative expense, increased profitability at all schools and
a one time deferred tax asset due to the termination of the S Corporation on
March 8, 1999. These increases were offset by the tax provision recorded by
the Company as a C Corporation.
Year Ended August 31, 1998 Compared to Year Ended August 31, 1997
Net Revenue. Net revenue increased 43.5% from $20.5 million for fiscal 1997
to $29.4 million for fiscal 1998, primarily due to additional net revenue of
$6.3 million from the acquisitions of Ventura and MIM. For schools owned by
the Company during fiscal 1997, the total number of students attending the
schools increased 38.8%, and the average tuition increased 5.6% during 1998.
Cost of Education. Cost of education increased 41.4% from $10.7 million for
fiscal 1997 to $15.1 million for fiscal 1998, due to additional teaching costs
to meet the growth in the number of students attending the schools and the
development of new programs. Cost of education, as a percentage of net
revenue, decreased slightly from 52.1% in 1997 to 51.4% in 1998 due to the
acquisition of Ventura, whose programs have lower cost of education than the
Company's other programs. This benefit was partially offset by the acquisition
of MIM, which has higher costs of education as a percentage of net revenue.
27
<PAGE>
Selling Expenses. Selling expenses increased 113.6% from $0.5 million for
fiscal 1997 to $1.1 million for fiscal 1998 and, as a percentage of net
revenue, increased from 2.5% to 3.8%, primarily due to the acquisitions of
each of Ventura and MIM, which require the use of more costly advertising
media than each of ASPP and
U of S. Selling expenses of schools acquired during 1998 accounted for
approximately 70.1% of the dollar amount of the increase. In addition, the
Company marketed new programs and increased promotion for ASPP'S Arizona,
Minnesota and Virginia campuses in fiscal 1998.
General and Administrative Expenses. General and administrative expenses
increased 67.6% from $5.4 million for fiscal 1997 to $9.1 million for fiscal
1998 and, as a percentage of net revenue, increased from 26.5% to 31.0%,
primarily due to additional costs associated with Ventura and MIM, which
accounted for approximately 51.9% of the dollar amount of the increase. The
Company also hired personnel at its corporate office to expand the depth of
its management.
Related Party General and Administrative Expense. Related party general and
administrative expense increased 128.7% from $1.0 million for fiscal 1997 to
$2.3 million for fiscal 1998 and, as a percentage of net revenue, increased
from 4.9% to 7.7%.
Interest/Other Income (Expense), Net. Interest/other income (expense), net
decreased 174.9% from $0.3 million for fiscal 1997 to $(0.3) million for
fiscal 1998 and, as a percentage of net revenue, decreased from 1.7% to
(0.9)%. Interest income decreased from $0.5 million for fiscal 1997 to $0.4
million for fiscal 1998. Interest expense of $0.6 million as a result of
additional borrowings to finance the acquisitions of Ventura and MIM exceeded
interest income earned on the Company's investments during fiscal 1998.
Provision for Income Taxes. The provision for income taxes was immaterial
for both fiscal 1997 and fiscal 1998.
Net Income. Net income decreased 52.1% from $3.2 million for fiscal 1997 to
$1.5 million for fiscal 1998, due to the increase in related party general and
administrative expense and additional interest expense in fiscal 1998 related
to the Company's acquisitions.
Seasonality; Variations in Quarterly Results of Operations
The Company has experienced seasonality in its results of operations
primarily due to the pattern of student enrollments at most of the Company's
schools. Historically, the Company's lowest quarterly net revenue and income
have been in the fourth fiscal quarter (June through August) due to lower
student enrollment during the summer months at most of the Company's schools,
while the Company's expenses remain relatively constant over the course of a
year. The Company expects that this seasonal trend will continue.
The following table sets forth unaudited quarterly financial data for the
fiscal years ended August 31, 1999 and 1998 and, for the fiscal years, such
data expressed as a percentage of the Company's totals with respect to such
information for the applicable quarters. The Company believes that this
information includes all adjustments (consisting solely of normal recurring
adjustments) necessary for a fair presentation of such quarterly information
when read in conjunction with the consolidated financial statements included
elsewhere herein. The operating results for any quarter are not necessarily
indicative of the results for any future period.
<TABLE>
<CAPTION>
Fiscal Year Ended August 31, Fiscal Year Ended August 31,
1999 1998
--------------------------------- --------------------------------
1st 1st 3rd
Qtr 2nd Qtr 3rd Qtr 4th Qtr Qtr 2nd Qtr Qtr 4th Qtr
------ ------- ------- ------- ------ ------- ------ -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue............. $9,341 $9,079 $10,695 $ 7,751 $7,249 $6,722 $8,771 $ 6,610
% of fiscal year total.. 25.4% 24.6% 29.0% 21.0% 24.7% 22.9% 29.9% 22.5%
Income from operations.. $1,818 $ 917 $ 2,930 $(1,160) $1,758 $ 615 $ 889 $(1,462)
% of fiscal year total.. 40.4% 20.4% 65.0% (25.8)% 97.7% 34.2% 49.3% (81.2)%
</TABLE>
28
<PAGE>
Liquidity and Capital Resources
Since its formation, the Company has financed its operating activities
primarily through cash generated from operations. Acquisitions have been
financed primarily through debt instruments. Net cash provided by operating
activities decreased from $2.6 million in fiscal 1998 to $3.7 million in
fiscal 1999, due primarily to the level of net income and changes in operating
assets and liabilities. The Company had $12.8 million of working capital as of
August 31, 1999 compared to $2.5 of working capital as of August 31, 1998. The
increase in working capital was due primarily to the receipt of proceeds from
our initial public offering and favorable operating results for fiscal 1999,
offset by debt repayment and shareholder distributions.
Capital expenditures increased from $0.6 million in fiscal 1998 to $1.9
million in fiscal 1999. The increase was due to continued upgrading of school
equipment and facilities and purchases of additional equipment to accommodate
the increasing student population. Capital expenditures are expected to
continue to increase in the future as student population increases and the
Company continues to upgrade and expand current facilities and equipment. The
Company invested approximately $1.0 million in upgrading its computer systems
during fiscal 1999. The Company has no other commitment for material capital
expenditures.
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, 1999.
The Company entered into the Credit Agreement with The Bank of America
providing for revolving credit borrowings of up to $20 million. Borrowings
under the Credit Agreement bear interest at a variable rate equal to (at the
Company's option) the principal lender's prime rate as in effect from time to
time or the London Inter-Bank Offered Rate plus, in each case, a margin of
between 25 and 250 basis points, depending on the type of loan and the
Company's ratio of funded debt to EBITDA. In addition, the Credit Agreement
provides for an unused commitment fee of 37.5 basis points on commitments
available but unused under the Credit Agreement, as well as certain other
customary fees. The Credit Agreement provides for a blanket lien on all
material assets of the Company and a pledge of the capital stock of all the
Company's material subsidiaries, as well as upstream guarantees from all such
subsidiaries. The Credit Agreement restricts the Company and its subsidiaries'
ability to take certain actions, including incurring additional indebtedness
or altering the Company's current method of doing business. The Credit
Agreement also contains certain financial covenants and ratios that may have
the effect of restricting the Company's ability to take certain actions in
light of their impact on the Company's financial condition or results of
operations. As of August 31, 1999 the Company was in compliance with its
covenants. The Credit Agreement will terminate on May 21, 2001, unless
extended.
The Company's cash flow from operations on a long-term basis is dependent
on the receipt of funds from the Title IV Programs. For fiscal 1999, the
Company's U.S. institutions derived approximately 43% to approximately 69% of
their respective net revenue (on a cash basis) from the Title IV Programs. The
HEA and its implementing regulations establish specific standards of financial
responsibility, administrative capability and other requirements that must be
satisfied in order to qualify for participation in the Title IV Programs.
The DOE requires that Title IV Program funds collected by an institution
for unbilled tuition be kept in separate cash or cash equivalent accounts
until the students are billed for the portion of their program related to
these Title IV Program funds. In addition, all funds transferred to the
Company through electronic funds transfer programs are held in a separate cash
account until certain conditions are satisfied. As of August 31, 1999, the
Company held an immaterial amount of funds in these separate accounts. The
restrictions on any cash held in these accounts have not significantly
affected the Company's ability to fund daily operations.
29
<PAGE>
The Company used approximately $4.7 million of the net proceeds from the
initial public offering to repay the outstanding indebtedness, which were
issued in connection with the acquisition of Ventura, MIM, and for general
corporate purposes, approximately $13.2 million to pay a distribution to the
Company's shareholder and $0.9 million of indebtedness due to the Company's
shareholder in connection with the acquisitions of MCM Plaza and PrimeTech.
The remainder of the net proceeds is available for working capital and general
corporate purposes.
Year 2000 Problem
The "Year 2000 Problem" is the potential for computer processing errors
resulting from the use of computer programs that have been written using two
digits, rather than four, to denote a year (e.g., using the digits "98" to
denote 1998). Computer programs using this nomenclature can misidentify
references to dates after 1999 as meaning dates early in the twentieth century
(e.g., "1902" rather than "2002"). The Year 2000 Problem is commonly
considered to be prevalent in computer programs written as recently as the
mid-1990s, and can cause such programs to generate erroneous information, to
otherwise malfunction or to cease operations altogether.
The Company is in the process of installing a new management information
system in its corporate headquarters and expects such installation to be
complete by November 1999. In addition, the Company's schools each have stand-
alone computer systems and networks for internal use and for communication
with its students and with corporate headquarters. There can be no assurance
that the installation of the Company's new system will proceed smoothly or
that additional management time or expense will not be required to
successfully complete such installation. Although the Company expects that its
new computer system will be free of the Year 2000 Problem and, based upon its
review of its other internal computer systems, expects such other systems will
be free of the Year 2000 Problem, there can be no assurance that this new
computer system will not be affected by the Year 2000 Problem, that the
Company's existing systems will not be affected by the Year 2000 Problem, or
that a failure of any other parties, such as the DOE or other government
agencies on which the Company depends for student financial assistance or the
financial institutions involved in the processing of student loans, to address
the Year 2000 Problem will not have a material adverse effect on the Company's
business, results of operations or financial condition. In particular, there
can be no assurance that malfunctions relating to the Year 2000 Problem will
not result in the misreporting of financial information by the Company. The
Company has made inquiries of substantially all of its material vendors
regarding the Year 2000 Problem, and has not detected any significant issues
relating to the Year 2000 Problem. However, the Company has not made a formal
assessment of the computer programs used by the DOE or other government
agencies or other third parties with which the company interacts, or an
assessment of its own vulnerability to the failure of such programs to be free
of the Year 2000 Problem. The Company does not have any formal contingency
plans relating to the Year 2000 Problem.
The Company believes that most reasonably likely worst case scenario for
the Company regarding the Year 2000 Problem is a failure of the DOE to
adequately ensure payment of financial aid amounts. The 1998 Amendments
require the DOE to take steps to ensure that the processing, delivery and
administration of grant, loan and work assistance provided under the Title IV
Programs are not interrupted because of the Year 2000 Problem. This
legislation also authorizes the DOE to postpone certain HEA requirements to
avoid overburdening institutions and disrupting the delivery of student
financial assistance as a consequence of this problem. There can be no
assurance, however, that assistance will not be interrupted or that any DOE
requirements would be postponed so that there would be no material adverse
effect on the Company's schools.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to the impact of interest rate changes, foreign
currency fluctuations and changes in the market value of its investments. The
Company does not utilize interest rate swaps, forward or option contracts on
foreign currencies or commodities, or other types of derivative financial
instruments. The Company has debt with fixed annual rates of interest ranging
from 6.25% to 9.00% totaling $3.5 million at August 31, 1999. A significant
majority of the variable interest loans were repaid with proceeds from the
initial public offering during 1999. The Company estimates that the fair value
of each of its debt instruments approximated its market value on August 31,
1999.
30
<PAGE>
The Company is subject to fluctuations in the value of the Canadian dollar
vis-a-vis the U.S. dollar. Its investment in its Canadian operations is
approximately $1.0 million at August 31,1999 and the fair value of the assets
and liabilities of these operations approximated current market rates at this
date.
From time to time, the Company invests excess cash in marketable
securities. These investments principally consist of U.S. Treasury notes,
corporate bonds, short-term commercial paper and money market accounts, the
fair value of which approximated current market rates at August 31, 1999.
Inflation
The Company has historically implemented tuition increases each year at or
above the rate of inflation. Average tuition increases at the Company's
schools for fiscal 1999, 1998 and 1997 were 5.1%, 5.1% and 5.2%, respectively.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated balance sheets are as of August 31, 1999 and 1998 and the
consolidated statements of operations, shareholders' equity and cash flows are
for each of the years ended August 31, 1999, 1998 and 1997:
Report of Independent Public Accountants, page F-1.
Consolidated Balance Sheets, page F-2.
Consolidated Statements of Operations, page F-3.
Consolidated Statements of Cash Flows, page F-4.
Consolidated Statements of Shareholders' Equity, page F-5.
Notes to Consolidated Financial Statements, page F-6.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information in response to this item is incorporated by reference from
the sections captioned "PROPOSAL NO. 1--ELECTION OF DIRECTORS" and "EXECUTIVE
OFFICERS" of the definitive Proxy Statement to be filed in connection with our
1999 Annual Meeting of Stockholders (the "1999 Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information in response to this item is incorporated by reference from
the section of the 1999 Proxy Statement captioned "EXECUTIVE COMPENSATION AND
CERTAIN TRANSACTIONS."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information in response to this item is incorporated by reference from
the section of the 1999 Proxy Statement captioned "SECURITY OWNERSHIP OF
MANAGEMENT AND PRINCIPAL STOCKHOLDERS."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in response to this item is incorporated by reference from
the sections of the 1999 Proxy Statement captioned "EXECUTIVE COMPENSATION AND
CERTAIN TRANSACTIONS" and "COMPENSATION COMMITTEE INTERLOCKS AND INSIDER
PARTICIPATION."
31
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K or
incorporated by reference as set forth below:
<TABLE>
<CAPTION>
Page
----
<S> <C>
1 and 2. Financial Statements of Argosy Education Group, Inc. and
subsidiaries
Report of Independent Public Accountants........................... F-1
Consolidated Balance Sheets as of August 31, 1999 and 1998......... F-2
Consolidated Statements of Operations for the years ended August
31, 1999, 1998 and 1997........................................... F-3
Consolidated Statements of Cash Flows for the years ended August
31, 1999, 1998 and 1997........................................... F-4
Consolidated Statements of Shareholders' Equity for the years ended
August 31, 1999, 1998, and 1997................................... F-5
Notes to Consolidated Financial Statements......................... F-6
</TABLE>
<TABLE>
<C> <S>
3. Exhibits:
3.1 Articles of Incorporation of the Company, Incorporated by
Reference to the Company's Registration Statement on Form S-
1.
3.2 By-laws of the Company, Incorporated by Reference to the
Company's Registration Statement on Form S-1.
10.1 Argosy Education Group, Inc. 1999 Stock Incentive Plan,
Incorporated by Reference to the Company's Registration
Statement on Form S-1.
10.2 Argosy Education Group, Inc. Employee Stock Discount Purchase
Plan, Incorporated by Reference to the Company's Registration
Statement on Form S-1.
10.3 Tax Indemnification Agreement, dated February 10, 1999,
between the Company and Dr. Markovitz, Incorporated by
Reference to the Company's Registration Statement on Form S-
1.
10.4 Term Note of Academic Review, Inc. dated August 27, 1997, in
favor of Northern Trust Company, Incorporated by Reference to
the Company's Registration Statement on Form S-1.
10.5 Real Estate Mortgage and Security Agreement, dated April 30,
1997, among MCM University Plaza, Inc. and Northern Trust
Bank of Florida, N.A., Incorporated by Reference to the
Company's Registration Statement on Form S-1.
10.6 Lease Agreement, dated July 21, 1995, between Park Central
Corp. and U of S, Incorporated by Reference to the Company's
Registration Statement on Form S-1.
10.7 Standard Tenancy Agreement, dated December 10, 1992, between
Lakeside Commons Partners and the Company, as amended by
Lease Amendment, dated March 17, 1994 between Lakeside
Commons Partners and the Company, Incorporated by Reference
to the Company's Registration Statement on Form S-1.
10.8 Tenant Lease, dated June 21, 1995, between CKSS Associates
and the Company, Incorporated by Reference to the Company's
Registration Statement on Form S-1.
</TABLE>
32
<PAGE>
<TABLE>
<C> <S>
10.9 Lease Agreement, dated January 20, 1997, between Reed Union
School District and California Graduate School of Psychology,
Incorporated by Reference to the Company's Registration
Statement on Form S-1.
10.10 Lease, dated September 8, 1994, between American National Bank
and Trust Company of Chicago and The Company, as amended by
Amendment to Lease, dated November 28, 1997, between American
National Bank and Trust Company of Chicago and the Company,
Incorporated by Reference to the Company's Registration
Statement on Form S-1.
10.11 Lease Agreement, dated July 3, 1996, between Continental Offices
Ltd. and the Company, as amended by First Amendment, to Lease
Agreement, dated July 3, 1996, between Continental Offices Ltd.
and the Company, Incorporated by Reference to the Company's
Registration Statement on Form S-1.
10.12 Office Lease, dated May 28, 1997, between Presson Advisory,
L.L.C. and the Company, Incorporated by Reference to the
Company's Registration Statement on Form S-1.
10.13 Lease, dated May 3, 1997, between Control Data Corporation and
the Company, and amended by Letter Agreement, dated December 8,
1994, Incorporated by Reference to the Company's Registration to
Statement on Form S-1.
10.14 Lease, dated August 1, 1997, between Oneida Realty Company and
the Company, Incorporated by Reference to the Company's
Registration Statement on Form S-1.
10.15 Lease Agreement, dated May 3, 1994, between Arlington Park
Realty Corporation and the Company, Incorporated by Reference to
the Company's Registration Statement on Form S-1.
10.16 Standard Industrial/Commercial Multi-Tenant Lease--Modified Net,
dated November 3, 1995, between the Gordon Family Trust and
AATBS, and addenda and amendments thereto, Incorporated by
Reference to the Company's Registration Statement on Form S-1.
10.17 Lease, dated October 11, 1991, between MEPC American Properties
Incorporated and Medical Institute of Minnesota, Inc. and
amendments thereto, Incorporated by Reference to the Company's
Registration Statement on Form S-1.
10.18 Indenture of Sublease, dated June 9, 1997, between Royal Bank of
Canada and PrimeTech Corporation, Incorporated by Reference to
the Company's Registration Statement on Form S-1.
10.19 Lease, dated March 14, 1997, between Cumberland-Bellair
Investment, Inc. and 1184266 Ontario Inc., Incorporated by
Reference to the Company's Registration Statement on Form S-1.
10.20 Stock Purchase Agreement, dated April 15, 1998, among PrimeTech
Canada Inc., George Schwartz, P.M.T. Holdings Inc. and Michael
Markovitz, Incorporated by Reference to the Company's
Registration Statement on Form S-1.
10.21 Stock Purchase Agreement, dated February 3, 1998, between
Medical Institutes of America, Inc. and Phillip Miller,
Incorporated by Reference to the Company's Registration
Statement on Form S-1.
10.22 Agreement to Purchase and Redeem Stock, dated August 26, 1997,
among Ventura, Steven H. Santini and Association for Advanced
Training in the Behavioral Sciences, Incorporated by Reference
to the Company's Registration Statement on Form S-1.
</TABLE>
33
<PAGE>
<TABLE>
<C> <S>
10.23 Agreement to Purchase Assets, dated August 26, 1997, among
Academic Review, Inc., an Illinois corporation, Academic Review,
Inc., a California corporation and Steven H. Santini,
Incorporated by Reference to the Company's Registration
Statement on Form S-1.
10.24 Purchase and Sale Agreement, dated August 31, 1998, between
University of Sarasota, Inc. and Michael C. Markovitz,
Incorporated by Reference to the Company's Registration
Statement on Form S-1.
10.25 Software License and Service Agreement, dated March 31, 1998,
between SCT Software & Resource Management Corporation and the
Company, Incorporated by Reference to the Company's Registration
Statement on Form S-1.
10.26 Purchase of Services Agreement, dated January 1, 1998, between
Illinois Alternatives, Inc. and the Company, Incorporated by
Reference to the Company's Registration Statement on Form S-1.
10.27 Form of Distribution Loan note, Incorporated by Reference to the
Company's Registration Statement on Form S-1.
10.28 Employment Agreement, dated February 10, 1999, between the
Company and Dr. Markovitz, Incorporated by Reference to the
Company's Registration Statement on Form S-1.
10.29 Indemnification Agreement, dated February 10, 1999, between the
Company and Dr. Markovitz, Incorporated by Reference to the
Company's Registration Statement on Form S-1.
10.30 Management Agreement between Argosy Education Group, Inc. and
John Marshall Law School of Georgia.
</TABLE>
(b) Reports on Form 8-K.
During the last quarter of the period covered by this Form 10-K, the
Company did not file any current reports on Form 8-K.
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 18th day of
March, 1999.
ARGOSY EDUCATION GROUP, INC.
/s/ Charles T. Gradowski
By: _________________________________
Charles T. Gradowski
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Harold J. O'Donnell President and a Director November 29, 1999
____________________________________
Harold J. O'Donnell
/s/ Michael C. Markovitz Chairman of the Board November 29, 1999
____________________________________
Michael C. Markovitz
/s/ Charles T. Gradowski Chief Financial Officer November 29, 1999
____________________________________ (Principal Financial and
Charles T. Gradowski Accounting Officer)
/s/ Theodore J. Herst Director November 29, 1999
____________________________________
Theodore J. Herst
/s/ Karen M. Knab Director November 29, 1999
____________________________________
Karen M. Knab
/s/ Michael W. Mercer Director November 29, 1999
____________________________________
Michael W. Mercer
/s/ Kalman K. Shiner Director November 29, 1999
____________________________________
Kalman K. Shiner
/s/ Leslie M. Simmons Director November 29, 1999
____________________________________
Leslie M. Simmons
</TABLE>
35
<PAGE>
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, 1999 and 1998 and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended August 31, 1999. 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 generally accepted auditing
standards. 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, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended August 31, 1999 in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Chicago, Illinois
October 25, 1999
F-1
<PAGE>
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
August 31,
----------------
ASSETS 1999 1998
------ ------- -------
<S> <C> <C>
Current Assets:
Cash and cash equivalents.................................... $ 8,980 $ 2,712
Short-term investments....................................... 6,027 1,131
Receivables--
Students, net of allowance for doubtful accounts of $316
and $230 at
August 31, 1999 and 1998, respectively.................... 988 451
Other...................................................... 605 222
Shareholder note receivable.................................. -- 6,000
Due from related entities.................................... 49 271
Inventories.................................................. -- 94
Prepaid taxes................................................ 614 --
Prepaid expenses............................................. 387 485
Deferred tax assets.......................................... 274 --
------- -------
Total current assets..................................... 17,924 11,366
------- -------
Property and equipment, net.................................... 5,617 3,870
Other assets:
Non-current investments...................................... 2,745 1,073
Deposits..................................................... 166 475
Deferred tax assets.......................................... 568 --
Due from related entity...................................... 500 --
Intangibles, net............................................. 6,799 6,691
------- -------
Total other assets....................................... 10,778 8,239
------- -------
Total assets............................................. $34,319 $23,475
======= =======
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt......................... $ 486 $ 3,362
Accounts payable............................................. 1,109 1,157
Accrued payroll and related expenses......................... 547 833
Accrued expenses............................................. 417 751
Deferred revenue............................................. 2,548 2,084
Shareholder distribution..................................... -- 720
------- -------
Total current liabilities................................ 5,107 8,907
------- -------
Long-term debt, less current maturities........................ 2,998 5,165
Deferred rent.................................................. 610 481
Commitments and contingencies
Shareholders' equity:
Class A common stock--30,000,000 shares authorized, $.01 par
value, 2,000,000 and no shares issued and outstanding at
August 31, 1999 and 1998, respectively...................... 20 --
Class B common stock--10,000,000 shares authorized, $.01 par
value, 4,900,000 shares issued and outstanding at August 31,
1999 and 1998, respectively................................. 49 49
Additional paid-in capital................................... 24,871 6,456
Accumulated other comprehensive income....................... 447 2
Purchase price in excess of predecessor carry over basis..... (720) (720)
Retained earnings............................................ 937 3,135
------- -------
Total shareholders' equity............................... 25,604 8,922
------- -------
Total liabilities and shareholders' equity............... $34,319 $23,475
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-2
<PAGE>
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended August 31,
-------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Net revenue......................................... $36,866 $29,352 $20,460
------- ------- -------
Operating expenses:
Cost of education................................. 18,489 15,075 10,661
Selling expenses.................................. 1,616 1,102 516
General and administrative expenses............... 11,588 9,104 5,432
Related party general and administrative expense.. 668 2,271 993
------- ------- -------
Total operating expenses........................ 32,361 27,552 17,602
------- ------- -------
Income from operations.......................... 4,505 1,800 2,858
------- ------- -------
Other income (expense):
Interest income................................... 695 357 497
Interest expense.................................. (567) (601) (107)
Other expense..................................... (6) (12) (48)
------- ------- -------
Total other income (expense), net............... 122 (256) 342
------- ------- -------
Income before provision for income taxes........ 4,627 1,544 3,200
Income Taxes:
Income tax provision on C corporation income
subsequent to March 8, 1999...................... 746 -- --
Income tax provision on S corporation income prior
to March 8, 1999................................. 62 29 37
Deferred income taxes recorded in conjunction with
termination of S corporation election on March 8,
1999............................................. (764) -- --
------- ------- -------
Total income taxes.............................. 44 29 37
------- ------- -------
Net income.......................................... $ 4,583 $ 1,515 $ 3,163
======= ======= =======
Earnings per share:
Basic and diluted................................. $ 0.78 $ 0.31 $ 0.65
======= ======= =======
Weighted average shares outstanding--basic and
diluted.......................................... 5,870 4,900 4,900
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE>
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Years Ended August 31,
--------------------------
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income....................................... $ 4,583 $ 1,515 $ 3,163
Adjustments to reconcile net income to net cash
provided by operating activities--
Depreciation and amortization.................. 1,405 938 438
Deferred taxes................................. (720) -- --
Changes in operating assets and liabilities,
net of acquired businesses--
Receivables, net............................. (579) 1 (38)
Inventories.................................. 94 67 53
Prepaid expenses............................. (560) (354) (56)
Deposits..................................... 72 (65) (154)
Accounts payable............................. (215) 231 251
Accrued payroll and related expenses......... (281) 256 70
Accrued expenses............................. (367) 284 (26)
Deferred revenue............................. 151 (384) 102
Deferred rent................................ 130 93 105
-------- ------- -------
Net cash provided by operating activities.. 3,713 2,582 3,908
-------- ------- -------
Cash flows from investing activities:
Purchase of property and equipment, net.......... (1,889) (597) (341)
Sale (purchase) of investments, net.............. (3,363) 1,784 (1,985)
Business acquisitions, net of cash acquired...... (186) (1,918) (6,292)
-------- ------- -------
Net cash used in investing activities...... (5,438) (731) (8,618)
-------- ------- -------
Cash flows from financing activities:
Issuance of common stock......................... 26,040 -- --
Organization costs............................... (1,149) -- --
Proceeds from issuance of long-term debt......... 150 3,029 6,296
Payments of long-term debt....................... (5,385) (1,271) (169)
Borrowings from (payments to) related entities,
net............................................. (443) (271) --
Shareholder distributions........................ (15,468) (5,340) (935)
Shareholder note receivable...................... -- 505 (505)
Repayment of shareholder note.................... 4,531 -- --
Payments to former owners of acquired businesses. (268) -- --
Shareholder contributions........................ -- -- 1
-------- ------- -------
Net cash provided by (used in) financing
activities................................ 8,008 (3,348) 4,688
-------- ------- -------
Effective exchange rate changes on cash............ (15)
Net increase (decrease) in cash and cash
equivalents....................................... 6,268 (1,497) (22)
Cash and cash equivalents, beginning of year....... 2,712 4,209 4,231
-------- ------- -------
Cash and cash equivalents, end of year............. $ 8,980 $ 2,712 $ 4,209
======== ======= =======
Supplemental disclosures of cash flow information:
Cash paid for--
Interest....................................... $ 584 $ 549 $ 107
Taxes.......................................... 1,524 41 17
======== ======= =======
Supplemental disclosure of non-cash investing and
financing activities:
Acquisitions of various schools and businesses--
Fair value of assets acquired.................. $ 1,561 $ 3,346 $ 6,677
Net cash used in acquisitions.................. (186) (1,918) (6,292)
-------- ------- -------
Liabilities assumed or incurred.............. $ 1,375 $ 1,428 $ 385
======== ======= =======
Supplemental disclosure of non-cash shareholder
activities:
</TABLE>
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 the three months ended November 30, 1998, the Company received
marketable securities with a fair market value of approximately $4,732,000
from the shareholder for partial repayment of the shareholder note receivable.
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Class A Class B
Common Stock Common Stock
$.01 par value, $.01 par value, Purchase
30,000,000 shares 10,000,000 shares Price in
authorized authorized Accumulated Excess of
------------------ ------------------ Additional Other Predecessor Total
Comprehensive Shares Shares Paid-in Comprehensive Carryover Retained Shareholders'
Income Outstanding Amount Outstanding Amount Capital Income Basis Earnings Equity
------------- ----------- ------ ----------- ------ ---------- ------------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, August
31, 1996......... -- $-- 4,900 $ 49 $ 455 $-- $ -- $ 4,732 $ 5,236
Net income...... $3,163 -- -- -- -- -- -- -- 3,163 3,163
Unrealized loss
on investments.. (17) -- -- -- -- -- (17) -- -- (17)
------
Comprehensive
income.......... $3,146
======
Shareholder
distributions... -- -- -- -- -- -- -- (935) (935)
Shareholder
contribution.... -- -- -- -- 1 -- -- -- 1
----- ---- ----- ---- ------- ---- ----- ------- --------
BALANCE, August
31, 1997......... -- -- 4,900 49 456 (17) -- 6,960 7,448
Net income...... $1,515 -- -- -- -- -- -- -- 1,515 1,515
Unrealized gain
on investments.. 19 -- -- -- -- -- 19 -- -- 19
------
Comprehensive
income.......... $1,534
======
Shareholder
distributions... -- -- -- -- -- -- -- (5,340) (5,340)
Shareholder
contribution.... -- -- -- -- 6,000 -- -- -- 6,000
Purchase price
in excess of
predecessor
carryover
basis........... -- -- -- -- -- -- (720) -- (720)
----- ---- ----- ---- ------- ---- ----- ------- --------
BALANCE, August
31, 1998......... -- -- 4,900 49 6,456 2 (720) 3,135 8,922
Net income...... $4,583 -- -- -- -- -- -- -- 4,583 4,583
Unrealized gain
on investments.. 445 -- -- -- -- -- 445 -- -- 445
------
Comprehensive
income.......... $5,028
======
Shareholder
distribution.... -- -- -- -- (6,456) -- -- (6,781) (13,237)
Issuance of
stock........... 2,000 20 -- -- 24,871 -- -- -- 24,891
----- ---- ----- ---- ------- ---- ----- ------- --------
BALANCE, August
31, 1999......... 2,000 $ 20 4,900 $ 49 $24,871 $447 $(720) $ 937 $ 25,604
===== ==== ===== ==== ======= ==== ===== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1999, 1998 AND 1997
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, 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 $26.0 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 $7.2 million of
proceeds is available for working capital and general corporate purposes.
2. 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 the
consolidation. The results of operations of all acquired businesses have been
consolidated for all periods subsequent to the date of acquisition.
F-6
<PAGE>
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 1999, 1998
and 1997 (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:
<TABLE>
<CAPTION>
For the Years Ended
August 31,
-------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Total Title IV funding........................ $16,823 $13,011 $ 9,035
Total cash receipts........................... $31,937 $28,514 $20,982
Total Title IV funding as a percentage of
total cash
Receipts..................................... 53% 46% 43%
======= ======= =======
</TABLE>
The Company generally completes and approves the financial aid packet of
each student who qualifies for financial aid prior to the student beginning
class in an effort to enhance the collectibility of its unsecured credit.
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 operating account. Restricted cash is not
included in the accounts of the Company and was immaterial at August 31, 1999
and 1998.
Investments
The Company invests excess cash in investments consisting primarily of
equity securities, corporate bonds (maturing from one to 13 months) and U.S.
Government treasury notes (maturing from two to 21 months). The investments
are considered available for sale, stated at their fair market value and
classified based upon their maturity dates.
F-7
<PAGE>
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At August 31, 1999 and 1998, investments consisted of the following
(dollars in thousands):
<TABLE>
<CAPTION>
August 31,
-------------
1999 1998
------ ------
<S> <C> <C>
Fair value--
Equity securities........................................ $2,770 $ --
Corporate bonds.......................................... 3,125 1,412
U.S. Government treasury notes........................... 2,839 792
Term deposits............................................ 38 --
------ ------
Total investments at fair value...................... 8,772 2,204
Unrealized gain............................................ 447 2
------ ------
Total investments at cost............................ $8,325 $2,202
====== ======
</TABLE>
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.
Inventories
During 1999, the Company outsourced its bookstore operations. Prior to
1999, inventories, consisting principally of books and supplies, were stated
at the lower of cost, determined on a first-in, first-out basis, or market.
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, 1999 and 1998, are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
August 31,
-------------
1999 1998 Life
------ ------ ----------
<S> <C> <C> <C>
Land.................... $ 517 $ 517
Building and
improvements........... 2,307 2,066 40 years
Office equipment........ 1,075 851 3-7 years
Furniture and fixtures.. 424 338 5-7 years
Leasehold improvements.. 837 526 4-10 years
Computer equipment and
software............... 2,134 631 3-5 years
Instructional equipment
and materials.......... 938 722 3-7 years
------ ------
8,232 5,651
Less--Accumulated
depreciation and
amortization........... 2,615 1,781
------ ------
$5,617 $3,870
====== ======
</TABLE>
F-8
<PAGE>
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, 1999 and 1998, the cost basis
and useful lives of intangible assets consist of the following (dollars in
thousands):
<TABLE>
<CAPTION>
August 31,
-------------
1999 1998 Life
------ ------ -----------
<S> <C> <C> <C>
Goodwill....................................... $7,300 $6,811 15-40 years
Intellectual property.......................... 776 600 2-4 years
Covenants not-to-compete....................... 252 252 5-10 years
------ ------
8,328 7,663
Less--Accumulated amortization................. 1,529 972
------ ------
$6,799 $6,691
====== ======
</TABLE>
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 approximately less than 10%, 13% and 3% of the
Company's net revenue for the fiscal years ended August 31, 1999, 1998 and
1997, respectively. Revenue is stated net of scholarships and grants given to
the students, which totaled approximately $657,000, $705,000 and $684,000 for
the fiscal years ended August 31, 1999, 1998 and 1997, 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.
Management's Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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
F-9
<PAGE>
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 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 shareholders' equity at August 31, 1999. As
of August 31, 1999 the foreign currency translation was immaterial.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 128, "Earnings Per Share" ("SFAS No. 128"), which is
effective for reporting periods ending after December 15, 1997. SFAS No. 128
changed the methodology of calculating earnings per share and renamed the two
calculations basic earnings per share and diluted earnings per share. The
calculations differ by eliminating any common stock equivalents (such as stock
options, warrants and convertible preferred stock) from the basic earnings per
share and changes certain calculations when computing diluted earnings per
share. The weighted average number of common shares outstanding used in
determining basic earnings per common share calculation includes all common
stock outstanding during each period presented.
<TABLE>
<CAPTION>
Basic and diluted weighted-average 1999 1998 1997
- ---------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Number of Common Stock outstanding................ 5,869,863 4,900,000 4,900,000
</TABLE>
The Company had 556,500 stock options at August 31, 1999 which were not
included in the computation of diluted earnings per share because the exercise
price was greater than the average market price of the common shares.
Supplemental pro forma earnings per share for the years ended August 31,
1999 and 1998 of $0.78, and $0.35, respectively, is computed based upon (i) a
reduction in interest expense (net of tax benefit) resulting from the
application of net proceeds of the contemplated offering to reduce
indebtedness of the Company and (ii) the pro forma weighted average number of
shares of common stock outstanding adjusted to reflect the assumed sale by the
Company of approximately 159,000 and 346,000 shares of common stock in the
Offering for the year ended August 31, 1999 and 1998, respectively, resulting
in net proceeds sufficient to pay indebtedness.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" ("SFAS No. 130"), which establishes standards
for reporting of comprehensive income. This pronouncement requires that all
items recognized under accounting standards as components of comprehensive
income, as defined in the pronouncement, be reported in a financial statement
that is displayed with the same prominence as other financial statements.
Comprehensive income includes all changes in equity during a period except
those resulting from investments by owners and distributions to owners. The
financial statement presentation required under SFAS No. 130 is effective for
all fiscal years beginning after December 15, 1997.
F-10
<PAGE>
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has adopted SFAS No. 130. For the periods ended August 31, 1999,
1998 and 1997 Accumulated Other Comprehensive Income net of tax was
approximately 207, 11 and 10 respectively and would have resulted in a
reduction of Comprehensive Income.
Segment Reporting
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information" ("SFAS
No. 131"), which amends the requirements for a public enterprise to report
financial and descriptive information about its reportable operating segments.
Operating segments, as defined in the pronouncement, 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 financial information is required to be reported
on the basis that it is used internally for evaluating segment performance and
deciding how to allocate resources to segments. The disclosure required by
SFAS No. 131 is effective for all fiscal years beginning after December 15,
1997. The Company has adopted SFAS No. 131.
Start-Up Costs
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities." This SOP provides guidance on the financial reporting of start-up
costs and organization costs. It requires that all nongovernmental entities
expense the costs of start-up activities as these costs are incurred. The
Company currently expenses all start-up and organization costs as incurred and
is therefore not impacted by this SOP.
3. 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 shareholder's equity.
Ventura
On August 26, 1997, Ventura acquired 100% of the outstanding shares of
capital stock of AATBS. This acquisition was accounted for as a purchase and,
accordingly, the acquired assets and assumed liabilities have been recorded at
their estimated fair market values at the date of the acquisition. The
estimated fair market values of certain assets are based upon appraisal
reports. The purchase price of approximately $1,756,000 exceeded the fair
market value of net assets acquired, resulting in goodwill of approximately
$1,562,000. In connection with the purchase, the former owner of the acquired
business entered into a 10 year covenant not-to-compete agreement with the
Company for a total price of $50,000. The acquisition was financed through the
issuance of a $1,606,000 promissory note payable to the former owner and other
debt financing.
AR
On August 26, 1997, AR acquired certain assets and assumed certain
liabilities of Academic Review, Inc., a California corporation. This
acquisition was accounted for as a purchase and, accordingly, the purchased
assets
F-11
<PAGE>
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and assumed liabilities have been recorded at their estimated fair market
values at the date of acquisition. The estimated fair market values of certain
assets are based upon appraisal reports. The purchase price of approximately
$2,324,000 exceeded the estimated fair market value of net assets acquired,
resulting in goodwill of approximately $2,045,000. In connection with the
purchase, the former owner of the acquired business entered into a 10 year
covenant not-to-compete agreement with the Company for a total price of
$50,000. The acquisition was financed with bank debt.
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, subject to certain modifications, exceeded
the fair market value of net assets acquired resulting in goodwill of
approximately $1,962,000. The final purchase price adjustment is still being
negotiated, and the negotiations are expected to be completed in early
February 2000. The Company does not expect a material adjustment to the
purchase price. 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, Canadian schools which award non-degree certificates in network
engineering and software programming. The shareholder of the Company owned a
one-third interest in PrimeTech. Under the acquisition agreement, the Company
was required to pay the former owners 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's shareholder received a note for $166,666 (Canadian Dollars) from the
Company representing his pro rata share of the initial payment; the other
owners received cash. The note was subsequently repaid with the proceeds from
the Offering. The purchase price was determined by arm's-length negotiations
between the other owners on behalf of themselves and the shareholder, and
representatives of the Company (excluding the majority shareholder). The
acquisition has been accounted for as a purchase.
The following unaudited pro forma results of operations data (in thousands,
except per share data) for the years ended August 31, 1998 and 1997, assumes
that the business acquisitions described above occurred at the beginning of
the year preceding the year of the acquisition. The 1998 acquisition of
PrimeTech is not significant, as such, the Company has not included their
results in the pro forma information below. The unaudited pro forma results
below are based on historical results of operations including adjustments for
interest, depreciation and amortization and do not necessarily reflect actual
results that would have occurred.
<TABLE>
<CAPTION>
Year Ended
August 31,
---------------
1998 1997
------- -------
(In thousands,
except per
share amounts)
<S> <C> <C>
Net revenue............................................. $33,420 $29,267
Net income.............................................. $ 1,537 $ 2,301
------- -------
Earnings per share--basic and diluted................... $ 0.31 $ 0.47
======= =======
</TABLE>
John Marshall Law School
As of September 1, 1999 the Company entered into an agreement to manage the
John Marshall Law School of Atlanta, Georgia ("John Marshall"). The agreement
is for 10 years includes an option to purchase John Marshall. The right can be
exercised at the Company's discretion.
F-12
<PAGE>
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Debt
Debt of the Company at August 31, 1999 and 1998, consists of the following:
<TABLE>
<CAPTION>
August 31,
-------------
1999 1998
------ ------
(dollars in
thousands)
<S> <C> <C>
Borrowings under line of credit agreements................ $ -- $ 441
Bank note payable, bearing interest at the bank's prime
rate, requiring monthly interest payments of $14,500 and
a final principal payment on March 31, 1999, secured by
the assets of ASPP, repaid in connection with the
Offering................................................. -- 2,023
Bank note payable, bearing interest at the one year U.S.
treasury note rate plus 2%, requiring monthly principal
payments of $27,976 through September 1, 2004, secured by
the assets of AR, repaid in connection with the Offering. -- 2,042
Promissory note with the former owner of AATBS, 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................................... 901 1,131
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..................... 2,129 2,157
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....... 191 285
Bank note payable, bearing interest at the one year U.S.
treasury rate plus 2% requiring monthly principal
payments of $1,768 through September 1, 2004, secured by
the assets of AATBS and Ventura, repaid in connection
with the Offering........................................ -- 130
Bank note payable, bearing interest at the bank's prime
rate plus 1% requiring monthly payments of interest only,
principal due on February 12, 1999, unsecured, repaid in
connection with the Offering............................. -- 80
Bank note payable, bearing interest at 9%, requiring
monthly principal and interest payments of $1,462 through
May 18, 2008, secured by real estate..................... 106 113
Other .................................................... 54 --
------ ------
3,484 8,527
Less--Current maturities.................................. 486 3,362
------ ------
$2,998 $5,165
====== ======
</TABLE>
Business improvement loans, bearing interest at the prime
rate plus 1.5% (8.25% at August 31, 1999), requiring
monthly principal payments of $4,810 through 2002........ 103 --
Bank note payable, bearing interest at the bank's prime
rate requiring monthly principal payments of $8,333
through July 31, 1999, secured by certain assets of ASPP,
repaid in connection with the Offering................... -- 125
F-13
<PAGE>
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company had three line-of-credit agreements with various banks which
provided for aggregate maximum borrowings of $700,000, expiring at various
times beginning on March 31, 1999. Amounts outstanding under these agreements
bear interest at rates ranging from prime to prime plus 2% (8.5% to 10.5% at
August 31, 1998) and are secured by the assets of MIM, AATBS, Ventura and
ASPP. As of August 31, 1999 and August 31, 1998, outstanding borrowings under
these agreements totaled approximately $0 and $441,000 respectively. These
credit agreements expired in 1999.
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. 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. As of August 31, 1999 the Company was in compliance with its
covenants. The Credit Agreement terminates on May 21, 2001. As of August 31,
1999 the Company had not borrowed under this Credit Agreement.
At August 31, 1999, future annual principal payments of long-term debt are
as follows (dollars in thousands):
<TABLE>
<S> <C>
August 31--
2000.............................. $ 486
2001.............................. 443
2002.............................. 443
2003.............................. 50
2004.............................. 55
2005 and thereafter............... 2,007
------
$3,484
======
</TABLE>
5. 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 years ended August 31, 1998 and 1997 do 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.
F-14
<PAGE>
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 1999, 1998
and 1997 consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current:
Federal................................................ $676 $-- $--
State.................................................. 210 29 37
---- ---- ----
Total current provision................................. 886 29 37
Deferred:
Federal................................................ 51
State.................................................. 3
Foreign................................................ 132 -- --
---- ---- ----
Total deferred benefit.................................. (78) -- --
Initial recognition of deferred income tax benefit
resulting from change in tax status..................... (764) -- -
---- ---- ----
Total income tax provision............................... $ 44 $ 29 $ 37
==== ==== ====
</TABLE>
A reconciliation of the statutory Federal tax rate to the actual effective
income tax rate for the year ended August 31, 1999, is as follows (tax
provision for 1998 and 1997 relates to only the S Corporation taxes):
<TABLE>
<CAPTION>
1999
-----
<S> <C>
Statutory Federal income
tax rate................. 34.0%
Foreign taxes............. (0.2)
State income taxes, net of
federal benefit.......... 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....... 4.5
-----
Effective rate.......... 1.0%
=====
</TABLE>
The significant components of deferred income tax assets and liabilities as
of August 31, 1999 are as follows (dollars in thousands):
<TABLE>
<S> <C>
Deferred income tax assets:
Payroll and related............................................... $149
Allowance for doubtful accounts................................... 122
Fixed assets...................................................... 105
Deferred rent..................................................... 241
Tax net operating loss carry forward.............................. 122
Other............................................................. 137
----
Total deferred income tax assets................................ 876
Deferred income tax liabilities:
Other............................................................. (34)
----
Total net deferred tax assets................................... 842
====
</TABLE>
F-15
<PAGE>
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
No valuation allowance for deferred income tax assets at August 31, 1999
has been recorded as the Company believes that the deferred tax assets will be
realized in the future.
6. Shareholders' Equity
On October 8, 1999, 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 purchases, as available.
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.
7. 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. on March 19, 1999
556,500 shares were issued options to purchase at a strike price of $14.00 per
share. The options vest and become exercisable in three equal annual
installments commencing August 31, 1999 and expire ten years from the date of
grant. Of the 556,500 options outstanding, 185,500 are currently exercisable
as of August 31, 1999.
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.
The fair weighted average value of option issued during 1999 was $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 5.81%; no
dividend yield; expected volatility of 70% and an expected life of ten years.
Had compensation costs for options issued during 1999 been determined in
accordance with SFAS 123, the Company's net income and diluted net income per
share for the year ended August 31, 1999, would have been approximately
$2,783,000 and $.47, 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.
8. 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 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,
$2,811,567, $1,617,784 and $1,087,204 for the fiscal years ended August 31,
1999, 1998 and 1997, respectively.
F-16
<PAGE>
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 1999, 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):
<TABLE>
<CAPTION>
Real Estate
and Total
Lease Sublease Operating
Commitments Income Leases
----------- ----------- ---------
<S> <C> <C> <C>
For the year ended August 31,
2000.................................. $ 2,693 $(296) $ 2,397
2001.................................. 2,914 (152) 2,762
2002.................................. 3,014 (90) 2,924
2003.................................. 3,072 (48) 3,024
2004.................................. 2,813 (19) 2,794
2005 and thereafter................... 9,502 (7) 9,495
------- ----- -------
$24,008 $(612) $23,396
======= ===== =======
</TABLE>
9. Commitments and Contingencies
Letters of Credit
The Company has outstanding irrevocable letters of credit totaling
approximately $685,000 as of August 31, 1999, which were primarily issued in
connection with leases for office facilities.
Litigation
The Company, the majority shareholder of the Company and certain other
companies in which the majority shareholder of the Company has an interest
have been named as defendants in a class action lawsuit filed in November
1997. The lawsuit arose in connection with the closing of a for-profit
psychiatric hospital (the "Hospital"), which was established in 1989 by the
majority shareholder of the Company. The Hospital was substantially dependent
on Medicare reimbursement for its revenues. In May 1997, after continued
Medicare reimbursement to the Hospital was effectively terminated, the
Hospital ceased operations and made an assignment for the benefit of its
creditors, which is ongoing. The Company owned a 95% equity interest in the
Hospital at the time of the assignment for the benefit of its creditors.
The plaintiffs in the lawsuit, former employees of the Hospital, allege
that (i) the Hospital was closed without proper notice to employees in
violation of the Worker Adjustment and Retraining Notification Act; (ii)
employee contributions to the Hospital's profit sharing plan made prior to the
Hospital closing were not delivered to the plan in violation of the Employee
Retirement Income Security Act of 1974; (iii) the Hospital failed to pay the
final compensation due its employees prior to the Hospital closing in
violation of the Illinois Wage Payment and Collection Act, and (iv) the
defendants converted for their own use and benefit the amount of the
plaintiffs' last paycheck, accrued vacation, profit sharing contributions and
credit union contributions. The Company, the majority shareholder of the
Company and the other defendants in the lawsuit deny all claims asserted and
are vigorously defending themselves. The cost of the defense has not been
borne by the Company. The majority shareholder of the Company has entered into
an indemnification agreement with the Company. The agreement
F-17
<PAGE>
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. Regulations
to implement the 1998 Amendments are scheduled to become effective on July 1,
2000, with the exception of new requirements concerning the calculation of
refunds to students who fail to complete their enrollment, which are scheduled
to become effective in October, 2000. The Company does not believe that the
1998 Amendments will have a material adverse effect on its business operations.
None of the Company's institutions derives more than 80% of its revenue from
Title IV funds and no institution has student loan default rates in excess of
current thresholds. The Company also believes based on its current refund
policy that it will satisfy the new refund requirements.
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, 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.
10. Related-Party Transactions
During fiscal 1997, the Company advanced funds to its majority shareholder
totaling $500,000. The unsecured note bears interest at 5.9% at August 31, 1997
and is due on June 26, 1999. The amount of principal and interest outstanding
totaled $527,791 and was repaid on May 31, 1998.
F-19
<PAGE>
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 note
is secured by the majority shareholder's stock in the Company, bears interest
at 4.33% and is due upon demand. The principal and accrued interest thereon was
repaid in full during 1999.
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, 1998 and 1997 the Company incurred and paid expenses totaling
$667,849, $2,271,232 and $993,441, respectively, related to such services.
Subsequent to the Offering, such services are no longer provided by the
affiliated company.
As of August 31, 1998, the Company had loaned approximately $165,000 to
PrimeTech, an entity one-third owned by the majority shareholder of the
Company. The note is unsecured and bears interest at 8.0%. The Company
purchased 100% of PrimeTech on November 30, 1998 (Note 3).
The Company pays 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 and $106,000 at August 31, 1999 and 1998, respectively. The affiliated
entity paid a management fee to the Company of approximately $72,000 and
$174,000 during fiscal 1999 and fiscal 1998, respectively, related to such
services.
The Company entered a 10 year management agreement with John Marshall Law
School of Atlanta. A line of credit was established between the Company and
John Marshall Law School. As of August 31, 1999, the Company advanced
approximately $500,000 to John Marshall Law School, the amount is included in
other long term assets..
12. 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 $585,423, $455,778
and $389,632 for the years ended August 31, 1999, 1998 and 1997, respectively.
13. 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 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-20
<PAGE>
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents financial data for the years ended August 31,
1999, 1998 and 1997 for these segments (dollars in thousands):
<TABLE>
<CAPTION>
Schools Test Preparation Consolidated
------- ---------------- ------------
1999
<S> <C> <C> <C>
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 3,796 788 4,584
Total assets........................ 30,233 4,086 34,319
Capital expenditures................ 1,860 29 1,889
Long-lived assets................... 8,684 3,732 12,416
<CAPTION>
1998
<S> <C> <C> <C>
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
<CAPTION>
1997
<S> <C> <C> <C>
Revenue............................. $20,460 $ -- $20,460
Income from operations.............. 2,858 -- 2,858
Depreciation and amortization....... 438 -- 438
Interest revenue.................... 497 -- 497
Interest expense.................... 107 -- 107
Net Income 3,163 -- 3,163
Total assets........................ 13,117 4,463 17,580
Capital expenditures................ 341 -- 341
Long-lived assets................... 3,483 4,436 7,919
</TABLE>
F-21
<PAGE>
MANAGEMENT SERVICES AGREEMENT
between
ARGOSY EDUCATION GROUP, INC.
and
JOHN MARSHALL LAW SCHOOL, Inc.
<PAGE>
MANAGEMENT SERVICES AGREEMENT
THIS MANAGEMENT SERVICES AGREEMENT dated as of September 1, 1999, is
entered into between ARGOSY EDUCATION GROUP, INC., an Illinois corporation (the
"Manager"), and JOHN MARSHALL LAW SCHOOL, INC., a Georgia non-profit corporation
("JMLS").
W I T N E S S E T H:
WHEREAS, JMLS is engaged in the business of providing legal education and
related services and supplies (the "School");
WHEREAS, JMLS desires to engage the Manager to manage the School and the
Manager is willing to be so engaged to manage the School, in accordance with the
terms and conditions set forth in this Agreement; and
WHEREAS, this Agreement and an Option Agreement between Argosy Education
Group, Inc. and John Marshall Law School, Inc., dated July 29, 1999, are among
the conditions precedent to the Loan Agreement between Argosy Education Group,
Inc. and John Marshall Law School, dated July 29, 1999.
NOW THEREFORE, in consideration of the premises and the mutual covenants
and agreements contained in this Agreement, and in order to permit the Manager
to take over the management of the School, it is hereby agreed as follows:
1. Definitions.
-----------
a. For purposes of this Agreement, the following terms shall have the
meanings set forth below:
"Affiliate" of any Person (the "first person") shall mean (a) any Person,
directly or indirectly, owning or controlling or holding power to vote ten
percent (10%) or more of the outstanding voting securities of the first person,
(b) any Person, ten percent (10%) or more of whose outstanding voting securities
are directly or indirectly owned, controlled or held with power to vote by the
first person, (c) any Person, directly or indirectly, controlling, controlled by
or under
<PAGE>
common control with the first person, (d) if the Person is a partnership, any
general partner of such partnership and (e) if the first person is an officer,
director or general partner, any Person for which the first person acts in such
capacity. As used in the definition of "Affiliate", the term "control" means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of a Person, whether through ownership
of voting securities, by contract or otherwise. Neither JMLS nor the Manager is
an Affiliate of the other.
"Agreement" shall mean this Management Services Agreement, including all
Schedules hereto, as it may be amended from time to time in accordance with its
terms.
"American Bar Association Standards" (ABA standards) shall mean the
Standards for the Approval of Law Schools.
"Anniversary" shall mean, when preceded by the term "First", "Second",
etc., the date which is the applicable anniversary of the Effective Date.
"Arbitrator" shall mean any natural person who is a resident of the United
States and who is not an employee or Affiliate of any of the parties hereto or
of any Person which is an Affiliate of any such party. In the selection and
appointment of Arbitrators the parties each agree to act in good faith to name
persons with experience and expertise in the subject matter involved.
"Budget" shall mean the budget for any Budget Period of JMLS, prepared and
approved in accordance with Section 13.
"Business Day" shall mean any day on which national banks located in
Chicago, Illinois are generally open for business.
"Effective Date" shall mean the effective date of this Agreement, set forth
in the introductory paragraph of this Agreement as the date as of which this
Agreement is entered into by the Manager and JMLS.
"GAAP" shall mean U.S. generally accepted accounting principles set forth
in the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board, which are
2
<PAGE>
applicable to the circumstances as of the date of determination. For purposes of
this Agreement, when GAAP permits the use of alternative accounting methods, the
choice of methods acceptable under GAAP shall be applied in a manner consistent
with the historic practices used by the Person to which the term applies.
"Include" and "including" shall mean include or including, as the case may
be, without any implied exclusion of other items.
"Law" shall mean any law, statute, regulation, rule, ordinance, order,
consent decree, settlement agreement or government requirement, including any
ruling or requirement having the effect of law and applicable to JMLS, Manager,
or their respective Affiliates issued by any federal, state or local executive,
legislative or judicial body or entity.
"Manager" shall have the meaning given to it in the preamble.
"JMLS" shall have the meaning given to it in the preamble.
"Person" shall mean any natural person, corporation, partnership or other
business structure recognized as a separate legal entity.
"Term" shall mean the period commencing on the Effective Date and ending on
the Termination Date.
"Termination Date" means the date on which this Agreement is terminated in
accordance with its terms.
2. Appointment. JMLS hereby appoints and engages the Manager as JMLS's
-----------
sole and exclusive business manager of the School, and the Manager accepts such
appointment and engagement on and subject to the terms and conditions set forth
in this Agreement. Subject to the limitations and conditions set forth in this
Agreement, the Manager, in such capacity, shall have the authority and
responsibility to direct, supervise and manage the business operations of the
School on behalf of and for the account of JMLS and to take all actions related
thereto.
3. Facilities Provided by JMLS. JMLS shall obtain such facilities and
---------------------------
shall provide such equipment and supplies as are reasonably necessary for the
3
<PAGE>
proper and efficient operation of the School. To the extent such facilities
and/or equipment are not in place at the time this Agreement is executed and
delivered, the Manager may advise JMLS of the need for same, whereupon unless
objected to in writing by JMLS, the Manager will arrange for the rental of such
facilities and/or the purchase or leasing of such equipment, in each case in the
name of, as the obligation of and funded by, JMLS. Such facilities, equipment
and supplies shall include the following:
a. Premises and Equipment.
----------------------
i. The Manager will maintain present leases and negotiate leases
or purchase contracts on behalf of and in the name of JMLS for such premises as
may be determined by the Manager to be necessary for the conduct of the School.
All premises used by JMLS in the conduct of the School are collectively referred
to herein as the "Premises".
ii. JMLS will make available for the Manager's use in connection
with the performance of the management services being provided hereunder
equipment, furniture and furnishings as are reasonably determined by the Manager
from time to time to be necessary for the operation of the School. At the
expense of JMLS, the Manager shall cause to be maintained such equipment in good
condition and repair, reasonable wear and tear excepted, and shall cause to be
refurbished or replaced the same as it becomes worn out or obsolete. The Manager
shall have no title in the equipment made available by JMLS hereunder; provided
however with the consent of JMLS, the Manager may from time to time take title
to any newly acquired equipment and lease such equipment to JMLS on terms that
are customary in the marketplace for similar leases or on terms otherwise
reasonably acceptable to JMLS. All of such equipment, furniture and furnishings
are collectively referred to as the "Equipment".
iii. This paragraph shall not be construed to effect the purchase
or lease of equipment in the academic program, specifically including computers
and peripherals used for students and faculty. Such leases and purchases shall
be made part of the Academic Support Budget.
b. Supplies. JMLS will provide all office and other supplies
--------
reasonably required for the operation of the School. The Manager will have the
authorization to order and/or purchase, in the name of JMLS, all such supplies.
4
<PAGE>
4. Manager's Basic Duties. Consistent with ABA Standard 204, the manager
----------------------
shall perform the following duties: supervise and direct the general financial
operations of the School; develop practices and structures with respect to the
implementation of new features and educational programs to the extent that the
financial obligations and resources of JMLS permit; develop a marketing program
for the purpose of creating an increased awareness of the School and its
program; stimulate the general business of the School; employ at the expense of
JMLS such personnel for the financial operation of the School as may be
reasonably considered required by the Manager; collect income; at the expense of
JMLS, cause the furniture, furnishings and equipment to be kept in good repair;
at the expense of JMLS, arrange for necessary replacements, improvements and
changes in the furniture, furnishings and equipment; supervise the placing of
insurance on the operations of the School and its assets against all risks
usually covered in the case of similarly situated businesses; and perform all
other acts necessary or desirable in the operation of the School consistent with
ABA Standards.
5. Expenses. All staff and administrative personnel employed to perform
--------
services at the JMLS facilities, other than employees of the Manager who may
visit the facilities of JMLS from time to time to provide assistance and other
than employees of the Manager who the Manager may, in its sole discretion,
locate at JMLS facilities, shall be the employees or independent contractors of
JMLS but shall be supervised and/or directed by the Manager. The Manager shall
make all hiring and termination decisions, establish and pay (from JMLS's funds)
all wages, salaries and compensation, determine staffing levels, individual work
hours, personnel policies and employee benefit programs for all of the JMLS
personnel engaged in providing services for the School, as determined by the
Manager to be competitive with comparable and/or nearby businesses. All academic
personnel shall be selected, retained, promoted and terminated in accordance
with Chapter 4 of the ABA Standards and Standard 204 and the Faculty Policies as
approved by the Board of Trustees. Academic personnel shall include all tenure
tract faculty, instructors whether or not on tenure tract, and library
professionals. JMLS shall enter into an Employment Agreement with Robert J.
D'Agostino, in substantially the form attached hereto as Exhibit "A." Robert J.
D'Agostino shall have discretion in choosing his administrative assistant, who
is currently Michael Owens.
6. Billing and Collection. The Manager shall provide such billing and
----------------------
collection services as are determined by the Manager to be reasonably necessary
to attempt to collect in a timely manner all charges resulting from
5
<PAGE>
JMLS provision of legal education and related services, and supplies to students
in connection with the operation of the School.
7. Expenditures by Manager. The Manager shall have the power and
-----------------------
authority to make all contracts and disbursements necessary to carry out the
duties conferred and imposed upon it by this Agreement, including, but not
limited to, the authority to pay for all salaries, operating expenses,
management expenses, maintenance and insurance. The Manager may, in the name
and at the expense of JMLS, institute any legal or equitable action or
proceeding for the collection of outstanding invoices fees, and/or other income
owing to the School. The Manager shall pay such expenses from the funds of
JMLS, or to the extent paid directly by the Manager, shall be entitled to prompt
reimbursement by JMLS for any and all such expenditures, provided that the
Manager shall bear the cost of its own overhead and the salaries of its own
officers and employees.
8. Bank Accounts.
-------------
a. JMLS shall establish or shall authorize the Manager to establish
segregated bank accounts at a banking institution or banking institutions
selected by the Manager (but consented to by JMLS, such consent not to be
unreasonably withheld). JMLS shall provide the Manager with control and
signature authority with respect to all such bank accounts for purposes of
enabling the Manager to carry out its duties hereunder. During the Term of this
Agreement, JMLS will not withdraw any funds from such accounts or issue any
checks against such accounts without first notifying the Manager of its desire
to do so and obtaining written approval from the Manager to do so. In the event
that there are any shortfall in funds necessary to pay the expenses of the
operation of the School (including the Manager's compensation), the Manager will
so notify JMLS and JMLS will deposit or cause to be deposited into the
appropriate bank account or bank accounts the funds necessary to fund such
shortfall.
b. At the commencement of this relationship, JMLS shall advise the
Manager as to the initial amounts deposited into each such bank account and the
Manager shall be entitled to take such reasonable action to verify such opening
balances. There shall be no outstanding checks drawn against such accounts at
the time this relationship commences.
9. Financial Aid. The Manager shall provide consulting services to
-------------
JMLS's administrative staff and students of the School to the extent that they
6
<PAGE>
interact with federal student aid organizations. Such services may also include
processing applications for federal student loans, reports on approval and
status of such loans and internal audits of JMLS records to assist JMLS in
remaining in compliance with federal regulations.
10. Attorney-in-Fact. JMLS hereby appoints the Manager its true and
----------------
lawful attorney-in-fact to take the following actions for and on behalf of and
in the name of JMLS:
a. bill and collect all charges resulting from JMLS provision of
legal educational services and supplies to students in connection with the
operation of the School;
b. take possession of and endorse in the name of JMLS all cash,
notes, checks, money orders, insurance payments and any other instruments
received as payment of accounts receivable;
c. deposit all such collections directly into a JMLS account or
accounts with a banking institution selected by the Manager, with the consent of
JMLS, and to make withdrawals from such JMLS account(s); and
d. place accounts for collection, settle and compromise claims, and
institute legal action for the recovery of accounts, provided, however, that the
decision to take such steps shall be subject to the prior approval of, or
policies developed by, JMLS.
11. Bookkeeping and Accounting Services. The Manager shall perform all
-----------------------------------
bookkeeping and accounting services required for the operation of the School,
including the maintenance, custody and supervision of the School's business
records, ledgers and reports; the establishment, administration and
implementation of accounting procedures, controls and systems; the preparation
of the financial and management reports referenced in Section 12; implementation
and management of computer-based management information systems; and
implementation and management of records retrieval and confidentiality systems.
12. Financial and Management Reports. The Manager shall prepare and
--------------------------------
furnish to JMLS the following reports:
7
<PAGE>
a. Monthly and annual balance sheets and income statements for JMLS.
All such statements shall be prepared on an accrual basis of accounting in
accordance with GAAP, with such exceptions thereto as are determined by the
Manager to be advisable; and
b. Any additional financial and management reports and information
that the Manager determines would assist JMLS in evaluating its productivity and
services.
The tax returns of JMLS for any period shall be the responsibility of JMLS,
although the Manager will reasonably cooperate with the person preparing such
returns.
13. Budgeting.
---------
The duties of the Manager hereunder include participating in the overall
financial planning for the School, and assisting JMLS in making business and
financial decisions with respect to the School. As part of that responsibility,
the Manager shall provide technical support and guidance in the preparation of
budgets. JMLS shall have initial responsibility to prepare the law school's
budget in conformity with the ABA Standards, specifically standards 209 and 602.
14. School Operating Plan.
---------------------
Within ninety (90) days of the Effective Date of the Agreement, and
every three (3) years thereafter, JMLS and the Manager will develop and adopt a
business operating plan (the "School Operating Plan"). JMLS and the Manager
each agree to cooperate and work together to implement the School Operating Plan
in accordance with the timetable specified therein, with such amendments and
modifications thereto as are deemed appropriate by the parties from time to
time. It is anticipated that the School Operating Plan will be consistent with
the School's mission of offering tuition below the price of competing private
schools, emphasizing first year writing courses, developing a third year program
oriented to practical training and maintaining a first-class teaching faculty.
15. Manager's Compensation.
----------------------
8
<PAGE>
a. The Manager shall be compensated at the rate of twenty percent
(20%) of the net revenues from the School. Such compensation shall be paid on
the 15th day of each month on the basis of the net revenues during the preceding
month (the "Monthly Fee"). The term "net revenues" as used in this Agreement
includes all revenue of JMLS, on an accrual basis, from all sources (other than
donations, grants, sums from sale of capital assets and from sums, including
tuition, due for services rendered prior to September 1, 1999), less discounts
and allowances not otherwise already deducted from such revenues. For the
purpose of calculating the Manager's compensation, funds used to make payments
on the Bank Loan and the Eisenstein Loan (as defined herein) will be excluded
from the calculation of net revenues regardless of the source of such funds.
All computations of net revenues shall be made on an accrual basis in accordance
with GAAP.
b. JMLS currently has a loan with First Citizens/The Bank in the
principal amount of $196,000 (the "Bank Loan") and a loan with Bernie Eisenstein
in the principal amount of $170,000 (the "Eisenstein Loan") which shall be paid
in accordance with (S)15(a) and the Loan Agreement. If, in any month, JMLS has
insufficient cash to pay the current monthly payment due on the Bank Loan or the
Eisenstein Loan, Manager agrees to defer and accrue its Monthly Fee, in full or
in part, as necessary to make the then current payments on the Bank Loan and
Eisenstein Loan. The Manager may also defer and accrue it's Monthly Fee to the
extent necessary to make any monthly payments due in JMLS's ordinary course of
business. Any Monthly Fees accrued pursuant to this subsection (b) during the
course of any fiscal year shall be paid in full out of the first available net
cash, after current payments due on the Bank Loan and the Eisenstein Loan, but
in no event later than sixty (60) days after the end of the School's fiscal
year, unless otherwise agreed by the Manager in writing.
15. Insurance.
---------
The Manager shall be responsible for procuring and maintaining
insurance for the benefit of the School at the expense of JMLS and shall name
the Manager as an additional insured under all such insurance. Such insurance
shall include all insurance customarily maintained by businesses similarly
situated including without limitation the following:
9
<PAGE>
a. Comprehensive general liability insurance and fidelity bonds (if
determined by the Manager to be necessary) in amounts and with coverages
approved by the parties;
b. Property insurance covering the premises, equipment and supplies
used in the conduct of the School, in an amount and with coverages approved by
the parties. The Manager may procure and maintain any insurance required of it
by this Agreement through any program of self-insurance that complies with
normal actuarial standards or through an Affiliate acting in the capacity as
agent or insurance company, including off-shore captive insurance companies, in
amounts not less than those approved by the parties; and
c. Such other insurance coverage as is determined by the parties to
be advisable and the cost of which is included in the applicable Budget.
16. Additional Covenants and Board Resolution.
-----------------------------------------
a. During the Term, JMLS agrees that it will not, without the prior
written consent of the Manager, (i) merge, consolidate, or acquire all or any
substantial portion of the assets or capital stock of any Person, (ii) sell,
lease, transfer or otherwise dispose of any of its assets, other than assets
sold in the ordinary course of its business, or (iii) dissolve JMLS.
b. Prior to the execution of this Agreement, the Board of Trustees
of JMLS shall have executed a resolution, substantially in the form attached
hereto as Exhibit B.
17. Events of Default.
-----------------
The following events shall each be a Default under this Agreement:
a. If either party fails to perform in any material respect any
material obligation required of it hereunder, and such default continues for 90
days after the giving of written notice by the non-defaulting party, specifying
the nature and extent of such default; provided, however, that if such default
is not cured within 90 days, but is capable of being cured within a reasonable
period of time in excess of 90 days, then a Default shall not occur if the
defaulting party commences the cure of such default within the first 90-day
period and thereafter diligently and in good faith continues to cure such
default until completion.
10
<PAGE>
b. If either party (i) applies for or consents to the appointment of
a receiver, trustee or liquidator of all or a substantial part of its assets,
files a voluntary petition in bankruptcy or consents to an involuntary petition,
makes a general assignment for the benefit of its creditors, files a petition or
answer seeking reorganization or arrangement with its creditors, or admits in
writing its inability to pay its debts when due, or (ii) suffers any order,
judgment or decree to be entered by any court of competent jurisdiction,
adjudicating such party bankrupt or approving a petition seeking its
reorganization or the appointment of a receiver, trustee or liquidator of such
party or of all or a substantial part of its assets, and such order, judgment or
decree continues unstayed and in effect for 90 days after its entry, then the
other party shall be entitled to terminate this Agreement by delivering written
notice of termination to such party.
18. Remedies Upon Default.
---------------------
a. If JMLS shall Default under this Agreement and such Default is not
cured by JMLS as provided in Section 18, then at the option of the Manager, the
Manager shall be entitled to terminate this Agreement.
b. In the event that the Manager shall Default under this Agreement
and such Default shall not be cured as provided in Section 18, then at the
option of JMLS, JMLS shall be entitled to terminate this Agreement.
19. Term. This Agreement shall commence on the Effective Date and, unless
----
earlier terminated pursuant to the terms hereof, shall expire on the tenth
anniversary of the Effective Date. Except for termination upon Default as
described in Section 18 or termination upon expiration of the Term, this
Agreement shall not be terminated by either party for any reason whatsoever.
20. Effect of Termination. Notwithstanding any other provisions of this
---------------------
Agreement, following the termination of this Agreement, this Agreement shall
remain in full force and effect with respect to events, actions, omissions or
occurrences which occurred prior to the termination of this Agreement. The
provisions of Sections 15, 19, 22-25, and of this Section, shall survive any
such termination and shall not expire.
11
<PAGE>
21. Indemnification. JMLS shall indemnify and hold harmless the Manager
---------------
from damages for injuries to persons or property resulting from any cause
whatsoever in connection with the operation of the School, and at its own cost
and expense, to defend any action or proceeding against the Manager arising
therefrom, except as to circumstances where such damages are a direct result of
the negligence or malfeasance of the Manager or principally a result of the
failure of the Manager to fully and faithfully perform its duties hereunder.
This indemnification shall include, but not be limited to, all costs in
defending against the suit, attorneys' fees and any eventual settlement or
judgment amount, plus interest.
22. Governing Law. This Agreement shall be construed, interpreted and
-------------
applied in accordance with the laws of the State of Illinois.
23. Dispute Resolution.
------------------
a. The parties desire to resolve disputes arising out of this
Agreement without litigation. Accordingly, except for action seeking temporary
restraining order or injunction related to the purposes of this Agreement, or
suit to compel compliance with this dispute resolution process, the parties
agree to use the following alternative dispute resolution procedure as their
sole remedy with respect to any controversy or claim arising out of or relating
to this Agreement or its breach.
b. At the written request of a party, each party will appoint a
knowledgeable, responsible representative to meet and negotiate in good faith to
resolve any dispute arising under this Agreement. The parties intend that these
negotiations be conducted by non-lawyer, business representatives. The
location, format, frequency, duration and conclusion of these discussions shall
be left to the discretion of the representatives. Upon agreement, the
representatives may utilize other alternative dispute resolution procedures such
as mediation to assist in the negotiations. Discussions and correspondence
among the representatives for purposes of these negotiations shall be treated as
confidential information developed for purposes of settlement, exempt from
discovery and production, which shall not be admissible in the arbitration
described below or in any lawsuit without the concurrence of all parties.
Documents identified in or provided with such communications, which are not
prepared for purposes of the negotiations, are not so exempted and may, if
otherwise admissible, be admitted in evidence in arbitration or lawsuit.
12
<PAGE>
c. If the negotiations do not resolve the disputes within sixty (60)
days of the initial written request, the disputes shall be submitted to binding
arbitration by a single arbitrator pursuant to the Commercial Arbitration Rules
of the American Arbitration Association. A party may demand such arbitration in
accordance with the procedures set out in those rules. Discovery shall be
controlled by the arbitrator and shall be permitted to the extent set out in
this section. Each party may submit in writing to a party, and that party shall
so respond, to a maximum of any combination of thirty-five (none of which may
have subparts) of the following: interrogatories, demands to produce documents,
and requests for admission. Each party is also entitled to take the oral
deposition of one individual of another party. Additional discovery may be
permitted upon mutual agreement of the parties. The arbitration hearing shall
commence within sixty (60) days of the demand for arbitration. The arbitration
shall be held in Chicago, Illinois. The arbitrator shall control the scheduling
so as to process the matter expeditiously. The parties may submit written
briefs. The arbitrator shall rule on the dispute by issuing a written opinion
within thirty days after the close of the hearings. The times specified in this
section may be extended upon mutual agreement of the parties or by the
arbitrator upon a showing of good cause. Judgment upon the award rendered by
the arbitrator may be entered in any court having jurisdiction.
d. Each party shall bear its own costs of these procedures. A party
seeking discovery shall reimburse the responding party for the costs of
production of documents (to include search time and reproduction costs). The
parties shall equally split the fees of the arbitration and the arbitrator.
24. Confidential Information and Records.
------------------------------------
a. JMLS and the Manager agree that each will acquire certain
information and materials that are the confidential and proprietary information
of the others (the "Confidential Information"). JMLS and the Manager each agree
not to disclose or use the Confidential Information of the other except in the
performance of this Agreement or with the prior, express, written consent of the
other. JMLS and the Manager each agree to take all actions reasonably necessary
and satisfactory to the other to protect the confidentiality of the Confidential
Information of the other. JMLS and the Manager each shall assume that all
information and materials exchanged are Confidential Information except that the
following shall not be considered Confidential Information:
13
<PAGE>
(1) Information known to the disclosee prior to the date the parties
first contacted each other.
(2) Information in the public domain, through no act or omission of
the party to this Agreement is required to keep such information
confidential.
(3) Information received from a third party with a legal or
contractual right to disclose such information.
(4) Information independently developed by the disclosee without
reference to the Confidential Information.
(5) Information disclosed without restriction pursuant to judicial
action or government regulation; provided, the party proposing to
disclose or use such Confidential Information has notified the other
party prior to such disclosure and reasonably cooperates with the
others in the event the other party chooses to legally contest and
avoid such disclosure.
b. All business records, information, software and systems of the
Manager relating to the provision of its services under this Agreement shall
remain the property of the Manager, and may be removed by the Manager from
supporting the School upon any termination of this Agreement; provided, however,
that JMLS shall be entitled upon reasonable written request, to access such
records and make copies or extracts thereof to the extent necessary to prosecute
or defend against any tax or other liabilities imposed on JMLS by any
governmental authority or other party.
c. Student data in usable form and student records shall remain the
property of JMLS and shall be delivered by the Manager to JMLS, upon request,
following any termination of this Agreement.
d. Except as otherwise provided in this Agreement, the parties shall
safeguard all records maintained by them pursuant to this Agreement for a period
of time specified by the parties (no less than three years) from the date of the
last activity recorded in such records and, prior to destruction of any such
records, shall give the other party notice of such destruction and, if the other
party
14
<PAGE>
so elects and applicable Law so permits, shall deliver such records to the other
party in lieu of destroying them.
25. Assignment. The Manager shall have the right to assign, transfer,
----------
sell or pledge its rights hereunder to any Affiliate of the Manager. JMLS shall
not have the right to assign its rights and obligations hereunder without the
prior written consent of the Manager. This Agreement shall be binding upon and
inure to the bereft of the parties hereto and their respective heirs, personal
representatives, and permitted successors and assigns.
26. Enforcement Rights. JMLS acknowledges that both JMLS and the Manager
------------------
will be directly or indirectly affected by the enforcement of JMLS's rights
against third parties, and that the Manager may need from time to time to take
legal action against third parties to enforce the rights of JMLS. Therefore,
JMLS hereby appoints the Manager its true and lawful attorney-in-fact to enforce
an any all rights of JMLS, other than any rights JMLS may have against the
Manager, to the extent not contrary to applicable Law.
27. Miscellaneous.
-------------
a. Amendment. This Agreement may be amended, modified or
---------
supplemented but only in writing signed by each of the parties hereto.
b. Notices. Any notice, request, instruction or other document to be
-------
given hereunder by a party hereto shall be in writing and shall be deemed to
have been given, (i) when received if given in person or by U.S. mail, certified
or registered mail, return receipt requested, postage prepaid, or (ii) on the
date of acknowledgment of receipt if sent by facsimile or other wire
transmission or by overnight courier.
If to JMLS, addressed as follows:
John Marshall Law School, Inc.
1422 West Peachtree St., N.W.
Atlanta, Georgia 30309
Attn: Robert J. D'Agostino
If to the Manager, addressed as follows:
15
<PAGE>
Argosy Education Group, Inc.
20 South Clark Street
Chicago, Illinois 60603
Attn: Harold J. O'Donnell, Ph.D.
or to such other individual or address as a party hereto may designate for
itself by notice given as herein provided.
c. Waivers. The failure of a party hereto at any time or times to
-------
require performance of any provision hereof shall in no manner affect its right
at a later time to enforce the same. No waiver by a party of any condition or of
any breach of any term contained in this Agreement shall be effective unless in
writing, and no waiver in any one or more instances shall be deemed to be a
further or continuing waiver of any such condition or breach in other instances
or a waiver of any other condition or breach of any other term.
d. Counterparts. This Agreement may be executed simultaneously in
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
e. Headings. The headings preceding the text of Sections of this
--------
Agreement are for convenience only and shall not be deemed part of this
Agreement.
f. Further Assurances. Each party will, at the reasonable request of
------------------
any other party hereto, execute and deliver to such other party all such further
instruments, assignments, assurances and other documents, and take such actions
as such other party may reasonably request in connection with the carrying out
of this Agreement.
g. Remedies Cumulative. No remedy set forth in this Agreement or
-------------------
otherwise conferred upon or reserved to any party shall be considered exclusive
of any other remedy available to any party, but the same shall be distinct,
separate and cumulative and may be exercised from time to time as often as
occasion may arise or as may be deemed expedient.
16
<PAGE>
h. Construction. The language in all parts of this Agreement shall
------------
be construed, in all cases, according to its fair meaning. The parties
acknowledge that each party and its counsel have reviewed and revised this
Agreement and that the normal rule of construction to the effect that any
ambiguities are to be resolved against the drafting party shall not be employed
in the interpretation of this Agreement.
i. Authorized Persons. Whenever any consent, approval or
------------------
determination of a party is required pursuant to this Agreement, such consent,
approval or determination shall be rendered on behalf of the party by the person
or persons duly authorized to do so, which the other party shall be justified in
assuming means any officer of the party rendering such consent, approval or
determination, or such party's board of directors.
j. Severability. If any provision of this Agreement is or becomes
------------
invalid. illegal or unenforceable in any respect, the validity, legally and
enforceability of the remaining provisions contained herein shall not be
affected thereby.
k. Entire Understanding. This Agreement, the Loan Agreement the
--------------------
Option Agreement and the other agreements between the parties expressly
contemplated hereby and thereby set forth the entire agreement and understanding
of the parties hereto in respect to the transactions contemplated hereby and
thereby and supersede all prior agreements, arrangements and understandings
relating to the subject matter hereof and thereof and is not intended to confer
upon any other person any rights or remedies hereunder or thereunder. There have
been no representations or statements, oral or written, that have been relied on
by any party hereto, except those expressly set forth in this Agreement, the
Loan Agreement, the Option Agreement and such other agreements.
l. Binding Effect. The provisions of this Agreement shall be binding upon and
--------------
inure to the benefit of both parties and their respective legal representatives,
successors and permitted assigns.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of
the day and year first above written.
17
<PAGE>
ARGOSY EDUCATION GROUP, INC.
By:__________________________
Title:_______________________________
JOHN MARSHALL LAW SCHOOL, INC.
By:________________________________
Title:_______________________________
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
THE BALANCE SHEET, STATEMENT OF OPERATIONS AND CASH FLOWS and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-START> SEP-01-1998
<PERIOD-END> AUG-31-1999
<CASH> 8,980
<SECURITIES> 6,027
<RECEIVABLES> 1,909
<ALLOWANCES> 316
<INVENTORY> 0
<CURRENT-ASSETS> 17,924
<PP&E> 8,232
<DEPRECIATION> 2,615
<TOTAL-ASSETS> 34,319
<CURRENT-LIABILITIES> 5,107
<BONDS> 0
0
0
<COMMON> 69
<OTHER-SE> 25,535
<TOTAL-LIABILITY-AND-EQUITY> 34,319
<SALES> 0
<TOTAL-REVENUES> 36,866
<CGS> 0
<TOTAL-COSTS> 32,361
<OTHER-EXPENSES> 6
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 567
<INCOME-PRETAX> 4,627
<INCOME-TAX> 44
<INCOME-CONTINUING> 4,583
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,583
<EPS-BASIC> .78
<EPS-DILUTED> .78
</TABLE>
