<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------
FORM 10-K
---------
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended August 31, 2000
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, Suite 2800, Chicago,
Illinois 60603
(Former Address: Two First National Plaza, 20 South Clark Street, 3rd Floor,
Chicago, Illinois 60603)
(Address of principal executive offices)
----------------------------------------
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 $5.94 per share closing sale price
of the registrant's Common Stock on November 21, 2000, was approximately
$9,376,848. 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 21, 2000 was 6,478,594.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of our Notice of Annual Meeting and Proxy Statement for our Annual
Meeting of Stockholders, is scheduled to be held on January 26, 2001, 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>
<CAPTION>
Page
<S> <C>
PART I
ITEM 1. BUSINESS................................................................................ 3
ITEM 2. PROPERTIES.............................................................................. 24
ITEM 3. LEGAL PROCEEDINGS....................................................................... 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................... 25
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS................... 25
ITEM 6. SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA......................................... 27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS... 28
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.............................. 35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................................. 36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.... 36
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...................................... 36
ITEM 11. EXECUTIVE COMPENSATION.................................................................. 36
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......................... 36
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................................... 36
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K........................ 37
</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.
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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. For the 1999-2000 school year, approximately 59% of the
Company's students were enrolled in doctoral programs. In 1999, the Company
graduated approximately 225 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 5,400 students, representing 50 states and 20
foreign countries, enrolled for the 1999-2000 school year.
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
six 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
the 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.
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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.
As of September 1, 1999 the Company entered into a long term agreement to
manage the John Marshall Law School of Atlanta, Georgia ("John Marshall"). The
agreement includes a 10-year option to purchase John Marshall. The right can be
exercised at the Company's discretion. Throughout its 67-year history, John
Marshall 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 contractual basis.
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>
American Schools of Professional
Psychology NCA
Illinois School of Professional
Psychology/Chicago......................... Chicago, IL 1976 -- APA
Illinois School of Professional
Psychology/Chicago Northwest............... 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 -- APA
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>
(1) Historically operated as a unit of the University of Sarasota.
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In February, 2000, MIM was granted candidate status for accreditation by
NCA MIM will continue its efforts towards full accredidation which can take at
least one or two years. In addition, the Florida School of Professional
Psychology will host the APA on a site visit which is a preliminary step to
potentially full accreditation.
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 2009 the number of students enrolled in
higher education institutions will increase from current estimated levels 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, 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 1997 the income premiums over comparable workers with high school
diplomas for associate, bachelor's, master's and doctoral degree holders were
26%, 57%, 103% and 175%, 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.
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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 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:
The Argosy University Concept. The Company is instituting the Argosy
University restructuring initiative. Under this plan, all Argosy Education
Group, Inc. schools will ultimately be represented under the single banner,
Argosy University. Among the strategic advantages identified are the following:
. Economies of scale - Operating as one entity will allow efficiencies
in facilities, student recruitment, marketing, advertising and other
communications, information technology, student financial aid and a
host of other administrative functions.
. Clearer investor identity - Communicating one brand consistently to
all audiences will raise awareness and create greater understanding
among current and prospective investors about the inherent value of
the Argosy franchise.
. Simplified accrediting and regulatory relationships - Argosy
University and all its campuses will be accredited by the North
Central Association of Schools and Colleges. Today, our campuses
hold accreditation from three regional accrediting bodies, each with
their own unique requirements. Managing state and federal regulatory
affairs also will become less burdensome.
. Streamlined corporate governance - Under the Argosy University
structure, the need for school-specific boards eventually will be
eliminated.
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Such an endeavor represents a major undertaking that will require the focus
and dedication of all management disciplines. Each campus will continue to offer
its current curricular programs, and over time will add additional programs in
Argosy's core disciplines of psychology, education, information technology,
healthcare and law. This approach will ultimately lead to a nationwide network
of full-service Argosy university campuses offering both graduate and
undergraduate degree programs. To move the process forward, integration teams
were established to address nine key operational areas: academic departments and
faculty, financial aid, institutional effectiveness, library services,
marketing, policy integration, recruiting, student services, and Web services
and technology. Team members include representatives from the central office
staff as well as campus deans and faculty members Accordingly, this inititative
is scheduled for initial phased implementation during the fiscal year starting
Spetember 1, 2001.
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 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 certificate levels. Of the 18
degree-granting programs currently offered by the Company, five have been
introduced since 1995. In 1999 the Company began offering courses in its new
sports psychology program. In 2000, the Company initiated master's of arts
("MA") in forensic psychology and a specialist degree in professional
counseling. 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 an MA degree in counseling at six of its campuses and is
in the process of making this program available at the remaining ASPP campuses.
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 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.
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. Accordingly, the Company plans on adding two ASPP campuses during the next
fiscal year. 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.
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
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developed into profitable, accredited degree-granting schools offering programs
consistent with the Company's mission.
The Company announced on November 16, 2000, that it has entered into an
agreement to purchase Western State University College of Law, in Fullerton,
California ("Western State") for approximately $13 million less certain
deductions as provided for in the Agreement. The proposed transaction is subject
to approval by accrediting and regulatory entities, including the Western
Association of Schools and Colleges, the American Bar Association and the U.S.
Department of Education. Western State has an enrollment of 501 students in both
full and part-time programs. Since its founding in 1966, the school has
graduated more than 10,000 students. Approximately 25 percent of the lawyers
practicing in Orange County and 15 percent of those practicing in the Inland
Empire and the Long Beach area are Western State University graduates. The
college is accredited by the Western Association of Schools and Colleges and
provisionally approved by the American Bar Association. Western State will
continue to operate under its current name and management following closing of
the purchase, which is anticipated in the first quarter of 2001.
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 70% 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 60% 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.
ASPP's academic programs are highly respected in the field. Since its
inception in 1976, ASPP has graduated over 2,800 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,
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international business, management and marketing. In behavioral science, U of S
offers a master's of arts in counseling.
The EdD, MAEd 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 MAEdand 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 the majority of ASPP's students for the 1999 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 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 and U 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
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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 1999-2000 academic year:
<TABLE>
<CAPTION>
Number of Average
--------- -------
School Students Age % Postgraduate
-------------------------------------- -------- --- --------------
<S> <C> <C> <C>
American Schools of Professional Psychology.... 2,350 32 100%
University of Sarasota......................... 2,096 41 98%
Medical Institute of Minnesota................. 626 26 0%
PrimeTech Institute............................ 272 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 1993 entering doctoral class
graduated in 1998, 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.
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.
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<PAGE>
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 any term for
which he or she received Title IV Program funds, the applicable school will
refund institutional charges based on the number of days 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.
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 1998, 1999 and 2000 were 5.1%, 5.2% and 5.1%, 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 1999-
2000 academic year:
<TABLE>
<CAPTION>
Average Total Length of
------------- ---------
School Tuition program
----------------------------------------------- ------- -------
<S> <C> <C>
American Schools of Professional Psychology
PsyD............................................. $55,320 4 years
MA (Clinical).................................... 26,280 2 years
MA (Counseling).................................. 20,060 2 years
University of Sarasota
DBA, EdD......................................... $22,260 3 years
MAEd............................................. 14,470 2 years
EdS.............................................. 11,130 2 years
MBA.............................................. 10,110 2 years
MA............................................... 17,810 2 years
BSBA............................................. 14,820 2 years
Medical Institute of Minnesota
Veterinary Technician, Radiologic Technologist,
Medical Lab Technician, Diagnostic Medical
Sonographer................................... $22,820 18 months
Histotechnician, Medical Assistant............... 20,870 18 months
</TABLE>
11
<PAGE>
<TABLE>
<S> <C> <C>
PrimeTech Institute (Canadian $)
Software Programming Engineer.................... $14,700 18 months
Software Programmer.............................. 11,900 13 months
PC/LAN........................................... 7,000 12 months
Internet Service/Support Engineer................ 6,150 12 months
Legal Secretary.................................. 5,800 12 months
LAN Professional, Paralegal...................... 5,500 12 months
Microcomputer Business Application
Administration................................ 4,300 12 months
Desktop Publishing Specialist.................... 3,950 12 months
Accounting Assistant............................. 3,500 12 months
</TABLE>
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 for the 1998-1999 school year, for example, reported a 93%
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 for the 1998-
1999 school year reported employment rates in their relevant fields of study
within six months of graduation of 85% and 75%, 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.
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<PAGE>
The following table sets forth certain information regarding the faculty at
each of the Company's schools as of August 31, 2000:
<TABLE>
<CAPTION>
Adjunct
School Faculty Faculty(1) Highest Degree of Full-Time Faculty
--------------------------------- ------- ---------- -----------------------------------
<S> <C> <C> <C>
American Schools of
Professional Psychology........ 95 89 100% Doctoral (PhD or PsyD)
University of Sarasota........... 32 32 97% Doctoral, 3% Master's
Medical Institute of Minnesota... 25 33 9% Doctoral, 14% Master's,
35% Bachelor's, 10% Associate,
32% Certificate
PrimeTech Institute.............. 15 31 12% Doctoral, 38% Master's,
50% Bachelor's
</TABLE>
(1) Represents faculty members teaching at least one class during the 1999-2000
academic year.
Governance of the Company's Schools
Each ASPP campus is managed locally by a Dean who reports either to a
regional Vice President (Joseph Bascuas, PhD and Cynthia Baum, PhD) or directly
to the Argosy Chief Operating Officer (Jim Otten, PhD). U of S is headed by a
Provost (Bill Pepicello, PhD) who reports to the Board of U of S. Both PrimeTech
and MIM are headed by Unit Presidents (Roy Rintoul and Scott Tjaden,PhD,
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 (Jim Otten). Scott Ables, General Manager of Ventura, also 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.
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.
PrimeTech operates in the Province of Ontario, Canada where a number of
competing programs exist, both in the public and private sectors, which offer a
broad spectrum of content and pricing.
Employees
As of August 31, 2000, the Company employed 355 persons. Of this number, 38
were employed in the Company's corporate headquarters, 167 were full-time or
permanent part-time faculty members and 150 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.
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<PAGE>
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 an institution and its educational programs
qualify 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 ("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 all of its campuses. ASPP's Chicago, Minneapolis,
Atlanta, Hawaii, Rolling Meadows and Virginia campuses also have programmatic
accreditation by the APA for the PsyD degree. Currently, ASPP's Florida campus
is hosting the APA on a site visit which is a preliminary step to potentially
full accreditation. Although APA accreditation is not currently required,
failure to obtain such accreditation could adversely affect state authorization
of this campus in future periods or the ability of graduates of this campus to
obtain state licenses to practice. 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 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. MIM has
been granted the status as a a candidate for accreditation by the NCA. MIM will
continue its efforts towards full accreditation which normally takes at least
one to two years. 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 $69,000
in fiscal 2000 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
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<PAGE>
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 60% of the students at its U.S. schools receive some
government-sponsored (federal or state) financial aid. For fiscal 2000,
approximately 55% 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 65% of the
students attending PrimeTech receive Canadian government-sponsored financial
aid.
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 continued many of
the then-current requirements for student and institutional participation in the
Title IV Programs. The 1998 Amendments also changed or modified some
requirements. These changes and modifications included increasing the percentage
of its 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
15
<PAGE>
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 expanded 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 took effect in October 2000, and
regulations to implement the remaining portions of the 1998 Amendments are
scheduled to become effective on July 1, 2001. 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.
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 1999 federal fiscal year, the maximum individual Pell
grant was $3,125. For the 2000, federal fiscal year, the maximum Pell grant
increased to $3,300, and no determination has been made, as yet, for the 2001
federal fiscal year.
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, MIM and U of S 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 2000 equaled approximately 55%
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)
16
<PAGE>
and other aid to which that student is entitled. At this time, of the Company's
institutions, only MIM 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 $4,000 under the
Perkins loan program during each academic year, with an aggregate maximum of
$20,000, 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 1999-2000 award
year, the Company collected approximately $56,100 from its former students in
repayment of Perkins loans. In the 1999-2000 award year, the Company's required
matching contribution was approximately $5,600. The Perkins loans disbursed to
students in the Company's institutions in the 1999-2000 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 1999-2000 award year, the Company's
institutions and other organizations provided matching contributions totaling
approximately $70,000. At least 5% of an institution's FWS allocation must be
used to fund student employment in community service positions. FWS earnings are
not restricted to tuition and fees. However, in the 1999-2000 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 HEA is subject to amendment
by Congress, and because 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 may announce new or
changed interpretation of existing laws and regulations, there can be no
assurance that the legal requirements for participation in the Title IV Programs
will remain the same in the future or that DOE will agree with the Company's
current understanding of each Title IV Program requirement.
17
<PAGE>
Largely as a result of this increased oversight, the DOE has reported that
over 1,000 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
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.
The DOE's published federal fiscal year 1998 cohort default rates for all
proprietary institutions is 11.4% and for proprietary institutions offering 4
year degrees is 9.6%. For the last three years, none of the Company's
institutions had a cohort default rate above 9%. The specific cohort default
rate percentages for the Company's institutions are as follows:
DOE fiscal year: ASPP U of S MIM
---------------- ---- ------ ---
1996 2.7% 0.0% 8.6%
1997 2.2% 4.9% 7.0%
1998 0.8% 2.6% 6.8%
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
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<PAGE>
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.
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, 2000, 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.
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<PAGE>
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. In addition, pursuant to regulations scheduled to take effect
July 1, 2000, institutions no longer will be required, under most circumstances,
to obtain DOE approval of an additional location before disbursing Title IV
Program funds to eligible students at those locations.
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 offered for a year and the
institution can demonstrate, based on an attestation by an 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 "90/10 Rule" (formerly the "85/15 Rule"). Under a provision of the HEA
commonly referred to as the "90/10 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
90% of its net revenues for the prior fiscal year was derived from the Title IV
Programs. Prior to the 1998 Amendments to the HEA, the allowable portion of cash
revenues derived from Title IV programs could not exceed 85%. Any institution
that violates this rule
20
<PAGE>
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
2000 the range for the Company's U.S. institutions was from approximately 48% to
approximately 59%. 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 appeared likely to
approach the maximum percentage threshold in any given fiscal year, 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. State
laws establish standards for instruction, qualifications of faculty, location
and 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.
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
21
<PAGE>
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. All 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
Ontario, 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.
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
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<PAGE>
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 all of its campuses, 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.
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.
23
<PAGE>
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, 2000 we owned
approximately 42,000 square feet and leased approximately 275,000 square feet.
The leases have remaining terms ranging from two years to nine 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, 2000
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..................... 37,381
Illinois School of Professional Psychology/Chicago Northwest........... 10,469
Minnesota School of Professional Psychology............................ 11,762
Georgia School of Professional Psychology.............................. 13,274
American School of Professional Psychology/Virginia.................... 13,437
American School of Professional Psychology/Hawaii...................... 11,566
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......................................... 57,316
PrimeTech Institute
PrimeTech Institute/North York......................................... 9,199
PrimeTech Institute/City Campus........................................ 8,681
PrimeTech Institute/Scarborough........................................ 13,289
Ventura................................................................ 9,040
</TABLE>
24
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company, Dr. Markovitz and certain other companies in which Dr.
Markovitz has an interest had been named as defendants in Charlena Griffith, et
al. v. University Hospital, L.L.C. et al., a class action lawsuit filed in
November 1997 and in the United States District Court for the Northern District
of Illinois, Eastern Division. This lawsuit was settled between the parties at
no cost to the Company.
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
consolidated results of operations or consolidated 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 2000.
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 ................................ 9.000 3.531
Second Quarter ............................... 6.125 4.125
Third Quarter................................. 7.500 4.813
Fourth Quarter ............................... 8.750 5.188
2000-2001
First Quarter (through November 21, 2000)..... 7.750 5.750
</TABLE>
The closing price of our Class "A" Common Stock as reported on the National
Market on November 21, 2000 was $5.94 per share. As of November 21, 2000, there
were 5 holders of record of our Common Stock.
25
<PAGE>
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. 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.
26
<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 five years in the period ended August 31, 2000, and the
balance sheet data as of August 31, 2000, 1999, 1998, 1997 and 1996 are derived
from our audited consolidated financial statements.
<TABLE>
<CAPTION>
Years Ended August 31,
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenue......................................................... $ 44,171 $ 36,866 $ 29,352 $ 20,460 $ 17,840
--------- --------- --------- ---------- ---------
Operating expenses:
Cost of education.............................................. 20,746 18,489 15,075 10,661 9,370
Selling expenses............................................... 3,837 1,616 1,102 516 263
General and administrative expenses............................ 14,713 11,588 9,104 5,432 5,174
Related party general and administrative
expense (1)................................................. -- 668 2,271 993 1,710
--------- --------- --------- ---------- ---------
Total operating expenses.................................. 39,296 32,361 27,552 17,602 16,517
--------- --------- --------- ---------- ---------
Income from operations.............................................. 4,875 4,505 1,800 2,858 1,323
Interest income..................................................... 854 695 357 497 304
Interest expense.................................................... (300) (567) (601) (107) (55)
Other income (expense), net......................................... (73) (6) (12) (48) 21
--------- --------- --------- ---------- ---------
Income before provision for income taxes ........................... 5,356 4,627 1,544 3,200 1,593
Provision for income taxes.......................................... 2,236 44 29 37 30
--------- --------- --------- ---------- ---------
Net income.......................................................... $ 3,120 $ 4,583 $ 1,515 $ 3,163 $ 1,563
========= ========= ========= ========== =========
Basic and diluted earning per share................................. $ 0.48 $ 0.78 $ 0.31 $ 0.65 $ 0.32
========= ========= ========= ========== =========
Other Data:
EBITDA (2).......................................................... $ 6,357 $ 5,910 $ 2,738 $ 3,296 $ 1,722
EBITDA margin (2)................................................... 14.4% 16.0% 9.3% 16.1% 9.7%
Cash flows from:
Operating activities........................................... $ 4,162 $ 3,713 $ 2,582 $ 3,908 $ 2,736
Investing activities........................................... (2,822) (5,438) (731) (9,123) (392)
Financing activities........................................... (2,185) 8,008 (3,348) 5,193 (124)
Capital expenditures, net........................................... 1,875 1,889 597 341 404
Student population (3).............................................. 5,344 4,542 4,514 3,253 2,858
Number of campuses (4).............................................. 17 17 10 8 8
</TABLE>
<TABLE>
<CAPTION>
As of August 31,
------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance sheet data:
Cash, cash equivalents and short-term
investments...................................................... $ 15,902 $ 15,007 $ 3,843 $ 6,728 $ 5,384
Working capital..................................................... 13,713 12,817 2,459 4,412 3,316
Total assets ....................................................... 36,684 34,319 23,475 17,580 8,336
Long-term debt (excluding current maturities)....................... 2,604 2,998 5,165 6,354 243
Shareholder's equity................................................ 27,509 25,604 8,922 7,448 5,236
</TABLE>
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<PAGE>
(1) 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. 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 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.
(2) "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.
(3) Reflects actual student population as of the beginning of the Fall school
year, not including participants in Ventura test preparation programs.
(4) 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 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. For the 1999-2000 school year, the Company's schools
had approximately 5,400 students enrolled representing 50 states and 20 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.
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 2000, approximately 55% of the Company's net cash
receipts were derived indirectly from the Title IV Programs.
The Company derived approximately 93% and 88% of its net revenue from
tuition in fiscal 2000 and in fiscal 1999, 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
28
<PAGE>
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. Revenue from
Ventura workshops is recognized on the date of the workshops. 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 a tuition
increase 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, 1999 represents an approximate increase of 5.1% over the same date in 1998.
The Company also generates revenue from textbook sales and property rental.
In both fiscal 2000 and fiscal 1999, less than 10% of the Company's net revenue
was derived from these sources.
The Company categorizes its expenses as cost of education, selling, general
and 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 recruiters salaries and benefits and 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 represented 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. 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 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 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, MIM 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.
Recent Acquisitions
On February 3, 1998, the Company acquired MIM for an aggregate purchase
price of $2.4 million. This acquisition was accounted for as a purchase.
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
29
<PAGE>
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
shareholders' equity by such amount.
On November 30, 1998, the Company acquired 100% of the outstanding stock of
PrimeTech, which owned two Canadian schools that award non-degree certificates
in network engineering and software programming. Prior to that acquisition the
majority shareholder of the Company owned a one-third interest in PrimeTech.
Under the acquisition agreement, the Company was required to pay the former
owners, consisting of Dr. Markovitz and two operating managers, a total of
$500,000 (Canadian Dollars) upon closing and is obligated to issue shares of the
Company's common stock, the fair value of which is equal to 102% of PrimeTech's
net income, as defined in such agreement, in each of PrimeTech's next three
fiscal years. The Company has negotiated agreements with the two operating
managers in lieu of future stock issuance as provided for in the acquisition
agreement. The agreements specify an aggregate payout of approximately $150,000
(US Dollars) which was paid during fiscal 2000. prior to May 31, 2000.
In April 2000, the Washington School of Professional Psychology (WSPP)
gained its regional accreditation from the North Central Association of Colleges
and Schools (NCA) and officially became a regionally accredited campus. This was
the final step in a purchase agreement for WSPP and resulted in a payment of
approximately $100,000 to the former owner.
The Company announced on November 16, 2000, that it has entered into an
agreement to purchase Western State University College of Law, in Fullerton,
California ("Western State") for approximately $13 million less certain
deductions as provided for in the agreement. The proposed transaction is subject
to approval by accrediting and regulatory entities, including the Western
Association of Schools and Colleges, the American Bar Association and the U.S.
Department of Education. Western State has an enrollment of 501 students in both
full and part-time programs. Since its founding in 1966, the school has
graduated more than 10,000 students. Approximately 25 percent of the lawyers
practicing in Orange County and 15 percent of those practicing in the Inland
Empire and the Long Beach area are Western State University graduates. The
college is accredited by the Western Association of Schools and Colleges and
provisionally approved by the American Bar Association. Western State will
continue to operate under its current name and management following closing of
the purchase, which is anticipated in the first quarter of fiscal 2001.
30
<PAGE>
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,
-----------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Statement of Operations Data:
Net revenue 100.0% 100.0% 100.0%
Operating expenses:
Cost of education.......................... 47.0 50.2 51.4
Selling expenses........................... 8.7 4.4 3.8
General and administrative expenses........ 33.3 31.4 31.0
Related party general and administrative
expense................................. -- 1.8 7.7
-------- -------- --------
Total operating expenses.............. 89.0 87.8 93.9
-------- -------- --------
Income from operations.......................... 11.0 12.2 6.1
Interest/other income (expense), net............ 1.1 0.3 (0.9)
-------- -------- --------
Income before provision for income taxes........ 12.1 12.5 5.2
Provision for income taxes...................... 5.0 0.1 0.0
-------- -------- --------
Net income 7.1% 12.4% 5.2%
======== ======== ========
</TABLE>
Year Ended August 31, 2000 Compared to Year Ended August 31, 1999
Net Revenue. Net revenues increased 19.8% from $36.9 million in fiscal 1999
to $44.2 million in fiscal 2000, primarily due to increased revenue at all
schools owned in both fiscal 1999 and 2000. For schools owned by the Company
during fiscal 1999, revenue increased by 16.1% primarily due to internal growth.
Additional revenue was recognized from tuition increases and the addition of new
satellite campus and new programs. Also, the fiscal 1999 totals include revenue
from PrimeTech only for the nine months following its acquisition as compared to
twelve months of revenues in fiscal 2000.
Cost of Education. Cost of education increased 12.2% from $18.5 million in
fiscal 1999 to $20.7 million in fiscal 2000, due to additional teaching costs to
meet the growth in the number of students attending the schools, the development
of new satellite campuses and programs and the acquisition of PrimeTech. As a
percentage of net revenue, cost of education decreased from 50.2% in fiscal 1999
to 47.0% in fiscal 2000 due to efficiencies in the student services area.
Selling Expenses. Selling expenses increased 137.4% from $1.6 million in
fiscal 1999 to $3.8 million in fiscal 2000. As a percentage of revenue, selling
expenses increased from 4.4% to 8.7% due to the addition of recruiters in all of
the Argosy schools and a more aggressive marketing strategy. In addition, the
acquisition of PrimeTech in the early part of fiscal 1999 has three more months
of selling expenses in fiscal 2000 and generally requires more costly
advertising media than the other Argosy companies.
General and Administrative Expenses. General and administrative expenses
increased 27.0% from $11.6 million in fiscal 1999 to $14.7 million in fiscal
2000 and, as a percentage of net revenue, general and administrative expenses
increased from 31.4% to 33.3%.The increase is primarily due to increases in
payroll costs, additional expenses incurred as a public company, additional
costs of start up operations, and additional depreciation expense due to the
continued investment in the Company's equipment and computer systems. In
addition, charges totaling $0.2 million were recorded in relation to the final
settlement of matters arising in connection with the purchase of MIM and a
settlement of a minor dispute.
31
<PAGE>
Related Party General and Administrative Expense. Related party general and
administrative expenses, which represents amounts paid to a company owned by the
majority shareholder that provided management services for the Company and its
schools, was $0.7 million in fiscal 1999. Upon consummation of the initial
public offering, the relationship with the related company was terminated.
Interest/Other Income (Expense), Net. Interest/other income (expense), net,
increased 294.3% from $0.1 million for fiscal 1999 to $0.5 million for fiscal
2000 and, as a percentage of net revenue, increased from 0.3% to 1.1%. Interest
income increased from $0.7 million for fiscal 1999 to $0.9 million for fiscal
2000 primarily as a result of a full year of use of the proceeds from the
initial public offering that increased cash and investments. Interest expense
decreased 47.1% from fiscal 1999 to fiscal 2000 due to the pay down of certain
debts and the implementation of a credit agreement at more favorable rates than
the facilities it replaced.
Provision for Income Taxes. The provision for income taxes increased from
$0.7 million in fiscal 1999 to $2.2 million in fiscal 2000, due to the Company's
change to a C Corporation on March 8, 1999. Upon the termination of its S
Corporation status in the third quarter of 1999, the Company recorded a deferred
income tax asset and corresponding reduction of income tax expense of $0.8
million. In addition, there was a negligible tax charge for the first half of
fiscal 1999 while the Company was an S Corporation.
Net Income. Net income decreased 31.9% from $4.6 million in fiscal 1999 to
$3.1 million in fiscal 2000 due primarily to the increase in income taxes of
$2.2 million which offset operating improvements of $0.7 million, as discussed
above.
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.
32
<PAGE>
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.
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, 2000 and 1999 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, 2000 Fiscal Year Ended August 31, 1999
--------------------------------------- --------------------------------------
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
---------- ---------- ----------- ----------- ---------- ---------- ----------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue............. $ 11,614 $ 10,576 $ 12,696 $ 9,285 $ 9,341 $ 9,079 $ 10,695 $ 7,751
% of fiscal year total.. 26.3% 23.9% 28.8% 21.0% 25.4% 24.6% 29.0% 21.0%
Income from
operations........... $ 1,689 $ 1,354 $ 2,809 $ (977) $ 1,818 $ 917 $ 2,930 $ (1,160)
% of fiscal year total.. 34.7% 27.8% 57.6% (20.1)% 40.4% 20.4% 65.0% (25.8)%
</TABLE>
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 increased from $3.7 million in fiscal 1999 to $4.2 million in fiscal
2000. The Company had $13.7 million of working capital as of August 31, 2000
compared to $12.8 million of working capital as of August 31, 1999.
Capital expenditures were $1.9 million in both fiscal 1999 and fiscal 2000.
The Company continues to invest in upgrading school equipment and facilities and
enhancing the capabilities of the Company's computer system. Capital
expenditures are expected to continue to increase as the student population
increases and the Company continues to upgrade and expand current facilities and
equipment. The Company has no other commitments for material capital
expenditures.
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
35
<PAGE>
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, 2000 the Company was in compliance with
its covenants or obtained a waiver. The Credit Agreement will terminate on May
21, 2001, unless extended. As of August 31, 2000, the Company had outstanding
borrowings of $350,000 under this Agreement.
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 2000, the
Company's U.S. institutions derived approximately 48% to approximately 59% 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, 2000, 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.
The Company entered into a long-term management arrangement with John
Marshall Law of Atlanta, Georgia in September 1999. As of August 31, 2000, the
Company has advanced nearly $3.0 million to the John Marshall Law School in
connection with that arrangement. The arrangement includes a management
agreement, a 10-year option to purchase John Marshall exercisable at the
Company's discretion and a line of credit of $600,000 between the Company and
John Marshall. As of August 31, 2000, the Company had advanced approximately
$500,000 under the line of credit and approximately $2,479,000 operating cash
under the management agreement. These advances are included in other long-term
assets. The Company has also committed to advance an additional $1.5 million for
John Marshall in fiscal 2001, if needed.
In 1987, the Georgia Supreme Court mandated that John Marshall obtain
American Bar Association ("ABA") accreditation before 2003. The ABA has to date
refused such accreditation. On September 5, 2000, John Marshall filed an appeal
regarding its accreditation, which is scheduled to be heard in February, 2001.
If the appeal is successful, the Company has been advised that the ABA will send
a two person team to inspect the school and verify that shortcomings noted in
previous inspections have been addressed. If the appeal proves unsuccessful,
John Marshall can begin the accreditation process again with a new application
filing in the Fall of 2001. Though the Company believes that accreditation can
be achieved before the 2003 deadline, there exist a myriad of circumstances that
cannot be foreseen and over which the Company has no control that could
interfere with the granting of accreditation status to John Marshall; thus,
there can be no assurance that accreditation will be received which could impact
the Company's ability to recover its $3.0 million advance to John Marshall.
The Company adopted a repurchase program for the Company's Class A Common
Stock of up to 500,000 shares. Shares of Class A Common Stock will be purchased
by the Company from time to time through open market purchases and private
purchase, as available. Under this program, the Company has repurchased 482,000
shares as of August 31, 2000 at a total cost of approximately $2,131,000.
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 "99" to
denote 1999). 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
34
<PAGE>
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 has installed a new management information system in its
corporate headquarters. 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. Since January 1, 2000, there have been
no material adverse affects related to the Year 2000 Problem. However, there can
be no assurance that this new computer system will not still be affected by the
Year 2000 Problem and that the Company's existing systems will not still 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 government agencies or other
first 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 the 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. To date, we do not believe that the DOE has experienced any
disruptions associated with the Year 2000 Problem, and our students have not
experienced any delays in tuition payments as a result of the Year 2000 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.
Recent Accounting Pronoucements
On December 3, 1999, the Securities and Exchange Commission released
Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition, to provide
guidance on the recognition, presentation, and disclosure of revenue in
financial statements. The SAB outlines basic criteria that must be met before
registrants may recognize revenue, including persuasive evidence of the
existence of an arrangement, the delivery of products or services, a fixed and
determinable sales price, and reasonable assurance of collection. SAB 101 is
effective beginning the first fiscal quarter of the first fiscal year beginning
after December 15, 1999. Through August 31, 2000, the Company has recognized
application, technology and registration fees as revenue upon receipt. Prior to
the release of SAB 101, the Company's revenue recognition policy was in
compliance with generally accepted accounting principles. Effective September 1,
2000, we will adopt a change in accounting principle to comply with the specific
provisions and guidance of SAB 101. SAB 101 will require the Company to
recognize revenue related to application, technology, and registration fees over
the contract period. The adoption of SAB 101 will not have a material effect on
the Company's financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, as amended by SFAS No. 137 "Accounting
for Derivative Instruments and Hedging Activities." The statement requires the
recognition of all derivatives as either assets or liabilities in the balance
sheet and the measurement of those instruments at fair value, and based on the
amendment, effective for all fiscal quarters of all fiscal years beginning after
June 15, 2000, which, therefore, would require the Company to adopt such
statement on September 1, 2000. The impact of adopting the standard will not
have a material effect on the consolidated operations of the Company beginning
September 1, 2000.
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 10.50% totaling $3.4 million at August 31, 2000. The Company
estimates that the fair value of each of its debt instruments approximated its
market value on August 31, 2000.
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, 2000 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, 2000.
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 2000, 1999 and 1998 were 5.1%, 5.2% and 5.1%, respectively.
35
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated balance sheets are as of August 31, 2000 and 1999 and the
consolidated statements of operations, shareholders' equity and cash flows are
for each of the years ended August 31, 2000, 1999 and 1998:
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
2001 Annual Meeting of Stockholders (the "2001 Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information in response to this item is incorporated by reference from
the section of the 2001 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 2001 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 2001 Proxy Statement captioned "EXECUTIVE COMPENSATION AND
CERTAIN TRANSACTIONS" and "COMPENSATION COMMITTEE INTERLOCKS AND INSIDER
PARTICIPATION."
36
<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, 2000 and 1999.......................... F-2
Consolidated Statements of Operations for the years ended August 31, 2000,
1999 and 1998.................................................................... F-3
Consolidated Statements of Cash Flows for the years ended August 31, 2000,
1999 and 1998.................................................................... F-4
Consolidated Statements of Shareholders' Equity for the years ended August 31,
2000, 1999, and 1998............................................................. F-5
Notes to Consolidated Financial Statements.......................................... F-6
</TABLE>
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.
37
<PAGE>
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.
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.
38
<PAGE>
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.
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.
39
<PAGE>
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.*
10.31 Consulting Agreement, dated September 1, 2000, between the
Company and Leeds Equity Associates, L.P.
10.32 Registration Agreement, dated September 1, 2000, between the
Company and Leeds Equity Associates, L.P.
10.33 Stock Purchase Warrant, dated September 1, 2000, between the
Company and Leeds Equity Associates, L.P.
23.1 Consent of Arthur Andersen LLP with respect to financial
statements of Argosy Education Group, Inc.
27. Financial data schedule.
* Filed previously.
(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.
40
<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.
Signature Title Date
----------------------- ------------------ ---------------
/s/ JAMES OTTEN President November 28, 2000
James Otten
/s/ Michael C. Markovitz Chairman of the Board November 28, 2000
Michael C. Markovitz
/s/ Charles T. Gradowski Chief Financial Officer November 28, 2000
(Principal Financial and
Charles T. Gradowski Accounting Officer)
/s/ Karen M. Knab Director November 28, 2000
Karen M. Knab
/s/ Jeffrey Leeds Director November 28, 2000
Jeffrey Leeds
/s/ Michael W. Mercer Director November 28, 2000
Michael W. Mercer
/s/ Harold J. O'Donnell Director November 28, 2000
Harold J. O'Donnell
41
<PAGE>
/s/ Kalman K. Shiner Director November 28, 2000
Kalman K. Shiner
/s/ Leslie M. Simmons Director November 28, 2000
Leslie M. Simmons
42
<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, 2000 and 1999 and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended August 31, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Argosy
Education Group, Inc. and Subsidiaries as of August 31, 2000 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended August 31, 2000 in conformity with accounting
principles generally accepted in the United States.
Arthur Andersen LLP
Chicago, Illinois
November 1, 2000
F-1
<PAGE>
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
August 31,
--------------------
ASSETS 2000 1999
--------------------------------------------------------------------------------- -------- --------
<S> <C> <C>
Current Assets:
Cash and cash equivalents.................................................... $ 8,115 $ 8,980
Short-term investments....................................................... 7,787 6,027
Receivables--
Students, net of allowance for doubtful accounts of $311 and $316 at
August 31, 2000 and 1999, respectively................................. 2,178 988
Other.................................................................... 586 605
Due from related entity...................................................... 49 49
Prepaid taxes................................................................ 160 614
Prepaid expenses............................................................. 429 387
Deferred tax assets.......................................................... 270 274
-------- --------
Total current assets................................................. 19,574 17,924
-------- --------
Property and equipment, net...................................................... 6,307 5,617
-------- --------
Other assets:
Non-current investments...................................................... 200 2,745
Deposits..................................................................... 159 166
Deferred tax assets.......................................................... 778 568
Advances to John Marshall.................................................... 2,979 500
Intangibles, net............................................................. 6,687 6,799
-------- --------
Total other assets................................................... 10,803 10,778
-------- --------
Total assets......................................................... $ 36,684 $ 34,319
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
---------------------------------------------------------------------------------
Current Liabilities:
Current maturities of long-term debt......................................... $ 796 $ 486
Accounts payable............................................................. 1,162 1,109
Accrued payroll and related expenses......................................... 634 547
Accrued expenses............................................................. 543 417
Deferred revenue............................................................. 2,726 2,548
-------- --------
Total current liabilities............................................ 5,861 5,107
-------- --------
Long-term debt, less current maturities.......................................... 2,604 2,998
Deferred rent.................................................................... 710 610
Commitments and contingencies
Shareholders' equity:
Class A common stock--30,000,000 shares authorized, $.01 par value,
2,059,417 and 2,000,000 issued and outstanding at August 31, 2000 and
1999, respectively......................................................... 21 20
Class B common stock--10,000,000 shares authorized, $.01 par value,
4,900,000 shares issued and outstanding at August 31, 2000 and 1999,
respectively............................................................... 49 49
Additional paid-in capital................................................... 25,131 24,871
Accumulated other comprehensive income....................................... 1,102 447
Purchase price in excess of predecessor carry over basis..................... (720) (720)
Treasury stock (482,000 shares of Class A common stock at August 31, 2000)... (2,131) --
Retained earnings............................................................ 4,057 937
-------- --------
Total shareholders' equity........................................... 27,509 25,604
-------- --------
Total liabilities and shareholders' equity........................... $ 36,684 $ 34,319
======== ========
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
F-2
<PAGE>
<PAGE>
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended August 31,
----------------------------
2000 1999 1998
------- -------- -------
<S> <C> <C> <C>
Net revenue .............................................................. $44,171 $ 36,866 $29,352
------- -------- -------
Operating expenses:
Cost of education..................................................... 20,746 18,489 15,075
Selling expenses...................................................... 3,837 1,616 1,102
General and administrative expenses................................... 14,713 11,588 9,104
Related party general and administrative expense...................... -- 668 2,271
------- -------- -------
Total operating expenses......................................... 39,296 32,361 27,552
------- -------- -------
Income from operations........................................... 4,875 4,505 1,800
------- -------- -------
Other income (expense):
Interest income....................................................... 854 695 357
Interest expense...................................................... (300) (567) (601)
Other expense......................................................... (73) (6) (12)
------- -------- -------
Total other income (expense), net................................ 481 122 (256)
------- -------- -------
Income before provision for income taxes......................... 5,356 4,627 1,544
Income Taxes:
Income tax provision on C corporation income subsequent to
March 8, 1999...................................................... 2,236 746 --
Income tax provision on S corporation income prior to March 8,
1999............................................................... -- 62 29
Deferred income taxes recorded in conjunction with termination of
S corporation election on March 8, 1999............................ -- (764) --
------- -------- -------
Total income taxes............................................... 2,236 44 29
------- -------- -------
Net income................................................................. $ 3,120 $ 4,583 $ 1,515
======= ======== =======
Earnings per share:
Basic................................................................. $ 0.48 $ 0.78 $ 0.31
======= ======== =======
Weighted average shares outstanding--basic............................ 6,529 5,870 4,900
======= ======== =======
Diluted............................................................... $ 0.48 $ 0.78 $ 0.31
======= ======== =======
Weighted average shares outstanding--diluted.......................... 6,530 5,870 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,
-------------------------------
2000 1999 1998
-------- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................................................ $ 3,120 $ 4,583 $ 1,515
Adjustments to reconcile net income to net cash provided by operating
activities--
Depreciation and amortization.................................................... 1,554 1,405 938
Deferred taxes................................................................... (206) (842) --
Issuance of stock performance grants............................................. 232 -- --
Changes in operating assets and liabilities, net of acquired businesses--
Receivables, net............................................................ (1,501) (579) 1
Inventories................................................................. (15) 94 67
Prepaid expenses............................................................ 427 (438) (354)
Deposits.................................................................... 7 72 (65)
Accounts payable............................................................ 53 (215) 231
Accrued payroll and related expenses........................................ 87 (281) 256
Accrued expenses............................................................ 126 (367) 284
Deferred revenue............................................................ 178 151 (384)
Deferred rent............................................................... 100 130 93
------- ------- -------
Net cash provided by operating activities.............................. 4,162 3,713 2,582
------- ------- -------
Cash flows from investing activities:
Purchase of property and equipment, net............................................... (1,875) (1,889) (597)
Sale (purchase) of investments, net................................................... 1,449 (3,363) 1,784
Business acquisitions, net of cash acquired........................................... (247) (186) (1,918)
Advances to John Marshall............................................................. (2,149) (500) --
------- ------- -------
Net cash used in investing activities.................................. (2,822) (5,938) (731)
------- ------- -------
Cash flows from financing activities:
Issuance of common stock.............................................................. 29 26,040 --
Offering costs........................................................................ -- (1,149) --
Purchase of treasury stock............................................................ (2,131) -- --
Proceeds from issuance of long-term debt.............................................. 380 150 3,029
Payments of long-term debt............................................................ (463) (5,385) (1,271)
Borrowings from (payments to) related entities, net................................... -- 57 (271)
Shareholder distributions............................................................. -- (14,215) (5,340)
Shareholder note receivable........................................................... -- 3,278 505
Payments to former owners of acquired businesses...................................... -- (268) --
------- -------- -------
Net cash provided by (used in) financing activities.................... (2,185) 8,508 (3,348)
------- -------- -------
Effective exchange rate changes on cash.................................................... (20) (15) --
------- -------- -------
Net increase (decrease) in cash and cash equivalents....................................... (865) 6,268 (1,497)
Cash and cash equivalents, beginning of year............................................... 8,980 2,712 4,209
------- -------- -------
Cash and cash equivalents, end of year..................................................... $ 8,115 $ 8,980 $ 2,712
======= ======== =======
Supplemental disclosures of cash flow information:
Cash paid for--
Interest......................................................................... $ 297 $ 584 $ 549
Taxes............................................................................ 1,989 1,524 41
======= ======== =======
Supplemental disclosure of non-cash investing and financing activities:
Acquisitions of various schools and businesses--
Fair value of assets acquired.................................................... $ 100 $ 1,561 $ 3,346
Net cash used in acquisitions.................................................... (247) (186) (1,918)
------- -------- -------
Liabilities assumed or incurred............................................. $ (147) $ 1,375 $ 1,428
======= ======== =======
</TABLE>
Supplemental disclosure of non-cash shareholder activities:
On August 30, 1998, the shareholder of the Company issued a note to the
Company in the form of a capital contribution totaling $6,000,000.
During 1999, the Company received marketable securities with a fair market
value of approximately $2,722,000 from the shareholder for partial repayment of
the shareholder note receivable.
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
<PAGE>
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Class A Class B
------- -------- Accumulated
Common Stock Common Stock Additional ------------
Comprehensive ------------ ------------ ----------- Other
------------- $.01 par value, $.01 par value, Paid-in -----
Income --------------- --------------- ------- Comprehensive
------ 30,000,000 shares 10,000,000 shares Capital -------------
----------------- ----------------- ------- Income
authorized authorized ------
---------- ----------
Shares Shares
------ ------
Outstanding Amount Outstanding Amount
----------- ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, August 31, 1997............. -- $ -- 4,900 $ 49 $ 456 $ (17)
Net income.......................... $1,515 -- -- -- -- -- --
Unrealized gain on
investments........................ 19 -- -- -- -- -- 19
Comprehensive income................ $1,534
======
Shareholder distributions........... -- -- -- -- -- --
Shareholder contribution............ -- -- -- -- 6,000 --
Purchase price in excess of
predecessor carryover basis........ -- -- -- -- -- --
------ ------ ----------- ------ ------- ------
BALANCE, August 31, 1998............. -- -- 4,900 49 6,456 2
Net income.......................... $4,583 -- -- -- -- -- --
Unrealized gain on
investments........................ 445 -- -- -- -- -- 445
------
Comprehensive income................ $5,028
======
Shareholder distribution............ -- -- -- -- (6,456) --
Issuance of stock................... 2,000 20 -- -- 24,871 --
------ ------ ----------- ------ ------- ------
BALANCE, August 31, 1999............. 2,000 20 4,900 49 24,871 447
Net income.......................... $3,120 -- -- -- -- -- --
Foreign translation
adjustment......................... (9) -- -- -- -- -- (9)
Unrealized gain on
investments........................ 664 -- -- -- -- -- 664
------
Comprehensive income................ $3,775 -- -- -- -- -- --
======
Purchase of treasury stock.......... -- -- -- -- -- --
Issuance of class A common
stock for stock performance
grants........................... 51 1 -- -- 231 --
Issuance of class A common
stock under employee stock
purchase plan.................... 8 -- -- -- 29 --
------ ------ ----------- ------ ------- ------
BALANCE, August 31, 2000............. 2,059 $ 21 4,900 $ 49 $25,131 $1,102
====== ====== =========== ====== ======= ======
<CAPTION>
Purchase
--------
Price in
--------
Excess of
---------
Predecessor Total
----------- -----
Carryover Treasury Stock Retained Shareholders'
--------- -------------- -------- ------------
Basis Earnings Equity
----- -------- ------
Shares
------
Purchased Amount
--------- ------
<S> <C> <C> <C> <C> <C>
BALANCE, August 31, 2000.........
BALANCE, August 31, 1997......... $ -- -- $ -- $ 6,960 $ 7,448
Net income...................... -- -- -- 1,515 1,515
Unrealized gain on
investments.................... -- -- -- 19
Comprehensive income............
Shareholder distributions....... -- -- -- (5,340) (5,340)
Shareholder contribution........ -- -- -- -- 6,000
Purchase price in excess of
predecessor carryover basis.... (720) -- -- -- (720)
---------- --------- -------- ------- --------
BALANCE, August 31, 1998......... (720) -- -- 3,135 8,922
Net income...................... -- -- -- 4,583 4,583
Unrealized gain on
investments.................... -- -- -- -- 445
Comprehensive income............
Shareholder distribution........ -- -- -- (6,781) (13,237)
Issuance of stock............... -- -- -- -- 24,891
---------- --------- -------- ------- --------
BALANCE, August 31, 1999......... -- -- -- 937 25,604
Net income...................... -- -- -- 3,120 3,120
Foreign translation
adjustment..................... -- -- -- -- (9)
Unrealized gain on
investments.................... -- -- -- -- 664
Comprehensive income............ -- -- -- -- --
Purchase of treasury stock...... -- 482 (2,131) -- (2,131)
Issuance of class A common
stock for stock performance
grants....................... -- -- -- -- 232
Issuance of class A common
stock under employee stock
purchase plan................ -- -- -- -- 29
---------- --------- -------- ------- --------
BALANCE, August 31, 2000......... $ (720) 482 $ (2,131) $ 4,057 $ 27,509
========== ========= ======== ======= ========
</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, 2000, 1999 AND 1998
1. Description of the Business and Basis of Presentation
The consolidated financial statements of Argosy Education Group, Inc.
(formerly known as American Schools of Professional Psychology, Inc. ("ASPP"))
(the "Company") include the accounts of the Company and its wholly-owned
subsidiaries, University of Sarasota, Inc. ("U of S"), Argosy International,
Inc. ("Ventura"), the Medical Institutes of America, Inc. ("MIA") and PrimeTech
Canada Inc., ("PrimeTech"). Prior to being subsidiaries of the Company, the
companies, other than PrimeTech, were separate entities owned by the same
shareholder. Through various transactions, these companies were contributed by
the shareholder to the Company. On November 30, 1998, the Company acquired 100%
of the outstanding stock of PrimeTech. The Company continues to conduct business
under its historical name, ASPP.
The Company provides programs in psychology, education, business, allied
health professions, network engineering and software programming and offers
courses and materials for post-graduate psychology license examinations in the
United States. The Company operates through four business units and is approved
and accredited to offer doctoral, master's, bachelor's and associate degrees as
well as to award diplomas and non degree certificates through 17 campuses in
nine states and Ontario, Canada.
The contribution by the shareholder of businesses under common control and,
as described in Note 3, the Company's purchase of MCM University Plaza, Inc.'s
stock from its shareholder have been accounted for in a manner similar to a
pooling of interests.
On March 8, 1999 the Company completed an initial public offering of Common
Stock (the "Offering"). Prior to the Offering, the Company had one class of
common stock outstanding. In connection with the Offering, the Company's
existing common stock underwent an approximate 2,941-for-one stock split which
was then converted into 4,900,000 shares of Class B Common Stock. The Company
authorized 30,000,000 shares of Class A Common Stock. The effect of the stock
split has been retroactively reflected for all periods presented in the
accompanying consolidated financial statements. The Company also authorized
5,000,000 shares of Preferred Stock. There was no Preferred Stock issued or
outstanding as of August 31, 2000 and 1999.
In the Offering, the Company issued and sold 2,000,000 shares of Class A
Common Stock at a price of $14.00 per share. The Company received total net
proceeds, after deduction of underwriting discounts and offering costs, of
approximately $25.0 million. The net proceeds from the Offering were used to
repay $4.7 million of the Company's indebtedness, pay a distribution to the
Company's majority shareholder of $13.2 million and repay $0.9 million of
indebtedness due to the Company's shareholder in connection with the
acquisitions of MCM Plaza and PrimeTech. The remaining $6.2 million of proceeds
is available for working capital and general corporate purposes.
2. 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
F-6
<PAGE>
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
consolidation. The results of operations of all acquired businesses have been
consolidated for all periods subsequent to the date of acquisition.
Concentration of Credit Risk
The Company extends unsecured credit for tuition to a significant portion
of the students who are in attendance at its schools. A substantial portion of
credit extended to students is repaid through the students' participation in
various federally funded financial aid programs under Title IV of the Higher
Education Act of 1965, as amended (the "Title IV Programs"). The following table
presents the amount and percentage of the Company's cash receipts collected from
the Title IV Programs for the years ended August 31, 2000, 1999 and 1998
(dollars in thousands). Such amounts were determined based upon each U.S.
institution's cash receipts for the twelve-month period ended August 31,
pursuant to the regulations of the United States Department of Education ("DOE")
at 34 C.F.R. (S) 600.5:
<TABLE>
<CAPTION>
For the Years Ended August 31,
---------------------------------
2000 1999 1998
-------- -------- -------
<S> <C> <C> <C>
Total Title IV funding........................... $ 20,898 $ 16,823 $13,011
Total cash receipts.............................. $ 37,673 $ 31,937 $28,514
Total Title IV funding as a percentage of total
cash Receipts................................. 55% 53% 46%
======== ======== =======
</TABLE>
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, 2000 and 1999.
Investments
The Company invests excess cash in investments consisting primarily of
equity securities, corporate bonds (maturing in less than one month) and U.S.
Government treasury notes (maturing from one to 17 months). The investments are
considered available for sale, stated at their fair market value and classified
based upon their maturity dates.
F-7
<PAGE>
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At August 31, 2000 and 1999, investments consisted of the following
(dollars in thousands):
August 31,
--------------
2000 1999
------ ------
Fair value--
Equity securities.......................... $3,514 $2,770
Corporate bonds............................ 1,500 3,125
U.S. Government treasury notes............. 2,935 2,839
Term deposits.............................. 38 38
------ ------
Total investments at fair value.. 7,987 8,772
Unrealized gain 1,111 447
------ ------
Total investments at cost........ $6,876 $8,325
====== ======
Advertising and Marketing Costs
Advertising and marketing costs are expensed as incurred and are included
in selling expenses in the accompanying consolidated statements of operations.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization
are recognized utilizing both accelerated and straight-line methods. Leasehold
improvements are amortized over their estimated useful lives or lease terms,
whichever is shorter. Maintenance, repairs and minor renewals and betterments
are expensed; major improvements are capitalized. The estimated useful lives and
cost basis of property and equipment at August 31, 2000 and 1999, are as follows
(dollars in thousands):
August 31, Life
---------------- ------
2000 1999
------- ------
Land..................................... $ 517 $ 517
Building and improvements................ 2,307 2,307 40 years
Office equipment......................... 1,390 1,075 3-7 years
Furniture and fixtures................... 681 424 5-7 years
Leasehold improvements................... 1,106 837 4-10 years
Computer equipment and software.......... 3,007 2,134 3-5 years
Instructional equipment and materials.... 1,103 938 3-7 years
------- ------
10,111 8,232
Less--Accumulated depreciation and
amortization.......................... 3,804 2,615
------- ------
$ 6,307 $5,617
======= ======
F-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, 2000 and 1999, the cost basis and
useful lives of intangible assets consist of the following (dollars in
thousands):
August 31, Life
--------------- ------
2000 1999
------ ------
Goodwill.......................... $7,552 $7,300 15-40 years
Intellectual property............. 776 776 2-4 years
Covenants not-to-compete.......... 252 252 5-10 years
------ ------
8,580 8,328
Less--Accumulated amortization.... 1,893 1,529
------ ------
$6,687 $6,799
====== ======
On an ongoing basis, the Company reviews intangible assets and other long-
lived assets for impairment whenever events or circumstances indicate that
carrying amounts may not be recoverable. To date, no such events or changes in
circumstances have occurred. If such events or changes in circumstances occur,
the Company will recognize an impairment loss if the undiscounted future cash
flows expected to be generated by the asset (or acquired business) are less than
the carrying value of the related asset. The impairment loss would adjust the
asset to its fair value.
Revenue Recognition
Revenue consists primarily of tuition revenue from courses taught at
the schools and workshop fees and sales of related materials. Tuition revenue
from courses taught is recognized on a straight-line basis over the length the
applicable course is taught. Revenue from workshops is recognized on the date of
the workshop. If a student withdraws, future revenue is reduced by the amount of
refund due to the student. Refunds are calculated in accordance with federal,
state and accrediting agency standards. Revenue from rental of the Company's
owned facility is recognized on a straight-line basis over the life of the
leases. Textbook sales are recorded upon shipment. Revenue from rent and
textbook sales represents less than 7%, 10% and 13% of the Company's net revenue
for the fiscal years ended August 31, 2000, 1999 and 1998, respectively. Revenue
is stated net of scholarships and grants given to the students, which totaled
approximately $726,000, $657,000 and $705,000 for the fiscal years ended August
31, 2000, 1999 and 1998, respectively. Deferred revenue represents the portion
of payments received but not earned and is reflected as a current liability in
the accompanying consolidated balance sheets as such amount is expected to be
earned within the next year.
SAB 101 Revenue Recognition
On December 3, 1999, the Securities and Exchange Commission released
Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition, to provide
guidance on the recognition, presentation, and disclosure of revenue in
financial statements. The SAB outlines basic criteria that must be met before
registrants may recognize revenue, including persuasive evidence of the
existence of an arrangement, the delivery of products or services, a fixed and
determinable sales price, and reasonable assurance of collection. SAB 101 is
effective beginning the first fiscal quarter of the first fiscal year beginning
after December 15, 1999. Through August 31, 2000, the Company has recognized
application, technology and registration fees as revenue upon receipt. Prior to
the release of SAB 101, the Company's revenue
F-9
<PAGE>
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
recognition policy was in compliance with generally accepted accounting
principles. Effective September 1, 2000, we will adopt a change in accounting
principle to comply with the specific provisions and guidance of SAB 101. SAB
101 will require the Company to recognize revenue related to application,
technology, and registration fees over the contract period. The adoption of SAB
101 will not have a material effect on the Company's financial position or
results of operations.
Management's Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and reported amounts of revenues and expenses during
the reported period. Actual results could differ from those estimates.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," ("SFAS No. 123") related to options issued to employees and
directors.
Financial Instruments
The carrying value of current assets and liabilities reasonably
approximates their fair value due to their short maturity periods. The carrying
value of the Company's debt obligations reasonably approximates their fair value
as the stated interest rate approximates current market interest rates of debt
with similar terms.
Foreign Currency Translation
The Company acquired PrimeTech, an entity with operations in Canada, on
November 30, 1998. At August 31, 2000 and 1999 revenues and expenses related to
these operations have been translated at average exchange rates in effect at the
time the underlying transactions occurred. Transaction gains and losses are
included in income. Assets and liabilities of this subsidiary have been
translated at the year-end exchange rate, with gains and losses resulting from
such translation being included in accumulated other comprehensive income at
August 31, 2000 and 1999.
F-10
<PAGE>
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Earnings Per Share
The Company had 433,800 and 381,900 shares of its Class A common stock
under stock options at August 31, 2000 and 1999, respectively. Of the stock
options outstanding at August 31, 2000, 44,283 shares under option were deemed
exercisable under the treasury stock method where the average market price
exceeded their exercise price. As a result, 140 net shares were added to the
calculation of diluted shares outstanding at August 31, 2000. On the other hand,
no shares were under stock options were not included in the computation of
diluted earnings per share for the year ended August 31, 1999 because the
exercise price was greater than the average market price of the common shares.
Comprehensive Income
For the periods ended August 31, 2000, 1999 and 1998, accumulated other
comprehensive income net of tax, was approximately $390,000, $207,000 and
$11,000, respectively and would have resulted in a reduction of comprehensive
income.
Start-Up Costs
The Company expenses all start-up and organization costs as incurred and is
therefore not impacted by this SOP.
Derivative Instruments
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, as amended by SFAS No. 137 "Accounting
for Derivative Instruments and Hedging Activities." The statement requires the
recognition of all derivatives as either assets or liabilities in the balance
sheet and the measurement of those instruments at fair value, and based on the
amendment, effective for all fiscal quarters of all fiscal years beginning after
June 15, 2000, which, therefore, would require the Company to adopt such
statement on September 1, 2000. The impact of adopting the standard will not
have a material effect on the consolidated operations of the Company beginning
September 1, 2000.
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
F-11
<PAGE>
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
approximately $2.6 million. MCM University Plaza, Inc. owns real estate occupied
by U of S, and was originally acquired by the Company's shareholder on April 30,
1997 for approximately $2.2 million with funds obtained from a mortgage (Note
4). The assets, liabilities and operations of the real estate are included in
the Company's financial statements subsequent to April 30, 1997, the date the
Company's shareholder purchased the real estate, in a manner similar to a
pooling of interests because the August 1998 transaction was between two parties
controlled by the Company's shareholder. The purchase price of MCM University
Plaza, Inc.'s stock in excess of the historical book value of the underlying net
assets acquired, totaling approximately $720,000, is reflected as a reduction of
shareholders' equity.
MIA
On February 3, 1998, MIA purchased 100% of the capital stock of MIM for a
purchase price of approximately $2,368,000. The acquisition was accounted for as
a purchase and, accordingly, the acquired assets and assumed liabilities have
been recorded at their estimated fair value at the date of the acquisition. The
purchase price exceeded the fair market value of net assets acquired resulting
in goodwill of approximately $1,962,000. During fiscal 2000, the Company
negotitated a final purchase price adjustment with the former owner resulting in
a payment of approximately $0.1 million; such amount was expensed in fiscal
2000. The purchase price was financed with approximately $2,068,000 in short-
term borrowings and cash from operations.
PrimeTech
On November 30, 1998, the Company acquired 100% of the outstanding stock of
PrimeTech, which owns two Canadian schools that award non-degree certificates in
network engineering and software programming. Prior to that acquisition the
majority shareholder of the Company owned a one-third interest in PrimeTech.
Under the acquisition agreement, the Company was required to pay the former
owners, consisting of Dr. Markovitz and two operating managers, a total of
$500,000 (Canadian Dollars) upon closing and is obligated to issue shares of the
Company's common stock, the fair value of which is equal to 102% of PrimeTech's
net income, as defined in such agreement, in each of PrimeTech's next three
fiscal years. The Company has negotiated agreements with the two operating
managers in lieu of future stock issuance as provided for in the acquisition
agreement. The agreements specify an aggregate payout of approximately $150,000
(US Dollars) to the two operating managers which was paid in fiscal 2000.
F-12
<PAGE>
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Debt
Debt of the Company at August 31, 2000 and 1999, consists of the following:
<TABLE>
<CAPTION>
August 31,
--------------
2000 1999
------ ------
(dollars in
thousands)
<S> <C> <C>
Borrowings under credit agreement........................................ $ 350 $ --
Mortgage debt, bearing interest at 9%, requiring monthly principal and
interest payments of $18,378 through March 31, 2007 and a final
payment of $1,830,368 on April 30, 2007, secured by related
real estate........................................................... 2,099 2,129
Promissory note with the former owner of AATBS (being operated by the
Company under the name Ventura), bearing interest at
6.25%, requiring an initial payment of $400,000 on January 1, 1998,
quarterly principal and interest payments of $75,000 through October
1, 2002 and a final payment of $375,000 on
January 1, 2002, secured by the assets of AATBS....................... 655 901
Promissory note with the former owner of MIM, bearing interest at 8%,
requiring monthly principal and interest payments of $9,426
through May 31, 2001, unsecured....................................... 90 191
Bank note payable, bearing interest at 9%, requiring monthly principal
and interest payments of $1,462 through May 18, 2008,
secured by real estate................................................ 97 106
Business improvement loans, bearing interest at the prime rate plus
1.5% (10.5% at August 31, 2000), requiring monthly principal
payments of $4,810 through 2002....................................... 50 103
Other ................................................................... 59 54
------ ------
3,400 3,484
Less--Current maturities................................................. 796 486
------ ------
$2,604 $2,998
====== ======
During 1999, the Company entered into a credit agreement with a syndicate
of banks ("Credit Agreement"), which provides for revolving credit borrowings
of up to $20 million. Borrowings under the Credit Agreement bear interest at a
variable rate equal to (at the Company's option) the principal lender's prime
rate as in effect from time to time or the London Inter-Bank Offered Rate plus,
in each case, a margin of between 25 and 250 basis points, depending on the type
of loan and the Company's ratio of funded debt to EBITDA. The interest rate
being charged on amounts outstanding at August 31, 2000 was 9.75%. In addition,
the Credit Agreement provides for an unused commitment fee of 37.5 basis points
on commitments available but unused under the Credit Agreement, as well as
certain other customary fees. The Credit Agreement provides for a blanket lien
on all material assets of the Company and a pledge of the capital stock of all
the Company's material subsidiaries, as well as guarantees from all such
subsidiaries. The Credit Agreement restricts the Company and its subsidiaries'
ability to take certain actions, including incurring additional indebtedness or
altering the Company's current method of doing business. The Credit Agreement
also contains certain financial covenants and ratios that may have the effect of
restricting the Company's ability to take certain actions in light of their
impact on the Company's financial condition or results of operations. As of
August 31, 2000 the Company was in compliance or received a covenant waiver. The
Credit Agreement terminates on May 21, 2001. As of August 31, 2000 and 1999,
outstanding borrowings under this Credit Agreement totaled approximately
$350,000 and $0, respectively.
The Company previously had three line-of-credit agreements with various
banks which provided for aggregate maximum borrowings of $700,000. These credit
agreements expired in 1999. Amounts outstanding under these agreements bore bear
interest at rates ranging from prime to prime plus 2% (8.5% to 10.5% at August
31, 1999) and were secured by the assets of MIM, AATBS, Ventura and ASPP. As of
August 31, 1999, outstanding borrowings under these agreements totaled $0.
At August 31, 2000, future annual principal payments of long-term debt are
as follows (dollars in thousands):
August 31--
2001.................. $ 796
2002.................. 492
2003.................. 50
2004.................. 55
2005.................. 60
2006 and thereafter... 1,947
------
$3,400
======
</TABLE>
F-13
<PAGE>
<PAGE>
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
year ended August 31, 1998 does not include a provision for Federal income
taxes. In connection with the Company's initial public offering, the Company
terminated its S Corporation election and recorded a deferred income tax asset
and corresponding income tax benefit of $764,222, arising from a change in the
Company's tax status. Beginning March 8, 1999, the Company provides for deferred
income taxes under the asset and liability method of accounting. This method
requires the recognition of deferred income taxes based upon the tax
consequences of "temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax basis of existing assets and liabilities.
In connection with the initial public offering, the Company and its
majority shareholder entered into a tax indemnification agreement. The agreement
provides that the Company will indemnify the majority shareholder against
additional income taxes resulting from adjustments made (as determined by an
appropriate tax authority) to the taxable income reported by the Company as an S
Corporation for the periods prior to the initial public offering, but only to
the extent those adjustments provide a tax benefit to the Company.
The provision for income taxes for the years ended August 31, 2000, 1999
and 1998 consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
2000 1999 1998
------ ------ ------
<S> <C> <C> <C>
Current:
Federal..................................................... $2,000 $ 676 $ --
State....................................................... 442 210 29
------ ----- ----
Total current provision....................................... 2,442 886 29
Deferred:
Federal..................................................... 110 51 --
State....................................................... 32 3 --
Foreign..................................................... (348) (132) --
------ ----- ----
Total deferred benefit........................................ (206) (78) --
Initial recognition of deferred income tax benefit resulting
from change in tax status..................................... -- (764) --
------ ----- ----
Total income tax provision....................................... $2,236 $ 44 $ 29
====== ===== ====
</TABLE>
A reconciliation of the statutory Federal tax rate to the actual effective
income tax rate for the years year ended August 31, 2000 and 1999, is as follows
(tax provision for 1998 relates to only the S Corporation taxes):
<TABLE>
<CAPTION>
2000 1999
------ ------
<S> <C> <C>
Statutory Federal income tax rate................................... 34.0% 34.0%
Foreign taxes....................................................... 0.7 (0.2)
State income taxes, net of federal benefit.......................... 4.8 4.6
Income tax benefit recognized as a result of change in tax status... -- (16.5)
S Corporation income taxes to its shareholder....................... -- (25.4)
Permanent and other................................................. 2.2 4.5
---- -----
Effective rate................................................. 41.7% 1.0%
==== =====
</TABLE>
F-14
<PAGE>
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The significant components of deferred income tax assets and liabilities as
of August 31, 2000 and 1999 are as follows (dollars in thousands):
2000 1999
Deferred income tax assets:
Canadian Tax net operating loss
carryforward............................ $ 488 $ 122
Payroll and related benefits............ 144 149
Allowance for doubtful accounts......... 123 122
Fixed assets............................ 97 105
Deferred rent........................... 279 241
Other................................... 3 137
------- -----
Total deferred income tax assets... 1,134 876
Deferred income tax liabilities:
Other................................... (86) (34)
------- -----
Total net deferred tax assets...... $ 1,048 $ 842
======= =====
No valuation allowance for deferred income tax assets at August 31, 2000
and 1999 has been recorded as the Company believes that it is more likely than
not that the deferred tax assets will be realized in the future.
6. Shareholders' Equity
The Company adopted a repurchase program for the Company's Class A Common
Stock of up to 500,000 shares. Shares of Class A Common Stock will be purchased
by the Company from time to time through open market purchases and private
purchase, as available. Under this program, the Company has repurchased 482,000
shares as of August 31, 2000 at a total cost of approximately $2,131,000.
Class A common stock and Class B common stock have identical rights except
that each share of Class B common stock is entitled to ten votes on all matters
submitted to a vote of shareholders as compared to one vote for each share of
Class A common stock and Class B common stock may be (and in certain cases are
required to be) converted into Class A common stock on a share-for-share basis.
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. Most of the options vest
and become exercisable in three equal annual installments commencing with their
issuance and at the next two anniversary dates. Some options are vested at the
date of grant based on determinations made by the Company's board of directors.
The stock options expire ten years from the date of grant.
F-16
<PAGE>
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes stock option activity under the Plan:
<TABLE>
<CAPTION>
August 31, 2000 August 31, 1999
--------------- ---------------
Shares Weighted Shares Weighted
------ -------- ------ --------
Average Average
------- -------
Price Price
----- -----
<S> <C> <C> <C> <C>
Outstanding at beginning of year 381,900 $ 13.54 -- $ --
Granted 97,500 6.17 381,900 13.54
Exercised -- -- -- --
Canceled (45,600) 14.00 -- --
------- ------- ------- -------
Outstanding at end of year 433,800 $ 11.84 381,900 $ 13.54
======= ======= ======= =======
Options exercisable at year-end 301,600 $ 12.37 163,300 $ 12.93
</TABLE>
The following table summarizes information about stock options outstanding
at August 31, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Range of Weighted-Average Weighted-Average
Exercise Prices Shares Remaining Life Shares Remaining Life
--------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C>
$5.375-$7.500 124,500 9.62 70,500 9.59
$14.00 309,300 8.55 231,100 8.55
</TABLE>
The Company also adopted the Employee Stock Discount Purchase Plan ("Stock
Purchase Plan") during 1999. The Stock Purchase Plan allows full-time employees
to purchase shares of Class A Common Stock through payroll deductions of up to
10% of gross pay, at a cost per share of 90% of the lowest closing price of the
stock on the Nasdaq National Market during the Plan quarter. The Company has
reserved 375,000 shares of Class A Common Stock for issuance in connection with
the Stock Purchase Plan. Through August 31, 2000, 8,299 shares of Class A Common
Stock have been issued under this Plan.
The weighted average fair value of options issued during 2000 and 1999 was
$3.642 and $9.703 and was estimated on the date of grant based on the
Black-Scholes option pricing model assuming, among other things, a risk-free
interest rate of 6.02% for 2000 and 5.81% for 1999; no dividend yield; expected
volatility of 63% for 2000 and 70% for 1999 and an expected life of five years
for 2000 and 10 years for 1999. Had compensation costs for options 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, 2000 would have been
approximately $2,223,000 and $.34, respectively and 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.
F-16
<PAGE>
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, $4,288,901,
$2,811,567 and $1,617,784 for the fiscal years ended August 31, 2000, 1999 and
1998, respectively.
Real Estate Rental Income
The Company leases certain space of its building owned by MCM University
Plaza, Inc. in Sarasota, Florida, to outside parties under noncancellable
operating leases.
At August 31, 2000, the approximate future minimum rental income and
commitments under operating leases that have initial or remaining noncancellable
lease terms in excess of one year are as follows (dollars in thousands):
Real Estate
-----------
and total
--- -----
Lease Sublease Operating
----- -------- ---------
Commitments Income Leases
----------- ------ ------
For the year ended August 31,
2001......................... $ 3,064 $ (298) $ 2,766
2002......................... 3,212 (164) 3,048
2003......................... 3,242 (122) 3,120
2004......................... 2,971 (24) 2,947
2005......................... 2,912 (8) 2,904
2006 and thereafter.......... 8,413 -- 8,413
-------- ------ -------
$ 23,814 $ (616) $23,198
======== ====== =======
9. Commitments and Contingencies
Letters of Credit
The Company has outstanding irrevocable letters of credit totaling
approximately $962,000 as of August 31, 2000, which were primarily issued in
connection with leases for office facilities.
Litigation
The Company, Dr. Markovitz and certain other companies in which Dr.
Markovitz has an interest had been named as defendants in Charlena Griffith, et
al. v. University Hospital, L.L.C. et al., a class action lawsuit filed in
November 1997 and in the United States District Court for the Northern District
of Illinois, Eastern Division. This lawsuit was settled between the parties
at no cost to the Company.
F-17
<PAGE>
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
From time to time, the Company is subject to occasional lawsuits,
investigations and claims arising out of the normal conduct of business.
Management does not believe the outcome of any pending claims will have a
material adverse impact on the Company's consolidated financial position or
consolidated results of operations.
10. Regulatory
The Company and its U.S. schools are subject to extensive regulation by
federal and state governmental agencies and accrediting bodies. In particular,
the Higher Education Act of 1965, as amended (the "HEA") and the regulations
promulgated thereunder by the DOE subject the Company's U.S. schools to
significant regulatory scrutiny on the basis of numerous standards that schools
must satisfy in order to participate in the various federal student financial
assistance programs under the Title IV Programs.
The standards employ a ratio methodology under which an institution need
only satisfy a single standard--the composite score standard. The ratio
methodology takes into account an institution's total financial resources and
provides a combined score of the measures of those resources along a common
scale (from negative 1.0 to positive 3.0). It allows a relative strength in one
measure to mitigate a relative weakness in another measure.
If an institution achieves a composite score of at least 1.5, it is
financially responsible without further oversight. If an institution achieves a
composite score from 1.0 to 1.4, it is in the "zone," is subject to additional
monitoring, and may continue to participate as a financially responsible
institution for up to three years. Additional monitoring may require the school
to (1) notify the DOE, within 10 days of certain changes, such as an adverse
accrediting action; (2) file its financial statements earlier than the six month
requirement following the close of the fiscal year and (3) subject the school to
a cash monitoring payment method. If an institution achieves a composite score
below 1.0, it fails to meet the financial responsibility standards unless it
qualifies under the provisions of an alternative standard (i.e., letter of
credit equal to 50% of the Title IV program funds expended from the prior fiscal
year or equal to at least 10% of the Title IV program funds expended from the
prior fiscal year and provisional certification status). The institution may
also be placed on the cash monitoring payment method or the reimbursement
payment method. The Company applied these new regulations to its financial
statements as of August 31, 2000 and has determined that the Company and each of
its institutions satisfied the standards based upon their composite scores.
On October 1, 1998, legislation was enacted which reauthorized the student
financial assistance programs of the HEA ("1998 Amendments"). The 1998
Amendments continue many of the current requirements for student and
institutional participation in the Title IV Programs. The 1998 Amendments also
change or modify some requirements. These changes and modifications include
increasing the revenues that an institution may derive from Title IV funds from
85% to 90% and revising the requirements pertaining to the manner in which
institutions must calculate refunds to students. The 1998 Amendments also
prohibit institutions that are ineligible for participation in Title IV loan
programs due to student default rates in excess of applicable thresholds from
participating in the Pell Grant program. Other changes expand participating
institutions' ability to appeal loss of eligibility owing to such default rates.
The 1998 Amendments further permit an institution to avoid the interruption of
eligibility for the Title IV Programs upon a change in ownership which results
in a change of control by submitting a materially complete application for
recertification of eligibility within 10 business days of such a change of
ownership. None of the Company's institutions derives more than 80% of its
revenue from Title IV funds and no institution has student loan default rates in
excess of current thresholds.
F-18
<PAGE>
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
11. Related-Party Transactions
On August 30, 1998, the majority shareholder of the Company issued a note
to the Company in the form of a capital contribution totaling $6,000,000. The
principal and accrued interest thereon was repaid in full during 1999.
Prior to the Offering, a company owned by the majority shareholder of the
Company provides management services for the Company and its schools. For the
years ended August 31, 1999 and 1998, the Company incurred and paid expenses
totaling $667,849 and $2,271,232, respectively, related to such services.
Subsequent to the Offering, such services are no longer provided by the
affiliated company.
F-19
<PAGE>
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company paid certain administrative and other expenses on behalf of an
entity partially owned by the majority shareholder of the Company. The total
amount owed to the Company from this entity for such advances was approximately
$49,000 at August 31, 2000 and 1999. The affiliated entity paid a management fee
to the Company of approximately $72,000 during fiscal 1999 related to such
services. This arrangement was terminated upon the initial public offering in
March, 1999.
John Marshall Law School
The Company entered into a long-term management arrangement with John
Marshall Law School ("John Marshall") of Atlanta, Georgia in September 1999. The
arrangement includes a management agreement, an option to purchase John Marshall
exercisable at the Company's discretion over a 10-year period and a line of
credit of $600,000 between the Company and John Marshall. The line of credit is
secured by essentially all of the assets of John Marshall. The principal and any
interest are due in 2003. As of August 31, 2000, the Company had advanced
approximately $500,000 under the line of credit. As provided for under the
agreement, the Company receives a management fee based upon John Marshall's net
revenue. During fiscal 2000, the Company provided $330,000 of management
services under the agreement. The Company has advanced $2,149,000 to fund
operating activities of John Marshall during fiscal 2000 and has committed to
advance an additional $1.5 million during fiscal 2001, if needed. Amounts owed
from John Marshall are included in other long-term assets. The Company's
assessment of the realizability of advances to John Marshall is based upon its
assessment of the ability of John Marshall to become accredited, the fair market
value of John Marshall's net assets, among other factors, and could result in
the recognition of losses during fiscal 2001.
In 1987, the Georgia Supreme Court mandated that John Marshall obtain
American Bar Association ("ABA") accreditation before 2003. The ABA has to date
refused such accreditation. On September 5, 2000, John Marshall filed an appeal
regarding its accreditation, which is scheduled to be heard in February 2001. If
the appeal is successful, the Company has been advised that the ABA will send a
two-person team to inspect the school and verify that shortcomings noted in
previous inspections have been addressed. If the appeal proves unsuccessful,
John Marshall can begin the accreditation process again with a new application
filing in the Fall of 2001. Though the Company believes that accreditation can
be achieved before the 2003 deadline, there exist a myriad of circumstances that
cannot be foreseen and over which the Company has no control that could
interfere with the granting of accreditation status to John Marshall; thus,
there can be no assurance that accreditation will be received. This could affect
the Company's ability to fully realize amounts it has advanced to John Marshall.
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 $713,235, $585,423 and
$455,778 for the years ended August 31, 2000, 1999 and 1998, respectively.
13. Segment Reporting
In accordance with, the Financial Accounting Standards Board SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information" ("SFAS No.
131"), operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the Company in
deciding how to allocate resources and in assessing performance.
The Company has two business segments: 1) Schools and 2) Test Preparation
Materials and Workshops ("Test Preparation"). These segments are managed as
separate strategic business units due to the distinct nature of their
operations. The Schools Segment, which represents the operations of ASPP, U of
S, MIA and PrimeTech, provides programs in psychology, education, business,
allied health professions, network engineering and software programming. All
operations of the Schools Segment are located in the United States with the
exception of PrimeTech which is located in Canada. The Test Preparation Segment
offers courses and materials for post-graduate psychology license examinations
in the United States.
F-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,
2000, 1999 and 1998, for these segments (dollars in thousands):
<TABLE>
<CAPTION>
Schools Test Preparation Consolidated
------- ---------------- ------------
2000
<S> <C> <C> <C>
Revenue.......................... $40,642 $ 3,529 $ 44,171
Income from operations........... 3,838 1,037 4,875
Depreciation and amortization.... 1,370 185 1,555
Interest revenue................. 854 -- 854
Interest expense................. 248 52 300
Net income....................... 2,625 495 3,120
Total assets..................... 31,626 5,058 36,684
Capital expenditures............. 1,872 3 1,875
Long-lived assets................ 9,444 3,550 12,994
1999
Revenue.......................... $33,176 $ 3,690 $ 36,866
Income from operations........... 3,469 1,036 4,505
Depreciation and amortization.... 1,028 377 1,405
Interest revenue................. 695 -- 695
Interest expense................. 401 166 567
Net income....................... 3,796 787 4,583
Total assets..................... 30,233 4,086 34,319
Capital expenditures............. 1,860 29 1,889
Long-lived assets................ 8,684 3,732 12,416
1998
Revenue.......................... $25,597 $ 3,755 $ 29,352
Income from operations........... 785 1,015 1,800
Depreciation and amortization.... 565 373 938
Interest revenue................. 357 -- 357
Interest expense................. 308 293 601
Net income....................... 805 710 1,515
Total assets..................... 18,591 4,884 23,475
Capital expenditures............. 579 18 597
Long-lived assets................ 6,480 4,081 10,561
</TABLE>
14. Valuation and Qualifying Accounts
The following summarizes the activity of the allowance for doubtful
accounts (dollars in thousands):
<TABLE>
<CAPTION>
Balance at Net Charges Increase Balance at
---------- ----------- -------- ----------
Beginning of to Operating Due to End of
------------ ------------ ------ ------
Period Expenses Acquisitions Period
------ -------- ------------ ------
<S> <C> <C> <C> <C>
Student receivable allowance
activity for the year ended
August 31, 1998.............. $ 30 $ 177 $ 23 $ 230
Student receivable allowance
activity for the year ended
August 31, 1999.............. $ 230 $ 47 $ 39 $ 316
Student receivable allowance
activity for the year ended
August 31, 2000.............. $ 316 $ (5) $ -- $ 311
</TABLE>
F-21
<PAGE>
15. Subsequent Events
On September 1, 2000, the Company entered into a Consulting Agreement with
Leeds Equity Associates, L.P. This partnership includes as a partner Jeffrey
Leeds, a member of the Company's board of directors. This Agreement encompasses
the performance of Company requested services over the six month term of the
Agreement. Payment is represented by a stock purchase warrant providing for the
purchase of 200,000 shares of the Company's Class A common stock at a purchase
price of $6.48 per share and with a seven year exercise period. The value of the
warrants will be charged to expense over the next six month period. Management
is in the process of valuing the warrants which under various assumptions could
total as much as $950,000.
The Company announced on November 16, 2000, that it has entered into an
agreement to purchase Western State University College of Law, in Fullerton,
California ("Western State") for approximately $13 million less certain
deductions as provided for in the agreement. The proposed transaction is subject
to approval by accrediting and regulatory entities, including the Western
Association of Schools and Colleges, the American Bar Association and the U.S.
Department of Education. The acquisition is anticipated in first quarter of
2001.
F-22
