<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 29, 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, 3rd Floor
Chicago, Illinois 60603
Telephone: (312) 899-9900
(Address, including zip code, and telephone number, including area code, of
principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
At April 10, 2000 the registrant had 6,476,430 shares of common stock
outstanding.
<PAGE>
ARGOSY EDUCATION GROUP, INC.
INDEX
<TABLE>
<CAPTION>
Description Page No.
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets............................ 3
Condensed Consolidated Statements of Operations.................. 4
Condensed Consolidated Statements of Cash Flows.................. 5
Notes to Condensed Consolidated Financial Statements............. 6
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition............................................... 9
Item 3. Quantitative and Qualitative Disclosure About Market Risk......... 14
Part II. Other Information
Item 1. Legal Proceedings................................................. 14
Item 2. Changes in Securities and Use of Proceeds......................... 14
Item 3. Defaults Upon Senior Securities................................... 14
Item 4. Submission of Matters to a Vote of Security-Holders............... 14
Item 5. Other Information................................................. 15
Item 6. Exhibits and Reports on Form 8-K.................................. 15
</TABLE>
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<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
February 29, 2000 August 31, 1999
----------------- ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 8,042 $ 8,980
Short-term investments 8,347 6,027
Receivables, net 3,127 1,593
Prepaid expenses and other current assets 906 1,324
------- -------
Total current assets 20,422 17,924
PROPERTY AND EQUIPMENT, net 6,488 5,617
NON-CURRENT INVESTMENTS 1,824 2,745
OTHER ASSETS 2,747 1,234
INTANGIBLES, net 6,799 6,799
------- -------
TOTAL ASSETS $38,280 $34,319
======= =======
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 913 $ 486
Accounts payable 1,482 1,109
Accrued payroll and other related liabilities 858 547
Accrued expenses 995 417
Deferred revenue and student deposits 4,444 2,548
------- -------
Total current liabilities 8,692 5,107
------- -------
LONG-TERM DEBT, less current maturities 2,776 2,998
DEFERRED RENT 723 610
COMMITMENTS & CONTINGENCIES
STOCKHOLDERS' EQUITY:
Class A common stock - 30,000,000 shares authorized,
$.01 par value, 2,055,885 shares issued and outstanding 21 20
Class B common stock - 10,000,000 shares authorized,
$.01 par value, 4,900,000 shares issued and outstanding 49 49
Additional paid-in capital 25,118 24,871
Treasury Stock--at cost: 482,000 shares (February 29, 2000) (2,131) -
Accumulated other comprehensive income 876 447
Purchase price in excess of predecessor carryover (720) (720)
Retained earnings 2,876 937
------- -------
Total stockholders' equity 26,089 25,604
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $38,280 $34,319
======= =======
</TABLE>
-3-
<PAGE>
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
February 29, February 28, February 29, February 28,
------------ ------------ ------------ ------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Tuition and fees, net $ 9,698 $ 7,992 $ 20,624 $ 16,530
Other 878 1,087 1,566 1,890
------- ------- -------- --------
Total revenues, net 10,576 9,079 22,190 18,420
------- ------- -------- --------
Operating expenses:
Cost of education 4,929 4,504 9,991 8,755
Selling expenses 795 417 1,833 778
General and administrative expenses 3,498 3,009 7,323 5,496
Related party general and administrative expense - 231 - 655
------- ------- -------- --------
Total operating expenses 9,222 8,161 19,147 15,684
------- ------- -------- --------
Income from operations 1,354 918 3,043 2,736
Other income (expense):
Interest income 228 172 443 313
Interest expense (72) (147) (142) (320)
Other income (expense) (68) - (49) (4)
------- ------- -------- --------
Total other income (expense), net 88 25 252 (11)
------- ------- -------- --------
Income before provision for income taxes 1,442 943 3,295 2,725
Income taxes:
Income tax provision on C corporation income 608 - 1,356 -
Income tax provision on S corporation income - 38 - 61
------- ------- -------- --------
Total income taxes 608 38 1,356 61
------- ------- -------- --------
Net income $ 834 $ 905 $ 1,939 $ 2,664
======= ======= ======== ========
Net income per share:
Basic and diluted $ 0.13 $ 0.18 $ 0.29 $ 0.54
======= ======= ======== ========
Weighted average shares outstanding:
Basic and diluted 6,472 4,900 6,583 4,900
======= ======= ======== ========
</TABLE>
-4-
<PAGE>
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
February 29, February 28,
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,939 $ 2,664
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation and amortization 663 607
Deferred taxes (184) -
Issuance of stock performance grants 228 -
Changes in operating assets and liabilities 2,201 597
--------- ---------
Net cash provided by operating activities 4,847 3,868
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net (1,368) (558)
Business acquisition, net of cash (165) (186)
(Purchase) sale of investments, net (948) 479
--------- ---------
Net cash used in investing activities (2,481) (265)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock (2,131) -
Borrowing of long-term debt 436 150
Payments of long-term debt (231) (426)
Advances (to)/from related party (1,357) 65
Shareholder distribution - (1,382)
Repayment of shareholder note - 3,278
Payments to former owners of acquired businesses - (268)
--------- ---------
Net cash (used in) provided by financing activities (3,283) 1,417
--------- ---------
EFFECTIVE EXCHANGE RATE CHANGES ON CASH (21) (3)
--------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (938) 5,017
CASH AND CASH EQUIVALENTS, beginning of period 8,980 2,712
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 8,042 $ 7,729
========= =========
</TABLE>
-5-
<PAGE>
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - The Company and Basis of Presentation
Argosy Education Group, Inc. (the "Company") is the nation's largest for-
profit provider of doctoral level programs. The Company's mission is to provide
academically oriented practitioner-focused education in fields with numerous
employment opportunities and strong student demand. The Company operates degree
and non-degree granting private, for-profit post-secondary schools devoted to
awarding doctoral and master's degrees in psychology, education and business as
well as bachelor's degrees in business, associate degrees in allied health
professions and diplomas in information technology.
The accompanying condensed unaudited consolidated financial statements have
been prepared on the same basis as the annual consolidated financial statements
and, in the opinion of management, reflect all adjustments, which include only
normal recurring adjustments, necessary to present fairly the financial
condition and results of operations of the Company. These consolidated financial
statements and notes thereto are unaudited and should be read in conjunction
with the Company's audited financial statements included in the Company's report
on Form 10K, as filed with the Securities and Exchange Commission. The results
of operations for the six months ended February 29, 2000 are not necessarily
indicative of results that can be expected for the entire fiscal year.
The condensed consolidated financial statements as of February 29, 2000 and
the six months ended February 29, 2000 and February 28, 1999 include the
accounts of the Company and its wholly owned subsidiaries. All intercompany
balances and transactions have been eliminated in consolidation.
On March 8, 1999 the Company completed an initial public offering of
2,000,000 shares of Class A 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 also authorized 30,000,000 shares of Class A
Common Stock and 5,000,000 shares of Preferred Stock. The effect of the stock
split has been retroactively reflected for all periods presented in the
accompanying consolidated financial statements. There was no Preferred Stock
issued or outstanding as of February 29, 2000.
On December 3, 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin (SAB) No. 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. Prior to the release of SAB 101, our 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 us to recognize revenue related to application, technology, and
registration fees over the contract period. Through February 29, 2000, we have
recognized application, technology and registration fees as revenue upon
receipt. We are currently in the process of estimating the cumulative effect of
this accounting change and do not believe that this change will have a material
impact on our financial position or operating results. The effect will be
recorded in the first quarter of fiscal year 2001.
-6-
<PAGE>
Note 2 - Income Taxes
Prior to the Offering completed on March 8, 1999, the Company included its
income and expenses with those of its shareholders for Federal and certain state
income tax purposes (an S Corporation election). Accordingly, the consolidated
statement of operations for the three months and six months ended February
28,1999 do not include a provision for Federal income taxes. In connection with
the Offering, the Company terminated its S Corporation status and recorded a
deferred income tax asset and corresponding reduction of income tax expense of
$764,222, arising from a change in the Company's tax status. Beginning March 8,
1999, the Company has provided 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 financial statements carrying amounts and the tax basis of
existing assets and liabilities.
Note 3: PrimeTech Acquisition
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 is negotiating agreements with the two operating
managers in lieu of future stock issuances as provided for in the acquisition
agreement. The agreements contemplate an aggregate payout of approximately
$200,000 (US dollars). As of February 29, 2000, the Company has paid
approximately $165,000 (US dollars) to the two operating managers.
Note 4: 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 February 29, 2000 at a total cost of approximately $2,131,000.
Note 5: Related-Party Transactions
As of September 1, 1999 the Company entered into an agreement to manage the
John Marshall Law School of Atlanta, Georgia ("John Marshall"). The agreement is
for 10 years and includes an option to purchase John Marshall. The right can be
exercised at the Company's discretion. In addition, a line of credit of $600,000
was established between the Company and John Marshall. As of February 29, 2000,
the Company advanced approximately $500,000 under the line of credit and
approximately $1,357,000 operating cash under the management agreement. The
amounts are included in other assets.
Note 6: Comprehensive Income
On September 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"), which
requires companies to report all changes in equity during a period, except those
resulting from investment by owners and distributions to owners, in a financial
statement for the period in which they are recognized. The disclosure of
comprehensive income and accumulated other comprehensive income is as follows:
-7-
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
February 29, February 28, February 29, February 28,
------------ ------------ ------------ ------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 834 $ 905 $ 1,939 $ 2,664
Other comprehensive income:
Unrealized gain/(loss) on investments 255 (31) 450 (31)
Foreign currency translation adjustment (21) 1 (21) 2
---------------------------- ----------------------------
Total other comprehensive income 234 (30) 429 (29)
---------------------------- ----------------------------
Comprehensive income 1,068 875 2,368 2,635
---------------------------- ----------------------------
</TABLE>
For the period ended February 29, 2000 and February 28, 1999 Accumulated Other
Comprehensive Income/(Loss), net of tax, was approximately $526,000 and
$(16,000), respectively, and would have resulted in a reduction (increase) of
Comprehensive Income.
The accumulated other comprehensive income balance has been restated to conform
to the SFAS No. 130 requirements.
Note 7: Segment Reporting
The Company has two business segments: 1) Schools and 2) Test Preparation
Materials and Workshops ("Test Preparation"). These segments are managed as
separate strategic business units due to the distinct nature of their
operations. The Schools Segment, which represents the operations of ASPP, U of
S, MIA and PrimeTech, provides programs in psychology, education, business,
allied health professions, network engineering and software programming. All
operations of the Schools Segment are located in the United States with the
exception of PrimeTech which is located in Canada. The Test Preparation Segment
offers courses and materials for post-graduate psychology and counseling license
examinations and is located in the United States.
-8-
<PAGE>
The following table presents financial data for the three and six months
ended February 29, 2000 and February 28, 1999 for these segments (dollars in
thousands):
<TABLE>
<CAPTION>
Schools Test Preparation Consolidated
---------- ------------------- ----------------
Three Months Ended
February 29, 2000
------------------
<S> <C> <C> <C>
Revenue $ 9,709 $ 867 $10,576
Income from operations 1,124 230 1,354
Net Income 704 130 834
Total Assets 34,373 3,907 38,280
Three Months Ended
February 28, 1999
------------------
Revenue $ 8,191 $ 888 $ 9,079
Income from operations 649 269 918
Net Income 692 213 905
Total Assets 22,207 5,005 27,212
Six Months Ended
February 29, 2000
-----------------
Revenue $20,458 $1,732 $22,190
Income from operations 2,574 469 3,043
Net Income 1,674 265 1,939
Total Assets 34,373 3,907 38,280
Six Months Ended
February 28, 1999
-----------------
Revenue $16,635 $1,785 $18,420
Income from operations 2,219 517 2,736
Net Income 2,269 395 2,664
Total Assets 22,207 5,005 27,212
</TABLE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
This Quarterly Report on Form 10-Q contains statements that may constitute
"forward-looking statements" as defined by the U.S. Private Securities
Litigation Reform Act of 1995. Such forward-looking statements can be identified
by the use of forward-looking terminology such as "believes," "estimates,"
"anticipates," "continues," "contemplates," "expects," "may," "will," "could,"
"should" or "would," or the negatives thereof. Those statements are based on
the intent, belief or expectation of the Company as of the date of this
Quarterly Report. Any such forward-looking statements are not guarantees of
future performance and may involve risks and uncertainties that are outside the
control of the Company. Results may differ materially from the forward-looking
statements contained herein as a result of changes in governmental regulations,
including those governing student financial aid, and other factors. The Company
expressly disclaims any obligation to release publicly any updates or revisions
to any forward-looking statement contained herein to reflect any change in the
Company's expectations with regard thereto or any change in events, conditions
or circumstances on which any such statement is based. The following discussion
of the Company's results of operations and financial condition should be read in
conjunction with the interim unaudited condensed financial statements of the
Company and the notes thereto included herein and in conjunction with the
information contained in the Form 10K as filed with the Securities and Exchange
Commission.
-9-
<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>
Three Months Ended Six Months Ended
February 29, February 28, February 29, February 28,
----------------- ---------------- --------------- ----------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total revenues, net 100% 100% 100% 100%
Operating expenses:
Cost of education 46.6 49.6 45.0 47.5
Selling expenses 7.5 4.6 8.3 4.2
General and administrative expenses 33.1 33.1 33.0 29.8
Related party general and administrative expense - 2.6 - 3.6
---- ---- ---- ----
Total operating expenses 87.2 89.9 86.3 85.1
---- ---- ---- ----
Income from operations 12.8 10.1 13.7 14.9
Total other income (expense), net 0.8 0.3 1.1 (0.1)
---- ---- ---- ----
Income before provision for income taxes 13.6 10.4 14.8 14.8
Provision for income taxes 5.7 0.4 6.1 0.3
---- ---- ---- ----
Net income 7.9% 10.0% 8.7% 14.5%
==== ==== ==== ====
</TABLE>
-10-
<PAGE>
Three Months Ended February 29, 2000 Compared to Three Months Ended February 28,
1999
Net revenues increased 16.5% from $9.1 million in the second quarter of
fiscal 1999 to $10.6 million in the second quarter of fiscal 2000, due to
increased revenue at all schools, primarily ASPP. For all schools owned by the
Company during fiscal 1999, the revenue increase is primarily due to internal
growth, tuition increases and the addition of new campuses and new programs.
Cost of education increased 9.4% from $4.5 million in the second quarter of
fiscal 1999 to $4.9 million in the second quarter of fiscal 2000, due to
additional teaching costs to meet the growth in the number of students attending
the schools, and the development of new programs. As a percentage of net
revenue, cost of education decreased from 49.6% in fiscal 1999 to 46.6% in
fiscal 2000 due to efficiencies in the student services area.
Selling expenses increased 90.6% from $0.4 million in the second quarter of
fiscal 1999 to $0.8 million in the second quarter of fiscal 2000. As a
percentage of revenue, selling expenses increased from 4.6% to 7.5% due to the
addition of recruiters in all of the Argosy schools. This is an integral part
of our marketing strategy.
General and administrative expenses increased 16.3% from $3.0 million in
the second quarter of fiscal 1999 to $3.5 million in the second quarter of
fiscal 2000 and, as a percentage of net revenue remained at 33.1% from quarter
to quarter. The dollar increase is primarily due to additional expenses
incurred as a public company, additional management payroll costs, additional
costs of start up operations, and additional depreciation expense due to the
continued investment in the Company's equipment and computer systems.
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 $0.2 million in the second quarter
of fiscal 1999. Upon consummation of the Offering, the relationship with the
related company was terminated.
The provision for income taxes increased from $0.04 million in the second
quarter of fiscal 1999 to $0.6 million in the second quarter of fiscal 2000, due
to the Company's change to a C Corporation on March 8, 1999. There was a
negligible tax charge for the second quarter of fiscal 1999 while the Company
was an S Corporation.
Net income decreased 7.8%, from $0.9 million in the second quarter of
fiscal 1999 to $0.8 million in the second quarter of fiscal 2000; due primarily
to start up operations at three campuses and the internet campus, additional
general and administrative expenses as a public company and higher income taxes
due to a change in the tax status of the Company. This was offset by the
increased profitability at existing schools and the elimination of related party
general and administrative expenses.
Six Months Ended February 29, 2000 Compared to Six Months Ended February 28,
1999
Net revenues increased 20.5% from $18.4 million in the first six months of
fiscal 1999 to $22.2 million in the first six months of fiscal 2000, primarily
due to additional net revenue from the acquisition of PrimeTech and increased
revenue at all schools owned in the first six months of both fiscal 1999 and
2000. For schools owned by the Company during fiscal 1999, revenue increased by
17.9% primarily due to internal
-11-
<PAGE>
growth. Additional revenue was recognized from tuition increases and the
addition of new campuses and new programs.
Cost of education increased 14.1% from $8.8 million in the first six months
of fiscal 1999 to $10.0 million in the first six months of fiscal 2000, due to
additional teaching costs to meet the growth in the number of students attending
the schools, the development of new programs and the acquisition of PrimeTech.
As a percentage of net revenue, cost of education decreased from 47.5% in fiscal
1999 to 45.0% in fiscal 2000 due to efficiencies in the student services area.
Selling expenses increased 135.6% from $0.8 million in the first six months
of fiscal 1999 to $1.8 million in the first six months of fiscal 2000. As a
percentage of revenue, selling expenses increased from 4.2% to 8.3% due to the
addition of recruiters in all of the Argosy schools. This is an integral part
of our marketing strategy. In addition, the acquisition of PrimeTech requires
more costly advertising media than the other Argosy companies.
General and administrative expenses increased 33.2% from $5.5 million in
the first six months of fiscal 1999 to $7.3 million in the first six months of
fiscal 2000 and, as a percentage of net revenue increased from 29.8% to 33.0%.
The increase is primarily due to additional expenses incurred as a public
company, additional management payroll costs, additional costs of start up
operations, and additional depreciation expense due to the continued investment
in the Company's equipment and computer systems.
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 the
first six months of fiscal 1999. Upon consummation of the Offering, the
relationship with the related company was terminated.
The provision for income taxes increased from $0.06 million in the first
six months of fiscal 1999 to $1.4 million in the first six months of fiscal
2000, due to the Company's change to a C Corporation on March 8, 1999. There
was a negligible tax charge for the first six months of fiscal 1999 while the
Company was an S Corporation.
Net income decreased 27.2%, from $2.7 million in the first six months of
fiscal 1999 to $1.9 million in the first six months of fiscal 2000; due
primarily to start up operations at three campuses and the internet campus,
additional general and administrative expenses as a public company and higher
income taxes due to a change in the tax status of the Company. This was offset
by the increased profitability at existing schools and the elimination of
related party general and administrative expenses.
Seasonality and Other Factors Affecting Quarterly Results
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 and that
operating results for any quarter are not necessarily indicative of the results
for any future period.
-12-
<PAGE>
Liquidity and Capital Resources
Since its formation, the Company has financed its operating activities
primarily through cash generated from operations. Acquisitions have been
financed primarily through debt instruments. Net cash provided by operating
activities increased from $3.9 million in the six months ended February 28, 1999
to $4.8 million in the six months ended February 29, 2000. The Company had
$11.7 million of working capital as of February 29, 2000 compared to $12.8
million of working capital as of August 31, 1999. Advances made to John Marshall
during the six months ended February 29, 2000 were approximately $1.4 million.
Capital expenditures increased from $0.6 million in the six months ended
February 28, 1999 to $1.4 million in the same period in 2000. The increase was
due to the investment in continued upgrading of school equipment and facilities,
the enhanced capabilities of the Company's computer system, and the investment
in the start up of an internet campus. 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.
Year 2000 Compliance
The "Year 2000 Problem" is the potential for computer processing errors
resulting from the use of computer programs that have been written using two
digits, rather than four, to denote a year (e.g., using the digits "98" to
denote 1998). Computer programs using this nomenclature can misidentify
references to dates after 1999 as meaning dates early in the twentieth century
(e.g., "1902" rather than "2002"). The Year 2000 Problem is commonly
considered to be prevalent in computer programs written as recently as the mid-
1990s, and can cause such programs to generate erroneous information, to
otherwise malfunction or to cease operations altogether.
The Company 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
-13-
<PAGE>
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.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The Company is exposed to the impact of interest rate changes, foreign
currency fluctuations and changes in the market value of its investments. The
Company does not utilize interest rate swaps, forward or option contracts on
foreign currencies or commodities, or other types of derivative financial
instruments. The Company has debt with fixed annual rates of interest ranging
from 6.25% to 9.0% totaling $3.7 million at February 29, 2000. The Company
estimates that the fair value of each of its debt instruments approximated its
market value on February 29, 2000.
The Company is subject to fluctuations in the value of the Canadian dollar
vis-a-vis the U.S. dollar. The fair value of the assets and liabilities of these
operations approximated current market rates at February 29, 2000.
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 February 29, 2000.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security-Holders
(a) Our annual meeting of stockholders was held on January 28, 2000.
(b) Our stockholders voted as follows to elect seven directors to our board
of directors:
<TABLE>
<CAPTION>
Directors For Against
--------- --- -------
Class A Class B Class A Class B
--------------- --------------- --------------- -------------
<S> <C> <C> <C> <C>
Michael C. Markovitz 1,853,763 4,900,000 6,235 -
Harold J. O'Donnell 1,853,763 4,900,000 6,235 -
Theodore J. Herst 1,853,763 4,900,000 6,235 -
Karen M. Knab 1,853,763 4,900,000 6,235 -
Michael W. Mercer 1,853,763 4,900,000 6,235 -
Kalman K. Shiner 1,853,763 4,900,000 6,235 -
Leslie M. Simmons 1,853,763 4,900,000 6,235 -
</TABLE>
-14-
<PAGE>
All of the directors' terms expired as of the annual meeting and therefore
all of the directors were up for re-election at the annual meeting.
(c) Our stockholders voted as follows to ratify the appointment of Arthur
Andersen LLP as independent auditors of our financial statements for the
year ended August 31, 2000:
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
Class A Class B Class A Class B Class A Class B
- -------------- -------------- ------------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
1,854,779 4,900,000 2,934 - 2,285 -
</TABLE>
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ARGOSY EDUCATION GROUP, INC.
April 14, 2000 /s/ Charles T. Gradowski
--------------------------
Charles T. Gradowski
Chief Financial Officer
-15-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
Consolidated Balance Sheet and Consolidated Statement of Operations and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-31-2000
<PERIOD-START> SEP-01-1999
<PERIOD-END> FEB-29-2000
<CASH> 8,042
<SECURITIES> 10,171
<RECEIVABLES> 3,413
<ALLOWANCES> 286
<INVENTORY> 15
<CURRENT-ASSETS> 20,422
<PP&E> 9,633
<DEPRECIATION> 3,145
<TOTAL-ASSETS> 38,280
<CURRENT-LIABILITIES> 8,692
<BONDS> 0
0
0
<COMMON> 70
<OTHER-SE> 26,019
<TOTAL-LIABILITY-AND-EQUITY> 38,280
<SALES> 0
<TOTAL-REVENUES> 22,190
<CGS> 0
<TOTAL-COSTS> 19,147
<OTHER-EXPENSES> 49
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 142
<INCOME-PRETAX> 3,295
<INCOME-TAX> 1,356
<INCOME-CONTINUING> 1,939
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,939
<EPS-BASIC> .29
<EPS-DILUTED> .29
</TABLE>
