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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 November 30, 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
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 January 11, 2001 the registrant had 6,481,062 shares of common stock
outstanding.
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ARGOSY EDUCATION GROUP, INC.
INDEX
Description Page No.
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.............................................. 14
Item 6. Exhibits and Reports on Form 8-K............................... 14
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
November 30, 2000 August 31, 2000
----------------- ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,812 $ 8,115
Short-term investments 4,544 7,787
Receivables, net 3,211 2,764
Prepaid expenses and other current assets 1,351 908
---------- ----------
Total current assets 14,918 19,574
PROPERTY AND EQUIPMENT, net 6,687 6,307
NON-CURRENT INVESTMENTS 0 200
OTHER ASSETS 1,005 937
WESTERN STATES INVESTMENT 6,857 0
ADVANCES TO JOHN MARSHALL 3,495 2,979
INTANGIBLES, net 6,571 6,687
---------- ----------
TOTAL ASSETS $ 39,533 $ 36,684
========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 890 $ 796
Accounts payable 1,902 1,162
Accrued payroll and other related liabilities 887 634
Accrued expenses 851 543
Deferred revenue and student deposits 3,224 2,726
---------- ----------
Total current liabilities 7,754 5,861
---------- ----------
LONG-TERM DEBT, less current maturities 2,516 2,604
DEFERRED RENT 758 710
COMMITMENTS & CONTINGENCIES
STOCKHOLDERS' EQUITY:
Class A common stock - 30,000,000 shares authorized, $.01 par value,
2,060,594 and 2,059,417 shares issued and outstanding at November 30,
2000 and August 31, 2000 respectively 21 21
Class B common stock - 10,000,000 shares authorized,
$.01 par value, 4,900,000 shares issued and outstanding
at November 30, 2000 and August 31, 2000 respectively 49 49
Additional paid-in capital 25,131 25,131
Treasury Stock-at cost: 482,000 shares at cost (2,131) (2,131)
Stock Warrants 860 0
Accumulated other comprehensive income 370 1,102
Purchase price in excess of predecessor carryover (720) (720)
Retained earnings 4,925 4,057
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Total stockholders' equity 28,505 27,509
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 39,533 $ 36,684
========== ==========
</TABLE>
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ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended
November 30,
------------
2000 1999
---- ----
Revenues:
Tuition and fees, net $ 13,190 $ 10,926
Other 80 688
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Total revenues, net 13,270 11,614
-------- --------
Operating expenses:
Cost of education 5,822 5,062
Selling expenses 1,477 1,038
General and administrative expenses 4,669 3,825
-------- --------
Total operating expenses 11,968 9,925
-------- --------
Income from operations 1,302 1,689
Other income (expense):
Interest income 225 215
Interest expense (75) (70)
Other income 4 19
-------- --------
Total other income net 154 164
-------- --------
Income before provision for income taxes 1,456 1,853
Total income taxes 575 748
-------- --------
Net income $ 881 $ 1,105
======== ========
Net income per share:
Basic and diluted $ 0.14 $ 0.17
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Weighted average shares outstanding:
Basic 6,478 6,693
======== ========
Diluted 6,484 6,693
======== ========
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ARGOSY EDUCATION GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
November 30,
2000 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 881 $ 1,105
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation and amortization 407 350
Deferred taxes (101) (199)
Issuance of stock performance grants and warrants 430 213
Changes in operating assets and liabilities 1,312 870
------- -------
Net cash provided by operating activities 2,929 2,339
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net (687) (604)
Advances to John Marshall Law School (405) (406)
Business acquisition, net of cash (6,857) (104)
(Purchase) sale of investments, net 2,773 (2,339)
------- -------
Net cash used in investing activities (5,176) (3,453)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock 0 (2,131)
Borrowing of long-term debt 115 -
Payments of long-term debt (110) (119)
------- -------
Net cash (used in) provided by financing activities 5 (2,250)
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EFFECTIVE EXCHANGE RATE CHANGES ON CASH (61) (12)
------- -------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
(2,303) (3,376)
CASH AND CASH EQUIVALENTS, beginning of period 8,115 8,980
------- -------
CASH AND CASH EQUIVALENTS, end of period $ 5,812 $ 5,604
======= =======
</TABLE>
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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 three months ended November 30,
2000 are not necessarily indicative of results that can be expected for the
entire fiscal year.
The condensed consolidated financial statements as of November 30, 2000
and the three months ended November 30, 2000 and November 30, 1999 include the
accounts of the Company and its wholly owned subsidiaries. All intercompany
balances and transactions have been eliminated in consolidation.
Note 2 - Acquisition
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 States") 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. In entering into the agreement, the Company placed
$6,857,000 into escrow. The escrow will be distributed at closing. The
acquisition is anticipated in first quarter of 2001.
Note 3 - Recent Accounting Pronouncement
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin 101 ("SAB 101"). SAB 101 requires deferral of certain
revenue items over the period that the related service is provided. Adoption of
SAB 101 is required by the Company's fourth quarter of fiscal 2001. The SEC has
recently issued interpretive guidance on the implementation of this bulletin,
and the Company is completing an evaluation of its effects. SAB 101 requires the
deferral of certain fees and other charges over the period of service (student
enrollment); however, based on preliminary analysis, the Company does not expect
SAB 101 to have a significant effect on its consolidated results of operations,
financial position and cash flow.
Note 4 - Shareholders' Equity
In the first quarter of 1999, the Company adopted a repurchase program
for the Company's Class A Common Stock of up to 500,000 shares. Shares of Class
A Common Stock will be purchased by the Company from time to time through open
market purchases and private purchase, as available. Under this program, the
Company has repurchased 482,000 shares as of November 30, 2000 and August 31,
2000 at a total cost of approximately $2,131,000.
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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 November 30, 2000,
the Company advanced approximately $500,000 under the line of credit and
approximately $2,994,000 to fund operations under the management agreement and
has committed to advance an additional $1.0 million in fiscal 2001 if needed.
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.
On September 1, 2000, the Company entered into a Consulting Agreement with
Leeds Equity Associates, L.P. This partnership includes as a partner Jeffrey
Leeds, a member of the Company's board of directors. This Agreement encompasses
the performance of Company requested services over the six month term of the
Agreement. Payment is represented by a stock purchase warrant providing for the
purchase of 200,000 shares of the Company's Class A common stock at a purchase
price of $6.48 per share and with a seven year exercise period. The warrants are
immediately exercisable and based upon the Black Scholes pricing model valued at
$860,000. The warrant value is being expensed over the service period resulting
in half of the charge recorded in this fiscal quarter and the remaining charge
occuring in the second quarter of 2001.
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:
Three Months Ended
------------------
November November
-------- --------
30, 2000 30, 1999
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Net income $ 881 $ 1,105
Other comprehensive income:
Unrealized gain/(loss) on investments (400) 117
Foreign currency translation adjustment (46) --
---------------------------
Total other comprehensive income (446) 117
---------------------------
Comprehensive income $ 435 $ 1,222
===========================
For the period ended November 30, 2000 and November 30, 1999
Accumulated Other Comprehensive Income, net of tax, was approximately $222,000
and $385,000, respectively, and would have resulted in a reduction of
Comprehensive Income.
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Note 7 - Segment Reporting
The Company has two business segments: 1) Schools ("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.
The following table presents financial data for the three months ended
November 30, 2000 and November 30, 1999 for these segments (dollars in
thousands):
Schools Test Preparation Consolidated
------- ---------------- ------------
Three Months Ended
November 30, 2000
-----------------
Revenue $12,419 $ 851 $13,270
Income from operations 1,113 189 1,302
Net Income 774 107 881
Total Assets 34,423 5,110 39,533
Three Months Ended
November 30, 1999
-----------------
Revenue $10,749 $ 865 $11,614
Income from operations 1,450 239 1,689
Net Income 970 135 1,105
Total Assets 30,690 3,938 34,628
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.
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Results of Operations
The following table summarizes the Company's operating results as a percentage
of net revenue for the period indicated:
Three Months Ended
November 30,
-----------
2000 1999
---- ----
Total revenues, net 100% 100%
Operating expenses:
Cost of education 43.9 43.6
Selling expenses 11.1 8.9
General and administrative expenses 35.2 32.9
---- ----
Total operating expenses 90.2 85.4
---- ----
Income from operations 9.8 14.6
Total other income (expense), net 1.2 1.4
--- ---
Income before provision for income taxes 11.0 16.0
Provision for income taxes 4.3 6.4
--- ---
Net income 6.7% 9.6%
==== ====
Three Months Ended November 30, 2000 Compared to Three Months Ended
November 30, 1999
Net revenues increased 14.3% from $11.6 million in the first quarter
of fiscal 2000 to $13.3 million in the first quarter of fiscal 2001, due to
increased revenue at all schools. The revenue increase is primarily due to
internal growth and tuition increases.
Cost of education increased 15.0% from $5.1 million in the first
quarter of fiscal 2000 to $5.8 million in the first quarter of fiscal 2001,
due to additional teaching costs to meet the growth in the number of
students attending the schools. As a percentage of net revenue, cost of
education increased slightly from 43.6% in fiscal 2000 to 43.9% in fiscal
2001.
Selling expenses increased 42.3% from $1.0 million in the first
quarter of fiscal 2000 to $1.5 million in the first quarter of fiscal 2001.
As a percentage of revenue, selling expenses increased from 8.9% to 11.1%
primarily due to the addition of recruiters and more aggressive advertising
at all of the Argosy schools. This is an integral part of our marketing
strategy.
General and administrative expenses increased 22.1% from $3.8 million
in the first quarter of fiscal 2000 to $4.7 million in the first quarter of
fiscal 2001 and, as a percentage of net revenue increased from 32.9% to
35.2% from quarter to quarter. The dollar increase is primarily due to the
expensing of warrants issued for general and academic services. On
September 1, 2000, the Company entered into a Consulting Agreement with
Leeds Equity Associates, LP. 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
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year exercise period. The value of the warrants was established at $.8 million
and half of the charge was recorded in the first fiscal quarter of 2001. An
additional charge of $.4 million will occur in the second quarter. Additional
expenses were incurred for additional management payroll costs.
The provision for income taxes decreased from $0.7 million in the first
quarter of fiscal 2000 to $.6 million in the first quarter of fiscal 2001.
Net income decreased 20.3%, from $1.1 million in the first quarter of
fiscal 2000 to $.9 million in the first quarter of fiscal 2001 due to the
reasons discussed above.
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.
Liquidity and Capital Resources
Since its formation, the Company has financed its operating activities
primarily through cash generated from operations. Completed acquisitions have
been financed primarily through debt instruments. Net cash provided by operating
activities increased from $2.3 million in the three months ended November 30,
1999 to $2.9 million in the three months ended November 30, 2000. The Company
had $7.2 million of working capital as of November 30, 2000 compared to $13.7
million of working capital as of August 31, 2000. The primary decrease is
attributable to the $6.9 million escrow payment made pursuant to the Western
States acquisition agreement. Advances made to John Marshall during the three
months ended November 30, 2000 were approximately $.4 million.
Capital expenditures increased from $0.6 million in the three months
ended November 30, 1999 to $.7 million in the same period in 2000. Capital
expenditures are expected 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 a long-term management arrangement with John
Marshall Law School of Atlanta, Georgia in September 1999. As of November 30,
2000, the Company has advanced nearly $3.5 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 November 30, 2000, the Company had advanced
approximately $500,000 under the line of credit and approximately $3.0 million
in operating cash under the management agreement. These advances are included in
other long-term assets. During the three months ended November 30, 2000, the
Company advanced $500,000 and has committed to advance an additional $1.0
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 exists a myriad of circumstances
that cannot be foreseen and over which the Company has no control that could
interfere
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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 $3.5 million advance to John Marshall.
The Company has entered into an agreement to purchase Western State
University College of Law, in Fullerton, California ("Western States") 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. Pursuant to
the terms of the transaction, the Company paid $6.8 million escrow in November
2000 and will make the remaining purchase price payment upon closing. The
acquisition is anticipated in the first quarter of 2001
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 10.50% totaling $3.2 million at November 30, 2000. In addition, at
November 30, 2000, the Company has debt in the amount of $0.4 million with
interest at the higher of the Federal Funds Rate plus 0.5% or the lender's rate
of interest. The Company estimates that the fair value of each of its debt
instruments approximated its market value on November 30, 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 financial statements of
these operations approximated current market rates at November 30, 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 November 30, 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
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
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(a) Exhibits
10.34 Purchase and Sale Agreement, dated November 14, 2000 between
Western State University And the Company
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.
January 16, 2001 /s/ Charles T. Gradowski
-------------------------------
Charles T. Gradowski
Chief Financial Officer
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