<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ending: December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: 000-21363
EDUCATION MANAGEMENT CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
PENNSYLVANIA 25-1119571
------------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 SIXTH AVENUE, PITTSBURGH, PENNSYLVANIA 15222
(Address of principal executive offices, including zip code)
(412) 562-0900
(Registrant's telephone number, including area code)
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.
[X] Yes [ ] No
SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK
As of December 31, 1996
Common Stock: 14,382,342 Shares
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FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I -- FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements.................................................................................3-8
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition...............................................................9-12
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.....................................................................................13
Item 2. Changes in Securities.................................................................................13
Item 3. Defaults Upon Senior Securities.......................................................................13
Item 4. Submission of Matters to a Vote of Security Holders...................................................13
Item 5. Other Information.....................................................................................14
Item 6. Exhibits and Reports on Form 8-K......................................................................14
SIGNATURES.......................................................................................................16
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, DECEMBER 31,
ASSETS 1995 1996 1996
- ------ ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,648 $ 26,162 $ 1,338
Restricted cash 3,494 1,237 3,322
-------- -------- --------
Total cash and cash equivalents 5,142 27,399 4,660
Receivables:
Trade, net of allowances 4,005 5,680 8,700
Notes, advances and other 3,480 2,492 2,356
Inventories 1,149 1,271 1,548
Other current assets 4,333 3,016 4,137
-------- -------- --------
Total current assets 18,109 39,858 21,401
-------- -------- --------
PROPERTY AND EQUIPMENT, NET 38,310 41,174 48,933
OTHER ASSETS 4,975 5,837 6,897
GOODWILL, NET OF AMORTIZATION 14,752 14,543 18,224
-------- -------- --------
$ 76,146 $101,412 $ 95,455
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 6,364 $ 3,890 $ 3,655
Accounts payable 2,130 4,776 3,518
Accrued liabilities 8,151 7,355 9,792
Advance payments 18,876 11,243 18,325
-------- -------- --------
Total current liabilities 35,521 27,264 35,290
-------- -------- --------
LONG-TERM DEBT, LESS CURRENT PORTION 33,463 62,029 5,354
DEFERRED INCOME TAXES AND
OTHER LONG-TERM LIABILITIES 2,292 2,463 2,477
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Capital stock:
Preferred stock, Series A, at paid-in value 22,075 22,075 --
Common stock 1 1 14
Warrants outstanding 7,683 7,683 --
Additional paid-in capital 19,349 19,742 87,488
Deferred compensation related to ESOP (2,774) -- --
Treasury stock (250) (99) (354)
Stock subscriptions receivable (139) (442) (171)
Accumulated deficit (41,075) (39,304) (34,643)
-------- -------- --------
TOTAL SHAREHOLDERS' EQUITY 4,870 9,656 52,334
-------- -------- --------
$ 76,146 $101,412 $ 95,455
======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
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EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
------------------ ------------------
1995 1996 1995 1996
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
NET REVENUES $42,635 $52,015 $70,968 $85,424
COSTS AND EXPENSES:
Educational services 24,715 30,230 46,657 54,975
General and administrative 8,763 10,792 15,216 19,152
Amortization of intangibles 265 546 530 993
ESOP expense 238 -- 476 --
------- ------- ------- -------
33,981 41,568 62,879 75,120
------- ------- ------- -------
INCOME BEFORE
INTEREST AND TAXES 8,654 10,447 8,089 10,304
Interest expense, net 893 599 1,809 1,551
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 7,761 9,848 6,280 8,753
Provision for income taxes 2,880 4,139 2,330 3,679
------- ------- ------- -------
INCOME BEFORE EXTRAORDINARY ITEM 4,881 5,709 3,950 5,074
Extraordinary loss on early
extinguishment of debt 926 -- 926 --
------- ------- ------- -------
NET INCOME $ 3,955 $ 5,709 $ 3,024 $ 5,074
======= ======= ======= =======
EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE
PRIMARY
INCOME BEFORE EXTRAORDINARY ITEM $ .42 $ .43 $ .28 $ .39
------- ------- ------- -------
NET INCOME $ .33 $ .43 $ .19 $ .39
------- ------- ------- -------
ASSUMING FULL DILUTION
INCOME BEFORE EXTRAORDINARY ITEM $ .36 $ .42 $ .24 $ .39
------- ------- ------- -------
NET INCOME $ .29 $ .42 $ .16 $ .39
------- ------- ------- -------
WEIGHTED AVERAGE SHARES
OUTSTANDING (FULLY DILUTED) 11,878,614 13,660,325 11,871,639 12,574,349
========== ========== ========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
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EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 31,
-----------------------------
1995 1996
---- ----
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 3,024 $ 5,074
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH FLOWS FROM OPERATING ACTIVITIES-
Depreciation and amortization 4,221 5,655
ESOP expense 476 --
Vesting of compensatory stock options 232 375
Changes in current assets and liabilities-
Restricted cash 4,009 (2,085)
Receivables (71) (2,884)
Inventories (156) (277)
Other current assets (2,520) (1,121)
Accounts payable (4,627) (1,258)
Accrued liabilities (220) 2,437
Advance payments 5,712 7,082
-------- --------
Total adjustments 7,056 7,924
-------- --------
Net cash flows from operating activities 10,080 12,998
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiary (450) (9,553)
Expenditures for property and equipment (7,625) (8,834)
Other items, net (1,429) 107
-------- --------
Net cash flows from investing activities (9,504) (18,280)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from public stock offering, net -- 45,054
Principal payments on debt, net (29,995) (56,910)
Dividends paid to ESOP (1,126) (83)
Capital stock transactions, net 73 (7,603)
-------- --------
Net cash flows from financing activities (31,048) (19,542)
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (30,472) (24,824)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 32,120 26,162
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,648 $ 1,338
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $1,853 $1,480
Income Taxes 182 802
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
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EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The interim consolidated financial statements consist of the accounts of
Education Management Corporation (the "Company") and its wholly owned
subsidiaries, which include The Art Institutes International ("AII"), The
New York Restaurant School ("NYRS"), The National Center for Paralegal
Training ("NCPT") and The National Center for Professional Development
("NCPD"). The Company's schools offer associate's and bachelor's degree
programs and non-degree programs in the areas of design, media arts,
culinary arts, fashion and paralegal studies. The Company has provided
career-oriented education programs for nearly 35 years. Unless otherwise
noted, references to the years 1996 and 1997 refer to the periods ended
December 31, 1995 and 1996, respectively.
2. The interim consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto for the fiscal
year ended June 30, 1996 included in the Company's Registration Statement
on Form S-1 as filed with the Securities and Exchange Commission on August
19, 1996 and the amendments thereto. The accompanying unaudited interim
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information
and with the instructions for Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the disclosures for complete
financial statements. This financial information reflects all adjustments,
consisting only of normal recurring adjustments, that are, in the opinion
of management, necessary to present fairly the financial condition and
results of operations for the interim periods presented. Fiscal year 1997
interim financial information was reviewed by Arthur Andersen LLP as set
forth in their report included in this document. The 1996 interim financial
information was not reviewed by the Company's independent accountants in
accordance with the standards established for such reviews.
3. On November 5, 1996, the Company completed the initial public offering (the
"Offering") of 5,073,600 shares of its Common Stock, $.01 par value (the
"Common Stock"), including 1,701,391 shares sold by certain shareholders,
at a price of $15 per share. Since that date, the authorized capital stock
of the Company has consisted of the Common Stock and Preferred Stock, $.01
par value (the "Preferred Stock").
From 1989 until immediately prior to the completion of the Offering, the
Company's outstanding capital stock consisted of Class A Common Stock,
$.0001 par value ("Class A Stock"), Class B Common Stock, $.0001 par value
("Class B Stock"), and Series A 10.19% Convertible Preferred Stock, $.0001
par value (the "Series A Preferred Stock"). All the outstanding shares of
Series A Preferred Stock were owned by the Education Management
Corporation Employee Stock Ownership Plan and Trust (the "ESOP"). In
addition, warrants to purchase shares of Class B Stock were outstanding.
Immediately prior to the completion of the Offering, the following
occurred: (i) the warrants to purchase 5,956,079 shares of Class B Stock
were exercised, (ii) the ESOP converted all the outstanding shares of
Series A Preferred Stock into 2,249,954 shares of Class A Stock, (iii) the
Company's Articles of Incorporation were amended and restated to authorize
the Common Stock and Preferred Stock, and (iv) all outstanding shares of
Class A Stock and Class B Stock
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(including the shares resulting from the exercise of the warrants and the
conversion of the Series A Preferred Stock) were reclassified into shares
of Common Stock on a one-for-two basis (also referred to as a one-for-two
reverse stock split).
For the purpose of presenting comparable financial information in this
report for 1996 and 1997, the per share amounts, the number of shares of
Class A Stock and Class B Stock, the conversion ratio for the Series A
Preferred Stock and the exercise price for the warrants have been restated
to reflect the one-for-two reverse stock split (other than in this note 3
and Item 4 of this report).
4. The results of operations for the three- and six-month periods ended
December 31, 1995 and 1996 are not necessarily indicative of the results
to be expected for either 1996 or 1997. In the Offering, the Company
received total net proceeds, after deduction of expenses and underwriting
discounts payable by the Company, of approximately $45 million. On the
date the Offering closed, $38.5 million of those proceeds were used to
repay the outstanding indebtedness under the Company's amended and
restated credit facility dated March 16, 1995 (the "Revolving Credit
Agreement"). The remaining proceeds were used for general corporate
purposes.
5. The Company provides an ESOP for certain of its employees. In connection
with establishing the ESOP, the borrowings under a senior term loan
financing ("ESOP Term Loan") were loaned to the ESOP on the same terms.
This loan was recorded as "deferred compensation related to ESOP" and is
shown as a reduction in shareholders' equity in the accompanying
consolidated financial statements.
As the ESOP Term Loan was repaid, shares were released from pledge and
allocated to ESOP participants' accounts. ESOP expense primarily
represents the difference between the cost of shares released to ESOP
participants' accounts and the dividends used by the ESOP for principal
and interest repayment on its loan. The dividends paid to the ESOP on the
Series A Preferred Stock were used by the ESOP trustee to pay the Company
principal and interest due on the ESOP's loan from the Company. As of June
30, 1996, the ESOP Term Loan was repaid, as was the loan due from the ESOP
to the Company. There will be no future ESOP expense attributable to the
repayment of this loan.
6. Prior to the closing of the Offering on November 5, 1996, holders of the
Company's equity securities had the right, under certain circumstances, to
require the Company to repurchase such securities. In addition, the
Company had the right to redeem shares of Series A Preferred Stock and
common stock under certain circumstances. Coincident with the Offering,
these rights expired and, accordingly, the term "redeemable" that appeared
as the caption in previous balance sheets has been removed.
7. Effective August 1, 1996, the Company acquired certain net assets of NYRS
for $9.5 million in cash. The Company acquired principally accounts
receivable, property and equipment, certain contracts and student
agreements, curriculum, trade names, goodwill and certain other assets.
The allocation of final values among those assets will be determined based
upon the resolution of certain pre-acquisition contingencies. In December
1996, the Company received the necessary regulatory approvals for the
acquisition of NYRS.
8. On August 9, 1996, the Company redeemed 75,000 shares of Series A
Preferred Stock from the ESOP at $101.43 per share, plus accrued and
unpaid dividends. The redemption was funded
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<PAGE> 8
through borrowings of $7.6 million under the Revolving Credit Agreement.
9. Pursuant to a Preferred Share Purchase Rights Plan (the "Rights Plan")
approved by the Company's Board of Directors, which became effective upon
the consummation of the Offering, one Preferred Share Purchase Right (a
"Right") is associated with each outstanding share of Common Stock. Each
Right entitles its holder to buy one one-hundredth of a share of Series A
Junior Participating Preferred Stock, $.01 par value, at an exercise price
of $50, subject to adjustment (the "Purchase Price"). The Rights Plan is
not subject to shareholder approval.
The Rights will become exercisable following a public announcement of a
person or group of persons (an "Acquiring Person") acquiring or intending
to make a tender offer for 17.5% or more of the outstanding shares of
Common Stock. If an Acquiring Person acquires 17.5% or more of the Common
Stock, each Right will entitle the shareholders, except the Acquiring
Person, to acquire upon exercise a number of shares of Common Stock having
a market value of two times the Purchase Price. In the event that the
Company is acquired in a merger or other business combination transaction
or 50% or more of its consolidated assets or earning power are sold after
a person or group of persons becomes an Acquiring Person, each Right will
entitle its holder to purchase, at the Purchase Price, that number of
shares of the acquiring company having a market value of two times the
Purchase Price. The Rights will expire on the tenth anniversary of the
closing of the Offering and are subject to redemption by the Company at
$.01 per Right, subject to adjustment.
10. In connection with the Offering, the Company, granted options to purchase
up to 623,000 shares of Common Stock to Company management and
non-employee directors. These options were granted effective with the date
of the Offering at the initial offering price of $15.00 and are subject to
certain vesting and other requirements.
11. Reconciliation of Income Available for Common Shareholders
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
------------------ ------------------
(000's) (000's)
1995 1996 1995 1996
----- ---- ----- ----
<S> <C> <C> <C> <C>
INCOME BEFORE
EXTRAORDINARY ITEM $4,881 $5,709 $3,950 $5,074
SERIES A PREFERRED STOCK
TRANSACTIONS
DIVIDENDS PAID (563) -- (1,126) --
REDEMPTION PREMIUM -- -- -- (107)
------ ------ ------ ------
INCOME AVAILABLE TO
COMMON SHAREHOLDERS
ASSUMING FULL DILUTION 4,318 5,709 2,824 4,967
DIVIDENDS PAID -- -- -- (83)
DIVIDENDS ACCRUABLE,
BUT NOT PAID -- (73) -- (296)
------ ------ ------ ------
INCOME BEFORE EXTRAORDINARY
ITEM AVAILABLE TO
COMMON SHAREHOLDERS $4,318 $5,636 $2,824 $4,588
====== ====== ====== ======
WEIGHTED AVERAGE SHARES FOR
PRIMARY EARNING PER SHARE 10,174,746 13,255,566 10,167,771 11,684,988
</TABLE>
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<PAGE> 9
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
The following discussion of the Company's results of operations and
financial condition should be read in conjunction with the consolidated
financial statements of the Company and the notes thereto.
RESULTS OF OPERATIONS
For the three months ended December 31, 1996 compared to the three months ended
December 31, 1995:
Net revenues increased by 22.0% to $52.0 million in 1997 from $42.6
million in 1996 due primarily to an 18.1% increase in student enrollments at
company-owned schools, accompanied by an average 5.5% tuition price increase at
The Art Institutes in the fall quarter of 1997. Total student enrollment at the
Company's schools increased from 13,407 in 1996 to 15,838 in 1997. In November
1995, two schools were acquired and renamed The Illinois Institute of Art at
Chicago and The Illinois Institute of Art at Schaumburg. A new school, The Art
Institute of Phoenix, commenced classes in January 1996 and The New York
Restaurant School (NYRS) was acquired in August 1996.
Educational services expense increased by $5.5 million, or 22.3%, to $30.2
million in 1997 from $24.7 million in 1996. The increase was primarily the
result of the additional costs required to service higher student enrollments at
The Art Institutes, the addition of NYRS and normal inflationary cost increases
for wages and other services. This quarter represents the first full fall
quarter The Illinois Institutes of Art were owned by the Company and the first
fall quarter The Art Institute of Phoenix conducted classes. Educational service
expense as a percentage of revenue for these new schools is significantly higher
than the Company consolidated percentage. Educational services expense in the
second quarter of fiscal 1997 was 58.1% of net revenues, nearly flat compared to
58.0% in the same period last year.
General and administrative expense increased by $2.0 million, or 23.1%, to
$10.8 million in 1997 from $8.8 million in 1996 primarily because of higher
marketing and student admissions expense, including the addition of $1.1
million of such expenses at four new schools and normal inflationary cost
increases for wages and media advertising. As a result of the above factors,
general and administrative expense as a percent of revenue increased to 20.7%
in the second quarter of fiscal 1997, compared to 20.6% in the same period last
year.
Amortization of intangibles increased by 106.0%, to $546,000 in 1997 from
$265,000 in 1996. The increase in amortization expense resulted from the
acquisition of the two Illinois Institutes of Art and NYRS. ESOP expense was
zero in 1997 compared to $238,000 in 1996 because the entire ESOP Term Loan was
repaid as of June 30, 1996. Accordingly, the Company will incur no ESOP expense
subsequent to June 30, 1996 resulting from the repayment of such loan.
Net interest expense decreased to $599,000 in 1997 from $893,000 in 1996.
The lower interest expense was primarily attributable to a decrease in the
average outstanding indebtedness from $35.9 million in 1996 to $23.9 million in
1997. The Company repaid all of the outstanding indebtedness under the
Revolving Credit Agreement with proceeds from the Offering on November 5, 1996.
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<PAGE> 10
The Company's effective tax rate increased from 37.1% in 1996 to 42.0% in
1997. The rate in fiscal 1996 was lower than the combined federal and state
statutory rate due to the tax deductibility of dividends on the Series A
Preferred Stock paid to the ESOP and used for ESOP Term Loan repayment.
Income before extraordinary item for the quarter increased by 17.0% to
$5.7 million in 1997 from $4.9 million in 1996, primarily as a result of
increased enrollment at Company-owned schools and lower interest expense,
partially offset by a higher effective income tax rate.
In October 1995, the Company prepaid in full $25 million in 13.25%
subordinated notes, resulting in a $926,000(net of tax) prepayment penalty.
This loss was treated as an extraordinary item in the consolidated income
statement.
RESULTS OF OPERATIONS
For the six-months ended December 31, 1996 compared to the six months ended
December 31, 1995:
Net revenues increased by 20.4% to $85.4 million in 1997 from $71.0
million in 1996 due primarily to a 16.2% increase in average student
enrollments at Company-owned schools, accompanied by an average 5.7% tuition
price increase at The Art Institutes. Average student enrollment at the
Company's schools increased from 11,676 in 1996 to 13,571 in 1997. In November
1995, two schools were acquired and renamed The Illinois Institute of Art at
Chicago and The Illinois Institute of Art at Schaumburg. A new school, The Art
Institute of Phoenix, commenced classes in January 1996 and The New York
Restaurant School (NYRS) was acquired in August 1996.
Educational services expense increased by $8.3 million, or 17.8%, to $55.0
million in 1997 from $46.7 million in 1996. The increase was primarily the
result of the additional costs required to service higher student enrollments
at The Art Institutes, the addition of NYRS and normal inflationary cost
increases for wages and other services. As a percentage of net revenues,
educational services expense declined from 65.7% in 1996 to 64.4% in 1997
generally because of operating leverage associated with the increased average
student enrollment during the first six months of fiscal 1997.
General and administrative expense increased by $4.0 million, or 25.9%, to
$19.2 million in 1997 from $15.2 million in 1996 primarily because of higher
marketing and student admissions expense, including the addition of $2.2
million of such expenses at four new schools and normal inflationary cost
increases for wages and media advertising. As a result of the above factors,
general and administrative expense as a percent of revenue increased to 22.4%
for the six-month period of fiscal 1997, compared to 21.4% the same period last
year.
Amortization of intangibles increased by 87.4%, to $993,000 in 1997 from
$530,000 in 1996. The increase in amortization expense resulted from the
acquisition of the two Illinois Institutes of Art and NYRS. ESOP expense was
zero in 1997 compared to $476,000 in 1996 because the entire ESOP Term Loan was
repaid as of June 30, 1996. Accordingly, the Company will incur no ESOP expense
subsequent to June 30, 1996 resulting from the repayment of such loan.
Net interest expense decreased to $1.6 million 1997 from $1.8 million in
1996. The lower interest expense was primarily attributable to an decrease in
the average outstanding indebtedness from $39.9 million in 1996 to $36.6
million in 1997. The Company repaid all of the outstanding indebtedness under
the Revolving Credit Agreement with proceeds from the Offering on November 5,
1996.
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<PAGE> 11
The Company's effective tax rate increased from 37.1% in 1996 to 42.0% in
1997. The rate in fiscal 1996 was lower than the combined federal and state
statutory rate due to the tax deductibility of dividends on the Series A
Preferred Stock paid to the ESOP and used for ESOP Term Loan repayment.
Income before extraordinary item for the period increased by $1.1
million or 28.5% to $5.1 million in 1997 from $4.0 million in 1996. This
increase is primarily the result of improved operations at Company-owned
schools and lower interest expense, partially offset by a higher effective
income tax rate.
In October 1995, the Company prepaid in full $25 million in 13.25%
subordinated notes, resulting in a $926,000(net of tax) prepayment penalty.
This loss was treated as an extraordinary item in the consolidated income
statement.
SEASONALITY AND OTHER FACTORS AFFECTING QUARTERLY RESULTS
The Company's quarterly revenues and income fluctuate primarily as a
result of the pattern of student enrollments. The Company experiences a
seasonal increase in new enrollments in the fall (fiscal year second quarter),
which is traditionally when the largest number of new high school graduates
begin postsecondary education. Some students choose not to attend classes
during summer months, although The Art Institutes and NYRS encourage year-round
attendance. As a result, total student enrollments at the Company's schools are
highest in the fall quarter and lowest in the summer months (fiscal year first
quarter). The Company's costs and expenses, however, do not fluctuate as
significantly as revenues on a quarterly basis.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated positive cash flow from operating activities for the
six months ended December 31, 1995 and 1996, respectively. Cash flow from
operations was $10.0 million and $13.0 million for 1995 and 1996, respectively.
The Company had a $13.9 million working capital deficit as of December 31,
1996 as compared to $12.6 million of working capital as of June 30, 1996. The
decrease in working capital was due primarily to $56.9 million in debt
repayments under the Revolving Credit Agreement and capitalized leases. Trade
accounts receivable has increased by $3.0 million from June 30, 1996. This
increase is attributable to the acquisition of NYRS and a delay in receipt of
certain Title IV financial aid funds for enrolled students. In the prior year,
The Art Institutes' academic calendar was such that certain Title IV funds for
enrolled students were received in December 1995. A difference in The Art
Institutes' academic calendar for this year compared to last resulted in such
funds being received in January 1997.
Effective October 13, 1995, the Company and its lenders amended the
Revolving Credit Agreement in order to increase the amount of the facility
thereunder to $70.0 million and to extend its term to October 13, 2000.
Borrowings under the Revolving Credit Agreement bear interest at one of three
rates set forth in the Revolving Credit Agreement at the election of the
Company. As of December 31, 1996, the Company was in compliance with all
covenants and had $70.0 million of additional borrowing capacity available
under the Revolving Credit Agreement.
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<PAGE> 12
Borrowings under the Revolving Credit Agreement are used by the Company
primarily to fund its capital investment program, finance acquisitions and meet
working capital needs. The pattern of cash receipts is seasonal throughout the
year. The level of accounts receivable reaches a peak immediately after the
billing of tuition and fees at the beginning of each academic quarter.
Collection of these receivables is heaviest at the start of each academic
quarter.
Following the consummation of the Offering, $38.5 million of the net
proceeds received by the Company was used to repay indebtedness under the
Revolving Credit Agreement. It is expected that the Company's interest expense
in periods following the Offering will be lower and will have a lesser
proportionate impact on net income in comparison to periods prior to the
Offering.
The Company believes that cash flow from operations, supplemented from
time to time by borrowings under the Revolving Credit Agreement, will provide
adequate funds for ongoing operations, planned expansion of new locations,
planned capital expenditures and debt service during the term of the Revolving
Credit Agreement.
The Company's capital expenditures were $7.6 million and $8.8 million for
the six months ended December 31, 1995 and 1996, respectively. The Company
anticipates increased capital spending for 1997, principally related to the
introduction and expansion of culinary programs, further investment in schools
acquired during 1996 and 1997 and additional investment in classroom
technology.
The Company leases nearly all of its facilities. Future commitments on
existing leases will be paid from cash provided by operating activities.
- 12 -
<PAGE> 13
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.....................................Not Applicable
Item 2. Changes in Securities
As approved by the shareholders on October 24, 1996, all of the
Company's common stock was reclassified so that each existing share
of common stock, outstanding immediately prior to the filing of
amended and restated articles of incorporation with the Department
of State of the Commonwealth of Pennsylvania, was automatically
reclassified as and converted into one-half of a share of the Common
Stock.
Item 3. Defaults Upon Senior Securities.......................Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
On October 24, 1996, the annual meeting (the "Meeting") of the
shareholders of the Company was held for the election of directors
and so that the shareholders could vote upon the five proposals set
forth below. In connection with providing the number of votes for
and the number of votes against each item considered at the Meeting
and the number of votes withheld with respect to each such item,
effect will not be given to the one-for-two reverse stock split
described elsewhere herein. On all such items, the then-outstanding
Class A Stock and Class B Stock voted together. In addition, the
then-outstanding Series A Preferred Stock voted with such common
stock based on the number of shares of such common stock into which
the 145,750 then-outstanding shares of Series A Preferred Stock were
convertible and also voted separately with regard to the amendment
of the Company's articles of incorporation.
(i) Election of directors:
<TABLE>
<CAPTION>
Name Class For Against Withheld
---- ----- --- ------- --------
<S> <C> <C> <C> <C>
Robert B. Knutson III 15,999,988 37,582 26,618
Miryam L. Drucker II 15,936,135 93,181 34,857
James J. Burke, Jr. II 15,964,411 33,643 66,134
J. Thomas Christofferson n/a 15,946,429 47,311 70,448
Albert Greenstone I 15,943,224 44,699 76,265
Harvey Sanford III 15,942,227 41,882 80,079
</TABLE>
(ii) Amendment and Restatement of Articles of Incorporation:
<TABLE>
<CAPTION>
For Against Withheld
--- ------- --------
<S> <C> <C> <C>
All capital stock 16,009,101 20,538 34,549
Series A Preferred Stock 144,037 683 1,030
</TABLE>
- 13 -
<PAGE> 14
(iii) Amendment and Restatement of Bylaws:
<TABLE>
<CAPTION>
For Against Withheld
--- ------- --------
<S> <C> <C> <C>
All capital stock 15,974,298 22,834 67,056
</TABLE>
(iv) Approval of the Education Management Corporation 1996 Employee
Stock Purchase Plan:
<TABLE>
<CAPTION>
For Against Withheld
--- ------- --------
<S> <C> <C> <C>
All capital stock 16,007,937 16,535 39,716
</TABLE>
(v) Approval of the Education Management Corporation 1996 Stock
Incentive Plan:
<TABLE>
<CAPTION>
For Against Withheld
--- ------- --------
<S> <C> <C> <C>
All capital stock 15,953,486 69,062 41,640
</TABLE>
(vi) Approval of the retention of Arthur Andersen LLP as the
Company's independent auditors:
<TABLE>
<CAPTION>
For Against Withheld
--- ------- --------
<S> <C> <C> <C>
All capital stock 15,992,123 19,294 52,771
</TABLE>
Item 5. Other Information
On January 30, 1997, the Company acquired the assets of Lowthian
College in Minneapolis, Minnesota for $400,000 and the assumption of
certain liabilities. This acquisition will be accounted for as a
purchase and is subject to regulatory approvals.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
(3)(a) Amended and Restated Articles of Incorporation (1)
(3)(b) Restated Bylaws (1)
(4) Rights Agreement, dated October 1, 1996, between Education
Management Corporation and Mellon Bank, N.A. (1)
(15) Report of Independent Public Accountants
(27) Financial Data Schedules
- ----------
(1) The form of this document is an exhibit to the Company's
registration statement on Form S-1 (Registration
No. 333-10385) filed on August 19, 1996 and incorporated
herein by reference.
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the three months ended December 31,
1996
- 14 -
<PAGE> 15
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Education Management Corporation and Subsidiaries:
We have reviewed the accompanying consolidated balance sheet of Education
Management Corporation (a Pennsylvania corporation) and Subsidiaries as of
December 31, 1996, and the related consolidated statements of income for the
three-month and six-month periods then ended, and the related consolidated
statement of cash flows for the six-month period then ended. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania
January 20, 1997
- 15 -
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EDUCATION MANAGEMENT CORPORATION
(Registrant)
Date: February 12, 1997
----------------------
/s/ ROBERT B. KNUTSON
------------------------------------
Robert B. Knutson
Chairman and Chief Executive Officer
/s/ ROBERT T. MCDOWELL
------------------------------------
Robert T. McDowell
Senior Vice President and
Chief Financial Officer
- 16 -
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 4,660
<SECURITIES> 0
<RECEIVABLES> 13,545
<ALLOWANCES> (4,845)
<INVENTORY> 1,548
<CURRENT-ASSETS> 21,401
<PP&E> 90,345
<DEPRECIATION> (41,412)
<TOTAL-ASSETS> 95,455
<CURRENT-LIABILITIES> 35,290
<BONDS> 9,009
0
0
<COMMON> 14
<OTHER-SE> 52,320
<TOTAL-LIABILITY-AND-EQUITY> 95,455
<SALES> 85,424
<TOTAL-REVENUES> 85,424
<CGS> 54,975
<TOTAL-COSTS> 75,120
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,551
<INCOME-PRETAX> 8,753
<INCOME-TAX> 3,679
<INCOME-CONTINUING> 5,074
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,074
<EPS-PRIMARY> .39
<EPS-DILUTED> .39
</TABLE>
