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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED: SEPTEMBER 30, 2000 COMMISSION FILE NUMBER: 000-21363
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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, PA 15222
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (412) 562-0900
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(Title of class)
PREFERRED SHARE PURCHASE RIGHTS
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
The number of shares of the registrant's Common Stock outstanding as of
September 30, 2000 was 29,162,136.
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INDEX
PART I - FINANCIAL INFORMATION PAGE
ITEM 1 - CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)................................3-6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION.........7-8
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS.......................................9
ITEM 2 - CHANGES IN SECURITIES...................................9
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES.........................9
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS......................................9
ITEM 5 - OTHER INFORMATION.......................................9
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K........................9
SIGNATURES ...............................................................10
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PART I
ITEM 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
EDUCATION MANAGEMENT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30, SEPTEMBER 30,
1999 2000 2000
------------- -------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents, including restricted balances $ 5,078 $ 39,538 $ 5,938
Receivables ............................................ 17,401 16,735 20,928
Inventories ............................................ 3,423 3,145 4,397
Deferred income taxes .................................. 2,476 2,872 2,872
Other current assets ................................... 5,682 4,423 8,293
--------- --------- ---------
TOTAL CURRENT ASSETS .............................. 34,060 66,713 42,428
--------- --------- ---------
PROPERTY AND EQUIPMENT, NET .............................. 98,610 135,358 138,315
DEFERRED INCOME TAXES AND OTHER LONG-TERM ASSETS ......... 7,953 10,677 11,449
INTANGIBLE ASSETS, NET OF AMORTIZATION ................... 27,918 27,927 28,151
--------- --------- ---------
TOTAL ASSETS ...................................... $ 168,541 $ 240,675 $ 220,343
========= ========= =========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Current portion of long-term debt ...................... $ 292 $ 16 $ 16
Accounts payable ....................................... 6,108 19,898 7,662
Accrued liabilities .................................... 12,085 13,062 12,437
Advance payments ....................................... 40,807 29,915 52,780
--------- --------- ---------
TOTAL CURRENT LIABILITIES ......................... 59,292 62,891 72,895
--------- --------- ---------
LONG-TERM DEBT, LESS CURRENT PORTION ..................... 14,903 64,267 31,225
OTHER LONG-TERM LIABILITIES .............................. 274 567 234
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' INVESTMENT:
Common Stock ........................................... 296 299 301
Additional paid-in capital ............................. 93,954 96,585 98,466
Treasury stock, at cost ................................ (4,373) (9,733) (9,733)
Retained earnings ...................................... 4,195 25,799 26,955
--------- --------- ---------
TOTAL SHAREHOLDERS' INVESTMENT .................... 94,072 112,950 115,989
--------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT .... $ 168,541 $ 240,675 $ 220,343
========= ========= =========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
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EDUCATION MANAGEMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED SEPTEMBER 30,
1999 2000
------- -------
<S> <C> <C>
NET REVENUES .......................................... $60,850 $72,561
COSTS AND EXPENSES:
Educational services ................................ 44,520 53,007
General and administrative .......................... 14,305 16,686
Amortization of intangibles ......................... 332 357
------- -------
59,157 70,050
INCOME BEFORE INTEREST AND TAXES ...................... 1,693 2,511
Interest expense, net ............................... 123 615
------- -------
INCOME BEFORE INCOME TAXES ............................ 1,570 1,896
Provision for income taxes .......................... 644 740
------- -------
NET INCOME ............................................ $ 926 $ 1,156
======= =======
EARNINGS PER SHARE:
Basic ............................................. $ .03 $ .04
======= =======
Diluted ........................................... $ .03 $ .04
======= =======
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (000's):
Basic ............................................. 29,340 29,076
Diluted ........................................... 30,109 30,778
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
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EDUCATION MANAGEMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED SEPTEMBER 30,
1999 2000
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................... $ 926 $ 1,156
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH FLOWS FROM
OPERATING ACTIVITIES:
Depreciation and amortization ....................... 4,638 5,535
Changes in current assets and liabilities:
Receivables ...................................... (1,903) (4,193)
Inventories ...................................... (1,256) (1,252)
Other current assets ............................. (2,371) (3,870)
Accounts payable ................................. (1,353) 925
Accrued liabilities .............................. 242 (625)
Advance payments ................................. 18,982 22,865
-------- --------
Total adjustments .............................. 16,979 19,385
-------- --------
Net cash flows from operating activities ....... 17,905 20,541
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiaries, net of cash acquired ........ (997) --
Expenditures for property and equipment .................. (10,486) (21,379)
Other, net ............................................... 26 (1,603)
-------- --------
Net cash flows from investing activities ....... (11,457) (22,982)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Revolving credit facility activity, net .................. (29,700) (33,025)
Principal payments on debt ............................... (881) (17)
Net proceeds from issuance of Common Stock ............... 218 1,883
Repurchase of Common Stock ............................... (3,878) --
-------- --------
Net cash flows from financing activities ....... (34,241) (31,159)
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS .................... (27,793) (33,600)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ............. 32,871 39,538
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD ................... $ 5,078 $ 5,938
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid
during the period for:
Interest (net of amount capitalized) ..................... $ 14 $ 644
Income taxes ............................................. 117 133
Noncash investing and financing activities
Acquisition of subsidiary with note payable .............. $ 7,050 --
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
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EDUCATION MANAGEMENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying condensed consolidated financial statements should be
read in conjunction with the Notes to Consolidated Financial Statements
included in the Company's Fiscal 2000 Annual Report on Form 10-K. The
accompanying condensed consolidated balance sheet as of June 30, 2000 has
been derived from the audited balance sheet included in the Company's
Fiscal 2000 Annual Report on Form 10-K. The accompanying interim financial
statements are unaudited; however, management believes that all adjustments
necessary for a fair presentation have been made and all such adjustments
are normal, recurring adjustments. The results for the three months ended
September 30, 2000 are not necessarily indicative of the results to be
expected for the full fiscal year. Unless otherwise noted, references to
2000 and 2001 refer to the periods ended September 30, 1999 and 2000,
respectively.
Certain prior period balances have been reclassified to conform to
the current period presentation.
2. Education Management Corporation ("EDMC" or the "Company") is among
the largest providers of proprietary postsecondary education in the United
States, based on student enrollment and revenues. Through its operating
units, primarily the Art Institutes, the Company offers bachelor's and
associate'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 over 35 years.
3. Reflected below is a summary of the Company's capital stock:
<TABLE>
<CAPTION>
PAR VALUE AUTHORIZED SEPTEMBER 30, 1999 JUNE 30, 2000 SEPTEMBER 30, 2000
<S> <C> <C> <C> <C> <C>
ISSUED:
Preferred Stock $ .01 10,000,000 -- -- --
Common Stock $ .01 60,000,000 29,570,022 29,877,025 30,069,582
HELD IN TREASURY:
Common Stock N/A N/A 387,146 907,446 907,446
</TABLE>
4. The Company began operations at two new locations in July 2000, The
Art Institute of Washington (located in Arlington, VA) and The Art
Institute of Los Angeles - Orange County.
5. Reconciliation of diluted shares (000's):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
1999 2000
------ ------
<S> <C> <C>
Basic shares........................... 29,340 29,076
Dilution for stock options............. 769 1,702
------ ------
Diluted shares......................... 30,109 30,778
====== ======
</TABLE>
For the period ended September 30, 1999, options to purchase 226,388
shares were excluded from the diluted earnings per share calculation
because of their antidilutive effect (due to the exercise price of such
options exceeding the average market price for the period).
6. Subsequent to September 30, 2000, the Company acquired the
outstanding stock of The Art Institute of California located San Diego,
California.
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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 be
forward-looking statements within the meaning of the U.S. Private Securities
Litigation Reform Act of 1995. Those 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. Actual results may vary
materially from the forward-looking statements contained herein as a result
of changes in United States or international economic conditions,
governmental regulations and other factors. The Company expressly disclaims
any obligation or understanding 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
consolidated financial statements of the Company and the notes thereto,
included herein. Unless otherwise noted, references to 2000 and 2001 are to
the periods ended September 30, 1999 and 2000, respectively.
RESULTS OF OPERATIONS
Net revenues increased by 19.2% to $72.6 million in 2001 from $60.9 million
in the first quarter of 2000 due primarily to a 15.3% increase in student
enrollment, accompanied by a tuition increase of approximately 5%. Total student
enrollment at the Company's schools increased from 18,208 in 2000 to 20,991 in
2001, including enrollment growth of approximately 12.2% at the schools that
have been operated by the Company for 24 months or more.
Educational services expense increased by $8.5 million, or 19.1%, to $53.0
million in 2001 from $44.5 million in 2000, due primarily to the incremental
costs incurred to support higher student enrollment. Educational services
expense represented 73.1% and 73.2% of net revenues for 2001 and 2000,
respectively.
General and administrative expense was $16.7 million in 2001, up 16.6% from
$14.3 million in 2000. The increase over the comparable quarter in the prior
year reflects higher marketing and student admissions expense, resulting
primarily from increased media advertising costs and high school and
international recruiting costs. General and administrative expense, as a percent
of net revenues, decreased as compared to the first quarter of fiscal 2000.
Amortization of intangibles increased by $25,000, to $357,000 in 2001, as
compared to the first quarter of fiscal 2000. This increase results primarily
from a full quarter of amortization of intangibles associated with the August
1999 acquisitions.
Net interest expense was $615,000 in 2001, as compared to $123,000 in 2000.
This change was attributable to an increase in the average outstanding
borrowings, primarily related to capital expenditures, acquisitions, and the
repurchase of shares of Common Stock.
The Company's effective tax rate was 39.0% in 2001 and 40.1% in 2000. The
effective rates differed from the combined federal and state statutory rates due
to expenses that are nondeductible for tax purposes.
Net income increased by $230,000 to $1.2 million in 2001 from $926,000 in
2000, due to the factors described above.
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 Company's schools 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. Historically, the Company's profitability has
been lowest in its fiscal first quarter due to lower revenues combined with
expenses incurred in preparation for the peak enrollments in the fall quarter.
The Company anticipates that the seasonal pattern in revenues and earnings will
continue in the future.
7
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LIQUIDITY AND CAPITAL RESOURCES
The Company generated positive cash flow from operating activities of $20.5
million for the three months ended September 30, 2000, an increase of $2.6
million over the comparable period for fiscal 2000, due to a decrease in working
capital commitment and increases in net income and depreciation and
amortization.
The Company had working capital deficits of $30.5 million and $25.2 million
as of September 30, 2000 and 1999, respectively, as compared to $3.8 million of
working capital as of June 30, 2000. The decrease in working capital was due
primarily to cash used for capital expenditures of $21.4 million and for $33.0
million in debt repayments.
Borrowings under the Credit Agreement dated February 18, 2000 (Credit
Agreement) are used by the Company primarily to fund working capital needs
resulting from the seasonal pattern of cash receipts 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.
The Company believes that cash flow from operations, supplemented from time
to time by borrowings under the Credit Agreement, will provide adequate funds
for ongoing operations, planned expansion to new locations, planned capital
expenditures and debt service during the term of the Credit Agreement.
The Company anticipates its total capital spending for fiscal 2001 will
decrease as compared to the prior year. The 2001 expenditures relate principally
to the investment in schools acquired or started during the previous several
years and added in 2001, continued improvements to current facilities,
additional or replacement school and housing facilities and classroom and
administrative technology.
The majority of the Company's facilities are leased. Future commitments on
existing leases will be paid from cash provided from operating activities.
IMPACT OF NEW ACCOUNTING STANDARDS
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101, Revenue Recognition ("SAB No. 101"), to provide
guidance on the recognition, presentation and disclosure of revenue in financial
statements. SAB No. 101 explains the SEC staff's general framework for revenue
recognition. SAB No. 101 does not change existing literature on revenue
recognition, but rather clarifies the SEC's position on pre-existing literature.
SAB No. 101 did not require the Company to change existing revenue recognition
policies and, therefore, had no impact on the Company's financial position or
results of operations.
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PART II
ITEM 1 - LEGAL PROCEEDINGS
The Company previously reported a lawsuit brought against the Company
and its wholly-owned subsidiaries The Art Institutes International, Inc. and The
Art Institute of Houston, Inc. and its president by certain former and current
students of The Art Institute of Houston. On October 30, 2000, the Company and
the plaintiffs' attorneys settled the claims of all but four of the plaintiffs.
The settlement did not have a material effect on the Company's financial
position or its results of operations and includes claims from a small number
of students at certain other EDMC schools who were represented by the same
attorneys but were not parties to the lawsuit. Management believes that the
ultimate outcome of the claims of the four remaining plaintiffs will not have a
material adverse effect on the Company's financial position or its results of
operations.
ITEM 2 - CHANGES IN SECURITIES
Not Applicable
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5 - OTHER INFORMATION
Not Applicable
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(10.1) Education Management Corporation Retirement Plan,
Amended and Restated as of April 1, 2000
(15) Report of Independent Public Accountants
(27) Financial Data Schedule submitted to the Securities
and Exchange Commission in electronic format
(b) Reports on Form 8-K:
No reports on Form 8-K were filed for the three months ended
September 30, 2000.
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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: November 14, 2000
/s/ Robert B. Knutson
----------------------------------------
Robert B. Knutson
Chairman and Chief Executive Officer
/s/ Robert T. McDowell
----------------------------------------
Robert T. McDowell
Executive Vice President and
Chief Financial Officer
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