-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LYNeel9xVuPvDQdaIgO1UoDwD5e8EazH8XNrZCN2oZYADFJ08mnzFDNBHgFCrEcS cXWjZG6OA5wtQ/x1bfWYAQ== 0000950128-97-000529.txt : 19970222 0000950128-97-000529.hdr.sgml : 19970222 ACCESSION NUMBER: 0000950128-97-000529 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970212 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: EDUCATION MANAGEMENT CORPORATION CENTRAL INDEX KEY: 0000880059 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EDUCATIONAL SERVICES [8200] IRS NUMBER: 251119571 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-21363 FILM NUMBER: 97527806 BUSINESS ADDRESS: STREET 1: 300 SIXTH AVENUE CITY: PITTSBURGH STATE: PA ZIP: 15222 BUSINESS PHONE: 4125620900 MAIL ADDRESS: STREET 1: 300 SIXTH AVE CITY: PITTSBURGH STATE: PA ZIP: 15222 10-Q 1 EDUCATION MANAGEMENT 10-Q 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 - 1 - 2 FORM 10-Q INDEX
PART I -- FINANCIAL INFORMATION PAGE 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
- 2 - 3 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
DECEMBER 31, JUNE 30, DECEMBER 31, ASSETS 1995 1996 1996 - ------ ---- ---- ---- (Unaudited) (Unaudited) 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 ======== ======== ========
The accompanying notes to consolidated financial statements are an integral part of these statements. - 3 - 4 EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS SIX MONTHS ENDED DECEMBER 31, ENDED DECEMBER 31, ------------------ ------------------ 1995 1996 1995 1996 (unaudited) (unaudited) 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 ========== ========== ========== ==========
The accompanying notes to consolidated financial statements are an integral part of these statements. - 4 - 5 EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
SIX MONTHS ENDED DECEMBER 31, ----------------------------- 1995 1996 ---- ---- (unaudited) (unaudited) 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
The accompanying notes to consolidated financial statements are an integral part of these statements. - 5 - 6 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 - 6 - 7 (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 - 7 - 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
THREE MONTHS SIX MONTHS ENDED DECEMBER 31, ENDED DECEMBER 31, ------------------ ------------------ (000's) (000's) 1995 1996 1995 1996 ----- ---- ----- ---- 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
- 8 - 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. - 9 - 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. - 10 - 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. - 11 - 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 - 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:
Name Class For Against Withheld ---- ----- --- ------- -------- 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
(ii) Amendment and Restatement of Articles of Incorporation:
For Against Withheld --- ------- -------- All capital stock 16,009,101 20,538 34,549 Series A Preferred Stock 144,037 683 1,030
- 13 - 14 (iii) Amendment and Restatement of Bylaws:
For Against Withheld --- ------- -------- All capital stock 15,974,298 22,834 67,056
(iv) Approval of the Education Management Corporation 1996 Employee Stock Purchase Plan:
For Against Withheld --- ------- -------- All capital stock 16,007,937 16,535 39,716
(v) Approval of the Education Management Corporation 1996 Stock Incentive Plan:
For Against Withheld --- ------- -------- All capital stock 15,953,486 69,062 41,640
(vi) Approval of the retention of Arthur Andersen LLP as the Company's independent auditors:
For Against Withheld --- ------- -------- All capital stock 15,992,123 19,294 52,771
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 - 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 - 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 - EX-27 2 EDUCATION MANAGEMENT 10-Q
5 1,000 6-MOS JUN-30-1997 JUL-01-1996 DEC-31-1996 4,660 0 13,545 (4,845) 1,548 21,401 90,345 (41,412) 95,455 35,290 9,009 0 0 14 52,320 95,455 85,424 85,424 54,975 75,120 0 0 1,551 8,753 3,679 5,074 0 0 0 5,074 .39 .39
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