UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: September 30, 2004
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period From to
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 incorporation or organization) |
(I.R.S. Employer Identification No.) | |
| 210 Sixth Avenue, Pittsburgh, PA | 15222 | |
| (Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code: (412) 562-0900
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 ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
The number of shares of the registrant’s Common Stock outstanding at September 30, 2004 was 73,511,469.
| PAGE | ||||||
| PART I – | FINANCIAL INFORMATION | |||||
| ITEM 1 – | FINANCIAL STATEMENTS | 3-11 | ||||
| ITEM 2 – | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
12-17 | ||||
| ITEM 3 – | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 17 | ||||
| ITEM 4 – | CONTROLS AND PROCEDURES | 17 | ||||
| PART II – | OTHER INFORMATION | |||||
| ITEM 6 – | EXHIBITS | 18 | ||||
| SIGNATURES | 19 | |||||
| EXHIBIT INDEX | 20 | |||||
2
EDUCATION MANAGEMENT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
| As of |
||||||||||||
| September 30, 2004 |
June 30, 2004 |
September 30, 2003 |
||||||||||
| (unaudited) | (unaudited) | |||||||||||
| Assets |
||||||||||||
| Current assets: |
||||||||||||
| Cash and cash equivalents |
$ | 88,228 | $ | 116,728 | $ | 20,263 | ||||||
| Restricted cash |
10,407 | 6,414 | 8,812 | |||||||||
| Total cash and cash equivalents |
98,635 | 123,142 | 29,075 | |||||||||
| Receivables, net |
62,964 | 52,196 | 58,083 | |||||||||
| Inventories |
7,905 | 5,002 | 7,332 | |||||||||
| Deferred income taxes |
17,203 | 17,203 | 12,830 | |||||||||
| Prepaid income taxes |
— | — | 5,423 | |||||||||
| Other current assets |
10,555 | 7,511 | 11,775 | |||||||||
| Total current assets |
197,262 | 205,054 | 124,518 | |||||||||
| Property and equipment, net |
283,241 | 276,148 | 252,411 | |||||||||
| Deferred income taxes and other long-term assets |
14,816 | 14,676 | 13,270 | |||||||||
| Intangible assets, net of amortization |
19,309 | 20,596 | 23,147 | |||||||||
| Goodwill |
312,663 | 311,525 | 299,947 | |||||||||
| Total assets |
$ | 827,291 | $ | 827,999 | $ | 713,293 | ||||||
| Liabilities and shareholders’ investment |
||||||||||||
| Current liabilities: |
||||||||||||
| Current portion of long-term debt |
$ | 233 | $ | 125,194 | $ | 50,120 | ||||||
| Notes payable |
— | 11,000 | 11,000 | |||||||||
| Accounts payable |
38,992 | 30,079 | 31,926 | |||||||||
| Accrued liabilities |
31,984 | 39,189 | 32,138 | |||||||||
| Accrued income taxes |
12,505 | 6,786 | 2,878 | |||||||||
| Advanced payments |
134,937 | 46,351 | 106,325 | |||||||||
| Unearned tuition |
47,935 | 22,909 | 34,476 | |||||||||
| Total current liabilities |
266,586 | 281,508 | 268,863 | |||||||||
| Long-term debt, less current portion |
5,376 | 3,366 | 3,401 | |||||||||
| Deferred income taxes |
5,336 | 5,892 | 3,578 | |||||||||
| Other long-term liabilities |
8,652 | 8,546 | 2,866 | |||||||||
| Shareholders’ investment: |
||||||||||||
| Common stock |
736 | 735 | 726 | |||||||||
| Additional paid-in capital |
298,396 | 296,038 | 274,913 | |||||||||
| Treasury stock, at cost |
(1,495 | ) | (1,495 | ) | (1,495 | ) | ||||||
| Retained earnings |
238,535 | 230,382 | 157,869 | |||||||||
| Accumulated other comprehensive income |
5,169 | 3,027 | 2,572 | |||||||||
| Total shareholders’ investment |
541,341 | 528,687 | 434,585 | |||||||||
| Total liabilities and shareholders’ investment |
$ | 827,291 | $ | 827,999 | $ | 713,293 | ||||||
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
3
EDUCATION MANAGEMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollars in thousands, except per share amounts)
| For the three months ended September 30, | ||||||
| 2004 |
2003 | |||||
| Net revenues |
$ | 213,594 | $ | 168,976 | ||
| Costs and expenses: |
||||||
| Educational services |
150,825 | 123,599 | ||||
| General and administrative |
46,532 | 35,862 | ||||
| Amortization of intangible assets |
1,766 | 1,446 | ||||
| 199,123 | 160,907 | |||||
| Income before interest and taxes |
14,471 | 8,069 | ||||
| Interest expense, net |
723 | 690 | ||||
| Income before income taxes |
13,748 | 7,379 | ||||
| Provision for income taxes |
5,595 | 2,878 | ||||
| Net income |
$ | 8,153 | $ | 4,501 | ||
| Earnings per share: |
||||||
| Basic |
$ | 0.11 | $ | 0.06 | ||
| Diluted |
$ | 0.11 | $ | 0.06 | ||
| Weighted average number of shares outstanding (000’s): |
||||||
| Basic |
73,418 | 72,136 | ||||
| Diluted |
75,167 | 74,816 | ||||
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
4
EDUCATION MANAGEMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
| For the three months ended September 30, |
||||||||
| 2004 |
2003 |
|||||||
| Cash flows from operating activities: |
||||||||
| Net income |
$ | 8,153 | $ | 4,501 | ||||
| Adjustments to reconcile net income to net cash flows provided by operating activities: |
||||||||
| Depreciation and amortization |
14,495 | 12,588 | ||||||
| Changes in current assets and liabilities: |
||||||||
| Restricted cash |
(3,993 | ) | (8,217 | ) | ||||
| Receivables |
(10,753 | ) | (12,154 | ) | ||||
| Inventories |
(2,898 | ) | (2,523 | ) | ||||
| Other current assets |
(3,013 | ) | (1,236 | ) | ||||
| Accounts payable |
8,815 | 5,614 | ||||||
| Accrued liabilities |
(1,629 | ) | 2,308 | |||||
| Advance payments |
88,486 | 60,528 | ||||||
| Unearned tuition |
25,037 | 21,047 | ||||||
| Total adjustments |
114,547 | 77,955 | ||||||
| Net cash flows from operating activities |
122,700 | 82,456 | ||||||
| Cash flows from investing activities: |
||||||||
| Acquisition of subsidiaries, net of cash acquired |
(11,031 | ) | (149,050 | ) | ||||
| Expenditures for property and equipment |
(18,137 | ) | (18,336 | ) | ||||
| Other items, net |
3,216 | (933 | ) | |||||
| Net cash flows from investing activities |
(25,952 | ) | (168,319 | ) | ||||
| Cash flows from financing activities: |
||||||||
| Revolving credit facility activity, net |
(125,100 | ) | 15,120 | |||||
| Principal payments on debt |
(25 | ) | (99 | ) | ||||
| Proceeds from issuance of Common Stock |
2,359 | 2,215 | ||||||
| Net cash flows from financing activities |
(122,766 | ) | 17,236 | |||||
| Effective exchange rate changes on cash |
(2,482 | ) | (67 | ) | ||||
| Net change in cash and cash equivalents |
(28,500 | ) | (68,694 | ) | ||||
| Cash and cash equivalents, beginning of period |
116,728 | 88,957 | ||||||
| Cash and cash equivalents, end of period |
$ | 88,228 | $ | 20,263 | ||||
| Supplemental disclosure of cash flow information: |
||||||||
| Cash paid during the period for: |
||||||||
| Interest |
$ | 256 | $ | 495 | ||||
| Income taxes |
434 | 7 | ||||||
| Noncash investing and financing activities: |
||||||||
| Expenditures for property and equipment included in accounts payable |
5,655 | 5,923 | ||||||
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
5
EDUCATION MANAGEMENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements should be read in conjunction with the financial statements and notes to consolidated financial statements included in the Annual Report on Form 10-K for the year ended June 30, 2004 (the “Fiscal 2004 Annual Report”). These condensed consolidated financial statements include the accounts of Education Management Corporation and its consolidated subsidiaries. The accompanying condensed consolidated balance sheet at June 30, 2004 has been derived from the audited balance sheet included in the Company’s Fiscal 2004 Annual Report. 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 considered normal and recurring. The results for the three month period ended September 30, 2004 are not necessarily indicative of the results to be expected for the full fiscal year. Unless otherwise noted, references to 2005 and 2004 refer to the periods ended September 30, 2004 and 2003, respectively.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates.
On October 25, 2004, the Company announced that its American Education Centers (“AEC”) campuses will be renamed Brown Mackie College, subject to regulatory approvals, in order to establish a common national identity. References in this Form 10-Q to AEC refer to Brown Mackie College.
Certain prior period balances have been reclassified to conform to the current period presentation.
NATURE OF OPERATIONS
Education Management Corporation (“EDMC” or the “Company”) is among the largest providers of private postsecondary education in North America, based on student enrollment and revenue. EDMC’s education institutions offer a broad range of academic programs concentrated in the media arts, design, fashion, culinary arts, behavioral sciences, health sciences, education, information technology, legal studies and business fields, culminating in the award of associate’s through doctoral degrees. EDMC has provided career-oriented education for over 40 years. The Company delivers education to its students through traditional classroom settings as well as online.
The Company’s quarterly revenues and income fluctuate primarily as a result of the pattern of student enrollments. Student enrollment has typically peaked in the fall (fiscal year second quarter), when the largest number of recent high school and college graduates traditionally begin post-secondary education programs. The first quarter is typically the lowest revenue recognition quarter due to student vacations. The seasonality of the Company’s business has decreased over the last several years due to an increased percentage of students at the Company’s schools enrolling in bachelor’s and post-bachelor’s degree programs. The decreased effect of seasonal fluctuations on the results of operations is discussed in “Change in Accounting” below.
CHANGE IN ACCOUNTING
In previous years, the Company allocated advertising and admissions expenses to each quarter within the fiscal year as permitted under Accounting Principles Board Opinion (“APB”) 28, “Interim Financial Reporting”, which permits the allocation of costs to all periods within a fiscal year when future periods benefit from the expenditure. Advertising and admissions expenses were not
6
deferred from one fiscal year to the next. In recent years, a significantly larger percentage of the Company’s students have enrolled in longer academic programs such as bachelor’s and graduate degree programs as compared to earlier fiscal years. This has led to more students in attendance for a given fiscal year who started their degree in a prior fiscal year, as well as less fluctuation in starting student body on a quarter to quarter basis, the metric by which the Company estimated the advertising and admissions allocation within a fiscal year. The increased offerings of bachelor’s and post-bachelor’s degree programs is due in part to acquisitions along with programmatic diversification. Therefore, beginning with the three months ended September 30, 2004, the Company began expensing all advertising and admissions costs in the period in which they are incurred for interim reporting purposes. This prospective change has no impact on the reported quarterly or annual results for prior years. Management also believes that expensing advertising and admissions costs as incurred is the preferable accounting method as it eliminates the uncertainty inherent in the estimation process. In addition, the change conforms the Company’s interim accounting policy with that used to prepare the annual financial statements.
The impact on quarterly net income and diluted earnings per share related to the change in accounting policy is as follows:
| Three Months September (unaudited) | |||||||
| 2004 |
2003 | ||||||
| Income before change in accounting policy (in thousands) |
$ | 10,209 | $ | 4,501 | |||
| Impact due to change in accounting policy, net of tax |
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