Attached files
file | filename |
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EX-32.1 - EXHIBIT 32.1 - EDUCATION MANAGEMENT CORPORATION | c95929exv32w1.htm |
EX-31.2 - EXHIBIT 31.2 - EDUCATION MANAGEMENT CORPORATION | c95929exv31w2.htm |
EX-31.1 - EXHIBIT 31.1 - EDUCATION MANAGEMENT CORPORATION | c95929exv31w1.htm |
EX-32.2 - EXHIBIT 32.2 - EDUCATION MANAGEMENT CORPORATION | c95929exv32w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: December 31, 2009
OR
o | 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: 001-34466
EDUCATION MANAGEMENT CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania (State or other jurisdiction of incorporation or organization) |
25-1119571 (I.R.S. Employer Identification No.) |
|
210 Sixth Avenue, Pittsburgh, PA, 33rd Floor (Address of principal executive offices) |
15222 (Zip Code) |
Registrants 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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act.): Yes
o No
þ
As of February 12, 2010, 142,826,146 shares of the registrants common stock were
outstanding.
Table of Contents
INDEX
PAGE | ||||||||
PART I FINANCIAL INFORMATION |
||||||||
ITEM 1. FINANCIAL STATEMENTS |
2 | |||||||
25 | ||||||||
37 | ||||||||
38 | ||||||||
39 | ||||||||
39 | ||||||||
39 | ||||||||
39 | ||||||||
39 | ||||||||
39 | ||||||||
39 | ||||||||
40 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
1
Table of Contents
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31, | June 30, | December 31, | ||||||||||
2009 | 2009 | 2008 | ||||||||||
(Unaudited) | (Unaudited) | |||||||||||
Assets |
||||||||||||
Current assets: |
||||||||||||
Cash and cash equivalents |
$ | 310,037 | $ | 363,318 | $ | 312,522 | ||||||
Restricted cash |
16,006 | 10,372 | 12,192 | |||||||||
Total cash, cash equivalents and restricted cash |
326,043 | 373,690 | 324,714 | |||||||||
Receivables, net of allowances of $108,576, $83,691
and $70,416 |
80,863 | 122,272 | 57,693 | |||||||||
Notes, advances and other |
11,024 | 13,678 | 17,108 | |||||||||
Inventories |
12,572 | 9,355 | 9,680 | |||||||||
Deferred income taxes |
45,164 | 45,164 | 25,739 | |||||||||
Other current assets |
48,130 | 30,163 | 30,474 | |||||||||
Total current assets |
523,796 | 594,322 | 465,408 | |||||||||
Property and equipment, net |
618,953 | 580,965 | 525,070 | |||||||||
Other long-term assets |
66,857 | 58,945 | 56,822 | |||||||||
Intangible assets, net |
469,546 | 471,882 | 477,029 | |||||||||
Goodwill |
2,579,131 | 2,579,131 | 2,578,898 | |||||||||
Total assets |
$ | 4,258,283 | $ | 4,285,245 | $ | 4,103,227 | ||||||
Liabilities and shareholders equity |
||||||||||||
Current liabilities: |
||||||||||||
Current portion of long-term debt |
$ | 12,281 | $ | 12,622 | $ | 12,758 | ||||||
Revolving credit facility |
| 100,000 | 180,000 | |||||||||
Accounts payable |
47,053 | 53,516 | 41,086 | |||||||||
Accrued liabilities |
147,176 | 163,485 | 91,875 | |||||||||
Accrued income taxes |
16,836 | 5,015 | 14,027 | |||||||||
Unearned tuition |
48,913 | 118,741 | 25,710 | |||||||||
Advance payments |
81,325 | 67,020 | 74,640 | |||||||||
Total current liabilities |
353,584 | 520,399 | 440,096 | |||||||||
Long-term debt, less current portion |
1,554,049 | 1,876,021 | 1,882,198 | |||||||||
Deferred income taxes |
177,396 | 187,583 | 164,939 | |||||||||
Deferred rent |
146,187 | 123,656 | 100,638 | |||||||||
Other long-term liabilities |
94,289 | 91,933 | 106,196 | |||||||||
Shareholders equity: |
||||||||||||
Common Stock, par value $0.01 per share; 600,000,000 shares
authorized; 142,823,731, 119,770,277 and 119,769,082 issued
and outstanding at December 31, 2009, June 30, 2009 and
December 31, 2008, respectively |
1,428 | 1,198 | 1,198 | |||||||||
Additional paid-in capital |
1,743,386 | 1,338,316 | 1,338,302 | |||||||||
Retained earnings |
217,803 | 181,767 | 116,361 | |||||||||
Accumulated other comprehensive loss |
(29,839 | ) | (35,628 | ) | (46,701 | ) | ||||||
Total shareholders equity |
1,932,778 | 1,485,653 | 1,409,160 | |||||||||
Total liabilities and shareholders equity |
$ | 4,258,283 | $ | 4,285,245 | $ | 4,103,227 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
2
Table of Contents
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands except per share amounts)
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands except per share amounts)
For the Three Months | For the Six Months | |||||||||||||||
Ended December 31, | Ended December 31, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net revenues |
$ | 655,469 | $ | 522,218 | $ | 1,189,868 | $ | 956,446 | ||||||||
Costs and expenses: |
||||||||||||||||
Educational services |
315,266 | 265,618 | 610,979 | 519,130 | ||||||||||||
General and administrative |
170,305 | 120,614 | 317,162 | 240,723 | ||||||||||||
Management fees paid to affiliates |
30,805 | 1,250 | 32,055 | 2,500 | ||||||||||||
Depreciation and amortization |
29,401 | 27,575 | 58,228 | 54,179 | ||||||||||||
Total costs and expenses |
545,777 | 415,057 | 1,018,424 | 816,532 | ||||||||||||
Income before interest, loss on early
retirement of debt and income taxes |
109,692 | 107,161 | 171,444 | 139,914 | ||||||||||||
Interest expense, net |
30,390 | 40,455 | 66,719 | 78,614 | ||||||||||||
Loss on early retirement of debt |
44,762 | | 44,762 | | ||||||||||||
Income before income taxes |
34,540 | 66,706 | 59,963 | 61,300 | ||||||||||||
Provision for income taxes |
14,266 | 24,404 | 23,927 | 22,301 | ||||||||||||
Net income |
$ | 20,274 | $ | 42,302 | $ | 36,036 | $ | 38,999 | ||||||||
Earnings per share: |
||||||||||||||||
Basic |
$ | 0.14 | $ | 0.35 | $ | 0.27 | $ | 0.33 | ||||||||
Diluted |
$ | 0.14 | $ | 0.35 | $ | 0.27 | $ | 0.33 | ||||||||
Weighted average number of shares outstanding: |
||||||||||||||||
Basic |
142,387 | 119,769 | 131,079 | 119,769 | ||||||||||||
Diluted |
143,143 | 119,769 | 131,457 | 119,769 |
The accompanying notes are an integral part of these consolidated financial statements.
3
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EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
For the Six Months | ||||||||
Ended December 31, | ||||||||
2009 | 2008 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 36,036 | $ | 38,999 | ||||
Adjustments to reconcile net income to
net cash flows provided by operating activities: |
||||||||
Depreciation and amortization of property and equipment |
53,659 | 45,358 | ||||||
Bad debt expense |
50,565 | 35,092 | ||||||
Amortization of intangible assets |
4,569 | 8,821 | ||||||
Amortization of debt issuance costs |
4,113 | 3,845 | ||||||
Loss on early retirement of debt |
44,762 | | ||||||
Share-based compensation |
17,476 | | ||||||
Non-cash adjustments related to deferred rent |
1,436 | (1,004 | ) | |||||
Purchase of private loans |
(22,643 | ) | (41 | ) | ||||
Reimbursements for tenant improvements |
7,421 | 11,543 | ||||||
Changes in assets and liabilities: |
||||||||
Restricted cash |
(5,634 | ) | 1,630 | |||||
Receivables |
(1,288 | ) | (2,348 | ) | ||||
Inventories |
(3,193 | ) | (1,256 | ) | ||||
Other assets |
(17,236 | ) | (12,829 | ) | ||||
Accounts payable |
(1,373 | ) | (6,778 | ) | ||||
Accrued liabilities |
(12,415 | ) | (21,815 | ) | ||||
Unearned tuition |
(69,828 | ) | (43,444 | ) | ||||
Advance payments |
13,997 | 14,622 | ||||||
Total adjustments |
64,388 | 31,396 | ||||||
Net cash flows provided by operating activities |
100,424 | 70,395 | ||||||
Cash flows from investing activities: |
||||||||
Expenditures for long-lived assets |
(69,826 | ) | (78,346 | ) | ||||
Reimbursements for tenant improvements |
(7,421 | ) | (11,543 | ) | ||||
Net cash flows used in investing activities |
(77,247 | ) | (89,889 | ) | ||||
Cash flows from financing activities: |
||||||||
Borrowings under revolving credit facility |
| 180,000 | ||||||
Payments under revolving credit facility |
(100,000 | ) | (120,000 | ) | ||||
Retirement of senior subordinated notes |
(355,465 | ) | | |||||
Net proceeds from issuance of common stock, including
stock option exercises |
387,824 | | ||||||
Principal payments on long-term debt |
(6,343 | ) | (6,489 | ) | ||||
Debt issuance costs |
(2,400 | ) | | |||||
Net cash flows (used in) provided by financing activities |
(76,384 | ) | 53,511 | |||||
Effect of exchange rate changes on cash and cash equivalents |
(74 | ) | 1,097 | |||||
Net change in cash and cash equivalents |
(53,281 | ) | 35,114 | |||||
Cash and cash equivalents, beginning of period |
363,318 | 277,408 | ||||||
Cash and cash equivalents, end of period |
$ | 310,037 | $ | 312,522 | ||||
Cash paid during the period for: |
||||||||
Interest (including swap settlement) |
$ | 64,168 | $ | 79,158 | ||||
Income taxes |
23,011 | 21,422 |
The accompanying notes are an integral part of these consolidated financial statements.
4
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EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(Dollars in thousands)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(Dollars in thousands)
Common Stock at Par Value | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total | ||||||||||||||||
Balance, June 30, 2008 |
$ | 1,198 | $ | 1,338,302 | $ | 77,362 | $ | (24,685 | ) | $ | 1,392,177 | |||||||||
Comprehensive income: |
||||||||||||||||||||
Net income |
| | 104,405 | | 104,405 | |||||||||||||||
Foreign currency translation |
| | | (1,147 | ) | (1,147 | ) | |||||||||||||
Unrealized loss on interest
rate swaps, net of tax
benefit of $5,709 |
| | | (9,796 | ) | (9,796 | ) | |||||||||||||
Comprehensive income |
93,462 | (a) | ||||||||||||||||||
Other |
| 14 | | | 14 | |||||||||||||||
Balance,
June 30, 2009
|
1,198 | 1,338,316 | 181,767 | (35,628 | )(b) | 1,485,653 | ||||||||||||||
(Unaudited) |
||||||||||||||||||||
Issuance of common stock including
option exercises |
230 | 387,594 | | | 387,824 | |||||||||||||||
Share-based compensation |
| 17,476 | | | 17,476 | |||||||||||||||
Comprehensive income: |
||||||||||||||||||||
Net income |
| | 36,036 | | 36,036 | |||||||||||||||
Foreign currency translation |
| | | 771 | 771 | |||||||||||||||
Unrealized gain on interest
rate swaps, net of tax
expense of $2,891 |
| | | 5,018 | 5,018 | |||||||||||||||
Comprehensive income |
41,825 | |||||||||||||||||||
Balance, December 31, 2009 |
$ | 1,428 | $ | 1,743,386 | $ | 217,803 | $ | (29,839 | )(b) | $ | 1,932,778 | |||||||||
(a) | During the six months ended December 31, 2008, other comprehensive loss consisted of a $22.0 million unrealized loss on interest rate swaps, net of tax expense, and less than a $0.1 million foreign currency translation loss. | |
(b) | The balance in accumulated other comprehensive loss at December 31, 2009, June 30, 2009 and December 31, 2008 is comprised of $29.2 million, $34.2 million and $46.3 million of unrealized losses on interest rate swaps, net of tax expense, respectively and $0.6 million, $1.4 million and $0.4 million of cumulative foreign currency translation losses, respectively. |
The accompanying notes are an integral part of these consolidated financial statements.
5
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EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Nature of operations
Education Management Corporation and its subsidiaries (the Company) is among the largest
providers of post-secondary education in North America, with approximately 136,000 active students
as of October 2009. The Company offers education through four different education systems (The Art
Institutes, Argosy University, Brown Mackie Colleges and South University) and through online
platforms at three of the four education systems. The schools provide students a wide variety of
programmatic and degree choices in a flexible learning environment. The curriculum is designed with
a distinct emphasis on applied career-oriented content and is primarily taught by faculty members
that possess practical and relevant professional experience in their respective fields.
Basis of presentation
The accompanying unaudited consolidated financial statements of the Company have been prepared
by management in accordance with generally accepted accounting principles for interim financial
information and applicable rules and regulations of the Securities Exchange Act of 1934, as
amended (the Exchange Act). Accordingly, they do not include all of the information and footnotes required by
generally accepted accounting principles in the United States for annual financial statements. The
unaudited consolidated financial statements included herein contain all adjustments (consisting of
normal recurring adjustments) which are, in the opinion of management, necessary to present fairly
the Companys financial position as of December 31, 2009 and 2008, and the statements of operations for the
three and six months ended December 31, 2009 and 2008 and the statements of cash flows for the six
months ended December 31, 2009 and 2008. The statements of operations for the three and six months
ended December 31, 2009 and 2008 are not necessarily indicative of the results to be expected for
future periods. These financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the Companys prospectus dated
October 1, 2009 for the fiscal year ended June 30, 2009 as filed with the Securities and Exchange
Commission (SEC). The accompanying consolidated balance sheet at June 30, 2009 has been derived
from the consolidated audited balance sheet included in the prospectus dated October 1, 2009 as
filed with the SEC.
On September 30, 2009, the Companys Board of Directors declared a 4.4737 for one split of the
Companys common stock, which was paid in the form of a stock dividend on September 30, 2009. In
connection with this stock split, the Company amended and restated its articles of incorporation
to, among other things, increase the Companys number of authorized shares of common stock. The
stock split also resulted in the issuance of approximately 93.0 million additional shares of common
stock, increased the number of stock options outstanding and exercisable in all periods presented,
changed earnings per share information and resulted in a reclassification of $0.9 million from
additional paid-in capital to common stock on the accompanying consolidated balance sheets. All
information presented in the accompanying consolidated financial statements and related notes has
been adjusted to reflect the Companys amended and restated articles of incorporation and stock
split.
In November 2009, the Company guaranteed the indebtedness of Education Management LLC (EM
LLC) and Education Management Finance Corp. (a wholly owned
subsidiary of EM LLC) under the 8.75% senior notes due 2014 (the Senior
Notes) and 10.25% senior subordinated notes due 2016 (the Senior Subordinated Notes and,
together with the Senior Notes, the Notes).
The Company performed an evaluation of subsequent events through February 12, 2010, the date
the financial statements were issued.
6
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EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Ownership
On June 1, 2006, the Company was acquired by a consortium of private equity investment
funds
led by Providence Equity Partners, Goldman Sachs Capital Partners and Leeds Equity Partners
(collectively, the Sponsors). The acquisition was accomplished through the merger of EM
Acquisition
Corporation into the Company, with the Company surviving the merger (the Transaction). Pursuant
to the terms of the merger agreement, all outstanding shares of the Companys common stock were
cancelled in exchange for cash. The Sponsors, together with certain other investors, became the
owners of the Company.
The acquisition of the Company was financed by equity invested in EM Acquisition Corporation
by the Sponsors and other investors, cash on hand, borrowings under a new senior secured credit
facility by EM LLC and the issuance by EM LLC and Education Management Finance Corp. of the Notes.
Initial public offering
In October 2009, the Company completed an initial public offering of 23.0 million shares of
common stock, $0.01 par value, at a per share price of $18.00 (the initial public offering). Net
proceeds to the Company, after transaction costs, totaled approximately $387.3 million. No
Sponsor-owned shares were sold in connection with the initial public offering. After the
consummation of the initial public offering, the equity funds controlled by the Sponsors owned
approximately 69.2% of the Companys outstanding common stock. Of the net proceeds from the
initial public offering, $355.5 million was used to purchase $316.0 million of the Senior
Subordinated Notes in a tender offer and $29.6 million was used to terminate a management agreement
entered into with the Sponsors in connection with the Transaction.
In the quarter ended December 31, 2009, the Company recognized several non-recurring expenses
in the consolidated statement of operations as a direct result of the initial public offering,
including a $44.8 million loss related to the early retirement of indebtedness, $15.2 million of
previously unrecognized stock-based compensation costs due to the removal of certain conditions
that existed related to the option holders inability to obtain fair value for exercised options,
and $29.6 million in advisory fees for the early termination of the management agreement with the Sponsors.
In addition, the availability for borrowing under EM LLCs revolving credit facility increased from
$388.5 million to $442.5 million effective upon the closing of the initial public offering.
Seasonality
The Companys quarterly net revenues and net income fluctuate primarily as a result of the
pattern of student enrollments at its schools. The seasonality of the Companys business has
decreased over the last several years due to an increase in the percentage of students enrolling in
online programs, which generally experience less seasonal fluctuations than campus-based programs.
The Companys first fiscal quarter is typically its lowest revenue recognition quarter due to
student vacations.
Reclassifications
Certain reclassifications of December 31, 2008 data have been made to conform to the December
31, 2009 presentation.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2009, the Financial Accounting Standards Board (the FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 168, The FASB Accounting Standards
CodificationTM and the Hierarchy of Generally Accepted Accounting Principles (GAAP), a
replacement of FASB Statement No. 162. All existing accounting standard documents are superseded
by the Codification, which does not change or alter existing GAAP. Since the Company adopted SFAS
No. 168 in the first fiscal quarter of
2010, any references to GAAP included in the Companys historical public filings with the SEC
are no longer included in the Companys filings. The adoption of SFAS No. 168 had no impact on the
Companys consolidated financial statements.
7
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EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. EARNINGS PER SHARE
Basic earnings per share (EPS) is computed using the weighted average number of shares
outstanding during the period. The Company uses the treasury stock method to compute diluted EPS,
which assumes that vested restricted stock was converted into common stock and outstanding
stock options were exercised and the resultant proceeds were used to acquire shares of common stock
at its average market price during the reporting period.
Basic and diluted EPS were calculated as follows (in thousands, except per share amounts):
For the Three Months | For the Six Months | |||||||||||||||
Ended December 31, | Ended December 31, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net income |
$ | 20,274 | $ | 42,302 | $ | 36,036 | $ | 38,999 | ||||||||
Weighted average number of shares outstanding |
||||||||||||||||
Basic |
142,387 | 119,769 | 131,079 | 119,769 | ||||||||||||
Effect of stock-based awards |
756 | | 378 | | ||||||||||||
Diluted |
143,143 | 119,769 | 131,457 | 119,769 | ||||||||||||
Earnings per share: |
||||||||||||||||
Basic |
$ | 0.14 | $ | 0.35 | $ | 0.27 | $ | 0.33 | ||||||||
Diluted |
$ | 0.14 | $ | 0.35 | $ | 0.27 | $ | 0.33 |
Time-based options to purchase 1.6 million shares of common stock were outstanding for the
three and six months ended December 31, 2009 but were not included in the computation of diluted
EPS because the effect of applying the treasury stock method would have been
antidilutive. The Companys time-based options were the only options included in the diluted EPS
calculation, due to certain performance and market conditions not being met with respect to the
Companys performance-based options, as further described in Note 4. As a result, the Companys
performance-based options were contingently issuable at December 31, 2009. In addition, all stock
options for the fiscal 2009 periods were contingently issuable, and therefore were not included in the computation of diluted EPS in those periods.
4. SHARE-BASED PAYMENT
Upon completion of the initial public offering in October 2009, the Company recognized $15.2
million of previously deferred stock-based compensation costs due to the removal of certain
conditions that precluded participants from receiving fair market value for exercised options.
During the quarter ended December 31, 2009, the Company recognized a total of approximately $17.5
million of stock-based compensation expense, $2.4 million of which was recorded in educational
services expense and $15.1 million of which was recorded in general and administrative expense.
All of the expense recognized in the quarter related to time-based options and restricted stock.
Less than 0.1 million of time-based options were exercised during the six-month period ended
December 31, 2009.
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EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2006 Stock Option Plan
In fiscal 2007, the Companys board of directors approved the 2006 Stock Option Plan (the
Option Plan), which authorized equity awards to be granted for up to approximately 8.3 million
shares of the Companys common stock. Under the Option Plan, certain
employees of the Company were granted a combination of time-based and performance-based options to
purchase the Companys common stock.
Time-based options vest ratably over the applicable service period, which is generally five
years, on each anniversary of the date of grant. Performance-based options vest upon the attainment
of specified returns on capital invested in the Company by Providence Equity Partners and Goldman
Sachs Capital Partners (together, the Principal Shareholders). Time-based and performance-based
options also generally vest upon a change in control or realization event, subject to certain
conditions, and generally expire ten years from the date of grant.
At December 31, 2009, the Company considered the conditions entitling performance-based option
holders to receive fair value for their shares to be less than probable. As such, compensation expense on
all performance-based option grants is not recognized until one of the conditions entitling option
holders to fair value for their shares becomes probable. Accordingly, the Company has not
recognized compensation expense related to performance-based options granted since the Transaction.
The total amount of unrecognized compensation cost over the vesting periods of time-based and
performance-based options under the Option Plan, net of expected forfeitures, is $9.4 million and
$9.3 million, respectively, at December 31, 2009.
Long Term Incentive Compensation Plan
In fiscal 2007, the Company adopted the Long-Term Incentive Compensation Plan (the LTIC
Plan), which is accounted for as an equity-based plan. The LTIC Plan consists of a bonus pool that
will be valued and paid in the Companys common stock based on returns to the Principal
Shareholders in connection with a change in control of the Company. Out of a total of
1,000,000 units authorized, approximately 802,000 units were outstanding under the LTIC Plan at
December 31, 2009. Each unit represents the right to receive a payment based on the value of the
bonus pool. As the contingent future events that would result in value to the unit-holders are not
probable, no compensation expense has been recognized by the Company during any of the periods
following the Transaction. The total amount of unrecognized compensation cost over the vesting
periods of all units, net of expected forfeitures, is approximately $3.1 million at December 31,
2009.
Omnibus Long-Term Incentive Plan
In April 2009, the Companys Board of Directors adopted the Omnibus Long-Term Incentive Plan
(the Omnibus Plan), which became effective upon the completion of the initial public offering.
Approximately 6.4 million shares of common stock have been reserved for issuance under the Omnibus
Plan, which may be used to issue stock options, stock-option appreciation rights, restricted stock,
restricted stock units and other forms of long-term incentive compensation.
During the quarter ended December 31, 2009, the Company granted 1.3 million time-vested stock
options under the Omnibus Plan. The options vest over a four year period and have an exercise
price of $18.00 per share, the price at which shares were sold to the public in the initial public
offering. These options were valued using the Black-Scholes method, and the Company used an
estimated stock price volatility assumption of 44% and an expected term assumption of 6.25 years.
In addition, less than 0.1 million shares of restricted stock, which
vest one year from the date of grant, were
issued under the Omnibus Plan.
These shares of restricted stock were valued at the closing price of a share of the Companys
common stock on the date of grant, which averaged $21.89 per share.
The total amount of unrecognized compensation cost over the vesting periods of all awards that
have been issued under the Omnibus Plan, net of expected forfeitures, is $10.0 million at December
31, 2009.
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CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following amounts (in thousands):
December 31, | June 30, | December 31, | ||||||||||
Asset Class | 2009 | 2009 | 2008 | |||||||||
Land |
$ | 17,657 | $ | 17,805 | $ | 17,805 | ||||||
Buildings and improvements |
73,683 | 74,171 | 73,798 | |||||||||
Leasehold improvements and capitalized lease costs |
372,578 | 329,449 | 306,500 | |||||||||
Furniture and equipment |
110,470 | 97,783 | 93,062 | |||||||||
Technology and other equipment |
193,148 | 170,818 | 153,256 | |||||||||
Software |
49,622 | 45,651 | 38,314 | |||||||||
Library books |
32,484 | 29,778 | 27,060 | |||||||||
Construction in progress |
57,178 | 43,470 | 14,863 | |||||||||
Total |
906,820 | 808,925 | 724,658 | |||||||||
Less accumulated depreciation |
(287,867 | ) | (227,960 | ) | (199,588 | ) | ||||||
Property and equipment, net |
$ | 618,953 | $ | 580,965 | $ | 525,070 | ||||||
Depreciation and amortization of property and equipment was $27.2 million and $23.2
million, respectively, for the three months ended December 31, 2009 and 2008. Depreciation and
amortization of property and equipment was $53.6 million and $45.4 million, respectively,
for the six months ended December 31, 2009 and 2008.
6. GOODWILL AND INTANGIBLE ASSETS
Goodwill
As a result of the Transaction, the Company recorded approximately $2.6 billion of goodwill.
Goodwill is recognized as an asset in the financial statements and is initially measured as the
excess of the purchase price of the acquired company over the amounts assigned to net assets
acquired. In connection with the Transaction, property, equipment, intangible assets other than
goodwill and other assets and liabilities were recorded at fair value. The remaining value was
assigned to goodwill and represents the intrinsic value of the Company beyond its tangible and
identifiable intangible assets. This is evidenced by the excess of the amount paid to acquire the
Company over the values of these respective assets.
The Company formally evaluates the carrying amount of goodwill for impairment on April 1 of
each fiscal year. During interim periods, the Company reviews forecasts, business plans,
regulatory and legal matters and other activities necessary to identify events that may trigger
more frequent impairment tests. During the six months ended December 31, 2009, the Company
identified no such triggering events, and as a result, no impairments were recorded.
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CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Intangible Assets
Intangible assets consisted of the following amounts (in thousands):
December 31, 2009 | June 30, 2009 | December 31, 2008 | ||||||||||||||||||||||
Gross | Gross | Gross | ||||||||||||||||||||||
Carrying | Accumulated | Carrying | Accumulated | Carrying | Accumulated | |||||||||||||||||||
Amount | Amortization | Amount | Amortization | Amount | Amortization | |||||||||||||||||||
Tradename-Art Institute |
$ | 330,000 | $ | | $ | 330,000 | $ | | $ | 330,000 | $ | | ||||||||||||
Tradename-Argosy University |
3,000 | (1,194 | ) | 3,000 | (1,028 | ) | 3,000 | (861 | ) | |||||||||||||||
Licensing, accreditation and Title
IV program participation |
112,179 | | 112,179 | | 112,179 | | ||||||||||||||||||
Curriculum and programs |
30,172 | (16,007 | ) | 27,974 | (13,520 | ) | 25,246 | (11,333 | ) | |||||||||||||||
Student contracts,
applications and
relationships |
39,511 | (33,284 | ) | 39,511 | (32,479 | ) | 39,511 | (28,292 | ) | |||||||||||||||
Favorable leases and other |
16,409 | (11,240 | ) | 16,351 | (10,106 | ) | 16,297 | (8,718 | ) | |||||||||||||||
Total intangible assets |
$ | 531,271 | $ | (61,725 | ) | $ | 529,015 | $ | (57,133 | ) | $ | 526,233 | $ | (49,204 | ) | |||||||||
State licenses and accreditations of the Companys schools as well as their eligibility for
Title IV program participation are periodically renewed in cycles ranging from every year to up to
every ten years depending upon government and accreditation regulations. The Company considers
these renewal processes to be a routine aspect of the overall business and assigned these assets
indefinite lives.
Tradenames are often considered to have useful lives similar to that of the overall business,
which generally means such assets are assigned an indefinite life for accounting purposes. However,
the Argosy tradename was assigned a finite life at the date of the Transaction due to the potential
for that tradename to be eliminated. As such, the same life was assigned to that asset, nine years,
as was assigned to its existing student relationships economic life.
Amortization of intangible assets for the three months ended December 31, 2009 and 2008 was
$2.2 million and $4.3 million, respectively. Amortization of intangible assets for the six months
ended December 31, 2009 and 2008 was $4.6 million and $8.8 million, respectively.
Total estimated amortization on the Companys existing intangible assets at December 31,
2009 for each of the years ending June 30, 2010 through 2014 and thereafter is as follows (in
thousands):
Amortization | ||||
Fiscal years | Expense | |||
2010 (remainder) |
$ | 4,026 | ||
2011 |
7,849 | |||
2012 |
6,783 | |||
2013 |
4,436 | |||
2014 |
2,668 | |||
Thereafter |
1,605 |
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CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
7. ACCRUED LIABILITIES
Accrued liabilities consisted of the following amounts (in thousands):
December 31, | June 30, | December 31, | ||||||||||
2009 | 2009 | 2008 | ||||||||||
Payroll and related taxes |
$ | 35,449 | $ | 77,894 | $ | 25,974 | ||||||
Capital expenditures |
22,904 | 8,032 | 4,324 | |||||||||
Advertising |
33,230 | 25,192 | 17,785 | |||||||||
Interest |
13,007 | 13,878 | 8,999 | |||||||||
Benefits |
9,842 | 8,597 | 8,277 | |||||||||
Other |
32,744 | 29,892 | 26,516 | |||||||||
Total accrued liabilities |
$ | 147,176 | $ | 163,485 | $ | 91,875 | ||||||
8. SHORT-TERM AND LONG-TERM DEBT
EM LLC increased the capacity on its revolving credit facility from $388.5 million to
$442.5 million in connection with the completion of the initial public offering. In addition, EM
LLC added two letter of credit issuing banks in August 2009, which increased the amounts available
for letters of credit issued under the revolving credit facility from $175.0 million to
$375.0 million. Outstanding letters of credit reduce availability of borrowings under the revolving credit facility.
Short-Term Debt:
No borrowings were outstanding at December 31, 2009 under the $442.5 million revolving credit
facility as compared to outstanding balances of $100.0 million and $180.0 million, respectively, at
June 30, 2009 and December 31, 2008. The interest rates on outstanding borrowings on the revolving
credit facility at June 30, 2009 and December 31, 2008 were 3.75% and 2.31%, respectively. The
applicable margin for borrowings under the revolving credit facility changes based on certain
leverage ratios. EM LLC is obligated to pay a per annum commitment fee on undrawn
amounts under the revolving credit facility, which is currently 0.375% and varies based on certain leverage ratios.
The revolving credit facility is secured by certain of EM LLCs assets and is subject to its satisfaction of certain covenants and financial ratios
described in Item 2-Managements
Discussion and Analysis of Financial Condition and Results of Operations Covenant Compliance.
EM LLC had outstanding letters of credit of $157.2 million at December 31, 2009. The U.S.
Department of Education requires the Company to maintain a $120.5 million letter of credit due to
the Companys failure to satisfy certain regulatory financial ratios after giving effect to the
Transaction. The amount of the letter of credit is currently set at 10% of the Title IV aid received by
students attending the Companys schools during the prior fiscal year. The Company anticipates that the
amount of the letter of credit will increase during the quarter ended March 31, 2010 based on Title
IV aid received by the Companys students during fiscal 2009. The majority of the remainder of the
outstanding letters of credit relate to obligations to
purchase loans under the Education Finance Loan program, which is further described in Note
12. The Company could incur $285.3 million of additional borrowings under the
revolving credit facility at December 31, 2009.
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CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Long-Term Debt:
The Companys long-term debt consisted of the following amounts (in thousands):
December 31, | June 30, | December 31, | ||||||||||
2009 | 2009 | 2008 | ||||||||||
Senior secured term loan facility, due 2013 |
$ | 1,120,902 | $ | 1,126,827 | $ | 1,132,752 | ||||||
Senior notes due 2014 at 8.75% |
375,000 | 375,000 | 375,000 | |||||||||
Senior subordinated notes due 2016 at 10.25% |
69,032 | 385,000 | 385,000 | |||||||||
Capital leases |
313 | 622 | 903 | |||||||||
Mortgage debt of consolidated entity |
1,083 | 1,194 | 1,301 | |||||||||
Total long-term debt |
1,566,330 | 1,888,643 | 1,894,956 | |||||||||
Less current portion |
12,281 | 12,622 | 12,758 | |||||||||
Total long term debt, less current portion |
$ | 1,554,049 | $ | 1,876,021 | $ | 1,882,198 | ||||||
In connection with the initial public offering, the Company purchased Senior Subordinated
Notes with a face value of approximately $316.0 million. The Company recorded a loss of $44.8
million on the early retirement of the Senior Subordinated Notes, which was comprised of a premium
to repurchase the debt over face value of $39.5 million and accelerated amortization on the
prorated portion of deferred financing costs related to the Senior Subordinated Notes of $5.3
million.
The interest rate on the senior secured term loan facility, which equals LIBOR plus a margin
spread of 1.75%, was 2.1% at December 31, 2009, 2.4% at June 30, 2009 and 3.3% at December 31,
2008.
9. DERIVATIVE INSTRUMENTS
EM LLC utilizes interest rate swap agreements, which are contractual agreements to exchange
payments based on underlying interest rates, to manage the floating rate portion of its term debt.
Currently, EM LLC has two five-year interest rate swaps outstanding through July 1, 2011, each for
a notional amount of $375.0 million. The interest rate swaps effectively convert a portion of the
variable interest rate on the senior secured term loan to a fixed rate. EM LLC receives payments
based on the three-month LIBOR and makes payments based on a fixed rate of 5.4%.
The fair value of the interest rate swaps was $46.5 million, $54.4 million and $73.7 million
at December 31, 2009, June 30, 2009 and December 31, 2008, respectively, which was recorded in
other long-term liabilities on the accompanying consolidated balance sheets. The Company recorded
an unrealized after-tax gain(loss) of $4.1 million and $(21.1) million for the three months ended
December 31, 2009 and 2008, respectively, and $5.0 million and $(22.0) million for the six months
ended December 31, 2009 and 2008, respectively, in other comprehensive loss related to the change
in market value of the swap agreements. Additionally, at December 31, 2009, there was a cumulative
unrealized loss of $29.2 million, net of tax, related to these interest rate swaps included in
accumulated other comprehensive loss on the Companys accompanying consolidated balance sheet. This
loss would be immediately recognized in the consolidated statement of operations if these
instruments fail to meet certain cash flow hedge requirements.
During the three and six months ended December 31, 2009, the Company reclassified
approximately $6.0 million and $11.7 million, respectively, from accumulated other comprehensive
loss to the consolidated statement of operations, all of which was paid due to regularly recurring
quarterly settlements of the interest rate swaps. Over the next twelve months, the Company
estimates approximately $24.3 million will be reclassified from accumulated other comprehensive
loss to the consolidated statement of operations based on current interest rates and underlying
debt obligations at December 31, 2009.
The Company used level two inputs to value its interest rate swaps. These inputs are
defined as other than quoted prices in active markets that are either directly or indirectly
observable. The application of level two inputs includes obtaining quotes from counterparties,
which are based on LIBOR forward curves, and assessing non-performance risk based upon published
market data.
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CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and fair values of financial instruments (in
thousands):
December 31, 2009 | June 30, 2009 | December 31, 2008 | ||||||||||||||||||||||
Carrying | Fair | Carrying | Fair | Carrying | Fair | |||||||||||||||||||
Value | Value | Value | Value | Value | Value | |||||||||||||||||||
Interest rate
swap liabilities |
$ | 46,511 | $ | 46,511 | $ | 54,421 | $ | 54,421 | $ | 73,724 | $ | 73,724 | ||||||||||||
Variable rate debt |
1,120,902 | 1,048,043 | 1,126,827 | 1,031,047 | 1,132,752 | 702,306 | ||||||||||||||||||
Fixed rate debt |
445,428 | 458,749 | 761,816 | 738,916 | 762,204 | 583,754 |
The fair values of cash and cash equivalents, accounts receivable, borrowings under the
revolving credit facility, accounts payable and accrued expenses approximate carrying values. This
is due to the short-term nature of these instruments. The derivative financial instruments are
carried at fair value, which is based on the framework discussed in Note 9. The fair values of the
Companys debt instruments are generally determined based on each instruments trading value at
each reporting date.
11. INCOME TAXES
The Company accounts for income taxes by the asset and liability method. Under this method,
deferred tax assets and liabilities result from (i) temporary differences in the recognition of
income and expense for financial and federal income tax reporting requirements, and
(ii) differences between the recorded value of assets acquired in business combinations accounted
for as purchases for financial reporting purposes and their corresponding tax bases. The Company
regularly evaluates deferred income tax assets for recoverability and records a valuation allowance
if it is more-likely-than-not that some portion of the deferred income tax asset will not be
realized.
The Companys effective tax rate was 41.3% and 39.9% for the three and six months ended
December 31, 2009 and 36.6% and 36.4% for the three and six months ended December 31, 2008. The
effective rates differed from the combined federal and state statutory rates primarily due to
valuation allowances, expenses that are non-deductible for tax purposes, and accounting for
uncertain tax positions.
There have been no material adjustments to liabilities relating to uncertain tax positions
since the last annual disclosure for the fiscal year ended June 30, 2009.
12. CONTINGENCIES
In August 2009, a complaint was filed in the District Court for Dallas County, Texas against
Argosy University, Education Management Corporation and Marilyn Powell-Kissinger, former President
of the Dallas campus of Argosy University. In September 2009, the defendants removed the case to
the United States District Court for the Northern District of Texas, Dallas division.
The case was remanded back to State court in November 2009 by agreement after the plaintiffs amended their pleadings to specify their allegations and agreed to dismiss
Ms. Powell-Kissinger
as a defendant. The plaintiffs filed an amended complaint in state court in January 2010 adding three
additional plaintiffs, among other things.
The plaintiffs in the litigation are 18 former students who were enrolled in the Clinical
Psychology doctoral program at the Argosy University
Dallas campus. The complaint alleges that, prior to the plaintiffs enrollment and/or while
the plaintiffs were enrolled in the program, the defendants violated the Texas Deceptive Trade
Practices and Consumer Protection Act and made material misrepresentations regarding the importance
of accreditation of the program by the Commission on Accreditation, American Psychological
Association, the status of the application of the Dallas campus for such accreditation, the
availability of loan repayment options for the plaintiffs, and the quantity and quality of the
plaintiffs career options. Plaintiffs seek unspecified monetary compensatory and punitive damages.
In June 2009, a complaint was filed in the
Twelfth Judicial Circuit of Tennessee by plaintiff The
University of the South against defendants South University, LLC, Education Management LLC,
and Education Management Corporation. In July 2009, defendants removed the case to the
United States District Court for the Eastern District of Tennessee, Winchester Division. Plaintiff
subsequently filed an amended complaint in which it alleges that defendants offering of
psychology and interdisciplinary studies degrees under the South University name breaches a
prior settlement and consent agreement entered into between the parties, and that the use of
South Universitys mark infringes on plaintiffs federal and state trademark rights. Plaintiff also alleges that defendants
actions constitute false designation of origin and unfair competition
under federal law (Lanham Act) and unfair and deceptive trade practices under Tennessee state
law. Plaintiff seeks an unspecified amount of damages, attorneys fees, and permanent injunction
relief. In response to the amended complaint, Defendants Education Management LLC and
Education Management Corporation filed a motion to dismiss the case against them for lack of
personal jurisdiction. Their motion was granted and they were dismissed from the lawsuit.
Defendant South University, LLC denies the allegations against it, and filed a counter-complaint
alleging that plaintiff breached the settlement and consent agreement based on a failure of
consideration and requesting declaratory judgment that plaintiff abandoned its mark and is
engaging in trademark misuse, that the settlement and consent agreement has been terminated
based on plaintiffs abandonment of the asserted trademark, and that South University is not in
breach of the contract, has not engaged unfair competition, and is not infringing on plaintiffs
mark. South University seeks damages in an unspecified amount, rescission of the Settlement
and Consent Agreement, restitution, and attorneys fees. The plaintiff filed for a preliminary
injunction against the defendant in November 2009 seeking, among other things, to enjoin the
defendant from offering its psychology and interdisciplinary studies degree programs. The
defendants brief in opposition to the motion for a preliminary injunction is due in February
2010. No trial date has been set for the lawsuit.
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CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In June 2007, The New England Institute of Art (NEIA) received a civil investigative
demand letter from the Massachusetts State Attorney General requesting information in connection
with the Attorney Generals review of alleged submissions of false claims by NEIA to the
Commonwealth of Massachusetts and alleged unfair and deceptive student lending and marketing
practices engaged in by the school. In February 2008, the Attorney General informed NEIA that it
does not plan to further pursue its investigation of the false claims and deceptive marketing
practices. NEIA intends to fully cooperate with the Attorney General in connection with its
investigation of NEIAs student lending practices.
The Art Institute of Portland and the Companys schools located in Illinois have received
requests for information from the Attorney General of their respective states addressing the
relationships between the schools and providers of loans to students attending the schools. The
Company has responded to the requests for information and intends to fully cooperate with the
Attorneys General in their investigations.
In August 2008, the Company introduced the Education Finance Loan program with a private
lender, which enables students who have exhausted all available government-sponsored or other aid
and have been denied a private loan to borrow funds to finance a portion of their tuition and other
educational expenses. Under the Education Finance Loan program, the Company purchases loans that
are originated by a private lender. As of December 31, 2009, the Company expects to purchase
approximately $60.0 million of loans during the remainder of fiscal 2010 and 2011.
In addition to the matters described above, the Company is a defendant in certain legal
proceedings arising out of the conduct of its business. In the opinion of management, based upon an
investigation of these claims and discussion with legal counsel, the ultimate outcome of such legal
proceedings, individually and in the aggregate, is not expected to have a material adverse effect
on the Companys consolidated financial position, results of operations or liquidity.
13. RELATED PARTY TRANSACTIONS
In September 2009, South University LLC, a wholly-owned subsidiary of the Company, renewed a
long term leasing arrangement of two buildings from two separate entities owned by John T. South,
who is one of the Companys executive officers. Annual rent payments under this lease, which
begins June 1, 2010, will approximate $2.2 million.
In connection with the Transaction and under the terms of an agreement between the Company and
the Sponsors, the Company agreed to pay annual advisory fees of $5.0 million to the Sponsors. This
agreement included customary exculpation and indemnification provisions in favor of the Sponsors
and their affiliates. Upon the completion of the initial public offering, the Company terminated
the agreement with the Sponsors and paid a non-recurring fee of $29.6 million. This has been
included in management fees paid to affiliates in the accompanying consolidated statements of
operations for the three and six months ended December 31, 2009.
An affiliate of one of the Sponsors participated as one of the joint book-running managers of
the Companys initial public offering. This affiliate was paid
$5.5 million pursuant to a customary
underwriting agreement among the Company and several underwriters. This fee was recorded as a
reduction to additional paid-in capital in the consolidated balance sheet as it reduced the
net proceeds received from the initial public offering.
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CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In June 2006, the Company entered into a five-year interest rate swap agreement in the amount
of $375.0 million with an affiliate of one of the Sponsors. The terms of this swap are discussed in
Note 9.
14. GUARANTOR SUBSIDIARIES FINANCIAL INFORMATION
On June 1, 2006, in connection with the Transaction, EM LLC and Education Management Finance
Corp. issued the Notes. The Notes are fully and unconditionally guaranteed by all of EM LLCs
existing direct and indirect domestic restricted subsidiaries, other than any subsidiary that
directly owns or operates a school, or has been formed for such purposes, and subsidiaries that
have no material assets (collectively, the Guarantors). All other subsidiaries of EM LLC, either
direct or indirect, do not guarantee the Notes (Non-Guarantors).
In November 2009, the Company became a guarantor of the Notes. The following tables
present the condensed consolidated financial position of EM LLC, the Guarantor Subsidiaries, the
Non-Guarantor Subsidiaries and Parent (EDMC) as of December 31, 2009, June 30, 2009
and December 31, 2008. The results of operations for the three and six month periods ended December
31, 2009 and 2008 and the condensed statements of cash flows for the six month periods ended
December 31, 2009 and 2008 are presented for EM LLC, the Guarantor Subsidiaries, the Non-Guarantor
Subsidiaries and Parent (EDMC).
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CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
CONDENSED CONSOLIDATED BALANCE SHEET
December 31, 2009 (In thousands)
December 31, 2009 (In thousands)
Guarantor | Non-Guarantor | EM LLC | EDMC | |||||||||||||||||||||||||||||
EM LLC | Subsidiaries | Subsidiaries | Eliminations | Consolidated | EDMC | Eliminations | Consolidated | |||||||||||||||||||||||||
Assets |
||||||||||||||||||||||||||||||||
Current: |
||||||||||||||||||||||||||||||||
Cash and cash equivalents |
$ | 245,086 | $ | 2,301 | $ | 16,544 | $ | | $ | 263,931 | $ | 46,106 | $ | | $ | 310,037 | ||||||||||||||||
Restricted cash |
531 | | 15,475 | | 16,006 | | | 16,006 | ||||||||||||||||||||||||
Notes, advances and trade
receivables, net |
63 | 53 | 91,767 | | 91,883 | 4 | | 91,887 | ||||||||||||||||||||||||
Inventories |
| 90 | 12,482 | | 12,572 | | | 12,572 | ||||||||||||||||||||||||
Other current assets |
29,377 | 624 | 63,293 | | 93,294 | | | 93,294 | ||||||||||||||||||||||||
Total current assets |
275,057 | 3,068 | 199,561 | | 477,686 | 46,110 | | 523,796 | ||||||||||||||||||||||||
Property and equipment, net |
52,434 | 6,481 | 560,038 | | 618,953 | | | 618,953 | ||||||||||||||||||||||||
Intangible assets, net |
2,952 | 68 | 466,526 | | 469,546 | | | 469,546 | ||||||||||||||||||||||||
Goodwill |
7,328 | | 2,571,803 | | 2,579,131 | | | 2,579,131 | ||||||||||||||||||||||||
Intercompany balances |
1,144,441 | (36,215 | ) | (1,508,694 | ) | | (400,468 | ) | 400,468 | | | |||||||||||||||||||||
Other long-term assets |
43,046 | 18,147 | 5,664 | | 66,857 | | | 66,857 | ||||||||||||||||||||||||
Investment in subsidiaries |
1,712,211 | | | (1,712,211 | ) | | 1,486,386 | (1,486,386 | ) | | ||||||||||||||||||||||
Total assets |
$ | 3,237,469 | $ | (8,451 | ) | $ | 2,294,898 | $ | (1,712,211 | ) | $ | 3,811,705 | $ | 1,932,964 | $ | (1,486,386 | ) | $ | 4,258,283 | |||||||||||||
Liabilities and shareholders equity
(deficit) |
||||||||||||||||||||||||||||||||
Current: |
||||||||||||||||||||||||||||||||
Current portion of long-term debt |
$ | 11,851 | $ | | $ | 430 | $ | | $ | 12,281 | $ | | $ | | $ | 12,281 | ||||||||||||||||
Accounts payable, accrued and
other current liabilities |
118,130 | 2,620 | 220,367 | | 341,117 | 186 | | 341,303 | ||||||||||||||||||||||||
Total current liabilities |
129,981 | 2,620 | 220,797 | | 353,398 | 186 | | 353,584 | ||||||||||||||||||||||||
Long-term debt, less current portion |
1,553,084 | | 965 | | 1,554,049 | | | 1,554,049 | ||||||||||||||||||||||||
Other long-term liabilities |
87,512 | 11,785 | 141,179 | | 240,476 | | | 240,476 | ||||||||||||||||||||||||
Deferred income taxes |
(19,494 | ) | (9,521 | ) | 206,411 | | 177,396 | | | 177,396 | ||||||||||||||||||||||
Total liabilities |
1,751,083 | 4,884 | 569,352 | | 2,325,319 | 186 | | 2,325,505 | ||||||||||||||||||||||||
Total shareholders
equity (deficit) |
1,486,386 | (13,335 | ) | 1,725,546 | (1,712,211 | ) | 1,486,386 | 1,932,778 | (1,486,386 | ) | 1,932,778 | |||||||||||||||||||||
Total liabilities and
shareholders equity
(deficit) |
$ | 3,237,469 | $ | (8,451 | ) | $ | 2,294,898 | $ | (1,712,211 | ) | $ | 3,811,705 | $ | 1,932,964 | $ | (1,486,386 | ) | $ | 4,258,283 | |||||||||||||
17
Table of Contents
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
CONDENSED CONSOLIDATED BALANCE SHEET
June 30, 2009 (In thousands)
June 30, 2009 (In thousands)
Guarantor | Non-Guarantor | EM LLC | EDMC | |||||||||||||||||||||||||||||
EM LLC | Subsidiaries | Subsidiaries | Eliminations | Consolidated | EDMC | Eliminations | Consolidated | |||||||||||||||||||||||||
Assets |
||||||||||||||||||||||||||||||||
Current: |
||||||||||||||||||||||||||||||||
Cash and cash equivalents |
$ | 15,789 | $ | 481 | $ | 305,287 | $ | | $ | 321,557 | $ | 41,761 | $ | | $ | 363,318 | ||||||||||||||||
Restricted cash |
789 | | 9,583 | | 10,372 | | | 10,372 | ||||||||||||||||||||||||
Notes, advances and trade
receivables, net |
172 | 35 | 135,738 | | 135,945 | 5 | | 135,950 | ||||||||||||||||||||||||
Inventories |
| | 9,355 | | 9,355 | | | 9,355 | ||||||||||||||||||||||||
Other current assets |
19,056 | 1,213 | 55,058 | | 75,327 | | | 75,327 | ||||||||||||||||||||||||
Total current assets |
35,806 | 1,729 | 515,021 | | 552,556 | 41,766 | | 594,322 | ||||||||||||||||||||||||
Property and equipment, net |
52,190 | 6,137 | 522,638 | | 580,965 | | | 580,965 | ||||||||||||||||||||||||
Intangible assets, net |
3,119 | 61 | 468,702 | | 471,882 | | | 471,882 | ||||||||||||||||||||||||
Goodwill |
7,328 | | 2,571,803 | | 2,579,131 | | | 2,579,131 | ||||||||||||||||||||||||
Intercompany balances |
1,880,889 | (20,819 | ) | (1,859,626 | ) | | 444 | (444 | ) | | | |||||||||||||||||||||
Other long-term assets |
48,447 | 9,764 | 734 | | 58,945 | | 58,945 | |||||||||||||||||||||||||
Investment in subsidiaries |
1,590,364 | | | (1,590,364 | ) | | 1,444,515 | (1,444,515 | ) | | ||||||||||||||||||||||
Total assets |
$ | 3,618,143 | $ | (3,128 | ) | $ | 2,219,272 | $ | (1,590,364 | ) | $ | 4,243,923 | $ | 1,485,837 | $ | (1,444,515 | ) | $ | 4,285,245 | |||||||||||||
Liabilities and shareholders
equity (deficit) |
||||||||||||||||||||||||||||||||
Current: |
||||||||||||||||||||||||||||||||
Current portion of long-term
debt |
$ | 111,911 | $ | | $ | 711 | $ | | $ | 112,622 | $ | | $ | | $ | 112,622 | ||||||||||||||||
Accounts payable, accrued and
other current liabilities |
111,694 | 4,739 | 291,159 | | 407,592 | 185 | | 407,777 | ||||||||||||||||||||||||
Total current liabilities |
223,605 | 4,739 | 291,870 | | 520,214 | 185 | | 520,399 | ||||||||||||||||||||||||
Long-term debt, less current portion |
1,874,921 | | 1,100 | | 1,876,021 | | | 1,876,021 | ||||||||||||||||||||||||
Other long-term liabilities |
91,124 | 4,649 | 119,817 | | 215,590 | (1 | ) | | 215,589 | |||||||||||||||||||||||
Deferred income taxes |
(16,022 | ) | 72 | 203,533 | | 187,583 | | | 187,583 | |||||||||||||||||||||||
Total liabilities |
2,173,628 | 9,460 | 616,320 | | 2,799,408 | 184 | | 2,799,592 | ||||||||||||||||||||||||
Total shareholders
equity (deficit) |
1,444,515 | (12,588 | ) | 1,602,952 | (1,590,364 | ) | 1,444,515 | 1,485,653 | (1,444,515 | ) | 1,485,653 | |||||||||||||||||||||
Total liabilities and
shareholders equity
(deficit) |
$ | 3,618,143 | $ | (3,128 | ) | $ | 2,219,272 | $ | (1,590,364 | ) | $ | 4,243,923 | $ | 1,485,837 | $ | (1,444,515 | ) | $ | 4,285,245 | |||||||||||||
18
Table of Contents
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
CONDENSED CONSOLIDATED BALANCE SHEET
December 31, 2008 (In thousands)
December 31, 2008 (In thousands)
Guarantor | Non-Guarantor | EM LLC | EDMC | |||||||||||||||||||||||||||||
EM LLC | Subsidiaries | Subsidiaries | Eliminations | Consolidated | EDMC | Eliminations | Consolidated | |||||||||||||||||||||||||
Assets |
||||||||||||||||||||||||||||||||
Current: |
||||||||||||||||||||||||||||||||
Cash and cash equivalents |
$ | 266,970 | $ | 168 | $ | 3,737 | $ | | $ | 270,875 | $ | 41,647 | $ | | $ | 312,522 | ||||||||||||||||
Restricted cash |
1,216 | | 10,976 | | 12,192 | | | 12,192 | ||||||||||||||||||||||||
Notes, advances and trade
receivables, net |
377 | 55 | 74,345 | | 74,777 | 24 | | 74,801 | ||||||||||||||||||||||||
Inventories |
| | 9,680 | | 9,680 | | | 9,680 | ||||||||||||||||||||||||
Other current assets |
13,256 | 539 | 42,418 | | 56,213 | | | 56,213 | ||||||||||||||||||||||||
Total current assets |
281,819 | 762 | 141,156 | | 423,737 | 41,671 | | 465,408 | ||||||||||||||||||||||||
Property and equipment, net |
48,205 | 6,101 | 470,764 | | 525,070 | | | 525,070 | ||||||||||||||||||||||||
Intangible assets, net |
444 | 63 | 476,522 | | 477,029 | | | 477,029 | ||||||||||||||||||||||||
Goodwill |
8,075 | | 2,570,823 | | 2,578,898 | | | 2,578,898 | ||||||||||||||||||||||||
Intercompany balances |
1,735,137 | (16,581 | ) | (1,718,112 | ) | | 444 | (444 | ) | | | |||||||||||||||||||||
Other long-term assets |
51,491 | | 5,331 | | 56,822 | | | 56,822 | ||||||||||||||||||||||||
Investment in subsidiaries |
1,480,514 | | | (1,480,514 | ) | | 1,368,119 | (1,368,119 | ) | | ||||||||||||||||||||||
Total assets |
$ | 3,605,685 | $ | (9,655 | ) | $ | 1,946,484 | $ | (1,480,514 | ) | $ | 4,062,000 | $ | 1,409,346 | $ | (1,368,119 | ) | $ | 4,103,227 | |||||||||||||
Liabilities and shareholders
equity (deficit) |
||||||||||||||||||||||||||||||||
Current: |
||||||||||||||||||||||||||||||||
Current portion of long-term
debt |
$ | 191,913 | $ | | $ | 845 | $ | | $ | 192,758 | $ | | $ | | $ | 192,758 | ||||||||||||||||
Accounts payable, accrued and
other current liabilities |
75,712 | 1,809 | 169,631 | | 247,152 | 186 | | 247,338 | ||||||||||||||||||||||||
Total current liabilities |
267,625 | 1,809 | 170,476 | | 439,910 | 186 | | 440,096 | ||||||||||||||||||||||||
Long-term debt, less current portion |
1,880,858 | | 1,340 | | 1,882,198 | | | 1,882,198 | ||||||||||||||||||||||||
Other long-term liabilities |
110,426 | 45 | 96,363 | | 206,834 | | | 206,834 | ||||||||||||||||||||||||
Deferred income taxes |
(21,343 | ) | 72 | 186,210 | | 164,939 | | | 164,939 | |||||||||||||||||||||||
Total liabilities |
2,237,566 | 1,926 | 454,389 | | 2,693,881 | 186 | | 2,694,067 | ||||||||||||||||||||||||
Total shareholders
equity (deficit) |
1,368,119 | (11,581 | ) | 1,492,095 | (1,480,514 | ) | 1,368,119 | 1,409,160 | (1,368,119 | ) | 1,409,160 | |||||||||||||||||||||
Total liabilities and
shareholders equity
(deficit) |
$ | 3,605,685 | $ | (9,655 | ) | $ | 1,946,484 | $ | (1,480,514 | ) | $ | 4,062,000 | $ | 1,409,346 | $ | (1,368,119 | ) | $ | 4,103,227 | |||||||||||||
19
Table of Contents
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
CONSOLIDATED STATEMENT OF OPERATIONS
For the Three Months Ended December 31, 2009 (In thousands)
For the Three Months Ended December 31, 2009 (In thousands)
Guarantor | Non-Guarantor | EM LLC | EDMC | |||||||||||||||||||||||||||||
EM LLC | Subsidiaries | Subsidiaries | Eliminations | Consolidated | EDMC | Eliminations | Consolidated | |||||||||||||||||||||||||
Net revenues |
$ | | $ | (3,254 | ) | $ | 658,723 | $ | | $ | 655,469 | $ | | $ | | $ | 655,469 | |||||||||||||||
Costs and expenses: |
||||||||||||||||||||||||||||||||
Educational services |
17,201 | (2,000 | ) | 300,065 | | 315,266 | | | 315,266 | |||||||||||||||||||||||
General and administrative |
(14,895 | ) | (29 | ) | 185,171 | | 170,247 | 58 | | 170,305 | ||||||||||||||||||||||
Management fees paid to affiliates |
30,805 | | | | 30,805 | | | 30,805 | ||||||||||||||||||||||||
Depreciation and amortization |
4,449 | 64 | 24,888 | | 29,401 | | | 29,401 | ||||||||||||||||||||||||
Total costs and expenses |
37,560 | (1,965 | ) | 510,124 | | 545,719 | 58 | | 545,777 | |||||||||||||||||||||||
Income (loss) before interest and income taxes |
(37,560 | ) | (1,289 | ) | 148,599 | | 109,750 | (58 | ) | | 109,692 | |||||||||||||||||||||
Interest expense, net |
29,612 | 85 | 722 | | 30,419 | (29 | ) | | 30,390 | |||||||||||||||||||||||
Loss on early retirement of debt |
44,762 | | | | 44,762 | | | 44,762 | ||||||||||||||||||||||||
Equity in earnings of subsidiaries |
(86,942 | ) | | | 86,942 | | (20,291 | ) | 20,291 | | ||||||||||||||||||||||
Income (loss) before income taxes |
(24,992 | ) | (1,374 | ) | 147,877 | (86,942 | ) | 34,569 | 20,262 | (20,291 | ) | 34,540 | ||||||||||||||||||||
Provision for (benefit from) income taxes |
(45,283 | ) | (546 | ) | 60,107 | | 14,278 | (12 | ) | | 14,266 | |||||||||||||||||||||
Net income (loss) |
$ | 20,291 | $ | (828 | ) | $ | 87,770 | $ | (86,942 | ) | $ | 20,291 | $ | 20,274 | $ | (20,291 | ) | $ | 20,274 | |||||||||||||
CONSOLIDATED STATEMENT OF OPERATIONS
For the Three Months Ended December 31, 2008 (In thousands)
For the Three Months Ended December 31, 2008 (In thousands)
Guarantor | Non-Guarantor | EM LLC | EDMC | |||||||||||||||||||||||||||||
EM LLC | Subsidiaries | Subsidiaries | Eliminations | Consolidated | EDMC | Eliminations | Consolidated | |||||||||||||||||||||||||
Net revenues |
$ | | $ | 1,902 | $ | 520,316 | $ | | $ | 522,218 | $ | | $ | | $ | 522,218 | ||||||||||||||||
Costs and expenses: |
||||||||||||||||||||||||||||||||
Educational services |
11,394 | 1,499 | 252,725 | | 265,618 | | | 265,618 | ||||||||||||||||||||||||
General and administrative |
(16,314 | ) | 725 | 136,146 | | 120,557 | 57 | | 120,614 | |||||||||||||||||||||||
Management fees paid to affiliates |
1,250 | | | | 1,250 | | | 1,250 | ||||||||||||||||||||||||
Depreciation and amortization |
3,801 | 91 | 23,683 | | 27,575 | | | 27,575 | ||||||||||||||||||||||||
Total costs and expenses |
131 | 2,315 | 412,554 | | 415,000 | 57 | | 415,057 | ||||||||||||||||||||||||
Income (loss) before interest and income
taxes |
(131 | ) | (413 | ) | 107,762 | | 107,218 | (57 | ) | | 107,161 | |||||||||||||||||||||
Interest expense, net |
39,802 | | 734 | | 40,536 | (81 | ) | | 40,455 | |||||||||||||||||||||||
Equity in earnings of subsidiaries |
(68,436 | ) | | | 68,436 | | (42,327 | ) | 42,327 | | ||||||||||||||||||||||
Income (loss) before income taxes |
28,503 | (413 | ) | 107,028 | (68,436 | ) | 66,682 | 42,351 | (42,327 | ) | 66,706 | |||||||||||||||||||||
Provision for (benefit from) income taxes |
(13,824 | ) | (154 | ) | 38,333 | | 24,355 | 49 | | 24,404 | ||||||||||||||||||||||
Net income (loss) |
$ | 42,327 | $ | (259 | ) | $ | 68,695 | $ | (68,436 | ) | $ | 42,327 | $ | 42,302 | $ | (42,327 | ) | $ | 42,302 | |||||||||||||
20
Table of Contents
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
CONSOLIDATED STATEMENT OF OPERATIONS
For the Six Months Ended December 31, 2009 (In thousands)
For the Six Months Ended December 31, 2009 (In thousands)
Guarantor | Non-Guarantor | EM LLC | EDMC | |||||||||||||||||||||||||||||
EM LLC | Subsidiaries | Subsidiaries | Eliminations | Consolidated | EDMC | Eliminations | Consolidated | |||||||||||||||||||||||||
Net revenues |
$ | | $ | (3,459 | ) | $ | 1,193,327 | $ | | $ | 1,189,868 | $ | | $ | | $ | 1,189,868 | |||||||||||||||
Costs and expenses: |
||||||||||||||||||||||||||||||||
Educational services |
26,174 | (2,526 | ) | 587,331 | | 610,979 | | | 610,979 | |||||||||||||||||||||||
General and administrative |
(34,706 | ) | 391 | 351,363 | | 317,048 | 114 | | 317,162 | |||||||||||||||||||||||
Management fees paid to affiliates |
32,055 | | | | 32,055 | | | 32,055 | ||||||||||||||||||||||||
Depreciation and amortization |
8,902 | 127 | 49,199 | | 58,228 | | | 58,228 | ||||||||||||||||||||||||
Total costs and expenses |
32,425 | (2,008 | ) | 987,893 | | 1,018,310 | 114 | | 1,018,424 | |||||||||||||||||||||||
Income (loss) before interest and income
taxes |
(32,425 | ) | (1,451 | ) | 205,434 | | 171,558 | (114 | ) | | 171,444 | |||||||||||||||||||||
Interest (income) expense, net |
65,523 | (208 | ) | 1,442 | | 66,757 | (38 | ) | | 66,719 | ||||||||||||||||||||||
Loss on early retirement of debt |
44,762 | | | | 44,762 | | | 44,762 | ||||||||||||||||||||||||
Equity in earnings of subsidiaries |
(121,847 | ) | | | 121,847 | | (36,082 | ) | 36,082 | | ||||||||||||||||||||||
Income (loss) before income taxes |
(20,863 | ) | (1,243 | ) | 203,992 | (121,847 | ) | 60,039 | 36,006 | (36,082 | ) | 59,963 | ||||||||||||||||||||
Provision for (benefit from) income taxes |
(56,945 | ) | (496 | ) | 81,398 | | 23,957 | (30 | ) | | 23,927 | |||||||||||||||||||||
Net income (loss) |
$ | 36,082 | $ | (747 | ) | $ | 122,594 | $ | (121,847 | ) | $ | 36,082 | $ | 36,036 | $ | (36,082 | ) | $ | 36,036 | |||||||||||||
CONSOLIDATED STATEMENT OF OPERATIONS
For the Six Months Ended December 31, 2008 (In thousands)
For the Six Months Ended December 31, 2008 (In thousands)
Guarantor | Non-Guarantor | EM LLC | EDMC | |||||||||||||||||||||||||||||
EM LLC | Subsidiaries | Subsidiaries | Eliminations | Consolidated | EDMC | Eliminations | Consolidated | |||||||||||||||||||||||||
Net revenues |
$ | | $ | 5,230 | $ | 951,216 | $ | | $ | 956,446 | $ | | $ | | $ | 956,446 | ||||||||||||||||
Costs and expenses: |
||||||||||||||||||||||||||||||||
Educational services |
22,155 | 3,859 | 493,116 | | 519,130 | | | 519,130 | ||||||||||||||||||||||||
General and administrative |
(30,442 | ) | 1,497 | 269,554 | | 240,609 | 114 | | 240,723 | |||||||||||||||||||||||
Management fees paid to affiliates |
2,500 | | | | 2,500 | | | 2,500 | ||||||||||||||||||||||||
Depreciation and amortization |
7,518 | 91 | 46,570 | | 54,179 | | | 54,179 | ||||||||||||||||||||||||
Total costs and expenses |
1,731 | 5,447 | 809,240 | | 816,418 | 114 | | 816,532 | ||||||||||||||||||||||||
Income (loss) before interest and income
taxes |
(1,731 | ) | (217 | ) | 141,976 | | 140,028 | (114 | ) | | 139,914 | |||||||||||||||||||||
Interest expense, net |
77,389 | | 1,467 | | 78,856 | (242 | ) | | 78,614 | |||||||||||||||||||||||
Equity in earnings of subsidiaries |
(89,259 | ) | | | 89,259 | | (38,920 | ) | 38,920 | | ||||||||||||||||||||||
Income (loss) before income taxes |
10,139 | (217 | ) | 140,509 | (89,259 | ) | 61,172 | 39,048 | (38,920 | ) | 61,300 | |||||||||||||||||||||
Provision for (benefit from) income taxes |
(28,781 | ) | (79 | ) | 51,112 | | 22,252 | 49 | | 22,301 | ||||||||||||||||||||||
Net income (loss) |
$ | 38,920 | $ | (138 | ) | $ | 89,397 | $ | (89,259 | ) | $ | 38,920 | $ | 38,999 | $ | (38,920 | ) | $ | 38,999 | |||||||||||||
21
Table of Contents
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the Six Months Ended December 31, 2009 (In thousands)
For the Six Months Ended December 31, 2009 (In thousands)
Guarantor | Non-Guarantor | EM LLC | EDMC | |||||||||||||||||||||
EM LLC | Subsidiaries | Subsidiaries | Consolidated | EDMC | Consolidated | |||||||||||||||||||
Net cash flows provided by (used in) operations |
$ | (33,830 | ) | $ | (3,542 | ) | $ | 137,635 | $ | 100,263 | $ | 161 | $ | 100,424 | ||||||||||
Cash flows from investing activities |
||||||||||||||||||||||||
Expenditures for long-lived assets |
(5,915 | ) | (731 | ) | (63,180 | ) | (69,826 | ) | | (69,826 | ) | |||||||||||||
Other investing activities |
| | (7,421 | ) | (7,421 | ) | | (7,421 | ) | |||||||||||||||
Net cash flows used in investing activities |
(5,915 | ) | (731 | ) | (70,601 | ) | (77,247 | ) | | (77,247 | ) | |||||||||||||
Cash flows from financing activities |
||||||||||||||||||||||||
Net repayments of debt and other |
(463,793 | ) | | (416 | ) | (464,209 | ) | | (464,209 | ) | ||||||||||||||
Net proceeds from issuance of common stock, including
stock-based compensation |
| | | | 387,825 | 387,825 | ||||||||||||||||||
Intercompany transactions |
732,835 | 6,093 | (355,287 | ) | 383,641 | (383,641 | ) | | ||||||||||||||||
Net cash flows provided by (used in) financing activities |
269,042 | 6,093 | (355,703 | ) | (80,568 | ) | 4,184 | (76,384 | ) | |||||||||||||||
Effect of exchange rate changes on cash and cash equivalents |
| | (74 | ) | (74 | ) | | (74 | ) | |||||||||||||||
Increase (decrease) in cash and cash equivalents |
229,297 | 1,820 | (288,743 | ) | (57,626 | ) | 4,345 | (53,281 | ) | |||||||||||||||
Beginning cash and cash equivalents |
15,789 | 481 | 305,287 | 321,557 | 41,761 | 363,318 | ||||||||||||||||||
Ending cash and cash equivalents |
$ | 245,086 | $ | 2,301 | $ | 16,544 | $ | 263,931 | $ | 46,106 | $ | 310,037 | ||||||||||||
22
Table of Contents
EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the Six Months Ended December 31, 2008 (In thousands)
For the Six Months Ended December 31, 2008 (In thousands)
Guarantor | Non-Guarantor | EM LLC | EDMC | |||||||||||||||||||||
EM LLC | Subsidiaries | Subsidiaries | Consolidated | EDMC | Consolidated | |||||||||||||||||||
Net cash flows provided by (used in) operations |
$ | (42,497 | ) | $ | (2,176 | ) | $ | 114,802 | $ | 70,129 | $ | 266 | $ | 70,395 | ||||||||||
Cash flows from investing activities |
||||||||||||||||||||||||
Expenditures for long-lived assets |
(7,193 | ) | (910 | ) | (70,243 | ) | (78,346 | ) | | (78,346 | ) | |||||||||||||
Other investing activities |
| | (11,543 | ) | (11,543 | ) | | (11,543 | ) | |||||||||||||||
Net cash flows used in investing activities |
(7,193 | ) | (910 | ) | (81,786 | ) | (89,889 | ) | | (89,889 | ) | |||||||||||||
Cash flows from financing activities |
||||||||||||||||||||||||
Net repayments of debt and other |
54,065 | (1 | ) | (553 | ) | 53,511 | | 53,511 | ||||||||||||||||
Intercompany transactions |
260,284 | 3,120 | (263,404 | ) | | | | |||||||||||||||||
Net cash flows provided by (used in) financing activities |
314,349 | 3,119 | (263,957 | ) | 53,511 | | 53,511 | |||||||||||||||||
Effect of exchange rate changes on cash and cash
equivalents |
| | 1,097 | 1,097 | | 1,097 | ||||||||||||||||||
Increase (decrease) in cash and cash equivalents |
264,659 | 33 | (229,844 | ) | 34,848 | 266 | 35,114 | |||||||||||||||||
Beginning cash and cash equivalents |
2,311 | 135 | 233,581 | 236,027 | 41,381 | 277,408 | ||||||||||||||||||
Ending cash and cash equivalents |
$ | 266,970 | $ | 168 | $ | 3,737 | $ | 270,875 | $ | 41,647 | $ | 312,522 | ||||||||||||
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ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Results of Operations
The
following table presents the relationship of each item in the
consolidated statements of operations for the three and six month
periods ended December 31, 2009 and 2008 as a percentage of net
revenues.
For the Three Months | For the Six Months | |||||||||||||||
Ended December 31, | Ended December 31, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net revenues |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Costs and expenses: |
||||||||||||||||
Educational services |
48.1 | % | 50.9 | % | 51.3 | % | 54.3 | % | ||||||||
General and administrative |
26.0 | % | 23.1 | % | 26.7 | % | 25.1 | % | ||||||||
Management fees paid to affiliates |
4.7 | % | 0.2 | % | 2.7 | % | 0.3 | % | ||||||||
Depreciation and amortization |
4.5 | % | 5.3 | % | 4.9 | % | 5.7 | % | ||||||||
Total costs and expenses |
83.3 | % | 79.5 | % | 85.6 | % | 85.4 | % | ||||||||
Income before interest, loss on early retirement of debt and income taxes |
16.7 | % | 20.5 | % | 14.4 | % | 14.6 | % | ||||||||
Interest expense, net |
4.6 | % | 7.7 | % | 5.6 | % | 8.2 | % | ||||||||
Loss on early retirement of debt |
6.8 | % | 0.0 | % | 3.8 | % | 0.0 | % | ||||||||
Income before income taxes |
5.3 | % | 12.8 | % | 5.0 | % | 6.4 | % | ||||||||
Provision for income taxes |
2.2 | % | 4.7 | % | 2.0 | % | 2.3 | % | ||||||||
Net income |
3.1 | % | 8.1 | % | 3.0 | % | 4.1 | % | ||||||||
Three months ended December 31, 2009 compared to the three months ended
December 31, 2008
All basis point changes are presented as a percentage of net revenues in each period of
comparison.
Net revenues
Net revenues for the three months ended December 31, 2009 increased 25.5% to $655.5
million, compared to $522.2 million in the same period a year ago. The October starting student
enrollment increased 22.7% in the current year quarter compared to the prior year quarter due
primarily to growth at existing schools aided by the introduction of new academic programs, the
growth in our fully online programs and the opening of new school locations. In addition, tuition
rates increased approximately 6% in the current quarter compared to the fiscal 2009 quarter. These factors
were partially offset by a lower average credit load taken by students. The decrease in credit load
was primarily the result of growth in the number of students enrolled in fully online programs, in
which students typically take a lesser credit load than onground students. None of the increase in
student enrollment was due to acquisitions of schools. Tuition revenue generally varies based on
the average tuition charge per credit hour, average credits per student and the average student
population.
Our quarterly net revenues and net income fluctuate primarily as a result of the pattern of
student enrollments at our schools. The seasonality of our business has decreased over the last
several years due to an increased percentage of students enrolling in online programs, which
generally experience less seasonal fluctuations than campus-based programs. Our first fiscal
quarter is typically our lowest revenue recognition quarter due to student vacations.
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Educational services expense
Educational services expense consists primarily of costs related to the development,
delivery and administration of our education programs. The major cost components include faculty
compensation, salaries of administrative and student services staff, costs of educational
materials, facility occupancy costs, information systems costs, loan fees and bad debt expense.
Educational services expense increased by $49.6 million, or 18.7%, to $315.3 million in
the current quarter due primarily to the incremental costs incurred to support higher student
enrollment. As a percentage of net revenues, educational services expense decreased by 277 basis
points from the quarter ended December 31, 2008 to the current quarter.
Salaries and benefits expense decreased by 170 basis points from the prior year quarter. This
decrease was primarily due to operating leverage at existing onground campuses, partially offset by
an increase in these costs for our fully online programs and $2.2 million in non-recurring
stock-based compensation costs recognized in connection with the initial public offering. We also
experienced operating leverage on rent associated with our schools, which decreased 72 basis points
as a percentage of net revenues to $41.9 million in the current quarter from $37.1
million in the prior year quarter. Additionally, costs related to outside services, insurance,
travel and utilities decreased 58 basis points in the current quarter compared to the prior year
quarter. We also experienced a decrease of 19 basis points from the prior year quarter in fees paid
to private lenders to originate loans obtained by our students.
Bad debt expense was $27.4 million, or 4.2% of net revenues, in the current quarter compared to
$17.1 million, or 3.3% of net revenues, in the prior period, which represented an increase of 90
basis points. The increase in bad debt expense as a percentage of net revenues was primarily due to
larger receivable balances as a result of our assistance with students cost of education, higher
delinquency rates, prevailing economic conditions and an increase in the proportion of our
receivables from out-of-school students, which are reserved for at a higher rate than receivables
from in-school students. In addition, allowances recorded in connection with our Education Finance
Loan program negatively impacted bad debt expense. The remaining net decrease of 48 basis points in
educational services expense in the current quarter was the result of a decrease in other costs,
none of which were individually significant.
General and administrative expense
General and administrative expense consists of marketing and student admissions expenses
and certain central staff departmental costs such as executive management, finance and accounting,
legal, corporate development and other departments that do not provide direct services to our
students.
General and administrative expense was $170.3 million for the current quarter, an increase
of 41.2% from $120.6 million in the prior year quarter. As a percentage of net revenues, general and
administrative expense increased 289 basis points compared to the quarter ended December 31, 2008.
During the current quarter, we incurred non-cash equity-based compensation expense of $13.1
million in connection with the initial public offering. This expense was previously deferred due
to the existence of certain conditions associated with the options which were removed upon the
completion of the initial public offering. We also incurred $0.9 million of legal costs and other fees
associated with the repurchase of the Senior Subordinated Notes.
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After adjusting for non-recurring costs incurred in connection with the initial public
offering and repurchase of the Senior Subordinated Notes, general and administrative expense
increased by 75 basis points in the current quarter compared to the prior year quarter. This was
primarily the result of an increase in salaries and benefits not related to marketing and
admissions of 47 basis points compared to the prior year quarter and recurring non-cash
equity-based compensation expense of $1.7 million, which accounted for a 26 basis point increase
compared to the prior year quarter. These increases were partially offset by a 7 basis point
decrease in total marketing and admissions costs, which were 20.6% of net revenues in the current
quarter compared to 20.7% of net revenues in the prior year quarter. The remaining net increase of
nine basis points in the current quarter was the result of increases in other costs, none of which
were individually significant.
Management fees paid to affiliates
For the quarter ended December 31, 2009,
management fees paid to affiliates consisted of the pro-rata portion of the $5.0 million annual
fee paid to the Sponsors under an agreement executed in connection
with the Transaction and a
non-recurring fee of $29.6 million to terminate the agreement which was paid at the
time of the initial public offering .
Depreciation and amortization expense
Depreciation and amortization expense on long-lived assets was $29.4 million in the
current quarter, an increase of 6.6% from the prior year quarter. As a percentage of net revenues,
depreciation and amortization expense decreased by 79 basis points compared to the prior year quarter,
due in part to a reduction in amortization of intangible assets due
primarily to the expiration in June 2009 of an intangible asset recorded in connection with the
Transaction.
Interest expense, net
Net interest expense was $30.4 million in the current quarter, a decrease of $10.1 million
from the prior year quarter. The decrease in net interest expense is primarily related to the early
retirement of $316.0 million of the Senior Subordinated Notes in connection with the initial public
offering in October 2009 and a lower interest rate on our term loan during the current quarter
compared to the prior year quarter.
Loss on early retirement of debt
In connection with the initial public offering, we retired $316.0 million of the Senior
Subordinated Notes in a tender offer at a premium of $39.5 million. We also accelerated
amortization on the deferred financing fees that related to these notes for $5.3 million.
Provision for income taxes
The provision for income taxes for the three months ended December 31, 2009 was $14.2
million, as compared to $24.4 million for the same period in the prior year. Our effective tax
rate was 41.3% for the three months ended December 31, 2009 as compared to 36.6% for the same
period in the prior year. The increase in effective tax rates from the same period in the prior
year was primarily due to two non-recurring benefits recorded in the second
quarter of fiscal 2009 related to an adjustment to the tax basis of certain intangible assets and
the release of valuation allowances previously recorded against our Canadian deferred tax assets.
The effective tax rates differed from the combined federal and state statutory rates
due primarily to valuation allowances, expenses that are non-deductible for tax purposes, and accounting for
uncertain tax positions.
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Six months ended December 31, 2009 compared to the six months ended December 31,
2008
All basis point changes are presented as a percentage of net revenues in each period of
comparison.
Net revenues
Net revenues for the six months ended December 31, 2009 increased 24.4% to $1,189.9
million, compared to $956.4 million in the same period a year ago. Average student enrollment
increased 22.9% in the current year period compared to the prior year period primarily due to
growth at existing schools aided by the introduction of new academic programs, the growth in our
fully online programs and the opening of new school locations. In addition, tuition rates increased
approximately 6% in the current period compared to the prior year period. These factors were partially
offset by a lower average credit load taken by students. The decrease in credit load was primarily
the result of growth in the number of students enrolled in fully online programs, in which students
typically take a lesser credit load than onground students. None of the increase in student
enrollment was due to acquisitions of schools.
Educational services expense
Educational services expense increased by $91.8 million, or 17.7%, to $611.0 million in
the current
year period due primarily to the incremental costs incurred to support higher student
enrollment. As a percentage of net revenues, educational services expense decreased by 293 basis
points in the current six month period compared to the six months ended December 31, 2008.
Salaries and benefits expense decreased by 170 basis points from the prior year
period due primarily to operating leverage at existing onground campuses, partially offset by an
increase in these costs for our fully online programs and $2.2 million in non-recurring stock-based
compensation costs recognized in connection with the initial public offering. We also experienced
operating leverage on rent associated with our schools, which decreased 65 basis points as a
percentage of net revenues to $82.3 million in the current year period from $72.4 million in the
prior year period. Additionally, costs related to outside services, insurance, travel and
utilities decreased 55 basis points in the current period compared to the prior year period. We
also experienced a decrease of 14 basis points from the prior year period in fees paid to private
lenders to originate loans obtained by our students.
Bad debt expense was $50.6 million, or 4.2% of net revenues, in the current period compared to
$35.1 million, or 3.7% of net revenues, in the prior year period, which represented an increase of 58
basis points. The increase in bad debt expense as a percentage of net revenues was primarily due to
larger receivable balances as a result of our assistance with students cost of education, higher
delinquency rates, prevailing economic conditions and an increase in the proportion of our
receivables from out-of-school students, which are reserved for at a higher rate than in-school
students. In addition, allowances recorded in connection with our Education Finance Loan program
negatively impacted bad debt expense. The remaining net decrease of 47 basis points in educational
services expense in the current period was the result of a decrease in other costs, none of which
were individually significant.
General and administrative expense
General and administrative expense was $317.2 million for the current period, an increase
of 31.8% from $240.7 million in the prior year period. As a percentage of net revenues, general and
administrative expense increased 149 basis points compared with the prior year period. During the
current period, we incurred non-cash equity-based compensation expense of $13.1 million in
connection with the initial public offering. This expense was previously deferred due to the
existence of certain conditions associated with the options which were removed upon the completion
of the initial public offering. We also incurred $0.9 million of legal costs and other fees associated with the
repurchase of the Senior Subordinated Notes.
After adjusting for non-recurring costs incurred in connection with the initial public
offering and repurchase of the Senior Subordinated Notes, general and administrative expense
increased by 31 basis points in the current period compared to the prior year period. This was
primarily the result of an increase in salaries and benefits not
related to marketing and admissions of 30 basis points compared to the
prior year period and recurring non-cash stock-based compensation
expense of $1.7 million, which accounted for a 14 basis point increase
compared to the prior year period. Marketing and admissions
costs were 22.1% of net revenues in the current six month period compared to 22.3% of net revenues
in the prior year period, or a decrease of 15 basis points. The remaining net increase of two basis
points in the current six-month period was the result of increases in other costs, none of which were
individually significant.
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Management fees paid to affiliates
For
the quarter ended December 31, 2009,
management fees paid to affiliates consisted of the pro-rata portion of the $5.0 million annual
fee paid to the Sponsors under an agreement executed in connection
with the Transaction and a
non-recurring fee of $29.6 million to terminate the agreement which was paid at the
time of the initial public offering.
Depreciation and amortization expense
Depreciation and amortization expense on long-lived assets was $58.2 million in the
current period,
an increase of 7.5% from the prior year period. As a percentage of net revenues, depreciation and
amortization expense decreased by 77 basis points compared to the prior year period, due in part to
a reduction in amortization of intangible assets due primarily to the
expiration in June 2009 of an intangible asset recorded in connection with the Transaction.
Interest expense, net
Net interest expense was $66.7 million in the current period, a decrease of $11.9 million
from the prior year period. The decrease in net interest expense is primarily related to the early
retirement of $316.0 million of the Senior Subordinated Notes in connection with the initial public
offering in October 2009 and a lower interest rate on our term loan during the current year period
compared to the prior year period.
Loss on early retirement of debt
In connection with the initial public offering, we retired $316.0 million of the Senior
Subordinated Notes in a tender offer at a premium of $39.5 million. We also accelerated
amortization on the deferred financing fees that related to these notes for $5.3 million.
Provision for income taxes
The provision for income taxes for the six months ended December 31, 2009 was $24.0
million as compared to $22.3 million for the same period in the prior year. Our effective tax rate
was 39.9% for the six months ended December 31, 2009 as compared to 36.4% for the same period in
the prior year. The increase in effective tax rates from the same period in the prior year is
primarily due to two non-recurring benefits recorded in the second quarter of
fiscal 2009 related to an adjustment to the tax basis of certain intangible assets and the release
of valuation allowances previously recorded against our Canadian deferred tax assets.
The effective tax rates differed from the combined federal and state statutory rates
due primarily to valuation allowances, expenses that are non-deductible for tax purposes, and accounting for
uncertain tax positions.
Liquidity and Funds of Capital Resources
We finance our operating activities primarily from cash generated from operations, and our
primary source of cash is tuition collected from our students. We believe that cash flow from
operations, supplemented from time to time with borrowings under our $442.5 million revolving
credit facility, will provide adequate funds for ongoing operations, planned expansion to new
locations, planned capital expenditures, debt service and acquisitions during the next
twelve months.
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Net working capital is calculated as total current assets less total current liabilities.
Advance payments and amounts outstanding under our revolving credit facility do not contribute to
any changes in net working capital as these liabilities are directly offset in current assets. We
had working capital of $170.2 million and $25.3 million at December 31, 2009 and 2008,
respectively. The increase in working capital is primarily due to improved operating performance
since December 31, 2008.
Operating cash flows
Cash flow from operations for the six month period ended December 31, 2009 was $100.4
million, including a non-recurring $29.6 million outflow to terminate the Sponsor management
agreement in connection with the initial public offering, compared to $70.4 million in the prior
year period. The increase in operating cash flows as compared to the prior year period was
primarily related to improved operating performance compared to the prior year period and a
reduction of $15.0 million in the amount of interest paid on our debt compared to the prior year
period as a result of the debt repurchase.
Days sales outstanding (DSO) in receivables remained flat at 12.8 days at December 31, 2009
compared to 12.9 days at December 31, 2008. We calculate DSO by dividing net student and other
receivables at period end by average daily net revenues for the most recently completed quarter.
Net accounts receivable can be affected significantly by the changes in the start dates of academic
terms from reporting period to reporting period. There were no significant changes to the start
dates of academic terms in session as compared to the prior year.
The level of accounts receivable reaches a peak immediately after the billing of tuition and
fees at the beginning of each academic term. Collection of these receivables is heaviest at the
start of each academic term. Additionally, federal financial aid proceeds for continuing students
can be received up to ten days prior to the start of an academic term, which can result in
fluctuations in quarterly cash receipts due to the timing of the start of academic terms.
In an effort to provide our students with financing for the cost of tuition, we have
established relationships with alternative or private loan providers. Private loans help bridge the
funding gap created by tuition rates that have risen more quickly than federally-guaranteed student
loans. In addition, we introduced the Education Finance Loan program in August 2008, which enables
students who have exhausted all available government-sponsored or other aid and have been denied a
private loan to borrow a portion of their tuition and other educational expenses at our schools if
they or a co-borrower meet certain eligibility and underwriting criteria. We purchased loans
totaling $22.6 million during the six-month period ended December 31, 2009 related to the Education
Finance Loan program.
We have accrued a total of $23.7 million as of December 31, 2009 for uncertain tax
positions, excluding interest and the indirect benefits associated with state income taxes. Future
cash payments relating to the amount accrued may result if we are ultimately unsuccessful in
defending these uncertain tax positions. However, we cannot reasonably predict at this time the
future period in which these payments may occur.
Investing cash flows
Capital expenditures were $69.8 million, or 5.9% of net revenues, in the six month period
ended December 31, 2009, compared to $78.3 million, or 8.2% of net revenues, in the prior year
period. The decrease in capital expenditures as a percentage of net revenues during the fiscal 2010
period as compared to the prior year period was primarily due to the timing of spending on start-up
school projects and existing school expansions. During fiscal 2010, we will continue to invest both in new facilities and in the
expansion of existing facilities. We expect capital expenditures in fiscal 2010 to be approximately 7.0% of net revenues compared to 7.5% of net revenues in fiscal 2009.
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Reimbursements for tenant improvements represent cash received from lessors based on the terms
of lease agreements to be used for leasehold improvements. We lease most of our facilities under
operating lease agreements. We anticipate that future commitments on existing leases will be
satisfied from cash provided from operating activities. We also expect to extend the terms of
leases that will expire in the near future or enter into similar long-term commitments for
comparable space.
Financing cash flows
In October 2009, we consummated an initial public offering of 23.0 million shares of our
common stock for net proceeds of approximately $387.3 million. The proceeds were primarily used to
purchase $316.0 million of the Senior Subordinated Notes in a tender offer for
$355.5 million and to pay $29.6 million to terminate a management agreement entered into with the
Sponsors in connection with the Transaction.
As a result of the Transaction, we are highly leveraged and our debt service requirements are
significant. At December 31, 2009, we had $1,566.3 million in aggregate indebtedness outstanding.
After giving effect to outstanding letters of credit and amounts drawn under the revolving credit
facility, we had $285.3 million of additional borrowing capacity on this facility at December 31,
2009. We expect our cash flows from operations, combined with availability under our revolving
credit facility, will provide sufficient liquidity to fund our current obligations, projected working
capital requirements and capital spending over the next twelve months.
Our revolving credit facility is available to draw upon in order to satisfy certain year-end
regulatory financial ratios, fund working capital needs that may result from the seasonal pattern
of cash receipts that occur throughout the year and finance acquisitions. On July 1, 2009, we
repaid the revolving credit facilitys balance outstanding of $100.0 million, which existed in
order to satisfy year-end regulatory financial ratios, from cash on hand at June 30, 2009.
We may issue up to $375.0 million of letters of credit under the revolving credit facility. We
have outstanding letters of credit of $157.2 million at December 31, 2009. We are required to
maintain a $120.5 million letter of credit with the U.S. Department of Education due to our failure
to satisfy certain regulatory financial ratios after giving effect to the Transaction. The amount
of the letter of credit is set at 10% of the Title IV aid received by students attending our
schools during the prior fiscal year. We anticipate that the amount of the letter of credit will
increase during the quarter ended March 31, 2010 based on Title IV aid received by our students
during fiscal 2009. The majority of the remainder of the outstanding letters of credit at December
31, 2009 relate to obligations to purchase loans under the Education Finance Loan program.
In November 2009, Education Management Corporation guaranteed the Notes. At December 31,
2009, total indebtedness outstanding under the Notes was $444.0 million. We do not expect the
guarantee will adversely affect our liquidity within the next twelve months or restrict our ability
to declare dividends or incur additional indebtedness in the future.
We may from time to time use cash on hand to retire or purchase our outstanding debt
through open market transactions, privately negotiated transactions or otherwise. Such
repurchases, if any, will depend on prevailing market conditions, our liquidity requirements,
contractual restrictions and other factors. The amounts involved may be material.
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Federal Family Education Loan Program and Private Student Loans
Approximately 81.5% and 13.1% of our net revenues were indirectly derived from Title IV
programs under the Higher Education Act of 1965 and private loan programs, respectively, in fiscal
2009 compared to 70.2% and 22.3% from Title IV programs and private loan programs, respectively, in
fiscal 2008. There have been significant recent developments that have impacted these programs.
The U.S. government has recently made additional financial aid available to students in order
to meet rising post-secondary education costs and decreased availability of private loans.
Effective July 1, 2008, the annual Stafford loans available for undergraduate students under the
FFEL program increased by $2,000. Effective as of July 1, 2008, the maximum amount of availability
of a Pell grant increased to $4,731 per year from a maximum of $4,310 per year in fiscal 2008. The
maximum Pell grant available to eligible students further increased effective July 1, 2009 to
$5,350 per award year.
The credit and equity markets of both mature and developing economies have experienced
extraordinary volatility, asset erosion and uncertainty in recent periods. In particular, adverse
market conditions for consumer student loans have resulted in providers of private loans reducing
the attractiveness and/or decreasing the availability of private loans to post-secondary students,
including students with low credit scores who would not otherwise be eligible for credit-based
private loans. In order to provide student loans to certain of our students who do not satisfy the
new standard underwriting, we pay credit enhancement fees to certain lenders (including SLM
Corporation, or Sallie Mae) based on the principal balance of each loan disbursed by the lender.
An agreement we entered into with Sallie Mae to
provide loans to certain students who received a private loan from Sallie Mae prior to April
17, 2008 and are continuing their education but who do not satisfy Sallie Maes current standard
underwriting criteria expires in June 2010.
The reliance by students attending our schools on private loans decreased substantially
during fiscal 2009 due to the increased availability of federal aid and certain operating
initiatives. Excluding activity under our Education Finance Loan program, private loans accounted
for approximately 13% of our net revenues in fiscal 2009 as compared to approximately 22% in fiscal
2008. This trend of decreasing reliance on private loans continued during the first six months of
fiscal 2010, as private loans accounted for approximately 7% of net revenues as compared to
approximately 19% of net revenues in the first six months of fiscal 2009.
We introduced the Education Finance Loan program through a private lender in August 2008
due to tightened credit markets facing our students. This program enables students who have
exhausted all available government-sponsored or other aid and have been denied a private loan to
borrow a portion of their tuition and other educational expenses at our schools if they or a
co-borrower meet certain eligibility and underwriting criteria. Under the program, we purchase
loans made by a private lender to students who attend our schools. Aid awarded under the Education
Finance Loan Program represented approximately 1.0% and 3.2% as a percentage of net revenues during
fiscal 2009 and the first six months of 2010, respectively. We estimate that aid awarded under this
program during fiscal 2010 will be approximately $75 million.
The Education Finance Loan program adversely impacts our liquidity and exposes us to new
and greater credit risk because we own loans to our students. This financing provides for payments
to us by our students over an extended term, which could have a material adverse effect on our cash
flows from operations. In addition, we have the risk of collection with respect to these loans,
which resulted in an increase in our bad debt expense as a percentage of net revenues beginning in
fiscal 2009 compared to prior fiscal years. While we are taking steps to address the private loan
needs of our students, the consumer lending market could worsen. The inability of our students to
finance their education could cause our student population to decrease, which could have a material
adverse effect on our financial condition, results of operations and cash flows.
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Contingencies
Refer to Item 1 Financial Statements Note 12, Contingencies.
New Accounting Standards Not Yet Adopted
Refer to Item 1 Financial Statements Note 2, Recent Accounting Pronouncements.
Non-GAAP Financial Measures
We use EBITDA, defined as net income plus interest expense, net, income taxes, depreciation and amortization, to measure operating performance. EBITDA is not
a recognized term under GAAP and does not purport to be an alternative to net income as a measure
of operating performance or to cash flows from operating activities as a measure of liquidity.
Additionally, EBITDA is not intended to be a measure of free cash flow available for our
discretionary use, as it does not consider certain cash requirements such as interest payments, tax
payments and debt service requirements.
We believe EBITDA is helpful in highlighting trends because EBITDA excludes the results of
decisions that are outside the control of operating management and can differ significantly from
company to company depending on long-term strategic decisions regarding capital structure, the tax
jurisdictions in which companies operate and capital investments. We compensate for the limitations
of using non-GAAP financial measures by using them to supplement GAAP results to provide a more
complete understanding
of the factors and trends affecting the business than GAAP results alone. Because not all
companies use identical calculations, our presentation of EBITDA may not be comparable to
similarly titled measures of other companies. EBITDA is calculated as follows (in millions):
For the Three Months | For the Six Months | |||||||||||||||
Ended December 31, | Ended December 31, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net income |
$ | 20.3 | $ | 42.3 | $ | 36.0 | $ | 39.0 | ||||||||
Interest expense, net |
30.4 | 40.5 | 66.7 | 78.6 | ||||||||||||
Loss on early retirement of debt (1) |
44.8 | 0.0 | 44.8 | 0.0 | ||||||||||||
Provision for income taxes |
14.2 | 24.4 | 24.0 | 22.3 | ||||||||||||
Depreciation and amortization |
29.4 | 27.5 | 58.2 | 54.2 | ||||||||||||
EBITDA |
$ | 139.1 | $ | 134.7 | $ | 229.7 | $ | 194.1 | ||||||||
(1) | In connection with our initial public offering, we purchased Senior Subordinated Notes with a face value of $316.0 million for approximately $355.5 million, resulting in a loss of $39.5 million. We also accelerated $5.3 million of amortization on the portion of deferred financing costs that related to the purchased Senior Subordinated Notes. |
Covenant Compliance
Under its senior secured credit facilities, our subsidiary, Education Management LLC, is
required to satisfy a maximum total leverage ratio, a minimum interest coverage ratio and other
tests of financial condition. At December 31, 2009, Education Management LLC was in compliance with
the financial and non-financial covenants. Its continued ability to meet those financial ratios and
tests can be affected by events beyond our control, and we cannot assure you that it will meet
those ratios and tests in the future.
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Adjusted EBITDA is a non-GAAP measure used to determine Education Management LLCs compliance with certain
covenants contained in the indentures governing the Senior Notes and Senior Subordinated Notes and
in its senior secured credit facilities. Adjusted EBITDA is defined as EBITDA further adjusted to
exclude unusual items and other adjustments permitted in calculating covenant compliance under the
indentures governing the Senior Notes and Senior Subordinated Notes and its senior secured credit
facilities. We believe that the inclusion of supplementary adjustments to EBITDA applied in
presenting Adjusted EBITDA is appropriate to provide additional information to investors to
demonstrate compliance with our financing covenants.
The breach of covenants in the senior secured credit facilities that are tied to ratios
based on Adjusted EBITDA could result in a default under that agreement, in which case the lenders
could elect to declare all amounts borrowed due and payable. Any such acceleration would also
result in a default under the indentures governing the Senior Notes and Senior Subordinated Notes.
Additionally, under the senior secured credit facilities and the indentures governing the Senior
Notes and Senior Subordinated Notes, our ability to engage in activities such as incurring
additional indebtedness, making investments and paying dividends is also tied to ratios based on
Adjusted EBITDA.
Adjusted EBITDA does not represent net income or cash flows from operations as those
terms are defined by GAAP and does not necessarily indicate whether cash flows will be sufficient
to fund cash needs. In addition, unlike GAAP measures such as net income and earnings per share,
Adjusted EBITDA does not reflect the impact of our obligations to make interest payments on outstanding
debt, which have increased substantially as a result of our indebtedness
incurred in June 2006 to finance the Transaction and related expenses. While Adjusted EBITDA and
similar measures are frequently used as measures of operations and the ability to meet debt service
requirements, these terms are not necessarily comparable to other similarly titled captions of
other companies due to the potential inconsistencies in the method of calculation.
Adjusted EBITDA does not reflect the impact of earnings or charges resulting from matters that
we may consider not to be indicative of our ongoing operations. In particular, the definition of
Adjusted EBITDA in the senior credit facilities and the indentures allows us to add back certain
non-cash, extraordinary, unusual or non-recurring charges that are deducted in calculating net
income. However, these are expenses that may recur, vary greatly and are difficult to predict.
Further, our debt instruments require that Adjusted EBITDA be calculated for the most recent four
fiscal quarters. As a result, the measure can be disproportionately affected by a particularly
strong or weak quarter. Further, it may not be comparable to the measure for any subsequent
four-quarter period or any complete fiscal year.
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The following is a reconciliation of net income, which is a GAAP measure of operating results,
to Adjusted EBITDA for Education Management LLC as defined in its debt agreements. The terms and
related calculations are defined in the senior secured credit agreement (in millions).
For the Twelve | ||||
Months Ended | ||||
December 31, | ||||
2009 | ||||
Net income |
$ | 101.4 | ||
Interest expense, net |
141.5 | |||
Loss on early retirement of debt (1) |
44.8 | |||
Provision for income taxes |
62.9 | |||
Depreciation and amortization |
116.3 | |||
EBITDA |
466.9 | |||
Reversal of impact of unfavorable leases (2) |
(1.1 | ) | ||
Management fees paid to affiliates (3) |
34.6 | |||
Severance and relocation |
5.8 | |||
Non-cash compensation |
17.2 | |||
Capital taxes |
4.6 | |||
Other |
1.5 | |||
Adjusted EBITDA Covenant Compliance |
$ | 529.5 | ||
(1) | In connection with Education Management Corporations initial public offering, we purchased Senior Subordinated Notes with a face value of approximately $316.0 million. In order to purchase this amount of Senior Subordinated Notes, we paid approximately $355.5 million, resulting in a loss of $39.5 million. We also accelerated $5.3 million of amortization on the portion of deferred financing costs that related to the purchased Senior Subordinated Notes. | |
(2) | Represents a non-cash reduction to rent expense due to the amortization on $7.3 million of unfavorable lease liabilities resulting from fair value adjustments required in connection with the Transaction. | |
(3) | Represents fees incurred under a management agreement with the Sponsors. Upon the completion of our initial public offering, we terminated the agreement with the Sponsors for a fee of $29.6 million. |
Education Management LLCs covenant requirements and actual ratios for the twelve months ended December 31, 2009 are as follows:
Covenant | Actual | |||||||
Senior secured credit facility | Requirements | Ratios | ||||||
Adjusted EBITDA to Consolidated Interest
Expense ratio |
Minimum of 1.90x | 3.73 | x | |||||
Consolidated Total Debt to Adjusted EBITDA ratio |
Maximum of 6.25x | 2.46 | x |
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Certain Risks and Uncertainties
Certain of the matters we discuss in this report may constitute forward-looking statements.
Forward-looking statements contain words such as believes, expects, may, will, should,
seeks, approximately, intends, plans, estimates, or anticipates or similar expressions
which concern our strategy, plans or intentions. All statements we make relating to estimated and
projected earnings, margins, costs, expenditures, cash flows, growth rates and financial results
are forward-looking statements. In addition, from time to time we make forward-looking public
statements concerning our expected future operations and performance and other developments. All of
these forward-looking statements are subject to risks and uncertainties that may change at any
time, and, therefore, our actual results may differ materially from those that we expected. We
derive most of our forward-looking statements from our operating budgets and forecasts, which are
based upon many detailed assumptions. While we believe that our
assumptions are reasonable, we caution that it is very difficult to predict the impact of
known factors, and, of course, it is impossible for us to anticipate all factors that could affect
our actual results. Some of the factors that we believe could affect our results include: our high
degree of leverage; our ability to generate sufficient cash to service all of our debt obligations;
general economic and market conditions; the condition of the post-secondary education industry; the
integration of acquired businesses, the performance of acquired businesses, and the prospects for
future acquisitions; the effect of war, terrorism, natural disasters or other catastrophic events;
the effect of disruptions to our systems and infrastructure; the timing and magnitude of student
enrollment; the timing and scope of technological advances; the trend in information availability
toward solutions utilizing more dedicated resources; the market and credit risks associated with
the post-secondary education industry; the ability to retain and attract students and key
personnel; and risks relating to the foreign countries where we transact business. The factors
described in this paragraph and other factors that may affect our business or future financial
results are discussed in our filings with the Securities and Exchange Commission, including this
report.
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are exposed to market risks in the ordinary course of business that include fluctuations in
the value of the Canadian dollar relative to the U.S. dollar. Due to the size of our Canadian
operations relative to our total business, we do not believe we are subject to material risks from
reasonably possible near-term changes in exchange rates and do not utilize forward or option
contracts on foreign currencies.
The fair values of cash and cash equivalents, accounts receivable, borrowings under our
revolving credit facility, accounts payable and accrued expenses approximate carrying values
because of the short-term nature of these instruments.
At December 31, 2009, we had total debt obligations of $1,566.3 million, including $1,120.9
million of variable rate debt under the senior secured credit facility at a weighted average
interest rate of 6.5%. A hypothetical change of 1.25% in interest rates from December 31, 2009
levels would have increased or decreased interest expense by approximately $2.3 million for the
variable rate debt in the six month period ended December 31, 2009.
Two five-year interest rate swap agreements fix the interest rate on $750.0 million of our
variable rate debt through July 1, 2011. At December 31, 2009, we had variable rate debt of $370.9
million that was subject to market rate risk, as our interest payments fluctuated as a result of
market changes. Under the terms of the interest rate swaps, we receive variable payments based on
the three month LIBOR and make payments based on a fixed rate of 5.4%. The net receipt or payment
from the interest rate swap agreements is recorded in interest expense. The interest rate swaps are
designated as and qualify as cash flow hedges. The derivative financial instruments are carried at
fair value, which is based on the framework discussed in Note 9 to the accompanying consolidated
financial statements. We do not use derivative instruments for trading or speculative purposes.
For the six-month period ended December 31, 2009, we recorded an unrealized after-tax gain of
$5.0 million in other comprehensive loss related to the change in market value of the interest rate
swaps. The cumulative unrealized loss of $29.2 million, net of tax, at December 31, 2009 related to
the swaps may be recognized in the consolidated statement of operations if these instruments fail
to meet certain cash flow hedge requirements, which include a change in certain terms of the senior
secured credit facilities or the extinguishment or termination of the senior secured credit
facilities or swap agreements prior to maturity.
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ITEM 4. | CONTROLS AND PROCEDURES |
The Company, under the supervision and participation of its management, which include the
Companys chief executive officer and chief financial officer, evaluated the effectiveness of its
disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Act of
1934, as amended (the Exchange Act). This evaluation was conducted as of the end of the period
covered by this Form 10-Q. Based on that evaluation, our chief executive officer and chief
financial officer have concluded that the Companys disclosure controls and procedures are
effective. Effective controls ensure that information required to be disclosed by the Company in
reports that it files under the Exchange Act is recorded, processed and summarized within the time
periods specified in Securities and Exchange Commissions rules and forms. These controls and
procedures are designed to ensure that information required to be disclosed by the Company in such
reports are accumulated and communicated to our management, including our chief executive officer
and chief financial officer, as appropriate, to allow timely decisions regarding required
disclosure.
There were no changes that occurred during the fiscal quarter covered by this Quarterly Report
on Form 10-Q that have materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting.
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PART II
OTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS |
Information relating to legal proceedings is included in Note 12, Contingencies, to the
Consolidated Financial Statements set forth in Part I, Item 1 of this Quarterly Report on Form
10-Q, which is incorporated herein by reference.
ITEM 1A. | RISK FACTORS |
Except
for the following Risk Factors,
there have been no material changes to our Risk Factors as previously disclosed in our
Prospectus filed on October 2, 2009 with the Securities and Exchange Commission (file no.
333-148259):
The U.S. Department of Education is in the process of preparing proposed regulatory changes
that, if enacted, could materially and adversely impact our business.
The U.S. Department of Education published a notice in the Federal Register in September 2009
announcing its intention to establish two negotiated rulemaking committees to prepare proposed
regulations under Title IV of the Higher Education Act of 1965, as amended (HEA). The HEA
requires that the U.S. Department of Education obtain public involvement in the development of
proposed regulations before publishing any proposed regulations to implement programs authorized
under Title IV of the HEA. The U.S. Department of Education uses a negotiated rulemaking process
to develop the proposed regulations with representatives of organizations and groups affected by
the proposed regulations.
The U.S. Department of Education convened two negotiated rulemaking committees in November
2009 to consider proposed regulations related to program integrity and foreign schools. The
program integrity committee considered proposed regulations for 14 issues including incentive
compensation, gainful employment in a recognized occupation, state authorization as a component of
institutional eligibility, misrepresentation of information, definition of a credit hour,
definition of high school diploma, ability to benefit, agreements between institutions of higher
education, verification of information included on student aid applications, satisfactory academic
progress, retaking coursework, disbursement of Title IV funds, return of Title IV funds and taking
attendance, and return of Title IV funds for term-based programs with modules or compressed
courses. The committee did not reach consensus on the proposed regulations for five of the 14
issues, including incentive compensation, gainful employment, state authorization, and the two
return of-Title-IV funds issues. As a result, the U.S. Department of Education is not bound by the
proposed regulations presented to the committee on any of the 14 issues. The U.S. Department of
Education is expected to publish proposed regulations on these issues later this year for public
comment, and the published versions may or may not differ from those presented to the committee.
The U.S. Department of Education has stated that its intent is to publish final versions of the
regulations by November 1, 2010. Any such regulations would become effective on July 1, 2011.
We cannot predict what regulations the U.S. Department of Education will publish in proposed
form later this year or the impact that enactment of the proposed regulations might have on our
business. The implementation of regulations removing previously enacted safe harbors under the
incentive compensation rule or otherwise limiting types of compensation to employees or third party
entities involved in admissions, student enrollment and financial aid may have a material adverse
affect on our recruiting processes and cause a decrease in student enrollment at our schools or a
decrease in the productivity of our admissions representatives. The implementation of a definition
of gainful employment tied to anticipated student debt and income for the purpose of determining
whether certain educational programs, including those provided by a for-profit institution, prepare
students for gainful employment in a recognized occupation and, in turn, whether that program
qualifies as a Title IV eligible program, may affect our ability to provide Title IV funds to
students enrolled in some of our educational programs or require us to decrease the tuition charged
at our schools. Any actions that result in a decrease in student enrollment or tuition charged at
our schools or affect our ability to participate in Title IV programs could materially and
adversely affect our cash flows, results of operations and financial condition. The implementation
of regulations which limit the ability of an institution to rely on the authorization of a state
licensing agency to establish its eligibility to participate in the Title IV programs if the state
agency does not meet or bring itself into compliance with prescribed standards and requirements
could prevent our schools in that state from remaining eligible for Title IV funds and could
materially and adversely affect our enrollments, revenues, and results of operations.
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If our institutions do not comply with the 90/10 Rule, they will lose eligibility to participate in
federal student financial aid programs.
Regulations promulgated under the HEA require all for-profit education institutions to comply
with the 90/10 Rule, which imposes sanctions on participating institutions that derive more than
90% of their total revenue on a cash accounting basis from Title IV programs as calculated under
the regulations. An institution that derives more than 90% of its total revenue on a cash
accounting basis from the Title IV programs for each of two consecutive fiscal years loses its
eligibility to participate in Title IV programs and is not permitted to reapply for eligibility
until the end of the following two fiscal years. Institutions which fail to satisfy the 90/10 Rule
for one fiscal year are placed on provisional certification and may be subject to other sanctions.
Compliance with the 90/10 Rule is measured at the end of each of our fiscal years. For those of
our institutions that disbursed federal financial aid during fiscal 2009, the percentage of
revenues derived from Title IV programs ranged from approximately 55% to 86%, with a weighted
average of approximately 70% as compared to a weighted average of approximately 65% in fiscal 2008.
We anticipate that our 90/10 rates will continue to increase in fiscal 2010 due to recent
increases in grants from the Federal Pell Grant (Pell) program and other Title IV loan limits,
coupled with decreases in the availability of state grants and private loans and the inability of
households to pay cash due to the current economic climate. While our consolidated 90/10 rate for
fiscal 2010 is projected to remain under the 90% threshold, we project that some of our
institutions will exceed the 90% threshold if we do not continue to successfully implement certain
changes to these institutions during the fiscal year which would decrease their 90/10 rate, such as
increases in international and military students and certain internal restructuring designed to
achieve additional operational efficiencies. In prior years, similar changes to operations
resulted in lower 90/10 rates at our institutions where we implemented such changes. Completion of
our proposed internal restructuring requires the prior approval of the U.S. Department of
Education, as well as approvals from certain accrediting bodies and state licensing agencies, some
of which must be obtained prior to the restructuring. Failure to obtain U.S. Department of
Education or other required approvals prior to the end of our fiscal year may result in failure of
some of our institutions to comply with the 90/10 Rule. Additionally, the HEA reauthorization
includes relief through June 30, 2011 from a $2,000 increase in the annual Stafford loan
availability for undergraduate students which became effective July 1, 2008. We anticipate that
our 90/10 rate will increase substantially in fiscal 2012 in the event that relief from this
additional $2,000 is not extended beyond June 30, 2011, which would adversely affect our ability to
comply with the 90/10 Rule. Continued decreases in the availability of state grants would also
adversely impact our ability to comply with the 90/10 Rule because state grants generally are
considered cash payments for purposes of the 90/10 Rule. We continue to monitor the compliance
with the 90/10 Rule by each of our institutions and assess the impact of increased financial aid
received by our students under the current rule. If any of our institutions violates the 90/10
Rule, its ineligibility to participate in Title IV programs for at least two years would have a
material adverse effect on our enrollments, revenues and results of operations.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
In October 2009, the Company completed a public offering of its common stock. The common stock was
registered pursuant to a registration statement filed with the Securities and Exchange Commission
on Form S-1, file number 333-148259, and declared effective on October 1, 2009. The registration
statement covered 23 million shares of the Companys common stock, par value $0.01 per share, all
of which were sold to the public at a per share price of $18.00. The managing underwriters for the
offering were Goldman, Sachs & Co., J.P. Morgan Securities Inc., Merrill Lynch, Pierce, Fenner &
Smith Incorporated, Barclays Capital Inc., Credit Suisse Securities (USA) LLC, Morgan Stanley & Co.
Incorporated, Robert W. Baird & Co. Incorporated, William Blair & Company, L.L.C., BMO Capital
Markets Corp., Piper Jaffray & Co., Barrington Research Associates, Inc., Signal Hill Capital Group
LLC, and Stifel, Nicolaus & Company, Incorporated. Information relating to the proceeds received
by the Company from the offering and the use of proceeds is included in Note 1, Basis of
Presentation Initial Public Offering, to the Consolidated Financial Statements set forth in Part
I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
ITEM 4. | SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS |
Not applicable.
ITEM 5. | OTHER INFORMATION |
None.
ITEM 6. | EXHIBITS INDEX |
Number | Document | |||
31.1 | Certification of Todd S. Nelson required by Rule 13a-14(a) or Rule
15d-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002. |
|||
31.2 | Certification of Edward H. West required by Rule 13a-14(a) or Rule
15d-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002. |
|||
32.1 | Certification of Todd S. Nelson required by Rule 13a-14(b) or Rule
15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002. |
|||
32.2 | Certification of Edward H. West required by Rule 13a-14(b) or Rule
15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002. |
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