Attached files
file | filename |
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EX-32.1 - EXHIBIT 32.1 - EDUCATION MANAGEMENT CORPORATION | c00729exv32w1.htm |
EX-32.2 - EXHIBIT 32.2 - EDUCATION MANAGEMENT CORPORATION | c00729exv32w2.htm |
EX-31.1 - EXHIBIT 31.1 - EDUCATION MANAGEMENT CORPORATION | c00729exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - EDUCATION MANAGEMENT CORPORATION | c00729exv31w2.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: March 31, 2010
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 | 25-1119571 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
210 Sixth Avenue, Pittsburgh, PA, 33rd Floor | 15222 | |
(Address of principal executive offices) | (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 (Do not check if a smaller reporting company) | Smaller reporting company o |
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 May 11, 2010, 142,849,833 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 | ||||||||
41 | ||||||||
41 | ||||||||
41 | ||||||||
41 | ||||||||
41 | ||||||||
42 | ||||||||
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)
March 31, 2010 |
June 30, 2009 |
March 31, 2009 |
||||||||||
(Unaudited) | (Unaudited) | |||||||||||
Assets |
||||||||||||
Current assets: |
||||||||||||
Cash and cash equivalents |
$ | 472,637 | $ | 363,318 | $ | 525,710 | ||||||
Restricted cash |
26,482 | 10,372 | 36,177 | |||||||||
Total cash, cash equivalents and restricted cash |
499,119 | 373,690 | 561,887 | |||||||||
Receivables, net of allowances of $118,246, $83,691
and $79,069 |
94,776 | 122,272 | 57,131 | |||||||||
Notes, advances and other |
17,457 | 13,678 | 21,632 | |||||||||
Inventories |
13,242 | 9,355 | 10,635 | |||||||||
Deferred income taxes |
46,320 | 45,164 | 27,047 | |||||||||
Other current assets |
44,442 | 30,163 | 28,360 | |||||||||
Total current assets |
715,356 | 594,322 | 706,692 | |||||||||
Property and equipment, net |
634,587 | 580,965 | 532,835 | |||||||||
Other long-term assets |
82,168 | 58,945 | 57,636 | |||||||||
Intangible assets, net |
468,224 | 471,882 | 473,913 | |||||||||
Goodwill |
2,579,131 | 2,579,131 | 2,579,131 | |||||||||
Total assets |
$ | 4,479,466 | $ | 4,285,245 | $ | 4,350,207 | ||||||
Liabilities and shareholders equity |
||||||||||||
Current liabilities: |
||||||||||||
Current portion of long-term debt |
$ | 12,172 | $ | 12,622 | $ | 12,705 | ||||||
Revolving credit facility |
| 100,000 | 180,000 | |||||||||
Accounts payable |
48,150 | 53,516 | 35,192 | |||||||||
Accrued liabilities |
187,812 | 163,485 | 158,638 | |||||||||
Accrued income taxes |
31,704 | 5,015 | 16,061 | |||||||||
Unearned tuition |
89,540 | 118,741 | 59,192 | |||||||||
Advance payments |
158,788 | 67,020 | 176,335 | |||||||||
Total current liabilities |
528,166 | 520,399 | 638,123 | |||||||||
Long-term debt, less current portion |
1,529,661 | 1,876,021 | 1,879,025 | |||||||||
Deferred income taxes |
178,388 | 187,583 | 165,128 | |||||||||
Deferred rent |
154,240 | 123,656 | 105,871 | |||||||||
Other long-term liabilities |
66,624 | 91,933 | 109,555 | |||||||||
Shareholders equity: |
||||||||||||
Common Stock, par value $0.01 per share; 600,000,000
shares authorized; 142,848,312 issued and outstanding
at March 31, 2010 and 119,770,277 issued and
outstanding at June 30, 2009 and March 31, 2009 |
1,428 | 1,198 | 1,198 | |||||||||
Additional paid-in capital |
1,745,512 | 1,338,316 | 1,338,316 | |||||||||
Retained earnings |
302,373 | 181,767 | 160,488 | |||||||||
Accumulated other comprehensive loss |
(26,926 | ) | (35,628 | ) | (47,497 | ) | ||||||
Total shareholders equity |
2,022,387 | 1,485,653 | 1,452,505 | |||||||||
Total liabilities and shareholders equity |
$ | 4,479,466 | $ | 4,285,245 | $ | 4,350,207 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
2
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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 Nine Months | |||||||||||||||
Ended March 31, | Ended March 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net revenues |
$ | 667,896 | $ | 535,438 | $ | 1,857,764 | $ | 1,491,884 | ||||||||
Costs and expenses: |
||||||||||||||||
Educational services |
323,146 | 268,499 | 934,125 | 787,629 | ||||||||||||
General and administrative |
174,446 | 129,272 | 491,608 | 369,995 | ||||||||||||
Management fees paid to affiliates |
| 1,250 | 32,055 | 3,750 | ||||||||||||
Depreciation and amortization |
30,674 | 28,828 | 88,902 | 83,007 | ||||||||||||
Total costs and expenses |
528,266 | 427,849 | 1,546,690 | 1,244,381 | ||||||||||||
Income before interest, loss on early
retirement of debt and income taxes |
139,630 | 107,589 | 311,074 | 247,503 | ||||||||||||
Interest expense, net |
27,933 | 37,400 | 94,652 | 116,014 | ||||||||||||
Loss on early retirement of debt |
2,445 | | 47,207 | | ||||||||||||
Income before income taxes |
109,252 | 70,189 | 169,215 | 131,489 | ||||||||||||
Provision for income taxes |
24,682 | 26,062 | 48,609 | 48,363 | ||||||||||||
Net income |
$ | 84,570 | $ | 44,127 | $ | 120,606 | $ | 83,126 | ||||||||
Earnings per share: |
||||||||||||||||
Basic |
$ | 0.59 | $ | 0.37 | $ | 0.89 | $ | 0.69 | ||||||||
Diluted |
$ | 0.59 | $ | 0.37 | $ | 0.89 | $ | 0.69 | ||||||||
Weighted average number of shares outstanding: |
||||||||||||||||
Basic |
142,831 | 119,770 | 134,939 | 119,769 | ||||||||||||
Diluted |
143,936 | 119,770 | 135,675 | 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 Nine Months | ||||||||
Ended March 31, | ||||||||
2010 | 2009 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 120,606 | $ | 83,126 | ||||
Adjustments to reconcile net income to
net cash flows provided by operating activities: |
||||||||
Depreciation and amortization of property and equipment |
82,231 | 69,875 | ||||||
Bad debt expense |
78,574 | 52,845 | ||||||
Amortization of intangible assets |
6,671 | 13,132 | ||||||
Amortization of debt issuance costs |
6,127 | 5,768 | ||||||
Loss on early retirement of debt |
47,207 | | ||||||
Share-based compensation |
19,428 | | ||||||
Non cash adjustments related to deferred rent |
1,898 | (2,045 | ) | |||||
Purchase of private loans |
(51,501 | ) | (3,235 | ) | ||||
Reimbursements for tenant improvements |
8,229 | 19,191 | ||||||
Changes in assets and liabilities: |
||||||||
Restricted cash |
(16,110 | ) | (22,355 | ) | ||||
Receivables |
(39,520 | ) | (19,057 | ) | ||||
Inventories |
(3,868 | ) | (2,202 | ) | ||||
Other assets |
(18,325 | ) | (21,246 | ) | ||||
Accounts payable |
696 | (13,369 | ) | |||||
Accrued liabilities |
35,675 | 48,795 | ||||||
Unearned tuition |
(29,202 | ) | (9,962 | ) | ||||
Advance payments |
91,341 | 115,656 | ||||||
Total adjustments |
219,551 | 231,791 | ||||||
Net cash flows provided by operating activities |
340,157 | 314,917 | ||||||
Cash flows from investing activities: |
||||||||
Expenditures for long-lived assets |
(119,825 | ) | (97,985 | ) | ||||
Reimbursements for tenant improvements |
(8,229 | ) | (19,191 | ) | ||||
Net cash flows used in investing activities |
(128,054 | ) | (117,176 | ) | ||||
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 |
(378,952 | ) | | |||||
Net proceeds from issuance of common stock, including stock option exercises |
387,998 | | ||||||
Principal payments on long-term debt |
(9,489 | ) | (9,715 | ) | ||||
Debt issuance costs |
(2,400 | ) | (887 | ) | ||||
Net cash flows (used in) provided by financing activities |
(102,843 | ) | 49,398 | |||||
Effect of exchange rate changes on cash and cash equivalents |
59 | 1,163 | ||||||
Net change in cash and cash equivalents |
109,319 | 248,302 | ||||||
Cash and cash equivalents, beginning of period |
363,318 | 277,408 | ||||||
Cash and cash equivalents, end of period |
$ | 472,637 | $ | 525,710 | ||||
Cash paid during the period for: |
||||||||
Interest (including swap settlement) |
$ | 81,734 | $ | 92,914 | ||||
Income taxes |
53,868 | 47,421 |
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)
Accumulated | ||||||||||||||||||||
Common | Additional | Other | ||||||||||||||||||
Stock at | Paid-in | Retained | Comprehensive | |||||||||||||||||
Par Value | Capital | Earnings | 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 stock option exercises |
230 | 387,768 | | | 387,998 | |||||||||||||||
Share-based compensation |
| 19,428 | | | 19,428 | |||||||||||||||
Comprehensive income: |
||||||||||||||||||||
Net income |
| | 120,606 | | 120,606 | |||||||||||||||
Foreign currency translation |
| | | 1,046 | 1,046 | |||||||||||||||
Unrealized gain on interest
rate swaps, net of tax
expense of $4,447 |
| | | 7,656 | 7,656 | |||||||||||||||
Comprehensive income |
129,308 | |||||||||||||||||||
Balance, March 31, 2010 |
$ | 1,428 | $ | 1,745,512 | $ | 302,373 | $ | (26,926 | )(b) | $ | 2,022,387 | |||||||||
(a) | During the nine months ended March 31, 2009, other comprehensive loss consisted of a $22.2 million unrealized loss on interest rate swaps, net of tax benefit, and a $0.6 million foreign currency translation loss. | |
(b) | The balance in accumulated other comprehensive loss at March 31, 2010, June 30, 2009 and March 31, 2009 is comprised of $26.5 million, $34.2 million and $46.6 million of unrealized losses on interest rate swaps, net of tax benefit, respectively and $0.4 million, $1.4 million and $0.9 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 March 31, 2010 and 2009, the statements of
operations for the three and nine months ended March 31, 2010 and 2009 and the statements of cash
flows for the nine months ended March 31, 2010 and 2009. The statements of operations for the three
and nine months ended March 31, 2010 and 2009 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 wholly owned subsidiary 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).
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.
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)
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.
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 stock 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 March 31, 2009 data have been made to conform to the March 31,
2010 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 Nine Months | |||||||||||||||
Ended March 31, | Ended March 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net income |
$ | 84,570 | $ | 44,127 | $ | 120,606 | $ | 83,126 | ||||||||
Weighted average number of shares
outstanding: |
||||||||||||||||
Basic |
142,831 | 119,770 | 134,939 | 119,769 | ||||||||||||
Effect of stock-based awards |
1,105 | | 736 | | ||||||||||||
Diluted |
143,936 | 119,770 | 135,675 | 119,769 | ||||||||||||
Earnings per share: |
||||||||||||||||
Basic |
$ | 0.59 | $ | 0.37 | $ | 0.89 | $ | 0.69 | ||||||||
Diluted |
$ | 0.59 | $ | 0.37 | $ | 0.89 | $ | 0.69 |
Time-based options to purchase 1.6 million shares of common stock were outstanding for the
three and nine months ended March 31, 2010 but were not included in the computation of diluted EPS
because the effect of applying the treasury stock method would have been antidilutive. Because
certain performance and market conditions have not been met with respect to the Companys
performance-based options, as further described in Note 4 below, they were determined to be
contingently issuable at March 31, 2010. As a result, time-based options that have a dilutive
effect were the only options included in the diluted EPS calculation. 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 existed related to the inability of option holders to obtain fair market value for
stock options. During the nine months ended March 31, 2010, the Company recognized a total of
approximately $19.4 million of stock-based compensation expense, $2.7 million of which was recorded
in educational services expense and $16.7 million of which was recorded in general and
administrative expense. During the three months ended March 31, 2010, the Company recognized a
total of approximately $2.2 million of stock-based compensation expense, $0.3 million of which was
recorded in educational services expense and $1.9 million of which was recorded in general and
administrative expense. All of the expense recognized in the nine-month period related to
time-based options and restricted stock.
Net of estimated forfeitures, the Company had $17.3 million of unrecognized compensation cost
relating to time-based stock option and restricted stock awards and $11.6 million of unrecognized
compensation cost related to performance-based stock option and other awards at March 31, 2010.
Approximately 60,000 time-based options were exercised during the nine-month period ended
March 31, 2010.
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.
8
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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)
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 March 31, 2010, the Company considered the conditions entitling performance-based option
holders to receive fair value for their options to be less than probable. Compensation expense on
all performance-based option grants is not recognized until one of the conditions entitling option
holders to fair value for exercised options becomes probable. Accordingly, the Company has not
recognized compensation expense related to performance-based options granted since the Transaction.
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. Forfeitures of options
under the Option Plan are added to the shares available for issuance under the Omnibus Plan.
During the nine months ended March 31, 2010, the Company granted 1.3 million of 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, approximately 20,000 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.
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 733,000 units were outstanding under the LTIC Plan at March 31,
2010. 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.
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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):
Asset Class | March 31, 2010 |
June 30, 2009 |
March 31, 2009 |
|||||||||
Land |
$ | 17,861 | $ | 17,805 | $ | 17,805 | ||||||
Buildings and improvements |
73,917 | 74,171 | 73,901 | |||||||||
Leasehold improvements and capitalized lease costs |
404,383 | 329,449 | 315,893 | |||||||||
Furniture and equipment |
117,117 | 97,783 | 95,593 | |||||||||
Technology and other equipment |
205,144 | 170,818 | 160,803 | |||||||||
Software |
53,083 | 45,651 | 40,702 | |||||||||
Library books |
33,551 | 29,778 | 28,566 | |||||||||
Construction in progress |
44,553 | 43,470 | 23,029 | |||||||||
Total |
949,609 | 808,925 | 756,292 | |||||||||
Less accumulated depreciation |
(315,022 | ) | (227,960 | ) | (223,457 | ) | ||||||
Property and equipment, net |
$ | 634,587 | $ | 580,965 | $ | 532,835 | ||||||
Depreciation and amortization of property and equipment was $28.6 million and $24.4
million, respectively, for the three months ended March 31, 2010 and 2009. Depreciation and
amortization of property and equipment was $82.2 million and $69.9 million, respectively, for the
nine months ended March 31, 2010 and 2009.
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 nine months ended March 31, 2010, the Company identified no such
triggering events, and as a result, no impairments were recorded.
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(Continued)
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Intangible Assets
Intangible assets consisted of the following amounts (in thousands):
March 31, 2010 | June 30, 2009 | March 31, 2009 | ||||||||||||||||||||||
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 | (1,278 | ) | 3,000 | (1,028 | ) | 3,000 | (944 | ) | |||||||||||||||
Licensing, accreditation and Title
IV program participation |
112,179 | | 112,179 | | 112,179 | | ||||||||||||||||||
Curriculum and programs |
30,935 | (17,191 | ) | 27,974 | (13,520 | ) | 26,446 | (12,457 | ) | |||||||||||||||
Student contracts, applications and
relationships |
39,511 | (33,687 | ) | 39,511 | (32,479 | ) | 39,511 | (30,723 | ) | |||||||||||||||
Favorable leases and other |
16,425 | (11,670 | ) | 16,351 | (10,106 | ) | 16,318 | (9,417 | ) | |||||||||||||||
Total intangible assets |
$ | 532,050 | $ | (63,826 | ) | $ | 529,015 | $ | (57,133 | ) | $ | 527,454 | $ | (53,541 | ) | |||||||||
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.
Amortization of intangible assets for the three months ended March 31, 2010 and 2009 was
$2.1 million and $4.3 million, respectively. Amortization of intangible assets for the nine months
ended March 31, 2010 and 2009 was $6.7 million and $13.1 million, respectively.
Total estimated amortization on the Companys existing intangible assets at March 31, 2010 for
each of the years ending June 30, 2010 through 2014 and thereafter is as follows (in thousands):
Amortization | ||||
Fiscal years | Expense | |||
2010 (remainder) |
$ | 1,937 | ||
2011 |
8,044 | |||
2012 |
6,978 | |||
2013 |
4,631 | |||
2014 |
2,862 | |||
Thereafter |
1,593 |
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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):
March 31, 2010 |
June 30, 2009 |
March 31, 2009 |
||||||||||
Payroll and related taxes |
$ | 67,775 | $ | 77,894 | $ | 51,791 | ||||||
Capital expenditures |
11,187 | 8,032 | 7,403 | |||||||||
Advertising |
30,009 | 25,192 | 32,452 | |||||||||
Interest |
21,790 | 13,878 | 31,448 | |||||||||
Benefits |
9,569 | 8,597 | 10,023 | |||||||||
Other |
47,482 | 29,892 | 25,521 | |||||||||
Total accrued liabilities |
$ | 187,812 | $ | 163,485 | $ | 158,638 | ||||||
In March 2010, the Company implemented a corporate services restructuring plan to improve
operational efficiencies by realigning functions between corporate services and the Companys
education systems. As a result of the restructuring plan, the Company recorded a charge of $5.7
million in general and administrative expense on the consolidated statement of operations for the
three months ended March 31, 2010. This expense was recorded in accrued liabilities on the
accompanying consolidated balance sheet and primarily relates to severance and benefit payments
that will be made to terminated employees through the end of fiscal 2011.
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 March 31, 2010 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 March 31, 2009. The interest rates on outstanding borrowings on the revolving
credit facility at June 30, 2009 and March 31, 2009 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 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 $210.7 million at March 31, 2010. The U.S.
Department of Education requires the Company to maintain a 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, which was $173.2
million at March 31, 2010, is currently set at 10% of the Title IV aid
received by students attending the Companys schools. 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 has
$231.8 million of additional borrowings available under the revolving credit facility at March 31,
2010. Subsequent to March 31, 2010, the U.S. Department of Education requested the Company
increase its letter of credit as described in Note 15.
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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):
March 31, 2010 |
June 30, 2009 |
March 31, 2009 |
||||||||||
Senior secured term loan facility, due 2013 |
$ | 1,117,940 | $ | 1,126,827 | $ | 1,129,790 | ||||||
Senior notes due 2014 at 8.75% |
375,000 | 375,000 | 375,000 | |||||||||
Senior subordinated notes due 2016 at 10.25% |
47,680 | 385,000 | 385,000 | |||||||||
Other |
1,213 | 1,816 | 1,940 | |||||||||
Total long-term debt |
1,541,833 | 1,888,643 | 1,891,730 | |||||||||
Less current portion |
12,172 | 12,622 | 12,705 | |||||||||
Total long term debt, less current portion |
$ | 1,529,661 | $ | 1,876,021 | $ | 1,879,025 | ||||||
During the nine months ended March 31, 2010, the Company purchased Senior Subordinated
Notes with a total face value of approximately $337.4 million at a premium through two tender offer
transactions. The Company recorded losses of $2.4 million and $47.2 million in the three and nine
months ended March 31, 2010, respectively, on the early retirement of the Senior Subordinated
Notes, which includes the acceleration of amortization on previously deferred debt fees of $0.3
million and $5.6 million, respectively.
The interest rate on the senior secured term loan facility, which equals LIBOR plus a margin
spread of 1.75%, was 2.1% at March 31, 2010, 2.4% at June 30, 2009 and 3.0% at March 31, 2009.
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 $42.3 million, $54.4 million and $74.1 million
at March 31, 2010, June 30, 2009 and March 31, 2009, 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 $2.6 million and $(0.2) million for the three months ended March
31, 2010 and 2009, respectively, and $7.7 million and $(22.2) million for the nine months ended
March 31, 2010 and 2009, respectively, in other comprehensive loss related to the change in market
value of the swap agreements. Additionally, at March 31, 2010, there was a cumulative unrealized
loss of $26.5 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 nine months ended March 31, 2010, the Company reclassified approximately
$6.1 million and $17.8 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 $24.1 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 March 31, 2010.
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):
March 31, 2010 | June 30, 2009 | March 31, 2009 | ||||||||||||||||||||||
Carrying | Carrying | Carrying | ||||||||||||||||||||||
Value | Fair Value | Value | Fair Value | Value | Fair Value | |||||||||||||||||||
Interest rate swap liabilities |
$ | 42,319 | $ | 42,319 | $ | 54,421 | $ | 54,421 | $ | 74,057 | $ | 74,057 | ||||||||||||
Variable rate debt |
1,117,940 | 1,089,992 | 1,126,827 | 1,031,047 | 1,129,790 | 949,024 | ||||||||||||||||||
Fixed rate debt |
423,893 | 437,082 | 761,816 | 738,916 | 761,940 | 720,040 |
The fair values of cash and cash equivalents, accounts receivable, borrowings under the
revolving credit facility, accounts payable and accrued expenses approximate carrying values 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 Companys effective tax rate was 22.6% and 28.7% for the three and nine months ended March
31, 2010 and 37.1% and 36.8% for the three and nine months ended March 31, 2009. 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.
As a result of the expiration of certain statutes of limitation with respect to the 2006 tax
year, the Companys liability for uncertain tax positions decreased by $16.3 million during the
three months ended March 31, 2010, excluding interest and the indirect benefits associated with
state income taxes of $1.6 million. As of March 31, 2010, the Companys accrual for uncertain tax
positions, excluding interest and the indirect benefits associated with state income taxes, was
$7.8 million. It is reasonably possible that the total amount of unrecognized tax benefits will
decrease by $4.4 million within the next twelve months due to the expiration of certain statutes of
limitation with respect to fiscal year 2007. If recognized, this benefit will be a discrete item
in the third quarter of fiscal year 2011.
The statutes of limitation for the Companys U.S. income tax returns are closed for years
through fiscal 2006. The statutes of limitation for the Companys state and local income tax
returns for prior periods vary by jurisdiction. However, the statutes of limitation with respect
to the major jurisdictions in which the Company files state and local income tax returns are
generally closed for years through fiscal 2005.
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(Continued)
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
12. CONTINGENCIES
In August 2009, a complaint was filed in the District Court for Dallas County, Texas in the
case of Capalbo et al. v. Argosy University, Education Management LLC, Education Management
Corporation and Marilyn Powell-Kissinger. 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 March 2010, lawsuits
filed by three of the plaintiffs who signed arbitration agreements with Argosy University were
remanded for binding arbitration. The remaining lawsuits in the Capalbo case were stayed pending
the resolution of the three arbitrations.
In March 2010, the same counsel representing the plaintiffs in the Capalbo case filed a
complaint in the District Court for Dallas County, Texas in the case of Adibian et al. v. Argosy
University, Education Management LLC and Education Management
Corporation. In Adibian, three
former students who were enrolled in the Clinical Psychology doctoral program at the Argosy
University Dallas campus make similar allegations to those set forth in the Capalbo case and 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. No
trial date has been set for the lawsuit.
On May 6, 2010, a qui tam action captioned Buchanan v. South University Online and Education
Management Corporation filed under the False Claims Act in July 2007 was unsealed due to the U.S.
Department of Justices decision to not intervene in the action at this time. The case, which is
pending in the United States District Court for the Western District of Pennsylvania, relates to
whether the defendants compensation plans for admission representatives violated the Higher
Education Act and U.S. Department of Education regulations prohibiting an institution participating
in Title IV Programs from providing any commission, bonus or other incentive payment based directly
or indirectly on success in securing enrollments to any person or entity engaged in any student
recruitment or admissions activity. A number of similar lawsuits have been filed in recent years
against educational institutions that receive Title IV funds. The complaint, which was filed by a
former admissions representative for the online programs offered by South University, outlines a
theory of damages based upon Title IV funding disbursements to the Company over a number of years
and asserts the plaintiff is entitled to recover treble the amount of actual damages allegedly
sustained by the federal government as a result of the alleged activity, plus civil monetary
penalties. The Company believes the claims to be without merit and intends to defend this action
vigorously.
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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 to the extent further cooperation is required.
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.
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 March 31, 2010, the Company is committed to purchase less
than $40 million of loans during the remainder of fiscal 2010 and 2011.
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 nine months ended March 31, 2010.
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. In addition, the Company paid an affiliate of
one of the Sponsors approximately $0.5 million in tender offer fees related to the two debt
repurchases that occurred during the nine-month period ended March 31, 2010. These fees were
recorded in general and administrative expense in the consolidated statement of operations.
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.
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CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 March 31, 2010, June 30, 2009 and March 31,
2009. The results of operations for the three and nine month periods ended March 31, 2010 and 2009
and the condensed statements of cash flows for the nine month periods ended March 31, 2010 and 2009
are presented for EM LLC, the Guarantor Subsidiaries, the Non-Guarantor Subsidiaries and Parent
(EDMC).
CONDENSED CONSOLIDATED BALANCE SHEET
March 31, 2010 (In thousands)
March 31, 2010 (In thousands)
Guarantor | Non-Guarantor | EM LLC | EDMC | |||||||||||||||||||||||||||||
EM LLC | Subsidiaries | Subsidiaries | Eliminations | Consolidated | EDMC | Eliminations | Consolidated | |||||||||||||||||||||||||
Assets |
||||||||||||||||||||||||||||||||
Current: |
||||||||||||||||||||||||||||||||
Cash and cash equivalents |
$ | 402,671 | $ | 4,685 | $ | 18,867 | $ | | $ | 426,223 | $ | 46,414 | $ | | $ | 472,637 | ||||||||||||||||
Restricted cash |
737 | 500 | 25,245 | | 26,482 | | | 26,482 | ||||||||||||||||||||||||
Notes, advances and trade receivables, net |
14,900 | 96 | 97,235 | | 112,231 | 2 | | 112,233 | ||||||||||||||||||||||||
Inventories |
| 168 | 13,074 | | 13,242 | | | 13,242 | ||||||||||||||||||||||||
Other current assets |
28,492 | 615 | 61,655 | | 90,762 | | | 90,762 | ||||||||||||||||||||||||
Total current assets |
446,800 | 6,064 | 216,076 | | 668,940 | 46,416 | | 715,356 | ||||||||||||||||||||||||
Property and equipment, net |
55,787 | 6,610 | 572,190 | | 634,587 | | | 634,587 | ||||||||||||||||||||||||
Intangible assets, net |
2,829 | 67 | 465,328 | | 468,224 | | | 468,224 | ||||||||||||||||||||||||
Goodwill |
7,328 | | 2,571,803 | | 2,579,131 | | | 2,579,131 | ||||||||||||||||||||||||
Intercompany balances |
937,892 | (62,315 | ) | (1,277,814 | ) | | (402,237 | ) | 402,237 | | | |||||||||||||||||||||
Other long-term assets |
41,276 | 35,295 | 5,598 | | 82,169 | (1 | ) | | 82,168 | |||||||||||||||||||||||
Investment in subsidiaries |
1,835,815 | | | (1,835,815 | ) | | 1,573,920 | (1,573,920 | ) | | ||||||||||||||||||||||
Total assets |
$ | 3,327,727 | $ | (14,279 | ) | $ | 2,553,181 | $ | (1,835,815 | ) | $ | 4,030,814 | $ | 2,022,572 | $ | (1,573,920 | ) | $ | 4,479,466 | |||||||||||||
Liabilities and shareholders equity (deficit) |
||||||||||||||||||||||||||||||||
Current: |
||||||||||||||||||||||||||||||||
Current portion of long-term debt |
$ | 11,850 | $ | | $ | 322 | $ | | $ | 12,172 | $ | | $ | | $ | 12,172 | ||||||||||||||||
Accounts payable, accrued and other current
liabilities |
162,718 | 3,934 | 349,157 | | 515,809 | 185 | | 515,994 | ||||||||||||||||||||||||
Total current liabilities |
174,568 | 3,934 | 349,479 | | 527,981 | 185 | | 528,166 | ||||||||||||||||||||||||
Long-term debt, less current portion |
1,528,770 | | 891 | | 1,529,661 | | | 1,529,661 | ||||||||||||||||||||||||
Other long-term liabilities |
66,066 | 7,395 | 147,403 | | 220,864 | | | 220,864 | ||||||||||||||||||||||||
Deferred income taxes |
(15,597 | ) | (12,206 | ) | 206,191 | | 178,388 | | | 178,388 | ||||||||||||||||||||||
Total liabilities |
1,753,807 | (877 | ) | 703,964 | | 2,456,894 | 185 | | 2,457,079 | |||||||||||||||||||||||
Total shareholders equity (deficit) |
1,573,920 | (13,402 | ) | 1,849,217 | (1,835,815 | ) | 1,573,920 | 2,022,387 | (1,573,920 | ) | 2,022,387 | |||||||||||||||||||||
Total liabilities and shareholders
equity (deficit) |
$ | 3,327,727 | $ | (14,279 | ) | $ | 2,553,181 | $ | (1,835,815 | ) | $ | 4,030,814 | $ | 2,022,572 | $ | (1,573,920 | ) | $ | 4,479,466 | |||||||||||||
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
March 31, 2009 (In thousands)
March 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 |
$ | 475,979 | $ | 614 | $ | 7,394 | $ | | $ | 483,987 | $ | 41,723 | $ | | $ | 525,710 | ||||||||||||||||
Restricted cash |
311 | | 35,866 | | 36,177 | | | 36,177 | ||||||||||||||||||||||||
Notes, advances and trade receivables, net |
(402 | ) | 47 | 79,103 | | 78,748 | 15 | | 78,763 | |||||||||||||||||||||||
Inventories |
| | 10,635 | | 10,635 | | | 10,635 | ||||||||||||||||||||||||
Other current assets |
16,533 | 686 | 38,188 | | 55,407 | | | 55,407 | ||||||||||||||||||||||||
Total current assets |
492,421 | 1,347 | 171,186 | | 664,954 | 41,738 | | 706,692 | ||||||||||||||||||||||||
Property and equipment, net |
48,472 | 6,137 | 478,226 | | 532,835 | | | 532,835 | ||||||||||||||||||||||||
Intangible assets, net |
399 | 61 | 473,453 | | 473,913 | | | 473,913 | ||||||||||||||||||||||||
Goodwill |
7,328 | | 2,571,803 | | 2,579,131 | | | 2,579,131 | ||||||||||||||||||||||||
Intercompany balances |
1,551,643 | (13,211 | ) | (1,537,932 | ) | | 500 | (500 | ) | | | |||||||||||||||||||||
Other long-term assets |
50,645 | 1,764 | 5,227 | | 57,636 | | | 57,636 | ||||||||||||||||||||||||
Investment in subsidiaries |
1,547,113 | | | (1,547,113 | ) | | 1,411,452 | (1,411,452 | ) | | ||||||||||||||||||||||
Total assets |
$ | 3,698,021 | $ | (3,902 | ) | $ | 2,161,963 | $ | (1,547,113 | ) | $ | 4,308,969 | $ | 1,452,690 | $ | (1,411,452 | ) | $ | 4,350,207 | |||||||||||||
Liabilities and shareholders equity (deficit) |
||||||||||||||||||||||||||||||||
Current: |
||||||||||||||||||||||||||||||||
Short-term and current portion of long-term debt |
$ | 191,913 | $ | | $ | 792 | $ | | $ | 192,705 | $ | | $ | | $ | 192,705 | ||||||||||||||||
Accounts payable, accrued and other current liabilities |
126,473 | 4,739 | 314,021 | | 445,233 | 185 | | 445,418 | ||||||||||||||||||||||||
Total current liabilities |
318,386 | 4,739 | 314,813 | | 637,938 | 185 | | 638,123 | ||||||||||||||||||||||||
Long-term debt, less current portion |
1,877,888 | | 1,137 | | 1,879,025 | | | 1,879,025 | ||||||||||||||||||||||||
Other long-term liabilities |
110,334 | 3,305 | 101,787 | | 215,426 | | | 215,426 | ||||||||||||||||||||||||
Deferred income taxes |
(20,039 | ) | 72 | 185,095 | | 165,128 | | | 165,128 | |||||||||||||||||||||||
Total liabilities |
2,286,569 | 8,116 | 602,832 | | 2,897,517 | 185 | | 2,897,702 | ||||||||||||||||||||||||
Total shareholders equity (deficit) |
1,411,452 | (12,018 | ) | 1,559,131 | (1,547,113 | ) | 1,411,452 | 1,452,505 | (1,411,452 | ) | 1,452,505 | |||||||||||||||||||||
Total liabilities and shareholders equity (deficit) |
$ | 3,698,021 | $ | (3,902 | ) | $ | 2,161,963 | $ | (1,547,113 | ) | $ | 4,308,969 | $ | 1,452,690 | $ | (1,411,452 | ) | $ | 4,350,207 | |||||||||||||
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 March 31, 2010 (In thousands)
For the Three Months Ended March 31, 2010 (In thousands)
Guarantor | Non-Guarantor | EM LLC | EDMC | |||||||||||||||||||||||||||||
EM LLC | Subsidiaries | Subsidiaries | Eliminations | Consolidated | EDMC | Eliminations | Consolidated | |||||||||||||||||||||||||
Net revenues |
$ | | $ | (1,232 | ) | $ | 669,128 | $ | | $ | 667,896 | $ | | $ | | $ | 667,896 | |||||||||||||||
Costs and expenses: |
||||||||||||||||||||||||||||||||
Educational services |
17,068 | (738 | ) | 306,816 | | 323,146 | | | 323,146 | |||||||||||||||||||||||
General and administrative |
(19,587 | ) | (94 | ) | 194,070 | | 174,389 | 57 | | 174,446 | ||||||||||||||||||||||
Management fees paid to affiliates |
| | | | | | | | ||||||||||||||||||||||||
Depreciation and amortization |
4,570 | 59 | 26,045 | | 30,674 | | | 30,674 | ||||||||||||||||||||||||
Total costs and expenses |
2,051 | (773 | ) | 526,931 | | 528,209 | 57 | | 528,266 | |||||||||||||||||||||||
Income (loss) before interest, loss on
early retirement of debt and income taxes |
(2,051 | ) | (459 | ) | 142,197 | | 139,687 | (57 | ) | | 139,630 | |||||||||||||||||||||
Interest
(income) expense, net |
27,811 | (560 | ) | 688 | | 27,939 | (6 | ) | | 27,933 | ||||||||||||||||||||||
Loss on early retirement of debt |
2,445 | | | | 2,445 | | | 2,445 | ||||||||||||||||||||||||
Equity in earnings of subsidiaries |
(123,604 | ) | | | 123,604 | | (84,621 | ) | 84,621 | | ||||||||||||||||||||||
Income (loss) before income taxes |
91,297 | 101 | 141,509 | (123,604 | ) | 109,303 | 84,570 | (84,621 | ) | 109,252 | ||||||||||||||||||||||
Provision for income taxes |
6,676 | 168 | 17,838 | | 24,682 | | | 24,682 | ||||||||||||||||||||||||
Net income (loss) |
$ | 84,621 | $ | (67 | ) | $ | 123,671 | $ | (123,604 | ) | $ | 84,621 | $ | 84,570 | $ | (84,621 | ) | $ | 84,570 | |||||||||||||
CONSOLIDATED STATEMENT OF OPERATIONS
For the Three Months Ended March 31, 2009 (In thousands)
For the Three Months Ended March 31, 2009 (In thousands)
Guarantor | Non-Guarantor | EM LLC | EDMC | |||||||||||||||||||||||||||||
EM LLC | Subsidiaries | Subsidiaries | Eliminations | Consolidated | EDMC | Eliminations | Consolidated | |||||||||||||||||||||||||
Net revenues |
$ | | $ | (613 | ) | $ | 536,051 | $ | | $ | 535,438 | $ | | $ | | $ | 535,438 | |||||||||||||||
Costs and expenses: |
||||||||||||||||||||||||||||||||
Educational services |
11,165 | (867 | ) | 258,201 | | 268,499 | | | 268,499 | |||||||||||||||||||||||
General and administrative |
(18,281 | ) | 903 | 146,592 | | 129,214 | 58 | | 129,272 | |||||||||||||||||||||||
Management fees paid to affiliates |
1,250 | | | | 1,250 | | | 1,250 | ||||||||||||||||||||||||
Depreciation and amortization |
3,805 | 43 | 24,980 | | 28,828 | | | 28,828 | ||||||||||||||||||||||||
Total costs and expenses |
(2,061 | ) | 79 | 429,773 | | 427,791 | 58 | | 427,849 | |||||||||||||||||||||||
Income (loss) before interest and income taxes |
2,061 | (692 | ) | 106,278 | | 107,647 | (58 | ) | | 107,589 | ||||||||||||||||||||||
Interest
(income) expense, net |
36,728 | | 726 | | 37,454 | (54 | ) | | 37,400 | |||||||||||||||||||||||
Equity in earnings of subsidiaries |
(66,599 | ) | | | 66,599 | | (44,129 | ) | 44,129 | | ||||||||||||||||||||||
Income (loss) before income taxes |
31,932 | (692 | ) | 105,552 | (66,599 | ) | 70,193 | 44,125 | (44,129 | ) | 70,189 | |||||||||||||||||||||
Provision for (benefit from) income taxes |
(12,197 | ) | (255 | ) | 38,516 | | 26,064 | (2 | ) | | 26,062 | |||||||||||||||||||||
Net income (loss) |
$ | 44,129 | $ | (437 | ) | $ | 67,036 | $ | (66,599 | ) | $ | 44,129 | $ | 44,127 | $ | (44,129 | ) | $ | 44,127 | |||||||||||||
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 Nine Months Ended March 31, 2010 (In thousands)
For the Nine Months Ended March 31, 2010 (In thousands)
Guarantor | Non-Guarantor | EM LLC | EDMC | |||||||||||||||||||||||||||||
EM LLC | Subsidiaries | Subsidiaries | Eliminations | Consolidated | EDMC | Eliminations | Consolidated | |||||||||||||||||||||||||
Net revenues |
$ | | $ | (4,691 | ) | $ | 1,862,455 | $ | | $ | 1,857,764 | $ | | $ | | $ | 1,857,764 | |||||||||||||||
Costs and expenses: |
||||||||||||||||||||||||||||||||
Educational services |
43,242 | (3,264 | ) | 894,147 | | 934,125 | | | 934,125 | |||||||||||||||||||||||
General and administrative |
(54,293 | ) | 297 | 545,433 | | 491,437 | 171 | | 491,608 | |||||||||||||||||||||||
Management fees paid to affiliates |
32,055 | | | | 32,055 | | | 32,055 | ||||||||||||||||||||||||
Depreciation and amortization |
13,472 | 186 | 75,244 | | 88,902 | | | 88,902 | ||||||||||||||||||||||||
Total costs and expenses |
34,476 | (2,781 | ) | 1,514,824 | | 1,546,519 | 171 | | 1,546,690 | |||||||||||||||||||||||
Income (loss) before interest, loss on
early retirement of debt and income taxes |
(34,476 | ) | (1,910 | ) | 347,631 | | 311,245 | (171 | ) | | 311,074 | |||||||||||||||||||||
Interest (income) expense, net |
93,334 | (768 | ) | 2,130 | | 94,696 | (44 | ) | | 94,652 | ||||||||||||||||||||||
Loss on early retirement of debt |
47,207 | | | | 47,207 | | | 47,207 | ||||||||||||||||||||||||
Equity in earnings of subsidiaries |
(245,451 | ) | | | 245,451 | | (120,703 | ) | 120,703 | | ||||||||||||||||||||||
Income (loss) before income taxes |
70,434 | (1,142 | ) | 345,501 | (245,451 | ) | 169,342 | 120,576 | (120,703 | ) | 169,215 | |||||||||||||||||||||
Provision for (benefit from) income taxes |
(50,269 | ) | (328 | ) | 99,236 | | 48,639 | (30 | ) | | 48,609 | |||||||||||||||||||||
Net income (loss) |
$ | 120,703 | $ | (814 | ) | $ | 246,265 | $ | (245,451 | ) | $ | 120,703 | $ | 120,606 | $ | (120,703 | ) | $ | 120,606 | |||||||||||||
CONSOLIDATED STATEMENT OF OPERATIONS
For the Nine Months Ended March 31, 2009 (In thousands)
For the Nine Months Ended March 31, 2009 (In thousands)
Guarantor | Non-Guarantor | EM LLC | EDMC | |||||||||||||||||||||||||||||
EM LLC | Subsidiaries | Subsidiaries | Eliminations | Consolidated | EDMC | Eliminations | Consolidated | |||||||||||||||||||||||||
Net revenues |
$ | | $ | 4,617 | $ | 1,487,267 | $ | | $ | 1,491,884 | $ | | $ | | $ | 1,491,884 | ||||||||||||||||
Costs and expenses: |
||||||||||||||||||||||||||||||||
Educational services |
33,320 | 2,992 | 751,317 | | 787,629 | | | 787,629 | ||||||||||||||||||||||||
General and administrative |
(48,723 | ) | 2,400 | 416,146 | | 369,823 | 172 | | 369,995 | |||||||||||||||||||||||
Management fees paid to
affiliates |
3,750 | | | | 3,750 | | | 3,750 | ||||||||||||||||||||||||
Depreciation and
amortization |
11,323 | 134 | 71,550 | | 83,007 | | | 83,007 | ||||||||||||||||||||||||
Total costs and
expenses |
(330 | ) | 5,526 | 1,239,013 | | 1,244,209 | 172 | | 1,244,381 | |||||||||||||||||||||||
Income (loss) before
interest and income taxes |
330 | (909 | ) | 248,254 | | 247,675 | (172 | ) | | 247,503 | ||||||||||||||||||||||
Interest
(income) expense, net |
114,117 | | 2,193 | | 116,310 | (296 | ) | | 116,014 | |||||||||||||||||||||||
Equity in earnings of
subsidiaries |
(155,858 | ) | | | 155,858 | | (83,049 | ) | 83,049 | | ||||||||||||||||||||||
Income (loss) before income
taxes |
42,071 | (909 | ) | 246,061 | (155,858 | ) | 131,365 | 83,173 | (83,049 | ) | 131,489 | |||||||||||||||||||||
Provision for (benefit
from) income taxes |
(40,978 | ) | (334 | ) | 89,628 | | 48,316 | 47 | | 48,363 | ||||||||||||||||||||||
Net income (loss) |
$ | 83,049 | $ | (575 | ) | $ | 156,433 | $ | (155,858 | ) | $ | 83,049 | $ | 83,126 | $ | (83,049 | ) | $ | 83,126 | |||||||||||||
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 Nine Months Ended March 31, 2010 (In thousands)
For the Nine Months Ended March 31, 2010 (In thousands)
Guarantor | Non-Guarantor | EM LLC | EDMC | |||||||||||||||||||||
EM LLC | Subsidiaries | Subsidiaries | Consolidated | EDMC | Consolidated | |||||||||||||||||||
Net cash flows provided by (used in) operations |
$ | (55,044 | ) | $ | (24,367 | ) | $ | 419,098 | $ | 339,687 | $ | 470 | $ | 340,157 | ||||||||||
Cash flows from investing activities |
||||||||||||||||||||||||
Expenditures for long-lived assets |
(10,534 | ) | (1,248 | ) | (108,043 | ) | (119,825 | ) | | (119,825 | ) | |||||||||||||
Other investing activities |
| | (8,229 | ) | (8,229 | ) | | (8,229 | ) | |||||||||||||||
Net cash flows used in investing activities |
(10,534 | ) | (1,248 | ) | (116,272 | ) | (128,054 | ) | | (128,054 | ) | |||||||||||||
Cash flows from financing activities |
||||||||||||||||||||||||
Net repayments of debt and other |
(490,243 | ) | | (598 | ) | (490,841 | ) | | (490,841 | ) | ||||||||||||||
Net proceeds from issuance of common stock, including
stock option exercises |
| | | | 387,998 | 387,998 | ||||||||||||||||||
Intercompany transactions |
942,703 | 29,819 | (588,707 | ) | 383,815 | (383,815 | ) | | ||||||||||||||||
Net cash flows provided by (used in) financing activities |
452,460 | 29,819 | (589,305 | ) | (107,026 | ) | 4,183 | (102,843 | ) | |||||||||||||||
Effect of exchange rate changes on cash and cash equivalents |
| | 59 | 59 | | 59 | ||||||||||||||||||
Increase (decrease) in cash and cash equivalents |
386,882 | 4,204 | (286,420 | ) | 104,666 | 4,653 | 109,319 | |||||||||||||||||
Beginning cash and cash equivalents |
15,789 | 481 | 305,287 | 321,557 | 41,761 | 363,318 | ||||||||||||||||||
Ending cash and cash equivalents |
$ | 402,671 | $ | 4,685 | $ | 18,867 | $ | 426,223 | $ | 46,414 | $ | 472,637 | ||||||||||||
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 Nine Months Ended March 31, 2009 (In thousands)
For the Nine Months Ended March 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 |
$ | (30,758 | ) | $ | 1,674 | $ | 343,659 | $ | 314,575 | $ | 342 | $ | 314,917 | |||||||||||
Cash flows from investing activities |
||||||||||||||||||||||||
Expenditures for long-lived assets |
(8,914 | ) | (1,128 | ) | (87,943 | ) | (97,985 | ) | | (97,985 | ) | |||||||||||||
Other investing activities |
| | (19,191 | ) | (19,191 | ) | | (19,191 | ) | |||||||||||||||
Net cash flows used in investing activities |
(8,914 | ) | (1,128 | ) | (107,134 | ) | (117,176 | ) | | (117,176 | ) | |||||||||||||
Cash flows from financing activities |
||||||||||||||||||||||||
Net proceeds from (payments of) debt and other |
50,208 | (1 | ) | (809 | ) | 49,398 | | 49,398 | ||||||||||||||||
Intercompany transactions |
463,132 | (66 | ) | (463,066 | ) | | | | ||||||||||||||||
Net cash flows provided by (used in) financing activities |
513,340 | (67 | ) | (463,875 | ) | 49,398 | | 49,398 | ||||||||||||||||
Effect of exchange rate changes on cash and cash
equivalents |
| | 1,163 | 1,163 | | 1,163 | ||||||||||||||||||
Increase (decrease) in cash and cash equivalents |
473,668 | 479 | (226,187 | ) | 247,960 | 342 | 248,302 | |||||||||||||||||
Beginning cash and cash equivalents |
2,311 | 135 | 233,581 | 236,027 | 41,381 | 277,408 | ||||||||||||||||||
Ending cash and cash equivalents |
$ | 475,979 | $ | 614 | $ | 7,394 | $ | 483,987 | $ | 41,723 | $ | 525,710 | ||||||||||||
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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)
15. SUBSEQUENT EVENTS
On May 7, 2010, the U.S. Department of Education requested the Company increase its letter of
credit to $259.8 million based on 10% of projected Title IV aid to be received by students
attending the Companys institutions during fiscal 2011. In
response, the size of the letter of credit
issued to the U.S. Department of Education will be increased by $86.6 million by June
4, 2010. As described in Note 8, letters of credit
reduce availability under the Companys revolving credit facility. Immediately following this
increase, the Company will have $145.2 million of additional borrowings available under the
revolving credit facility.
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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 nine month periods ended March 31, 2010 and 2009 as a percentage of
net revenues.
Amounts expressed as a percentage of net revenues
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Three Months | For the Nine Months | |||||||||||||||
Ended March 31, | Ended March 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net revenues |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Costs and expenses: |
||||||||||||||||
Educational services |
48.4 | % | 50.1 | % | 50.3 | % | 52.8 | % | ||||||||
General and administrative |
26.1 | % | 24.1 | % | 26.5 | % | 24.7 | % | ||||||||
Management fees paid to affiliates |
0.0 | % | 0.2 | % | 1.7 | % | 0.3 | % | ||||||||
Depreciation and amortization |
4.6 | % | 5.4 | % | 4.8 | % | 5.6 | % | ||||||||
Total costs and expenses |
79.1 | % | 79.8 | % | 83.3 | % | 83.4 | % | ||||||||
Income before interest, loss on
early retirement of debt and
income taxes |
20.9 | % | 20.2 | % | 16.7 | % | 16.6 | % | ||||||||
Interest expense, net |
4.2 | % | 7.0 | % | 5.1 | % | 7.8 | % | ||||||||
Loss on early retirement of debt |
0.4 | % | 0.0 | % | 2.5 | % | 0.0 | % | ||||||||
Income before income taxes |
16.3 | % | 13.2 | % | 9.1 | % | 8.8 | % | ||||||||
Provision for income taxes |
3.7 | % | 4.9 | % | 2.6 | % | 3.2 | % | ||||||||
Net income |
12.6 | % | 8.3 | % | 6.5 | % | 5.6 | % | ||||||||
Three months ended March 31, 2010 compared to the three months ended March 31, 2009
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 March 31, 2010 increased 24.7% to $667.9 million,
compared to $535.4 million in the same period a year ago. The January starting student enrollment
increased 22.4% 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.
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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.
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 $54.6 million, or 20.4%, to $323.1 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 176 basis
points from the quarter ended March 31, 2009 to the current quarter.
Salaries and benefits expense decreased by 154 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. We also experienced operating leverage on
rent associated with our schools, which decreased 62 basis points as a percentage of net revenues
to $42.0 million in the current quarter compared to $37.0 million in the prior year quarter. We
also experienced a decrease of 59 basis points from the prior year quarter in fees paid to private
lenders to originate loans obtained by our students. This trend is discussed more fully in Item 2
Managements Discussion and Analysis of Financial Condition and Results of Operations Liquidity
- Federal Family Education Loan Program and Private Student Loans.
Bad debt expense was $28.0 million, or 4.2% of net revenues, in the current quarter compared
to $17.8 million, or 3.3% of net revenues, in the prior period, which represented an increase of 88
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 increase of 11 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 $174.5 million for the current quarter, an increase of
34.9% from $129.3 million in the prior year quarter. As a percentage of net revenues, general and
administrative expense increased 198 basis points compared to the quarter ended March 31, 2009.
During the current quarter, we implemented a corporate services restructuring plan designed to
improve operational efficiencies by realigning functions between corporate services and our
education systems. As a result of the restructuring plan, we recorded a non-recurring charge of
$5.7 million.
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After adjusting for the costs described above, general and administrative expense increased by
112 basis points in the current period compared to the prior year period. The increase was
primarily the result of recording non-cash equity-based compensation expense of $1.7 million, or a
26 basis point increase from the prior year quarter. Equity-based compensation expense was not
required to be recorded in the prior fiscal year due to the existence of certain conditions
associated with the options that were removed upon the completion of the initial public offering.
There was also a 22 basis point increase in total marketing and admissions costs, which were 21.6%
of net revenues in the current quarter compared to 21.4% of net revenues in the prior year quarter.
The remaining net increase of 64 basis points compared to the prior
year quarter was primarily the result
of net increases in other items including benefits, insurance and legal costs.
Management fees paid to affiliates
For the quarter ended March 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. In connection with the initial public offering, the management
agreement was terminated in October 2009 and no expense was incurred for the quarter ended March
31, 2010.
Depreciation and amortization expense
Depreciation and amortization expense on long-lived assets was $30.7 million in the current
quarter, an increase of 6.4% 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 to leverage in relation to revenue growth and 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 $27.9 million in the current quarter, a decrease of $9.5 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
During the quarter ended March 31, 2010, we purchased Senior Subordinated Notes with a face
value of approximately $21.4 million, on which we recorded a loss of $2.4 million.
Provision for income taxes
Our effective tax rate was 22.6% for the three months ended March 31, 2010 as compared to
37.1% for the same period in the prior year. The effective tax 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.
The decrease in the effective tax rate for the three months ended March 31, 2010 as compared
to the prior year quarter was primarily due to a $16.3 million decrease in the liability for
uncertain tax positions and $1.6 million of interest and the indirect benefits associated with
state income taxes as the result of the expiration of certain statutes of limitation with respect
to fiscal year 2006.
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Nine months ended March 31, 2010 compared to the nine months ended March 31, 2009
All basis point changes are presented as a percentage of net revenues in each period of
comparison.
Net revenues
Net revenues for the nine months ended March 31, 2010 increased 24.5% to $1,857.8 million,
compared to $1,491.9 million in the same period a year ago. Average student enrollment increased
22.7% 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 $146.5 million, or 18.6%, to $934.1 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 251 basis
points in the current nine month period compared to the nine months ended March 31, 2009.
Salaries and benefits expense decreased by 164 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. We also experienced operating leverage on rent
associated with our schools, which decreased 64 basis points as a percentage of net revenues to
$124.4 million in the current year period compared to $109.5 million in the prior year period.
Additionally, costs related to outside services and insurance, utilities and information technology
maintenance decreased 50 basis points in the current period compared to the prior year period. We
also experienced a decrease of 30 basis points from the prior year period in fees paid to private
lenders to originate loans obtained by our students. This trend is discussed more fully in Item 2
Managements Discussion and Analysis of Financial Condition and Results of Operations Liquidity
- Federal Family Education Loan Program and Private Student Loans.
Bad debt expense was $78.6 million, or 4.2% of net revenues, in the current period compared to
$52.8 million, or 3.5% of net revenues, in the prior year period, which represented an increase of
69 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 12 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 $491.6 million for the current period, an increase of
32.9% from $370.0 million in the prior year period. As a percentage of net revenues, general and
administrative expense increased 166 basis points compared to 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 $1.0 million of legal costs and other fees
associated with the repurchases of $337.4 million of Senior Subordinated Notes. Further, in March
2010 we implemented a corporate services restructuring plan that was designed to improve
operational efficiencies and to support the growth of our education systems. As a result of the
restructuring plan, we recorded a non-recurring charge of $5.7 million.
After adjusting for the costs described above, general and administrative expense increased by
59 basis points in the current period compared to the prior year period. We incurred non-cash
equity-based compensation expense of $3.3 million, or an 18 basis point increase since this was not
required to be recorded in the prior year period.
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Marketing and admissions costs were 21.9% of net revenues in the current nine month period
compared to 22.0% of net revenues in the prior year period, or a decrease of two basis points. The
remaining net increase of 43 basis points in the current nine-month period was primarily the result
of increases in other items including benefits and legal costs.
Management fees paid to affiliates
For the nine-month period ended March 31, 2010, management fees paid to affiliates consisted
of the pro-rata portion of the $5.0 million annual fee paid to the Sponsors through December 31,
2009 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 $88.9 million in the current
period, an increase of 7.1% from the prior year period. As a percentage of net revenues,
depreciation and amortization expense decreased by 78 basis points compared to the prior year
period, due to leverage in relation to revenue growth and 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 $94.7 million in the current period, a decrease of $21.4 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
During the nine months ended March 31, 2010, we purchased Senior Subordinated Notes with a
face value of approximately $337.4 million through two tender offer transactions. We recorded a
loss of $47.2 million during this period on the early retirement of these notes, which was
comprised of a premium of $41.6 million over face value to repurchase debt and accelerated
amortization on the prorated portion of deferred financing costs related to these notes of $5.6
million.
Provision for income taxes
Our effective tax rate was 28.7% for the nine months ended March 31, 2010 as compared to 36.8%
for the same period in the prior year. The effective tax 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.
The decrease in the effective tax rate for the nine months ended March 31, 2010 as compared to
the prior year period was primarily due to a $16.3 million decrease in the liability for uncertain
tax positions and $1.6 million of interest and the indirect benefits associated with state income
taxes as the result of the expiration of certain statutes of limitation with respect to fiscal year
2006.
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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Operating cash flows
Cash flow from operations for the nine month period ended March 31, 2010 was $340.2 million,
including the effect of a non-recurring $29.6 million cash payment to terminate the Sponsor
management agreement in connection with the initial public offering, compared to $314.9 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 $11.2 million in the
amount of interest paid on our debt compared to the prior year period as a result of debt
repurchases and lower interest rates.
Days sales outstanding (DSO) in receivables increased to 15.1 days at March 31,
2010 compared to 12.8 days at March 31, 2009. 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 $51.5 million and $3.2 million during the nine-month periods ended March 31, 2010 and
2009, respectively related to the Education Finance Loan program.
We have accrued a total of $7.8 million as of March 31, 2010 for uncertain tax positions,
excluding interest and the indirect benefits associated with state income taxes. We may have cash
payments in future periods relating to the amount accrued 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 $119.8 million, or 6.4% of net revenues, for the nine month period
ended March 31, 2010, compared to $98.0 million, or 6.6% of net revenues, for the prior year
period. During fiscal 2010, we have continued to invest both in new facilities and in the
expansion of existing facilities. We expect capital expenditures in fiscal 2010 to approximate
7.0% of net revenues compared to 7.5% of net revenues in fiscal 2009.
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.
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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 a face value of $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. In addition, we purchased Senior Subordinated Notes with a face value of
approximately $21.4 million through a tender offer during the quarter ended March 31, 2010.
As a result of the Transaction, we are highly leveraged and our debt service requirements are
significant. At March 31, 2010, we had $1,541.8 million in aggregate indebtedness outstanding.
After giving effect to outstanding letters of credit, we had $231.8 million of additional borrowing
capacity on this facility at March 31, 2010. We expect our cash flows from operations, combined
with availability under our revolving credit facility, to 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 $210.7 million at March 31, 2010. We are required to maintain
a 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, which was $173.2 million at March 31,
2010, is set at 10% of the Title IV aid received by students attending our
schools. The majority of the remainder of the outstanding letters of
credit at March 31, 2010 relate to obligations to purchase loans under the Education Finance Loan
program. On May 7, 2010, the U.S. Department of Education requested us to increase our letter of
credit to $259.8 million by June 4, 2010 based on projected Title IV aid to be received by students
attending our institutions during fiscal 2011. Immediately following this increase, we will have
$145.2 million of additional borrowings available under the revolving credit facility.
In November 2009, Education Management Corporation guaranteed the Notes. At March 31, 2010,
total indebtedness outstanding under the Notes was $422.7 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.
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.
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With the enactment of the Ensuring Continued Access to Student Loans Act of 2008, the U.S.
government has 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 unsubsidized Stafford loans made available to all undergraduate students under the FFEL
and Direct Loan program increased by $2,000. On July 1, 2009, the maximum amount of availability of
a Pell grant increased to $5,350 per year from a maximum of $4,731 per year in fiscal 2009. In addition, with the enactment of the Higher Education Opportunity Act of
2008, effective July 1, 2009 students are eligible for up to two annual scheduled Pell Grant
awards, which should encourage students to accelerate their programs. The maximum Pell grant
available to eligible students is scheduled to increase to $5,550 per award year effective July 1,
2010.
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. As the
number of students receiving loans through this program has decreased substantially throughout
fiscal 2009 and 2010, we do not expect to extend this program beyond 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 nine months of
fiscal 2010, as private loans accounted for approximately 5% of net revenues as compared to
approximately 15% of net revenues in the first nine 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 3.0% as a percentage of net revenues during fiscal 2009
and the first nine months of 2010, respectively. We estimate that total aid awarded under this
program during fiscal 2010 will be approximately $70 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 has resulted in an increase in our bad debt expense as a percentage of net revenues 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, loss on early retirement of
debt, 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, these presentations 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 Nine Months | |||||||||||||||
Ended March 31, | Ended March 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net income |
$ | 84.6 | $ | 44.1 | $ | 120.6 | $ | 83.1 | ||||||||
Interest expense, net |
27.9 | 37.4 | 94.7 | 116.0 | ||||||||||||
Loss on early retirement of debt (1) |
2.4 | 0.0 | 47.2 | 0.0 | ||||||||||||
Provision for income taxes |
24.7 | 26.1 | 48.6 | 48.4 | ||||||||||||
Depreciation and amortization |
30.7 | 28.8 | 88.9 | 83.0 | ||||||||||||
EBITDA |
$ | 170.3 | $ | 136.4 | $ | 400.0 | $ | 330.5 | ||||||||
(1) | In connection with the initial public offering in October 2009, we retired $316.0 million of the Senior Subordinated Notes in a tender offer. We also purchased Senior Subordinated Notes with a face value of $21.4 million in the third quarter of fiscal 2010 through another tender offer. |
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 March 31, 2010, 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.
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).
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For the twelve | ||||
months ended | ||||
March 31, | ||||
2010 | ||||
Net income |
$ | 141.9 | ||
Interest expense, net |
132.0 | |||
Loss on early retirement of debt (1) |
47.2 | |||
Provision for income taxes |
61.5 | |||
Depreciation and amortization |
118.2 | |||
EBITDA |
500.8 | |||
Reversal of impact of unfavorable leases (2) |
(0.9 | ) | ||
Management fees paid to affiliates (3) |
33.3 | |||
Severance and relocation |
7.0 | |||
Non-cash compensation |
19.4 | |||
Capital taxes |
5.0 | |||
Other |
6.9 | |||
Adjusted EBITDA Covenant Compliance |
$ | 571.5 | ||
(1) | In connection with the initial public offering in October 2009, we retired $316.0 million of the Senior Subordinated Notes in a tender offer. We also purchased Senior Surbordinated Notes with a face value of $21.4 million in the third quarter of fiscal 2010 through another tender offer. | |
(2) | Represents non-cash reduction to rent expense due to the amortization on $7.3 million of unfavorable lease liabilities resulting from fair value adjustments required as part of the Transaction. | |
(3) | Represents fees incurred under a management advisory 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. |
Our covenant requirements and actual ratios for the twelve months ended March
31, 2010 are as follows:
Covenant | Actual | |||||||
Senior secured credit facility | Requirements | Ratios | ||||||
Adjusted EBITDA to Consolidated Interest Expense ratio |
Minimum of 2.00x | 4.31x | ||||||
Consolidated Total Debt to Adjusted EBITDA ratio |
Maximum of 5.75x | 1.95x |
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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; changes to rules and
regulations that affect our business by the U.S. Department of Education, accrediting agencies and
state licensing bodies; 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 March 31, 2010, we had total debt obligations of $1,541.8 million, including $1,117.9
million of variable rate debt under the senior secured credit facility at a weighted average
interest rate of 6.4%. A hypothetical change of 1.25% in interest rates from March 31, 2010 levels
would have increased or decreased interest expense by approximately $3.4 million for the variable
rate debt in the nine month period ended March 31, 2010.
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 March 31, 2010, we had variable rate debt of $367.9
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 nine-month period ended March 31, 2010, we recorded an unrealized after-tax gain of
$7.7 million in other comprehensive loss related to the change in market value of the interest rate
swaps. The cumulative unrealized loss of $26.5 million, net of tax, at March 31, 2010 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.
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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.
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 fiscal 2010 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 for at least two years, its ineligibility to
participate in Title IV programs could have a material adverse effect on our
enrollments, revenues and results of operations.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
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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