The following risk factors and other information included in this Form 10-K should be carefully considered. The risks and uncertainties described below are not the only ones we face.
RISKS RELATED TO OUR INDUSTRY
If we fail to demonstrate "administrative capability" to the DOE, our business could suffer.
DOE regulations specify extensive criteria an institution must satisfy to establish that it has the requisite "administrative capability" to participate in Title IV Programs. For a description of these criteria, see “Regulatory Environment – Administrative Capability.”
Other standards provide that an institution may be found to lack administrative capability and be placed on provisional certification if its student loan default rate under the FFEL and FDL program is 30% or greater for at least two of the three most recent federal fiscal years for which the DOE has issued three-year rates.
If an institution fails to satisfy any of these criteria or any other DOE regulation, the DOE may, among other things:
| · | Require the repayment of Title IV funds; |
| · | Impose a less favorable payment system for the institution's receipt of Title IV funds; |
| · | Place the institution on provisional certification status; or |
| · | Commence a proceeding to impose a fine or to limit, suspend or terminate the participation of the institution in Title IV Programs. |
If we are found not to have satisfied the DOE's "administrative capability" requirements, one or more of our institutions, including its additional locations, could be limited in its access to, or lose, Title IV Program funding. A decrease in Title IV funding could adversely affect our revenue, as we received approximately 80% of our revenue (calculated based on cash receipts) from Title IV Programs in 2014, which would have a significant impact on our business and results of operations.
Failure of our schools to comply with the extensive regulatory requirements for school operations could result in financial penalties, restrictions on our operations and loss of external financial aid funding, which could affect our revenues and impose significant operating restrictions on us.
Our schools are subject to extensive regulation by federal and state governmental agencies and by accrediting commissions. In particular, the HEA and the regulations promulgated thereunder by the DOE, set forth numerous standards that our schools must satisfy to participate in various federal student financial assistance programs under Title IV Programs. In 2013,2014, we derived approximately 80% of our revenues, calculated based on cash receipts, from Title IV Programs. To participate in Title IV Programs, each of our schools must receive and maintain authorization by the applicable education agencies in the state in which each school is physically located, be accredited by an accrediting commission recognized by the DOE and be certified as an eligible institution by the DOE. These regulatory requirements cover the vast majority of our operations, including our educational programs, facilities, instructional and administrative staff, administrative procedures, marketing, recruiting, student performances and outcomes, financial operations and financial condition. These regulatory requirements also affect our ability to acquire or open additional schools, add new educational programs, expand existing educational programs, and change our corporate structure and ownership.
If any of our schools fails to comply with applicable regulatory requirements, the school and its related main campus and/or additional locations could be subject to, among other things, the loss of state licensure or accreditation, the loss of eligibility to participate in and receive funds under the Title IV Programs, the loss of the ability to grant degrees, diplomas and certificates, provisional certification, or the imposition of liabilities or monetary penalties, each of which could adversely affect our revenues and impose significant operating restrictions upon us. In addition, the loss by any of our schools of its accreditation, its state authorization or license, or its eligibility to participate in Title IV Programs constitutes an event of default under our credit agreement. An event of default on our credit agreement could result in the acceleration of all amounts then outstanding under our credit agreement. The various regulatory agencies periodically revise their requirements and modify their interpretations of existing requirements and restrictions. We cannot predict with certainty how any of these regulatory requirements will be applied or whether each of our schools will be able to comply with these requirements or any additional requirements instituted in the future.
Congress has changed, and may make other changes, to the laws applicable to, or reduce funding for, Title IV Programs, which could reduce our student population, revenues or profit margin.
Political and budgetary concerns significantly affect Title IV programs. Congress periodically revises the HEA and other laws governing Title IV HEA Programs and annually determines the funding level for each Title IV Program. On August 14, 2008, the Higher Education Opportunity Act, Public Law 110-315 reauthorized the Title IV programs through at least September 30, 2014. The HEA was automatically extended through September 30, 2015. Congress will be considering reauthorization of the Title IV HEA programs, but it is unknown when Congress will complete that process or what changes will be made to the HEA or other laws affecting Federal student aid. Any action by Congress that significantly reduces funding for Title IV Programs or the ability of our schools or students to receive funding through those programs could result in increased administrative costs and decreased profit margin.
In addition, Congress reviews and determines federal appropriations for Title IV Programs on an annual basis. Congress can also make changes in the laws affecting Title IV Programs in the annual appropriations bills and in other laws it enacts between the HEA reauthorizations. Because a significant percentage of our revenues are derived from Title IV Programs, any action by Congress that significantly reduces Title IV Program funding or the ability of our schools or students to participate in Title IV Programs could reduce our student enrollment and our revenues. Congressional action may also increase our administrative costs and require us to modify our practices in order for our schools to comply fully with Title IV Program requirements.
We cannot predict what if any legislation or other actions will be taken or proposed by Congress in connection with the reauthorization of the HEA or with other activities of Congress. Any action by Congress that significantly reduces funding for Title IV Programs or that limits or restricts the ability of our schools, programs, or students to receive funding through those programs or that imposes new restrictions or constraints upon our business or operations could result in increased administrative costs and decreased profit margin. In addition, current requirements for student or school participation in Title IV programs may change or one or more of the present Title IV programs could be replaced by other programs with materially different student or school eligibility requirements. If we cannot comply with the provisions of the HEA, as they may be revised, or if the cost of such compliance is excessive, or if funding is materially reduced, our revenues or profit margin could be materially adversely affected.
Congress has made recent changes to the law that have and could continue to have an adverse effect on our business.
On December 23, 2011, President Obama signed into law the Consolidated Appropriations Act, 2012 (Public Law 112-74) (the “Appropriations Act”). The new law significantly impacted the federal student aid programs authorized under Title IV of HEA.
Ability-to-Benefit — The Appropriations Act also eliminated federal student aid eligibility for all students without a “certificate of graduation from a school providing secondary education or the recognized equivalent of such a certificate.” The Appropriations Act makes an exception for students who have completed a secondary school education in a home school setting that is treated as a home school or private school under state law. Therefore, students who do not have a high school diploma or a recognized equivalent (e.g., a GED), or do not meet the home school requirements, and who first enroll in a program of study on or after July 1, 2012, are not eligible to receive Title IV student aid. Students will qualify for Title IV student aid under one of the ability-to-benefit (ATB) alternatives if the student was enrolled in a Title IV eligible program prior to July 1, 2012. Those alternatives include the student passing an independently-administered, approved ATB test or successfully completing at least six credit hours or 225 clock hours of postsecondary education. A student who does not possess a high school diploma, or a recognized equivalent, but who is enrolled in a Title IV eligible program any time prior to July 1, 2012 may be eligible to receive Title IV student assistance after July 1, 2012. We ceased enrolling ability to benefit students effective July 1, 2012.
The DOE has changed its regulations, and may make other changes in the future, in a manner which could require us to incur additional costs in connection with our administration of the Title IV programs, affect our ability to remain eligible to participate in the Title IV programs, impose restrictions on our participation in the Title IV programs, affect the rate at which students enroll in our programs, or otherwise have a material adverse effectsignificant impact on our business and results of operations.
In June 2013, the DOE announced its intention to establish a negotiated rulemaking committee to prepare new gainful employment regulations, which would replace those vacated by the District Court. The DOE held negotiating sessions with the committee beginning in September 2013 and concluding in December 2013. Before each session,In October 2014, the DOE distributed draft regulatory language marked as a draft for discussion purposes. The draft regulatory language distributed by the DOE to the committee for discussion purposes in December 2013 requiresissued final regulations on gainful employment requiring each educational program to achieve threshold rates in threetwo debt measure categories related to an annual debt to annual earnings ratio and an annual debt to discretionary income ratio, and a program cohort default rate.ratio. The various formulas are calculated under complex methodologies and definitions outlined in the draft regulatory languagefinal regulations and, in some cases, are based on data that may not be readily accessible to institutions. The draft language outlinesregulations outline various scenarios under which programs could lose Title IV eligibility for failure to achieve threshold rates in one or more measures over certain periods of time ranging from two to four years. The draft languageregulations also requiresrequire an institution to provide warnings to students in programs which may lose Title IV eligibility at the end of an award year, limit its Title IV enrollment in these programs, and submit a letter of credit or set aside funds to provide borrower relief to students in the event the programs become ineligible.year. The draft regulatory language containsfinal regulations also contain other provisions that, among other things, include disclosure, reporting, and new program approval, and certification requirements.The certification requirements will require each institution to certify to the DOE that each GE program is programmatically accredited, if such accreditation is required by a Federal governmental entity or by governmental entity in the state in which the institution is physically located
The draft regulatory language discussed above is not final and is subject to change by the DOE. The DOE is expected to publish draft regulations for comment by the public before preparing and publishing final regulations. Accordingly, we cannot predict the ultimate content of any new regulations that may emerge from this process or the potential impact of such regulations on us or our institutions. New final DOE regulations published on or before November 1, 2014 typically would have ana general effective date of July 1, 2015, although it is unknown at this time whether some or all of these regulations might have an earlier or later effective date.2015. The implementation of new gainful employment regulations, or any other changes the DOE may propose and implement, could require us to eliminate certain educational programs, could result in the loss of our students’ access to Title IV Program funds for the affected programs, and could have a material adverse effectsignificant impact on the rate at which students enroll in our programs and on our business and results of operations.Based on our preliminary analysis the majority of our programs will not be effected and we should be able to alter the affected programs to meet the new regulations.
The DOE published additional new regulations in 2014 on other topics, including regulations related to adverse credit for borrowers of PLUS loans and related to certain campus safety and security related requirements. The DOE also announced additional topics that will be considered for new regulations byduring negotiated rulemaking committees beginningsessions in February 2014. The2014, but did not publish, regulations on other topics under discussion are expected to include, but may not be limited to, the following:including clock to credit hour conversion for programs offered in credit hours that do not transfer into degree programs and are subject to the federal conversion formula for determining credit hours; cash management of funds provided under the Title IV Federal student aid programs, including the handling of the use of debit cards and the handling of credit balances; state authorization for programs offered through distance education or correspondence education; and state authorization for foreign locations of institutions located in a state; and the definition of "adverse credit" for borrowers of certain loans. Another committee is scheduled to meet during three sessions beginning in January 2014 and addressing topics related to the scope of campus crime statistics that Title IV participating institutions are required to distribute to current and prospective students and employees.state.
The DOE intends to use the negotiated rulemaking process during 20142015 to develop new regulations on these and potentially other topics. These regulations typically would be subject to a notice and comment period during which the public comments on proposed regulations and the DOE responds to comments and publishes final regulations. We cannot predict the ultimate content of any new regulations that may emerge from thisthe negotiated rulemaking process in 2015 or the potential impact of such regulations on us or our institutions. New final DOE regulations published on or before November 1, 2014 typically would have an effective date of July 1, 2015, although it is unknown at this time whether some or all of these regulations may have an earlier or later effective date. The implementation of any new regulations by DOE could have a material adverse effectsignificant impact on the rate at which students enroll in our programs and on our business and results of operations.
If we or our eligible institutions do not meet the financial responsibility standards prescribed by the DOE, we may be required to post letters of credit or our eligibility to participate in Title IV Programs could be terminated or limited, which could significantly reduce our student population and revenues.
To participate in Title IV Programs, an eligible institution must satisfy specific measures of financial responsibility prescribed by the DOE or post a letter of credit in favor of the DOE and possibly accept other conditions on its participation in Title IV Programs. Any obligation to post one or more letters of credit would increase our costs of regulatory compliance. Our inability to obtain a required letter of credit or limitations on, or termination of, our participation in Title IV Programs could limit our students' access to various government-sponsored student financial aid programs, which could significantly reduce our student population and revenues.
Each year, based on the financial information submitted by an eligible institution that participates in Title IV Programs, the DOE calculates three financial ratios for the institution: an equity ratio, a primary reserve ratio and a net income ratio. Each of these ratios is scored separately and then combined into a composite score to measure the institution's financial responsibility. If theThe composite score must be at least 1.5 for the institution to be deemed financially responsible without the need for further oversight.
If an institution fallsinstitution’s composite score is below thresholds established1.5, but is at least 1.0, it is in a category denominated by the DOE as “the zone.” Under DOE regulations, institutions that are in the zone typically may be permitted by the DOE could placeto continue to participate in the title IV programs by choosing one of two alternatives: 1) the “Zone Alternative” under which we are required to make disbursements to students under the Heightened Cash Monitoring 1 (HCM1) payment method and to notify the DOE within 10 days after the occurrence of certain oversight and financial events or 2) submit a letter of credit to the DOE equal to 50 percent of the Title IV funds received by our institutions during the most recent fiscal year. The DOE permits an institution to participate under the “Zone Alternative for a period of up to three consecutive fiscal years. Under the HCM1 payment method, the institution on provisional certification and/or transfer the institutionis required to the reimbursement or cash monitoring system of receivingmake Title IV Program funds, under which an institution must disburse its own fundsdisbursements to eligible students and documentparents before it requests or receives funds for the student's eligibility for Title IV Program funds before receiving such fundsamount of those disbursements from the DOE. If an institution has a composite score between 1.0As long as the student accounts are credited before the funding requests are initiated, we are permitted to draw down funds through the DOE’s electronic system for grants management and 1.4,payments for the institution will be requiredamount of disbursements made to operate under "Heightened Cash Monitoring, Type 1 status." eligible students. Unlike the HCM2 and reimbursement payment methods, the HCM1 payment method typically does not require schools to submit documentation to the DOE and wait for DOE approval before drawing down Title IV funds.
If an institution's composite score is below 1.0, the institution is considered by the DOE to lack financial responsibility. If the DOE determines that an institution does not satisfy the DOE’s financial responsibility standards, depending on its composite score and as a condition of Title IV Program participation, theother factors, that institution may be required to,establish its financial responsibility on an alternative basis by, among other things, post a letter of credit in an amount of at least 10% to 50% of the institution's annual Title IV Program participation for its most recent fiscal year.things:
| · | Posting a letter of credit in an amount equal to at least 50% of the total Title IV Program funds received by the institution during the institution's most recently completed fiscal year; |
| · | Posting a letter of credit in an amount equal to at least 10% of such prior year's Title IV Program funds, accepting provisional certification, complying with additional DOE monitoring requirements and agreeing to receive Title IV Program funds under an arrangement other than the DOE's standard advance funding arrangement; and/or |
| · | Complying with additional DOE monitoring requirements and agreeing to receive Title IV Program funds under an arrangement other than the DOE's standard advance funding arrangement. |
The DOE has evaluated the financial responsibility requirements of our institutions on a consolidated basis. Based onWe have submitted to the DOE our calculations, our 2013 and 2012 consolidatedaudited financial statements reflectfor the 2013 fiscal year reflecting a composite score of 1.4, based upon our calculations. We chose the “Zone Alternative” option described above because, among other things, it does not require us to submit a letter of credit to the DOE and because the HCM1 payment method is less burdensome than the HCM2 or reimbursement methods of payment that the DOE has the authority to impose. We believe that, prior to moving to the HCM1 payment method on October 22, 2014, our procedures for processing Title IV payments were similar to those now required under the HCM1 payment method. As of this date, we have not identified any impact on our ability to make disbursements of Title IV funds to our students or to receive funds for the Companyamount of 1.5 and 1.6, respectively. However,those disbursements from the DOE.
For the 2014 fiscal year, we have calculated our 2013 composite score to be 1.3. This number is subject to confirmationdetermination by the DOE once it receives and reviews our audited financial statements for the 20132014 fiscal year.
Our composite score for 2013 was 1.4. The DOE regulations specify extensive criteria an institution must satisfygenerally permit institutions with a composite score of between 1.0 and 1.4 to establishparticipate under the Zone Alternative for a period of up to three consecutive fiscal years. We believe that it hasif our composite score is below 1.5 for three consecutive years we will be able to continue to operate under the requisite "administrative capability"Zone Alternative; however, this determination is made solely by the DOE. If our composite score drops below 1.0 in a given year or if our composite score remains between 1.0 and 1.4 for three or more consecutive years, we may be required to meet alternative requirements for continuing to participate in Title IV Programs. Forprograms by submitting a descriptionletter of these criteria, see “Regulatory Environment – Administrative Capability.”
We are subject to fines and other sanctions if we pay impermissible commissions, bonuses or other incentive payments to individuals involved in certain recruiting, admissions or financial aid activities, which could increase our cost of regulatory compliance and adversely affect our results of operations.
An institution participating in Title IV Programs may not provide any commission, bonus or other incentive payment based directly or indirectly on success in enrolling students or securing financial aid to any person involved in any student recruiting or admission activities or in making decisions regarding the awarding of Title IV Program funds. The DOE’s regulations established twelve “safe harbors” identifying types of compensation that could be paid without violating the incentive compensation rule. On October 29, 2010, the DOE issued final rules effective July 1, 2011 that amended the incentive compensation rule by, among other things, eliminating the twelve safe harbors (and thereby reducing the scope of permissible payments under the rule) and expanding the scope of payments and employees subject to the rule. The DOE has stated that it does not intend to provide private guidance regarding particular compensation structures in the future and will enforce the regulations as written. We cannot predict how the DOE will interpret and enforce the revised incentive compensation rule. The implementation of the final regulations required us to change our compensation practices and has had and may continue to have a material adverse effectsignificant impact on the rate at which students enroll in our programs and on our business and results of operations. If we are found to have violated this law, we could be fined or otherwise sanctioned by the DOE or we could face litigation filed under the qui tam provisions of the Federal False Claims Act.
If our schools do not maintain their state authorizations and their accreditation, they may not participate in Title IV Programs, which could adversely affect our student population and revenues.
An institution that grants degrees, diplomas or certificates must be authorized by the appropriate education agency of the state in which it is located and, in some cases, other states. Requirements for authorization vary substantially among states. The school must be authorized by each state in which it is physically located in order for its students to be eligible for funding under Title IV Programs. Loss of state authorization by any of our schools from the education agency of the state in which the school is located would end that school's eligibility to participate in Title IV Programs and could cause us to close the school.
If any of our schools fail to comply with state licensing requirements, they are subject to the loss of state licensure or authorization. If any one of our schools lost its authorization from the education agency of the state in which the school is located, that school and its related main campus and/or additional locations would lose its eligibility to participate in Title IV Programs, be unable to offer its programs and we could be forced to close that school. If one of our schools lost its state authorization from a state other than the state in which the school is located, the school would not be able to recruit students or to operate in that state.
A school also must be accredited by an accrediting commission recognized by the DOE in order to participate in Title IV Programs. Accreditation is a non-governmental process through which an institution submits to qualitative review by an organization of peer institutions, based on the standards of the accrediting agency and the stated aims and purposes of the institution, including achieving and maintaining stringent retention, completion and placement outcomes. Certain states require institutions to maintain accreditation as a condition of continued authorization to grant degrees. The HEA requires accrediting commissions recognized by the DOE to review and monitor many aspects of an institution's operations and to take appropriate disciplinary action when the institution fails to comply with the accrediting agency's standards. See “Regulatory Environment – Accreditation.” If one of our schools fails to comply with accrediting commission requirements, the institution and its main and/or branch campuses are subject to the loss of accreditation or may be placed on probation or a special monitoring or reporting status which, if the noncompliance with accrediting commission requirements is not resolved, could result in loss of accreditation. Our school in Fern Park, Florida received a letter from ABHES in February 20142015 directing the school to show cause why its accreditation should not be withdrawn. See “Regulatory Environment – Compliance with Regulatory Standards and Effect of Regulatory Violations.” Loss of accreditation by any of our main campuses would result in the termination of eligibility of that school and all of its branch campuses to participate in Title IV Programs and could cause us to close the school and its branches, which could have a material adverse effectsignificant impact on our business and operations.On February 27, 2015, our Board of Directors approved a plan to cease operations at the Fern Park, Florida school which is scheduled to close in the first quarter of 2016.
Programmatic accreditation is the process through which specific programs are reviewed and approved by industry- and program-specific accrediting entities. Although programmatic accreditation is not generally necessary for Title IV eligibility, such accreditation may be required to allow students to sit for certain licensure exams or to work in a particular profession or career or to meet other requirements. Failure to obtain or maintain such programmatic accreditation may lead to a decline in enrollments in such programs. Moreover, under new gainful employment regulations issued by the DOE, institutions may be required to certify that they have programmatic accreditation under certain circumstances. See “—Regulatory Environment – DOE Development of New Regulations.” Failure to comply with these new requirements, which take effect on July 1, 2015, could impact the Title IV eligibility of educational programs that are required to maintain such programmatic accreditation.
Our institutions would lose eligibility to participate in Title IV Programs if the percentage of their revenues derived from those programs are too high,exceeds 90%, which could reduce our student population and revenues.
Under the HEA reauthorization, a proprietary institution that derives more than 90% of its total revenue from Title IV programs for two consecutive fiscal years becomes immediately ineligible to participate in Title IV programs and may not reapply for eligibility until the end of at least two fiscal years. An institution with revenues exceeding 90% for a single fiscal year ending after August 14, 2008 will be placed on provisional certification and may be subject to other enforcement measures. If an institution violated the 90/10 Rule and became ineligible to participate in Title IV Programs but continued to disburse Title IV Program funds, the DOE would require the institution to repay all Title IV Program funds received by the institution after the effective date of the loss of eligibility.
We have calculated that, for our 20132014 fiscal year, our existing institutions' 90/10 Rule percentages ranged from 69%76% to 85%86%. For 2012,2014, none of our existing institutions derived more than 90% of their revenues from Title IV Programs. We regularly monitor compliance with this requirement to minimize the risk that any of our institutions would derive more than the maximum percentage of its revenues from Title IV Programs for any fiscal year. Our calculations may beare subject to review by the DOE.
Our institutions would lose eligibility to participate in Title IV Programs if their former students defaulted on repayment of their federal student loans in excess of specified levels, which could reduce our student population and revenues.
An institution may lose its eligibility to participate in some or all Title IV Programs if the rates at which the institution's current and former students default on their federal student loans exceed specified percentages. The DOE calculates these rates based on the number of students who have defaulted, not the dollar amount of such defaults. The DOE calculates an institution's cohort default rate (as defined by the DOE regulations) on an annual federal fiscal year basis as the rate at which borrowers scheduled to begin repayment on their loans in onethe federal fiscal year default on those loans byduring the end offederal fiscal year or the next year (two year ratio). subsequent two federal fiscal years
An institution whose FFEL and FDL cohort default rate is 25%30% or greater for three consecutive federal fiscal years loses eligibility to participate in the FFEL, FDL, and Pell programs for the remainder of the federal fiscal year in which the DOE determines that such institution has lost its eligibility and for the two subsequent federal fiscal years. An institution whose FFEL and FDL cohort default rate for any single federal fiscal year exceeds 40% loses its eligibility to participate in the FFEL and FDL programs for the remainder of the federal fiscal year in which the DOE determines that such institution has lost its eligibility and for the two subsequent federal fiscal years. If an institution’s cohort default rate equals or exceeds 25% in any of its three most recent fiscal years, the institution may be placed on provisional certification status.
If former students defaulted on repayment of their federal student loans in excess of specified levels, our institutions would lose eligibility to participate in Title IV Programs, which could decrease our student population and revenues.
We are subject to sanctions if we fail to correctly calculate and timely return Title IV Program funds for students who withdraw before completing their educational program, which could increase our cost of regulatory compliance and decrease our profit margin.
An institution participating in Title IV Programs must correctly calculate the amount of unearned Title IV Program funds that have been credited to students who withdraw from their educational programs before completing them and must return those unearned funds in a timely manner, generally within 45 days of the date the institution determines that the student has withdrawn. If the unearned funds are not properly calculated and timely returned, we may have to post a letter of credit in favor of the DOE or may be otherwise sanctioned by the DOE, which could increase our cost of regulatory compliance and adversely affect our results of operations.
If regulators do not approve our acquisition of a school that participates in Title IV Programs, the acquired school would no longer be permitted to participate in Title IV Programs, which could impair our ability to operate the acquired school as planned or to realize the anticipated benefits from the acquisition of that school.
If we acquire a school that participates in Title IV Programs, we must obtain approval from the DOE and applicable state education agencies and accrediting commissions in order for the school to be able to continue operating and participating in Title IV Programs. An acquisition can result in the temporary suspension of the acquired school's participation in Title IV Programs unless we submit to the DOE a timely and materially complete application for recertification and the DOE issues a temporary provisional program participation agreement. If we are unable to timely re-establish the state authorization, accreditation or DOE certification of the acquired school, our ability to operate the acquired school as planned or to realize the anticipated benefits from the acquisition of that school could be impaired.
Issuance or salessales of a substantial amount of our common stock could result in a change in control under the DOE standards, the standards of state education agencies, and/or the standards of certain institutional accrediting agencies, and could require each of our schools to apply for recertification for continued ability to participate in Title IV Programs and reaffirmation of their state authorizations and accreditations. The failure to obtain the required recertifications and reaffirmations could have a material adverse effectsignificant impact on our results of operations.operations.
The DOE, most state education agencies and our accrediting commissions each have standards pertaining to a change in control of schools that are not uniform and are subject to interpretation by these respective agencies. A change in control under the definition of one of these agencies requires the affected school to reaffirm the applicable DOE approval, state authorization or accreditation. Each school that undergoes a change in control under the standards of the DOE must apply for recertification for continued ability to participate in Title IV Programs. Some agencies would require approval prior to a sale or disposition that would result in a change in control in order to maintain authorization or accreditation. The requirements to obtain such reaffirmation from the states and our accrediting commissions vary widely. See “Regulatory Environment – Change of Control.”
A change of control could occur as a result of future transactions in which our company or schools are involved. Some corporate reorganizations and some changes in the board of directors are examples of such transactions. Moreover, the potential adverse effects of a change of control could influence future decisions by us and our stockholders regarding the sale, purchase, transfer, issuance or redemption of our stock. In addition, the adverse regulatory effect of a change of control also could discourage bids for your shares of common stock and could have an adverse effect on the market price of our shares.
If we fail to apply for or obtain approvals from the DOE and applicable state education agencies and accrediting commissions, our institutions could lose their approval to participate in the Title IV Programs, their accreditation, and their authority to operate in the applicable states, which would have a material adversesignificant impact on our results of operation.
Regulatory agencies or third parties may conduct compliance reviews, bring claims or initiate litigation against us. If the results of these reviews or claims are unfavorable to us, our results of operations and financial condition could be adversely affected.
Because we operate in a highly regulated industry, we are subject to compliance reviews and claims of noncompliance and lawsuits by government agencies and third parties. If the results of these reviews or proceedings are unfavorable to us, or if we are unable to defend successfully against third-party lawsuits or claims, we may be required to pay money damages or be subject to fines, limitations on the operations of our business, loss of federal funding, injunctions or other penalties. Even if we adequately address issues raised by an agency review or successfully defend a third-party lawsuit or claim, we may have to divert significant financial and management resources from our ongoing business operations to address issues raised by those reviews or defend those lawsuits or claims. Certain of our institutions are subject to ongoing reviews and proceedings. See “Regulatory Environment – State Authorization,” “Regulatory Environment – Accreditation,” and “Regulatory Environment - Compliance with Regulatory Standards and Effect of Regulatory Violations.”
Our failure to comply with regulations promulgated by the DOE could result in financial penalties, or the limitation, suspension, or termination of our continued participation in the Title IV programs.
Students attending our schools finance their education through a combination of family contributions, individual resources, private loans and federal financial aid programs. Each of our schools participates in the federal programs of student financial aid authorized under the Title IV Programs, which are administered by the DOE. For the year ended December 31, 2013,2014, approximately 80% (calculated based on cash receipts) of our revenues were derived from the Title IV Programs. Students obtain access to federal student financial aid through a DOE prescribed application and eligibility certification process. Student financial aid funds are generally made available to students at prescribed intervals throughout their predetermined expected length of study. Students typically use the funds received from the federal financial aid programs to pay their tuition and fees.
In connection with the students' receipt of federal financial aid, our schools are subject to extensive regulation by governmental agencies and licensing and accrediting bodies. In particular, the Title IV Programs, and the regulations issued thereafter by the DOE, subject us to significant regulatory scrutiny in the form of numerous standards that each of our schools must satisfy in order to participate in the various federal student financial aid programs. The DOE has published new regulations, proposed other regulations, and may propose additional regulations in the future that are applicable to our institutions. Failure of an institution to comply with new or existing DOE regulations could result in sanctions that could have a material adverse effectsignificant impact on our business, including, but not limited to:
| · | loss of eligibility to participate in Title IV Programs; |
| · | requirement to repay Title IV funds and related costs to the DOE and lenders; |
| · | transfer of the institution to the heightened cash monitoring level two method of payment or to the reimbursement method of payment, which would adversely affect the timing of the institution's receipt of Title IV funds; |
| · | requirement to post a letter of credit in favor of the DOE as a condition for continued Title IV certification; |
| · | requirement to provide timely information regarding certain oversight and financial events; |
| · | proceedings to impose a fine or to limit, suspend or terminate the institution's participation in Title IV Programs; |
| · | an emergency action to suspend the institution's participation in Title IV Programs without prior notice or a prior opportunity for a hearing; |
| · | denial or refusal to consider an institution's application for renewal of its certification to participate in Title IV Programs; or |
| · | referral of a matter for possible civil or criminal investigation. |
Our regulatory environment and our reputation may be negatively influenced by the actions of other postsecondary institutions.
In recent years, regulatory investigations and civil litigation have been commenced against several postsecondary educational institutions. These investigations and lawsuits have alleged, among other things, deceptive trade practices and non-compliance with DOE regulations. These allegations have attracted adverse media coverage and have been the subject of federal and state legislative hearings. Although the media, regulatory and legislative focus has been primarily on the allegations made against these specific companies, broader allegations against the overall postsecondary sector may negatively impact public perceptions of postsecondary educational institutions, including us. Such allegations could result in increased scrutiny and regulation by the DOE, U.S. Congress, accrediting bodies, state legislatures or other governmental authorities on all postsecondary institutions, including us.
A decline in the overall growth of enrollment in postsecondary institutions, or in our core disciplines, or in the number of students seeking degrees online, could cause us to experience lower enrollment at our schools, which could negatively impact our future growth.
Our business could be adversely impacted by additional legislation, regulations, or investigations regarding private student lending because students attending our schools rely on private student loans to pay tuition and other institutional charges.
The U.S. Consumer Financial Protection Bureau (“CFPB”), under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, has supervisory authority over private education loan providers. The CFPB has been active in conducting investigations into the private student loan market and issuing several reports with findings that are critical of the private student loan market. The CFPB has initiated investigations into the lending practices of other institutions in the for-profit education sector. The CFPB has issued procedures for further examination of private education loans and published requests for information regarding repayment plans and regarding arrangements between schools and financial institutions. We cannot predict whether any of this activity, or other activities, will result in Congress, the CFPB or other regulators adopting new legislation or regulations, or conducting new investigations, into the private student loan market or into the loans received by our students to attend our institutions. Any new legislation, regulations, or investigations regarding private student lending could limit the availability of private student loans to our students, which could have a material adverse effectsignificant impact on our business and operations.
RISKS RELATED TO OUR BUSINESS
If we are unable to improve our liquidity by monetizing certain of our assets or by securing other forms of financing, our cash flows and operations could be adversely affected.
For the last several years, we and the proprietary school sector generally have faced various forms of adversity which have contributed to deteriorating earnings growth. Government regulations have negatively impacted earnings by making it more difficult for potential students to obtain loans, which when coupled with the overall economic environment have hindered potential students from enrolling in our schools. In light of these factors, we have incurred significant operating losses as a result of lower student population. We also recorded a pre-tax goodwill impairment charge of $39.0 million for the year ended December 31, 2014 as a result of a significant decline in market capitalization. Despite these events, we believe that our likely sources of cash should be sufficient to fund operations for the next twelve months. Our available sources of cash primarily include cash from operations, cash and cash equivalents on hand at December 31, 2014 of $12.3 million and the ability to draw up to $20 million under the revolving line of credit less letters of credit that was extended through April 2016. To fund our business plans, including any anticipated future losses, purchase commitments, capital expenditures, principal and interest payments on borrowings and to satisfy the DOE financial responsibility standards, we have the ability to leverage our owned real estate that is not classified as held for sale. We are also continuing to take actions to improve cash flow by aligning our cost structure to our student population.
In addition to the aforementioned current sources of capital that will provide short term liquidity, we also plan to sell approximately $50.9 million in assets which are currently classified as held for sale and are expected to be sold within one year. We also are currently exploring various other alternatives including debt financing vehicles and strategic partnerships. However, at this time we have no commitments to obtain any additional funds, and there can be no assurance such funds will be available on acceptable terms or at all. If we are unable to sell our assets classified as held for sale, leverage certain of our properties or obtain additional funding, our financial condition and results of operations may be materially adversely affected.
We may not be able to successfully integrate acquisitions into our business, which may materially adversely affect our business, financial condition, results of operations and could cause the market value of our common stock to decline.
Since 1999, we have acquired a number of schools and we intend to continue to grow our business through acquisitions and internal expansion of our programs. The anticipated benefits of an acquisition may not be achieved unless we successfully integrate the acquired school or schools into our operations and are able to effectively manage, market and apply our business strategy to any acquired schools. Integration challenges include, among others, regulatory approvals, significant capital expenditures, assumption of known and unknown liabilities and our ability to control costs. The successful integration of future acquisitions may also require substantial attention from our senior management and the senior management of the acquired schools, which could decrease the time that they devote to the day-to-day management of our business. The difficulties of integration may initially be increased by the necessity of integrating personnel with disparate business backgrounds and corporate cultures. Management's focus on the integration of acquired schools and on the application of our business strategy to those schools could interrupt or cause loss of momentum in our other ongoing activities. Our inability to properly manage or support the growth may have a material adverse effectsignificant impact on our business, financial condition, and results of operations and could cause the market value of our common stock to decline.
Failure on our part to establish and operate additional schools or campuses or effectively identify suitable expansion opportunities could reduce our ability to implement our growth strategy.
As part of our business strategy, we anticipate opening and operating new schools or campuses. Establishing new schools or campuses poses unique challenges and requires us to make investments in management and capital expenditures, incur marketing expenses and devote financial and other resources that are different, and in some cases greater than those required with respect to the operation of acquired schools.
To open a new school or campus, we would be required to obtain appropriate state and accrediting commission approvals, which may be conditioned or delayed in a manner that could significantly affect our growth plans. In addition, to be eligible for federal Title IV Program funding, a new school or campus would have to be certified by the DOE and would require federal authorization and approvals. In the case of entirely separate, freestanding U.S. schools, a minimum of two years' operating history is required to be eligible for Title IV Program funding. We cannot be sure that we will be able to identify suitable expansion opportunities or that we will be able to successfully integrate or profitably operate any new schools or campuses. A failure by us to effectively identify suitable expansion opportunities and to establish and manage the operations of newly established schools or online offerings could make any newly established schools or our online programs unprofitable or more costly to operate than we had planned.
Our success depends in part on our ability to update and expand the content of existing programs and develop new programs in a cost-effective manner and on a timely basis.
Prospective employers of our graduates increasingly demand that their entry-level employees possess appropriate technological skills. These skills are becoming more sophisticated in line with technological advancements in the automotive, diesel, information technology, or IT, skilled trades, healthcare industries and hospitality services. Accordingly, educational programs at our schools must keep pace with those technological advancements. The expansion of our existing programs and the development of new programs may not be accepted by our students, prospective employers or the technical education market. Even if we are able to develop acceptable new programs, we may not be able to introduce these new programs as quickly as our competitors or as quickly as employers demand. If we are unable to adequately respond to changes in market requirements due to financial constraints, unusually rapid technological changes or other factors, our ability to attract and retain students could be impaired, our placement rates could suffer and our revenues could be adversely affected.
In addition, if we are unable to adequately anticipate the requirements of the employers we serve, we may offer programs that do not teach skills useful to prospective employers or students seeking a technical or career-oriented education which could affect our placement rates and our ability to attract and retain students, causing our revenues to be adversely affected.
We may not be able to retain our key personnel or hire and retain the personnel we need to sustain and grow our business.
Our success has depended, and will continue to depend, largely on the skills, efforts and motivation of our executive officers who generally have significant experience within the post-secondary education industry. Our success also depends in large part upon our ability to attract and retain highly qualified faculty, school directors, administrators and corporate management. Due to the nature of our business, we face significant competition in the attraction and retention of personnel who possess the skill sets that we seek. In addition, key personnel may leave us and subsequently compete against us. Furthermore, we do not currently carry "key man" life insurance on any of our employees. The loss of the services of any of our key personnel, or our failure to attract and retain other qualified and experienced personnel on acceptable terms, could have an adverse effect on our ability to operate our business efficiently and to execute our growth strategy.
If we are unable to hire, retain and continue to develop and train our employees responsible for student recruitment, the effectiveness of our student recruiting efforts would be adversely affected.
In order to support revenue growth, we need to hire new employees dedicated to student recruitment and retain and continue to develop and train our current student recruitment personnel. Our ability to develop a strong student recruiting team may be affected by a number of factors, including our ability to integrate and motivate our student recruiters; our ability to effectively train our student recruiters; the length of time it takes new student recruiters to become productive; regulatory restrictions on the method of compensating student recruiters; the competition in hiring and retaining student recruiters; and our ability to effectively manage a multi-location educational organization. If we are unable to hire, develop or retain our student recruiters, the effectiveness of our student recruiting efforts would be adversely affected.
Competition could decrease our market share and cause us to lower our tuition rates.
The post-secondary education market is highly competitive. Our schools compete for students and faculty with traditional public and private two-year and four-year colleges and universities and other proprietary schools, many of which have greater financial resources than we do. Some traditional public and private colleges and universities, as well as other private career-oriented schools, offer programs that may be perceived by students to be similar to ours. Most public institutions are able to charge lower tuition than our schools, due in part to government subsidies and other financial resources not available to for-profit schools. Some of our competitors also have substantially greater financial and other resources than we have which may, among other things, allow our competitors to secure strategic relationships with some or all of our existing strategic partners or develop other high profile strategic relationships, or devote more resources to expanding their programs and their school network, or provide greater financing alternatives to their students, all of which could affect the success of our marketing programs. In addition, some of our competitors have a larger network of schools and campuses than we do, enabling them to recruit students more effectively from a wider geographic area. If we are unable to compete effectively with these institutions for students, our student enrollment and revenues will be adversely affected.
We may be required to reduce tuition or increase spending in response to competition in order to retain or attract students or pursue new market opportunities. As a result, our market share, revenues and operating margin may be decreased. We cannot be sure that we will be able to compete successfully against current or future competitors or that the competitive pressures we face will not adversely affect our revenues and profitability.
We may experience business interruptions resulting from natural disasters, inclement weather, transit disruptions, or other events in one or more of the geographic areas in which we operate.
We may experience business interruptions resulting from natural disasters, inclement weather, transit disruptions, or other events in one or more of the geographic areas in which we operate. These events could cause us to close schools temporarily or permanently and could affect student recruiting opportunities in those locations, causing enrollment and revenues to decline.
Our financial performance depends in part on our ability to continue to develop awareness and acceptance of our programs among high school graduates and working adults looking to return to school.
The awareness of our programs among high school graduates and working adults looking to return to school is critical to the continued acceptance and growth of our programs. Our inability to continue to develop awareness of our programs could reduce our enrollments and impair our ability to increase our revenues or maintain profitability. The following are some of the factors that could prevent us from successfully marketing our programs:
| · | Student dissatisfaction with our programs and services; |
| · | Diminished access to high school student populations; |
| · | Our failure to maintain or expand our brand or other factors related to our marketing or advertising practices; and |
| · | Our inability to maintain relationships with automotive, diesel, healthcare, skilled trades, IT and hospitality services manufacturers, suppliers and employers. |
If students fail to pay their outstanding balances, our profitability will be adversely affected.
We offer a variety of payment plans to help students pay the portion of their education expense not covered by financial aid programs. These balances are unsecured and not guaranteed. Although we have reserved for estimated losses related to unpaid student balances, losses in excess of the amounts we have reserved for bad debts will result in a reduction in our profitability.
An increase in interest rates could adversely affect our ability to attract and retain students.
Interest rates have reached historical lows in recent years, creating a favorable borrowing environment for our students. Much of the financing our students receive is tied to floating interest rates. Increases in interest rates result in a corresponding increase in the cost to our existing and prospective students of financing their education which could result in a reduction in the number of students attending our schools and could adversely affect our results of operations and revenues. Higher interest rates could also contribute to higher default rates with respect to our students' repayment of their education loans. Higher default rates may in turn adversely impact our eligibility for Title IV Program participation or the willingness of private lenders to make private loan programs available to students who attend our schools, which could result in a reduction in our student population.
Seasonal and other fluctuations in our results of operations could adversely affect the trading price of our common stock.
Our results of operations fluctuate as a result of seasonal variations in our business, principally due to changes in total student population. Student population varies as a result of new student enrollment, graduations and student attrition. Historically, our schools have had lower student populations in our first and second quarters and we have experienced large class starts in the third and fourth quarters and student attrition in the first half of the year. Our second half growth is largely dependent on a successful recruiting season. Our expenses, however, do not vary significantly over the course of the year with changes in our student population and net revenues. We expect quarterly fluctuations in results of operations to continue as a result of seasonal enrollment patterns. Such patterns may change, however, as a result of acquisitions, new school openings, new program introductions and increased enrollments of adult students. These fluctuations may result in volatility or have an adverse effect on the market price of our common stock.
Our total assets include substantial intangible assets. In the event that our schools do not achieve satisfactory operating results, we may be required to write-off of a significant portion of unamortized intangible assets which would negatively affect our results of operations.
Our total assets reflect substantial intangible assets. At December 31, 2013,2014, goodwill and identified intangibles, net, associated with our acquisitions representeddecreased to approximately 10.9% from 21.0% of total assets.assets at December 31, 2013. On at least an annual basis, we assess whether there has been an impairment in the value of goodwill and other intangible assets with indefinite lives. If the carrying value of the tested asset exceeds its estimated fair value, impairment is deemed to have occurred. In this event, the amount is written down to fair value. Under current accounting rules, this would result in a charge to operating earnings. Any determination requiring the write-off of a significant portion of goodwill or unamortized identified intangible assets would negatively affect our results of operations and total capitalization, which could be material.
In 2014, we tested goodwill and long-lived assets for impairment and determined that impairments existed which resulted in a pre-tax charge of $43.0 million ($2.1 million included in discontinued operations).
In 2013, we tested goodwill and indefinite-lived intangibleslong-lived assets for impairment and determined that impairments existed which resulted in a pre-tax charge of $6.2 million ($2.3 million included in discontinued operations).
28
We cannot predict our future capital needs, and if we are unable to secure additional financing when needed, our operations and revenues would be adversely affected.
We may need to raise additional capital in the future to fund acquisitions, working capital requirements, expand our markets and program offerings or respond to competitive pressures or perceived opportunities. We cannot be sure that additional financing will be available to us on favorable terms, or at all particularly during times of uncertainty in the financial markets similar to that which is currently being experienced. If adequate funds are not available when required or on acceptable terms, we may be forced to forego attractive acquisition opportunities, cease our operations and, even if we are able to continue our operations, our ability to increase student enrollment and revenues would be adversely affected.
Our schools' failure to comply with environmental laws and regulations governing our activities could result in financial penalties and other costs which could adversely impact our results of operations.
We use hazardous materials at some of our schools and generate small quantities of waste, such as used oil, antifreeze, paint and car batteries. As a result, our schools are subject to a variety of environmental laws and regulations governing, among other things, the use, storage and disposal of solid and hazardous substances and waste, and the clean-up of contamination at our facilities or off-site locations to which we send or have sent waste for disposal. In the event we do not maintain compliance with any of these laws and regulations, or are responsible for a spill or release of hazardous materials, we could incur significant costs for clean-up, damages, and fines or penalties which could adversely impact our results of operations.
Approximately 48% of our schools are concentrated in the states of New Jersey, Connecticut and Pennsylvania and a change in the general economic or regulatory conditions in these states could increase our costs and have an adverse effect on our revenues.
As of December 31, 2013,2014, we operated 3331 campuses and five training sites in 15 states. 1615 of those schools are located in the states of New Jersey, Connecticut and Pennsylvania. As a result of this geographic concentration, any material change in general economic conditions in New Jersey, Connecticut or Pennsylvania could reduce our student enrollment in our schools located in these states and thereby reduce our revenues. In addition, the legislatures in the states of New Jersey, Connecticut and/or Pennsylvania could change the laws in those states or adopt regulations regarding private, for-profit post-secondary coeducation institutions which could place additional burdens on us. If we were unable to comply with any such new legislation, we could be prohibited from operating in those jurisdictions, which could reduce our revenues.
A substantial decrease in student financing options, or a significant increase in financing costs for our students, could have a material adverse affectsignificant impact on our student population, revenues and financial results.
The consumer credit markets in the United States have recently suffered from increases in default rates and foreclosures on mortgages. Adverse market conditions for consumer and federally guaranteed student loans could result in providers of alternative loans reducing the attractiveness and/or decreasing the availability of alternative loans to post-secondary students, including students with low credit scores who would not otherwise be eligible for credit-based alternative loans. Prospective students may find that these increased financing costs make borrowing prohibitively expensive and abandon or delay enrollment in post-secondary education programs. Private lenders could also require that we pay them new or increased fees in order to provide alternative loans to prospective students. If any of these scenarios were to occur, our students’ ability to finance their education could be adversely affected and our student population could decrease, which could have a material adverse effectsignificant impact on our financial condition, results of operations and cash flows.
In addition, any actions by the U.S. Congress or by states that significantly reduce funding for Title IV Programs or other student financial assistance programs, or the ability of our students to participate in these programs, or establish different or more stringent requirements for our schools to participate in those programs, could have a material adverse effectsignificant impact on our student population, results of operations and cash flows.
Anti-takeover provisions in our amended and restated certificate of incorporation, our amended and restated bylaws and New Jersey law could discourage a change of control that our stockholders may favor, which could negatively affect our stock price.
Provisions in our amended and restated certificate of incorporation and our amended and restated bylaws and applicable provisions of the New Jersey Business Corporation Act may make it more difficult and expensive for a third party to acquire control of us even if a change of control would be beneficial to the interests of our stockholders. These provisions could discourage potential takeover attempts and could adversely affect the market price of our common stock. For example, applicable provisions of the New Jersey Business Corporation Act may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of five years after the person becomes an interested stockholder. Furthermore, our amended and restated certificate of incorporation and amended and restated bylaws:
| · | Authorize the issuance of blank check preferred stock that could be issued by our board of directors to thwart a takeover attempt; |
| · | Prohibit cumulative voting in the election of directors, which would otherwise allow holders of less than a majority of stock to elect some directors; |
| · | Require super-majority voting to effect amendments to certain provisions of our amended and restated certificate of incorporation; |
| · | Limit who may call special meetings of both the board of directors and stockholders; |
| · | Prohibit stockholder action by non-unanimous written consent and otherwise require all stockholder actions to be taken at a meeting of the stockholders; |
| · | Establish advance notice requirements for nominating candidates for election to the board of directors or for proposing matters that can be acted upon by stockholders at stockholders' meetings; and |
| · | Require that vacancies on the board of directors, including newly created directorships, be filled only by a majority vote of directors then in office. |
We can issue shares of preferred stock without shareholder approval, which could adversely affect the rights of common stockholders.
Our amended and restated certificate of incorporation permits us to establish the rights, privileges, preferences and restrictions, including voting rights, of future series of our preferred stock and to issue such stock without approval from our stockholders. The rights of holders of our common stock may suffer as a result of the rights granted to holders of preferred stock that may be issued in the future. In addition, we could issue preferred stock to prevent a change in control of our company, depriving common stockholders of an opportunity to sell their stock at a price in excess of the prevailing market price.
System disruptions to our technology infrastructure could impact our ability to generate revenue and could damage the reputation of our institutions.
The performance and reliability of our technology infrastructure is critical to our reputation and to our ability to attract and retain students. We license the software and related hosting and maintenance services for our online platform and our student information system from third-party software providers. Any system error or failure, or a sudden and significant increase in bandwidth usage, could result in the unavailability of systems to us or our students. Any such system disruptions could impact our ability to generate revenue and affect our ability to access information about our students and could also damage the reputation of our institutions.
We are subject to privacy and information security laws and regulations due to our collection and use of personal information, and any violations of those laws or regulations, or any breach, theft or loss of that information, could adversely affect our reputation and operations.
Our efforts to attract and enroll students result in us collecting, using and keeping substantial amounts of personal information regarding applicants, our students, their families and alumni, including social security numbers and financial data. We also maintain personal information about our employees in the ordinary course of our activities. Our services, the services of many of our health plan and benefit plan vendors, and other information can be accessed globally through the Internet. We rely extensively on our network of interconnected applications and databases for day to day operations as well as financial reporting and the processing of financial transactions. Our computer networks and those of our vendors that manage confidential information for us or provide services to our student may be vulnerable to unauthorized access, inadvertent access or display, theft or misuse, hackers, computer viruses, or third parties in connection with hardware and software upgrades and changes. Such unauthorized access, misuse, theft or hacks could evade our intrusion detection and prevention precautions without alerting us to the breach or loss for some period of time or may never be detected. Regular patching of our computer systems and frequent updates to our virus detection and prevention software with the latest virus and malware signatures may not catch newly introduced malware and viruses or “zero-day” viruses, prior to their infecting our systems and potentially disrupting our data integrity, taking sensitive information or affecting financial transactions. While we utilize security and business controls to limit access to and use of personal information, any breach of student or employee privacy or errors in storing, using or transmitting personal information could violate privacy laws and regulations resulting in fines or other penalties. A wide range of high profile data breaches in 2014 has led to renewed interest in federal data and cybersecurity legislation that could increase our costs and/or require changes in our operating procedures or systems. A breach, theft or loss of personal information held by us or our vendors, or a violation of the laws and regulations governing privacy could have a material adverse effect on our reputation or result in lawsuits, additional regulation, remediation and compliance costs or investments in additional security systems to protect our computer networks, the costs of which may be substantial.
None.
As of December 31, 2013,2014, we leased all of our facilities, except for our campuses in West Palm Beach, Florida, Nashville, Tennessee, Grand Prairie, Texas, and Denver, Colorado, all of which we own. Four of our facilities (Union, New Jersey; Allentown, Pennsylvania; Philadelphia, Pennsylvania; and one of our facilities in Grand Prairie, Texas) were also accounted for by us under a finance lease obligation. We continue to re-evaluate our facilities to maximize our facility utilization and efficiency and to allow us to introduce new programs and attract more students. As of December 31, 2013,2014, all of our existing leases expire between July 2014February 2015 and October 2032.
The following table provides information relating to our facilities as of December 31, 2013,2014, including our corporate office:
| Location | Brand | Approximate Square Footage | ||
| Henderson, Nevada | Euphoria Institute | 18,000 | ||
| Las Vegas, Nevada | Euphoria Institute | 19,000 | ||
| Southington, Connecticut | Lincoln College of New England | 113,000 | ||
| Columbia, Maryland | Lincoln College of Technology | 110,000 | ||
| Denver, Colorado | Lincoln College of Technology | 212,000 | ||
| Grand Prairie, Texas | Lincoln College of Technology | 146,000 | ||
| Indianapolis, Indiana | Lincoln College of Technology | 189,000 | ||
| Marietta, Georgia | Lincoln College of Technology | 30,000 | ||
| Melrose Park, Illinois | Lincoln College of Technology | 88,000 | ||
| West Palm Beach, Florida | Lincoln College of Technology | 117,000 | ||
| Hartford, Connecticut | Lincoln Technical Institute | 367,000 | ||
| Allentown, Pennsylvania | Lincoln Technical Institute | 26,000 | ||
| Brockton, Massachusetts | Lincoln Technical Institute | 22,000 | ||
| East Windsor, Connecticut | Lincoln Technical Institute | 289,000 | ||
| Edison, New Jersey | Lincoln Technical Institute | 64,000 | ||
| Fern Park, Florida | Lincoln Technical Institute | 46,000 | ||
| Lincoln, Rhode Island | Lincoln Technical Institute | 59,000 | ||
| Lowell, Massachusetts | Lincoln Technical Institute | 21,000 | ||
| Mahwah, New Jersey | Lincoln Technical Institute | 79,000 | ||
| Moorestown, New Jersey | Lincoln Technical Institute | 35,000 | ||
| New Britain, Connecticut | Lincoln Technical Institute | 35,000 | ||
| Northeast Philadelphia, Pennsylvania | Lincoln Technical Institute | 25,000 | ||
| Paramus, New Jersey | Lincoln Technical Institute | 30,000 | ||
| Philadelphia, Pennsylvania | Lincoln Technical Institute | 36,000 | ||
| Philadelphia, Pennsylvania | Lincoln Technical Institute | 29,000 | ||
| Queens, New York | Lincoln Technical Institute | 48,000 | ||
| Shelton, Connecticut | Lincoln Technical Institute | 47,000 | ||
| Somerville, Massachusetts | Lincoln Technical Institute | 33,000 | ||
| South Plainfield, New Jersey | Lincoln Technical Institute | 60,000 | ||
| Union, New Jersey | Lincoln Technical Institute | 56,000 | ||
| Nashville, Tennessee | Lincoln College of Technology | 278,000 | ||
| West Orange, New Jersey | Corporate Office | 52,000 | ||
| Plymouth Meeting, Pennsylvania | | Corporate Office | 6,000 | |
| Melbourne, Florida | Florida Medical Training Institute | | 11,000 | |
| Jacksonville, Florida | Florida Medical Training Institute | | 7,000 | |
| Tampa, Florida | Florida Medical Training Institute | | 8,000 | |
| Miami, Florida | Florida Medical Training Institute | | 7,000 | |
| Coral Springs, Florida | Florida Medical Training Institute | | ||
| 7,000 |
We believe that our facilities are suitable for their present intended purposes.
In the ordinary conduct of our business, we are subject to periodic lawsuits, investigations and claims, including, but not limited to, claims involving students or graduates and routine employment matters. Although we cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against us, we do not believe that any currently pending legal proceeding to which we are a party will have a material effect on our business, financial condition, results of operations or cash flows.
On November 21, 2012, we received a Civil Investigation Demand from the Attorney General of the Commonwealth of Massachusetts relating to their investigation of whether we and certain of our academic institutions have complied with certain Massachusetts state consumer protection and finance laws. On July 29, 2013 and January 17, 2014, we received follow-up Civil Investigative Demands. Pursuant to the Civil Investigative Demands, the Attorney General has requested from us and certain of our academic institutions documents and detailed information from the time period January 1, 2008 to the present. The Company has responded to this request and intends to continue cooperating with the Attorney General’s Office.
In accordance with applicable accounting guidance, the Company establishes a loss contingency for litigation and regulatory matters when those matters present loss contingencies that are both probable and estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. A loss contingency in the amount of $1.0 million was established for the year ended December 31, 2014. The Company continues to monitor the matter for further developments that could affect the amount of the liability that has been established.
Not applicable.
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market for our Common Stock
Our common stock is quoted on the Nasdaq Global Select Market under the symbol “LINC”.
The following table sets forth the range of high and low sales prices per share for our common stock, as reported by the Nasdaq Global Select Market, for the periods indicated and the cash dividends per share declared on our common stock:
| Price Range of Common Stock | Price Range of Common Stock | |||||||||||||||||||||||
| High | Low | Dividend | High | Low | Dividend | |||||||||||||||||||
| Fiscal Year Ended December 31, 2013 | ||||||||||||||||||||||||
| Fiscal Year Ended December 31, 2014 | ||||||||||||||||||||||||
| First Quarter | $ | 6.59 | $ | 5.00 | $ | 0.07 | $ | 5.27 | $ | 3.63 | $ | 0.07 | ||||||||||||
| Second Quarter | $ | 7.02 | $ | 5.12 | $ | 0.07 | $ | 4.49 | $ | 3.56 | $ | 0.07 | ||||||||||||
| Third Quarter | $ | 6.99 | $ | 4.58 | $ | 0.07 | $ | 4.57 | $ | 2.21 | $ | 0.02 | ||||||||||||
| Fourth Quarter | $ | 5.56 | $ | 4.48 | $ | 0.07 | $ | 3.66 | $ | 2.42 | $ | 0.02 | ||||||||||||
| Price Range of Common Stock | ||||||||||||||||||||||||
| High | Low | Dividend | ||||||||||||||||||||||
| Fiscal Year Ended December 31, 2012 | ||||||||||||||||||||||||
| First Quarter | $ | 9.60 | $ | 7.62 | $ | 0.07 | ||||||||||||||||||
| Second Quarter | $ | 7.91 | $ | 5.49 | $ | 0.07 | ||||||||||||||||||
| Third Quarter | $ | 6.38 | $ | 3.44 | $ | 0.07 | ||||||||||||||||||
| Fourth Quarter | $ | 5.94 | $ | 3.64 | $ | 0.07 | ||||||||||||||||||
| Price Range of Common Stock | ||||||||||||
| High | Low | Dividend | ||||||||||
| Fiscal Year Ended December 31, 2013 | ||||||||||||
| First Quarter | $ | 6.59 | $ | 5.00 | $ | 0.07 | ||||||
| Second Quarter | $ | 7.02 | $ | 5.12 | $ | 0.07 | ||||||
| Third Quarter | $ | 6.99 | $ | 4.58 | $ | 0.07 | ||||||
| Fourth Quarter | $ | 5.56 | $ | 4.48 | $ | 0.07 | ||||||
On March 7, 2014,12, 2015, the last reported sale price of our common stock on the Nasdaq Global Select Market was $4.53$2.88 per share. As of March 7, 2014,12, 2015, based on the information provided by Continental Stock Transfer & Trust Company, there were approximately 4234 stockholders of record of our common stock.
Dividend Policy
On November 5, 2013,October 29, 2014, our Board of Directors declared a quarterly cash dividend of $0.07$0.02 per share of common stock outstanding, which was paid on December 31, 20132014 to shareholders of record on December 13, 2013. The establishment of future record and payment dates is subject to the final determination of the Company’s15, 2014. On February 27, 2015, our Board of Directors.Directors discontinued the quarterly cash dividend.
Stock Performance Graph
This stock performance graph compares our total cumulative stockholder return on our common stock during the period from January 2, 20094, 2010 through December 31, 20132014 with the cumulative return on the Russell 2000 Index and a Peer Issuer Group Index. The peer issuer group consists of the companies identified below, which were selected on the basis of the similar nature of their business. The graph assumes that $100 was invested on January 2, 2009,4, 2010, and any dividends were reinvested on the date on which they were paid.
The information provided under the heading "Stock Performance Graph" shall not be considered "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 or incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that we specifically incorporate it by reference into a filing.
Companies in the Peer Group include Apollo Group, Inc., Corinthian Colleges, Inc., Career Education Corp., DeVry, Inc., ITT Educational Services, Inc., Strayer Education, Inc. and Universal Technical Institute, Inc.
Securities Authorized for Issuance under Equity Compensation Plans
We have various equity compensation plans under which equity securities are authorized for issuance. Information regarding these securities as of December 31, 20132014 is as follows:
| Plan Category | Number of Securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column) | Number of Securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column) | ||||||||||||||||||
| Equity compensation plans approved by security holders | 547,125 | $ | 14.73 | 988,381 | 424,167 | $ | 13.65 | 908,231 | ||||||||||||||||
| Equity compensation plans not approved by security holders | - | - | - | - | - | - | ||||||||||||||||||
| Total | 547,125 | $ | 14.73 | 988,381 | 424,167 | $ | 13.65 | 908,231 | ||||||||||||||||
SELECTED FINANCIAL INFORMATION
The following table sets forth our selected historical consolidated financial and operating data as of the dates and for the periods indicated. You should read these data together with Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K. The selected historical consolidated statement of operations data for each of the years in the three-year period ended December 31, 20132014 and historical consolidated balance sheet data at December 31, 20132014 and 20122013 have been derived from our audited consolidated financial statements which are included elsewhere in this Annual Report on Form 10-K. The selected historical consolidated statements of operations data for the fiscal years ended December 31, 20102011 and 20092010 and historical consolidated balance sheet data as of December 31, 2012, 2011 2010 and 20092010 have been derived from our audited consolidated financial information not included in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of our future results.
| 2013 | 2012 | 2011 | 2010 | 2009 | 2014 | 2013 | 2012 | 2011 | 2010 | |||||||||||||||||||||||||||||||
| (In thousands, except per share amounts) | (In thousands, except per share amounts) | |||||||||||||||||||||||||||||||||||||||
| Statement of Operations Data, Year Ended December 31: | Statement of Operations Data, Year Ended December 31: | |||||||||||||||||||||||||||||||||||||||
| Revenue | $ | 345,024 | $ | 382,773 | $ | 456,722 | $ | 543,734 | $ | 480,037 | $ | 325,022 | $ | 341,512 | $ | 380,163 | $ | 456,722 | $ | 543,734 | ||||||||||||||||||||
| Cost and expenses: | ||||||||||||||||||||||||||||||||||||||||
| Educational services and facilities | 172,685 | 180,610 | 196,639 | 210,684 | 189,820 | 164,352 | 169,049 | 178,271 | 196,639 | 210,684 | ||||||||||||||||||||||||||||||
| Selling, general and administrative | 178,494 | 191,033 | 216,846 | 242,320 | 231,602 | 168,441 | 175,978 | 189,488 | 216,846 | 242,320 | ||||||||||||||||||||||||||||||
| (Gain) loss on sale of assets | (506 | ) | (75 | ) | 4 | (15 | ) | 28 | (58 | ) | (501 | ) | (75 | ) | 4 | (15 | ) | |||||||||||||||||||||||
| Impairment of goodwill and long-lived assets | 3,908 | 25,221 | 8,290 | 4,850 | 215 | 40,836 | 3,908 | 25,221 | 8,290 | 4,850 | ||||||||||||||||||||||||||||||
| Total costs and expenses | 354,581 | 396,789 | 421,779 | 457,839 | 421,665 | 373,571 | 348,434 | 392,905 | 421,779 | 457,839 | ||||||||||||||||||||||||||||||
| Operating (loss) income | (9,557 | ) | (14,016 | ) | 34,943 | 85,895 | 58,372 | (48,549 | ) | (6,922 | ) | (12,742 | ) | 34,943 | 85,895 | |||||||||||||||||||||||||
| Other: | ||||||||||||||||||||||||||||||||||||||||
| Interest income | 37 | 2 | 17 | 30 | 29 | 153 | 37 | 2 | 17 | 30 | ||||||||||||||||||||||||||||||
| Interest expense | (4,667 | ) | (4,475 | ) | (4,369 | ) | (4,522 | ) | (4,270 | ) | (5,613 | ) | (4,667 | ) | (4,475 | ) | (4,369 | ) | (4,522 | ) | ||||||||||||||||||||
| Other income | 18 | 14 | 18 | 45 | 35 | 297 | 18 | 14 | 18 | 45 | ||||||||||||||||||||||||||||||
| (Loss) income from continuing operations before income taxes | (14,169 | ) | (18,475 | ) | 30,609 | 81,448 | 54,166 | (53,712 | ) | (11,534 | ) | (17,201 | ) | 30,609 | 81,448 | |||||||||||||||||||||||||
| Provision (benefit) for income taxes (1) | 19,591 | (2,791 | ) | 13,053 | 31,117 | 22,916 | ||||||||||||||||||||||||||||||||||
| (Benefit) provision for income taxes (1) | (4,225 | ) | 19,591 | (2,282 | ) | 13,053 | 31,117 | |||||||||||||||||||||||||||||||||
| (Loss) income from continuing operations | (33,760 | ) | (15,684 | ) | 17,556 | 50,331 | 31,250 | (49,487 | ) | (31,125 | ) | (14,919 | ) | 17,556 | 50,331 | |||||||||||||||||||||||||
| (Loss) gain from discontinued operations, net of income taxes | (17,526 | ) | (21,502 | ) | (16 | ) | 19,400 | 17,989 | (6,646 | ) | (20,161 | ) | (22,267 | ) | (16 | ) | 19,400 | |||||||||||||||||||||||
| Net (loss) income | $ | (51,286 | ) | $ | (37,186 | ) | $ | 17,540 | $ | 69,731 | $ | 49,239 | $ | (56,133 | ) | $ | (51,286 | ) | $ | (37,186 | ) | $ | 17,540 | $ | 69,731 | |||||||||||||||
| Basic | ||||||||||||||||||||||||||||||||||||||||
| (Loss) earnings per share from continuing operations | $ | (1.50 | ) | $ | (0.71 | ) | $ | 0.80 | $ | 2.06 | $ | 1.19 | $ | (2.17 | ) | $ | (1.38 | ) | $ | (0.67 | ) | $ | 0.80 | $ | 2.06 | |||||||||||||||
| (Loss) earnings per share from discontinued operations | (0.78 | ) | (0.97 | ) | (0.00 | ) | 0.79 | 0.68 | (0.29 | ) | (0.90 | ) | (1.01 | ) | (0.00 | ) | 0.79 | |||||||||||||||||||||||
| Net (loss) income per share | $ | (2.28 | ) | $ | (1.68 | ) | $ | 0.80 | $ | 2.86 | $ | 1.87 | $ | (2.46 | ) | $ | (2.28 | ) | $ | (1.68 | ) | $ | 0.80 | $ | 2.86 | |||||||||||||||
| Diluted | ||||||||||||||||||||||||||||||||||||||||
| (Loss) earnings per share from continuing operations | $ | (1.50 | ) | $ | (0.71 | ) | $ | 0.79 | $ | 2.01 | $ | 1.15 | $ | (2.17 | ) | $ | (1.38 | ) | $ | (0.67 | ) | $ | 0.79 | $ | 2.01 | |||||||||||||||
| (Loss) earnings per share from discontinued operations | (0.78 | ) | (0.97 | ) | (0.00 | ) | 0.78 | 0.66 | (0.29 | ) | (0.90 | ) | (1.01 | ) | (0.00 | ) | 0.78 | |||||||||||||||||||||||
| Net (loss) income per share | $ | (2.28 | ) | $ | (1.68 | ) | $ | 0.79 | $ | 2.79 | $ | 1.82 | $ | (2.46 | ) | $ | (2.28 | ) | $ | (1.68 | ) | $ | 0.79 | $ | 2.79 | |||||||||||||||
| Weighted average number of common shares outstanding: | ||||||||||||||||||||||||||||||||||||||||
| Basic | 22,513 | 22,195 | 22,020 | 24,418 | 26,337 | 22,814 | 22,513 | 22,195 | 22,020 | 24,418 | ||||||||||||||||||||||||||||||
| Diluted | 22,513 | 22,195 | 22,155 | 25,024 | 27,095 | 22,814 | 22,513 | 22,195 | 22,155 | 25,024 | ||||||||||||||||||||||||||||||
| Other Data: | ||||||||||||||||||||||||||||||||||||||||
| Capital expenditures | $ | 6,538 | $ | 8,839 | $ | 38,119 | $ | 42,352 | $ | 24,018 | $ | 7,472 | $ | 6,538 | $ | 8,839 | $ | 38,119 | $ | 42,352 | ||||||||||||||||||||
| Depreciation and amortization from continuing operations | 22,002 | 24,094 | 25,320 | 24,067 | 23,056 | 19,201 | 21,808 | 23,979 | 25,320 | 24,067 | ||||||||||||||||||||||||||||||
| Number of campuses | 33 | 33 | 34 | 34 | 34 | 31 | 33 | 33 | 34 | 34 | ||||||||||||||||||||||||||||||
| Average student population from continuing operations (2) | 15,009 | 17,121 | 21,396 | 26,221 | 23,609 | 14,010 | 14,804 | 16,961 | 21,396 | 26,221 | ||||||||||||||||||||||||||||||
| Cash dividend declared per common share | $ | 0.28 | $ | 0.28 | $ | 0.07 | $ | 1.00 | $ | - | $ | 0.18 | $ | 0.28 | $ | 0.28 | $ | 0.07 | $ | 1.00 | ||||||||||||||||||||
| Balance Sheet Data, At December 31: | ||||||||||||||||||||||||||||||||||||||||
| Cash and cash equivalents and restricted cash | $ | 67,386 | $ | 61,708 | $ | 26,524 | $ | 66,689 | $ | 46,934 | $ | 42,299 | $ | 67,386 | $ | 61,708 | $ | 26,524 | $ | 66,689 | ||||||||||||||||||||
| Working capital (deficit) (3) | 47,041 | 40,939 | 1,540 | (4,176 | ) | 4,494 | 29,585 | 47,041 | 40,939 | 1,540 | (4,176 | ) | ||||||||||||||||||||||||||||
| Total assets | 305,949 | 346,774 | 362,251 | 412,822 | 388,368 | 213,707 | 305,949 | 346,774 | 362,251 | 412,822 | ||||||||||||||||||||||||||||||
| Total debt (4) | 90,116 | 73,527 | 36,508 | 56,945 | 57,328 | 65,181 | 90,116 | 73,527 | 36,508 | 56,945 | ||||||||||||||||||||||||||||||
| Total stockholders' equity | 145,196 | 198,477 | 239,025 | 222,485 | 218,636 | 83,010 | 145,196 | 198,477 | 239,025 | 222,485 | ||||||||||||||||||||||||||||||
All amounts have been restated to give effect to discontinued operations in 20132014 and 2012.2013.
(1) Provision (benefit)(Benefit) provision for income taxes includes a valuation allowance from continuing operations of $24.5$46.7 million and $23.5 million for the year ended December 31, 2013.2014 and 2013, respectively.
(2) Average student population includes diploma and above students and excludes short certificate programs.
(3) Working capital (deficit) is defined as current assets less current liabilities.
(4) Total debt consists of long-term debt including current portion, capital leases, auto loans and a finance obligation of $9.7 million for each of the years in the five-year period ended December 31, 20132014 incurred in connection with a sale-leaseback transaction as further described in Note 98 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
You should read the following discussion together with the “Selected Financial Data,” “Forward Looking Statements” and the consolidated financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that are based on management’s current expectations, estimates and projections about our business and operations. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of a number of factors, including those we discuss under “Risk Factors” and “Forward Looking Statements” and elsewhere in this Annual Report on Form 10-K.
GENERAL
We are a leading provider of diversified career-oriented post-secondary education as measured by total enrollment. We offer recent high school graduates and working adults degree and diploma programs in five areas of study: automotive technology, health sciences, skilled trades, hospitality services and business and information technology. Each area of study is specifically designed to appeal to and meet the educational objectives of our student population, while also satisfying the criteria established by industry and employers. The resulting diversification limits dependence on any one industry for enrollment growth or placement opportunities and broadens potential branches for introducing new programs. As of December 31, 2013,2014, we enrolled 13,74013,278 students in diploma and degree programs and 104 in certificate programs at our 3331 campuses and five training sites across 15 states. Of those schools, 1615 are located in the states of New Jersey, Connecticut and Pennsylvania.
Our revenues consist primarily of student tuition and fees derived from the programs we offer. Our revenues are reduced by scholarships granted to our students. We recognize revenues from tuition and one-time fees, such as application fees, ratably over the length of a program, including internships or externships that take place prior to graduation. We also earn revenues from our bookstores, dormitories, cafeterias and contract training services. These non-tuition revenues are recognized upon delivery of goods or as services are performed and represent less than 10% of our revenues.
Tuition varies by school and by program and on average we increase tuition once a year by 3%2-3%. Our ability to raise tuition is influenced by the demand for our programs,markets we serve, by the rate of tuition increase at other post-secondary schools and by regulatory requirements. If historical trends continue, weWe expect to be able to continue to raise tuition annually at comparable rates.based on permitting market circumstances.
Our revenues are directly dependent on the average number of students enrolled in our schools and the courses in which they are enrolled. Our average enrollment is impacted by the number of new students starting, re-entering, graduating and withdrawing from our schools. In addition, our diploma/certificate programs range from 22 to 106 weeks, our associate’s degree programs range from 48 to 156 weeks, and our bachelor’s degree programs range from 142104 to 208 weeks, and students attend classes for different amounts of time per week depending on the school and program in which they are enrolled. Because we start new students every month, our total student population changes monthly. The number of students enrolling or re-entering our programs each month is driven by the demand for our programs, the effectiveness of our marketing and advertising, the availability of financial aid and other sources of funding, the number of recent high school graduates, the job market and seasonality. Our retention and graduation rates are influenced by the quality and commitment of our teachers and student services personnel, the effectiveness of our programs, the placement rate and success of our graduates and the availability of financial aid. Although similar courses have comparable tuition rates, the tuition rates vary among our numerous programs. As more of our schools receive approval to offer associate’s degree and bachelor’s degree programs, which are longer than our diploma degree programs, we would expect our average enrollment and the average length of stay of our students to increase.
The majority of students enrolled at our schools rely on funds received under various government-sponsored student financial aid programs to pay a substantial portion of their tuition and other education-related expenses. The largest of these programs are Title IV Programs which represented approximately 80% of our revenue on a cash receipts relatingbasis while approximately 20% was derived from state grants and cash payments made by students during 2014 and 2013. The HEA requires institutions to revenues in 2013.use the cash basis of accounting when determining its compliance with the 90/10 rule.
We extend credit for tuition and fees to many of our students that attend our campuses. Our credit risk is mitigated through the student’s participation in federally funded financial aid programs unless students withdraw prior to the receipt by us of Title IV funds for those students. Under Title IV Programs, the government funds a certain portion of a students’ tuition, with the remainder, referred to as “the gap,” financed by students themselves under private party loans, including credit extended by us. The gap amount has continued to increase over the last several years as we have raised tuition on average for the last several years by 3%2-3% per year and restructured certain programs to reduce the amount of financial aid available to students, while funds received from Title IV Programs increased at lower rates.
The additional financing that we are providing to students may expose us to greater credit risk and can impact our liquidity. However, we believe that these risks are somewhat mitigated due to the following:
| · | Our internal financing is provided to students only after all other funding resources have been exhausted; thus, by the time this funding is available, students have completed approximately two-thirds of their curriculum and are more likely to graduate; |
| · | Funding for students who interrupt their education is typically covered by Title IV funds as long as they have been properly packaged for financial aid; and |
| · |
The operating expenses associated with an existing school do not increase or decrease proportionally as the number of students enrolled at the school increases or decreases. We categorize our operating expenses as:
| · | Educational services and facilities. Major components of educational services and facilities expenses include faculty compensation and benefits, expenses of books and tools, facility rent, maintenance, utilities, depreciation and amortization of property and equipment used in the provision of education services and other costs directly associated with teaching our programs excluding student services which is included in selling, general and administrative expenses. |
| · | Selling, general and administrative. Selling, general and administrative expenses include compensation and benefits of employees who are not directly associated with the provision of educational services (such as executive management and school management, finance and central accounting, legal, human resources and business development), marketing and student enrollment expenses (including compensation and benefits of personnel employed in sales and marketing and student admissions), costs to develop curriculum, costs of professional services, bad debt expense, rent for our corporate headquarters, depreciation and amortization of property and equipment that is not used in the provision of educational services and other costs that are incidental to our operations. Selling, general and administrative expenses also includes the cost of all student services including financial aid and career services. All marketing and student enrollment expenses are recognized in the period incurred. |
DISCONTINUED OPERATIONS
2014 Event
On December 3, 2014, our Board of Directors approved a plan to cease operations at five training sites in Florida. We performed a cost benefit analysis on several schools and concluded that the training sites contained a high fixed cost component and has had difficulty attracting enough students due to high competition to maintain a stable profit margin. Accordingly, we ceased operations at these campuses as of December 31, 2014. This was a strategic shift to close all of our training sites and all locations that do not accept Title IV payments. The results of operations of these campuses are reflected as discontinued operations in the consolidated financial statements.
The results of operations at these five training sites for the three year periods ended December 31, 2014 were as follows (in thousands):
| Year Ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| Revenue | $ | 2,140 | $ | 3,512 | $ | 2,610 | ||||||
| Loss before income tax | (6,731 | ) | (2,635 | ) | (1,274 | ) | ||||||
| Income tax benefit | (85 | ) | - | (508 | ) | |||||||
| Net loss from discontinued operations | $ | (6,646 | ) | $ | (2,635 | ) | $ | (766 | ) | |||
Amounts include impairments of goodwill and long-lived assets for these campuses of $2.1 million for the year ended December 31, 2014.
2013 Event
On June 18, 2013, our Board of Directors approved a plan to cease operations at four campuses in Ohio and one campus in Kentucky consisting of our Dayton institution and its branch campuses. Federal legislation implemented on July 1, 2012 that prohibits “ability to benefit” (“ATB”) students from participating in federal student financial aid programs led to a dramatic decrease in the number of students attending these five campuses. Accordingly, wethe Company ceased operations at these campuses as of December 31, 2013. The results of operations of these campuses are reflected as discontinued operations in the consolidated financial statements.
The results of operations at these five campuses for the threetwo year periods ended December 31, 2013 were as follows (in thousands):
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||
| 2013 | 2012 | 2011 | 2013 | 2012 | ||||||||||||||||
| Revenue | $ | 7,724 | $ | 19,924 | $ | 35,099 | $ | 7,724 | $ | 19,924 | ||||||||||
| (Loss) income before income tax | (17,287 | ) | (13,641 | ) | 5,236 | |||||||||||||||
| Loss before income tax | (17,287 | ) | (13,641 | ) | ||||||||||||||||
| Income tax expense (benefit) | 239 | (5,444 | ) | 1,677 | 239 | (5,444 | ) | |||||||||||||
| Net (loss) income from discontinued operations | $ | (17,526 | ) | $ | (8,197 | ) | $ | 3,559 | ||||||||||||
| Net loss from discontinued operations | $ | (17,526 | ) | $ | (8,197 | ) | ||||||||||||||
Amounts include impairments of goodwill and long-lived assets for these campuses of $2.3 million and $8.7 million for the years ended December 31, 2013 and 2012, respectively.
2012 Event
On July 31, 2012, our Board of Directors approved a plan to cease operations at seven campuses. The adjustments made to our business model to better align with the DOE’s increased emphasis on student outcomes and our efforts to comply with the 90/10 rule and cohort default rates greatly impacted the population at these campuses. In addition, the current economic environment and regulatory changes under the Consolidated Appropriations Act, 2012, which eliminated the ability to enroll “ability to benefit” (“ATB”)ATB students, have made these campuses no longer viable. Accordingly, we ceased operations at these campuses as of December 31, 2012. The results of operations are reflected as discontinued operations in the consolidated financial statements.
The results of operations at these seven campuses for the twoone year periods ended December 31, 2012 were as follows (in thousands):
| Year Ended December 31, | Year Ended December 31, | |||||||||||
| 2012 | 2011 | 2012 | ||||||||||
| Revenue | $ | 8,500 | $ | 20,804 | $ | 8,500 | ||||||
| Loss before income tax | (22,142 | ) | (5,260 | ) | (22,142 | ) | ||||||
| Income tax benefit | (8,837 | ) | (1,685 | ) | (8,837 | ) | ||||||
| Net loss from discontinued operations | $ | (13,305 | ) | $ | (3,575 | ) | $ | (13,305 | ) | |||
Amounts include impairments of goodwill and long-lived assets for these campuses of $9.5 million and $2.1 million for the yearsyear ended December 31, 2012 and 2011, respectively.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussions of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. On an ongoing basis, we evaluate our estimates and assumptions, including those related to revenue recognition, bad debts, fixed assets, goodwill and other intangible assets, income taxes and certain accruals. Actual results could differ from those estimates. The critical accounting policies discussed herein are not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not result in significant management judgment in the application of such principles. We believe that the following accounting policies are most critical to us in that they represent the primary areas where financial information is subject to the application of management's estimates, assumptions and judgment in the preparation of our consolidated financial statements.
Revenue recognition. Revenues are derived primarily from programs taught at our schools. Tuition revenues and one-time fees, such as nonrefundable application fees, and course material fees are recognized on a straight-line basis over the length of the applicable program, which is the period of time from a student's start date through his or her graduation date, including internships or externships that take place prior to graduation. If a student withdraws from a program prior to a specified date, any paid but unearned tuition is refunded. Refunds are calculated and paid in accordance with federal, state and accrediting agency standards. Other revenues, such as tool sales and contract training revenues are recognized as services are performed or goods are delivered. On an individual student basis, tuition earned in excess of cash received is recorded as accounts receivable, and cash received in excess of tuition earned is recorded as unearned tuition.
Allowance for uncollectible accounts. Based upon experience and judgment, we establish an allowance for uncollectible accounts with respect to tuition receivables. We use an internal group of collectors augmented by third-party collectors as deemed appropriate, in our collection efforts. In establishing our allowance for uncollectible accounts, we consider, among other things, current and expected economic conditions, a student's status (in-school or out-of-school), whether or not a student is currently making payments, and overall collection history. Changes in trends in any of these areas may impact the allowance for uncollectible accounts. The receivables balances of withdrawn students with delinquent obligations are reserved for based on our collection history. Although we believe that our reserves are adequate, if the financial condition of our students deteriorates, resulting in an impairment of their ability to make payments, additional allowances may be necessary, which will result in increased selling, general and administrative expenses in the period such determination is made.
Our bad debt expense as a percentage of revenues for the years ended December 31, 2014, 2013 and 2012 was 4.7%, 4.1% and 2011 was 4.1%, 5.1% and 4.5%, respectively. Our exposure to changes in our bad debt expense could impact our operations. A 1% increase in our bad debt expense as a percentage of revenues for the years ended December 31, 2014, 2013 2012 and 20112012 would have resulted in an increase in bad debt expense of $3.5$3.3 million, $3.8$3.4 million and $4.6$3.8 million, respectively.
We do not believe that there is any direct correlation between tuition increases, the credit we extend to students and our loan commitments. Our loan commitments to our students are made on a student-by-student basis and are predominantly a function of the specific student’s financial condition. We only extend credit to the extent there is a financing gap between the tuition and fees charged for the program and the amount of grants, loans and parental loans each student receives. Each student’s funding requirements are unique. Factors that determine the amount of aid available to a student are student status (whetherinclude whether they are dependent or independent students),students, Pell grants awarded, Federal Direct loans awarded, Plus loans awarded or denied to parents and family contributions. As a result, it is extremely difficult to predict the number of students that will need us to extend credit to them. Our tuition increases have ranged historically from 3% to 5%averaged 2-3% annually and have not meaningfully impacted overall funding requirements, since the amount of financial aid funding available to students in recent years has increased at greater rates than our tuition increases.
Because a substantial portion of our revenues are derived from Title IV Programs, any legislative or regulatory action that significantly reduces the funding available under Title IV Programs or the ability of our students or schools to participate in Title IV Programs could have a material effect on the realizability of our receivables.
Goodwill. We test our goodwill for impairment annually, or whenever events or changes in circumstances indicate an impairment may have occurred, by comparing its fair value to its carrying value. Impairment may result from, among other things, deterioration in the performance of the acquired business, adverse market conditions, adverse changes in applicable laws or regulations, including changes that restrict the activities of the acquired business, and a variety of other circumstances. If we determine that impairment has occurred, we are required to record a write-down of the carrying value and charge the impairment as an operating expense in the period the determination is made. In evaluating the recoverability of the carrying value of goodwill and other indefinite-lived intangible assets, we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the acquired assets. Changes in strategy or market conditions could significantly impact these judgments in the future and require an adjustment to the recorded balances.
Goodwill represents a significant portion of our total assets. As of December 31, 2013,2014, goodwill was approximately $22.2 million, or 10.4%, of our total assets which decreased from approximately $62.5 million, or 20.4%, at December 31, 2013. This decrease was due to the impairment of our total assets.goodwill in the three months ended September 30, 2014.
We test our goodwill for impairment using a two-step approach. The first step is conducted utilizing the multiple of earnings and discounted cash flow approach and comparing the carrying value of our reporting units to their implied fair value. If necessary, the second step is conducted comparing the implied fair value of goodwill for our reporting units with the carrying amount of that goodwill.
At December 31, 2014, we conducted our annual test for goodwill impairment and determined we did not have an impairment. The fair value of our reporting units were determined using Level 3 inputs included in our multiple of earnings and discounted cash flow approach. We concluded that as of September 30, 2014 there was an indicator of potential impairment as a result of a decrease in market capitalization and, accordingly, we tested goodwill for impairment. The test indicated that 10 of our reporting units were impaired, which resulted in a pre-tax non-cash charge of $39.0 million for the three months ended September 30, 2014 ($1.9 million of which is included in discontinued operations).
At December 31, 2013, we conducted our annual test for goodwill impairment and determined we did not have an impairment. The fair value of our reporting units were determined using Level 3 inputs included in our multiple of earnings and discounted cash flow approach. As of June 30, 2013, we concluded that current period losses at two reporting units, which resulted in a deterioration of current and projected cash flows, was an indicator of potential impairment and, accordingly, tested goodwill and long-lived assets for impairment. The tests indicated that these two reporting units were impaired, which resulted in a pre-tax non-cash charge of $3.1 million for the three months ended June 30, 2013.
At December 31, 2012, we tested goodwill for impairment and determined that an impairment of approximately $18.3 million ($4.5 million included in discontinued operations) existed for seven of our reporting units. We concluded that the decrease in our market capitalization as of June 30, 2012 was an indicator of potential impairment and, accordingly, we tested goodwill for impairment. The tests indicated that five of our reporting units were impaired as a result of lower than expected student population, which resulted in a pre-tax charge of $15.4 million in the second quarter of 2012 ($8.4 million included in discontinued operations). The fair values of these reporting units were estimated using the expected present value of future cash flows. No other reporting unit’s carrying goodwill amount exceeded or approximated its implied value.
Stock-based compensation. We currently account for stock-based employee compensation arrangements by using the Black-Scholes valuation model and utilize straight-line amortization of compensation expense over the requisite service period of the grant. We make an estimate of expected forfeitures at the time options are granted.
The fair value of the stock options used to compute stock-based compensation is the estimated present value at the date of grant using the Black-Scholes option pricing model. During 20132014 and 2011,2013, there were no new stock option grants. The weighted average fair values of options granted during 2012 was $2.52 using the following weighted average assumptions for grants:
| At December 31, | ||||
| 2012 | ||||
| Expected volatility | 51.25 | % | ||
| Expected dividend yield | 4 | % | ||
| Expected life (term) | 4.65 Years | |||
| Risk-free interest rate | 0.87 | % | ||
| Weighted-average exercise price during the year | $ | 7.79 | ||
The expected volatility considers the volatility of our common stock that has been traded for a period commensurate with the expected life. The expected term of options granted represents the period of time that options granted are expected to be outstanding based on historical experience. The risk-free rate used is based on the published U.S. Treasury yield curve in effect at the time of grant for instruments with a similar life. The 2012 expected dividend yield presumes a set dividend rate based on the current dividend yield.
Income taxes. We account for income taxes in accordance with FASB ASC Topic 740, “Income Taxes” (“ASC 740”). This statement requires an asset and a liability approach for measuring deferred taxes based on temporary differences between the financial statement and tax bases of assets and liabilities existing at each balance sheet date using enacted tax rates for years in which taxes are expected to be paid or recovered.
In accordance with ASC 740, we assess our deferred tax asset to determine whether all or any portion of the asset is more likely than not unrealizable. A valuation allowance is required to be established or maintained when, based on currently available information, it is more likely than not that all or a portion of a deferred tax asset will not be realized. In accordance with ASC 740, our assessment considers whether there has been sufficient income in recent years and whether sufficient income is expected in future years in order to utilize the deferred tax asset. In evaluating the realizability of deferred income tax assets we considered, among other things, historical levels of income, expected future income, the expected timing of the reversals of existing temporary reporting differences, and the expected impact of tax planning strategies that may be implemented to prevent the potential loss of future income tax benefits. Significant judgment is required in determining the future tax consequences of events that have been recognized in our consolidated financial statements and/or tax returns. Differences between anticipated and actual outcomes of these future tax consequences could have a material impact on our consolidated financial position or results of operations. Changes in, among other things, income tax legislation, statutory income tax rates, or future income levels could materially impact our valuation of income tax assets and liabilities and could cause our income tax provision to vary significantly among financial reporting periods.
We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense. During the years ended December 31, 20132014 and 2012,2013, the interest and penalties expense associated with uncertain tax positions are not significant to our results of operations or financial position.
Results of Continuing Operations for the Three Years Ended December 31, 20132014
The following table sets forth selected consolidated statements of continuing operations data as a percentage of revenues for each of the periods indicated:
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
| 2013 | 2012 | 2011 | 2014 | 2013 | 2012 | |||||||||||||||||||
| Revenue | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||
| Costs and expenses: | ||||||||||||||||||||||||
| Educational services and facilities | 50.1 | % | 47.2 | % | 43.1 | % | 50.6 | % | 49.5 | % | 46.9 | % | ||||||||||||
| Selling, general and administrative | 51.7 | % | 49.9 | % | 47.5 | % | 51.8 | % | 51.5 | % | 49.8 | % | ||||||||||||
| (Gain) loss on sale of assets | -0.1 | % | 0.0 | % | 0.0 | % | ||||||||||||||||||
| Gain on sale of assets | 0.0 | % | -0.1 | % | 0.0 | % | ||||||||||||||||||
| Impairment of goodwill and long-lived assets | 1.1 | % | 6.6 | % | 1.7 | % | 12.5 | % | 1.1 | % | 6.7 | % | ||||||||||||
| Total costs and expenses | 102.8 | % | 103.7 | % | 92.3 | % | 114.9 | % | 102.0 | % | 103.4 | % | ||||||||||||
| Operating (loss) income | -2.8 | % | -3.7 | % | 7.7 | % | ||||||||||||||||||
| Operating loss | -14.9 | % | -2.0 | % | -3.4 | % | ||||||||||||||||||
| Interest expense, net | -1.3 | % | -1.1 | % | -1.0 | % | -1.6 | % | -1.4 | % | -1.1 | % | ||||||||||||
| (Loss) income from continuing operations before income taxes | -4.1 | % | -4.8 | % | 6.7 | % | ||||||||||||||||||
| Provision (benefit) for income taxes | 5.7 | % | -0.7 | % | 2.9 | % | ||||||||||||||||||
| (Loss) income from continuing operations | -9.8 | % | -4.1 | % | 3.8 | % | ||||||||||||||||||
| Loss from continuing operations before income taxes | -16.5 | % | -3.4 | % | -4.5 | % | ||||||||||||||||||
| (Benefit) provision for income taxes | -1.3 | % | 5.7 | % | -0.6 | % | ||||||||||||||||||
| Loss from continuing operations | -15.2 | % | -9.1 | % | -3.9 | % | ||||||||||||||||||
Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
Revenue. Revenue decreased by $16.5 million, or 4.8%, to $325.0 million for the year ended December 31, 2014 from $341.5 million for the year ended December 31, 2013. The decrease stems from the fact that we experienced a 5.4% decline in average student population, which decreased to approximately 14,000 students from 14,800 students for the respective periods, offset by a 0.6% increase in average revenue per student mainly due to tuition rate increases diluted by scholarships. We began 2014 with approximately 1,800 or 11.4%, fewer students than we had on January 1, 2013.
Increased scholarship awards also contributed to the revenue decline. Scholarships are recognized ratably over the term of the student’s program. This has resulted in an increase in discounts applied for students currently attending our programs by $3.4 million for 2014 as compared to 2013. While scholarships have negatively impacted revenue, we believe we provide more students the opportunity to pursue their educational goals by assisting in their affordability challenge.
Furthermore, 2014 revenue was reduced by a loss of revenue and student refunds in connection with the merger of our Las Vegas, Nevada and Hamden, Connecticut campuses with their respective neighboring campuses.
For a general discussion of trends in our student enrollment, see “- Seasonality and Outlook” below.
Educational services and facilities expense. Our educational services and facilities expense decreased by $4.7 million, or 2.8%, to $164.4 million for the year ended December 31, 2014 from $169.0 million for the year ended December 31, 2013. The expense reductions were primarily due to a $4.1 million, or 4.8%, decrease in instructional expenses and a $0.3 million, or 2.0%, decrease in books and tools expense.
Instructional expense savings were a result of a reduction in the number of instructors and other related costs resulting from lower average student population. Similarly, the decrease in books and tools expense is also attributable to the decrease in average student population of approximately 800 students in 2014.
Our facilities expenses was essentially flat year over year. We experienced an increase in insurance offset by lower rent expense as a result of a reduced number of campuses and lower depreciation expense primarily due to long-lived asset impairment charges.
Our educational expenses contain a high fixed cost component and are not as scalable as some of our other expenses. As our student population decreases, we typically experience a reduction in average class size and, therefore, are not always able to align these expenses with the corresponding decrease in population. As a result, educational services and facilities expenses, as a percentage of revenue, increased to 50.6% for the year ended December 31, 2014 from 49.5% for the year ended December 31, 2013.
Selling, general and administrative expense. Our selling, general and administrative expense decreased by $7.5 million, or 4.3%, to $168.4 million for the year ended December 31, 2014 from $176.0 million for the year ended December 31, 2013. Administrative expense was lower by $2.5 million, or 2.7%, after giving effect to one-time charges of $1.8 million for severances costs as a result of management restructuring and a $1.0 million expense related to a loss contingency relating to the Company’s campuses in Massachusetts. The decrease was primarily driven by a reduction of salaries and benefit costs due to a smaller workforce year over year.
Bad debt expense as a percentage of revenue was 4.7% for the year ended December 31, 2014, compared to 4.1% for the same period in 2013. Bad debt was negatively impacted by a combination of a slight deterioration in our collection history and a small increase in day’s sales outstanding. The company is in the process of centralizing various aspects of the financial aid process to enhance the student customer service experience, improve quality control and reduce bad debt.
Sales and marketing expenses decreased $4.0 million, or 6.3% as a result of a reduction in marketing expenses of $1.5 million and $2.5 million in sales expense in 2014 compared to 2013. The reduction in sales expense was mainly attributable to a reduction in the number of admissions representatives dedicated to the destination schools as a result of the Company’s decision to replace select representatives who cover large territories with a centralized call center staff eliminating travel costs and reducing salary expense. These changes yielded significant cost-savings and were a major component of our cost rationalization. We continue to focus on our recruitment strategies while remaining compliant with the incentive compensation regulations. In an effort to enhance the admissions process and results, the Company has invested in a new customer relationship management software designed to improve communications and efficiencies with the objective of positively impacting enrollments and start rate.
During 2014, we reduced our marketing expenses resulting in a decrease year over year mainly due to a decrease in average student population partially offset by production costs associated with our new marketing campaign as “Lincoln Tech, America’s Technical Institute”. Additionally, as a result of the two merging campuses in 2014, we realized expense reductions of approximately $0.5 million in marketing expense.
Student services expense also decreased by $1.0 million, or 5.8%, to $16.0 million for 2014 as a result of our smaller student population.
As a percentage of revenues, selling, general and administrative expense for the year ended December 31, 2014 increased to 51.8% from 51.5% for the year ended December 31, 2013.
As of December 31, 2014, we had outstanding loan commitments to our students of $34.1 million, as compared to $36.5 million at December 31, 2013. Loan commitments, net of interest that would be due on the loans through maturity, were $24.1 million at December 31, 2014, as compared to $26.5 million at December 31, 2013. Loan commitments decreased as a result of lower population and fewer campuses.
Impairment of goodwill and long-lived assets. We tested our goodwill and long-lived assets as of December 31, 2014 and determined there is no goodwill impairment, however, we recorded a $1.5 million long-lived asset impairment charge in connection with one asset group. As of September 30, 2014 we tested goodwill and long-lived assets for impairment and determined that an impairment of approximately $41.4 million existed for 10 reporting units related to goodwill and six asset groups related to long-lived assets and intangible assets ($2.1 million is included in discontinued operations).
Previously, as of June 30, 2013, we determined that an impairment of approximately $4.5 million existed for two of our reporting units and four asset groups related to goodwill and long-lived assets ($0.7 million is included in discontinued operations); at March 31, 2013, we determined that an impairment of approximately $1.7 million existed for two asset groups related to long-lived assets ($1.6 million is included in discontinued operations).
Net interest expense. Our net interest expense for the year ended December 31, 2014 increased by $0.8 million compared to prior year due to financing fees expensed associated with changes in our credit facility.
Income taxes. Our benefit for income taxes for the year ended December 31, 2014 was $4.2 million, or 7.9% of pretax loss, compared to a provision for income taxes of $19.6 million, or 169.9%, of pretax income for the year ended December 31, 2013.
Prior to 2014, we had a deferred tax liability related to an indefinite life intangible that was not available to offset the net deferred tax asset when evaluating the amount of the valuation allowance needed. As a result of our impairment of goodwill in the third quarter of 2014, the deferred tax liability related to the indefinite life intangible of $4.5 million was reversed resulting in a decrease in the valuation allowance needed. This release of the valuation allowance resulted in an income tax benefit.
We assess the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A significant piece of objective negative evidence was the cumulative losses incurred by us in recent years. On the basis of this evaluation, the realization of our deferred tax assets was not deemed to be more likely than not and thus we maintained a valuation allowance on our net deferred tax assets as of December 31, 2014.
Year Ended December 31, 2013 Compared to Year Ended December 31, 2012
Revenue. Revenue decreased by $37.7$38.7 million, or 9.9%10.2%, to $345.0$341.5 million for the year ended December 31, 2013 from $382.8$380.2 million for the year ended December 31, 2012. The decrease was primarily attributable to a 12.3%12.7% decrease in average student population, which decreased to 15,009approximately 14,800 for the year ended December 31, 2013 from 17,12117,000 for the year ended December 31, 2012, partially offset by a 2.8%2.9% increase in average revenue per student. We began 2013 with approximately 2,200,2,400, or 12.3%13.5%, fewer students than we had on January 1, 2012.
The average student population was negatively impacted by regulatory changes under the Appropriations Act, which eliminated our ability to enroll ATB students as well as our decision in early 2012 to stop enrolling fully online students. In addition, we believe current economic conditions have increased the number of potential students who are hesitant to incur debt and therefore, have not enrolled in our schools. These factors have led to a significant decline in student starts and average student population.
Average revenue per student increased 2.8%2.9% for the year ended December 31, 2013 from the year ended December 31, 2012, primarily from tuition increases that averaged 3%.
For a general discussion of trends in our student enrollment, see “- Seasonality and Trends”Outlook” below.
Educational services and facilities expense. Our educational services and facilities expense decreased by $7.9$9.2 million, or 4.4%5.2%, to $172.7$169.0 million for the year ended December 31, 2013 from $180.6$178.3 million for the year ended December 31, 2012. This decrease in educational services and facilities expense was due to a $6.6$7.4 million, or 7.0%8.0%, decrease in instructional expenses, and a $1.3$1.4 million, or 7.3%7.9%, decrease in books and tools expense.
The decrease in instructional expenses was primarily due to a reduction in the number of instructors and other related costs at our campuses resulting from a lower student population. The decrease in books and tools expense was attributable to a decline in student starts of approximately 2,1002,400 for the year ended December 31, 2013 compared to the year ended December 31, 2012.
Our education expenses contain a high fixed cost component and are not as leverageable as some of our other expenses. As our student population decreases, we typically experience reductions in average class size and, therefore, are not always able to align these expenses with the corresponding decrease in population.
As a result, educational services and facilities expenses, as a percentage of revenue, increased to 50.1%49.5% for the year ended December 31, 2013 from 47.2%46.9% for the year ended December 31, 2012.
Selling, general and administrative expense. Our selling, general and administrative expense for the year ended December 31, 2013 was $178.5$176.0 million, a decrease of $12.5$13.5 million, or 6.6%7.1%, from $191.0$189.5 million for the year ended December 31, 2012. This decrease was primarily due to a $9.0$9.6 million, or 8.6%9.3%, decrease in administrative expenses, a $2.6$2.9 million, or 3.9%4.2%, decrease in sales and marketing expenses and a $0.9$1.0 million, or 4.6%5.5%, decrease in student services expenses.
The decrease in administrative expenses was due to a $5.2$5.4 million reduction in bad debt expense and a reduction in compensation and benefits.
The bad debt expense as a percentage of revenue was 4.1% for the year ended December 31, 2013, compared to 5.1% for the year ended December 31, 2012. The reduction in bad debt as a percentage of revenue was due to our focused efforts on the financial aid processes and collection activities.
The decrease in sales and marketing expenses was primarily due to a reduction in marketing expenses as well as a reduction in the number of admissions representatives in order to align our cost structure to our student population.
As a percentage of revenues, selling, general and administrative expense for the year ended December 31, 2013 increased to 51.7%51.5% from 49.9%49.8% for the year ended December 31, 2012.
As of December 31, 2013, we had outstanding loan commitments to our students of $36.5 million as compared to $34.7 million at December 31, 2012. Loan commitments, net of interest that would be due on the loans through maturity, were $26.5 million at December 31, 2013 as compared to $25.0 million at December 31, 2012.
Impairment of goodwill and long-lived assets. We test our goodwill and long-lived assets and have determined the following: (a) there have been no new impairments as of December 31, 2013; (b) at June 30, 2013, we determined that an impairment of approximately $4.5 million existed for two of our reporting units and four asset groups related to goodwill and long-lived assets ($0.7 million is included in discontinued operations); (c) at March 31, 2013, we determined that an impairment of approximately $1.7 million existed for two asset groups related to long-lived assets ($1.6 million is included in discontinued operations); (d) at December 31, 2012, we determined that an impairment of approximately $19.7 million existed for seven of our reporting units and four asset groups related to long lived assets; and (e) at June 30, 2012, we determined that an impairment charge of approximately $23.7 million existed for five reporting units related to goodwill and 10 asset groups related to long-lived assets($9.4 million included in discontinued operations).
Net interest expense. Our net interest expense for the year ended December 31, 2013 was $4.6 million essentially flat compared to the year ended December 31, 2012.
Income taxes. Our provision for income taxes for the year ended December 31, 2013 was $19.6 million, or (138.3%(169.9%) of pretax loss, compared to a benefit for income taxes of $2.8 million, or 15.1%13.3%, of pretax loss for the year ended December 31, 2012. The effective tax rate increase was primarily due to a $24.5 million valuation allowance recorded for the year ended December 31, 2013.
We assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A significant piece of objective negative evidence was the cumulative losses incurred by us in recent years. On the basis of this evaluation we believe it is more likely than not that we will realize the net deferred tax assets. As a result, as of December 31, 2013, we recorded a valuation allowance against the net deferred tax assets, excluding the indefinite life assets which generated a deferred tax liability.
LIQUIDITY AND CAPITAL RESOURCES
Our primary capital requirements are for facilities expansion and maintenance, acquisitions and the development of new programs. Our principal sources of liquidity have been cash provided by operating activities and borrowings under our credit agreement. The following chart summarizes the principal elements of our cash flow for each of the three years in the period ended December 31, 2013:2014:
| Cash Flow Summary | Cash Flow Summary | |||||||||||||||||||||||
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
| 2013 | 2012 | 2011 | 2014 | 2013 | 2012 | |||||||||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||||||||||
| Net cash provided by operating activities | $ | 3,246 | $ | 15,986 | $ | 36,838 | $ | 12,022 | $ | 3,246 | $ | 15,986 | ||||||||||||
| Net cash used in investing activities | $ | (5,788 | ) | $ | (10,187 | ) | $ | (37,389 | ) | $ | (7,405 | ) | $ | (5,788 | ) | $ | (10,187 | ) | ||||||
| Net cash (used in) provided by financing activities | $ | (46,280 | ) | $ | 29,385 | $ | (38,920 | ) | $ | (5,204 | ) | $ | (46,280 | ) | $ | 29,385 | ||||||||
As of December 31, 2013,2014, we had cash, cash equivalents, and restricted cash of $67.4$42.3 million, including $54.5$30.0 million of restricted cash representing an increasea decrease of approximately $5.7$25.1 million as compared to $61.7$67.4 million of cash, and cash equivalents, and restricted cash as of December 31, 2012.2013. This increasedecrease is primarily due a $24.5 million reduction in borrowings under our credit facility to $30.0 million as of December 31, 2014 compared to $54.5 million for the comparable period of 2013. In addition, we repaid $54.5 million of borrowings under our Credit Facility (as defined below) duringin the fourthfirst quarter of 2013 compared to $37.52014 which was included in restricted cash as of December 31, 2013. Similarly, in the first quarter of 2015 we repaid $30.0 million of borrowings duringunder our Credit Facility included in restricted cash as of December 31, 2014. In the fourththird quarter of 2012 partially offset2014 the quarterly cash dividend was decreased from $0.07 to $0.02 and was discontinued for 2015. The discontinuation of the cash dividend will provide additional funds for future investments.
For the last several years, we and the proprietary school sector generally have faced various forms of adversity which have contributed to deteriorating earnings growth. Government regulations have negatively impacted earnings by making it more difficult for potential students to obtain loans, which when coupled with the overall economic environment have hindered potential students from enrolling in our schools. In light of these factors, we have incurred significant operating losses as a net loss duringresult of lower student population. We also recorded a pre-tax goodwill impairment charge of $39.0 million for the year ended December 31, 20132014 as a result of $51.3 million compared to a net loss during the year ended December 31, 2012significant decline in market capitalization. Despite these events, we believe that our likely sources of $37.2 million. Historically, we have financed our operating activities and organic growth primarily through cash generated from operations. We have financed acquisitions primarily through borrowings under our Credit Facility and cash generated from operations. We currently anticipate that we willshould be able to meet our short-term cash needs, as well as our needsufficient to fund operations and meet our obligations beyondfor the next twelve months withmonths. Our available sources of cash generated byprimarily include cash from operations, existing cash balances and borrowings under our Credit Facility. In addition, we may also consider accessing the financial markets in the future as a source of liquidity for capital requirements, acquisitions and general corporate purposes to the extent such requirements are not satisfied by cash equivalents on hand borrowings under our Credit Facility or operating cash flows. However, we cannot assure you that we will be able to raise additional capital on favorable terms, if at all. As of December 31, 2013, we had $54.52014 of $12.3 million outstandingand the ability to draw up to $20 million under ourthe revolving line of credit agreement. This amount was paid in full on January 3, 2014. As of December 31, 2013, we had outstandingless letters of credit aggregating $5.3that was extended through April 2016. To fund our business plans, including any anticipated future losses, purchase commitments, capital expenditures, principal and interest payments on borrowings and to satisfy the DOE financial responsibility standards, we have the ability to leverage our owned real estate that is not classified as held for sale. We are also continuing to take actions to improve cash flow by aligning our cost structure to our student population.
In addition to the aforementioned current sources of capital that will provide short term liquidity, we also plan to sell approximately $50.9 million in assets which primarily comprised of security deposits in connection withare currently classified as held for sale and are expected to be sold within one year. We also are currently exploring various other alternatives including debt financing vehicles and strategic partnerships. However, at this time we have no commitments to obtain any additional funds, and there can be no assurance such funds will be available on acceptable terms or at all. If we are unable to sell our assets classified as held for sale, leverage certain of our real estate leases. The Credit Facility matures on April 5, 2015.properties or obtain additional funding, our financial condition and results of operations may be materially adversely affected.
Our primary source of cash is tuition collected from theour students. The majority of students enrolled at our schools rely on funds received under various government-sponsored student financial aid programs to pay a substantial portion of their tuition and other education-related expenses. The largest of these programs are Title IV Programs which represented approximately 80% of our cash receipts relating to revenues in 2013.2014. Students must apply for a new loan for each academic period. Federal regulations dictate the timing of disbursements of funds under Title IV Programs and loan funds are generally provided by lenders in two disbursements for each academic year. The first disbursement is usually received approximately 31 days after the start of a student's academic year and the second disbursement is typically received at the beginning of the sixteenth week from the start of the student's academic year. Certain types of grants and other funding are not subject to a 30-day delay. In certain instances, if a student withdraws from a program prior to a specified date, any paid but unearned tuition or prorated Title IV financial aid is refunded according to federal, state and federal regulations.accrediting agency standards.
As a result of the significance of the Title IV funds received by our students, we are highly dependent on these funds to operate our business. Any reduction in the level of Title IV funds that our students are eligible to receive or any impact on our ability to be able to receive Title IV funds would have a significant impact on our operations and our financial condition. See “Risk Factors” in Item 1A, included in our Annual Report on Form 10-K for the year ended December 31, 2014.
Operating Activities
Net cash provided by operating activities was $12.0 million for the year ended December 31, 2014 as compared to $3.2 million for the year ended December 31, 2013 as compared to $16.02013. The $8.8 million for year ended December 31, 2012. The $12.7 million decreaseincrease in net cash provided by operating activities primarily resulted from a reduction in$7.4 million net income offset bytax refunds and other working capital items.
Investing Activities
Net cash used in investing activities decreased by $4.4for the year ended December 31, 2014 was $7.4 million compared to $5.8 million for the year ended December 31, 2013 from $10.2 million for the year ended December 31, 2012. The decrease2013. Our primary use of cash in investing activities was primarily attributable to a $2.3 million reduction in cash used for capital expenditures for the year ended December 31, 2013 compared to the year ended December 31, 2012 and the acquisition of FMTI of $1.5 million in the second quarter of 2012. Our 2013 capital expenditures mainly resulted from leasehold improvements and facility expansions as well asassociated with investments in campuses,training technology, classroom furniture, and shop technology. The decreasenew program build outs.
During 2014 we have strategically utilized our cash resources to develop and expand our new Computer Numerical Control (CNC) program which was a result of decreased demand for expenditures duefirst launched in late 2013 at our Indianapolis and Grand Prairie campuses. In 2014, we have further expanded our CNC program into our Mahwah campus and expect to reduced student population, assets transferred from closed schoolssuccessfully launch this program at our New Britain campus in mid to late 2015. Additionally, we have also upgraded our HVAC program at our East Windsor and significant investments in prior periods.New Britain locations.
We currently lease a majority of our campuses. We own our campuses in Grand Prairie, Texas; West Palm Beach, Florida; Nashville, Tennessee; Cincinnati (Tri-County), Ohio; Suffield, Connecticut; and Denver, Colorado. Our Cincinnati (Tri-County), Ohio and Suffield, Connecticut locationsWe have three properties that are held for sale. Although our current growth strategy is to continue our organic growth, strategic acquisitions of operations will be considered. To the extent that these potential strategic acquisitions are large enough to require financing beyond available cash from operations and borrowings under our credit facilities, we may incur additional debt and/or issue additional debt or equity securities.
Capital expenditures are expected to approximate 4%1% to 3% of revenues in 20142015 as compared to 1.9%2% in 2013.2014. We expect to fund thesefuture capital expenditures with cash generated from operating activities and if necessary, with borrowings undercash from our credit facility.real estate monetization.
Financing Activities
Net cash used in financing activities was $5.2 million for the year ended December 31, 2014, as compared to $46.3 million for the year ended December 31, 2013,2013. The decrease of $41.1 million was primarily attributable to $24.5 million of net payments from borrowings for the year ended December 31, 2014 as compared to net cash provided by financing activitiesproceeds from borrowings of $29.4$17.0 million for the year ended December 31, 2012. The increase of $75.7 million was primarily attributable to borrowings of $37.5 million for the year ended December 31, 2012 which was repaid for the year ended December 31, 2013. During the fourth quarter of 2013 $54.5 million was borrowed and included in restricted cash.
Credit Agreement. On April 5, 2012, we, as borrower, and certain of our wholly-owned subsidiaries, as guarantors, entered into a secured revolving credit agreement with a syndicate of four lenders led by Bank of America, N.A., as administrative agent and letter of credit issuer (the “Credit Facility”). The April 5, 2012 agreement, along with subsequent amendments dated December 29, 2014, June 18, 2013, and December 20, 2013 and March 4, 2015, are collectively referred to as the “Credit Agreement.”
As of December 31, 2013, the aggregate principal amount available under the Credit Facility was $60 million. Effective January 16, 2014, this amount was reduced to $40 million. Effective January 15, 2015, this amount was reduced to $20 million. During the period commencing on December 1, 2015 through January 15, 2016 the Company is required to reduce the outstanding revolving loans, other than letters of credit obligations, to $0. The Credit Facility may be used to finance capital expenditures and permitted acquisitions, to pay transaction expenses, for the issuance of letters of credit and for general corporate purposes. The Credit Agreement includes a $25 million letter of credit sublimit.sublimit which is reduced to $20 million effective January 15, 2015. Borrowings under the Credit Facility are secured by a first priority lien on substantially all of our and our subsidiaries’ the tangible and intangible assets of the Company and its subsidiaries including real estate. The term of the Credit Facility iswas 36 months, maturing on April 5, 2015.2015 which was extended on March 4, 2015 for an additional 12 months with an expiration date of April 5, 2016.
The Credit Agreement provides that the lenders will receive first priority lien on substantially all of our tangible and intangible non-real property assets of our and our subsidiaries as well as a first priority lien on substantially all real property owned by our and our subsidiaries and that all net proceeds of future sales of real property by our and our subsidiaries be used to prepay revolving loans and permanently reduce the principal amount of revolving loans available under the Credit Facility.
In 2014, amounts borrowed as revolving loans under the Credit Facility will bear interest, at our option, at either (i) an interest rate based on LIBOR and adjusted for any reserve percentage obligations under Federal Reserve Bank regulations (the “Eurodollar Rate”) for specified interest periods or (ii) the Base Rate (as defined in the Credit Agreement), in each case, plus an applicable margin rate as determined under the Credit Agreement. The “Base Rate”, as defined under the Credit Agreement, is the highest of (a) the rate of interest announced from time to time by Bank of America, N.A. as its prime rate, (b) the Federal Funds rate plus 0.50% and (c) a daily rate equal to the one-month LIBOR rate plus 1.0%. Pursuant to the Amendment, the margin interest rate is subject to adjustment within a range of 2.50% to 6.00% based upon changes in our consolidated leverage ratio and depending on whether we have chosen the Eurodollar Rate or the Base Rate option. Letters of credit will require a fee equal to the applicable margin rate multiplied by the daily amount available to be drawn under each issued letter of credit plus an agreed upon fronting fee and customary issuance, presentation, amendment and other processing fees associated with letters of credit.
At December 31, 2013,2014, we had outstanding letters of credit aggregating $5.3$7.1 million, which were primarily comprised of letters of credit for the Department of Education, or DOE, matters and real estate leases.
The Credit Agreement contains customary representations, warranties and covenants including consolidated adjusted net worth, consolidated leverage ratio, consolidated fixed charge coverage ratio, minimum financial responsibility composite score, cohort default rate and other financial covenants, certain restrictions on capital expenditures as well as affirmative and negative covenants and events of default customary for facilities of this type. In addition, we are paying fees to the lenders that are customary for facilities of this type. As of December 31, 20132014 we are in compliance with all financial covenants.
| As of December 31, | ||||||||
| 2013 | 2012 | |||||||
| Credit agreement | $ | 54,500 | $ | 37,500 | ||||
| Finance obligation | 9,672 | 9,672 | ||||||
| Capital lease-property (with a rate of 8.0%) | 25,944 | 26,344 | ||||||
| Capital leases-equipment (with rates ranging from 5.0% to 8.5%) | - | 11 | ||||||
| Subtotal | 90,116 | 73,527 | ||||||
| Less current maturities | (435 | ) | (412 | ) | ||||
| Total long-term debt | $ | 89,681 | $ | 73,115 | ||||
| As of December 31, | ||||||||
| 2014 | 2013 | |||||||
| Credit agreement | $ | 30,000 | $ | 54,500 | ||||
| Finance obligation | 9,672 | 9,672 | ||||||
| Capital lease-property (with a rate of 8.0%) | 25,509 | 25,944 | ||||||
| Subtotal | 65,181 | 90,116 | ||||||
| Less current maturities | (30,471 | ) | (435 | ) | ||||
| Total long-term debt | $ | 34,710 | $ | 89,681 | ||||
Climate Change
Climate change has not had and is not expected to have a significant effectimpact on our operations.
Contractual Obligations
Current portion of Long-Term Debt, Long-Term Debt and Lease Commitments. As of December 31, 2013,2014, our current portion of long-term debt and long-term debt consisted of borrowings under our Credit Facility, the finance obligation in connection with our sale-leaseback transaction in 2001, and amounts due under capital lease obligations. We lease offices, educational facilities and various equipment for varying periods through the year 2032 at basic annual rentals (excluding taxes, insurance, and other expenses under certain leases).
The following table contains supplemental information regarding our total contractual obligations as of December 31, 2013:2014:
| Payments Due by Period | Payments Due by Period | |||||||||||||||||||||||||||||||||||||||
| Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||||||||||||||||||
| Credit agreement (including interest) (1) | $ | 54,532 | $ | - | $ | 54,532 | $ | - | $ | - | $ | 30,000 | $ | 30,000 | $ | - | $ | - | $ | - | ||||||||||||||||||||
| Capital leases (including interest) | 50,037 | 2,494 | 5,050 | 5,356 | 37,137 | 47,543 | 2,494 | 5,234 | 5,356 | 34,459 | ||||||||||||||||||||||||||||||
| Operating leases | 119,517 | 21,223 | 35,109 | 28,272 | 34,913 | 100,266 | 19,666 | 30,735 | 26,105 | 23,760 | ||||||||||||||||||||||||||||||
| Rent on finance obligation | 4,638 | 1,546 | 3,092 | - | - | 3,128 | 1,564 | 1,564 | - | - | ||||||||||||||||||||||||||||||
| Total contractual cash obligations | $ | 228,724 | $ | 25,263 | $ | 97,783 | $ | 33,628 | $ | 72,050 | $ | 180,937 | $ | 53,724 | $ | 37,533 | $ | 31,461 | $ | 58,219 | ||||||||||||||||||||
| (1) | Amounts outstanding under the Credit Agreement were repaid on January |
OFF-BALANCE SHEET ARRANGEMENTS
We had no off-balance sheet arrangements as of December 31, 2013,2014, except for our letters of credit and surety bonds. Letters of credit of $5.3$7.1 million are primarily comprised of letters of credit for DOE matters and security deposits in connection with certain of our real estate leases. We are required to post surety bonds on behalf of our campuses and education representatives with multiple states to maintain authorization to conduct our business. At December 31, 2013,2014, we posted surety bonds in the total amount of approximately $16.9$15.1 million. These off-balance sheet arrangements do not adversely impact our liquidity or capital resources.
SEASONALITY AND TRENDSOUTLOOK
Seasonality
Our revenue and operating results normally fluctuate as a result of seasonal variations in our business, principally due to changes in total student population. Student population varies as a result of new student enrollments, graduations and student attrition. Historically, our schools have had lower student populations in our first and second quarters and we have experienced larger class starts in the third and fourth quartersquarter and higher student attrition in the first half of the year. Our second half growth is largely dependent on a successful high school recruiting season. We recruit our high school students several months ahead of their scheduled start dates, and thus, while we have visibility on the number of students who have expressed interest in attending our schools, we cannot predict with certainty the actual number of new student enrollments and the related impact on revenue. Our expenses, however, typically do not vary significantly over the course of the year with changes in our student population and revenue. During the first half of the year, we make significant investments in marketing, staff, programs and facilities to ensure that we meet our second half of the year targets and, as a result, such expenses do not fluctuate significantly on a quarterly basis. To the extent new student enrollments, and related revenue, in the second half of the year fall short of our estimates, our operating results could be negatively impacted. We expect quarterly fluctuations in operating results to continue as a result of seasonal enrollment patterns. Such patterns may change as a result of new school openings, new program introductions, and increased enrollments of adult students and/or acquisitions.
As the economy continues to improve and the unemployment rate continue to decline our student enrollment has been negatively impacted due to a portion of our potential student base which has entered the workforce prematurely without obtaining any post-secondary training. Offsetting this short term decline in available students is the fact that an increasing number of ATB students discussed above, changesthe “baby boom” generation are retiring from the workforce. The retirement of baby boomers coupled with a growing economy has resulted in additional employers looking to admissions advisor compensation policies, other changes promulgated byus to help solve their workforce needs. With schools in 15 states, we are a very attractive employment solution for large regional and national employers.
To fund our business plans, including any anticipated future losses, purchase commitments, capital expenditures, principal and interest payments on borrowings and to satisfy the DOE and the current economic slowdown have all led to significant deterioration in student enrollments. This deterioration continued into 2013. We believe thatfinancial responsibility standards, we have startedthe ability to see stabilization inleverage our owned real estate including selling our assets that are classified as held for sale. We are also continuing to take actions to improve cash flow by aligning our cost structure to our student starts for our continuing operations. In particular our automotive and skill trade campuses appear to have stabilized while our other programs continue to experience some challenges. Some of this can be attributable to large financing gaps at certain programs as well as the hesitation or inability of students to incur additional debt and/or make required monthly payments. We continue to explore ways to help these students achieve their goals, including reducing tuition of certain programs or providing need based scholarships. Students’ starts for the fourth quarter of 2013 were down 7.2% as compared to the fourth quarter of 2012.population.
Effect of Inflation
Inflation has not had and is not expected to have a significant effectimpact on our operations.
We are exposed to certain market risks as part of our on-going business operations. We have a credit agreement with a syndicate of banks. Our obligations under the credit agreement are secured by a lien on substantially all of our assets and our subsidiaries and any assets that we or our subsidiaries may acquire in the future, including a pledge of substantially all of our subsidiaries’ common stock. Outstanding borrowings bear interest at the rate of 7.25% (as calculated in the credit agreement) as of December 31, 2013.2014. As of December 31, 2013,2014, we had $54.5$30.0 million outstanding under our credit agreement.
Based on our outstanding debt balance as of December 31, 2013,2014, a change of one percent in the interest rate would have caused a change in our interest expense of approximately $0.5$0.3 million, or less than $0.02$0.01 per basic share, on an annual basis. Changes in interest rates could have an impact however on our operations, which are greatly dependent on students’ ability to obtain financing. Any increase in interest rates could greatly impact our ability to attract students and have an adverse impact on the results of our operations. The remainder of our interest rate risk is associated with miscellaneous capital equipment leases, which is not significant.
See “Index to Consolidated Financial Statements” on page F-1 on this Annual Report on Form 10-K.
None.
Evaluation of disclosure controls and procedures
Our Chief Executive Officer and Chief Financial Officer, after evaluating, together with management, the effectiveness of our disclosure controls and procedures (as defined in Securities Exchange Act Rule 13a-15(e)) as of December 31, 20132014 have concluded that our disclosure controls and procedures are effective to reasonably ensure that material information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended is recorded, processed, summarized and reported within the time periods specified by Securities and Exchange Commissions’ Rules and Forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Internal Control Over Financial Reporting
During the quarter ended December 31, 2013,2014, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s Annual Report on Internal Control over Financial Reporting
The management of Lincoln Educational Services Corporation (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. The Company’s internal control system was designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2013,2014, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (1992)(2013). Based on its assessment, management believes that, as of December 31, 2013,2014, the Company’s internal control over financial reporting is effective.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s independent auditors, Deloitte & Touche LLP, an independent registered public accounting firm, audited the Company’s internal control over financial reporting as of December 31, 2013,2014, as stated in their report included in this Form 10-K that follows.
| /s/ Shaun McAlmont | |
| Shaun McAlmont | |
| Chief Executive Officer | |
| March | |
| /s/ | |
| Chief Financial Officer | |
| March |
On March 12, 2015, the Company entered into (a) an employment agreement with Brian K. Meyers, Executive Vice President and Chief Financial Officer; and (b) an amendment to its employment agreement, dated June 4, 2014, with Kenneth M. Swisstack, Executive Vice President and General Counsel.
Upon a Change in Control of the Company (as defined in the employment agreement), (i) the term of the employment agreement will be automatically extended for an additional two-year term commencing on the date of the change in control and (ii) all outstanding equity awards held by Mr. Meyers will vest in full. The employment agreement also provides that if (x) any amounts due to Mr. Meyers pursuant to the employment agreement or any other plan or arrangement constitute a parachute payment for purposes of Section 280G of the Internal Revenue Code and (y) the aggregate amount that he would receive (after taking into account all taxes, including excise taxes) will be less than three times his base amount (as defined under the Code) less one dollar, then the payment will be reduced to three times his base amount less one dollar.
The employment agreement also contains a two-year post-employment non-competition agreement and standard non-solicitation and confidentiality provisions.
Amended Employment Agreement of Mr. Swisstack. The terms of Mr. Swisstack’s original employment agreement, dated June 2, 2014, remain in full force and effect, except that the term of Mr. Swisstack’s agreement has been extended to December 31, 2016 and his annual base salary is now $306,000.
The descriptions of the agreements contained herein do not purport to be complete and are qualified in their entirety by reference to the agreements, copies of which are attached hereto as Exhibits 10.9 and 10.10 and are incorporated herein by reference.
Directors and Executive Officers
The information required by this item is incorporated herein by reference to our definitive Proxy Statement to be filed in connection with our 20142015 Annual Meeting of Shareholders.
Code of Ethics
We have adopted a Code of Conduct and Ethics applicable to our directors, officers and employees and certain other persons, including our Chief Executive Officer and Chief Financial Officer. A copy of our Code of Ethics is available on our website at www.lincolnedu.com. If any amendments to or waivers from the Code of Conduct are made, we will disclose such amendments or waivers on our website.
Information required by Item 11 of Part III is incorporated by reference to our definitive Proxy Statement to be filed in connection with our 20142015 Annual Meeting of Shareholders.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Information required by Item 12 of Part III is incorporated by reference to our definitive Proxy Statement to be filed in connection with our 20142015 Annual Meeting of Shareholders.
Information required by Item 13 of Part III is incorporated by reference to our definitive Proxy Statement to be filed in connection with our 20142015 Annual Meeting of Shareholders.
Information required by Item 14 of Part III is incorporated by reference to our definitive Proxy Statement to be filed in connection with our 20142015 Annual Meeting of Shareholders.
| 1. | Financial Statements |
See “Index to Consolidated Financial Statements” on page F-1 of this Annual Report on Form 10-K.
| 2. | Financial Statement Schedule |
See “Index to Consolidated Financial Statements” on page F-1 of this Annual Report on Form 10-K.
| 3. | Exhibits Required by Securities and Exchange Commission Regulation S-K |
Exhibit Number | Description | |
| 3.1 | Amended and Restated Certificate of Incorporation of the Company (1). | |
| 3.2 | Amended and Restated By-laws of the Company (2). | |
| 4.1 | Management Stockholders Agreement, dated as of January 1, 2002, by and among Lincoln Technical Institute, Inc., Back to School Acquisition, L.L.C. and the Stockholders and other holders of options under the Management Stock Option Plan listed therein (1). | |
| 4.2 | Assumption Agreement and First Amendment to Management Stockholders Agreement, dated as of December 20, 2007, by and among Lincoln Educational Services Corporation, Lincoln Technical Institute, Inc., Back to School Acquisition, L.L.C. and the Management Investors parties therein (3). | |
| 4.3 | Registration Rights Agreement, dated as of June 27, 2005, between the Company and Back to School Acquisition, L.L.C. (2). | |
| 4.4 | Specimen Stock Certificate evidencing shares of common stock (1). | |
| 10.1 | Credit Agreement, dated as of April 5, 2012, among the Company, the Guarantors from time to time parties thereto, the Lenders from time to time parties thereto and Bank of America, N.A., as Administrative Agent | |
| 10.2 | First Amendment to the Credit Agreement, dated as of June 18, 2013, among the Company, the Guarantors from time to time parties thereto, the Lenders from time to time parties thereto and Bank of America, N.A., as Administrative Agent | |
| 10.3 | Second Amendment to the Credit Agreement, dated as of December 20, 2013, among the Company, the Guarantors from time to time parties thereto, the Lenders from time to time parties thereto and Bank of America, N.A., as Administrative Agent | |
| 10.4 | Third Amendment to the Credit Agreement, dated as of December 29, 2014, among the Company, the Guarantors from time to time parties thereto, the Lenders from time to time parties thereto and Bank of America, N.A., as Administrative Agent (7). | |
| 10.6 | Employment Agreement, dated as of January | |
| 10.7 | Employment Agreement, dated as of January | |
| 10.8 | Employment Agreement, dated as of June 2, 2014, between the Company and Kenneth M. Swisstack (10). | |
| Amendment to Employment Agreement, dated as of March 12, 2015, between the Company and Kenneth M. Swisstack. |
| Employment Agreement, dated as of March 12, 2015, between the Company and Brian K. Meyers. | ||
| 10.11 | Lincoln Educational Services Corporation Amended and Restated 2005 Long-Term Incentive Plan | |
| Lincoln Educational Services Corporation 2005 Non-Employee Directors Restricted Stock Plan | ||
| Lincoln Educational Services Corporation 2005 Deferred Compensation Plan (1). | ||
| Lincoln Technical Institute Management Stock Option Plan, effective January 1, 2002 (1). |
| 10.15 | Form of Stock Option Agreement, dated January 1, 2002, between Lincoln Technical Institute, Inc. and certain participants (1). | |
| Form of Stock Option Agreement under our 2005 Long-Term Incentive Plan | ||
| Form of Restricted Stock Agreement under our 2005 Long-Term Incentive Plan | ||
| Form of Performance-Based Restricted Stock Award Agreement under our Amended & Restated 2005 Long-Term Incentive Plan | ||
| Management Stock Subscription Agreement, dated January 1, 2002, among Lincoln Technical Institute, Inc. and certain management investors (1). | ||
| Stock Repurchase Agreement, dated as of December 15, 2009, among Lincoln Educational Services Corporation and Back to School Acquisition, L.L.C | ||
| Subsidiaries of the Company. | ||
| Consent of Independent Registered Public Accounting Firm. | ||
| Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
| 101** | The following financial statements from Lincoln Educational Services Corporation’s Annual Report on Form 10-K for the year ended December 31, |
| (1) | Incorporated by reference to the Company’s Registration Statement on Form S-1 (Registration No. 333-123644). |
| (2) | Incorporated by reference to the Company’s Form 8-K filed June 28, 2005. |
| (3) | Incorporated by reference to the Company’s Registration Statement on Form S-3 (Registration No. 333-148406). |
| (4) | Incorporated by reference to the Company’s |
| (5) | Incorporated by reference to the Company’s Form 8-K filed |
| (6) | Incorporated by reference to the Company’s Form 8-K filed December |
| (7) | Incorporated by reference to the Company’s Form 8-K filed January 5, 2015. |
| (8) | Incorporated by reference to the Company’s Form 8-K filed March 10, 2015. |
| (9) | Incorporated by reference to the Company’s Form 8-K filed February 5, 2015. |
| (10) | Incorporated by reference to the Company’s Annual Report on Form 10-Q filed August 8, 2014. |
| (11) | Incorporated by reference to the Company’s Form 8-K filed May 6, 2013. |
| Registration Statement on Form S-8 (Registration No. 333-188240). |
| (13) | Incorporated by reference to the Company’s Annual Report on Form |
| Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. |
| Incorporated by reference to the Company’s Form 8-K filed |
| Incorporated by reference to the Company’s Form 8-K filed December |
| * | Filed herewith. |
| ** | As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Date: March 16, 2015 | ||||
| LINCOLN EDUCATIONAL SERVICES CORPORATION | ||||
| By: | /s/ | |||
| Brian Meyers | ||||
| Executive Vice President, Chief Financial Officer and Treasurer | ||||
| (Principal Accounting and Financial Officer) | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||
| /s/ Shaun E. McAlmont | March 16, 2015 | |||
| Shaun McAlmont | Chief Executive Officer and Director | |||
| /s/ | Executive Vice President, Chief Financial Officer and | March 16, 2015 | ||
| Treasurer (Principal Accounting and Financial Officer) | ||||
| /s/ Alvin O. Austin | Director | March 16, 2015 | ||
| Alvin O. Austin | ||||
| /s/ Peter S. Burgess | Director | March 16, 2015 | ||
| Peter S. Burgess | ||||
| /s/ James J. Burke, Jr. | Director | March 16, 2015 | ||
| James J. Burke, Jr. | ||||
| /s/ Celia H. Currin | Director | March 16, 2015 | ||
| Celia H. Currin | ||||
| /s/ | ||||
| Director | March | |||
| Douglas G. DelGrosso | ||||
| /s/ Ronald E. Harbour | Director | March 16, 2015 | ||
| Ronald E. Harbour | ||||
| /s/ Charles F. Kalmbach | Director | March 16, 2015 | ||
| Charles F. Kalmbach | ||||
| /s/ Alexis P. Michas | Director | March 16, 2015 | ||
| Alexis P. Michas | ||||
| /s/ J. Barry Morrow | Director | March 16, 2015 | ||
| J. Barry Morrow |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Page Number | |
| F-2 | |
| F-4 | |
| F-6 | |
| F-7 | |
| F-8 | |
| F-9 | |
| F-11 | |
F-1
To the Board of Directors and Stockholders of
Lincoln Educational Services Corporation
West Orange, New Jersey
We have audited the accompanying consolidated balance sheets of Lincoln Educational Services Corporation and subsidiaries (the "Company") as of December 31, 20132014 and 2012,2013, and the related consolidated statements of operations, comprehensive (loss) income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2013.2014. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Lincoln Educational Services Corporation and subsidiaries as of December 31, 20132014 and 2012,2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013,2014, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2013,2014, based on the criteria established in Internal Control — Integrated Framework (1992)(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 11, 201416, 2015 expressed an unqualified opinion on the Company's internal control over financial reporting.
| /s/ DELOITTE & TOUCHE LLP |
| Parsippany, New Jersey |
| March 16, 2015 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Lincoln Educational Services Corporation
West Orange, New Jersey
We have audited the internal control over financial reporting of Lincoln Educational Services Corporation and subsidiaries (the "Company") as of December 31, 2013,2014, based on the criteria established in Internal Control — Integrated Framework (1992)(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013,2014, based on the criteria established in Internal Control — Integrated Framework (1992)(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s consolidated balance sheet as of December 31, 20132014 and the related consolidated statements of operations, comprehensive (loss) income, changes in stockholders’ equity, cash flows and financial statement schedule for the year ended December 31, 2013,2014, and our report dated March 11, 201416, 2015 expressed an unqualified opinion on those consolidated financial statements and financial statement schedule.
| /s/ DELOITTE & TOUCHE LLP |
| Parsippany, New Jersey |
| March 16, 2015 |
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
(In thousands, except share amounts)
| December 31, | December 31, | |||||||||||||||
| 2013 | 2012 | 2014 | 2013 | |||||||||||||
| ASSETS | ||||||||||||||||
| CURRENT ASSETS: | ||||||||||||||||
| Cash and cash equivalents | $ | 12,886 | $ | 61,708 | $ | 12,299 | $ | 12,886 | ||||||||
| Restricted cash | 54,500 | - | 30,000 | 54,500 | ||||||||||||
| Accounts receivable, less allowance of $13,787 and $17,751 at December 31, 2013 and 2012, respectively | 16,127 | 17,370 | ||||||||||||||
| Accounts receivable, less allowance of $12,193 and $13,787 at December 31, 2014 and 2013, respectively | 13,533 | 16,127 | ||||||||||||||
| Inventories | 2,269 | 2,677 | 1,486 | 2,269 | ||||||||||||
| Prepaid income taxes and income taxes receivable | 8,517 | 7,085 | 879 | 8,517 | ||||||||||||
| Deferred income taxes, net | - | 7,729 | ||||||||||||||
| Assets held for sale | 6,310 | - | ||||||||||||||
| Assets held for sale, net | 50,930 | 6,310 | ||||||||||||||
| Prepaid expenses and other current assets | 3,013 | 2,944 | 3,937 | 3,013 | ||||||||||||
| Total current assets | 103,622 | 99,513 | 113,064 | 103,622 | ||||||||||||
| PROPERTY, EQUIPMENT AND FACILITIES - At cost, net of accumulated depreciation and amortization of $146,795 and $137,834 at December 31, 2013 and 2012, respectively | 127,332 | 154,096 | ||||||||||||||
| PROPERTY, EQUIPMENT AND FACILITIES - At cost, net of accumulated depreciation and amortization of $136,910 and $146,795 at December 31, 2014 and 2013, respectively | 69,740 | 127,332 | ||||||||||||||
| OTHER ASSETS: | ||||||||||||||||
| Noncurrent receivables, less allowance of $982 and $1,078 at December 31, 2013 and 2012, respectively | 6,869 | 6,109 | ||||||||||||||
| Noncurrent receivables, less allowance of $1,016 and $982 at December 31, 2014 and 2013, respectively | 6,235 | 6,869 | ||||||||||||||
| Deferred finance charges | 1,163 | 774 | 158 | 1,163 | ||||||||||||
| Deferred income taxes, net | - | 17,065 | - | - | ||||||||||||
| Goodwill | 62,465 | 65,527 | 22,207 | 62,465 | ||||||||||||
| Other assets, net | 4,498 | 3,690 | 2,303 | 4,498 | ||||||||||||
| Total other assets | 74,995 | 93,165 | 30,903 | 74,995 | ||||||||||||
| TOTAL | $ | 305,949 | $ | 346,774 | $ | 213,707 | $ | 305,949 | ||||||||
See notes to consolidated financial statements.
F-4
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Continued)
| December 31, | December 31, | |||||||||||||||
| 2013 | 2012 | 2014 | 2013 | |||||||||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||||
| CURRENT LIABILITIES: | ||||||||||||||||
| Current portion of long-term debt and lease obligations | $ | 435 | $ | 412 | ||||||||||||
| Current portion of credit agreement | $ | 30,000 | $ | - | ||||||||||||
| Current portion of capital lease obligations | 471 | 435 | ||||||||||||||
| Unearned tuition | 30,195 | 34,648 | 26,469 | 30,195 | ||||||||||||
| Accounts payable | 14,603 | 13,500 | 11,894 | 14,603 | ||||||||||||
| Accrued expenses | 10,655 | 9,746 | 13,865 | 10,655 | ||||||||||||
| Other short-term liabilities | 693 | 268 | 780 | 693 | ||||||||||||
| Total current liabilities | 56,581 | 58,574 | 83,479 | 56,581 | ||||||||||||
| NONCURRENT LIABILITIES: | ||||||||||||||||
| Long-term debt and lease obligations, net of current portion | 89,681 | 73,115 | ||||||||||||||
| Long-term credit agreement | - | 54,500 | ||||||||||||||
| Long-term capital lease obligations | 25,038 | 25,509 | ||||||||||||||
| Long-term finance obligation | 9,672 | 9,672 | ||||||||||||||
| Pension plan liabilities | 1,522 | 6,901 | 5,299 | 1,522 | ||||||||||||
| Deferred income taxes, net | 4,528 | - | - | 4,528 | ||||||||||||
| Accrued rent | 7,695 | 8,663 | 6,852 | 7,695 | ||||||||||||
| Other long-term liabilities | 746 | 1,044 | 357 | 746 | ||||||||||||
| Total liabilities | 160,753 | 148,297 | 130,697 | 160,753 | ||||||||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||||||||||
| STOCKHOLDERS' EQUITY: | ||||||||||||||||
| Preferred stock, no par value - 10,000,000 shares authorized, no shares issued and outstanding at December 31, 2013 and 2012 | - | - | ||||||||||||||
| Common stock, no par value - authorized 100,000,000 shares at December 31, 2013 and 2012, issued and outstanding 29,919,761 shares at December 31, 2013 and 29,659,457 shares at December 31, 2012 | 141,377 | 141,377 | ||||||||||||||
| Preferred stock, no par value - 10,000,000 shares authorized, no shares issued and outstanding at December 31, 2014 and 2013 | - | - | ||||||||||||||
| Common stock, no par value - authorized 100,000,000 shares at December 31, 2014 and 2013, issued and outstanding 29,933,086 shares at December 31, 2014 and 29,919,761 shares at December 31, 2013 | 141,377 | 141,377 | ||||||||||||||
| Additional paid-in capital | 24,177 | 22,677 | 26,350 | 24,177 | ||||||||||||
| Treasury stock at cost - 5,910,541 shares at December 31, 2013 and 2012 | (82,860 | ) | (82,860 | ) | ||||||||||||
| Treasury stock at cost - 5,910,541 shares at December 31, 2014 and 2013 | (82,860 | ) | (82,860 | ) | ||||||||||||
| Retained earnings | 66,064 | 124,059 | 5,610 | 66,064 | ||||||||||||
| Accumulated other comprehensive loss | (3,562 | ) | (6,776 | ) | (7,467 | ) | (3,562 | ) | ||||||||
| Total stockholders' equity | 145,196 | 198,477 | 83,010 | 145,196 | ||||||||||||
| TOTAL | $ | 305,949 | $ | 346,774 | $ | 213,707 | $ | 305,949 | ||||||||
See notes to consolidated financial statements.
| Year Ended December 31, | ||||||||||||
| 2013 | 2012 | 2011 | ||||||||||
| REVENUE | $ | 345,024 | $ | 382,773 | $ | 456,722 | ||||||
| COSTS AND EXPENSES: | ||||||||||||
| Educational services and facilities | 172,685 | 180,610 | 196,639 | |||||||||
| Selling, general and administrative | 178,494 | 191,033 | 216,846 | |||||||||
| (Gain) loss on sale of assets | (506 | ) | (75 | ) | 4 | |||||||
| Impairment of goodwill and long-lived assets | 3,908 | 25,221 | 8,290 | |||||||||
| Total costs & expenses | 354,581 | 396,789 | 421,779 | |||||||||
| OPERATING (LOSS) INCOME | (9,557 | ) | (14,016 | ) | 34,943 | |||||||
| OTHER: | ||||||||||||
| Interest income | 37 | 2 | 17 | |||||||||
| Interest expense | (4,667 | ) | (4,475 | ) | (4,369 | ) | ||||||
| Other income | 18 | 14 | 18 | |||||||||
| (LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES | (14,169 | ) | (18,475 | ) | 30,609 | |||||||
| PROVISION (BENEFIT) FOR INCOME TAXES | 19,591 | (2,791 | ) | 13,053 | ||||||||
| (LOSS) INCOME FROM CONTINUING OPERATIONS | (33,760 | ) | (15,684 | ) | 17,556 | |||||||
| LOSS FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES | (17,526 | ) | (21,502 | ) | (16 | ) | ||||||
| NET (LOSS) INCOME | $ | (51,286 | ) | $ | (37,186 | ) | $ | 17,540 | ||||
| Basic | ||||||||||||
| (Loss) earnings per share from continuing operations | $ | (1.50 | ) | $ | (0.71 | ) | $ | 0.80 | ||||
| Loss per share from discontinued operations | (0.78 | ) | (0.97 | ) | (0.00 | ) | ||||||
| Net (loss) income per share | $ | (2.28 | ) | $ | (1.68 | ) | $ | 0.80 | ||||
| Diluted | ||||||||||||
| (Loss) earnings per share from continuing operations | $ | (1.50 | ) | $ | (0.71 | ) | $ | 0.79 | ||||
| Loss per share from discontinued operations | (0.78 | ) | (0.97 | ) | (0.00 | ) | ||||||
| Net (loss) income per share | $ | (2.28 | ) | $ | (1.68 | ) | $ | 0.79 | ||||
| Weighted average number of common shares outstanding: | ||||||||||||
| Basic | 22,513 | 22,195 | 22,020 | |||||||||
| Diluted | 22,513 | 22,195 | 22,155 | |||||||||
| December 31, | ||||||||||||
| 2013 | 2012 | 2011 | ||||||||||
| Net (loss) income | $ | (51,286 | ) | $ | (37,186 | ) | $ | 17,540 | ||||
| Other comprehensive (loss) income | ||||||||||||
| Employee pension plan adjustments, net of taxes of $1,283, $25 and $1,321 for the years ended December 31, 2013, 2012 and 2011, respectively | 3,214 | (60 | ) | (1,968 | ) | |||||||
| Comprehensive (loss) income | $ | (48,072 | ) | $ | (37,246 | ) | $ | 15,572 | ||||
| Accumulated | ||||||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||||||
| Common Stock | Paid-in | Treasury | Retained | Comprehensive | ||||||||||||||||||||||||
| Shares | Amount | Capital | Stock | Earnings | Loss | Total | ||||||||||||||||||||||
| BALANCE - January 1, 2011 | 28,109,987 | $ | 140,726 | $ | 17,378 | $ | (82,860 | ) | $ | 151,989 | $ | (4,748 | ) | $ | 222,485 | |||||||||||||
| Net income | - | - | - | - | 17,540 | - | 17,540 | |||||||||||||||||||||
| Employee pension plan adjustments, net of taxes | - | - | - | - | - | (1,968 | ) | (1,968 | ) | |||||||||||||||||||
| Stock-based compensation expense | ||||||||||||||||||||||||||||
| Restricted stock | 393,431 | - | 3,141 | - | - | - | 3,141 | |||||||||||||||||||||
| Stock options | - | - | 400 | - | - | - | 400 | |||||||||||||||||||||
| Tax benefit of options exercised | - | - | 158 | - | - | - | 158 | |||||||||||||||||||||
| Tax deficiency of stock-based awards and canceled | - | - | (740 | ) | - | - | - | (740 | ) | |||||||||||||||||||
| Net share settlement for equity-based compensation | (68,250 | ) | (60 | ) | (802 | ) | - | - | - | (862 | ) | |||||||||||||||||
| Cash dividend of $0.07 per common share | - | - | - | - | (1,583 | ) | - | (1,583 | ) | |||||||||||||||||||
| Cash dividend declared true-up | - | - | - | - | (257 | ) | - | (257 | ) | |||||||||||||||||||
| Exercise of stock options | 113,106 | 711 | - | - | - | - | 711 | |||||||||||||||||||||
| BALANCE - December 31, 2011 | 28,548,274 | 141,377 | 19,535 | (82,860 | ) | 167,689 | (6,716 | ) | 239,025 | |||||||||||||||||||
| Net income | - | - | - | - | (37,186 | ) | - | (37,186 | ) | |||||||||||||||||||
| Employee pension plan adjustments, net of taxes | - | - | - | - | - | (60 | ) | (60 | ) | |||||||||||||||||||
| Stock-based compensation expense | ||||||||||||||||||||||||||||
| Restricted stock | 1,213,621 | - | 3,982 | - | - | - | 3,982 | |||||||||||||||||||||
| Stock options | - | - | 358 | - | - | - | 358 | |||||||||||||||||||||
| Tax deficiency of stock-based awards and canceled | - | - | (667 | ) | - | - | - | (667 | ) | |||||||||||||||||||
| Net share settlement for equity-based compensation | (102,438 | ) | - | (531 | ) | - | - | - | (531 | ) | ||||||||||||||||||
| Cash dividend of $0.28 per common share | - | - | - | - | (6,444 | ) | - | (6,444 | ) | |||||||||||||||||||
| BALANCE - December 31, 2012 | 29,659,457 | 141,377 | 22,677 | (82,860 | ) | 124,059 | (6,776 | ) | 198,477 | |||||||||||||||||||
| Net loss | - | - | - | - | (51,286 | ) | - | (51,286 | ) | |||||||||||||||||||
| Employee pension plan adjustments, net of taxes | - | - | - | - | - | 3,214 | 3,214 | |||||||||||||||||||||
| Stock-based compensation expense | ||||||||||||||||||||||||||||
| Restricted stock | 400,779 | - | 2,893 | - | - | - | 2,893 | |||||||||||||||||||||
| Stock options | - | - | 102 | - | - | - | 102 | |||||||||||||||||||||
| Tax deficiency of stock-based awards and cancels | - | - | (698 | ) | - | - | - | (698 | ) | |||||||||||||||||||
| Net share settlement for equity-based compensation | (140,475 | ) | - | (797 | ) | - | - | - | (797 | ) | ||||||||||||||||||
| Cash dividend of $0.28 per common share | - | - | - | - | (6,709 | ) | - | (6,709 | ) | |||||||||||||||||||
| BALANCE - December 31, 2013 | 29,919,761 | $ | 141,377 | $ | 24,177 | $ | (82,860 | ) | $ | 66,064 | $ | (3,562 | ) | $ | 145,196 | |||||||||||||
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
(In thousands, except per share amounts)
| Year Ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| REVENUE | $ | 325,022 | $ | 341,512 | $ | 380,163 | ||||||
| COSTS AND EXPENSES: | ||||||||||||
| Educational services and facilities | 164,352 | 169,049 | 178,271 | |||||||||
| Selling, general and administrative | 168,441 | 175,978 | 189,488 | |||||||||
| Gain on sale of assets | (58 | ) | (501 | ) | (75 | ) | ||||||
| Impairment of goodwill and long-lived assets | 40,836 | 3,908 | 25,221 | |||||||||
| Total costs and expenses | 373,571 | 348,434 | 392,905 | |||||||||
| OPERATING LOSS | (48,549 | ) | (6,922 | ) | (12,742 | ) | ||||||
| OTHER: | ||||||||||||
| Interest income | 153 | 37 | 2 | |||||||||
| Interest expense | (5,613 | ) | (4,667 | ) | (4,475 | ) | ||||||
| Other income | 297 | 18 | 14 | |||||||||
| LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES | (53,712 | ) | (11,534 | ) | (17,201 | ) | ||||||
| (BENEFIT) PROVISION FOR INCOME TAXES | (4,225 | ) | 19,591 | (2,282 | ) | |||||||
| LOSS FROM CONTINUING OPERATIONS | (49,487 | ) | (31,125 | ) | (14,919 | ) | ||||||
| LOSS FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES | (6,646 | ) | (20,161 | ) | (22,267 | ) | ||||||
| NET LOSS | $ | (56,133 | ) | $ | (51,286 | ) | $ | (37,186 | ) | |||
| Basic | ||||||||||||
| Loss per share from continuing operations | $ | (2.17 | ) | $ | (1.38 | ) | $ | (0.67 | ) | |||
| Loss per share from discontinued operations | (0.29 | ) | (0.90 | ) | (1.01 | ) | ||||||
| Net loss per share | $ | (2.46 | ) | $ | (2.28 | ) | $ | (1.68 | ) | |||
| Diluted | ||||||||||||
| Loss per share from continuing operations | $ | (2.17 | ) | $ | (1.38 | ) | $ | (0.67 | ) | |||
| Loss per share from discontinued operations | (0.29 | ) | (0.90 | ) | (1.01 | ) | ||||||
| Net loss per share | $ | (2.46 | ) | $ | (2.28 | ) | $ | (1.68 | ) | |||
| Weighted average number of common shares outstanding: | ||||||||||||
| Basic | 22,814 | 22,513 | 22,195 | |||||||||
| Diluted | 22,814 | 22,513 | 22,195 | |||||||||
See notes to consolidated financial statements
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
(In thousands)
| December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| Net loss | $ | (56,133 | ) | $ | (51,286 | ) | $ | (37,186 | ) | |||
| Other comprehensive loss | ||||||||||||
| Employee pension plan adjustments, net of taxes of $0, $1,283 and $25 for the years ended December 31, 2014, 2013 and 2012, respectively | (3,905 | ) | 3,214 | (60 | ) | |||||||
| Comprehensive loss | $ | (60,038 | ) | $ | (48,072 | ) | $ | (37,246 | ) | |||
See notes to consolidated financial statements
| Year Ended December 31, | ||||||||||||
| 2013 | 2012 | 2011 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||
| Net (loss) income | $ | (51,286 | ) | $ | (37,186 | ) | $ | 17,540 | ||||
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | ||||||||||||
| Depreciation and amortization | 23,701 | 26,848 | 28,464 | |||||||||
| Amortization of deferred finance costs | 474 | - | - | |||||||||
| Deferred income taxes | 26,490 | (14,229 | ) | 3,200 | ||||||||
| (Gain) loss on disposition of assets | (506 | ) | (71 | ) | 5 | |||||||
| Impairment of goodwill and long-lived assets | 6,194 | 43,364 | 10,377 | |||||||||
| Fixed asset donation | (37 | ) | - | - | ||||||||
| Provision for doubtful accounts | 15,532 | 21,056 | 30,553 | |||||||||
| Stock-based compensation expense | 2,995 | 4,340 | 3,541 | |||||||||
| Tax benefit associated with exercise of share based payments | - | - | (158 | ) | ||||||||
| Deferred rent | (888 | ) | 421 | 768 | ||||||||
| (Increase) decrease in assets, net of acquisition of business: | ||||||||||||
| Accounts receivable | (15,049 | ) | (19,202 | ) | (15,317 | ) | ||||||
| Inventories | 408 | 421 | 504 | |||||||||
| Prepaid income taxes and income taxes receivable | (1,432 | ) | 4,053 | (13,268 | ) | |||||||
| Prepaid expenses and current assets | (106 | ) | (1,274 | ) | (1,670 | ) | ||||||
| Other assets | (1,177 | ) | 999 | 696 | ||||||||
| Increase (decrease) in liabilities, net of acquisition of business: | ||||||||||||
| Accounts payable | 1,461 | (2,180 | ) | (5,510 | ) | |||||||
| Accrued expenses | 829 | (1,688 | ) | (14,936 | ) | |||||||
| Pension plan liabilities | (672 | ) | (718 | ) | (276 | ) | ||||||
| Unearned tuition | (4,453 | ) | (9,466 | ) | (7,702 | ) | ||||||
| Other liabilities | 768 | 498 | 27 | |||||||||
| Total adjustments | 54,532 | 53,172 | 19,298 | |||||||||
| Net cash provided by operating activities | 3,246 | 15,986 | 36,838 | |||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||
| Restricted cash | - | - | 694 | |||||||||
| Capital expenditures | (6,538 | ) | (8,839 | ) | (38,119 | ) | ||||||
| Proceeds from sale of property and equipment | 750 | 124 | 36 | |||||||||
| Acquisition of business, net of cash acquired | - | (1,472 | ) | - | ||||||||
| Net cash used in investing activities | (5,788 | ) | �� | (10,187 | ) | (37,389 | ) | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||
| Proceeds from borrowings | 59,500 | 37,500 | - | |||||||||
| Payments on borrowings | (42,500 | ) | - | (20,000 | ) | |||||||
| Reclassifications of proceeds from borrowings to restricted cash | (54,500 | ) | - | - | ||||||||
| Payment of deferred finance fees | (863 | ) | (659 | ) | - | |||||||
| Proceeds from exercise of stock options | - | - | 711 | |||||||||
| Tax benefit associated with exercise of share based payments | - | - | 158 | |||||||||
| Net share settlement for equity-based compensation | (797 | ) | (531 | ) | (862 | ) | ||||||
| Dividends paid | (6,709 | ) | (6,444 | ) | (18,490 | ) | ||||||
| Principal payments under capital lease obligations | (411 | ) | (481 | ) | (437 | ) | ||||||
| Net cash (used in) provided by financing activities | (46,280 | ) | 29,385 | (38,920 | ) | |||||||
| NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | (48,822 | ) | 35,184 | (39,471 | ) | |||||||
| CASH AND CASH EQUIVALENTS—Beginning of year | 61,708 | 26,524 | 65,995 | |||||||||
| CASH AND CASH EQUIVALENTS—End of year | $ | 12,886 | $ | 61,708 | $ | 26,524 | ||||||
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
(In thousands, except share amounts)
| Common Stock | Additional Paid-in | Treasury | Retained | Accumulated Other | ||||||||||||||||||||||||
| Shares | Amount | Capital | Stock | Earnings | Loss | Total | ||||||||||||||||||||||
| BALANCE - January 1, 2012 | 28,548,274 | $ | 141,377 | $ | 19,535 | $ | (82,860 | ) | $ | 167,689 | $ | (6,716 | ) | $ | 239,025 | |||||||||||||
| Net loss | - | - | - | - | (37,186 | ) | - | (37,186 | ) | |||||||||||||||||||
| Employee pension plan adjustments, net of taxes | - | - | - | - | - | (60 | ) | (60 | ) | |||||||||||||||||||
| Stock-based compensation expense | ||||||||||||||||||||||||||||
| Restricted stock | 1,213,621 | - | 3,982 | - | - | - | 3,982 | |||||||||||||||||||||
| Stock options | - | - | 358 | - | - | - | 358 | |||||||||||||||||||||
| Tax deficiency of stock-based awards and canceled | - | - | (667 | ) | - | - | - | (667 | ) | |||||||||||||||||||
| Net share settlement for equity-based compensation | (102,438 | ) | - | (531 | ) | - | - | - | (531 | ) | ||||||||||||||||||
| Cash dividend of $0.28 per common share | - | - | - | - | (6,444 | ) | - | (6,444 | ) | |||||||||||||||||||
| BALANCE - December 31, 2012 | 29,659,457 | 141,377 | 22,677 | (82,860 | ) | 124,059 | (6,776 | ) | 198,477 | |||||||||||||||||||
| Net loss | - | - | - | - | (51,286 | ) | - | (51,286 | ) | |||||||||||||||||||
| Employee pension plan adjustments, net of taxes | - | - | - | - | - | 3,214 | 3,214 | |||||||||||||||||||||
| Stock-based compensation expense | ||||||||||||||||||||||||||||
| Restricted stock | 400,779 | - | 2,893 | - | - | - | 2,893 | |||||||||||||||||||||
| Stock options | - | - | 102 | - | - | - | 102 | |||||||||||||||||||||
| Tax deficiency of stock-based awards and canceled | - | - | (698 | ) | - | - | - | (698 | ) | |||||||||||||||||||
| Net share settlement for equity-based compensation | (140,475 | ) | - | (797 | ) | - | - | - | (797 | ) | ||||||||||||||||||
| Cash dividend of $0.28 per common share | - | - | - | - | (6,709 | ) | - | (6,709 | ) | |||||||||||||||||||
| BALANCE - December 31, 2013 | 29,919,761 | 141,377 | 24,177 | (82,860 | ) | 66,064 | (3,562 | ) | 145,196 | |||||||||||||||||||
| Net loss | - | - | - | - | (56,133 | ) | - | (56,133 | ) | |||||||||||||||||||
| Employee pension plan adjustments, net of taxes | - | - | - | - | - | (3,905 | ) | (3,905 | ) | |||||||||||||||||||
| Stock-based compensation expense | ||||||||||||||||||||||||||||
| Restricted stock | 158,308 | - | 2,517 | - | - | - | 2,517 | |||||||||||||||||||||
| Stock options | - | - | 104 | - | - | - | 104 | |||||||||||||||||||||
| Net share settlement for equity-based compensation | (144,983 | ) | - | (448 | ) | - | - | - | (448 | ) | ||||||||||||||||||
| Cash dividend of $0.18 per common share | - | - | - | - | (4,321 | ) | - | (4,321 | ) | |||||||||||||||||||
| BALANCE - December 31, 2014 | 29,933,086 | $ | 141,377 | $ | 26,350 | $ | (82,860 | ) | $ | 5,610 | $ | (7,467 | ) | $ | 83,010 | |||||||||||||
See notes to consolidated financial statements.
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
(In thousands)
| Year Ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||
| Net loss | $ | (56,133 | ) | $ | (51,286 | ) | $ | (37,186 | ) | |||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||||||
| Depreciation and amortization | 19,338 | 23,701 | 26,848 | |||||||||
| Amortization of deferred finance costs | 818 | 474 | - | |||||||||
| Deferred income taxes | (4,528 | ) | 26,490 | (14,229 | ) | |||||||
| Loss (gain) on disposition of assets | 41 | (506 | ) | (71 | ) | |||||||
| Impairment of goodwill and long-lived assets | 42,958 | 6,194 | 43,364 | |||||||||
| Fixed asset donation | (92 | ) | (37 | ) | - | |||||||
| Provision for doubtful accounts | 15,500 | 15,532 | 21,056 | |||||||||
| Stock-based compensation expense | 2,621 | 2,995 | 4,340 | |||||||||
| Deferred rent | (740 | ) | (888 | ) | 421 | |||||||
| (Increase) decrease in assets, net of acquisition of business: | ||||||||||||
| Accounts receivable | (14,470 | ) | (15,049 | ) | (19,202 | ) | ||||||
| Inventories | 372 | 408 | 421 | |||||||||
| Prepaid income taxes and income taxes receivable | 7,638 | (1,432 | ) | 4,053 | ||||||||
| Prepaid expenses and current assets | (986 | ) | (106 | ) | (1,274 | ) | ||||||
| Other assets | 231 | (1,177 | ) | 999 | ||||||||
| Increase (decrease) in liabilities, net of acquisition of business: | ||||||||||||
| Accounts payable | (2,732 | ) | 1,461 | (2,180 | ) | |||||||
| Accrued expenses | 3,806 | 829 | (1,688 | ) | ||||||||
| Pension plan liabilities | (271 | ) | (672 | ) | (718 | ) | ||||||
| Unearned tuition | (1,190 | ) | (4,453 | ) | (9,466 | ) | ||||||
| Other liabilities | (159 | ) | 768 | 498 | ||||||||
| Total adjustments | 68,155 | 54,532 | 53,172 | |||||||||
| Net cash provided by operating activities | 12,022 | 3,246 | 15,986 | |||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||
| Capital expenditures | (7,472 | ) | (6,538 | ) | (8,839 | ) | ||||||
| Proceeds from sale of property and equipment | 67 | 750 | 124 | |||||||||
| Acquisition of business, net of cash acquired | - | - | (1,472 | ) | ||||||||
| Net cash used in investing activities | (7,405 | ) | (5,788 | ) | (10,187 | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||
| Proceeds from borrowings | 47,500 | 59,500 | 37,500 | |||||||||
| Payments on borrowings | (72,000 | ) | (42,500 | ) | - | |||||||
| Reclassifications of proceeds from borrowings to restricted cash | 24,500 | (54,500 | ) | - | ||||||||
| Payment of deferred finance fees | - | (863 | ) | (659 | ) | |||||||
| Net share settlement for equity-based compensation | (448 | ) | (797 | ) | (531 | ) | ||||||
| Dividends paid | (4,321 | ) | (6,709 | ) | (6,444 | ) | ||||||
| Principal payments under capital lease obligations | (435 | ) | (411 | ) | (481 | ) | ||||||
| Net cash (used in) provided by financing activities | (5,204 | ) | (46,280 | ) | 29,385 | |||||||
| NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | (587 | ) | (48,822 | ) | 35,184 | |||||||
| CASH AND CASH EQUIVALENTS—Beginning of year | 12,886 | 61,708 | 26,524 | |||||||||
| CASH AND CASH EQUIVALENTS—End of year | $ | 12,299 | $ | 12,886 | $ | 61,708 | ||||||
See notes to consolidated financial statements.
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Continued)
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
| 2013 | 2012 | 2011 | 2014 | 2013 | 2012 | |||||||||||||||||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | ||||||||||||||||||||||||
| Cash paid during the year for: | ||||||||||||||||||||||||
| Interest | $ | 4,209 | $ | 4,184 | $ | 4,003 | $ | 4,597 | $ | 4,209 | $ | 4,184 | ||||||||||||
| Income taxes | $ | 410 | $ | 226 | $ | 23,218 | $ | 145 | $ | 410 | $ | 226 | ||||||||||||
| SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: | ||||||||||||||||||||||||
| Liabilities accrued for or noncash purchases of fixed assets | $ | 93 | $ | 1,789 | $ | 1,166 | $ | 1,613 | $ | 93 | $ | 1,789 | ||||||||||||
See notes to consolidated financial statements.
F-10
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
AS OF DECEMBER 31, 20132014 AND 20122013 AND FOR THE THREE YEARS ENDED DECEMBER 31, 20132014
(In thousands, except share and per share amounts, schools, training sites, campuses and unless otherwise stated)
| 1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Business Activities—Lincoln Educational Services Corporation and Subsidiaries (the "Company") is a provider of diversified career-oriented post-secondary education. The Company offers recent high school graduates and working adults degree and diploma programs in five principal areas of study: Automotive Technology, Health Science, Skilled Trades, Hospitality Services and Business and Information Technology. The Company currently has 3331 schools and five training sites in 15 states across the United States.
Liquidity—For the last several years, the Company and the proprietary school sector generally have faced various forms of adversity which have contributed to deteriorating earnings growth. Government regulations have negatively impacted earnings by making it more difficult for potential students to obtain loans, which when coupled with the overall economic environment have hindered potential students from enrolling in its schools. In light of these factors, the Company has incurred significant operating losses as a result of lower student population. The Company also recorded a pre-tax goodwill impairment charge of $39.0 million for the year ended December 31, 2014 as a result of a significant decline in market capitalization. Despite these events, the Company believes that its likely sources of cash should be sufficient to fund operations for the next twelve months. The Company’s available sources of cash primarily include cash from operations, cash and cash equivalents on hand at December 31, 2014 of $12.3 million and the ability to draw up to $20 million under the revolving line of credit less letters of credit that was extended through April 2016. To fund the Company’s business plans, including any anticipated future losses, purchase commitments, capital expenditures, principal and interest payments on borrowings and to satisfy the DOE financial responsibility standards, the Company has the ability to leverage its owned real estate that is not classified as held for sale. The Company is also continuing to take actions to improve cash flow by aligning its cost structure to its student population.
In addition to the aforementioned current sources of capital that will provide short term liquidity, the Company also plans to sell approximately $50.9 million in assets which are currently classified as held for sale and are expected to be sold within one year. The Company also is currently exploring various other alternatives including debt financing vehicles and strategic partnerships. However, at this time the Company has no commitments to obtain any additional funds, and there can be no assurance such funds will be available on acceptable terms or at all.
Principles of Consolidation—The accompanying consolidated financial statements include the accounts of Lincoln Educational Services Corporation and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.
Revenue Recognition—Revenue is derived primarily from programs taught at the schools. Tuition revenue and one-time fees, such as nonrefundable application fees, registration fees, and course material fees are recognized on a straight-line basis over the length of the applicable program. If a student withdraws from a program prior to a specified date, any paid but unearned tuition is refunded. Other revenues, such as tool sales and contract training revenues are recognized as services are performed or goods are delivered. On an individual student basis, tuition earned in excess of cash received is recorded as accounts receivable, and cash received in excess of tuition earned is recorded as unearned tuition. Refunds are calculated and paid in accordance with federal, state and accrediting agency standards.
Cash and Cash Equivalents—Cash and cash equivalents include all cash balances and highly liquid short-term investments, which mature within three months of purchase.
Restricted Cash—Restricted cash consists of deposits maintained at financial institutions under a cash collateralized agreement under the Company’s credit agreement. Refer to Note 98 for more information on the credit agreement.
Accounts Receivable—The Company reports accounts receivable at net realizable value, which is equal to the gross receivable less an estimated allowance for uncollectible accounts. Noncurrent accounts receivable represent amounts due from graduates in excess of 12 months from the balance sheet date.
Allowance for uncollectible accounts—Based upon experience and judgment, an allowance is established for uncollectible accounts with respect to tuition receivables. In establishing the allowance for uncollectible accounts, we consider, among other things, current and expected economic conditions, a student's status (in-school or out-of-school), whether or not a student is currently making payments, and overall collection history. Changes in trends in any of these areas may impact the allowance for uncollectible accounts. The receivables balances of withdrawn students with delinquent obligations are reserved for based on our collection history.
Fair Value of Financial Instruments—The carrying value of cash and cash equivalents approximates fair value at December 31, 20132014 and 2012.2013. In addition, the carrying value of all borrowings under the credit agreement approximates fair value at December 31, 20132014 and 2012.2013. The account receivable, net balances are presented within current and non-current assets on the consolidated balance sheets. It is not practicable to estimate the fair value of these financial instruments, since observable market data is not readily available, and no reasonable estimation methodology exists.
Inventories—Inventories consist mainly of textbooks, computers, tools and supplies. Inventories are valued at the lower of cost or market on a first-in, first-out basis.
Property, Equipment and Facilities—Depreciation and Amortization—Property, equipment and facilities are stated at cost. Major renewals and improvements are capitalized, while repairs and maintenance are expensed when incurred. Upon the retirement, sale or other disposition of assets, costs and related accumulated depreciation are eliminated from the accounts and any gain or loss is reflected in operating (loss) income. For financial statement purposes, depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the assets, and amortization of leasehold improvements is computed over the lesser of the term of the lease or its estimated useful life.
Rent Expense—Rent expense related to operating leases where scheduled rent increases exist, is determined by expensing the total amount of rent due over the life of the operating lease on a straight-line basis. The difference between the rent paid under the terms of the lease and the rent expensed on a straight-line basis is included in accrued rent and other long-term liabilities on the accompanying consolidated balance sheets.
Advertising Costs—Costs related to advertising are expensed as incurred and approximated $29.3$27.5 million, $30.3$29.0 million and $38.1$30.1 million from continuing operations for the years ended December 31, 2014, 2013 2012 and 2011,2012, respectively. These amounts are included in selling, general and administrative expenses in the consolidated statements of operations.
Goodwill and Other Intangible Assets— The Company tests its goodwill for impairment annually, or whenever events or changes in circumstances indicate an impairment may have occurred, by comparing its reporting unit’s carrying value to its implied fair value. Impairment may result from, among other things, deterioration in the performance of the acquired business, adverse market conditions, adverse changes in applicable laws or regulations, reductions in market value of the Company, including changes that restrict the activities of the acquired business, and a variety of other circumstances. If the Company determines that an impairment has occurred, it is required to record a write-down of the carrying value and charge the impairment as an operating expense in the period the determination is made. In evaluating the recoverability of the carrying value of goodwill and other indefinite-lived intangible assets, the Company must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the acquired assets. Changes in strategy or market conditions could significantly impact these judgments in the future and require an adjustment to the recorded balances.
At December 31, 2014, the Company conducted its annual test for goodwill impairment and determined it did not have an impairment. The fair value of the Company’s reporting units were determined using Level 3 inputs included in its multiple of earnings and discounted cash flow approach. The Company concluded that as of September 30, 2014 there was an indicator of potential impairment as a result of a decrease in market capitalization and, accordingly, the Company tested goodwill for impairment. The test indicated that 10 of the Company’s reporting units were impaired, which resulted in a pre-tax non-cash charge of $39.0 million for the three months ended September 30, 2014 ($1.9 million of which is included in discontinued operations).
At December 31, 2013, the Company conducted its annual test for goodwill impairment and determined it did not have an impairment. The fair value of the Company’s reporting units were determined using Level 3 inputs included in its multiple of earnings and discounted cash flow approach. As of June 30, 2013, the Company concluded that current period losses at two reporting units, which resulted in a deterioration of current and projected cash flows, was an indicator of potential impairment and, accordingly, tested goodwill and long-lived assets for impairment. The tests indicated that these two reporting units were impaired, which resulted in a pre-tax non-cash charge of $3.1 million for the three months ended June 30, 2013.
At December 31, 2012, the Company tested goodwill for impairment and determined that an impairment of approximately $18.3 million ($4.5 million included in discontinued operations) existed for seven of its reporting units. The Company concluded that the decrease in the Company’s market capitalization as of June 30, 2012 was an indicator of potential impairment and, accordingly, the Company tested goodwill for impairment. The tests indicated that five of the Company’s reporting units were impaired as a result of lower than expected student population, which resulted in a pre-tax charge of $15.4 million in the second quarter of 2012 ($8.4 million included in discontinued operations). The fair values of these reporting units were estimated using the expected present value of future cash flows. No other reporting unit’s carrying goodwill amount exceeded or approximated its implied value.
Impairment of Long-Lived Assets—The Company reviews the carrying value of our long-lived assets and identifiable intangibles for possible impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. The Company evaluates long-lived assets for impairment by examining estimated future cash flows using Level 3 inputs. These cash flows are evaluated by using weighted probability techniques as well as comparisons of past performance against projections. Assets may also be evaluated by identifying independent market values. If the Company determines that an asset’s carrying value is impaired, it will record a write-down of the carrying value of the asset and charge the impairment as an operating expense in the period in which the determination is made.
The Company tested goodwillconcluded that for impairment and determined it did not have anthe three months ended December 31, 2013, there was no long-lived asset impairment. The Company concluded that the decrease in the Company’s market capitalization as of SeptemberJune 30, 20112013 and March 31, 2013, there was sufficient evidence to conclude that there were impairments of certain long-lived assets at four and two of our campuses, respectively. Long lived assets had been tested at these campuses as a result of certain financial indicators such as our history of losses, our current respective period losses, as well as future projected losses at these campuses. The long-lived assets impairment resulted in a pre-tax charge of $1.4 million ($0.7 million included in discontinued operations) and $1.7 million ($1.6 million included in discontinued operations) for leasehold improvements as of June 30, 2013 and March 31, 2013, respectively.
The Company concluded that as of December 31, 2012 and June 30, 2012, there was an indicator of potential impairment and, accordingly, the Company tested goodwilllong-lived assets for impairment and indefinite-lived intangibles for impairment. The tests indicateddetermined that fivecertain long-lived assets at four and 10 of the Company’s reporting unitsits campuses were impaired, whichimpaired. This resulted in an expensea pre-tax charge of $9.3$1.3 million in the third quarter of 2011 ($1.00.9 million included in discontinued operations). for leasehold improvements as of December 31, 2012 and $8.3 million ($4.4 million in discontinued operations) as of June 30, 2012, which included leasehold improvements of $8.1 million and $0.2 million in definite-lived intangible assets respectively.
Concentration of Credit Risk—Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments. The Company places its cash and cash equivalents with high credit quality financial institutions. The Company's cash balances with financial institutions typically exceed the Federal Deposit Insurance limit of $0.25 million. The Company's cash balances on deposit at December 31, 2013,2014, exceeded the balance insured by the FDIC Corporation (“FDIC”) by approximately $66.7$41.2 million. The Company has not experienced any losses to date on its invested cash.
The Company extends credit for tuition and fees to many of its students. The credit risk with respect to these accounts receivable is mitigated through the students' participation in federally funded financial aid programs unless students withdraw prior to the receipt of federal funds for those students. In addition, the remaining tuition receivables are primarily comprised of smaller individual amounts due from students.
With respect to student receivables, the Company had no significant concentrations of credit risk as of December 31, 20132014 and 2012.2013.
Use of Estimates in the Preparation of Financial Statements—The preparation of financial statements in conformity with generally accepted accounting principles in the United States (“GAAP’) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. On an ongoing basis, the Company evaluates the estimates and assumptions, including those related to revenue recognition, bad debts, impairments, fixed assets, income taxes, benefit plans and certain accruals. Actual results could differ from those estimates.
Stock-Based Compensation Plans—The Company measures the value of stock options on the grant date at fair value, using the Black-Scholes option valuation model. The Company amortizes the fair value of stock options, net of estimated forfeitures, utilizing straight-line amortization of compensation expense over the requisite service period of the grant.
The Company measures the value of service and performance-based restricted stock on the fair value of a share of common stock on the date of the grant. The Company amortizes the fair value of service based restricted stock utilizing straight-line amortization of compensation expense over the requisite service period of the grant.
The Company amortizes the fair value of the performance-based restricted stock based on determination of the probable outcome of the performance condition. If the performance condition is expected to be met, then the Company amortizes the fair value of the number of shares expected to vest utilizing straight-line basis over the requisite performance period of the grant. However, if the associated performance condition is not expected to be met, then the Company does not recognize the stock-based compensation expense.
Income Taxes—The Company accounts for income taxes in accordance with FASB ASC Topic 740, “Income Taxes” (“ASC 740”). This statement requires an asset and a liability approach for measuring deferred taxes based on temporary differences between the financial statement and tax bases of assets and liabilities existing at each balance sheet date using enacted tax rates for years in which taxes are expected to be paid or recovered.
In accordance with ASC 740, the Company assesses our deferred tax asset to determine whether all or any portion of the asset is more likely than not unrealizable. A valuation allowance is required to be established or maintained when, based on currently available information, it is more likely than not that all or a portion of a deferred tax asset will not be realized. In accordance with ASC 740, our assessment considers whether there has been sufficient income in recent years and whether sufficient income is expected in future years in order to utilize the deferred tax asset. In evaluating the realizability of deferred income tax assets, the Company considered, among other things, historical levels of income, expected future income, the expected timing of the reversals of existing temporary reporting differences, and the expected impact of tax planning strategies that may be implemented to prevent the potential loss of future income tax benefits. Significant judgment is required in determining the future tax consequences of events that have been recognized in our consolidated financial statements and/or tax returns. Differences between anticipated and actual outcomes of these future tax consequences could have a material impact on our consolidated financial position or results of operations. Changes in, among other things, income tax legislation, statutory income tax rates, or future income levels could materially impact our valuation of income tax assets and liabilities and could cause our income tax provision to vary significantly among financial reporting periods.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. During the years ended December 31, 20132014 and 2012,2013, the interest and penalties expense associated with uncertain tax positions are not significant to the Company’s results of operations or financial position.
Start-up Costs—Costs related to the start of new campuses are expensed as incurred.
New Accounting Pronouncements
In January 2013,May 2014, the Financial Accounting Standards Board ("FASB"(“FASB”) issued Accounting Standard Update ("ASU") No. 2013-01, Clarifyinga new standard related to revenue recognition, which requires an entity to recognize the Scopeamount of Disclosures about Offsetting Assets and Liabilities.revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The amendmentsnew standard will replace most of the existing revenue recognition standards in this ASU clarify that the disclosure requirements of ASU No. 2011-11 are limited to derivatives, including bifurcated embedded derivatives, repurchase and reverse repurchase agreements, and securities borrowing and lending transactions that are either offset in the statement of financial position or subject to an enforceable master netting arrangement or similar agreement. This ASU isGAAP when it becomes effective retrospectively for annual periods beginning on or after January 1, 2013.2017. Early adoption is not permitted. The adoptionnew standard can be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of this ASU didthe change recognized at the date of the initial application. The Company is assessing the potential impact of the new standard on financial reporting and has not materially impactyet selected a transition method.
In April 2014, FASB issued amended guidance on the use and presentation of discontinued operations in an entity's consolidated financial statements. The new guidance restricts the presentation of itsdiscontinued operations to business circumstances when the disposal of business operations represents a strategic shift that has or will have a major effect on an entity's operations and financial condition, results of operation and disclosures.
| 2. | FINANCIAL AID AND REGULATORY COMPLIANCE |
Financial Aid
The Company’s schools and students participate in a variety of government-sponsored financial aid programs that assist students in paying the cost of their education. The largest source of such support is the federal programs of student financial assistance under Title IV of the Higher Education Act of 1965, as amended, commonly referred to as the Title IV Programs, which are administered by the U.S. Department of Education (the "DOE"). During the years ended December 31, 2014, 2013 2012 and 2011,2012, approximately 80%, 81%80% and 84%81%, respectively, of net revenues on a cash basis were indirectly derived from funds distributed under Title IV Programs.
For the year ended December 31, 2014, 2013 2012 and 2011,2012, the Company was in compliance with the standards established by the DOE requiringcalculated that no individual DOE reporting entity can receivereceived more than 90% of its revenue, determined on a cash basis under DOE regulations, from Title IV, HEA Program Funds. AThe Company’s calculations may be subject to review by the DOE. Under DOE regulations, a proprietary institution that derives more than 90% of its total revenue from the Title IV programs for two consecutive fiscal years becomes immediately ineligible to participate in the Title IV programs and may not reapply for eligibility until the end of two fiscal years. An institution with revenues exceeding 90% for a single fiscal year ending after August 14, 2008 will be placed on provisional certification and may be subject to other enforcement measures. If one of the Company’s institutions violated the 90/10 Rule and became ineligible to participate in Title IV Programs but continued to disburse Title IV Program funds, the DOE would require the institution to repay all Title IV Program funds received by the institution after the effective date of the loss of eligibility.
Regulatory Compliance
To participate in Title IV Programs, a school must be authorized to offer its programs of instruction by relevant state education agencies, be accredited by an accrediting commission recognized by the DOE and be certified as an eligible institution by the DOE. For this reason, the schools are subject to extensive regulatory requirements imposed by all of these entities. After the schools receive the required certifications by the appropriate entities, the schools must demonstrate their compliance with the DOE regulations of the Title IV Programs on an ongoing basis. Included in these regulations is the requirement that the Company must satisfy specific standards of financial responsibility. The DOE evaluates institutions for compliance with these standards each year, based upon the institution’s annual audited financial statements, as well as following a change in ownership resulting in a change of control of the institution. Under regulations which took effect July 1, 1998, the DOE calculates the institution's composite score for financial responsibility based on its (i) equity ratio, which measures the institution's capital resources, ability to borrow and financial viability; (ii) primary reserve ratio, which measures the institution's ability to support current operations from expendable resources; and (iii) net income ratio, which measures the institution's ability to operate at a profit. This composite score can range from -1 to +3.
The composite score must be at least 1.5 for the institution to be deemed financially responsible without the need for further oversight. If an institution’s composite score is below 1.5, but is at least 1.0, it is in a category denominated by the DOE as “the zone.” Under the DOE regulations, institutions that are in the zone typically may be permitted by the DOE to continue to participate in the title IV programs by choosing one of two alternatives: 1) the “Zone Alternative” under which we are required to make disbursements to students under the Heightened Cash Monitoring 1 (HCM1) payment method and to notify the DOE within 10 days after the occurrence of certain oversight and financial events or 2) submit a letter of credit to the DOE equal to 50 percent of the Title IV funds received by our institutions during the most recent fiscal year. The DOE permits an institution to participate under the “Zone Alternative” for a period of up to three consecutive fiscal years. Under the HCM1 payment method, the institution is required to make Title IV disbursements to eligible students and parents before it requests or receives funds for the amount of those disbursements from the DOE. As long as the student accounts are credited before the funding requests are initiated, we are permitted to draw down funds through the DOE’s electronic system for grants management and payments for the amount of disbursements made to eligible students. Unlike the HCM2 and reimbursement payment methods, the HCM1 payment method typically does not require schools to submit documentation to the DOE and wait for DOE approval before drawing down Title IV funds.
If an institution's composite score is below 1.0, the institution is considered by the DOE to lack financial responsibility. If the DOE determines that an institution does not satisfy the DOE's financial responsibility standards, depending on its composite score and other factors, that institution may establish its financial responsibility on an alternative basis by, among other things:
| · | Posting a letter of credit in an amount equal to at least 50% of the total Title IV Program funds received by the institution during the institution's most recently completed fiscal year; |
| · | Posting a letter of credit in an amount equal to at least 10% of such prior year's Title IV Program funds, accepting provisional certification, complying with additional DOE monitoring requirements and agreeing to receive Title IV Program funds under an arrangement other than the DOE's standard advance funding arrangement; and/or |
| · | Complying with additional DOE monitoring requirements and agreeing to receive Title IV Program funds under an arrangement other than the DOE's standard advance funding arrangement. |
The DOE has evaluated the financial responsibility of the Company’sour institutions on a consolidated basis. The Company has submitted to the DOE itsour audited financial statements for the 2012 and 20112013 fiscal yearsyear reflecting a composite score of 1.6 and 2.1, respectively,1.4, based upon its calculations, and that its schools meetcalculations. The Company chose the “Zone Alternative” option described above because, among other things, it does not require the Company to submit a letter of credit to the DOE standardsand because the HCM1 payment method is less burdensome than the HCM2 or reimbursement methods of financial responsibility. payment that the DOE has the authority to impose. The Company believes that, prior to moving to the HCM1 payment method on October 22, 2014, its procedures for processing Title IV payments were similar to those now required under the HCM1 payment method. As of this date, the Company not identified any impact on our ability to make disbursements of Title IV funds to its students or to receive funds for the amount of those disbursements from the DOE.
For the 20132014 fiscal year, the Company has calculated its composite score to be 1.5. 1.3. THowever, thishis number is subject to determination by the DOE once it receives and reviews the Company’s audited financial statements for the 20132014 fiscal year. The Company’s composite score for 2013 was 1.4. The DOE regulations generally permit institutions with a composite score of between 1.0 and 1.4 to participate under the Zone Alternative for a period of up to three consecutive fiscal years. The Company believes that if its composite score is below 1.5 for three consecutive years it will be able to continue to operate under the Zone Alternative; however, this determination is made solely by the DOE. If the composite score drops below 1.0 in a given year or if the composite score remains between 1.0 and 1.4 for three or more consecutive years, the Company may be required to meet alternative requirements for continuing to participate in Title IV programs by submitting a letter of credit, complying with monitoring requirements, disbursing Title IV funds under the HCM1, HCM2, or reimbursement payment methods, and complying with other requirements and conditions. The Company’s existing credit agreement, which expires April 5, 2016, gives it the ability to draw up to $20 million under the revolving line of credit less letters of credit except that during the period commencing on December 1, 2015 through January 15, 2016 the Company is required to reduce the outstanding revolving loans other than letters of credit to $0. If the Company is unable to sell its held for sale assets, leverage its other owned properties or obtain other financing in 2015, the composite score may be less than 1.0 as of December 31, 2015.
| 3. | WEIGHTED AVERAGE COMMON SHARES |
The weighted average numbersnumber of common shares used to compute basic and diluted income per share for the years ended December 31, 2014, 2013 2012 and 2011,2012, respectively were as follows:
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
| 2013 | 2012 | 2011 | 2014 | 2013 | 2012 | |||||||||||||||||||
| Basic shares outstanding | 22,513,391 | 22,195,407 | 22,019,563 | 22,814,105 | 22,513,391 | 22,195,407 | ||||||||||||||||||
| Dilutive effect of stock options | - | - | 135,437 | - | - | - | ||||||||||||||||||
| Diluted shares outstanding | 22,513,391 | 22,195,407 | 22,155,000 | 22,814,105 | 22,513,391 | 22,195,407 | ||||||||||||||||||
For the year ended December 31, 2014, 2013 and 2012, options to acquire 222,707119,722; 222,707; and 71,989 shares were excluded from the above table because the Company reported a net loss for the year and therefore their impact on reported loss per share would have been antidilutive. For the years ended December 31, 2014, 2013 2012 and 2011,2012, options to acquire 795,985; 657,083; 216,908; and 399,583216,908 shares; respectively, were excluded from the above table because they have an exercise price that is greater than the average market price of the Company’s common stock and therefore their impact on reported (loss) earnings per share would have been antidilutive.
In 2011, 2013 and 2013,2014, the Company issued certain members of management performance shares that vest when certain performance conditions are met. As of December 31, 2013,2014, these performance conditions were not met. Accordingly, 441,552360,402 and 134,131441,552 shares of outstanding performance shares have been excluded from the computation of diluted earnings per share for the year ended December 31, 20132014 and 2012,2013, respectively. Refer to Note 109 for more information on performance shares.
| 4. | DISCONTINUED OPERATIONS |
2014 Event
On December 3, 2014, the Company’s Board of Directors approved a plan to cease operations at five training sites in Florida. The Company performed a cost benefit analysis on several schools and concluded that the training sites contained a high fixed cost component and has had difficulty attracting enough students due to high competition to maintain a stable profit margin. Accordingly, the Company ceased operations at these campuses as of December 31, 2014. This was a strategic shift to close all of the Company’s training sites and all locations that do not accept Title IV payments. The results of operations of these campuses are reflected as discontinued operations in the consolidated financial statements.
The results of operations at these five training sites for the three year periods ended December 31, 2014 were as follows (in thousands):
| Year Ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| Revenue | $ | 2,140 | $ | 3,512 | $ | 2,610 | ||||||
| Loss before income tax | (6,731 | ) | (2,635 | ) | (1,274 | ) | ||||||
| Income tax benefit | (85 | ) | - | (508 | ) | |||||||
| Net loss from discontinued operations | $ | (6,646 | ) | $ | (2,635 | ) | $ | (766 | ) | |||
Amounts include impairments of goodwill and long-lived assets for these campuses of $2.1 million for the year ended December 31, 2014.
2013 Event
On June 18, 2013, the Company’s Board of Directors approved a plan to cease operations at four campuses in Ohio and one campus in Kentucky consisting of the Company’s Dayton institution and its branch campuses. Federal legislation implemented on July 1, 2012 that prohibits “ability to benefit” (“ATB”) students from participating in federal student financial aid programs led to a dramatic decrease in the number of students attending these five campuses. Accordingly, the Company ceased operations at these campuses as of December 31, 2013. The results of operations of these campuses are reflected as discontinued operations in the consolidated financial statements.
The results of operations at these five campuses for the threetwo year periods ended December 31, 2013 were as follows (in thousands):
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||
| 2013 | 2012 | 2011 | 2013 | 2012 | ||||||||||||||||
| Revenue | $ | 7,724 | $ | 19,924 | $ | 35,099 | $ | 7,724 | $ | 19,924 | ||||||||||
| (Loss) income before income tax | (17,287 | ) | (13,641 | ) | 5,236 | |||||||||||||||
| Loss before income tax | (17,287 | ) | (13,641 | ) | ||||||||||||||||
| Income tax expense (benefit) | 239 | (5,444 | ) | 1,677 | 239 | (5,444 | ) | |||||||||||||
| Net (loss) income from discontinued operations | $ | (17,526 | ) | $ | (8,197 | ) | $ | 3,559 | ||||||||||||
| Net loss from discontinued operations | $ | (17,526 | ) | $ | (8,197 | ) | ||||||||||||||
Amounts include impairments of goodwill and long-lived assets for these campuses of $2.3 million and $8.7 million for the years ended December 31, 2013 and 2012, respectively.
2012 Event
On July 31, 2012, the Company’s Board of Directors approved a plan to cease operations at seven campuses. The adjustments made to the Company’s business model to better align with the DOE’s increased emphasis on student outcomes and the Company’s efforts to comply with the 90/10 rule and cohort default rates greatly impacted the population at these campuses. In addition, the current economic environment and regulatory changes under the Consolidated Appropriations Act, 2012, which eliminated the ability to enroll “ability to benefit” (“ATB”)ATB students, have made these campuses no longer viable. Accordingly, the Company ceased operations at these campuses as of December 31, 2012. The results of operations are reflected as discontinued operations in the consolidated financial statements.
The results of operations at these seven campuses for the twoone year periods ended December 31, 2012 were as follows (in thousands):
| Year Ended December 31, | Year Ended December 31, | |||||||||||
| 2012 | 2011 | 2012 | ||||||||||
| Revenue | $ | 8,500 | $ | 20,804 | $ | 8,500 | ||||||
| Loss before income tax | (22,142 | ) | (5,260 | ) | (22,142 | ) | ||||||
| Income tax benefit | (8,837 | ) | (1,685 | ) | (8,837 | ) | ||||||
| Net loss from discontinued operations | $ | (13,305 | ) | $ | (3,575 | ) | $ | (13,305 | ) | |||
Amounts include impairments of goodwill and long-lived assets for these campuses of $9.5 million and $2.1 million for the yearsyear ended December 31, 2012 and 2011, respectively.2012.
| GOODWILL AND OTHER INTANGIBLES |
Changes in the carrying amount of goodwill during the years ended December 31, 20132014 and 20122013 are as follows:
Gross Goodwill Balance | Accumulated Impairment Losses | Net Goodwill Balance | Gross Goodwill Balance | Accumulated Impairment Losses | Net Goodwill Balance | |||||||||||||||||||
| Balance as of January 1, 2012 | $ | 115,303 | $ | (17,932 | ) | $ | 97,371 | |||||||||||||||||
| Acquisition of FMTI | 1,873 | - | 1,873 | |||||||||||||||||||||
| Goodwill impairment (1) | - | (33,717 | ) | (33,717 | ) | |||||||||||||||||||
| Balance as of December 31, 2012 | 117,176 | (51,649 | ) | 65,527 | ||||||||||||||||||||
| Balance as of January 1, 2013 | $ | 117,176 | $ | (51,649 | ) | $ | 65,527 | |||||||||||||||||
| Goodwill impairment | - | (3,062 | ) | (3,062 | ) | - | (3,062 | ) | (3,062 | ) | ||||||||||||||
| Balance as of December 31, 2013 | $ | 117,176 | $ | (54,711 | ) | $ | 62,465 | 117,176 | (54,711 | ) | 62,465 | |||||||||||||
| Asset held for sale (2) | (1,304 | ) | - | (1,304 | ) | |||||||||||||||||||
| Goodwill impairment | - | (38,954 | ) | (38,954 | ) | |||||||||||||||||||
| Balance as of December 31, 2014 | $ | 115,872 | $ | (93,665 | ) | $ | 22,207 | |||||||||||||||||
| (1) | $ |
| (2) | Refer to Note 6 for more information on assets held for sale. |
Intangible assets, which are included in other assets in the accompanying consolidated balance sheets, consisted of the following:
Student Contracts | Indefinite Trade Name | Trade Name | Accreditation | Curriculum | Non-compete | Total | ||||||||||||||||||||||
| Gross carrying amount at December 31, 2012 | $ | 25 | $ | 180 | $ | 366 | $ | 1,268 | $ | 1,124 | $ | 200 | $ | 3,163 | ||||||||||||||
| Write-off | (25 | ) | - | (31 | ) | (102 | ) | - | - | (158 | ) | |||||||||||||||||
| Gross carrying amount at December 31, 2013 | - | 180 | 335 | 1,166 | 1,124 | 200 | 3,005 | |||||||||||||||||||||
| Accumulated amortization at December 31, 2012 | 25 | - | 209 | - | 670 | 28 | 932 | |||||||||||||||||||||
| Write-off | (25 | ) | - | (31 | ) | - | - | - | (56 | ) | ||||||||||||||||||
| Amortization | - | - | 50 | - | 158 | 40 | 248 | |||||||||||||||||||||
| Accumulated amortization at December 31, 2013 | - | - | 228 | - | 828 | 68 | 1,124 | |||||||||||||||||||||
| Net carrying amount at December 31, 2013 | $ | - | $ | 180 | $ | 107 | $ | 1,166 | $ | 296 | $ | 132 | $ | 1,881 | ||||||||||||||
| Weighted average amortization period (years) | Indefinite | 7 | Indefinite | 9 | 3 | |||||||||||||||||||||||
Indefinite Trade Name | Trade Name | Accreditation | Curriculum | Non-compete | Total | |||||||||||||||||||
| Gross carrying amount at December 31, 2013 | $ | 180 | $ | 335 | $ | 1,166 | $ | 1,124 | $ | 200 | $ | 3,005 | ||||||||||||
| Impairment (1) | (180 | ) | (25 | ) | (102 | ) | (574 | ) | (200 | ) | (1,081 | ) | ||||||||||||
| Gross carrying amount at December 31, 2014 | - | 310 | 1,064 | 550 | - | 1,924 | ||||||||||||||||||
| Accumulated amortization at December 31, 2013 | - | 228 | - | 828 | 68 | 1,124 | ||||||||||||||||||
| Impairment (1) | - | (12 | ) | - | (448 | ) | (95 | ) | (555 | ) | ||||||||||||||
| Amortization | - | 48 | - | 89 | 27 | 164 | ||||||||||||||||||
| Accumulated amortization at December 31, 2014 | - | 264 | - | 469 | - | 733 | ||||||||||||||||||
| Net carrying amount at December 31, 2014 | $ | - | $ | 46 | $ | 1,064 | $ | 81 | $ | - | $ | 1,191 | ||||||||||||
| Weighted average amortization period (years) | 7 | Indefinite | 10 | |||||||||||||||||||||
Student Contracts | Indefinite Trade Name | Trade Name | Accreditation | Curriculum | Non-compete | Total | ||||||||||||||||||||||
| Gross carrying amount at December 31, 2011 | $ | - | $ | 180 | $ | 509 | $ | 1,268 | $ | 1,150 | $ | 1,980 | $ | 5,087 | ||||||||||||||
| Acquisition of FMTI (1) | 25 | - | 25 | - | 224 | 200 | 474 | |||||||||||||||||||||
| Write-off | - | - | - | - | - | (1,980 | ) | (1,980 | ) | |||||||||||||||||||
| Impairment (2) | - | - | (168 | ) | - | (250 | ) | - | (418 | ) | ||||||||||||||||||
| Gross carrying amount at December 31, 2012 | 25 | 180 | 366 | 1,268 | 1,124 | 200 | 3,163 | |||||||||||||||||||||
| Accumulated amortization at December 31, 2011 | - | - | 262 | - | 620 | 1,952 | 2,834 | |||||||||||||||||||||
| Amortization | 25 | - | 74 | - | 135 | 56 | 290 | |||||||||||||||||||||
| Write-off | - | - | - | - | - | (1,980 | ) | (1,980 | ) | |||||||||||||||||||
| Impairment (2) | - | - | (127 | ) | - | (85 | ) | - | (212 | ) | ||||||||||||||||||
| Accumulated amortization at December 31, 2012 | 25 | - | 209 | - | 670 | 28 | 932 | |||||||||||||||||||||
| Net carrying amount at December 31, 2012 | $ | - | $ | 180 | $ | 157 | $ | 1,268 | $ | 454 | $ | 172 | $ | 2,231 | ||||||||||||||
| Weighted average amortization period (years) | Indefinite | 7 | Indefinite | 9 | 3 | |||||||||||||||||||||||
| (1) |
| Refer to Note 1 for more information related to the impairment. |
Student Contracts | Indefinite Trade Name | Trade Name | Accreditation | Curriculum | Non-compete | Total | ||||||||||||||||||||||
| Gross carrying amount at December 31, 2012 | $ | 25 | $ | 180 | $ | 366 | $ | 1,268 | $ | 1,124 | $ | 200 | $ | 3,163 | ||||||||||||||
| Write-off | (25 | ) | - | (31 | ) | (102 | ) | - | - | (158 | ) | |||||||||||||||||
| Gross carryingamount at December 31, 2013 | - | 180 | 335 | 1,166 | 1,124 | 200 | 3,005 | |||||||||||||||||||||
| Accumulated amortization at December 31, 2012 | 25 | - | 209 | - | 670 | 28 | 932 | |||||||||||||||||||||
| Write-off | (25 | ) | - | (31 | ) | - | - | - | (56 | ) | ||||||||||||||||||
| Amortization | - | - | 50 | - | 158 | 40 | 248 | |||||||||||||||||||||
| Accumulated amortization at December 31, 2013 | - | - | 228 | - | 828 | 68 | 1,124 | |||||||||||||||||||||
| Net carrying amount at December 31, 2013 | $ | - | $ | 180 | $ | 107 | $ | 1,166 | $ | 296 | $ | 132 | $ | 1,881 | ||||||||||||||
| Weighted average amortization period (years) | Indefinite | 7 | Indefinite | 9 | 3 | |||||||||||||||||||||||
Amortization of intangible assets for the years ended December 31, 2014, 2013 2012 and 20112012 was approximately $0.2 million, $0.4 million $0.3 million and $1.4$0.3 million, respectively.
The following table summarizes the estimated future amortization expense:
Year Ending December 31, | ||||
| 2015 | $ | 65 | ||
| 2016 | 22 | |||
| 2017 | 20 | |||
| 2018 | 19 | |||
| 2019 | 1 | |||
| $ | 127 | |||
Year Ending December 31, | ||||
| 2014 | $ | 200 | ||
| 2015 | 156 | |||
| 2016 | 112 | |||
| 2017 | 46 | |||
| 2018 | 20 | |||
| Thereafter | 1 | |||
| $ | 535 | |||
| PROPERTY, EQUIPMENT AND FACILITIES |
Property, equipment and facilities consist of the following:
Useful life (years) | At December 31, | Useful life (years) | At December 31, | |||||||||||||||||||||
| 2013 | 2012 | 2014 | 2013 | |||||||||||||||||||||
| Land | - | $ | 17,562 | $ | 18,363 | - | $ | 5,338 | $ | 17,562 | ||||||||||||||
| Buildings and improvements | 1-25 | 178,089 | 192,990 | 1-25 | 128,973 | 178,089 | ||||||||||||||||||
| Equipment, furniture and fixtures | 1-7 | 76,769 | 79,172 | 1-7 | 71,005 | 76,769 | ||||||||||||||||||
| Vehicles | 3 | 1,282 | 1,231 | 3 | 1,300 | 1,282 | ||||||||||||||||||
| Construction in progress | - | 425 | 174 | - | 34 | 425 | ||||||||||||||||||
| 274,127 | 291,930 | 206,650 | 274,127 | |||||||||||||||||||||
| Less accumulated depreciation and amortization | Less accumulated depreciation and amortization | (146,795 | ) | (137,834 | ) | (136,910 | ) | (146,795 | ) | |||||||||||||||
| $ | 127,332 | $ | 154,096 | $ | 69,740 | $ | 127,332 | |||||||||||||||||
Included above in buildings and improvements are buildings acquired under capital leases as of December 31, 20132014 and 20122013 of $26.8 million, each net of accumulated depreciation of $8.8$10.6 million and $7.0$8.8 million, respectively.
Included above in equipment, furniture and fixtures are assets acquired under capital leases as of December 31, 20132014 and 20122013 of $0.4 million and $0.6$0.4 million, respectively, net of accumulated depreciation of $0.4 million and $0.6$0.4 million, respectively.
Included above in buildings and improvements is capitalized interest as of December 31, 20132014 and 20122013 of $0.6 million, respectively, net of accumulated depreciation of $0.5 million and $0.4 million, respectively.
Depreciation and amortization expense of property, equipment and facilities was $19.1 million, $23.3 million $26.4 million and $26.3$26.4 million for the years ended December 31, 2014, 2013 and 2012, respectively.
The Company is exploring all options to monetize its assets and 2011, respectively.as part of the process has decided to put two campuses for sale as of the three months ended December 31, 2014. The Company believes this will strengthen its balance sheet and cash position. The Company anticipates that these properties will be sold during 2015. Accordingly, the assets have been reflected as “held for sale” in the accompanying consolidated balance sheet.
The Company closed its campuses in Suffield, Connecticut in 2012 and Cincinnati, Ohio (Tri-County) in 2013. During 2013, the Company decided to sell these properties as they arewere no longer pertinent to continuing operations. The Company anticipatesanticipated that these properties willwould be sold during 2014. Accordingly, the assets have been reflected as “held for sale” in the accompanying consolidated balance sheet. sheet at December 31, 2013. As of December 31, 2014, the Suffield campus is still held for sale and is expected to be sold shortly. The Tri-County campus is no longer for sale.
The assets held for sale as a result of the closures consist of the following:
| At December 31, | ||||
| 2013 | ||||
| Land | $ | 800 | ||
| Buildings and improvements | 5,510 | |||
| Assets held for sale | $ | 6,310 | ||
At December 31, 2014 | At December 31, 2013 | |||||||
| Inventories | $ | 411 | $ | - | ||||
| Accounts receivable, less allowance of $1,545 at December 31, 2014 | 1,527 | - | ||||||
| Noncurrent receivables, less allowance of $95 at December 31, 2014 | 671 | - | ||||||
| Property, equipment and facilities - at cost, net of accumluated depreciation and amortization of $17,843 and $1,418 at December 31, 2014 and 2013, respectively | 50,252 | 6,310 | ||||||
| Goodwill | 1,304 | - | ||||||
| Unearned tuition | (2,536 | ) | - | |||||
| Accrued expenses | (699 | ) | - | |||||
| Assets held for sale, net | $ | 50,930 | $ | 6,310 | ||||
| ACCRUED EXPENSES |
Accrued expenses consist of the following:
| At December 31, | At December 31, | |||||||||||||||
| 2013 | 2012 | 2014 | 2013 | |||||||||||||
| Accrued compensation and benefits | $ | 5,128 | $ | 3,163 | $ | 5,787 | $ | 5,128 | ||||||||
| Accrued rent and real estate taxes | $ | 3,251 | $ | 2,245 | ||||||||||||
| Other accrued expenses | 5,527 | 6,583 | 4,827 | 3,282 | ||||||||||||
| $ | 10,655 | $ | 9,746 | $ | 13,865 | $ | 10,655 | |||||||||
| LONG-TERM DEBT AND LEASE OBLIGATIONS |
Long-term debt and lease obligations consist of the following:
| At December 31, | At December 31, | |||||||||||||||
| 2013 | 2012 | 2014 | 2013 | |||||||||||||
| Credit agreement (a) | $ | 54,500 | $ | 37,500 | $ | 30,000 | $ | 54,500 | ||||||||
| Finance obligation (b) | 9,672 | 9,672 | 9,672 | 9,672 | ||||||||||||
| Capital lease-property (with a rate of 8.0%) (c) | 25,944 | 26,344 | 25,509 | 25,944 | ||||||||||||
| Capital leases-equipment (with rates ranging from 5.0% to 8.5%) | - | 11 | ||||||||||||||
| 90,116 | 73,527 | 65,181 | 90,116 | |||||||||||||
| Less current maturities | (435 | ) | (412 | ) | (30,471 | ) | (435 | ) | ||||||||
| $ | 89,681 | $ | 73,115 | $ | 34,710 | $ | 89,681 | |||||||||
(a) On April 5, 2012, the Company, as borrower, and certain of its wholly-owned subsidiaries, as guarantors, entered into a secured revolving credit agreement with a syndicate of four lenders led by Bank of America, N.A., as administrative agent and letter of credit issuer (the “Credit Facility”). The April 5, 2012 agreement, along with subsequent amendments dated June 18, 2013, and December 20, 2013, December 29, 2014 and March 4, 2015, are collectively referred to as the “Credit Agreement.”
As of December 31, 2013, the aggregate principal amount available under the Credit Facility was $60 million. Effective January 16, 2014, this amount was reduced to $40 million. Effective January 15, 2015, this amount was reduced to $20 million. During the period commencing on December 1, 2015 through January 15, 2016 the Company is required to reduce the outstanding revolving loans, other than letters of credit obligations, to $0. The Credit Facility may be used to finance capital expenditures and permitted acquisitions, to pay transaction expenses, for the issuance of letters of credit and for general corporate purposes. The Credit Agreement includes a $25 million letter of credit sublimit.sublimit which is reduced to $20 million effective January 15, 2015. Borrowings under the Credit Facility are secured by a first priority lien on substantially all of the tangible and intangible assets of the Company and its subsidiaries including real estate. The term of the Credit Facility iswas 36 months, maturing on April 5, 2015.2015 which was extended on March 4, 2015 for an additional 12 months with an expiration date of April 5, 2016.
The Credit Agreement provides that the lenders will receive first priority lien on substantially all of the tangible and intangible non-real property assets of the Company and its subsidiaries as well as a first priority lien on substantially all real property owned by the Company and its subsidiaries and that all net proceeds of future sales of real property by the Company and its subsidiaries be used to prepay revolving loans and permanently reduce the principal amount of revolving loans available under the Credit Facility.
At December 31, 2013,2014, the Company had outstanding letters of credit aggregating $5.3$7.1 million, which were primarily comprised of letters of credit for the Department of Education, or DOE, matters and real estate leases.
The Credit Agreement contains customary representations, warranties and covenants including consolidated adjusted net worth, consolidated leverage ratio, consolidated fixed charge coverage ratio, minimum financial responsibility composite score, cohort default rate and other financial covenants, certain restrictions on capital expenditures as well as affirmative and negative covenants and events of default customary for facilities of this type. In addition, the Company is paying fees to the lenders that are customary for facilities of this type. As of December 31, 20132014 the Company is in compliance with all financial covenants.
As of December 31, 2013,2014, the Company had $54.5$30.0 million outstanding under the Credit Agreement. The interest rate on borrowings under the Credit Agreement during the year ended December 31, 20132014 was 7.25%. All amounts outstanding on December 31, 20132014 were repaid on January 3, 2014.14, 2015. The Company had $37.5$54.5 million outstanding under the Credit Agreement as of December 31, 2012.2013. The interest rate on this borrowing was 4.5%7.25%.
(b) The Company completed a sale and a leaseback of several facilities on December 28, 2001. The Company retained a continuing involvement in the lease and as a result it is prohibited from utilizing sale-leaseback accounting. Accordingly, the Company has treated this transaction as a finance lease. Rent payments under this obligation for the three years in the period ended December 31, 20132014 were $1.5$1.6 million, respectively. These payments have been reflected in the accompanying consolidated statements of operations as interest expense for all periods presented since the effective interest rate on the obligation is greater than the scheduled payments. The lease expiration date is December 31, 2016.
(c) In 2009, the Company assumed real estate capital leases in Fern Park, Florida and Hartford, Connecticut. These leases bear interest at 8% and expire in 2032 and 2031, respectively.
Scheduled maturities of long-term debt and lease obligations at December 31, 20132014 are as follows:
Year ending December 31, | ||||||||
| 2014 | $ | 435 | ||||||
| 2015 | 54,971 | $ | 30,471 | |||||
| 2016 | 10,244 | 10,244 | ||||||
| 2017 | 748 | 748 | ||||||
| 2018 | 810 | 810 | ||||||
| 2019 | 877 | |||||||
| Thereafter | 22,908 | 22,031 | ||||||
| $ | 90,116 | $ | 65,181 | |||||
Restricted Stock
The Company has two stock incentive plans: a Long-Term Incentive Plan (the “LTIP”) and a Non-Employee Directors Restricted Stock Plan (the “Non-Employee Directors Plan”).
Under the LTIP, certain employees received awards of restricted shares of common stock based on service and performance. The number of shares granted to each employee is based on the fair market value of a share of common stock on the date of grant.
All service-based restricted shares granted prior to February 23, 2011 vest ratably on the first through fifth anniversaries of the grant date. The service-based restricted shares granted on or after February 23, 2011 vest ratably on the grant date and the first through fourth anniversaries of the grant date except for the service-based restricted shares granted on March 2, 2012 which vest fully on the first anniversary of the grant date.
On June 2, 2014 and December 18, 2014, performance-based shares were granted which vest over three years based upon the attainment of (i) a specified operating income margin during any one or more of the fiscal years in the period beginning January 1, 2015 and ending December 31, 2017 and (ii) the attainment of earnings before interest, taxes, depreciation and amortization targets during each of the fiscal years ended December 31, 2015 through 2017. There is no vesting period on the right to vote or the right to receive dividends on any of the restricted shares.
On April 29, 2013, performance-based shares were granted which vest over four years based upon the attainment of (i) a specified operating income margin during any one or more of the fiscal years in the period beginning January 1, 2013 and ending December 31, 2016 and (ii) the attainment of earnings before interest, taxes, depreciation and amortization targets during each of the fiscal years ended December 31, 2013 through 2016. There is no vesting period on the right to vote or the right to receive dividends on any of the restricted shares.
On April 29, 2011, performance-based shares were granted which vest over four years based upon the attainment of (i) a specified operating income margin during any one or more of the fiscal years in the period beginning January 1, 2011 and ending December 31, 2014 and (ii) the attainment of earnings before interest, taxes, depreciation and amortization targets during each of the fiscal years ended December 31, 2011 through 2014. There is no vesting period on the right to vote or the right to receive dividends on any of the restricted shares.
Pursuant to the Non-Employee Directors Plan, each non-employee director of the Company receives an annual award of restricted shares of common stock on the date of the Company’s annual meeting of shareholders. The number of shares granted to each non-employee director is based on the fair market value of a share of common stock on that date. The restricted shares vest on the first anniversary of the grant date; however, there is no vesting period on the right to vote or the right to receive dividends on these restricted shares.
In 2014, 2013 2012 and 2011,2012, the Company completed a net share settlement for 144,983, 140,475 102,438 and 68,250102,438 restricted shares and stock options exercised, respectively, on behalf of certain employees that participate in the LTIP upon the vesting of the restricted shares pursuant to the terms of the LTIP or exercise of the stock options. The net share settlement was in connection with income taxes incurred on restricted shares or stock option exercises that vested and were transferred to the employee during 2014, 2013 2012 and/or 2011,2012, creating taxable income for the employee. At the employees’ request, the Company will pay these taxes on behalf of the employees in exchange for the employees returning an equivalent value of restricted shares or stock options to the Company. These transactions resulted in a decrease of approximately $0.4 million, $0.8 million and $0.5 million in 2014, 2013 and $0.9 million in 2013, 2012, and 2011, respectively, to equity as the cash payment of the taxes effectively was a repurchase of the restricted shares or stock options granted in previous years.
The following is a summary of transactions pertaining to restricted stock:
| Shares | Weighted Average Grant Date Fair Value Per Share | Shares | Weighted Average Grant Date Fair Value Per Share | |||||||||||||
| Nonvested restricted stock outstanding at December 31, 2011 | 501,551 | $ | 16.10 | |||||||||||||
| Nonvested restricted stock outstanding at December 31, 2012 | 1,341,084 | $ | 7.79 | |||||||||||||
| Granted | 1,213,621 | 4.82 | 434,308 | 5.62 | ||||||||||||
| Cancelled | (33,529 | ) | 16.70 | |||||||||||||
| Vested | (374,088 | ) | 9.30 | (493,917 | ) | 7.41 | ||||||||||
| Nonvested restricted stock outstanding at December 31, 2012 | 1,341,084 | 7.79 | ||||||||||||||
| Nonvested restricted stock outstanding at December 31, 2013 | 1,247,946 | 6.77 | ||||||||||||||
| Granted | 434,308 | 5.62 | 337,100 | 3.50 | ||||||||||||
| Cancelled | (33,529 | ) | 16.70 | (178,792 | ) | 6.47 | ||||||||||
| Vested | (493,917 | ) | 7.41 | (480,435 | ) | 5.36 | ||||||||||
| Nonvested restricted stock outstanding at December 31, 2013 | 1,247,946 | 6.77 | ||||||||||||||
| Nonvested restricted stock outstanding at December 31, 2014 | 925,819 | 5.04 | ||||||||||||||
The restricted stock expense for each of the years ended December 31, 2014, 2013 and 2012 and 2011 was $2.5 million, $2.9 million $4.0 million and $3.1$4.0 million, respectively. The unrecognized restricted stock expense as of December 31, 2014 and 2013 and 2012 was $7.4$4.2 million and $8.6$7.4 million, respectively. As of December 31, 2013,2014, unrecognized restricted stock expense will be expensed over the weighted-average period of approximately 2.52.12 years. As of December 31, 2013,2014, outstanding restricted shares under the LTIP had an aggregate intrinsic value of $6.2$2.6 million.
Stock Options
The fair value of the stock options used to compute stock-based compensation is the estimated present value at the date of grant using the Black-Scholes option pricing model. During 20132014 and 20112013 there were no new stock option grants. The weighted average fair values of options granted during 2012 was $2.52 using the following weighted average assumptions for grants:
| |||||||||||||||||||||||||||||||||
The expected volatility considers the volatility of the Company common stock that has been traded for a period commensurate with the expected life. The expected term of options granted represents the period of time that options granted are expected to be outstanding based on historical experience. The risk-free rate used is based on the published U.S. Treasury yield curve in effect at the time of grant for instruments with a similar life. The 2012 expected dividend yield presumes a set dividend rate based on the current dividend yield.
The following is a summary of transactions pertaining to the option plans:
| Shares | Weighted Average Exercise Price Per Share | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||||||||||||||||||
| Outstanding December 31, 2010 | 720,940 | $ | 14.59 | 5.14 years | $ | 2,095 | ||||||||||||||||||||
| Cancelled | (74,459 | ) | 12.80 | |||||||||||||||||||||||
| Exercised | (113,106 | ) | 6.29 | 759 | ||||||||||||||||||||||
| Shares | Weighted Average Exercise Price Per Share | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||||||||||||||||||
| Outstanding December 31, 2011 | 533,375 | 16.60 | 4.68 years | - | 533,375 | $ | 16.60 | 4.68 years | $ | - | ||||||||||||||||
| Granted | 157,000 | 7.79 | 157,000 | 7.79 | ||||||||||||||||||||||
| Cancelled | (34,500 | ) | 12.26 | - | (34,500 | ) | 12.26 | - | ||||||||||||||||||
| Outstanding December 31, 2012 | 655,875 | 14.72 | 4.89 years | - | 655,875 | 14.72 | 4.89 years | - | ||||||||||||||||||
| Cancelled | (108,750 | ) | 14.64 | (108,750 | ) | 14.64 | - | |||||||||||||||||||
| Outstanding December 31, 2013 | 547,125 | 14.73 | 4.56 years | - | 547,125 | 14.73 | 4.56 years | - | ||||||||||||||||||
| Cancelled | (122,958 | ) | 18.49 | |||||||||||||||||||||||
| Vested or expected to vest as of December 31, 2013 | 527,527 | 14.99 | 4.43 years | - | ||||||||||||||||||||||
| Outstanding December 31, 2014 | 424,167 | 13.65 | 4.18 years | - | ||||||||||||||||||||||
| Exercisable as of December 31, 2013 | 449,134 | 16.25 | 3.77 years | - | ||||||||||||||||||||||
| Vested or expected to vest as of December 31, 2014 | 415,035 | 13.77 | 4.11 years | - | ||||||||||||||||||||||
| Exercisable as of December 31, 2014 | 378,507 | 14.35 | 3.82 years | - | ||||||||||||||||||||||
As of December 31, 2013,2014, unrecognized pre-tax compensation expense for all unvested stock option awards is approximately $0.1 million$20 thousand which will be expensed over the weighted-average period of approximately 1.80.2 years.
The following table presents a summary of options outstanding at December 31, 2013:2014:
| At December 31, 2013 | At December 31, 2014 | ||||||||||||||||||||||||||||||||||||||||
| Stock Options Outstanding | Stock Options Exercisable | Stock Options Outstanding | Stock Options Exercisable | ||||||||||||||||||||||||||||||||||||||
| Range of Exercise Prices | Shares | Contractual Weighted Average life (years) | Weighted Average Price | Shares | Weighted Exercise Price | Shares | Contractual Weighted Average life (years) | Weighted Average Price | Shares | Weighted Exercise Price | |||||||||||||||||||||||||||||||
| $4.00-$13.99 | 259,792 | 6.13 | $ | 9.60 | 161,801 | $ | 10.70 | 232,334 | 5.27 | $ | 9.50 | 186,674 | $ | 9.92 | |||||||||||||||||||||||||||
| $14.00-$19.99 | 182,333 | 3.36 | 17.67 | 182,333 | 17.67 | 133,333 | 2.50 | 17.86 | 133,333 | 17.86 | |||||||||||||||||||||||||||||||
| $20.00-$25.00 | 105,000 | 2.77 | 22.33 | 105,000 | 22.33 | 58,500 | 3.67 | 20.48 | 58,500 | 20.48 | |||||||||||||||||||||||||||||||
| 547,125 | 4.56 | 14.73 | 449,134 | 16.25 | 424,167 | 4.18 | 13.65 | 378,507 | 14.35 | ||||||||||||||||||||||||||||||||
| PENSION PLAN |
The Company sponsors a noncontributory defined benefit pension plan covering substantially all of the Company's union employees. Benefits are provided based on employees' years of service and earnings. This plan was frozen on December 31, 1994 for non-union employees.
The following table sets forth the plan's funded status and amounts recognized in the consolidated financial statements:
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
| 2013 | 2012 | 2011 | 2014 | 2013 | 2012 | |||||||||||||||||||
| CHANGES IN BENEFIT OBLIGATIONS: | ||||||||||||||||||||||||
| Benefit obligation-beginning of year | $ | 23,169 | $ | 21,233 | $ | 17,903 | $ | 20,314 | $ | 23,169 | $ | 21,233 | ||||||||||||
| Service cost | 37 | 35 | 117 | 23 | 37 | 35 | ||||||||||||||||||
| Interest cost | 790 | 872 | 939 | 892 | 790 | 872 | ||||||||||||||||||
| Actuarial (gain) loss | (2,614 | ) | 1,926 | 3,008 | ||||||||||||||||||||
| Actuarial loss (gain) | 4,149 | (2,614 | ) | 1,926 | ||||||||||||||||||||
| Benefits paid | (1,068 | ) | (897 | ) | (734 | ) | (1,079 | ) | (1,068 | ) | (897 | ) | ||||||||||||
| Benefit obligation at end of year | 20,314 | 23,169 | 21,233 | 24,299 | 20,314 | 23,169 | ||||||||||||||||||
| CHANGE IN PLAN ASSETS: | ||||||||||||||||||||||||
| Fair value of plan assets-beginning of year | 16,268 | 14,639 | 15,087 | 18,792 | 16,268 | 14,639 | ||||||||||||||||||
| Actual return on plan assets | 2,919 | 1,807 | 12 | 1,017 | 2,919 | 1,807 | ||||||||||||||||||
| Employer contributions | 673 | 719 | 274 | 270 | 673 | 719 | ||||||||||||||||||
| Benefits paid | (1,068 | ) | (897 | ) | (734 | ) | (1,079 | ) | (1,068 | ) | (897 | ) | ||||||||||||
| Fair value of plan assets-end of year | 18,792 | 16,268 | 14,639 | 19,000 | 18,792 | 16,268 | ||||||||||||||||||
| BENEFIT OBLIGATION IN EXCESS OF FAIR VALUE FUNDED STATUS: | $ | (1,522 | ) | $ | (6,901 | ) | $ | (6,594 | ) | $ | (5,299 | ) | $ | (1,522 | ) | $ | (6,901 | ) | ||||||
For the year ended December 31, 2014, the actuarial loss of 4.1 million was due to the decrease in the discount rate from 4.46% to 3.66% of $2.1 million and the change in the mortality assumption of $2.0 million. The mortality table was changed from the RP-2000 Annuitants and Non-Annuitants Mortality Tables for males and females projected with Scale AA to the valuation year with an additional 7 years and 15 years projected for Annuitants and Non-Annuitants, respectively to the Generational RP-2014 Separate Annuitant and Non-Annuitant Mortality Tables, projected with Scale MP-2014, for males and females.
Amounts recognized in the consolidated balance sheets consist of:
| At December 31, | ||||||||||||
| 2013 | 2012 | 2011 | ||||||||||
| Noncurrent liabilities | $ | (1,522 | ) | $ | (6,901 | ) | $ | (6,594 | ) | |||
| At December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| Noncurrent liabilities | $ | (5,299 | ) | $ | (1,522 | ) | $ | (6,901 | ) | |||
Amounts recognized in accumulated other comprehensive loss consist of:
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
| 2013 | 2012 | 2011 | 2014 | 2013 | 2012 | |||||||||||||||||||
| Accumulated loss | $ | (5,928 | ) | $ | (11,276 | ) | $ | (11,191 | ) | $ | (9,833 | ) | $ | (5,928 | ) | $ | (11,276 | ) | ||||||
| Deferred income taxes | 2,366 | 4,500 | 4,475 | 2,366 | 2,366 | 4,500 | ||||||||||||||||||
| Accumulated other comprehensive loss | $ | (3,562 | ) | $ | (6,776 | ) | $ | (6,716 | ) | $ | (7,467 | ) | $ | (3,562 | ) | $ | (6,776 | ) | ||||||
The accumulated benefit obligation was $20.3$24.3 million and $23.2$20.3 million at December 31, 20132014 and 2012,2013, respectively.
The following table provides the components of net periodic cost for the plan:
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
| 2013 | 2012 | 2011 | 2014 | 2013 | 2012 | |||||||||||||||||||
| COMPONENTS OF NET PERIODIC BENEFIT COST | COMPONENTS OF NET PERIODIC BENEFIT COST | |||||||||||||||||||||||
| Service cost | $ | 37 | $ | 35 | $ | 117 | $ | 23 | $ | 37 | $ | 35 | ||||||||||||
| Interest cost | 790 | 872 | 939 | 892 | 790 | 872 | ||||||||||||||||||
| Expected return on plan assets | (1,141 | ) | (1,021 | ) | (1,034 | ) | (1,287 | ) | (1,141 | ) | (1,021 | ) | ||||||||||||
| Recognized net actuarial loss | 955 | 1,056 | 742 | 513 | 955 | 1,056 | ||||||||||||||||||
| Net periodic benefit cost | $ | 641 | $ | 942 | $ | 764 | $ | 141 | $ | 641 | $ | 942 | ||||||||||||
The estimated net loss, transition obligation and prior service cost for the plan that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over the next year is $0.4$0.9 million.
Employee pension plan adjustments of $3.2$3.9 million for the year ended December 31, 20132014 includes $1.0$0.5 million of recognized actuarial losses reclassified from accumulated other comprehensive income.
The following tables present plan assets using the fair value hierarchy as of December 31, 20132014 and 2012.2013. The fair value hierarchy has three levels based on the reliability of inputs used to determine fair value. Level 1 refers to fair values determined based on quoted prices in active markets for identical assets. Level 2 refers to fair values estimated using observable prices that are based on inputs not quoted in active markets but observable by market data, while Level 3 includes the fair values estimated using significant non-observable inputs. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | |||||||||||||||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | Total | (Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||||||||||||||
| Equity securities | $ | 9,491 | $ | - | $ | - | $ | 9,491 | $ | 9,566 | $ | - | $ | - | $ | 9,566 | ||||||||||||||||
| Fixed income | 5,787 | - | - | 5,787 | 6,099 | - | - | 6,099 | ||||||||||||||||||||||||
| International equities | 3,484 | - | - | 3,484 | 3,328 | - | - | 3,328 | ||||||||||||||||||||||||
| Cash and equivalents | 30 | - | - | 30 | 7 | - | - | 7 | ||||||||||||||||||||||||
| Balance at December 31, 2013 | $ | 18,792 | $ | - | $ | - | $ | 18,792 | ||||||||||||||||||||||||
| Balance at December 31, 2014 | $ | 19,000 | $ | - | $ | - | $ | 19,000 | ||||||||||||||||||||||||
Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | |||||||||||||||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | Total | (Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||||||||||||||
| Equity securities | $ | 7,455 | $ | - | $ | - | $ | 7,455 | $ | 9,491 | $ | - | $ | - | $ | 9,491 | ||||||||||||||||
| Fixed income | 5,835 | - | - | 5,835 | 5,787 | - | - | 5,787 | ||||||||||||||||||||||||
| International equities | 2,957 | - | - | 2,957 | 3,484 | - | - | 3,484 | ||||||||||||||||||||||||
| Cash and equivalents | 21 | - | - | 21 | 30 | - | - | 30 | ||||||||||||||||||||||||
| Balance at December 31, 2012 | $ | 16,268 | $ | - | $ | - | $ | 16,268 | ||||||||||||||||||||||||
| Balance at December 31, 2013 | $ | 18,792 | $ | - | $ | - | $ | 18,792 | ||||||||||||||||||||||||
Fair value of total plan assets by major asset category as of December 31:
| 2014 | 2013 | 2012 | ||||||||||
| Equity securities | 50 | % | 51 | % | 46 | % | ||||||
| Fixed income | 32 | % | 31 | % | 36 | % | ||||||
| International equities | 18 | % | 18 | % | 18 | % | ||||||
| Cash and equivalents | 0 | % | 0 | % | 0 | % | ||||||
| Total | 100 | % | 100 | % | 100 | % | ||||||
| 2013 | 2012 | 2011 | ||||||||||
| Equity securities | 51 | % | 46 | % | 47 | % | ||||||
| Fixed income | 31 | % | 36 | % | 36 | % | ||||||
| International equities | 18 | % | 18 | % | 17 | % | ||||||
| Cash and equivalents | 0 | % | 0 | % | 0 | % | ||||||
| Total | 100 | % | 100 | % | 100 | % | ||||||
Weighted-average assumptions used to determine benefit obligations as of December 31:
| 2013 | 2012 | 2011 | 2014 | 2013 | 2012 | |||||||||||||||||||
| Discount rate | 4.46 | % | 3.55 | % | 4.10 | % | 3.66 | % | 4.46 | % | 3.55 | % | ||||||||||||
| Rate of compensation increase | 2.00 | % | 1.75 | % | 4.00 | % | 6.75 | % | 2.00 | % | 1.75 | % | ||||||||||||
Weighted-average assumptions used to determine net periodic pension cost for years ended December 31:
| 2013 | 2012 | 2011 | 2014 | 2013 | 2012 | |||||||||||||||||||
| Discount rate | 3.55 | % | 4.10 | % | 5.18 | % | 4.46 | % | 3.55 | % | 4.10 | % | ||||||||||||
| Rate of compensation increase | 2.00 | % | 4.00 | % | 4.00 | % | 1.13 | % | 2.00 | % | 4.00 | % | ||||||||||||
| Long-term rate of return | 7.00 | % | 7.00 | % | 7.00 | % | 7.00 | % | 7.00 | % | 7.00 | % | ||||||||||||
As this plan was frozen to non-union employees on December 31, 1994, the difference between the projected benefit obligation and accumulated benefit obligation is not significant in any year.
The Company invests plan assets based on a total return on investment approach, pursuant to which the plan assets include a diversified blend of equity and fixed income investments toward a goal of maximizing the long-term rate of return without assuming an unreasonable level of investment risk. The Company determines the level of risk based on an analysis of plan liabilities, the extent to which the value of the plan assets satisfies the plan liabilities and the plan's financial condition. The investment policy includes target allocations ranging from 30% to 70% for equity investments, 20% to 60% for fixed income investments and 0% to 10% for cash equivalents. The equity portion of the plan assets represents growth and value stocks of small, medium and large companies. The Company measures and monitors the investment risk of the plan assets both on a quarterly basis and annually when the Company assesses plan liabilities.
The Company uses a building block approach to estimate the long-term rate of return on plan assets. This approach is based on the capital markets assumption that the greater the volatility, the greater the return over the long term. An analysis of the historical performance of equity and fixed income investments, together with current market factors such as the inflation and interest rates, are used to help make the assumptions necessary to estimate a long-term rate of return on plan assets. Once this estimate is made, the Company reviews the portfolio of plan assets and makes adjustments thereto that the Company believes are necessary to reflect a diversified blend of equity and fixed income investments that is capable of achieving the estimated long-term rate of return without assuming an unreasonable level of investment risk. The Company also compares the portfolio of plan assets to those of other pension plans to help assess the suitability and appropriateness of the plan's investments.
The Company expectsdoes not expect to make $0.3 million in contributions to the plan in 2014.2015. However after considering the funded status of the plan, movements in the discount rate, investment performance and related tax consequences, the Company may choose to make additional contributions to the plan in any given year.
The total amount of the Company’s contributions paid under its pension plan was $0.3 million and $0.7 million for each of the years ended December 31, 2014 and 2013, and 2012.respectively.
Information about the expected benefit payments for the plan is as follows:
Year Ending December 31, | ||||||||
| 2014 | $ | 1,041 | ||||||
| 2015 | 1,127 | $ | 1,132 | |||||
| 2016 | 1,196 | 1,187 | ||||||
| 2017 | 1,275 | 1,269 | ||||||
| 2018 | 1,330 | 1,360 | ||||||
| Years 2019-2023 | 6,911 | |||||||
| 2019 | 1,390 | |||||||
| Years 2020-2024 | 7,129 | |||||||
The Company has a 401(k) defined contribution plan for all eligible employees. Employees may contribute up to 25% of their compensation into the plan. The Company will contribute an additional 30% of the employee's contributed amount up to 6% of compensation. For the years ended December 31, 2014, 2013 2012 and 2011,2012, the Company's expense for the 401(k) plan amounted to $1.6 million, $1.9 million $2.0 million and $2.3$2.0 million, respectively.
| INCOME TAXES |
Components of the provision for income taxes from continuing operations were as follows:
| Year Ended December 31, | ||||||||||||
| 2013 | 2012 | 2011 | ||||||||||
| Current: | ||||||||||||
| Federal | $ | (7,369 | ) | $ | 9,273 | $ | 7,099 | |||||
| State | 709 | 2,164 | 2,754 | |||||||||
| Total | (6,660 | ) | 11,437 | 9,853 | ||||||||
| Deferred: | ||||||||||||
| Federal | 21,103 | (11,394 | ) | 3,312 | ||||||||
| State | 5,148 | (2,834 | ) | (112 | ) | |||||||
| Total | 26,251 | (14,228 | ) | 3,200 | ||||||||
| Total provision (benefit) | $ | 19,591 | $ | (2,791 | ) | $ | 13,053 | |||||
The components of the deferred tax assets are as follows:
| At December 31, | At December 31, | |||||||||||||||
| 2013 | 2012 | 2014 | 2013 | |||||||||||||
| Deferred tax assets | ||||||||||||||||
| Current: | ||||||||||||||||
| Accrued vacation | $ | 79 | $ | 60 | $ | - | $ | 79 | ||||||||
| Net operating loss carryforwards | - | 586 | ||||||||||||||
| Allowance for bad debts | 5,502 | 7,083 | 5,527 | 5,502 | ||||||||||||
| Total current deferred tax assets | 5,581 | 7,729 | 5,527 | 5,581 | ||||||||||||
| Deferred tax assets | ||||||||||||||||
| Noncurrent: | ||||||||||||||||
| Allowance for bad debts | 392 | 430 | 399 | 392 | ||||||||||||
| Accrued rent | 3,669 | 3,785 | 3,255 | 3,669 | ||||||||||||
| Stock-based compensation | 1,509 | 2,095 | 907 | 1,509 | ||||||||||||
| Depreciation | 10,670 | 5,953 | 15,754 | 10,670 | ||||||||||||
| Goodwill | 1,002 | - | ||||||||||||||
| Other intangibles | 434 | 547 | 452 | 434 | ||||||||||||
| Pension plan liabilities | 608 | 2,754 | 2,115 | 608 | ||||||||||||
| Net operating loss carryforwards | 6,285 | 1,553 | 14,332 | 6,285 | ||||||||||||
| Sale leaseback-deferred gain | 2,531 | 2,482 | 2,580 | 2,531 | ||||||||||||
| AMT credit | 424 | - | 424 | 424 | ||||||||||||
| Other | - | 77 | ||||||||||||||
| Total noncurrent deferred tax assets | 26,522 | 19,676 | 41,220 | 26,522 | ||||||||||||
| Total deferred tax assets | 32,103 | 27,405 | 46,747 | 32,103 | ||||||||||||
| Less valuation allowance | (31,679 | ) | - | (46,747 | ) | (31,679 | ) | |||||||||
| Deferred tax assets, net of valuation allowance | 424 | 27,405 | - | 424 | ||||||||||||
| Deferred tax liabilities | ||||||||||||||||
| Noncurrent: | ||||||||||||||||
| Goodwill | (4,952 | ) | (2,611 | ) | - | (4,952 | ) | |||||||||
| Total deferred tax liabilities | (4,952 | ) | (2,611 | ) | - | (4,952 | ) | |||||||||
| Total net noncurrent deferred tax (liabilities) assets | (4,528 | ) | 17,065 | - | (4,528 | ) | ||||||||||
| Total net deferred tax (liabilities) assets | $ | (4,528 | ) | $ | 24,794 | $ | - | $ | (4,528 | ) | ||||||
Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A significant piece of objective negative evidence was the cumulative losses incurred by the Company in recent years.
On the basis of this evaluation the Company believes it is not more likely than not that it will realize its net deferred tax assets. As a result, as of December 31, 2014 and 2013, the Company has recorded a valuation allowance of $46.7 million and $31.7 million, ($7.1 million from discontinued operations)respectively, against its net deferred tax assets, excluding the indefinite life assets which generated a deferred tax liability.
The difference between the actual tax provision and the tax provision that would result from the use of the Federal statutory rate is as follows:
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||
| 2013 | 2012 | 2011 | 2014 | 2013 | 2012 | |||||||||||||||||||||||||||||||||||||||||||
| (Loss) income from continuing operations before taxes | $ | (14,169 | ) | $ | (18,475 | ) | $ | 30,609 | ||||||||||||||||||||||||||||||||||||||||
| Loss from continuing operations before taxes | $ | (53,712 | ) | $ | (11,534 | ) | $ | (17,201 | ) | |||||||||||||||||||||||||||||||||||||||
| Expected tax (benefit) expense | $ | (4,959 | ) | 35.0 | % | $ | (6,466 | ) | 35.0 | % | $ | 10,713 | 35.0 | % | ||||||||||||||||||||||||||||||||||
| State tax expense (benefit) (net of federal) | (221 | ) | 1.6 | (436 | ) | 2.4 | 1,717 | 5.6 | ||||||||||||||||||||||||||||||||||||||||
| Expected tax benefit | $ | (18,799 | ) | 35.0 | % | $ | (4,037 | ) | 35.0 | % | $ | (6,020 | ) | 35.0 | % | |||||||||||||||||||||||||||||||||
| State tax benefit (net of federal) | (1,494 | ) | 2.8 | (92 | ) | 0.8 | (395 | ) | 2.3 | |||||||||||||||||||||||||||||||||||||||
| Permanent impairment | - | - | 3,588 | (19.4 | ) | 109 | 0.4 | 6,539 | (12.2 | ) | - | - | 3,588 | (20.9 | ) | |||||||||||||||||||||||||||||||||
| Valuation allowance | 24,541 | (173.2 | ) | - | - | - | - | 9,344 | (17.4 | ) | 23,490 | (203.7 | ) | - | - | |||||||||||||||||||||||||||||||||
| Other | 230 | (1.7 | ) | 523 | (2.9 | ) | 514 | 1.6 | 185 | (0.3 | ) | 230 | (2.0 | ) | 545 | (3.2 | ) | |||||||||||||||||||||||||||||||
| Total | $ | 19,591 | -138.3 | % | $ | (2,791 | ) | 15.1 | % | $ | 13,053 | 42.6 | % | $ | (4,225 | ) | 7.9 | % | $ | 19,591 | -169.9 | % | $ | (2,282 | ) | 13.2 | % | |||||||||||||||||||||
As of December 31, 2014 and 2013, 2012, the Company has NOL carryforwards of $12.3$32.3 million and $6.1$12.3 million, respectively, which, if unused, will expire beginning in years 2027.2027 and ending in 2034. Of these NOLs, $7.8 million and $6.1$7.8 million are limited in the amount that can be utilized in a given year due to a Section 382 limitation for December 31, 20132014 and 2012,2013, respectively.
The following table summarizes the activity related to the Company’s uncertain tax positions:
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
| 2013 | 2012 | 2011 | 2014 | 2013 | 2012 | |||||||||||||||||||
| Balance at January 1, | $ | 135 | $ | 100 | $ | 100 | $ | - | $ | 135 | $ | 100 | ||||||||||||
| Decrease for tax positions of prior years | (135 | ) | (100 | ) | - | (135 | ) | (100 | ) | |||||||||||||||
| Increase for tax positions of current year | - | 135 | - | - | - | 135 | ||||||||||||||||||
| Balance at December 31, | $ | - | $ | 135 | $ | 100 | $ | - | $ | - | $ | 135 | ||||||||||||
As of December 31, 2014 and 2013, the Company no longer has any liability for uncertain tax positions. Included in the balance of unrecognized tax benefits at December 31, 2012 and 2011 areis an unrecognized tax benefits of $0.1 million, respectively, of which $0.1 million would be reflected as an adjustment to income tax expense if recognized.million.
The Company recognizes accrued interest and penalties related to uncertain tax positions in income tax expense. During the years ended December 31, 2012, and 2011, the interest and penalties expense associated with uncertain tax positions are not significant to its results of operations or financial position.
The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states. The Company is no longer subject to U.S. federal income tax examinations for years before 20092010 and generally, is no longer subject to state and local income tax examinations by tax authorities for years before 2008.2009.
| SEGMENT REPORTING |
Each of the Company’s schools is a reporting unit and an operating segment. The Company’s operating segments have been aggregated into one reportable segment because, in the Company’s judgment, the reporting units have similar products, production processes, types of customers, methods of distribution, regulatory environment and economic characteristics.
| COMMITMENTS AND CONTINGENCIES |
Lease Commitments—The Company leases office premises, educational facilities and various equipment for varying periods through the year 2032 at basic annual rentals (excluding taxes, insurance, and other expenses under certain leases) as follows:
| Year Ending December 31, | Finance Obligation | Operating Leases | Capital Leases | Finance Obligation | Operating Leases | Capital Leases | ||||||||||||||||||
| 2014 | $ | 1,546 | $ | 21,223 | $ | 2,494 | ||||||||||||||||||
| 2015 | 1,546 | 19,429 | 2,494 | $ | 1,564 | $ | 19,666 | $ | 2,494 | |||||||||||||||
| 2016 | 1,546 | 15,680 | 2,556 | 1,564 | 15,892 | 2,556 | ||||||||||||||||||
| 2017 | - | 14,628 | 2,678 | - | 14,843 | 2,678 | ||||||||||||||||||
| 2018 | - | 13,644 | 2,678 | - | 14,028 | 2,678 | ||||||||||||||||||
| 2019 | - | 12,077 | 2,678 | |||||||||||||||||||||
| Thereafter | - | 34,913 | 37,137 | - | 23,760 | 34,460 | ||||||||||||||||||
| 4,638 | 119,517 | 50,037 | 3,128 | 100,266 | 47,544 | |||||||||||||||||||
| Less amount representing interest | (4,638 | ) | - | (24,094 | ) | (3,128 | ) | - | (22,035 | ) | ||||||||||||||
| $ | - | $ | 119,517 | $ | 25,943 | $ | - | $ | 100,266 | $ | 25,509 | |||||||||||||
On December 28, 2001, the Company completed a sale and a leaseback of four owned facilities to a third party for net proceeds of approximately $8.8 million. The initial term of the lease is 15 years with two ten-year extensions. The lease is an operating lease that starts at $1.2 million in the first year and increases annually by the consumer price index. The lease includes an option near the end of the initial lease term to purchase the facilities at fair value, as defined. The net proceeds received have been reflected in the consolidated balance sheet as a finance obligation. The lease payments are included as a component of interest expense.
Rent expense, included in operating expenses in the accompanying consolidated statements of operations for the three years ended December 31, 2014, 2013 and 2012 is $20.5 million, $21.1 million and 2011 is $21.9$21.3 million, respectively. Interest expense related to the financing obligation in the accompanying statements of operations for the years ended December 31, 2014, 2013 and 2012 is $1.6 million, $1.5 million, and 2011 is $1.5 million respectively.
Litigation and Regulatory Matters— Matters—In the ordinary conduct of our business, the Company iswe are subject to periodic lawsuits, investigations and claims, including, but not limited to, claims involving students or graduates and routine employment matters. Although the Companywe cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against it, the Company doesus, we do not believe that any currently pending legal proceeding to which it iswe are a party will have a material effect on our business, financial condition, results of operations or cash flows.
On November 21, 2012, the Companywe received a Civil Investigation Demand from the Attorney General of the Commonwealth of Massachusetts relating to their investigation of whether the Companywe and certain of itsour academic institutions have complied with certain Massachusetts state consumer protection and finance laws. On July 29, 2013 and January 17, 2014, the Companywe received follow-up Civil Investigative Demands. Pursuant to the Civil Investigative Demands, the Attorney General has requested from the Companyus and certain of itsour academic institutions documents and detailed information from the time period January 1, 2008 to the present. The Company has responded to these requeststhis request and intends to continue cooperating with the Attorney General’s Office.
In accordance with applicable accounting guidance, the Company establishes a loss contingency for litigation and regulatory matters when those matters present loss contingencies that are both probable and estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. A loss contingency in the amount of $1.0 million was established for the year ended December 31, 2014. The Company continues to monitor the matter for further developments that could affect the amount of the liability that has been established.
Student Loans—At December 31, 2013,2014, the Company had outstanding net loan commitments to its students to assist them in financing their education of approximately $26.5$24.1 million.
Vendor Relationship—TheThe Company is party to two agreementsan agreement with Matco Tools (“Matco”) which expire on July 31, 2017. The Company has agreed to grant Matco exclusive access to the 12 campuses and its students and instructors. This exclusivity includes but is not limited to, all other tool manufacturers and/or tool distributors, by whatever means, during the term of the agreement. Under the agreement, the Company will be provided on an advance commission basis, credits in branded tools, tools storage, equipment, and diagnostics products over the term of the contract.
The Company is party to an agreement with Snap-on Industrial (“Snap-on”) which expire on June 30, 2014 and December 31, 2014.2015. The Company has agreed to grant Snap-on exclusive rights to certainone automotive campusescampus to display advertising and supply certain tools with the exception of one pre-existing vendor contract.tools. The Company earns credits that are redeemable for certain tools and equipment based on the sales to students and to the Company.
Executive Employment Agreements—The Company entered into employment contracts with key executives that provide for continued salary payments if the executives are terminated for reasons other than cause, as defined in the agreements. The future employment contract commitments for such employees were approximately $8.9$5.0 million at December 31, 2013.2014.
Change in Control Agreements—In the event of a change of control several key executives will receive continued salary payments based on their employment agreements.
Surety Bonds—Each of the Company’s campuses must be authorized by the applicable state education agency in which the campus is located to operate and to grant degrees, diplomas or certificates to its students. The campuses are subject to extensive, ongoing regulation by each of these states. In addition, our campuses are required to be authorized by the applicable state education agencies of certain other states in which our campuses recruit students. The Company is required to post surety bonds on behalf of our campuses and education representatives with multiple states to maintain authorization to conduct our business. At December 31, 2013,2014, the Company has posted surety bonds in the total amount of approximately $16.9$15.1 million.
| UNAUDITED QUARTERLY FINANCIAL INFORMATION |
Quarterly financial information for 20132014 and 20122013 is as follows:
| Quarter | Quarter | |||||||||||||||||||||||||||||||
| 2013 | First | Second | Third | Fourth | ||||||||||||||||||||||||||||
| 2014 | First | Second | Third (1) | Fourth (2) | ||||||||||||||||||||||||||||
| Revenue | $ | 86,270 | $ | 81,751 | $ | 88,527 | $ | 88,475 | $ | 79,202 | $ | 76,389 | $ | 83,982 | $ | 85,449 | ||||||||||||||||
| (Loss) income from continuing operations | (5,282 | ) | (6,688 | ) | 77 | (21,866 | ) | (10,291 | ) | (10,944 | ) | (35,364 | ) | 7,112 | ||||||||||||||||||
| Loss from discontinued operations | (2,205 | ) | (2,690 | ) | (2,353 | ) | (10,279 | ) | (803 | ) | (652 | ) | (2,717 | ) | (2,474 | ) | ||||||||||||||||
| Net loss | (7,487 | ) | (9,378 | ) | (2,276 | ) | (32,145 | ) | ||||||||||||||||||||||||
| Net (loss) income | (11,094 | ) | (11,596 | ) | (38,081 | ) | 4,638 | |||||||||||||||||||||||||
| Basic | ||||||||||||||||||||||||||||||||
| (Loss) earnings per share from continuing operations | $ | (0.24 | ) | $ | (0.30 | ) | $ | 0.00 | $ | (0.97 | ) | $ | (0.45 | ) | $ | (0.48 | ) | $ | (1.55 | ) | $ | 0.31 | ||||||||||
| Loss per share from discontinued operations | (0.10 | ) | (0.12 | ) | (0.10 | ) | (0.45 | ) | (0.04 | ) | (0.03 | ) | (0.12 | ) | (0.11 | ) | ||||||||||||||||
| Net loss per share | $ | (0.33 | ) | $ | (0.42 | ) | $ | (0.10 | ) | $ | (1.42 | ) | ||||||||||||||||||||
| Net (loss) earnings per share | $ | (0.49 | ) | $ | (0.51 | ) | $ | (1.67 | ) | $ | 0.20 | |||||||||||||||||||||
| Diluted | ||||||||||||||||||||||||||||||||
| (Loss) earnings per share from continuing operations | $ | (0.24 | ) | $ | (0.30 | ) | $ | 0.00 | $ | (0.97 | ) | $ | (0.45 | ) | $ | (0.48 | ) | $ | (1.55 | ) | $ | 0.31 | ||||||||||
| Loss per share from discontinued operations | (0.10 | ) | (0.12 | ) | (0.10 | ) | (0.45 | ) | (0.04 | ) | (0.03 | ) | (0.12 | ) | (0.11 | ) | ||||||||||||||||
| Net loss per share | $ | (0.33 | ) | $ | (0.42 | ) | $ | (0.10 | ) | $ | (1.42 | ) | ||||||||||||||||||||
| Net (loss) earnings per share | $ | (0.49 | ) | $ | (0.51 | ) | $ | (1.67 | ) | $ | 0.20 | |||||||||||||||||||||
| Weighted average number of common shares outstanding: | ||||||||||||||||||||||||||||||||
| Basic | 22,414 | 22,497 | 22,528 | 22,618 | 22,723 | 22,800 | 22,843 | 22,888 | ||||||||||||||||||||||||
| Diluted | 22,414 | 22,497 | 22,811 | 22,618 | 22,723 | 22,800 | 22,843 | 23,004 | ||||||||||||||||||||||||
| Quarter | ||||||||||||||||
| 2012 | First | Second | Third | Fourth | ||||||||||||
| Revenue | $ | 96,242 | $ | 91,867 | $ | 97,704 | $ | 96,962 | ||||||||
| (Loss) income from continuing operations | (1,571 | ) | (11,064 | ) | 2,284 | (5,334 | ) | |||||||||
| Loss from discontinued operations | (1,484 | ) | (9,644 | ) | (3,768 | ) | (6,605 | ) | ||||||||
| Net loss | (3,055 | ) | (20,708 | ) | (1,484 | ) | (11,939 | ) | ||||||||
| Basic | ||||||||||||||||
| (Loss) earnings per share from continuing operations | $ | (0.07 | ) | $ | (0.50 | ) | $ | 0.10 | $ | (0.24 | ) | |||||
| Loss per share from discontinued operations | (0.07 | ) | (0.43 | ) | (0.17 | ) | (0.30 | ) | ||||||||
| Net loss per share | $ | (0.14 | ) | $ | (0.93 | ) | $ | (0.07 | ) | $ | (0.54 | ) | ||||
| Diluted | ||||||||||||||||
| (Loss) earnings per share from continuing operations | $ | (0.07 | ) | $ | (0.50 | ) | $ | 0.10 | $ | (0.24 | ) | |||||
| Loss per share from discontinued operations | (0.07 | ) | (0.43 | ) | (0.17 | ) | (0.30 | ) | ||||||||
| Net loss per share | $ | (0.14 | ) | $ | (0.93 | ) | $ | (0.07 | ) | $ | (0.54 | ) | ||||
| Weighted average number of common shares outstanding: | ||||||||||||||||
| Basic | 22,137 | 22,183 | 22,195 | 22,266 | ||||||||||||
| Diluted | 22,137 | 22,183 | 22,281 | 22,266 | ||||||||||||
| (1) | Includes impairment of goodwill and long-lived assets from continuing operations of $39.3 million. |
| (2) | Includes impairment of long-lived assets from continuing operations of $1.5 million. |
| Quarter | ||||||||||||||||
| 2013 | First | Second | Third | Fourth | ||||||||||||
| Revenue | $ | 85,387 | $ | 80,943 | $ | 87,740 | $ | 87,441 | ||||||||
| (Loss) income from continuing operations | (4,884 | ) | (6,280 | ) | 564 | (20,525 | ) | |||||||||
| Loss from discontinued operations | (2,603 | ) | (3,098 | ) | (2,840 | ) | (11,620 | ) | ||||||||
| Net loss | (7,487 | ) | (9,378 | ) | (2,276 | ) | (32,145 | ) | ||||||||
| Basic | ||||||||||||||||
| (Loss) earnings per share from continuing operations | $ | (0.22 | ) | $ | (0.28 | ) | $ | 0.03 | $ | (0.91 | ) | |||||
| Loss per share from discontinued operations | (0.11 | ) | (0.14 | ) | (0.13 | ) | (0.51 | ) | ||||||||
| Net loss per share | $ | (0.33 | ) | $ | (0.42 | ) | $ | (0.10 | ) | $ | (1.42 | ) | ||||
| Diluted | ||||||||||||||||
| (Loss) earnings per share from continuing operations | $ | (0.22 | ) | $ | (0.28 | ) | $ | 0.02 | $ | (0.91 | ) | |||||
| Loss per share from discontinued operations | (0.11 | ) | (0.14 | ) | (0.12 | ) | (0.51 | ) | ||||||||
| Net loss per share | $ | (0.33 | ) | $ | (0.42 | ) | $ | (0.10 | ) | $ | (1.42 | ) | ||||
| Weighted average number of common shares outstanding: | ||||||||||||||||
| Basic | 22,414 | 22,497 | 22,528 | 22,618 | ||||||||||||
| Diluted | 22,414 | 22,497 | 22,811 | 22,618 | ||||||||||||
| 15. | DIVIDENDS |
During 2014, 2013 2012 and 2011,2012, the Board of Directors declared cash dividends of $0.28,$0.18, $0.28 and $0.07$0.28 per share of common stock outstanding, respectively. InOn February 2014, the27, 2015, our Board of Directors declared adiscontinued the quarterly cash dividend of $0.07 per share of common stock outstanding, which will be paid on March 31, 2014 to shareholders of record on March 14, 2014. The establishment of future record and payment dates is subject to the final determination of the Company’sdividend.
| 16. | SUBSEQUENT EVENT |
On February 27, 2015, our Board of Directors.Directors approved a plan to cease operations at the Fern Park, Florida school which is scheduled to close in the first quarter of 2016.
LINCOLN EDUCATIONAL SERVICES CORPORATION
(in thousands, continuing and discontinued operations)
| Description | Balance at Beginning of Period | Charged to Expense | Accounts Written-off | Balance at End of Period | ||||||||||||
| Allowance accounts for the year ended: | ||||||||||||||||
| December 31, 2014 | ||||||||||||||||
| Student receivable allowance | $ | 14,769 | $ | 15,500 | $ | (15,420 | ) | $ | 14,849 | |||||||
| December 31, 2013 | ||||||||||||||||
| Student receivable allowance | $ | 18,829 | $ | 15,532 | $ | (19,592 | ) | $ | 14,769 | |||||||
| December 31, 2012 | ||||||||||||||||
| Student receivable allowance | $ | 21,858 | $ | 21,056 | $ | (24,085 | ) | $ | 18,829 | |||||||
| Description | Balance at Beginning of Period | Charged to Expense | Accounts Written-off | Balance at End of Period | ||||||||||||
| Allowance accounts for the year ended: | ||||||||||||||||
| December 31, 2013 Student receivable allowance | $ | 18,829 | $ | 15,532 | $ | (19,592 | ) | $ | 14,769 | |||||||
| December 31, 2012 Student receivable allowance | $ | 21,858 | $ | 21,056 | $ | (24,085 | ) | $ | 18,829 | |||||||
| December 31, 2011 Student receivable allowance | $ | 26,993 | $ | 30,553 | $ | (35,688 | ) | $ | 21,858 | |||||||
F-33