U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
- -------------------------------------------------------------------------------- Form 10-Q
(Mark
(Mark One)
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|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2005 |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 - -------------------------------------------------------------------------------- Commission File Number 000-51371
- -------------------------------------------------------------------------------- LINCOLN EDUCATIONAL SERVICES CORPORATION
(Exact
(Exact name of registrant as specified in its charter)
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New Jersey 57-1150621
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
200 Executive Drive, Suite 340
West Orange, NJ 07052(Address
(Address of principal executive offices)
(973) 736-9340(Registrant’s
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes o|X| No ý
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes o|_| No ý
|X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
As of August 10,November 9, 2005, there were 25,052,86225,154,390 shares of the registrant’sregistrant's common
stock outstanding.
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INDEX TO FORM 10-Q
FOR THE QUARTER ENDING JUNESEPTEMBER 30, 2005
PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
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Condensed Consolidated Balance Sheets at September 30, 2005 and
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December 31, 2004 (unaudited)
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Condensed Consolidated Statements of Income for the three and nine
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months ended September 30, 2005 and 2004 (unaudited)
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Condensed Consolidated Statements of Changes in Stockholders' Equity
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for the nine months ended September 30, 2005 (unaudited)
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Condensed Consolidated Statement of Cash Flows for the nine months
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ended September 30, 2005 and 2004 (unaudited)
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Notes to Unaudited Condensed Consolidated Financial Statements
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
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of Operations
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
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Item 4. Controls and Procedures
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PART II. OTHER INFORMATION
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Item 1. Legal Proceedings
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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Item 6. Exhibits
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2
–- FINANCIAL INFORMATION
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 and JUNE 30, 2005(In
(In thousands, except share amounts)
(Unaudited)
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| December 31, |
| June 30, |
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| 2004 |
| 2005 |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
| $ | 41,445 |
| $ | 30,122 |
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Accounts receivable, less allowance of $7,023 and $7,488 at December 31, 2004 and June 30, 2005, respectively |
| 12,820 |
| 12,469 |
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Inventories |
| 1,664 |
| 1,644 |
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Assets held for sale |
| 893 |
| 893 |
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Deferred income taxes |
| 4,509 |
| 4,661 |
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Prepaid expenses and other current assets |
| 2,893 |
| 3,170 |
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Prepaid income taxes |
| — |
| 2,208 |
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Other accounts receivable |
| — |
| 1,148 |
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Total current assets |
| 64,224 |
| 56,315 |
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PROPERTY, EQUIPMENT AND FACILITIES—At cost, net of accumulated depreciation and amortization |
| 55,149 |
| 56,967 |
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OTHER ASSETS: |
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Deferred finance charges |
| 943 |
| 1,316 |
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Prepaid pension cost |
| 4,820 |
| 4,841 |
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Deferred income taxes |
| 2,166 |
| 2,209 |
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Goodwill |
| 32,802 |
| 51,347 |
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Other assets |
| 2,625 |
| 3,684 |
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Total other assets |
| 43,356 |
| 63,397 |
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TOTAL |
| $ | 162,729 |
| $ | 176,679 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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CURRENT LIABILITIES: |
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Current portion of long-term debt and lease obligations |
| $ | 5,311 |
| $ | 317 |
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Unearned tuition |
| 31,185 |
| 24,091 |
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Accounts payable |
| 10,664 |
| 12,178 |
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Accrued expenses |
| 12,147 |
| 11,713 |
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Advance payments of federal funds |
| 330 |
| 381 |
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Income taxes payable |
| 17 |
| — |
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Total current liabilities |
| 59,654 |
| 48,680 |
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COMMITMENTS AND CONTINGENCIES |
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NONCURRENT LIABILITIES |
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Other long-term liabilities |
| 3,471 |
| 4,192 |
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Long-term debt and lease obligations, net of current portion |
| 41,518 |
| 10,605 |
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Total liabilities |
| 104,643 |
| 63,477 |
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STOCKHOLDERS’ EQUITY: |
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Preferred stock, no par value—0 shares authorized, issued and outstanding at December 31, 2004 and 10,000,000 shares authorized, 0 shares issued and outstanding at June 30, 2005 |
| — |
| — |
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Common stock, no par value—authorized 50,000,000 shares at December 31, 2004 and 100,000,000 shares authorized at June 30, 2005, issued and outstanding 21,698,785 shares at December 31, 2004 and 24,834,937 shares at June 30, 2005 |
| 62,482 |
| 115,856 |
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Additional paid-in capital |
| 3,262 |
| 4,009 |
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Accumulated deficit |
| (7,477 | ) | (6,663 | ) | ||
Less loan receivable from stockholders |
| (181 | ) | — |
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Total stockholders’ equity |
| 58,086 |
| 113,202 |
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TOTAL |
| $ | 162,729 |
| $ | 176,679 |
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1
3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2005(In
(In thousands, except per share amounts)
(Unaudited)
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| Three Months Ended June 30, |
| Six Months Ended June 30, |
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| 2004 |
| 2005 |
| 2004 |
| 2005 |
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REVENUES |
| $ | 59,206 |
| $ | 68,236 |
| $ | 118,780 |
| $ | 139,105 |
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COSTS AND EXPENSES: |
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Educational services and facilities |
| 24,231 |
| 29,559 |
| 48,394 |
| 58,643 |
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Selling, general and administrative |
| 32,533 |
| 37,865 |
| 64,312 |
| 77,149 |
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Loss on sale of assets |
| 323 |
| — |
| 323 |
| — |
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Total costs and expenses |
| 57,087 |
| 67,424 |
| 113,029 |
| 135,792 |
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OPERATING INCOME |
| 2,119 |
| 812 |
| 5,751 |
| 3,313 |
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INTEREST INCOME |
| 21 |
| 22 |
| 34 |
| 30 |
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INTEREST EXPENSE |
| (710 | ) | (763 | ) | (1,552 | ) | (1,957 | ) | ||||
INCOME BEFORE INCOME TAXES |
| 1,430 |
| 71 |
| 4,233 |
| 1,386 |
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PROVISION FOR INCOME TAXES |
| 570 |
| 29 |
| 1,755 |
| 572 |
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NET INCOME |
| $ | 860 |
| $ | 42 |
| $ | 2,478 |
| $ | 814 |
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Earnings per share—basic: |
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Net income available to common shareholders |
| $ | 0.04 |
| $ | 0.00 |
| $ | 0.11 |
| $ | 0.04 |
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Earnings per share—diluted: |
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Net income available to common shareholders |
| $ | 0.04 |
| $ | 0.00 |
| $ | 0.11 |
| $ | 0.04 |
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Weighted average number of common share outstanding: |
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Basic |
| 21,670 |
| 21,950 |
| 21,669 |
| 21,825 |
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Diluted |
| 23,257 |
| 23,077 |
| 23,147 |
| 23,021 |
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4
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2005(In
(In thousands)
(Unaudited)
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| Common |
| Additional |
| Loan |
| Accumulated |
| Total |
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BALANCE—December 31, 2004 |
| $ | 62,482 |
| $ | 3,262 |
| $ | (181 | ) | $ | (7,477 | ) | $ | 58,086 |
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Net income |
| — |
| — |
| — |
| 814 |
| 814 |
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Issuance of common stock, net of issuance expenses |
| 53,118 |
| — |
| — |
| — |
| 53,118 |
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Stock-based compensation expense |
| — |
| 708 |
| — |
| — |
| 708 |
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Stockholders loan repayment |
| — |
| — |
| 181 |
| — |
| 181 |
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Tax benefit of options exercised |
| — |
| 39 |
| — |
| — |
| 39 |
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Exercise of stock options |
| 256 |
| — |
| — |
| — |
| 256 |
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BALANCE—June 30, 2005 |
| $ | 115,856 |
| $ | 4,009 |
| $ | — |
| $ | (6,663 | ) | $ | 113,202 |
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5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSSIX MONTHS ENDED JUNE 30, 2004 AND 2005(In
(In thousands, except share amounts)
(Unaudited)
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| June 30, |
| June 30, |
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| 2004 |
| 2005 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income |
| $ | 2,478 |
| $ | 814 |
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Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
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Depreciation and amortization |
| 5,124 |
| 6,134 |
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Amortization of deferred finance charges |
| 191 |
| 95 |
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Write-off of deferred finance costs |
| — |
| 365 |
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Deferred income taxes |
| 106 |
| (195 | ) | ||
Loss on sale of assets |
| 323 |
| — |
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Provision for doubtful accounts |
| 3,899 |
| 4,730 |
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Stock-based compensation expense |
| 1,243 |
| 708 |
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Tax benefit associated with exercise of stock options |
| — |
| 39 |
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(Increase) decrease in assets, net of acquisitions: |
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Accounts receivable |
| (4,140 | ) | (3,637 | ) | ||
Inventories |
| (105 | ) | 20 |
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Prepaid expenses and current assets |
| 363 |
| (362 | ) | ||
Other assets |
| 1,260 |
| 608 |
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Increase (decrease) in liabilities, net of acquisitions: |
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Accounts payable |
| 4,384 |
| 1,343 |
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Other liabilities |
| 299 |
| 772 |
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Income taxes payable/prepaid |
| (7,619 | ) | (2,225 | ) | ||
Accrued expenses |
| (284 | ) | (962 | ) | ||
Unearned tuition |
| (4,173 | ) | (9,942 | ) | ||
Total adjustments |
| 871 |
| (2,509 | ) | ||
Net cash provided by (used in) operating activities |
| 3,349 |
| (1,695 | ) | ||
CASH FLOWS FROM INVESTING ACTIVITIES: |
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Capital expenditures |
| (12,835 | ) | (6,566 | ) | ||
Acquisition of a business, net of cash acquired |
| (14,341 | ) | (19,877 | ) | ||
Net cash used in investing activities |
| (27,176 | ) | (26,443 | ) | ||
CASH FLOWS FROM FINANCING ACTIVITIES: |
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Proceeds from borrowings |
| 312 |
| 31,000 |
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Payments on borrowings |
| (3,000 | ) | (66,750 | ) | ||
Payments of deferred finance fees |
| — |
| (833 | ) | ||
Proceeds from exercise of stock options |
| 8 |
| 256 |
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Principal payments under capital lease obligations |
| (540 | ) | (157 | ) | ||
Proceeds from shareholder loans |
| 245 |
| 181 |
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Proceeds from issuance of common stock, net of issuance costs of $6,882 |
| — |
| 53,118 |
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Net cash provided by (used in) financing activities |
| (2,975 | ) | 16,815 |
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NET DECREASE IN CASH AND CASH EQUIVALENTS |
| (26,802 | ) | (11,323 | ) | ||
CASH AND CASH EQUIVALENTS—Beginning of period |
| 48,965 |
| 41,445 |
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CASH AND CASH EQUIVALENTS—End of period |
| $ | 22,163 |
| $ | 30,122 |
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
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Cash paid during the period for: |
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Interest |
| $ | 1,349 |
| $ | 1,573 |
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Income taxes |
| $ | 9,269 |
| $ | 2,949 |
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SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: |
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Cash paid during the period for: |
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Fair value of assets acquired |
| $ | 14,436 |
| $ | 23,425 |
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Net cash paid for the acquisitions |
| (14,341 | ) | (19,877 | ) | ||
Liabilities assumed |
| $ | 95 |
| $ | 3,548 |
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4
6
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX
THREE AND NINE MONTHS ENDED JUNESEPTEMBER 30, 2005 AND 2004
AND 2005(In(In thousands, except share and per share amounts)
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Activities—LincolnActivities--Lincoln Educational Services Corporation and its wholly
owned subsidiaries (the “Company”("LESC" or the "Company") operate trade schools in various
locations, which offer technical programs of study in several different
specialties.
In February 2003, Lincoln Educational Services Corporation (“LESC”), which is a holding company that owns 100% of Lincoln Technical Institute, Inc. (“LTI”) was formed. The Company effected the creation of LESC by first creating LESC as a wholly owned subsidiary of LTI and then creating Lincoln Acquisition Corporation (“LAC”) as a wholly owned subsidiary of LESC. The Company then merged LTI into LAC with LTI becoming the surviving entity and a wholly owned subsidiary of LESC. All of the stockholders of LTI then exchanged their shares for shares in LESC. The effect of this transaction did not result in any change in ownership or control, and as such the assets and liabilities of LESC are reflected at the carryover basis of LTI. The formation of LESC, which was not material, has been retroactively reflected.
Basis of Presentation—ThePresentation--The accompanying unaudited condensed consolidated
financial statements have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission and in accordance with
accounting principles generally accepted in the United States of America
(“GAAP”("GAAP"). Certain information and footnote disclosures normally included in
annual financial statements have been omitted or condensed pursuant to such
regulations. TheThese statements, when read in conjunction with the December 31,
2004 consolidated financial statements of the Company reflect all adjustments,
consisting solely of normal recurring adjustments, necessary to summarizepresent fairly
the consolidated financial position, results of operations, and cash flows for
such periods. The results of operations for the three and sixnine months ended
JuneSeptember 30, 2005 are not necessarily indicative of the results that may be
expected for the fiscal year ending December 31, 2005.
The unaudited consolidated financial statements as of September 30, 2005 and the
consolidated financial statements as of December 31, 2004 and the unaudited consolidated financial statements as of June 30, 2005 and for the three and
sixnine months ended JuneSeptember 30, 20042005 and 20052004 include the accounts of the
Company. All significant intercompany accounts and transactions have been
eliminated.
Use of Estimates in the Preparation of Financial Statements—TheStatements--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, the Company evaluates the
estimates and assumptions, including those related to revenue recognition, bad
debts, fixed assets, income taxes, benefit plans and certain accruals. Actual
results could differ from those estimates.
Reclassifications—Certain
Reclassifications--Certain 2004 amounts have been reclassified to conform to the
current year presentation.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board (“FASB”("FASB") issued
Statement of Financial Accounting Standards (“SFAS”("SFAS") No. 123R, Share Based
Payment,, which eliminates the alternative to measure stock-based compensation
awards using the intrinsic value approach permitted by Accounting Principles
Board (“APB”("APB") Opinion No. 25, Accounting for Stock-Based Compensation and by
SFAS No. 123 Accounting for Stock-Based Compensation.Compensation. The Company has not yet
determined what impact, if any, the adoption of SFAS No. 123R will have on the
consolidated financial statements; however, as discussed in Note 3 to the
unaudited consolidated financial statements, the Company adopted the fair value
method of accounting for stock-based
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Compensation—TransitionCompensation--Transition
and Disclosure.Disclosure. As a result, the Company has been recording stock-based
compensation expense for all employee stock awards that were granted or
modified.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets,
an Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions.Transactions.
SFAS No. 153 addresses the measurement of exchanges of nonmonetary assets and
requires that such exchanges be measured at fair value, with limited exceptions.
SFAS No. 153 amends APB Opinion No. 29 Accounting for Nonmonetary Transactions,
by eliminating the exception that required nonmonetary exchanges of similar
productive assets be recorded on a carryover basis. The provisions of SFAS No.
153 are effective for nonmonetary asset exchanges occurring in fiscal periods
beginning after June 15, 2005. The adoption of the provisions of SFAS No. 153 is
not expected to have a material effect on the Company's consolidated financial
statements.
In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3.3. SFAS
No. 154 applies to all voluntary changes in accounting principle, and changes
the requirements for accounting for and reporting of a change in accounting
principle. SFAS No. 154 requires retrospective application to prior periods’periods'
financial statements of a voluntary change in accounting principle unless it is
impracticable. APB Opinion No. 20 previously required that most voluntary
changes in accounting principle be recognized by including in net income of the
period of the change the cumulative effect of changing to the new accounting
principle. SFAS No. 154 is intended to improve financial reporting by enhancing the consistency of financial information between periods. SFAS No. 154 requires that a change in method of depreciation,
amortization, or depletion for long-lived, nonfinancial assets be accounted for
as a change in accounting estimate that is effected by a change in accounting
principle. APB Opinion No. 20 previously required that such a change be reported
as a change in accounting principle. SFAS No. 154 is effective for accounting
changes and corrections of errors in fiscal years beginning after December 15,
2005. Earlier application is permitted for accounting changes and corrections of
errors in fiscal years beginning after June 1, 2005. SFAS No. 154 does not
change the transition provisions of any existing accounting pronouncements,
including those that are in a transition phase as of the effective date of this
Statement. The adoption of the provisions of SFAS No. 154 is not expected to
have a material effect on the Company’sCompany's consolidated financial statements.
3. STOCK-BASED COMPENSATION
The Company accounts for the fair value of its grants under its stock-based
compensation plan in accordance with the provisions of SFAS No. 123, Accounting
for Stock-Based Compensation.Compensation. The compensation cost that has been charged
against income under this plan was approximately $0.5$0.4 million and $0.3$0.1 million
for the three months ended JuneSeptember 30, 2005 and 2004 and 2005 and $1.2$1.1 million and $0.7$1.3
million for the sixnine months ended JuneSeptember 30, 2005 and 2004, and 2005, respectively.
4. WEIGHTED AVERAGE COMMON SHARES
The weighted average numbers of common shares used to compute basic and diluted
income per share for the three and sixnine months ended JuneSeptember 30, 20042005 and
2005,2004, respectively, were as follows:
|
| Three Months Ending |
| Six Months Ending |
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|
| 2004 |
| 2005 |
| 2004 |
| 2005 |
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Basic shares outstanding |
| 21,670 |
| 21,950 |
| 21,669 |
| 21,825 |
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Dilutive effect of stock options |
| 1,587 |
| 1,127 |
| 1,478 |
| 1,196 |
|
Diluted shares outstanding |
| 23,257 |
| 23,077 |
| 23,147 |
| 23,021 |
|
6
5. BUSINESS ACQUISITIONS
On January 11, 2005, a newly formed wholly-owned subsidiary of LESC, New England
Acquisition, LLC, a Delaware limited liability company, acquired New England
Technical Institute (“NETI”("NETI") in New Britain, Hamden, Shelton and Cromwell,
Connecticut for approximately $19.9$18.8 million, net of cash acquired. The post
acquisition consolidated financial statements include the results of operations
of NETI from the acquisition date. The purchase price has been allocated to
NETI’sNETI's identifiable net assets with the excess of the purchase price over the
estimated fair value of the net assets acquired recorded as goodwill pending managements’ final valuation of the fair value of the net assets acquired as of the acquisition date.goodwill. Intangible
assets acquired, included in other assets in the accompanying consolidated
balance sheet, include curriculum of $0.7 million which is being amortized over
aits useful life of ten year periodyears from the date of acquisition, student contracts of
$0.7$0.8 million which are being amortized over a 15 month period from the date of
acquisition and trade name of $0.6 million which is not subject to amortization.
Upon consummation of the acquisition $1.3 million was allocated to non-compete agreements which are no longer considered to have any value. The Company does not expect any material changes in the purchase price allocation upon completion of the final valuation. Intangible asset amortization expense for the three and sixnine months ended
JuneSeptember 30, 2005 was $0.1$0.2 million and $0.3$0.5 million, respectively. Goodwill of
approximately $18.5 million, which is deductible for tax purposes, is also not
subject to amortization. The following table summarizes the estimated fair value
of assets acquired and liabilities assumed at January 11, 2005, the date of
acquisition.
Property, equipment and facilities |
| $ | 1,000 |
|
Goodwill and intangible assets |
| 20,495 |
| |
Current assets, excluding cash acquired |
| 1,930 |
| |
Current liabilities |
| (3,548 | ) | |
Cost of acquisition, net of cash acquired |
| $ | 19,877 |
|
8
sixnine months
ended JuneSeptember 30, 20042005 and 2005,2004, assumes that the acquisition of NETI occurred
at the beginning of the year preceding the year of acquisition. The unaudited
pro forma results of operations are based on historical results of operations,
include adjustments for depreciation, amortization, interest, and taxes, but do
not necessarily reflect the actual results that would have occurred.
|
| June 30, |
| June 30, |
| ||
|
| 2004 |
| 2005 |
| ||
|
| (unaudited) |
| ||||
Pro forma revenues |
| $ | 125,862 |
| $ | 139,383 |
|
Pro forma net income |
| $ | 2,618 |
| $ | 815 |
|
|
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|
|
|
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Earnings per share – basic – pro forma |
| $ | 0.12 |
| $ | 0.04 |
|
Earnings per share – diluted – pro forma |
| $ | 0.11 |
| $ | 0.04 |
|
6. GOODWILL AND OTHER INTANGIBLES
The Company accounts for its intangible assets in accordance with SFAS No. 142,
Goodwill and Other Intangible Assets.Assets. The Company reviews intangible assets with
an indefinite useful life for impairment when indicators of impairment exist, as
defined by SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets.Assets. Annually, or more frequently if necessary, the Company evaluates
goodwill for impairment, with any resulting impairment reflected as an operating
expense.
Amortization of intangible assets for the three months ended JuneSeptember 30, 20042005
and 20052004 was approximately $0.1$0.2 million and $0.1 million, respectively, and for
the sixnine months ended JuneSeptember 30, 20042005 and 20052004 was approximately $0.5 million
and $0.2 million, and $0.3 million, respectively.
7
Changes in the carrying amount of goodwill duringfrom the year ended December 31, 2004
and sixto the nine months ended JuneSeptember 30, 2005 were as follows:
Goodwill balance as of December 31, 2004 |
| $ | 32,802 |
|
Goodwill acquired pursuant to business acquisition |
| 18,545 |
| |
Goodwill balance as of June 30, 2005 |
| $ | 51,347 |
|
Goodwill balance as of December 31, 2004 $ 32,802
Goodwill acquired pursuant to business acquisition 18,451
--------------
Goodwill balance as of September 30, 2005 $ 51,253
--------------
Intangible assets, which are included in other assets in the accompanying
consolidated balance sheet, consistedconsist of the following:
|
| At December 31, 2004 |
| At June 30, 2005 |
| ||||||||||
|
| Gross |
| Accumulated |
| Gross |
| Accumulated |
| Weighted Average |
| ||||
Student contracts |
| $ | 950 |
| $ | 928 |
| $ | 1,600 |
| $ | 1,196 |
| 1 |
|
Trade name |
| 810 |
| — |
| 1,410 |
| — |
| Indefinite |
| ||||
Curriculum |
| — |
| — |
| 700 |
| 33 |
| 10 |
| ||||
Non-compete |
| 1 |
| 1 |
| 1 |
| 1 |
| 1 |
| ||||
Total |
| $ | 1,761 |
| $ | 929 |
| $ | 3,711 |
| $ | 1,230 |
| N/A |
|
7. OTHER ACCOUNTS RECEIVABLE
Other accounts receivable represents a receivable due from the previous owners of New England Technical Institute, Inc. resulting from purchase price adjustments in the closing balance sheet as stipulated in the asset purchase agreement. These amounts are expected to be received prior to year-end.
8. LONG-TERM DEBT
On February 15, 2005, the Company entered into a new credit agreement with a
syndicate of banks led by its existing lender. Under
9
The obligations of the Company under the credit agreement are secured by a lien
on substantially all of the assets of the Company and its subsidiaries and any
assets that it or its subsidiaries may acquire in the future, including a pledge
of substantially all of the subsidiaries’subsidiaries' common stock. Outstanding borrowings
bear interest at the rate of adjusted LIBOR plus 1.0% to 1.75%, as defined, or a
base rate (as defined in the credit agreement). In addition to paying interest
on outstanding principal under the credit agreement, the Company and its
subsidiaries are required to pay a commitment fee to the lender with respect to
the unused amounts available under the credit agreement at a rate equal to 0.25%
to 0.40% per year, as defined. In connection with the public offering discussed
in Note 9,8, the Company repaid the outstanding loan balance of $31.0 million.
9.
8. EQUITY
On June 28, 2005, the Company sold 3.0 million shares of common stock in an
initial public offering for approximately $53.1 million in net cash proceeds,
after deducting underwriting commissions and offering expenses of approximately
$6.9 million. A portion of the $53.1 million in net proceeds received from the
sale of common stock was used to repay all the outstanding indebtedness under
the credit facility discussed in Note 8,7, totaling $31.0 million.
8
On June 23, 2005, the Amended and Restated Certificate of Incorporation became effective. The Amended and Restated Certificate of Incorporation increased the number of authorized common shares from 50.0 million shares to 100.0 million shares and increased the number of authorized preferred shares from 0 shares to 10.0 million shares of preferred stock.
10.
On July 18, 2005, the underwriters of the initial public offering exercised a
portion of their over-allotment option resulting in the Company's sale on July
22, 2005 of 177,425 shares of common stock and net proceeds to the Company of
$3.3 million.
Pursuant to our 2005 Non-Employee Directors Restricted Stock Plan, each of the
Company's seven non-employee directors received an award of restricted shares of
common stock equal to $60,000 on July 29, 2005. The number of shares granted to
each non-employee director was based on the fair market value of a share of
common stock on that date. These restricted shares (3,069 for each non-employee
director) vest ratably on the first, second and third anniversaries of the date
of grant; however, there is no vesting period on the right to vote or receive
dividends on these restricted shares.
9. INCOME TAXES
The effective tax rate for the secondthird quarter and first sixnine months of 2005 was
40.8%31.0% and 41.3%32.5%, respectively. The effective rate for the secondthird quarter and
first sixnine months of 2004 was 39.9%41.8% and 41.5%41.7%, respectively.
11. For the quarter
ended September 30, 2005, the Company recognized a benefit of approximately $0.8
million resulting from the resolution of certain tax contingencies.
10. RELATED PARTY TRANSACTIONS
The Company had a consulting agreement with Hart Capital LLC, which terminated
by its terms in June 2004, to advise the Company in identifying acquisition and
merger targets and assisting with the due diligence reviews of and negotiations
with these targets. Hart Capital LLC is the managing member of Five Mile River
Capital Partners LLC, which is the second largest stockholder of the Company.
Steven Hart, the President of Hart Capital, LLC, sits onis a member of the Company’sCompany's board
of directors. The Company paid Hart Capital LLC a monthly retainer, reimbursement of
expenses and an advisory fee for its work on successful acquisitions or mergers.
Pursuant to the agreement, however, the Company may have future obligations to make certain payments to Hart Capital LLC with respect to acquisition opportunities identified for the Company by Hart Capital LLC prior to the termination of the agreement, if the Company consummates any acquisition opportunities previously identified for the Company within the twelve months following the termination of the agreement. In accordance with the agreement, the Company paid Hart Capital LLC approximately
$0.04 million and $0.01 million$0 for the three months ended JuneSeptember 30, 20042005 and 2005,2004,
respectively, and $0.3$0.4 million, and $0.3$0.4 million for the sixnine months ended
JuneSeptember 30, 20042005 and 2005,2004, respectively. In connection with the consummation
of the NETI acquisition, which closed on January 11, 2005, the Company paid Hart
Capital LLC $0.3 million for its services.
In 2003, the Company entered into a management service agreement with its
majority stockholder, Stonington Partners. In accordance with this agreement the
Company pays Stonington Partners a management fee of $0.75 million per year for
management consulting and financial and business advisory services. Such
services include valuing acquisitions and structuring their financing and
assisting with new loan agreements. The Company paid Stonington Partners $0.75
million in January 20042005 and 2005.2004. Fees paid to Stonington Partners were
amortized over a twelve month period. This agreement terminated by its terms
upon the Company’sCompany's completion of its initial public offering. Selling, general
and administrative expenses for the threenine months ended JuneSeptember 30, 2005 include
a $0.4 million charge resulting from the write-off of the remaining unamortized
fees.
During 2002, the Company advanced certain members of senior management
approximately $0.4 million in connection with their purchase of Company Stock.
These notes have been reflected as a reduction in stockholders’stockholders' equity. In the
first quarter of 2005 the remainder of these loans was repaid.
10
Litigation and Regulatory Matters—TheMatters--The Company has been named as a defendant in
actions resulting from the normal course of operations. Based, in part, on the
opinion of counsel, management believes that the resolution of these matters
will not have a material effect on its financial position, results of operations
and cash flows.
13. SUBSEQUENT EVENT
On July 18, 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 Company adopted the provisions of SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits (revised December 2003),"
("SFAS No. 132R") as of December 31, 2003. SFAS No. 132R revises employers'
disclosures about pension plans and other postretirement benefit plans. It does
not change the measurement or recognition of those plans required by SFAS No.
87, "Employers' Accounting for Pensions," SFAS No. 88, "Employers' Accounting
for Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits" and SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." SFAS No. 132R retains the
disclosure requirements contained in the original SFAS No. 132, which it
replaces, and also requires additional disclosures about the assets,
obligations, cash flows and net periodic benefit cost of defined benefit pension
plans and other defined benefit postretirement plans as well as certain interim
disclosures.
The total amount of the Company's contributions paid, and expected to be paid,
under its group insurance plan in 2005 has not changed from amounts previously
reported. The net periodic benefit income was $11,000 and $10,000 for the three
months ended September 30, 2005 and 2004 respectively. For the nine months ended
September 30, 2005, the underwriters ofnet periodic benefit income was $31,000. For the initial public offering, discussed in Note 9, exercised a portion of their over-allotment option resulting innine
months ended September 30, 2004, the Company’s sale on July 22, 2005 of 177,425 shares of common stock and net proceeds to the Company of $3.3 million.
periodic benefit cost was $150,000.
11
**
9
Item 2. MANAGEMENT’SMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion may contain forward-looking statements regarding us,
our business, prospects and our results of operations that are subject to
certain risks and uncertainties posed by many factors and events that could
cause our actual business, prospects and results of operations to differ
materially from those that may be anticipated by such forward-looking
statements. Factors that could cause or contribute to such differences include,
but are not limited to, those described in the “Risk Factors”"Risk Factors" section of the
final prospectus relating to our initial public offering, as filed with the
Securities and Exchange Commission. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date of
this report. We undertake no obligation to revise any forward-looking statements
in order to reflect events or circumstances that may subsequently arise. Readers
are urged to carefully review and consider the various disclosures made by us in
this report and in our other reports filed with the Securities and Exchange
Commission that advise interested parties of the risks and factors that may
affect our business.
These interim financial statements filed on this Form 10-Q and the discussions contained herein should be read in conjunction with the annual financial statements and notes included in the final prospectus relating to our initial public offering, as filed with the Securities and Exchange Commission, which includes audited consolidated financial statements for our three fiscal years ended December 31, 2004.
General
We are a leading and diversified for-profit provider of career-oriented
post-secondary education. We offer recent high school graduates and working
adults degree and diploma programs in four areas of study: automotive
technology, allied health, skilled trades, and business and information
technology. As of JuneSeptember 30, 2005, we enrolled 16,66419,824 students at our 32
campuses across 15 states. Our campuses primarily attract students from their
local communities and surrounding areas, although our four destination schools
attract students from across the United States, and in some cases, from abroad.
We continue to expand our product offering. In the secondthird quarter of 2005, we
received approval to offer our new medical coding and billing program at
thirteen of our campuses. Also during the quarter three more of our campuses were approved to offer associate degrees, bringing our total number of degree granting campuses to 16. WeIn addition, we completed a 14,000 square foot
addition to our Marietta, Georgia campus in June 2005 which enables us to offer
a new program, Electronic Systems Technician, as well as additional capacity for
allied health programs.
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 policies 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. There are also areas in which management’smanagement's
judgment in selecting any available alternative would not produce a materially
different result from the result derived from the application of our critical
accounting policies. 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’smanagement's estimates, assumptions
and judgment in the preparation of our consolidated financial statements.
Revenue recognition.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’sstudent's
start date
10
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 textbook sales, 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.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, a
student’sstudent's status (in-school or out-of-school), whether or not additional
financial aid funding will be collected from Title IV Programs or other sources,
whether or not a student is currently making payments and overall collection
history. Changes in trends in any of these areas may
12
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, or if we underestimate the allowances required,
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 revenue for the three months ended
JuneSeptember 30, 2004 and 2005 and six2004 was 4.2% and 4.1%, respectively, and the nine months
ended JuneSeptember 30, 2005 and 2004 was 3.7% and 2005 was 3.5%, 3.6%, 3.3% and 3.4%, respectively. Our exposure
to changes in our bad debt expense could impact our operations.
Because a substantial portion of our revenue is 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.
Goodwill. We assess the impairment of goodwill in accordance with SFAS No. 142,
“Goodwill"Goodwill and Other Intangible Assets.”" Accordingly, 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 an 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.
Utilizing the market experience of our principal stockholders and management, we believe that the most appropriate determination of fair value for each reporting unit is a market approach, which takes into consideration peer company multiples of revenues and earnings before interest, taxes, depreciation and amortization, or EBITDA, discounted for lack of marketability. Under this approach we utilized a 20% discount factor, which was deemed reasonable by management, to peer company multiples to determine the valuation of our reporting units. Various factors, including changes in revenues, earnings and market trends, among others, could affect the valuation of our reporting units. If any factor or combination of factors were to cause the valuation of any reporting unit to be reduced by as much as 50%, it would not result in any impairment in accordance with SFAS No. 142.
Stock-based compensation.compensation. We account for stock-based employee compensation
arrangements in accordance with the provisions of SFAS No. 123, “Accounting"Accounting for
Stock-Based Compensation.”Compensation." Effective January 1, 2004, we elected to change our
accounting policies from the use of the intrinsic value method of Accounting
Principles Board (“APB”("APB") Opinion No. 25, “Accounting"Accounting for Stock-Based
Compensation”Compensation" to the fair value-based method of accounting for options.
11
We valuevalued the exercise price of options issued to employees using a market based
approach. This approach takestook into consideration the value ascribed to our
competitors by the market. In determining the fair value of an option at the
time of grant, we reviewreviewed contemporaneous information about our peers, which
includesincluded a variety of market multiples, including, but not limited to, revenue,
EBITDA, net income, historical growth rates and market/industry focus. During
2004, the value we ascribed to stock options granted was based upon our
anticipated initial public offering as well as discussions with our investment
advisors. Due to the number of peer companies in our sector, we believe using
public company comparisons providesprovided a better indication of how the market values
companies in the for-profit post secondary education sector.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123R, “Share Based Payment,,” which eliminated the alternative to measure stock-based compensation awards using the intrinsic value approach permitted by Accounting Principles Board, or APB, Opinion No. 25, “Accounting for Stock-Based Compensation” and by SFAS No. 123. We have not yet determined what impact, if any, adoption of SFAS No. 123R will have on the consolidated financial statements; however, we adopted the fair value method of accounting for stock-based compensation provisions of SFAS No. 123 and the retroactive transitional provisions of SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure.” As a result, we have been recording stock-based compensation expense for all employee stock awards that were granted or modified.
Effect of Inflation
Inflation has not had a material effect on our operations.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123R, Share Based Payment, which
eliminates the alternative to measure stock-based compensation awards using the
intrinsic value approach permitted by Accounting Principles Board (“APB”("APB")
Opinion No. 25, Accounting for Stock-Based Compensation and by SFAS No. 123
Accounting for Stock-Based Compensation.Compensation. We have not yet determined what impact,
if any, the adoption of SFAS No. 123R will have on our consolidated financial
statements; however, discussed in Note 3 to the unaudited consolidated financial
statements, included in this report, we have adopted the fair value method of
accounting for stock-based compensation provisions of SFAS No. 123 and the
retroactive transitional provisions of SFAS No. 148, Accounting for Stock-Based
Compensation—TransitionCompensation--Transition and Disclosure.Disclosure. As a result, we have been recording
stock-based compensation expense for all employee stock awards that were granted
or modified.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets,
an Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions.Transactions.
SFAS No. 153 addresses the measurement of exchanges of nonmonetary assets and
requires that such exchanges be measured at fair value, with limited exceptions.
SFAS No. 153 amends APB Opinion No. 29, Accounting for Nonmonetary Transactions,
by eliminating the exception that required nonmonetary exchanges of similar
productive assets be recorded on a carryover basis. The provisions of SFAS No.
153 are effective for nonmonetary asset exchanges occurring in fiscal periods
beginning after June 15, 2005. The adoption of the provisions of SFAS No. 153 is
not expected to have a material effect on our consolidated financial statements.
In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3.3. SFAS
No. 154 applies to all voluntary changes in accounting principle, and changes
the requirements for accounting for and reporting of a change in accounting
principle. SFAS No. 154 requires retrospective application to prior periods’periods'
financial statements of a voluntary change in accounting principle unless it is
impracticable. APB Opinion No. 20 previously required that most voluntary
changes in accounting principle be recognized by including in net income of the
period of the change the cumulative effect of changing to the new accounting
principle. SFAS No. 154 is intended to improve financial reporting by enhancing the consistency of financial information between periods. Statement 154 requires that a change in method of depreciation,
13
12
for accounting changes and corrections of errors in fiscal years beginning after June 1, 2005. SFAS No. 154 does not change the transition provisions of any existing accounting pronouncements, including those that are in a transition phase as of the effective date of this Statement. The adoption of the provisions of SFAS No. 154 is not expected to have a material effect on our consolidated financial statements.
Results of Operations
The following table sets forth selected consolidated statements of operations data as a percentage of revenues for each of the periods indicated.
|
| Three Months Ended June 30, |
| Six Months Ended June 30, |
| ||||
|
| 2004 |
| 2005 |
| 2004 |
| 2005 |
|
Revenues |
| 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
Costs and expenses: |
|
|
|
|
|
|
|
|
|
Educational services and facilities |
| 40.9 | % | 43.3 | % | 40.7 | % | 42.2 | % |
Selling, general and administrative |
| 55.0 | % | 55.5 | % | 54.2 | % | 55.4 | % |
Loss on sale of assets |
| 0.5 | % | 0.0 | % | 0.3 | % | 0.0 | % |
Total costs and expenses |
| 96.4 | % | 98.8 | % | 95.2 | % | 97.6 | % |
Operating income |
| 3.6 | % | 1.2 | % | 4.8 | % | 2.4 | % |
Interest expense, net |
| (1.1 | )% | (1.1 | )% | (1.2 | )% | (1.4 | )% |
Income before income taxes |
| 2.5 | % | 0.1 | % | 3.6 | % | 1.0 | % |
Provision for income taxes |
| 1.0 | % | 0.0 | % | 1.5 | % | 0.4 | % |
Net income |
| 1.5 | % | 0.1 | % | 2.1 | % | 0.6 | % |
Three Months Ended JuneSeptember 30, 2005 Compared to Three Months Ended JuneSeptember
30, 2004
Revenues.
Revenues. Our revenues for the three months ended JuneSeptember 30, 2005 were $68.2$78.4
million, representing an increase of $9.0$9.2 million, or 15.3%13.3%, as compared to
revenues of $59.2$69.2 million for the three months ended JuneSeptember 30, 2004. Of this increase,
approximately $3.8$4.6 million, or 6.4%6.7%, was the result of our acquisition of New
England Technical Institute ("NETI") on January 11, 2005, while the remainder of
the increase was primarily due to a 3.6%2.2% increase in theour average undergraduate
full-time student enrollment, which increased to 15,789, exclusive of NETI,16,975 for the three months
ended JuneSeptember 30, 2005, exclusive of NETI, as compared to 15,24716,607 for the three
months ended JuneSeptember 30, 2004 andas well as from tuition increases, which
averaged between 2% to 5% annually depending on the program.
For a discussion of
trends in our student enrollment, see "Seasonality and Trends" below.
Educational services and facilities expenses.expenses. Our educational services and
facilities expenses for the three months ended JuneSeptember 30, 2005 were $29.6$32.5
million, representing an increase of $5.3$4.8 million, or 22.0%17.5%, as compared to
educational services and facilities expenses of $24.2$27.7 million for the three months ended JuneSeptember 30, 2004. The acquisition of
New England Technical InstituteNETI on January 11, 2005 resulted in $2.4$2.8 million or 9.9% of this increase.
In addition, instructionalInstructional expenses increased by $1.3$0.3 million or 2.2% over the comparable
period in the priorlast year primarily due to increased compensation and benefits, related to current and anticipated higher average student enrollments, which start in the second half of the fiscal year and required additional educational and operations personnel and the gear up for anticipated growth expected in the second half of the year.benefits. The
increase in average population for the period also resulted in an increase of books and tools
expense of approximately $0.6$0.2 million over the comparable period in priorlast year.
Additionally, for the three months ended June 30, 2005, facilities expenses increased consistent with our growth
initiatives by approximately $0.9$1.1 million as compared to the three months ended
JuneSeptember 30, 2004 due to rent on our new Queens, New York facility in 2005, our
expanded campus facilities in Lincoln, Rhode Island and Marietta, Georgia, which
opened during the later part of 2004 and as2004. Our facility expenses also included a
resultcharge of $0.2 million related to catch-up depreciation resulting from the
reclassification of our expanded corporate facilitiesproperty in February 2005. Educational servicesIndianapolis, Indiana from property held for
sale to property, equipment and facilities expenses as a percentage of revenues increased to 43.3% for the three months ended JuneSeptember 30, 2005 from 40.9% for the three months ended June 30, 2004.
2005.
Selling, general and administrative expenses.expenses. Our selling, general and
administrative expenses for the three months ended JuneSeptember 30, 2005 were $37.9
million, an increase of $5.3$4.7 million, or 16.4%14.2%, as compared to selling, general and administrative expenses of $32.5$33.2 million for
the three months ended JuneSeptember 30, 2004. Approximately $1.4$1.8 million, or 4.4%5.4%,
of the increase was due to the acquisition of New England Technical Institute.NETI. The remainder of the
13
increase was primarily due to: (a) a 25.5%, or $1.5 million, increase in
marketing costs as a result of increased advertising expenses associated with
the development of student leads and enrollment; and (b) a 13.3% increase in
student services expenses as a result of our increase in average student
enrollment as well as a $0.3 million increase in transportation services for our
students. The $0.8 million, or 4.6%, increase in administrative costs was
primarily due to: (1) an increase in bad debt expense of $0.5 million related to
the timing of student enrollments; and (2) an increase of $0.3 million
associated with expenses incurred to roll out a new student software and
management reporting system at some of our schools.
14
(1)the acquisition of NETI. The remainder of the
increase was due to: (a) a $0.4$3.7 million, or 2.1%7.4%, increase in administrative
costs, (2)costs; (b) a 29.1%29.8% increase in marketing costs as a result of increased
advertising expenses associated with student leads and enrollment, (3) an 18.7%enrollment; (c) a 12.9%
increase in sales expenses primarily attributable to additional compensation and
benefit expenses related to additional sales representatives,representatives; and (4)(d) a 22.3%17.4%
increase in student services expenses as a result of our 3.4%2.2% increase in
average student enrollment as well as a $0.2$0.6 million increase in bus services
for our students. The $0.4$3.7 million increase in administrative costs was
primarily due to (1) a one-time charge of $0.4 million related to the write-off
of prepaid management fees resulting from the termination of our management fee
agreement with our principal shareholders,shareholders; (2) an increase of $0.3$1.2 million over
the prior year period associated with expenses incurred to roll out a new
student software and management reporting system at some of our schools and (3) an annual increase in compensation and benefits, offset by a decrease of $1.4 million due to the one-time charge in the second quarter of the previous year of the write-off of deferred offering costs due to a delay in filing the registration statement for our initial public offering.
Selling, general and administrative expenses as a percentage of revenue increased to 55.5% for the three months ended June 30, 2005 from 55.0% for the three months ended June 30, 2004.
Interest expense. Our interest expense for the three months ended June 30, 2005 was $0.8 million representing an increase of $0.1 million or 7.5% from $0.7 million for the three months ended June 30, 2004. This increase was primarily due to an increase in the average debt balance outstanding under our previous credit agreement as a result of our acquisition of New England Technical Institute.
Income taxes. Our provision for income taxes for the three months ended June 30, 2005 was $0.03 million, or 40.8% of pretax income, compared to a $0.6 million, or 39.9% of pretax income, for the three months ended June 30, 2004. The higher effective tax rate for the three months ended June 30, 2005 is primarily attributable to our accruing for income taxes based upon our expected effective tax rate for the year ending December 31, 2005.
Six Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2004
Revenues. Our revenues for the six months ended June 30, 2005 were $139.1 million, representing an increase of $20.3 million, or 17.1%, as compared to revenues of $118.8 million for the six months ended June 30, 2004. Of this increase, approximately $7.2 million, or 6.1%, was the result of our acquisition of New England Technical Institute on January 11, 2005, while the remainder of the increase was primarily due to a 6.2% increase in the average undergraduate full-time student enrollment, which increased to 16,276, exclusive of NETI, for the six months ended June 30, 2005 as compared to 15,332 for the six months ended June 30, 2004, and from tuition increases, which averaged between 2% to 5% annually depending on the program.
Educational services and facilities expenses. Our educational services and facilities expenses for the six months ended June 30, 2005 were $58.6 million, representing an increase of $10.2 million, or 21.2%, as compared to educational services and facilities expenses of $48.4 million for the six months ended June 30, 2004. The acquisition of New England Technical Institute on January 11, 2005 resulted in $4.7 million of this increase. In addition, instructional expenses increased $3.2 million over the comparable period in the prior year primarily due to increased compensation and benefits related to current and anticipated higher average student enrollments, which required additional educational and operations personnel and the gear up for anticipated growth expected in the second half of the year. The increase in average population for the period also resulted in an increase of books and tools expense of approximately $0.6 million over the comparable period in prior year. Additionally, for the six months ended June 30, 2005, facilities expense increased by approximately $1.3 million as compared to the six months ended June 30, 2004 due to rent on our new Queens, New York facility in 2005 and as a result of our expanded campus facilities in Lincoln, Rhode Island and Marietta, Georgia during the later part of 2004 and our expanded corporate facilities in February 2005. Educational services and facilities expenses as a percentage of revenues increased to 42.2% for the six months ended June 30, 2005 from 40.7% for the six months ended June 30, 2004.
Selling, general and administrative expenses. Our selling, general and administrative expenses for the six months ended June 30, 2005 was $77.1 million, an increase of $12.8 million, or 20.0%, as compared to selling, general and administrative expenses of $64.3 million for the six months ended June 30, 2004. Approximately $2.5 million or 3.9% of the increase was due to the acquisition of New England Technical Institute. The remainder of the
14
increase was due to (1) a $3.0 million or 8.8% increase in administrative costs, (2) a 32.1% increase in marketing costs as a result of increased advertising expenses associated with student leads and enrollment, (3) an 18.7% increase in sales expenses primarily attributable to additional compensation and benefit expenses related to additional sales representatives, and (4) a 19.4% increase in student services expenses as a result of our 6.0% increase in average student enrollment as well as a $0.4 million increase in bus services for our students. The $3.0 million increase in administrative costs was primarily due to (1) a one-time charge of $0.4 million related to the write-off of prepaid management fees resulting from the termination of our management fee agreement with our principal shareholders, (2) an increase of $0.9 million over the prior year period associated with expenses incurred to roll out a new student software and management reporting system at some of our schools,schools; (3) an
increase of approximately $0.6$1.3 million in bad debt expense due to the
approximately $20.3$29.5 million increase in revenuerevenue; and (4) an annual increase in
compensation and benefits expenses offset by a decrease of $2.0 million due to
the one-time charge recorded in the first and second quarters of the previous
year of the write-off of deferred offering costs due to a delay in filing the
registration statement for our initial public offering.
Selling, general and administrative expenses as a percentage of revenue increased to 55.5% for the six months ended June 30, 2005 from 54.1% for the six months ended June 30, 2004.
Net Interest expense.expense. Our net interest expense for the sixnine months ended
JuneSeptember 30, 2005 was $2.0$2.1 million, representing an increasea decrease of $0.4$0.2 million or
26.1%6.0% from $1.6$2.3 million for the sixnine months ended JuneSeptember 30, 2004. This
increasedecrease was primarily due to higher levels of interest income during the period
end offset by the write-off of deferred financing costs related to our old
credit agreement.
Income taxes.taxes. Our provision for income taxes for the sixnine months ended JuneSeptember
30, 2005 was $0.6$3.0 million, or 41.3%32.5% of pretax income, compared to $1.8$4.9 million,
or 41.5%41.7% of pretax income, for the sixnine months ended JuneSeptember 30, 2004. The
lower effective tax rate for the threenine months ended JuneSeptember 30, 2005 iswas
primarily attributable to our accruing for income taxes based upon our expected effectivethe recognition of a benefit of $0.8 million related
to the favorable resolution of a tax rate for the year ending December 31, 2005.
contingency.
15
Our primary capital requirements are for facility 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 the sixnine months ended JuneSeptember 30, 20042005 and 2005:
2004: Cash Flow Summary
|
| Six Months Ended June 30, |
| ||||
|
| 2004 |
| 2005 |
| ||
|
| (dollars in thousands) |
| ||||
Net cash provided by (used in) operating activities |
| $ | 3,349 |
| $ | (1,695 | ) |
Net cash used in investing activities: |
|
|
|
|
| ||
Capital expenditures |
| (12,835 | ) | (6,566 | ) | ||
Acquisitions of a business, net of cash acquired |
| (14,341 | ) | (19,877 | ) | ||
Total net cash used in investing activities |
| (27,176 | ) | (26,443 | ) | ||
Net cash provided by (used in) financing activities |
| $ | (2,975 | ) | $ | 16,815 |
|
Operating Activities
As of JuneSeptember 30, 2005, we had cash and cash equivalents of $30.1$44.7 million,
compared to cash and cash equivalents of $41.4 million as of December 31, 2004. 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 agreement and cash generated from operations. ManagementWe
currently anticipatesanticipate that we will be able to meet both our short-term cash
needs, as well as our needsneed to fund operations and meet our obligations beyond
the next twelve months with cash generated by operations, existing cash balances
and, if necessary, borrowings under our credit agreement. As of JuneSeptember 30,
2005, we had borrowings available under our credit agreement of approximately
$95.7 million, including a $4.3 million sub-limit on letters of credit.
15
Our primary source of cash is tuition collected from our students. Our students
fund their tuition payments from a variety of sources including Title IV
Programs, federal and state grants, private loans and their personal resources.
TheA significant majority of students’our students' tuition payments are derived from Title
IV Programs. 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
30 days after the start of a student’sstudent's academic year and the second disbursement
is typically received at the beginning of the sixteenth week fromafter the start of
the student’sstudent's academic year. Certain types of grants and other funding are not
subject to a 30-day delay. Our programs range from 30 to 84 weeks and may cover
one or two academic years. 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 and the amount of the refund varies by state.
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 areis Title IV, Programs which represented approximately 81% of our cash
receipts relating to revenues in 2004. 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.
Net cash provided by or used in operating activities is attributable primarily to net income adjusted for depreciation and amortization, non cash expenses and changes in working capital items.
Net cash used in operating activities was $1.7 million for the six months ended June 30, 2005 compared to net cash provided by operating activities of $3.3was $13.2 million for the sixnine months
ended JuneSeptember 30, 2005 compared to $17.8 million for the nine months ended
September 30, 2004. The $5.0$4.6 million changedecrease was primarily due to the increase in accounts payable for the six months ended June 30, 2005 being $3.0 million less than the corresponding increase in the comparable preceding period and a $5.8 million increasedecrease in
unearned tuition, offset by decreasesresulting from large prime starts in income taxesthird quarter of the
year, which is a function of the seasonality of our business, as well as due to
a lower level of accounts payable as of $5.4 million.September 30, 2005 as compared to the
comparable period in 2004. The remaining difference resulted from changes in
other working capital items including bad debt expense and other assets.
items. Investing Activities
We currently lease almost all of our campuses. As we executepart of our growth strategy,
we may consider strategic acquisitions of campuses may be considered.campuses. In October, 2005, we
completed the purchase of our Grand Prairie, Texas facility and expect it to
open in the first half of 2006.
In addition, although our current growth strategy is to continue ourprimarily focused on internal
growth, including campus expansions, we may also consider strategic
acquisitions of operations would be considered.acquisitions. 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 or issue
additional debt or equity securities.
Our credit agreement also restrictslimits the amount of capital expenditures we may make to $35 million
for any of the four fiscal quarterly periods ending March 31, 2005, June 30,
2005, September 30, 2005 orand December 31, 2005. Management does notWe believe that this capital
expenditure limit in 2005 will not have any material impact on our operations.
16
in acquiring schools.acquisitions. Our capital expenditures result
primarily result from facility expansion, leasehold improvements and investments in
classroom and shop technology and in operating systems. On January 11, 2005, we
acquired NETI for approximately $19.9$18.8 million, in cash.
net of cash acquired.
Net cash used in investing activities decreased $0.7$3.7 million from $27.2to $30.3 million
for the sixnine months ended JuneSeptember 30, 2004 to $26.42005 from $34.0 million for the sixnine
months ended JuneSeptember 30, 2005.2004. This decrease is primarily attributable to a
decrease in capital expenditures of $6.3$8.1 million, offset by an increase in cash used in acquisitions of $5.5$4.4
million in connection with the acquisition of New England Technical Institute. Under the termsNETI. The decrease of our credit agreement, we may not make more than $35.0$8.1 million
in capital expenditures paymentsfor the nine months ended September 30, 2005 compared to
the nine months ended September 30, 2004 is due entirely to the timing of
expenditures. We expect our spending on capital expenditures to increase in each fiscalthe
fourth quarter in 2005.
16
of 2005 due to the purchase of our Grand Prairie, Texas facility
as well as capital expenditures associated with our Queens, New York campus.
17
orand open new facilities to meet increased student
enrollments. We opened a new 126,000 square foot automotive school in Indianapolis, Indiana in the second quarter of 2004, and a new 40,000 square foot allied health and information technology school in Lincoln, Rhode Island in October 2004 and added 14,000 square feet to our school in Marietta, Georgia in May 2005. We also took possession of our new 48,000 square foot Queens, New York automotive campus in the first quarter of 2005 with an expected opening date in the first quarter of 2006. Additionally, we are evaluating several other expansion
opportunities. We anticipate capital expenditures relative to our mature
locations to be approximately 8% to 10% of revenues. We expect to be able to
fund these capital expenditures with cash generated from operating activities.
Financing Activities
Net cash provided by financing activities was $16.8$20.3 million for the sixnine months
ended JuneSeptember 30, 2005 compared to net cash used in financing activities of $3.0$19.3 million for the sixnine months ended
JuneSeptember 30, 2004. This increase is mainly attributable to the $53.1$56.3 million of
net cash received from our initial public offering in June 2005 and the exercise
of the over-allotment option in July 2005, offset by the repayment of our debt
of $35.7 million during the first half of 2005.
On February 15, 2005, we entered into a new credit agreement with a syndicate of
banks led by our existing lender. Under the terms of thethis agreement, the
syndicate provided us with a $100 million credit facility with a term of five
years. The credit agreement permits the issuance of letters of credit of up to
$20 million, the amount of which reduces the availability of permitted
borrowings under the agreement. As a result ofIn connection with this new credit agreement,
we wrote off as a component of interest expense approximately $0.4 million of
unamortized deferred finance costs under our old credit agreement in the three
months ended March 31, 2005. We incurred approximately $0.8 million of deferred
finance costs under the new agreement.
The following table sets forth our long-term debt forat the periodsdates indicated:
|
| Year Ended |
| Six Months Ended |
| ||
|
| 2004 |
| 2005 |
| ||
|
|
|
|
|
| ||
Credit agreement |
| $ | 35,750 |
| $ | — |
|
Automobile loans |
| 113 |
| 97 |
| ||
Finance obligation |
| 9,672 |
| 9,672 |
| ||
Capital leases—computers (with rates ranging from 6.97% to 19.9%) |
| 1,294 |
| 1,153 |
| ||
Subtotal |
| 46,829 |
| 10,922 |
| ||
Less current maturities |
| (5,311 | ) | (317 | ) | ||
|
| $ | 41,518 |
| $ | 10,605 |
|
Contractual Obligations
Long-Term Debt.Debt. As of JuneSeptember 30, 2005, our long-term debt consisted entirely
of the finance obligation in connection with our sale-leaseback transaction in
2001 and amounts due under capital lease obligations.
Lease Commitments.Commitments. We lease offices, educational facilities and various
equipment for varying periods through the year 2020 at basic annual rentals
(excluding taxes, insurance, and other expenses under certain leases).
17
The following table contains supplemental information regarding our total
contractual obligations as of JuneSeptember 30, 2005, measured from the end of our
fiscal year, December 31, 2004:
|
| Payments Due by Period |
| |||||||||||||
|
| Total |
| Less than 1 |
| 2-3 years |
| 4-5 years |
| After 5 |
| |||||
|
| (dollars in thousands) |
| |||||||||||||
Capital leases (including interest) |
| $ | 1,412 |
| $ | 368 |
| $ | 492 |
| $ | 355 |
| $ | 197 |
|
Operating leases |
| 127,450 |
| 14,195 |
| 27,979 |
| 24,667 |
| 60,609 |
| |||||
Finance obligation |
| 14,578 |
| 1,258 |
| 2,517 |
| 2,517 |
| 8,286 |
| |||||
Automobile Loans (including interest) |
| 102 |
| 36 |
| 62 |
| 4 |
| — |
| |||||
Total contractual cash obligations |
| $ | 143,542 |
| $ | 15,857 |
| $ | 31,050 |
| $ | 27,543 |
| $ | 69,092 |
|
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of JuneSeptember 30, 2005.
Related Party Transactions
18
LLC is the managing member of Five Mile River Capital Partners
LLC, which is our second largest stockholder. Steven Hart, the President of Hart
Capital, LLC, sits onis a member of our board of directors. We paid Hart Capital LLC a monthly
retainer, reimbursement of expenses and an advisory fee for its work on
successful acquisitions or mergers. In accordance with the agreement, we paid
Hart Capital LLC approximately $0.04 million and $0.01 million$0 for the three months ended
JuneSeptember 30, 2005 and 2004 and 2005 and $0.3$0.4 million, and $0.3$0.4 million for the sixnine
months ended JuneSeptember 30, 2005 and 2004, and 2005, respectively. Pursuant to the agreement, however, we may have future obligations to make certain payments to Hart Capital LLC with respect to acquisition opportunities identified for us by Hart Capital LLC prior to the termination of the agreement, if we consummate any acquisition opportunities previously identified for us within the twelve months following the termination of the agreement. Accordingly, inIn connection with the
consummation of the NETI acquisition, which closed on January 11, 2005, we paid
Hart Capital LLC $0.3 million for its services.
In 2003, we entered into a management serviceservices agreement with our majority
stockholder, Stonington Partners. In accordance with this agreement we paid
Stonington Partners a management fee of $0.75 million per year for management
consulting and financial and business advisory services. Such services include
valuing acquisitions and structuring their financing and assisting with new loan
agreements. We paid Stonington Partners $0.75 million in January 20042005 and 2005.2004.
Fees paid to Stonington Partners were amortized over a twelve month period. This
agreement terminated by its terms upon our completion of an initial public
offering. Selling, general and administrative expenses for the threenine months ended
JuneSeptember 30, 2005 includes a $0.4 million charge resulting from the write-off
of the remaining unamortized fees.
During 2002, we advanced certain members of senior management approximately $0.4
million in connection with their purchase of shares of our common stock. These
advances have been reflected as a reduction in stockholders’stockholders' equity. In the
first quarter of 2005 the remainder of these loans was repaid.
Seasonality and Trends
Our net revenues 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 large class starts in the third and fourth quarters and student attrition in the first half of the year. Our expenses, however, do not vary significantly with changes in our student
18
population and net revenues. During the first half of the
year, we make significant investments in marketing, staff, programs and
facilities to ensure that we have the proper staffing to meet our second half of the year
targets and, as a result, such expenses do not fluctuate significantly on a
quarterly basis. We expect quarterly fluctuationfluctuations in operating results to
continue as a result of seasonal enrollment patterns. Such patterns may change,
however, as a result of new school openings, new program introductions,
increased enrollments of adult students and/or acquisitions.
Similar to many other for-profit post secondary education companies, the
increase in our average undergraduate enrollments has not met our historical or
our 2005 anticipated growth rates. The slow down that has occurred in the
for-profit post secondary education sector appears to have had a greater impact
on companies, like ours, that are more dependent on their on-ground business as
opposed to on-line students. We believe that the slow down can be attributed to
many factors, including: (a) the economy; (b) dependency on television to
attract students to our school; (c) turnover of our sales representatives; and
(d) increasing competition in the marketplace.
Despite soft organic enrollment trends and increased volatility in the near
term, we believe that our growth initiatives as well as the steps we have taken
to address the challenging trends that our industry and we are currently facing
will produce positive growth over the long-term. While our operating strategy,
business model and infrastructure are well suited for the short-term and we have
ample operating flexibility, we continue to be prudent and realistic and have
taken the necessary steps to ensure that operations that have not grown as
rapidly as expected are right sized. We also continue to make investments in
areas that are demonstrating solid growth. As a result, during September of
2005, we eliminated approximately $6.4 million of expenses that were forecasted
for the fourth quarter of 2005. These expenses had been forecasted to support
much higher levels of student enrollments.
Operating income is negatively impacted during the initial start-up phase of new
campus expansions. We incur sales and marketing costs as well as campus
personnel costs in advance of the campus facility opening.opening of each campus. Typically we begin to
incur such costs approximately 15 months in advance of the campus opening with
the majority of such costs being incurred in the nine-month period prior to a
campus opening. During the current year, we initiated expansion efforts for one
new campus, located in Queens, New York, which is scheduled to open in the first
quarter of 2006.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our principal exposure to market risk relates to interest rate changes. However, as a result of completing our initial public offering, we have been able to repay in full our line of credit leaving only miscellaneous capital equipment leases, which are not material.
Item 4. CONTROLS AND PROCEDURES
(a)
(a) Evaluation of disclosure controls and procedures. Our Chief Executive
Officer and Chief Financial Officer, after evaluating the
19
Commissions’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.
(b) Changes in Internal Control Over Financial Reporting. There were no changes made during our most recently completed fiscal quarter in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
In the ordinary conduct of our business, we are periodically subject to 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 adverse effect on our business or financial condition.
Since
Beginning in May 2002, we have beenwere involved in litigation brought by two former
employees acting as “relators”"relators" under the qui tam provisions of the federal False
Claims Act, 31 U.S.C. §§ ss.ss. 3729-33 (FCA). The relators have alleged that we
violated Title IV Program requirements that prohibit the payment of commissions,
bonuses or other incentive payments to admissions and recruitment personnel
based upon their success in securing enrollments, and that our participation in
the federal student aid programs under these circumstances constituted
actionable “false claims”"false claims" within the meaning of federal law. The relators
are pursuingpursued the litigation against us on their own, without the involvement or
support of the U.S. Department of Justice, which had given notice, after
investigation, of its intention not to participate in the case. On September 3,
2003, after full briefing of the issues by the parties, the
19
district court
granted our motion and dismissed the entire action, with prejudice. The relators
appealed the ruling to the United States Court of Appeals for the Fifth Circuit,
which affirmed the District Court’sCourt's dismissal of the case on October 15, 2004.
The relators subsequently served upon us a petition for a Writ of Certiorari
with the Supreme Court of the United States and the petition was docketed in the
Supreme Court on March 10, 2005. The Supreme Court denied the writ on May 16,
2005. On June 10, 2005, the relators submitted a petition for rehearing with the
Supreme Court. We would vigorously defend the rulings of the District Court and the Fifth Circuit if theThe Supreme Court reversed its prior decision of May 16,denied the petition for rehearing on August 1,
2005, and granted the writ.
ITEMthus finally terminating all proceedings in this case.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Use of Proceeds
We completed our initial public offering of 4,000,000 shares of our common stock on June 28, 2005. The offer and sale of these shares were registered under the Securities Act of 1933, as amended, pursuant to a registration statement on Form S-1, as amended (File No. 333-123644), which was declared effective by the Securities and Exchange Commission on June 22, 2005. The managing underwriters of this offering were Merrill Lynch, Pierce, Finner & Smith Incorporated, Banc of America Securities LLC, Lehman Brothers Inc., Harris Nesbitt Corp., Jeffries & Company, Inc. and Robert W. Baird & Co. Incorporated. In this offering, we sold an aggregate of 3,000,000 shares of our common stock and selling stockholders sold 1,000,000 shares for their own accounts. We received $53.1 million in net proceeds for the sale of 3,000,000 shares, based on our initial public offering price of $20.00 per share, after deducting the underwriting discounts and commissions and the estimated offering expenses payable by us. We received none of the proceeds from the 1,000,000 shares that were sold by the selling stockholders.
In addition, we granted the underwriters the right to purchase up to an
additional 600,000 shares at the initial public offering price to cover
over-allotments. On July 18, 2005, the underwriters exercised their
over-allotment option and purchased 177,425 shares on July 22, 2005. The net
proceeds to us from the exercise of the underwriters’underwriters' over-allotment option were
approximately $3.3 million, after deducting the underwriting discounts and
commissions and the estimated offering expenses payable by us.
We used the net proceeds from the initial public offering and the exercise of
the underwriters’underwriters' over-allotment option to repay all amounts outstanding under
our credit agreement and intend to use the remainder for working capital and
general corporate purposes.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On June 8, 2005, we sent a written consent to certain6. EXHIBITS
EXHIBIT INDEX
The following exhibits are filed or incorporated by reference with this
Form 10-Q.
Exhibit
Number Description
- -------------- --------------------------------------------------------------
**3.1 Amended and Restated Certificate of our stockholders requesting approvalIncorporation of
the following matters in connection with our initial public offering: (1) our amended and restated certificate of incorporation; (2) our amended and restated by-laws; (3) our 2005 Long-Term Incentive Plan; (4) our 2005 Deferred Compensation Plan; and (5) our 2005 Non-Employee Directors Restricted Stock Plan. All such actions were effected pursuant to an action by written consent of our stockholders pursuant to Section 5-6(2) of the New Jersey Business Corporation Act. A total of 21,297,600 shares out of our 21,710,985 shares issued and outstanding voted in favor of these matters.
1.1 Underwriting Agreement, among the Company, certain selling stockholders of the Company named therein, and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Banc of America Securities LLC, Lehman Brothers Inc., Harris Nesbitt Corp., Jefferies & Company, Inc. and Robert W. Baird & Co. Incorporated and Barrington Research Associates, Inc., as underwriters (1).
3.1Company.
***3.2 Amended and Restated By-laws of the Company (1).
4.7Company.
**4.1 Stockholders' Agreement, dated as of September 15, 1999, among
Lincoln Technical Institute, Inc., Back to School Acquisition,
L.L.C., and Five Mile River Capital Partners LLC.
**4.2 Letter agreement, dated August 9, 2000, by Back to School
Acquisition, L.L.C., amending the Stockholders' Agreement.
**4.3 Letter agreement, dated August 9, 2000, by Lincoln Technical
Institute, Inc., amending the Stockholders' Agreement.
**4.4 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.
***4.5 Registration Rights Agreement between the CompanyLincoln Educational
Services Corporation and Back to School Acquisition, L.L.C.
(1)
**10.1 Credit Agreement, dated as of February 15, 2005, among Lincoln Educational Services Corporation, the Guarantors from time to time parties thereto, the Lenders from time to time parties thereto and Harris Trust and Savings Bank, as Administrative Agent. **10.2 Employment Agreement, dated as of January 3, 2005, between Lincoln Educational Services Corporation and David F. Carney. **10.3 Amended Employment Agreement, dated as of March 1, 2005, between Lincoln Educational Services Corporation and David F. Carney. 20
Stockholders Lincoln Technical Institute Management Stock Option Plan,
effective January 1, 2002.
**10.14 Form of Stock Option Agreement, dated January 1, 2002, between
Lincoln Technical Institute, Inc. and certain participants.
**10.15 Management Stock Subscription Agreement, dated January 1,
2002, among Lincoln Technical Institute, Inc. and certain
management investors.
***10.16 Stockholder's Agreement among the Company,Lincoln Educational Services,
Steven W. Hart and Steven W. Hart 2003 Grantor Retained
AnnuityTrust (1).
31.1 Trust.
*31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2
*31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32
*32 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.
(1)Incorporated
* Filed herewith
** Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (Registration No. 333-123644) and incorporated by reference herein.
*** Previously filed as an exhibit to the Registrant’sCompany's Form 8-K datedon June 28, 2005.
2005 and incorporated by reference herein. 21
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Date: August 12,November 10, 2005
| |||
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| |||
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LINCOLN EDUCATIONAL SERVICES CORPORATION By: /s/ Cesar Ribeiro -------------------------------------------- Cesar Ribeiro Chief Financial Officer (Principal Accounting and Financial Officer) 22