As of November 4, 2011,May 3, 2012, there were 22,624,89822,804,111 shares of the registrant’s common stock outstanding.

  

 

  

 

The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries.  All significant intercompany accounts and transactions have been eliminated.

 

In September 2011, the FASB issued accounting pronouncementsa revised standard on testing for goodwill impairment. The revised standard allows an entity to first assess qualitatively whether it is necessary to perform step one of the two-step annual goodwill impairment test. An entity is required to perform step one only if the entity concludes that it is more likely than not that a reporting unit’s fair value is less than its carrying amount, a likelihood of more than 50 percent. An entity can choose to perform the qualitative assessment on none, some, or all of its reporting units. Moreover, an entity can bypass the qualitative assessment for any reporting unit in any period and believes noneproceed directly to step one of the impairment test, and then perform the qualitative assessment in any subsequent period. The revised standard is effective for the Company for annual and interim goodwill impairment tests performed beginning after January 1, 2012 for the Company. The Company does not believe this guidance will have any material impact on the Company’s condensedits consolidated financial statements.position, results of operations, or cash flows.

 

The weighted average number of common shares used to compute basic and diluted (loss) income per share for the three and nine months ended September 30,March 31, 2012 and 2011 and 2010 was as follows:

For the three months ended September 30, 2011 and 2010,March 31, 2012, options to acquire 414,583 and 328,33378,301 shares respectively, andwere excluded from the above table because the Company reported a net loss for the ninequarter and therefore their impact on reported earnings per share would have been antidilutive.  For the three months ended September 30,March 31, 2011, and 2010, options to acquire 293,333 and 64,500313,333 shares respectively, were excluded from the above table because they have an exercise price that is greater than the average market price of the Company’s common stock and therefore their impact on reported earnings per share would have been antidilutive.  For the three months ended September 30,

On April 29, 2011, options to acquire 110,978 shares were excluded from the above table because the Company reported a net loss for the quarter and therefore their impact on reported earnings per share would have been antidilutive.

The Company reviews intangible assets for impairment when indicators of impairment exist.  Annually, or more frequently if necessary, the Company evaluates goodwill and intangible assets with indefinite lives for impairment, with any resulting impairment reflected as an operating expense. The Company concluded that the decrease in the Company’s market capitalization as of September 30, 2011 was a triggering event and, accordingly, the Company tested goodwill and indefinite lived intangibles for impairment.  The tests indicated that five of the Company’s reporting units were impaired, which resulted in an expense of $9.4 million in the third quarter of 2011.  In addition, the Company recorded an impairment charge of $1.0 million in the third quarter of 2011 related to a regional accreditation indefinite intangible asset that is no longer being utilized.

The following table summarizes the estimated future amortization expense:

 

Long-term debt and lease obligations consist of the following:

Amounts borrowed as revolving loans under the 2009 Credit Facility will bearbore interest, at the Company’s option, at either (i) an interest rate based on LIBOR and adjusted for any reserve percentage obligations under Federal Reserve Bank regulations (the “Euro Dollar Rate”) for specified interest periods or (ii) the Base Rate (as defined in the 2009 Credit Agreement), in each case, plus an applicable margin rate as determined under the 2009 Credit Agreement.  The “Base Rate,” as defined under the 2009 Credit Agreement, is the highest of (a) the prime rate, (b) the Federal Funds rate plus 0.50% and (c) a daily rate equal to one month of the Euro Dollar Rate plus 1.0%.  Under the 2009 Credit Agreement, the margin interest rate is subject to adjustment within a range of 1.50% to 3.25% based upon changes in the Company’s consolidated leverage ratio and depending on whether the Company has chosen the Euro Dollar Rate or the Base Rate option.  Swing line loans will bear interest at the Base Rate plus the applicable margin rate.  Letters of credit will require a fee equal to the applicable margin rate multiplied by the daily amount available to be drawn under each issued letter of credit plus a fronting fee of 0.125% of the amount available to be drawn and customary issuance, presentation, amendment and other processing fees associated with letters of credit.  At September 30, 2011March 31, 2012 and December 31, 2010,2011, the Company had outstanding letters of credit aggregating $0.5$1.6 million, which were primarily comprised of letters of credit for the Department of Education matters and real estate leases.

The 2009 Credit Agreement contains customary representations, warranties and covenants including consolidated adjusted net worth, consolidated leverage ratio, consolidated fixed charge coverage ratio, minimum financial responsibility composite score, cohort default rate and other financial covenants, certain restrictions on capital expenditures as well as affirmative and negative covenants and events of default customary for facilities of this type.  In addition, the Company is paying fees to the lenders that are customary for facilities of this type.  As of September 30, 2011, the Company was in compliance with the covenants contained in the credit agreement.

As of September 30,March 31, 2012 and December 31, 2011, the Company had no amounts outstanding under the 2009 Credit Agreement.  As of December 31, 2010, the Company had a total of $20.0 million outstanding under its Credit Agreement.  During the nine months ended September 30, 2011, the Company repaid $20.0 million under its Credit Facility. The interest rate on borrowings under the Credit Facility during the nine months ended September 30, 2011 was 4.75%.

(b) The Company completed a sale and a leaseback of several facilities on December 28, 2001. The Company retains a continuing involvement in the lease and, as a result, it is prohibited from utilizing sale-leaseback accounting. Accordingly, the Company has treated this transaction as a finance lease. The lease expiration date isexpires on December 31, 2016.

(c) In 2009, the Company assumed real estate capital leases in Fern Park, Florida and Hartford, Connecticut.  These leases bear interest at 8% and expire in 2032 and 2031, respectively.

The Company has two stock incentive plans:  a Long-Term Incentive Plan (the “LTIP”) and a Non-Employee Directors Restricted Stock Plan (the “Non-Employee Directors Plan”).

Under the LTIP, certain employees received awards of restricted shares of common stock.stock based on service and performance.  The number of shares granted to each employee is based on the fair market value of a share of common stock on the date of grant.  As of September 30, 2011, there were a total of 774,456 restricted shares awarded and 251,265 shares vested under the LTIP. The

All service-based restricted shares granted prior to February 23, 2011 vest ratably on the first through fifth anniversaries of the grant date.  The service-based restricted shares granted on or after February 23, 2011 through December 31, 2011 vest ratably on the grant date and the first through fourth anniversaries of the grant date.  The service-based restricted shares that were granted on March 2, 2012 vest on March 2, 2013.

On April 29, 2011, 134,131 performance-based shares were granted which vest over four years based upon the attainment of (i) a specified operating income margin during any one or more of the fiscal years in the period beginning January 1, 2011 and ending December 31, 2014 and (ii) the attainment of earnings before interest, taxes, depreciation and amortization targets during each of the fiscal years ended December 31, 2011 2012, 2013 andthrough 2014.  There is no vesting period on the right to vote or the right to receive dividends on any of the restricted shares.  The recognized restricted stock expense for the three months ended September 30, 2011 and 2010 was $0.4 million and $0.3 million, respectively, and for the nine months ended September 30, 2011 and 2010 was $2.0 million and $1.0 million, respectively. The unrecognized restricted stock expense under the LTIP as of September 30, 2011 and December 31, 2010 was $7.0 million and $3.4 million, respectively.

Pursuant to the Non-Employee Directors Plan, each non-employee director of the Company receives an annual award of restricted shares of common stock on the date of the Company’s annual meeting of shareholders.  The number of shares granted to each non-employee director is based on the fair market value of a share of common stock on that date.  The restricted shares vest ratably on the first through third anniversary of the grant date; however, there is no vesting period on the right to vote or the right to receive dividends on these restricted shares.  Beginning in 2010, all new awards of restricted shares of common stock granted under the Non-Employee Directors Plan vest fully on the first anniversary of the grant date.  As of September 30, 2011, there were a total of 155,641 shares awarded less 5,035 shares canceled and 116,238 shares vested under the Non-Employee Directors Plan.  The recognized restricted stock expense for

For the three months ended September 30,March 31, 2012 and 2011, and 2010 was $0.1 million and $0.2 million, respectively, and for the nine months ended September 30, 2011 and 2010 was $0.5 million, respectively.  The unrecognized restricted stock expense under the Non-Employee Directors Plan as of September 30, 2011 and December 31, 2010 was $0.3 million.

The recognized restricted stock expense for the three months ended March 31, 2012 and 2011 was $0.8 million and $0.1$1.1 million, forrespectively. The unrecognized restricted stock expense as of March 31, 2012 and 2011 was $6.6 million and $5.9 million, respectively.  As of March 31, 2012, outstanding restricted shares under the nine months ended September 30, 2011 and 2010, respectively.LTIP had aggregate intrinsic value of $4.2 million.

The fair value of the stock options used to compute stock-based compensation is the estimated present value at the date of grant using the Black-Scholes option pricing model.  The weighted average fair values of options granted during the three months ended March 31, 2012 was $2.52 using the following weighted average assumptions for grants:

The following is a summary of transactions pertaining to the stock options:

As of September 30, 2011,March 31, 2012, the unrecognized pre-tax compensation expense for all unvested stock option awards was $0.4$0.6 million.  This amount will be expensed over the weighted-average period of approximately 2.162.73 years.

The following table presents a summary of stock options outstanding:

 

 

In the ordinary conduct of its business, the Company is subject to lawsuits, investigations and claims, including, but not limited to, claims involving students or graduates and routine employment matters. Although the Company cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against it, the Company does not believe that any currently pending legal proceedingproceedings to which it is a party will have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.

 

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 total amount of the Company’s contributions paid under its pension plan was $0.2 million for the ninethree months ended September 30, 2011March 31, 2012 and $0.7$0.1 million for the ninethree months ended September 30, 2010.March 31, 2011.  The net periodic benefit cost was $0.3 million and $0.1$0.2 million for the three months ended September 30,March 31, 2012 and 2011, and 2010, respectively, and $0.8 million and $0.5 million for the nine months ended September 30, 2011 and 2010, respectively.

 

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” section of our Annual Report on Form 10-K for the year ended December 31, 2010,2011, as filed with the Securities and Exchange Commission (“SEC”) and in our other filings with the SEC. 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 SEC that advise interested parties of the risks and factors that may affect our business.

 

The 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 our Form 10-K for the year ended December 31, 2010,2011, as filed with the SEC, which includes audited consolidated financial statements for our three fiscal years ended December 31, 2010.2011.

 

We are a leading provider of diversified career-oriented post-secondary education. We offer recent high school graduates and working adults degree and diploma programs in five areas of study: health sciences, automotive technology, skilled trades, business and information technology and hospitality services. Each area of study is specifically designed to appeal to and meet the educational objectives of our student population, while also satisfying the criteria established by industry and employers. The resulting diversification limits dependence on any one industry for enrollment growth or placement opportunities and broadens ourpotential opportunities for introducing new programs. As of September 30, 2011, 22,526March 31, 2012, we enrolled 19,118 students were enrolled at our 46 campuses across 17 states. Our campuses primarily attract students from their local communities and surrounding areas, although our five destination campuses attract students from across the United States, and in some cases, from abroad.

 

Our discussions of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP.  The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period.  On an ongoing basis, we evaluate our estimates and assumptions, including those related to revenue recognition, bad debts, fixed assets, goodwill and other intangible assets, income taxes and certain accruals and contingencies.  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’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’s estimates, assumptions and judgment in the preparation of our consolidated financial statements.

 

 

 

 

Our bad debt expense as a percentage of revenues for the three months ended September 30,March 31, 2012 and 2011 was 3.5% and 2010 was 7.8% and 7.7%, respectively, and for the nine months ended September 30, 2011 and 2010 was 6.0% and 6.6%4.6%, respectively.  Our exposure to changes in our bad debt expense could impact our operations.  A 1% increase in our bad debt expense as a percentage of revenues for the three months ended September 30,March 31, 2012 and 2011 and 2010 would have resulted in an increase in bad debt expense of $1.2$1.0 million and $1.7 million, respectively, and for the nine months ended September 30, 2011 and 2010 would have resulted in an increase in bad debt expense of $4.0 million and $4.7$1.5 million, respectively.

 

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, schools, or educational programs to participate in Title IV programs could have a material effect on our ability to realize our receivables.

 

 

Goodwill represents a significant portion of our total assets. As of September 30, 2011,March 31, 2012, goodwill represented approximately $97.4 million, or 26.6%27.3%, of our total assets.

We test our goodwill for impairment using a two-step approach.  The first step is conducted utilizing the multiple of earnings approach and comparing the carrying value of our reporting units to their implied fair value.  If necessary, the second step is conducted utilizing a discounted cash flow approach and comparing the carrying value of our reporting units to their estimated fair value.

At December 31, 2010,2011, we tested our goodwill for impairment and determined we did not have an impairment. No events have occurred since that an impairment of approximately $6.2 million existed for three of our reporting units.  No other reporting unit’s carrying goodwill amount exceeded or approximated its implied value.

 

Inflation has not had a material effect on our operations.

Certain reported amounts in our analysis have been rounded for presentation purposes.

 

The following table sets forth selected consolidated statements of operations data as a percentage of revenues for each of the periods indicated:

 

Our primary capital requirements are for facility maintenance and expansion, acquisitions and the development of new programs.  Our principal sources of liquidity have been cash provided by operating activities and borrowings under our $115 million credit facility.facility (the “2009 Credit Facility”). 

The following chart summarizes the principal elements of our cash flows (in thousands):