L I N C O L N T E C H N I C A L I N S T I T U T E www.lincolntech.com
ALLENTOWN
5151 Tilghman Street
Allentown, PA 18104
610.398.5300
BROCKTON
375 Westgate Drive
Brockton, MA 02301
508.941.0730
CENTER CITY
PHILADELPHIA
3600 Market Street
Philadelphia, PA 19104
215.382.1553
GRAND PRAIRIE
2915 Alouette Drive
Grand Prairie, TX 75052
972.660.5701
MOUNT LAUREL
1000 Howard Boulevard
Mt. Laurel, NJ 08054
856.722.9333
HAMDEN
Branch Campus of New Britain, CT
109 Sanford Street
Hamden, CT 06514
203.287.7300
NEW BRITAIN
200 John Downey Drive
New Britain, CT 06051
860.225.8641
PLYMOUTH MEETING
One Plymouth Meeting
Suite 300
Plymouth Meeting, PA 19462
610.941.0319
QUEENS
Branch Campus of Union, NJ
15-30 Petracca Place
Whitestone, NY 11357
718.640.9800
EDISON
1697 Oak Tree Road
Edison, NJ 08820
732.548.8798
MAHWAH
Branch Campus of Union, NJ
70 McKee Drive
Mahwah, NJ 07430
201.529.1414
PHILADELPHIA
9191 Torresdale Avenue
Philadelphia, PA 19136
215.335.0800
UNION
2299 Vauxhall Road
Union, NJ 07083
908.964.7800
COLUMBIA
9325 Snowden River Parkway
Columbia, MD 21046
410.290.7100
LINCOLN
622 George Washington
Highway
Lincoln, RI 02865
401.334.2430
NORTHEAST
PHILADELPHIA
2180 Hornig Road, Bldg. A
Philadelphia, PA 19116
215.969.0869
SHELTON
Center for Culinary Arts/
Branch Campus of New Britain, CT
8 Progress Drive
Shelton, CT 06484
203.929.0592
CROMWELL
Center for Culinary Arts/
Branch Campus of New Britain, CT
106 Sebethe Drive
Cromwell, CT 06416
860.613.3350
LOWELL
211 Plain Street
Lowell, MA 01852
978.458.4800
PARAMUS
160 Route 4 East
Paramus, NJ 07652
201.845.6868
SOMERVILLE
5 Middlesex Avenue
Somerville, MA 02145
61 7.776.3500
L I N C O L N C O L L E G E O F T E C H N O L O G Y www.lincolncollegeoftechnology.com
DENVER
460 South Lipan Street
Denver, CO 80223
303.722.5724
FLORIDA
2410 Metrocentre Boulevard
West Palm Beach, FL 33407
561.842.8324
INDIANAPOLIS (AC0102)
7225 Winton Drive, Bldg.128
Indianapolis, IN 46268
31 7.632.5553
HENDERSON
2290 Corporate Circle
Suite 100
Henderson, NV 89074
702.269.7600
MARIETTA
2359 Windy Hill Road
Marietta, GA 30067
770.226.0056
MELROSE PARK
831 7 West North Avenue
Melrose Park, IL 60160
708.344.4700
NORCROSS
5675 Jimmy Carter Boulevard
Suite 100
Norcross, GA 30071
678.966.9411
L I N C O L N C O L L E G E O N L I N E www.lincolncollegeonline.com
S O U T H W E S T E R N C O L L E G E www.swcollege.net
DAYTON (04-01-1707B)
111 West First Street
Dayton, OH 45402
937.224.0061
FRANKLIN (04-01-1706B)
201 East Second Street
Franklin, OH 45005
937.746.6633
NORTHERN KENTUCKY
8095 Connector Drive
Florence, KY 41042
859.282.9999
TRI-COUNTY (04-01-1705B)
149 Northland Boulevard
Cincinnati, OH 45246
513.874.0432
VINE STREET (04-01-1708B)
632 Vine Street
Cincinnati, OH 45202
513.421.3212
N A S H V I L L E A U T O - D I E S E L C O L L E G E www.nadcedu.com
NASHVILLE
1524 Gallatin Road
Nashville, TN 37206
615.226.3990
E U P H O R I A I N S T I T U T E O F B E A U T Y A R T S & S C I E N C E S www.euphoriainstitute.com
GREEN VALLEY
11041 South Eastern Avenue
Henderson, NV 89052
702.932.8111
SUMMERLIN
9340 West Sahara Avenue
Suite 205
Las Vegas, NV 89117
702.341.8111
F L O R I D A C U L I N A R Y I N S T I T U T E www.floridaculinary.com
FLORIDA
2410 Metrocentre Boulevard
West Palm Beach, FL 33407
561.842.8324
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FINANCIAL HIGHLIGHTS$139,201$198,574$261,233$299,221$321,50620022003200420052006NET REVENUESDollars in ThousandsAVERAGE ENROLLMENTOPERATING INCOMEDollars in ThousandsNet Revenues$139,201$198,574$261,233$299,221$321,506Total Operating Expenses$137,251$182,893$236,152$266,711$293,505Income From Operations$1,950$15,681$25,081$32,510$28,001Net Income($674)$8,219$12,978$18,709$15,552Income Per Common ShareBasic($0.03)$0.38$0.60$0.80$0.61Diluted($0.03)$0.37$0.56$0.76$0.60Cash, Restricted Cash and Marketable Securities$11,079$48,965$41,445$50,257$7,381Total Debt$22,682$43,060$46,829$10,768$9,860Total Stockholders’ Equity$33,905$42,924$58,086$135,990$151,783Depreciation and Amortization$7,201$9,879$10,749$13,064$14,866Capital Expenditures$3,598$13,154$23,813$22,621$19,341Acquisitions, Net of Cash Acquired$ –$7,583$14,498$27,776$32,872Average Enrollment9,15512,48716,26617,86918,081Number of Campuses2323283437DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS20022003200420052006$1,950$15,681$25,081$32,510$28,001200220032004200520069,15512,48716,26617,86918,08120022003200420052006LIFELONG LEARNING FOR PRODUCTIVE CAREERSCORPORATE INFORMATIONLIFELONG LEARNING FOR PRODUCTIVE CAREERSDAVID F. CARNEY(1)Chairman of the Board and Chief Executive OfficerALEXIS P. MICHAS(1) (3) (4)Managing PartnerStonington Partners, Inc.JAMES J. BURKE, JR.(1) (3) (4)PartnerStonington Partners, Inc.STEVEN W. HART(3)PresidentHart Capital LLCJERRY G. RUBENSTEIN(2) (5)PresidentOMNI Management AssociatesPAUL E. GLASKE(3) (4) (5)Former Chairman and Chief Executive Officer Blue Bird CorporationPETER S. BURGESS(2) (5)Former PartnerArthur Andersen LLPCELIA CURRIN(2) (5)Founder and PrincipalBenchStrength MarketingJ. BARRY MORROW(4) (5)Former PresidentChase Education FinanceBOARD OF DIRECTORS(1) Member of Executive Committee(2) Member of Audit Committee(3) Member of Compensation Committee(4) Member of Nominating and Corporate Governance Committee(5) Independent DirectorDAVID F. CARNEYChairman of the Board and Chief Executive OfficerLAWRENCE E. BROWNVice ChairmanSHAUN E. MCALMONTPresident and Chief Operating OfficerSCOTT M. SHAWExecutive Vice PresidentCESAR RIBEIROSenior Vice President and Chief Financial OfficerTHOMAS F. MCHUGHSenior Vice President and Chief Compliance OfficerEDWARD B. ABRAMSSenior Vice President OperationsDEBORAH M. RAMENTOLSenior Vice President OperationsPIPER P. JAMESONChief Marketing OfficerCORPORATE OFFICERS200 Executive Drive, Suite 340West Orange, NJ 07052973.736.9340www.lincolneducationalservices.comCORPORATEHEADQUARTERSShearman & Sterling LLPNew York, NYOUTSIDE COUNSELDeloitte & Touche LLPParsippany, NJ AUDITORSTraded on the NASDAQ Global Marketunder the symbol LINCCOMMON STOCKContinental Stock Transfer & Trust CompanyNew York, NYTRANSFER AGENTBrainerd Communicators, Inc.New York, NY212.986.6667INVESTOR RELATIONS LIFELONG LEARNING FOR PRODUCTIVE CAREERS
1
L E T T E R T O S H A R E H O L D E R S
D E A R F E L L O W S H A R E H O L D E R S ,
While the past year was a period of challenge and transition for
our company, we continued to aggressively move forward in
implementing our growth strategy and strategic investment
plan. We launched our online platform, re-branded schools
under the Lincoln name, opened our Queens, New York, campus,
completed the acquisition of New England Institute of
Technology at West Palm Beach, and expanded our Grand
Prairie, Texas, campus. We believe these initiatives will strengthen
our value proposition to students and employers and bolster
our competitive position in the years to come.
During 2006, we also achieved record revenues of $321.5
million, a 7.4% increase compared to $299.2 million for 2005.
In addition, our average student enrollment reached record
levels, as we finished 2006 with 18,081 students, up 1.2%
compared to 2005. Excluding the impact of acquisitions,
however, our results trailed our expectations as the anticipated
benefits of our strategic investments during the year were
delayed. These initiatives added to our expenses without
contributing sufficiently to our enrollment and revenues. In
addition, our results were impacted by changes in the operating
environment, most notably the strong labor market, as many of
our high school recruits chose immediate employment over the
pursuit of educational alternatives.
Notwithstanding these challenges, we remain very optimistic
about our future growth potential. Our economy continues to
demand and reward employees who have skills, and Lincoln has
the experience and expertise to educate today’s workforce.
As a result, we believe that the mission at hand is one of
continued execution and focus – in terms of marketing and
recruiting students, replicating our fast-growing programs to
effectively utilize our existing capacity, and building out our
online resources.
2007 AND BEYOND – INVESTING FOR GROWTH
We believe the benefits of the investments we have been making
in our business will begin to surface in the second half of 2007
and beyond. Our optimism is principally based on the following:
• First, in the past two years, we have significantly expanded
our program mix. We have strengthened our Spa and Culinary
vertical with the acquisitions of the New England Institute of
Technology at West Palm Beach and the Euphoria Institute of
Beauty Arts & Sciences. The West Palm Beach acquisition
represents our first school to offer programs in each of our five
verticals. Moreover, West Palm Beach’s Florida Culinary
Institute is a premier culinary school in a very attractive market
that we believe we can meaningfully grow with our new national
sales force initiative. In addition, in 2007 we will benefit from 12
months of operations compared to only 7 months in 2006.
Euphoria has been completely integrated into our company
and is positioned for growth. We will be opening a third
Euphoria campus in Las Vegas during 2007 as well as launching
Euphoria programs in two of our existing campuses. Similarly,
in 2007 we will open a culinary school at our existing Columbia,
Maryland, campus, which will enable us to leverage that
school’s management team while appealing to a broader audi-
ence in the densely populated Washington-Baltimore corridor.
• Second, in 2007 we will benefit from our new 101,000 square-
foot facility in Grand Prairie, Texas, which was opened in July of
2006. We are now firmly established in our new facility, and
enrollment in one of our new programs, Collision Repair, is
progressing well. We expect to benefit from the campus
being in operation for the entire year, particularly during the
important fall recruiting season. We expect 2007 to be a very
strong year at Grand Prairie.
• Third, our new Queens campus is gaining momentum, and
we expect continued enrollment growth during 2007. More
importantly, although the school incurred losses for the year, it
turned profitable in the fourth quarter, and we expect Queens
to be profitable in each of the four quarters of 2007, thus creating
a favorable year over year swing in both revenue and net income.
• Fourth, we anticipate strong growth from our online business
in 2007 and beyond. Specifically, we see a clear opportunity to
utilize our newly acquired Florida resources for the expansion of
our online and associate degree programs. We recently
received approval from a national accrediting commission for
ten online associate degree completion programs that will
allow Lincoln students at all 37 campuses to complete an
associate degree online. These programs will be branded as
Lincoln Management Programs, which we believe will serve as
a differentiating factor in the auto and skilled trades areas.
2
L E T T E R T O S H A R E H O L D E R S C O N T I N U E D
These programs include Automotive Service Management,
HVAC Management, Healthcare Management, and Culinary
Management, among others.
We ended the year with 200 students who were primarily
enrolled in just one program. We launched our second associate
of applied science degree program in late 2006. We anticipate
launching two additional associate degree programs in the
second quarter and a bachelor degree program unique to
Lincoln Online in the third quarter of 2007. Online programs will
allow for the expansion of our business and IT vertical, support
degree completion for current students, and ultimately become
a growth engine for the company.
2007 OPERATING PLAN
In addition to recognizing the true benefits from these various
growth initiatives in 2007, we are dedicated to improving various
components of our internal operations. The environment we
operate in has changed, and as a result, we believe adjustments
are necessary in order to optimize our efficiency and maximize
our future growth potential. Accordingly, we are taking steps to
enhance our recruitment organization and processes and
strengthen our marketing efforts.
Expanding and Improving Our Recruiting Program
There are four key areas within our recruitment organization
that we have begun to address.
First, we have fostered extensive collaboration with our call
center partner and shortened our script. As a result, we have
increased transfer rates from the call center to campus admission
representatives across our entire organization over the past six
months. We believe our efforts in this area will position the call
center and our representatives for the most efficient live transfer
of leads possible, which should result in more enrollments.
Second, we are engaged in an exclusive partnership with a
military recruiting organization to provide training to
discharged veterans and National Guard troops, an important
market of prospective students. We will designate and train
military admissions staff to work with these veterans and will
direct the enrolled students either to our online programs or to
our large destination campuses, which are equipped to handle
housing and related processes.
Third, given the increase in our web-based leads over the past
24 months, we have worked closely with our lead generation
partner to better understand the intricacies of the Internet in
the sales process and related buying behavior in this new
technological environment. Based on our research, we have
accelerated our training development plans to better
prepare our representatives to work with these leads in contact,
response time,
information exchange, enrollment, and
follow-up service.
Finally, we are focused on further improving our approach to
recruiting and packaging prospective students. Fine-tuning our
operations and sales processes is one component of our
improved approach, and we are also expanding our high school
recruitment program in order to increase our potential pool of
students. Accordingly, we have expanded our presence in
our traditional high school recruiting base by increasing our
admissions staff and expanding the number of schools that we
visit.
We are also changing how we work with students and their
parents during their decision-making process. A strong labor
market, the influence of the Internet as a resource, and the
potential for immediate gratification have further complicated
the decision-making process related to continuing one’s
education. Students and their parents have to evaluate more
schools and program choices than ever before. Additionally, a
major area of concern for students and their parents is afford-
ability. We believe that by improving our student financing
process we will better serve our potential students and
recapture growth in the high school student market.
As a result, we have streamlined our financial aid process so
that students know well in advance of starting class how they
will pay for their education. By determining earlier in the recruit-
ment process that a student has concerns with his or her financial
aid package, we have more time to work with the student and
thus increase their likelihood of starting class with us.
Strengthening Our Marketing Efforts
In early 2007, we completed our nationwide re-branding initia-
tive, well ahead of our initial plan. We have now consolidated
29 of our 37 campuses under the Lincoln banner, including
eight campuses now operating as “Lincoln College of
Technology” and 21 campuses operating as “Lincoln Technical
LIFELONG LEARNING FOR PRODUCTIVE CAREERS
3
Institute.” This re-branding initiative projects a more powerful,
unified image of Lincoln schools to our constituents, focuses
our resources for continued growth, allows us to efficiently
leverage our marketing spend, and more effectively integrates
our online and on-ground educational offerings. In addition,
our re-branding efforts have provided us with the opportunity
to organize a national admissions team for the first time in
our history. The Lincoln name holds significant brand equity
across the five distinct verticals we serve, and our new national
brand name and sales force will both support and drive our
future growth.
Also, we have identified several areas within our marketing
efforts that we believe are priorities for 2007. These areas
include: the development of new sales and advertising
collateral; the development and launch of a new and intelligent
Lincoln Website; the production of new television commercials,
newspaper advertisements, and Internet advertisements; an
emphasis on a more focused and performance-based media
buying; and a year-round marketing effort to support high
school recruitment.
MANAGEMENT TEAM
These various operational initiatives will be guided by an
improved and expanded senior management team. Helping to
chart our course is Shaun McAlmont, who was elected
President and Chief Operating Officer of Lincoln in January
2007. Shaun, who was previously Executive Vice President and
President of our Online Division, has led the repositioning of
our marketing and product development efforts. As COO, he
will be in a position to fully implement these changes through-
out all of our operations and lead us through the next stage of
our growth and development.
In addition, we recently appointed Piper Jameson our Chief
Marketing Officer. Piper joined us with over a decade of post-
secondary education experience, during which time her
creative work has been recognized with numerous marketing
awards, including two Emmy Awards for commercial production.
Piper possesses a strong marketing and financial background
and our company will benefit from her expertise in television
and Internet advertising, branding, strategic partnerships, and
new program launches.
We are also in the process of filling the position of Vice
President of Recruitment and Sales. This position has been created
in order to strengthen our focus on admissions, especially given
the challenging environment and the changing technologies and
techniques that now must be employed in order to recruit
today’s students.
SUMMARY
Despite having experienced one of the more challenging
periods in our history, we remain very optimistic about our
growth prospects over the long term. We believe the invest-
ments we are making in our business today will support a return
to growth at our company in 2007 and beyond. Interest in our
programs from both students and employers is solid, and our
job placement rates remain strong.
We were founded in 1946 with the goal of providing quality
training and education to young men and former troops during
the post-World War II economy. Now, over 60 years later, we
remain dedicated to our goal of providing a quality education
to our students and helping position them for future success.
During 2007, we will continue to build on our exceptional track
record and long-standing commitment to the students and
communities we serve.
We appreciate your support and look forward to updating you
on our progress as the year unfolds.
Sincerely,
David F. Carney
Chairman and CEO
Lincoln Educational Services Corporation
LIFELONG LEARNING FOR PRODUCTIVE CAREERS
4
E D U C AT I O N A L P R O G R A M S
D E G R E E
AUTOMOTIVE
• Auto Service Management
• Diesel Service Management
• Auto and Diesel Technology
• Collision Repair
SKILLED TRADES
• Drafting Design and CAD
• Electronic Engineering Technician
HEALTH SCIENCES
• Medical Assisting Technology
• Medical Administrative Assisting
Technology
SPA AND CULINARY SERVICES
• Culinary Management
BUSINESS & IT
• Business Office Administrative
Specialist
• Network Systems Administrative
Technology
• PC System and Networking
Technology
• Software Application and Network
Technology
• Accounting
• Criminal Justice
D I P L O M A
AUTOMOTIVE
• Auto Service Technician
• Diesel Service Technician
• Auto and Diesel Technology
• Collision Repair
SKILLED TRADES
• Drafting Design and CAD
• EST
• HVAC
• Electrical
• Electronics Technician
HEALTH SCIENCES
• Medical Assisting
• Medical Administrative Assistant
• Medical Coding and Billing
• Pharmacy Technician
• Phlebotomy
• Licensed Practical Nursing
• Dental Assisting
SPA AND CULINARY SERVICES
• Culinary Arts
• Cosmetology
• Esthetics
• Nail Technology
• Therapeutic Massage and
Bodywork Technology
BUSINESS & IT
• Business Administrative Specialist
• Network Systems Administrator
• PC Support Technician
• IT Specialist
• Computerized Accounting
• Computer Information Specialist
• Criminal Justice
__________________________________________________________________________________
U.S. SECURITIES AND EXCHANGE COMMISSION
__________________________________________________________________________________________________
WASHINGTON, D.C. 20549
Form 10-K
⌧
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006
__________________________________________________________________________________________________
__________________________________________________________________________________________________
Commission File Number 000-51371
LINCOLN EDUCATIONAL SERVICES CORPORATION
(Exact name of registrant as specified in its charter)
New Jersey
(State or other jurisdiction of incorporation or
organization)
57-1150621
(IRS Employer Identification No.)
200 Executive Drive, Suite 340
West Orange, NJ 07052
(Address of principal executive offices)
(973) 736-9340
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:31) No ⌧
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:31) No ⌧
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 ⌧ No (cid:31)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. ⌧
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition
of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer (cid:31)
Accelerated filer ⌧
Non-accelerated filer (cid:31)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes (cid:31) No ⌧
The aggregate market value of the 4,445,545 shares of common stock held by non-affiliates of the Registrant issued and outstanding
as of June 30, 2006, the last business day of the registrant’s most recently completed second fiscal quarter was $75,974,364. This
amount is based on the closing price of the common stock on the Nasdaq Global Market of $17.09 per share on June 30, 2006. Shares
of common stock held by executive officers and directors and persons who own 5% or more of outstanding common stock have been
excluded since such persons may be deemed affiliates. This determination of affiliate status is not a determination for any other
purpose.
The number of shares of Registrant’s common stock outstanding as of March 13, 2007 was 25,472,221.
Documents Incorporated by Reference
Portions of the Proxy Statement for the Registrant’s 2007 Annual Meeting of Stockholders are incorporated by reference in Part III of
this Annual Report on Form 10-K. With the exception of those portions that are specifically incorporated by reference in this Annual
Report on Form 10-K, such Proxy Statement shall not be deemed filed as part of this Report or incorporated by reference herein.
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-K
FOR THE FISCAL YEAR ENDING DECEMBER 31, 2006
PART I.
BUSINESS
ITEM 1.
ITEM 1A. RISK FACTORS
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2.
ITEM 3.
ITEM 4.
PROPERTIES
LEGAL PROCEEDINGS
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
SELECTED FINANCIAL DATA
ITEM 6.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8
ITEM 9.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
ITEM 9A. DISCLOSURE CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
PART III.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
PART IV.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
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Forward-Looking Statements
This Form 10-K contains “forward-looking statements,” within the meaning of Section 21E of the Securities and
Exchange Act of 1934, as amended, which include information relating to future events, future financial performance, strategies,
expectations, competitive environment, regulation and availability of resources. These forward-looking statements include,
without limitation, statements regarding: proposed new programs; expectations that regulatory developments or other matters will
not have a material adverse effect on our consolidated financial position, results of operations or liquidity; statements concerning
projections, predictions, expectations, estimates or forecasts as to our business, financial and operating results and future
economic performance; and statements of management’s goals and objectives and other similar expressions concerning matters
that are not historical facts. Words such as “may,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,”
“anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” and similar expressions, as well as statements in future tense,
identify forward-looking statements.
Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily
be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are
based on information available at the time those statements are made and/or management’s good faith belief as of that time with
respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ
materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such
differences include, but are not limited to:
•
•
•
•
•
•
•
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•
•
actual or anticipated fluctuations in our results of operations;
our failure to comply with the extensive regulatory framework applicable to our industry or our failure to obtain timely
regulatory approvals in connection with a change of control of our company;
our success in updating and expanding the content of existing programs and developing new programs in a cost-effective
manner or on a timely basis;
risks associated with the opening of new campuses;
risk associated with integration of acquired schools;
industry competition;
our ability to continue to execute our growth strategies;
conditions and trends in our industry;
general and economic conditions; and
other factors discussed under the headings “Business,” “Risk Factors” and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations.”
Forward-looking statements speak only as of the date the statements are made. You should not put undue reliance on any
forward-looking statements. We assume no obligation to update forward-looking statements to reflect actual results, changes in
assumptions or changes in other factors affecting forward-looking information, except to the extent required by applicable
securities laws.
ITEM 1.
BUSINESS
OVERVIEW
PART I.
We are a leading and diversified for-profit provider of career-oriented post-secondary education as measured by total enrollment
and number of graduates. We offer recent high school graduates and working adults degree and diploma programs in five
principal areas of study: automotive technology, health sciences (which includes programs in licensed practical nursing (LPN) for
medical administrative assistants, medical assistants, pharmacy technicians, medical coding and billing and dental assisting),
skilled trades, business and information technology and spa and culinary. For the year ended December 31, 2006, our automotive
technology program, our health science program, our skilled trades program, our business and information technology program,
our spa and culinary program accounted for approximately 41%, 32%, 13%, 5%, and 9%, respectively, of our average enrollment.
We had 17,167 students enrolled as of December 31, 2006 and our average enrollment for the year ended December 31, 2006 was
18,081 students, an increase of 1.2% from our average enrollment of 17,869 for the year ended December 31, 2005. For the year
ended December 31, 2006, our revenues were $321.5 million, which represents an increase of 7.4% from the year ended
December 31, 2005. Excluding our acquisition of Euphoria Institute of Beauty Arts and Sciences, or Euphoria, in December 2005
and New England Institute of Technology at Palm Beach, Inc., or FLA, in May 2006, our revenues and average enrollments
would have increased by 2.3% and decreased by 3.8%, respectively, compared to the year ended December 31, 2005. For the year
ended December 31, 2005, our revenues were $299.2 million, which represents a 14.5% increase from the year ended
December 31, 2004. Excluding our acquisition of New England Technical Institute, or NETI, in January 2005, our revenues and
average enrollments would have increased by 8.1% and 3.0%, respectively, compared to the year ended December 31, 2004.
As of December 31, 2006 we operated 37 campuses in 17 states. In 2006, we initiated a re-branding strategy to consolidate
schools under the Lincoln brand, either Lincoln College of Technology or Lincoln Technical Institute depending on the state. As
of January 2007, we had completed our rebranding initiative. Our current brands are Lincoln College of Technology (eight
campuses), Lincoln Technical Institute (twenty-one campuses), Nashville Auto-Diesel College (one campus), Southwestern
College (five campuses), and Euphoria Institute of Beauty Arts and Sciences (two campuses). Our campuses, the majority of
which serve major metropolitan markets, are located in various areas throughout the United States. Five of our campuses are
destination schools, which attract students from across the United States and, in some cases, from abroad. Our other campuses
primarily attract students from their local communities and surrounding areas. All of our schools are nationally accredited and are
eligible to participate in federal financial aid programs.
On January 11, 2005, we acquired the rights, title and interest in the assets used in the conduct and operation of New England
Technical Institute for approximately $18.8 million, net of cash acquired. New England Technical Institute operates four schools
in New Britain, Hamden, Shelton and Cromwell, Connecticut and provides programs in automotive technology, health sciences,
business and information technology, skilled trades and culinary arts. This acquisition expanded our presence in the northeastern
U.S.
On December 1, 2005, we acquired the rights, title and interest in the assets used in the conduct and operation of Euphoria for
approximately $9.2 million, net of cash acquired. Euphoria operates two campuses, serving approximately 300 students in Las
Vegas and Henderson, Nevada. Euphoria currently offers certificates programs in esthetics, cosmetology and nail design.
On March 27, 2006 we opened our new automotive campus in Queens, New York.
On May 22, 2006, we acquired all of the outstanding common stock of FLA for approximately $40.1 million. The purchase price
was $32.9 million, net of cash acquired plus the assumption of a mortgage note for $7.2 million. FLA operates two campuses,
serving approximately 1,000 students. FLA currently offers associates and bachelor’s degrees in various areas including
automotive, skilled trade, health science, business and information technology, and spa and culinary. This acquisition increased
the number of campuses we operate from 35 to 37.
We believe that we provide our students with the highest quality career-oriented training available for our areas of study in our
markets. We offer programs in areas of study that we believe are typically underserved by traditional providers of post-secondary
education and for which we believe there exists significant demand among students and employers. Furthermore, we believe our
convenient class scheduling, career focused curricula and emphasis on job placement offer our students valuable advantages that
have been neglected by the traditional academic sector. By combining substantial hands-on training with traditional classroom-
based training led by experienced instructors, we believe we offer our students a unique opportunity to develop practical job skills
in key areas of expected job demand. We believe these job skills enable our students to compete effectively for employment
opportunities and to pursue on-going salary and career advancement.
Our principal business is providing post-secondary education. Accordingly, our operations aggregate into one reporting segment.
1
AVAILABLE INFORMATION
Our website is www.lincolneducationalservices.com. We make available on this website our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, annual proxy statement on Schedule 14A and amendments to those
reports as soon as reasonably practicable after we electronically file or furnish such materials to the Securities and Exchange
Commission. You can access this information on our website, free of charge, by clicking on “Investor Relations.” The information
contained on or connected to our website is not a part of this annual report on Form 10-K.
GROWTH STRATEGY
Our goal is to strengthen our role as a leading and diversified provider of career-oriented post-secondary education by continuing
to pursue the following growth strategies:
Expand Existing Areas of Study and Existing Facilities. We believe we can leverage our existing operations to capitalize on
demand from students and employers in our local markets. We are adding new programs and degree offerings in our current areas
of study and are expanding several of our campus facilities.
Expand Existing Areas of Study. We are expanding our program offerings in our existing areas of study by replicating existing
programs in new locations and increasing our degree offerings. In 2006 we replicated 3 programs across 3 campuses.
We are extending our culinary program and are opening a new facility at our Columbia, Maryland campus, and we expect to be
offering classes in the second quarter of 2007. Similarly, we are replicating our cosmetology program and constructing a
cosmetology facility at our Lincoln, Rhode Island campus and expect to be offering classes in the second quarter of 2007. In total,
we expect to replicate twelve programs across 10 different campuses.
We are also continuing to expand our associate degree offerings. We currently offer associate degrees at 19 of our campuses
bringing the total enrollment in associate degree programs to approximately 17.2% and 14.2% as of December 31, 2006 and 2005,
respectively. In 2006, we acquired our first bachelor’s degree program in culinary arts. We are also currently seeking approval for
a bachelor’s of technology degree at our Columbia, Maryland campus.
Expand Existing Facilities. We are expanding our existing facilities and relocating other schools to expand capacity. This will
enable us to roll out new programs and attract more students. For example, we moved to a new facility in June 2004 in
Indianapolis, Indiana which accommodates 2,000 students and nearly doubled our capacity in that city. This additional space
allowed us to grow our student population and further diversify our product offerings. We moved into a new 40,000 square foot
facility in October 2004 in Lincoln, Rhode Island which allowed us to consolidate facilities into one location and more than
double our classroom space. Operationally, these new facilities are more efficient to manage and will accommodate increased
enrollments and programs. In October 2005, we acquired an additional 100,000 square foot facility in Grand Prairie, Texas, which
combined with our existing facility, tripled the size of the original 50,000 square foot facility. We opened this new facility in the
second quarter of 2006 and combined with the existing school will be able to serve approximately 2,200 students.
Expand Existing Geographic Markets. We are expanding our Euphoria campus in the north end of Las Vegas which will enable
us to better serve fast growing city.
Enter New Geographic Markets and New Areas of Study. We believe we can increase our student enrollments by entering
selected new geographic markets and new areas of study. We target new markets and areas of study that we believe have
significant growth potential and where we can leverage our reputation and operating expertise. We expect that our entrance into
new geographic markets and areas of study will increase our diversification and potential for future program expansion.
Evaluate New Geographic Markets. We continuously search for entry into markets where we can start new schools. Our most
recent start-up is the partnership with the Greater New York Area Automobile Dealers Association which offers programs in
automotive technology. We opened the school on March 27, 2006. In addition, we expanded our presence in the New England and
Las Vegas markets in 2005 as a result of our acquisitions of NETI and Euphoria, and in 2006 we entered the Florida market with
the acquisition of FLA.
Evaluate New Areas of Study. We continuously search for new, high-growth areas of study that are in demand by students and
employers. We typically require six to 18 months to develop new programs and to obtain necessary regulatory approvals. On
January 11, 2005, we acquired NETI which has subsequently been re-branded Lincoln College of Technology. NETI offers
programs in culinary arts and nursing, which were new programs for us. During the fourth quarter of 2005, we acquired Euphoria
which provided us with new programs including cosmetology, esthetics, hair design and nail technician. In 2005 we also
introduced a new program for dental assistants in Lincoln, Rhode Island. In 2006, we launched Health Information Technology
and Criminal Justice programs both on ground and online. We expect to roll these programs out to additional campuses in 2007.
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We are developing several other new programs in the health sciences, business and information technology and skilled trades, and
some of these programs are expected to be approved for offering in 2007.
Opportunistically Pursue Strategic Acquisitions. We continue to evaluate attractive acquisition candidates. In evaluating
potential acquisitions, we seek to identify schools with the potential for program replication at our existing campuses, new areas
of study, new markets with attractive growth opportunities and advanced degree programs. We also look for schools whose
operations we can improve by leveraging our sales and marketing expertise, business management systems and our experienced
management team.
Introduce Online Education Alternatives. We recently launched our online initiative to capitalize on the rapidly growing
demand for, and flexibility provided by, online education alternatives. Initially, we were offering some of our diploma graduates
the opportunity to earn their associate degree online and in June 2006 we launched our first 100% online program. In December
2006, we launched our second 100% online program, and we anticipate launching three to five more programs in 2007. We
believe that our online initiatives will broaden our addressable market and be an attractive option for students without the
geographic or financial flexibility to enroll in campus-based programs.
PROGRAMS AND AREAS OF STUDY
We structure our program offerings to provide our students with a practical, career-oriented education and position them for
attractive entry-level job opportunities in their chosen fields. Our programs are designed to be completed in 14 to 105 weeks.
Tuition for programs ranges from $4,100 to $33,500, depending on the length of the program and the area of study. All of our
schools offer diploma and certificate programs, 19 of our schools are currently approved to offer associate degree programs and
one school is approved to offer a bachelor’s degree program. In order to accommodate the schedules of our students and maximize
classroom utilization, we typically offer courses five days a week in three shifts a day and start new classes every month. We
update and expand our programs frequently to reflect the latest technological advances in the field, providing our students with the
specific skills and knowledge required in the current marketplace. Classroom instruction combines lectures and demonstrations by
our experienced faculty with comprehensive hands-on laboratory exercises in simulated workplace environments.
3
The following table lists the programs offered and the average number of students enrolled in each area of study as of
December 31, 2006.
Program Offered
Area of Study
Bachelor
Associate
Automotive
Technology
-
Health Sciences
-
Skilled Trades
-
Auto Service
Management,
Collision Repair,
Diesel Technology,
Diesel & Truck
Service
Management
Medical Assisting
Technology,
Medical
Administrative
Assistant
Technology
Mechanical /
Architectural
Drafting,
Electronics
Engineering
Technology,
HVAC
Spa and Culinary
Culinary
Management
Culinary Arts
Business and
Information
Technology
-
PC Systems &
Networking
Technology,
Network Systems
Administration,
Business
Administration,
Criminal Justice
Total:
Diploma or
Certificate
Automotive
Mechanics,
Automotive
Technology,
Collision Repair,
Diesel Truck
Mechanics, Diesel
Technology, Diesel
& Truck
Technology,
Master Automotive
Technology
Medical
Administrative
Assisting, Medical
Assisting,
Pharmacy
Technology,
Medical Billing
and Coding, Dental
Assisting, Licensed
Practical Nurse
Electronic
Servicing,
Electronics
Engineering
Technology,
Electronics System
Technology,
HVAC,
Mechanical /
Architectural
Drafting,
Electrician
Culinary Arts,
Baking & Pastry,
Cosmetology,
Esthetics, Nail
Technician,
Therapeutic,
Massage & Body
Technology
Business
Administration,
Graphic Web
Design, Network
Systems
Administrating, PC
Support
Technology,
Criminal Justice
4
Average
Enrollment
Percent of Total
Enrollment
7,288
41%
5,863
32%
2,440
13%
1,659
9%
831
18,081
5%
100%
Automotive Technology. Automotive technology represents our largest area of study, with 41% of our average student
enrollments for the year ended December 31, 2006. Our automotive technology programs are 24 to 105 weeks in length, with
tuition rates of $9,750 to $33,500. We believe we are a leading provider of automotive technology education in each of our local
markets. Graduates of our programs are qualified to obtain entry level employment ranging from positions as technicians and
mechanics to various apprentice level positions. Our graduates are employed by a wide variety of employers, ranging from
automotive and diesel dealers, independent auto body paint and repair shops, to trucking and construction companies.
We have an arrangement with BMW that offers our automotive technology students the opportunity to work for BMW through
the Service Technician Education Program (STEP). The STEP program is a "graduate" school program for individuals who have
successfully earned an automotive certification either at one of our schools or any of our competitor's schools. Students who are
admitted to the STEP program have their tuition paid by BMW and upon successfully completing the program are typically
employed as BMW mechanics. The BMW STEP program commenced at our Columbia, Maryland facility in 2004. Our
arrangement with BMW signifies our high quality education capabilities and is an attractive marketing program.
All of our Lincoln Technical Institute schools, with the exception of our Allentown, Pennsylvania campus, offer programs in
automotive technology in addition to other technical programs. Lincoln Technical Institute (formerly Denver Automotive &
Diesel College) and Nashville Auto-Diesel College which we acquired in 2000 and 2003, respectively, currently offer programs
exclusively in automotive technology. Denver Automotive & Diesel College, Nashville Auto-Diesel College, our Columbia,
Maryland Lincoln Technical Institute school and our Indianapolis, Indiana Lincoln Technical Institute schools are destination
schools, attracting students from throughout the United States and, in some cases, from abroad.
Health Sciences. For the year ended December 31, 2006, health sciences represented our second largest area of study,
representing 32% of our total average enrollments. Our health science programs are 30 to 68 weeks in length, with tuition rates of
$10,720 to $23,400. Graduates of our programs are qualified to obtain positions such as licensed practical nurses, medical
administrative assistant, EKG technician, claims examiner and pharmacy technician. Our graduates are employed by a wide
variety of employers, including hospitals, laboratories, insurance companies, doctors' offices and pharmacies. Our medical
assistant and medical administrative assistant programs are our largest health science programs.
We offer health science programs at most of our Lincoln College of Technology schools, Southwestern College and our
Allentown, Pennsylvania and Melrose, Illinois Lincoln Technical Institute schools as well as select New England Technical
Institute schools.
Skilled Trades. For the year ended December 31, 2006, 13% of our average student enrollments were in our skilled trades
programs. Our skilled trades programs are 45 to 91 weeks in length, with tuition rates of $15,000 to $27,900. Our skilled trades
programs include heating, ventilation and air conditioning repair, drafting and computer-aided design and electronic system
technician. Graduates of our programs are qualified to obtain entry level employment positions such as cable, wiring and HVAC
installers and servicers and drafting technicians. Our graduates are employed by a wide variety of employers, including residential
and commercial telecommunications companies and architectural firms.
We created our own in-house electronic system technician program in 2001 with the assistance of two industry groups, Electronic
Systems Technician Consortium and the National Center for Construction Education and Research. We have introduced our
electronic system technician program to six of our campuses and plan to expand it to additional campuses. Students in these
programs are trained to install and service equipment such as alarm systems, cable infrastructure, home entertainment systems,
fiber-optic wiring in homes and offices, and satellite and telecommunication systems.
We offer skilled trades programs at nine of our twenty-one Lincoln Technical Institute campuses.
Spa and Culinary. For the year ended December 31, 2006, 9% of our average student enrollments were in our spa and culinary
programs. Our spa and culinary programs are 14 to 97 weeks in length, with tuition rates of $4,100 to $27,300.
Business and Information Technology. For the year ended December 31, 2006, 5% of our average student enrollments were in
our business and information technology programs. Our business and information technology programs are 30 to 96 weeks in
length, with tuition rates of $12,000 to $27,165. We experienced a decline in our business and information technology programs
between the years 2000 and 2006 due to weakness in the economy and reduced demand for IT professionals. We have since
developed our in-house electronic system technician and health science programs in 2001 and 2002, respectively. We remain
committed to the IT industry and expect it to grow, especially as the economy recovers and business investment in hardware and
software increases with rapid technological advancement of computer applications. We have focused our current program
offerings on those that are most in demand, such as our PC systems technician, network systems administrator and business
administration specialist programs.
5
MARKETING AND STUDENT RECRUITMENT
We utilize a variety of marketing and recruiting methods to attract students and increase enrollments. Our marketing and
recruiting efforts are targeted at potential students who are entering the workforce, or who are underemployed or unemployed and
require additional training to enter or re-enter the workforce.
Marketing. Our marketing program utilizes media advertising such as television, the Internet, and various print media and is
enhanced by referrals. We continuously monitor and adjust the focus of our marketing efforts to maximize efficiency and
minimize our student acquisition costs.
Media. Our media advertising is directed primarily at attracting students from the local areas in which our schools operate.
Television advertising, which is coordinated by a national buyer, is our most successful medium. Systems we have developed
enable us to closely monitor and track the effectiveness of each advertisement on a daily or weekly basis and make adjustments
accordingly. The Internet is our second most successful medium and its effectiveness is continuously increasing. We also
advertise via direct mail, in telephone directories and in newspapers.
Referrals. Referrals from current students, high school counselors and satisfied graduates and their employers have historically
represented over 20% of our new enrollments. Our school administrators actively work with our current students to encourage
them to recommend our programs to potential students. We continue to build strong relationships with high school guidance
counselors and instructors by offering annual seminars at our training facilities to further educate these individuals on the
strengths of our programs. Graduates who have gone on to enjoy success in the workforce frequently recommend our programs, as
do local business owners who are pleased with the performance of our graduates whom they have hired.
Recruiting. Our recruiting efforts are conducted by a group of approximately 331 field- and campus-based representatives who
meet directly with potential students during presentations conducted at high schools, in the potential student's home or during a
visit to one of our campuses.
Field-Based Recruiting. Our field-based recruiting representatives make presentations at high schools to attract students to both
our local and destination campuses. Our field-based representatives also visit directly with potential students in their homes.
During 2006, we have recruited approximately 18% of our students directly out of high school.
Campus-Recruiting. When a potential student is identified through our marketing and recruiting efforts, one of our
representatives is paired with the potential student to follow up on an individual basis. Our media advertisements contain a unique
toll-free number and our telephone system automatically directs the call to the campus nearest the caller. At this point, a recruiting
representative will respond to the inquiry, typically within 24 hours. The representatives are trained to explain in detail the
opportunities available within each program, schedule an appointment for the potential student to visit the school and tour the
school's facilities.
STUDENT ADMISSIONS, ENROLLMENT AND RETENTION
Admissions. In order to attend our schools, students must complete an application and pass an entry examination. While each of
our programs has different admissions criteria, we screen all applications and counsel the students on the most appropriate
program to increase the likelihood that our students complete the requisite coursework and obtain and sustain employment
following graduation.
Enrollment. We enroll students continuously throughout the year, with our largest classes enrolling in late summer or early fall
following high school graduation. We had 17,167 students enrolled as of December 31, 2006 and our average enrollment for the
year ended December 31, 2006 was 18,081 students, an increase of 1.2% from December 31, 2005. Excluding our acquisition of
Euphoria in December 2005 and FLA in May 2006, our average enrollments would have decreased by 3.8%. Our average
enrollment for the year ended December 31, 2005 was 17,869 students, an increase of 9.9% from December 31, 2004. Excluding
our acquisition of NETI in January 2005, our average enrollments would have increased by 3.0%.
Retention. To maximize student retention, the staff at each school is trained to recognize the early warning signs of a potential
drop and to assist and advise students on academic, financial, employment and personal matters. We monitor our retention rates
by instructor, course, program and school. When we notice that a particular instructor or program is experiencing a higher than
normal dropout rate, we quickly seek to determine the cause of the problem and attempt to correct it. When we notice that a
student is having trouble academically, we offer tutoring.
6
JOB PLACEMENT
We believe that securing employment for our graduates is critical to our ability to attract high quality students. In addition, high
job placement rates result in low student loan default rates, an important requirement for continued participation in Title IV
Programs. See "Regulatory Environment—Regulation of Federal Student Financial Aid Programs." Accordingly, we dedicate
significant resources to maintaining an effective graduate placement program. Our non-destination schools work closely with local
employers to ensure that we are training students with skills that employers want. Each school has an advisory council made up of
local employers who provide us with direct feedback on how well we are preparing our students to succeed in the workplace. This
enables us to tailor our programs to the market. For example, part of a student's grade is dependent upon attendance and
appearance because employers want their employees to be punctual and to have a professional appearance. The placement staff in
each of our destination schools maintains databases of potential employers throughout the country, allowing us to place students
in their career field upon graduation. We also have internship programs that provide our students with opportunities to work with
employers prior to graduation. For example, some of the students in our automotive programs have the opportunity to complete a
portion of their hands-on training while working with a potential employer. In addition, some of our allied health students are
required to participate in an internship program during which they work in the field as part of their career training. Students that
participate in these programs often go on to work for the same business upon graduation. We also assist students with resume
writing, interviewing and other job search skills.
FACULTY AND EMPLOYEES
We hire our faculty in accordance with established criteria, including relevant work experience, educational background and
accreditation and state regulatory standards. We require meaningful industry experience of our teaching staff in order to maintain
the quality of instruction in all of our programs and to address current and industry-specific issues in our course content. In
addition, we provide intensive instructional training and continuing education, including quarterly instructional development
seminars, annual reviews, technical upgrade training, faculty development plans and weekly staff meetings.
The staff of each school typically includes a school director, a director of graduate placement, an education director, a director of
student services, a financial-aid director, an accounting manager, a director of admissions and instructors, all of whom are industry
professionals with experience in our areas of study.
As of December 31, 2006, we had approximately 2,862 employees, including 725 full-time faculty and 400 part-time instructors
and, at six of our campuses, the teaching professionals are represented by unions. These employees are covered by collective
bargaining agreements that expire between 2007 through 2011, except for one agreement which we are currently negotiating. We
believe that we have good relationships with these unions and our employees.
We have had no work stoppages at any of our campuses in the past 22 years.
COMPETITION
The for-profit, post-secondary education industry is highly competitive and highly fragmented, with no one provider controlling
significant market share. Direct competition between career-oriented schools and traditional four-year colleges or universities is
limited. Thus, our main competitors are other for-profit, career-oriented schools, as well as public and private two-year junior and
community colleges. Competition is generally based on location, the type of programs offered, the quality of instruction,
placement rates, reputation, recruiting and tuition rates. Public institutions are generally able to charge lower tuition than our
schools, due in part to government subsidies and other financial sources not available to for-profit schools. In addition, some of
our private competitors have a more extended or dense network of schools and campuses than we do, which enables them to
recruit students more efficiently from a wider geographic area. Nevertheless, we believe that we are able to compete effectively in
our local markets because of the diversity of our program offerings, quality of instruction, the strength of our brands, our
reputation and our success in placing students with employers.
We compete with every institution that is eligible to receive Title IV funding. This includes four-year, not-for-profit public and
private colleges and universities, community colleges and all for-profit institutions whether they are four years, two years or less.
Our competition differs in each market depending on the curriculum that we offer. For example, a school offering automotive,
allied health and skilled trades programs will have a different group of competitors than a school offering allied health,
business/IT and skilled trades. Also, because schools can add new programs within six to twelve months, new competitors can
emerge relatively quickly. Moreover, with the introduction of online learning, the number of competitors in each market has
increased because students can now stay local but learn from a non-local institution.
Notwithstanding the above, today we mainly compete with community colleges and other career schools, both for-profit and not-
for-profit. We focus on programs that are in high demand. We compete against community colleges by seeking to offer more
frequent start dates, more flexible hours, better instructional resources, more hands on training, shorter program length and greater
assistance with job placement. We compete against the other career schools by seeking to offer a higher quality of education,
7
higher quality instructional equipment and a better overall value. On average, each of our schools has at least three direct
competitors and at least a dozen indirect competitors. As we continue to add courses and degree programs, our addressable market
increases and thus we face increased competition.
ENVIRONMENTAL MATTERS
We use hazardous materials at our training facilities and campuses, and generate small quantities of waste such as used oil,
antifreeze, paint and car batteries. As a result, our facilities and operations are subject to a variety of environmental laws and
regulations governing, among other things, the use, storage and disposal of solid and hazardous substances and waste, and the
clean-up of contamination at our facilities or off-site locations to which we send or have sent waste for disposal. We are also
required to obtain permits for our air emissions, and to meet operational and maintenance requirements. In the event we do not
maintain compliance with any of these laws and regulations, or are responsible for a spill or release of hazardous materials, we
could incur significant costs for clean-up, damages, and fines or penalties.
REGULATORY ENVIRONMENT
Students attending our schools finance their education through a combination of family contributions, individual resources, private
loans and federal financial aid programs. Each of our schools participates in the federal programs of student financial aid
authorized under Title IV Programs, which are administered by the DOE. For the year ended December 31, 2006, approximately
80.1% (calculated based on cash receipts) of our revenues were derived from the Title IV Programs. Students obtain access to
federal student financial aid through a DOE prescribed application and eligibility certification process. Student financial aid funds
are generally made available to students at prescribed intervals throughout their predetermined expected length of study. Students
typically use the funds received from the federal financial aid programs to pay their tuition and fees. The transfer of funds from
the financial aid programs are to the student, who then applies those funds to the cost of their education.
In connection with the students' receipt of federal financial aid, our schools are subject to extensive regulation by governmental
agencies and licensing and accrediting bodies. In particular, the Title IV Programs, and the regulations issued thereafter by the
DOE, subject us to significant regulatory scrutiny in the form of numerous standards that each of our schools must satisfy in order
to participate in the various federal student financial aid programs. To participate in the Title IV Programs, a school must be
authorized to offer its programs of instruction by the applicable state education agencies in the states in which it is physically
located, be accredited by an accrediting commission recognized by the DOE and be certified as an eligible institution by the DOE.
The DOE defines an eligible institution to consist of both a main campus and its additional locations, if any. Each of our schools is
either a main campus or an additional location of a main campus. Each of our schools is subject to extensive regulatory
requirements imposed by state education agencies, accrediting commissions, and the DOE. Our schools also participate in other
federal and state financial aid programs that assist students in paying the cost of their education.
State Authorization
Each of our schools must be authorized by the applicable education agencies in the states in which the school is physically located
and, in some cases other states, in order to operate and to grant degrees, diplomas or certificates to its students. State agency
authorization is also required in each state in which a school is physically located in order for the school to become and remain
eligible to participate in Title IV Programs. Currently, each of our schools is authorized by the applicable state education agencies
in the states in which the school is physically located and in which it recruits students.
Our schools are subject to extensive, ongoing regulation by each of these states. State laws typically establish standards for
instruction, qualifications of faculty, location and nature of facilities and equipment, administrative procedures, marketing,
recruiting, financial operations and other operational matters. State laws and regulations may limit our ability to offer educational
programs and to award degrees, diplomas or certificates. Some states prescribe standards of financial responsibility that are
different from, and in certain cases more stringent than, those prescribed by the DOE. Some states require schools to post a surety
bond. Currently, we have posted surety bonds on behalf of our schools and education representatives with multiple states in a total
amount of approximately $12.2 million. These bonds are backed by $2.4 million of letters of credit.
If any of our schools fail to comply with state licensing requirements, they are subject to the loss of state licensure or
accreditation. If any one of our schools lost its authorization from the education agency of the state in which the school is located,
that school and its related main campus and/or additional locations would lose its eligibility to participate in Title IV Programs, be
unable to offer its programs and we could be forced to close that school. If one of our schools lost its state authorization from a
state other than the state in which the school is located, the school would not be able to recruit students in that state. We believe
that each of our schools is in substantial compliance with the applicable education agency requirements in each state in which it is
physically located.
Due to state budget constraints in other states in which we operate, it is possible that those states may reduce the number of
employees in, or curtail the operations of, the state education agencies that authorize our schools. A delay or refusal by any state
8
education agency in approving any changes in our operations that require state approval could prevent us from making such
changes or could delay our ability to make such changes.
Accreditation
Accreditation is a non-governmental process through which a school submits to ongoing qualitative and quantitative review by an
organization of peer institutions. Accrediting commissions primarily examine the academic quality of the school's instructional
programs, and a grant of accreditation is generally viewed as confirmation that the school's programs meet generally accepted
academic standards. Accrediting commissions also review the administrative and financial operations of the schools they accredit
to ensure that each school has the resources necessary to perform its educational mission.
Accreditation by an accrediting commission recognized by the DOE is required for an institution to be certified to participate in
Title IV Programs. In order to be recognized by the DOE, accrediting commissions must adopt specific standards for their review
of educational institutions. Fifteen of our campuses are accredited by the Accrediting Commission of Career Schools and Colleges
of Technology or ACCSCT, and twenty-one of our campuses are accredited by the Accrediting Council for Independent Colleges
and Schools, or ACICS. Both of these accrediting commissions are recognized by the DOE. The following is a list of the dates in
which each campus was accredited by its accrediting commission and the date by which its accreditation must be renewed.
9
Accrediting Commission of Career Schools and Colleges of Technology Reaccreditation Dates
School
Philadelphia, PA
Union, NJ
Mahwah, NJ*
Melrose Park, IL
Denver, CO
Columbia, MD
Grand Prairie, TX
Allentown, PA
Nashville, TN
Indianapolis, IN
New Britain, CT
Shelton, CT**
Cromwell, CT**
Hamden, CT**
Queens*
Last Accreditation Letter
December 4, 2003
June 4, 2004
December 9, 2004
March 11, 2005
September 8, 2006
March 6, 2002
September 7, 2001
December 9, 2002
June 3, 2002
December 9, 2002
June 6, 2003
September 3, 2004
November 22, 2004
March 4, 2003
June 30, 2006
Next Accreditation
May 1, 2008
February 1, 2009
August 1, 2009
November 1, 2009
February 1, 2011
February 1, 2012
September 7, 2006****
January 1, 2007***
May 1, 2007***
November 1, 2007
January 1, 2008
September 1, 2008
November 1, 2011
July 1, 2007***
June 30, 2008
*
**
***
**** Reviewed at February 2007 ACCSCT Commission meeting
Branch campus of main campus in Union, NJ
Branch campus of main campus in New Britain, CT
Currently going through re-accreditation
Accrediting Council for Independent Colleges and Schools Reaccreditation Dates
Last Accreditation Letter
School
April 14, 2005
Brockton, MA****
April 14, 2005
Henderson, NV****
April 14, 2005
Lincoln, RI
December 7, 2004
Lowell, MA**
December 7, 2004
Somerville, MA
April 30, 2003
Philadelphia (Center City), PA*
April 30, 2003
Edison, NJ
April 14, 2005
Marietta, GA****
April 30, 2003
Mt. Laurel, NJ*
April 14, 2005
Norcross, GA****
April 30, 2003
Paramus, NJ*
April 30, 2003
Philadelphia (Northeast), PA*
April 30, 2003
Plymouth Meeting, PA*
April 14, 2006
Dayton, OH
Cincinnati (Vine Street), OH***
April 14, 2006
Cincinnati (Northland Blvd.), OH*** April 14, 2006
April 14, 2006
Franklin, OH***
April 14, 2006
Florence, KY***
December 11, 2006
West Palm Beach, FL
December 9, 2006
Summerlin, NV
December 9, 2006
Green Valley, NV
Branch campus of main campus in Edison, NJ
*
Branch campus of main campus in Somerville, MA
**
***
Branch campus of main campus in Dayton, OH
**** Branch campus of main campus in Lincoln, RI
***** To be reviewed at April 2007 commission meeting
10
Next Accreditation
December 31, 2008
December 31, 2008
December 31, 2008
December 31, 2008
December 31, 2008
December 31, 2006*****
December 31, 2006*****
December 31, 2008
December 31, 2006*****
December 31, 2008
December 31, 2006*****
December 31, 2006*****
December 31, 2006*****
December 31, 2009
December 31, 2009
December 31, 2009
December 31, 2009
December 31, 2009
December 31, 2008
October 31, 2007
October 31, 2007
If one of our schools fails to comply with accrediting commission requirements, the institution and its main and/or branch
campuses are subject to the loss of accreditation. If any one of our schools lost its accreditation, students attending that school
would no longer be eligible to receive Title IV Program funding, and we could be forced to close that school. Our Cincinnati
(Vine Street), OH, and Franklin, OH, campuses are currently required to submit retention data to the ACICS. Any institution
required to submit retention data to the ACICS is required to obtain prior permission from the ACICS for the initiation of any new
program.
Nature of Federal and State Support for Post-Secondary Education
The federal government provides a substantial part of the support for post-secondary education through Title IV Programs, in the
form of grants and loans to students who can use those funds at any institution that has been certified as eligible by the DOE. Most
aid under Title IV Programs is awarded on the basis of financial need, generally defined as the difference between the cost of
attending the institution and the expected amount a student and his or her family can reasonably contribute to that cost. All
recipients of Title IV Program funds must maintain a satisfactory grade point average and progress in a timely manner toward
completion of their program of study. In addition, each school must ensure that Title IV Program funds are properly accounted for
and disbursed in the correct amounts to eligible students.
Students at our schools receive grants and loans to fund their education under the following Title IV Programs: (1) the Federal
Family Education Loan program, (2) the Federal Pell Grant, or Pell, program, (3) the Federal Supplemental Educational
Opportunity Grant program, and (4) the Federal Perkins Loan, or Perkins, program.
Federal Family Education Loan. Under the Federal Family Education Loan program, banks and other lending institutions
make loans to students or their parents. If a student or parent defaults on a loan, payment is guaranteed by a federally recognized
guaranty agency, which is then reimbursed by the DOE. Students with financial need qualify for interest subsidies while in school
and during grace periods. For the year ended December 31, 2006, we derived approximately 58% of our Title IV revenues
(calculated based on cash receipts) from the Federal Family Education Loan program.
Pell. Under the Pell program, the DOE makes grants to students who demonstrate the greatest financial need. For the year ended
December 31, 2006, we derived approximately 16% of our revenues (calculated based on cash receipts) from the Pell program.
Federal Supplemental Educational Opportunity Grant. The Federal Supplemental Educational Opportunity Grant program
grants are designed to supplement Pell grants for students with the greatest financial needs. An institution is required to make a
25% matching contribution for all funds received from the DOE under this program. For the year ended December 31, 2006, we
received less than 1% of our revenues (calculated based on cash receipts) from the Federal Supplemental Educational Opportunity
Grant program.
Perkins. Perkins loans are made from a revolving institutional account, 75% of which is capitalized by the DOE and the
remainder by the institution. Each institution is responsible for collecting payments on Perkins loans from its former students and
lending those funds to currently enrolled students. Defaults by students on their Perkins loans reduce the amount of funds
available in the applicable school's revolving account to make loans to additional students, but the school does not have any
obligation to guarantee the loans or repay the defaulted amounts. For the year ended December 31, 2006, we derived less than 1%
of our revenues (calculated based on cash receipts) from the Perkins program.
Other Financial Assistance Programs
Some of our students receive financial aid from federal sources other than Title IV Programs, such as the programs administered
by the U.S. Department of Veterans Affairs and under the Workforce Investment Act. In addition, many states also provide
financial aid to our students in the form of grants, loans or scholarships. The eligibility requirements for state financial aid and
these other federal aid programs vary among the funding agencies and by program. Several states that provide financial aid to our
students are facing significant budgetary constraints. We believe that the overall level of state financial aid for our students is
likely to decrease in the near term, but we cannot predict how significant any such reductions will be or how long they will last.
In addition to Title IV and other government-administered programs, all of our schools are eligible to participate in alternative
loan programs for their students. Alternative loans fill the gap between what the student receives from all financial aid sources and
what the student may need to cover the full cost of their education. Students or their parents can apply to a number of different
lenders for this funding at current market interest rates.
Reorganization
We were founded in 1946 as Lincoln Technical Institute, Inc. In February 2003, we reorganized our corporate structure to create a
holding company, Lincoln Educational Services Corporation. The ownership of Lincoln Educational Services Corporation was
identical to that of Lincoln Technical Institute, Inc. immediately prior to this reorganization. We subsequently began operating our
11
entire organization under the Lincoln Educational Services Corporation name; however, before this reorganization, all of our
interaction with the DOE, state and federal regulators and accrediting agencies was conducted by Lincoln Technical Institute, Inc.
Regulation of Federal Student Financial Aid Programs
To participate in Title IV Programs, an institution must be authorized to offer its programs by the relevant state education
agencies, be accredited by an accrediting commission recognized by the DOE and be certified as eligible by the DOE. The DOE
will certify an institution to participate in Title IV Programs only after the institution has demonstrated compliance with the
Higher Education Act and the DOE's extensive regulations regarding institutional eligibility. The DOE defines an institution to
consist of both a main campus and its additional locations, if any. Under this definition, for DOE purposes, we have the
following 15 institutions, collectively consisting of 15 main campuses and 21 additional locations:
Brand
Lincoln Technical Institute
Main Campus (es)
Union, NJ
Additional Location (s)
Mahwah, NJ
Queens, NY
Philadelphia, PA
Columbia, MD
Grand Prairie, TX
Allentown, PA
Edison, NJ
Somerville, MA
Lincoln, RI
Indianapolis, IN
Melrose Park, IL
Denver, CO
New Britain, CT
West Palm Beach, FL
Lincoln College of Technology
Nashville Auto Diesel College
Nashville, TN
Southwestern College of Technology
Dayton, OH
Mount Laurel, NJ
Paramus, NJ
Philadelphia, PA (Center City)
Plymouth Meeting, PA
Northeast Philadelphia, PA
Lowell, MA
Brockton, MA
Norcross, GA*
Marietta, GA*
Henderson, NV*
Henderson, NV (Green Valley)**
Las Vegas, NV (Summerlin)**
Shelton,CT
Cromwell, CT
Hamden, CT
West Palm Beach, FL (Culinary)***
Cincinnati, OH (Vine Street)
Franklin, OH
Cincinnati, OH (Northland Blvd.)
Florence, KY
*
**
***
These campuses are Lincoln College of Technology brands.
These campuses are Euphoria Institute of Beauty Arts & Sciences brands.
This campus is Florida Culinary Institute brand.
All of our main campuses, including their additional locations, are currently certified by the DOE to participate in Title IV
Programs. Southwestern College received an executed provisional program participation agreement from the DOE. In connection
with our acquisition of New England Technical Institute, Euphoria Institute of Beauty Arts & Sciences, and New England Institute
of Technology at Palm Beach, we have received an executed provisional program participation agreement from the DOE.
12
The DOE, accrediting commissions and state education agencies have responsibilities for overseeing compliance of schools with
Title IV Program requirements. As a result, each of our schools is subject to detailed oversight and review, and must comply with
a complex framework of laws and regulations. Because the DOE periodically revises its regulations and changes its interpretation
of existing laws and regulations, we cannot predict with certainty how the Title IV Program requirements will be applied in all
circumstances.
Significant factors relating to Title IV Programs that could adversely affect us include the following:
Congressional Action. Political and budgetary concerns significantly affect Title IV Programs. Congress must reauthorize the
Higher Education Act approximately every five years. Recently, Congress temporarily extended the provisions of the Higher
Education Act, or HEA, pending completion of the formal reauthorization process. In February 2006, Congress enacted the
Deficit Reduction Act of 2005, which contained a number of provisions affecting Title IV Programs, including some provisions
that had been in the HEA reauthorization bills. We believe that, in 2007, Congress will either complete the reauthorization of the
HEA or further extend additional provisions of the HEA. Numerous changes to the HEA are likely to result from any further
reauthorization and, possibly, from any extension of the remaining provisions of the HEA, but at this time we cannot predict all of
the changes the Congress will ultimately make.
In addition, Congress reviews and determines federal appropriations for Title IV Programs on an annual basis. Congress can also
make changes in the laws affecting Title IV Programs in the annual appropriations bills and in other laws it enacts between the
Higher Education Act reauthorizations. Because a significant percentage of our revenues are derived from Title IV Programs, any
action by Congress that significantly reduces Title IV Program funding or the ability of our schools or students to participate in
Title IV Programs could reduce our student enrollment and our revenues. Congressional action may also increase our
administrative costs and require us to modify our practices in order for our schools to comply fully with Title IV Program
requirements.
The "90/10 Rule." A proprietary institution, such as each of our institutions, loses its eligibility to participate in Title IV
Programs if, based on cash receipts, it derives more than 90% of its revenues for any fiscal year from Title IV Programs. Any
institution that violates this rule becomes ineligible to participate in Title IV Programs as of the first day of the fiscal year
following the fiscal year in which it exceeds 90%, and is unable to apply to regain its eligibility until the next fiscal year. If one of
our institutions violated the 90/10 Rule and became ineligible to participate in Title IV Programs but continued to disburse
Title IV Program funds, the DOE would require the institution to repay all Title IV Program funds received by the institution after
the effective date of the loss of eligibility.
We have calculated that, for each of our 2006, 2005 and 2004 fiscal years, none of our institutions derived more than 86.9% of its
revenues from Title IV Programs. For our 2006 fiscal year, our institutions' 90/10 Rule percentages ranged from 72.1% to 86.9%.
We regularly monitor compliance with this requirement to minimize the risk that any of our institutions would derive more than
the maximum percentage of its revenues from Title IV Programs for any fiscal year.
Student Loan Defaults. An institution may lose its eligibility to participate in some or all Title IV Programs if the rates at which
the institution's current and former students default on their federal student loans exceed specified percentages. The DOE
calculates these rates based on the number of students who have defaulted, not the dollar amount of such defaults. The DOE
calculates an institution's cohort default rate on an annual basis as the rate at which borrowers scheduled to begin repayment on
their loans in one year default on those loans by the end of the next year. An institution whose Federal Family Education Loan
cohort default rate is 25% or greater for three consecutive federal fiscal years (which correspond to our fiscal years) loses
eligibility to participate in the Federal Family Education Loan and Pell programs for the remainder of the federal fiscal year in
which the DOE determines that such institution has lost its eligibility and for the two subsequent federal fiscal years. An
institution whose Federal Family Education Loan cohort default rate for any single federal fiscal year exceeds 40% may have its
eligibility to participate in all Title IV Programs limited, suspended or terminated by the DOE.
None of our institutions has had a Federal Family Education Loan cohort default rate of 25% or greater for any of the federal
fiscal years 2004, 2003 and 2002, the three most recent years for which the DOE has published such rates. Nine of our 15
institutions (which include 23 of 32 campuses) had default rates less than 10% for these years. Based on the recent reconciliation
bill, these 23 campuses are eligible to disburse loans without waiting the initial 30 days. The following table sets forth the Federal
Family Education Loan cohort default rates for each of our 15 DOE numbered institutions for those fiscal years.
13
Institution
Union, NJ
Indianapolis, IN
Philadelphia, PA
Columbia, MD
Allentown, PA
Melrose Park, IL
Grand Prairie, TX
Edison, NJ
Denver, CO
Nashville, TN
Lincoln, RI
Somerville, MA
Southwestern, OH
New England, CT
West Palm Beach, FL
2004
7.60%
7.90%
12.80%
8.90%
7.00%
11.90%
19.50%
3.30%
8.40%
3.10%
10.00%
10.60%
3.20%
4.60%
8.20%
2003
7.10%
7.90%
15.40%
8.80%
3.90%
9.60%
10.80%
5.00%
9.10%
1.80%
7.40%
8.90%
6.20%
1.70%
9.20%
2002
5.90%
8.41%
13.70%
7.10%
7.10%
11.90%
14.30%
4.10%
8.40%
5.00%
6.20%
6.20%
0.00%
3.90%
10.90%
An institution whose cohort default rate under the Federal Family Education Loan program is 25% or greater for any one of the
three most recent federal fiscal years, or whose cohort default rate under the Perkins program exceeds 15% for any federal award
year (the twelve-month period from July 1 through June 30), may be placed on provisional certification status by the DOE. None
of our institutions have a Federal Family Education Loan cohort default rate above 25% for any of the three most recent fiscal
years for which the DOE has published rates.
An institution whose Perkins cohort default rate is 50% or greater for three consecutive federal award years loses eligibility to
participate in the Perkins program for the remainder of the federal award year in which DOE determines that the institution has
lost its eligibility and for the two subsequent federal award years. None of our institutions has had a Perkins cohort default rate of
50% or greater for any of the last three federal award years. The DOE also will not provide any additional federal funds to an
institution for Perkins loans in any federal award year in which the institution's Perkins cohort default rate is 25% or greater.
Denver Automotive & Diesel College and New England Technical Institute are our only institutions participating in the Perkins
program. Denver Automotive & Diesel College's cohort default rate was 16.1% for students scheduled to begin repayment in the
2004-2005 federal award year. The DOE did not provide any additional Federal Capital Contribution Funds for Perkins loans to
Denver Automotive & Diesel College. Denver Automotive & Diesel College continues to make loans out of its existing Perkins
loan fund. Lincoln Technical Institute (New Britain, CT) is provisionally certified by the DOE based on its change in ownership
and on a finding by the DOE prior to the change in ownership that New England Technical Institute had not transmitted certain
data related to the Perkins program to the National Student Loan Data System during periods prior to the acquisition. Lincoln
Technical Institute (New Britain, CT) cohort default rate was 0% for students scheduled to begin repayment in the 2004-2005
federal award year.
Financial Responsibility Standards. All institutions participating in Title IV Programs must satisfy specific standards of
financial responsibility. The DOE evaluates institutions for compliance with these standards each year, based on the institution's
annual audited financial statements, as well as following a change in ownership resulting in a change of control of the institution.
The most significant financial responsibility measurement is the institution's composite score, which is calculated by the DOE
based on three ratios:
• The equity ratio, which measures the institution's capital resources, ability to borrow and financial viability;
• The primary reserve ratio, which measures the institution's ability to support current operations from expendable
resources; and
• The net income ratio, which measures the institution's ability to operate at a profit.
The DOE assigns a strength factor to the results of each of these ratios on a scale from negative 1.0 to positive 3.0, with negative
1.0 reflecting financial weakness and positive 3.0 reflecting financial strength. The DOE then assigns a weighting percentage to
each ratio and adds the weighted scores for the three ratios together to produce a composite score for the institution. The
composite score must be at least 1.5 for the institution to be deemed financially responsible without the need for further oversight.
If an institution's composite score is below 1.5, but is at least 1.0, it is in a category denominated by the DOE as "the zone." Under
the DOE regulations, institutions that are in the zone are deemed to be financially responsible for a period of up to three years but
are required to accept payment of Title IV Program funds under the cash monitoring or reimbursement method of payment, to be
provisionally certified and to provide to the DOE timely information regarding various oversight and financial events.
14
If an institution's composite score is below 1.0, the institution is considered by the DOE to lack financial responsibility. If the
DOE determines that an institution does not satisfy the DOE's financial responsibility standards, depending on its composite score
and other factors, that institution may establish its financial responsibility on an alternative basis by, among other things:
• Posting a letter of credit in an amount equal to at least 50% of the total Title IV Program funds received by the institution
during the institution's most recently completed fiscal year;
• Posting a letter of credit in an amount equal to at least 10% of such prior year's Title IV Program funds, accepting
provisional certification, complying with additional DOE monitoring requirements and agreeing to receive Title IV
Program funds under an arrangement other than the DOE's standard advance funding arrangement; and/or
• Complying with additional DOE monitoring requirements and agreeing to receive Title IV Program funds under an
arrangement other than the DOE's standard advance funding arrangement.
We have submitted to the DOE our audited financial statements for the 2004 and 2005 fiscal year reflecting a composite score of
1.8 and 2.5, respectively, based upon our calculations, and that our schools meet the DOE standards of financial responsibility.
For the 2006 fiscal year, we have calculated our composite score to be 1.7.
The DOE has evaluated the financial condition of our institutions on a consolidated basis. DOE regulations permit the DOE to
examine our financial statements, including the financial statements of each institution and the financial statements of any related
party. Based on the Company's calculations, the 2006, 2005 and 2004 financial statements reflect a composite score of 1.7, 2.5
and 1.8, respectively. However, as a result of corrections of certain errors, including accounting for advertising costs, a sale
leaseback transaction, rent and certain other individually insignificant adjustments, in our prior financial statements, the DOE
recomputed the Company's consolidated composite scores for the years ended December 31, 2001 and 2002 and concluded that
the recomputed consolidated composite scores for those two years were below 1.0. In addition, we identified certain additional
errors in our financial statements for the year ended December 31, 2003 relating to our accounting for stock-based compensation
and accrued bonuses that did not result in a recomputation of our 2003 composite score. The DOE informed the Company that as
a result, for a period of three years effective December 30, 2004, all of the Company's current and future institutions have been
placed on "Heightened Cash Monitoring, Type 1 status," and are required to timely notify the DOE with respect to certain
enumerated oversight and financial events. The DOE also informed the Company that its circumstances will be taken into
consideration when each of our institutions applies for recertification of the Company's eligibility to participate in Title IV
Programs. When each of our institutions is next required to apply for recertification to participate in Title IV Programs, we expect
that the DOE will also consider our audited financial statements and composite scores for our most recent fiscal year as well as for
other fiscal years after 2001 and 2002. Additionally, since the DOE concluded that the previously computed composite scores for
2001 and 2002 were overstated, the Company agreed to pay $165,000 to the DOE, pursuant to a settlement agreement, to resolve
compliance issues related to this matter. The Company paid this amount on March 3, 2005. Although no assurance can be given,
the Company's management does not believe that the actions of the DOE specified above will have a material effect on its
financial position, results of operations or cash flows.
Return of Title IV Funds. An institution participating in Title IV Programs must calculate the amount of unearned Title IV
Program funds that have been disbursed to students who withdraw from their educational programs before completing them, and
must return those unearned funds to the DOE or the applicable lending institution in a timely manner, which is generally within
30 days from the date the institution determines that the student has withdrawn.
If an institution is cited in an audit or program review for returning Title IV Program funds late for 5% or more of the students in
the audit or program review sample, the institution must post a letter of credit in favor of the DOE in an amount equal to 25% of
the total amount of Title IV Program funds that should have been returned for students who withdrew in the institution's previous
fiscal year. Southwestern College made late returns of Title IV Program funds in excess of the DOE's prescribed threshold, most
of which predated our acquisition of Southwestern College. As a result, in accordance with DOE regulations, we have submitted a
letter of credit to the DOE in the amount of $28,400.
School Acquisitions. When a company acquires a school that is eligible to participate in Title IV Programs, that school
undergoes a change of ownership resulting in a change of control as defined by the DOE. Upon such a change of control, a
school's eligibility to participate in Title IV Programs is generally suspended until it has applied for recertification by the DOE as
an eligible school under its new ownership, which requires that the school also re-establish its state authorization and
accreditation. The DOE may temporarily and provisionally certify an institution seeking approval of a change of control under
certain circumstances while the DOE reviews the institution's application. The time required for the DOE to act on such an
application may vary substantially. DOE recertification of an institution following a change of control will be on a provisional
basis. Our expansion plans are based, in part, on our ability to acquire additional schools and have them certified by the DOE to
participate in Title IV Programs. Our expansion plans take into account the approval requirements of the DOE and the relevant
state education agencies and accrediting commissions.
15
Change of Control. In addition to school acquisitions, other types of transactions can also cause a change of control. DOE, most
state education agencies and our accrediting commissions have standards pertaining to the change of control of schools, but these
standards are not uniform. DOE regulations describe some transactions that constitute a change of control, including the transfer
of a controlling interest in the voting stock of an institution or the institution's parent corporation. For a publicly traded
corporation, DOE regulations provide that a change of control occurs in one of two ways: (a) if there is an event that would
obligate the corporation to file a Current Report on Form 8-K with the Securities and Exchange Commission disclosing a change
of control or (b) if the corporation has a shareholder that owns at least 25% of the total outstanding voting stock of the corporation
and is the largest shareholder of the corporation, and that shareholder ceases to own at least 25% of such stock or ceases to be the
largest shareholder. These standards are subject to interpretation by the DOE.
A significant purchase or disposition of our common stock could be determined by the DOE to be a change of control under this
standard. Most of the states and our accrediting commissions include the sale of a controlling interest of common stock in the
definition of a change of control. A change of control under the definition of one of these agencies would require the affected
school to reaffirm its state authorization or accreditation. The requirements to obtain such reaffirmation from the states and our
accrediting commissions vary widely.
A change of control could occur as a result of future transactions in which our company or schools are involved. Some corporate
reorganizations and some changes in the board of directors are examples of such transactions. Moreover, the potential adverse
effects of a change of control could influence future decisions by us and our stockholders regarding the sale, purchase, transfer,
issuance or redemption of our stock. In addition, the adverse regulatory effect of a change of control also could discourage bids
for your shares of common stock and could have an adverse effect on the market price of your shares.
Opening Additional Schools and Adding Educational Programs. For-profit educational institutions must be authorized by their
state education agencies and fully operational for two years before applying to the DOE to participate in Title IV Programs.
However, an institution that is certified to participate in Title IV Programs may establish an additional location and apply to
participate in Title IV Programs at that location without reference to the two-year requirement, if such additional location satisfies
all other applicable DOE eligibility requirements. Our expansion plans are based, in part, on our ability to open new schools as
additional locations of our existing institutions and take into account the DOE's approval requirements.
A student may use Title IV Program funds only to pay the costs associated with enrollment in an eligible educational program
offered by an institution participating in Title IV Programs. Generally, an institution that is eligible to participate in Title IV
Programs may add a new educational program without DOE approval if that new program leads to an associate level or higher
degree and the institution already offers programs at that level, or if that program prepares students for gainful employment in the
same or a related occupation as an educational program that has previously been designated as an eligible program at that
institution and meets minimum length requirements. If an institution erroneously determines that an educational program is
eligible for purposes of Title IV Programs, the institution would likely be liable for repayment of Title IV Program funds provided
to students in that educational program. Our expansion plans are based, in part, on our ability to add new educational programs at
our existing schools. We do not believe that current DOE regulations will create significant obstacles to our plans to add new
programs.
Some of the state education agencies and our accrediting commission also have requirements that may affect our schools' ability
to open a new campus, establish an additional location of an existing institution or begin offering a new educational program. Our
Cincinnati (Vine Street), OH, and Franklin, OH, campuses are currently required to submit retention data to the ACICS. Any
institution required to submit retention data to the ACICS may be required to obtain prior permission from the ACICS for the
initiation of any new program. We do not believe that these standards will create significant obstacles to our expansion plans.
Administrative Capability. The DOE assesses the administrative capability of each institution that participates in Title IV
Programs under a series of separate standards. Failure to satisfy any of the standards may lead the DOE to find the institution
ineligible to participate in Title IV Programs or to place the institution on provisional certification as a condition of its
participation. These criteria require, among other things, that the institution:
• Complies with all applicable federal student financial aid regulations;
• Has capable and sufficient personnel to administer the federal student financial aid programs;
• Has acceptable methods of defining and measuring the satisfactory academic progress of its students;
• Refers to the Office of the Inspector General any credible information indicating that any applicant, student, employee or
agent of the school has been engaged in any fraud or other illegal conduct involving Title IV Programs;
• Provides financial aid counseling to its students; and
• Submits in a timely manner all reports and financial statements required by the regulations.
Failure by an institution to satisfy any of these or other administrative capability criteria could cause the institution to lose its
eligibility to participate in Title IV Programs, which would have a material adverse effect on our business and results of
operations.
16
Other standards provide that an institution may be found to lack administrative capability and be placed on provisional
certification if its student loan default rate under the Federal Family Education Loan program is 25% or greater for any of the
three most recent federal fiscal years, or if its Perkins cohort default rate exceeds 15% for any federal award year. None of our
institutions have a Federal Family Education Loan cohort default rate above 25% for any of the three most recent fiscal years for
which the DOE has published rates. Denver Automotive & Diesel College and New England Technical Institute are our only
institutions participating in the Perkins program. Denver Automotive & Diesel College's cohort default rate was 16.1% for
students scheduled to begin repayment in the 2004-2005 federal award year. The DOE did not provide any additional Federal
Capital Contribution Funds for Perkins loans to Denver Automotive & Diesel College. Denver Automotive & Diesel College
continues to make loans out of its existing Perkins loan fund. As it was prior to when we acquired it, New England Technical
Institute is provisionally certified by the DOE based on its change in ownership and on a finding by the DOE prior to the change
in ownership that New England Technical Institute had not transmitted certain data related to the Perkins program to the National
Student Loan Data System during periods prior to the acquisition. New England Technical Institute's cohort default rate was 0%
for students scheduled to begin repayment in the 2004-2005 federal award year.
Ability to Benefit Regulations. Under certain circumstances, an institution may elect to admit non-high school graduates, or
"ability to benefit," students, into certain of its programs of study. In order for ability to benefit students to be eligible for Title IV
Program participation, the institution must comply with the ability to benefit requirements set forth in the Title IV Program
requirements. The basic evaluation method to determine that a student has the ability to benefit from the program is the student's
achievement of a minimum score on a test approved by the DOE and independently administered in accordance with DOE
regulations. In addition to the testing requirements, the DOE regulations also prohibit ability to benefit student enrollments from
constituting 50% or more of the total enrollment of the institution. In 2006, the following schools were authorized to enroll
“ability to benefit” applicants: Southwestern College, New Britain, Cromwell, Shelton, Hamden, Union, Mahwah, Indianapolis,
Melrose Park, Denver, West Palm Beach, Paramus, Mt. Laurel, Marietta, Edison and Norcross.
Restrictions on Payment of Commissions, Bonuses and Other Incentive Payments. An institution participating in Title IV
Programs may not provide any commission, bonus or other incentive payment based directly or indirectly on success in securing
enrollments or financial aid to any person or entity engaged in any student recruiting or admission activities or in making
decisions regarding the awarding of Title IV Program funds. In November 2002, the DOE published new regulations which
attempt to clarify this so-called "incentive compensation rule." Failure to comply with the incentive compensation rule could
result in loss of ability to participate in Title IV Programs or in fines or liabilities. We believe that our current compensation plans
are in compliance with the Higher Education Act and the DOE's new regulations, although we cannot assure you that the DOE
will not find deficiencies in our compensation plans.
Eligibility and Certification Procedures. Each institution must periodically apply to the DOE for continued certification to
participate in Title IV Programs. The institution must also apply for recertification when it undergoes a change in ownership
resulting in a change of control. The institution also may come under DOE review when it undergoes a substantive change that
requires the submission of an application, such as opening an additional location or raising the highest academic credential it
offers. The DOE agreed that the addition of the holding company to our ownership structure in 2003 would not constitute a
change in ownership of our schools resulting in a change of control provided that certain conditions were met, including that the
holding company execute the program participation agreement for each institution. See "Regulatory Environment—
Reorganization" for a description of our reorganization in 2003. The holding company has executed a program participation
agreement for each of our institutions.
The DOE may place an institution on provisional certification status if it determines that the institution does not fully satisfy
certain administrative and financial standards or if the institution undergoes a change in ownership resulting in a change of
control. The DOE may withdraw an institution's provisional certification with the institution having fewer due process protections
than if it were fully certified. In addition, the DOE may more closely review an institution that is provisionally certified if it
applies for approval to open a new location, add an educational program, acquire another school or make any other significant
change. Provisional certification does not otherwise limit an institution's access to Title IV Program funds. Southwestern College
received an executed program participation agreement from the DOE. In connection with each of our acquisitions of New England
Technical Institute, Euphoria Institute of Beauty Arts & Sciences, and New England Institute of Technology at Palm Beach we
received an executed temporary provisional program participation agreement from the DOE.
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All institutions are recertified on various dates for various amounts of time. The following table sets forth the expiration dates for
each of our institutions' current program participation agreement:
Institution
Expiration Date of Current Program
Participation Agreement
Allentown, PA
Columbia, MD
Philadelphia, PA
Denver, CO
Lincoln, RI
Nashville, TN
Somerville, MA
Edison, NJ
Union, NJ
Grand Prairie, TX
Indianapolis, IN
Melrose Park, IL
Dayton, OH
New Britain, CT
West Palm Beach, FL
* Provisionally certified.
September 30, 2007
September 30, 2007
September 30, 2007
December 31, 2009
June 30, 2008
June 30, 2008
June 30, 2008
September 30, 2007
September 30, 2007
March 31, 2009
March 31, 2009
March 31, 2009
June 30, 2008*
March 31, 2009*
June 30, 2010
Compliance with Regulatory Standards and Effect of Regulatory Violations. Our schools are subject to audits, program
reviews, and site visits by various regulatory agencies, including the DOE, the DOE's Office of Inspector General, state education
agencies, student loan guaranty agencies, the U.S. Department of Veterans Affairs and our accrediting commissions. In addition,
each of our institutions must retain an independent certified public accountant to conduct an annual audit of the institution's
administration of Title IV Program funds. The institution must submit the resulting audit report to the DOE for review.
The DOE conducted a program review at Denver Automotive and Diesel College (DADC) and issued an initial program review
report on January 23, 2006 in which it identified potential instances of noncompliance with certain DOE requirements. DADC has
submitted an initial response to the report and is waiting for a response or determination from the DOE.
If one of our schools failed to comply with accrediting or state licensing requirements, such school and its main and/or branch
campuses could be subject to the loss of state licensure or accreditation, which in turn could result in a loss of eligibility to
participate in Title IV Programs. If the DOE determined that one of our institutions improperly disbursed Title IV Program funds
or violated a provision of the Higher Education Act or DOE regulations, the institution could be required to repay such funds and
related costs to the DOE and lenders, and could be assessed an administrative fine. The DOE could also place the institution on
provisional certification and/or transfer the institution to the reimbursement or cash monitoring system of receiving Title IV
Program funds, under which an institution must disburse its own funds to students and document the students' eligibility for
Title IV Program funds before receiving such funds from the DOE. The DOE has informed us that as a result of our recomputed
composite scores for the 2001 and 2002 fiscal years, all of our current and future institutions have been placed on "Heightened
Cash Monitoring, Type 1 status" for a period of three years effective December 30, 2004 and are required to timely notify the
DOE with respect to certain enumerated oversight and financial events. The DOE has also informed us that these accounting
charges will be taken into consideration when each of our institutions applies for recertification of its eligibility to participate in
Title IV Programs.
An institution that is operating under "Heightened Cash Monitoring, Type 1 status," is required to credit student accounts before
drawing down funds under Title IV Programs and to draw down funds in an amount no greater than the previous disbursement to
students and parents. Additionally, the institution's compliance audit will be required to contain verification that this did occur
throughout the year. In addition to the above, the DOE has required us to comply with certain requirements prescribed for
institutions operating in "the zone," which is indicative of a composite score between 1.0 and 1.4. Those requirements include
providing timely information regarding any of the following oversight and financial events:
• Any adverse action, including a probation or similar action, taken against the institution by its accrediting agency;
• Any event that causes the institution, or related entity to realize any liability that was noted as a contingent liability in the
institution's or related entity's most recent audit financial statement;
• Any violation by the institution of any loan agreement;
• Any failure of the institution to make a payment in accordance with its debt obligations that results in a creditor filing
suit to recover funds under those obligations;
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• Any withdrawal of owner's equity from institution by any means, including declaring a dividend; or
• Any extraordinary losses, as defined in accordance with Accounting Principles Board Opinion No. 30.
Operating under the zone requirements may also require the institution to submit its financial statement and compliance audits
earlier than the date previously required and require the institution to provide information about its current operations and future
plans. An institution that continues to fail to meet the financial responsibility standards set by the DOE or does not comply with
the zone requirements may lose its eligibility to continue to participate in Title IV funding or it may be required to post
irrevocable letters of credit, for an amount determined by the DOE that is not less than 50% of the Title IV Program funds
received by the institution during its most recently completed fiscal year.
Significant violations of Title IV Program requirements by us or any of our institutions could be the basis for a proceeding by the
DOE to limit, suspend or terminate the participation of the affected institution in Title IV Programs or to civil or criminal
penalties. Generally, such a termination extends for 18 months before the institution may apply for reinstatement of its
participation. There is no DOE proceeding pending to fine any of our institutions or to limit, suspend or terminate any of our
institutions' participation in Title IV Programs.
We and our schools are also subject to complaints and lawsuits relating to regulatory compliance brought not only by our
regulatory agencies, but also by third parties, such as present or former students or employees and other members of the public. If
we are unable to successfully resolve or defend against any such complaint or lawsuit, we may be required to pay money damages
or be subject to fines, limitations, loss of federal funding, injunctions or other penalties. Moreover, even if we successfully resolve
or defend against any such complaint or lawsuit, we may have to devote significant financial and management resources in order
to reach such a result.
Lenders and Guaranty Agencies. In 2006, seven lenders provided funding to more than 90% of the students at the schools we
owned during that year: Citibank Student Loan Corporation, AMS Trust, AmSouth Bank, Citizens Bank, Charter One Bank,
Nellie Mae, and Nelnet. While we believe that other lenders would be willing to make federally guaranteed student loans to our
students if loans were no longer available from our current lenders, there can be no assurances in this regard. In addition, the
Higher Education Act requires the establishment of lenders of last resort in every state to ensure that loans are available to
students at any school that cannot otherwise identify lenders willing to make federally guaranteed loans to its students.
Our primary guarantors for Title IV loans are USA Group, a subsidiary of Sallie Mae, and New Jersey Higher Education
Assistance Authority, an independent agency of the State of New Jersey. These two agencies currently guarantee a majority of the
federally guaranteed student loans made to students enrolled at our schools. There are six other guaranty agencies that guarantee
student loans made to students enrolled at our schools. We believe that other guaranty agencies would be willing to guarantee
loans to our students if any of the guaranty agencies ceased guaranteeing those loans or reduced the volume of loans they
guarantee, although there can be no assurances in this regard.
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Item 1A.
RISK FACTORS
The following risk factors and other information included in this Form 10-K should be carefully considered. The risks and
uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that
we currently deem immaterial also may impair our business operations. If any of the following risks occur, our business, financial
condition, operating results, and cash flows could be materially adversely affected.
RISKS RELATED TO OUR INDUSTRY
Failure of our schools to comply with the extensive regulatory requirements for school operations could result in financial
penalties, restrictions on our operations and loss of external financial aid funding, which could affect our revenues and
impose significant operating restrictions on us.
Our schools are subject to extensive regulation by federal and state governmental agencies and by accrediting commissions. In
particular, the Higher Education Act of 1965, as amended, and the regulations promulgated thereunder by the DOE, set forth
numerous standards that our schools must satisfy to participate in various federal student financial assistance programs under
Title IV Programs. In 2006, we derived approximately 80.1% of our revenues, calculated based on cash receipts, from Title IV
Programs. To participate in Title IV Programs, each of our schools must receive and maintain authorization by the applicable
education agencies in the state in which each school is physically located, be accredited by an accrediting commission recognized
by the DOE and be certified as an eligible institution by the DOE. These regulatory requirements cover the vast majority of our
operations, including our educational programs, facilities, instructional and administrative staff, administrative procedures,
marketing, recruiting, financial operations and financial condition. These regulatory requirements also affect our ability to acquire
or open additional schools, add new educational programs, expand existing educational programs, and change our corporate
structure and ownership.
If any of our schools fails to comply with applicable regulatory requirements, the school and its related main campus and/or
additional locations could be subject to the loss of state licensure or accreditation, the loss of eligibility to participate in and
receive funds under the Title IV Programs, the loss of the ability to grant degrees, diplomas and certificates, provisional
certification, or the imposition of liabilities or monetary penalties, each of which could adversely affect our revenues and impose
significant operating restrictions upon us. In addition, the loss by any of our schools of its accreditation, its state authorization or
license, or its eligibility to participate in Title IV Programs constitutes an event of default under our credit agreement, which we
and our subsidiaries entered into with a syndicate of banks on February 15, 2005, which could result in the acceleration of all
amounts then outstanding under our credit agreement. The various regulatory agencies periodically revise their requirements and
modify their interpretations of existing requirements and restrictions. We cannot predict with certainty how any of these
regulatory requirements will be applied or whether each of our schools will be able to comply with these requirements or any
additional requirements instituted in the future.
If we or our eligible institutions do not meet the financial responsibility standards prescribed by the DOE, as has occurred
in the past, we may be required to post letters of credit or our eligibility to participate in Title IV Programs could be
terminated or limited, which could significantly reduce our student population and revenues.
To participate in Title IV Programs, an eligible institution must satisfy specific measures of financial responsibility prescribed by
the DOE or post a letter of credit in favor of the DOE and possibly accept other conditions on its participation in Title IV
Programs. Any obligation to post one or more letters of credit would increase our costs of regulatory compliance. Our inability to
obtain a required letter of credit or limitations on, or termination of, our participation in Title IV Programs could limit our
students' access to various government-sponsored student financial aid programs, which could significantly reduce our student
population and revenues.
Each year, based on the financial information submitted by an eligible institution that participates in Title IV Programs, the DOE
calculates three financial ratios for the institution: an equity ratio, a primary reserve ratio and a net income ratio. Each of these
ratios is scored separately and then combined into a composite score to measure the institution's financial responsibility. As a
result of the corrections of certain errors, including accounting for advertising costs, a sale leaseback transaction, rent and certain
other individually insignificant adjustments, in our prior financial statements, the DOE recomputed our consolidated composite
scores for the years ended December 31, 2001 and 2002 and concluded that the recomputed consolidated composite scores for
those two years were below 1.0. In addition, we identified certain additional errors in our financial statements for the year ended
December 31, 2003 relating to our accounting for stock-based compensation and accrued bonuses that did not result in a
recomputation of our 2003 composite score. The DOE has informed us that as a result, for a period of three years effective
December 30, 2004, all of our current and future institutions have been placed on "Heightened Cash Monitoring, Type 1 status," a
less favorable Title IV fund payment system that requires us to credit student accounts before drawing down Title IV funds and to
timely notify the DOE with respect to certain enumerated oversight and financial events. If we fail to comply with these
requirements, we may lose our eligibility for continued participation in Title IV Programs or may be required to post irrevocable
letters of credit. We expect that the DOE will also consider our audited financial statements and composite scores for our most
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recent fiscal year as well as for other fiscal years after 2001 and 2002 when each of our institutions is next required to apply for
recertification to participate in Title IV Programs. Additionally, since the DOE concluded that the previously computed composite
scores for 2001 and 2002 were overstated, we agreed to pay $165,000 to the DOE pursuant to a settlement agreement with respect
to compliance issues related to this matter. We paid this amount on March 3, 2005.
Based on our calculations the 2006 and 2005 financial statements reflect a composite score of 1.7 and 2.5, respectively.
If we fail to demonstrate "administrative capability" to the DOE, our business could suffer.
DOE regulations specify extensive criteria an institution must satisfy to establish that it has the requisite "administrative
capability" to participate in Title IV Programs. These criteria require, among other things, that the institution:
• Comply with all applicable Title IV regulations;
• Have capable and sufficient personnel to administer Title IV Programs;
• Have acceptable methods of defining and measuring the satisfactory academic progress of its students;
• Provide financial aid counseling to its students; and
• Submit in a timely manner all reports and financial statements required by the regulations.
If an institution fails to satisfy any of these criteria or any other DOE regulation, the DOE may:
Impose a less favorable payment system for the institution's receipt of Title IV funds;
• Require the repayment of Title IV funds;
•
• Place the institution on provisional certification status; or
• Commence a proceeding to impose a fine or to limit, suspend or terminate the participation of the institution in Title IV
Programs.
If we are found not to have satisfied the DOE's "administrative capability" requirements, one or more of our institutions, including
its additional locations, could be limited in its access to, or lose, Title IV Program funding. A decrease in Title IV funding could
adversely affect our revenues, as we received approximately 80.1% of our revenues (calculated based on cash receipts) from
Title IV Programs in 2005.
We are subject to fines and other sanctions if we pay impermissible commissions, bonuses or other incentive payments to
individuals involved in certain recruiting, admissions or financial aid activities, which could increase our cost of regulatory
compliance and adversely affect our results of operations.
A school participating in Title IV Programs may not provide any commission, bonus or other incentive payment based on success
in enrolling students or securing financial aid to any person involved in any student recruiting or admission activities or in making
decisions regarding the awarding of Title IV Program funds. The law and regulations governing this requirement do not establish
clear criteria for compliance in all circumstances. If we are found to have violated this law, we could be fined or otherwise
sanctioned by the DOE or we could face litigation filed under the qui tam provisions of the Federal False Claims Act.
If our schools do not maintain their state authorizations and their accreditation, they may not participate in Title IV
Programs, which could adversely affect our student population and revenues.
An institution that grants degrees, diplomas or certificates must be authorized by the appropriate education agency of the state in
which it is located and, in some cases, other states. Requirements for authorization vary substantially among states. The school
must be authorized by each state in which it is physically located in order for its students to be eligible for funding under Title IV
Programs. Loss of state authorization by any of our schools from the education agency of the state in which the school is located
would end that school's eligibility to participate in Title IV Programs and could cause us to close the school.
A school must be accredited by an accrediting commission recognized by the DOE in order to participate in Title IV Programs.
Accreditation is a non-governmental process through which an institution submits to qualitative review by an organization of peer
institutions, based on the standards of the accrediting agency and the stated aims and purposes of the institution, including
achieving and maintaining stringent retention, completion and placement outcomes. Certain states require institutions to maintain
accreditation as a condition of continued authorization to grant degrees. The Higher Education Act requires accrediting
commissions recognized by the DOE to review and monitor many aspects of an institution's operations and to take appropriate
disciplinary action when the institution fails to comply with the accrediting agency's standards. Loss of accreditation by any of our
main campuses would result in the termination of eligibility of that school and all of its branch campuses to participate in Title IV
Programs and could cause us to close the school and its branches.
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Our institutions would lose eligibility to participate in Title IV Programs if the percentage of their revenues derived from
those programs were too high, which could reduce our student population and revenues.
Each of our institutions would immediately lose its eligibility to participate in Title IV Programs if it derived more than 90% of its
revenues (calculated based on cash receipts) from those programs in any fiscal year as calculated in accordance with DOE
regulations. Any institution that violates this rule is ineligible to apply to regain its eligibility until the following fiscal year. Based
on our calculations, none of our institutions received more than 90% of its revenues in fiscal year 2006, and our institution with
the highest percentage received approximately 86.9% of its revenues, from Title IV Programs. If any of our institutions loses
eligibility to participate in Title IV Programs, that loss would cause an event of default under our credit agreement, which could
result in the acceleration of any indebtedness then outstanding under our credit agreement, and would also adversely affect our
students' access to various government-sponsored student financial aid programs, which could reduce our student population and
revenues. These calculations are required to be made based on cash receipts.
Our institutions would lose eligibility to participate in Title IV Programs if their former students defaulted on repayment
of their federal student loans in excess of specified levels, which could reduce our student population and revenues.
An institution of higher education, such as each of our institutions, loses its eligibility to participate in some or all Title IV
Programs if its former students default on the repayment of their federal student loans in excess of specified levels. If any of our
institutions exceeds the official student loan default rates published by the DOE, it will lose eligibility to participate in Title IV
Programs. That loss would adversely affect our students' access to various government-sponsored student financial aid programs,
which could reduce our student population and revenues.
We are subject to sanctions if we fail to correctly calculate and timely return Title IV Program funds for students who
withdraw before completing their educational program, which could increase our cost of regulatory compliance and
decrease our profit margin.
An institution participating in Title IV Programs must correctly calculate the amount of unearned Title IV Program funds that
have been credited to students who withdraw from their educational programs before completing them and must return those
unearned funds in a timely manner, generally within 30 days of the date the institution determines that the student has withdrawn.
If the unearned funds are not properly calculated and timely returned, we may have to post a letter of credit in favor of the DOE or
may be otherwise sanctioned by the DOE, which could increase our cost of regulatory compliance and adversely affect our results
of operations. One of our schools, Southwestern College, made late returns of Title IV Program funds in excess of the DOE's
prescribed threshold. As a result, in accordance with DOE regulations, we submitted a letter of credit in favor of the DOE in the
amount of $28,400.
If regulators do not approve our acquisition of a school that participates in Title IV Programs, the acquired school would
no longer be permitted to participate in Title IV Programs, which could impair our ability to operate the acquired school
as planned or to realize the anticipated benefits from the acquisition of that school.
If we acquire a school that participates in Title IV Programs, we must obtain approval from the DOE and applicable state
education agencies and accrediting commissions in order for the school to be able to continue operating and participating in
Title IV Programs. An acquisition can result in the temporary suspension of the acquired school's participation in Title IV
Programs unless we submit to the DOE a timely and materially complete application for recertification and the DOE issues a
temporary provisional program participation agreement. If we were unable to timely re-establish the state authorization,
accreditation or DOE certification of the acquired school, our ability to operate the acquired school as planned or to realize the
anticipated benefits from the acquisition of that school could be impaired. Southwestern College received an executed provisional
program participation agreement from the DOE. In connection with each of our acquisition of New England Technical Institute,
Euphoria Institute of Beauty Arts & Sciences, and New England Institute of Technology at Palm Beach, we received an executed
provisional program participation agreement from the DOE.
If regulators do not approve or delay their approval of transactions involving a change of control of our company or any
of our schools, our ability to participate in Title IV Programs may be impaired.
If we or any of our schools experience a change of control under the standards of applicable state education agencies, our
accrediting commissions or the DOE, we or the affected schools must seek the approval of the relevant regulatory agencies in
order for us or the acquired school to participate in Title IV Programs. Transactions or events that constitute a change of control of
us include significant acquisitions or dispositions of our common stock (including, pursuant to DOE regulations, sales by a
shareholder that owns at least 25% of our total outstanding voting stock and is our largest shareholder, as a result of which sales
such shareholder ceases to own at least 25% of our outstanding voting stock or ceases to be our largest shareholder) or significant
changes in the composition of our board of directors. Some of these transactions or events may be beyond our control. Our failure
to obtain, or a delay in receiving, approval of any change of control from any state in which our schools are located or other states
as the case may be, our accrediting commissions or the DOE could impair or result in the termination of our accreditation, state
22
licensure or ability to participate in Title IV Programs. Our failure to obtain, or a delay in obtaining, approval of any change of
control from any state in which we do not have a school but in which we recruit students could require us to suspend our
recruitment of students in that state until we receive the required approval. The potential adverse effects of a change of control
with respect to participation in Title IV Programs could influence future decisions by us and our stockholders regarding the sale,
purchase, transfer, issuance or redemption of our stock. In addition, the adverse regulatory effect of a change of control also could
discourage bids for your shares of our common stock and could have an adverse effect on the market price of your shares.
Congress may change the law or reduce funding for Title IV Programs, which could reduce our student population,
revenues or profit margin.
Congress periodically revises the Higher Education Act and other laws governing Title IV Programs and annually determines the
funding level for each Title IV Program. Recently, Congress temporarily extended the provisions of the Higher Education Act, or
HEA, pending completion of the formal reauthorization process. In February 2006, Congress enacted the Deficit Reduction Act of
2005, which contained a number of provisions affecting Title IV Programs, including some provisions that had been in the HEA
reauthorization bills. We believe that, in 2007, the U.S. Congress will either complete its reauthorization of the HEA or further
extend the provisions of the HEA. Numerous changes to the HEA are likely to result from any further reauthorization and,
possibly, from any extension of the existing provisions of the HEA, but at this time we cannot predict all of the changes that the
U.S. Congress will ultimately make. In January 2007, the political party to which a majority of the members of both houses of the
U.S. Congress are affiliated changed from the Republican party to the Democratic party. As a result, it is possible that the
Democrat-controlled U.S. Congress will revise provisions of the HEA in significantly different ways than were being considered
by the Republican-controlled U.S. Congress in 2005 and 2006. Approximately 80.1% of our revenues in 2006 (calculated based
on cash receipts) were derived from Title IV programs. Any action by Congress that significantly reduces funding for Title IV
Programs or the ability of our schools or students to receive funding through these programs could reduce our student population
and revenues. Congressional action may also require us to modify our practices in ways that could result in increased
administrative costs and decreased profit margin.
In addition, current requirements for student and school participation in Title IV Programs may change or one or more of the
present Title IV Programs could be replaced by other programs with materially different student or school eligibility requirements.
If we cannot comply with the provisions of the Higher Education Act, as they may be revised, or if the cost of such compliance is
excessive, our revenues or profit margin could be adversely affected.
Regulatory agencies or third parties may conduct compliance reviews, bring claims or initiate litigation against us. If the
results of these reviews or claims are unfavorable to us, our results of operations and financial condition could be
adversely affected.
Because we operate in a highly regulated industry, we are subject to compliance reviews and claims of noncompliance and
lawsuits by government agencies and third parties. If the results of these reviews or proceedings are unfavorable to us, or if we are
unable to defend successfully against third-party lawsuits or claims, we may be required to pay money damages or be subject to
fines, limitations on the operations of our business, loss of federal funding, injunctions or other penalties. Even if we adequately
address issues raised by an agency review or successfully defend a third-party lawsuit or claim, we may have to divert significant
financial and management resources from our ongoing business operations to address issues raised by those reviews or defend
those lawsuits or claims. The DOE conducted a program review at DADC and issued an initial program review report on January
23, 2006 in which it identified potential instances of noncompliance with certain DOE requirements. DADC has submitted an
initial response to the report and is waiting for a response or determination from the DOE.
RISKS RELATED TO OUR BUSINESS
If we fail to effectively manage our growth, we may incur higher costs and expenses than we anticipate in connection with
our growth.
We have experienced a period of significant growth since 1999. Our continued growth has strained and may in the future strain
our management, operations, employees or other resources. We will need to continue to assess the adequacy of our staff, controls
and procedures to meet the demands of our continued growth. We may not be able to maintain or accelerate our current growth
rate, effectively manage our expanding operations or achieve planned growth on a timely or profitable basis. If we are unable to
manage our growth effectively while maintaining appropriate internal controls, we may experience operating inefficiencies that
likely will increase our expected costs.
We may not be able to successfully integrate acquisitions into our business, which may adversely affect our results of
operations and financial condition.
Since 1999, we have acquired a number of schools and we may continue to grow our business through acquisitions. The
anticipated benefits of an acquisition may not be achieved unless we successfully integrate the acquired school or schools into our
operations and are able to effectively manage, market and apply our business strategy to any acquired schools. Integration
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challenges include, among others, regulatory approvals, significant capital expenditures, assumption of known and unknown
liabilities and our ability to control costs. The successful integration of future acquisitions may also require substantial attention
from our senior management and the senior management of the acquired schools, which could decrease the time that they devote
to the day-to-day management of our business. The difficulties of integration may initially be increased by the necessity of
integrating personnel with disparate business backgrounds and corporate cultures. Management's focus on the integration of
acquired schools and on the application of our business strategy to those schools could interrupt or cause loss of momentum in our
other ongoing activities.
Failure on our part to establish and operate additional schools or campuses or effectively identify suitable expansion
opportunities could reduce our ability to implement our growth strategy.
As part of our business strategy, we anticipate opening and operating new schools or campuses. Establishing new schools or
campuses poses unique challenges and requires us to make investments in management and capital expenditures, incur marketing
expenses and devote other resources that are different, and in some cases greater than those required with respect to the operation
of acquired schools.
To open a new school or campus, we would be required to obtain appropriate state and accrediting commission approvals, which
may be conditioned or delayed in a manner that could significantly affect our growth plans. In addition, to be eligible for federal
Title IV Program funding, a new school or campus would have to be certified by the DOE and would require federal authorization
and approvals. In the case of entirely separate, freestanding U.S. schools, a minimum of two years' operating history is required to
be eligible for Title IV Program funding. We cannot be sure that we will be able to identify suitable expansion opportunities to
maintain or accelerate our current growth rate or that we will be able to successfully integrate or profitably operate any new
schools or campuses. A failure by us to effectively identify suitable expansion opportunities and to establish and manage the
operations of newly established schools or online offerings could slow our growth and make any newly established schools or our
online programs unprofitable or more costly to operate than we had planned.
Our success depends in part on our ability to update and expand the content of existing programs and develop new
programs in a cost-effective manner and on a timely basis.
Prospective employers of our graduates increasingly demand that their entry-level employees possess appropriate technological
skills. These skills are becoming more sophisticated in line with technological advancements in the automotive, diesel,
information technology, or IT, skilled trades, healthcare industries and spa and culinary. Accordingly, educational programs at our
schools must keep pace with those technological advancements. The expansion of our existing programs and the development of
new programs may not be accepted by our students, prospective employers or the technical education market. Even if we are able
to develop acceptable new programs, we may not be able to introduce these new programs as quickly as our competitors or as
quickly as employers demand. If we are unable to adequately respond to changes in market requirements due to financial
constraints, unusually rapid technological changes or other factors, our ability to attract and retain students could be impaired, our
placement rates could suffer and our revenues could be adversely affected.
In addition, if we are unable to adequately anticipate the requirements of the employers we serve, we may offer programs that do
not teach skills useful to prospective employers or students seeking a technical or career-oriented education which could affect our
placement rates and our ability to attract and retain students, causing our revenues to be adversely affected.
Risks specific to our schools’ online campuses could have a material adverse effect on our business.
Our schools’ online campuses intend to increase student enrollments, and more resources will be required to support this growth,
including additional faculty, admissions, academic, and financial aid personnel. This growth may place a strain on the operational
resources of our schools’ online campuses. Our schools’ online campuses’ success depends, in part, on their ability to expand the
content of their programs, develop new programs in a cost-effective manner, maintain good standings with their regulators and
accreditors, and meet their students’ needs in a timely manner. The expansion of our schools’ online campuses’ existing programs
and the development of new programs may not be accepted by their students or the online education market, and new programs
could be delayed due to current and future unforeseen regulatory restrictions. The performance and reliability of the program
infrastructure at our schools’ online campuses is critical to the reputation of these campuses and the campuses ability to attract and
retain students. Any computer system error or failure, or a sudden and significant increase in traffic on our computer networks that
host our schools’ online campuses, may result in the unavailability of our schools’ online campuses’ computer networks.
Individual, sustained, or repeated occurrences could significantly damage the reputation of our schools’ online campuses and
result in a loss of potential or existing students. Additionally, our schools’ online campuses’ computer systems and operations are
vulnerable to interruption or malfunction due to events beyond our control, including natural disasters and network and
telecommunications failures. Any interruption to our schools’ online campuses’ computer systems or operations could have a
material adverse effect on the ability of our schools’ online campuses to attract and retain students.
24
Our computer networks—either administrative network or those supporting educational programs— may also be vulnerable to
unauthorized access, computer hackers, computer viruses, and other security threats. A user who circumvents security measures
could misappropriate proprietary information or cause interruptions or malfunctions in our operations. Due to the sensitive nature
of the information contained on our networks, such as students’ grades, our networks may be targeted by hackers. As a result, we
may be required to expend significant resources to protect against the threat of these security breaches or to alleviate problems
caused by these breaches.
We may not be able to retain our key personnel or hire and retain the personnel we need to sustain and grow our business.
Our success has depended, and will continue to depend, largely on the skills, efforts and motivation of our executive officers who
generally have significant experience within the post-secondary education industry. Our success also depends in large part upon
our ability to attract and retain highly qualified faculty, school directors, administrators and corporate management. Due to the
nature of our business, we face significant competition in the attraction and retention of personnel who possess the skill sets that
we seek. In addition, key personnel may leave us and subsequently compete against us. Furthermore, we do not currently carry
"key man" life insurance on any of our employees. The loss of the services of any of our key personnel, or our failure to attract
and retain other qualified and experienced personnel on acceptable terms, could have an adverse effect on our ability to operate
our business efficiently and to execute our growth strategy.
If we are unable to hire, retain and continue to develop and train our employees responsible for student recruitment, the
effectiveness of our student recruiting efforts would be adversely affected.
In order to support revenue growth, we need to hire new employees dedicated to student recruitment and retain and continue to
develop and train our current student recruitment personnel. Our ability to develop a strong student recruiting team may be
affected by a number of factors, including our ability to integrate and motivate our student recruiters; our ability to effectively
train our student recruiters; the length of time it takes new student recruiters to become productive; regulatory restrictions on the
method of compensating student recruiters; the competition in hiring and retaining student recruiters; and our ability to effectively
manage a multi-location educational organization. If we are unable to hire, develop or retain our student recruiters, the
effectiveness of our student recruiting efforts would be adversely affected.
Competition could decrease our market share and cause us to lower our tuition rates.
The post-secondary education market is highly competitive. Our schools compete for students and faculty with traditional public
and private two-year and four-year colleges and universities and other proprietary schools, many of which have greater financial
resources than we do. Some traditional public and private colleges and universities, as well as other private career-oriented
schools, offer programs that may be perceived by students to be similar to ours. Most public institutions are able to charge lower
tuition than our schools, due in part to government subsidies and other financial resources not available to for-profit schools.
Some of our competitors also have substantially greater financial and other resources than we have which may, among other
things, allow our competitors to secure strategic relationships with some or all of our existing strategic partners or develop other
high profile strategic relationships or devote more resources to expanding their programs and their school network, all of which
could affect the success of our marketing programs. In addition, some of our competitors already have a more extended or dense
network of schools and campuses than we do, enabling them to recruit students more effectively from a wider geographic area. If
we are unable to compete effectively with these institutions for students, our student enrollments and revenues will be adversely
affected.
We may be required to reduce tuition or increase spending in response to competition in order to retain or attract students or
pursue new market opportunities. As a result, our market share, revenues and operating margin may be decreased. We cannot be
sure that we will be able to compete successfully against current or future competitors or that the competitive pressures we face
will not adversely affect our revenues and profitability.
We may experience business interruptions resulting from natural disasters, inclement weather, transit disruptions, or
other events in one or more of the geographic areas in which we operate.
We may experience business interruptions resulting from natural disasters, inclement weather, transit disruptions, or other events
in one or more of the geographic areas in which we operate. These events could cause us to close schools — temporarily or
permanently — and could affect student recruiting opportunities in those locations, causing enrollment and revenues to decline.
Our financial performance depends in part on our ability to continue to develop awareness and acceptance of our
programs among high school graduates and working adults looking to return to school.
The awareness of our programs among high school graduates and working adults looking to return to school is critical to the
continued acceptance and growth of our programs. Our inability to continue to develop awareness of our programs could reduce
our enrollments and impair our ability to increase our revenues or maintain profitability. The following are some of the factors
25
that could prevent us from successfully marketing our programs:
• Student dissatisfaction with our programs and services;
• Diminished access to high school student populations;
• Our failure to maintain or expand our brand or other factors related to our marketing or advertising practices; and
• Our inability to maintain relationships with automotive, diesel, healthcare, skilled trades and IT, and spa and culinary
manufacturers and suppliers.
If students fail to pay their outstanding balances, our profitability will be adversely affected.
We offer a variety of payment plans to help students pay the portion of their education expense not covered by financial aid
programs. These balances are unsecured and not guaranteed. Although we have reserved for estimated losses related to unpaid
student balances, losses in excess of the amounts we have reserved for bad debts will result in a reduction in our profitability.
An increase in interest rates could adversely affect our ability to attract and retain students.
Interest rates have reached historical lows in recent years, creating a favorable borrowing environment for our students. Much of
the financing our students receive is tied to floating interest rates. However, interest rates have increased in the recent months
resulting in a corresponding increase in the cost to our existing and prospective students of financing their education. Higher
interest rates could also contribute to higher default rates with respect to our students' repayment of their education loans. Higher
default rates may in turn adversely impact our eligibility for Title IV Program participation or the willingness of private lenders to
make private loan programs available to students who attend our schools, which could result in a reduction in our student
population.
Seasonal and other fluctuations in our results of operations could adversely affect the trading price of our common stock.
Our results of operations fluctuate as a result of seasonal variations in our business, principally due to changes in total student
population. Student population varies as a result of new student 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 second half growth is largely dependent on a successful
recruiting season. Our expenses, however, do not vary significantly over the course of the year with changes in our student
population and net revenues. We expect quarterly fluctuations in results of operations to continue as a result of seasonal
enrollment patterns. Such patterns may change, however, as a result of acquisitions, new school openings, new program
introductions and increased enrollments of adult students. These fluctuations may result in volatility or have an adverse effect on
the market price of our common stock.
Our total assets include substantial intangible assets. The write-off of a significant portion of unamortized intangible assets
would negatively affect our results of operations.
Our total assets reflect substantial intangible assets. At December 31, 2006, goodwill and identified intangibles, net, represented
approximately 38.5% of total assets. Intangible assets consist of goodwill and other identified intangible assets associated with our
acquisitions. On at least an annual basis, we assess whether there has been an impairment in the value of goodwill and other
intangible assets with indefinite lives. If the carrying value of the tested asset exceeds its estimated fair value, impairment is
deemed to have occurred. In this event, the amount is written down to fair value. Under current accounting rules, this would
result in a charge to operating earnings. Any determination requiring the write-off of a significant portion of unamortized goodwill
and identified intangible assets would negatively affect our results of operations and total capitalization, which could be material.
We cannot predict our future capital needs, and if we are unable to secure additional financing when needed, our
operations and revenues would be adversely affected.
We may need to raise additional capital in the future to fund our operations, expand our markets and program offerings or respond
to competitive pressures or perceived opportunities. We cannot be sure that additional financing will be available to us on
favorable terms, or at all. If adequate funds are not available when required or on acceptable terms, we may be forced to cease our
operations and, even if we are able to continue our operations, our ability to increase student enrollments and revenues would be
adversely affected.
Our schools' failure to comply with environmental laws and regulations governing our activities could result in financial
penalties and other costs which could adversely impact our results of operations.
We use hazardous materials at some of our schools and generate small quantities of waste, such as used oil, antifreeze, paint and
car batteries. As a result, our schools are subject to a variety of environmental laws and regulations governing, among other
26
things, the use, storage and disposal of solid and hazardous substances and waste, and the clean-up of contamination at our
facilities or off-site locations to which we send or have sent waste for disposal. In the event we do not maintain compliance with
any of these laws and regulations, or are responsible for a spill or release of hazardous materials, we could incur significant costs
for clean-up, damages, and fines or penalties which could adversely impact our results of operations.
Approximately 27% of our schools are concentrated in the states of New Jersey and Pennsylvania and a change in the
general economic or regulatory conditions in these states could increase our costs and have an adverse effect on our
revenues.
As of December 31, 2006, we operated 37 campuses in 17 states. Ten of those schools are located in the states of New Jersey and
Pennsylvania. As a result of this geographic concentration, any material change in general economic conditions in New Jersey or
Pennsylvania could reduce our student enrollment in our schools located in these states and thereby reduce our revenues. In
addition, the legislatures in the states of New Jersey and/or Pennsylvania could change the laws in those states or adopt
regulations regarding private, for-profit post-secondary coeducation institutions which could place additional burdens on us. If we
were unable to comply with any such new legislation, we could be prohibited from operating in those jurisdictions, which could
reduce our revenues.
The number of lenders and financial institutions that make federally guaranteed student loans and that guarantee Title IV
loans is relatively small. The loss of any of these lenders or guarantors could cause a material adverse effect on our
revenues.
In 2006, seven lenders provided funding to more than 90% of the students at the schools we owned. While we believe that other
lenders would be willing to make federally guaranteed student loans to our students if loans were no longer available from our
current lenders, we cannot assure you that there are other lenders who would make federally guaranteed loans to our students. If
such alternative lenders were not forthcoming, our enrollment and our results of operations could be materially and adversely
affected.
In addition, the primary guarantors for the Title IV loans of our students are USA Group, a subsidiary of Sallie Mae, and New
Jersey Higher Education Assistance Authority, an independent agency of the State of New Jersey. These two agencies currently
guarantee a majority of the federally guaranteed student loans made to students enrolled at our schools. There are six other
guaranty agencies that guarantee student loans made to students enrolled at our schools. We believe that other guaranty agencies
would be willing to guarantee loans to our students if any of these guarantee agencies ceased guaranteeing those loans or reduced
the volume of loans they guarantee; however, if we cannot find other guarantors, our enrollment and our revenues could be
materially and adversely affected.
Anti-takeover provisions in our amended and restated certificate of incorporation, our amended and restated bylaws and
New Jersey law could discourage a change of control that our stockholders may favor, which could negatively affect our
stock price.
Provisions in our amended and restated certificate of incorporation and our amended and restated bylaws and applicable
provisions of the New Jersey Business Corporation Act may make it more difficult and expensive for a third party to acquire
control of us even if a change of control would be beneficial to the interests of our stockholders. These provisions could
discourage potential takeover attempts and could adversely affect the market price of our common stock. For example, applicable
provisions of the New Jersey Business Corporation Act may discourage, delay or prevent a change in control by prohibiting us
from engaging in a business combination with an interested stockholder for a period of five years after the person becomes an
interested stockholder. Furthermore, our amended and restated certificate of incorporation and amended and restated bylaws:
•
•
•
•
•
authorize the issuance of blank check preferred stock that could be issued by our board of directors to thwart a takeover
attempt;
prohibit cumulative voting in the election of directors, which would otherwise allow holders of less than a majority of
stock to elect some directors;
require super-majority voting to effect amendments to certain provisions of our amended and restated certificate of
incorporation;
limit who may call special meetings of both the board of directors and stockholders;
prohibit stockholder action by non-unanimous written consent and otherwise require all stockholder actions to be taken at
a meeting of the stockholders;
27
•
•
establish advance notice requirements for nominating candidates for election to the board of directors or for proposing
matters that can be acted upon by stockholders at stockholders' meetings; and
require that vacancies on the board of directors, including newly created directorships, be filled only by a majority vote
of directors then in office.
We can issue shares of preferred stock without shareholder approval, which could adversely affect the rights of common
stockholders.
Our amended and restated certificate of incorporation permits us to establish the rights, privileges, preferences and restrictions,
including voting rights, of future series of our preferred stock and to issue such stock without approval from our stockholders. The
rights of holders of our common stock may suffer as a result of the rights granted to holders of preferred stock that may be issued
in the future. In addition, we could issue preferred stock to prevent a change in control of our company, depriving common
stockholders of an opportunity to sell their stock at a price in excess of the prevailing market price.
Our principal stockholder owns a large percentage of our voting stock which allows it to control substantially all matters
requiring shareholder approval.
Stonington Partners Inc. II, or Stonington, our principal stockholder, directly or indirectly holds approximately 77% of our
outstanding shares. Accordingly, it controls us through its ability to determine the outcome of the election of our directors, to
amend our certificate of incorporation and bylaws and to take other actions requiring the vote or consent of stockholders,
including mergers, going private transactions and other extraordinary transactions, and the terms of any of these transactions. The
ownership positions of this stockholder may have the effect of delaying, deterring or preventing a change in control or a change in
the composition of our board of directors. In addition, two members of our board of directors are partners of Stonington. As a
result, Stonington has an added ability to influence certain matters, such as determining compensation of our executive officers.
A disposition by our principal stockholder of all or a significant portion of its shares of our outstanding stock could impact
the marker price of our shares and result in a change of control.
In light of the termination provisions of its fund agreement, Stonington, our largest stockholder, is currently considering its
options with respect to its investment in us, including the sale of its shares of our outstanding common stock. A sale by Stonington
of all or a significant portion of its shares of our outstanding common stock, whether to a single buyer, through open market sales
or otherwise, could cause the price of our common stock to decline. Such a sale could also result in a change of control under the
standards of the DOE and applicable state education agencies and accrediting commissions. See “Business - Change of Control”
and “Risk Factors -- Risks Related to Our Industry.”
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
28
ITEM 2.
PROPERTIES
We lease all of our facilities, except for our West Palm Beach, Florida campus, our Nashville, Tennessee campus, our Grand
Prairie, Texas campus and our Cincinnati (Tri-County) campus, which we own. Four of our facilities (Union, New Jersey;
Allentown, Pennsylvania; Philadelphia, Pennsylvania; and Grand Prairie, Texas) are also accounted for by us under a finance
lease obligation. We continue to re-evaluate our facilities to maximize our facility utilization and efficiency and to allow us to
introduce new programs and attract more students. All of our existing leases expire between December 2007 and August 2023,
with the exception of one lease representing a total of 3,000 square feet that we lease on a month-to-month basis. On January 1,
2007, we increased our square footage at our Indianapolis, Indiana campus by approximately 63,000 square feet.
The following table provides information relating to our facilities as of December 31, 2006, including our corporate offices:
Location
Union, New Jersey
Mahwah, New Jersey
Allentown, Pennsylvania
Philadelphia, Pennsylvania
Columbia, Maryland
Grand Prairie, Texas
Queens, New York
Edison, New Jersey
Mt. Laurel, New Jersey
Philadelphia, Pennsylvania
Northeast Philadelphia, Pennsylvania
Plymouth Meeting, Pennsylvania
Paramus, New Jersey
Brockton, Massachusetts
Lincoln, Rhode Island
Lowell, Massachusetts
Somerville, Massachusetts
New Britain, Connecticut
Cromwell, Connecticut
Hamden, Connecticut
Shelton, Connecticut
Indianapolis, Indiana
Melrose Park, Illinois
Denver, Colorado
Norcross, Georgia
Marietta, Georgia
Henderson, Nevada
West Palm Beach, Florida
Nashville, Tennessee
Dayton, Ohio
Franklin, Ohio
Cincinnati, Ohio
Cincinnati (Tri-County), Ohio
Florence, Kentucky
Las Vegas, Nevada
Henderson, Nevada
West Orange, New Jersey
Brand
Lincoln Technical Institute
Lincoln Technical Institute
Lincoln Technical Institute
Lincoln Technical Institute
Lincoln Technical Institute
Lincoln Technical Institute
Lincoln Technical Institute
Lincoln Technical Institute
Lincoln Technical Institute
Lincoln Technical Institute
Lincoln Technical Institute
Lincoln Technical Institute
Lincoln Technical Institute
Lincoln Technical Institute
Lincoln Technical Institute
Lincoln Technical Institute
Lincoln Technical Institute
Lincoln Technical Institute
Lincoln Technical Institute
Lincoln Technical Institute
Lincoln Technical Institute
Lincoln College of Technology
Lincoln College of Technology
Lincoln College of Technology
Lincoln College of Technology
Lincoln College of Technology
Lincoln College of Technology
Lincoln College of Technology and
Florida Culinary Institute
Nashville Auto-Diesel College
Southwestern College
Southwestern College
Southwestern College
Southwestern College
Southwestern College
Euphoria Institute
Euphoria Institute
Corporate Offices
We believe that our facilities are suitable for their present intended purposes.
29
Approximate Square Footage
56,000
79,000
26,000
30,000
110,000
146,000
48,000
64,000
26,000
29,000
25,000
30,000
27,000
10,000
40,000
20,000
33,000
51,000
12,000
14,000
41,600
126,000
67,000
78,000
27,000
30,000
27,000
117,000
278,000
9,000
14,000
10,000
25,000
11,000
13,000
20,000
41,000
ITEM 3.
LEGAL PROCEEDINGS
In the ordinary conduct of our business, we are subject to periodic lawsuits, investigations and claims, including, but not limited
to, claims involving students or graduates and routine employment matters. Although we cannot predict with certainty the ultimate
resolution of lawsuits, investigations and claims asserted against us, we do not believe that any currently pending legal proceeding
to which we are a party will have a material adverse effect on our business, financial condition, results of operation or cash flows.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth
quarter of 2006.
30
PART II.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market for our Common Stock
Our common stock is quoted on the Nasdaq Global Market under the symbol “LINC”.
The following table sets forth the range of high and low sales prices per share for our common stock, as reported by the Nasdaq
Global Market, for the periods indicated.
Fiscal Year Ended December 31, 2006:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year Ended December 31, 2005:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Price Range of Common Stock
High
Low
$
$
$
$
17.28 $
17.09 $
18.25 $
17.06 $
14.25
15.42
16.33
12.14
Price Range of Common Stock
High
Low
$
$
$
$
- $
20.25 $
21.00 $
15.01 $
-
19.11
11.67
11.80
On March 13, 2007, the last reported sale price of our common stock on the Nasdaq Global Market was $12.75 per share. As of
March 13, 2006, based on the information provided by Continental Stock Transfer & Trust Company, there were approximately
30 stockholders of record of our common stock.
Dividend Policy
No cash dividends were declared or paid in 2006. We anticipate retaining all available funds to finance future internal growth.
Payment of future cash dividends, if any, will be at the discretion of our board of directors after taking into account various
factors, including our financial condition, operating results, current and anticipated cash needs and plans for expansion.
31
Stock Performance Graph
This stock performance graph compares the Company’s total cumulative stockholder return on its common stock during the
period from June 23, 2005 (the date on which our common stock first traded on the Nasdaq Global Market) through December 31,
2006 with the cumulative return on the Russell 2000 Index and a Peer Issuer Group Index. The peer issuer group consists of the
companies identified below, which were selected on the basis of the similar nature of their business. The graph assumes that $100
was invested on June 23, 2005, and any dividends were reinvested on the date on which they were paid.
The information provided under the heading "Stock Performance Graph" shall not be considered "filed" for purposes of Section
18 of the Securities Exchange Act of 1934 or incorporated by reference in any filing under the Securities Act of 1933 or the
Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates it by reference into a filing.
Stock Performance Graph
(6/23/05 - 12/31/06)
$130
$120
$110
$100
$90
$80
$70
$60
$50
$40
6/23/2005
7/20/2005
8/16/2005
9/12/2005
10/9/2005
11/5/2005
12/2/2005
12/29/2005
1/25/2006
2/21/2006
3/20/2006
4/16/2006
5/13/2006
6/9/2 006
7/6/2 006
8/2/2 006
8/29/2006
9/25/2006
10/22/2006
11/18/2006
12/15/2006
12/31/06
LINC
Peer Group
S&P 500
Russell 2000
Companies in the Peer Group include Apollo Group, Inc., Corinthian Colleges, Inc., Career Education Corp., DeVry, Inc.,
Education Management Corporation, ITT Educational Services, Inc., Strayer Education, Inc. and Universal Technical Institute,
Inc.
32
Securities Authorized for Issuance under Equity Compensation Plans
The Company has various equity compensation plans under which equity securities are authorized for issuance. Information
regarding these securities as of December 31, 2006 is as follows:
Number of
Securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
Weighted-average
exercise price of
outstanding
options, warrants
and rights
Number of
securities
remaining
available for future
issuance under
equity
compensation
plans (excluding
securities reflected
in column
1,728,225 $
- $
1,728,225 $
8.85
-
8.85
1,015,450
-
1,015,450
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security
holders
Total
33
ITEM 6.
SELECTED FINANCIAL DATA
SELECTED FINANCIAL INFORMATION
The following table sets forth our selected historical consolidated financial and operating data as of the dates and for the periods
indicated. You should read these data together with Item 7 - "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our consolidated financial statements and the notes thereto included in Part II. Item 8 of this filing. The
selected historical consolidated statement of operations data for each of the years in the three-year period ended December 31,
2006 have been derived from our audited consolidated financial statements which are included elsewhere in this Form 10-K. The
selected historical consolidated statements of operations data for the fiscal years ended December 31, 2003 and 2002 and
historical consolidated balance sheet data as of December 31, 2004, 2003 and 2002 have been derived from our consolidated
financial information not included in this Form 10-K. Our historical results are not necessarily indicative of our future results.
2006
Year Ended December 31,
2004
(In thousands, except per share amounts)
2003
2005
2002
Statement of Operations Data:
Revenues
Cost and expenses:
Educational services and facilities (1)
Selling, general and administrative (2)
(Gain) loss on sale of assets
Total costs & expenses
Operating income
Other:
Gain on sale of securities
Interest income
Interest expense (3)
Other (loss) income
Income (loss) before income taxes
Provision (benefit) for income taxes
Net income (loss)
Earnings per share - basic:
Net income (loss) available to common stockholders
Earnings per share - diluted:
Net income (loss) available to common stockholders
Weighted average number of common shares
outstanding:
Basic
Diluted
Other Data:
Capital expenditures
Depreciation and amortization
Number of campuses
Average student population
Balance Sheet Data:
Cash and cash equivalents
Working (deficit) capital (4)
Total assets
Total debt (5)
Total stockholders' equity
$
321,506 $
299,221 $
261,233 $
198,574 $
139,201
136,631
157,309
(435)
293,505
28,001
121,524
145,194
(7)
266,711
32,510
104,843
130,941
368
236,152
25,081
85,201
97,714
(22)
182,893
15,681
66,580
71,753
(1,082)
137,251
1,950
-
981
(2,291)
(132)
26,559
11,007
15,552 $
-
775
(2,892)
243
30,636
11,927
18,709 $
-
104
(3,007)
42
22,220
9,242
12,978 $
211
133
(2,758)
307
13,574
5,355
8,219 $
-
212
(2,937)
-
(775)
(101)
(674)
0.61 $
0.80 $
0.60 $
0.38 $
(0.03)
0.60 $
0.76 $
0.56 $
0.37 $
(0.03)
25,336
26,086
23,475
24,503
21,676
23,095
21,667
22,364
21,662
21,662
19,341 $
14,866
37
18,081
22,621 $
13,064
34
17,869
23,813 $
10,749
28
16,266
13,154 $
9,879
23
12,487
3,598
7,201
23
9,155
$
$
$
$
$
6,461 $
50,257 $
41,445 $
48,965 $
11,079
(20,943)
226,216
9,860
151,783
8,531
214,792
10,768
135,990
4,570
162,729
46,829
58,086
13,402
139,355
43,060
42,924
(11,287)
92,562
22,682
33,905
34
Educational services and facilities expenses include a charge of $0.2 million for the year ended December 31, 2005
(1)
related to catch-up depreciation resulting from the reclassification of our property in Indianapolis, Indiana from property held for
sale to property, equipment and facilities as of September 30, 2005.
Selling, general and administrative expenses include (a) a $2.1 million charge for the year ended December 31, 2004 to
(2)
give effect to the one-time write-off of deferred offering costs, (b) compensation costs of approximately $1.2 million, $1.3
million, $1.8 million, $0.8 million and $0.5 million for the years ended December 31, 2006, 2005, 2004, 2003 and 2002,
respectively, related to the adoption of SFAS No. 123R, "Share Based Payment," (c) a $0.7 million one-time non-cash charge for
the year ended December 31, 2004 related to the timing of rent expense for our schools during the period of construction of
leasehold improvements and to align the depreciation lives of our leasehold improvements to the terms of our noncancellable
leases, including renewal options, (d) a $0.5 million write-off for the year ended December 31, 2005 resulting from our decision
not to purchase the site we had considered for expansion of our facility in Philadelphia, Pennsylvania, and (e) $0.9 million of re-
branding cost for the year ended December 31, 2006.
(3)
off of deferred finance costs under our previous credit agreement.
Interest expense includes a $0.4 million non-cash charge for the year ended December 31, 2005 resulting from the write-
(4)
Working (deficit) capital is defined as current assets less current liabilities.
Total debt consists of long-term debt including current portion, capital leases, auto loans and a finance obligation of
(5)
$9.7 million for each of the years in the five year period ended December 31, 2006 incurred in connection with a sale-leaseback
transaction as further described in Note 9 to the consolidated financial statements included in Part II. Item 8 of this Form 10-K.
35
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
You should read the following discussion together with the “Selected Financial Data,” “Forward Looking Statements” and the
consolidated financial statements and the related notes thereto included elsewhere in this Form 10-K. This discussion contains
forward-looking statements that are based on management’s current expectations, estimates and projections about our business
and operations. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking
statements as a result of a number of factors, including those we discuss under “Risk Factors,” “Forward Looking Statements”
and elsewhere in this Form 10-K.
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 five areas of study: automotive technology, health sciences, skilled
trades, business and information technology and spa and culinary. Each area of study is specifically designed to appeal to and
meet the educational objectives of our student population, while also satisfying the criteria established by industry and employers.
The resulting diversification limits dependence on any one industry for enrollment growth or placement opportunities and
broadens potential branches for introducing new programs. As of December 31, 2006, we enrolled 17,167 students at our 37
campuses across 17 states. Our campuses primarily attract students from their local communities and surrounding areas, although
our five destination schools attract students from across the United States, and in some cases, from abroad.
As of January 2007, we had completed our re-branding initiative. As a result, 29 of our 37 campuses nationwide now operate
under the Lincoln name. In addition to Lincoln College Online, we now operate 5 related brands: Lincoln Technical Institute,
Lincoln College of Technology, Nashville Auto-Diesel College (NADC), Southwestern College and Euphoria. Uniform national
brands are expected to allow us greater advertising leverage and consistency of message, which will serve to strengthen appeal to
students in both local and destination markets. Lincoln’s Cittone Institute schools in New Jersey and Pennsylvania as well as the
Massachusetts and Rhode Island Career Education Institute (CEI) schools were re-branded as Lincoln Technical Institute. The
West Palm Beach campuses (Formerly New England Institute of Technology), Marietta, Georgia, Norcross, Georgia, and
Henderson, Nevada campuses (formerly Career Education Institute - CEI), the Connecticut campuses (formerly New England
Technical Institute, or NETI) and Denver, Colorado, were re-branded Lincoln College of Technology. Included in selling, general
and administrative expenses for the year ended December 31, 2006 are approximately $0.9 million of costs incurred in connection
with this initiative.
From 1999 through December 31, 2006, we have increased our geographic footprint and added 17 additional schools through our
acquisitions of: Denver Automotive & Diesel College in 2000 (one school), Career Education Institute in 2001 (two schools),
Nashville Auto-Diesel College in 2003 (one school), Southwestern College in 2004 (five schools), New England Technical
Institute (four schools) in January 2005, Euphoria Institute of Beauty Arts and Sciences (two schools) in December 2005 and New
England Institute of Technology at Palm Beach, Inc. in May 2006 (two schools). Our campuses, a majority of which serve major
metropolitan markets, are located throughout the United States. Five of our campuses are destination schools, which attract
students from across the United States and, in some cases, from abroad. Our other campuses primarily attract students from their
local communities and surrounding areas. All of our schools are nationally accredited and are eligible to participate in federal
financial aid programs. Southwestern College received an executed provisional program participation agreement from the DOE.
In connection with each of our acquisitions of New England Technical Institute, Euphoria Institute of Beauty Arts & Sciences,
and New England Institute of Technology at Palm Beach, we received an executed provisional program participation agreement
from the DOE.
Our revenues consist primarily of student tuition and fees derived from the programs we offer and are presented as revenues after
reductions related to scholarships for students who withdraw from our programs prior to specified dates. We recognize revenues
from tuition and one-time fees, such as application fees, ratably over the length of a program, including internships or externships
that take place prior to graduation. We also earn revenues from our bookstores, dormitories, cafeterias and contract training
services. These non-tuition revenues are recognized upon delivery of goods or as services are performed and represent less than
10% of our revenues.
Tuition varies by school and by program and on average we increase tuition once a year by 2% to 5%. Our ability to raise tuition
is influenced by the demand for our programs and by the rate of tuition increase at other post-secondary schools. If historical
trends continue, we expect to be able to continue to raise tuition annually at comparable rates.
We have historically enjoyed strong revenue growth. In 2006, our growth resulted from strategic acquisitions and prior to 2006 we
also enjoyed strong organic growth. Our revenues have increased 7.4% and 14.5% in 2006 and 2005, respectively, over the prior
years as we grew from 28 campuses at December 31, 2004 to 37 campuses at December 31, 2006. During this same time period
our average student population increased from 16,266 for the year ended December 31, 2004 to 18,081 for the year ended
December 31, 2006. While we expect to increase our revenues and enrollments in the foreseeable future as a result of both organic
36
growth and strategic acquisitions, we can give no assurance as to our ability to continue to increase our revenues at historical rates
and expect our rate of revenue increases to moderate over time as we become a larger and more mature company.
Our operating expenses while also a function of our revenue growth also contain a high fixed cost component. Our educational
services and facilities expenses and selling, general and administrative expenses as a percentage of revenue increased in 2006
from 2005 levels as we experienced lower student enrollments and thus lower capacity utilization across our schools. Our
educational services and facilities expenses as a percentage of revenues increased to 42.5% in 2006 from 40.6% in 2005 and
40.1% in 2004, and selling, general and administrative expenses increased as a percentage of revenue to 48.9% in 2006 from
48.5% in 2005 and decreased from 50.1% in 2004. We expect that in the future these expenses will decline slightly as a
percentage of revenues as we achieve better operating efficiencies and utilization at our schools.
Our revenues are directly dependent on our average number of students enrolled and the particular courses they are taking. Our
enrollment is influenced by the number of new students starting, re-entering, graduating and withdrawing from our schools. In
addition, our programs range from 14 to 105 weeks and students attend classes for different amounts of time per week depending
on the school and program in which they are enrolled. Because we start new students every month, our total student population
changes monthly. The number of students enrolling or re-entering our programs each month is driven by the demand for our
programs, the effectiveness of our marketing and advertising, the availability of financial aid and other sources of funding, the
number of recent high school graduates and seasonality. Our retention and graduation rates are influenced by the quality and
commitment of our teachers and student services personnel, the effectiveness of our programs, the placement rate and success of
our graduates and the availability of financial aid. Although similar courses have comparable tuition rates, the tuition rates vary
among our numerous programs. As more of our schools receive approval to offer associate degree programs, which are longer
than our diploma degree programs, we would expect our average enrollments and the average length of stay of our students to
increase.
The majority of students enrolled at our schools rely on funds received under various government-sponsored student financial aid
programs to pay a substantial portion of their tuition and other education-related expenses. The largest of these programs are Title
IV Programs which represented approximately 80.1% of our cash receipts relating to revenues in 2006.
We extend credit for tuition and fees to many of our students that are in attendance in our campuses. In addition, we also
participated in a private recourse lending agreement with SLM Financial Corporation where we had credit risk for student loan
defaults up to 30% of funds disbursed under the agreement. The agreement had a disbursement limit of $6 million. The agreement
terminated by its terms on June 30, 2006. Our credit risk is mitigated through the student’s participation in federally funded
financial aid programs unless students withdraw prior to the receipt by us of Title IV funds for those students. Under Title IV
programs, the government funds a certain portion of a students’ tuition, with the remainder, referred to as “the gap,” financed by
students themselves under private party loans, including credit extended by us. The gap amount has continued to increase over the
last several years as we have raised tuition on average for the last several years by 2% to 5% per year, while funds received from
Title IV programs have remained constant. Thus, a significant number of students are required to finance amounts that could
range between $2,000, and in some cases, as much as $14,000 per year. As a result of the above, during 2006 our bad debt
expense as a percentage of revenues increased to 4.8% from 3.7% and 3.5%, respectively in 2005 and 2004.
All institutions participating in Title IV Programs must satisfy specific standards of financial responsibility. The DOE evaluates
institutions for compliance with these standards each year, based on the institution’s annual audited financial statements, as well
as following a change in ownership resulting in a change of control of the institution.
Based on audited financial statements for the 2006, 2005 and 2004 fiscal years our calculations result in a composite score of 1.7,
2.5 and 1.8, respectively. The DOE has confirmed that we received a passing composite score of 1.5 or more for the 2003 fiscal
year. However, as a result of the corrections of certain errors, including accounting for advertising costs, a sale leaseback
transaction, rent and certain other individually insignificant adjustments, in our prior financial statements, the DOE recomputed
our consolidated composite scores for the years ended December 31, 2001 and 2002 and concluded that the recomputed
consolidated composite scores for those two years were below 1.0. In addition, we identified certain additional errors in our
financial statements for the year ended December 31, 2003 relating to our accounting for stock-based compensation and accrued
bonuses that did not result in a recomputation of our 2003 composite score. The DOE has informed us that as a result, for a period
of three years effective December 30, 2004, all of our current and future institutions have been placed on "Heightened Cash
Monitoring, Type 1 status." As a result, we are subject to a less favorable Title IV fund payment system that requires us to credit
student accounts before drawing down Title IV funds and are also required to timely notify the DOE with respect to certain
enumerated oversight and financial events. The DOE also informed us that these corrections will be taken into consideration when
each of our institutions applies for recertification of its eligibility to participate in Title IV Programs. When each of our
institutions is next required to apply for recertification to participate in Title IV Programs, we expect that the DOE will also
consider our audited financial statements and composite scores for our most recent fiscal year as well as for other fiscal years after
2001 and 2002. Additionally, since the DOE concluded that the previously computed composite scores for 2001 and 2002 were
overstated, we agreed to pay $165,000 to the DOE, pursuant to a settlement agreement, with respect to compliance issues related
to this matter. We paid this amount on March 3, 2005.
37
Although no assurance can be given, we do not believe that the actions of the DOE specified above will have a material effect on
our financial position, results of operations or cash flows since we have always operated our business in a manner similar to an
institution operating under "Heightened Cash Monitoring, Type 1 status" and accordingly, it has been our policy to credit student
accounts before drawing down Title IV funds. We also do not believe the additional reporting requirements will cause an undue
burden on our operations.
An institution is required to operate under "Heightened Cash Monitoring, Type 1 status," if it has a composite score between 1.0
and 1.4. If an institution's composite score is below 1.0, the institution is considered by the DOE to lack financial responsibility
and, as a condition of Title IV Program participation, the institution may be required to, among other things, post a letter of credit
in an amount of at least 10 to 50 percent of the institution's annual Title IV Program participation for its most recent fiscal year. A
composite score under 1.0 in any future year could have an adverse effect on our operations and would result in a default under
our new credit agreement and could result in an acceleration of the debt under our new credit agreement.
The operating expenses associated with an existing school do not increase proportionally as the number of students enrolled at the
school increases. We categorize our operating expenses as (1) educational services and facilities and (2) selling, general and
administrative.
• Major components of educational services and facilities expenses include faculty compensation and benefits,
expenses of books and tools, facility rent, maintenance, utilities, depreciation and amortization of property and
equipment used in the provision of education services and other costs directly associated with teaching our programs
and providing educational services to our students.
• Selling, general and administrative expenses include compensation and benefits of employees who are not directly
associated with the provision of educational services (such as executive management and school management,
finance and central accounting, legal, human resources and business development), marketing and student
enrollment expenses (including compensation and benefits of personnel employed in sales and marketing and
student admissions), costs to develop curriculum, costs of professional services, bad debt expense, rent for our
corporate headquarters, depreciation and amortization of property and equipment that is not used in the provision of
educational services and other costs that are incidental to our operations. All marketing and student enrollment
expenses are recognized in the period incurred.
We use advertising to attract a substantial portion of our yearly student enrollments. While we utilize a mix of different
advertising mediums, including television, internet and direct mail, we rely heavily on television advertising. The cost of
television advertising has been increasing faster than the pace of student tuition increases and the cost of living index. Continued
increases in the cost of television advertising may have a material impact on our operating margins.
External costs associated with the implementation of our student management and reporting system decreased over the last year as
we utilized more internal staff in continuing the rollout of a new student management and reporting system. We expect the roll-out
of this system to continue through the third quarter of 2007. We believe that the investment in our student management and
reporting system will improve services to students and our ability to integrate new schools into our operations, if and when new
schools are opened or acquired. We anticipate that the cost to complete the continued roll-out of our new student management and
reporting system will be approximately $0.5 million. We anticipate funding these costs with cash provided by operating activities
and cash on hand or alternatively with borrowings under our credit agreement. Included in selling, general and administrative
expenses are costs related to this roll out of approximately $0.4 million, $1.8 million and $0.5 million, respectively for each of the
three years ended December 31, 2006.
Costs related to developing and starting-up new facilities are expensed as incurred. Costs related to our start up facility in Queens,
New York, which opened March 27, 2006, were approximately $0.9 million, $1.6 million and $0.1 million, for each of the three
years in the period ended December 31, 2006.
ACQUISITIONS
Acquisitions have been, and will continue to be, a component of our growth strategy. We have a team of professionals who
conduct financial, operational and regulatory due diligence as well as a team that integrates acquisitions with our policies,
procedures and systems.
On May 22, 2006, a wholly-owned subsidiary of the Company, acquired all of the outstanding common stock of New England
Institute of Technology at Palm Beach, Inc., or FLA, for approximately $40.1 million. The purchase price was $32.9 million, net
of cash acquired plus the assumption of a mortgage note for $7.2 million. The FLA purchase price has been allocated to
identifiable net assets with the excess of the purchase price over the estimated fair value of the net assets acquired recorded as
goodwill.
38
On December 1, 2005, a wholly-owned subsidiary of the Company acquired all of the rights, title and interest in the assets of
Euphoria Institute LLC, or EUP, for approximately $9.2 million, net of cash acquired.
On January 11, 2005, a wholly-owned subsidiary of the Company acquired all of the rights, title and interest in the assets of New
England Technical Institute, or NETI, for approximately $18.8 million, net of cash acquired.
On January 23, 2004, the Company acquired all of the rights, title and interest in the assets of the Southwestern College of
Business, Inc., or Southwestern or SWC, for approximately $14.5 million, net of cash acquired. Included in this purchase price is
certain real estate which was acquired from Southwestern for $0.7 million.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussions of our financial condition and results of operations are based upon our consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during the period. On an ongoing basis, we evaluate our
estimates and assumptions, including those related to revenue recognition, bad debts, fixed assets, goodwill and other intangible
assets, income taxes and certain accruals. Actual results could differ from those estimates. The critical accounting policies
discussed herein are not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting
treatment of a particular transaction is specifically dictated by GAAP and does not result in significant management judgment in
the application of such principles. 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.
Revenue recognition. Revenues are derived primarily from programs taught at our schools. Tuition revenues and one-time fees,
such as nonrefundable application fees, and course material fees are recognized on a straight-line basis over the length of the
applicable program, which is the period of time from a student's start date through his or her graduation date, including internships
or externships that take place prior to graduation. If a student withdraws from a program prior to a specified date, any paid but
unearned tuition is refunded. Refunds are calculated and paid in accordance with federal, state and accrediting agency standards.
Other revenues, such as 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. 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'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 impact the allowance for uncollectible accounts. The receivables balances of withdrawn students
with delinquent obligations are reserved for based on our collection history. Although we believe that our reserves are adequate, if
the financial condition of our students deteriorates, resulting in an impairment of their ability to make payments, additional
allowances may be necessary, which will result in increased selling, general and administrative expenses in the period such
determination is made.
Our bad debt expense as a percentage of revenues for the years ended December 31, 2006, 2005 and 2004 was 4.8%, 3.7% and
3.5%, respectively. Our exposure to changes in our bad debt expense could impact our operations. A 1% increase in our bad debt
expense as a percentage of revenues for the years ended December 31, 2006, 2005 and 2004 would have resulted in an increase in
bad debt expense of $3.2 million, $3.0 million and $2.6 million, respectively.
Because a substantial portion of our revenues 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. We test our goodwill for impairment annually, or whenever events or changes in circumstances indicate an
impairment may have occurred, by comparing its fair value to its carrying value. Impairment may result from, among other things,
deterioration in the performance of the acquired business, adverse market conditions, adverse changes in applicable laws or
regulations, including changes that restrict the activities of the acquired business, and a variety of other circumstances. If we
determine that impairment has occurred, we are required to record a write-down of the carrying value and charge the impairment
as an operating expense in the period the determination is made. In evaluating the recoverability of the carrying value of goodwill
39
and other indefinite-lived intangible assets, we must make assumptions regarding estimated future cash flows and other factors to
determine the fair value of the acquired assets. Changes in strategy or market conditions could significantly impact these
judgments in the future and require an adjustment to the recorded balances.
Goodwill represents a significant portion of our total assets. As of December 31, 2006, goodwill represented approximately $85.0
million, or 37.6%, of our total assets. At December 31, 2006, we tested our goodwill for impairment utilizing a market
capitalization approach and determined that we did not have an impairment.
Stock-based compensation. We currently account for stock-based employee compensation arrangements in accordance with the
provisions of SFAS No. 123R, “Share Based Payment.” Effective January 1, 2004, we elected to change our accounting policies
from the use of the intrinsic value method of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock-Based
Compensation" to the fair value-based method of accounting for options as prescribed by SFAS No. 123 “Accounting for Stock-
Based Compensation”. As permitted under SFAS No. 148, "Accounting for Stock-Based Compensation—Transitions and
Disclosure—an amendment to SFAS Statement No. 123," we elected to retroactively restate all periods presented. Because no
market for our common stock existed prior to our initial public offering, our board of directors determined the fair value of our
common stock based upon several factors, including our operating performance, forecasted future operating results, and our
expected valuation in an initial public offering.
Prior to our initial public offering, we valued the exercise price of options issued to employees using a market based approach.
This approach took 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 reviewed contemporaneous information about our peers, which included 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 believed using public company comparisons
provided a better indication of how the market values companies in the for-profit post secondary education sector.
During 2005, we adopted the provisions of SFAS No. 123R, “Share Based Payment”. The adoption of SFAS No. 123R did not
have a material impact on our financial statements.
Bonus costs. We accrue the estimated cost of our bonus programs using current financial and statistical information as
compared to targeted financial achievements and actual student graduate outcomes. Although we believe our estimated liability
recorded for bonuses is reasonable, actual results could differ and require adjustment of the recorded balance.
40
Results of Operations for the Three Years Ended December 31, 2006
The following table sets forth selected consolidated statements of operations data as a percentage of revenues for each of the
periods indicated:
Year Ended December 31,
2005
2006
2004
Revenues
Costs and expenses:
Educational services and facilities
Selling, general and administrative
(Gain) loss on sale of assets
Total costs and expenses
Operating income
Interest expense, net
Other Income
Income before income taxes
Provision for income taxes
Net income
100.0%
100.0%
100.0%
42.5
48.9
(0.1)
91.3
8.7
(0.4)
0.0
8.3
3.4
4.8%
40.6
48.5
0.0
89.1
10.9
(0.8)
0.1
10.1
3.9
6.3%
40.1
50.1
0.2
90.4
9.6
(1.1)
0.0
8.5
3.5
5.0%
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
Revenues. Revenues increased by $22.3 million, or 7.4%, to $321.5 million for 2006 from $299.2 million for 2005.
Approximately $5.4 million and $10.4 million, respectively, of this increase was a result of our acquisition of Euphoria on
December 1, 2005 and our acquisition of New England Institute of Technology at Palm Beach, Inc. (“FLA”), on May 22, 2006.
The remainder of the increase was due to tuition increases, which ranged between 2% and 5% annually depending on the program.
Substantially all of our revenues consist of student tuition. For the year ended December 31, 2006, our average undergraduate full-
time student enrollment increased 1.2% to 18,081 compared to 17,869 for the year ended December 31, 2005. Excluding our
acquisition of Euphoria and FLA, our average undergraduate student enrollment decreased by 3.8% to 17,176.
Historically, our schools have lower student populations in our first and second quarters and we have experienced large class starts
in the third and fourth quarters. Our second half growth is largely dependent on a successful high school recruiting season. We
recruit our high school students several months ahead of their scheduled start dates, and thus, while we have visibility on the
number of students who have expressed interest in attending our schools, we cannot predict with certainty the actual number of
new student starts and its related impact on revenue.
As the third quarter of 2006 progressed, we experienced erosion between the number of students who expressed an interest in
attending our schools and enrolled, and those that commenced classes. Many of these prospective students chose immediate
employment, rather than pursuing education in the near term. Moreover, we believe the attractive job market further elevated
sensitivity levels regarding the affordability of education, given the attractive alternative of immediate employment.
Educational services and facilities expenses. Our educational services and facilities expenses increased by $15.1 million, or
12.4%, to $136.6 million for 2006 from $121.5 million for 2005. Our acquisitions of Euphoria and FLA accounted for $8.0
million or 53.0% of this increase. Excluding Euphoria and FLA, instructional expenses and books and tools expense increased by
$70.0 million or 4.9% and $15.1 million or 9.3%, respectively, over the prior year primarily due to increased compensation and
benefits expenses and due to higher costs of books and tools. The remainder of the increase in educational services and facilities
expenses was primarily due to facilities expenses which increased $2.6 million over the prior year. Of this amount approximately
$0.8 million represented additional rent expense in 2006 due to our expanded campus facilities in Lincoln, Rhode Island and
NETI as well as from normal rent escalation clauses. During the year we also experienced increased costs for insurance and real
estate taxes, which increased approximately $0.4 million from the prior year, utilities which increased approximately $0.5 million
over the prior year and from repairs and maintenance expenses, which increased approximately $0.4 million over the prior year.
Educational services and facilities expenses as a percentage of revenues increased to 42.5% of revenues for 2006 from 40.6% for
2005.
Selling, general and administrative expenses. Our selling, general and administrative expenses for the year ended December
31, 2006 were $157.3 million, an increase of $12.1 million, or 8.3%, from $145.2 million for 2005. Approximately $1.5 million
and $4.0 million of this increase were attributed to our acquisitions of Euphoria and FLA, respectively. The remainder of the
41
increase was primarily due to: (a) a $1.2 million or 4.0% increase in sales expense resulting mainly from incremental
compensation and benefit expenses related to additional sales representatives; (b) an 8.2%, or $2.3 million, increase in marketing
costs as a result of increased advertising expenses associated with student leads and enrollment; (c) a $2.9 million or 4.0%
increase in administrative expenses, excluding Euphoria and FLA, over the prior year. The increase in administrative expenses
included approximately $0.9 million of re-branding costs incurred during the year. The remainder of the increase in administrative
expenses was attributable to a higher provision for bad debts in 2006 as compared to 2005. Bad debt expense in 2006 increased by
$4.4 million from $11.2 million in 2005 to $15.6 million for the year ended December 31, 2006. This increase was due to several
factors, including (1) higher accounts receivable balances throughout the year as compared to prior year, (2) increased loans to our
students under a recourse agreement we entered into in 2005 with SLM Financial Corporation (SLM) to provide private recourse
loans to qualifying students, and (3) the effect of increasing the payment terms on the self finance portion of their tuition to some
of our students from 5 years to 7 years. Accounts receivable throughout the year included five new campuses that did not exist in
2005 (our two Euphoria and two FLA campuses as well as our new Queens, New York campus). Under the terms of the SLM
agreement, we are required to fund up to 30% of all loans disbursed into a deposit account, which may ultimately be utilized to
purchase loans in default. As of December 31, 2006, we had reserved $1.5 million under this agreement, which represents an
increase of $1.1 million from amounts reserved at December 31, 2005. Funding under this agreement terminated by its terms on
June 30, 2006.
These increases were partially offset by lower expenses incurred in rolling out our campus management and reporting system as
well as lower compensation expense, primarily resulting from a decrease in bonuses to be paid. As a percentage of revenue,
selling, general and administrative expenses increased to 48.9% of revenues for 2006 from 48.5% for 2005.
Interest income. Interest income increased to $1.0 million for the year ended December 31, 2006, an increase of $0.2 million
from interest income of $0.8 million for 2005. The increase in interest income for the year was due to higher average cash
balances during the year, resulting from receipt of $56.3 million of net proceeds from our initial public offering in June 2005 and
cash generated by operations.
Interest expense. Interest expense decreased $0.6 million, or 20.7%, to $2.3 million for 2006 from $2.9 million for 2005. This
decrease was primarily due to a decrease in our average debt balance outstanding as we utilized a portion of the proceeds from our
initial public offering to pay down all amounts outstanding under our previous credit agreement in 2005. Interest expense for the
year ended December 31, 2005 also included approximately $0.4 million related to the write-off of deferred financing costs under
our previous credit agreement.
Income taxes. Our provision for income taxes for the year ended December 31, 2006 was $11.0 million, or 41.4% of pretax
income, compared to $11.9 million, or 38.9% of pretax income for the year ended December 31, 2005. The increase in effective
tax rate for the year ended December 31, 2006 is attributable to the recognition of a tax benefit of $0.8 million in 2005 related to
the favorable resolution of a tax contingency.
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
Revenues. Revenues increased by $38.0 million, or 14.5%, to $299.2 million for 2005 from $261.2 million for 2004. Of this
increase, approximately $16.7 million, or 6.4%, was attributable to the acquisition of New England Technical Institute, or NETI,
on January 11, 2005, while the remainder of the increase was primarily due to a 3.0% increase in our average undergraduate full-
time student population, which increased to 16,752 for the year ended December 31, 2005, exclusive of NETI, as compared to
16,266 for the year ended December 31, 2004, as well as from tuition increases, which ranged between 2% and 5% annually
depending on the program. Growth in average student population was driven by increased demand for our health sciences and
automotive programs and partially offset by decreased demand for our information technology programs. Average student
population for the year ended December 31, 2005 was 17,869 students, representing an increase of 9.9% compared to average
student enrollment of 16,266 for the year ended December 31, 2004.
Educational services and facilities expenses. Our educational services and facilities expenses increased by $16.7 million, or
15.9%, to $121.5 million for 2005 from $104.8 million for 2004. Our acquisition of NETI accounted for 9.6%, or $10.0 million, of
this increase. Instructional expenses increased by 3.6% over the prior year primarily due to increased compensation and benefits
expenses. The increase in average student population also resulted in an increase in books and tools expenses, which increased
8.2% for the year. The remainder of the increase in educational services and facilities expenses was primarily due to facilities
expenses which increased $3.5 million over the prior year. Of this amount approximately $1.3 million represented additional rent
expense in 2005 as compared to prior year rent due on our new Queens, New York facility, our expanded campus facilities in
Lincoln, Rhode Island and Marietta, Georgia, which opened in the latter part of 2004, and the expansion of our corporate facilities
in February 2005. The increase in our facilities expenses also resulted from an increase in student meal plan expense of
approximately $0.8 million due to new cafeteria facilities at our Indianapolis, Indiana facility as well as increased population at
our other destination schools. Our facilities expenses also included a charge of $0.2 million related to catch-up depreciation
resulting from the reclassification of our property in Indianapolis, Indiana from property held for sale to property, equipment and
facilities as of September 30, 2005. Educational services and facilities expenses as a percentage of revenues increased to 40.6% of
revenues for 2005 from 40.1% for 2004.
42
Selling, general and administrative expenses. Our selling, general and administrative expenses for the year ended December
31, 2005 were $145.2 million, an increase of $14.3 million, or 10.9%, from $130.9 million for 2004. Approximately $5.8 million,
or 4.4%, of this increase was attributed to our acquisition of NETI in January 2005. The remainder of the increase was primarily
due to: (a) a 5.2% increase in sales expense resulting mainly from incremental compensation and benefit expenses related to
additional sales representatives; (b) a 17.3%, or $3.9 million increase in marketing costs as a result of increased advertising
expenses associated with student leads and enrollment; and (c) a 9.0% increase in student services expense as a result of our 3.0%
growth in average student population as well as increased expenses incurred to bus our students at some of our campuses. For
additional information on our accounts receivable balances, see “Operating Activities “below.
Additionally, for the year ended December 31, 2005, administrative expenses increased $1.7 million over the prior year. This
increase includes approximately $0.5 million of costs that we wrote-off in December 2005 resulting from our decision not to
pursue the acquisition of a site we had identified for expanding our facility in Philadelphia, Pennsylvania. In December 2005, we
made this decision due to delays in obtaining the necessary variances from the city. The implementation of our student
management and reporting system also resulted in approximately $1.3 million of increased costs over 2004. These increases were
partially offset in 2005 with lower compensation expense, primarily resulting from a decrease of bonuses to be paid in 2005 as
compared to 2004. Selling, general and administrative expenses as a percentage of revenues decreased to 48.5% of revenues for
2005 from 50.1% for 2004.
Interest income. Interest income increased to $0.8 million for the year ended December 31, 2005, an increase of $0.7 million
from interest income of $0.1 million for 2004. The increase in interest income for the year was due to higher average cash
balances during the year, resulting from higher cash generated by operations as well as our receipt of $56.3 million of net
proceeds from our initial public offering.
Interest expense. Interest expense decreased $0.1 million, or 3.8%, to $2.9 million for 2005 from $3.0 million for 2004. This
decrease was primarily due to a decrease in our average debt balance outstanding as we utilized a portion of the proceeds from our
initial public offering to pay down all amounts outstanding under our previous credit agreement. Interest expense for the year
ended December 31, 2005 also included approximately $0.4 million related to the write-off of deferred financing costs under our
previous credit agreement.
Income taxes. Our provision for income taxes for the year ended December 31, 2005 was $11.9 million, or 38.9% of pretax
income, compared to $9.2 million, or 41.6% of pretax income for the year ended December 31, 2004. The lower effective tax rate
for the year ended December 31, 2005 was primarily attributable to the recognition of a benefit of $0.8 million related to the
favorable resolution of a tax contingency.
LIQUIDITY AND CAPITAL RESOURCES
Our primary capital requirements are for facilities expansion and maintenance, acquisitions and the development of new
programs. Our principal sources of liquidity have been cash provided by operating activities and borrowings under our credit
agreement. The following chart summarizes the principal elements of our cash flow for the past three fiscal years ended December
31, 2006:
Cash Flow Summary
2006
Year Ended December 31,
2005
(In thousands)
2004
Net cash provided by operating activities
Net cash used in investing activities
Net cash (used in) provided by financing activities
$
$
$
15,258 $
(52,160) $
(6,894) $
38,966 $
(50,397) $
20,243 $
26,674
(38,311)
4,117
Operating Activities
As of December 31, 2006, we had cash and cash equivalents of $6.5 million, compared to cash and cash equivalents of
$50.3 million as of December 31, 2005. Historically, we have financed our operating activities and our organic growth primarily
through cash generated from operations. We have financed acquisitions primarily through the proceeds from our initial public
offering, borrowings under our credit agreement and cash generated from operations. Management currently anticipates that we
will be able to meet both our short-term cash needs, as well as our needs 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 December 31, 2006, we had net borrowings available under our $100 million credit agreement of $95.6 million,
including a sub-limit on letters of credit of $15.6 million.
43
Our primary source of cash is tuition collected from our students. The majority of students enrolled at our schools rely on funds
received under various government-sponsored student financial aid programs to pay a substantial portion of their tuition and other
education-related expenses. The largest of these programs are Title IV Programs which represented approximately 80.1% of our
cash receipts relating to revenues in 2006. 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's academic year and the second disbursement is typically received at the beginning of the sixteenth week from the start of
the student's academic year. Certain types of grants and other funding are not subject to a 30-day delay. Our programs range from
14 to 105 weeks. 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.
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 operating activities is attributable primarily to net income adjusted for depreciation and amortization, non-
cash expenses and changes in working capital items.
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005. Net cash provided by operating activities
decreased to $15.3 million for 2006 from $39.0 million for 2005. This decrease of $23.7 million, or 60.8%, was primarily due to a
$10.2 million increase in accounts receivable at December 31, 2006 from December 31, 2005. This increase in accounts
receivable which represents 24.1 days revenues outstanding for 2006 as compared to 17.3 days revenue outstanding in 2005 is
attributable to the addition of five campuses during 2006 as well as the increase in the self-pay portion of our students’ tuition. As
the gap between the amount of funding provided by Title IV and tuition rates widens, students are finding it increasingly difficult
to finance on a short term basis this portion of their tuition. This has resulted in an overall increase in the term of loan programs
established to assist students in financing this gap. In an ongoing effort to help those students who are unable to obtain any
additional sources of financing, we assist students in financing a portion of their tuition. Students that elect to participate in this
financing option currently have up to seven years to repay this obligation, an increase of up to two years from the five year term
that we previously offered our students in prior years.
While the increase in repayment terms from five to seven years benefits our students by decreasing their monthly payments, it
adversely impacts our accounts receivable, our allowance for doubtful accounts and our cash flow from operations. Although we
reserved for estimated losses related to unpaid student balances, losses in excess of the amounts we have reserved for bad debts
will result in a reduction in our profitability and can have an adverse impact on the results of our operations.
Other significant items impacting cash flow from operations in 2006 versus 2005 were the impact of the $3.2 million reduction in
our net income in 2006 and a $4.8 million increase in cash paid during 2006 for income taxes. The increase in cash paid for
income taxes during 2006 was due to the Company having overpaid amounts due in 2005.
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004. Net cash provided by operating activities
increased to $39.0 million for 2005 from $26.7 million for 2004. This increase of $12.3 million, or 46.1%, was primarily due to a
$5.7 million increase in net income, a $1.9 million increase in our provision for doubtful accounts for the year and taxes currently
payable of approximately $4.1 million. During 2004 we made an extra $2.4 million in tax payments. The remainder of the
increase resulted from changes in other working capital items.
Investing Activities
Our cash used in investing activities was primarily related to the purchase of property and equipment and in acquiring schools.
Our capital expenditures primarily result from facility expansion, leasehold improvements, and investments in classroom and shop
technology and in operating systems. On May 22, 2006 we acquired all of the outstanding common stock of FLA for $32.9
million in cash and the assumption of a mortgage. On January 11, 2005, we acquired NETI for $18.8 million in cash and on
December 1, 2005, we acquired Euphoria for approximately $9.0 million in cash.
We currently lease a majority of our campuses. We own our new Grand Prairie, Texas campus, our FLA campuses, our Nashville
campus and certain buildings in our Southwestern campuses. As we execute our growth strategy, strategic acquisitions of
campuses may be considered. In addition, although our current growth strategy is to continue our organic growth, strategic
acquisitions of operations will be considered. To the extent that these potential strategic acquisitions are large enough to require
financing beyond available cash from operations and borrowings under our credit facilities, we may incur additional debt or issue
additional debt or equity securities.
44
Year Ended December 31, 2006 Compared to the Year Ended December 31, 2005. Net cash used in investing activities
increased $1.8 million to $52.1 million for the year ended December 31, 2006 from $50.4 million for the year ended
December 31, 2005. This increase was primarily attributable to a $5.1 million increase in cash used in acquisitions offset by a $3.3
million decrease in capital expenditures for the year ended December 31, 2006 from the year ended December 31, 2005.
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004. Net cash used in investing activities increased
$12.1 million to $50.4 million for the year ended December 31, 2005 from $38.3 million for the year ended December 31, 2004.
This increase was primarily attributable to an increase in cash used in acquisitions of $13.3 million in connection with the
acquisitions of NETI and Euphoria. Capital expenditures decreased to $22.6 million for 2005 from $23.8 million for 2004. This
decrease of $1.2 million was primarily attributable to the timing of certain expenditures. Our capital expenditures result primarily
from facility expansions, leasehold improvements, investments in classroom and shop technology and in operating systems.
Capital expenditures are expected to increase in 2007 as we upgrade and expand current equipment and facilities or open or
expand new facilities to meet increased student enrollments. We anticipate capital expenditures to range between 10% to 12% of
revenues in 2007 and expect to fund these capital expenditures with cash generated from operating activities and, if necessary,
with borrowings under our credit agreement.
Financing Activities
Year Ended December 31, 2006 Compared to the Year Ended December 31, 2005. Net cash used in financing activities was
$6.9 million for the year ended December 31, 2006, as compared to net cash provided by financing activities of $20.2 million for
the year ended December 31, 2005. This decrease is attributable to our repaying the mortgage note assumed in our purchase of
FLA in 2006, reduced by our receipt of the net proceeds from our initial public offering in 2005 reduced by debt repayments
under our previous credit agreement.
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004. Net cash provided by financing activities
increased to $20.2 million for the year ended December 31, 2005 from $4.1 million for the year ended December 31, 2004. This
increase is mainly attributable to our receipt of the net proceeds from our initial public offering offset by debt repayments under
our previous credit agreement.
At December 31, 2004, our wholly-owned operating subsidiary, Lincoln Technical Institute, Inc., its subsidiaries and
Southwestern College had $35.8 million in loans outstanding and $4.0 million in letters of credit outstanding under our previous
credit agreement that was entered into at February 11, 2003 to refinance our prior credit agreement. At December 31, 2004, the
interest rate on the amounts outstanding under our previous credit agreement ranged from 5.70% to 6.75%.
On February 15, 2005, we and our subsidiaries entered into a new credit agreement with a syndicate of banks. This new credit
agreement provides for a $100 million revolving credit facility with a term of five years under which any outstanding borrowings
bear interest at the rate of adjusted LIBOR (as defined in the new credit agreement) plus a margin that may range from 1.00% to
1.75% or a base rate (as defined in the new credit agreement) plus a margin that may range from 0.00% to 0.25%. We did not
have any amounts outstanding under this credit agreement as of December 31, 2006. The new credit agreement permits the
issuance of letters of credit up to an aggregate amount of $20.0 million, the amount of which reduces the availability of permitted
borrowings under the new credit agreement. We incurred approximately $0.8 million of deferred finance costs under this
agreement.
Our obligations and our subsidiaries’ obligations under the credit agreement are secured by a lien on substantially all of our and
our subsidiaries’ assets and any assets that we and our subsidiaries may acquire in the future, including a pledge of substantially
all of the subsidiaries’ common stock. In addition to paying interest on outstanding principal under the credit agreement, we 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 our initial public offering in 2005, we repaid the then
outstanding loan balance of $31.0 million under our credit facility.
45
The credit agreement contains various covenants, including a number of financial covenants. Furthermore, the credit agreement
contains customary events of default as well as an event of default in the event of the suspension or termination of Title IV
Program funding for our and our subsidiaries' schools aggregating 10% or more of our EBITDA (as defined in the new credit
agreement) or our and our subsidiaries' consolidated total assets and such suspension or termination is not cured within a specified
period. The following table sets forth our long-term debt for the periods indicated:
Credit agreement
Finance obligation
Automobile loans
Capital leases-computers (with rates ranging from 6.7% to 10.7%)
Subtotal
Less current portion
Total long-term debt
As of December 31,
2005
2006
- $
9,672
37
151
9,860
(91)
9,769 $
-
9,672
81
1,015
10,768
(283)
10,485
$
$
We believe that our working capital, cash flow from operations, access to operating leases and borrowings available from our
amended credit agreement will provide us with adequate resources for our ongoing operations through 2007 and our currently
identified and planned capital expenditures.
Contractual Obligations
Long-Term Debt. As of December 31, 2006, 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. 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).
The following table contains supplemental information regarding our total contractual obligations as of December 31, 2006:
Payments Due by Period
Capital leases (including interest)
Operating leases
Rent on finance obligation
Automobile loans (including interest)
$
165 $
148,413
13,454
38
Total
Less than 1
year
2-3 years 4-5 years
86 $
30,390
2,668
16
- $
24,486
2,668
-
79 $
17,085
1,334
22
After 5
years
-
76,452
6,784
-
Total contractual cash obligations
$
162,070 $
18,520 $
33,160 $
27,154 $
83,236
Capital Expenditures. The Company has entered into commitments to expand or renovate campuses. These commitments are in
the range of $3.0 to $5.0 million in the aggregate and are due within the next 12 months. We expect to fund these commitments
from cash generated from operations.
OFF-BALANCE SHEET ARRANGEMENTS
We had no off-balance sheet arrangements as of December 31, 2006, except for our letters of credit of $4.4 million which are
primarily comprised of letters of credit for the DOE and security deposits in connection with certain of our real estate leases.
These off-balance sheet arrangements do not adversely impact our liquidity or capital resources.
RELATED PARTY TRANSACTIONS
Pursuant to the Employment Agreement between Shaun E. McAlmont and us, we agreed to pay and reimburse Mr. McAlmont for
the reasonable costs of his relocation from Denver, Colorado to West Orange, New Jersey in the year ended December 31, 2006.
Such relocation assistance included our purchase of Mr. McAlmont’s home in Denver, Colorado. The $0.5 million price paid for
Mr. McAlmont’s home equaled the average of the amount of two independent appraisers selected by us. This amount is reflected
in property, equipment and facilities in the accompanying consolidated balance sheets.
46
We had a consulting agreement with Hart Capital LLC, which terminated by its terms in June 2004, to advise us in identifying
acquisition and merger targets and assisting with the due diligence reviews of and negotiations with these targets. Hart Capital 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, is a member of our board of directors. We paid Hart Capital 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 approximately $0, and $0.4 million for the years ended December 31, 2006 and 2005, respectively. In connection
with the consummation of the NETI acquisition, which closed on January 11, 2005, we paid Hart Capital $0.3 million for its
services.
In 2003, we entered into a management service agreement with our major stockholder. 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 for each of the years in 2005, 2004 and 2003. Such services included valuing acquisitions and structuring their financing
and assisting with new loan agreements. We paid Stonington Partners $0 and $0.75 million for the years ended December 31,
2006 and 2005, respectively. Fees paid to Stonington Partners were being amortized over a twelve month period. This agreement
terminated by its terms upon our completion of its initial public offering. Selling, general and administrative expenses for the year
ended December 31, 2005 includes $0.4 million resulting from the amortization of these fees.
During 2002, certain members of senior management issued personal recourse secured promissory notes to us for approximately
$0.4 million in connection with their purchase of shares of our stock. These notes have been reflected as a reduction in
stockholders’ equity. All amounts outstanding under these promissory notes were repaid by the end of the first quarter of 2005.
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 second half growth is largely
dependent on a successful high school recruiting season. We recruit our high school students several months ahead of their
scheduled start dates, and thus, while we have visibility on the number of students who have expressed interest in attending our
schools, we cannot predict with certainty the actual number of new student enrollments and the related impact on revenue. Our
expenses, however, do not vary significantly over the course of the year with changes in our student 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
meet our second half of the year targets and, as a result, such expenses do not fluctuate significantly on a quarterly basis. To the
extent new student enrollments, and related revenues, in the second half of the year fall short of our estimates, our operating
results could suffer. We expect quarterly fluctuations in operating results to continue as a result of seasonal enrollment patterns.
Such patterns may change as a result of new school openings, new program introductions, 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 did
not meet our historical or our 2006 and 2005 anticipated growth rates. As a result of the slow down in 2005, we entered 2006 with
fewer students enrolled than we had in January of 2005. This trend continued throughout 2006 and resulted in a shortfall in the
enrollments we were expecting in the second half of 2006 and especially in the third quarter which has accounted for a majority of
our yearly starts. As a result we will also enter 2007 with fewer students enrolled than we had in January 2006. 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) the availability of student financing; (c) dependency on television to
attract students to our school; (d) turnover of our sales representatives; and (e) 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.
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. 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 opened one new campus, located in Queens, New York, which
opened on March 27, 2006.
47
RECENT ACCOUNTING PRONOUNCEMENTS
In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards
(“SFAS”) No. 159 (“SFAS 159”) “The Fair Value Option for Financial Assets and Financial Liabilities”, providing companies
with an option to report selected financial assets and liabilities at fair value. The Standard’s objective is to reduce both complexity
in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently.
Generally accepted accounting principles have required different measurement attributes for different assets and liabilities that can
create artificial volatility in earnings. SFAS 159 helps to mitigate this type of accounting-induced volatility by enabling companies
to report related assets and liabilities at fair value, which would likely reduce the need for companies to comply with detailed rules
for hedge accounting. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons
between companies that choose different measurement attributes for similar types of assets and liabilities. The Standard requires
companies to provide additional information that will help investors and other users of financial statements to more easily
understand the effect of the Company’s choice to use fair value on its earnings. It also requires entities to display the fair value of
those assets and liabilities for which the Company has chosen to use fair value on the face of the balance sheet. SFAS 159 is
effective for us on January 1, 2008. We are currently evaluating the impact of the adoption of this Statement on our consolidated
financial statements.
In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R).” Among other items, SFAS 158 requires
recognition of the overfunded or underfunded status of an entity’s defined benefit postretirement plan as an asset or liability in the
financial statements, requires the measurement of defined benefit postretirement plan assets and obligations as of the end of the
employer’s fiscal year, and requires recognition of the funded status of defined benefit postretirement plans in other
comprehensive income. SFAS 158 was adopted on December 31, 2006. See Note 12 in the consolidated financial statements
related to the adoption of SFAS 158.
In September 2006, the FASB issued SFAS No. 157,“Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. This Statement applies
under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in
those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not
require any new fair value measurements. The provisions of SFAS No. 157 are effective as of January 1, 2008. The adoption of
the provision of SFAS No. 157 is not expected to have a material effect on our consolidated financial statements.
In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (“SAB”) No. 108 which
provides interpretive guidance on how the effects of the carryover or reversal of prior year unrecorded misstatements should be
considered in quantifying a current year misstatement. SAB No. 108 is effective for the Company as of January 1, 2007. The
adoption of the provision of SAB No. 108 did not have a material effect on our consolidated financial statements.
In June 2006, FASB issued FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes.” FIN 48 clarifies
the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB SFAS
No. 109, “Accounting for Income Taxes”, which will become effective for the Company on January 1, 2007. This Interpretation
prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax
positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-
than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of
benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The adoption of FIN 48 will result in a
negative cumulative effect adjustment to retained earnings as of January 1, 2007 of approximately $0.1 million.
In March 2006, FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets.” SFAS No. 156 provides guidance
addressing the recognition and measurement of separately recognized servicing assets and liabilities, common with mortgage
securitization activities, and provides an approach to simplify efforts to obtain hedge accounting treatment. SFAS No. 156 will be
adopted on January 1, 2007. The adoption of the provision of SFAS No. 156 is not expected to have a material effect on our
consolidated financial statements.
In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments.” SFAS No. 155 is
effective beginning January 1, 2007. The adoption of the provision of SFAS No. 155 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.” 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’ financial statements of a voluntary change in accounting principle unless it is impracticable.
Accounting Principles Boards (“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
48
principle. 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 affected by a change in accounting principle. APB Opinion No.
20 previously required that such a change be reported as a change in accounting principle. We adopted SFAS No. 154 on January
1, 2006. The adoption of the provisions of SFAS No. 154 had no effect on our consolidated financial statements.
In March 2005, the FASB issued FIN 47, “Accounting for Conditional Asset Retirement Obligations”. FIN 47 clarifies that a
conditional asset retirement obligation, as used in SFAS 143, “Accounting for Asset Retirement Obligations,” refers to a legal
obligation to perform an asset retirement activity in which the timing and/or method of the settlement are conditional on a future
event that may or may not be within the control of the entity. Accordingly, we are required to recognize a liability for the fair
value of a conditional asset retirement obligation if the fair value can be reasonably estimated. We adopted FIN 47 on January 1,
2006. The adoption of the provisions of FIN 47 had no effect on our consolidated financial statements.
In December 2004, the FASB issued SFAS No. 153,“Exchanges of Nonmonetary Assets, an Amendment of APB Opinion No. 29,
Accounting for Nonmonetary 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. We adopted SFAS No. 153 on January 1, 2006. The adoption of the
provisions of SFAS No. 153 had no effect on our consolidated financial statements.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks as part of our on-going business operations. We have a credit agreement with a syndicate
of banks. Our obligations under the credit agreement are secured by a lien on substantially all of our assets and our subsidiaries
and any assets that we or our subsidiaries may acquire in the future, including a pledge of substantially all of our subsidiaries’
common stock. Outstanding borrowings bear interest at the rate of adjusted LIBOR plus 1.0% to 1.75%, as defined, or a base rate
(as defined in the credit agreement). As of December 31, 2006, we had $0 outstanding under the credit agreement.
In conjunction with the acquisition of New England Institute of Technology at Palm Beach, Inc., we assumed a mortgage note
payable with an accompanying interest rate swap (the “SWAP”) in the amount of $7.2 million. The interest rate swap agreement
converts the mortgage note payable from a variable rate to a fixed rate of 6.48% through May 1, 2013. The fair value of the
SWAP upon acquisition was $0.3 million and all future changes in the market valuation of the SWAP were recorded as other
income or expense on the consolidated statement of operations. Accordingly, the Company recorded a $0.2 million loss due to a
decrease in fair market value. The Company repaid the mortgage note in November 2006. As a result the SWAP agreement was
terminated and the Company received $0.2 million for the fair market value.
Based on our outstanding debt balance, a change of one percent in the interest rate would not cause a change in our interest
expense. Changes in interest rates could have an impact however on our operations, which are greatly dependent on students’
ability to obtain financing. Any increase in interest rates could greatly impact our ability to attract students and have an adverse
impact on the results of our operations.
The remainder of our interest rate risk is associated with miscellaneous capital equipment leases, which are not material.
Effect of Inflation
Inflation has not had and is not expected to have a significant effect on our operations.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See “Index to Consolidated Financial Statements” on page F-1 on this Form 10-K.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
ITEM 9.
None.
ITEM 9A.
DISCLOSURE CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Our Chief Executive Officer and Chief Financial Officer, after evaluating,
together with management, the effectiveness of our disclosure controls and procedures (as defined in Securities Exchange Act
Rule 13a-15(e)) as of the end of the quarterly period covered by this report, have concluded that our disclosure controls and
procedures are adequate and effective to reasonably ensure that material information required to be disclosed by us in the reports
49
that we file or submit under the Securities Exchange Act of 1934, as amended is recorded, processed, summarized and reported
within the time periods specified by Securities and Exchange Commissions’ Rules and Forms and that such information is
accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is
defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended. Under the supervision and with the
participation of management, including the Chief Executive Officer and Chief Financial Officer, we assessed the effectiveness of
our internal control over financial reporting as of December 31, 2006. In making this assessment, we used the criteria set forth by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework.
Based on our assessment under the framework in Internal Control—Integrated Framework, we concluded that our internal control
over financial reporting was effective as of December 31, 2006. Our assessment of the effectiveness of internal control over
financial reporting as of December 31, 2006 has been audited by Deloitte & Touche LLP, an independent registered public
accounting firm, as stated in their report which is included herein.
Management’s Report on Internal Control Over Financial Reporting and the Report of Independent Registered Public Accounting
Firm are included in “Item 8-Financial Statements and Supplementary Data.”
(b) Changes in Internal Control Over Financial Reporting. During the quarter ended December 31, 2006, there has been no
change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
ITEM 9B.
OTHER INFORMATION
None.
50
PART III.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers
The information required by this item is incorporated herein by reference to our definitive Proxy Statement to be filed in
connection with our 2007 Annual Meeting of Shareholders.
Code of Ethics
We have adopted a Code of Conduct and Ethics applicable to our directors, officers and employees and certain other persons,
including our Chief Executive Officer and Chief Financial Officer. A copy of our Code of Ethics is available on our website at
www.lincolneducationalservices.com. If any amendments to or waivers from the Code of Conduct are made, we will disclose such
amendments or waivers on our website.
ITEM 11.
EXECUTIVE COMPENSATION
Information required by Item 11 of Part III is incorporated by reference to our definitive Proxy Statement to be filed in connection
with our 2007 Annual Meeting of Shareholders.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information required by Item 12 of Part III is incorporated by reference to our definitive Proxy Statement to be filed in connection
with our 2007 Annual Meeting of Shareholders.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Information required by Item 13 of Part III is incorporated by reference to our definitive Proxy Statement to be filed in connection
with our 2007 Annual Meeting of Shareholders.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
Information required by Item 14 of Part III is incorporated by reference to our definitive Proxy Statement to be filed in connection
with our 2007 Annual Meeting of Shareholders.
51
PART IV.
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
1.
Financial Statements
See “Index to Consolidated Financial Statements” on page F-1 of this Form 10-K.
2.
Financial Statement Schedule
See “Index to Consolidated Financial Statements” on page F-1 of this Form 10-K.
3.
Exhibits Required by Securities and Exchange Commission Regulation S-K
Exhibit
Number
Description
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
10.1
10.2 *
10.3 *
10.4 *
10.5 *
10.6 *
Amended and Restated Certificate of Incorporation of the Company (1).
Amended and Restated By-laws of the Company (2).
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. (1).
Letter agreement, dated August 9, 2000, by Back to School Acquisition, L.L.C., amending the Stockholders’
Agreement (1).
Letter agreement, dated August 9, 2000, by Lincoln Technical Institute, Inc., amending the Stockholders’
Agreement (1).
Management Stockholders Agreement, dated as of January 1, 2002, by and among Lincoln Technical Institute,
Inc., Back to School Acquisition, L.L.C. and the Stockholders and other holders of options under the Management
Stock Option Plan listed therein (1).
Registration Rights Agreement between the Company and Back to School Acquisition, L.L.C. (2).
Specimen Stock Certificate evidencing shares of common stock (1).
Credit Agreement, dated as of February 15, 2005, among the Company, 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
(1).
Amended and Restated Employment Agreement, dated as of February 1, 2007, between the Company and David
F. Carney.
Amended and Restated Employment Agreement, dated as of February 1, 2007, between the Company and
Lawrence E. Brown.
Amended and Restated Employment Agreement, dated as of February 1, 2007, between the Company and Scott
M. Shaw.
Amended and Restated Employment Agreement, dated as of February 1, 2007, between the Company and Cesar
Ribeiro.
Amended and Restated Employment Agreement, dated as of February 1, 2007, between the Company and Shaun
E. McAlmont.
10.7
Lincoln Educational Services Corporation 2005 Long Term Incentive Plan (1).
52
10.8
10.9
10.10
10.11
10.12
10.13
10.14
Lincoln Educational Services Corporation 2005 Non Employee Directors Restricted Stock Plan (1).
Lincoln Educational Services Corporation 2005 Deferred Compensation Plan (1).
Lincoln Technical Institute Management Stock Option Plan, effective January 1, 2002 (1).
Form of Stock Option Agreement, dated January 1, 2002, between Lincoln Technical Institute, Inc. and certain
participants (1).
Management Stock Subscription Agreement, dated January 1, 2002, among Lincoln Technical Institute, Inc. and
certain management investors (1).
Stockholder’s Agreement among Lincoln Educational Services Corporation, Back to School Acquisition L.L.C.,
Steven W. Hart and Steven W. Hart 2003 Grantor Retained Annuity Trust (2).
Stock Purchase Agreement, dated as of March 30, 2006, among Lincoln Technical Institute, Inc., and Richard I.
Gouse, Andrew T. Gouse, individually and as Trustee of the Carolyn Beth Gouse Irrevocable Trust, Seth A. Kurn
and Steven L. Meltzer (3).
21.1 *
Subsidiaries of the Company.
23 *
Consent of Independent Registered Public Accounting Firm.
31.1 *
Certification of Chairman & Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 *
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32 *
Certification of Chairman & 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)
(2)
(3)
*
Incorporated by reference to the Company’s Registration Statement on Form S-1 (Registration No. 333-123664).
Incorporated by reference to the Company’s Form 8-K dated June 28, 2005.
Incorporated by reference to the Company’s Form 10-Q for the quarterly period ended March 31, 2006.
Filed herewith.
53
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 16, 2007
LINCOLN EDUCATIONAL SERVICES CORPORATION
By:
/s/ Cesar Ribeiro
Cesar Ribeiro
Senior Vice President, Chief Financial Officer and Treasurer
(Principal Accounting and Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ David F. Carney
David F. Carney
/s/ Cesar Ribeiro
Cesar Ribeiro
/s/ Peter S. Burgess
Peter S. Burgess
/s/ James J. Burke, Jr.
James J. Burke, Jr.
/s/ Celia Currin
Celia Currin
/s/ Paul E. Glaske
Paul E. Glaske
/s/ Steven W. Hart
Steven W. Hart
/s/ Alexis P. Michas
Alexis P. Michas
/s/ J. Barry Morrow
J. Barry Morrow
/s/ Jerry G. Rubenstein
Jerry G. Rubenstein
Chief Executive Officer and Chairman of the Board
March 16, 2007
March 16, 2007
March 16, 2007
March 16, 2007
March 16, 2007
March 16, 2007
March 16, 2007
March 16, 2007
March 16, 2007
March 16, 2007
Senior Vice President, Chief Financial Officer and
Treasurer (Principal Accounting and Financial
Officer)
Director
Director
Director
Director
Director
Director
Director
Director
54
Exhibit 21.1
The following is a list of Lincoln Educational Services Corporation’s subsidiaries:
Subsidiaries of the Company
Name
Lincoln Technical Institute, Inc. (wholly owned)
New England Acquisition LLC (wholly owned)
Southwestern Acquisition LLC (wholly owned)
Nashville Acquisition, LLC (wholly owned through Lincoln Technical Institute, Inc.)
Euphoria Acquisition, LLC (wholly owned through Lincoln Technical Institute, Inc.)
New England Institute of Technology at Palm Beach, Inc. (wholly owned through Lincoln
Technical Institute, Inc.)
Florida Acquisition, LLC (wholly owned)
Jurisdiction
New Jersey
Delaware
Delaware
Delaware
Delaware
Florida
Delaware
ComTech Services Group Inc. (wholly owned through Lincoln Technical Institute, Inc.)
New Jersey
55
Consent of Independent Registered Public Accounting Firm
Exhibit 23
We consent to the incorporation by reference in Registration Statement No. 333-126066, 333-132749 and 333-138715 on Form S-
8 of our reports dated March 14, 2007 relating to the consolidated financial statements and financial statement schedule of Lincoln
Educational Services Corporation (which report expressed an unqualified opinion and includes an explanatory paragraph relating
to the adoption of the provisions of FASB Statement No. 158, “Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans”), and management's report on the effectiveness of internal control over financial reporting appearing in the
Annual Report on Form 10-K of Lincoln Educational Services Corporation for the year ended December 31, 2006.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
March 14, 2007
56
EXHIBIT 31.1
I, David F. Carney, certify that:
CERTIFICATION
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Lincoln Educational Services Corporation;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report
financial information; and
(b)
the registrant’s internal control over financial reporting.
Any fraud, whether or not material, that involves management or other employees who have a significant role in
Date: March 16, 2007
/s/ David F. Carney
David F. Carney
Chairman & Chief Executive Officer
57
EXHIBIT 31.2
I, Cesar Ribeiro, certify that:
CERTIFICATION
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Lincoln Educational Services Corporation;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report
financial information; and
(b)
the registrant’s internal control over financial reporting.
Any fraud, whether or not material, that involves management or other employees who have a significant role in
Date: March 16, 2007
/s/ Cesar Ribeiro
Cesar Ribeiro
Chief Financial Officer
58
EXHIBIT 32
CERTIFICATION
Pursuant to 18 U.S.C. 1350 as adopted by
Section 906 of the Sarbanes-Oxley Act of 2002
Each of the undersigned, David F. Carney, Chairman and Chief Executive Officer of Lincoln Educational Services
Corporation (the “Company”), and Cesar Ribeiro, Chief Financial Officer of the Company, has executed this certification in
connection with the filing with the Securities and Exchange Commission of the Company’s Annual Report on Form 10-K for the
fiscal year ended December 31 2006 (the “Report”).
Each of the undersigned hereby certifies that, to his respective knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: March 16, 2007
/s/ David F. Carney
David F. Carney
Chairman & Chief Executive Officer
/s/ Cesar Ribeiro
Cesar Ribeiro
Chief Financial Officer
59
INDEX TO FINANCIAL STATEMENTS AND MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER
FINANCIAL REPORTING
Management’s Report on Internal Control over Financial Reporting
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2006 and 2005
Consolidated Statements of Income for the years ended December 31, 2006, 2005 and 2004
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 2006, 2005 and 2004
Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004
Notes to Consolidated Financial Statements
Item 15
Schedule II-Valuation and Qualifying Accounts
Page Number
F-2
F-3
F-5
F-7
F-8
F-9
F-11
F-33
F-1
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Lincoln Educational Services Corp. (the “Company”) is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. The
Company’s internal control system was designed to provide reasonable assurance to the Company’s management and Board of
Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006,
based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control—Integrated Framework. Based on that assessment, management believes that, as of December 31, 2006, the
Company’s internal control over financial reporting is effective.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s independent auditors, Deloitte & Touche LLP, an independent registered public accounting firm that audited the
financial statements included in this report, have issued an attestation report on our assessment of the Company’s internal control
over financial reporting and their report follows.
/s/ David F. Carney
David F. Carney
Chairman & Chief Executive Officer
March 16, 2007
/s/ Cesar Ribeiro
Cesar Ribeiro
Chief Financial Officer
March 16, 2007
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Lincoln Educational Services Corporation
West Orange, New Jersey
We have audited the accompanying consolidated balance sheets of Lincoln Educational Services Corporation and subsidiaries (the
"Company") as of December 31, 2006 and 2005, and the related statements of income, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2006. Our audits also included the consolidated financial statement
schedule II listed in the Index at Item 15. These financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company as of
December 31, 2006 and 2005, and the results of its operations and its cash flows for each of the three years in the period ended
December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 12 to the consolidated financial statements, the Company adopted the provisions of FASB Statement No.
158,“Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.”
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
effectiveness of the Company's internal control over financial reporting as of December 31, 2006, based on the criteria established
in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 14, 2007 expressed an unqualified opinion on management's assessment of the effectiveness of the
Company's internal control over financial reporting and an unqualified opinion on the effectiveness of the Company's internal
control over financial reporting.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
March 14, 2007
F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
of Lincoln Educational Services Corporation:
West Orange, New Jersey
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over
Financial Reporting, that Lincoln Educational Services Corporation. and subsidiaries (the “Company”) maintained effective
internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is
responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the
effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of
internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s
principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board
of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material
effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis.
Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject
to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of
December 31, 2006, is fairly stated, in all material respects, based on the criteria established by the Committee of Sponsoring
Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2006, based on the criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
Company’s consolidated balance sheet as of December 31, 2006 and the related consolidated statements of income, stockholders’
equity, and cash flow and financial statement schedule for the year ended December 31, 2006, and our report dated March 14,
2007 expressed an unqualified opinion on those financial statements and schedule and included an explanatory paragraph relating
to the Company’s adoption of the provisions of FASB Statement No. 158, “Employers’ Accounting for Defined Benefit Pension
and Other Postretirement Plans.”
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
March 14, 2007
F-4
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
Restricted cash
Accounts receivable, less allowance of $11,456 and $7,563 at December 31, 2006 and
December 31, 2005, respectively
$
Inventories
Deferred income taxes
Prepaid expenses and other current assets
Other receivable
Total current assets
PROPERTY, EQUIPMENT AND FACILITIES - At cost, net of accumulated depreciation
and amortization of $72,870 and $59,570 at December 31, 2006 and December 31, 2005,
respectively
OTHER ASSETS:
Deferred finance charges
Pension plan assets, net
Deferred income taxes, net
Goodwill
Noncurrent accounts receivable, less allowance of $80 and $84 at December 31, 2006 and
December 31, 2005, respectively
Other assets
Total other assets
TOTAL
$
December 31,
2006
2005
6,461 $
920
20,473
2,438
4,827
3,049
-
38,168
50,257
-
13,452
1,764
3,545
2,934
452
72,404
94,368
68,932
1,019
1,107
2,688
84,995
723
3,148
93,680
226,216 $
1,211
5,071
2,790
59,467
754
4,163
73,456
214,792
F-5
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and lease obligations
Unearned tuition
Accounts payable
Accrued expenses
Advance payments of federal funds
Income taxes payable
Total current liabilities
NONCURRENT LIABILITIES:
Long-term debt and lease obligations, net of current portion
Other long-term liabilities
Total liabilities
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, no par value - 10,000,000 shares authorized, no shares issued and
outstanding at December 31, 2006 and 2005
Common stock, no par value - authorized 100,000,000 shares at December 31, 2006 and
2005, issued and outstanding 25,450,695 shares at December 31, 2006 and 25,168,390
shares at December 31, 2005
Additional paid-in capital
Deferred compensation
Retained earnings
Accumulated other comprehensive loss
Total stockholders' equity
TOTAL
See notes to consolidated financial statements.
$
December 31,
2006
2005
91 $
33,150
12,118
10,335
557
2,860
59,111
9,769
5,553
74,433
283
34,930
12,675
11,060
840
4,085
63,873
10,485
4,444
78,802
-
-
120,182
7,695
(467)
26,784
(2,411)
151,783
226,216 $
119,453
5,665
(360)
11,232
-
135,990
214,792
$
F-6
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
REVENUES
COSTS AND EXPENSES:
Educational services and facilities
Selling, general and administrative
(Gain) loss on sale of assets
Total costs & expenses
OPERATING INCOME
OTHER:
Interest income
Interest expense
Other (loss) income
INCOME BEFORE INCOME TAXES
PROVISION FOR INCOME TAXES
NET INCOME
Earnings per share - basic:
Net income available to common stockholders
Earnings per share - diluted:
Net income available to common stockholders
Weighted average number of common shares outstanding:
Basic
Diluted
Year Ended December 31,
2005
2004
2006
$
321,506 $
299,221 $
261,233
136,631
157,309
(435)
293,505
28,001
981
(2,291)
(132)
26,559
11,007
15,552 $
121,524
145,194
(7 )
266,711
32,510
775
(2,892 )
243
30,636
11,927
18,709 $
0.61 $
0.80 $
0.60 $
0.76 $
104,843
130,941
368
236,152
25,081
104
(3,007)
42
22,220
9,242
12,978
0.60
0.56
25,336
26,086
23,475
24,503
21,676
23,095
$
$
$
See notes to consolidated financial statements
F-7
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands)
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Deferred
Compensation
Loan
Receivable
From
Stockholders
Accumulated
Other
Comprehensive
Loss
Retained
Earnings
(Accumulated
Deficit)
Total
BALANCE - December 31, 2003
Net income
Stock-based compensation expense
Stockholders loan repayment
21,668
-
-
-
Tax benefit of options exercised
-
Exercise of stock options
BALANCE - December 31, 2004
Net income
Issuance of common stock, net of
31
21,699
-
$ 62,385
$ 1426
$ -
$(432)
$ -
$ (20,455)
$ 42,924
-
-
-
-
97
62,482
-
-
-
-
-
12,978
1,793
-
-
-
-
-
-
251
-
-
43
-
-
-
-
-
-
-
-
-
3,262
-
(181)
-
(7,477)
-
-
-
-
18,709
12,978
1,793
251
43
97
58,086
18,709
issuance expenses
3,177
56,255
-
-
-
-
-
56,255
Issuance of restricted stock and
amortization of deferred
compensation
21
Stock-based compensation expense
-
Stockholders loan repayment
Tax benefit of options exercised
Exercise of stock options
BALANCE - December 31, 2005
Net income
Reduction in estimated stock
-
-
271
25,168
-
-
-
420
(360)
-
-
-
1,286
-
-
-
-
-
-
-
181
-
-
-
697
-
-
-
-
716
119,453
-
-
-
-
-
5,665
(360)
-
-
11,232
-
-
-
-
15,552
60
1,286
181
697
716
135,990
15,552
issuance expenses
-
150
-
-
-
-
-
150
Issuance of restricted stock and
amortization of deferred
compensation
19
-
300
(107)
-
-
-
Stock-based compensation expense
-
-
1,231
-
-
-
-
Tax benefit of options exercised
Exercise of stock options
-
264
-
579
499
-
-
-
-
-
-
-
-
-
Initial adoption of SFAS No. 158,
193
1,231
499
579
net of taxes
-
-
-
-
-
(2,411)
-
(2,411)
BALANCE – December 31, 2006
25,451
$120,182
$ 7,695
$ (467)
$ -
$ (2,411)
$ 26,784
$ 151,783
See notes to consolidated financial statements.
F-8
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
2005
2006
2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
$
15,552 $
18,709 $
12,978
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization
Amortization of deferred finance charges
Write-off of deferred finance costs
Deferred income taxes
Fixed asset donations
Loss (gain) on disposal of assets
Provision for doubtful accounts
Stock-based compensation expense
Tax benefit associated with exercise of stock options
Deferred rent
(Increase) decrease in assets, net of acquisitions:
Accounts receivable
Inventories
Prepaid expenses and current assets
Other assets
Increase (decrease) in liabilities, net of acquisitions:
Accounts payable
Other liabilities
Income taxes payable/prepaid
Accrued expenses
Unearned tuition
Total adjustments
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted cash
Capital expenditures
Proceeds from sale of property and equipment
Acquisitions, net of cash acquired
Net cash used in investing activities
14,866
192
-
(3,655)
(22)
(437)
15,590
1,424
-
1,081
(21,870)
(587)
(374)
1,181
(1,441)
(157)
(1,225)
(870)
(3,990)
(294)
15,258
(920)
(19,341)
973
(32,872)
(52,160)
13,064
215
365
340
(243)
(7)
11,188
1,346
697
1,670
(11,676)
(65)
(300)
54
1,801
(468)
4,068
(1,715)
(77)
20,257
38,966
-
(22,621)
-
(27,776)
(50,397)
10,749
375
-
(329)
-
368
9,247
1,793
43
1,602
(11,091)
(577)
(400)
(830)
1,547
(229)
(3,839)
331
4,936
13,696
26,674
-
(23,813)
-
(14,498)
(38,311)
F-9
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Continued)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings
Payments on borrowings
Proceeds from finance obligation
Payments of deferred finance fees
Proceeds from exercise of stock options
Tax benefit associated with exercise of stock options
Principal payments under capital lease obligations
Repayment from shareholder loans
Proceeds from issuance of common stock, net of issuance costs of $2,845
Net cash (used in) provided by financing activities
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS—Beginning of year
CASH AND CASH EQUIVALENTS—End of year
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest
Income taxes
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Cash paid during the period for:
Fair value of assets acquired
Net cash paid for the acquisitions
Liabilities assumed
$
$
$
$
$
Year Ended December 31,
2005
2006
2004
14,000
(21,214)
-
-
579
499
(908)
-
150
(6,894)
(43,796)
50,257
6,461 $
31,000
(66,750)
-
(848)
716
-
(311)
181
56,255
20,243
8,812
41,445
50,257 $
25,290
(21,000)
169
-
97
-
(690)
251
-
4,117
(7,520)
48,965
41,445
2,243 $
2,358 $
15,799 $
11,025 $
2,780
13,382
47,511 $
(32,872)
14,639 $
32,335 $
(27,776)
4,559 $
14,593
(14,498)
95
See notes to consolidated financial statements.
F-10
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
(In thousands, except share and per share amounts and unless otherwise stated)
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Activities—Lincoln Educational Services Corporation and Subsidiaries (the "Company") is a diversified provider of
career-oriented post-secondary education. The Company offers recent high school graduates and working adults degree and
diploma programs in five principal areas of study: Automotive Technology, Health Sciences (which includes programs for
licensed practical nursing (LPN), medical administrative assistants, medical assistants, pharmacy technicians, medical coding and
billing and dental assisting), Business and Information Technology, Hospitality Services (spa and culinary) and Skilled Trades.
We currently have 37 schools in 17 states across the United States.
Principles of Consolidation—The accompanying consolidated financial statements include the accounts of Lincoln Educational
Services Corporation and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been
eliminated.
Revenue Recognition—Revenue is derived primarily from programs taught at the schools. Tuition revenue and one-time fees,
such as nonrefundable application fees, and course material fees are recognized on a straight-line basis over the length of the
applicable program. If a student withdraws from a program prior to a specified date, any paid but unearned tuition is refunded.
Other revenues, such as 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. Refunds are calculated and paid in accordance with federal,
state and accrediting agency standards.
Cash and Cash Equivalents—Cash and cash equivalents include all cash balances and highly liquid short-term investments,
which mature within three months of purchase.
Restricted Cash— Restricted cash represents amounts received from the federal and state governments under various student aid
grant and loan programs. These funds are either received prior to the completion of the authorization and disbursement process for
the benefit of the student or immediately prior to that authorization. Restricted funds are held in separate bank accounts. Once the
authorization and disbursement process is completed and authorization obtained, the funds are transferred to unrestricted accounts,
and these funds then become available for use in the Company’s current operations.
Accounts Receivable—The Company reports accounts receivable at net realizable value, which is equal to the gross receivable
less an estimated allowance for uncollectible accounts.
Allowance for uncollectible accounts—Based upon experience and judgment, we establish an allowance for uncollectible
accounts with respect to tuition receivables. We use an internal group of collectors, augmented by third-party collectors as deemed
appropriate, in our collection efforts. In establishing our allowance for uncollectible accounts, we consider, among other things, a
student'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 impact the allowance for uncollectible accounts. The receivables balances of withdrawn students
with delinquent obligations are reserved for based on our collection history.
Inventories—Inventories consist mainly of textbooks, tools and supplies. Inventories are valued at the lower of cost or market on
a first-in, first-out basis.
Property, Equipment and Facilities—Depreciation and Amortization—Property, equipment and facilities are stated at cost.
Major renewals and improvements are capitalized, while repairs and maintenance are expensed when incurred. Upon the
retirement, sale or other disposition of assets, costs and related accumulated depreciation are eliminated from the accounts and any
gain or loss is reflected in operating income. For financial statement purposes, depreciation of property and equipment is
computed using the straight-line method over the estimated useful lives of the assets, and amortization of leasehold improvements
is computed over the lesser of the term of the lease or its estimated useful life.
Rent Expense—Rent expense related to operating leases where scheduled rent increases exist, is determined by expensing the
total amount of rent due over the life of the operating lease on a straight-line basis. The difference between the rent paid under the
F-11
terms of the lease and the rent expensed on a straight-line basis is included in accrued expenses and other long-term liabilities on
the accompanying consolidated balance sheets.
Deferred Finance Charges—These charges consist of $0.5 million and $0.7 million as of December 31, 2006 and 2005,
respectively, related to the long-term debt and $0.5 million as of December 31, 2006 and 2005, related to the finance obligation.
These amounts are being amortized as an increase in interest expense over the respective life of the debt or finance obligation.
Advertising Costs—Costs related to advertising are expensed as incurred and approximated $30.6 million, $27.6 million and
$22.3 million for the years ended December 31, 2006, 2005 and 2004, respectively. These amounts are included in selling, general
and administrative expenses in the consolidated statement of income.
Bonus costs—We accrue the estimated cost of our bonus programs using current financial and statistical information as compared
to targeted financial achievements and actual student graduate outcomes. Although we believe our estimated liability recorded for
bonuses is reasonable, actual results could differ and require adjustment of the recorded balance.
Goodwill and Other Intangible Assets— The Company tests its goodwill for impairment annually, or whenever events or changes
in circumstances indicate an impairment may have occurred, by comparing its 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 the Company determines that an impairment has occurred, it is required to record a write-down of the
carrying value and charge the impairment as an operating expense in the period the determination is made. In evaluating the
recoverability of the carrying value of goodwill and other indefinite-lived intangible assets, the Company must make assumptions
regarding estimated future cash flows and other factors to determine the fair value of the acquired assets. Changes in strategy or
market conditions could significantly impact these judgments in the future and require an adjustment to the recorded balances.
At December 31, 2006 and 2005, the Company tested its goodwill for impairment determined that it did not have an impairment.
Concentration of Credit Risk—Financial instruments that potentially subject the Company to concentrations of credit risk consist
principally of temporary cash investments and student receivables.
The Company places its cash and cash equivalents with high credit quality financial institutions. The Company's cash balances
with financial institutions typically exceed the Federal Deposit Insurance limit of $100,000. The Company's cash balances on
deposit at December 31, 2006, exceeded the balance insured by the FDIC by approximately $8.4 million. The Company has not
experienced any losses to date on its invested cash.
The Company extends credit for tuition and fees to many of its students. The credit risk with respect to these accounts receivable
is mitigated through the students' participation in federally funded financial aid programs unless students withdraw prior to the
receipt of federal funds for those students. In addition, the remaining tuition receivables are primarily comprised of smaller
individual amounts due from students.
With respect to student receivables, the Company had no significant concentrations of credit risk as of December 31, 2006, and
2005.
Use of Estimates in the Preparation of Financial Statements—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.
Stock Based Compensation Plans—The Company has stock-based compensation plans as discussed further in Note 11. In
December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised
2004), Share-Based Payment, (“FAS 123R”). This Statement requires companies to expense the estimated fair value of stock
options and similar equity instruments issued to employees over the requisite service period. On December 1, 2005, the Company
adopted FAS 123R in advance of the mandatory adoption date of the first quarter of 2006 to better reflect the full cost of
employee compensation. The Company adopted FAS 123R using the modified prospective method, which requires the Company
to record compensation expense for all awards granted after the date of adoption, and for the unvested portion of previously
granted awards that remain outstanding at the date of adoption. Prior to the adoption of FAS 123R, the Company recognized
stock-based compensation under FAS 123 “Stock Based Compensation” and as a result, the implementation of FAS 123R did not
have a material impact on the Company’s financial presentation.
F-12
The fair value concepts were not changed significantly under FAS 123R from those utilized under FAS No. 123; however, in
adopting this Standard, companies must choose among alternative valuation models and amortization assumptions. After assessing
these alternatives, the Company decided to continue using the Black-Scholes valuation model. However, the Company also
decided to utilize straight-line amortization of compensation expense over the requisite service period of the grant, rather than
over the individual grant requisite period as chosen under FAS 123. Under FAS 123, the Company had recognized stock option
forfeitures as they incurred. With the adoption of FAS 123R, the Company made an estimate of expected forfeitures calculation
upon grant issuance.
Income Taxes—Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to
differences between financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of changes in tax
rates is recognized in income in the period that includes the enactment date.
Impairment of Long-Lived Assets—The Company reviews the carrying value of our long-lived assets and identifiable intangibles
for possible impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable.
The Company assesses the potential impairment of property and equipment and identifiable intangibles whenever events or
changes in circumstances indicate that the carrying value may not be recoverable. The Company evaluates long-lived assets for
impairment by examining estimated future cash flows. These cash flows are evaluated by using weighted probability techniques as
well as comparisons of past performance against projections. Assets may also be evaluated by identifying independent market
values. If the Company determines that an asset’s carrying value is impaired, it will record a write-down of the carrying value of
the asset and charge the impairment as an operating expense in the period in which the determination is made.
Start-up Costs—Costs related to the start of new campuses are expensed as incurred.
Reclassification—In 2006, the Company reclassified amounts reflected in the 2005 consolidated balance sheet for receivables
with a maturity greater than 1 year to noncurrent assets.
2.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards
(“SFAS”) No. 159 (“SFAS 159”) “The Fair Value Option for Financial Assets and Financial Liabilities”, providing companies
with an option to report selected financial assets and liabilities at fair value. The Standard’s objective is to reduce both complexity
in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently.
Generally accepted accounting principles have required different measurement attributes for different assets and liabilities that can
create artificial volatility in earnings. SFAS 159 helps to mitigate this type of accounting-induced volatility by enabling companies
to report related assets and liabilities at fair value, which would likely reduce the need for companies to comply with detailed rules
for hedge accounting. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons
between companies that choose different measurement attributes for similar types of assets and liabilities. The Standard requires
companies to provide additional information that will help investors and other users of financial statements to more easily
understand the effect of the Company’s choice to use fair value on its earnings. It also requires entities to display the fair value of
those assets and liabilities for which the Company has chosen to use fair value on the face of the balance sheet. SFAS 159 is
effective for the Company on January 1, 2008. The Company is currently evaluating the impact of the adoption of this Statement
on its consolidated financial statements.
In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R).” Among other items, SFAS 158 requires
recognition of the overfunded or underfunded status of an entity’s defined benefit postretirement plan as an asset or liability in the
financial statements, requires the measurement of defined benefit postretirement plan assets and obligations as of the end of the
employer’s fiscal year, and requires recognition of the funded status of defined benefit postretirement plans in other
comprehensive income. SFAS 158 was adopted on December 31, 2006. See Footnote 12 related to the adoption of SFAS 158.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. This Statement applies
under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in
those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not
require any new fair value measurements. The provisions of SFAS No. 157 are effective as of January 1, 2008. The adoption of
the provision of SFAS No. 157 is not expected to have a material effect on the Company’s consolidated financial statements.
In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (“SAB”) No. 108 which
provides interpretive guidance on how the effects of the carryover or reversal of prior year unrecorded misstatements should be
F-13
considered in quantifying a current year misstatement. SAB No. 108 is effective for the Company as of January 1, 2007. The
adoption of the provision of SAB No. 108 did not have a material effect on the Company’s consolidated financial statements.
In June 2006, FASB issued FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes.” FIN 48 clarifies
the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB SFAS
No. 109, “Accounting for Income Taxes”, which will become effective for the Company on January 1, 2007. This Interpretation
prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax
positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-
than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of
benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The adoption of FIN 48 will result in a
cumulative effect adjustment to retained earnings as of January 1, 2007 of approximately $0.1 million.
In March 2006, FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets.” SFAS No. 156 provides guidance
addressing the recognition and measurement of separately recognized servicing assets and liabilities, common with mortgage
securitization activities, and provides an approach to simplify efforts to obtain hedge accounting treatment. SFAS No. 156 will be
adopted on January 1, 2007. The adoption of the provision of SFAS No. 156 is not expected to have a material effect on the
Company’s consolidated financial statements.
In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments.” SFAS No. 155 is
effective beginning January 1, 2007. The adoption of the provision of SFAS No. 155 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.” 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’ financial statements of a voluntary change in accounting principle unless it is impracticable.
Accounting Principles Boards (“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 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 affected by a change in accounting principle. APB Opinion No.
20 previously required that such a change be reported as a change in accounting principle. The Company adopted SFAS No. 154
on January 1, 2006. The adoption of the provisions of SFAS No. 154 had no effect on the Company’s consolidated financial
statements.
In March 2005, the FASB issued FIN 47, “Accounting for Conditional Asset Retirement Obligations”. FIN 47 clarifies that a
conditional asset retirement obligation, as used in SFAS 143, “Accounting for Asset Retirement Obligations,” refers to a legal
obligation to perform an asset retirement activity in which the timing and/or method of the settlement are conditional on a future
event that may or may not be within the control of the entity. Accordingly, the Company is required to recognize a liability for the
fair value of a conditional asset retirement obligation if the fair value can be reasonably estimated. The Company adopted FIN 47
on January 1, 2006. The adoption of the provisions of FIN 47 had no effect on the Company’s consolidated financial statements.
In December 2004, the FASB issued SFAS No. 153,“Exchanges of Nonmonetary Assets, an Amendment of APB Opinion No. 29,
Accounting for Nonmonetary 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 Company adopted SFAS No. 153 on January 1, 2006. The adoption of the
provisions of SFAS No. 153 had no effect on the Company’s consolidated financial statements.
3.
FINANCIAL AID AND REGULATORY COMPLIANCE
Financial Aid
The Company’s schools and students participate in a variety of government-sponsored financial aid programs that assist students
in paying the cost of their education. The largest source of such support is the federal programs of student financial assistance
under Title IV of the Higher Education Act of 1965, as amended, commonly referred to as the Title IV Programs, which are
administered by the U.S. Department of Education (or "DOE"). During the years ended December 31, 2006, 2005 and 2004,
approximately 80%, 80% and 81%, respectively, of net revenues were indirectly derived from funds distributed under Title IV
Programs.
F-14
Regulatory Compliance
To participate in Title IV Programs, a school must be authorized to offer its programs of instruction by relevant state education
agencies, be accredited by an accrediting commission recognized by the DOE and be certified as an eligible institution by the
DOE. For this reason, the schools are subject to extensive regulatory requirements imposed by all of these entities. After the
schools receive the required certifications by the appropriate entities, the schools must demonstrate their compliance with the
DOE regulations of the Title IV Programs on an ongoing basis. Included in these regulations is the requirement that the Company
must satisfy specific standards of financial responsibility. The DOE evaluates institutions for compliance with these standards
each year, based upon the institutions' annual audited financial statements, as well as following a change in ownership of the
institution. Under regulations which took effect July 1, 1998, the DOE calculates the institution's composite score for financial
responsibility based on its (i) equity ratio, which measures the institution's capital resources, ability to borrow and financial
viability; (ii) primary reserve ratio, which measures the institution's ability to support current operations from expendable
resources; and (iii) net income ratio, which measures the institution's ability to operate at a profit. This composite score can range
from -1 to +3.
An institution that does not meet the DOE's minimum composite score requirements of 1.5 may establish its financial
responsibility by posting a letter of credit or complying with additional monitoring procedures as defined by the DOE.
Based on the Company's calculations, the 2006 and 2005 financial statements reflect a composite score of 1.7 and 2.5,
respectively. However, as a result of corrections of certain errors, including accounting for advertising costs, a sale leaseback
transaction, rent and certain other individually insignificant adjustments, in our prior financial statements, the DOE recomputed
the Company's consolidated composite scores for the years ended December 31, 2001 and 2002 and concluded that the
recomputed consolidated composite scores for those two years were below 1.0. In addition, we identified certain additional errors
in our financial statements for the year ended December 31, 2003 relating to our accounting for stock-based compensation and
accrued bonuses that did not result in a recomputation of our 2003 composite score. The DOE informed the Company that as a
result, for a period of three years effective December 30, 2004, all of the Company's current and future institutions have been
placed on "Heightened Cash Monitoring, Type 1 status," and are required to timely notify the DOE with respect to certain
enumerated oversight and financial events. The DOE also informed the Company that its circumstances will be taken into
consideration when each of our institutions applies for recertification of the Company's eligibility to participate in Title IV
Programs. When each of our institutions is next required to apply for recertification to participate in Title IV Programs, we expect
that the DOE will also consider our audited financial statements and composite scores for our most recent fiscal year as well as for
other fiscal years after 2001 and 2002. Additionally, since the DOE concluded that the previously computed composite scores for
2001 and 2002 were overstated, the Company agreed to pay $165,000 to the DOE, pursuant to a settlement agreement, to resolve
compliance issues related to this matter. The Company paid this amount on March 3, 2005. Although no assurance can be given,
the Company's management does not believe that the actions of the DOE specified above will have a material effect on its
financial position, results of operations or cash flows.
For the years ended December 31, 2006, 2005 and 2004 the Company was in compliance with the standards established by the
DOE requiring that no individual DOE reporting entity can receive more than 90% of its revenue, determined on a cash basis,
from Title IV, HEA Program Funds.
4.
WEIGHTED AVERAGE COMMON SHARES
The weighted average numbers of common shares used to compute basic and diluted income per share for the years ended
December 31, 2006, 2005 and 2004, respectively, in thousands, were as follows:
Year Ended December 31,
2005
2004
2006
Basic shares outstanding
Dilutive effect of stock options
Diluted shares outstanding
25,336
750
26,086
23,475
1,028
24,503
21,676
1,419
23,095
For the years ended December 31, 2006, 2005 and 2004, options to acquire 288,500, 184,000 and 71,000 shares, respectively,
were excluded from the above table as the result on reported earnings per share would have been antidilutive.
5.
BUSINESS ACQUISITIONS
On May 22, 2006, the Company, acquired all of the outstanding common stock of New England Institute of Technology at Palm
Beach, Inc. (“FLA”) for approximately $40.1 million. The purchase price was $32.9 million, net of cash acquired plus the
F-15
assumption of a mortgage note for $7.2 million. The FLA purchase price has been allocated to identifiable net assets with the
excess of the purchase price over the estimated fair value of the net assets acquired recorded as goodwill.
On December 1, 2005, the Company acquired all of the rights, title and interest in the assets of Euphoria Institute LLC (“EUP”)
for approximately $9.2 million, net of cash acquired.
On January 11, 2005, the Company acquired all of the rights, title and interest in the assets of New England Technical Institute
(“NETI”) for approximately $18.8 million, net of cash acquired.
On January 23, 2004, the Company acquired all of the rights, title and interest in the assets of the Southwestern College of
Business, Inc. ("Southwestern or SWC") for approximately $14.5 million, net of cash acquired. Included in this purchase price is
certain real estate which was acquired from Southwestern for $0.7 million.
The consolidated financial statements include the results of operations from the respective acquisition dates. The purchase price
has been allocated to identifiable net assets with the excess of the purchase price over the estimated fair value of the net assets
acquired recorded as goodwill. None of the acquisitions were deemed material to the Company’s consolidated financial
statements.
The following table summarizes the estimated fair value of assets acquired and liabilities assumed at the date of acquisition:
Property, equipment and facilities
Goodwill
Identified intangibles:
Student contracts
Trade name
Curriculum
Non-compete
Other assets
Current assets, excluding cash acquired
Total liabilities assumed
Cost of acquisition, net of cash acquired
FLA
May 22, 2006
EUP
December 1,
2005
NETI
January 11,
2005
SWC
January 23,
2004
$
$
20,609 $
24,710
350
280
-
200
450
912
(14,639)
32,872 $
793 $
9,019
130
180
-
-
-
125
(998)
9,249 $
1,000 $
18,464
770
600
700
-
-
782
(3,561 )
18,755 $
890
12,826
280
330
-
-
-
267
(95)
14,498
F-16
The following unaudited pro forma results of operations for the years ended December 31, 2006, 2005 and 2004 assumes that the
acquisitions occurred at the beginning of 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.
Year ended December 31, 2006
Pro forma
impact
FLA 2006
Pro forma
2006
2006
Historical
Revenue
Net income
Earnings per share - basic
Earnings per share - diluted
$
$
$
$
321,506 $
15,552 $
7,148 $
(98) $
328,654
15,454
0.61
0.60
$
$
0.61
0.59
Year ended December 31, 2005
Pro forma
impact
EUP 2005
Pro forma
impact
NETI 2005
Pro forma
impact
FLA 2005
Pro forma
2005
Historical
2005
Revenue
Net income
Earnings per share - basic
Earnings per share - diluted
$
$
$
$
299,221 $
18,709 $
278 $
6 $
4,964 $
128 $
19,030 $
836 $
323,493
19,679
0.80
0.76
$
$
0.84
0.80
Year ended December 31, 2004
Pro forma
impact
SWC 2004
Pro forma
2004
2004
Historical
Revenue
Net income
Earnings per share - basic
Earnings per share - diluted
$
$
$
$
261,233 $
12,978 $
46 $
(145) $
261,279
12,833
0.60
0.56
$
$
0.59
0.56
F-17
6.
GOODWILL AND OTHER INTANGIBLES
Changes in the carrying amount of goodwill during the years ended December 31, 2006 and 2005 are as follows (in thousands):
Goodwill balance as of December 31, 2004
Goodwill acquired pursuant to business acquisition-EUP
Goodwill acquired pursuant to business acquisition-NET
Goodwill balance as of December 31, 2005
Goodwill acquired pursuant to business acquisition-FLA
Goodwill adjustments
Goodwill balance as of December 31, 2006
$
$
32,802
8,201
18,464
59,467
24,710
818
84,995
Identified intangible assets, which are included in other assets in the accompanying consolidated balance sheets, consisted of the
following:
At December 31, 2006
At December 31, 2005
Student contracts
Trade name
Curriculum
Non-compete
Total
1 $
Indefinite
10
5
$
Weighted
Average
Amortization
Period (years)
Gross
Carrying
Amount
Accumulated
Amortization
2,010 $
-
138
25
2,173 $
2,200 $
1,270
700
201
4,371 $
Gross
Carrying
Amount
1,920 $
1,410
1,400
1
4,731 $
Accumulated
Amortization
1,569
-
74
1
1,644
Amortization of intangible assets for the years ended December 31, 2006, 2005 and 2004 was approximately $0.5 million, $0.7
million and $0.4 million, respectively.
The following table summarizes the estimated future amortization expense:
Year Ending December 31,
2007
2008
2009
2010
2011
Thereafter
$
$
300
110
110
110
86
212
927
F-18
7.
PROPERTY, EQUIPMENT AND FACILITIES
A summary of property, equipment and facilities is as follows:
Land
Buildings and improvements
Equipment, furniture and fixtures
Vehicles
Construction in progress
Less accumulated depreciation and amortization
Useful life
(years)
-
1-25
1-12
1-7
-
At December 31,
2006
2005
13,563 $
97,914
52,311
1,915
1,536
167,239
(72,871 )
94,368 $
5,519
68,922
44,097
1,853
8,111
128,502
(59,570)
68,932
$
$
Included above in equipment, furniture and fixtures are assets acquired under capital leases as of December 31, 2006 and 2005 of
$6.0 million and $6.0 million, respectively, net of accumulated depreciation of $5.7 million and $5.5 million, respectively.
Included above in buildings and improvements is capitalized interest as of December 31, 2006 and 2005 of $0.4 million and
$0.3 million, respectively, net of accumulated depreciation of $0.4 million and $0.3 million, respectively.
Depreciation and amortization expense of property, equipment and facilities was $14.0 million, $12.2 million and $10.3 million
for the years ended December 31, 2006, 2005 and 2004, respectively.
8.
ACCRUED EXPENSES
Accrued expenses consist of the following:
Accrued compensation and benefits
Other accrued expenses
At December 31,
2006
2005
$
$
6,255 $
4,080
10,335 $
7,393
3,667
11,060
F-19
9.
LONG-TERM DEBT AND LEASE OBLIGATIONS
Long-term debt and lease obligations consist of the following:
Credit agreement (a)
Finance obligation (b)
Automobile loans
Capital leases-computers (with rates ranging from 6.7% to 10.7%)
Less current maturities
At December 31,
2006
2005
- $
9,672
37
151
9,860
(91 )
9,769 $
-
9,672
81
1,015
10,768
(283)
10,485
$
$
(a) The Company has a credit agreement with a syndicate of banks. Under the terms of the agreement, the syndicate provided the
Company with a $100 million credit facility. The credit agreement permits the issuance of up to $20 million in letters of credit, the
amount of which reduces the availability of permitted borrowings under the agreement. In connection with entering into the credit
agreement, the Company expensed approximately $0.4 million of unamortized deferred finance charges under the previous credit
agreement for the year ended December 31, 2005. The Company incurred approximately $0.8 million of deferred finance charges
under the existing credit agreement. At December 31, 2006, the Company had outstanding letters of credit aggregating
$4.4 million which is primarily comprised of letters of credit for the Department of Education and real estate leases.
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’ 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
Company’s initial public offering in 2005, the Company repaid the then outstanding loan balance of $31.0 million.
On May 16, 2006, the Company borrowed $10.0 million under the credit agreement. The interest rate under this borrowing was
6.17%. On July 5, 2006, and on November 13, 2006, the Company borrowed $2.0 million, respectively under the credit
agreement. All amounts under the credit agreement were repaid by December 31, 2006. There were no borrowings outstanding
under the credit agreement at December 31, 2006.
The credit agreement contains various covenants, including a number of financial covenants. Furthermore, the credit agreement
contains customary events of default as well as an event of default in the event of the suspension or termination of Title IV
Program funding for the Company’s and its subsidiaries' schools aggregating 10% or more of the Company’s EBITDA (as
defined) or its consolidated total assets and such suspension or termination is not cured within a specified period. As of December
31, 2006, the Company was in compliance with the financial covenants contained in the credit agreement.
(b) The Company completed a sale and a leaseback of several facilities on December 28, 2001, as discussed further in Note 17.
The Company retained a continuing involvement in the lease and as a result it is prohibited from utilizing sale-leaseback
accounting. Accordingly, the Company has treated this transaction as a finance lease. Rent payments under this obligation for the
three years in the period ended December 31, 2006 were $1.3 million, $1.3 million and $1.2 million, respectively. These payments
have been reflected in the accompanying consolidated income statement as interest expense for all periods presented since the
effective interest rate on the obligation is greater than the scheduled payments. The lease expiration date is January 25, 2017.
On May 22, 2006, the Company assumed a mortgage note payable as part of the acquisition of FLA in the amount of $7.2 million.
The mortgage note was payable to the bank in monthly installments which varied due to changes in the interest rates. The note had
an interest rate which was at the bank’s LIBOR rate plus 2.0% with a maturity date of May 1, 2023. The note was repaid in
November 2006. Also see Note 16.
As of December 31, 2006, the Company was in compliance with the financial covenants contained in its borrowing agreements.
F-20
Scheduled maturities of long-term debt and lease obligations at December 31, 2006 are as follows:
Year ending December 31,
2007
2008
2009
2010
2011
Thereafter
$
$
91
91
6
-
-
9,672
9,860
10.
RECOURSE LOAN AGREEMENT
The Company entered into an agreement effective March 28, 2005 to June 30, 2006 with a SLM Financial Corporation (SLM) to
provide up to $6.0 million of private recourse loans to qualifying students. The following table reflects selected information with
respect to the recourse loan agreements, including cumulative loan disbursements and purchase activity under the agreement:
Disbursement Year
2005
2006
$
$
Loans
Disbursed
Loans We
May be
Required to
Purchase (1)
420
1,046
1,466
1,400 $
3,486
4,886 $
(1)
Represents the maximum amount of loans under the agreement that we may be required to purchase in the future based
on cumulative loans disbursed and purchased.
Under the recourse loan agreement, the Company is required to fund 30% of all loans disbursed into a SLM reserve account. The
amount of our loan purchase obligation may not exceed 30% of this deposit. We record such amounts in accounts receivable on
our consolidated balance sheet. Amounts on deposit may ultimately be utilized to purchase loans in default, in which case
recoverability of such amounts would be in question. Accordingly, the Company recorded an allowance for the full amount of
deposit. Approved funding under this agreement terminated by its terms on June 30, 2006.
11.
STOCKHOLDERS' EQUITY
Effective January 1, 2002, the Company adopted the Lincoln Technical Institute Management Stock Option Plan ("2002 Plan")
for key employees, consultants and nonemployee directors. The name of the Plan was changed to the LESC Management Stock
Option Plan in 2003. There are reserved for issue, upon exercise of options granted under the Plan, no more than 2,087,835 shares
of the authorized common shares. The term of each option granted is ten years. The options awarded to each key employee were
evenly divided between service options, which vest annually from the date of grant, and performance options, which vest
according to annual targets. The vesting of the options varies depending on date of hire. For all key employees, or non-employee
directors who were with the Company prior to February 1, 2001, 20% of their service options were granted as of the effective date
with 20% vesting annually thereafter. For their performance options, 25% will vest each year beginning April 15, 2003, subject to
the Company achieving certain financial goals. For all key employees, or non-employee directors who were hired after
February 1, 2001, 20% of their service options vest on the anniversary of their hire date. Similarly, 20% of their performance
options will vest on each April 15 after the date of hire subject to achieving certain financial goals and vest in full after five years.
Prior to the Company’s initial public offering in June 2005, the exercise price of the options was the estimated fair value of the
shares at the date of grant, as determined by the board of directors. Concurrent with the Company’s initial public offering, all
performance options not yet vested were converted to service options and vest in the same manner as described above.
On June 8, 2005, the Company adopted the Lincoln Educational Services Corporation 2005 Long-Term Incentive Plan (the
“LTIP”). The LTIP permits the granting of stock options, restricted share units, performance share units, stock appreciation rights
and other equity awards, as determined by the Company’s compensation committee. The compensation committee has the
authority, among other things, to determine eligibility to receive awards, the type of awards to be granted, the number of shares of
stock subject to, or cash amount payable in connection with, the awards and the terms and conditions of each award (including
vesting, forfeiture, payment, exercisability and performance periods and targets). The maximum number of shares of our common
stock that may be issued for all purposes under the LTIP is 1,000,000 shares plus any shares of common stock remaining available
for issuance under the 2002 Plan. Any shares of our common stock that (i) correspond to awards under the LTIP or the 2002 Plan
F-21
that are forfeited or expire for any reason without having been exercised or settled or (ii) are tendered or withheld to pay the
exercise price of an award or to satisfy a participant’s tax withholding obligations will be added back to the maximum number of
shares available for issuance under the LTIP.
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 authorized 10.0 million shares of preferred stock.
On June 28, 2005, the Company issued 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 9, totaling $31.0 million.
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 the Company’s 2005 Non-Employee Directors Restricted Stock Plan (the “Non-Employee Directors Plan”), each of
the Company’s seven non-employee directors received an award of 3,069 restricted shares of common stock equal to $0.06
million on July 29, 2005. On January 1, 2006, one non-employee director resigned, forfeiting 3,069 restricted shares of common
stock awarded on July 29, 2005. Two newly appointed non-employee directors each received an award of 3,625 restricted shares
of common stock equal to $0.06 million on March 1, 2006. Additionally, on May 23, 2006, the date of our annual meeting, each
non-employee director received an annual restricted award of 1,781 restricted shares of common stock equal to $0.03 million. 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. The restricted shares vest ratably on the first, second and third anniversaries 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. As of December 31, 2006, there were a total
of 39,912 shares awarded and 6,138 shares vested under the Non-Employee Directors Plan. The recognized restricted stock
expense as of December 31, 2006 and 2005 was $0.3 million and $0.06 million respectively. The deferred compensation or
unrecognized restricted stock expense as of December 31, 2006 and 2005 was $0.4 million and $0.5 million respectively.
During 2002, 147,563 shares were purchased by certain officers and directors. In connection with the purchase of these shares, the
Company received promissory notes for approximately $0.4 million, payable in 10 years. Interest was payable annually at an
annual interest rate of 5.6%. These notes had been reflected as a reduction in stockholders' equity. During 2004, approximately
$0.3 million of these loans were repaid. In the first quarter of 2005, the remaining balance on these loans was paid in full.
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 2006, 2005, and 2004
were $9.68, $10.55, and $15.05, respectively, using the following weighted average assumptions for grants:
Expected volatility
Expected dividend yield
Expected life (term)
Risk-free interest rate
Weighted-average exercise price during the year
2006
55.10%
0%
6 Years
4.13-4.84%
$17.00
December 31,
2005
55.10-71.35%
0%
4-8 Years
3.59-4.29%
$17.14
2004
59.79-80.35%
0%
4-8.5 Years
2.45-4.27%
$23.88
F-22
The following is a summary of transactions pertaining to the option plans:
Outstanding December 31, 2003
Granted
Cancelled
Exercised
Outstanding December 31, 2004
Granted
Cancelled
Exercised
Outstanding December 31, 2005
Granted
Cancelled
Exercised
Weighted
Average
Exercise Price
Per Share
Weighted
Average
Remaining
Contractual
Term
Aggregate
intrinsic
Value (in
thousands)
5.22
23.88
9.49
3.10
5.92
17.14
11.30
2.65
7.26
17.00
13.98
3.56
$
3,444
Shares
2,155,595 $
128,500
(230,425)
(31,175)
2,022,495
189,500
(102,125)
(270,697)
1,839,173
256,000
(103,072)
(263,876)
Outstanding December 31, 2006
1,728,225
8.85
6.31 years
10,255
Exercisable as of December 31, 2006
1,189,582
5.64
5.37 years
9,876
As of December 31, 2006, we estimate that pre-tax compensation expense for all unvested stock option awards, in the amount of
approximately $2.7 million which will be expensed over the weighted-average period of approximately 2.0 years.
The following table presents a summary of options outstanding at December 31, 2006:
As of December 31, 2006
Stock Options Outstanding
Contractual
Weighted
Average life
(years)
Range of Exercise Prices
Shares
$1.55
$3.10
$4.00-$13.99
$14.00-$19.99
$20.00-$25.00
12.
PENSION PLAN
50,898
906,952
38,500
591,375
140,500
1,728,225
2.47 $
5.03
6.34
8.27
7.75
6.31
Stock Options Exercisable
Shares
Weighted
Exercise Price
1.55
3.10
5.43
14.03
23.01
50,898 $
885,512
17,300
190,872
45,000
Weighted
Average Price
1.55
3.10
5.81
15.28
22.41
8.85
1,189,582
5.57
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 nonunion employees.
F-23
The following table sets forth the plan's funded status and amounts recognized in the consolidated financial statements as of
December 31:
CHANGES IN BENEFIT OBLIGATIONS:
Benefit obligation-beginning of year
Service cost
Interest cost
Actuarial loss
Benefits paid
Benefit obligation at end of year
CHANGE IN PLAN ASSETS:
Fair value of plan assets-beginning of year
Actual return on plan assets
Employer contribution
Benefits paid, including expenses
Fair value of plan assets-end of year
$
Year Ended December 31,
2006
2005
13,961 $
110
797
218
(462)
14,624
14,330
1,663
200
(462)
15,731
13,055
104
732
710
(640)
13,961
14,071
649
250
(640)
14,330
FAIR VALUE IN EXCESS OF BENEFIT OBLIGATION FUNDED STATUS:
$
1,107 $
369
Amounts recognized in the consolidated balance sheets consist of:
Noncurrent assets
Current liabilities
Noncurrent liabilities
Amounts recognized in accumulated other comprehensive income consist of:
Transition asset/(obligation)
Prior service cost
Loss
Year Ended December 31,
2006
2005
$
$
1,107 $
-
-
1,107 $
-
-
-
-
Year Ended December 31,
2006
2005
$
$
- $
-
(4,062 )
(4,062 ) $
-
-
-
-
The accumulated benefit obligation was $14.5 million and $14.0 million at December 31, 2006 and 2005, respectively.
F-24
Effective on December 31, 2006, the Company adopted the provisions of FASB Statement No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans.” The incremental effects of applying Statement 158 on the Company’s
December 31, 2006 consolidated financial statements, on a line by line basis, are as follows:
Pension plan assets, net
Deferred income taxes
Accumulated other comprehensive income
$
5,169 $
1,037
-
The following table provides the components of net periodic benefit cost for the plan:
Balances
Before
Adoption of
Statement 158 Adjustments
Balances
After
Adoption of
Statement 158
1,107
2,688
2,411
(4,062 ) $
1,651
2,411
COMPONENTS OF NET PERIODIC BENEFIT COST (INCOME)
Service cost
Interest cost
Expected return on plan assets
Amortization of transition asset
Amortization of prior service cost
Recognized net actuarial loss
Net periodic benefit cost (income)
Year Ended December 31,
2006
2005
$
$
110 $
797
(1,122)
-
1
316
102 $
104
732
(1,101)
(3)
1
266
(1)
The estimated net loss, transition obligation and prior service cost for the plan that will be amortized from accumulated other
comprehensive income into net periodic benefit cost over the next year are $0.2 million, 0 and 0, respectively.
Fair value of total plan assets by major asset category as of December 31:
Equity securities
Fixed income
International equities
Cash and equivalents
Total
Weighted-average assumptions used to determine benefit obligations as of December 31:
Discount rate
Rate of compensation increase
2006
2005
49%
36%
14%
1%
100%
48%
39%
12%
1%
100%
2006
2005
5.82%
4.00%
5.75%
4.00%
Weighted-average assumptions used to determine net periodic pension cost for years ended December 31:
Discount rate
Rate of compensation increase
Long-term rate of return
2006
2005
5.75%
4.00%
8.00%
5.75%
4.00%
8.00%
As this plan was frozen to non-union employees on December 31, 1994, the difference between the benefit obligation and
accumulated benefit obligation is not significant in any year.
The Company invests plan assets based on a total return on investment approach, pursuant to which the plan assets include a
F-25
diversified blend of equity and fixed income investments toward a goal of maximizing the long-term rate of return without
assuming an unreasonable level of investment risk. The Company determines the level of risk based on an analysis of plan
liabilities, the extent to which the value of the plan assets satisfies the plan liabilities and the plan's financial condition. The
investment policy includes target allocations ranging from 30% to 70% for equity investments, 20% to 60% for fixed income
investments and 0% to 10% for cash equivalents. The equity portion of the plan assets represents growth and value stocks of
small, medium and large companies. The Company measures and monitors the investment risk of the plan assets both on a
quarterly basis and annually when the Company assesses plan liabilities.
The Company uses a building block approach to estimate the long-term rate of return on plan assets. This approach is based on the
capital markets assumption that the greater the volatility, the greater the return over the long term. An analysis of the historical
performance of equity and fixed income investments, together with current market factors such as the inflation and interest rates,
are used to help make the assumptions necessary to estimate a long-term rate of return on plan assets. Once this estimate is made,
the Company reviews the portfolio of plan assets and makes adjustments thereto that the Company believes are necessary to
reflect a diversified blend of equity and fixed income investments that is capable of achieving the estimated long-term rate of
return without assuming an unreasonable level of investment risk. The Company also compares the portfolio of plan assets to
those of other pension plans to help assess the suitability and appropriateness of the plan's investments.
While the Company does not expect to make any contributions to the plan in 2007, after considering the funded status of the plan,
movements in the discount rate, investment performance and related tax consequences, the Company may choose to make
contributions to the plan in any given year.
The total amount of the Company’s contributions paid under its pension plan was $0.2 million and $0.3 million for the year ended
December 31, 2006 and 2005, respectively. The net periodic benefit expense was $102,000 for the year ended December 31,
2006. The net periodic benefit income was $1,000 for the year ended December 31, 2005.
Information about the expected benefit payments for the plan is as follows:
Fiscal Year Ending December 31,
2007
2008
2009
2010
2011
Years 2012-2016
$
645
661
703
769
798
5,000
Effective January 1, 1995, the Company established a 401(k) salary reduction plan for all eligible employees. Employees may
contribute up to 15% of their compensation into the plan. The Company will contribute an additional 30% of the employee's
contributed amount on the first 6% of compensation. For the years ended December 31, 2006, 2005 and 2004 the Company's
expense for the 401(k) plan amounted to $0.9 million, $0.9 million and $0.9 million, respectively.
13.
INCOME TAXES
Components of the provision for income taxes were as follows:
Year Ended December 31,
2005
2004
2006
Current:
Federal
State
Total
Deferred:
Federal
State
Total
$
11,727 $
2,935
14,662
9,160 $
2,427
11,587
(2,908)
(747)
(3,655)
75
265
340
7,774
1,797
9,571
(329)
-
(329)
Total provision
$
11,007 $
11,927 $
9,242
F-26
The components of the deferred tax assets are as follows:
Deferred tax assets
Current:
Accrued vacation
Allowance for bad debts
Accrued student fees
Other
Total current deferred tax assets
Noncurrent:
Accrued rent
Stock-based compensation
Depreciation
Other intangibles
Net operating loss carryforward
Sale leaseback-deferred gain
Other
Total noncurrent deferred tax assets
Deferred tax liabilities
Noncurrent:
Goodwill
Prepaid pension cost
Total deferred tax liabilities
Total net noncurrent deferred tax assets
Total net deferred tax assets
$
At December 31,
2006
2005
94 $
4,683
50
-
4,827
2,177
1,568
5,369
(3,177 )
-
1,889
-
7,826
81
3,084
376
4
3,545
1,649
1,140
2,698
487
60
1,769
7
7,810
(4,687 )
(451 )
(5,138 )
2,688
7,515 $
(2,961)
(2,059)
(5,020)
2,790
6,335
$
At December 31, 2005, the Company had $0.8 million of state net operating loss carry-forwards, which were used in 2006.
The difference between the actual tax provision (benefit) and the tax provision (benefit) that would result from the use of the
Federal statutory rate is as follows:
Income before taxes
2006
26,559
$
Year Ended December 31,
2005
30,636
$
$
2004
22,220
$
Expected tax
State tax expense (net of federal benefit)
Resolution of tax contingency (a)
Other
Total
$
9,296
1,507
-
204
11,007
35.0%$
5.7
-
0.7
41.4%$
10,723
1,750
(785)
239
11,927
35.0% $
5.7
(2.6)
0.8
38.9% $
7,777
1,168
-
297
9,242
35.0%
5.3
-
1.3
41.6%
(a) For the year ended December 31, 2005, the Company recognized a benefit of approximately $0.8 million resulting from the
resolution of a tax contingency.
F-27
14.
SEGMENT REPORTING
The Company's principal business is providing post-secondary education. Accordingly, the Company's operations aggregate into
one reporting segment.
15.
RELATED PARTY TRANSACTIONS
Pursuant to the Employment Agreement between Shaun E. McAlmont and the Company, the Company agreed to pay and
reimburse Mr. McAlmont the reasonable costs of his relocation from Denver, Colorado to West Orange, New Jersey in the year
ended December 31, 2006. Such relocation assistance included the purchase by the Company of Mr. McAlmont’s home in
Denver, Colorado. The $0.5 million price paid for Mr. McAlmont’s home equaled the average of the amount of two independent
appraisers selected by the Company. This amount is reflected in property, equipment and facilities in the accompanying
consolidated balance sheets.
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 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, is a member of the Company’s board of directors. The Company paid
Hart Capital a monthly retainer, reimbursement of expenses and an advisory fee for its work on successful acquisitions or
mergers. In accordance with the agreement, the Company paid Hart Capital approximately $0, and $0.4 million for the years
ended December 31, 2006 and 2005, respectively. In connection with the consummation of the NETI acquisition, which closed
on January 11, 2005, the Company paid Hart Capital $0.3 million for its services.
In 2003, the Company entered into a management service agreement with its major stockholder. In accordance with this
agreement the Company paid Stonington Partners a management fee of $0.75 million per year for management consulting and
financial and business advisory services for each of the years in 2005, 2004 and 2003. Such services included valuing acquisitions
and structuring their financing and assisting with new loan agreements. The Company paid Stonington Partners $0 and $0.75
million for the years ended December 31, 2006 and 2005, respectively. Fees paid to Stonington Partners were being amortized
over a twelve month period. This agreement terminated by its terms upon the Company’s completion of its initial public offering.
Selling, general and administrative expenses for the year ended December 31, 2005 include a $0.4 million resulting from the
amortization of these fees.
During 2002, certain members of senior management issued personal recourse secured promissory notes to the Company for
approximately $0.4 million in connection with their purchase of shares of our company stock. These notes have been reflected as
a reduction in stockholders’ equity. All amounts outstanding under these promissory notes were repaid by the end of the first
quarter of 2005.
16.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
On May 22, 2006, the Company assumed a mortgage note payable (See Note 9) with an accompanying interest rate swap (the
“SWAP”) as part of the acquisition of the New England Institute of Technology at Palm Beach, Inc. in the amount of $7.2
million. The Company accounted for the interest rate swap agreement in accordance with SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended. Under the swap agreement, the Company paid a fixed rate tied to the
one month LIBOR rate until May 1, 2013 and received a variable rate of 6.48%. The SWAP was accounted for as an ineffective
hedge as it did not meet the requirements set forth under SFAS No. 133. Accordingly, other income (loss) includes a loss of
$0.2 million as of December 31, 2006. The Company repaid the mortgage note in November 2006. As a result the SWAP
agreement was terminated and the Company received $0.2 million for the fair market value.
F-28
17.
COMMITMENTS AND CONTINGENCIES
Lease Commitments—The Company leases office premises, 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) as follows:
Year Ending December 31,
2007
2008
2009
2010
2011
Thereafter
Less amount representing interest
Finance
Obligations
Operating
Leases
Capital
Leases
$
$
1,334 $
1,334
1,334
1,334
1,334
6,784
13,454
(13,454)
- $
17,085 $
16,264
14,126
12,570
11,916
76,452
148,413
-
148,413 $
101
95
7
-
-
-
203
(15)
188
On December 28, 2001, the Company completed a sale and a leaseback of four owned facilities to a third party for net proceeds of
approximately $8.8 million. The initial term of the lease is 15 years with two ten-year extensions. The lease is an operating lease
that starts at $1.2 million in the first year and increases annually by the consumer price index. The lease includes an option near
the end of the initial lease term to purchase the facilities at fair value, as defined. This transaction is being accounted for as a lease
obligation. The net proceeds received have been reflected in the consolidated balance sheet as a finance obligation. The lease
payments are included as a component of interest expense.
Rent expense, included in operating expenses in the accompanying financial statements for the three years ended December 31,
2006 is $17.2 million, $16.7 million, and $15.2 million, respectively. Interest expense related to the financing obligation in the
accompanying financial statements for the years ended December 31, 2006, 2005 and 2004 is $1.3 million, $1.3 million and
$1.2 million, respectively.
Capital Expenditures—The Company has entered into commitments to expand or renovate campuses. These commitments are in
the range of $3.0 to $5.0 million in the aggregate and are due within the next 12 months.
Litigation and Regulatory Matters—In the ordinary conduct of our business, we are subject to periodic lawsuits, investigations
and claims, including, but not limited to, claims involving students or graduates and routine employment matters. Although we
cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against us, we do not believe
that any currently pending legal proceeding to which we are a party will have a material adverse effect on our business, financial
condition, results of operation or cash flows.
F-29
18.
UNAUDITED QUARTERLY FINANCIAL INFORMATION
Quarterly financial information for 2006 and 2005 is as follows (in thousands except per share data):
2006
First
Second
Third
Fourth
Quarter
Net revenues
Income from operations
Net income available to common stockholders
Income per share:
Basic
Diluted
2005
Net revenues
Income from operations
Net income available to common stockholders
Income per share:
Basic
Diluted
$
$
$
$
$
$
75,513 $
4,708
2,762
0.11 $
0.11 $
75,363 $
1,799
966
0.04 $
0.04 $
84,505 $
4,630
2,232
0.09 $
0.09 $
86,125
16,864
9,592
0.38
0.37
First
Second
Third
Fourth
Quarter
70,869 $
2,501
772
0.04 $
0.03 $
68,236 $
812
42
0.00 $
0.00 $
78,352 $
7,898
5,485
0.22 $
0.21 $
81,764
21,299
12,410
0.49
0.48
F-30
LINCOLN EDUCATIONAL SERVICES CORPORATION
Schedule II—Valuation and Qualifying Accounts
Description
Allowance accounts for the year ended:
December 31, 2006
Student receivable allowance
December 31, 2005
Student receivable allowance
December 31, 2004
Student receivable allowance
(in thousands)
Balance at
Beginning of
Period
Charged to
Expense
Amount
Written-off
Balance at
End of Period
$
$
$
7,647 $
15,590 $
(11,701 ) $
11,536
7,023 $
11,188 $
(10,564 ) $
7,647
5,469 $
9,247 $
(7,693 ) $
7,023
F-31
T H I S PA G E L E F T B L A N K I N T E N T I O N A L LY
FINANCIAL HIGHLIGHTS$139,201$198,574$261,233$299,221$321,50620022003200420052006NET REVENUESDollars in ThousandsAVERAGE ENROLLMENTOPERATING INCOMEDollars in ThousandsNet Revenues$139,201$198,574$261,233$299,221$321,506Total Operating Expenses$137,251$182,893$236,152$266,711$293,505Income From Operations$1,950$15,681$25,081$32,510$28,001Net Income($674)$8,219$12,978$18,709$15,552Income Per Common ShareBasic($0.03)$0.38$0.60$0.80$0.61Diluted($0.03)$0.37$0.56$0.76$0.60Cash, Restricted Cash and Marketable Securities$11,079$48,965$41,445$50,257$7,381Total Debt$22,682$43,060$46,829$10,768$9,860Total Stockholders’ Equity$33,905$42,924$58,086$135,990$151,783Depreciation and Amortization$7,201$9,879$10,749$13,064$14,866Capital Expenditures$3,598$13,154$23,813$22,621$19,341Acquisitions, Net of Cash Acquired$ –$7,583$14,498$27,776$32,872Average Enrollment9,15512,48716,26617,86918,081Number of Campuses2323283437DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS20022003200420052006$1,950$15,681$25,081$32,510$28,001200220032004200520069,15512,48716,26617,86918,08120022003200420052006LIFELONG LEARNING FOR PRODUCTIVE CAREERSCORPORATE INFORMATIONLIFELONG LEARNING FOR PRODUCTIVE CAREERSDAVID F. CARNEY(1)Chairman of the Board and Chief Executive OfficerALEXIS P. MICHAS(1) (3) (4)Managing PartnerStonington Partners, Inc.JAMES J. BURKE, JR.(1) (3) (4)PartnerStonington Partners, Inc.STEVEN W. HART(3)PresidentHart Capital LLCJERRY G. RUBENSTEIN(2) (5)PresidentOMNI Management AssociatesPAUL E. GLASKE(3) (4) (5)Former Chairman and Chief Executive Officer Blue Bird CorporationPETER S. BURGESS(2) (5)Former PartnerArthur Andersen LLPCELIA CURRIN(2) (5)Founder and PrincipalBenchStrength MarketingJ. BARRY MORROW(4) (5)Former PresidentChase Education FinanceBOARD OF DIRECTORS(1) Member of Executive Committee(2) Member of Audit Committee(3) Member of Compensation Committee(4) Member of Nominating and Corporate Governance Committee(5) Independent DirectorDAVID F. CARNEYChairman of the Board and Chief Executive OfficerLAWRENCE E. BROWNVice ChairmanSHAUN E. MCALMONTPresident and Chief Operating OfficerSCOTT M. SHAWExecutive Vice PresidentCESAR RIBEIROSenior Vice President and Chief Financial OfficerTHOMAS F. MCHUGHSenior Vice President and Chief Compliance OfficerEDWARD B. ABRAMSSenior Vice President OperationsDEBORAH M. RAMENTOLSenior Vice President OperationsPIPER P. JAMESONChief Marketing OfficerCORPORATE OFFICERS200 Executive Drive, Suite 340West Orange, NJ 07052973.736.9340www.lincolneducationalservices.comCORPORATEHEADQUARTERSShearman & Sterling LLPNew York, NYOUTSIDE COUNSELDeloitte & Touche LLPParsippany, NJ AUDITORSTraded on the NASDAQ Global Marketunder the symbol LINCCOMMON STOCKContinental Stock Transfer & Trust CompanyNew York, NYTRANSFER AGENTBrainerd Communicators, Inc.New York, NY212.986.6667INVESTOR RELATIONS L I N C O L N T E C H N I C A L I N S T I T U T E www.lincolntech.com
ALLENTOWN
5151 Tilghman Street
Allentown, PA 18104
610.398.5300
BROCKTON
375 Westgate Drive
Brockton, MA 02301
508.941.0730
CENTER CITY
PHILADELPHIA
3600 Market Street
Philadelphia, PA 19104
215.382.1553
GRAND PRAIRIE
2915 Alouette Drive
Grand Prairie, TX 75052
972.660.5701
MOUNT LAUREL
1000 Howard Boulevard
Mt. Laurel, NJ 08054
856.722.9333
HAMDEN
Branch Campus of New Britain, CT
109 Sanford Street
Hamden, CT 06514
203.287.7300
NEW BRITAIN
200 John Downey Drive
New Britain, CT 06051
860.225.8641
PLYMOUTH MEETING
One Plymouth Meeting
Suite 300
Plymouth Meeting, PA 19462
610.941.0319
QUEENS
Branch Campus of Union, NJ
15-30 Petracca Place
Whitestone, NY 11357
718.640.9800
EDISON
1697 Oak Tree Road
Edison, NJ 08820
732.548.8798
MAHWAH
Branch Campus of Union, NJ
70 McKee Drive
Mahwah, NJ 07430
201.529.1414
PHILADELPHIA
9191 Torresdale Avenue
Philadelphia, PA 19136
215.335.0800
UNION
2299 Vauxhall Road
Union, NJ 07083
908.964.7800
COLUMBIA
9325 Snowden River Parkway
Columbia, MD 21046
410.290.7100
LINCOLN
622 George Washington
Highway
Lincoln, RI 02865
401.334.2430
NORTHEAST
PHILADELPHIA
2180 Hornig Road, Bldg. A
Philadelphia, PA 19116
215.969.0869
SHELTON
Center for Culinary Arts/
Branch Campus of New Britain, CT
8 Progress Drive
Shelton, CT 06484
203.929.0592
CROMWELL
Center for Culinary Arts/
Branch Campus of New Britain, CT
106 Sebethe Drive
Cromwell, CT 06416
860.613.3350
LOWELL
211 Plain Street
Lowell, MA 01852
978.458.4800
PARAMUS
160 Route 4 East
Paramus, NJ 07652
201.845.6868
SOMERVILLE
5 Middlesex Avenue
Somerville, MA 02145
61 7.776.3500
L I N C O L N C O L L E G E O F T E C H N O L O G Y www.lincolncollegeoftechnology.com
DENVER
460 South Lipan Street
Denver, CO 80223
303.722.5724
FLORIDA
2410 Metrocentre Boulevard
West Palm Beach, FL 33407
561.842.8324
INDIANAPOLIS (AC0102)
7225 Winton Drive, Bldg.128
Indianapolis, IN 46268
31 7.632.5553
HENDERSON
2290 Corporate Circle
Suite 100
Henderson, NV 89074
702.269.7600
MARIETTA
2359 Windy Hill Road
Marietta, GA 30067
770.226.0056
MELROSE PARK
831 7 West North Avenue
Melrose Park, IL 60160
708.344.4700
NORCROSS
5675 Jimmy Carter Boulevard
Suite 100
Norcross, GA 30071
678.966.9411
L I N C O L N C O L L E G E O N L I N E www.lincolncollegeonline.com
S O U T H W E S T E R N C O L L E G E www.swcollege.net
DAYTON (04-01-1707B)
111 West First Street
Dayton, OH 45402
937.224.0061
FRANKLIN (04-01-1706B)
201 East Second Street
Franklin, OH 45005
937.746.6633
NORTHERN KENTUCKY
8095 Connector Drive
Florence, KY 41042
859.282.9999
TRI-COUNTY (04-01-1705B)
149 Northland Boulevard
Cincinnati, OH 45246
513.874.0432
VINE STREET (04-01-1708B)
632 Vine Street
Cincinnati, OH 45202
513.421.3212
N A S H V I L L E A U T O - D I E S E L C O L L E G E www.nadcedu.com
NASHVILLE
1524 Gallatin Road
Nashville, TN 37206
615.226.3990
E U P H O R I A I N S T I T U T E O F B E A U T Y A R T S & S C I E N C E S www.euphoriainstitute.com
GREEN VALLEY
11041 South Eastern Avenue
Henderson, NV 89052
702.932.8111
SUMMERLIN
9340 West Sahara Avenue
Suite 205
Las Vegas, NV 89117
702.341.8111
F L O R I D A C U L I N A R Y I N S T I T U T E www.floridaculinary.com
FLORIDA
2410 Metrocentre Boulevard
West Palm Beach, FL 33407
561.842.8324
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