CC
T L G S
Lincoln Technical Institute
www.lincolntech.com
Allentown, PA
Brockton, MA
Center City Philadelphia, PA
Columbia, MD
Cromwell, CT
Edison, NJ
Hamden, CT
Lincoln, RI
Lowell, MA
Mahwah, NJ
Mt. Laurel, NJ
New Britain, CT
NE Philadelphia, PA
Paramus, NJ
Philadelphia, PA
Whitestone, NY
Shelton, CT
Somerville, MA
Union, NJ
Lincoln College of Technology
www.lincolncollegeoftechnology.com
Denver, CO
West Palm Beach, FL
Grand Prairie, TX
Indianapolis, IN
Marietta, GA
Melrose Park, IL
Southwestern College
www.swcollege.net
Dayton, OH
Toledo, OH (opening 2009)
North Cincinnati, OH
Central Cincinnati, OH
Franklin, OH
Florence, KY
Euphoria Institute of Beauty Arts & Sciences
www.euphoriainstitute.com
Henderson, NV
Lincoln, RI
Aliante, NV
West Palm Beach, FL
Las Vegas, NV
Nashville Auto Diesel College
www.nadcedu.com
Nashville, TN
Lincoln College Online
www.lincolncollegeonline.com
Florida Culinary Institute
www.fl oridaculinary.com
West Palm Beach, FL
Center for Culinary Arts
www.centerforculinaryarts.com
Cromwell, CT
Shelton, CT
Columbia, MD
Briarwood College
www.briarwood.edu
Southington, CT
N S A J
Americare School of Nursing
www.americareschools.com
Fern Park, FL
St. Petersburg, FL
Baran Institute of Technology
www.baraninstitute.com
East Windsor, CT
Engine City Technical Institute
www.enginecity.edu
South Plainfi eld, NJ
Connecticut Culinary Institute
www.ctculinary.edu
Hartford, CT
Suffi eld, CT
2008 ANNUAL REPORT
R F U T URE
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Lincoln_08ar_CVR_V12_INSIDE 3/25/09 5:14 PM Page 1
About Lincoln Educational Services Corporation Lincoln Educational Services Corporation, through its subsidiaries,
operates Lincoln Technical Institute, Lincoln College of Technology, Southwestern College, Nashville Auto-Diesel College, Euphoria
Institute of Beauty Arts & Sciences and Briarwood College. Lincoln also operates divisions within some of these institutions under the names Florida
Culinary Institute and The Center For Culinary Arts. With a broad geographic reach of 36 campuses in 17 states, Lincoln is well positioned to
achieve its goal of becoming one of the largest providers of post-secondary education in the United States.
Financial Highlights
Dollars in Thousands, Except Per Share Amounts
Revenues
Total Costs and Expenses
Operating Income
Income From Continuing Operations
Net Income
Earnings Per Common Share From
Continuing Operations
Basic
Diluted
Income Per Common Share
Basic
Diluted
2008
$376,907
$341,332
$ 35,575
$ 20,195
$ 20,195
$0.80
$0.78
$0.80
$0.78
Cash, Restricted Cash and Marketable Securities
Total Debt
Total Stockholders’ Equity
$ 15,617
$ 10,174
$174,949
Depreciation and Amortization From
Continuing Operations
Capital Expenditures
Acquisitions, Net of Cash Acquired
Average Enrollment
Number of Campuses
Educational Programs
D E G R E E
$ 17,920
$ 20,166
$ 10,520
20,006
36
2007
2006
$327,774
$301,881
$ 25,893
$ 13,827
$ 8,340
$0.54
$0.53
$0.33
$0.32
$ 3,502
$ 15,378
$162,467
$ 15,111
$ 24,766
—
$
17,687
34
$310,630
$280,012
$ 30,618
$ 17,084
$ 15,552
$0.67
$0.65
$0.61
$0.60
$ 7,381
$ 9,860
$151,783
$ 13,829
$ 19,341
$ 32,872
17,397
34
2005
$287,368
$252,279
$ 35,089
$ 20,284
$ 18,709
$0.86
$0.83
$0.80
$0.76
$ 50,257
$ 10,768
$135,990
$ 12,099
$ 22,621
$ 27,776
17,064
31
2004
$248,508
$221,841
$ 26,667
$ 13,907
$ 12,978
$0.64
$0.60
$0.60
$0.56
$ 41,445
$ 46,829
$ 58,086
$ 9,870
$ 23,813
$ 14,498
15,401
25
D I P LO M A / C E R T I F I C AT E
Automotive Technology
Auto Service Management
Collision Repair
Diesel & Truck Service
Management
Health Sciences
Medical Assisting Technology
Medical Administrative
Technology
Dental Office Management
Child Development
Health Information Coding
Medical Office Management
Medical Administrative
Assistant
Mortuary Science
Nuclear Medicine
Occupational Therapy
Assistant
Dental Hygiene
Dental Administrative
Assistant
Advanced Medical
Coding and Billing
Skilled Trades
Mechanical/Architectural
Drafting
Electronics Engineering
Technician
Electronic Systems Technician
Hospitality Services
Culinary Management
Culinary Arts
Cosmetology
Food and Beverage
Baking and Pastry
Hotel Restaurant
Management
Dietetic Technician
Travel and Tourism
Business and IT
Criminal Justice
Funeral Service Management
PC Systems & Networking
Technology
Network Systems
Administration
Network Communications
and Information Systems
Business Management
Business Marketing
HR Management
Accounting
Broadcasting and
Communications
Fashion Merchandising
Paralegal
ONLINE Programs
Accounting and Technology
Business Administration
Business Management
Business Marketing
HR Management
Criminal Justice and the
Study of the Criminal Mind
Criminal Justice
Network Communications
and Information Systems
Information Management
and Security
Advanced Medical Coding
and Billing
Hospitality Services
Culinary Arts
Baking and Pastry
Aesthetics
Cosmetology
Therapeutic Massage
& Body Technology
Business and IT
Business Administration
Network Systems
Administrating
PC Support Technology
Criminal Justice
Network Communications
and Information Systems
Automotive Technology
Automotive Mechanics
Automotive Technology
Collision Repair
Diesel Truck Mechanics
Diesel & Truck Technology
Health Sciences
Medical Administrative
Assisting
Medical Assisting
Pharmacy Technology
Medical Coding and Billing
Dental Assisting
Practical Nursing
Phlebotomy
Nuclear Medicine
Skilled Trades
Electronics Engineering
Technician
Electronics System Technician
HVAC
Mechanical/Architectural
Drafting
Electrician
Welding
Corporate Information
Board of Directors
Corporate Officers
David F. Carney (1)
Chairman of the Board and
Chief Executive Officer
Alexis P. Michas (1) (3) (4)
Managing Partner
Stonington Partners, Inc.
James J. Burke, Jr. (1) (3) (4)
Partner
Stonington Partners, Inc.
David F. Carney
Chairman of the Board and
Chief Executive Officer
Shaun E. McAlmont
President and
Chief Operating Officer
Scott M. Shaw
Executive Vice President and
Chief Administrative Officer
Jerry G. Rubenstein (2) (5)
President
OMNI Management Associates
Cesar Ribeiro
Senior Vice President,
Chief Financial Officer and Treasurer
Thomas F. McHugh
Senior Vice President and
Chief Compliance Officer
Piper P. Jameson
Senior Vice President and
Chief Marketing Officer
Edward B. Abrams
President
Lincoln Education Group
Deborah M. Ramentol
President
Lincoln Technical Group
Paul E. Glaske (3) (4) (5)
Former Chairman and
Chief Executive Officer
Blue Bird Corporation
Peter S. Burgess (2) (5)
Former Partner
Arthur Andersen LLP
Celia H. Currin (2) (5)
Founder and Principal
BenchStrength Marketing
J. Barry Morrow (4) (5)
Former President
Chase Education Finance
Charles F. Kalmbach (2) (3) (5)
Former Global Managing Partner
Accenture, Ltd.
(1) Member of Executive Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee
(4) Member of Nominating and Corporate Gover-
nance Committee
(5) Independent Director
Corporate Headquarters
200 Executive Drive, Suite 340
West Orange, NJ 07052
973.736.9340
www.lincolnedu.com
Outside Counsel
Shearman & Sterling LLP
New York, NY
Auditors
Deloitte & Touche LLP
Parsippany, NJ
Transfer Agent
Continental Stock Transfer &
Trust Company
New York, NY
Common Stock
Traded on the NASDAQ
Global Market under
the symbol LINC
Investor Relations
Brainerd Communicators, Inc.
New York, NY
212.986.6667
In 2008, we built upon the momentum and positive trends
in our business and as a result, we believe we are well
positioned for sustainable growth and profitability as we
navigate through 2009 and beyond.
Revenues
Dollars in Thousands
$376,907
$310,630
$327,774
$287,368
$248,508
Letter to Shareholders
’04
’05
’06
’07
’08
Dear Fellow Shareholders:
The past year marked an outstanding period of progress for
Lincoln. We generated strong financial results, strong starts and
enrollment growth, and effectively advanced our various growth
initiatives. We built upon the momentum and positive trends in
our business and as a result, we believe we are well positioned
for sustainable growth and profitability as we navigate through
2009 and beyond.
2008 STRATEGIC AND OPERATIONS REVIEW
During 2008, we continued to execute our growth strategy, fo-
cusing on improving our operational efficiency, increasing our
addressable market, expanding our new program development
and replication efforts, opening new campuses, making strategic
acquisitions, and building additional capacity at select campuses
to capitalize on student demand.
For the full year 2008, our total revenue grew by 15.0% (14.7%
on a same school basis) to $376.9 million compared to $327.8
million for 2007. In addition, student starts increased 17.1% and
year-end total enrollment on a same-school basis reached a
record of 21,116 over 2007, an increase of 17.2%.
Our strong full year starts and enrollment growth were prima-
rily driven by our diversified program offerings, as well as the
operational enhancements we implemented over the past
several years. As a result, we have generated nine continuous
quarters of year-over-year start growth, which has increased our
capacity utilization and driven continued margin improvement.
Excluding Briarwood College, we entered 2009 with 3,100 or
17.2% more students than 2008.
Operationally, we continue to make significant improvements
that result in greater efficiencies. We fine-tuned our website with
the goal of optimizing search results at higher rates and began
working to generate improved lead volume and quality through
examination of the search, viewing and buying behaviors of vis-
itors. The Internet is the primary source for all leads, and we will
continue to enhance our website, including incorporating the
latest aspects of Web 2.0 and social networking trends as they
emerge. Furthermore, by reducing admissions turnover and pro-
viding new training materials, we have increased our conver-
sion rates and reduced our cost per start. We have continued to
invest in our high school sales force which has strengthened our
relationships with high school counselors. Additionally, we con-
tinue to improve the student experience by enhancing vital stu-
dent services. For example, we have improved student financing
processes and maintained financing alternatives despite the
crumbling credit markets.
During 2008, we also remained dedicated to placement as-
sistance by integrating career services into the curriculum
and preparing students for their job search well before grad-
uation. We are committed to aggressively generating place-
ment opportunities with businesses locally and with national
accounts for larger industry employers within each of our
L I N C O L N E D U C AT I O N A L S E R V I C E S 1
Operating Income
Dollars in Thousands
$35,089
$30,618
$35,575
$26,667
$25,893
Our ability to provide quality
education to our diverse student
population directly benefits our
financial and operating results
and drives shareholder value.
’04
’05
’06
’07
’08
momentum and believe that offering more associate and bach-
elor’s degree programs will assist us in sustaining double-digit
growth into the future. In December, we acquired Briarwood
College, our first regionally accredited school. Briarwood cur-
rently offers associate and bachelor’s degree programs, provides
our Connecticut students with the opportunity to further
advance their education via the pursuit of an advanced de-
gree and enhances our online platform by offering regionally
accredited programs.
In addition to the degree programs added through the acquisi-
tion of Briarwood, our Lincoln Technical Institute campus in Co-
lumbia, Maryland was awarded degree granting status in
September from the Maryland Higher Education Commission.
This is now our fifteenth campus approved to offer degrees. As
of December 31, 2008, 23% of our students were enrolled in
degree programs, and our goal is to grow significantly our share
of degree students over the foreseeable future.
Finally in 2008, we continued to advance our online presence
by strengthening our staff, refining our technical infrastructure,
obtaining higher levels of accreditation and developing our on-
line brand. We remain encouraged by the online foundation we
verticals. Obtaining a job upon graduation is the number one
reason why students come to Lincoln, and we are committed
to the success of each of our students.
We also remain committed to maintaining our strong regulatory
record. By investing in compliance training and personnel, we
continue to maintain a strong regulatory performance record
while further strengthening the organization.
We achieved our biggest gains through expanding our address-
able market, namely adding higher degree programs both
online and on-ground. The weak economy and increasing un-
employment levels are helping to drive more students to our
schools as they seek rapid training in order to re-enter the work-
force. When the economy rebounds, our goal is to maintain the
Strong Leading Indicators–New Starts
Year-over-Year Growth (%)
20.9
17.1
10.6
10.3
5.4
2.7
7.7
7.5
8.6
1.3 2.4
(12.0)
Q1 Q2 Q3 Q4
2006
Q1 Q2 Q3 Q4
2007
Q1 Q2 Q3 Q4
2008
2 L I N C O L N E D U C AT I O N A L S E R V I C E S
Enrollment by Vertical
at December 31, 2008
10% 9%
10% 9%
10% 9%
10% 9%
14%
14%
14%
14%
32%
32%
32%
32%
35%
35%
35%
35%
Health Sciences
Automotive
Skilled Trades
Business/IT
Hospitality
have built and are pleased with the development of our bache-
lor’s degree programs and the prospects for long-term sustain-
able growth that will come with the addition of our regional
accreditation platform.
2009 – BUILDING ON OUR SUCCESS
During 2009, we are focused on continuing to execute our var-
ious growth initiatives and further strengthening operating effi-
ciencies across our organization. While only a few months into
the year, we are already building upon the many successes
accomplished during 2008.
We further expanded our addressable market, program offerings
and degree-granting capabilities through the acquisition of Baran
Institute of Technology in January 2009. Baran is comprised of
five institutions offering associate and diploma programs across
four of our verticals – Automotive, Skilled Trades, Health Sci-
ences and Culinary. We have acquired four of these institutions
and expect to acquire the fifth institution, Clemens College, in
the second quarter of 2009.
Now that we have acquired Briarwood and Baran, our atten-
tion is focused on effectively integrating them. We believe we
have a strong track record of integrating acquisitions. We will
leverage our strengthened corporate platform by applying func-
tional area expertise and marketing processes, co-brand the
schools with the Lincoln brand, introduce information systems
and assist local management with new student admissions and
retention processes.
Another area of focus in 2009 is continuing to expand the
breadth of our program and degree offerings as well as replicat-
ing high demand programs across our campuses. Increasing our
degree options provides a path for students to migrate from
diploma to degree within the Lincoln family of schools and
expands our addressable market.
Increasing Enrollment Growth
Year-over-Year Growth (%)
20.3
14.7 15.1
10.0
8.5
6.5
4.9
1.7
(1.0)
(2.3) (1.8)
(1.5)
Q1 Q2 Q3 Q4
2006
Q1 Q2 Q3 Q4
2007
Q1 Q2 Q3 Q4
2008
We continue to expand our footprint by opening schools in new
markets. We expect to start our first classes at our new South-
western College in Toledo, Ohio in April 2009. The Toledo cam-
pus will become our sixth Southwestern College and will offer
programs in our Health Sciences and Business/IT verticals.
Finally, we expect the addition of Briarwood to accelerate
the growth profile of our online platform. In 2009, we will
be launching a new online website dedicated to redefining
our online brand and when bolstered by regionally accred-
ited programs, which we expect to be approved by early
2010, our online platform is expected to provide a significant
growth opportunity.
L I N C O L N E D U C AT I O N A L S E R V I C E S 3
Our strong full year starts and enrollment growth
were primarily driven by our diversified program
offerings, as well as the operational enhancements
we implemented over the past several years.
Average Enrollment
17,064
17,397
17,687
15,401
20,006
NEW LEADERSHIP
As we announced in January, Shaun McAlmont will become Pres-
ident and Chief Executive Officer and I will become Executive
Chairman on April 30, 2009. I have enjoyed growing Lincoln over
the past ten years and now is the right time to continue what has
been a smooth transition to new leadership. Shaun is a proven
and talented industry executive and has played a pivotal role, op-
erationally and strategically, in supporting Lincoln’s growth and
strengthening our outlook. I will remain actively involved on a
full-time basis through the end of 2010, and I look forward to
working with Shaun and the rest of our senior management team
as we build upon Lincoln’s successes.
SUMMARY
During 2008, we continued to see the benefits of the many
operational initiatives we have implemented over the past
several years. In addition, we further executed our growth
strategy and diversified our program offerings which strength-
ened our presence in five high-demand verticals that possess
attractive employment prospects.
Over our sixty year history, Lincoln has been steadfast in pro-
viding a quality education to our students and helping them
’04
’05
’06
’07
’08
fulfill their dreams and improve their lives. This dedication
remains strong today as we strive to provide more students
with the education and training that best positions them for
lifelong success.
These efforts would not be possible without our highly engaged
employees and the strong regulatory performance record we
maintain with all of our agencies. Moving forward, we will con-
tinue to build upon our track record and honor our commit-
ments to the talented, motivated and diverse group of students
we serve.
We appreciate your support and look forward to updating you
on our progress throughout the year.
David F. Carney
Chairman and Chief Executive Officer
Lincoln Educational Services Corporation
4 L I N C O L N E D U C AT I O N A L S E R V I C E S
___________________________________________________________________________________
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, 2008
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, a non-accelerated filer or a smaller reporting
company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Large accelerated filer (cid:31)
Accelerated filer ⌧
Non-accelerated filer (cid:31)
Smaller reporting company (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 4,556,925 shares of common stock held by non-affiliates of the Registrant issued and outstanding as of
June 30, 2008, the last business day of the registrant’s most recently completed second fiscal quarter was $52,997,038. This amount is
based on the closing price of the common stock on the Nasdaq Global Market of $11.63 per share on June 30, 2008. 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 11, 2009 was 26,092,361.
Documents Incorporated by Reference
Portions of the Proxy Statement for the Registrant’s 2009 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 ENDED DECEMBER 31, 2008
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
1
1
21
29
30
31
31
31
31
35
37
50
50
50
50
51
52
52
52
52
52
52
53
53
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:
•
•
•
•
•
•
•
•
•
•
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 or acquisitions;
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. Except as required under the federal securities
laws and rules and regulations of the SEC, we undertake no obligation to update or revise forward-looking statements to reflect actual
results, changes in assumptions or changes in other factors affecting forward-looking information. We caution you not to unduly rely on
the forward-looking statements when evaluating the information presented herein.
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. 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 hospitality services. For the year ended December 31, 2008, our
automotive technology program, our health science program, our skilled trades program, our business and information technology
program, and our hospitality services program accounted for approximately 35%, 32%, 14%, 9%, and 10%, respectively, of our average
enrollment. We had 21,667 students enrolled as of December 31, 2008 and our average enrollment for the year ended December 31, 2008
was 20,006 students, an increase of 13.1% from our average enrollment of 17,687 for the year ended December 31, 2007. For the year
ended December 31, 2008, our revenues were $376.9 million, which represents an increase of 15.0% from the year ended December 31,
2007. Excluding our acquisition of Briarwood College, or BRI, in December 2008, our revenues and average enrollment would have
increased by 14.7% and 13.0%, respectively, compared to the year ended December 31, 2007. For the year ended December 31, 2007, our
revenues were $327.8 million, which represented a 5.5% increase from the year ended December 31, 2006. Excluding our acquisition of
New England Institute of Technology at Palm Beach, Inc., or FLA, in May 2006, our revenues and average enrollment in 2007 would have
increased by 3.2% and decreased by 0.4%, respectively, compared to the year ended December 31, 2006.
As of December 31, 2008, we operated 36 campuses in 17 states. We operate our campuses under the following six brand names: Lincoln
Technical Institute, Lincoln College of Technology, Nashville Auto-Diesel College (“NADC”), Southwestern College, Euphoria Institute
of Beauty Arts and Sciences and Briarwood College. In February 2007, we completed a re-branding initiative to consolidate 26 of our
schools under the Lincoln Technical Institute and Lincoln College of Technology brand names, with the remaining schools continuing to
operate under their pre-existing names. Most of our campuses serve major metropolitan markets and each typically offers courses in
multiple areas of study. 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 by the U.S. Department of Education, or DOE, and
applicable state education agencies and accrediting commissions which allow students to apply for and access federal student loans as well
as other forms of financial aid.
In May 2007, we announced a realignment pursuant to which we created separate managerial oversight for two groups of educational
programs:
• Lincoln Technical Group. The Lincoln Technical Group primarily focuses on our automotive technology and skilled trades
programs.
• Lincoln Education Group. The Lincoln Education Group primarily focuses on our health sciences, hospitality services and
business and information technology programs, as well as our online programs.
This realignment is intended to promote efficiencies across our operations and further enhance our ability to execute on our strategy.
On December 1, 2008, we acquired the rights, title and interest in the assets used in the conduct and operation of Briarwood College
(“Briarwood”) for approximately $10.5 million in cash, net of cash acquired. Briarwood operates one campus in Southington,
Connecticut, is regionally accredited by the New England Association of Schools and Colleges (“NEASC”), and currently offers two
bachelor’s degree programs and 31 associate degree programs to approximately 550 students as of December 31, 2008 from Connecticut
and surrounding states.
On January 20, 2009, we completed the acquisition of four of the five institutions comprising Baran Institute of Technology, or Baran, for
approximately $24.9 million in cash, net of cash acquired, subject to contractual post closing adjustments. Baran consists of five distinct
institutions serving approximately 1,900 students and offers associate and diploma programs in the fields of automotive, skilled trades,
health sciences and culinary arts. The four institutions we acquired on January 20, 2009 are Baran Institute of Technology, or BIT,
Connecticut Culinary Institute, or CCI, Americare School of Nursing, or ASN, and Engine City Technical Institute, or ECTI. We also
acquired the membership interests of Hartford Urban Ventures, LLC and certain assets and assumed certain liabilities of Educational
Properties, LLC, which provide support services to Baran. We expect to acquire the fifth Baran institution, Clemens College, for an
additional $3.0 million in the second quarter of 2009.
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
1
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.
DISCONTINUED OPERATIONS
On July 31, 2007, our Board of Directors approved a plan to cease operations at three of our campuses. As a result of that decision, we
recognized a non-cash impairment charge related to goodwill at these three campuses of approximately $2.1 million as of June 30, 2007.
Additionally, we determined that certain long-lived assets would not be recoverable at June 30, 2007 and recorded a non-cash charge of
$0.9 million to reduce the carrying value of these assets to their estimated fair value.
As of September 30, 2007, all operations had ceased at these campuses, and accordingly, the results of operations of these campuses have
been reflected in the accompanying statements of operations as “Discontinued Operations” for all periods presented.
The following amounts relate to discontinued operations at these three campuses (in thousands):
Year Ended December 31,
Revenue
Operating Expenses
Benefit for income taxes
Loss from discontinued operations
AVAILABLE INFORMATION
$
$
2007
4,230
(13,760)
(9,530)
(4,043)
(5,487)
2006
10,876
(13,493)
(2,617)
(1,085)
(1,532)
$
$
Our website is www.lincolnedu.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.
BUSINESS STRATEGY
Our goal is to strengthen our position as a leading and diversified provider of career-oriented post-secondary education by continuing to
pursue the following:
Maximize Utilization of Existing Facilities. We believe that by creating separate oversight for two groups of educational programs, we
are able to improve the day-to-day management, operational efficiency and capacity utilization of our campuses. We are also focused on
improving capacity utilization through increased enrollments, and we expect to continue investing in marketing resources to attract new
students.
Expand Existing Areas of Study and Existing Facilities. We believe we can leverage our operations to expand our program offerings in
existing areas of study and expand into new areas of study to capitalize on demand from students and employers in our target markets. For
example, in 2007 we began offering courses in Licensed Practical Nursing at three of our New Jersey campuses, and we believe we will be
able to similarly expand our program offerings at other campuses. We also expect to continue expanding some of our existing facilities
and relocating other facilities to expand capacity. In 2008, we increased capacity at two of our Southwestern College campuses and moved
into a new and larger campus in Brockton, Massachusetts.
Expand Geographic Presence. We believe that we can leverage our marketing and recruiting programs by opening additional campuses in
selected markets and obtaining greater market penetration. For example, in March 2006, we established our presence in the New York
metropolitan area with the opening of our Queens, New York automotive school in partnership with the Greater New York Area
Automobile Dealers Association. In 2008, we expanded our presence in Las Vegas with the opening of our third Euphoria campus in the
north end of Las Vegas which will enable us to better serve that market. We believe we can also increase our student enrollments by
entering selected new geographic markets that we believe have significant growth potential and where we can leverage our reputation and
operating expertise.
Opportunistically Pursue Strategic Acquisitions. We continue to evaluate attractive acquisition candidates. In evaluating potential
acquisitions, we seek to identify schools that provide the potential for program replication at our existing campuses, expand our program
and degree offerings, and extend our presence into markets with attractive growth opportunities.
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On December 1, 2008, we acquired Briarwood College which strengthened our position in Connecticut, by adding additional associate and
bachelor’s degree programs and has regional accreditation which we believe will enable us to serve a new market and enhance our online
programs.
Expand Online Programs. We have offered online programs since 2005 with a view towards capitalizing on the rapidly growing
demand for, and flexibility provided by, online education alternatives. We launched our first 100% online program in June 2006 and our
second in December 2006. In 2008, we launched two associate degree programs and three bachelor’s degree programs. We believe that
our online programs are an attractive option for students without the geographic or financial flexibility to enroll in campus-based programs
and will continue to broaden our addressable market.
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 102 weeks. Tuition for programs
ranges from $10,000 to $35,000, depending on the length of the program and the area of study. As of December 31, 2008, all of our
schools offer diploma and certificate programs, 18 of our schools are currently approved to offer associate degree programs and two
schools are 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 four to five days a week in three shifts per day and start new classes every month. Also for
those students who do not live near one of our campuses or whose schedules prevent them from attending school we offer several
programs online. 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.
The following table lists the programs offered as of December 31, 2008 with the average number of students enrolled in each area of study
for the year ended December 31, 2008:
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Area of Study
Bachelor's
Associate
Diploma and Certificate
Program Offered
Automotive
Technology
Health Sciences
-
-
Skilled Trades
-
Hospitality Services
Culinary
Management
Business and
Information
Technology
Criminal
Justice,
Funeral
Service
Management
Auto Service Management,
Collision Repair, Diesel
Technology, Diesel & Truck
Service Management
Medical Assisting Technology,
Medical Administrative
Assistant Technology, Dental
Office Management, Child
Development, Health
Information Coding, Medical
Office Management, Medical
Assistant, Mortuary Science,
Nuclear Medicine,
Occupational Therapy
Assistant, Dental Hygeine,
Dental Administrative
Assistant
Mechanical / Architectural
Drafting, Electronics
Engineering Technology,
HVAC, EST
Culinary Arts, Cosmetology
Management, Food and
Beverage, Baking and Pastry,
Culinary Management, Hotel
Restraurant Management,
Dietetic Technician, Travel
and Tourism
PC Systems & Networking
Technology, Network Systems
Administration, Business
Administration, Criminal
Justice, NCIS, Business
Management, Business
Marketing, HR Management,
Accounting, Broadcasting and
Communications, Fashion
Merchandising, Paralegal
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, Phlebotomy,
Child Development, Nuclear
Medicine
Electronic Servicing,
Electronics Engineering
Technology, Electronics
System Technology, HVAC,
Mechanical / Architectural
Drafting, Electrician,
Welding
Culinary Arts, Baking &
Pastry, Cosmetology,
Aesthetics, Therapeutic,
Massage & Body
Technology
Business Administration,
Network Systems
Administrating, PC Support
Technology, Criminal
Justice, Network
Communications and
Information Systems
Average
Enrollment
Percent of
Total
Enrollment
7,034
35%
6,416
32%
2,783
14%
1,935
10%
1,838
9%
Total:
20,006
100%
4
Automotive Technology. Automotive technology represents our largest area of study, with 35% of our total average student enrollment
for the year ended December 31, 2008. Our automotive technology programs are 24 to 92 weeks in length, with tuition rates of $10,000 to
$35,000. 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.
As of December 31, 2008, each 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 College of Technology (formerly Denver
Automotive & Diesel College) (“Denver LCT”) and Nashville Auto-Diesel College currently offer programs exclusively in automotive
technology. Denver LCT, Nashville Auto-Diesel College, and our Lincoln College of Technology schools in Grand Prairie, Texas and
Indianapolis, Indiana are destination schools, attracting students throughout the United States and, in some cases, from abroad.
Health Sciences. For the year ended December 31, 2008, health sciences represented our second largest area of study, representing 32%
of our total average student enrollment. Our health science programs are 30 to 92 weeks in length, with tuition rates of $10,000 to $30,000.
Graduates of our programs are qualified to obtain positions such as licensed practical nurse, 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.
As of December 31, 2008, we offered health science programs at 23 schools, including five Southwestern College schools, Briarwood
College, and 17 Lincoln College of Technology and Lincoln Technical Institute schools.
Skilled Trades. For the year ended December 31, 2008, 14% of our total average student enrollment was in our skilled trades programs.
Our skilled trades programs are 41 to 91 weeks in length, with tuition rates of $16,000 to $29,000. Our skilled trades programs include
electrician, heating, ventilation and air conditioning repair, welding, drafting and computer-aided design and electronic system technician.
Graduates of our programs are qualified to obtain entry level employment positions such as electrician, cable, wiring and HVAC installer
and servicer and drafting technician. Our graduates are employed by a wide variety of employers, including residential and commercial
construction, telecommunications installation companies and architectural firms.
In the first quarter of 2008 we launched our first welding program. This program was developed based on the National Center for
Construction Education and Research (“NCCER”) curriculum. NCCER is a not-for-profit education foundation created to help address the
critical workforce shortage facing the construction industry and to develop industry-driven standardized craft training programs with
portable credentials.
As of December 31, 2008, we offered skilled trades programs at 13 of our 25 Lincoln Technical Institute and Lincoln College of
Technology campuses.
Hospitality Services. For the year ended December 31, 2008, 10% of our total average student enrollment was in our hospitality services
programs. Our hospitality services programs are 14 to 98 weeks in length, with tuition rates of $10,000 to $27,000. Our spa programs
include therapeutic massage, cosmetology and aesthetics. Graduates work in salons, spas, cruise ships or are self-employed. We offer
massage programs at 15 campuses and cosmetology programs at five campuses. Our culinary graduates are employed by restaurants,
hotels, cruise ships and bakeries. As of December 31, 2008, we offered culinary programs at the Florida Culinary Institute and three
Centers for Culinary Arts.
Business and Information Technology. For the year ended December 31, 2008, 9% of our total average student enrollment was in our
business and information technology programs, which include our diploma and degree criminal justice programs. Our business and
information technology programs are 30 to 102 weeks in length, with tuition rates of $11,000 to $27,000. We have focused our current IT
program offerings on those that are most in demand, such as our PC systems technician, network systems administrator and business
administration specialist programs. Our IT and business graduates work in entry level positions for both small and large corporations. Our
criminal justice graduates work in the security industry and for various government agencies and departments. As of December 31, 2008,
we offered these programs at 18 of our campuses.
5
MARKETING AND STUDENT RECRUITMENT
We utilize a variety of marketing and recruiting methods to attract students and increase enrollment. 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 and Advertising. Our marketing program utilizes integrated advertising such as the Internet, television, and various print
media, direct mail, and event marketing campaigns. These campaigns are enhanced by student and alumni referrals. Internet lead
generation is our most successful medium, built upon successful search engine optimization and specific keywords. Our website leads
incorporate integrated campaigns that drive prospects to the website for lead capture. Our internal systems enable us to closely monitor
and track the effectiveness of each advertisement on a daily or weekly basis and make adjustments accordingly to enhance efficiency and
limit our student acquisition costs.
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 400 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 2008, we
recruited approximately 21% 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 to 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
and 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 21,667 students enrolled as of December 31, 2008 and our average enrollment for the year
ended December 31, 2008 was 20,006 students, an increase of 13.1% from December 31, 2007. Excluding our acquisition of BRI in
December 2008, our average student enrollment would have increased by 13.0%. Our average student enrollment for the year ended
December 31, 2007 was 17,687 students, an increase of 1.7% from December 31, 2006. Excluding our acquisition of FLA in May 2006,
our average enrollment for the year ended December 31, 2007 would have decreased by 0.4%.
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.
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 need. Each school has an advisory council made up of local employers who provide us with
6
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. 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, 2008, we had approximately 3,206 employees, including 793 full-time faculty and 663 part-time instructors. At six
of our campuses, the teaching professionals are represented by unions. These employees are covered by collective bargaining agreements
that expire between 2009 through 2012. We believe that we generally have good relationships with these unions and our employees.
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 other institutions that are 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, 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, 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 competitors within a given market increase 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.
7
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 the
Title IV Programs, which are administered by the DOE. For the year ended December 31, 2008, approximately 79% (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 his or her 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 will certify an institution to
participate in Title IV Programs only after the institution has demonstrated compliance with the Higher Education Act of 1965, as
amended, or HEA, and the DOE's extensive regulations regarding institutional eligibility. 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. Because the DOE periodically revises its regulations and changes its interpretations of existing laws and
regulations, we cannot predict with certainty how Title IV Program requirements will be applied in all circumstances. 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. Some states have sought to assert
jurisdiction over online educational institutions that offer educational services to residents in the state, notwithstanding the lack of a
physical location in that state. 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. If we are found not to be in compliance with the applicable
state regulation and a state seeks to restrict one or more of our business activities within its boundaries, we may not be able to recruit or
enroll students in that state and may have to stop providing services in that state, which could have a material adverse effect on our
business and results of operations. 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,
curriculum, qualifications of faculty, location and nature of facilities and equipment, administrative procedures, marketing, recruiting,
financial operations, student outcomes 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. We believe that
we have posted surety bonds on behalf of our schools and education representatives with multiple states in a total amount of approximately
$13.7 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 authorization. If any
one of our schools lost its authorization from the education agency of the state in which the school is located, that school and its related
main campus and/or additional locations would lose its eligibility to participate in Title IV Programs, be unable to offer its programs and
we could be forced to close that school. If one of our schools lost its state authorization from a state other than the state in which the school
is located, the school would not be able to recruit students 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 certain 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 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.
8
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. As of December 31, 2008, fifteen of our campuses are accredited by the Accrediting Commission of Career Schools and
Colleges of Technology or ACCSCT, nineteen of our campuses are accredited by the Accrediting Council for Independent Colleges and
Schools or ACICS and one of our campuses is accredited by the New England Association of Schools and Colleges or NEASC. All of
these accrediting commissions are recognized by the DOE. The following is a list of the dates on which each campus was accredited by its
accrediting commission and the date by which its accreditation must be renewed.
Accrediting Commission of Career Schools and Colleges 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, NY*
Last Accreditation Letter
December 4, 2008
June 4, 2004
December 9, 2004
March 11, 2005
September 8, 2006
March 13, 2007
May 29, 2007
January 1, 2007
May 1, 2007
December 5, 2008
January 1, 2008
September 3, 2005
November 22, 2006
July 1, 2007
June 30, 2008
Next Accreditation
May 1, 2013
February 1, 2009***
August 1, 2009
November 1, 2009
February 1, 2011
February 1, 2012
August 1, 2011
January 1, 2012
May 1, 2012
November 1, 2012
January 1, 2013
September 1, 2008***
November 1, 2011
July 1, 2012
June 30, 2012
*
**
***
Branch campus of main campus in Union, NJ
Branch campus of main campus in New Britain, CT
Currently going through re-accreditation
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Accrediting Council for Independent Colleges and Schools Reaccreditation Dates
School
Brockton, MA****
Lincoln, RI
Lowell, MA**
Somerville, MA
Philadelphia (Center City), PA*
Edison, NJ
Marietta, GA****
Mt. Laurel, NJ*
Paramus, NJ*
Philadelphia (Northeast), PA*
Dayton, OH
Cincinnati (Vine Street), OH***
Cincinnati (Northland Blvd.), OH***
Franklin, OH***
Florence, KY***
West Palm Beach, FL
Summerlin, NV****
Green Valley, NV****
Aliante, NV****
Last Accreditation Letter
December 31, 2008
December 31, 2008
December 16, 2008
December 16, 2008
April 23, 2007
April 23, 2007
December 31, 2008
April 23, 2007
April 23, 2007
April 23, 2007
April 14, 2006
April 14, 2006
April 14, 2006
April 14, 2006
April 14, 2006
December 11, 2006
December 16, 2008
December 16, 2008
December 16, 2008
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
Next Accreditation
December 31, 2014
December 31, 2014
December 31, 2014
December 31, 2014
December 31, 2012
December 31, 2012
December 31, 2014
December 31, 2012
December 31, 2012
December 31, 2012
December 31, 2009
December 31, 2009
December 31, 2009
December 31, 2009
December 31, 2009
December 31, 2014
December 31, 2014
December 31, 2014
December 31, 2014
New England Association of Schools and Colleges of Technology and Reaccreditation Dates
School
Briarwood College
Last Accreditation Letter
November 31, 2006
Next Accreditation
November 31, 2011
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. 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 and new branch campus or
learning site.
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, 2008, we derived approximately 62% of our Title IV revenues (calculated based on cash receipts) from the
Federal Family Education Loan program.
10
Pell. Under the Pell program, the DOE makes grants to students who demonstrate the greatest financial need. For the year ended
December 31, 2008, we derived approximately 19% of our revenues (calculated based on cash receipts) from the Pell program.
Federal Supplemental Educational Opportunity Grant. Under the Federal Supplemental Educational Opportunity Grant program, the
DOE issues grants which 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, 2008, 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 funded 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, 2008, 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 programs administered 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. Many 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 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.
Effective February 2008, Sallie Mae, Inc. (“SLM”) terminated its tiered discount loan agreement with us pursuant to which SLM provided
private party loans to our students. As a result, we continue to search for alternative sub-prime loan providers but in the meantime we have
decided to make financing available to students through our internal funding sources.
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 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 in the
state in which it is physically located, 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 of 1965, as amended, HEA or 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 had the following 16 institutions as of December 31, 2008, collectively consisting of 16 main campuses
and 19 additional locations:
11
Brand
Lincoln Technical Institute
Lincoln College of Technology
Nashville Auto Diesel College
Southwestern College
Main Campus (es)
Union, NJ
Philadelphia, PA
Columbia, MD
Allentown, PA
Edison, NJ
Somerville, MA
Lincoln, RI
New Britain, CT
Indianapolis, IN
Grand Prairie, TX
Melrose Park, IL
Denver, CO
West Palm Beach, FL
Nashville, TN
Dayton, OH
Additional Location (s)
Mahwah, NJ
Queens, NY
Mount Laurel, NJ
Paramus, NJ
Philadelphia, PA (Center City)
Northeast Philadelphia, PA (Northeast)
Lowell, MA
Marietta, GA*
Brockton, MA
Henderson, NV (Green Valley)**
Las Vegas, NV (Summerlin)**
Las Vegas, NV (Aliante)**
Shelton, CT
Cromwell, CT
Hamden, CT
Cincinnati, OH (Vine Street)
Franklin, OH
Cincinnati, OH (Northland Blvd.)
Florence, KY
Briarwood College
Southington, CT
*
**
This campus operates under the Lincoln College of Technology brand.
These campuses operate under the Euphoria Institute of Beauty Arts & Sciences brands.
All of our main campuses, including their additional locations, are currently certified by the DOE to participate in the Title IV Programs.
In connection with our acquisitions of New England Technical Institute, and New England Institute of Technology at Palm Beach, we have
received in each case an executed provisional program participation agreement from the DOE. In connection with our acquisition of
Briarwood College, we have received a temporary provisional program participation agreement from the DOE which remains in effect on
a month-to-month basis until the DOE completes its review and approval process for the change in ownership.
The DOE, accrediting commissions and state education agencies have responsibilities for overseeing compliance 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. On August 14, 2008, the Higher
Education Opportunity Act, Public Law 110-315, reauthorized the Title IV HEA programs through at least September 30, 2014. The HEA
reauthorization among other things revises the 90/10 Rule, as described below, revises the calculation of an institution's cohort default rate,
requires additional disclosures and certifications with respect to non-Title IV alternative loans, prohibits certain activities or relations
between lenders and schools to discourage preferential treatment of lenders based on factors not in students' best interests, and makes other
changes.
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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 College Cost Reduction & Access Act, which
was signed into law in September 2007, cut approximately $22 billion in subsidies to federal student lenders and guarantors as an offset to
increases to federal financial aid. This resulted in significant changes to the terms that alternative lending providers were willing to make
and resulted in the tiered discount programs.
The College Cost Reduction & Access Act reduces payments to lenders and guaranty agencies participating in the Federal Family
Education Loan (FFEL) Program. This, in turn, reduces the profitability of the FFEL Program and will make access to these loans, as well
as, private loans more difficult. The widening sub-prime mortgage crisis has negatively impacted student loans. Lenders are experiencing
difficulty in securing funding from the debt markets to make new student loans, however through the Ensuring Continued Access to
Student Loans Act the Department of Education will provide liquidity support to FFEL lenders by purchasing loans and providing long
term financing for FFEL loans. This program is designed to continue access to these funds for students and their parents.
On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act which further increased the maximum Pell
grant to $4,860 for the July 1, 2009 through June 30, 2010 award year. When these funds are combined with the funding authorized and
appropriated by the College Cost Reduction and Access Act – which increased the maximum award by $490 – the maximum Pell award
will be $5,350 for the July 1, 2009 through June 30, 2010 award year.
The "90/10 Rule." Under the HEA reauthorization, a proprietary institution that derives more than 90% of its total revenue from the
Title IV programs for two consecutive fiscal years becomes immediately ineligible to participate in the Title IV programs and may not
reapply for eligibility until the end of two fiscal years. An institution with revenues exceeding 90% for a single fiscal year ending after
August 14, 2008 will be placed on provisional certification and may be subject to other enforcement measures. Under prior law, an
institution would immediately lose its eligibility to participate in Title IV Programs if it derived more than 90% of its revenue (calculated
based on cash receipts) from those programs in any fiscal year as calculated in accordance with DOE regulation s and would be ineligible
to apply to regain its eligibility until the following fiscal year. If one of our institutions violated the 90/10 Rule and became ineligible to
participate in Title IV Programs but continue 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. Effective July 1, 2008, the annual Stafford
loans available for undergraduate students under the Federal Family Education Loan Program, or FFEL, increased. This loan limit
increase, coupled with recent increases in grants from the Pell program and other Title IV loan limits, will result in some of our schools
experiencing an increase in the revenues they receive from the Title IV programs. The HEA reauthorization provides some relief from this
effect by excluding portions of the loan limit increase from the Title IV component of the 90/10 rule calculation.
We have calculated that, for each of our 2008, 2007 and 2006 fiscal years, none of our institutions derived more than 89.0% of its revenues
from Title IV Programs. For our 2008 fiscal year, our institutions' 90/10 Rule percentages ranged from 69.7% to 89.0% except for
Briarwood which was 45.5%. 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 (as defined by the DOE regulations) 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 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. The
HEA has been amended by the HEOA to calculate the institution’s cohort default rate using a three year period, effective for fiscal 2009
and beyond.
Under the HEA reauthorization, an institution's cohort default rate is redefined to be based on the rate at which its former students default
on their FFEL loans over a period of time that is one year longer than the period of time over which rates currently are calculated. As a
result, most institutions' respective cohort default rates are expected to increase under the new provision, which first would apply to cohort
default rates calculated after October 1, 2011. The DOE will not impose sanctions based on rates calculated under the new provision until
three consecutive years have been calculated under the new method. Until that time, the DOE will continue to calculate rates under the old
method and impose sanctions based on those rates. The HEOA also increases the cohort default three-year threshold from 25% to 30%
effective in fiscal year 2012. On September 15, 2008, the DOE published the cohort default rate for each of our schools which range from
5.6% to 19.3%.
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Federal Family Education Loan Program
As of December 31, 2008, none of our institutions has had a Federal Family Education Loan cohort default rate (as defined by the DOE) of
25% or greater for any of the federal fiscal years 2006, 2005 and 2004, the three most recent years for which the DOE has published such
rates. The following table sets forth the Federal Family Education Loan cohort default rates for each of our 15 DOE institutions as of
December 31, 2008 for those fiscal years:
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
Dayton, OH
New Britain, CT
West Palm Beach, FL
Southington, CT
2006
2005
2004
10.8%
12.3%
15.0%
12.0%
10.1%
11.8%
19.3%
14.5%
11.1%
5.6%
14.9%
12.3%
9.9%
11.2%
9.9%
10.2%
9.9%
7.5%
9.2%
7.5%
11.5%
11.6%
14.6%
6.7%
7.0%
5.2%
12.8%
8.5%
7.6%
4.6%
4.7%
13.9%
7.6%
7.9%
12.8%
8.9%
7.0%
11.9%
19.5%
3.3%
8.4%
3.1%
10.0%
10.6%
3.2%
4.6%
8.2%
9.8%
An institution whose cohort default rate under the FFEL program is 25% or greater for any one of the three most recent federal fiscal years
does not meet the DOE standards of administrative capability may be placed on provisional certification status by the DOE.
Perkins Loan Program
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 LCT and NETI are our only institutions
participating in the Perkins program. Denver LCT’s cohort default rate was 35.7% for students scheduled to begin repayment in the 2007-
2008 federal award year. The DOE did not provide any additional Federal Capital Contribution Funds for Perkins loans to Denver LCT.
Denver LCT 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 NETI had not
transmitted certain data related to the Perkins program to the National Student Loan Data System during periods prior to the acquisition.
Our New Britain, CT institution’s cohort default rate was 14.1% for students scheduled to begin repayment in the 2007-2008 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
14
funds under the cash monitoring or reimbursement method of payment and to provide to the DOE timely information regarding various
oversight and financial events.
If an institution's composite score is below 1.0, the institution is considered by the DOE to lack financial responsibility. If the DOE
determines that an institution does not satisfy the DOE's financial responsibility standards, depending on its composite score and other
factors, that institution may establish its financial responsibility on an alternative basis by, among other things:
• Posting a letter of credit in an amount equal to at least 50% of the total Title IV Program funds received by the institution during
the institution's most recently completed fiscal year;
• Posting a letter of credit in an amount equal to at least 10% of such prior year's Title IV Program funds, accepting provisional
certification, complying with additional DOE monitoring requirements and agreeing to receive Title IV Program funds under an
arrangement other than the DOE's standard advance funding arrangement; and/or
• Complying with additional DOE monitoring requirements and agreeing to receive Title IV Program funds under an arrangement
other than the DOE's standard advance funding arrangement.
The DOE has evaluated the financial responsibility of our institutions on a consolidated basis. We have submitted to the DOE our audited
financial statements for the 2006 and 2007 fiscal year reflecting a composite score of 1.7 and 1.8, respectively, based upon our
calculations, and that our schools meet the DOE standards of financial responsibility. For the 2008 fiscal year, we have calculated our
composite score to be 1.8.
Beginning December 30, 2004 and for a period of three years, all of our institutions were placed on "Heightened Cash Monitoring, Type 1
status." As a result, we were subject to a less favorable Title IV fund payment system that required us to credit student accounts before
drawing down Title IV funds and also required us to timely notify the DOE with respect to certain enumerated oversight and financial
events. The DOE has notified us that, as of December 31, 2007, we are no longer subject to Heightened Cash Monitoring, Type 1 status.
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 45 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.
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.
Our recent acquisition of Briarwood College resulted in a change in ownership of said school requiring it to reapply for eligibility to
participate in the Title IV programs and for approvals from their accrediting and state licensing agencies. Briarwood has received approval
of the change in ownership from its accrediting agency and from its state licensing agency. Briarwood has also received a Temporary
Provisional Program Participation Agreement, or Temporary PPPA, from the DOE, and we believe that we have provided the
documentation necessary for the Temporary PPPA to remain in effect on a month-to-month basis pending completion of the DOE's review.
While it cannot be assured that the respective agencies will issue the required approvals described above, we believe that we will be able to
meet the requirements necessary for obtaining these approvals.
Prior to our acquisition of Briarwood, the American Board of Funeral Service Education (“ABFSE”), the accrediting agency that accredits
Briarwood’s Mortuary Sciences program, placed the program on “show cause”. Briarwood submitted a response on January 12, 2009 and
hosted a follow-up visit from the agency on February 8–10, 2009. ABFSE has informed us that they intend to review Briarwood’s January
response as well as the information obtained from the agency’s February visit at their April 2009 meeting.
Change of Control. In addition to school acquisitions, other types of transactions can also cause a change of control. The 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
15
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 a person acquires ownership and control of the corporation so that the corporation is
required to file a Current Report on Form 8-K with the Securities and Exchange Commission disclosing the 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 although some agencies could determine that the sale or disposition of a smaller interest would result in 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. Some agencies would require approval prior to a sale or disposition that would result in a change of control in order to
maintain 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 the Company’s shares.
Opening Additional Schools and Adding Educational Programs. For-profit educational institutions must be authorized by their state
education agencies and be 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. 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 or new branch campus or learning site. 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 adequate checks and balances in its system of internal controls;
• Divides the function of authorizing and disbursing or delivering Title IV Program Funds so that no office has the responsibility
for both functions;
• Establishes and maintains records required under the Title IV regulations;
• Develops and applies an adequate system to identify and resolve discrepancies in information from sources regarding a student’s
application for financial aid under Title IV;
• 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
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• 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.
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 has 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 LCT and
NETI are our only institutions participating in the Perkins program. Denver LCT 's cohort default rate was 35.7% for students scheduled to
begin repayment in the 2007-2008 federal award year. The DOE did not provide any additional Federal Capital Contribution Funds for
Perkins loans to Denver LCT. Denver LCT continues to make loans out of its existing Perkins loan fund. As was the case prior to our
acquisition NETI, the institution remains 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 NETI had not transmitted certain data related to the Perkins program to the National Student Loan
Data System during periods prior to the acquisition. NETI 's cohort default rate was 14.1% for students scheduled to begin repayment in
the 2007-2008 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. The HEOA provisions also permit
students to demonstrate their ability to benefit and become eligible to receive Title IV funds upon satisfactory completion of six credit
hours or the equivalent coursework. 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 2008, the following schools were authorized to
enroll “ability to benefit” applicants: Southwestern College, New Britain, Cromwell, Shelton, Hamden, Union, Mahwah, Indianapolis,
Melrose Park, Grand Prairie, Somerville, Denver, West Palm Beach, Center City Philadelphia, Northeast Philadelphia, Paramus, Mt.
Laurel, Marietta, Lowell, Edison, Brockton, Allentown, and Summerlin.
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 the "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 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. In connection with our acquisitions of NETI, and New England Institute of Technology at
Palm Beach, we received in each case an executed provisional program participation agreement from the DOE. In connection with our
acquisition of Briarwood College, we received a temporary provisional program participation agreement from the DOE which remains in
effect until the DOE completes its review and approval process for the change in ownership.
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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 as of December 31, 2008:
Institution
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
Southington, CT
Expiration Date of Current
Program Participation
Agreement
March 31, 2014
June 30, 2013
September 30, 2013
December 31, 2009
March 31, 2014
March 31, 2014
March 31, 2014
June 30, 2011
June 30, 2011
March 31, 2009**
March 31, 2009**
March 31, 2009**
March 31, 2014
March 31, 2009*
June 30, 2010*
January 31, 2009***
* Provisionally certified
**Currently going through re-certification
*** Temporary provisional certification extended on a month-to-month basis pending completion of DOE change in ownership review and
approval process
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 Southwestern College (“SWC”) and issued an initial program review report, dated February 6,
2008, in which it identified potential instances of noncompliance with certain DOE requirements. SWC responded to the DOE initial
program review report on April 3, 2008. In a letter, dated May 29, 2008, the DOE issued a Final Program Review Determination and
SWC refunded $0.2 million to the DOE.
In a letter received from the ACCSCT, dated July 7, 2008, we were informed of a “show cause” regarding our Lincoln Technical Institute
institution in Philadelphia, Pennsylvania. An institution under “show cause” is required to satisfy its accrediting agency within a
prescribed period, typically 18 months, that it has satisfactorily resolved the deficiency. We responded to ACCSCT’s “show cause”
request in September 2008. In a letter dated December 5, 2008, ACCSCT informed us that the “show cause” order was vacated.
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. An
institution that is operating under this "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;
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• 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;
• 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. If eligibility is lost, the institution may be required to post irrevocable letters of
credit, for an amount determined by the DOE at a minimum of 50% of the Title IV Program funds received by the institution during its
most recently completed fiscal year. The institution may also be required to post irrevocable letters of credit at a minimum of 10% of such
funds and be provisionally certified and subject to other reporting and monitoring requirements.
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 2008, six lenders provided funding to more than 90% of the students at the schools we owned
during that year: Sallie Mae Education Trust, AMS Trust, Regions Bank, PNC Bank, Student Funding Group, and Nelnet. While we
believe that other lenders might 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.
Subsequent Event. On January 20, 2009, we completed the acquisition of four of the five institutions comprising Baran Institute of
Technology, or Baran, for approximately $24.9 million in cash, net of cash acquired, subject to contractual post closing adjustments.
Baran consists of five distinct institutions serving approximately 1,900 students and offers associate and diploma programs in the fields of
automotive, skilled trades, health sciences and culinary arts. The four institutions we acquired on January 20, 2009 are Baran Institute of
Technology, or BIT, Connecticut Culinary Institute, or CCI, Americare School of Nursing, or ASN, and Engine City Technical Institute, or
ECTI. We also acquired the membership interests of Hartford Urban Ventures, LLC and certain assets and assumed certain liabilities of
Educational Properties, LLC, which provide support services to Baran. We expect to acquire the fifth Baran institution, Clemens College,
for an additional $3.0 million in the second quarter of 2009.
Our recent acquisition of the four Baran schools resulted in a change in ownership of such schools requiring each of those schools and their
campuses to reapply for eligibility to participate in the Title IV programs and for approvals from their accrediting and state licensing
agencies. Each of the four Baran schools has received a Temporary Provisional PPA allowing each to resume its participation in the
Title IV programs and we have provided the documentation necessary for each Temporary Provisional PPA to remain in effect on a
month-to-month basis pending completion of the DOE's review and decision to issue a Provisional Program Participation Agreement.
Each of BIT, CCI and ECTI have received Part 1 approval of the change in ownership from their accrediting agency, the Accrediting
Commission of Career Schools and Colleges of Technology, or ACCSCT, and have applied for Part 2 approval under a process that takes
place after the change in ownership under applicable standards. Both BIT and CCI have received approval of the change in ownership
from the State of Connecticut Board of Governors for Higher Education. ECTI has applied for approval of its change in ownership from
the New Jersey Department of Labor and Workforce Development under a process that takes place after the change in ownership. ASN has
received a provisional license from the Commission for Independent Education of the Florida Department of Education and is awaiting
final approval of the change in ownership from that agency at its March 2009 meeting. ASN has applied for approval of the change in
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ownership with its accrediting agency, the Accrediting Bureau of Health Education Schools, or ABHES, under a process that also takes
place after the change in ownership under applicable standards.
While we cannot assure you that the respective agencies will issue the required approvals described above, we believe that we will be able
to meet the requirements necessary for obtaining these approvals.
Prior to our acquisition of the four Baran schools, the DOE notified those schools that they did not meet DOE financial responsibility
standards and, as a result, must submit letters of credit to the DOE in the amount of $2.0 million and be placed on heightened cash
monitoring 1 status. The required letters of credit have been submitted to the DOE and have an expiration date of December 31, 2009.
Prior to our acquisition of the ASN school, ABHES directed the school to show cause why its accreditation should not be withdrawn based
upon a visit to the school's branch campus in St. Petersburg, Florida. The school is required to submit a response to ABHES by April 1,
2009 and will have a subsequent opportunity to appear before an ABHES panel. Subsequent to our acquisition of the school, we have
engaged in a process to respond to the show cause order and to work closely with ABHES to resolve any potential issues.
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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 believe
are not material may also adversely affect our business, financial condition, operating results, cash flows and prospects.
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 2008, we
derived approximately 79% of our revenues, calculated based on cash receipts, from Title IV Programs. To participate in Title IV
Programs, each of our schools must receive and maintain authorization by the applicable education agencies in the state in which each
school is physically located, be accredited by an accrediting commission recognized by the DOE and be certified as an eligible institution
by the DOE. These regulatory requirements cover the vast majority of our operations, including our educational programs, facilities,
instructional and administrative staff, administrative procedures, marketing, recruiting, student performances and outcomes, financial
operations and financial condition. These regulatory requirements also affect our ability to acquire or open additional schools, add new
educational programs, expand existing educational programs, and change our corporate structure and ownership.
If any of our schools fails to comply with applicable regulatory requirements, the school and its related main campus and/or additional
locations could be subject to 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. An event of default on our credit agreement could result in the acceleration of all amounts then outstanding under our
credit agreement. The various regulatory agencies periodically revise their requirements and modify their interpretations of existing
requirements and restrictions. We cannot predict with certainty how any of these regulatory requirements will be applied or whether each
of our schools will be able to comply with these requirements or any additional requirements instituted in the future.
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. If the composite score for an
institution falls below thresholds established by the DOE, the DOE could 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 student's eligibility for Title IV Program funds before receiving such funds from the
DOE. If an institution has a composite score between 1.0 and 1.4, the institution will be required to operate under "Heightened Cash
Monitoring, Type 1 status." 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.
Based on our calculations, the 2008 and 2007 financial statements reflect a composite score of 1.8 for each year. However, because our
composite scores for 2001 and 2002 were below 1.0 all of our institutions were placed on “Heightened Cash Monitoring, Type 1 status”
from December 30, 2004 through December 30, 2007. If we revert to this status in the future or fail to comply with applicable DOE
requirements, we may lose our eligibility for continued participation in Title IV Programs or may be required to post irrevocable letters of
credit. In addition, 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 credit agreement and could result in an acceleration of the debt under our credit agreement.
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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;
• Has adequate checks and balance in its system of internal controls;
• Divides the function of authorizing and disbursing or delivering Title IV Program Funds so that no office has the responsibility
for both functions;
• Establishes and maintains records required under the Title IV regulations;
• Develops and applies an adequate system to identify and resolve discrepancies in information from sources regarding a student’s
application for financial aid under Title IV;
• 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 79% of our revenues (calculated based on cash receipts) from Title IV Programs in
2008.
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 directly or
indirectly on success in enrolling students or securing financial aid to any person involved in any student recruiting or admission activities
or in making decisions regarding the awarding of Title IV Program funds. The 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 we were involved in conflicts of interest with student loan lenders, we could be subject to penalties and otherwise suffer adverse
impacts on our business.
In 2007, the New York Attorney General, several other attorneys-general, the United States Senate and House of Representatives
Education Committees, and the DOE all launched investigations of potential conflicts of interest between university officials and various
private lending organizations that provide student loans. Several universities and lending organizations have agreed to pay fines to settle
claims in this regard. In addition, several financial aid officials at other universities have been suspended or placed on leaves of absence.
While no allegations have been raised concerning our institutions, we received general requests for information from the offices of two
state attorneys-general. We have no reason to believe that any of our employees have engaged in improper conduct in this regard. If any
such impropriety were found, we could be subject to penalties and other adverse consequences.
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
22
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.
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.
Under the HEA reauthorization, a proprietary institution that derives more than 90% of its total revenue from the Title IV programs for two
consecutive fiscal years becomes immediately ineligible to participate in the Title IV programs and may not reapply for eligibility until the
end of two fiscal years. An institution with revenues exceeding 90% for a single fiscal year ending after August 14, 2008, will be placed
on provisional certification and may be subject to other enforcement measures. Under prior law, an institution 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 and would be 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 2008,
and our institution with the highest percentage received approximately 89.0% of its revenues, from Title IV Programs. 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. 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 45 days of the date the institution determines that the student has withdrawn. If the unearned funds are not
properly calculated and timely returned, we may have to post a letter of credit in favor of the DOE or may be otherwise sanctioned by the
DOE, which could increase our cost of regulatory compliance and adversely affect our results of operations.
If regulators do not approve our acquisition of a school that participates in Title IV Programs, the acquired school would no
longer be permitted to participate in Title IV Programs, which could impair our ability to operate the acquired school as planned
or to realize the anticipated benefits from the acquisition of that school.
If we acquire a school that participates in Title IV Programs, we must obtain approval from the DOE and applicable state education
agencies and accrediting commissions in order for the school to be able to continue operating and participating in Title IV Programs. An
acquisition can result in the temporary suspension of the acquired school's participation in Title IV Programs unless we submit to the DOE
a timely and materially complete application for recertification and the DOE issues a temporary provisional program participation
agreement. If we 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.
In connection with our acquisitions of New England Technical Institute and, New England Institute of Technology at Palm Beach, we
received in each case an executed provisional program participation agreement from the DOE. In connection with our acquisition of
Briarwood College, we have received a temporary provisional program participation agreement from the DOE which remains in effect
until the DOE completes its review and approval process for the change in ownership.
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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 maintain required state licensure and accreditation and 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 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 shares of our common stock and
could have an adverse effect on the market price of shares of our common stock.
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 HEA Programs and annually determines the
funding level for each Title IV Program. On August 14, 2008, the Higher Education Opportunity Act, Public Law 110-315 was enacted.
The HEA reauthorized the Title IV programs through at least September 30, 2014. Any action by Congress that significantly reduces
funding for Title IV Programs or the ability of our schools or students to receive funding through those programs could result in increased
administrative costs and decreased profit margin.
In addition, 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.
In February 2009, President Obama released a budget blueprint for federal fiscal year 2010 that proposes that all new loans be originated
through the Federal Direct Loan Program rather than the FFEL Program. The Proposal has not been passed by Congress and is subject to
further amendment. If this proposal were adopted, it could result in our institutions being required to certify loans through the Federal
Direct Loan Program rather than through the Federal Family Education Loan Program. Our schools currently participate in the Federal
Direct Loan Programs.
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. Prior to our acquisition of
Briarwood, the American Board of Funeral Service Education (“ABFSE”), the accrediting agency that accredits Briarwood’s Mortuary
Sciences program, placed the program on “show cause”. Briarwood submitted a response on January 12, 2009 and hosted a follow-up visit
from the agency on February 8–10, 2009. ABFSE has informed us that they intend to review Briarwood’s January response as well as the
information obtained from the agency’s February visit at their April 2009 meeting.
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
24
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 materially adversely affect our business,
financial condition, results of operations and could cause the market value of our common stock to decline.
Since 1999, we have acquired a number of schools and we intend to continue to grow our business through acquisitions and internal
expansion of our programs. The anticipated benefits of an acquisition may not be achieved unless we successfully integrate the acquired
school or schools into our operations and are able to effectively manage, market and apply our business strategy to any acquired schools.
Integration challenges include, among others, regulatory approvals, significant capital expenditures, assumption of known and unknown
liabilities and our ability to control costs. The successful integration of future acquisitions may also require substantial attention from our
senior management and the senior management of the acquired schools, which could decrease the time that they devote to the day-to-day
management of our business. The difficulties of integration may initially be increased by the necessity of integrating personnel with
disparate business backgrounds and corporate cultures. Management's focus on the integration of acquired schools and on the application
of our business strategy to those schools could interrupt or cause loss of momentum in our other ongoing activities. Our inability to
properly manage or support the growth may have a material adverse effect on our business, financial condition, and results of operations
and could cause the market value of our common stock to decline.
Failure on our part to establish and operate additional schools or campuses or effectively identify suitable expansion opportunities
could reduce our ability to implement our growth strategy.
As part of our business strategy, we anticipate opening and operating new schools or campuses. Establishing new schools or campuses
poses unique challenges and requires us to make investments in management and capital expenditures, incur marketing expenses and
devote financial and other resources that are different, and in some cases greater than those required with respect to the operation of
acquired schools.
To open a new school or campus, we would be required to obtain appropriate state and accrediting commission approvals, which may be
conditioned or delayed in a manner that could significantly affect our growth plans. In addition, to be eligible for federal Title IV Program
funding, a new school or campus would have to be certified by the DOE and would require federal authorization and approvals. In the case
of entirely separate, freestanding U.S. schools, a minimum of two years' operating history is required to be eligible for Title IV Program
funding. We cannot be sure that we will be able to identify suitable expansion opportunities 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 hospitality services. Accordingly, educational programs at our schools must keep pace with
those technological advancements. The expansion of our existing programs and the development of new programs may not be accepted by
our students, prospective employers or the technical education market. Even if we are able to develop acceptable new programs, we may
not be able to introduce these new programs as quickly as our competitors or as quickly as employers demand. If we are unable to
adequately respond to changes in market requirements due to financial constraints, unusually rapid technological changes or other factors,
our ability to attract and retain students could be impaired, our placement rates could suffer and our revenues could be adversely affected.
In addition, if we are unable to adequately anticipate the requirements of the employers we serve, we may offer programs that do not teach
skills useful to prospective employers or students seeking a technical or career-oriented education which could affect our placement rates
and our ability to attract and retain students, causing our revenues to be adversely affected.
Risks specific to our schools’ online campuses could have a material adverse effect on our business.
Our schools’ online campuses intend to increase student enrollment, 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
25
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.
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, or provide greater financing alternatives to their students, all of which could affect the
success of our marketing programs. In addition, some of our competitors have a larger network of schools and campuses than we do,
enabling them to recruit students more effectively from a wider geographic area. If we are unable to compete effectively with these
institutions for students, our student enrollment and revenues will be adversely affected.
We may be required to reduce tuition or increase spending in response to competition in order to retain or attract students or pursue new
market opportunities. As a result, our market share, revenues and operating margin may be decreased. We cannot be sure that we will be
able to compete successfully against current or future competitors or that the competitive pressures we face will not adversely affect our
revenues and profitability.
We may experience business interruptions resulting from natural disasters, inclement weather, transit disruptions, or other events
in one or more of the geographic areas in which we operate.
We may experience business interruptions resulting from natural disasters, inclement weather, transit disruptions, or other events in one or
more of the geographic areas in which we operate. These events could cause us to close schools — temporarily or permanently — and
26
could affect student recruiting opportunities in those locations, causing enrollment and revenues to decline.
Our financial performance depends in part on our ability to continue to develop awareness and acceptance of our programs
among high school graduates and working adults looking to return to school.
The awareness of our programs among high school graduates and working adults looking to return to school is critical to the continued
acceptance and growth of our programs. Our inability to continue to develop awareness of our programs could reduce our enrollments and
impair our ability to increase our revenues or maintain profitability. The following are some of the factors that could prevent us from
successfully marketing our programs:
• Student dissatisfaction with our programs and services;
• Diminished access to high school student populations;
• Our failure to maintain or expand our brand or other factors related to our marketing or advertising practices; and
• Our inability to maintain relationships with automotive, diesel, healthcare, skilled trades and IT, and hospitality services
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. As a result of SLM’s tiered discount loan program termination, effective February 18,
2008, our internal gap financing between Title IV and tuition has increased. Although we have reserved for estimated losses related to
unpaid student balances, losses in excess of the amounts we have reserved for bad debts will result in a reduction in our profitability.
An increase in interest rates could adversely affect our ability to attract and retain students.
Interest rates have reached historical lows in recent years, creating a favorable borrowing environment for our students. Much of the
financing our students receive is tied to floating interest rates. Increases in interest rates result in a corresponding increase in the cost to our
existing and prospective students of financing their education which could result in a reduction in the number of students attending our
schools and could adversely affect our results of operations and revenues. Higher interest rates could also contribute to higher default rates
with respect to our students' repayment of their education loans. Higher default rates may in turn adversely impact our eligibility for
Title IV Program participation or the willingness of private lenders to make private loan programs available to students who attend our
schools, which could result in a reduction in our student population.
Seasonal and other fluctuations in our results of operations could adversely affect the trading price of our common stock.
Our results of operations fluctuate as a result of seasonal variations in our business, principally due to changes in total student population.
Student population varies as a result of new student enrollment, graduations and student attrition. Historically, our schools have had lower
student populations in our first and second quarters and we have experienced large class starts in the third and fourth quarters and student
attrition in the first half of the year. Our second half growth is largely dependent on a successful recruiting season. Our expenses, however,
do not vary significantly over the course of the year with changes in our student population and net revenues. We expect quarterly
fluctuations in results of operations to continue as a result of seasonal enrollment patterns. Such patterns may change, however, as a result
of acquisitions, new school openings, new program introductions and increased enrollments of adult students. These fluctuations may
result in volatility or have an adverse effect on the market price of our common stock.
Our total assets include substantial intangible assets. 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, 2008, goodwill and identified intangibles, net, represented
approximately 35.9% 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 goodwill or unamortized identified intangible assets would
negatively affect our results of operations and total capitalization, which could be material. Our annual impairment analysis, performed as
of December 31, 2008, did not result in an impairment charge.
27
We cannot predict our future capital needs, and if we are unable to secure additional financing when needed, our operations and
revenues would be adversely affected.
We may need to raise additional capital in the future to fund acquisitions, working capital requirements, expand our markets and program
offerings or respond to competitive pressures or perceived opportunities. We cannot be sure that additional financing will be available to us
on favorable terms, or at all particularly during times of uncertainty in the financial markets similar to that which is currently being
experienced. If adequate funds are not available when required or on acceptable terms, we may be forced to forego attractive acquisition
opportunities, cease our operations and, even if we are able to continue our operations, our ability to increase student enrollment and
revenues would be adversely affected.
Our schools' failure to comply with environmental laws and regulations governing our activities could result in financial penalties
and other costs which could adversely impact our results of operations.
We use hazardous materials at some of our schools and generate small quantities of waste, such as used oil, antifreeze, paint and car
batteries. As a result, our schools are subject to a variety of environmental laws and regulations governing, among other things, the use,
storage and disposal of solid and hazardous substances and waste, and the clean-up of contamination at our facilities or off-site locations to
which we send or have sent waste for disposal. In the event we do not maintain compliance with any of these laws and regulations, or are
responsible for a spill or release of hazardous materials, we could incur significant costs for clean-up, damages, and fines or penalties
which could adversely impact our results of operations.
Approximately 25% 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, 2008, we operated 36 campuses in 17 states. Nine 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.
A substantial decrease in student financing options, or a significant increase in financing costs for our students, could have a
material adverse affect on our student population, revenues and financial results.
The consumer credit markets in the United States have recently suffered from increases in default rates and foreclosures on mortgages.
Adverse market conditions for consumer and federally guaranteed student loans could result in providers of alternative loans reducing the
attractiveness and/or decreasing the availability of alternative loans to post-secondary students, including students with low credit scores
who would not otherwise be eligible for credit-based alternative loans. Prospective students may find that these increased financing costs
make borrowing prohibitively expensive and abandon or delay enrollment in post-secondary education programs. Private lenders could
also require that we pay them new or increased fees in order to provide alternative loans to prospective students. If any of these scenarios
were to occur, our students’ ability to finance their education could be adversely affected and our student population could decrease, which
could have a material adverse effect on our financial condition, results of operations and cash flows.
In 2008, six lenders provided funding to more than 90% of the students at the schools we owned. 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. While we believe that other lenders may be willing to make federally guaranteed student loans to our students if loans were
no longer available from our current lenders, and that other guaranty agencies would be willing to guarantee loans to our students if any of
the current guarantee agencies ceased guaranteeing those loans or reduced the volume of loans they guarantee, we cannot assure you that
we would be successful in locating alternative lenders or guarantors. If such alternative lenders or guarantors were not forthcoming, our
enrollment and our results of operations could be materially and adversely affected.
In February 2008, Sallie Mae terminated its tiered discount loan program with us. Students who obtained funding through Sallie Mae
programs continue to have access to funding either through alternative lenders or through our own internal financing. However, if we
opted to no longer provide financing to our students and/or were unable to obtain other alternative loan providers, our student population
could decrease, which could have a material adverse effect on our financial condition, results of operations and cash flows.
In addition, any actions by the U.S. Congress that significantly reduce funding for Title IV Programs or the ability of our students to
participate in these programs, or establish different or more stringent requirements for our schools to participate in Title IV Programs,
could have a material adverse effect on our student population, results of operations and cash flows.
28
Anti-takeover provisions in our amended and restated certificate of incorporation, our amended and restated bylaws and New
Jersey law could discourage a change of control that our stockholders may favor, which could negatively affect our stock price.
Provisions in our amended and restated certificate of incorporation and our amended and restated bylaws and applicable provisions of the
New Jersey Business Corporation Act may make it more difficult and expensive for a third party to acquire control of us even if a change
of control would be beneficial to the interests of our stockholders. These provisions could discourage potential takeover attempts and could
adversely affect the market price of our common stock. For example, applicable provisions of the New Jersey Business Corporation Act
may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination with an interested
stockholder for a period of five years after the person becomes an interested stockholder. Furthermore, our amended and restated certificate
of incorporation and amended and restated bylaws:
• Authorize the issuance of blank check preferred stock that could be issued by our board of directors to thwart a takeover attempt;
• Prohibit cumulative voting in the election of directors, which would otherwise allow holders of less than a majority of stock to
elect some directors;
• Require super-majority voting to effect amendments to certain provisions of our amended and restated certificate of
incorporation;
• Limit who may call special meetings of both the board of directors and stockholders;
• Prohibit stockholder action by non-unanimous written consent and otherwise require all stockholder actions to be taken at a
meeting of the stockholders;
• Establish advance notice requirements for nominating candidates for election to the board of directors or for proposing matters
that can be acted upon by stockholders at stockholders' meetings; and
• Require that vacancies on the board of directors, including newly created directorships, be filled only by a majority vote of
directors then in office.
We can issue shares of preferred stock without shareholder approval, which could adversely affect the rights of common
stockholders.
Our amended and restated certificate of incorporation permits us to establish the rights, privileges, preferences and restrictions, including
voting rights, of future series of our preferred stock and to issue such stock without approval from our stockholders. The rights of holders
of our common stock may suffer as a result of the rights granted to holders of preferred stock that may be issued in the future. In addition,
we could issue preferred stock to prevent a change in control of our company, depriving common stockholders of an opportunity to sell
their stock at a price in excess of the prevailing market price.
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 58% 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
market 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 selling its shares of our outstanding common stock, in one or more transactions, over the next 12
to 24 months. 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.
29
ITEM 2.
PROPERTIES
As of December 31, 2008, we leased 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) were also accounted for by us under a finance
lease obligation. We continue to re-evaluate our facilities to maximize our facility utilization and efficiency and to allow us to introduce
new programs and attract more students. As of December 31, 2008, all of our existing leases expire between June 2009 and August 2023.
The following table provides information relating to our facilities as of December 31, 2008, including our corporate office:
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
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
Toledo, Ohio
Las Vegas, Nevada
Henderson, Nevada
North Las Vegas, Nevada
Southington, Connecticut
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 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
Southwestern College
Euphoria Institute
Euphoria Institute
Euphoria Institute
Briarwood College
Corporate Office
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
27,000
22,000
59,000
20,000
33,000
35,000
12,000
14,000
42,000
189,000
77,000
78,000
7,000
30,000
27,000
117,000
278,000
15,000
14,000
14,000
35,000
11,000
16,000
13,000
20,000
12,000
113,000
47,000
*Operations at this campus has ceased as of September 30, 2007.
We believe that our facilities are suitable for their present intended purposes.
30
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
2008.
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, 2008:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year Ended December 31, 2007:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Price Range of Common Stock
High
Low
$
$
$
$
14.55
12.55
15.64
14.46
$
$
$
$
11.62
10.79
11.23
10.75
Price Range of Common Stock
High
Low
$
$
$
$
14.21
15.79
15.60
15.43
$
$
$
$
11.58
13.64
12.56
13.10
On March 11, 2009, the last reported sale price of our common stock on the Nasdaq Global Market was $16.79 per share. As of March 11,
2009, based on the information provided by Continental Stock Transfer & Trust Company, there were approximately 18 stockholders of
record of our common stock.
Dividend Policy
We have never declared or paid dividends on our common stock and we do not anticipate declaring or paying dividends on our common
stock in the foreseeable future. Instead, we currently anticipate that we will retain all of our future earnings, if any, to fund the operation
and expansion of our business and to use as working capital and for other general corporate purposes. Our board of directors will
determine whether to pay cash dividends in the future based on conditions then existing and the financial responsibility standards
prescribed by the DOE, as well as any economic and other conditions that our board of directors may deem relevant. In addition, our
ability to declare and pay dividends is subject to certain restrictions under our existing credit agreement.
31
Issuer Purchases of Equity Securities
On April 1, 2008, our Board of Directors approved the repurchase of up to 1,000,000 shares of our common stock over the period of one
year. The following table outlines repurchases of our common stock during the quarter ended December 31, 2008:
Period
Total Number
of Shares
Purchased
Average
Price Paid
per Share
Total Number of
Maximum Number of Shares
Shares Purchased
That May Yet Be Purchased
October 1, 2008 -- October 31, 2008
November 1, 2008 -- November 30, 2008
December 1, 2008 -- December 31, 2008
Total
--
15,000
--
15,000
--
$13.90
--
$13.90
--
15,000
--
15,000
400,000
385,000
385,000
385,000
32
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, 2008 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.
S to c k P e rfo rm a n c e G ra p h
(6/23/05 - 12/ 31/08)
$180
$160
$140
$120
$100
$80
$60
$40
6/2 3/2 00 5
6 /2 3 /2 0 06
6 /2 3 /2 0 07
6 /23 /20 0 8
12 /31 /20 0 8
LIN C
P eer G roup
S & P 500
R us s ell 2000
Companies in the Peer Group include Apollo Group, Inc., Corinthian Colleges, Inc., Career Education Corp., DeVry, Inc., ITT Educational
Services, Inc., Strayer Education, Inc. and Universal Technical Institute, Inc.
33
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, 2008 is as follows:
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans (excluding
securities reflected
in column
603,336
-
603,336
Weighted-
average
exercise price
of
outstanding
options,
warrants and
rights
$
9.98
-
9.98
$
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
Number of
Securities to be
issued upon
exercise of
outstanding
options,
warrants and
rights
1,474,215
-
1,474,215
34
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 income data for each of the years in the three-year period ended December 31, 2008 and historical consolidated
balance sheet data at December 31, 2008 and 2007 have been derived from our audited consolidated financial statements which are
included elsewhere in this Form 10-K. The selected historical consolidated statements of income data for the fiscal years ended
December 31, 2005 and 2004 and historical consolidated balance sheet data as of December 31, 2006, 2005 and 2004 have been derived
from our audited consolidated financial information not included in this Form 10-K. Our historical results are not necessarily indicative of
our future results.
Statement of Income Data, Year Ended December 31:
Revenues
Cost and expenses:
Educational services and facilities
Selling, general and administrative (1)
(Gain) loss on sale of assets
Total costs and expenses
Operating income
Other:
Interest income
Interest expense (2)
Other (loss) income
Income from continuing operations before income taxes
Provision for income taxes
Income from continuing operations
Loss from discontinued operations, net of income taxes
Net income
Basic
Earnings per share from continuing operations
Loss per share from discontinued operations
Net income per share
Diluted
Earnings per share from continuing operations
Loss per share from discontinued operations
Net income per share
Weighted average number of common shares outstanding:
Basic
Diluted
Other Data:
Capital expenditures
Depreciation and amortization from continuing operations
Number of campuses
Average student population
Balance Sheet Data, At December 31:
Cash and cash equivalents
Working (deficit) capital (3)
Total assets
Total debt (4)
Total stockholders' equity
2008
2007
2005
2006
(In thousands, except per share amounts)
2004
$
376,907
$
327,774
$
310,630
$
287,368
$
248,508
153,530
187,722
80
341,332
35,575
139,500
162,396
(15)
301,881
25,893
129,311
151,136
(435)
280,012
30,618
114,161
138,125
(7)
252,279
35,089
97,439
124,034
368
221,841
26,667
113
(2,152)
-
33,536
13,341
20,195
-
20,195
$
180
(2,341)
27
23,759
9,932
13,827
(5,487)
8,340
$
981
(2,291)
(132)
29,176
12,092
17,084
(1,532)
15,552
$
775
(2,892)
243
33,215
12,931
20,284
(1,575)
18,709
$
104
(3,002)
42
23,811
9,904
13,907
(929)
12,978
$
$
$
$
$
$
$
$
$
$
$
0.80
-
0.80
0.78
-
0.78
0.54
(0.21)
0.33
0.53
(0.21)
0.32
0.67
(0.06)
0.61
0.65
(0.05)
0.60
0.86
(0.06)
0.80
0.83
(0.07)
0.76
0.64
(0.04)
0.60
0.60
(0.04)
0.56
$
$
$
$
$
$
$
$
$
$
25,308
25,984
25,479
26,090
25,336
26,086
23,475
24,503
21,676
23,095
$
20,166
17,920
36
20,006
$
24,766
15,111
34
17,687
$
19,341
13,829
34
17,397
$
22,621
12,099
31
17,064
$
23,813
9,870
25
15,401
$
15,234
(19,840)
268,042
10,174
174,949
$
3,502
(17,952)
246,183
15,378
162,467
$
6,461
(20,943)
226,216
9,860
151,783
$
50,257
8,531
214,792
10,768
135,990
$
41,445
4,570
162,729
46,829
58,086
35
Selling, general and administrative expenses include (a) a $2.1 million charge for the year ended December 31, 2004 to give
(1)
effect to the one-time write-off of deferred offering costs, (b) compensation costs of approximately $2.2 million, $1.8 million, $1.4 million,
$1.3 million and $1.8 million for the years ended December 31, 2008, 2007, 2006, 2005 and 2004, respectively, related to 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, (e) $0.9 million of re-branding cost for the year ended December 31, 2006, and (f) $0.9 million of acquisition costs incurred
during the year ended December 31, 2008 in connection with the acquisition of Baran which was completed on January 20, 2009 and
expensed in accordance with the transition guidance for SFASB No. 141R.
(2)
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-off of
(3)
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 $9.7 million
(4)
for each of the years in the five-year period ended December 31, 2008 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.
36
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 hospitality services. Each area of study is specifically designed to appeal to and meet the educational
objectives of our student population, while also satisfying the criteria established by industry and employers. The resulting diversification
limits dependence on any one industry for enrollment growth or placement opportunities and broadens potential branches for introducing
new programs. As of December 31, 2008, we enrolled 21,667 students at our 36 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.
From 1999 through December 31, 2008, we increased our geographic footprint and added 18 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, New England Institute of Technology at Palm
Beach, Inc. in May 2006 (two schools) and Briarwood College in December 2008 (one school). 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. In
connection with each of our acquisitions of New England Technical Institute, New England Institute of Technology at Palm Beach and
Briarwood College, we received an executed provisional program participation agreement in connection with the acquisition, from the
DOE.
Our revenues consist primarily of student tuition and fees derived from the programs we offer. Our revenues are reduced by our
scholarships granted to our students. We recognize revenues from tuition and one-time fees, such as application fees, ratably over the
length of a program, including internships or externships that take place prior to graduation. We also earn revenues from our bookstores,
dormitories, cafeterias and contract training services. These non-tuition revenues are recognized upon delivery of goods or as services are
performed and represent less than 10% of our revenues.
Tuition varies by school and by program and on average we increase tuition once a year by 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 revenue growth as a result of strategic acquisitions coupled with organic growth. We have enjoyed organic
growth every year except for 2006. Our revenues increased 15.0% in 2008 and 5.5% in 2007, over the prior years as we grew from 34
campuses at December 31, 2007 to 36 campuses at December 31, 2008. Our average student population increased from 17,687 for the year
ended December 31, 2007 to 20,006 for the year ended December 31, 2008. While we expect to increase our revenues and enrollment in
the foreseeable future as a result of both organic 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, contain a high fixed cost component. Our educational services and
facilities expenses as a percentage of revenues decreased to 40.7% in 2008 from 42.6% in 2007 and 41.6% in 2006, and selling, general
and administrative expenses increased as a percentage of revenue to 49.9% in 2008 from 49.5% in 2007 and 48.7% in 2006. 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 courses in which they are enrolled. 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 102 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
37
marketing and advertising, the availability of financial aid and other sources of funding, the number of recent high school graduates, the
job market and seasonality. Our retention and graduation rates are influenced by the quality and commitment of our teachers and student
services personnel, the effectiveness of our programs, the placement rate and success of our graduates and the availability of financial aid.
Although similar courses have comparable tuition rates, the tuition rates vary among our numerous programs. As more of our schools
receive approval to offer associate degree programs, which are longer than our diploma degree programs, we would expect our average
enrollment and the average length of stay of our students to increase.
The majority of students enrolled at our schools rely on funds received under various government-sponsored student financial aid
programs to pay a substantial portion of their tuition and other education-related expenses. The largest of these programs are Title IV
Programs which represented approximately 79% of our cash receipts relating to revenues in 2008.
We extend credit for tuition and fees to many of our students that are in attendance in our campuses. Our credit risk is mitigated through
the student’s participation in federally funded financial aid programs unless students withdraw prior to the receipt by us of Title IV funds
for those students. Under Title IV programs, the government funds a certain portion of a students’ tuition, with the remainder, referred to
as “the gap,” financed by students themselves under private party loans, including credit extended by us. The gap amount has continued to
increase over the last several years as we have raised tuition on average for the last several years by 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
be as much as $15,000 per year.
We entered into a tiered discount loan program agreement, effective September 1, 2007, with SLM Financial Corporation (“SLM”) to
provide up to $16.0 million of private non-recourse loans to qualifying students. Under this agreement, we were required to pay SLM
either 20% or 30% of all loans disbursed, depending on each student borrower’s credit score. We were billed at the beginning of each
month based on loans disbursed during the prior month. For the year ended December 31, 2008, $0.5 million of loans were disbursed,
resulting in a $0.1 million loss on sale of receivables. Loss on sale of receivables is included in selling, general and administrative
expenses in our financial statements.
In February 2008, SLM terminated its tiered discount loan program with us. It is our understanding that SLM also terminated its tiered
discount loan programs with our peer companies. The College Cost Reduction & Access Act, which was signed into law in September
2007, cut approximately $22 billion in subsidies to federal student lenders and guarantors as an offset to increases in federal financial aid.
This resulted in significant changes to the terms that alternative lending providers including SLM were willing to make and resulted in the
termination of the tiered discount loan programs described above. As a result of the costs associated with these programs and, in
anticipation of additional changes, we concluded that the cost of using the tiered discount loan program was too high and would lead to
significant margin erosion over time and that we would be better served by financing the gap between Title IV and tuition internally, while
also examining other alternative loan sources.
We believe that SLM’s termination of its tiered discount loan program will continue to have a limited impact on our business. Our current
expectations are that students who previously received funding through the program will continue to have access to funding either through
alternative lenders or through our own internal financing.
The additional financing that we are providing to students may expose us to greater credit risk and can impact our liquidity. We believe
that these risks are however somewhat mitigated due to:
• Annual federal Title IV loan limits, including grants have increased. Title IV funds represented 79% of our 2008 revenue on a
cash basis;
• Our internal financing is provided to students only after all other funding resources have been exhausted; thus, by the time this
funding is available, students have completed approximately two-thirds of their curriculum and are more likely to graduate;
• Funding for students who interrupt their education is typically covered by Title IV funds as long as they have been properly
packaged for financial aid; and
• We have an excellent collection history with our graduates. Historically, 90% of all graduates have repaid their balances in full.
For the year ended December 31, 2008, approximately 79% of our revenue on a cash basis was derived from Title IV funds, approximately
13% was derived from state grants and cash payments made by students, and approximately 4% was funded under third-party private loan
programs, which included SLM programs. For the year ended December 31, 2007, approximately 80% of our revenue on a cash basis was
derived from Title IV funds, approximately 13% was derived from state grants and cash payments made by students, and approximately
7% was funded under third-party private loan programs, which include SLM programs. Of the private loan programs funded during 2007,
approximately 4.6% would be considered sub-prime loans. The credit crisis that has impacted the financial markets is expected to have a
limited impact on our ability to continue to finance our credit worthy students. There are a number of lenders that will finance the Title IV
funds or alternatively we may choose to finance Title IV funds directly with the government under the government’s Direct Loan Program.
Additionally, we have several alternative lenders that will provide private party loans to credit worthy students. In addition, commencing
in late 2007, we decided to assist students in financing the gap in student tuition for which students are unable to obtain third-party
financing. As of December 31, 2008, we had outstanding loan commitments to our students of $24.0 million as compared to $15.7 million
at December 31, 2007. Loan commitments, net of interest that would be due on the loans through maturity, were $16.5 million at
38
December 31, 2008 as compared to $10.8 million at December 31, 2007. Assuming that our historical trends continue, we expect that in
2009 our net incremental investment in accounts receivable will not exceed $5.0 million.
As a result of the above, during 2008 our bad debt expense as a percentage of revenues increased to 5.7% from 5.3% and 4.9%,
respectively, in 2007 and 2006.
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 2008, 2007 and 2006 fiscal years our calculations resulted in a composite score of 1.8, 1.8
and 1.7, respectively.
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 enrollment. While we utilize a mix of different advertising
mediums, including television, internet and direct mail, we rely heavily on television and internet 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.
During the third quarter of 2007, we completed the roll-out of our new student management and reporting system to all of our campuses.
We believe that 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. The costs associated with the implementation of this new system are
included in selling, general and administrative expenses and were approximately $0.6 million and $0.4 million, respectively, for the two
years ended December 31, 2007. No additional costs were incurred in 2008.
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 for 2006.
DISCONTINUED OPERATIONS
On July 31, 2007, our Board of Directors approved a plan to cease operations at our Plymouth Meeting, Pennsylvania, Norcross, Georgia
and Henderson, Nevada campuses. As a result, we reviewed the related goodwill and long-lived assets for possible impairment in
accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” and SFAS No. 144, “Accounting for the Impairment or Disposal
of Long-Lived Assets.”
As of September 30, 2007, all operations had ceased at these campuses and, accordingly, the results of operations of these campuses have
been reflected in the accompanying statements of operations as “Discontinued Operations” for all periods presented.
39
The results of operations at these three campuses for each of the two year period ended December 31, 2007 were comprised of the
following (in thousands):
Year Ended December 31,
Revenue
Operating Expenses
Benefit for income taxes
Loss from discontinued operations
ACQUISITIONS
$
$
2007
4,230
(13,760)
(9,530)
(4,043)
(5,487)
2006
10,876
(13,493)
(2,617)
(1,085)
(1,532)
$
$
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 January 20, 2009, we completed the acquisition of four of the five institutions comprising Baran Institute of Technology, or Baran, for
approximately $24.9 million in cash, net of cash acquired, subject to contractual post closing adjustments. Baran consists of five distinct
institutions serving approximately 1,900 students and offers associate and diploma programs in the fields of automotive, skilled trades,
health sciences and culinary arts. The four institutions we acquired on January 20, 2009 are Baran Institute of Technology, or BIT,
Connecticut Culinary Institute, or CCI, Americare School of Nursing, or ASN, and Engine City Technical Institute, or ECTI. We also
acquired the membership interests of Hartford Urban Ventures, LLC and certain assets and assumed certain liabilities of Educational
Properties, LLC, which provide support services to Baran. We expect to acquire the fifth Baran institution, Clemens College, for an
additional $3.0 million in the second quarter of 2009.
On December 1, 2008, we acquired all of the rights, title and interest in the assets of Briarwood College (“BRI”) for approximately $10.5
million, net of cash acquired. Briarwood is regionally accredited by the New England Association of Schools and Colleges, and currently
offers two bachelor’s degree programs to approximately 550 students as of December 31, 2008 from Connecticut and surrounding states.
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.
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.
40
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, 2008, 2007 and 2006 was 5.7%, 5.3% and 4.9%,
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, 2008, 2007 and 2006 would have resulted in an increase in bad debt expense of
$3.8 million, $3.3 million and $3.1 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 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.
As discussed in “Discontinued Operations” above, as a result of a decision to close three of our campuses we conducted a review of our
goodwill as of June 30, 2007. In connection with that review, we recognized a non-cash impairment charge of approximately $2.1 million
as of June 30, 2007. Goodwill represents a significant portion of our total assets. As of December 31, 2008, goodwill was approximately
$91.5 million, or 34.1%, of our total assets. As of December 31, 2008 and 2007, 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.
41
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 2008, 2007, and 2006 were $6.69, $6.78,
and $9.68, 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
2008
57.23%
0%
6 Years
2.76-3.29%
$
11.97
At December 31,
2007
55.42%
0%
6 Years
4.36%
$
11.96
2006
55.10%
0%
6 Years
4.13-4.84%
$
17.00
The expected volatility considers the volatility of certain of our competitors’ common stock that has been traded for a period
commensurate with the expected life. The expected term of options granted represents the period of time that options granted are expected
to be outstanding. The risk-free rate used is based on the published U.S. Treasury yield curve in effect at the time of grant for instruments
with a similar life. The dividend yield is 0% as we have never declared or paid dividends on our common stock and we do not anticipate
declaring or paying dividends on our common stock in the foreseeable future.
Results of Continuing Operations for the Three Years Ended December 31, 2008
The following table sets forth selected consolidated statements of continuing operations data as a percentage of revenues for each of the
periods indicated:
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 from continuing operations before income taxes
Provision for income taxes
Income from continuing operations
Year Ended December 31,
2007
100.0%
2008
100.0%
2006
100.0%
40.7%
49.9%
0.0%
90.6%
9.4%
-0.6%
0.0%
8.8%
3.5%
5.3%
42.6%
49.5%
0.0%
92.1%
7.9%
-0.7%
0.0%
7.2%
3.0%
4.2%
41.6%
48.7%
-0.1%
90.1%
9.9%
-0.5%
0.0%
9.4%
3.9%
5.5%
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
Revenues. Revenues increased by $49.1 million, or 15.0%, to $376.9 million for 2008 from $327.8 million for 2007. Approximately
$1.0 million of this increase was a result of our acquisition of Briarwood College (BRI), on December 1, 2008. Excluding BRI, the
increase in revenues was primarily attributable to a 13.0% increase in average student population, which increased to 19,983 for the year
ended December 31, 2008, from 17,687 for the year ended December 31, 2007. Revenues were also favorably impacted during the year by
tuition increases, which averaged from 3.0% to 3.5%, and increases in book and tool sales and interest income collected on student loans,
which increased by $0.7 million and $0.8 million, respectively, for the year ended December 2008. Average revenue per student
increased 1.5% for the year ended December 31, 2008, from the year ended December 31, 2007, primarily due to tuition increases during
the year, offset by a shift in our student population enrolled in lower tuition programs.
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.
Educational services and facilities expenses. Our educational services and facilities expenses increased by $14.0 million, or 10.1%, to
$153.5 million for the year ended December 31, 2008 from $139.5 million for the year ended December 31, 2007. BRI accounted for $0.5
million or, 0.4%, of this increase. Excluding BRI, the increase in educational services and facilities expenses was primarily due to
instructional expenses, and books and tools expenses, which increased by $6.1 million, or 8.4%, and $3.6 million, or 20.9%, respectively,
42
over the prior year. This increase was attributable to a 12.4% increase in student starts for the year ended December 31, 2008 as compared
to the prior year and the overall increase in student population and higher tool sales during 2008 compared to 2007. We began 2008 with
approximately 1,400 more students than we had on January 1, 2007 and as of December 31, 2008 our population was approximately 3,600
higher than as of December 31, 2007. The remainder of the increase in educational services and facilities expenses was due to facilities
expenses, which increased by $3.8 million for the year ended December 31, 2008 over the prior year. This increase was primarily due to
an increase in depreciation expense of $2.7 million resulting from higher capital expenditures during 2008 and 2007. The remainder of the
increase in facilities expenses was due to higher utilities, rent and repairs and maintenance expenses at our campuses. Capital expenditures
in 2008 included the renovation and conversion of our former auto school in Grand Prairie, Texas to a skilled trades school, as well as the
opening of our new campus, Aliante, in North Las Vegas, Nevada. Educational services and facilities expenses as a percentage of
revenues decreased to 40.7% of revenues for the year ended December 31, 2008 from 42.6% for the year ended December 31, 2007.
Selling, general and administrative expenses. Our selling, general and administrative expenses for the year ended December 31, 2008
were $187.7 million, an increase of $25.3 million, or 15.6%, from $162.4 million for the year ended December 31, 2007. Approximately
$0.3 million, or 1.2%, of this increase was attributable to BRI. Excluding BRI, the increase in our selling, general and administrative
expenses for the year ended December 31, 2008 was primarily due to a $1.9 million, or 13.4%, increase in student services, a $4.8 million,
or 7.4%, increase in sales and marketing and an $18.3 million, or 22.0%, increase in administrative expenses as compared to the prior year.
The increase in student services was primarily due to increases in compensation and benefit expenses attributed to additional financial aid
and career services personnel as a result of a larger student population during the year ended December 31, 2008 as compared to the prior
year. In addition, we expanded a pilot program, which we began in 2007, to centralize the back office administration of our financial aid
department in an effort to improve the effectiveness of our financial aid processing. This resulted in the hiring of additional financial aid
representatives during 2008.
The increase in sales and marketing expense was due to (a) annual compensation increases to sales representatives; (b) the hiring of
additional sales representatives; and (c) increased call center support for the year ended December 31, 2008 as compared to the prior year.
In addition, we increased our marketing investments in an effort to continue to grow our student population.
The increase in administrative expenses was primarily due to (a) a $9.8 million increase in compensation and benefits, resulting from
annual compensation increases, including increases in employee bonuses, stock compensation expense and the cost of benefits provided to
employees; (b) a $4.2 million increase in bad debt expense; (c) $0.2 million refunded to the U.S. Department of Education resulting from
a program review at Southwestern College; (d) a $0.6 million increase in software maintenance expenses resulting from increased software
licenses for our student management system; (e) $0.9 million of acquisition costs incurred in 2008 related to our acquisition of Baran in
January 2009 in accordance with the transitional guidance to SFAS No. 141; and (f ) $0.9 million of expenses incurred in connection with
two registration statements on Form S-3, filed with the SEC during 2008, and other related expenses.
For year ended December 31, 2008, our bad debt expense as a percentage of revenue was 5.7% as compared to 5.3% for the year ended
December 31, 2007. This increase was primarily attributable to higher accounts receivable due to an increase of 13.0% in average student
population for 2008 as compared to the same period in 2007. The number of days sales outstanding for 2008 decreased to 25.4 days
compared to 27.7 days for 2007, primarily due to the timing of the collection of federal funds. Commencing in late 2007, we decided to
assist students in financing the gap in student tuition for which students were unable to obtain third-party financing. As of December 31,
2008, we had outstanding loan commitments to our students of $24.0 million as compared to $15.7 million at December 31, 2007. Loan
commitments, net of interest that would be due on the loans through maturity, were $16.5 million at December 31, 2008 as compared to
$10.8 million at December 31, 2007. Assuming that our historical trends continue, we expect that in 2009 our net incremental investment
in accounts receivable will not exceed $5.0 million.
As a percentage of revenues, selling, general and administrative expenses increased to 49.9% of revenues for 2008 from 49.5% for 2007.
Net interest expense. Our net interest expense for the year ended December 31, 2008 decreased slightly to $2.0 million from $2.2 million
for the same period in 2007 due to lower interest rates as well as lower average borrowings outstanding during the year.
Income taxes. Our provision for income taxes for the year ended December 31, 2008 was $13.3 million, or 39.8% of pretax income,
compared to $9.9 million, or 41.8% of pretax income for the year ended December 31, 2007. The decrease in our effective tax rate for the
year ended December 31, 2008 was primarily attributable to shifts in state taxable income among various states.
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
Revenues. Revenues increased by $17.1 million, or 5.5%, to $327.8 million for 2007 from $310.6 million for 2006. Approximately
$7.4 million of this increase was a result of 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. For the year ended December 31, 2007, our average undergraduate full-time student enrollment increased 1.7% to 17,687
compared to 17,397 for the year ended December 31, 2006. Excluding our acquisition of FLA, our average undergraduate student
enrollment decreased by 0.4% to 16,682 from 16,757 in 2006.
43
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.
During 2006, 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. As a
result of the above, our first half 2007 revenue was negatively impacted by lower student populations at our campuses. This was not offset
until the third quarter of 2007 when we experienced a 10.3% increase in student starts due to improved retention of sales representatives,
packaging our students for financial aid earlier in the process and by extending our student outreach program.
Educational services and facilities expenses. Our educational services and facilities expenses increased by $10.2 million, or 7.9%, to
$139.5 million for 2007 from $129.3 million for 2006. Our acquisition of FLA accounted for $3.0 million or 29.4% of this increase.
Excluding FLA, instructional expenses and books and tools expense increased by $1.1 million or 1.7% and $1.8 million or 11.9%,
respectively, over the prior year primarily due to increased compensation and benefits expenses and due to higher volumes of sales for
books and tools. The remainder of the increase in educational services and facilities expenses was primarily due to facilities expenses
which increased $4.3 million over the prior year. Of this amount approximately $3.7 million represents increases in facility costs and $0.6
million represents additional depreciation expense during the year over prior year. The increase in facilities costs is primarily due to a $1.0
million increase in rent expense in 2007 due to our expanded campus facilities at our Rhode Island, Southwestern and Indianapolis
campuses. We also experienced increased costs for insurance and real estate taxes, which increased approximately $0.5 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 $1.4 million over the prior year. Approximately $0.8 million of the increase in repairs and maintenance was due
to higher than normal repairs and maintenance expenses at one of our schools. Educational services and facilities expenses as a percentage
of revenues increased to 42.6% of revenues for 2007 from 41.6% for 2006.
Selling, general and administrative expenses. Our selling, general and administrative expenses for the year ended December 31, 2007
were $162.4 million, an increase of $11.3 million, or 7.5%, from $151.1 million for 2006. Approximately $4.1 million of this increase
were attributed to our acquisition of FLA. The remainder of the increase was primarily due to: (a) a $1.0 million or 3.3% increase in sales
expense resulting mainly from yearly compensation increases; (b) a $0.6 million or 2.1%, increase in marketing costs as a result of
increased advertising expenses associated with student leads and enrollment; and (c) a $5.2 million or 7.0% increase in administrative
expenses, over the prior year.
The increase in marketing expenses during 2007 included a shift from television advertising to internet based initiatives and from the re-
launching of our website during 2007. These initiatives increased student leads at a lower cost per lead. Included in administrative
expenses during 2007 are an upfront one time non-cash charge of $0.5 million incurred in connection with the termination of certain lease
agreements and a $0.6 million charge incurred in connection with severance payments related to the separation of employment of two
executives. The remainder of the increase in administrative expenses was attributable to a higher provision for bad debts in 2007 as
compared to 2006. Bad debt expense, excluding FLA in 2007 increased by $1.8 million from $14.9 million in 2006 to $16.7 million for the
year ended December 31, 2007. This increase was due to higher accounts receivable balances throughout the year as compared to prior
year, resulting from increased loans to our students. The remainder of the increase in administrative expenses is due to yearly
compensation increases to existing personnel and higher benefit costs during the year.
As a percentage of revenue, selling, general and administrative expenses increased to 49.5% of revenues for 2007 from 48.7% for 2006.
Interest income. Interest income decreased to $0.2 million for the year ended December 31, 2007, a decrease of $0.8 million from
interest income of $1.0 million for 2006. The decrease in interest income for the year was due to lower average cash balances during the
year as compared to 2006.
Interest expense. Interest expense was essentially flat year over year at $2.3 million, respectively in 2007 and 2006 due to our average
borrowings during 2007 remaining relatively flat with 2006.
Income taxes. Our provision for income taxes for the year ended December 31, 2007 was $9.9 million, or 41.8% of pretax income,
compared to $12.1 million, or 41.4% of pretax income for the year ended December 31, 2006. The increase in effective tax rate for the
year ended December 31, 2007 is attributable to higher state income taxes during the period.
44
LIQUIDITY AND CAPITAL RESOURCES
Our primary capital requirements are for facilities expansion and maintenance, acquisitions and the development of new programs. Our
principal sources of liquidity have been cash provided by operating activities and borrowings under our credit agreement. The following
chart summarizes the principal elements of our cash flow for each of the three years in the period ended December 31, 2008:
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
$
$
$
54,176
(31,205)
(11,239)
$
$
$
15,735
(23,830)
5,136
$
$
$
15,258
(52,160)
(6,894)
2008
Year Ended December 31,
2007
(In thousands)
2006
As of December 31, 2008, we had cash and cash equivalents of $15.2 million, representing an increase of approximately $11.7 million as
compared to $3.5 million as of December 31, 2007. Historically, we have financed our operating activities and organic growth primarily
through cash generated from operations. We have financed acquisitions primarily through borrowings under our credit facility and cash
generated from operations. During 2008, we borrowed an additional $23.0 million to finance our working capital needs during the first
half of the year and repaid $28.0 million outstanding under our credit facility in the second half of the year. We currently anticipate that
we will be able to meet both our short-term cash needs, as well as our need 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 facility. On
February 18, 2009, we sold common stock in a public offering and received net proceeds of approximately $14.0 million. In addition, we
may also consider accessing the financial markets again as a source of liquidity for capital requirements, acquisitions and general corporate
purposes to the extent such requirements are not satisfied by cash on hand, borrowings under our credit facility or operating cash flows.
However, we cannot assure you that we will be able to raise additional capital on favorable terms, if at all. At December 31, 2008, we had
net borrowings available under our $100 million credit agreement of approximately $95.9 million, including a $15.9 million sub-limit on
letters of credit. The line of credit matures February 15, 2010.
Our primary source of cash is tuition collected from the 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 79% of our cash receipts relating to
revenues in 2008. Students must apply for a new loan for each academic period. Federal regulations dictate the timing of disbursements of
funds under Title IV Programs and loan funds are generally provided by lenders in two disbursements for each academic year. The first
disbursement is usually received approximately 31 days after the start of a student's academic year and the second disbursement is
typically received at the beginning of the sixteenth week from the start of the student's academic year. Certain types of grants and other
funding are not subject to a 30-day delay. Our programs range from 14 to 102 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 according to state and federal
regulations.
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.
Operating Activities
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007. Net cash provided by operating activities was $54.2
million for the year ended December 31, 2008 as compared to $15.7 million for the year ended December 31, 2007. The $38.5 million
increase in net cash provided by operating activities was driven by an increase in net income of approximately $11.9 million coupled with
better collection on accounts receivable as our days sales outstanding decreased from 27.7 to 25.4 due to, among other things, the
successful centralization of the back office administration of our financial aid department. Additionally, during the year we were favorably
impacted by the timing of cash collections from federal fund programs. The remainder of the increase was due to increases in cash
provided by other working capital items.
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006. Net cash provided by operating activities increased to
$15.7 million for 2007 from $15.3 million for 2006. This increase of $0.4 million was primarily due to a reduction of approximately $5.7
million in cash paid for income taxes during 2007 as compared to 2006 offset by a $3.7 million increase in accounts receivable at
December 31, 2007 from December 31, 2006. The remainder of the decrease was primarily due to decreases in cash used for working
capital items during the year offset by a decrease in net income during the year. The increase in accounts receivable which represents 27.5
days revenues outstanding for 2007 as compared to 24.3 days revenue outstanding in 2006 is attributable to the increase in loans that we
provided to our students. 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
45
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.
The increase in loans to our students 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.
Investing Activities
Our cash used in investing activities was primarily related to capital expenditures and the acquisition of BRI. Our capital expenditures
included facility expansion, leasehold improvements, improvements of classroom, furniture and shop training equipment and student
management operation systems. On December 1, 2008 we acquired all the rights, title and interest in the assets of BRI for $10.5 million in
cash, net of cash acquired. 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.
We currently lease a majority of our campuses. We own the new Grand Prairie, Texas campus, the FLA campuses, the Nashville campus
and certain buildings in the SWC 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.
Year Ended December 31, 2008 Compared to the Year Ended December 31, 2007. Net cash used in investing activities increased
$7.4 million to $31.2 million for the year ended December 31, 2008 from $23.8 million for the year ended December 31, 2007. This
increase was primarily attributable to a $10.5 million increase in cash used in the acquisition of Briarwood offset by a $4.6 million
decrease in capital expenditures due to the timing of payments for the year ended December 31, 2008 from the year ended December 31,
2007.
Year Ended December 31, 2007 Compared to the Year Ended December 31, 2006. Net cash used in investing activities decreased
$28.4 million to $23.8 million for the year ended December 31, 2007 from $52.2 million for the year ended December 31, 2006. This
decrease was primarily attributable to a $32.9 million decrease in cash used in acquisitions offset by a $5.4 million increase in capital
expenditures for the year ended December 31, 2007 from the year ended December 31, 2006.
Capital expenditures are expected to increase in 2009 as we upgrade and expand current equipment and facilities and open or expand new
facilities to meet increased student enrollment. We anticipate capital expenditures to range from 5% to 6% of revenues in 2009 and expect
to fund these capital expenditures with cash generated from operating activities and, if necessary, with borrowings under our credit facility.
Financing Activities
Year Ended December 31, 2008 Compared to the Year Ended December 31, 2007. Net cash used in financing activities was $11.2 million
for the year ended December 31, 2008, as compared to net cash provided by financing activities of $5.1 million for the year ended
December 31, 2007. This decrease of $16.4 million was attributable to the repayment of debt resulting in a decrease in net borrowings of
$10.0 million as compared to 2007 and to repurchases of our common stock for $6.6 million during 2008.
On February 18, 2009, we sold common stock in a public offering and received net proceeds of approximately $14.0 million.
Year Ended December 31, 2007 Compared to the Year Ended December 31, 2006. Net cash provided by financing activities was
$5.1 million for the year ended December 31, 2007, as compared to net cash used in financing activities of $6.9 million for the year ended
December 31, 2006. This increase is due to increased borrowings under our credit facility during 2007 to fund our working capital needs.
On April 1, 2008, our Board of Directors approved the repurchase of up to 1,000,000 shares of our common stock over the period of one
year. In 2008, we repurchased 615,000 shares of our common stock for approximately $6.6 million.
On February 15, 2005, we and our subsidiaries entered into a credit agreement with a syndicate of banks, which expires February 15, 2010.
This 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%. At December 31,
2008 we had no amounts outstanding under the credit facility. The 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 credit facility.
46
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.
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:
As of December 31,
Credit agreement
Finance obligation
Automobile loans
Capital leases-computers (with rates ranging from 8.5% to 8.7%)
Subtotal
Less current maturities
Total long-term debt
2008
-
$
9,672
-
502
10,174
(130)
10,044
$
2007
$
5,000
9,672
16
690
15,378
(204)
15,174
$
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 2009 and our currently identified and planned
capital expenditures.
Contractual Obligations
Long-Term Debt and Lease Commitments. As of December 31, 2008, our long-term debt consisted of the finance obligation in
connection with our sale-leaseback transaction in 2001 and amounts due under capital lease obligations. We lease offices, educational
facilities and various equipment for varying periods through the year 2023 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, 2008:
Payments Due by Period
Capital leases (including interest)
Operating leases
Rent on finance obligation
Total contractual cash obligations
Total
$
583
140,810
11,164
152,557
$
Less than 1
year
$
167
17,840
1,381
19,388
$
2-3 years
$
322
31,182
2,762
34,266
$
4-5 years
$
94
28,290
2,762
31,146
$
After 5
years
$
-
63,498
4,259
67,757
$
Capital Expenditures. We have 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, 2008, except for our letters of credit of $4.1 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.
47
RELATED PARTY TRANSACTIONS
On May 12, 2008, we repurchased from Five Mile River Capital Partners and Steven W. Hart an aggregate 100,000 shares of our common
stock for $11.25 per share for a total cost of $1.1 million. Hart Capital LLC is the managing member of Five Mile River Capital Partners
LLC, our second largest stockholder. Steven W. Hart is the owner and president of Hart Capital LLC and is a former member of our board
of directors. At the time of the transaction Hart Capital beneficially owned, through Five Mile River Capital LLC, 8.3% of our outstanding
shares of common stock.
On October 15, 2007, we entered into a Separation and Release Agreement with Lawrence E. Brown, our former Vice Chairman. Under
this agreement Mr. Brown’s employment terminated as of the close of business on October 31, 2007. For a period of 14 months following
the date of separation of employment, Mr. Brown continued to provide transitional services to us, not to exceed ten hours per month. In
consideration for a release of claims, we paid Mr. Brown a lump sum cash payment of $0.5 million and reimbursed Mr. Brown for the
employer-portion of the premiums due for continuation of coverage under COBRA through December 31, 2008. Mr. Brown was entitled
to the use of his automobile and reimbursement of associated costs by us through December 31, 2008. In addition, pursuant to the terms of
the agreement, Mr. Brown agreed to be subject to certain restrictive covenants, which, among other things, prohibited him for the duration
of 14 months following the date of separation of employment, from (i) competing against us and (ii) soliciting our or any of our affiliates’
or subsidiaries’ employees, consultants, clients or customers through December 31, 2008.
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.
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, and 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 in 2007 and
2006 did not meet our anticipated growth rates. As a result of the slowdown 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 also entered
2007 with fewer students enrolled than we had in January 2006. This trend continued during the first half of 2007 and reversed itself in
the latter half of the year as we benefited from the 2007 high school recruiting season. The slowdown 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 this slowdown was 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.
As a result of soft organic enrollment trends we experienced, we instituted numerous initiatives and took steps to address and optimize our
internal operations. These initiatives coupled with the counter cyclicality of our programs have now produced nine consecutive quarters of
positive student start growth and six consecutive quarters of enrollment growth. This has resulted in us entering 2009 with approximately
3,100 more students on a same school basis than we had on January 1, 2008. Because our revenue stream is closely related to our
enrollments, we believe that this will result in revenue and net income growth in 2009.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No.
163, “Accounting for Financial Guarantee Insurance Contracts – an interpretation of FASB Statement No. 60,” (“SFAS No. 163”). SFAS
48
No. 163 requires that an insurance enterprise recognize a claim liability prior to an event of default when there is evidence that credit
deterioration has occurred in an insured financial obligation. SFAS No. 163 is effective for us as of January 1, 2009. The implementation
of this standard had no effect on our consolidated financial statements.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles,” (“SFAS No. 162”). SFAS
No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial
statements. SFAS No. 162 was effective for us as of November 15, 2008. The implementation of this standard had no effect on our
consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities,” (“SFAS No. 161”) –
an amendment to FASB Statement No. 133. SFAS No. 161 is intended to improve financial standards for derivative instruments and
hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity's financial position,
financial performance, and cash flows. Entities are required to provide enhanced disclosures about: (a) how and why an entity uses
derivative instruments; (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related
interpretations; and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance,
and cash flows. The Statement is effective for us as of January 1, 2009. The adoption of the provision of SFAS No. 161 had no effect on
our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141R, "Business Combinations" (“SFAS No. 141R”). SFAS No. 141R establishes revised
principles and requirements for how we will recognize and measure assets and liabilities acquired in a business combination. SFAS No.
141R requires, among other things, transaction costs incurred in a business combination to be expensed, establishes a new measurement
date for valuing acquirer shares issued in consideration for a business combination, and requires the recognition of contingent
consideration and pre-acquisition gain and loss contingencies. SFAS No. 141R was effective for our business combinations completed on
or after January 1, 2009. In accordance with the transition guidance of SFAS No. 141R, we elected to expense $0.9 million of costs
incurred in 2008 related to an acquisition which was completed in 2009.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements, an amendment of
Accounting Research Bulletin (“ARB”) No. 51" (“SFAS No. 160”). SFAS No. 160 establishes accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is effective for us as of January 1, 2009.
The adoption of the provision of SFAS No. 160 had no effect on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No.
159”), providing companies with an option to report selected financial assets and liabilities at fair value. SFAS No. 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. SFAS No. 159 requires companies to provide additional information that will help
investors and other users of financial statements to more easily understand the effect of our choice to use fair value on its earnings. It also
requires entities to display the fair value of those assets and liabilities for which they have chosen to use fair value on the face of the
balance sheet. SFAS No. 159 became effective for us as of January 1, 2008; however, we did not elect to utilize the option to report
selected assets and liabilities at fair value.
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)” (“SFAS No. 158”). Among other items, SFAS No. 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. We adopted
SFAS No. 158 on December 31, 2006. The incremental effects of applying SFAS No. 158 on our 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
-
(4,062) $
1,651
2,411
Balances
Before
Adoption of
Statement 158 Adjustments
Balances After
Adoption of
Statement 158
1,107
2,688
2,411
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value,
establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS No. 157 does
not require any new fair value measurements. The provisions of SFAS No. 157 were effective for us as of January 1, 2008. The adoption
of the provision of SFAS No. 157 had no effect on our consolidated financial statements.
49
In September 2006, the Securities and Exchange Commission 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 became effective for us as of January 1, 2007. The adoption of the provision of
SAB No. 108 had no effect on our consolidated financial statements.
In June 2006, FASB issued FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN No. 48”). FIN No.
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 was adopted by us on January 1, 2007. FIN No. 48 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 No. 48 resulted 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”). 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 was adopted on
January 1, 2007. The adoption of the provision of SFAS No. 156 had no effect on our consolidated financial statements.
In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments” (“SFAS No. 155”). SFAS No.
155 is effective beginning January 1, 2007. The adoption of the provision of SFAS No. 155 had no effect on our consolidated financial
statements.
Effect of Inflation
Inflation has not had and is not expected to have a significant effect on our operations.
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, 2008, we had no amounts outstanding under the credit agreement. We initially funded our acquisition of
Baran with borrowings under our credit facility and may incur additional borrowings to fund capital expenditures in 2009.
Based on our outstanding debt balance as of December 31, 2008, a change of one percent in the interest rate would not have caused 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.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See “Index to Consolidated Financial Statements” on page F-1 on this Form 10-K.
ITEM 9.
None.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
ITEM 9A.
DISCLOSURE CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
Our Chief Executive Officer and Chief Financial Officer, after evaluating, together with management, the effectiveness of our disclosure
controls and procedures (as defined in Securities Exchange Act Rule 13a-15(e)) as of December 31, 2008, have concluded that our
disclosure controls and procedures are effective to reasonably ensure that material information required to be disclosed by us in the reports
that we file or submit under the Securities Exchange Act of 1934, as amended is recorded, processed, summarized and reported within the
50
time periods specified by Securities and Exchange Commissions’ Rules and Forms and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure.
Internal Control Over Financial Reporting
During the quarter ended December 31, 2008, there has been no change in our internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s Annual Report on Internal Control over Financial Reporting
The management of Lincoln Educational Services Corporation (the “Company”) is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. The Company’s internal
control system was designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2008, based on the
framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated
Framework. Based on its assessment, management believes that, as of December 31, 2008, the Company’s internal control over financial
reporting is effective.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s independent auditors, Deloitte & Touche LLP, an independent registered public accounting firm, audited the Company’s
internal control over financial reporting as of December 31, 2008, as stated in their report included in this Form 10-K that follows.
/s/ David F. Carney
David F. Carney
Chairman & Chief Executive Officer
March 12, 2009
/s/ Cesar Ribeiro
Cesar Ribeiro
Chief Financial Officer
March 12, 2009
ITEM 9B.
OTHER INFORMATION
None.
51
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers
PART III.
The information required by this item is incorporated herein by reference to our definitive Proxy Statement to be filed in connection with
our 2009 Annual Meeting of Shareholders.
Code of Ethics
We have adopted a Code of Conduct and Ethics applicable to our directors, officers and employees and certain other persons, including our
Chief Executive Officer and Chief Financial Officer. A copy of our Code of Ethics is available on our website at www.lincolnedu.com. If
any amendments to or waivers from the Code of Conduct are made, we will disclose such amendments or waivers on our website.
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
2009 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
2009 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
2009 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
2009 Annual Meeting of Shareholders.
52
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
4.7
10.1
10.2
10.3 *
10.4
10.5
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 L.L.C. (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).
Assumption Agreement and First Amendment to Management Stockholders Agreement, dated as of December 20,
2007, by and among Lincoln Educational Services Corporation, Lincoln Technical Institute, Inc., Back to School
Acquisition, L.L.C. and the Management Investors parties therein (6).
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 (3).
Amendment to Amended and Restated Employment Agreement, dated as of January 14, 2009, between the
Company and David F. Carney.
Separation and Release Agreement, dated as of October 15, 2007, between the Company and Lawrence E. Brown
(4).
Amended and Restated Employment Agreement, dated as of February 1, 2007, between the Company and Scott
M. Shaw (3).
53
10.6 *
10.7
10.8 *
10.9
10.10 *
10.11
10.12
10.13
10.14
10.15
Amendment to Amended and Restated Employment Agreement, dated as of January 14, 2009, between the
company and Scott M. Shaw.
Amended and Restated Employment Agreement, dated as of February 1, 2007, between the Company and Cesar
Ribeiro (3).
Amendment to Amended and Restated Employment Agreement, dated as of January 14, 2009, between the
company and Cesar Ribeiro.
Amended and Restated Employment Agreement, dated as of February 1, 2007, between the Company and Shaun
E. McAlmont (3).
Amendment to Amended and Restated Employment Agreement, dated as of January 14, 2009, between the
company and Shaun E. McAlmont.
Lincoln Educational Services Corporation 2005 Long Term Incentive Plan (1).
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).
10.16
Form of Stock Option Agreement under our 2005 Long Term Incentive Plan (7).
10.17
Form of Restricted Stock Agreement under our 2005 Long Term Incentive Plan (7).
10.18
10.19
10.20
10.21 *
10.22 *
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 (5).
Stock Purchase Agreement, dated as of January 20, 2009, among Lincoln Technical Institute, Inc., NN
Acquisition, LLC, Brad Baran, Barbara Baran, UGP Education Partners, LLC, UGPE Partners Inc. and Merion
Investment Partners, L.P.
Stock Purchase Agreement, dated as of January 20, 2009, among Lincoln Technical Institute, Inc., NN
Acquisition, LLC, Brad Baran, Barbara Baran, UGP Education Partners, LLC, Merion Investment Partners, L.P.
and, for certain limited purposes only, UGPE Partners Inc.
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.
54
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)
(4)
(5)
(6)
(7)
*
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-K for the year ended December 31, 2006.
Incorporated by reference to the Company’s Form 8-K dated October 15, 2007.
Incorporated by reference to the Company’s Form 10-Q for the quarterly period ended March 31, 2006.
Incorporated by reference to the Company’s Registration Statement on Form S-3 (Registration No. 333-148406).
Incorporated by reference to the Company’s Form 10-K for the year ended December 31, 2007.
Filed herewith.
55
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 13, 2009
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 H. Currin
Celia H. Currin
/s/ Paul E. Glaske
Paul E. Glaske
/s/ Charles F. Kalmbach
Charles F. Kalmbach
/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 13, 2009
Senior Vice President, Chief Financial Officer and
Treasurer (Principal Accounting and Financial Officer)
March 13, 2009
Director
Director
Director
Director
Director
Director
Director
Director
March 13, 2009
March 13, 2009
March 13, 2009
March 13, 2009
March 13, 2009
March 13, 2009
March 13, 2009
March 13, 2009
The following is a list of Lincoln Educational Services Corporation’s subsidiaries as of December 31, 2008:
Subsidiaries of the Company
Exhibit 21.1
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)
LCT Acquisition, LLC (wholly owned through Lincoln Technical Institute, Inc.)
Jurisdiction
New Jersey
Delaware
Delaware
Delaware
Delaware
Florida
Delaware
Delaware
ComTech Services Group Inc. (wholly owned through Lincoln Technical Institute, Inc.)
New Jersey
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 and in Registration Statement No. 333-148406 and 333-152854 on Form S-3 of our reports dated March 12, 2009 relating to the
consolidated financial statements and financial statement schedule of Lincoln Educational Services Corporation and subsidiaries (the
“Company”) (which report expressed an unqualified opinion and includes an explanatory paragraph relating to the adoption of the
provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”), and 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, 2008.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
March 12, 2009
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)
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 the
Date: March 13, 2009
/s/ David F. Carney
David F. Carney
Chairman & Chief Executive Officer
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) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 13, 2009
/s/ Cesar Ribeiro
Cesar Ribeiro
Chief Financial Officer
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
2008 (the “Report”).
Each of the undersigned hereby certifies that, to his respective knowledge:
1.
2.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: March 13, 2009
/s/ David F. Carney
David F. Carney
Chairman & Chief Executive Officer
/s/ Cesar Ribeiro
Cesar Ribeiro
Chief Financial Officer
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
mriF gnitnuoccA cilbuP deretsigeR tnednepednI fo stropeR
7002 dna 8002 ,13 rebmeceD fo sa steehS ecnalaB detadilosnoC
Consolidated Statements of Income for the years ended December 31, 2008, 2007 and 2006
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2008,
2007 and 2006
Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006
stnemetatS laicnaniF detadilosnoC ot setoN
Item 15
stnuoccA gniyfilauQ dna noitaulaV-II eludehcS
Page Number
2-F
4-F
F-6
F-7
F-8
01-F
82-F
F-1
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, 2008 and 2007, and the related consolidated statements of income, changes in stockholders' equity
and cash flows for each of the three years in the period ended December 31, 2008. Our audits also included the consolidated financial
statement schedule listed in the Index at Item 15. These consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Lincoln
Educational Services Corporation and subsidiaries as of December 31, 2008 and 2007, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2008, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such consolidated financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set
forth therein.
As discussed in Note 2 to the consolidated financial statements, the Company adopted the provisions of Financial Accounting
Standards Board Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement
No. 109” on January 1, 2007.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
Company's internal control over financial reporting as of December 31, 2008, 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 13, 2009 expressed an unqualified opinion on the Company's internal control over financial reporting.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
March 12, 2009
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 internal control over financial reporting of Lincoln Educational Services Corporation and subsidiaries (the
"Company") as of December 31, 2008, 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, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to
express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal
executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors,
management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control
over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis.
Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to
the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31,
2008, 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, 2008 and the related consolidated statements of income, changes in
stockholders’ equity and cash flows and financial statement schedule for the year ended December 31, 2008, and our report dated
March 12, 2009 expressed an unqualified opinion on those financial statements and schedule and included an explanatory paragraph
regarding the Company’s adoption of the provisions of Financial Accounting Standards Board Interpretation (“FIN”) No. 48,
“Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109” on January 1, 2007.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
March 12, 2009
F-3
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 $13,914 and $11,244 at December 31, 2008 and
2007, respectively
Inventories
Deferred income taxes, net
Due from federal programs
Prepaid expenses and other current assets
Total current assets
December 31,
2008
2007
$
15,234
$
3,502
383
22,857
3,374
5,627
828
2,958
51,261
-
23,286
2,540
4,575
6,087
3,771
43,761
PROPERTY, EQUIPMENT AND FACILITIES - At cost, net of accumulated depreciation
and amortization of $83,345 and $82,931 at December 31, 2008 and 2007, respectively
108,567
106,564
OTHER ASSETS:
Noncurrent accounts receivable, less allowance of $824 and $159 at December 31, 2008 and
2007, respectively
Deferred finance charges
Pension plan assets, net
Deferred income taxes, net
Goodwill
Other assets, net
Total other assets
TOTAL
3,326
632
-
7,080
91,460
5,716
108,214
1,608
827
1,696
5,500
82,714
3,513
95,858
$
268,042
$
246,183
See notes to consolidated financial statements.
F-4
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
$
130
$
204
December 31,
2008
2007
Unearned tuition
Accounts payable
Accrued expenses
Income taxes payable
Other short-term liabilities
Total current liabilities
NONCURRENT LIABILITIES:
Long-term debt and lease obligations, net of current portion
Pension plan liabilities, net
Accrued rent
Other long-term liabilities
Total liabilities
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
38,806
12,349
16,239
3,263
314
71,101
10,044
4,335
5,972
1,641
93,093
34,810
13,721
10,079
1,460
1,439
61,713
15,174
-
5,608
1,221
83,716
Preferred stock, no par value - 10,000,000 shares authorized, no shares issued and
outstanding at December 31, 2008 and 2007
Common stock, no par value - authorized 100,000,000 shares at December 31, 2008
and 2007, issued and outstanding 26,088,261 shares at December 31, 2008 and
25,888,348 shares at December 31, 2007
Additional paid-in capital
Deferred compensation
Treasury stock at cost - 615,000 at December 31, 2008 and no shares at December 31, 2007
Retained earnings
Accumulated other comprehensive loss
Total stockholders' equity
TOTAL
-
-
120,597
15,119
(3,619)
(6,584)
55,219
(5,783)
174,949
120,379
12,378
(3,228)
-
35,024
(2,086)
162,467
$
268,042
$
246,183
See notes to consolidated financial statements.
F-5
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
Loss (gain) on sale of assets
Total costs & expenses
OPERATING INCOME
OTHER:
Interest income
Interest expense
Other (loss) income
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
PROVISION FOR INCOME TAXES
INCOME FROM CONTINUING OPERATIONS
LOSS FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES
NET INCOME
Basic
Earnings per share from continuing operations
Loss per share from discontinued operations
Net income per share
Diluted
Earnings per share from continuing operations
Loss per share from discontinued operations
Net income per share
Weighted average number of common shares outstanding:
Basic
Diluted
2008
Year Ended December 31,
2007
2006
$
376,907
$
327,774
$
310,630
153,530
187,722
80
341,332
35,575
113
(2,152)
-
33,536
13,341
20,195
-
20,195
$
139,500
162,396
(15)
301,881
25,893
180
(2,341)
27
23,759
9,932
13,827
(5,487)
8,340
$
129,311
151,136
(435)
280,012
30,618
981
(2,291)
(132)
29,176
12,092
17,084
(1,532)
15,552
$
$
$
$
$
$
$
$
$
$
$
$
$
0.54
(0.21)
0.33
0.53
(0.21)
0.32
0.80
-
0.80
0.78
-
0.78
0.67
(0.06)
0.61
0.65
(0.05)
0.60
25,308
25,984
25,479
26,090
25,336
26,086
See notes to consolidated financial statements
F-6
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands, except share amounts)
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
BALANCE - January 1, 2006
Net income
Reduction in estimated stock
issuance expenses
Stock-based compensation expense
Restricted Stock
Stock Options
Tax benefit of options exercised
Exercise of stock options
Initial adoption of SFAS No. 158,
net of taxes
BALANCE - December 31, 2006
Net income
Initial adoption of FIN 48
Employee pension plan, net of taxes
Stock-based compensation expense
Restricted stock
Stock options
Tax benefit of options exercised
Exercise of stock options
BALANCE - December 31, 2007
Net income
Employee pension plan, net of taxes
Stock-based compensation expense
Restricted stock
Stock options
Purchase of treasury stock
Tax benefit of options exercised
Net share settlement for
equity-based compensation
Exercise of stock options
BALANCE - December 31, 2008
Common Stock
Shares
25,168,390
-
Amount
119,453
$
-
Additional
Paid-in
Capital
$
5,665
-
Deferred
Compensation
$
(360)
-
Treasury
Stock
-
$
-
Retained
Earnings
11,232
$
15,552
Accumulated
Other
Comprehensive
Loss
-
$
-
$
Total
135,990
15,552
-
18,429
-
-
263,876
150
-
-
-
579
-
25,450,695
-
-
120,182
-
-
-
217,565
-
-
220,088
25,888,348
-
-
123,477
-
-
-
-
-
-
-
-
197
120,379
-
-
-
-
-
-
-
300
1,231
499
-
-
7,695
-
-
-
3,155
1,455
73
-
12,378
-
-
1,487
1,105
-
331
(13,512)
89,948
26,088,261
-
218
120,597
$
(182)
-
15,119
$
$
-
(107)
-
-
-
-
(467)
-
-
-
(2,761)
-
-
-
(3,228)
-
-
(391)
-
-
-
-
-
(3,619)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(6,584)
-
-
-
(6,584)
$
-
-
-
-
-
-
26,784
8,340
(100)
-
-
-
-
-
35,024
20,195
-
-
-
-
-
-
-
-
-
-
(2,411)
(2,411)
-
-
325
-
-
-
-
(2,086)
-
(3,697)
-
-
-
-
150
193
1,231
499
579
(2,411)
151,783
8,340
(100)
325
394
1,455
73
197
162,467
20,195
(3,697)
1,096
1,105
(6,584)
331
-
-
55,219
$
-
-
(5,783)
(182)
218
174,949
$
$
See notes to consolidated financial statements.
F-7
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization
Amortization of deferred finance charges
Deferred income taxes
Loss (gain) on disposition of assets
Impairment of goodwill and long-lived assets
Fixed asset donations
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
Due from federal funds
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
Net share settlement for equity-based compensation
Acquisitions, net of cash acquired
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings
Payments on borrowings
Proceeds from exercise of stock options
Tax benefit associated with exercise of stock options
Principal payments under capital lease obligations
Purchase of treasury stock
Reduction in estimated stock issuance expenses
Net cash (used in) provided by financing activities
F-8
Year Ended December 31,
2007
2008
2006
$
20,195
$
8,340
$
15,552
17,920
195
(298)
80
-
-
21,642
2,201
(331)
412
(22,775)
(824)
(338)
5,259
306
818
(1,533)
2,134
6,103
3,010
33,981
54,176
(383)
(20,166)
46
(182)
(10,520)
(31,205)
23,000
(28,000)
218
331
(204)
(6,584)
-
(11,239)
15,741
192
(2,761)
(15)
3,099
(26)
17,767
1,849
(73)
630
(21,465)
(102)
(1,957)
(6,644)
(740)
(284)
1,926
(1,181)
(221)
1,660
7,395
15,735
920
(24,766)
16
-
-
(23,830)
26,500
(21,500)
197
73
(134)
-
-
5,136
14,866
192
(3,655)
(437)
-
(22)
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)
14,000
(21,214)
579
499
(908)
-
150
(6,894)
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Continued)
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:
Fixed assets acquired in capital lease transactions
Fixed assets acquired in noncash transactions
Year Ended December 31,
2007
2008
2006
$
1,998
$
2,305
$
2,243
$
12,137
$
10,148
$
15,799
$
-
$
652
$
-
$
1,430
$
2,812
$
101
See notes to consolidated financial statements.
F-9
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
(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 and Skilled Trades. We currently have 36 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 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.
Other Comprehensive Income— Other comprehensive income was as follows:
Net income
Employee pension plan, net of taxes
Other comprehensive income
Year Ended December 31,
2008
$ 20,195
(3,697)
16,498
$
2007
$ 8,340
325
8,665
$
2006
$ 15,552
-
15,552
$
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. As of December 31, 2006, the Company was subject
to Heightened Cash Monitoring, Type 1 Status by the DOE, however as of December 30, 2007, the Company was no longer subject to
this restriction. Therefore, the Company had no restrictions on cash at December 31, 2007. As of December 31, 2008, restricted cash
related to Connecticut State Grants of $0.4 million.
Accounts Receivable—The Company reports accounts receivable at net realizable value, which is equal to the gross receivable less an
estimated allowance for uncollectible accounts. Noncurrent accounts receivable represent amounts due from graduates in excess of 12
months from the balance sheet date.
Allowance for uncollectible accounts—Based upon experience and judgment, we establish an allowance for uncollectible accounts
with respect to tuition receivables. We use an internal group of collectors, augmented by third-party collectors as deemed appropriate,
in our collection efforts. In establishing our allowance for uncollectible accounts, we consider, among other things, current and
expected economic conditions, a student's status (in-school or out-of-school), whether or not additional financial aid funding will be
F-10
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 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 $0.2 million and $0.3 million as of December 31, 2008 and 2007, respectively,
related to the long-term debt and $0.4 million as of December 31, 2008 and 2007, 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 $33.8 million, $31.1 million and
$28.9 million for the years ended December 31, 2008, 2007 and 2006, respectively. These amounts are included in selling, general and
administrative expenses in the consolidated statement of income.
Bonus costs—The Company accrues the estimated cost of our bonus programs using current financial and statistical information as
compared to targeted financial achievements and individual performance objectives. 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.
As discussed in Note 19, as a result of a decision to close three of our campuses we conducted a review of our goodwill as of June 30,
2007. In connections with that review, we recognized a non-cash impairment charge of approximately $2.1 million as of June 30,
2007. At December 31, 2008 and 2007, the Company tested its goodwill for impairment utilizing a market capitalization approach
and 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 Emergency Economic Stabilization Act of
2008 that was enacted October 3, 2008 temporarily raised the FDIC insurance coverage to the first $250,000 of funds at member
banks. This temporary increase is scheduled to expire January 1, 2010. The Company's cash balances on deposit at December 31,
2008, exceeded the balance insured by the FDIC by approximately $12.9 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
F-11
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, 2008, and 2007.
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 accounts for its stock-based compensation plans in accordance with Statement of
Financial Accounting Standards (“SFAS”) No. 123R, Share-Based Payment. The Company measures the value of stock options on
the grant date at fair value, using the Black-Scholes option valuation model. The Company amortizes the fair value, net of estimated
forfeitures, utilizing straight-line amortization of compensation expense over the requisite service period of the grant.
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 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.
As discussed in Note 19, as a result of a decision to close three of our campuses we conducted a review of our long-lived assets as of
June 30, 2007. In connections with that review, we recognized a non-cash impairment charge of approximately $0.9 million as of
June 30, 2007.
Start-up Costs—Costs related to the start of new campuses are expensed as incurred.
2.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts – an interpretation of FASB Statement No. 60,” (“SFAS No. 163”). SFAS No. 163 requires that an insurance
enterprise recognize a claim liability prior to an event of default when there is evidence that credit deterioration has occurred in an
insured financial obligation. SFAS No. 163 is effective for the Company as of January 1, 2009. The implementation of this standard
had no effect on the Company’s consolidated financial statements.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles,” (“SFAS No. 162”).
SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of
financial statements. SFAS No. 162 was effective for the Company as of November 15, 2008. The implementation of this standard
had no effect on the Company’s consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities,” (“SFAS No.
161”) – an amendment to FASB Statement No. 133. SFAS No. 161 is intended to improve financial standards for derivative
instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an
entity's financial position, financial performance, and cash flows. Entities are required to provide enhanced disclosures about: (a) how
and why an entity uses derivative instruments; (b) how derivative instruments and related hedged items are accounted for under SFAS
No. 133 and its related interpretations; and (c) how derivative instruments and related hedged items affect an entity’s financial
position, financial performance and cash flows. The Statement is effective for the Company as of January 1, 2009. The adoption of the
provision of SFAS No. 161 had no effect on the Company’s consolidated financial statements.
F-12
In December 2007, the FASB issued SFAS No. 141R, "Business Combinations" (“SFAS No. 141R”). SFAS No. 141R establishes
revised principles and requirements for how the Company will recognize and measure assets and liabilities acquired in a business
combination. SFAS 141R requires, among other things, transaction costs incurred in a business combination to be expensed,
establishes a new measurement date for valuing acquirer shares issued in consideration for a business combination, and requires the
recognition of contingent consideration and pre-acquisition gain and loss contingencies. SFAS No. 141R was effective for business
combinations completed on or after January 1, 2009. In accordance with the transition guidance of SFAS No. 141R, the Company
elected to expense $0.9 million of costs incurred in 2008 related to an acquisition which was completed in 2009.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements, an amendment
of Accounting Research Bulletin (“ARB”) No. 51" (“SFAS No. 160”). SFAS No. 160 establishes accounting and reporting standards
for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is effective for the Company
as of January 1, 2009. The adoption of the provision of SFAS No. 160R had no effect on the Company’s consolidated financial
statements.
In February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS
No. 159”), providing companies with an option to report selected financial assets and liabilities at fair value. SFAS No. 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. SFAS No. 159 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 they have chosen to use
fair value on the face of the balance sheet. SFAS No. 159 became effective for the Company as of January 1, 2008; however, the
Company did not elect to utilize the option to report selected assets and liabilities at fair value.
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)” (“SFAS No. 158”). Among other items, SFAS No. 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. The Company adopted SFAS No. 158 on December 31, 2006. The incremental effects of applying SFAS No. 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
-
(4,062) $
1,651
2,411
Balances
Before
Adoption of
Statement 158 Adjustments
Balances After
Adoption of
Statement 158
1,107
2,688
2,411
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair
value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS No.
157 does not require any new fair value measurements. The provisions of SFAS No. 157 were effective for the Company as of January
1, 2008. The adoption of the provision of SFAS No. 157 had no 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
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 had no effect on the Company’s consolidated financial statements.
In June 2006, the FASB issued FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN No. 48”).
FIN No. 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 was adopted by the Company on January 1, 2007. FIN No. 48
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 No. 48 resulted in a cumulative effect
adjustment to retained earnings as of January 1, 2007 of $0.1 million.
F-13
In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets” (“SFAS No. 156”). 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
was adopted on January 1, 2007. The adoption of the provision of SFAS No. 156 had no 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”). SFAS
No. 155 is effective beginning January 1, 2007. The adoption of the provision of SFAS No. 155 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, 2008, 2007 and 2006, approximately 79%, 80% and
80%, respectively, of net revenues were indirectly derived from funds distributed under Title IV Programs.
Regulatory Compliance
To participate in Title IV Programs, a school must be authorized to offer its programs of instruction by relevant state education
agencies, be accredited by an accrediting commission recognized by the DOE and be certified as an eligible institution by the DOE.
For this reason, the schools are subject to extensive regulatory requirements imposed by all of these entities. After the schools receive
the required certifications by the appropriate entities, the schools must demonstrate their compliance with the DOE regulations of the
Title IV Programs on an ongoing basis. Included in these regulations is the requirement that the Company must satisfy specific
standards of financial responsibility. The DOE evaluates institutions for compliance with these standards each year, based upon the
institution’s annual audited financial statements, as well as following a change in ownership 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 audited financial
statements for the 2008, 2007 and 2006 fiscal years our calculations result in a composite score of 1.8, 1.8 and 1.7, respectively.
Beginning December 30, 2004 and for a period of three years, all of our institutions were placed on "Heightened Cash Monitoring,
Type 1 status." As a result, we were subject to a less favorable Title IV fund payment system that required us to credit student
accounts before drawing down Title IV funds and also required us to timely notify the DOE with respect to certain enumerated
oversight and financial events. The DOE has notified us that, as of December 31, 2007, we are no longer subject to Heightened Cash
Monitoring, Type 1 Status.
For the years ended December 31, 2008, 2007 and 2006 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.
F-14
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, 2008, 2007 and 2006, respectively, in thousands, were as follows:
Basic shares outstanding
Dilutive effect of stock options
Diluted shares outstanding
2008
25,308,144
675,852
25,983,996
Year Ended December 31,
2007
25,478,614
611,759
26,090,373
2006
25,335,591
750,798
26,086,389
For the years ended December 31, 2008, 2007 and 2006, options to acquire 546,708, 608,208 and 288,500 shares, respectively, were
excluded from the above table as the result on reported earnings per share would have been antidilutive.
5.
BUSINESS ACQUISITIONS
On December 1, 2008, the Company acquired all of the rights, title and interest in the assets of Briarwood College (“BRI”) for
approximately $10.5 million, net of cash acquired. Briarwood is regionally accredited by the New England Association of Schools
and Colleges, and currently offers two bachelor’s degree programs to approximately 550 students as of December 31, 2008 from
Connecticut and surrounding states. The BRI purchase price has been preliminarily 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. Accordingly, the allocation may be
subject to revisions when the Company receives final information including appraisals, valuations and other analyses.
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 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.
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 of BRI at the date of acquisition:
Property, equipment and facilities
Goodwill
Identified intangibles:
Student contracts
Trade name
Accreditation
Curriculum
Non-compete
Other assets
Current assets, excluding cash acquired
Total liabilities assumed
Cost of acquisition, net of cash acquired
December 1,
2008
$
1,265
8,746
348
-
1,000
1,300
-
21
195
(2,355)
10,520
$
F-15
6.
GOODWILL AND OTHER INTANGIBLES
Changes in the carrying amount of goodwill during the years ended December 31, 2008 and 2007 are as follows (in thousands):
Goodwill balance as of December 31, 2006
Goodwill adjustments
Goodwill impairment
Goodwill balance as of December 31, 2007
Goodwill acquired pursuant to business acquisition-BRI
Goodwill balance as of December 31, 2008
$
84,995
(146)
(2,135)
82,714
8,746
91,460
$
As described further in Note 19, during the year ended December 31, 2007, the Company recorded a goodwill impairment charge as a
result of its decision to cease operations at three of its campuses.
Identified intangible assets, which are included in other assets in the accompanying consolidated balance sheets, consisted of the
following:
At December 31, 2008
At December 31, 2007
Weighted
Average
Amortization
Period
(years)
2
Indefinite
Indefinite
10
5
Student Contracts
Trade name
Accreditation
Curriculum
Non-compete
Total
Gross
Carrying
Amount
$
2,563
1,270
1,307
2,000
201
7,341
$
Accumulated
Amortization
2,230
$
-
-
289
105
2,624
$
Gross
Carrying
Amount
$
2,215
1,270
307
700
201
4,693
$
Accumulated
Amortization
2,212
$
-
-
208
65
2,485
$
The increase in student contracts, accreditation and curriculum assets was due to the acquisition of BRI on December 1, 2008.
Amortization of intangible assets for the years ended December 31, 2008, 2007 and 2006 was approximately $0.1 million, $0.3
million and $0.5 million, respectively.
The following table summarizes the estimated future amortization expense:
Year Ending December 31,
2009
2010
2011
2012
2013
Thereafter
$
414
400
216
200
200
710
$
2,140
F-16
7.
PROPERTY, EQUIPMENT AND FACILITIES
Property, equipment and facilities consist of the following:
Useful life
(years)
At December 31,
Land
Buildings and improvements
Equipment, furniture and fixtures
Vehicles
Construction in progress
-
1-25
1-12
1-7
-
Less accumulated depreciation and amortization
$
$
2008
13,563
120,834
55,604
1,137
774
191,912
(83,345)
108,567
2007
13,563
104,484
61,102
2,120
8,226
189,495
(82,931)
106,564
$
$
Included above in equipment, furniture and fixtures are assets acquired under capital leases as of December 31, 2008 and 2007 of $4.5
million and $6.6 million, respectively, net of accumulated depreciation of $4.1 million and $5.9 million, respectively.
Included above in buildings and improvements is capitalized interest as of December 31, 2008 and 2007 of $0.6 million and
$0.5 million, respectively, net of accumulated depreciation of $0.2 million and $0.1 million, respectively.
Depreciation and amortization expense of property, equipment and facilities was $17.2 million, $14.5 million and $13.0 million for
the years ended December 31, 2008, 2007 and 2006, respectively.
8.
ACCRUED EXPENSES
Accrued expenses consist of the following:
Accrued compensation and benefits
Other accrued expenses
At December 31,
2008
11,915
4,324
16,239
$
$
2007
$
5,888
4,191
10,079
$
9.
LONG-TERM DEBT AND LEASE OBLIGATIONS
Long-term debt and lease obligations consist of the following:
At December 31,
Credit agreement (a)
Finance obligation (b)
Automobile loans
Capital leases-computers (with rates ranging from 8.5% to 8.7%)
Less current maturities
2008
$
-
9,672
-
502
10,174
(130)
10,044
$
2007
$
5,000
9,672
16
690
15,378
(204)
15,174
$
(a) The Company has a credit agreement with a syndicate of banks which expires February 15, 2010. 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. At
F-17
December 31, 2008, the Company had outstanding letters of credit aggregating $4.1 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.
During 2008, the Company borrowed an additional $23.0 million under the credit agreement. During the third quarter of 2008, the
Company repaid a total of $28.0 million, leaving no amounts outstanding as of December 31, 2008. Interest rates on the loans
outstanding during the year ranged from 3.46% to 7.25%.
During 2007, the Company had borrowed a total of $26.5 million under the current credit agreement. Interest rates on the loans
outstanding during the year ranged from 6.32% to 8.25%. During the third quarter of 2007, the Company had repaid a total of $21.5
million on the total debt incurred during the year, leaving $5.0 million outstanding under the credit agreement as of December 31,
2007. The interest rate on the $5.0 million was 7.25% at December 31, 2007.
The credit agreement contains various covenants, which, among other things, restricts, subject to certain exceptions, the Company’s
ability to incur additional indebtedness, pay dividends and make certain acquisitions. 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, 2008, 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, 2008 were $1.4 million, $1.3 million and $1.3 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.
As of December 31, 2008, the Company was in compliance with the financial covenants contained in its borrowing agreements.
Scheduled maturities of long-term debt and lease obligations at December 31, 2008 are as follows:
Year ending December 31,
2009
2010
2011
2012
2013
Thereafter
$
130
135
146
91
-
9,672
10,174
$
10.
SLM FINANCIAL CORPORATION LOAN AGREEMENT
The Company entered into a Tiered Discount Loan Program agreement, effective September 1, 2007, with SLM Financial Corporation
(“SLM”) to provide up to $16.0 million of private non-recourse loans to qualifying students. Under this agreement, the Company was
required to pay SLM either 20% or 30% of all loans disbursed, depending on each student borrower’s credit score. The Company was
billed at the beginning of each month based on loans disbursed during the prior month. For the year ended December 31, 2008, $0.5
million of loans were disbursed, resulting in a $0.1 million loss on sale of receivables. Loss on sale of receivables is included in
selling, general and administrative expenses in the accompanying statements of income.
In January 2008, SLM notified the Company that it was terminating its tiered discount loan program, effective February 18, 2008.
F-18
11.
STOCKHOLDERS' EQUITY
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 Lincoln Technical Institute Management Stock Option Plan (“2002 Plan”). Any shares of our common stock that (i) correspond to
awards under the LTIP or the 2002 Plan 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.
Under the Company’s LTIP, certain employees received restricted stock totaling 200,000 shares, valued at $2.9 million, on October
30, 2007; 80,000 shares, valued at $1.0 million, on February 29, 2008; 8,000 shares, valued at $0.1 million, on May 2, 2008; and
8,000 shares, valued at $0.1 million, on May 5, 2008. As of December 31, 2008, there were a total of 296,000 restricted shares
awarded and 40,000 shares vested under the LTIP. The restricted shares vest ratably on the first through fifth anniversary of the grant
date; however, there is no vesting period on the right to vote or the right to receive dividends on these restricted shares. The
recognized restricted stock expense for the years ended December 31, 2008 and 2007 was $0.8 million and $0.1 million, respectively.
The deferred compensation or unrecognized restricted stock expense under the LTIP as of December 31, 2008 and 2007 was $3.2
million and $2.8 million, respectively.
Pursuant to the Company’s 2005 Non-Employee Directors Restricted Stock Plan (the “Non-Employee Directors Plan”), each non-
employee director of the Company receives an annual award of restricted shares of common stock on the date of the Company’s
annual meeting of shareholders. The number of shares granted to each non-employee director is based on the fair market value of a
share of common stock on that date. The restricted shares vest ratably on the first through third anniversary of the grant date;
however, there is no vesting period on the right to vote or the right to receive dividends on these restricted shares. As of December 31,
2008, there were a total of 84,954 shares awarded and 37,772 shares vested under the Non-Employee Directors Plan. The recognized
restricted stock expense for the years ended December 31, 2008, 2007 and 2006 was $0.3 million, respectively. The deferred
compensation or unrecognized restricted stock expense under the Non-Employee Directors Plan as of December 31, 2008 and 2007
was $0.4 million, respectively.
On April 1, 2008, the Company’s Board of Directors approved the repurchase of up to 1,000,000 shares of its common stock over the
period of one year. The purchases may be made in the open market or in privately negotiated transactions from time to time as
permitted by securities laws and other legal requirements. The timing, manner, price and amount of any repurchases will be
determined by the Company in its discretion and will be subject to economic and market conditions, stock price, applicable legal
requirements and other factors. The program may be suspended or discontinued at any time. During the year ended December 31,
2008, the Company repurchased 615,000 shares of its common stock for approximately $6.6 million at an average price of $10.70 per
share.
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 2008, 2007, and 2006 were $6.69,
$6.78, and $9.68, 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
2008
57.23%
0%
6 Years
2.76-3.29%
$
11.97
At December 31,
2007
55.42%
0%
6 Years
4.36%
$
11.96
2006
55.10%
0%
6 Years
4.13-4.84%
$
17.00
The expected volatility considers the volatility of certain of our competitors’ common stock that has been traded for a period
commensurate with the expected life. The expected term of options granted represents the period of time that options granted are
expected to be outstanding. The risk-free rate used is based on the published U.S. Treasury yield curve in effect at the time of grant for
instruments with a similar life. The dividend yield is 0% as the Company has never declared or paid dividends on our common stock
and we do not anticipate declaring or paying dividends on our common stock in the foreseeable future.
F-19
The following is a summary of transactions pertaining to the option plans:
Outstanding December 31, 2005
Granted
Cancelled
Exercised
Outstanding December 31, 2006
Granted
Cancelled
Exercised
Outstanding December 31, 2007
Granted
Cancelled
Exercised
Shares
1,839,173
256,000
(103,072)
(263,876)
1,728,225
185,500
(181,474)
(220,088)
1,512,163
145,500
(93,500)
(89,948)
Outstanding December 31, 2008
1,474,215
Exercisable as of December 31, 2008
1,154,633
Weighted
Average Exercise
Price Per Share
7.26
17.00
13.98
3.56
8.85
11.96
12.02
3.34
9.65
11.97
15.01
2.43
9.98
8.92
Weighted Average
Remaining
Contractual Term
Aggregate
intrinsic Value
(in thousands)
$
3,444
6.31 years
10,255
5.83 years
5.25 years
4.42 years
1,811
9,156
1,018
6,808
6,506
As of December 31, 2008, we estimate that unrecognized pre-tax compensation expense for all unvested stock option awards, in the
amount of approximately $1.1 million which will be expensed over the weighted-average period of approximately 1.2 years. In 2009,
174,333 shares are expected to vest.
The following table presents a summary of options outstanding at December 31, 2008:
Stock Options Outstanding
Stock Options Exercisable
At December 31, 2008
Contractual
Weighted
Average life
(years)
3.03
8.50
6.15
5.61
5.25
Weighted
Average Price
3.10
$
11.82
15.26
22.88
Shares
628,507
63,678
375,048
87,400
Weighted
Exercise Price
$
3.10
11.26
14.97
23.10
9.98
1,154,633
8.92
Range of Exercise Prices
$3.10
$4.00-$13.99
$14.00-$19.99
$20.00-$25.00
Shares
628,507
299,000
429,208
117,500
1,474,215
12.
PENSION PLAN
The Company sponsors a noncontributory defined benefit pension plan covering substantially all of the Company's union employees.
Benefits are provided based on employees' years of service and earnings. This plan was frozen on December 31, 1994 for non-union
employees.
F-20
The following table sets forth the plan's funded status and amounts recognized in the consolidated financial statements:
CHANGES IN BENEFIT OBLIGATIONS:
Benefit obligation-beginning of year
Service cost
Interest cost
Actuarial (gain) loss
Benefits paid
Benefit obligation at end of year
CHANGE IN PLAN ASSETS:
Fair value of plan assets-beginning of year
Actual (loss) return on plan assets
Benefits paid
Fair value of plan assets-end of year
Year Ended December 31,
2008
2007
$
14,062
113
893
484
(558)
14,994
$
14,624
115
831
(965)
(543)
14,062
15,758
(4,540)
(559)
10,659
15,731
570
(543)
15,758
FAIR VALUE IN EXCESS OF BENEFIT OBLIGATION FUNDED STATUS:
$
(4,335)
$
1,696
Amounts recognized in the consolidated balance sheets consist of:
Noncurrent assets
Noncurrent liabilities
At December 31,
2008
$
-
$
(4,335)
2007
$
1,696
$
-
Amounts recognized in accumulated other comprehensive loss consist of:
Year Ended December 31,
2008
2007
Accumulated loss
Deferred income taxes
Accumulated other comprehensive loss
$
$
(9,567)
3,784
(5,783)
$
$
(3,537)
1,451
(2,086)
The accumulated benefit obligation was $14.8 million and $13.9 million at December 31, 2008 and 2007, respectively.
The following table provides the components of net periodic cost/(income) for the plan:
Year Ended December 31,
2008
2007
COMPONENTS OF NET PERIODIC BENEFIT COST (INCOME)
Service cost
Interest cost
Expected return on plan assets
Recognized net actuarial loss
Net periodic benefit cost (income)
$
$
113
894
(1,233)
228
2
115
831
(1,233)
223
(64)
$
$
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 ($0.8) million, $0 million and $0 million.
F-21
Fair value of total plan assets by major asset category as of December 31:
Equity securities
Fixed income
International equities
Cash and equivalents
Total
2008
2007
42%
48%
10%
0%
100%
49%
37%
14%
0%
100%
Weighted-average assumptions used to determine benefit obligations as of December 31:
Discount rate
Rate of compensation increase
2008
2007
6.27%
4.00%
6.37%
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
2008
2007
2006
6.37%
4.00%
8.00%
5.82%
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
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 2009, 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 for each of the years ended December 31, 2008
and 2007, respectively. The net periodic benefit expense was $2 thousand for the year ended December 31, 2008. The net periodic
benefit income was $64 thousand for the year ended December 31, 2007.
F-22
Information about the expected benefit payments for the plan is as follows:
Year Ending December 31,
2009
2010
2011
2012
2013
Years 2014-2018
$
733
819
847
886
974
5,828
The Company has a 401(k) defined contribution 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, 2008, 2007 and 2006 the Company's expense for the 401(k) plan amounted to
$1.4 million, $1.2 million and $0.9 million, respectively.
13.
INCOME TAXES
Components of the provision for income taxes from continuing operations were as follows:
Current:
Federal
State
Total
Deferred:
Federal
State
Total
Year Ended December 31,
2008
2007
2006
$
10,960
2,679
13,639
$
8,538
2,484
11,022
$
12,585
3,162
15,747
(159)
(139)
(298)
(776)
(314)
(1,090)
(2,908)
(747)
(3,655)
Total provision
$
13,341
$
9,932
$
12,092
F-23
The components of the deferred tax assets are as follows:
Deferred tax assets
Current:
Accrued vacation
Allowance for bad debts
Total current deferred tax assets
Deferred tax liabilities
Current:
Accrued student fees
Total current deferred tax liabilities
Total net current deferred tax assets
Noncurrent:
Accrued rent
Stock-based compensation
Depreciation
Prepaid pension asset
Sale leaseback-deferred gain
Total noncurrent deferred tax assets
Deferred tax liabilities
Noncurrent:
Other intangibles
Goodwill
Prepaid pension cost
Total deferred tax liabilities
Total net noncurrent deferred tax assets
Total net deferred tax assets
At December 31,
2008
2007
$
117
5,773
5,890
$
102
4,662
4,764
(263)
(263)
5,627
2,530
2,390
8,360
1,714
2,067
17,061
(2,893)
(7,088)
-
(9,981)
7,080
12,707
(189)
(189)
4,575
2,455
2,048
7,554
-
2,025
14,082
(2,294)
(5,592)
(696)
(8,582)
5,500
10,075
$
$
The difference between the actual tax provision and the tax provision that would result from the use of the Federal statutory rate is as
follows:
Income from continuing operations before taxes
$
33,536
$
23,759
2008
Year Ended December 31,
2007
2006
$
29,176
Expected tax
State tax expense (net of federal benefit)
Other
Total
$
$
11,737
1,651
(47)
13,341
35.0%
4.9
(0.1)
39.8%
$
$
8,316
1,411
205
9,932
35.0%
6.0
0.8
41.8%
$
$
10,212
1,570
310
12,092
35.0%
5.4
1.0
41.4%
The Company adopted the FIN No. 48 in 2006. At that time the Company established a liability of $0.1 million. In 2007 and 2008
there have been no adjustments or settlements related to such uncertain tax positions. Accordingly, at December 31, 2008, the
Company’s liability remained $0.1 million. The Company believes that it is reasonably possible that the $0.1 million of unrecognized
tax benefits associated with FIN No. 48 will be resolved by December 31, 2009.
The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states. The Company is no
longer subject to U.S. federal income tax examinations for years before 2004 and generally, is no longer subject to state and local
income tax examinations by tax authorities for years before 2003.
F-24
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
On May 12, 2008, the Company repurchased from Five Mile River Capital Partners and Steven W. Hart an aggregate 100,000 shares
of our common stock for $11.25 per share for a total cost of $1.1 million. Hart Capital LLC is the managing member of Five Mile
River Capital Partners LLC, our second largest stockholder. Steven W. Hart is the owner and president of Hart Capital LLC and is a
former member of our board of directors. At the time of the transaction Hart Capital beneficially owned, through Five Mile River
Capital LLC, 8.3% of our outstanding shares of common stock.
On October 15, 2007, the Company entered into a Separation and Release Agreement with Lawrence E. Brown, our former Vice
Chairman. Under this agreement Mr. Brown’s employment terminated as of the close of business on October 31, 2007. For a period
of 14 months following the date of separation of employment, Mr. Brown continued to provide transitional services to the Company,
not to exceed ten hours per month. In consideration for a release of claims, the Company paid Mr. Brown a lump sum cash payment
of $0.5 million and reimbursed Mr. Brown for the employer-portion of the premiums due for continuation of coverage under COBRA
through December 31, 2008. Mr. Brown was entitled to the use of his automobile and reimbursement of associated costs by us
through December 31, 2008. In addition, pursuant to the terms of the agreement, Mr. Brown agreed to be subject to certain restrictive
covenants, which, among other things, prohibited him for the duration of 14 months following the date of separation of employment,
from (i) competing against the Company and (ii) soliciting the Company or any of our affiliates’ or subsidiaries’ employees,
consultants, clients or customers through December 31, 2008.
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.
16.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
On May 22, 2006, the Company assumed a mortgage note payable 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 in 2006 and the Company
received $0.2 million for the fair market value.
F-25
17.
COMMITMENTS AND CONTINGENCIES
Lease Commitments—The Company leases office premises, educational facilities and various equipment for varying periods through
the year 2023 at basic annual rentals (excluding taxes, insurance, and other expenses under certain leases) as follows:
Year Ending December 31,
2009
2010
2011
2012
2013
Thereafter
Less amount representing interest
Finance
Obligations
1,381
$
1,381
1,381
1,381
1,381
4,259
11,164
(11,164)
-
$
Operating
Leases
Capital
Leases
$
$
17,840
15,935
15,247
14,811
13,479
63,498
140,810
-
140,810
167
161
161
94
-
-
583
(81)
502
$
$
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, 2008
is $17.2 million, $16.7 million, and $15.7 million, respectively. Interest expense related to the financing obligation in the
accompanying financial statements for the years ended December 31, 2008, 2007 and 2006 is $1.4 million, $1.3 million and
$1.3 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.
Student Loans—At December 31, 2008, the Company had outstanding net loan commitments to its students to assist them in
financing their education of approximately $16.5 million.
Vendor Relationship—On April 1, 2006, the Company entered into an agreement with Snap-on Industrial (“Snap-on”) which expires
on March 31, 2011. The Company has agreed to grant Snap-on exclusive rights to our certain automotive campuses to display
advertising and to train our students with the exception of one pre-existing vendor contract. The Company earns credits that are
redeemable for tools and equipment based on the number of automotive graduates quarterly. In addition, credits are earned on our
purchases as well as purchases made by students enrolled in our automotive programs. Snap-on receivable for credits not redeemed
for the years ended December 31, 2008 and 2007 was $0.3 million and $0.5 million, respectively.
In October 1, 2005, the Company entered into an agreement with Snap-on exclusively for our Queens, NY campus opened March 27,
2006 which expires on November 30, 2011. We have agreed to grant Snap-on exclusive rights to in school advertising and supplying
all student training tools and equipment, as well as our automotive equipment purchases. In exchange, Snap-on agreed to advance
tools and equipment needed to build out the school, not to exceed $1.0 million at list price. The equipment advance is offset by
credits earned through purchases by the Queens campus and their students. Snap-on liability resulting from advanced equipment
received in excess of credits earned for the years ended December 31, 2008 and 2007, was $0.5 million and $0.6 million, respectively.
F-26
Executive Employment Agreements—The Company entered into employment contracts with key executives that provide for
continued salary payments if the executives are terminated for reasons other than cause, as defined in the agreements. The future
employment contract commitments for such employees were approximately $4.0 million at December 31, 2008.
Change in Control Agreements—In the event of a change of control several key executives will receive continue salary payments
based on their employment agreements.
Surety Bonds—Each of our campuses must be authorized by the applicable state education agency in which the campus is located to
operate and to grant degrees, diplomas or certificates to its students. The campuses are subject to extensive, ongoing regulation by
each of these states. In addition, our campuses are required to be authorized by the applicable state education agencies of certain other
states in which our campuses recruit students. The Company is required to post surety bonds on behalf of our campuses and education
representatives with multiple states to maintain authorization to conduct our business. At December 31, 2008, we have posted surety
bonds in the total amount of approximately $13.7 million.
18.
UNAUDITED QUARTERLY FINANCIAL INFORMATION
Quarterly financial information for 2008 and 2007 is as follows (in thousands except per share data):
2008
Revenues
Operating income
Net income
Income per share:
Basic
Net income per share
Diluted
Net income per share
2007
Revenues
Operating (loss) income
(Loss) income from continuing operations
Loss from discontinued operations
Net (loss) income
(Loss) income per share:
Basic
(Loss) earnings per share from continuing operations
Loss per share from discontinued operations
Net (loss) income per share
Diluted
(Loss) earnings per share from continuing operations
Loss per share from discontinued operations
Net (loss) income per share
19.
DISCONTINUED OPERATIONS
First
Second
Third
Fourth
Quarter
$
84,047
1,249
484
$
85,056
2,686
1,241
$
100,481
10,391
5,706
$
107,323
21,248
12,763
$
0.02
$
0.05
$
0.23
$
0.51
$
0.02
$
0.05
$
0.22
$
0.49
First
Second
Third
Fourth
Quarter
$
76,170
(1,164)
(930)
(688)
(1,618)
$
74,744
1,966
768
(2,468)
(1,700)
$
86,566
8,079
4,370
(2,331)
2,039
$
90,294
17,013
9,620
-
9,620
$
$
$
$
$
$
$
$
0.38
-
0.38
(0.04)
(0.02)
(0.06)
(0.04)
(0.02)
(0.06)
$
$
0.03
(0.10)
(0.07)
0.03
(0.10)
(0.07)
$
$
$
$
$
$
0.37
-
0.37
0.17
(0.09)
0.08
0.17
(0.09)
0.08
On July 31, 2007 the Company’s Board of Directors approved a plan to cease operations at the Company’s Plymouth Meeting,
Pennsylvania, Norcross, Georgia and Henderson, Nevada campuses. As a result of the above decision, the Company reviewed the
related goodwill and long-lived assets for possible impairment in accordance with SFAS No. 142, “Goodwill and Other Intangible
Assets,” and SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”
F-27
As of September 30, 2007, all operations had ceased at these campuses and, accordingly, the results of operations of these campuses
have been reflected in the accompanying statements of operations as “Discontinued Operations” for all periods presented.
The results of operations at these three campuses for each of the two year period ended December 31, 2007 were comprised of the
following (in thousands):
Year Ended December 31,
euneveR
sesnepxE gnitarepO
Benefit for income taxes
Loss from discontinued operations
20.
SUBSEQUENT EVENTS
2007
$
032,4
)067,31(
(9,530)
(4,043)
(5,487)
$
2006
10,876
(13,493)
(2,617)
(1,085)
(1,532)
$
$
On January 20, 2009, the Company completed the acquisition of four of the five institutions comprising Baran Institute of Technology
(“Baran”), for approximately $24.9 million in cash, net of cash acquired, subject to contractual post closing adjustments. Baran
consists of five distinct institutions serving approximately 1,900 students and offers associate and diploma programs in the fields of
automotive, skilled trades, health sciences and culinary arts. The four institutions the Company acquired on January 20, 2009 are
Baran Institute of Technology (“BIT”), Connecticut Culinary Institute (“CCI”), Americare School of Nursing (“ASN”), and Engine
City Technical Institute (“ECTI”). The Company also acquired the membership interests of Hartford Urban Ventures, LLC and
certain assets and assumed certain liabilities of Educational Properties, LLC, which provide support services to Baran. In connection
with these acquisitions, the Company recorded a charge of approximately $0.02 per share in the fourth quarter of 2008 and for the year
ended December 31, 2008 and we expect to record a charge of approximately $0.01 per share in the first quarter of 2009 to reflect the
expenses related to the acquisitions.
On February 18, 2009, we sold common stock in a public offering and received net proceeds of approximately $14.0 million.
LINCOLN EDUCATIONAL SERVICES CORPORATION
Schedule II—Valuation and Qualifying Accounts
Description
Allowance accounts for the year ended:
December 31, 2008
Student receivable allowance
December 31, 2007
Student receivable allowance
December 31, 2006
Student receivable allowance
(in thousands)
Balance at
Beginning of
Period
Charged to
Expense
Accounts
Written-off
Balance at
End of
Period
$
11,403
$
21,642
$
(18,307)
$
14,738
$
11,536
$
17,767
$
(17,900)
$
11,403
$
7,647
$
15,590
$
(11,701)
$
11,536
F-28
Lincoln_08ar_CVR_V12_INSIDE 3/25/09 5:14 PM Page 1
About Lincoln Educational Services Corporation Lincoln Educational Services Corporation, through its subsidiaries,
operates Lincoln Technical Institute, Lincoln College of Technology, Southwestern College, Nashville Auto-Diesel College, Euphoria
Institute of Beauty Arts & Sciences and Briarwood College. Lincoln also operates divisions within some of these institutions under the names Florida
Culinary Institute and The Center For Culinary Arts. With a broad geographic reach of 36 campuses in 17 states, Lincoln is well positioned to
achieve its goal of becoming one of the largest providers of post-secondary education in the United States.
Financial Highlights
Dollars in Thousands, Except Per Share Amounts
Revenues
Total Costs and Expenses
Operating Income
Income From Continuing Operations
Net Income
Earnings Per Common Share From
Continuing Operations
Basic
Diluted
Income Per Common Share
Basic
Diluted
2008
$376,907
$341,332
$ 35,575
$ 20,195
$ 20,195
$0.80
$0.78
$0.80
$0.78
Cash, Restricted Cash and Marketable Securities
Total Debt
Total Stockholders’ Equity
$ 15,617
$ 10,174
$174,949
Depreciation and Amortization From
Continuing Operations
Capital Expenditures
Acquisitions, Net of Cash Acquired
Average Enrollment
Number of Campuses
Educational Programs
D E G R E E
$ 17,920
$ 20,166
$ 10,520
20,006
36
2007
2006
$327,774
$301,881
$ 25,893
$ 13,827
$ 8,340
$0.54
$0.53
$0.33
$0.32
$ 3,502
$ 15,378
$162,467
$ 15,111
$ 24,766
—
$
17,687
34
$310,630
$280,012
$ 30,618
$ 17,084
$ 15,552
$0.67
$0.65
$0.61
$0.60
$ 7,381
$ 9,860
$151,783
$ 13,829
$ 19,341
$ 32,872
17,397
34
2005
$287,368
$252,279
$ 35,089
$ 20,284
$ 18,709
$0.86
$0.83
$0.80
$0.76
$ 50,257
$ 10,768
$135,990
$ 12,099
$ 22,621
$ 27,776
17,064
31
2004
$248,508
$221,841
$ 26,667
$ 13,907
$ 12,978
$0.64
$0.60
$0.60
$0.56
$ 41,445
$ 46,829
$ 58,086
$ 9,870
$ 23,813
$ 14,498
15,401
25
D I P LO M A / C E R T I F I C AT E
Automotive Technology
Auto Service Management
Collision Repair
Diesel & Truck Service
Management
Health Sciences
Medical Assisting Technology
Medical Administrative
Technology
Dental Office Management
Child Development
Health Information Coding
Medical Office Management
Medical Administrative
Assistant
Mortuary Science
Nuclear Medicine
Occupational Therapy
Assistant
Dental Hygiene
Dental Administrative
Assistant
Advanced Medical
Coding and Billing
Skilled Trades
Mechanical/Architectural
Drafting
Electronics Engineering
Technician
Electronic Systems Technician
Hospitality Services
Culinary Management
Culinary Arts
Cosmetology
Food and Beverage
Baking and Pastry
Hotel Restaurant
Management
Dietetic Technician
Travel and Tourism
Business and IT
Criminal Justice
Funeral Service Management
PC Systems & Networking
Technology
Network Systems
Administration
Network Communications
and Information Systems
Business Management
Business Marketing
HR Management
Accounting
Broadcasting and
Communications
Fashion Merchandising
Paralegal
ONLINE Programs
Accounting and Technology
Business Administration
Business Management
Business Marketing
HR Management
Criminal Justice and the
Study of the Criminal Mind
Criminal Justice
Network Communications
and Information Systems
Information Management
and Security
Advanced Medical Coding
and Billing
Hospitality Services
Culinary Arts
Baking and Pastry
Aesthetics
Cosmetology
Therapeutic Massage
& Body Technology
Business and IT
Business Administration
Network Systems
Administrating
PC Support Technology
Criminal Justice
Network Communications
and Information Systems
Automotive Technology
Automotive Mechanics
Automotive Technology
Collision Repair
Diesel Truck Mechanics
Diesel & Truck Technology
Health Sciences
Medical Administrative
Assisting
Medical Assisting
Pharmacy Technology
Medical Coding and Billing
Dental Assisting
Practical Nursing
Phlebotomy
Nuclear Medicine
Skilled Trades
Electronics Engineering
Technician
Electronics System Technician
HVAC
Mechanical/Architectural
Drafting
Electrician
Welding
Corporate Information
Board of Directors
Corporate Officers
David F. Carney (1)
Chairman of the Board and
Chief Executive Officer
Alexis P. Michas (1) (3) (4)
Managing Partner
Stonington Partners, Inc.
James J. Burke, Jr. (1) (3) (4)
Partner
Stonington Partners, Inc.
David F. Carney
Chairman of the Board and
Chief Executive Officer
Shaun E. McAlmont
President and
Chief Operating Officer
Scott M. Shaw
Executive Vice President and
Chief Administrative Officer
Jerry G. Rubenstein (2) (5)
President
OMNI Management Associates
Cesar Ribeiro
Senior Vice President,
Chief Financial Officer and Treasurer
Thomas F. McHugh
Senior Vice President and
Chief Compliance Officer
Piper P. Jameson
Senior Vice President and
Chief Marketing Officer
Edward B. Abrams
President
Lincoln Education Group
Deborah M. Ramentol
President
Lincoln Technical Group
Paul E. Glaske (3) (4) (5)
Former Chairman and
Chief Executive Officer
Blue Bird Corporation
Peter S. Burgess (2) (5)
Former Partner
Arthur Andersen LLP
Celia H. Currin (2) (5)
Founder and Principal
BenchStrength Marketing
J. Barry Morrow (4) (5)
Former President
Chase Education Finance
Charles F. Kalmbach (2) (3) (5)
Former Global Managing Partner
Accenture, Ltd.
(1) Member of Executive Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee
(4) Member of Nominating and Corporate Gover-
nance Committee
(5) Independent Director
Corporate Headquarters
200 Executive Drive, Suite 340
West Orange, NJ 07052
973.736.9340
www.lincolnedu.com
Outside Counsel
Shearman & Sterling LLP
New York, NY
Auditors
Deloitte & Touche LLP
Parsippany, NJ
Transfer Agent
Continental Stock Transfer &
Trust Company
New York, NY
Common Stock
Traded on the NASDAQ
Global Market under
the symbol LINC
Investor Relations
Brainerd Communicators, Inc.
New York, NY
212.986.6667
CC
T L G S
Lincoln Technical Institute
www.lincolntech.com
Allentown, PA
Brockton, MA
Center City Philadelphia, PA
Columbia, MD
Cromwell, CT
Edison, NJ
Hamden, CT
Lincoln, RI
Lowell, MA
Mahwah, NJ
Mt. Laurel, NJ
New Britain, CT
NE Philadelphia, PA
Paramus, NJ
Philadelphia, PA
Whitestone, NY
Shelton, CT
Somerville, MA
Union, NJ
Lincoln College of Technology
www.lincolncollegeoftechnology.com
Denver, CO
West Palm Beach, FL
Grand Prairie, TX
Indianapolis, IN
Marietta, GA
Melrose Park, IL
Southwestern College
www.swcollege.net
Dayton, OH
Toledo, OH (opening 2009)
North Cincinnati, OH
Central Cincinnati, OH
Franklin, OH
Florence, KY
Euphoria Institute of Beauty Arts & Sciences
www.euphoriainstitute.com
Henderson, NV
Lincoln, RI
Aliante, NV
West Palm Beach, FL
Las Vegas, NV
Nashville Auto Diesel College
www.nadcedu.com
Nashville, TN
Lincoln College Online
www.lincolncollegeonline.com
Florida Culinary Institute
www.fl oridaculinary.com
West Palm Beach, FL
Center for Culinary Arts
www.centerforculinaryarts.com
Cromwell, CT
Shelton, CT
Columbia, MD
Briarwood College
www.briarwood.edu
Southington, CT
N S A J
Americare School of Nursing
www.americareschools.com
Fern Park, FL
St. Petersburg, FL
Baran Institute of Technology
www.baraninstitute.com
East Windsor, CT
Engine City Technical Institute
www.enginecity.edu
South Plainfi eld, NJ
Connecticut Culinary Institute
www.ctculinary.edu
Hartford, CT
Suffi eld, CT
2008 ANNUAL REPORT
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