A L I N C O L N S U C C E S S S T O R Y
A N N U A L R E P O R T
Financial Highlights
Dollars in Thousands, Except Per Share Amounts
2009
2008
2007
2006
2005
Revenue $552,536
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
Cash, Restricted Cash and Marketable Securities
Total Debt
Total Stockholders’ Equity
Depreciation and Amortization From
Continuing Operations
Capital Expenditures
Acquisitions, Net of Cash Acquired
Average Enrollment
Number of Campuses
$376,907
$464,218
$ 88,318
$ 49,239
$ 49,239
$327,774
$341,332
$ 35,575
$ 20,195
$ 20,195
$310,630
$301,881
$ 25,893
$ 13,827
$ 8,340
$287,368
$280,012
$ 30,618
$ 17,084
$ 15,552
$252,279
$ 35,089
$ 20,284
$ 18,709
$ 1.87
$ 1.82
$ 0.80
$ 0.78
$ 0.54
$ 0.53
$ 0.67
$ 0.65
$ 0.86
$ 0.83
$ 1.87
$ 1.82
$ 46,934
$ 57,328
$218,636
$ 24,240
$ 24,018
$ 27,552
27,808
43
$ 0.80
$ 0.78
$ 15,617
$ 10,174
$174,949
$ 17,920
$ 20,166
$ 10,520
20,006
36
$ 0.33
$ 0.32
$ 3,502
$ 15,378
$162,467
$ 15,111
$ 24,766
$ —
17,687
34
$ 0.61
$ 0.60
$ 7,381
$ 9,860
$151,783
$ 13,829
$ 19,341
$ 32,872
17,397
34
$ 0.80
$ 0.76
$ 50,257
$ 10,768
$135,990
$ 12,099
$ 22,621
$ 27,776
17,064
31
Educational Programs and Areas of Study
Automotive
Health Sciences
Hospitality
Hospitality
Business and IT
Online Programs
Online Programs
Automotive Technology
Basic X-ray Technician
Aesthetics
Accounting
Collision Repair
Child Development
Baking and Pastry
Business Management
Diesel Technology
Dental Assistant
Culinary Arts
Criminal Justice
Motorcycle
Dental Hygiene
Culinary Management
Fashion Merchandising
Skilled Trades
Drafting
Electrical Technology
Electrician
Electronic Systems
Technician
HVAC
Welding
Medical Assistant
Cosmetology
Medical Administrative
Assistant
Medical Coding & Billing
Hospitality Management
Italian Culinary Arts
Massage Therapy
Funeral Service
Management
Marketing
Mortuary Science
Nuclear Medicine
Occupational Therapy
Assistant
Pharmacy Technician
Phlebotomy
Practical Nursing
Surgical Technologist
Network Communication
& Information Systems
Paralegal
Lincoln schools offer diploma, certifi cate, associate’s and bachelor’s degrees for select programs.
Advanced Medical
Coding & Billing
Business Management
Criminal Justice
Graphic Design
Information Management
& Security
Web Design
Letter to Shareholders
600000
Dear Fellow Shareholders:
2009 was a remarkable year for our Company. We achieved record revenue,
operating income, net income, earnings per share and enrollment. We believe
this has been possible due to the building blocks we put in place over the last
few years. We consolidated our brand, invested signifi cantly in our marketing
message and in the training of our personnel. We also signifi cantly reduced
turnover, which led to a more seasoned and productive admissions group.
300000
200000
400000
500000
Furthermore, we placed greater emphasis and dedicated signifi cant resources
to enhance our services to our students throughout their educational
experience. While a student’s fi rst contact is with admissions, their experience
with fi nancial aid, their instructors and other campus personnel all contribute
to a positive student experience. As a result, we achieved high levels of student
satisfaction as compared to prior years with 98% of all students indicating
that they were satisfi ed with their educational experience.
0
100000
2009 was a year of strong company-wide performance which we believe will
serve as a foundation for 2010 and beyond.
Financial and Enrollment Results
Revenue for the full year increased 46.6% to $552.5 million, and revenue on a
same school basis increased by 31.5% to $494.6 million. Our 2009 operating
margin increased by 655 basis points to 16.0% compared to 9.4% in 2008
as we continued to capitalize on the leverage in our business model, resulting
from solid enrollment growth and increased capacity utilization. Consequently,
net income for the year was $49.2 million which resulted in diluted earnings
per share increasing 133% from $0.78 in 2008 to $1.82 in 2009.
Our average enrollment of 27,808 for the year ended December 31, 2009,
increased 39% year-over-year and was divided between Health Sciences 37%,
Automotive 31%, Skilled Trades 13%, Hospitality 10%, and Business and IT 9%.
Our balance sheet was strong as we fi nished the year with $46.9 million in cash
and cash equivalents and $20 million of borrowings outstanding under our
$115 million credit facility.
We believe we are well positioned for another strong year of growth as we
continue to benefi t from improved operations and a weakened economy,
leading us into 2010 with approximately 7,650 more students than in 2009.
REVENUE
Dollars in Thousands
$552,536
$376,907
$310,630
$327,774
$287,368
‘05
‘06
‘07
‘08
‘09
OPERATING
INCOME
Dollars in Thousands
$88,318
$35,089
$30,618
$35,575
$25,893
‘05
‘06
‘07
‘08
‘09
AVERAGE
ENROLLMENT
27,808
17,064
17,397
17,687
20,006
‘05
‘06
‘07
‘08
‘09
LINCOLN EDUCATIONAL SERVICES 1
Continued Operational Investments
Human Capital
Student Outcomes
In 2009 we invested in our institutions with a clear focus
on student outcomes because we believe strong student
persistence, satisfaction, graduation and job placement
rates equate to a compelling return on a student’s
education investment. To this end we have focused on
key student services including job placement assistance
and default management. Operating in a challenging job
market required increasing our career services staff by
31% in order to assist students in fi nding employment
while in school and also post graduation. In addition, we
invested in personnel, processes, and technology that will
aid students in understanding and managing their debt.
Facilities
We continue to invest in our facilities in order to provide
innovative learning environments for our students and to
position ourselves competitively to gain market share. We
fi nished the year at an overall capacity utilization of 70%.
In 2010 we are moving certain schools to new facilities
and adding additional space to others to accommodate
new programs. In all, we are expanding seven
three others
relocating
including a 215,000 square foot facility in
Denver, Colorado which is expected to open
in the summer of 2011.
campuses and
We believe our employees are at the center of our success
and we continue to invest in their training and education.
To support our growth, we increased our employee training
programs to help our employees clearly understand our
mission, vision and company goals and specifi cally how
their efforts relate to student achievement and company
success. We believe these efforts have been successful
and have contributed to our strong 2009 performance
and solid regulatory record.
Student Recruitment
We continue to benefi t from our ongoing re-branding strategy
and the strong performance of our Internet presence. We
have transitioned all campuses to a Lincoln brand or applied
the Lincoln Group of Schools tagline where appropriate.
We believe that utilizing the Internet as our primary source
for new student inquiries helps us to more effectively
achieve greater marketing effi ciencies and promote the
Lincoln brand.
QUARTERLY
NEW ENROLLMENTS
Year-over-Year
Growth (%)
42.4
40.7
35.1
31.8
20.9
17.1
10.3
7.7
7.5
8.6
5.4
2.7
Q1 Q2 Q3 Q4
2007
Q1 Q2 Q3 Q4
2008
Q1 Q2 Q3 Q4
2009
“Lincoln has defi nitely given me a strong base to build a career from. My experience at the school was great and
the hands on aspect gave me a feeling of being in the fi eld before I was there. The instructors are knowledgeable.
I had a job offer before I was fi nished with school and feel confi dent I could be hired anywhere.”
George Heerema
Electronic Systems Technician Graduate
2 LINCOLN EDUCATIONAL SERVICES
INCREASING
ENROLLMENT
GROWTH
Year-over-Year
Quarterly Growth (%)
40.0
40.6
37.6
35.4
20.3
14.7 15.1
10.0
8.5
4.9
1.7
(1.5)
Q1 Q2 Q3 Q4
2007
Q1 Q2 Q3 Q4
2008
Q1 Q2 Q3 Q4
2009
2009 AVERAGE ENROLLMENT BY VERTICAL
9%
9%
10%
10%
13%
13%
31%
31%
37%
37%
Health Sciences
Automotive
Skilled Trades
Hospitality
Business/IT
Building on Our Success in 2010
Expanding Program Breadth and Depth
Our vision involves maintaining a strong and competitive
presence in our fi ve program verticals. In addition, we believe
there is an opportunity to expand our program breadth
within each vertical and increase the depth of our offerings
through associate’s and bachelor’s degrees. This year we
plan to introduce or replicate programs across all verticals
as we believe strengthening each program will enhance our
ability to withstand a downturn in any one program area.
We continue to invest substantial resources into our Health
Sciences vertical as we believe the aging population will
provide increasing demand in the future. We have placed
a signifi cant emphasis on nursing and other specialized
medical professions. Our Practical Nursing program remains
in high demand and we plan to continue to replicate this
program to additional campuses. Other areas of attention
are renewable energy enhancements for our Automotive and
Skilled Trade verticals, as well as additional Business and
IT programs. We also continue to execute our longer-term
strategy to expand our degree offerings.
Start-up Campuses
We expect to open two new schools in 2010 and plan on
multiple start-up campuses beyond 2010 in order to expand
our geographic footprint and facilitate company growth.
“All the instructors, career services, and education department personnel were great!
The attention drawn to each student in succeeding is above and beyond. Since they
know what is expected in the work fi eld, they will push you to do your best.”
Juliana Oliveira
Medical Assistant Graduate
LINCOLN EDUCATIONAL SERVICES 3
Positioning for Long Term Growth
In Conclusion
We continue to serve a diverse student population in
our 43 campuses, which span 17 states. We believe
our programs provide educational access to thousands
of students who otherwise would not have pursued an
education, which allows Lincoln to continue to emerge
as an important player in President Obama’s plan for
expanded education in the United States. Furthermore,
by offering programs in high demand with meaningful job
placements, we are fulfi lling our mission and benefi ting
the communities we serve.
Overall we believe expanding our market reach via
advanced degree offerings while also continuing to
generate growth in our diploma and associate’s degree
programs will position Lincoln for long-term growth and
strengthen our position when the economy improves. We
plan to continue to build upon our strong, existing platform
with the goal of strengthening our competitive position,
capitalizing on market opportunities and continuing to
deliver strong returns to our shareholders.
The Lincoln Collegiate Group
In order to position Lincoln for long term growth, we
are committed to widening our demographic reach to
include students seeking associate’s, bachelor’s and
eventually higher degrees. To this end, we acquired two
undercapitalized regionally accredited colleges, Briarwood
College and Clemens College, and have begun the multi-
year investment plan to improve the facilities and expand
and update the program offerings to better serve the local
community. We received approval from the New England
Association of Schools and Colleges (NEASC) in December
2009 to merge the two colleges into the new Lincoln
College of New England. We also received approval
to launch a new branch of this school in our existing
downtown Hartford facility. This new combined entity will
serve as our fi rst Lincoln branded regionally accredited
ground operation with student residences at each site. As
for our online initiative, we expect to receive approval to
launch our fi rst fully online regionally accredited programs
in 2010. We believe our careful transition into advanced
degree levels will offer us additional opportunities for
student growth and degree completion opportunities.
David F. Carney
Executive Chairman and
Chairman of the Board of Directors
Shaun E. McAlmont
President and
Chief Executive Offi cer
“Being a single mom and out of work, I decided to do a career change in my mid 40’s
and as we all know that change is scary. I enrolled at Lincoln Tech in Paramus, NJ.
I have a new career and a new job in the fi eld I studied at Lincoln.”
Randi Levant
Network Communications and
Information Systems Technician Graduate
4 LINCOLN EDUCATIONAL SERVICES
_________________________________________________________________________________________________________
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, 2009
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 whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files). Yes (cid:134) No (cid:134)
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 11,373,470 shares of common stock held by non-affiliates of the registrant issued and outstanding as of
June 30, 2009, the last business day of the registrant’s most recently completed second fiscal quarter, was $238,046,727. This amount is based on
the closing price of the common stock on the Nasdaq Global Select Market of $20.93 per share on June 30, 2009. 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 the registrant’s common stock outstanding as of March 9, 2010 was 25,924,518.
Documents Incorporated by Reference
Portions of the Proxy Statement for the Registrant’s 2010 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, 2009
PART I.
BUSINESS
ITEM 1.
ITEM 1A. RISK FACTORS
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2.
ITEM 3.
ITEM 4.
PROPERTIES
LEGAL PROCEEDINGS
RESERVED
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
22
33
34
35
35
35
35
39
41
52
53
53
53
53
54
54
54
54
54
54
56
56
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:
•
•
•
•
•
•
•
•
•
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;
risks associated with integration of acquired schools;
industry competition;
our ability to continue to execute our growth strategies;
conditions and trends in our industry;
general 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 provider of diversified career-oriented post-secondary education as measured by total enrollment. As of December 31,
2009, we operated 43 campuses in 17 states. We offer recent high school graduates and working adults degree and diploma programs in
five areas of study: health sciences, automotive technology, skilled trades, hospitality services and business and information technology.
For the year ended December 31, 2009, our health science program, our automotive technology program, our skilled trades program, our
hospitality services program and our business and information technology program accounted for approximately 37%, 31%, 13%, 10%,
and 9%, respectively, of our average enrollment. We had 29,340 students enrolled as of December 31, 2009 and our average enrollment for
the year ended December 31, 2009 was 27,808 students, an increase of 39.0% from our average enrollment of 20,006 for the year ended
December 31, 2008. For the year ended December 31, 2009, our revenues were $552.5 million, which represents an increase of 46.6%
from the year ended December 31, 2008. Excluding our acquisitions of Lincoln College of New England (formerly known as Briarwood
College) or BRI on December 1, 2008, six of the seven schools comprising Baran Institute of Technology or BAR on January 20, 2009 and
Clemens College, the seventh BAR school, or Clemens on April 20, 2009 or collectively, the Acquisitions, our revenues and average
enrollment would have increased by 31.5% and 26.5%, respectively, compared to the year ended December 31, 2008. For the year ended
December 31, 2008, our revenues were $376.9 million, which represented a 15.0% increase from the year ended December 31, 2007.
Excluding our acquisition of BRI, our revenues and average enrollment for 2008 would have increased by 14.7% and 13.0%, respectively,
compared to the year ended December 31, 2007.
All of our schools operate under the Lincoln Technical Institute, Lincoln College of Technology and Lincoln College of New England
brand names, except for Nashville Auto-Diesel College, or NADC, Southwestern College, Clemens College and Euphoria Institute of
Beauty Arts and Sciences, which continue to operate under their previous 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 or regionally 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.
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 many of the key areas of expected job
demand. We believe these job skills enable our students to compete effectively for employment opportunities and to pursue on-going
salary and career advancement.
Each of our schools is an operating segment. Our operating segments have been aggregated into one reportable segment because, in our
judgment, the operating segments have similar products, production processes, types of customers, methods of distribution, regulatory
environment and economic characteristics.
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.
1
The following amounts relate to discontinued operations at these three campuses (in thousands):
Year Ended
December 31,
2007
$
4,230
(13,760)
(9,530)
(4,043)
(5,487)
$
Revenues
Operating expenses
Benefit for income taxes
Loss from discontinued operations
AVAILABLE INFORMATION
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 strategy:
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.
Whenever possible we seek to replicate programs across our campuses. We also expect to continue expanding some of our existing
facilities and relocating other facilities to expand capacity. In 2008 and 2009, we increased capacity at four of our Southwestern College
campuses and at our campus in Melrose Park, Illinois, and moved into a new and larger campus in Brockton, Massachusetts. In 2009, we
acquired a property which is currently being expanded and which will serve as the new home for our Lincoln College of Technology in
Denver, Colorado.
Maximize Utilization of Existing Facilities. We are focused on improving capacity utilization of existing facilities through increased
enrollments and the introduction of new programs. We expect to continue investing in marketing, recruiting and retention resources to
increase enrollment.
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 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. In 2009, we
expanded our presence in Ohio by opening our sixth Southwestern College in Toledo. 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.
Pursue Strategic Acquisitions. We continue to evaluate 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. For example, during the first and second quarters of 2009, we completed
the acquisition of BAR, which consists of seven campuses serving 2,273 students as of December 31, 2009 and offers associate’s degree
and diploma programs in the fields of automotive, skilled trades, health sciences and culinary arts.
Expand Market. We believe that we can enter new markets and broaden the Lincoln brand by operating regionally accredited schools that
offer associate’s and bachelor’s degrees, both on ground and online. To launch this effort we acquired BRI on December 1, 2008. BRI
operates one campus in Southington, Connecticut and is regionally accredited by the New England Association of Schools and Colleges,
and currently offers two bachelor’s degree programs and 31 associate’s degree programs to 668 students as of December 31, 2009 from
Connecticut and surrounding states.
Expand Online Programs. We offer online programs with a view towards capitalizing on the growing demand for, and flexibility
provided by, online education alternatives. In 2008, we launched online associate’s and bachelor’s degree programs under our national
accreditation. 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 market. Furthermore, with the addition of BRI we expect to offer
regionally accredited online degree programs that we believe will make our online offerings more attractive and competitive compared to
those of our peers.
2
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 diploma/certificate programs typically take between 16 to 105 weeks to complete,
with tuition ranging from $7,000 to $35,000. Our associate’s degree programs typically take between 47 to 92 weeks to complete, with
tuition ranging from $18,000 to $33,000. Our bachelor’s degree programs typically take between 132 and 193 weeks to complete, with
tuition ranging from $55,000 to $70,000. As of December 31, 2009, all of our schools offer diploma and certificate programs, 22 of our
schools are currently approved to offer associate’s degree programs and three 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.
3
The following table lists the programs offered as of December 31, 2009 with the average number of students enrolled in each area of study
for the year ended December 31, 2009:
Area of Study
Bachelor's
Associate's
Diploma and Certificate
Programs Offered
Health Sciences
-
Automotive
-
Medical Assisting
Technology, Medical
Assisting & Administrative
Technology, Dental Office
Management, Child
Development, Health
Information Technology,
Medical Office
Management, Medical
Assistant, Mortuary
Science, Nuclear Medicine
Technology, Occupational
Therapy Assistant, Dental
Hygeine, Dental
Administrative Assistant,
Surgical Technologist,
Advanced Medical Coding
& Billing, Pharmacy
Technician
Automotive Technology,
MasterCertified Auto
Service Management,
Collision Repair &
Refinishing Service
Management, Diesel
Technology, Master
Certified Diesel & Truck
Service Management
Medical Administrative
Assistant, Medical Assistant,
Pharmacy Technician,
Medical Coding & Billing,
Dental Assistant, Licensed
Practical Nursing,
Phlebotomy, Nuclear
Medicine Technology,
Medical Assistant w/Basic X-
ray, Basic X-Ray
Technician, Patient Care
Technician, Surgical
Technologist
Automotive Mechanics,
Master Certified Automotive
Technology, Collision
Repair & Refinishing
Technology, Diesel & Truck
Mechanics, Diesel
Technology, Master
Certified Diesel & Truck
Technology, Master
Certified Automotive
w/Diesel Technology,
Motorcycle Technology
Average
Enrollment
Percent of
Total
Enrollment
10,220
37%
8,676
31%
Skilled Trades
-
3,526
13%
Mechanical / Architectural
Drafting & CAD
Technology, Electronic
Engineering Technology,
HVAC, Electronics
Systems Service
Management, Security
Systems Service
Management
Electrical Technology,
Electronics Engineering
Technology, Electronics
Systems Technician, Air
Conditioning Refridgeration
& Heating Technology,
Electrician, Welding
Technology, Security
Systems Technician
4
Average
Enrollment
Percent of
Total
Enrollment
2,720
10%
2,666
9%
Programs Offered (Continued)
Area of Study
Bachelor's
Associate's
Diploma and Certificate
Hospitality Services
Culinary Arts
Management
Business and
Information
Technology
Business
Management,
Business
Marketing,
Criminal
Justice,
Funeral
Service
Management,
Integrated
Marketing
Communicati
on & Design,
Information
Mangement &
Security,
Human
Resource
Management
Culinary Arts, Advanced
Culinary Arts, Baking &
Pastry Essentials,
Cosmetology, Aesthetics,
Therapeutic Massage &
Bodywork Technician,
Advanced Italian Culinary
Arts
PC Support Technician,
Criminal Justice, Network
Communications and
Information Systems,
Business Office Technology
Culinary Arts, Salon
Management, Food and
Beverage, International
Baking and Pastry,
Culinary Management,
Hotel Restaurant
Management, Dietetic
Technician, Travel and
Tourism, Hospitality
Management
PC Systems & Networking
Technician, Business
Administration, Criminal
Justice, Network
Communications &
Information Systems,
Business Management,
Business Marketing,
Human Resource
Management, Accounting
Technology, Broadcasting
and Communications,
Fashion Merchandising,
Paralegal, Graphic Design,
Web Design
:latoT
808,72
100%
5
Health Sciences. For the year ended December 31, 2009, health sciences represented our largest area of study, representing 37% of our
total average student enrollment. Our health science programs are 24 to 92 weeks in length, with tuition rates of $7,000 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, 2009, we offered health science programs at 27 schools, including six Southwestern College schools, BRI, and 20
Lincoln College of Technology and Lincoln Technical Institute schools.
Automotive Technology. Automotive technology represents our second largest area of study, with 31% of our total average student
enrollment for the year ended December 31, 2009. Our automotive technology programs are 24 to 105 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.
As of December 31, 2009, each of our Lincoln Technical Institute schools, with the exception of our Allentown, Pennsylvania campus,
offers programs in automotive technology and most of these schools offer other technical programs. Our campuses in East Windsor,
Connecticut; Nashville, Tennessee; Grand Prairie, Texas; Indianapolis, Indiana; and Denver Colorado are destination schools, attracting
students throughout the United States and, in some cases, from abroad.
Skilled Trades. For the year ended December 31, 2009, 13% 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 $30,000. 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, 2009, we offered skilled trades programs at 14 of our 29 Lincoln Technical Institute and Lincoln College of
Technology campuses.
Hospitality Services. For the year ended December 31, 2009, 10% of our total average student enrollment was in our hospitality services
programs. Our hospitality services programs are 16 to 132 weeks in length, with tuition rates of $9,000 to $55,000. 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, 2009, we offered culinary programs at six Lincoln Culinary Institutes.
Business and Information Technology. For the year ended December 31, 2009, 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 193 weeks in length, with tuition rates of $11,000 to $70,000. 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, 2009,
we offered these programs at 20 of our campuses.
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
6
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 17% 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 475 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 2009, we
recruited approximately 20% 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 entrance 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 29,340 students enrolled as of December 31, 2009 and our average enrollment for the year
ended December 31, 2009 was 27,808 students, an increase of 39.0% from December 31, 2008. Excluding the Acquisitions, our average
student enrollment increased by 26.5%. Our average student 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 2008 average student enrollment
increased by 13.0%.
Retention. To maximize student retention, the staff at each school is trained to recognize the early warning signs of a potential drop and
to assist and advise students on academic, financial, employment and personal matters. We monitor our retention rates by instructor,
course, program and school. When we notice that a particular instructor or program is experiencing a higher than normal dropout rate, we
quickly seek to determine the cause of the problem and attempt to correct it. When we notice that a student is having trouble academically,
we offer tutoring.
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
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.
7
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, 2009, we had approximately 4,250 employees, including 1,038 full-time faculty and 834 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 2010 through 2016. 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 other competitors have a more extensive 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 competition 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. Climate change has not had and is not expected to have a significant effect on our operations.
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, 2009, approximately 81% (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
8
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 have posted
surety bonds on behalf of our schools and education representatives with multiple states in a total amount of approximately $14.2 million.
These bonds are backed by $2.4 million of letters of credit.
If any of our schools fail to comply with state licensing requirements, they are subject to the loss of state licensure or 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. As of December 31, 2009, 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.
We were notified by the State of Connecticut Department of Higher Education, or the DHE, that each of Lincoln Technical Institute—East
Windsor, or “East Windsor”, and Lincoln Technical Institute—Hartford, or “Hartford”, two of the schools we acquired in January 2009 in
connection with our acquisition of BAR, did not meet the DHE’s fiscal viability standards requiring sufficient liquid assets or other
evidence of fiscal soundness for the year ended December 31, 2008, which preceded our acquisition of BAR. Specifically, according to the
DHE’s calculations, East Windsor’s composite score for 2008 was -1.0 and Hartford’s composite score was -1.0, both of which are less
than the 1.5 required by the DHE. The DHE held a compliance meeting in September 2009 which was attended by certain of our
personnel. At this meeting, we informed the DHE that we believe that each school would have met or exceeded the DHE requirement if its
financial results had been consolidated with our financial results for the year ended December 31, 2008. We have been informed that the
DHE will not make its determination until we submit our 2009 financial statements. If the DHE’s determination stands, the two schools
may be required to submit letters of credit to the DHE or be subject to revocation of authorizations to operate as a for-profit provider, loss
of federal funding, limitations on the operations on their business, injunctions or fines, money damages, or other penalties, including being
placed on probation for a period of up to one year.
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.
9
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, 2009, nineteen of our campuses are accredited by the Accrediting Commission of Career Schools and
Colleges or ACCSC; twenty of our campuses are accredited by the Accrediting Council for Independent Colleges and Schools or ACICS;
two of our campuses are accredited by the New England Association of Schools and Colleges or NEASC; and two of our campuses are
accredited by Accrediting Bureau of Health Education Schools or ABHES. 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*
Hartford, CT
Suffield, CT***
East Windsor, CT
South Plainfield, NJ
Last Accreditation Letter
December 5, 2008
December 9, 2009
December 9, 2004
March 11, 2005
September 8, 2006
March 13, 2007
May 29, 2007
March 7, 2008
September 5, 2008
December 5, 2008
September 5, 2008
December 9, 2009
March 13, 2007
September 7, 2007
September 5, 2008
June 3, 2005
August 1, 2007
September 5, 2008
September 11, 2009
Next Accreditation
May 1, 2013
February 1, 2014
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, 2013
November 1, 2011
July 1, 2012
June 1, 2012
November 1, 2009 ****
August 1, 2012
February 1, 2013
August 1, 2014
*
**
***
**** Currently undergoing re-accreditation
Branch campus of main campus in Union, NJ
Branch campus of main campus in New Britain, CT
Branch campus of main campus in Hartford, CT
10
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***
Toledo, OH***
West Palm Beach, FL
Summerlin, NV****
Green Valley, NV****
Aliante, NV****
Last Accreditation Letter
December 16, 2008
December 16, 2008
December 16, 2008
December 16, 2008
April 23, 2007
April 23, 2007
December 16, 2008
April 23, 2007
April 23, 2007
April 23, 2007
August 13, 2009
August 13, 2009
August 13, 2009
August 13, 2009
August 13, 2009
December 9, 2009
April 16, 2008
December 16, 2008
December 16, 2008
April 8, 2009
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, 2015
December 31, 2015
December 31, 2015
December 31, 2015
December 31, 2015
December 31, 2015
December 31, 2014
December 31, 2014
December 31, 2014
December 31, 2014
New England Association of Schools and Colleges of Technology Reaccreditation Dates
School
Southington, CT
Suffield, CT
Last Accreditation Letter
November 31, 2006
November 1, 2006
Next Accreditation
November 31, 2011
November 1, 2011
Accrediting Bureau of Health Education Schools Reaccreditation Dates
School
Fern Park, FL
St. Petersburg, FL
Last Accreditation Letter
December 15, 2003
July 23, 2007
Next Accreditation
December 31, 2010
December 31, 2010
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.
Prior to our acquisition of the Americare School of Nursing in January 2009, 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. We were informed that
at ABHES’s December 2009 board meeting, the ABHES board acknowledged that all the concerns covered by the show cause order were
resolved to their satisfaction. However, the show cause order was extended until the next ABHES commission meeting in July 2010, due
to ASN’s composite score under Department of Education financial responsibility regulations. See “Regulatory Environment – Financial
Responsibility Standards.”
Prior to our acquisition of BRI, the American Board of Funeral Service Education, or ABFSE, the accrediting agency that provides
programmatic accreditation of the college’s mortuary sciences program, directed BRI to show cause why its accreditation should not be
withdrawn. BRI submitted a response and hosted a follow-up visit from the agency in February 2009. BRI received a visit report and
submitted a response to that report which was reviewed by ABFSE at its commission meeting. ABFSE informed the school that the show
cause will stay in place until 2010, subject to improvement in the pass rate of the certification test. The pass rate for 2009 graduates
11
exceeded the required threshold. Although no assurance can be given, we believe that BRI has addressed the remaining concern of
ABFSE and that ABFSE will vacate the show cause order at its next commission meeting in April 2010.
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, 2009, we derived approximately 64% of our Title IV revenues (calculated based on cash receipts) from the
Federal Family Education Loan program.
Pell. Under the Pell program, the DOE makes grants to students who demonstrate the greatest financial need. For the year ended
December 31, 2009, we derived approximately 22% 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, 2009, 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, 2009, 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.
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
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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 21 institutions as of December 31, 2009, collectively consisting of 21 main campuses
and 22 additional locations:
Brand
Lincoln Technical Institute
Lincoln College of Technology
Main Campus (es)
Union, NJ
Philadelphia, PA
Allentown, PA
Edison, NJ
Somerville, MA
Lincoln, RI
New Britain, CT
East Windsor, CT
Hartford, CT
South Plainfield, NJ
Fern Park, FL
Indianapolis, IN
Grand Prairie, TX
Melrose Park, IL
Columbia, MD
Denver, CO
West Palm Beach, FL
Nashville Auto Diesel College
Nashville, TN
Southwestern College
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
Suffield, CT
St. Petersburg, FL
Cincinnati, OH (Vine Street)
Franklin, OH
Cincinnati, OH (Northland Blvd.)
Florence, KY
Toledo, OH
Lincoln College of New England
Southington, CT
Clemens College
Suffield, 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 BRI
and BAR we have received a provisional program participation agreement from the DOE.
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,
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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.
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 reduced payments to lenders and guaranty agencies participating in the Federal Family
Education Loan (FFEL) Program. This, in turn, reduced the profitability of the FFEL Program and made 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
for the July 1, 2009 through June 30, 2010 award year is $5,350.
In September 2009, the House of Representatives passed the Student Aid and Fiscal Responsibility Act of 2009, H.R. 3221. This
legislation, which was designed to address the goals outlined by the U.S. federal budget, would amend the Higher Education Act to
prohibit new federally guaranteed loans from being made under the FFEL Program, beginning on July 1, 2010, at which time all new
federal education loans would be originated through the Federal Direct Loan Program. The legislation would also, among other matters,
provide for automatic increases in the maximum amount of the Pell Grant for which a student would be eligible (subject to appropriations),
create a new Federal Direct Perkins Loan program (to replace the current Perkins loan program) and provide relief to for-profit institutions
by amending the 90/10 rule to: (i) extend to July 2012 the ability of for-profit institutions to exclude from their Title IV revenues the
additional $2,000 per student in certain annual federal student loan amounts that became available in June 2008, (ii) exclude from the
90/10 rule calculation for the period July 1, 2010 through July 1, 2012 the revenue received from loans disbursed under the Federal Direct
Perkins Loan program and (iii) give for-profit institutions three years (as opposed to two) to come into compliance with the 90/10 rule
before becoming ineligible to participate in the Title IV programs if the second year ends between July 1, 2008 and June 30, 2011. The
Student Aid and Fiscal Responsibility Act of 2009 has not been passed by Congress and is subject to further review and amendment. If the
legislation passes, our institutions would be required to certify loans through the Federal Direct Loan Program rather than through the
FFEL Program. Each of our institutions is eligible to participate in, and some of our institutions are currently participating in, the Federal
Direct Loan Programs. We expect to be able to fully transition from the FFEL Program to the Federal Direct Loan Program by the
proposed July 1, 2010 phase-out date, if necessary.
DOE Development of New Regulations. The DOE published new regulations in October 2009 to implement the amendments made to the
HEA by the Higher Education Opportunity Act enacted in August 2008. The new regulations cover a broad range of topics including the
90/10 rule, cohort default rates and other matters. The new regulations have an effective date of July 1, 2010 with certain exceptions and
with certain provisions subject to early implementation as of November 1, 2009 at the discretion of an institution.
The DOE convened two negotiated rulemaking committees in November 2009 with the objective of developing new regulations in the
areas of program integrity and foreign schools, respectively. With respect to program integrity, the DOE released to negotiators on the
negotiated rulemaking committee issue papers containing preliminary drafts of proposed regulations for discussion purposes on topics
which include the definition of high school diploma for the purpose of establishing institutional eligibility to participate in the Title IV
programs and student eligibility to receive Title IV aid, ability to benefit students, misrepresentation of information provided to students
and prospective students, incentive compensation, state authorization as a component of institutional eligibility, gainful employment in a
recognized occupation, the definition of a credit hour, agreements between institutions of higher education, verification of information
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included on student aid applications, satisfactory academic progress, monitoring grade point averages, retaking coursework, return of Title
IV funds with respect to term-based programs with modules or compressed courses and with respect to taking attendance, and the
timeliness and method of disbursements of Title IV funds. The proposed regulations in the issue paper for incentive compensation would
eliminate the 12 “safe harbors” established in the current regulations which permit certain types of activities related to the compensation of
individuals engaged in student recruiting or admission activities or in making decisions regarding the awarding of Title IV program funds.
The proposed regulations in the issue paper regarding gainful employment would require educational programs to prepare students for
“gainful employment” in a recognized occupation, which includes all of our educational programs currently offered, to meet a standard
under which the average student annual loan repayments cannot exceed eight percent of a student’s starting annual income as calculated
under a regulatory formula, or that the educational programs meet other alternative thresholds. The implementation of any of these
regulatory changes, or other changes the DOE might propose and implement, could have a materially adverse effect on our business and
results of operations. However, the proposals presented to the negotiated rulemaking committee are not final regulations, nor do they
necessarily represent the final position of the DOE on these subjects, and remain subject to further review and change during the
subsequent rulemaking process. The negotiated rulemaking committee did not reach consensus on all of the proposed regulations, which
means that DOE may publish proposed regulations which differ from those presented to the committee. The DOE is expected to publish
proposed regulations later this year which will be subject to public comment and further revision by the DOE before publication of final
regulations. The DOE has stated that its intention is to publish final regulations by November 1, 2010, which would result in a general
effective date of July 1, 2011. We are closely monitoring any policy or regulatory changes resulting from these rulemaking sessions which
could materially impact our institutions, our business and results of operations.
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 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. 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 provided 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 2009, 2008 and 2007 fiscal years, none of our institutions derived more than 88.5% of its revenues
from Title IV Programs. For our 2009 fiscal year, our institutions' 90/10 Rule percentages ranged from 64.6% to 88.5%. 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 (two year ratio). 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, Federal Direct 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% loses its eligibility to participate in the Federal Family Education Loan
and Federal Direct Loan programs for the remainder of the federal fiscal year in which the DOE determines that such institution has lost its
eligibility and for the two subsequent federal fiscal years. If an institution’s cohort default rate equals or exceeds 25% in any of its three
most recent fiscal years, the institution may be placed on provisional certification status.
The HEA has been amended by the Higher Education Opportunity Act, or HEOA, to provide for the calculation of an institution’s cohort
default rate using a three year period, beginning with the cohort default rate for the 2009 federal fiscal year. 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
for the 2009 federal fiscal year. 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 for three year cohort default rates issued beginning in federal fiscal year 2012. On September 15, 2009, the DOE published the
cohort default rate for each of our schools for the 2007 federal fiscal year which range from 0% to 22.9%.
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As of December 31, 2009, none of our institutions 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 2007, 2006 and 2005, 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 21 DOE institutions as of
December 31, 2009 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*
South Plainfied**
Fern Park**
Hartford**
East Windsor**
Clemens College***
2007
2006
2005
12.6%
13.0%
19.9%
12.5%
10.3%
18.1%
22.0%
16.3%
11.0%
7.2%
12.9%
12.3%
13.5%
9.1%
10.3%
22.9%
9.4%
5.9%
6.5%
9.5%
0.0%
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%
6.3%
6.2%
5.3%
6.1%
0.0%
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%
5.6%
2.0%
6.7%
7.0%
0.0%
*This institution was acquired on December 1, 2008.
**These institutions were acquired on January 20, 2009.
***This institution was acquired on April 20, 2009.
On February 8, 2010, the DOE issued draft cohort default rates for the 2008 federal fiscal year. The draft rates are not final and may be
subject to appeal and further upward or downward revisions before the DOE publishes final rates, which is expected to occur in October
2010. Our 2008 rates ranged from 4.6% to 26.4%. The preliminary cohort default rate of one institution was over 25%.
In December 2009, the DOE issued an electronic announcement explaining the future changes to the methodology for calculating an
institution’s cohort default rate based on defaults occurring over a three-year period, rather than a two-year period, and released unofficial
trial three-year cohort default rates for the 2005, 2006, and 2007 federal fiscal years. These unofficial rates are for information purposes
only and are intended to provide institutions with an indication of what their cohort default rates would be for the 2005, 2006 and 2007
federal fiscal years if calculated under the new methodology.
The rates for our institutions under the new methodology ranged from 7.2% to 31.7% for the 2005 federal fiscal year, from 10.6% to
37.0% for the 2006 federal fiscal year and from 16.2% to 42.2% for the 2007 federal fiscal year. Our official cohort default rates for
institutions for these same time periods as published by the DOE range from 0% to 14.6% for the 2005 federal fiscal year, from 0% to
19.3% for the 2006 federal fiscal year and from 0% to 22.9% for the 2007 federal fiscal year. The DOE stated in the electronic
announcement that the publication of these rates is for informational purposes only and that no sanctions will be imposed based on these
rates.
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. Such institutions also may be subject to provisional
certification. Our Denver, Colorado institution, or Denver, and NETI are our only institutions participating in the Perkins program.
Denver’s Perkins cohort default rate was 30.4% for students scheduled to begin repayment in the 2008-2009 federal award year. The DOE
did not provide any additional Federal Capital Contribution Funds for Perkins loans to Denver. Denver 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
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program to the National Student Loan Data System during periods prior to the acquisition. Our New Britain, CT institution’s cohort default
rate was 19.0% for students scheduled to begin repayment in the 2008-2009 federal award year.
Financial Responsibility Standards. All institutions participating in Title IV Programs must satisfy specific standards of financial
responsibility. The DOE evaluates institutions for compliance with these standards each year, based on the institution's annual audited
financial statements, as well as following a change in ownership resulting in a change of control of the institution.
The most significant financial responsibility measurement is the institution's composite score, which is calculated by the DOE based on
three ratios:
• The equity ratio, which measures the institution's capital resources, ability to borrow and financial viability;
• The primary reserve ratio, which measures the institution's ability to support current operations from expendable resources; and
• The net income ratio, which measures the institution's ability to operate at a profit.
The DOE assigns a strength factor to the results of each of these ratios on a scale from negative 1.0 to positive 3.0, with negative 1.0
reflecting financial weakness and positive 3.0 reflecting financial strength. The DOE then assigns a weighting percentage to each ratio and
adds the weighted scores for the three ratios together to produce a composite score for the institution. The composite score must be at least
1.5 for the institution to be deemed financially responsible without the need for further oversight. If an institution's composite score is
below 1.5, but is at least 1.0, it is in a category denominated by the DOE as "the zone." Under the DOE regulations, institutions that are in
the zone are deemed to be financially responsible for a period of up to three years but are required to accept payment of Title IV Program
funds under the cash monitoring or reimbursement method of payment 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 2007 and 2008 fiscal year reflecting a composite score of 1.8 and 1.8, respectively, based upon our
calculations, and that our schools meet the DOE standards of financial responsibility. For the 2009 fiscal year, we have calculated our
composite score to be 2.0.
Prior to our acquisition, all of the former Baran institutions (East Windsor, South Plainfield, Fern Park, Hartford and Clemens/Suffield)
were placed on Heightened Cash Monitoring Type 1 status, resulting from their failure to meet their financial responsibility composite
scores for the years ended December 31, 2008 and December 31, 2007. As a result, these institutions were subject to a less favorable
Title IV funding 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. In addition, the institutions were required to submit
letters of credit to the DOE in the amount of $2.0 million with an expiration date of December 31, 2009 based on the composite score
review for December 31, 2007. Based on the composite score review for December 31, 2008, the DOE subsequently required the
institutions to increase the letter of credit to approximately $2.9 million to reflect the increase of Title IV participation during 2008. The
letter of credit was posted as of December 31, 2009 with an expiration date of December 31, 2010. We expect that once we file our 2009
consolidated financial statements with the DOE, which we believe reflects a composite score of 2.0 that the requirement for the letter of
credit will be vacated, but this outcome remains subject to DOE review.
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. None of our
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institutions are currently required to submit a letter of credit to the DOE based on late return of Title IV funds.
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.
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 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. In the event that the largest shareholder’s interest falls below 25%, it will result
in a change of ownership as defined by ACCSC (15 Campuses) standards as well as defined by Title IV regulations (all campuses) and
would require approval, and advance approval in some cases, by these and any other agencies that deem the transaction to constitute a
change of control.
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 our 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’s 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.
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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:
• Comply with all applicable federal student financial aid regulations;
• Have capable and sufficient personnel to administer the federal student financial aid programs;
• Administer Title IV programs with adequate checks and balances in its system of internal controls over financial reporting;
• Divides the function of authorizing and disbursing or delivering Title IV Program Funds so that no office has the responsibility
for both functions;
• Establish and maintain records required under the Title IV regulations;
• Develop and apply 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;
• Refer 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;
• Not be, and not have any principal or affiliate who is, debarred or suspended from federal contracting or engaging in activity that
is cause for debarment or suspension;
• Provide financial aid counseling to its students;
• Submit in a timely manner all reports and financial statements required by the regulations; and
• Not otherwise appear to lack administrative capability.
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%. None of our institutions had 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 official rates. Denver and NETI are our only
institutions participating in the Perkins program. Denver's cohort default rate was 30.4% for students scheduled to begin repayment in the
2008-2009 federal award year. The DOE did not provide any additional Federal Capital Contribution Funds for Perkins loans to Denver.
Denver continues to make loans out of its existing Perkins loan fund. As was the case prior to our acquisition of 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 19.0% for students scheduled to begin repayment in the 2008-2009 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 2009, 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 Summerlin, Hartford, Suffield, Fern Park, St. Petersberg, BRI and South Plainfield.
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. The DOE is
in the process of considering amendments to the incentive compensation rule. See “Regulatory Environment – DOE Development of New
Regulations.”
19
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.
Our acquisitions of BRI and of the BAR 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. BRI and each of the BAR schools have each received a Provisional Program Participation Agreement from the DOE following
completion of the DOE’s review of the change in ownership, and have received approval of the change in ownership from their accrediting
agencies and from their state licensing agencies.
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, 2009:
Expiration Date of Current
Program Participation
Agreement
March 31, 2014
June 30, 2013
December 31, 2013
September 30, 2012*
March 31, 2014
March 31, 2014
March 31, 2014
June 30, 2011
June 30, 2011
December 31, 2014
December 31, 2014
December 31, 2014
March 31, 2014
September 30, 2013*
June 30, 2010*
September 30, 2011*
June 30, 2012*
June 30, 2012*
June 30, 2012*
June 30, 2012*
June 30, 2012*
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
East Windsor, CT
Suffield, CT
Fern Park, FL
South Plainfield, NJ
Hartford, CT
* Provisionally certified
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.
BRI self-reported a matter of potential regulatory non-compliance to the DOE regarding the eligibility of certain students to receive
Title IV funds for their enrollment in certain educational programs. The institution received a letter from the DOE requesting that the
school provide a list of all students who attended the program and the total amount of their Title IV disbursements. The DOE informed us
in November 2009 that the total liability due to the DOE as a result of this letter is approximately $290,000. We have notified the prior
owners of the results and recovered $205,000 of the amount under the escrow and indemnity arrangement in the related purchase
agreement.
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In December 2009, the DOE performed its new Compliance Assurance Program Review at BRI. The review assessed BRI’s
administration of Title IV programs during the period from July 1, 2008 through June 30, 2009. The review has been completed and the
exit interview conducted by the DOE revealed several minor concerns. BRI is waiting for a formal report from the DOE with its findings
and recommendations.
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, an institution's compliance audit is required to contain verification that this did occur throughout the year. In
addition to the above, the DOE requires institutions to comply with certain requirements if they are operating in "the zone," which is
indicative of a composite score between 1.0 and 1.4. Those requirements include providing timely information regarding any of the
following oversight and financial events:
• Any adverse action, including a probation or similar action, taken against the institution by its accrediting agency;
• Any event that causes the institution, or related entity to realize any liability that was noted as a contingent liability in the
institution's or related entity's most recent audit financial statement;
• Any violation by the institution of any loan agreement;
• Any failure of the institution to make a payment in accordance with its debt obligations that results in a creditor filing suit to
recover funds under those obligations;
• 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 2009, 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, Fifth Third Bank, Student Funding Group, Federal Direct Student Loans, 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.
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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 2009, we
derived approximately 81% 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
December 1, 2009. 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 is the case with some
of our institutions, 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.
Certain of our institutions currently do not comply with DOE financial responsibility requirements. See “Regulatory Environment –
Financial Responsibility Standards.”
Based on our calculations, our 2009 and 2008 consolidated financial statements reflect a composite score for the Company of 2.0 and 1.8,
respectively.
22
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;
• Administer the Title IV Programs with adequate checks and balance in its system of internal controls over financial reporting;
• Divide the function of authorizing and disbursing or delivering Title IV Program Funds so that no office has the responsibility for
both functions;
• Establish and maintain records required under the Title IV regulations;
• Develop and apply 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;
• Refer 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;
• Not be, and not have any principal or affiliate who is, debarred or suspended from federal contracting or engaging in activity that
is cause for debarment or suspension;
• 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 81% of our revenues (calculated based on cash receipts) from Title IV Programs in
2009.
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.
The New York Attorney General, several other attorneys-general, the United States Senate and House of Representatives Education
Committees, and the DOE have 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 agreed to pay fines to settle claims in this
regard. In addition, several financial aid officials at other universities were suspended or placed on leaves of absence. While no
allegations were raised concerning our institutions, we received general requests for information from the offices of two state attorneys-
general in 2007. 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.
23
A school must be accredited by an accrediting commission recognized by the DOE in order to participate in Title IV Programs.
Accreditation is a non-governmental process through which an institution submits to qualitative review by an organization of peer
institutions, based on the standards of the accrediting agency and the stated aims and purposes of the institution, including achieving and
maintaining stringent retention, completion and placement outcomes. Certain states require institutions to maintain accreditation as a
condition of continued authorization to grant degrees. The Higher Education Act requires accrediting commissions recognized by the DOE
to review and monitor many aspects of an institution's operations and to take appropriate disciplinary action when the institution fails to
comply with the accrediting agency's standards. Loss of accreditation by any of our main campuses would result in the termination of
eligibility of that school and all of its branch campuses to participate in Title IV Programs and could cause us to close the school and its
branches.
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 2009,
and our institution with the highest percentage received approximately 88.5% 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 and in accordance with rules prescribed
under the HEA and DOE regulations.
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
specified levels based on official student loan default rates published by the DOE, it will lose eligibility to participate in some or all
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.
24
Issuance or sales of a substantial amount of our common stock could result in a change in control of our schools, which could
require any affected schools to reaffirm their DOE approvals, state authorizations and accreditations and their ability to
participate in Title IV Programs.
A significant issuance or disposition of our common stock could result in a change in control under the standards of the DOE and
applicable state education agencies and accrediting commissions. The DOE, most state education agencies and our accrediting
commissions have standards pertaining to the change in control of schools, which are not uniform and are subject to interpretation by these
respective agencies. A change in control under the definition of one of these agencies would require the affected school to reaffirm the
applicable DOE approval, state authorization or accreditation. Each school that undergoes a change in control under the standards of the
DOE must apply for recertification for continued ability to participate in Title IV Programs. Some agencies would require approval prior to
an issuance or disposition that would result in a change in control in order to maintain authorization or accreditation. The requirements to
obtain such reaffirmation from the states and our accrediting commissions vary widely.
DOE regulations describe some transactions that constitute a change in control, including the transfer of a controlling interest in the voting
stock of an institution or the institution’s parent corporation. For a publicly traded corporation, DOE regulations provide that a change in
ownership resulting in 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
in control or (b) if the corporation has a stockholder that owns at least 25% of the total outstanding voting stock of the corporation and is
the largest stockholder of the corporation, and that stockholder ceases to own at least 25% of such stock or ceases to be the largest
stockholder. The DOE regulations state that an institution that undergoes a change in ownership that results in a change in control ceases to
qualify as an institution eligible to participate in the Title IV programs upon the change in ownership and control. However, the DOE
regulations provide that the DOE may continue the institution’s participation in the Title IV programs on a provisional basis provided that
the institution submits to the DOE a materially complete application (as defined in the DOE regulations) for approval to participate in the
Title IV programs no later than 10 business days after the change in ownership occurs. If a change in ownership occurs, we intend to
submit a materially complete application to the DOE for each of our institutions prior to this deadline.
If the DOE determines that the institution has submitted a materially complete application, the DOE provides the institution with a
Temporary Provisional Program Participation Agreement, or Temporary PPPA, which extends the terms and conditions of the program
participation agreement that were in effect for the institution before its change in ownership pending the DOE’s consideration of the
institution’s application for approval to participate in the Title IV programs. The Temporary PPPA expires on the last day of the month
following the month in which the change in ownership resulting in a change of control occurred unless the institution provides
documentation outlined in the DOE regulations to the DOE on or before that date. If the Temporary PPPA were to expire, the institution
would become ineligible to participate in the Title IV programs until the DOE completed its review of the institution’s application for
approval to participate in the Title IV programs. If the institution provides the DOE with the required documentation, the DOE extends the
Temporary PPPA on a month-to-month basis until the DOE completes its review of the application for approval to participate in the Title
IV programs and either signs a new provisional program participation agreement with the institution or notifies the institution that its
application is denied. If the DOE denies the application of one or more of our institutions, each of such institutions, including its main
campus and all of its additional locations, would be ineligible to participate in the Title IV programs. As of December 31, 2009, our
principal stockholder owned 31.8% of our outstanding common stock. Future issuances of common stock by us or sales of common stock
by our principal stockholder may result in a change in control under any of the DOE or state authorization and accreditation standards. See
“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.” We cannot assure you that each of the aforementioned agencies would approve any
application it will or may require in connection with a change in control.
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. Congress is currently considering amendments to the HEA. See “Regulatory
Environment - Congressional Action.”
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Regulatory agencies or third parties may conduct compliance reviews, bring claims or initiate litigation against us. If the results of
these reviews or claims are unfavorable to us, our results of operations and financial condition could be adversely affected.
Because we operate in a highly regulated industry, we are subject to compliance reviews and claims of noncompliance and lawsuits by
government agencies and third parties. If the results of these reviews or proceedings are unfavorable to us, or if we are unable to defend
successfully against third-party lawsuits or claims, we may be required to pay money damages or be subject to fines, limitations on the
operations of our business, loss of federal funding, injunctions or other penalties. Even if we adequately address issues raised by an agency
review or successfully defend a third-party lawsuit or claim, we may have to divert significant financial and management resources from
our ongoing business operations to address issues raised by those reviews or defend those lawsuits or claims. Certain of our institutions
are subject to ongoing reviews and proceedings. See “Regulatory Environment – State Authorization,” “Regulatory Environment –
Accreditation,” and “Regulatory Environment - Compliance with Regulatory Standards and Effect of Regulatory Violations.”
Our failure to comply with regulations promulgated by the DOE could result in financial penalties, or the limitation, suspension,
or termination of our continued participation in the Title IV programs.
The issues addressed in the regulations that have been or are expected to be proposed by the DOE, which are described under "Regulatory
Environment” in this Annual Report on Form 10-K are broad and complex and address a number of significant aspects of the Title IV
programs, including eligibility and certification, administrative capability, school-lender relationships, the 90/10 rule, incentive
compensation, student loan default rates and gainful employment. Failure of an institution to comply with new or existing DOE
regulations could result in sanctions, including loss of eligibility to participate in Title IV programs; requirement to repay Title IV funds
and related costs to the DOE and lenders; transfer of the institution to the heightened cash monitoring level two method of payment or to
the reimbursement method of payment, which would adversely affect the timing of the institution's receipt of Title IV funds; requirement
to post a letter of credit in favor of the DOE as a condition for continued Title IV certification; requirement to provide timely information
regarding certain oversight and financial events; proceedings to impose a fine or to limit, suspend or terminate the institution's participation
in Title IV programs; an emergency action to suspend the institution's participation in Title IV programs without prior notice or a prior
opportunity for a hearing; denial or refusal to consider an institution's application for renewal of its certification to participate in Title IV
programs; or referral of a matter for possible civil or criminal investigation.
The DOE may change its regulations in a manner which could require us to incur additional costs in connection with our
administration of the Title IV programs, affect our ability to remain eligible to participate in the Title IV programs, or otherwise
have a material adverse effect on our business and results of operations.
The DOE convened two negotiated rulemaking committees in November 2009 with the objective of developing new regulations in the
areas of program integrity and foreign schools, respectively. With respect to program integrity, the DOE released to negotiators on the
negotiated rulemaking committee issue papers containing preliminary drafts of proposed regulations for discussion purposes on topics
which include the definition of high school diploma for the purpose of establishing institutional eligibility to participate in the Title IV
programs and student eligibility to receive Title IV aid, ability to benefit students, misrepresentation of information provided to students
and prospective students, incentive compensation, state authorization as a component of institutional eligibility, gainful employment in a
recognized occupation, the definition of a credit hour, agreements between institutions of higher education, verification of information
included on student aid applications, satisfactory academic progress, monitoring grade point averages, retaking coursework, return of Title
IV funds with respect to term-based programs with modules or compressed courses and with respect to taking attendance, and the
timeliness and method of disbursements of Title IV funds. The proposed regulations in the issue paper for incentive compensation would
eliminate the 12 “safe harbors” established in the current regulations which permit certain types of activities related to the compensation of
individuals engaged in student recruiting or admission activities or in making decisions regarding the awarding of Title IV program funds.
The proposed regulations in the issue paper regarding gainful employment would require educational programs to prepare students for
“gainful employment” in a recognized occupation, which includes all of our educational programs currently offered, to meet a standard
under which the average student annual loan repayments cannot exceed eight percent of a student’s starting annual income as calculated
under a regulatory formula, or that the educational programs meet other alternative thresholds. The implementation of any of these
regulatory changes, or other changes the DOE might propose and implement, could have a materially adverse effect on our business.
However, the proposals presented to the negotiated rulemaking committee are not final regulations, nor do they necessarily represent the
final position of the DOE on these subjects, and remain subject to further review and change during the subsequent rulemaking process.
The negotiated rulemaking committee did not reach consensus on all of the proposed regulations, which means that DOE may publish
proposed regulations which differ from those presented to the committee. The DOE is expected to publish proposed regulations later this
year which will be subject to public comment and further revision by the DOE before publication of final regulations. The DOE has stated
that its intention is to publish final regulations by November 1, 2010, which would result in a general effective date of July 1, 2011. We
are closely monitoring any policy or regulatory changes resulting from these rulemaking sessions which could materially impact our
institutions, our business and results of operations.
Our regulatory environment and our reputation may be negatively influenced by the actions of other postsecondary institutions.
In recent years, regulatory investigations and civil litigation have been commenced against several postsecondary educational institutions.
These investigations and lawsuits have alleged, among other things, deceptive trade practices and non-compliance with DOE regulations.
These allegations have attracted adverse media coverage and have been the subject of federal and state legislative hearings. Although the
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media, regulatory and legislative focus has been primarily on the allegations made against these specific companies, broader allegations
against the overall postsecondary sector may negatively impact public perceptions of postsecondary educational institutions, including us.
Such allegations could result in increased scrutiny and regulation by the DOE, U.S. Congress, accrediting bodies, state legislatures or other
governmental authorities on all postsecondary institutions, including us.
A decline in the overall growth of enrollment in postsecondary institutions, or in our core disciplines or in the number of students
seeking degrees online, could cause us to experience lower enrollment at our schools, which could negatively impact our future
growth.
The growth rate of enrollment in degree-granting, postsecondary institutions over the next ten years is expected to be slower than in the
prior ten years. Growth rates of online postsecondary education enrollment are also expected to be slower in future periods. In addition,
according to a March 2008 report from the Western Interstate Commission for Higher Education, the number of high school graduates that
are eligible to enroll in degree-granting, postsecondary institutions is expected to peak at approximately 3.3 million for the class of 2008,
falling in the period between 2007–08 and 2013–14 by about 150,000 in total before resuming a growth pattern for the foreseeable future.
Although, as of December 31, 2009, only 23.1 % of our students were enrolled in degree granting programs (primarily at the associate's
degree level), our strategy is to expand our degree granting offerings. In order to increase our current growth rates in degree granting
programs, we will need to attract a larger percentage of students in existing markets and expand our markets by creating new academic
programs. In addition, if job growth in the fields related to our core disciplines is weaker than expected, as a result of any regional or
national economic downturn or otherwise, fewer students may seek the types of diploma or degree granting programs that we offer and
seek to offer. Our failure to attract new students, or the decisions by prospective students to seek diploma or degree programs in other
disciplines, would have an adverse impact on our future growth.
RISKS RELATED TO OUR BUSINESS
If we fail to effectively manage our growth, we may incur higher costs and expenses than we anticipate in connection with our growth.
We have experienced a period of significant growth since 1999. Our continued growth has strained and may in the future strain our
management, operations, employees or other resources. We will need to continue to assess the adequacy of our staff, controls and
procedures to meet the demands of our continued growth. We may not be able to maintain or accelerate our current growth rate, effectively
manage our expanding operations or achieve planned growth on a timely or profitable basis. If we are unable to manage our growth
effectively while maintaining appropriate internal controls, we may experience operating inefficiencies that likely will increase our
expected costs.
We may not be able to successfully integrate acquisitions into our business, which may 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
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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
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
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factors, including our ability to integrate and motivate our student recruiters; our ability to effectively train our student recruiters; the
length of time it takes new student recruiters to become productive; regulatory restrictions on the method of compensating student
recruiters; the competition in hiring and retaining student recruiters; and our ability to effectively manage a multi-location educational
organization. If we are unable to hire, develop or retain our student recruiters, the effectiveness of our student recruiting efforts would be
adversely affected.
Competition could decrease our market share and cause us to lower our tuition rates.
The post-secondary education market is highly competitive. Our schools compete for students and faculty with traditional public and
private two-year and four-year colleges and universities and other proprietary schools, many of which have greater financial resources than
we do. Some traditional public and private colleges and universities, as well as other private career-oriented schools, offer programs that
may be perceived by students to be similar to ours. Most public institutions are able to charge lower tuition than our schools, due in part to
government subsidies and other financial resources not available to for-profit schools. Some of our competitors also have substantially
greater financial and other resources than we have which may, among other things, allow our competitors to secure strategic relationships
with some or all of our existing strategic partners or develop other high profile strategic relationships, or devote more resources to
expanding their programs and their school network, or provide greater financing alternatives to their students, all of which could affect the
success of our marketing programs. In addition, some of our competitors have a larger network of schools and campuses than we do,
enabling them to recruit students more effectively from a wider geographic area. If we are unable to compete effectively with these
institutions for students, our student enrollment and revenues will be adversely affected.
We may be required to reduce tuition or increase spending in response to competition in order to retain or attract students or pursue new
market opportunities. As a result, our market share, revenues and operating margin may be decreased. We cannot be sure that we will be
able to compete successfully against current or future competitors or that the competitive pressures we face will not adversely affect our
revenues and profitability.
We may experience business interruptions resulting from natural disasters, inclement weather, transit disruptions, or other events
in one or more of the geographic areas in which we operate.
We may experience business interruptions resulting from natural disasters, inclement weather, transit disruptions, or other events in one or
more of the geographic areas in which we operate. These events could cause us to close schools — temporarily or permanently — and
could affect student recruiting opportunities in those locations, causing enrollment and revenues to decline.
Our financial performance depends in part on our ability to continue to develop awareness and acceptance of our programs
among high school graduates and working adults looking to return to school.
The awareness of our programs among high school graduates and working adults looking to return to school is critical to the continued
acceptance and growth of our programs. Our inability to continue to develop awareness of our programs could reduce our enrollments and
impair our ability to increase our revenues or maintain profitability. The following are some of the factors that could prevent us from
successfully marketing our programs:
• Student dissatisfaction with our programs and services;
• Diminished access to high school student populations;
• Our failure to maintain or expand our brand or other factors related to our marketing or advertising practices; and
• Our inability to maintain relationships with automotive, diesel, healthcare, skilled trades 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
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Title IV Program participation or the willingness of private lenders to make private loan programs available to students who attend our
schools, which could result in a reduction in our student population.
Seasonal and other fluctuations in our results of operations could adversely affect the trading price of our common stock.
Our results of operations fluctuate as a result of seasonal variations in our business, principally due to changes in total student population.
Student population varies as a result of new student enrollment, graduations and student attrition. Historically, our schools have had lower
student populations in our first and second quarters and we have experienced large class starts in the third and fourth quarters and student
attrition in the first half of the year. Our second half growth is largely dependent on a successful recruiting season. Our expenses, however,
do not vary significantly over the course of the year with changes in our student population and net revenues. We expect quarterly
fluctuations in results of operations to continue as a result of seasonal enrollment patterns. Such patterns may change, however, as a result
of acquisitions, new school openings, new program introductions and increased enrollments of adult students. These fluctuations may
result in volatility or have an adverse effect on the market price of our common stock.
Our total assets include substantial intangible assets. In the event that our schools do not achieve satisfactory operating results, we
may be required to write-off of a significant portion of unamortized intangible assets which would negatively affect our results of
operations.
Our total assets reflect substantial intangible assets. At December 31, 2009, goodwill and identified intangibles, net, represented
approximately 30.9% 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. At December 31, 2009, we tested our goodwill
for impairment and determined that an impairment of approximately $215,000 existed for one of our reporting units.
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 42% of our schools are concentrated in the states of New Jersey, Connecticut and Pennsylvania and a change in the
general economic or regulatory conditions in these states could increase our costs and have an adverse effect on our revenues.
As of December 31, 2009, we operated 43 campuses in 17 states. 18 of those schools are located in the states of New Jersey, Connecticut
and Pennsylvania. As a result of this geographic concentration, any material change in general economic conditions in New Jersey,
Connecticut or Pennsylvania could reduce our student enrollment in our schools located in these states and thereby reduce our revenues. In
addition, the legislatures in the states of New Jersey, Connecticut and/or Pennsylvania could change the laws in those states or adopt
regulations regarding private, for-profit post-secondary coeducation institutions which could place additional burdens on us. If we were
unable to comply with any such new legislation, we could be prohibited from operating in those jurisdictions, which could reduce our
revenues.
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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 2009, 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.
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,
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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 have significant influence over
substantially all matters requiring shareholder approval.
Stonington Partners Inc. II, or Stonington, our principal stockholder, directly or indirectly holds approximately 31.8% of our outstanding
shares. Accordingly, it has significant influence 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.
Stonington, our largest stockholder, has in 2009 sold approximately 47.9% of its ownership of our common stock and is currently
considering its options with respect to its investment in us, including selling all shares of our outstanding common stock it owns, 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.”
A protracted economic slowdown and rising unemployment could harm our business if our students are unable to obtain
employment upon completion of their programs, are unable to repay student loans or elect not to pursue an education with us.
We believe that many students pursue postsecondary education to be more competitive in the job market. However, the current economic
recession has adversely affected job markets and a protracted economic slowdown could further increase unemployment and diminish job
prospects and placement rates. Our placement rates declined in 2008 compared to 2007, and further diminished job prospects and
placement rates and heightened financial worries could affect the willingness of students to incur loans to pay for postsecondary education
and to pursue postsecondary education in general. As a result, our enrollment and operating performance could suffer. The recent
weakness in the job markets could also affect the prospects for long-term job growth, and there can be no assurance that the growth
projected by the U.S. Bureau of Labor Statistics through 2016 will materialize.
In addition, many of our students borrow Title IV loans to pay for tuition, fees and other expenses. A protracted economic slowdown
could negatively impact our students' ability to repay those loans which could negatively impact the cohort default rates of our institutions.
Our 2006 cohort default rates at our institutions, including BRI and BAR, as reported by the DOE range from 0% to 19.3%. Our 2007
cohort default rates as reported by the DOE range from 0% to 22.9%, and were higher than the 2006 cohort default rates for most of our
schools, and the weakness in the economy could continue to increase default rates. For information regarding the historical default rates for
our schools, see "Business—Regulatory Environment—Federal Family Education Loan Program" in this Annual Report. An increase in
our cohort default rates in excess of specified levels could cause our institutions to lose their eligibility to participate in some or all Title IV
Programs which could have a material adverse effect on our operations. See “Risk Factors – Risks Related to Our Industry. 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" in this Annual Report on Form 10-K.
System disruptions to our technology infrastructure could impact our ability to generate revenue and could damage the reputation
of our institutions.
The performance and reliability of our technology infrastructure is critical to our reputation and to our ability to attract and retain students.
We license the software and related hosting and maintenance services for our online platform and our student information system from
third-party software providers. Any system error or failure, or a sudden and significant increase in bandwidth usage, could result in the
unavailability of systems to us or our students. Any such system disruptions could impact our ability to generate revenue and affect our
ability to access information about our students and could also damage the reputation of our institutions.
32
Although we are no longer a “controlled company” under rules of the Nasdaq Global Select Market, a transition period is allowed
before we will be required to fully comply with certain corporate governance requirements applicable to companies whose stock is
quoted on the Nasdaq Global Select Market.
Prior to September 30, 2009, we were a “controlled company” under rules of the Nasdaq Global Select Market and availed ourselves of
exemptions from certain corporate governance requirements, which provide protection to shareholders of companies whose stock is quoted
on the Nasdaq Global Select Market. Specifically, these corporate governance requirements are:
•
•
•
a majority of our board of directors must consist of independent directors;
the compensation of executive officers must be determined, or recommended to our board of directors for determination,
either by (a) a majority of the independent directors or (b) a compensation committee comprised solely of independent
directors; and
director nominees must be selected, or recommended for our board of directors’ selection, either by (a) a majority of the
independent directors or (b) a nominations committee comprised solely of independent directors.
As of September 30, 2009, we ceased to be a “controlled company” and must fully comply with these requirements by September 30,
2010.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
33
ITEM 2.
PROPERTIES
As of December 31, 2009, we leased all of our facilities, except for our campuses in West Palm Beach, Florida, Nashville, Tennessee,
Grand Prairie, Texas, and Cincinnati (Tri-County), Ohio, all of which we own. Additionally in 2009, we purchased a building in Denver,
Colorado which will be occupied by our existing Denver, Colorado school once construction is complete. 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, 2009, all of our existing leases expire between May 2010 and
March 2032.
The following table provides information relating to our facilities as of December 31, 2009, including our corporate office:
Location
Henderson, Nevada
Las Vegas, Nevada
North Las Vegas, Nevada
Henderson, Nevada
Southington, Connecticut
Suffield, Connecticut
Columbia, Maryland
Denver, Colorado*
Grand Prairie, Texas
Indianapolis, Indiana
Marietta, Georgia
Melrose Park, Illinois
West Palm Beach, Florida
Hartford, Connecticut
Allentown, Pennsylvania
Brockton, Massachusetts
Cromwell, Connecticut
East Windsor, Connecticut
Edison, New Jersey
Fern Park, Florida
Hamden, Connecticut
Lincoln, Rhode Island
Lowell, Massachusetts
Mahwah, New Jersey
Mt. Laurel, New Jersey
New Britain, Connecticut
Northeast Philadelphia, Pennsylvania
Paramus, New Jersey
Philadelphia, Pennsylvania
Philadelphia, Pennsylvania
Queens, New York
Shelton, Connecticut
Somerville, Massachusetts
South Plainfield, New Jersey
St. Peterburg, Florida
Union, New Jersey
Nashville, Tennessee
Cincinnati (Tri-County), Ohio
Cincinnati, Ohio
Dayton, Ohio
Florence, Kentucky
Franklin, Ohio
Toledo, Ohio
West Orange, New Jersey
Brand
Euphoria Institute
Euphoria Institute
Euphoria Institute
Lincoln College of New England
Lincoln College of New England
Lincoln College of New England
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
Lincoln Culinary Institute
Lincoln Technical Institute
Lincoln Technical Institute
Lincoln Technical Institute
Lincoln Technical Institute
Lincoln Technical Institute
Lincoln Technical Institute
Lincoln Technical Institute
Lincoln Technical Institute
Lincoln Technical Institute
Lincoln Technical Institute
Lincoln Technical Institute
Lincoln Technical Institute
Lincoln Technical Institute
Lincoln Technical Institute
Lincoln Technical Institute
Lincoln Technical Institute
Lincoln Technical Institute
Lincoln Technical Institute
Lincoln Technical Institute
Lincoln Technical Institute
Lincoln Technical Institute
Lincoln Technical Institute
Lincoln Technical Institute
Nashville Auto-Diesel College
Southwestern College
Southwestern College
Southwestern College
Southwestern College
Southwestern College
Southwestern College
Corporate Office
Approximate Square Footage
20,000
13,000
12,000
7,000
113,000
132,000
110,000
290,000
146,000
189,000
30,000
88,000
117,000
367,000
26,000
22,000
12,000
323,000
64,000
46,000
14,000
59,000
21,000
79,000
26,000
35,000
25,000
30,000
30,000
29,000
48,000
42,000
33,000
48,000
13,000
56,000
278,000
38,000
16,000
19,000
11,000
14,000
16,000
47,000
*Denver, Colorado includes 212,000 square feet of space which we purchased in December 2009.
We believe that our facilities are suitable for their present intended purposes.
34
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.
RESERVED
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 Select Market under the symbol “LINC”.
The following table sets forth the range of high and low sales prices per share for our common stock, as reported by the Nasdaq Global
Select Market, for the periods indicated:
Fiscal Year Ended December 31, 2009
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year Ended December 31, 2008:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Price Range of Common Stock
High
Low
$
$
$
$
18.32
20.93
23.50
24.49
$
$
$
$
10.88
14.49
18.44
19.66
Price Range of Common Stock
High
Low
$
$
$
$
14.55
12.55
15.64
14.46
$
$
$
$
11.62
10.79
11.23
10.75
On March 9, 2010, the last reported sale price of our common stock on the Nasdaq Global Select Market was $25.55 per share. As of
March 9, 2010, based on the information provided by Continental Stock Transfer & Trust Company, there were approximately 16
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.
35
Issuer Purchases of Equity Securities
On December 15, 2009, we entered into a definitive stock repurchase agreement with Back to School Acquisition, L.L.C., or BTS, our
principal shareholder, relating to our repurchase of 1,250,000 shares of our common stock owned by BTS at a purchase price of $20.95 per
share or an aggregate purchase price of $26.2 million. The following table outlines repurchases of our common stock during the quarter
ended December 31, 2009:
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, 2009 -- October 31, 2009
November 1, 2009 -- November 30, 2009
December 1, 2009 -- December 31, 2009
Total
--
--
1,250,000
1,250,000
--
--
$20.95
$20.95
--
--
1,250,000
1,250,000
N/A
N/A
N/A
N/A
36
Stock Performance Graph
This stock performance graph compares our total cumulative stockholder return on our 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, 2009 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 we specifically incorporates it by reference into a filing.
Stock Performance Graph
(6/23/05 - 12/31/09)
$200
$180
$160
$140
$120
$100
$80
$60
$40
$20
$0
LINC
Peer Group
S&P 500
Russell 2000
Companies in the Peer Group include Apollo Group, Inc., Corinthian Colleges, Inc., Career Education Corp., DeVry, Inc., ITT Educational
Services, Inc., Strayer Education, Inc. and Universal Technical Institute, Inc.
37
Securities Authorized for Issuance under Equity Compensation Plans
We have various equity compensation plans under which equity securities are authorized for issuance. Information regarding these
securities as of December 31, 2009 is as follows:
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans (excluding
securities reflected
in column
768,630
-
768,630
Weighted-
average
exercise price
of
outstanding
options,
warrants and
rights
$
11.74
-
11.74
$
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
1,183,921
-
1,183,921
38
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, 2009 and historical consolidated
balance sheet data at December 31, 2009 and 2008 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, 2006 and 2005 and historical consolidated balance sheet data as of December 31, 2007, 2006 and 2005 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:
2009
2008
2007
2006
2005
(In thousands, except per share amounts)
Revenues
Cost and expenses:
Educational services and facilities (1)
Selling, general and administrative
Loss (gain) on sale of assets
Impairment of goodwill
Total costs and expenses
Operating income
Other:
Interest income
Interest expense (2)
Other income (loss)
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 capital (deficit) (3)
Total assets
Total debt (4)
Total stockholders' equity
$
552,536
$
376,907
$
327,774
$
310,630
$
287,368
211,295
252,673
35
215
464,218
88,318
29
(4,275)
35
84,107
34,868
49,239
-
49,239
$
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
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
$
$
$
$
$
$
$
$
$
$
$
1.87
-
1.87
1.82
-
1.82
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
$
$
$
$
$
$
$
$
$
$
26,337
27,095
25,308
25,984
25,479
26,090
25,336
26,086
23,475
24,503
$
24,018
24,240
43
27,808
$
46,076
4,494
388,368
57,328
218,636
$
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
$
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
39
Selling, general and administrative expenses include (a) a $0.5 million write-off for the year ended December 31, 2005 resulting
(1)
from our decision not to purchase the site we had considered for expansion of our facility in Philadelphia, Pennsylvania, (b) $0.9 million of
re-branding cost for the year ended December 31, 2006, and (c) $1.4 million and $0.9 million of acquisition costs incurred during the year
ended December 31, 2009 and 2008, respectively, in connection with the acquisition of BAR which was completed on January 20, 2009.
(2)
deferred finance costs related to 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, 2009 incurred in connection with a sale-leaseback transaction as further
described in Note 8 to the consolidated financial statements included in Part II. Item 8 of this Form 10-K.
40
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 provider of diversified career-oriented post-secondary education as measured by total enrollment. We offer recent high
school graduates and working adults degree and diploma programs in five areas of study: health sciences, automotive technology, skilled
trades, hospitality services and business and information technology. Each area of study is specifically designed to appeal to and meet the
educational objectives of our student population, while also satisfying the criteria established by industry and employers. The resulting
diversification limits dependence on any one industry for enrollment growth or placement opportunities and broadens potential branches
for introducing new programs. As of December 31, 2009, we enrolled 29,340 students at our 43 campuses across 17 states. Our campuses
primarily attract students from their local communities and surrounding areas, although our seven destination schools attract students from
across the United States, and in some cases, from abroad.
From 1999 through 2009, we increased our geographic footprint and added 26 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 in 2005 (four schools), Euphoria
Institute of Beauty Arts and Sciences in 2005 (two schools), New England Institute of Technology at Palm Beach, Inc. in 2006 (two
schools), BRI in 2008 (one school) and BAR in 2009 (seven schools. Our campuses, a majority of which serve major metropolitan
markets, are located throughout the United States. Seven 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 either nationally or regionally accredited and are eligible to participate in federal financial aid
programs.
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 3% 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. Our revenues increased
46.6% in 2009 and 15.0% in 2008, over the prior years as we grew from 34 campuses at December 31, 2007 to 43 campuses at
December 31, 2009. Our average student population increased from 20,006 for the year ended December 31, 2008 to 27,808 for the year
ended December 31, 2009. 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 38.3% in 2009 from 40.7% in 2008 and 42.6% in 2007, and selling, general
and administrative expenses decreased as a percentage of revenue to 45.7% in 2009 from 49.9% in 2008 and 49.5% in 2007. 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 the average number of students enrolled in our schools and the courses in which they are enrolled.
Our average enrollment is impacted by the number of new students starting, re-entering, graduating and withdrawing from our schools. In
addition, our diploma/certificate programs range from 16 to 105 weeks, our associate’s degree programs range from 47 to 92 weeks, and
our bachelor’s degree programs range from 132 to 193 weeks, and students attend classes for different amounts of time per week
depending on the school and program in which they are enrolled. Because we start new students every month, our total student population
changes monthly. The number of students enrolling or re-entering our programs each month is driven by the demand for our programs, the
effectiveness of our marketing and advertising, the availability of financial aid and other sources of funding, the number of recent high
school graduates, the job market and seasonality. Our retention and graduation rates are influenced by the quality and commitment of our
41
teachers and student services personnel, the effectiveness of our programs, the placement rate and success of our graduates and the
availability of financial aid. Although similar courses have comparable tuition rates, the tuition rates vary among our numerous programs.
As more of our schools receive approval to offer associate’s degree and bachelor’s degree programs, which are longer than our diploma
degree programs, we would expect our average enrollment and the average length of stay of our students to increase.
The majority of students enrolled at our schools rely on funds received under various government-sponsored student financial aid
programs to pay a substantial portion of their tuition and other education-related expenses. The largest of these programs are Title IV
Programs which represented approximately 81% of our cash receipts relating to revenues in 2009.
We extend credit for tuition and fees to many of our students that attend our campuses. Our credit risk is mitigated through the student’s
participation in federally funded financial aid programs unless students withdraw prior to the receipt by us of Title IV funds for those
students. Under Title IV programs, the government funds a certain portion of a students’ tuition, with the remainder, referred to as “the
gap,” financed by students themselves under private party loans, including credit extended by us. The gap amount has continued to
increase over the last several years as we have raised tuition on average for the last several years by 3% to 5% per year, while funds
received from Title IV programs have remained constant.
We entered into a tiered discount loan program agreement, effective September 1, 2007, with SLM Financial Corporation or 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.
SLM’s termination of its tiered discount loan program had 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 81% of our 2009 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, 2009, approximately 81% of our revenue on a cash basis was derived from Title IV funds, approximately
10% was derived from state grants and cash payments made by students, and approximately 3% was funded under third-party private loan
programs, which included SLM programs. 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 include SLM programs. The credit crisis that has impacted the financial
markets has had a limited impact on our ability to finance our credit worthy students. However, no assurance can be given that the
worsening of the current economic downturn or tightening of the credit markets would not have a negative impact on our ability to
continue to finance our creditworthy 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, 2009, we had outstanding loan commitments to our students of $28.9 million as compared to $24.0 million at December 31,
2008. Loan commitments, net of interest that would be due on the loans through maturity, were $20.5 million at December 31, 2009 as
compared to $16.5 million at December 31, 2008. Commitments at December 31, 2009 represented an average commitment balance,
including interest of approximately $7,200.
42
Our bad debt expense as a percentage of revenue increased to 6.7% for 2009 from 5.7% and 5.3%, respectively, in 2008 and 2007. This
increase was attributable to several factors, including:
•
•
•
a slight deterioration in the performance of our loan portfolio, as we experienced a 5% increase in defaults for students who
dropped out;
an increase in our reserve for graduate receivables of 7% in 2009 based upon our consideration of the current economic
environment and high unemployment rates which could impact our students ability to repay their loans; and
the increase in our internal commitments and the associated credit risk of maintaining loans on our balance sheet that may take up
to 7 years to repay.
All institutions participating in Title IV Programs must satisfy specific standards of financial responsibility. The DOE evaluates
institutions for compliance with these standards each year, based on the institution’s annual audited financial statements, as well as
following a change in ownership resulting in a change of control of the institution.
The most significant financial responsibility measurement is the institution's composite score, which is calculated by the DOE based on
three ratios:
•
•
•
the equity ratio, which measures the institution's capital resources, ability to borrow and financial viability;
the primary reserve ratio, which measures the institution's ability to support current operations from expendable resources; and
the net income ratio, which measures the institution's ability to operate at a profit.
The DOE assigns a strength factor to the results of each of these ratios on a scale from negative 1.0 to positive 3.0, with negative 1.0
reflecting financial weakness and positive 3.0 reflecting financial strength. The DOE then assigns a weighting percentage to each ratio and
adds the weighted scores for the three ratios together to produce a composite score for the institution. The composite score must be at least
1.5 for the institution to be deemed financially responsible without the need for further oversight. If an institution's composite score is
below 1.5, but is at least 1.0, it is in a category denominated by the DOE as "the zone." Under the DOE regulations, institutions that are in
the zone are deemed to be financially responsible for a period of up to three years but are required to accept payment of Title IV Program
funds under the cash monitoring or reimbursement method of payment and to provide to the DOE timely information regarding various
oversight and financial events.
Based on audited financial statements for the 2009, 2008 and 2007 fiscal years our calculations resulted in a composite score of 2.0, 1.8
and 1.8, 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. We utilize a mix of different advertising mediums,
including television, internet and direct mail.
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 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.
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.
43
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,
2007
$
4,230
(13,760)
(9,530)
(4,043)
(5,487)
$
Revenues
Operating expenses
Benefit for income taxes
Loss from discontinued operations
ACQUISITIONS
Acquisitions have been, and are expected to 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 six of the seven schools comprising BAR, for approximately $24.9 million in cash,
net of cash acquired. BAR consists of seven schools serving approximately 2,300 students as of December 31, 2009 and offers associate’s
degree and diploma programs in the fields of automotive, skilled trades, health sciences and culinary arts. On April 20, 2009, we acquired
the seventh BAR school, Clemens, for $2.7 million, in cash, net of cash acquired. In connection with these acquisitions, we incurred
approximately $1.4 million of transaction expenses for the year ended December 31, 2009.
On December 1, 2008, we acquired all of the rights, title and interest in the assets of BRI for approximately $10.6 million, net of cash
acquired. BRI is regionally accredited by NEASC, and offered bachelor’s degree programs to approximately 670 students as of December
31, 2009 from Connecticut and surrounding states.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussions of our financial condition and results of operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of
financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the period. On an ongoing basis, we evaluate our estimates and assumptions, including
those related to revenue recognition, bad debts, fixed assets, goodwill and other intangible assets, income taxes and certain accruals. Actual
results could differ from those estimates. The critical accounting policies discussed herein are not intended to be a comprehensive list of all
of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does
not result in significant management judgment in the application of such principles. There are also areas in which management's judgment
in selecting any available alternative would not produce a materially different result from the result derived from the application of our
critical accounting policies. We believe that the following accounting policies are most critical to us in that they represent the primary
areas where financial information is subject to the application of management's estimates, assumptions and judgment in the preparation of
our consolidated financial statements.
Revenue recognition. Revenues are derived primarily from programs taught at our schools. Tuition revenues and one-time fees, such as
nonrefundable application fees, and course material fees are recognized on a straight-line basis over the length of the applicable program,
which is the period of time from a student's start date through his or her graduation date, including internships or externships that take
place prior to graduation. If a student withdraws from a program prior to a specified date, any paid but unearned tuition is refunded.
Refunds are calculated and paid in accordance with federal, state and accrediting agency standards. Other revenues, such as textbook sales,
tool sales and contract training revenues are recognized as services are performed or goods are delivered. On an individual student basis,
tuition earned in excess of cash received is recorded as accounts receivable, and cash received in excess of tuition earned is recorded as
unearned tuition.
Allowance for uncollectible accounts. Based upon experience and judgment, we establish an allowance for uncollectible accounts with
respect to tuition receivables. We use an internal group of collectors, augmented by third-party collectors as deemed appropriate, in our
collection efforts. In establishing our allowance for uncollectible accounts, we consider, among other things, a student's status (in-school or
out-of-school), whether or not additional financial aid funding will be collected from Title IV Programs or other sources, whether or not a
student is currently making payments, and overall collection history. Changes in trends in any of these areas may impact the allowance for
uncollectible accounts. The receivables balances of withdrawn students with delinquent obligations are reserved for based on our
44
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, 2009, 2008 and 2007 was 6.7%, 5.7% and 5.3%,
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, 2009, 2008 and 2007 would have resulted in an increase in bad debt expense of
$5.5 million, $3.8 million and $3.3 million, respectively.
Because a substantial portion of our revenues are derived from Title IV Programs, any legislative or regulatory action that significantly
reduces the funding available under Title IV Programs or the ability of our students or schools to participate in Title IV Programs could
have a material effect on the realizability of our receivables.
Goodwill. We test our goodwill for impairment annually, or whenever events or changes in circumstances indicate an impairment may
have occurred, by comparing its fair value to its carrying value. Impairment may result from, among other things, deterioration in the
performance of the acquired business, adverse market conditions, adverse changes in applicable laws or regulations, including changes that
restrict the activities of the acquired business, and a variety of other circumstances. If we determine that impairment has occurred, we are
required to record a write-down of the carrying value and charge the impairment as an operating expense in the period the determination is
made. In evaluating the recoverability of the carrying value of goodwill and other indefinite-lived intangible assets, we must make
assumptions regarding estimated future cash flows and other factors to determine the fair value of the acquired assets. Changes in strategy
or market conditions could significantly impact these judgments in the future and require an adjustment to the recorded balances.
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, 2009, goodwill was approximately
$113.0 million, or 29.1%, of our total assets.
We test our goodwill for impairment using a two-step approach. The first step is conducted utilizing the multiple of earnings approach and
comparing the carrying value of our reporting units to their implied fair value; if necessary, the second step is conducted utilizing a
discounted cash flow approach and comparing the carrying value of our reporting units to their implied fair value.
At December 31, 2009, we tested our goodwill for impairment and determined that an impairment of approximately $215,000 existed for
one of our reporting units. No other reporting unit’s carrying goodwill amount exceeded its implied value. At December 31, 2008, we
tested our goodwill and determined we did not have an impairment.
Stock-based compensation. We currently account for stock-based employee compensation arrangements by using the Black-Scholes
valuation model and utilize straight-line amortization of compensation expense over the requisite service period of the grant. We make an
estimate of expected forfeitures at the time options are granted.
The fair value of the stock options used to compute stock-based compensation is the estimated present value at the date of grant using the
Black-Scholes option pricing model. The weighted average fair values of options granted during 2009, 2008, and 2007 were $8.75, $6.69,
and $6.78, 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
2009
51.95%
0%
4.8-6 Years
2.29-2.36%
$
18.48
At December 31,
2008
57.23%
0%
6 Years
2.76-3.29%
$
11.97
2007
55.42%
0%
6 Years
4.36%
$
11.96
The expected volatility considers the volatility of our common stock and 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.
45
Results of Continuing Operations for the Three Years Ended December 31, 2009
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
Loss (gain) on sale of assets
Impairment of goodwill
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,
2008
100.0%
2009
100.0%
2007
100.0%
38.3%
45.7%
0.0%
0.0%
84.0%
16.0%
-0.8%
0.0%
15.2%
6.3%
8.9%
40.7%
49.9%
0.0%
0.0%
90.6%
9.4%
-0.6%
0.0%
8.8%
3.5%
5.3%
42.6%
49.5%
0.0%
0.0%
92.1%
7.9%
-0.7%
0.0%
7.2%
3.0%
4.2%
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
Revenues. Revenues increased by $175.6 million, or 46.6%, to $552.5 million for 2009 from $376.9 million for 2008. Approximately
$57.0 million of this increase was a result of our acquisitions of BRI on December 1, 2008, six of the seven schools comprising BAR on
January 20, 2009 and Clemens on April 20, 2009, which we refer to collectively as the “Acquisitions”. The remainder of the increase in
revenues was primarily attributable to a 26.5% increase in average student population, which increased to 25,277 for the year ended
December 31, 2009, from 19,983 for the year ended December 31, 2008. Average revenue per student on a same school basis increased
4.0% for the year ended December 31, 2009, from the year ended December 31, 2008, primarily from tuition increases which ranged from
3% to 5% annually and from a shift from lower to higher tuition programs.
Educational services and facilities expenses. Our educational services and facilities expenses increased by $57.8 million, or 37.6%, to
$211.3 million for the year ended December 31, 2009 from $153.5 million for the year ended December 31, 2008. The Acquisitions
accounted for $32.0 million of this increase. The remainder of the increase in educational services and facilities expenses was primarily
due to instructional expenses which increased by $15.3 million, or 19.2%, and books and tools expenses, which increased by $7.2 million,
or 34.2%, respectively, over 2008. These increases were attributable to a 26.7% increase in student starts for the year ended December 31,
2009 as compared to 2008 coupled with a 26.5% increase in average student population and higher tool sales during the year ended
December 31, 2009 compared to 2008. On a same school basis, we began 2009 with approximately 3,000 more students than we had on
January 1, 2008, and as of December 31, 2009, our population on a same school basis was approximately 5,300 higher than as of
December 31, 2008. Also contributing to the increase in educational services and facilities expenses were higher facilities expenses, which
increased by approximately $3.2 million over 2008. Educational services and facilities expenses as a percentage of revenues decreased to
38.3% from 40.7% for the year ended December 31, 2009 compared to 2008.
Selling, general and administrative expenses. Our selling, general and administrative expenses for the year ended December 31, 2009
were $252.7 million, an increase of $65.0 million, or 34.6%, from $187.7 million for the year ended December 31, 2008. Approximately
$29.9 million of this increase was attributable to the Acquisitions. The remainder of the increase in our selling, general and administrative
expenses for the year ended December 31, 2009 was primarily due to: (a) a $2.9 million, or 17.9%, increase in student services; (b) a $7.5
million, or 10.7%, increase in sales and marketing; and (c) a $24.6 million, or 24.2%, increase in administrative expenses as compared to
2008.
The increase in student services during the year ended December 31, 2009 as compared to 2008 was primarily due to annual increases in
compensation and benefit expenses to our financial aid and career services personnel. Additionally, during 2009, we slightly increased the
number of financial aid personnel as a result of a larger student population during the year ended December 31, 2009 as compared to 2008.
We also increased by 31.2% the number of career service personnel during 2009 to further aid our students in obtaining job placement
during these difficult economic times.
The increase in sales and marketing expense during the year ended December 31, 2009 as compared to 2008 was primarily due to: (a)
annual compensation increases to sales representatives; (b) additional sales representatives to facilitate our recent and anticipated growth;
and (c) increased call center personnel as compared to 2008. In addition, we continued to invest in marketing initiatives in an effort to
continue to grow our student population.
46
The increase in administrative expenses during the year ended December 31, 2009 as compared to 2008 was due to: (a) a $9.0 million
increase in personnel costs relating to (i) annual compensation increases and an increase in the number of personnel needed to serve the
needs of a higher student population during the year ended December 31, 2009 as compared to 2008, (ii) an increase in accruals for
incentive compensation and increased cost of benefits provided to employees; (b) a $11.3 million increase in bad debt expense; (c) $0.5
million increase in stationary and supplies due to our re-branding; (d) $0.3 million incurred due to the re-branding of our Florida Culinary
Institute in West Palm Beach, Florida; (e) $0.4 million in connection with our acquisition of BAR on January 20, 2009; and (f) a $1.0
million increase in our net periodic benefit cost of our defined benefit pension plan.
For the year ended December 31, 2009, including the Acquisitions, our bad debt expense as a percentage of revenue was 6.7% as
compared to 5.7% for 2008. This increase was primarily attributable to a slight deterioration in the performance of our loan portfolio, due
to the current economic environment. During 2009, we considered the current economic environment which has produced high
unemployment rates and concluded to increase our reserve on graduate receivables to 17% from 10% in 2008. Our number of days sales
outstanding for the fourth quarter of 2009 were 25.0 days, compared to 22.4 days for the fourth quarter of 2008. As of December 31, 2009,
we had outstanding loan commitments to our students of $28.9 million as compared to $24.0 million at December 31, 2008. Loan
commitments, net of interest that would be due on the loans through maturity, were $20.5 million at December 31, 2009 as compared to
$16.5 million at December 31, 2008.
As a percentage of revenues, selling, general and administrative expenses decreased to 45.7% of revenues for 2009 from 49.9% for 2008.
Net interest expense. Our net interest expense for the year ended December 31, 2009 was $4.2 million, an increase of $2.2 million, from
$2.0 million for the same period in 2008. This increase was attributable to real estate capital leases assumed in connection with the
Acquisitions.
Income taxes. Our provision for income taxes for the year ended December 31, 2009 was $34.9 million, or 41.5% of pretax income,
compared to $13.3 million, or 39.8% of pretax income for the year ended December 31, 2009. The increase in our effective tax rate for the
year ended December 31, 2009 was primarily attributable to nondeductible acquisition costs.
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 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,
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
47
$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 BAR 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.
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.
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, 2009:
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
2009
Cash Flow Summary
Year Ended December 31,
2008
(In thousands)
$
54,176
$
(31,205)
$
(11,239)
$
73,169
$
(51,593)
$
9,266
2007
$
15,735
$
(23,830)
$
5,136
As of December 31, 2009, we had cash and cash equivalents of $46.1 million, representing an increase of approximately $30.9 million as
compared to $15.2 million as of December 31, 2008. 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 2009, we borrowed an additional $64.0 million to finance our working capital needs and repaid $44.0
million outstanding under our credit facility. 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 $14.9 million. The proceeds of this offering were used to repay borrowings under our credit
48
agreement used to finance the BAR acquisitions. We may 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. On December 15, 2009, we repurchased 1,250,000 shares of common stock for $26.2 million from our
principal stockholder, Back to School Acquisition, L.L.C., concurrently with its sale of an additional 750,000 shares of common stock in a
block trade pursuant to Rule 144 under the Securities Act of 1933. At December 31, 2009, we had net borrowings available under our
$115 million credit agreement of approximately $88.2 million, including an $18.2 million sub-limit on letters of credit. The line of credit
matures on December 1, 2012.
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 81% 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 193 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, 2009 Compared to Year Ended December 31, 2008. Net cash provided by operating activities was $73.2
million for the year ended December 31, 2009 as compared to $54.2 million for the year ended December 31, 2008. The $19.0 million
increase in net cash provided by operating activities was driven by an increase in net income of approximately $29.0 million offset by
$23.2 million of higher tax payments and by the increase in net accounts receivable of $51.1 million which represented 28.3 days revenue
outstanding for 2009 as compared to 25.4 days revenue outstanding for 2008. The increase in days revenues outstanding is attributable to
the increase in loans that we provided to our students. The remainder of the increase was attributable to cash provided by other working
capital items.
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.
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 BAR. Our capital expenditures
included facility expansion, leasehold improvements, improvements of classroom, furniture and shop training equipment and the purchase
of a building in Denver, Colorado. On January 20, 2009 and April 20, 2009, we acquired the schools comprising BAR for approximately
$27.6 million in cash, net of cash acquired. On December 1, 2008 we acquired all the rights, title and interest in the assets of BRI for
$10.6 million in cash, net of cash acquired.
We currently lease a majority of our campuses. We own our campuses in Grand Prairie, Texas; West Palm Beach, Florida; Nashville,
Tennessee; and Cincinnati (Tri-County), Ohio. In addition, we purchased a building in Denver, Colorado in 2009 which will be occupied
by our existing Denver, Colorado school once construction is complete. 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.
49
Year Ended December 31, 2009 Compared to the Year Ended December 31, 2008. Net cash used in investing activities increased
$20.4 million to $51.6 million for the year ended December 31, 2009 from $31.2 million for the year ended December 31, 2008. This
increase was primarily attributable to a $17.0 million increase in cash used in acquisitions and a $3.9 million increase in capital
expenditures for the year ended December 31, 2009 from the year ended December 31, 2008. Our capital expenditures primarily resulted
from facility expansion, leasehold improvements, investments in classroom and shop technology, and the purchase of the building in
Denver, Colorado.
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 BRI 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.
Capital expenditures are expected to increase in 2010 as we build out our new Denver, Colorado facility, open a new start-up campus,
upgrade and expand current equipment and facilities and expand new facilities to meet increased student enrollment. We anticipate capital
expenditures to range from 8% to 9% of revenues in 2010 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, 2009 Compared to the Year Ended December 31, 2008. Net cash provided by financing activities was
$9.3 million for the year ended December 31, 2009, as compared to net cash used in financing activities of $11.2 million for the year ended
December 31, 2008. This increase of $20.5 million was primarily due to: (a) $14.9 million received from our sale of common stock in a
public offering during the year ended December 31, 2009; (b) a $25.0 million increase in net borrowings under our credit agreement; (c)
$1.9 million increase in proceeds from the exercise of stock options; offset by (d) $6.6 million in repurchases of our common stock during
the year ended December 31, 2008 as compared to $26.2 million repurchases of our common stock during the year ended December 31,
2009; (e) offset by $0.8 increase in capital lease payments and (f) $1.0 million increase in payments on deferred finance fees.
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 December 15, 2009, we entered into a definitive stock repurchase agreement with BTS, relating to our repurchase of 1,250,000 shares
of our common stock owned by BTS at a purchase price of $20.95 per share or an aggregate purchase price of $26.2 million. The
repurchased shares represent approximately 4.6% of our total shares of common stock outstanding on December 15, 2009. In accordance
with the terms of the repurchase agreement, consummation of the share repurchase was conditioned upon the completion of the sale by
BTS of an additional 750,000 shares of our common stock in a block trade pursuant to Rule 144 under the Securities Act of 1933, as
amended. The completion of the block trade and the concurrent closing of the share repurchase occurred on December 21, 2009. We used
cash on hand to pay the purchase price for the repurchased shares. Approximately 25.9 million shares of our common stock remained
outstanding after the completion of the share repurchase. The sale of stock by BTS in the share repurchase and the block trade have
resulted in the reduction of BTS’s beneficial ownership interest in us from approximately 37.9% to approximately 31.8% as of December
31, 2009.
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 December 1, 2009, we, as borrower, and all of our wholly-owned subsidiaries, as guarantors, entered into a secured revolving credit
agreement with a syndicate of seven lenders led by Bank of America, N.A., as administrative agent, swing line lender and letter of credit
issuer, for an aggregate principal amount of up to $115 million, which we refer to as the “Credit Facility”. Banc of America Securities
LLC acted as sole lead arranger and book manger under the credit agreement. The Credit Facility replaces our prior $100 million credit
facility with Harris N.A. and other lenders which was due to expire on February 15, 2010. The prior facility was terminated concurrently
with the effective date of the credit agreement.
Amounts borrowed as revolving loans under the Credit Facility will bear interest, at our option, at either (i) an interest rate based on
LIBOR and adjusted for any reserve percentage obligations under Federal Reserve Bank regulations, or the “Euro Dollar Rate,” for
specified interest periods or (ii) the Base Rate (as defined in the credit agreement), in each case, plus an applicable margin rate as
determined under the credit agreement. The “Base Rate,” as defined under the credit agreement, is the highest of (a) the prime rate, (b) the
Federal Funds rate plus 0.50% and (c) a daily rate equal to one-month of the Euro Dollar Rate plus 1.0%. Under the credit agreement, the
margin interest rate is subject to adjustment within a range of 1.50% to 3.25% based upon changes in our consolidated leverage ratio and
depending on whether we have chosen the Euro Dollar Rate or the Base Rate option. Swing line loans will bear interest at the Base Rate
plus the applicable margin rate. Letters of credit will require a fee equal to the applicable margin rate multiplied by the daily amount
available to be drawn under each issued letter of credit plus a fronting fee of 0.125% of the amount available to be drawn and customary
50
issuance, presentation, amendment and other processing fees associated with letters of credit. At December 31, 2009, we had outstanding
letters of credit aggregating $6.8 million which is primarily comprised of letters of credit for the DOE matters and security deposits in
connection with certain of our real estate leases.
The credit agreement contains customary representations, warranties and covenants including consolidated adjusted net worth,
consolidated leverage ratio, consolidated fixed charge coverage ratio, minimum financial responsibility composite score, cohort default
rate and other financial covenants, certain restrictions on capital expenditures as well as affirmative and negative covenants and events of
default customary for facilities of this type. In addition, we are paying fees to the lenders that are customary for facilities of this type.
As of December 31,
Credit agreement
Finance obligation
Note payable
Capital lease-property (with a rate of 8.0%)
Capital leases-equipment (with rates ranging from 5.0% to 8.5%)
Subtotal
Less current maturities
Total long-term debt
2009
$
20,000
9,672
11
27,202
443
57,328
(383)
56,945
$
2008
-
$
9,672
-
-
502
10,174
(130)
10,044
$
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.
Climate Change
Climate change has not had and is not expected to have a significant effect on our operations.
Contractual Obligations
Long-Term Debt and Lease Commitments. As of December 31, 2009, our long-term debt consisted of amounts borrowed under our
credit agreement, the finance obligation in connection with our sale-leaseback transaction in 2001, notes payable, and amounts due under
capital lease obligations. We lease offices, educational facilities and various equipment for varying periods through the year 2032 at basic
annual rentals (excluding taxes, insurance, and other expenses under certain leases).
The following table contains supplemental information regarding our total contractual obligations as of December 31, 2009:
Credit agreement
Capital leases (including interest)
Note payable (including interest)
Uncertain income taxes
Operating leases
Rent on finance obligation
Total contractual cash obligations
Payments Due by Period
Less than 1
year
$
-
2,570
11
200
22,543
1,427
26,751
$
2-3 years
$
20,000
5,212
-
-
43,540
2,854
71,606
$
4-5 years
$
-
4,999
-
-
39,403
2,854
47,256
$
After 5
years
$
-
47,543
-
-
89,144
2,856
139,543
$
$
Total
20,000
60,324
11
200
194,630
9,991
285,156
$
Capital Expenditures. We have entered into commitments to expand or renovate campuses. These commitments are in the range of
$13.0 to $16.0 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, 2009, except for our letters of credit of $6.8 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.
51
RELATED PARTY TRANSACTIONS
On December 15, 2009, we entered into a definitive stock repurchase agreement with BTS, relating to our repurchase of 1,250,000 shares
of our common stock owned by BTS at a purchase price of $20.95 per share or an aggregate purchase price of $26.2 million. The
repurchased shares represent approximately 4.6% of our total shares of common stock outstanding on December 15, 2009. In accordance
with the terms of the repurchase agreement, consummation of the share repurchase was conditioned upon the completion of the sale by
BTS of an additional 750,000 shares of our common stock in a block trade pursuant to Rule 144 under the Securities Act of 1933, as
amended. The completion of the block trade and the concurrent closing of the share repurchase occurred on December 21, 2009.
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.
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.
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 5% (as calculated in the credit agreement) as of December 31, 2009. As of December
31, 2009, we had $20.0 million outstanding under our credit agreement.
Based on our outstanding debt balance as of December 31, 2009, a change of one percent in the interest rate would have caused a change
in our interest expense of approximately $0.2 million, or less than $0.01 per basic share, on an annual basis. Changes in interest rates
could have an impact however on our operations, which are greatly dependent on students’ ability to obtain financing. Any increase in
interest rates could greatly impact our ability to attract students and have an adverse impact on the results of our operations. The remainder
of our interest rate risk is associated with miscellaneous capital equipment leases, which are not material.
52
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, 2009, have concluded that our
disclosure controls and procedures are effective to reasonably ensure that material information required to be disclosed by us in the reports
that we file or submit under the Securities Exchange Act of 1934, as amended is recorded, processed, summarized and reported within the
time periods specified by Securities and Exchange Commissions’ Rules and Forms and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure.
Internal Control Over Financial Reporting
During the quarter ended December 31, 2009, 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, 2009, 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, 2009, 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, 2009, as stated in their report included in this Form 10-K that follows.
/s/ Shaun McAlmont
Shaun McAlmont
President and Chief Executive Officer
March 11, 2010
/s/ Cesar Ribeiro
Cesar Ribeiro
Chief Financial Officer
March 11, 2010
ITEM 9B.
OTHER INFORMATION
None.
53
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 2010 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
2010 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
2010 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
2010 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
2010 Annual Meeting of Shareholders.
54
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 (5).
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 December 1, 2009, among the Company, the Guarantors from time to time parties
thereto, the Lenders from time to time parties thereto and Bank of America, N.A., as Administrative Agent (7).
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).
55
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 (6).
10.17
Form of Restricted Stock Agreement under our 2005 Long Term Incentive Plan (6).
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 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.
Stock Purchase Agreement, dated as of December 15, 2009, among Lincoln Educational Services Corporation and
Back to School Acquisition, L.L.C.
21.1 *
Subsidiaries of the Company.
23 *
Consent of Independent Registered Public Accounting Firm.
31.1 *
Certification of Chairman & Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 *
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32 *
Certification of Chairman & Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
56
________________________________________________
(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 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.
Incorporated by reference to the Company’s Form 8-K dated December 1, 2009.
Filed herewith.
57
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 11, 2010
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/ Shaun McAlmont
Shaun McAlmont
/s/ Cesar Ribeiro
Cesar Ribeiro
/s/ Alvin O. Austin
Alvin O. Austin
/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
Executive Chairman
March 11, 2010
President and Chief Executive Officer
March 11, 2010
Senior Vice President, Chief Financial Officer and
Treasurer (Principal Accounting and Financial Officer)
March 11, 2010
Director
Director
Director
Director
Director
Director
Director
Director
Director
March 11, 2010
March 11, 2010
March 11, 2010
March 11, 2010
March 11, 2010
March 11, 2010
March 11, 2010
March 11, 2010
March 11, 2010
Exhibit 21.1
Subsidiaries of the Company
The following is a list of Lincoln Educational Services Corporation’s subsidiaries as of December 31, 2009:
Name
Lincoln Technical Institute, Inc. (wholly owned)
Jurisdiction
New Jersey
New England Acquisition LLC (wholly owned through Lincoln Technical Institute, Inc.)
Delaware
Southwestern Acquisition LLC (wholly owned through Lincoln Technical Institute, Inc.)
Delaware
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.)
LTI Holdings, LLC (wholly owned through Lincoln Technical Institute, Inc.)
LCT Acquisition, LLC (wholly owned through Lincoln Technical Institute, Inc.)
Delaware
Delaware
Florida
Colorado
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, 333-138715, and 333-158923 on
Form S-8 and in Registration Statement No. 333-148406 and 333-152854 on Form S-3 of our reports dated March 11, 2010, relating to the
consolidated financial statements and financial statement schedule of Lincoln Educational Services Corporation and subsidiaries, 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, 2009.
/s/ DELOITTE & TOUCHE LLP
Parsippany, New Jersey
March 11, 2010
EXHIBIT 31.1
I, Shaun McAlmont, 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 11, 2010
/s/ Shaun McAlmont
Shaun McAlmont
President and 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 11, 2010
/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, Shaun McAlmont, President 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 11, 2010
/s/ Shaun McAlmont
Shaun McAlmont
President and Chief Executive Officer
/s/ Cesar Ribeiro
Cesar Ribeiro
Chief Financial Officer
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2009 and 2008
Consolidated Statements of Income for the years ended December 31, 2009, 2008 and 2007
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2009,
2008 and 2007
Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007
Notes to Consolidated Financial Statements
Item 15
Schedule II-Valuation and Qualifying Accounts
Page Number
F-2
F-4
F-6
F-7
F-8
F-10
F-30
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, 2009 and 2008, and the related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2009. Our audits also included the financial statement schedule
listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Lincoln
Educational Services Corporation and subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2009, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
Company's internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
March 11, 2010 expressed an unqualified opinion on the Company's internal control over financial reporting.
/s/ DELOITTE & TOUCH LLP
Parsippany, New Jersey
March 11, 2010
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, 2009, 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,
2009, 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, 2009 and the related consolidated statements of income, stockholders’
equity, cash flows and financial statement schedule for the year ended December 31, 2009, and our report dated March 11, 2010
expressed an unqualified opinion on those financial statements and financial statement schedule.
/s/ DELOITTE & TOUCHE LLP
Parsippany, New Jersey
March 11, 2010
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 $25,293 and $13,914 at December 31, 2009 and
2008, respectively
Inventories
Deferred income taxes, net
Due from federal programs
Prepaid expenses and other current assets
Total current assets
December 31,
2009
2008
$
46,076
$
15,234
858
36,614
3,329
10,877
-
8,207
105,961
383
22,857
3,374
5,627
828
2,958
51,261
PROPERTY, EQUIPMENT AND FACILITIES - At cost, net of accumulated depreciation
and amortization of $97,590 and $83,345 at December 31, 2009 and 2008, respectively
149,310
108,567
OTHER ASSETS:
Noncurrent receivables, less allowance of $1,566 and $824 at December 31, 2009 and
2008, respectively
Deferred finance charges
Deferred income taxes, net
Goodwill
Other assets, net
Total other assets
TOTAL
6,264
1,346
4,236
112,953
8,298
133,097
3,326
632
7,080
91,460
5,716
108,214
$
388,368
$
268,042
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
$
383
$
130
December 31,
2009
2008
Unearned tuition
Accounts payable
Accrued expenses
Advanced payments from federal funds
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:
48,087
19,649
26,966
667
5,358
357
101,467
56,945
3,192
6,282
1,846
169,732
38,806
12,349
16,239
-
3,263
314
71,101
10,044
4,335
5,972
1,641
93,093
Preferred stock, no par value - 10,000,000 shares authorized, no shares issued and
outstanding at December 31, 2009 and 2008
Common stock, no par value - authorized 100,000,000 shares at December 31, 2009
and 2008, issued and outstanding 27,722,471 shares at December 31, 2009 and
26,088,261 shares at December 31, 2008
Additional paid-in capital
Deferred compensation
Treasury stock at cost - 1,865,000 at December 31, 2009 and 615,000 at December 31, 2008
Retained earnings
Accumulated other comprehensive loss
Total stockholders' equity
TOTAL
-
-
137,689
14,161
-
(32,771)
104,458
(4,901)
218,636
120,597
15,119
(3,619)
(6,584)
55,219
(5,783)
174,949
$
388,368
$
268,042
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
Impairment of goodwill
Total costs & expenses
OPERATING INCOME
OTHER:
Interest income
Interest expense
Other 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
2009
Year Ended December 31,
2008
2007
$
552,536
$
376,907
$
327,774
211,295
252,673
35
215
464,218
88,318
153,530
187,722
80
-
341,332
35,575
139,500
162,396
(15)
-
301,881
25,893
29
(4,275)
35
84,107
34,868
49,239
-
49,239
$
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
$
$
$
$
$
$
$
$
$
$
$
$
$
1.87
-
1.87
1.82
-
1.82
0.80
-
0.80
0.78
-
0.78
0.54
(0.21)
0.33
0.53
(0.21)
0.32
26,337
27,095
25,308
25,984
25,479
26,090
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)
Common Stock
Shares
25,450,695
-
Amount
$
120,182
-
Additional
Paid-in
Capital
$
7,695
-
Deferred
Compensation
$
(467)
-
Treasury
Stock
$
-
BALANCE - January 1, 2007
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
-
-
217,565
-
-
-
-
-
-
-
220,088
197
BALANCE - December 31, 2007
25,888,348
120,379
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
-
-
123,477
-
-
-
(13,512)
89,948
-
-
-
-
-
-
-
218
BALANCE - December 31, 2008
26,088,261
120,597
Net income
Employee pension plan, net of taxes
Stock-based compensation expense
Restricted stock
Stock options
Purchase of treasury stock
Sale of common stock,
net of expenses
Tax benefit of options exercised
Net share settlement for
equity-based compensation
Other
-
-
144,288
-
-
-
-
-
-
-
1,150,000
14,932
-
(16,206)
-
-
-
-
Exercise of stock options
356,128
2,160
-
-
3,155
1,455
73
-
12,378
-
-
1,487
1,105
-
331
(182)
-
15,119
-
-
410
1,169
-
-
578
(294)
(2,821)
-
Accumulated
Other
Comprehensive
Loss
$
(2,411)
-
-
325
-
-
-
-
$
Total
151,783
8,340
(100)
325
394
1,455
73
197
(2,086)
-
162,467
20,195
(3,697)
(3,697)
-
-
-
-
-
-
(5,783)
-
882
-
-
-
-
-
-
-
-
1,096
1,105
(6,584)
331
(182)
218
174,949
49,239
882
1,208
1,169
(26,187)
14,932
578
(294)
-
2,160
Retained
Earnings
$
26,784
8,340
(100)
-
-
-
-
-
35,024
20,195
-
-
-
-
-
-
-
55,219
49,239
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(2,761)
-
-
-
(3,228)
-
-
-
(391)
-
-
-
-
-
(6,584)
-
-
-
(3,619)
(6,584)
-
-
798
-
-
-
-
-
2,821
-
-
-
-
-
(26,187)
-
-
-
-
-
BALANCE - December 31, 2009
27,722,471
$
137,689
$
14,161
$
-
$
(32,771)
$
104,458
$
(4,901)
$
218,636
See notes to consolidated financial statements.
F-7
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
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
Pension
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, including restricted cash
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings
Payments on borrowings
Payment of deferred finance fees
Proceeds from exercise of stock options
Tax benefit associated with exercise of stock options
Net share settlement for equity-based compensation
Principal payments under capital lease obligations
Purchase of treasury stock
Proceeds from issuance of common stock, net of issuance costs
Net cash provided by (used in) financing activities
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS—Beginning of year
Year Ended December 31,
2008
2009
2007
$
49,239
$
20,195
$
8,340
24,240
248
(2,677)
34
215
280
-
36,982
2,377
(578)
334
(51,073)
188
(1,477)
1,495
(152)
358
452
2,673
7,509
(692)
3,194
23,930
73,169
(113)
(24,018)
90
-
(27,552)
(51,593)
64,000
(44,000)
(962)
2,160
578
(294)
(961)
(26,187)
14,932
9,266
30,842
15,234
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)
11,732
3,502
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
(2,959)
6,461
CASH AND CASH EQUIVALENTS—End of year
$
46,076
$
15,234
$
3,502
See notes to consolidated financial statements.
F-8
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:
Capital leases acquired in acquisition
Fixed assets acquired in capital lease transactions
Fixed assets acquired in noncash transactions
Year Ended December 31,
2008
2009
2007
$
4,007
$
1,998
$
2,305
$
35,355
$
12,137
$
10,148
$
26,828
$
-
$
-
$
75
$
-
$
652
$
2,005
$
1,430
$
2,812
See notes to consolidated financial statements.
F-9
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
(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 provider of diversified career-
oriented post-secondary education. The Company offers recent high school graduates and working adults degree and diploma
programs in five principal areas of study: Health Science, Automotive Technology, Skilled Trades, Hospitality Services and Business
and Information Technology. We currently have 43 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,
2009
$ 49,239
882
50,121
$
2008
$ 20,195
(3,697)
16,498
$
2007
$ 8,340
325
8,665
$
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, 2009, the Company had
restricted cash of $0.5 million related to state grants and $0.4 million related to the acquisition of Baran Institute of Technology
(“BAR”). As of December 31, 2008, the Company had restricted cash of $0.4 million related to state grants.
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. 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 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.
F-10
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 consisted of $1.3 million and $0.2 million as of December 31, 2009 and 2008,
respectively, related to the long-term debt and $0.4 million as of December 31, 2009 and 2008, 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. The increase
in deferred finance charges relates to our new credit agreement with a syndicate of banks entered into on December 1, 2009.
Advertising Costs—Costs related to advertising are expensed as incurred and approximated $40.9 million, $33.8 million and
$31.1 million for the years ended December 31, 2009, 2008 and 2007, respectively. These amounts are included in selling, general and
administrative expenses in the consolidated statement of income.
Goodwill and Other Intangible Assets— The Company tests its goodwill for impairment annually, or whenever events or changes in
circumstances indicate an impairment may have occurred, by comparing its reporting unit’s carrying value to its implied fair value.
Impairment may result from, among other things, deterioration in the performance of the acquired business, adverse market
conditions, adverse changes in applicable laws or regulations, 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 16, 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, 2009, we tested our goodwill for impairment and determined that an impairment of approximately $215,000
existed for one of our reporting units. No other reporting unit’s carrying goodwill amount exceeded its implied value. At December
31, 2008, we tested our goodwill and determined we 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 December 31, 2013. The Company's cash balances on deposit at December 31,
2009, exceeded the balance insured by the FDIC by approximately $42.9 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
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, 2009, and 2008.
F-11
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 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 16, 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.
During 2009 the Company changed the name of its Florida Culinary Institute to Lincoln Culinary Institute and wrote-off
approximately $0.3 million associated with the previous trade name.
Start-up Costs—Costs related to the start of new campuses are expensed as incurred.
New Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (“FASB”) issued an accounting standard on variable interest entities to
address the elimination of the concept of a qualifying special purpose entity. This standard also replaces the quantitative-based risks
and rewards calculation for determining which enterprise has a controlling financial interest in a variable interest entity with an
approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity and the obligation to
absorb losses of the entity or the right to receive benefits from the entity. Additionally, it provides more timely and useful information
about an enterprise’s involvement with a variable interest entity. The standard will become effective in the first quarter of 2010. The
adoption of this standard will have no effect on the Company’s consolidated financial statements.
In December 2008, the FASB issued an accounting standard enhancing employer’s disclosures about postretirement benefit plan
assets. This new standard requires companies to disclose information about the fair value measurement of plan assets. The standard
became effective in the fourth quarter of 2009. See Note 10 “Pension Plan” for further information.
In March 2008, the FASB issued an accounting standard requiring enhanced disclosure for derivative and hedging activities. The
standard became effective in the first quarter of 2009. The adoption of this standard had no effect on the Company’s consolidated
financial statements.
In December 2007, the FASB issued an accounting standard which addresses the accounting and disclosure for identifiable assets
acquired, liabilities assumed, and noncontrolling interests in a business combination. For the years ended December 31, 2009 and
2008, the Company incurred approximately $1.4 million and $0.9 million, respectively, of expenses related to the adoption of this
standard.
In December 2007, the FASB issued an accounting standard on noncontrolling interests which addresses the accounting and reporting
framework for noncontrolling interests by a parent company. The standard also addresses disclosure requirements to distinguish
between interests of the parent and interests of the noncontrolling owners of a subsidiary. The standard became effective in the first
F-12
quarter of 2009 and required that minority interest be renamed noncontrolling interests and that a company present a consolidated net
income measure that includes the amount attributable to such noncontrolling interests for all periods presented. The adoption of this
standard had no effect on the Company’s consolidated financial statements.
2.
FINANCIAL AID AND REGULATORY COMPLIANCE
Financial Aid
The Company’s schools and students participate in a variety of government-sponsored financial aid programs that assist students in
paying the cost of their education. The largest source of such support is the federal programs of student financial assistance under Title
IV of the Higher Education Act of 1965, as amended, commonly referred to as the Title IV Programs, which are administered by the
U.S. Department of Education (or "DOE"). During the years ended December 31, 2009, 2008 and 2007, approximately 81%, 79% and
80%, respectively, of net revenues on a cash basis were indirectly derived from funds distributed under Title IV Programs.
For the years ended December 31, 2009, 2008 and 2007 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.
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 2009, 2008 and 2007 fiscal years our calculations result in a composite score of 2.0, 1.8 and 1.8, 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. As of December 31, 2007, we are no longer subject to Heightened Cash Monitoring, Type 1 Status.
Prior to our acquisition in 2009, all of the former BAR institutions were placed on "Heightened Cash Monitoring due to a Type 1
status," resulting from their failure to meet their financial responsibility composite score for the years ended December 31, 2008 and
December 31, 2007. As a result, these institutions are subject to a less favorable Title IV funding system that requires us to credit
student accounts before drawing down Title IV funds and also requires us to timely notify the DOE with respect to certain enumerated
oversight and financial events.
F-13
3.
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, 2009, 2008 and 2007, respectively were as follows:
Basic shares outstanding
Dilutive effect of stock options
Diluted shares outstanding
2009
26,337,172
757,926
27,095,098
Year Ended December 31,
2008
25,308,144
675,852
25,983,996
2007
25,478,614
611,759
26,090,373
For the years ended December 31, 2009, 2008 and 2007, options to acquire 186,500, 546,708 and 608,208 shares, respectively, were
excluded from the above table as the result on reported earnings per share would have been antidilutive.
4.
BUSINESS ACQUISITIONS
On January 20, 2009, the Company completed the acquisition of six of the seven schools comprising BAR, for approximately $24.9
million in cash, net of cash acquired. BAR consists of seven schools serving approximately 2,300 students as of December 31, 2009
and offers associate’s degree and diploma programs in the fields of automotive, skilled trades, health sciences and culinary arts. On
April 20, 2009, the Company acquired the seventh BAR school, Clemens College (“Clemens”), for $2.7 million, in cash, net of cash
acquired. In connection with these acquisitions, the Company incurred approximately $1.4 million of transaction expenses for the
year ended December 31, 2009.
On December 1, 2008, the Company acquired all of the rights, title and interest in the assets of Lincoln College of New England
formerly Briarwood College (“BRI”) for approximately $10.6 million, net of cash acquired. BRI is regionally accredited by the New
England Association of Schools and Colleges, and currently offers bachelor’s degree programs to approximately 670 students as of
December 31, 2009 from Connecticut and surrounding states.
The consolidated financial statements include the results of operations from the respective acquisition dates. The purchase price
allocations for BRI were finalized in 2009. The Company has not yet finalized the purchase price allocation of BAR.
F-14
The following table summarizes the reported fair value of assets acquired and liabilities assumed related to acquisitions:
BAR
January 20,
2009 and
Clemens
April 20,
2009
BRI
December 1,
2008
$
263
8,059
36,739
264,02
-
$
195
1,265
9,992
261,2
015
040,1
014
089,1
037
)886,61(
(28,214)
27,552
$
450
-
960
40
-
21
(1,539)
(816)
10,568
$
hsac detcirtseR
Current assets, excluding cash acquired (1)
Property, equipment and facilities
lliwdooG
Identified intangibles:
stcartnoc tnedutS
eman edarT
noitatiderccA
mulucirruC
etepmoc-noN
stessa mret-gnol rehtO
Current liabilitie
Long-term liabilities assumed
Cost of acquisition, net of cash acquired
demussa s
(1) Current assets, excluding cash acquired for BAR includes reported amounts due from the seller in accordance with the stock
purchase agreement.
5.
GOODWILL AND OTHER INTANGIBLES
Changes in the carrying amount of goodwill during the years ended December 31, 2009 and 2008 are as follows:
Balance as of January 1, 2008
lliwdooG
sessol tnemriapmi detalumuccA
Goodwill acquired pursuant to business acquisition-BRI
Balance as of December 31, 2008
lliwdooG
sessol tnemriapmi detalumuccA
)1( stnemtsujda lliwdooG
tnemriapmi lliwdooG
Goodwill acquired pursuant to business acquisition-BAR
Balance as of December 31, 2009
lliwdooG
sessol tnemriapmi detalumuccA
$
948,48
)531,2(
82,714
8,746
595,39
)531,2(
91,460
642,1
)512(
20,462
303,511
)053,2(
112,953
$
(1) Goodwill adjustments are related to the finalization of the purchase price of BRI.
F-15
Intangible assets, which are included in other assets in the accompanying consolidated balance sheets, consisted of the following:
Gross carrying amount at
December 31, 2007
Acquisition (1)
Gross carrying amount at
December 31, 2008
Accumulated amortization at
December 31, 2007
Amortization
Accumulated amortization at
December 31, 2008
Net carrying amount at
December 31, 2008
Weighted average amortization
period (years)
Gross carrying amount at
December 31, 2008
Acquisitions (2)
BRI adjustment (3)
Write-off (4)
Gross carrying amount at
December 31, 2009
Accumulated amortization at
December 31, 2008
Amortization
Accumulated amortization at
December 31, 2009
Net carrying amount at
December 31, 2009
Weighted average amortization
period (years)
Student
Contracts
Indefinite
Trade
Name
Trade
Name
Accreditation Curriculum Non-compete
Total
$
2,215
348
$
1,270
-
$
-
-
$
307
1,000
$
700
1,300
$
201
-
$
4,693
2,648
2,563
1,270
2,212
18
2,230
-
-
-
-
-
-
-
1,307
2,000
201
7,341
-
-
-
208
81
289
65
40
2,485
139
105
2,624
$
333
$
1,270
$
-
$
1,307
$
1,711
$
96
$
4,717
2
Indefinite
6
Indefinite
10
3
Student
Contracts
$
2,563
2,162
102
-
Indefinite
Trade
Name
$
1,270
-
-
(280)
Trade
Name
$
-
509
-
-
Accreditation Curriculum Non-compete
Total
$
1,307
1,040
(40)
-
$
2,000
410
(1,260)
-
$
201
1,980
-
-
$
7,341
6,101
(1,198)
(280)
4,827
990
509
2,307
1,150
2,181
11,964
2,230
1,604
3,834
-
-
-
-
84
84
-
-
-
289
101
390
105
673
2,624
2,462
778
5,086
$
993
$
990
$
425
$
2,307
$
760
$
1,403
$
6,878
2
Indefinite
6
Indefinite
10
3
(1) The acquisition related to the acquisition of BRI on December 1, 2008.
(2) The acquisitions related to the acquisitions of six of the BAR schools on January 20, 2009 and Clemens on April 20, 2009.
(3) The adjustments are related to the finalization of the purchase price of BRI.
(4) During the second quarter of 2009, the Company wrote-off the value of the trade name of Florida Culinary Institute in West Palm
Beach, Florida due to rebranding.
Amortization of intangible assets for the years ended December 31, 2009, 2008 and 2007 was approximately $2.5 million, $0.1
million and $0.3 million, respectively.
F-16
The following table summarizes the estimated future amortization expense:
Year Ending December 31,
2010
2011
2012
2013
2014
Thereafter
$
1,894
883
232
181
160
231
$
3,581
6.
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
$
$
2009
17,563
159,882
64,887
1,363
3,205
246,900
(97,590)
149,310
2008
13,563
120,834
55,604
1,137
774
191,912
(83,345)
108,567
$
$
Included above in equipment, furniture and fixtures are assets acquired under capital leases as of December 31, 2009 and 2008 of $1.2
million and $4.5 million, respectively, net of accumulated depreciation of $0.8 million and $4.1 million, respectively.
Included above in buildings and improvements are buildings acquired under capital leases as of December 31, 2009 of $26.8 million,
net of accumulated depreciation of $1.6 million.
Included above in buildings and improvements is capitalized interest as of December 31, 2009 and 2008 of $0.6 million, respectively,
net of accumulated depreciation of $0.2 million, respectively.
Depreciation and amortization expense of property, equipment and facilities was $21.1 million, $17.2 million and $14.5 million for
the years ended December 31, 2009, 2008 and 2007, respectively.
7.
ACCRUED EXPENSES
Accrued expenses consist of the following:
Accrued compensation and benefits
Other accrued expenses
At December 31,
2009
19,231
7,735
26,966
$
$
2008
11,915
4,324
16,239
$
$
F-17
8.
LONG-TERM DEBT AND LEASE OBLIGATIONS
Long-term debt and lease obligations consist of the following:
Credit agreement (a)
Credit agreement (b)
Finance obligation (c)
Note payable
Capital lease-property (with a rate of 8.0%) (d)
Capital leases-equipment (with rates ranging from 5.0% to 8.5%)
Less current maturities
At December 31,
2009
$
-
20,000
9,672
11
27,202
443
57,328
(383)
56,945
$
2008
$
-
-
9,672
-
-
502
10,174
(130)
10,044
$
(a) On December 1, 2009, the Company, as borrower, and all of its wholly-owned subsidiaries, as guarantors, entered into a secured
revolving credit agreement (the “Credit Agreement”) with a syndicate of seven lenders led by Bank of America, N.A., as
administrative agent, swing line lender and letter of credit issuer, for an aggregate principal amount of up to $115 million (the “Credit
Facility”). Banc of America Securities LLC acted as sole lead arranger and book manger in connection with the Credit Facility. The
Credit Agreement replaces the Company’s prior $100 million credit facility with Harris N.A. and other lenders which was due to
expire on February 15, 2010. The prior facility was terminated concurrently with the effective date of the Credit Agreement, which
was December 1, 2009.
Amounts borrowed as revolving loans under the Credit Facility will bear interest, at the Company’s option, at either (i) an interest rate
based on LIBOR and adjusted for any reserve percentage obligations under Federal Reserve Bank regulations (the “Euro Dollar Rate”)
for specified interest periods or (ii) the Base Rate (as defined in the Credit Agreement), in each case, plus an applicable margin rate as
determined under the Credit Agreement. The “Base Rate”, as defined under the Credit Agreement, is the highest of (a) the prime rate,
(b) the Federal Funds rate plus 0.50% and (c) a daily rate equal to one-month of the Euro Dollar Rate plus 1.0%. Under the Credit
Agreement, the margin interest rate is subject to adjustment within a range of 1.50% to 3.25% based upon changes in the Company’s
consolidated leverage ratio and depending on whether the Company has chosen the Euro Dollar Rate or the Base Rate option. Swing
line loans will bear interest at the Base Rate plus the applicable margin rate. Letters of credit will require a fee equal to the applicable
margin rate multiplied by the daily amount available to be drawn under each issued letter of credit plus a fronting fee of 0.125% of the
amount available to be drawn and customary issuance, presentation, amendment and other processing fees associated with letters of
credit. At December 31, 2009, the Company had outstanding letters of credit aggregating $6.8 million which was primarily comprised
of letters of credit for the Department of Education matters and real estate leases.
The Credit Agreement contains customary representations, warranties and covenants including consolidated adjusted net worth,
consolidated leverage ratio, consolidated fixed charge coverage ratio, minimum financial responsibility composite score, cohort
default rate and other financial covenants, certain restrictions on capital expenditures as well as affirmative and negative covenants
and events of default customary for facilities of this type. In addition, the Company is paying fees to the lenders that are customary
for facilities of this type. As of December 31, 2009, the Company was in compliance with the financial covenants contained in the
credit agreement.
As of December 31, 2009, the Company had a total of $20.0 million outstanding under its credit agreement. Interest rates on
borrowing under the credit agreement during the year ended December 31, 2009 was 5.00%.
The credit agreement expires December 1, 2012.
(b) The Company previously had a credit agreement with a syndicate of banks, which was terminated on December 1, 2009. Under
the terms of the agreement, the syndicate provided the Company with a $100 million credit facility. The credit agreement permitted
the issuance of up to $20 million in letters of credit, the amount of which reduces the availability of permitted borrowings under the
agreement.
The obligations of the Company under the prior credit agreement were 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 bore interest at the rate of adjusted LIBOR plus 1.0% to 1.75%, as
F-18
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 were 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 2009, the Company borrowed a total of $44.0 million and repaid $44.0 million under its old credit agreement. Interest rates on
borrowing under the prior credit agreement during the year ended December 31, 2009 ranged from 1.31% to 3.25%.
During 2008, the Company borrowed $23.0 million under the prior 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%.
The prior credit agreement contained various covenants, including total funded debt to adjusted EBITDA of not less than 2:1, net
worth of not less than $141.8 million, a fixed charge coverage ratio of not less that 1:1, a minimum financial responsibility score of
not less than 1.0, and a cohort default rate of not more than 20%. Additionally, the credit agreement contained 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 the termination of the agreement, the Company was in
compliance with the financial covenants contained in the credit agreement.
(c) The Company completed a sale and a leaseback of several facilities on December 28, 2001, as discussed further in Note 14. 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, 2009 were $1.4 million, $1.4 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.
(d) As part of the acquisition of BAR, the Company assumed real estate capital leases related to Americare School of Nursing in St.
Petersburg, Florida and Connecticut Culinary Institute in Hartford, Connecticut. These leases bear interest at 8% and expire in 2032
and 2031, respectively.
Scheduled maturities of long-term debt and lease obligations at December 31, 2009 are as follows:
Year ending December 31,
2010
2011
2012
2013
2014
Thereafter
$
384
437
20,481
412
435
35,179
57,328
$
9.
STOCKHOLDERS' EQUITY
The Company has two stock incentive plans: a Long-Term Incentive Plan (the “LTIP”) and a Non-Employee Directors Restricted
Stock Plan (the “Non-Employee Directors Plan”).
Under the LTIP, certain employees received awards of restricted shares of common stock. The number of shares granted to each
employee is based on the fair market value of a share of common stock on the date of grant. As of December 31, 2009, there were a
total of 421,000 restricted shares awarded and 99,200 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, 2009, 2008 and 2007 was $0.9
million $0.8 million and $0.1 million, respectively. The deferred compensation or unrecognized restricted stock expense under the
LTIP as of December 31, 2009, 2008 and 2007 was $4.8 million, $3.2 million and $2.8 million, respectively.
Pursuant to the Non-Employee Directors Plan, each non-employee director of the Company receives an annual award of restricted
shares of common stock on the date of the Company’s annual meeting of shareholders. The number of shares granted to each non-
employee director is based on the fair market value of a share of common stock on that date. The restricted shares vest ratably on the
first through third anniversary of the grant date; however, there is no vesting period on the right to vote or the right to receive
F-19
dividends on these restricted shares. As of December 31, 2009, there were a total of 109,277 shares awarded less 5,035 shares
canceled and 60,047 shares vested under the Non-Employee Directors Plan. The recognized restricted stock expense for the years
ended December 31, 2009, 2008 and 2007 was $0.3 million, respectively. The deferred compensation or unrecognized restricted stock
expense under the Non-Employee Directors Plan as of December 31, 2009, 2008 and 2007 was $0.4 million, $0.4 million and $0.4
million, respectively.
In 2009 and 2008, the Company completed a net share settlement for 16,206 and 13,512 restricted shares, respectively, on behalf of
some employees that participate in the LTIP upon the vesting of the restricted shares pursuant to the terms of the LTIP. The net share
settlement was in connection with income taxes incurred on restricted shares that vested and were transferred to the employee during
2009 and/or 2008, creating taxable income for the employee. The Company has agreed to pay these taxes on behalf of the employees
in return for the employee returning an equivalent value of restricted shares to the Company. This transaction resulted in a decrease of
approximately $0.3 million and $0.2 million in 2009 and 2008, respectively, to equity on the consolidated balance sheets as the cash
payment of the taxes effectively was a repurchase of the restricted shares granted in previous years.
On February 18, 2009, the Company issued 1.15 million shares of common stock in a public offering and received net proceeds of
approximately $14.9 million, after deducting underwriting commissions and offering costs of approximately $0.3 million. In addition,
in connection with the same public offering, the Company also expensed $1.2 million of costs associated with the sale of stock by
certain selling shareholders.
On December 15, 2009, the Company entered into a definitive stock repurchase agreement (the “Repurchase Agreement”) with Back
to School Acquisition, L.L.C., its principal shareholder (“BTS”), relating to the Company’s repurchase of 1,250,000 shares of the
Company’s common stock (the “Repurchase Shares”) owned by BTS at a purchase price of $20.95 per share or an aggregate purchase
price of $26,187,500 (the “Share Repurchase”). The Repurchase Shares represent approximately 4.6% of the Company’s total shares
of common stock outstanding on December 15, 2009. In accordance with the terms of the Repurchase Agreement, consummation of
the Share Repurchase was conditioned upon the completion of the sale by BTS of an additional 750,000 shares of the Company’s
common stock in a block trade pursuant to Rule 144 under the Securities Act of 1933, as amended (the “Block Trade”). The
completion of the Block Trade and the concurrent closing of the Share Repurchase occurred on December 21, 2009. The Company
used cash on hand to pay the purchase price for the Repurchase Shares. Approximately 25.9 million shares of the Company’s
common stock remain outstanding after the completion of the Share Repurchase. The sale of stock by BTS in the Share Repurchase
and the Block Trade have resulted in the reduction of BTS’s beneficial ownership interest in the Company from approximately 37.9%
to approximately 31.8% as of December 31, 2009.
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. 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 2009, 2008, and 2007 were $8.75,
$6.69, and $6.78, 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
2009
51.95%
0%
4.8-6 Years
2.29-2.36%
$
18.48
At December 31,
2008
57.23%
0%
6 Years
2.76-3.29%
$
11.97
2007
55.42%
0%
6 Years
4.36%
$
11.96
The expected volatility considers the volatility of the Company and 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-20
The following is a summary of transactions pertaining to the option plans:
Outstanding December 31, 2006
Granted
Cancelled
Exercised
Outstanding December 31, 2007
Granted
Cancelled
Exercised
Outstanding December 31, 2008
Granted
Cancelled
Exercised
Shares
1,728,225
185,500
(181,474)
(220,088)
1,512,163
145,500
(93,500)
(89,948)
1,474,215
101,000
(35,166)
(356,128)
Outstanding December 31, 2009
1,183,921
Weighted
Average
Remaining
Contractual
Term
6.31 years
Aggregate
intrinsic Value
$
10,255
Weighted
Average Exercise
Price Per Share
8.85
11.96
12.02
3.34
9.65
11.97
15.01
2.43
9.98
18.48
14.81
6.07
11.74
5.83 years
5.25 years
4.95 years
1,811
9,156
1,018
6,808
4,760
11,934
10,395
Exercisable as of December 31, 2009
952,504
10.95
4.09 years
As of December 31, 2009, we estimate that unrecognized pre-tax compensation expense for all unvested stock option awards, in the
amount of approximately $0.9 million which will be expensed over the weighted-average period of approximately 1.7 years.
The following table presents a summary of options outstanding at December 31, 2009:
Stock Options Outstanding
Stock Options Exercisable
At December 31, 2009
Contractual
Weighted
Average life
(years)
2.02
7.53
6.02
4.63
4.95
Weighted
Average Price
3.10
$
11.76
15.24
23.08
10.95
Shares
370,246
121,515
354,843
105,900
952,504
Weighted
Exercise Price
$
3.10
11.76
15.24
23.08
10.95
Range of Exercise Prices
$3.10
$4.00-$13.99
$14.00-$19.99
$20.00-$25.00
Shares
370,246
248,332
452,843
112,500
1,183,921
During 2009, the Company transferred the $2.8 million balance in deferred compensation to additional paid-in-capital. The Company
concluded that this transfer should have been made concurrently with its previous change in accounting for stock based compensation.
The Company determined the effect of this error on its prior financial statements is immaterial.
10.
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-21
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 return (loss) on plan assets
Employer contributions
Benefits paid
Fair value of plan assets-end of year
Year Ended December 31,
2009
2008
$
14,994
98
917
900
(583)
16,326
$
14,062
113
893
484
(558)
14,994
10,659
2,366
692
(583)
13,134
15,758
(4,540)
-
(559)
10,659
BENEFIT OBLIGATION IN EXCESS OF FAIR VALUE FUNDED STATUS:
$
(3,192)
$
(4,335)
Amounts recognized in the consolidated balance sheets consist of:
At December 31,
2009
2008
Noncurrent liabilities
$
(3,192)
$
(4,335)
Amounts recognized in accumulated other comprehensive loss consist of:
Year Ended December 31,
2009
2008
Accumulated loss
Deferred income taxes
Accumulated other comprehensive loss
$
$
(8,157)
3,256
(4,901)
$
$
(9,567)
3,784
(5,783)
The accumulated benefit obligation was $16.2 million and $14.8 million at December 31, 2009 and 2008, respectively.
The following table provides the components of net periodic cost for the plan:
Year Ended December 31,
2009
2008
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost
Interest cost
Expected return on plan assets
Recognized net actuarial loss
Net periodic benefit cost
$
$
98
917
(864)
807
958
113
894
(1,233)
228
2
$
$
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 ($0.7) million.
F-22
Fair value of total plan assets by major asset category as of December 31:
Equity securities
Fixed income
International equities
Cash and equivalents
Total
2009
2008
46%
38%
15%
1%
100%
42%
48%
10%
0%
100%
Weighted-average assumptions used to determine benefit obligations as of December 31:
Discount rate
Rate of compensation increase
2009
2008
5.75%
4.00%
6.27%
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
2009
2008
2007
6.27%
4.00%
8.00%
6.37%
4.00%
8.00%
5.82%
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.
The Company expects to make $0.7 million in contributions to the plan in 2010. However after considering the funded status of the
plan, movements in the discount rate, investment performance and related tax consequences, the Company may choose to make
additional contributions to the plan in any given year.
The total amount of the Company’s contributions paid under its pension plan was $0.7 million for 2009 and $0 for each of the years
ended December 31, 2008. The net periodic benefit expense was $1.0 million and $2 thousand for the year ended December 31, 2009
and 2008, respectively.
F-23
Information about the expected benefit payments for the plan is as follows:
Year Ending December 31,
2010
2011
2012
2013
2014
Years 2015-2019
$
847
869
904
989
1,027
6,111
The Company has a 401(k) defined contribution plan for all eligible employees. Employees may contribute up to 25% of their
compensation into the plan. The Company will contribute an additional 30% of the employee's contributed amount up to 6% of
compensation. For the years ended December 31, 2009, 2008 and 2007 the Company's expense for the 401(k) plan amounted to
$1.7 million, $1.4 million and $1.2 million, respectively.
11.
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,
2009
2008
2007
$
29,817
8,187
38,004
$
10,960
2,679
13,639
$
8,538
2,484
11,022
(1,651)
(1,485)
(3,136)
(159)
(139)
(298)
(776)
(314)
(1,090)
Total provision
$
34,868
$
13,341
$
9,932
F-24
The components of the deferred tax assets are as follows:
Deferred tax assets
Current:
Accrued vacation
Net operating loss carryforwards
Allowance for bad debts
Other
Total current deferred tax assets
Deferred tax liabilities
Current:
Accrued student fees
Total current deferred tax liabilities
Total net current deferred tax assets
Deferred tax assets
Noncurrent:
Allowance for bad debts
Accrued rent
Stock-based compensation
Depreciation
Prepaid pension asset
Net operating loss carryforwards
Sale leaseback-deferred gain
Total noncurrent deferred tax assets
Deferred tax liabilities
Noncurrent:
Other intangibles
Goodwill
Total deferred tax liabilities
Total net noncurrent deferred tax assets
Total net deferred tax assets
At December 31,
2009
2008
$
114
430
10,084
249
10,877
$
117
-
5,773
-
5,890
-
-
10,877
625
2,686
2,353
3,610
1,274
3,641
2,203
16,392
(3,043)
(9,113)
(12,156)
4,236
15,113
$
$
(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
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
$
84,107
$
33,536
2009
Year Ended December 31,
2008
2007
23,759
$
$
11,737
1,651
(47)
13,341
$
35.0%
4.9
(0.1)
39.8%
Expected tax
State tax expense (net of federal benefit)
Other
Total
$
29,438
4,356
1,074
34,868
$
35.0%
5.2
1.3
41.5%
F-25
$
$
8,316
1,411
205
9,932
35.0%
6.0
0.8
41.8%
As of January 1, 2007, the Company adopted an accounting standard related to the accounting for uncertainty in income taxes. This
standard clarifies the accounting for uncertainty in income taxes recognized in financial statements and provides guidance on the
recognition and measurement of tax positions taken or expected to be taken by an entity. The adoption of this standard did not have a
significant impact on the Company’s financial position. The following table summarizes the activity related to the Company’s
unrecognized tax benefits:
Balance at January 1,
Gross increases for tax positions of prior years
Balance at December 31,
Year Ended December 31,
2008
100
$
-
100
$
100
100
200
2007
100
$
-
$
100
2009
$
$
Included in the balance of unrecognized tax benefits at December 31, 2009 and 2008 are unrecognized tax benefits of $0.2 million and
$0.1 million, of which $0.2 million and $0.1 million, would be reflected as an adjustment to income tax expense if recognized,
respectively. It is expected that the amount of unrecognized tax benefits will change in the next 12 months; however, we do not expect
the change to have a significant impact on our results of operations or financial position.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. During the years
ended December 31, 2009 and 2008, the interest and penalties expense associated with uncertain tax positions are not significant to
our results of operations or financial position.
The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states. The Company is no
longer subject to U.S. federal income tax examinations for years before 2005 and generally, is no longer subject to state and local
income tax examinations by tax authorities for years before 2004.
Presently, the Company is currently under examination by the Internal Revenue Service for tax years 2006 through 2008. The
Company has not been contacted by any U.S. state, local or tax authority for all open tax periods beginning after December 31, 2004.
12.
SEGMENT REPORTING
Each of the Company’s schools is an operating segment. Our operating segments have been aggregated into one reportable segment
because, in the Company’s judgment, the operating segments have similar products, production processes, types of customers,
methods of distribution, regulatory environment and economic characteristics.
13.
RELATED PARTY TRANSACTIONS
As discussed in Note 9, on December 15, 2009, the Company entered into a Repurchase Agreement with BTS, its principal
shareholder, relating to the Company’s repurchase of 1,250,000 shares of the Company’s common stock owned by BTS at a purchase
price of $20.95 per share or an aggregate purchase price of $26,187,500. The Repurchase Shares represented approximately 4.6% of
the Company’s total shares of common stock outstanding on December 15, 2009.
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.
F-26
14.
COMMITMENTS AND CONTINGENCIES
Lease Commitments—The Company leases office premises, educational facilities and various equipment for varying periods through
the year 2032 at basic annual rentals (excluding taxes, insurance, and other expenses under certain leases) as follows:
Year Ending December 31,
2010
2011
2012
2013
2014
Thereafter
Less amount representing interest
Finance
Obligation
1,427
$
1,427
1,427
1,427
1,427
2,856
9,991
(9,991)
-
$
Operating
Leases
Capital
Leases
$
$
22,543
21,965
21,575
20,166
19,237
89,144
194,630
-
194,630
2,570
2,603
2,609
2,505
2,494
47,543
60,324
(32,679)
27,645
$
$
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, 2009
is $23.1 million, $17.2 million, and $16.7 million, respectively. Interest expense related to the financing obligation in the
accompanying financial statements for the years ended December 31, 2009, 2008 and 2007 is $1.4 million, $1.4 million and
$1.3 million, respectively.
Credit Facility—As of December 31, 2009, the Company had a total of $20.0 million outstanding under its Credit Agreement.
Interest rates on borrowing under the Credit Agreement during the year ended December 31, 2009 was 5.00%. The Credit Facility
expires December 1, 2012.
Capital Expenditures—The Company has entered into commitments to expand or renovate campuses. These commitments are in the
range of $13.0 to $16.0 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, 2009, the Company had outstanding net loan commitments to its students to assist them in
financing their education of approximately $20.5 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, 2009 and 2008 was $0.7 million and $0.3 million, respectively.
On 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
F-27
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, 2009 and 2008, was $0.4 million and $0.5 million, respectively.
As part of the acquisition of BAR in January 2009, the Company assumed an agreement with Snap-on exclusively for our East
Windsor, Connecticut campus which expires on December 31, 2011. We have agreed to grant Snap-on exclusive rights to promote
and sell to East Windsor students’ equipment offered by Snap-on. In exchange, Snap-on agreed to initially advance tools and
equipment up to $0.5 million of the equipment to East Windsor as agreed upon by the parties. Snap-on may at its discretion advance
additional amounts for equipment according to the agreement Snap-on liability resulting from advanced equipment received in excess
of credits earned for years ended December 31, 2009 was $0.2 million.
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 $6.2 million at December 31, 2009.
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, 2009, we have posted surety
bonds in the total amount of approximately $14.2 million.
15.
UNAUDITED QUARTERLY FINANCIAL INFORMATION
Quarterly financial information for 2009 and 2008 is as follows:
2009
First
Second
Third
Fourth
Quarter
Revenues
Operating income
Net income
Income per share:
Basic
Net income per share
Diluted
Net income per share
$
118,599
10,690
5,823
$
128,110
13,429
7,426
$
148,368
24,151
13,656
$
157,459
40,048
22,334
$
0.23
$
0.28
$
0.51
$
0.84
$
0.22
$
0.27
$
0.50
$
0.82
2008
First
Second
Third
Fourth
Quarter
Revenues
Operating income
Net income
Income per share:
Basic
Net income per share
Diluted
Net income per share
$
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
F-28
16.
DISCONTINUED OPERATIONS
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.
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 period ended December 31, 2007 was comprised of the following:
Revenue
Operating Expenses
Benefit for income taxes
Loss from discontinued operations
Year Ended
December 31,
2007
$
4,230
(13,760)
(9,530)
(4,043)
(5,487)
$
F-29
LINCOLN EDUCATIONAL SERVICES CORPORATION
Schedule II—Valuation and Qualifying Accounts
Description
Allowance accounts for the year ended:
December 31, 2009
Student receivable allowance
December 31, 2008
Student receivable allowance
December 31, 2007
Student receivable allowance
(in thousands)
Balance at
Beginning of
Period
Charged to
Expense
Accounts
Written-off
Balance at
End of
Period
$
14,738
$
36,982
$
(24,861)
$
26,859
$
11,403
$
21,642
$
(18,307)
$
14,738
$
11,536
$
17,767
$
(17,900)
$
11,403
F-30
Corporate Information
Board of Directors
Executive Team
Corporate Headquarters
David F. Carney (1)
Executive Chairman and
Chairman of the Board of Directors
David F. Carney
Executive Chairman and
Chairman of the Board of Directors
200 Executive Drive, Suite 340
West Orange, NJ 07052
973.736.9340
www.lincolnedu.com
Auditors
Deloitte & Touche LLP
Parsippany, NJ
Transfer Agent
Continental Stock Transfer
& Trust Company
17 Battery Place
New York, NY 10014
212.509.4000
Common Stock
Traded on the NASDAQ
Global Select Market under
the symbol LINC
Investor Relations
James K. Jacobson
Director of Investor Relations
973.736.9340
Annual Meeting
Stockholders
The annual meeting of
stockholders of Lincoln
Educational Services
Corporation will be held
on April 30, 2010 in
West Orange, NJ.
Reports and Publications
Copies of Lincoln’s Form
10-Ks and Form 10-Qs
and other reports fi led with
the Securities Exchange
Commission may be obtained
without charge by accessing
the SEC’s Web site at
www.sec.gov, or the
Company’s Web site at
www.lincolnedu.com.
Michael Carlantone
Michael Carlantone
Automotive Technology
Automotive Technology
Graduate
Graduate
Shawn McFarlane
HVAC Graduate
Paul Severino
Automotive Technology
Graduate
Shaun E. McAlmont
President and
Chief Executive Offi cer
Scott M. Shaw
Executive Vice President and
Chief Administrative Offi cer
Cesar Ribeiro
Senior Vice President,
Chief Financial Offi cer
and Treasurer
Thomas F. McHugh
Senior Vice President and
Chief Compliance Offi cer
Piper P. Jameson
Senior Vice President and
Chief Marketing Offi cer
John J. King, Ed.D.
Senior Vice President and
Chief Academic Offi cer
Edward B. Abrams
President
Lincoln Education Group
Deborah M. Ramentol
Deborah M. Ramentol
President
President
Lincoln Technical Group
Lincoln Technical Group
Julie R. Smith
Julie R. Smith
President
President
Lincoln Collegiate Group
Lincoln Collegiate Group
Shaun E. McAlmont
President and
Chief Executive Offi cer
Alexis P. Michas (1) (4)
Managing Partner
Stonington Partners, Inc.
James J. Burke, Jr. (1) (3)
Partner
Stonington Partners, Inc.
Jerry G. Rubenstein (2) (5)
President
OMNI Management Associates
Paul E. Glaske (3) (4) (5)
Former Chairman and
Chief Executive Offi cer
Blue Bird Corporation
Peter S. Burgess (2) (5)
Former Partner
Arthur Andersen LLP
Celia H. Currin (2) (4) (5)
Founder and Principal
BenchStrength Marketing
J. Barry Morrow (3) (4) (5)
Former President
Chase Education Finance
Charles F. Kalmbach (2) (3) (5)
Former Global Managing Partner
Accenture, Ltd.
Alvin O. Austin, Ph.D. (2) (5)
Former President and Chancellor
of LeTourneau University
(1) Member of Executive
Committee
(2) Member of Audit Committee
(3) Member of Compensation
Committee
(4) Member of Nominating and
Corporate Governance
Committee
(5) Independent Director
T L G S
LINCOLN TECHNICAL INSTITUTE
Allentown, PA
Brockton, MA
CC Philadelphia, PA
Cromwell, CT
East Windsor, CT
Edison, NJ
Fern Park, FL
Hamden, CT
Lincoln, RI
Lowell, MA
Mahwah, NJ
Mt. Laurel, NJ
NE Philadelphia, PA
New Britain, CT
Lincoln Technical Institute
Paramus, NJ
www.lincolntech.com
Philadelphia, PA
Queens, NY
Allentown, PA
Shelton, CT
Somerville, MA
Brockton, MA
South Plainfield, NJ
Center City Philadelphia, PA
St. Petersburg, FL
Union, NJ
Cromwell, CT
East Windsor, CT
Edison, NJ
Fern Park, FL
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
South Plainfi eld, NJ
St. Petersburg, FL
Union, NJ
Lincoln College Online
www.lincolncollegeonline.com
LINCOLN COLLEGE OF TECHNOLOGY
Columbia, MD
Denver, CO
Grand Prairie, TX
Indianapolis, IN
Marietta, GA
Melrose Park, IL
West Palm Beach, FL
SOUTHWESTERN COLLEGE
Cincinnati (Vine Street), OH
Cincinnati (Tri County), OH
Columbus, OH*
Dayton, OH
Florence, KY
Franklin, OH
Toledo, OH
Lincoln College of Technology
www.lincolncollegeoftechnology.com
Columbia, MD
EUPHORIA INSTITUTE OF BEAUTY ARTS & SCIENCES
Henderson (Green Valley), NV
Denver, CO
Las Vegas (Summerlin), NV
West Palm Beach, FL
Lincoln, RI
North Las Vegas (Aliante), NV
Grand Prairie, TX
West Palm Beach, FL
Indianapolis, IN
Marietta, GA
Melrose Park, IL
Southwestern College
www.swcollege.net
Central Cincinnati, OH
North Cincinnati, OH
Columbus, OH*
Dayton, OH
Franklin, OH
Florence, KY
Toledo, OH
Nashville Auto Diesel College
www.nadcedu.com
Nashville, TN
NASHVILLE AUTO-DIESEL COLLEGE
Nashville, TN
LINCOLN CULINARY INSTITUTE
Columbia, MD
Cromwell, CT
Hartford, CT
Shelton, CT
Suffield, CT
West Palm Beach, FL
LINCOLN COLLEGE OF NEW ENGLAND
Hartford, CT*
Southington, CT
Suffield, CT
Euphoria Institute of Beauty
Arts & Sciences
www.euphoriainstitute.com
* Opening Soon
Alianté, NV
Henderson, NV
Las Vegas, NV
Lincoln, RI
West Palm Beach, FL
Lincoln Culinary Institute
www.lincolnculinary.com
Columbia, MD
Cromwell, CT
Hartford, CT
Shelton, CT
Suffi eld, CT
West Palm Beach, FL
Lincoln College of New England
www.lincolncollegeNE.edu
Hartford, CT*
Southington, CT
Suffi eld, CT
*Opening 2010