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:
An increase in interest rates could adversely affect our ability to attract and retain students.
A substantial decrease in student financing options, or a significant increase in financing costs for our students, could have a significant impact 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 significant impact on our financial condition, results of operations and cash flows.
In addition, any actions by the U.S. Congress or by states that significantly reduce funding for Title IV Programs or other student financial assistance 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 those programs, could have a significant impact on our student population, results of operations and cash flows.
Anti-takeover provisions in our amended and restated certificate of incorporation, our 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 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 bylaws:
We can issue shares of preferred stock without stockholder approval, which could adversely affect the rights of common stockholders.
Our amended and restated certificate of incorporation permits us to establish the rights, privileges, preferences and restrictions, including voting rights, of future series of our preferred stock and to issue such stock without approval from our stockholders. The rights of holders of our common stock may suffer as a result of the rights granted to holders of preferred stock that may be issued in the future. In addition, we could issue preferred stock to prevent a change in control of our Company, depriving common stockholders of an opportunity to sell their stock at a price in excess of the prevailing market price.
System disruptions to our technology infrastructure could impact our ability to generate revenue and could damage the reputation of our institutions.
We are subject to privacy and information security laws and regulations due to our collection and use of personal information, and any violations of those laws or regulations, or any breach, theft or loss of that information, could adversely affect our reputation and operations.
Regular patching of our computer systems and frequent updates to our virus detection and prevention software with the latest virus and malware signatures may not catch newly introduced malware and viruses or “zero-day” viruses, prior to their infecting our systems and potentially disrupting our data integrity, taking sensitive information or affecting financial transactions. While we utilize security and business controls to limit access to and use of personal information, any breach of student or employee privacy or errors in storing, using or transmitting personal information could violate privacy laws and regulations resulting in fines or other penalties. A wide range of high profile data breaches in 2014recent years has led to renewed interest in federal data and cybersecurity legislation that could increase our costs and/or require changes in our operating procedures or systems. A breach, theft or loss of personal information held by us or our vendors, or a violation of the laws and regulations governing privacy could have a material adverse effect on our reputation or result in lawsuits, additional regulation, remediation and compliance costs or investments in additional security systems to protect our computer networks, the costs of which may be substantial.
None.
As of December 31, 2015,2017, we leased all of our facilities, except for our campuses in West Palm Beach, Florida, Nashville, Tennessee, Grand Prairie, Texas, and Denver, Colorado, and former school properties in Mangonia Park, Palm Beach County, Florida and Suffield, Connecticut, all of which we own. Four of our facilities (Union, New Jersey; Allentown, Pennsylvania; Philadelphia, Pennsylvania; and one of our facilities in Grand Prairie, Texas) were also accounted for by us under a finance lease obligation that remains in effect until December 31, 2026, the terms of which were amended on January 20, 2016. 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, 2015,2017, all of our existing leases expire between December 2018 and May 2016 and October 2032. The Company signed a new lease that begins on June 1, 2016 to move our Edison, New Jersey campus to Iselin, New Jersey which has an approximate square footage of 32,000.2030.
On December 3, 2015, our Board of Directors approved a plan to cease operations at our Hartford, Connecticut school, which is scheduled to close in the fourth quarter of 2016. The terminated lease agreement was replaced with a short-term lease agreement in order to allow students currently enrolled at the school to complete their course of study.
On February 27, 2015, our Board of Directors approved a plan to cease operations at the Fern Park, Florida school, which is scheduled to close in the first quarter of 2016. The terminated lease agreement will expire on April 10, 2016 in order to allow students currently enrolled at the school to complete their course of study.
The following table provides information relating to our facilities as of December 31, 2015,2017, including our corporate office:
Location | | Brand | | Approximate Square Footage |
Henderson, Nevada | | Euphoria Institute | | 18,000 |
Las Vegas, Nevada | | Euphoria Institute | | 19,000 |
Southington, Connecticut | | Lincoln College of New England | | 113,000 |
Columbia, Maryland | | Lincoln College of Technology | | 110,000 |
Denver, Colorado | | Lincoln College of Technology | | 212,000 |
Grand Prairie, Texas | | Lincoln College of Technology | | 146,000 |
Indianapolis, Indiana | | Lincoln College of Technology | | 189,000 |
Marietta, Georgia | | Lincoln College of Technology | | 30,000 |
Melrose Park, Illinois | | Lincoln College of Technology | | 88,000 |
West Palm Beach, Florida | | Lincoln College of Technology | | 117,000 |
Hartford, Connecticut | | Lincoln Technical Institute | | 367,00027,000 |
Allentown, Pennsylvania | | Lincoln Technical Institute | | 26,000 |
Brockton, Massachusetts | | Lincoln Technical Institute | | 22,000 |
East Windsor, Connecticut | | Lincoln Technical Institute | | 289,000 |
Edison,Iselin, New Jersey | | Lincoln Technical Institute | | 64,000 |
Fern Park, Florida | | Lincoln Technical Institute | | 46,00032,000 |
Lincoln, Rhode Island | | Lincoln Technical Institute | | 59,000 |
Lowell, Massachusetts | | Lincoln Technical Institute | | 21,00039,000 |
Mahwah, New Jersey | | Lincoln Technical Institute | | 79,000 |
Moorestown, New Jersey | | Lincoln Technical Institute | | 35,000 |
New Britain, Connecticut | | Lincoln Technical Institute | | 35,000 |
Northeast Philadelphia, Pennsylvania | | Lincoln Technical Institute | | 25,000 |
Paramus, New Jersey | | Lincoln Technical Institute | | 30,000 |
Philadelphia, Pennsylvania | | Lincoln Technical Institute | | 36,000 |
Philadelphia, Pennsylvania | | Lincoln Technical Institute | | 29,000 |
Queens, New York | | Lincoln Technical Institute | | 48,000 |
Shelton, Connecticut | | Lincoln Technical Institute and Lincoln Culinary Institute | | 47,000 |
Somerville, Massachusetts | | Lincoln Technical Institute | | 33,000 |
South Plainfield, New Jersey | | Lincoln Technical Institute | | 60,000 |
Union, New Jersey | | Lincoln Technical Institute | | 56,000 |
Nashville, Tennessee | | Lincoln College of Technology | | 281,000 |
West Orange, New Jersey | | Corporate Office | | 52,000 |
Plymouth Meeting, Pennsylvania | | Corporate Office | | 6,000 |
Suffield, Connecticut | | | | 132,000 |
We believe that our facilities are suitable for their present intended purposes.
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 effect on our business, financial condition, results of operations or cash flows.
On November 21, 2012, the Company received a Civil Investigative Demand from the Attorney General of the Commonwealth of Massachusetts relating to its investigation of whether the Company and certain of its academic institutions have complied with certain Massachusetts state consumer protection laws. On July 29, 2013 and January 17, 2014, the Company received additional Civil Investigative Demands, pursuant to which the Attorney General requested from the Company and certain of its academic institutions in Massachusetts documents and detailed information for the time period from January 1, 2008 to the present.
On July 13, 2015, the Commonwealth of Massachusetts filed a complaint against the Company in the Suffolk County Superior Court alleging certain violations of the Massachusetts Consumer Protection Act since at least 2010 and continuing through 2013. At the same time, the Company agreed to the entry of a Final Judgment by Consent in order to avoid the time, burden, and expense of contesting such liability. As part of the Final Judgment by Consent, the Company denied all allegations of wrongdoing and any liability for the claims asserted in the complaint. The Company, however, paid the sum of $850,000 to the Attorney General and has agreed to forgive $165,000 of debt consisting of unpaid balances owed to the Company by certain graduates in the sole discretion of the Massachusetts Attorney General, which were previously accrued for at December 31, 2014. The Final Judgment by Consent also included certain requirements for calculation of job placement rates in Massachusetts and imposed certain disclosure obligations that are consistent with the regulations that have been previously enacted by the Massachusetts Attorney General’s Office.
On December 15, 2015, we received an administrative subpoena from the Attorney General of the State of Maryland. Pursuant to the subpoena, Maryland’s Attorney General has requested from the Company documents and detailed information relating to its Columbia, Maryland campus. The Company has responded to this request and intends to continue cooperating with the Maryland Attorney General’s Office.
ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
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, no par value per share, 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 and the cash dividends per share declared on our common stock:
| | Price Range of Common Stock | | | | | | Price Range of Common Stock | | | | |
| | High | | | Low | | | Dividend | | | High | | | Low | | | Dividend | |
Fiscal Year Ended December 31, 2015 | | | | | | | | | | |
Fiscal Year Ended December 31, 2017 | | | | | | | | | | |
First Quarter | | $ | 3.10 | | | $ | 2.08 | | | $ | - | | | $ | 2.92 | | | $ | 1.86 | | | $ | - | |
Second Quarter | | $ | 2.71 | | | $ | 1.93 | | | $ | - | | | $ | 3.53 | | | $ | 2.74 | | | $ | - | |
Third Quarter | | $ | 1.93 | | | $ | 0.20 | | | $ | - | | | $ | 3.36 | | | $ | 2.50 | | | $ | - | |
Fourth Quarter | | $ | 2.40 | | | $ | 0.53 | | | $ | - | | | $ | 2.56 | | | $ | 2.00 | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Price Range of Common Stock | | | | | | | Price Range of Common Stock | | | | | |
| | High | | | Low | | | Dividend | | | High | | | Low | | | Dividend | |
Fiscal Year Ended December 31, 2014 | | | | | | | | | | | | | |
Fiscal Year Ended December 31, 2016 | | | | | | | | | | | | | |
First Quarter | | $ | 5.27 | | | $ | 3.63 | | | $ | 0.07 | | | $ | 3.05 | | | $ | 1.92 | | | $ | - | |
Second Quarter | | $ | 4.49 | | | $ | 3.56 | | | $ | 0.07 | | | $ | 2.49 | | | $ | 1.37 | | | $ | - | |
Third Quarter | | $ | 4.57 | | | $ | 2.21 | | | $ | 0.02 | | | $ | 2.58 | | | $ | 1.37 | | | $ | - | |
Fourth Quarter | | $ | 3.66 | | | $ | 2.42 | | | $ | 0.02 | | | $ | 2.20 | | | $ | 1.58 | | | $ | - | |
On March 8, 2016,5, 2018, the last reported sale price of our common stock on the Nasdaq Global Select Market was $2.77$1.83 per share. As of March 8, 2016,5, 2018, based on the information provided by Continental Stock Transfer & Trust Company, there were 2932 stockholders of record of our common stock.
Dividend Policy
On February 27, 2015, our Board of Directors discontinued the quarterly cash dividend.
Share Repurchases
The Company did not repurchase any shares of our common stock during the fourth quarter of the fiscal year ended December 31, 2015.2017.
Stock Performance Graph
This stock performance graph compares our total cumulative stockholder return on our common stock duringfor the period fromfive years ended December 31, 2010 through December 31, 20152017 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 December 31, 20102012 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 incorporate it by reference into a filing.
Companies in the Peer Group include Apollo Group, Inc., Career Education Corp., DeVry,Adtalem Global Education Inc., ITT Educational Services, Inc., Strayer Education, Inc., Bridgepoint Education, Inc., Apollo Education Group, Inc., Grand Canyon University, Inc. and Universal Technical Institute, Inc.
Equity Compensation Plan Information
We have various equity compensation plans under which equity securities are authorized for issuance. Information regarding these securities as of December 31, 20152017 is as follows:
Plan Category | | Number of Securities to be issued upon exercise of outstanding options, warrants and rights | | | Weighted- average exercise price of outstanding options, warrants and rights | | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | | | Number of Securities to be issued upon exercise of outstanding options, warrants and rights | | | Weighted- average exercise price of outstanding options, warrants and rights | | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |
| | (a) | | | (b) | | | (c) | | | (a) | | | | | | | |
Equity compensation plans approved by security holders | | | 246,167 | | | $ | 12.52 | | | | 1,192,270 | | | | 167,667 | | | $ | 12.11 | | | | 2,186,206 | |
Equity compensation plans not approved by security holders | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total | | | 246,167 | | | $ | 12.52 | | | | 1,192,270 | | | | 167,667 | | | $ | 12.11 | | | | 2,186,206 | |
ITEM 6. | SELECTED FINANCIAL DATA |
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 elsewhere in this Annual Report on Form 10-K. The selected historical consolidated statement of operations data for each of the years in the three-year period ended December 31, 20152017 and historical consolidated balance sheet data at December 31, 20152017 and 20142016 have been derived from our audited consolidated financial statements which are included elsewhere in this Annual Report on Form 10-K. The selected historical consolidated statements of operations data for the fiscal years ended December 31, 20122014 and 20112013 and historical consolidated balance sheet data as of December 31, 2013, 20122015, 2014 and 20112013 have been derived from our consolidated financial information not included in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of our future results.
| | 2015 | | | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | | | 2013 | |
| | (In thousands, except per share amounts) | | | (In thousands, except per share amounts) | |
Statement of Operations Data, Year Ended December 31: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenue | | $ | 193,220 | | | $ | 202,889 | | | $ | 215,596 | | | $ | 233,727 | | | $ | 271,281 | | | $ | 261,853 | | | $ | 285,559 | | | $ | 306,102 | | | $ | 325,022 | | | $ | 341,512 | |
Cost and expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Educational services and facilities | | | 92,165 | | | | 100,335 | | | | 102,489 | | | | 107,063 | | | | 116,789 | | | | 129,413 | | | | 144,426 | | | | 151,647 | | | | 164,352 | | | | 169,049 | |
Selling, general and administrative | | | 98,319 | | | | 110,901 | | | | 116,841 | | | | 127,124 | | | | 144,531 | | | | 138,779 | | | | 148,447 | | | | 151,797 | | | | 168,441 | | | | 175,978 | |
Loss (gain) on sale of assets | | | 1,742 | | | | (57 | ) | | | (282 | ) | | | (71 | ) | | | (1 | ) | |
(Gain) loss on sale of assets | | | | (1,623 | ) | | | 233 | | | | 1,738 | | | | (58 | ) | | | (501 | ) |
Impairment of goodwill and long-lived assets | | | 216 | | | | 3,201 | | | | - | | | | 8,268 | | | | 311 | | | | - | | | | 21,367 | | | | 216 | | | | 40,836 | | | | 3,908 | |
Total costs and expenses | | | 192,442 | | | | 214,380 | | | | 219,048 | | | | 242,384 | | | | 261,630 | | | | 266,569 | | | | 314,473 | | | | 305,398 | | | | 373,571 | | | | 348,434 | |
Operating income (loss) | | | 778 | | | | (11,491 | ) | | | (3,452 | ) | | | (8,657 | ) | | | 9,651 | | |
Operating (loss) income | | | | (4,716 | ) | | | (28,914 | ) | | | 704 | | | | (48,549 | ) | | | (6,922 | ) |
Other: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest income | | | 52 | | | | 62 | | | | 37 | | | | 2 | | | | 11 | | | | 56 | | | | 155 | | | | 52 | | | | 153 | | | | 37 | |
Interest expense | | | (7,438 | ) | | | (5,169 | ) | | | (4,267 | ) | | | (4,078 | ) | | | (3,978 | ) | | | (7,098 | ) | | | (6,131 | ) | | | (8,015 | ) | | | (5,613 | ) | | | (4,667 | ) |
Other income | | | 4,142 | | | | 297 | | | | 18 | | | | 14 | | | | 18 | | | | - | | | | 6,786 | | | | 4,151 | | | | 297 | | | | 18 | |
(Loss) income from continuing operations before income taxes | | | (2,466 | ) | | | (16,301 | ) | | | (7,664 | ) | | | (12,719 | ) | | | 5,702 | | |
Provision (benefit) for income taxes (1) | | | 242 | | | | (1,479 | ) | | | 19,591 | | | | (2,602 | ) | | | 3,254 | | |
(Loss) income from continuing operations | | | (2,708 | ) | | | (14,822 | ) | | | (27,255 | ) | | | (10,117 | ) | | | 2,448 | | |
(Loss) gain from discontinued operations, net of income taxes | | | (642 | ) | | | (41,311 | ) | | | (24,031 | ) | | | (27,069 | ) | | | 15,092 | | |
Net (loss) income | | $ | (3,350 | ) | | $ | (56,133 | ) | | $ | (51,286 | ) | | $ | (37,186 | ) | | $ | 17,540 | | |
Loss from continuing operations before income taxes | | | | (11,758 | ) | | | (28,104 | ) | | | (3,108 | ) | | | (53,712 | ) | | | (11,534 | ) |
(Benefit) provision for income taxes | | | | (274 | ) | | | 200 | | | | 242 | | | | (4,225 | ) | | | 19,591 | |
Loss from continuing operations | | | | (11,484 | ) | | | (28,304 | ) | | | (3,350 | ) | | | (49,487 | ) | | | (31,125 | ) |
Loss from discontinued operations, net of income taxes | | | | - | | | | - | | | | - | | | | (6,646 | ) | | | (20,161 | ) |
Net loss | | | $ | (11,484 | ) | | $ | (28,304 | ) | | $ | (3,350 | ) | | $ | (56,133 | ) | | $ | (51,286 | ) |
Basic | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Loss) earnings per share from continuing operations | | $ | (0.12 | ) | | $ | (0.65 | ) | | $ | (1.21 | ) | | $ | (0.46 | ) | | $ | 0.11 | | |
(Loss) earnings per share from discontinued operations | | | (0.02 | ) | | | (1.81 | ) | | | (1.07 | ) | | | (1.22 | ) | | | 0.69 | | |
Net (loss) income per share | | $ | (0.14 | ) | | $ | (2.46 | ) | | $ | (2.28 | ) | | $ | (1.68 | ) | | $ | 0.80 | | |
Loss per share from continuing operations | | | $ | (0.48 | ) | | $ | (1.21 | ) | | $ | (0.14 | ) | | $ | (2.17 | ) | | $ | (1.38 | ) |
Loss per share from discontinued operations | | | | - | | | | - | | | | - | | | | (0.29 | ) | | | (0.90 | ) |
Net loss per share | | | $ | (0.48 | ) | | $ | (1.21 | ) | | $ | (0.14 | ) | | $ | (2.46 | ) | | $ | (2.28 | ) |
Diluted | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Loss) earnings per share from continuing operations | | $ | (0.12 | ) | | $ | (0.65 | ) | | $ | (1.21 | ) | | $ | (0.46 | ) | | $ | 0.11 | | |
(Loss) earnings per share from discontinued operations | | | (0.02 | ) | | | (1.81 | ) | | | (1.07 | ) | | | (1.22 | ) | | | 0.68 | | |
Net (loss) income per share | | $ | (0.14 | ) | | $ | (2.46 | ) | | $ | (2.28 | ) | | $ | (1.68 | ) | | $ | 0.79 | | |
Loss per share from continuing operations | | | $ | (0.48 | ) | | $ | (1.21 | ) | | $ | (0.14 | ) | | $ | (2.17 | ) | | $ | (1.38 | ) |
Loss per share from discontinued operations | | | | - | | | | - | | | | - | | | | (0.29 | ) | | | (0.90 | ) |
Net loss per share | | | $ | (0.48 | ) | | $ | (1.21 | ) | | $ | (0.14 | ) | | $ | (2.46 | ) | | $ | (2.28 | ) |
Weighted average number of common shares outstanding: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | | 23,167 | | | | 22,814 | | | | 22,513 | | | | 22,195 | | | | 22,020 | | | | 23,906 | | | | 23,453 | | | | 23,167 | | | | 22,814 | | | | 22,513 | |
Diluted | | | 23,167 | | | | 22,814 | | | | 22,513 | | | | 22,195 | | | | 22,155 | | | | 23,906 | | | | 23,453 | | | | 23,167 | | | | 22,814 | | | | 22,513 | |
Other Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Capital expenditures | | $ | 2,218 | | | $ | 7,472 | | | $ | 6,538 | | | $ | 8,839 | | | $ | 38,119 | | | $ | 4,755 | | | $ | 3,596 | | | $ | 2,218 | | | $ | 7,472 | | | $ | 6,538 | |
Depreciation and amortization from continuing operations | | | 11,920 | | | | 15,303 | | | | 16,553 | | | | 17,673 | | | | 18,783 | | | | 8,702 | | | | 11,066 | | | | 14,506 | | | | 19,201 | | | | 21,808 | |
Number of campuses | | | 31 | | | | 31 | | | | 33 | | | | 33 | | | | 34 | | | | 23 | | | | 28 | | | | 31 | | | | 31 | | | | 33 | |
Average student population from continuing operations (2) | | | 7,553 | | | | 8,132 | | | | 8,479 | | | | 9,103 | | | | 10,927 | | | | 10,772 | | | | 11,864 | | | | 12,981 | | | | 14,010 | | | | 14,804 | |
Cash dividend declared per common share | | $ | - | | | $ | 0.18 | | | $ | 0.28 | | | $ | 0.28 | | | $ | 0.07 | | | $ | - | | | $ | - | | | $ | - | | | $ | 0.18 | | | $ | 0.28 | |
Balance Sheet Data, At December 31: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash, cash equivalents and restricted cash | | $ | 61,041 | | | $ | 42,299 | | | $ | 67,386 | | | $ | 61,708 | | | $ | 26,524 | | | $ | 54,554 | | | $ | 47,715 | | | $ | 61,041 | | | $ | 42,299 | | | $ | 67,386 | |
Working capital (deficit) (3) | | | 33,818 | | | | 29,585 | | | | 47,041 | | | | 40,939 | | | | 1,540 | | |
Working (deficit) capital (1) | | | | (2,766 | ) | | | (1,733 | ) | | | 33,818 | | | | 29,585 | | | | 47,041 | |
Total assets | | | 210,279 | | | | 213,707 | | | | 305,949 | | | | 346,774 | | | | 362,251 | | | | 155,213 | | | | 163,207 | | | | 210,279 | | | | 213,707 | | | | 305,949 | |
Total debt (4)(2) | | | 58,224 | | | | 65,181 | | | | 90,116 | | | | 73,527 | | | | 36,508 | | | | 52,593 | | | | 41,957 | | | | 58,224 | | | | 65,181 | | | | 90,116 | |
Total stockholders' equity | | | 80,997 | | | | 83,010 | | | | 145,196 | | | | 198,477 | | | | 239,025 | | | | 45,813 | | | | 54,926 | | | | 80,997 | | | | 83,010 | | | | 145,196 | |
All amounts have been restated to give effect to discontinuedthe HOPS segments which has been reclassified to continuing operations in 2016, 2015, 2014 and 2013.
(1) Provision (benefit) for income taxes includes a valuation allowance from continuing operations of $43.9 million, $46.7 million and $23.5 million for the year ended December 31, 2015, 2014 and 2013, respectively.
(2)Average student population includes diploma and above students and excludes short certificate programs.
(3)Working (deficit) capital (deficit) is defined as current assets less current liabilities.
(4)(2) Total debt consists of long-term debt including current portion, capital leases, auto loans and a finance obligation of $9.7 million for each of the years in the five-yearthree-year period ended December 31, 2015 incurred in connection with a sale-leaseback transaction as further described in Note 8 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.transaction.
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 Annual Report on 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” and “Forward-Looking Statements” and elsewhere in this Annual Report on Form 10-K.
GENERAL
Lincoln Educational Services Corporation and its subsidiaries (collectively, the “Company”, “we”, “our” and “us”, as applicable) provide diversified career-oriented post-secondary education to recent high school graduates and working adults. In the first quarter of 2015, we reorganized our operations into three reportable segments: (a) Transportation and Skilled Trades, (b) Healthcare and Other Professions, and (c) Transitional which refers to business that are currently being phased out. In November, 2015, the Board of Directors of the Company approved a plan for the Company to divest 17 of 18 of the schools included in its Healthcare and Other Professions business segment. Implementation of the plan would result in the Company’s operations focused solely on the Transportation and Skilled Trades segment. Then, in December, 2015, our Board of Directors approved a plan to cease operations of the remaining school in this segment in Hartford, Connecticut school which is scheduled to close in the fourth quarter of 2016. This divestiture marks a shift in our business strategy will enable us to focus energy and resources predominantly on Transportation and Skilled Trades though some other programs will continue to be available at some campuses. The results of operations of the 17 campuses slated for divestiture are reflected as discontinued operations in the consolidated financial statements.
The Company, which currently operates 3123 schools in 1514 states, across the United States and offeroffers programs in automotive technology, skilled trades (which include HVAC, welding and computerized numerical control and electronic systems technology, among other programs), healthcare services (which include nursing, dental assistant, medical administrative assistant and pharmacy technician, among other programs), hospitality services (which include culinary, therapeutic massage, cosmetology and aesthetics) and business and information technology (which includes information technology and criminal justice programs). OurThe schools operate under the Lincoln Technical Institute, Lincoln College of Technology, Lincoln College of New England, Lincoln Culinary Institute, and Euphoria Institute of Beauty Arts and Sciences and associated brand names. Most of ourthe campuses serve major metropolitan markets and each typically offers courses in multiple areas of study. Five of ourthe campuses are destination schools, which attract students from across the United States and, in some cases, from abroad. OurThe Company’s other campuses primarily attract students from their local communities and surrounding areas. All of ourthe campuses are nationally or regionally accredited and are eligible to participate in federal financial aid programs by the U.S. Department of Education (the “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.
Our business is organized into three reportable business segments: (a) Transportation and Skilled Trades, (b) Healthcare and Other Professions (“HOPS”), and (c) Transitional, which refers to businesses that have been or are currently being taught out. In November 2015, the Board of Directors of the Company approved a plan for the Company to divest the 18 campuses then comprising the HOPS segment due to a strategic shift in the Company’s business strategy. The Company underwent an exhaustive process to divest the HOPS schools which proved successful in attracting various purchasers but, ultimately, did not result in a transaction that our Board believed would enhance shareholder value. By the end of 2017, we had strategically closed seven underperforming campuses leaving a total of 11 campuses remaining under the HOPS segment. The Company believes that the closures of the aforementioned campuses has positioned the HOPS segment and the Company to be more profitable going forward as well as maximizing returns for the Company’s shareholders.
The combination of several factors, including the inability of a prospective buyer of the HOPS segment to close on the purchase, the improvements the Company has implemented in the HOPS segment operations, the closure of seven underperforming campuses and the change in the United States government administration, resulted in the Board reevaluating its divestiture plan and the determination that shareholder value would more likely be enhanced by continuing to operate our HOPS segment as revitalized. Consequently, the Board of Directors has abandoned the plan to divest the HOPS segment and the Company now intends to retain and continue to operate the remaining campuses in the HOPS segment. The results of operations of the campuses included in the HOPS segment are reflected as continuing operations in the consolidated financial statements.
In 2016, the Company completed the teach-out of its Hartford, Connecticut, Fern Park, Florida and Henderson (Green Valley), Nevada campuses, which originally operated in the HOPS segment. In 2017, the Company completed the teach-out of its Northeast Philadelphia, Pennsylvania; Center City Philadelphia, Pennsylvania; West Palm Beach, Florida; Brockton, Massachusetts; and Lowell, Massachusetts schools, which also were originally in our HOPS segment and all of which were taught out and closed by December 2017 and are included in the Transitional segment as of December 31, 2017.
On August 14, 2017, New England Institute of Technology at Palm Beach, Inc., a wholly-owned subsidiary of the Company, consummated the sale of the real property located at 2400 and 2410 Metrocentre Boulevard East, West Palm Beach, Florida, including the improvements and other personal property located thereon (the “West Palm Beach Property”) to Tambone Companies, LLC (“Tambone”), pursuant to a previously disclosed purchase and sale agreement (the “West Palm Sale Agreement”) entered into on March 14, 2017. Pursuant to the terms of the West Palm Sale Agreement, as subsequently amended, the purchase price for the West Palm Beach Property was $15.8 million. As a result, the Company recorded a gain on the sale in the amount of $1.5 million. As previously disclosed, the West Palm Beach Property served as collateral for a short term loan in the principal amount of $8.0 million obtained by the Company from its lender, Sterling National Bank, on April 28, 2017, which loan matured upon the earlier of the sale of the West Palm Beach Property or October 1, 2017. Accordingly, on August 14, 2017, concurrently with the consummation of the sale of the West Palm Beach Property, the Company repaid the term loan in an aggregate amount of $8.0 million, consisting of principal and accrued interest.
On March 31, 2017, the Company entered into a new revolving credit facility with Sterling National Bank in the aggregate principal amount of up to $55 million, which consists of up to $50 million of revolving loans, including a $10 million sublimit for letters of credit, and an additional $5 million non-revolving loan. The proceeds of the $5 million non-revolving loan were held in a pledged account at Sterling National Bank as required by the terms of the new credit facility pending the completion of environmental studies undertaken at certain properties owned by the Company and mortgaged to Sterling National Bank. Upon the completion of environmental studies that revealed that no environmental issues existed at the properties, during the quarter ended June 30, 2017, the $5 million held in the pledged account at Sterling National Bank was released and used to repay the $5 million non-revolving loan. The credit facility was amended on November 29, 2017, to provide the Company with an additional $15 million revolving credit loan, resulting in an increase in the aggregate availability under the credit facility to $65 million. The credit facility was again amended on February 23, 2018, to, among other things, effect certain modifications to the financial covenants and other provisions of the credit facility and to allow the Company to pursue the sale of certain real property assets. The new credit facility requires that revolving loans in excess of $25 million and all letters of credit issued thereunder be cash collateralized dollar for dollar. The new revolving credit facility replaces a term loan facility which was repaid and terminated concurrently with the effectiveness of the new revolving credit facility. The final maturity date for the new revolving credit facility is May 31, 2020. The new revolving credit facility is discussed in further detail under the heading “Liquidity and Capital Resources” below and in Note 7 to the consolidated financial statements included in this report.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act. The Tax Cuts and Jobs Act, among other things, made broad and complex changes to the U.S. tax code which impacted 2017, including, but not limited to, reducing the U.S. federal corporate tax rate, eliminating the corporate alternative minimum tax and changing how existing corporate alternative minimum tax credits can be realized either to offset regular tax liability or to be refunded. See additional information regarding the impact of the Tax Cuts and Jobs Act in “Management's Discussion and Analysis of Financial Condition and Results of Operations” and Note 10 to our consolidated financial statements included in this Annual Report on Form 10-K.
As of December 31, 2015,2017, we had 10,159 students enrolled 6,811 students at our 14 campuses included in continuing operations.23 campuses.
Our campuses, a majority of which serve major metropolitan markets, are located throughout the United States. Five of our campuses are destination schools, which attract students from across the United States and, in some cases, from abroad. Our other campuses primarily attract students from their local communities and surrounding areas. All of our schools are 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 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.
From both continuing and discontinued operations, ourOur 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 2228 to 136 weeks, our associate’s degree programs range from 4858 to 208156 weeks, and our bachelor’s degree programs range from 104 to 208 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 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.
The majority of students enrolled at our schools rely on funds received under various government-sponsored student financial aid programs to pay a substantial portion of their tuition and other education-related expenses. The largest of these programs are Title IV Programs which represented approximately 80%78% and 79% of our revenue on a cash basis while approximately 20% wasthe remainder is primarily derived from state grants and cash payments made by students during 20152017 and 2014.2016, respectively. The HEAHigher Education Act of 1965, as amended (the “HEA”) requires institutions to use the cash basis of accounting when determining its compliance with the 90/10 rule.
We extend credit for tuition and fees to many of our students that attend our campuses. Our credit risk is mitigated through the student’sstudents’ participation in federally funded financial aid programs unless students withdraw prior to the receipt by us of Title IV Program funds for those students. Under Title IV Programs, the government funds a certain portion of a student’s tuition, with the remainder, referred to as “the gap,” financed by the students themselves under private party loans, including credit extended by us. The gap amount has continued to increase over the last several years as we have raised tuition on average for the last several years by 2-3% per year and restructured certain programs to reduce the amount of financial aid available to students, while funds received from Title IV Programs increased at lower rates.
The additional financing that we are providing to students may expose us to greater credit risk and can impact our liquidity. However, we believe that these risks are somewhat mitigated due to the following:
The operating expenses associated with an existing school do not increase or decrease proportionally as the number of students enrolled at the school increases or decreases. We categorize our operating expenses as:
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. We believe that the following accounting policies are most critical to us in that they represent the primary areas where financial information is subject to the application of management's estimates, assumptions and judgment in the preparation of our consolidated financial statements.
Our bad debt expense as a percentage of revenues for the years ended December 31, 2017, 2016 and 2015 2014was 5.2%, 5.1% and 2013 was 4.8%, 5.5% and 4.6%4.4%, 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, 2015, 20142017, 2016 and 20132015 would have resulted in an increase in bad debt expense of $1.9$2.6 million, $2.0$2.9 million and $2.2$3.1 million, respectively.
We do not believe that there is any direct correlation between tuition increases, the credit we extend to students and our loan commitments. Our loan commitments to our students are made on a student-by-student basis and are predominantly a function of the specific student’s financial condition. We only extend credit to the extent there is a financing gap between the tuition and fees charged for the program and the amount of grants, loans and parental loans each student receives. Each student’s funding requirements are unique. Factors that determine the amount of aid available to a student include whether they are dependent or independent students, Pell grants awarded, Federal Direct loans awarded, Plus loans awarded to parents and the student’s personal resources and family contributions. As a result, it is extremely difficult to predict the number of students that will need us to extend credit to them. Our tuition increases have averaged 2-3% annually and have not meaningfully impacted overall funding requirements, since the amount of financial aid funding available to students in recent years has increased at greater rates than our tuition increases.
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 represents a significant portion of our total assets. As of December 31, 2015,2017, goodwill was approximately $14.5 million, or 6.9%9.4%, of our total assets, which decreasedwas flat from approximately $22.2$14.5 million, or 10.4%8.9%, of our total assets at December 31, 2014.2016.
At December 31, 2017 and December 31, 2015, we conducted our annual test for goodwill impairment and determined we did not have an impairment. The fair valueAt December 31, 2016, we conducted our annual test for goodwill impairment and determined we had an impairment of our reporting units were determined using Level 3 inputs included in our multiple of earnings and discounted cash flow approach.$9.9 million. We concluded that as of September 30, 2015 there was an indicator of potential impairment as a result of a decrease in market capitalization and, accordingly, we tested goodwill for impairment. The test indicated that one of our reporting units was impaired, which resulted in a pre-tax non-cash charge of $0.2 million for the three months ended September 30, 2015.
At December 31, 2014, we conducted our annual test for goodwill impairment and determined we did not have an impairment. The fair value of our reporting units were determined using Level 3 inputs included in our multiple of earnings and discounted cash flow approach. We concluded that as of September 30, 2014 there was an indicator of potential impairment as a result of a decrease in market capitalization and, accordingly, we tested goodwill for impairment. The test indicated that ten of our reporting units were impaired, which resulted in a pre-tax non-cash charge of $39.0 million for the three months ended September 30, 2014 ($38.8 million of which is included in discontinued operations).
At December 31, 2013, we conducted our annual test for goodwill impairment and determined we did not have an impairment. The fair value of our reporting units were determined using Level 3 inputs included in our multiple of earnings and discounted cash flow approach. We concluded that, as of June 30, 2013, current period losses at two reporting units, which resulted in a deterioration of current and projected cash flows, was an indicator of potential impairment and, accordingly, tested goodwill and long-lived assets for impairment. The tests indicated that these two reporting units were impaired, which resulted in a pre-tax non-cash charge of $3.1 million for the three months ended June 30, 2013 ($3.1 million of which is included in discontinued operations).
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.
We measure the value of service and performance-based restricted stock on the fair value of a share of common stock on the date of the grant. We amortize the fair value of service-based restricted stock utilizing straight-line amortization of compensation expense over the requisite service period of the grant.
We amortize the fair value of the performance-based restricted stock based on determination of the probable outcome of the performance condition. If the performance condition is expected to be met, then we amortize the fair value of the number of shares expected to vest utilizing the straight-line basis over the requisite performance period of the grant. However, if the associated performance condition is not expected to be met, then we do not recognize the stock-based compensation expense.
Income taxes. We account for income taxes in accordance with FASB ASC Topic 740, “Income Taxes” (“ASC 740”). This statement requires an asset and a liability approach for measuring deferred taxes based on temporary differences between the financial statement and tax bases of assets and liabilities existing at each balance sheet date using enacted tax rates for years in which taxes are expected to be paid or recovered.
In accordance with ASC 740, we assess our deferred tax asset to determine whether all or any portion of the asset is more likely than not unrealizable. A valuation allowance is required to be established or maintained when, based on currently available information, it is more likely than not that all or a portion of a deferred tax asset will not be realized. In accordance with ASC 740, our assessment considers whether there has been sufficient income in recent years and whether sufficient income is expected in future years in order to utilize the deferred tax asset. In evaluating the realizability of deferred income tax assets we considered, among other things, historical levels of income, expected future income, the expected timing of the reversals of existing temporary reporting differences, and the expected impact of tax planning strategies that may be implemented to prevent the potential loss of future income tax benefits. Significant judgment is required in determining the future tax consequences of events that have been recognized in our consolidated financial statements and/or tax returns. Differences between anticipated and actual outcomes of these future tax consequences could have a material impact on our consolidated financial position or results of operations. Changes in, among other things, income tax legislation, statutory income tax rates, or future income levels could materially impact our valuation of income tax assets and liabilities and could cause our income tax provision to vary significantly among financial reporting periods.
We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense. During the years ended December 31, 20152017 and 2014, the2016, we did not record any interest and penalties expense associated with uncertain tax positionspositions.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation known as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act establishes new tax laws that will take effect in 2018, including, but not limited to (1) reduction of the U.S. federal corporate tax rate from a maximum of 35% to 21%; (2) elimination of the corporate alternative minimum tax (AMT); (3) a new limitation on deductible interest expense; (4) the repeal of the domestic production activity deduction; (5) limitations on the deductibility of certain executive compensation; and (6) limitations on net operating losses (NOLs) generated after December 31, 2017, to 80% of taxable income. In addition, certain changes were made to the bonus depreciation rules that will impact fiscal year 2017.
ASC 740 requires the effects of changes in tax laws to be recognized in the period in which the legislation is enacted. However, due to the complexity and significance of the Tax Act's provisions, the staff of the Securities and Exchange Commission issued Staff Accounting Bulletin 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
At December 31, 2017, we have not completed our analysis of the tax effects of enactment of the Tax Act; however, we have made a reasonable estimate of the effects of the Tax Act’s change in the federal rate and revalued our deferred tax assets based on the rates at which they are not significantexpected to reverse in the future, which is generally the new 21% federal corporate tax rate plus applicable state tax rate. Based on our resultsinitial analysis of operations or financial position.the impact, we consequently recorded a decrease related to deferred tax assets of $17.7 million. The expense is offset with a corresponding release of valuation allowance.
In addition, we released the valuation allowance against AMT credits deferred tax asset and recorded a deferred tax provision benefit of $0.4 million.
The Tax Act did not have a material impact on our financial statements because we are under a full valuation allowance and we do not have any significant offshore earnings from which to record the mandatory transition tax.
The Tax Act requires the Company to assess whether its valuation allowance analyses are affected by various aspects of the Tax Act. Since, as discussed herein, we have recorded provisional amounts related to certain portions of the Tax Act, any corresponding determination of the need for or change in a valuation allowance is also provisional. The Company’s valuation allowance position did not change as a result of tax reform except for AMT credits which is discussed above and a reduction related to a change in the deferred tax rate.
Results of Continuing Operations for the Three Years Ended December 31, 20152017
The following table sets forth selected consolidated statements of continuing operations data as a percentage of revenues for each of the periods indicated:
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2015 | | | 2014 | | | 2013 | | | 2017 | | | 2016 | | | 2015 | |
Revenue | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
Costs and expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
Educational services and facilities | | | 47.7 | % | | | 49.5 | % | | | 47.5 | % | | | 49.4 | % | | | 50.6 | % | | | 49.5 | % |
Selling, general and administrative | | | 50.9 | % | | | 54.7 | % | | | 54.2 | % | | | 53.0 | % | | | 52.0 | % | | | 49.6 | % |
Gain (loss) on sale of assets | | | 0.9 | % | | | 0.0 | % | | | -0.1 | % | |
(Gain) loss on sale of assets | | | | -0.6 | % | | | 0.1 | % | | | 0.6 | % |
Impairment of goodwill and long-lived assets | | | 0.1 | % | | | 1.6 | % | | | 0.0 | % | | | 0.0 | % | | | 7.5 | % | | | 0.1 | % |
Total costs and expenses | | | 99.6 | % | | | 105.8 | % | | | 101.6 | % | | | 101.8 | % | | | 110.2 | % | | | 99.8 | % |
Operating income (loss) | | | 0.4 | % | | | -5.8 | % | | | -1.6 | % | |
Operating (loss) income | | | | -1.8 | % | | | -10.2 | % | | | 0.2 | % |
Interest expense, net | | | -1.7 | % | | | -2.3 | % | | | -1.9 | % | | | -2.7 | % | | | -2.0 | % | | | -2.6 | % |
Loss from continuing opeartions before income taxes | | | -1.3 | % | | | -8.1 | % | | | -3.5 | % | |
Provision (benefit) for income taxes | | | 0.1 | % | | | -0.8 | % | | | 9.1 | % | |
Loss from continuing operations | | | -1.4 | % | | | -7.3 | % | | | -12.6 | % | |
Other income | | | | 0.0 | % | | | 2.4 | % | | | 1.4 | % |
Loss from operations before income taxes | | | | -4.5 | % | | | -9.8 | % | | | -1.0 | % |
(Benefit) provision for income taxes | | | | -0.1 | % | | | 0.1 | % | | | 0.1 | % |
Net loss | | | | -4.4 | % | | | -9.9 | % | | | -1.1 | % |
Year Ended December 31, 20152017 Compared to Year Ended December 31, 20142016
Consolidated Results of Operations
Revenue. Revenue decreased by $9.7$23.7 million, or 4.8%8.3%, to $193.2$261.9 million for the year ended December 31, 20152017 from $202.9$285.6 million for the year ended December 31, 2014. 2016. The decrease was a resultin revenue is primarily attributable to the campuses in our Transitional segment, which have closed during 2017. This segment accounted for approximately $22.1 million, or 93.1% of lower student population levels of approximately 100, or 1%, as we began 2015 coupled with fewer newthe revenue decline.
Total student starts of 759 which decreased by 10.8% to 8,018approximately 11,800 from 13,200 for the year ended December 31, 2015 from 8,7772017 as compared to the prior year comparable period. The suspension of new student starts for the Transitional segment accounted for approximately 92.5% of the decline. The Transportation and Skilled Trades segment starts were slightly down 1.5% and the HOPS segment starts remained essentially flat at 4,200 for the year ended December 31, 2014. These two factors led to a decline of 7.1% in average student population to approximately 7,600 students from 8,100 students in the comparable period of 2014.
Offsetting the revenue decline from lower student population was a 2.5% increase in average revenue per student due to improved student retention and a shift in program mix.
In addition, revenue was lower in 2015 due to higher scholarship recognition in comparison to 2014. Scholarships are recognized ratably over the term of the student’s program. Scholarship discounts increased by $0.6 million for the year ended December 31, 20152017 as compared to the prior2016 fiscal year. While scholarships have negatively impacted revenue, we believe we provide more students with the opportunity to pursue their educational goals by assisting in their affordability challenge.
We continue to face several challenges in sustaining our student population levels including the impact DOE incentive compensation regulations have on compensation practices for our admissions representatives, a low national unemployment rate and increased competition from peers and community colleges. We remain focused on our strategy to expand corporate training and form partnership relationships to increase student population.
For a general discussion of trends in our student enrollment, see “Seasonality and Outlook” below.
Educational services and facilities expense. Our educational services and facilities expense decreased by $8.2$15.0 million, or 8.1%10.4%, to $92.2$129.4 million for the year ended December 31, 20152017 from $100.3$144.4 million in the prior year comparable period. The decrease is mainly due to the Transitional segment, which accounted for approximately $13.9 million, or 92.4% of the decrease. The remainder of the $1.2 million decrease was primarily due to a decrease in facilities expenses slightly offset by increased instructional expenses. Facilities expense decreased due to a decline in depreciation expense of approximately $1.6 million due to fully depreciated assets. Partially, offsetting the decreases are $0.6 million in increased books and tools costs resulting from the addition of laptops for an increasing number of program offerings in the HOPS segment. Educational services and facilities expenses, as a percentage of revenue, decreased to 49.4% for the year ended December 31, 2017 from 50.6% in the prior year comparable period.
Selling, general and administrative expense. Our selling, general and administrative expense decreased by $9.7 million, or 6.5%, to $138.8 million for the year ended December 31, 2017 from $148.5 million in the prior year comparable period. The decrease was primarily due to the Transitional segment, which accounted for approximately $13.6 million in cost reductions. Partially offsetting the cost reductions are $2.8 million in additional sales and marketing expense and $1.2 million in increased administrative expense.
The $2.8 million increase in sales and marketing expense reductions werewas the result of strategic marketing spending in an effort to expand our reach in the adult market. The additional spending resulted in an increase in adult starts year over year.
Administrative expense increased primarily due to a $4.1$1.2 million increase in bad debt expense and $1.6 million in closed school expenses, offset by $1.3 million in reduced salaries and benefits expense.
The increase in closed school expenses related to the Hartford, Connecticut campus, which closed on December 31, 2016 and was included in the Transitional segment in 2016, but has an apartment lease for student dorms which ends in September 2019.
Bad debt expense as a percentage of revenue was 5.2% for the year ended December 31, 2017, compared to 5.1% for the same period in 2016. The increase in bad debt expense was the result of higher student receivable accounts, primarily driven by lower scholarship recognition and a higher number of institutional loans. During 2017, we made modifications to the institutional loan program which expanded the program’s eligibility base and lessened the student’s affordability challenge. In addition, we experienced higher account write-offs and timing of Title IV funds receipts, which contributed to the increase in bad debt expense.
As of December 31, 2017, we had total outstanding loan commitments to our students of $51.9 million, as compared to $40.0 million at December 31, 2016. The increase was due to a higher number of students packaged with institutional loans as a result of 2017 modifications to the program, which expanded the eligibility base and lessened the affordability obstacle.
Gain on sale of fixed assets. Gain on sale of fixed assets increased by $1.8 million primarily due to the sale of two real properties located in West Palm Beach, Florida. The sale occurred on August 14, 2017 and resulted in a gain of $1.5 million.
Impairment of goodwill and long-lived assets. We tested our goodwill and long-lived assets and determined that as of December 31, 2017 no impairments existed. The fair value of the Company’s reporting units were determined using Level 3 inputs included in its multiple of earnings and discounted cash flow approach. At December 31, 2016, we tested our goodwill and long-lived assets and determined that there was sufficient evidence to conclude that an impairment existed, which resulted in a pre-tax, non-cash charge of $21.4 million.
Net interest expense. For the year ended December 31, 2017, our net interest expense increased by $1.1 million. The increase was mainly attributable to a $2.2 million non-cash write-off of previously capitalized deferred financing fees; and a $1.8 million early termination fee. These costs were incurred at March 31, 2017 when the Company entered into a new revolving credit facility with Sterling National Bank. Partially offsetting these increases were reductions in interest expense resulting from lower debt outstanding in combination with more favorable terms under the current credit facility compared to the terms of a prior term loan facility provided to the Company by a former lender.
Income taxes. Our benefit for income taxes was $0.3 million, or 7.4%2.3% of pretax loss, for the year ended December 31, 2017, compared to a provision for income taxes of $0.2 million, or 0.7% of pretax loss, in the prior year comparable period.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Cuts and Jobs Act, among other things, eliminates the corporate alternative minimum tax (the “AMT”) and changes how existing AMT credits can be realized either to offset regular tax liability or to be refunded. As a result of this change, the Company released the valuation allowance against AMT credits deferred tax asset and recorded a deferred tax provision benefit of $0.4 million. Offsetting this benefit was $0.1 million of income tax expense from various minimal state tax expenses.
At December 31, 2017, we have not completed our analysis of the tax effects of enactment of the Tax Act; however, we have made a reasonable estimate of the effects of the Tax Act’s change in the federal rate and revalued our deferred tax assets based on the rates at which they are expected to reverse in the future, which is generally the new 21% federal corporate tax rate plus applicable state tax rate. Based on our initial analysis of the impact, we recorded a decrease related to deferred tax assets of $17.7 million. The expense is offset with a corresponding release of valuation allowance.
No other federal or state income tax benefit was recognized for the current period loss due to the recognition of a full valuation allowance.
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Consolidated Results of Operations
Revenue. Revenue decreased by $20.5 million, or 6.7%, to $285.6 million for the year ended December 31, 2016 from $306.1 million for the year ended December 31, 2015. The decrease in revenue can mainly be attributed to the closure of campuses in our Transitional segment during 2016, which accounted for $11.8 million, or 57.3% of the total revenue decline, and a lower carry in population, which has been one of the main contributing factors to the declines in revenue over the past several years. We started 2016 with approximately 1,400 fewer students than we had on January 1, 2015, which led to an 8.6% decline in average student population to approximately 11,900 as of December 31, 2016 from 13,000 in the comparable period of 2015. Partially offsetting the revenue decline from lower student population was a 2.0% increase in average revenue per student mainly attributable to shifts in our program mix.
Student start results decreased by 6.0% to approximately 13,200 from 14,100 for the year ended December 31, 2016 as compared to the prior year comparable period. Excluding the Transitional segment, student starts were down 1.8%. The decline in student starts was mainly a result of the underperformance of one campus. Excluding this one campus and the Transitional segment, our starts for the year ended December 31, 2016 would have remained essentially flat as compared to 2015.
For a general discussion of trends in our student enrollment, see “Seasonality and Outlook” below.
Educational services and facilities expense. Our educational services and facilities expense decreased by $7.2 million, or 4.8%, to $144.4 million for the year ended December 31, 2016 when compared to $151.6 million in the prior year comparable period. The decrease is mainly due to the Transitional Segment which accounted for approximately $6.6 million, or 90.8% of the decrease year over year. Instructional expense decreased by $2.4 million or 3.8%, primarily resulting from a reduction in salaries and benefits expense of $1.9 million due to historically lower medical claims in 2016 and reductions in salaries expense resulting from the HOPS segment, which was classified as held for sale as of December 31, 2016. Partially offsetting the decrease in instructional and books and tools expense. Instructional savingsexpense were a result of a reduction in the number of instructors and other related costs resulting from lower average student population. The decreaseincreases in books and tools expense is also attributable to lower student starts.
Ourand facilities expenses decreasedexpense. Books and tools increased by $4.1$1.6 million, or 9.1%12.1%, primarily due to lowerthe purchase of laptops provided to newly enrolled students in certain programs to enhance and expand the students overall learning experience. Facilities expense increased by $0.2 million, primarily resulting from two main factors: a) decreased depreciation expense as a result of discontinued depreciation$1.8 million resulting from the suspension of depreciations expense in connection with two campusesfor the HOPS segment, which was classified as assets held for sale atfor the year ended December 31, 2014. Prior long-lived asset impairment expenses2016; and lower capital expenditures also contributedb) increased rent expense of $1.6 million was the result of the transition of our finance obligation at four of our campuses to the decrease.operating leases which were previously included in interest expense.
Our educational expenses contain a high fixed cost component and are not as scalable as some of our other expenses. As our student population decreases, we typically experience a reduction in average class size and, therefore, are not always able to align these expenses with the corresponding decrease in population. Educational services and facilities expenses, as a percentage of revenue, decreasedincreased to 47.7% for the year ended December 31, 201550.6% from 49.5% forin the prior year ended December 31, 2014.comparable period.
Selling, general and administrative expense. Our selling, general and administrative expense decreased by $12.6$3.4 million, or 11.3%2.2%, to $98.3$148.4 million for the year ended December 31, 20152016 from $110.9$151.8 million in the prior year. The decrease was primarily due to our Transitional segment which accounted for approximately $2.0 million, or 60.8% of the decrease year ended December 31, 2014.over year.
Administrative expense was lowerexpenses decreased by $8.0 million, or 12.8%, after giving consideration to a $4.4 decrease in$1.2 primarily resulting from reduced salaries and benefit expensesbenefits expense, partially offset by increases in bad debt expense. Student services expense decreased by $0.8 million primarily as a result of management restructuring designed to help align ourreduced salaries and benefits expense. Partially offsetting the cost structure. Furthermore, salesreductions was an increase in marketing expense decreased by $3.3 million, or 14.1%.of $0.9 million. The reductionincrease in salesmarketing expense was mainly attributablethe result of additional spending made in an effort to a reduction in the number of admissions representatives, dedicated to the destination schools being replaced with a centralized call center, thereby reducing travel costsreach more potential students, expand brand awareness, and salary expense.increase enrollments.
Bad debt expense as a percentage of revenue was 4.8%5.1% for the year ended December 31, 2015,2016, compared to 5.5%4.4% for the same period in 2014. The improvement in bad debt expense2015. This increase was mainly the result of improvement in current collections and collections history.
Student servicesincurring additional bad debt expense also decreased by $1.3 million, or 13.1%, to $8.5 million as a result offrom increased reserves placed on our smaller student population.newly reclassified Transitional segment campuses.
As a percentage of revenues, selling, general and administrative expense decreasedincreased to 50.9%52.0% for the year ended December 31, 20152016 from 54.7% for49.6% in the comparable prior year ended December 31, 2014.period.
As of December 31, 2015,2016, we had total outstanding loan commitments to our students of $33.4$40.0 million, as compared to $34.1$33.4 million at December 31, 2014.2015. Loan commitments, net of interest that would be due on the loans through maturity, were $30.0 million at December 31, 2016, as compared to $24.8 million at December 31, 2015, as compared to $24.1 million at December 31, 2014.2015.
Loss (gain) on sale of fixed assets. Loss on sale of assets increaseddecreased by $1.8$1.5 million primarily as a result of a one-timenon-cash charge in relation to two of our campuses that were previously classified as held for sale in 2014. During 2015, the Company re-classed these campuses out of held for sale and booked catch-up depreciation in the amount of $2.0 million. This was partially offset by a non-cash charge in relation to three of our campuses that were previously classified as held for sale in 2015. During 2016, the Company re-classed these campuses out of held for sale and booked catch-up depreciation in the amount of approximately $0.4 million.
Impairment of goodwill and long-lived assets. We tested our goodwill and long-lived assets as ofAt December 31, 20152016, we tested long-lived assets and determined that there is no goodwill impairment. The fair valuewas sufficient evidence to conclude that an impairment existed, which resulted in a pre-tax, non-cash charge of the Company’s reporting units were determined using Level 3 inputs included in its multiple of earnings and discounted cash flow approach.$21.4 million. As of September 30, 2015, we tested goodwill and long-lived assets for impairment and determined that one of the Company’s reporting units relating to goodwill was impaired, which resulted in a pre-tax, non-cash charge of $0.2 million.
As of September 30, 2014 we tested goodwill and long-lived assets for impairment and determined that ten of the Company’s reporting units were impaired, which resulted in a pre-tax non-cash charge of $39.0 million relating to goodwill ($38.8 million of which is included in discontinued operations).42
Net interest expense. OurFor the year ended December 31, 2016, our net interest expense increaseddecreased by $2.3 million due$2.0 million. The decrease in interest expense was primarily the result of the transition of our finance obligation at four of our campuses to operating leases coupled with the termination of the lease termination for our Fern Park, Florida facility, which was previously accounted for as a higher outstanding loan balance and financing feescapital lease. Partially offsetting the reduction in interest expense associated with our newwas interest paid under the Company’s term loan agreement.facility entered into on July 31, 2015.
Income taxes. Our provision for income taxes was $0.2 million, or 9.8%0.7% of pretax loss, for the year-endedyear ended December 31, 2015,2016, compared to a benefit for income taxes of $1.5$0.2 million, or 9.1%7.8% of pretax loss, in the same period in 2014.prior year comparable period. No federal or state income tax benefit was recognized for the current period loss due to the recognition of a full valuation allowance against deferred tax assets.allowance. Income tax expense for 2015 resulted from various minimal state tax expenses.
Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
Consolidated Results of Operations
Revenue. Revenue decreased by $12.7 million, or 5.9%, to $202.9 million for the year ended December 31, 2014 from $215.6 million for the year ended December 31, 2013. The decrease was a result of a 6.2% decline in average student population, which decreased to approximately 8,100 students from 8,700 students in the comparable period of 2013.
We began 2014 with approximately 700, or 8.2%, fewer students than we had on January 1, 2013.
Increased scholarship awards also contributed to the revenue decline. Scholarships are recognized ratably over the term of the student’s program. This has resulted in an increase in discounts applied for students currently attending our programs by $1.9 million for 2014 as compared to 2013. While scholarships have negatively impacted revenue, we believe we provide more students the opportunity to pursue their educational goals by assisting in their affordability challenge.
For a general discussion of trends in our student enrollment, see “Seasonality and Outlook” below.
Educational services and facilities expense. Our educational services and facilities expense decreased by $2.2 million, or 2.1%, to $100.3 million for the year ended December 31, 2014 from $102.5 million in the prior comparable period.
The expense reductions were primarily due to a $2.3 million, or 4.9%, decrease in instructional expense and a $0.4 million, or 4.3%, decrease in books and tools expense. Instructional expense savings were a result of a reduction in the number of instructors and other related costs resulting from lower average student population. Similarly, the decrease in books and tools expense is also attributable to the decrease in average student population of approximately 600 students in 2014.
Our facilities expenses increased by $0.6 million, or 1.4% to $44.9 million for the year ended December 31, 2014, from $44.3 million from the comparable prior year period. The majority of this increase was primarily the result of an increase in insurance and real estate taxes, offset by a reduction in repairs and maintenance.
Our educational expenses contain a high fixed cost component and are not as scalable as some of our other expenses. As our student population decreases, we typically experience a reduction in average class size and, therefore, are not always able to align these expenses with the corresponding decrease in population. Educational services and facilities expenses, as a percentage of revenue, decreased to 49.5% for the year ended December 31, 2014 from 47.5% for the year ended December 31, 2013.
Selling, general and administrative expense. Our selling, general and administrative expense decreased by $5.9 million, or 5.1%, to $110.9 million for the year ended December 31, 2014 from $116.8 million for the year ended December 31, 2013.
Administrative expense was lower by $2.5 million, or 3.8%, after giving effect to a one-time charges of $1.8 million for severances costs as a result of a realignment of the Company’s costs structure in addition to an overall reduction in salaries and benefits as a result of a reduced workforce.
Bad debt expense as a percentage of revenue was 5.5% for the year ended December 31, 2014, compared to 4.6% for the same period in 2013. Bad debt was negatively impacted by a combination of a slight deterioration in our collection history and a small increase in day’s sales outstanding. The company is in the process of centralizing various aspects of the financial aid process to enhance the student customer service experience, improve quality control and reduce bad debt.
Sales and marketing expenses decreased $2.6 million, or 6.3%, as a result of a reduction in marketing expenses of $0.5 million and $2.1 million of sales expense in 2014 compared to 2013. The reduction in sales expense was mainly attributable to a reduction in the number of admissions representatives dedicated to the destination schools as a result of the Company’s decision to replace select representatives who cover large territories with a centralized call center staff eliminating travel costs and reducing salary expense. These changes yielded significant cost-savings and were a major component of our cost rationalization. We continue to focus on our recruitment strategies while remaining compliant with the incentive compensation regulations. In an effort to enhance the admissions process and results, the Company has invested in a new customer relationship management software designed to improve communications and efficiencies with the objective of positively impacting enrollments and start rate.
During 2014, we reduced our marketing expenses resulting in a decrease year over year mainly due to decrease in average student population partially offset by production costs associated with our new marketing campaign as “Lincoln Tech, America’s Technical Institute”.
Student services expense also decreased by $0.9 million or 8.2%, to $9.7 million for 2014 as a result of our smaller student population.
As a percentage of revenues, selling, general and administrative expense increased to 54.7% for the year ended December 31, 2014 from 54.2% for the year ended December 31, 2013.
As of December 31, 2014, we had outstanding loan commitments to our students of $34.1 million, as compared to $36.5 million at December 31, 2013. Loan commitments, net of interest that would be due on the loans through maturity, were $24.1 million at December 31, 2014, as compared to $26.5 million at December 31, 2013. Loan commitments decreased as a result of lower population and fewer campuses.
Impairment of goodwill and long-lived assets. We tested our goodwill and long-lived assets as of December 31, 2014 and determined there is no goodwill impairment; however, we recorded a $1.5 million long-lived asset impairment charge in connection with one asset group. As of September 30, 2014, we tested goodwill and long-lived assets for impairment and determined that ten of the Company’s reporting units were impaired, which resulted in a pre-tax non-cash charge of $39.0 million relating to goodwill ($38.8 million of which is included in discontinued operations). Long-lived assets were determined to be impaired at six of our campuses resulting in impairment charges of $1.9 for leasehold improvements ($1.9 million included in discontinued operations) and $0.5 million ($0.5 million included in discontinued operations) for intangible assets
Previously, as of June 30, 2013, we tested our goodwill and long-lived assets and determined that an impairment of approximately $3.1 million existed for two of our reporting units relating to goodwill and long-lived assets ($3.1 million was of which was included in discontinued operations). Long-lived assets had also been determined to be impaired, which resulted in a pre-tax charge of $1.4 million ($1.4 million included in discontinued operations). At March 31, 2013, the Company had also incurred impairment charges $1.7 million ($1.7 million included in discontinued operations) for leasehold improvements.
Net interest expense. Our net interest expense increased by $0.9 million compared to the prior year due to financing fees expense associated with changes in our credit facility.
Income taxes. Our benefit for income taxes was $1.5 million, or 9.1%, of pretax loss for the year-ended December 31, 2014, compared to a provision for income taxes of $19.6 million, or 255.6%, of pretax loss in the same period in 2014.
Prior to 2014, we had a deferred tax liability related to an indefinite life intangible that was not available to offset the net deferred tax asset when evaluating the amount of the valuation allowance needed. As a result of our impairment of goodwill in the third quarter of 2014, the deferred tax liability related to the indefinite life intangible of $4.5 million was reversed resulting in a decrease in the valuation allowance needed. This release of the valuation allowance resulted in an income tax benefit.
We assess the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A significant piece of objective negative evidence was the cumulative losses incurred by us in current years. On the basis of this evaluation, the realization of our deferred tax assets was not deemed to be more likely than not and thus we maintained a valuation allowance on our net deferred tax assets as of December 31, 2014.
Segment Results of Operations
The for-profit education industry has been impacted by numerous regulatory changes, the changing economy and an onslaught of negative media attention. As a result of these actions,challenges, student populations have declined and operating costs have increased. Over the past few years, the Company has closed over ten locations and exited its online business. On November 3, 2015,In 2016, the Company’s BoardCompany ceased operations in Hartford, Connecticut; Fern Park, Florida; and Henderson (Green Valley), Nevada. In 2017, the Company completed the teach-out of Directors approved a plan to divest 17its Center City Philadelphia, Pennsylvania; Northeast Philadelphia, Pennsylvania; West Palm Beach, Florida, Brockton, Massachusetts and Lowell, Massachusetts schools. All of the 18these schools were previously included in our HOPS segment and are included in the Company’s Healthcare and Other Professions business segment. The 17 campuses associated with this decision are reported in discontinued operations on the statementTransitional segment as of operations. On December 3, 2015, our Board of Directors approved a plan to cease operations at the remaining school in this segment, located in Hartford, Connecticut, which is scheduled to close in the fourth quarter of 2016. The Company reviewed how it is structured and changed its organization, including reorganizing its Group Presidents to oversee each of the reporting segments. By aggregating the remaining 14 operating segments into two reporting segments, the Company is better able to allocate financial and human resources to respond to its markets with the goal of improving its profitability and competitive advantage.31, 2017.
In the past, we offered any combination of programs at any campus. We have changedshifted our focus to program offerings that create greater differentiation among campuses and attainpromote attainment of excellence to attract more students and gain market share. Also, strategically, we began offering continuing education training to select employers who hire our studentsgraduates and this is best achieved at campuses focused on theirthe applicable profession.
As a result of these environmental,the regulatory environment, market forces and our strategic decisions, we now operate our business in twothree reportable segments: a)(a) the Transportation and Skilled Trades segment; (b) the Healthcare and b) Transitional.
Other Professions segment; and (c) the Transitional segment. Our reportable segments have been determined based on thea method by which our chief operating decision makerwe now evaluatesevaluate performance and allocatesallocate resources. Each reportable segment represents a group of post-secondary education providers that offer a variety of degree and non-degree academic programs. These segments are organized by key market segments to enhance operational alignment within each segment to more effectively execute our strategic plan. Each of the Company’s schools is a reporting unit and an operating segment. Our operating segments have been aggregated into two reportable segments because, in our judgment, the reporting units have similar services, types of customers, regulatory environment and economic characteristics. Our reporting segments are described below.
Transportation and Skilled Trades – The Transportation and Skilled Trades segment offers academic programs mainly in the career-oriented disciplines of transportation and skilled trades (e.g. automotive, diesel, HVAC, welding and manufacturing).
TransitionalHealthcare and Other Professions – The Healthcare and Other Professions segment offers academic programs in the career-oriented disciplines of health sciences, hospitality and business and information technology (e.g. dental assistant, medical assistant, practical nursing, culinary arts and cosmetology).
Transitional – The Transitional segment refers to campuses that are being taught-out and closed and operations that are being phased out and consists of our campus that is currently being taught out. TheseThe schools are employingin the Transitional segment employ a gradual teach-out process that enables the schools to continue to operate whileto allow their current students to complete their course of study. These schools are no longer enrolling new students. In
The Company continually evaluates each campus for profitability, earning potential, and customer satisfaction. This evaluation takes several factors into consideration, including the first quartercampus’s geographic location and program offerings, as well as skillsets required of 2015, we announcedour students by their potential employers. The purpose of this evaluation is to ensure that we are teaching out our campusprograms provide our students with the best possible opportunity to succeed in Fern Park, Floridathe marketplace with the goals of attracting more students to our programs and, ultimately, to provide our shareholders with the maximum return on their investment. Campuses in December 2015, we announced that we are teaching out our campus in Hartford Connecticut. The teach-out at these campuses is expectedthe Transitional segment have been subject to be complete by March 2016this process and December 2016, respectively.have been strategically identified for closure.
We evaluate segment performance based on operating results. Adjustments to reconcile segment results to consolidated results are included under the caption “Corporate,” which primarily includes unallocated corporate activity.
The following table present results for our three reportable segments for the years ended December 31, 2017 and 2016:
| | Twelve Months Ended December 31, | |
| | 2017 | | | 2016 | | | % Change | |
Revenue: | | | | | | | | | |
Transportation and Skilled Trades | | $ | 177,099 | | | $ | 177,883 | | | | -0.4 | % |
Healthcare and Other Professions | | | 76,310 | | | | 77,152 | | | | -1.1 | % |
Transitional | | | 8,444 | | | | 30,524 | | | | -72.3 | % |
Total | | $ | 261,853 | | | $ | 285,559 | | | | -8.3 | % |
| | | | | | | | | | | | |
Operating Income (Loss): | | | | | | | | | | | | |
Transportation and Skilled Trades | | $ | 17,861 | | | $ | 21,278 | | | | -16.1 | % |
Healthcare and Other Professions | | | 2,318 | | | | (10,917 | ) | | | 121.2 | % |
Transitional | | | (5,379 | ) | | | (15,170 | ) | | | 64.5 | % |
Corporate | | | (19,516 | ) | | | (24,105 | ) | | | 19.0 | % |
Total | | $ | (4,716 | ) | | $ | (28,914 | ) | | | 83.7 | % |
| | | | | | | | | | | | |
Starts: | | | | | | | | | | | | |
Transportation and Skilled Trades | | | 7,510 | | | | 7,626 | | | | -1.5 | % |
Healthcare and Other Professions | | | 4,157 | | | | 4,148 | | | | 0.2 | % |
Transitional | | | 132 | | | | 1,452 | | | | -90.9 | % |
Total | | | 11,799 | | | | 13,226 | | | | -10.8 | % |
| | | | | | | | | | | | |
Average Population: | | | | | | | | | | | | |
Transportation and Skilled Trades | | | 6,752 | | | | 6,852 | | | | -1.5 | % |
Healthcare and Other Professions | | | 3,569 | | | | 3,560 | | | | 0.3 | % |
Transitional | | | 451 | | | | 1,452 | | | | -68.9 | % |
Total | | | 10,772 | | | | 11,864 | | | | -9.2 | % |
| | | | | | | | | | | | |
End of Period Population: | | | | | | | | | | | | |
Transportation and Skilled Trades | | | 6,413 | | | | 6,700 | | | | -4.3 | % |
Healthcare and Other Professions | | | 3,746 | | | | 3,587 | | | | 4.4 | % |
Transitional | | | - | | | | 948 | | | | -100.0 | % |
Total | | | 10,159 | | | | 11,235 | | | | -9.6 | % |
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Transportation and Skilled Trades
Student start results decreased by 1.5% to 7,510 for the year ended December 31, 2017 from 7,626 in the prior year comparable period.
Increased marketing spend targeted at the adult demographic has resulted in slightly higher adult start rates for the year ended December 31, 2017 when compared to the prior year comparable period. However, as previously reported for the second quarter of 2017, there was a decline in starts as a result of a lower than expected high school start rate. Graduating high school students make up approximately 31% of the segment’s starts. In an effort to increase high school enrollments, the Company has made various changes to its processes and organizational structure. These shortfalls in the high school start rate have offset the favorable start rates for the adult start demographic.
Operating income decreased by $3.4 million, or 16.1%, to $17.9 million from $21.3 million mainly driven by the following factors:
| · | Revenue decreased to $177.1 million for the year ended December 31, 2017, as compared to $177.9 million in the comparable prior year period. The slight decrease in revenue was primarily driven by a 1.5% decrease in average student population, partially offset by a 1.0% increase in average revenue per student. |
| · | Educational services and facilities expense decreased by $1.3 million, or 1.6%, mainly due to reductions in depreciation expense attributable to assets that have fully depreciated. |
| · | Selling, general and administrative expense increased by $4.0 million, primarily resulting from $1.4 million of additional bad debt expense resulting from higher student accounts, higher account write-off’s, and timing of Title IV Program receipts and a $1.4 million increase in marketing expense. The increase in marketing expense is part of a strategic effort to increase student population and increase brand awareness. As mentioned previously, the increased marketing spend targeted at the adult demographic has resulted in slightly higher starts year over year. This progress has been offset by lower than expected high school starts. |
Healthcare and Other Professions
Student start results had increased slightly by 0.2% to 4,157 for the year ended December 31, 2017 from 4,148 in the prior year comparable period. This increase represents the first time in approximately three years where student starts have yielded positive results. We believe this achievement is the result of additional marketing spend aimed at increasing student population.
Operating income for the year ended December 31, 2017 was $2.3 million compared to an operating loss of $10.9 million in the prior year comparable period. The $13.2 million change was mainly driven by the following factors:
| · | Revenue decreased to $76.3 million for the year ended December 31, 2017, as compared to $77.2 million in the comparable prior year period. The decrease in revenue is mainly attributable to a lower carry in population year over year of approximately 90 students and a 1.4% decline in average revenue per student due to tuition decreases at certain campuses. |
| · | Educational services and facilities expense increased by $0.2 million to $39.9 million for the year ended December 31, 2017 from $39.7 million in the prior year comparable period. The increase was attributable to a $0.3 million increase in books and tools expense resulting from the introduction of student laptops for an increasing number of program offerings. |
| · | Selling, general and administrative expenses increased by $1.9 million, or 5.8%, mainly due to a $1.3 million increase in sales and marketing expense as a result of increased spending in an effort to increase student population and brand awareness and a $0.4 million increase in administrative expense as a result of increased salaries and benefits. Increased salaries and benefits resulted from the addition of administrative staff to accommodate newly transferred students from our Northeast Philadelphia, Pennsylvania and Center City Philadelphia, Pennsylvania campuses, which were closed in August 2017. |
| · | Impairment of goodwill and long lived asset decreased by $16.1 million as a result of non-cash, pre-tax charges during the year ended December 31, 2016. |
Transitional
The following table lists the schools that are categorized in the Transitional segment which are all closed as of December 31, 2017:
Campus | Date Closed |
Northeast Philadelphia, Pennsylvania | September 30, 2017 |
Center City Philadelphia, Pennsylvania | August 31, 2017 |
West Palm Beach, Florida | September 30, 2017 |
Brockton, Massachusetts | December 31, 2017 |
Lowell, Massachusetts | December 31, 2017 |
Fern Park, Florida | March 31, 2016 |
Hartford, Connecticut | December 31, 2016 |
Henderson (Green Valley), Nevada | December 31, 2016 |
Revenue for the campuses in the above table have been classified in the Transitional segment for comparability for the years ended December 31, 2017 and 2016.
Revenue was $8.4 million for the year ended December 31, 2017 as compared to $30.5 million in the prior year comparable period mainly due to the campus closures.
Operating loss decreased by $9.8 million to $5.4 million for the year ended December 31, 2017 from $15.2 million in the prior year comparable period. The decrease was due to campus closures.
Corporate and Other
This category includes unallocated expenses incurred on behalf of the entire Company. Corporate and other expenses decreased by $4.6 million, or 19.0%, to $19.5 million from $24.1 million in the prior year comparable period. The decrease was primarily driven by a $1.5 million gain resulting from the sale of two properties located in West Palm Beach, Florida on August 14, 2017; a reduction in salaries and benefits expense of approximately $2.5 million; and a $1.4 million non-cash impairment charge in relation to one of our corporate properties that occurred in December 31, 2016. Partially offsetting these reductions were $1.6 million in additional closed school costs. The additional closed school costs related to the closure of the Hartford, Connecticut campus on December 31, 2016. The additional expenses relating to the Hartford, Connecticut campus were due to an apartment lease for student dorms, which will end in September 2019.
The following table present results for our two reportable segments for the years ended December 31, 20152016 and 2014.2015.
| | Year Ended December 31, | | | Twelve Months Ended December 31, | |
| | 2015 | | | 2014 | | | % Change | | | 2016 | | | 2015 | | | % Change | |
Revenue: | | | | | | | | | | | | | | | | | | |
Transportation and Skilled Trades | | $ | 183,821 | | | $ | 188,669 | | | | -2.6 | % | | $ | 177,883 | | | $ | 183,822 | | | | -3.2 | % |
Healthcare and Other Professions | | | $ | 77,152 | | | $ | 79,978 | | | | -3.5 | % |
Transitional | | | 9,399 | | | | 14,220 | | | | -33.9 | % | | | 30,524 | | | | 42,302 | | | | -27.8 | % |
Total | | $ | 193,220 | | | $ | 202,889 | | | | -4.8 | % | | $ | 285,559 | | | $ | 306,102 | | | | -6.7 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Operating Income (Loss): | | | | | | | | | | | | | | | | | | | | | | | | |
Transportation and Skilled Trades | | $ | 26,778 | | | $ | 19,519 | | | | 37.2 | % | | $ | 21,278 | | | $ | 26,777 | | | | -20.5 | % |
Healthcare and Other Professions | | | $ | (10,917 | ) | | $ | 5,386 | | | | -302.7 | % |
Transitional | | | (6,859 | ) | | | (7,647 | ) | | | 10.3 | % | | | (15,170 | ) | | | (7,543 | ) | | | -101.1 | % |
Corporate | | | (19,141 | ) | | | (23,363 | ) | | | 18.1 | % | | | (24,105 | ) | | | (23,916 | ) | | | -0.8 | % |
Total | | $ | 778 | | | $ | (11,491 | ) | | | 106.8 | % | | $ | (28,914 | ) | | $ | 704 | | | | 4207.1 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Starts: | | | | | | | | | | | | | | | | | | | | | | | | |
Transportation and Skilled Trades | | | 7,794 | | | | 8,289 | | | | -6.0 | % | | | 7,626 | | | | 7,794 | | | | -2.2 | % |
Healthcare and Other Professions | | | | 4,148 | | | | 4,195 | | | | -1.1 | % |
Transitional | | | 224 | | | | 488 | | | | -54.1 | % | | | 1,452 | | | | 2,080 | | | | -30.2 | % |
Total | | | 8,018 | | | | 8,777 | | | | -8.6 | % | | | 13,226 | | | | 14,069 | | | | -6.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Average Population: | | | | | | | | | | | | | | | | | | | | | | | | |
Transportation and Skilled Trades | | | 7,238 | | | | 7,603 | | | | -4.8 | % | | | 6,852 | | | | 7,238 | | | | -5.3 | % |
Healthcare and Other Professions | | | | 3,560 | | | | 3,827 | | | | -7.0 | % |
Transitional | | | 315 | | | | 529 | | | | -40.5 | % | | | 1,452 | | | | 1,916 | | | | -24.2 | % |
Total | | | 7,553 | | | | 8,132 | | | | -7.1 | % | | | 11,864 | | | | 12,981 | | | | -8.6 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
End of Period Population: | | | | | | | | | | | | | | | | | | | | | | | | |
Transportation and Skilled Trades | | | 6,617 | | | | 7,210 | | | | -8.2 | % | | | 6,700 | | | | 6,617 | | | | 1.3 | % |
Healthcare and Other Professions | | | | 3,587 | | | | 3,677 | | | | -2.4 | % |
Transitional | | | 194 | | | | 418 | | | | -53.6 | % | | | 948 | | | | 1,587 | | | | -40.3 | % |
Total | | | 6,811 | | | | 7,628 | | | | -10.7 | % | | | 11,235 | | | | 11,881 | | | | -5.4 | % |
Year Ended December 31, 20152016 Compared to Year Ended December 31, 20142015
Transportation and Skilled Trades
Revenue
Student start results decreased by 2.2% to $183.8 million for the year ended December 31, 2015, as compared to $188.7 million in the comparable period, primarily driven by a 4.8% decline in average student population, which decreased to approximately 7,2007,626 from 7,600 in the prior comparable year. In addition, we had fewer new starts of 495 which decreased our new student population to 7,794 for the year ended December 31, 2015 from 8,289 for the year ended December 31, 2014. The revenue decline from lower population was slightly offset by a 2.3% increase in average revenue per student due to improved student retention and a shift in program mix.
In addition, revenue was lower in 2015 due to higher scholarship recognition in comparison to 2014. Scholarships are recognized ratably over the term of the student’s program. Scholarship discounts increased by $0.7 million for the year ended December 31, 20152016 as compared to the prior year. While scholarshipsyear comparable period. The decline in student starts was mainly the result of the underperformance of one campus. Excluding this campus, student starts for the year would have negatively impacted revenue, we believe we provide more students with the opportunity to pursue their educational goals by assisting in their affordability challenge.
We continue to face several challenges in sustaining our population levels including DOE incentive compensation regulations that impact our compensation decisions with respect to our admissions representatives, a low unemployment rate and increased competition from peers and community colleges. We remain focused on our strategy to expand corporate training and form partnerships relationship to increase student population.grown 1.3% year over year.
Operating income improveddecreased by $7.3$5.5 million, or 37.2%20.5%, to $21.3 million from $26.8 million from $19.5 millionin the prior year mainly driven by the following expense reductions:factors:
| · | Revenue decreased to $177.9 million for the year ended December 31, 2016, as compared to $183.8 million for the year ended December 31, 2015, primarily driven by a 5.3% decrease in average student population, which decreased to approximately 6,900 from 7,200 in the prior year. The decrease in average population was a result of starting 2016 with approximately 600 fewer students than we had on January 1, 2015. The revenue decline from a lower population was slightly offset by a 2.2% increase in average revenue per student due to a shift in program mix. |
| · | Educational services and facilities expense reducedincreased by $6.5$1.9 million comprised of: (a) $3.7mainly due to a $2.0 million, or 9.8%5.9%, reductionincrease in facilities expense primarily due to lower(a) increased rent expense of $1.3 million as a result of a modification of leases for three of our campuses, which were previously accounted for as finance obligations under which rent payments were previously included in interest expense; (b) $0.6 million in additional depreciation expense resulting from the reclassification of one of our facilities out of held for sale as of December 31, 2015; and (c) a $1.5 million, or 17.4%, increase in books and tools expenses resulting from the purchase of laptops provided to newly enrolled students in certain programs to enhance and expand their overall learning experience. Partially offsetting the above increases was a $1.6 million, or 4.1%, decrease in instructional expense as a result of discontinued depreciation for one campus included in assets held for sale and lower asset base duerealigning our cost structure to prior long-lived asset impairments; and (b) lower instructional expenses of $2.4 million, or 5.8%, and books and tools expense of $0.4 million, or 4.7% as a result of lower student population.meet our population. |
| · | Selling, general and administrative expenses reduceddecreased by $5.7$0.5 million comprised of: (a) $2.6 million, or 11.8%, reduction in sales expenses offset by a $0.8 million, or 5.8%, increase in marketing. The decrease in sales expense was attributable to a reduction in the number of admissions representatives dedicated to the destination schools replaced with a centralized call center thus reducing travel costs and salary expense, while the marketing increase was a result of increased spending on production costs associated with our new marketing campaign as “Lincoln Tech, America’s Technical Institute”; (b) $1.1 million reduction in student services driven by lower student population; and (c) $2.8 million, or 8.2%, reduction in administrative expenses primarily as a result of a reduction$1.6 million decrease in bad debt expense. The improvementadministrative and student services expense due to reduced salary and benefits. Partially offsetting the decrease was a $1.1 million increase in bad debtmarketing expense, which was mainlylargely the result of improvementadditional spending in current collectionsa strategic effort to reach more potential students, expand brand awareness and collections history.increase enrollments. |
| · | GainLoss on sale of assets increasedasset decreased by $1.6 million as a result of a one-time charge in relation to one of our campuses that was previously classified as held for sale in 2014.sale. During 2015, the Companycompany had re-classifiedreclassified this campus out of held for sale and recorded catch-up depreciation in the amount of $1.6 million. |
· | Impairment of goodwill and long-lived assets of $0.2 million compared to $1.7 million for the years ended December 31, 2015 and 2014, respectively.
|
Transitional
This segment consists of our Fern Park, Florida and Hartford, Connecticut campus’s where we have ceased student enrollment and existing students are being trained through March 2016 and December 2016, respectively.
Revenue decreased by $4.8 million, or 33.9%, to $9.4 million as of December 31, 2015 from $14.2 million in the comparable prior year period. This decrease is primarily attributed to a 40.5% decrease in average student population due to suspension of new student enrollments at our Fern Park, Florida location effective February 2015.
Operating loss decreased by $0.8 million, or 10.3%, to $6.9 million as of December 31, 2015 compared to $7.6 million in the comparable prior year period primarily as a result of a one-time impairment charge of $1.5 million in 2014 coupled with a decrease in overall expenses as a result of ceased student enrollments.
Corporate and Other
This category includes unallocated expenses incurred on behalf of the entire company. Corporate and Other costs decreased by $4.2 million, or 18.1%, to $19.1 million from $23.4 million, respectively, as compared to the prior year. This decrease was primarily a result of cost restructuring efforts during the second half of 2014.
The following table present results for our two reportable segments for the years ended December 31, 2014 and 2013:
| | Year Ended December 31, | |
| | 2014 | | | 2013 | | | % Change | |
Revenue: | | | | | | | | | |
Transportation and Skilled Trades | | $ | 188,669 | | | $ | 196,230 | | | | -3.9 | % |
Transitional | | | 14,220 | | | | 19,366 | | | | -26.6 | % |
Total | | $ | 202,889 | | | $ | 215,596 | | | | -5.9 | % |
| | | | | | | | | | | | |
Operating Income (Loss): | | | | | | | | | | | | |
Transportation and Skilled Trades | | $ | 19,519 | | | $ | 27,917 | | | | -30.1 | % |
Transitional | | | (7,647 | ) | | | (5,938 | ) | | | -28.8 | % |
Corporate | | | (23,363 | ) | | | (25,431 | ) | | | 8.1 | % |
Total | | $ | (11,491 | ) | | $ | (3,452 | ) | | | -232.9 | % |
| | | | | | | | | | | | |
Starts: | | | | | | | | | | | | |
Transportation and Skilled Trades | | | 8,289 | | | | 8,518 | | | | -2.7 | % |
Transitional | | | 488 | | | | 616 | | | | -20.8 | % |
Total | | | 8,777 | | | | 9,134 | | | | -3.9 | % |
| | | | | | | | | | | | |
Average Population: | | | | | | | | | | | | |
Transportation and Skilled Trades | | | 7,603 | | | | 7,860 | | | | -3.3 | % |
Transitional | | | 529 | | | | 809 | | | | -34.6 | % |
Total | | | 8,132 | | | | 8,668 | | | | -6.2 | % |
| | | | | | | | | | | | |
End of Period Population: | | | | | | | | | | | | |
Transportation and Skilled Trades | | | 7,210 | | | | 7,178 | | | | 0.4 | % |
Transitional | | | 418 | | | | 527 | | | | -20.7 | % |
Total | | | 7,628 | | | | 7,705 | | | | -1.0 | % |
Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
Transportation and Skilled Trades
Revenue decreased to $188.7 million for the year ended December 31, 2014, as compared to $196.2 million in the comparable period, primarily driven by a 3.3% decrease in average student population, which decreased to approximately 7,600 from 7,900 in the prior comparable year. In addition there was a $1.9 million increase in scholarship recognition in the current period compared to the prior comparable year period.
Operating income decreased by $8.4 million, or 30.1%, to $19.5 million from $27.9 million mainly driven by the following factors:
| · | Educational services and facilities expense increased by $0.3 million comprised of $1.0 million, or 2.6%, increase in facilities expense, primarily due to an increase in insurance of $0.5 million coupled with a $0.4 million increase in real estate taxes offset $0.6 million, or 1.4%, lower instructional expenses relating to a lower student population. |
| · | Selling, general and administrative expenses reduced by $1.1 million comprised of (a) $2.2 million, or 5.8%, reduction in sales and marketing expenses attributable to $1.3 million lower sales salary and travel expense coupled with a $1.2 million reduction in our TV marketing initiatives.; (b) $0.5 million reduction in student services due to the smaller student population; and (c) $1.6 million, or 5.0% increase in administrative expenses primarily as a result of an increase in bad debt expense. |
| · | Impairment of goodwill and long lived asset increaseddecreased by $1.7$0.2 million as a result of one-time charges in relation to one of our campuses during the year ended December 31, 2014.2015. |
TransitionalHealthcare and Other Professions
This segment consists of our Fern Park, Florida and Hartford, Connecticut campuses.
Student starts decreased by 1.1% to 4,148 from 4,195 for the year ended December 31, 2016 as compared to the prior year.
Revenue decreasedOperating loss increased to $10.9 million for the year ended December 31, 2016 from operating income of $5.4 million in the prior year comparable period mainly driven by $5.1 million, or 26.6%, to $14.2the following factors:
| · | Revenue decreased to $77.2 million for the year ended December 31, 2016, as compared to $80.0 million in the comparable prior year period, primarily driven by a 7.0% decrease in average student population, which decreased to approximately 3,600 from 3,800 in the prior year. The decrease in average population was a result of starting 2016 with approximately 350 fewer students than we had on January 1, 2015. The revenue decline from a lower population was slightly offset by a 3.6% increase in average revenue per student due to a shift in program mix. |
| · | Educational services and facilities expense decreased by $2.6 million mainly due to a $1.9 million, or 13.0%, decrease in facilities expense primarily due to the suspension of depreciation expense during the year ended December 31, 2016 as this segment was classified as held for sale. |
| · | Selling, general and administrative expenses remained essentially flat at $32.3 million for the year ended December 31, 2016 and 2015. |
| · | Impairment of goodwill and long lived assets of $16.1 million at December 31, 2016. |
Transitional
The following table lists the schools that are categorized in the Transitional segment and their status as of December 31, 2014 from $19.42016:
Campus | Date Closed |
Northeast Philadelphia, Pennsylvania | September 30, 2017 |
Center City Philadelphia, Pennsylvania | August 31, 2017 |
West Palm Beach, Florida | September 30, 2017 |
Brockton, Massachusetts | December 31, 2017 |
Lowell, Massachusetts | December 31, 2017 |
Fern Park, Florida | March 31, 2016 |
Hartford, Connecticut | December 31, 2016 |
Henderson (Green Valley), Nevada | December 31, 2016 |
Revenue for the campuses in the above table have been classified in the Transitional segment for comparability for the year ended December 31, 2016 and 2015.
Revenue was $30.5 million for the comparableyear ended December 31, 2016 as compared to $42.3 million in the prior year comparable period attributablemainly due to a 34.6% decrease in average student population.the campus closures.
Operating loss increased by $1.7$7.6 million to $7.6$15.2 million for the year ended December 31, 2016 from $5.9$7.5 million resulting primarily from revenue declinein the prior year comparable period. The decrease was due to a declining student population offset by minimized expenses including sales and marketing.campus closures.
Corporate and Other
This category includes unallocated expenses incurred on behalf of the entire company.Company. Corporate and Otherother costs decreasedincreased by $2.1$0.2 million, or 8.1%0.8%, to $23.4$24.1 million for the year ended December 31, 2016 from $25.4$23.9 million respectively, as compared toin the prior year.year comparable period. This decreaseincrease was primarily athe result of a)a $1.4 million non-cash impairment charge in relation to one of our corporate properties. Partially offsetting the increase is a $0.6 million decrease in administrative costs resulting from a reduction in salaries and benefits expense and b) $1.1a $0.6 million reduction in insurance and employee benefits as a resultgain resulting from the sale of certain Company assets for the Company realigning its cost structure to meet long-term strategic goals.year ended December 31, 2016.
LIQUIDITY AND CAPITAL RESOURCES
Our primary capital requirements are for facilities expansion and maintenance, and the development of new programs. Our principal sources of liquidity have been cash provided by operating activities and borrowings under our term loan.credit facility. The following chart summarizes the principal elements of our cash flow for each of the three years in the period ended December 31, 2015:2017:
| | Cash Flow Summary Year Ended December 31, | |
| | 2015 | | | 2014 | | | 2013 | |
| | (In thousands) | |
Net cash provided by operating activities | | $ | 14,337 | | | $ | 12,022 | | | $ | 3,246 | |
Net cash used in investing activities | | $ | (1,767 | ) | | $ | (7,405 | ) | | $ | (5,788 | ) |
Net cash provided by (used in) financing activities | | $ | 13,551 | | | $ | (5,204 | ) | | $ | (46,280 | ) |
| | Cash Flow Summary Year Ended December 31, | |
| | 2017 | | | 2016 | | | 2015 | |
| | (In thousands) | |
Net cash (used in) provided by operating activities | | $ | (11,321 | ) | | $ | (6,107 | ) | | $ | 14,337 | |
Net cash provided by (used in) investing activities | | $ | 9,917 | | | $ | (2,182 | ) | | $ | (1,767 | ) |
Net cash (used in) provided by financing activities | | $ | (5,097 | ) | | $ | (9,067 | ) | | $ | 13,551 | |
AsThe Company had $54.6 million of December 31, 2015, we had cash, cash equivalents, and restricted cash of $61.0 million, including $22.6at December 31, 2017 ($40.0 million of restricted cash representing an increase of approximately $18.7 millionat December 31, 2017) as compared to $42.3$47.7 million of cash, cash equivalents, and restricted cash as of December 31, 2014. 2016 ($26.7 million of restricted cash at December 31, 2016). This increase for the year ended December 31, 2015 is primarily due tothe result of borrowings under our new term loan, which increased our cash and cash equivalents by $19.2 million netline of finance fees. In addition, cash and cash equivalents increased due to other working capital itemscredit facility partially offset by repayment under our previous term loan facility, a net loss during the year ended December 31, 2017 and seasonality of $3.4 million.the business.
For the last several years, wethe Company and the proprietary school sector generally have faced deteriorating earnings growth. Government regulations have negatively impacted earnings by making it more difficult for prospective students to obtain loans, which when coupled with the overall economic environment have hindered prospective students from enrolling in our schools. In light of these factors, we have incurred significant operating losses as a result of lower student population. Despite these events, we believe that our likely sources of cash should be sufficient to fund operations for the next twelve months. At December 31, 2015, our available sources of cash primarily included cash from operations, cashmonths and cash equivalents of $38.4 million.thereafter for the foreseeable future.
To fund our business plans, including any anticipated future losses, purchase commitments, capital expenditures and principal and interest payments on borrowings, we leveraged our owned real estate that is not classified as held for sale.estate. We are also continuing to take actions to improve cash flow by aligning our cost structure to our student population.
In addition to the aforementionedour current sources of capital that will provide short term liquidity, we also planthe Company has been making efforts to sell approximately $31.7 millionits Mangonia Park, Palm Beach County, Florida property and associated assets originally operated in net assetsthe HOPS segment, which are currentlyhas been classified as assets held for sale and are expected to be sold within one year from the date of classification. Some of the net proceeds of future sales of real property by the Company and its subsidiaries must be used to prepay and permanently reduce the principal amount of our term loansale.
Our primary source of cash is tuition collected from our students. The majority of students enrolled at our schools rely on funds received under various government-sponsored student financial aid programs to pay a substantial portion of their tuition and other education-related expenses. The largestmost significant source of these programs arestudent financing is Title IV Programs, which represented approximately 80%78% of our cash receipts relating to revenues in 2015. Students2017. Pursuant to applicable regulations, 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'sstudent’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-day31-day delay. In certain instances, if a student withdraws from a program prior to a specified date, any paid but unearned tuition or prorated Title IV Program financial aid is refunded according to federal, state and accrediting agency standards.
As a result of the significancesignificant amount of the Title IV Program funds received by our students, we are highly dependent on these funds to operate our business. Any reduction in the level of Title IV Program funds that our students are eligible to receive or any impactrestriction on our ability to be ableeligibility to receive Title IV Program funds would have a significant impact on our operations and our financial condition. See “Risk Factors” in Item 1A of this Annual Report on Form 10-K for the year ended December 31, 2015.2017.
On January 11, 2018, the DOE sent letters to our Columbia, Maryland and Iselin, New Jersey institutions requiring each institution to submit a letter of credit to the DOE based on findings of late returns of Title IV funds in the annual Title IV compliance audits submitted to the DOE for the fiscal year ended December 31, 2016. Our Iselin institution provided evidence demonstrating that only 3% of the Title IV Program funds returned were late. However, the DOE concluded that a letter of credit would nevertheless be required for each institution because the regulatory auditor included a finding that there was a material weakness in our report on internal controls relating to return of unearned Title IV Program funds. We disagree with the regulatory auditor’s conclusion that a material weakness could exist if the error rate in the expanded audit sample is only 3% or approximately $20,000 and we believe that the regulatory auditor’s conclusion is erroneous. We requested the DOE to reconsider the letter of credit requirement. By letter dated February 7, 2018, DOE maintained that the refund letters of credit were necessary but agreed that the amount of each letter of credit could be based on the returns that were required to be made by each institution in the 2017 fiscal year rather than the 2016 fiscal year. Accordingly, we submitted letters of credit in the amounts of $0.5 million and $0.1 million by the February 23, 2018 deadline and expect that these letters of credit will remain in place for a minimum of two years.
Operating Activities
Net cash used in operating activities was $11.3 million for the year ended December 31, 2017 compared to $6.1 million for the comparable period of 2016. The increase in cash used in operating activities in the year ended December 31, 2017 as compared to the year ended December 31, 2016 is primarily due to an increased net loss as well as changes in other working capital such as accounts receivable, accounts payable, accrued expenses and unearned tuition.
Investing Activities
Net cash provided by operatinginvesting activities was $14.3$9.9 million for the year ended December 31, 20152017 compared to $12.0 million for the comparable period of 2014. The $2.3 million increase in net cash used of $2.2 million in the prior year comparable period. The increase of $12.1 million was primarily resulted from a reduction in net loss coupled with more rapid collectionsthe result of the sale of two of our outstanding accounts receivable as well as a reductionthree properties located in unearned tuition which was offset by other working capital items.
Investing ActivitiesWest Palm Beach, Florida resulting in cash inflows of $15.5 million. The sale of the two properties occurred on August 14, 2017.
Net cash used in investing activities was $1.8 million compared to $7.4 million for the years ended December 31, 2015 and 2014, respectively. OurOne of our primary useuses of cash in investing activities was capital expenditures associated with investments in training technology, classroom furniture, and new program build outs.buildouts.
We currently lease a majority of our campuses. We own our campusesschools in Grand Prairie, Texas; Nashville, Tennessee; Westand Denver, Colorado and our former school properties in Mangonia Park, Palm Beach County, Florida and Suffield, Connecticut; and Denver, Colorado. We have 17 campuses that are held for sale.Connecticut.
Capital expenditures are expected to approximate 2% of revenues in 2016.2018. We expect to fund future capital expenditures with cash generated from operating activities, borrowings under our term loan agreement,revolving credit facility, and cash from our real estate monetization.
Financing Activities
Net cash provided byused in financing activities was $13.6$5.1 million as compared to net cash used of $5.2$9.1 million for the years ended December 31, 20152017 and 2014,2016, respectively.
The increasedecrease of $18.8$4.0 million was primarily due to two main factors: (a) net borrowingpayments on borrowings of $22.0 million for the new term loan for the year ended December 31, 2015 as compared to 2014, $4.3$3.4 million; and (b) $2.9 million in savings as a result oflease termination fees paid in the previously reported dividend discontinuation for year ended December 31, 2015 as compared to the year ended December 31, 2014, partially offset by $2.8 million of finance fees in relation to the term loan and $5.5 million in principal payments made in relation to an exit of a capital lease at our Hartford, Connecticut campus.prior year.
Net borrowings consisted of: (a) total borrowing to date under our secured revolving credit facility of $75.9 million; (b) reclassification of payments of borrowing from restricted cash of $20.3 million; (c) reclassification of proceeds from borrowings to restricted cash of $32.8 million; and (d) $66.8 million in total repayments made by the Company. The noncurrent restricted cash balance of $32.8 million has been repaid in 2018.
Credit Agreement. Agreement
On JulyMarch 31, 2015, we2017, the Company entered into a secured revolving credit agreement (the “Credit Agreement”) with three lenders, AlostarSterling National Bank of Commerce (“Alostar”), HPF Holdco, LLC and Rushing Creek 4, LLC, led by HPF Service, LLC, as administrative agent and collateral agent (the “Agent”“Bank”), for an pursuant to which the Company obtained a credit facility in the aggregate principal amount of $45up to $55 million (the “Term Loan”“Credit Facility”). The July 31, 2015Credit Facility consists of (a) a $30 million loan facility (“Facility 1”), which is comprised of a $25 million revolving loan designated as “Tranche A” and a $5 million non-revolving loan designated as “Tranche B,” which Tranche B was repaid during the quarter ended June 30, 2017 and (b) a $25 million revolving loan facility (“Facility 2”), which includes a sublimit amount for letters of credit agreement, alongof $10 million. The Credit Agreement was subsequently amended, on November 29, 2017, to provide the Company with subsequent amendmentsan additional $15 million revolving credit loan (“Facility 3”), resulting in an increase in the aggregate availability under the Credit Facility to $65 million. The Credit Agreement was again amended on February 23, 2018, to, among other things, effect certain modifications to the financial covenants and other provisions of the Credit Agreement dated December 31, 2015 and to allow the Company to pursue the sale of certain real property assets. The February 29, 2016, are collectively referred23, 2018 amendment increased the interest rate for borrowings under Tranche A of Facility 1 to asa rate per annum equal to the “Credit Agreement.” Asgreater of December 31, 2015(x) the Bank’s prime rate plus 2.85% and prior(y) 6.00%. Prior to the most recent amendment of the Credit Agreement, revolving loans outstanding under Tranche A of Facility 1 bore interest at a rate per annum equal to the greater of (x) the Bank’s prime rate plus 2.50% and (y) 6.00%.
The Credit Facility replaces a term loan facility (the “Prior Credit Facility”) which was repaid and terminated concurrently with the effectiveness of a second amendment to the Credit AgreementFacility. The term of the Credit Facility is 38 months, maturing on February 29, 2016 (the “Second Amendment”),May 31, 2020, except that the Term Loan consistedterm of a $30 million term loan (the “Term Loan A”) from HPF Holdco, LLC, Rushing Creek 4, LLC and Tiger Capital Group, LLC,Facility 3 will mature one year earlier, on May 31, 2019.
The Credit Facility is secured by a first priority lien in favor of the AgentBank on substantially all of the real and personal property owned by the Company as well as mortgages on four parcels of real property owned by the Company in Colorado, Tennessee and a $15 million term loan (the “Term Loan B”) from Alostar secured by a $15.3 million cash collateral account. Pursuant to the Second Amendment, we received an additional $5 million term loan from Alostar withTexas at which we repaid $5 millionthree of the principal amountCompany’s schools are located, as well as a former school property owned by the Company located in Connecticut.
At the closing of the Term Loan A. Accordingly, uponCredit Facility, the effectiveness of the Second Amendment, the aggregate term loans outstanding under the Credit Agreement remains at approximately $45 million, consisting of an approximateCompany drew $25 million Term Loanunder Tranche A and a $20 million Term Loan B. In addition,of Facility 1, which, pursuant to the Second Amendment, the amount of cash collateral securing the Term Loan B was increased to $20.3 million. At the Company’s request, a percentage of the cash collateral may be released to the Company in the Agent’s sole discretion and with the consent of Alostar upon the satisfaction of certain criteria as outlined in the Credit Agreement. The Term Loan, which matures on July 31, 2019, replaces our previously existing $20 million revolving credit facility with Bank of America, N.A. and other lenders, which was due to expire on April 5, 2016. The previously existing revolving credit facility was terminated concurrently with the effective dateterms of the Credit Agreement, on July 31, 2015 (the “Closing Date”).was used to repay the Prior Credit Facility and to pay transaction costs associated with closing the Credit Facility. After the disbursements of such amounts, the Company retained approximately $1.8 million of the borrowed amount for working capital purposes.
A portionAlso, at closing, $5 million was drawn under Tranche B and, pursuant to the terms of the proceedsCredit Agreement, was deposited into an interest-bearing pledged account (the “Pledged Account”) in the name of the Term LoanCompany maintained at the Bank in order to secure payment obligations of the Company with respect to the costs of remediation of any environmental contamination discovered at certain of the mortgaged properties based upon environmental studies undertaken at such properties. During the quarter ended June 30, 2017, the environmental studies were used by uscompleted and revealed no environmental issues existing at the properties. Accordingly, pursuant to (i) repay approximately $6.3the terms of the Credit Agreement, the $5 million in the Pledged Account was released and used to repay the non-revolving loan outstanding under Tranche B. Upon the repayment of Tranche B, the maximum principal accrued interestamount of Facility 1 was permanently reduced to $25 million.
Pursuant to the terms of the Credit Agreement, all draws under Facility 2 for letters of credit or revolving loans and fees dueall draws under the previously existing revolving credit facility, (ii) fund the $20.3 millionFacility 3 must be secured by cash collateral account securing the portionin an amount equal to 100% of the Term Loan provided by Alostar, (iii) fund approximately $7.4 million in a cash collateral account securingaggregate stated amount of the letters of credit issued under the previously existingand revolving credit facility that remainloans outstanding after the termination of that facility and (iv) pay transaction expenses in connection with the Term Loan and the terminationthrough draws from Facility 1 or other available cash of the previously existing revolving credit facility. The remaining proceeds of the Term Loan of approximately $13.3 million may be used by the Company to finance capital expenditures and for general corporate purposes consistent with the terms of the Credit Agreement.Company.
Interest will accrueAccrued interest on the Term Loan at a per annum rate equal to the greater of (i) 11% or (ii) 90-day LIBOR plus 9% determined monthly by the Agent andeach revolving loan will be payable monthly in arrears. The principal balanceRevolving loans under Tranche A of Facility 1 bear interest at a rate per annum equal to the greater of (x) the Bank’s prime rate plus 2.85% and (y) 6.00%. Prior to the February 23, 2018 amendment of the Term LoanCredit Agreement, the interest rate for revolving loans under Tranche A of Facility 1 was equal to the greater of (x) the Bank’s prime rate plus 2.50% and (y) 6.00%. The amount borrowed under Tranche B of Facility 1 and revolving loans under Facility 2 and Facility 3 will be repaid inbear interest at a rate per annum equal monthly installments, commencing on August 1, 2017, determined asto the quotientgreater of (i) 10%(x) the Bank’s prime rate and (y) 3.50%.
Each issuance of the outstanding principal balancea letter of the Term Loan as of Julycredit under Facility 2 2017 divided by (ii) 12. A final installment of principal and all accrued and unpaid interest will be due on the maturity date of the Term Loan.
The Term Loan may be prepaid in whole or in part at any time, subject torequire the payment of a prepayment premiumletter of credit fee to the Bank equal to (i) 5%a rate per annum of the principal amount prepaid at any time up to but not including the second anniversary of the Closing Date and (ii) 3% of the principal amount prepaid at any time commencing1.75% on the second anniversarydaily amount available to be drawn under the letter of credit, which fee shall be payable in quarterly installments in arrears. Letters of credit totaling $6.2 million that were outstanding under a $9.5 million letter of credit facility previously provided to the Closing Date up to but not including the third anniversary of the Closing Date. In the event of any sale or other disposition of a school or real propertyCompany by the Company permittedBank, which letter of credit facility was set to mature on April 1, 2017, are treated as letters of credit under the Term Loan, the net proceedsFacility 2.
The terms of such sale or disposition must be used to prepay the Loan in an amount determined pursuant to the Credit Agreement subject to the applicable prepayment premium; provided, however, that no prepayment premium will be due with respect to up to $15 million of aggregate repayments of the Term Loan made during the first yearprovide that the Term LoanBank be paid an unused facility fee on the average daily unused balance of Facility 1 at a rate per annum equal to 0.50%, which fee is outstanding. A portionpayable quarterly in arrears. In addition, the Company is required to maintain, on deposit in one or more non-interest bearing accounts, a minimum of $5 million in quarterly average aggregate balances. If in any quarter the net cash proceedsrequired average aggregate account balance is not maintained, the Company is required to pay the Bank a fee of any disposition of a school in an amount determined pursuant to the terms of the Term Loan, must be deposited$12,500 for that quarter and, held as cash collateral in a deposit account controlled by the Agent until the conditions for release set forth in the Term Loan are satisfied. In connectionevent that the Company terminates the Credit Facility or refinances with another lender within 18 months of closing, the assets which are currently classified as held for sale and are expected to be sold within one year, we areCompany is required to classify $10.0 million as short term debt due topay the Term Loan prepayment minimum required with respect to any such disposition.Bank a breakage fee of $500,000.
The Term LoanIn addition to the foregoing, the Credit Agreement contains customary representations, warranties and covenants such as minimum financial responsibility composite score, cohort default rate, and other financial covenants, including minimum liquidity, maximum capital expenditures, maximum 90/10 ratio and minimum EBITDA (as defined in the Term Loan), as well as affirmative and negative covenants, including financial covenants that restrict capital expenditures, prohibit the incurrence of a net loss commencing on December 31, 2018 and require a minimum adjusted EBITDA and a minimum tangible net worth, which is an annual covenant, as well as events of default customary for facilities of this type. We wereAs of December 31, 2017, the Company is in compliance with all covenants as of December 31, 2015. Subsequent to the fiscal year end, pursuant to the Second Amendment, the financial covenants were adjusted and, at the Company’s election, will be adjusted for fiscal year 2017 and for each subsequent fiscal year until the maturity of the Term Loan at either the levels applicable to fiscal year 2016 (and each fiscal quarter thereof) contained incovenants.
In connection with the Credit Agreement, as of the Closing Date orCompany paid the levels applicable to fiscal year 2016 (and each fiscal quarter thereof) containedBank an origination fee in the Second Amendment. In the eventamount of $250,000 and other fees and reimbursements that we elect to re-set the financial covenants at the 2016 covenant levels contained in the Second Amendment, we will be required to prepay on or before January 15, 2017, without prepayment penalty, amounts outstanding under the Term Loan up to $4 million.
The Credit Agreement contains events of default, the occurrence and continuation of which provide our lenders with the right to exercise remedies against us and the collateral securing the Term Loan, including our cash. These events of default include, among other things, our failure to pay any amounts due under the Term Loan, a breach of covenants under the Credit Agreement, our insolvency and the insolvency of our subsidiaries, the occurrence of a material adverse effect, the occurrence of any default under certain other indebtedness, and a final judgment against us in an amount greater than $1,000,000.
Also, in connection with the Term Loan, we paid to the Agent a commitment fee of $1.0 million on the Closing Date and are required to pay to the Agent other customary fees for facilities of this type. Total fees forIn connection with the Term Loan were $2.8 million during fiscal year 2015, which are included in deferred finance charges onsecond amendment of the consolidated balance sheet. SubsequentCredit Agreement, the Company paid to the fiscal year end,Bank a modification fee in the amount of $50,000.
The Company incurred an early termination premium of approximately $1.8 million in connection with the effectivenesstermination of the Second Amendment, we paidPrior Credit Facility.
On April 28, 2017, the Company entered into an additional secured credit agreement with the Bank, pursuant to which the Company obtained a short term loan in the principal amount of $8 million, the proceeds of which were used for working capital and general corporate purposes. The loan, which had an interest rate equal to the Agent a loan modification feegreater of $.5the Bank’s prime rate plus 2.50% or 6.00%, was secured by two real property assets located in West Palm Beach, Florida at which schools operated by the Company were located and matured upon the earlier of October 1, 2017 and the date of the sale of the West Palm Beach, Florida property. The Company sold the two properties located in West Palm Beach, Florida to Tambone Companies, LLC in the third quarter of 2017 and subsequently repaid the $8 million.
For the year ended As of December 31, 2015, $0.4 million of2017, the Term Loan was repaid in connection with the Company’s sale of real property located in Springdale, Ohio. WeCompany had $44.7$53.4 million outstanding under the Term Loan asCredit Facility; offset by $0.8 million of deferred finance fees. As of December 31, 2015.
We2016, the Company had $30.0$44.3 million outstanding under our previously existing revolvingthe Prior Credit Facility; offset by $2.3 million of deferred finance fees, which were written-off. As of December 31, 2017 and December 31, 2016, there were letters of credit facility asin the aggregate outstanding principal amount of December 31, 2014, which was repaid on January 3, 2015. The interest rate on this borrowing was 7.25%.$7.2 million and $6.2 million, respectively.
Long-term debt and lease obligations consist of the following:
| | As of December 31, | | | As of December 31, | |
| | 2015 | | | 2014 | | | 2017 | | | 2016 | |
Credit agreement | | | $ | 53,400 | | | $ | - | |
Term loan | | $ | 44,653 | | | $ | - | | | | - | | | | 44,267 | |
Credit agreement | | | - | | | | 30,000 | | |
Finance obligation | | | 9,672 | | | | 9,672 | | |
Capital lease-property (with a rate of 8.0%) | | | 3,899 | | | | 25,509 | | |
Deferred financing fees | | | | (807 | ) | | | (2,310 | ) |
Subtotal | | | 58,224 | | | | 65,181 | | | | 52,593 | | | | 41,957 | |
Less current maturities | | | (10,114 | ) | | | (30,471 | ) | | | - | | | | (11,713 | ) |
Total long-term debt | | $ | 48,110 | | | $ | 34,710 | | | $ | 52,593 | | | $ | 30,244 | |
As of December 31, 2017, we had outstanding loan commitments to our students of $51.9 million, as compared to $40.0 million at December 31, 2016. Loan commitments, net of interest that would be due on the loans through maturity, were $38.5 million at December 31, 2017, as compared to $30.0 million at December 31, 2016.
Climate Change
Climate change has not had and is not expected to have a significant impact on our operations.
Contractual Obligations
Current portion of Long-Term Debt, Long-Term Debt and Lease Commitments. As of December 31, 2015,2017, our current portion of long-term debt and long-term debt consisted of borrowings under our Term Loan, the finance obligation in connection with our sale-leaseback transaction in 2001, and amounts due under capital lease obligations.Credit Facility. We lease offices, educational facilities and various equipment for varying periods through the year 20322030 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, 2015:2017:
| | Payments Due by Period | |
| | Total | | | Less than 1 year | | | 1-3 years | | | 3-5 years | | | More than 5 years | |
Credit agreement (including interest) | | $ | 58,867 | | | $ | 15,026 | | | $ | 12,260 | | | $ | 31,581 | | | $ | - | |
Capital leases (including interest) (1) | | | 7,109 | | | | 422 | | | | 845 | | | | 845 | | | | 4,997 | |
Operating leases | | | 93,638 | | | | 19,013 | | | | 33,123 | | | | 23,643 | | | | 17,859 | |
Rent on finance obligation (2) | | | 1,588 | | | | 1,588 | | | | - | | | | - | | | | - | |
Total contractual cash obligations | | $ | 161,202 | | | $ | 36,049 | | | $ | 46,228 | | | $ | 56,069 | | | $ | 22,856 | |
| (1) | The Fern Park, Florida capital lease is included in the scheduled maturities of $7.1 million; however, subsequent to December 31, 2015, the Company entered into an agreement to terminate the lease which included a termination fee of $2.8 million. |
| (2) | On January 20, 2016 the lease was amended. |
| | Payments Due by Period | |
| | Total | | | Less than 1 year | | | 1-3 years | | | 3-5 years | | | More than 5 years | |
Credit facility | | $ | 53,400 | | | $ | - | | | $ | 53,400 | | | $ | - | | | $ | - | |
Operating leases | | | 78,408 | | | | 19,347 | | | | 28,994 | | | | 14,207 | | | | 15,860 | |
Total contractual cash obligations | | $ | 131,808 | | | $ | 19,347 | | | $ | 82,394 | | | $ | 14,207 | | | $ | 15,860 | |
OFF-BALANCE SHEET ARRANGEMENTS
We had no off-balance sheet arrangements as of December 31, 2015,2017, except for surety bonds. At December 31, 2015,2017, we posted surety bonds in the total amount of approximately $14.9$12.7 million. Cash collateralized letters of credit of $7.0$6.5 million are primarily comprised of letters of credit for DOE matters and security deposits in connection with certain of our real estate leases. We are required to post surety bonds on behalf of our campuses and education representatives with multiple states to maintain authorization to conduct our business. These off-balance sheet arrangements do not adversely impact our liquidity or capital resources.
SEASONALITY AND OUTLOOK
Seasonality
Our revenue 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 larger class starts in the third quarter and higher 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, typically do not vary significantly over the course of the year with changes in our student population and revenue. During the first half of the year, we make significant investments in marketing, staff, programs and facilities to 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 revenue, in the second half of the year fall short of our estimates, our operating results could be negatively impacted. 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.
Outlook
Similar to many companies in the proprietary education sector, we have experienced significant deterioration in student enrollments over the last several years. This can be attributed to many factors including the economic environment and numerous regulatory changes such as changes to admissions advisor compensation policies, elimination of the ability-to-benefit (“ATB”),“ability-to-benefit,” changes to the 90/10 Rule and cohort default rates, gainful employment and modifications to Title IV Program amounts and eligibility. While demand from employers in most of our fieldsthe industry has not returned to growth, the trends are increasing wefar more stable as declines have yet to see an increase in demand from new students.slowed.
As the economy continues to improve and the unemployment rate continues to decline our student enrollment has beenis negatively impacted due to a portion of our potential student base which has enteredentering the workforce prematurelyearlier without obtaining any post-secondary training. Offsetting this short term decline in available students is the fact that an increasing number of individuals in the “baby boom” generation are retiring from the workforce. The retirement of baby boomers coupled with a growing economy has resulted in additional employers looking to us to help solve their workforce needs. With schools in 1114 states, we are a very attractive employment solution for large regional and national employers.
To fund our business plans, including any anticipated future losses, purchase commitments, capital expenditures, and principal and interest payments on borrowings and to satisfy the DOE financial responsibility standards, we have entered into a new term loancredit facility as described above and continue to have the ability to sell our assets that are classified as held for sale. We are also continuing to take actions to improve cash flow by aligning our cost structure to our student population.
On November 3, 2015, our Board of Directors approved a plan for us to divest our Healthcare and Other Professions business segment. Implementation of the plan results in our operations focused solely on the Transportation and Skilled Trades segment. Due to the Board’s decision to divest the Healthcare and Other Professions business segment this segment was classified as discontinued operations and asset and liabilities classified as held for sale.
In addition, as of September 30, 2015, we had two campuses held for sale. With the approval of the plan to divest the Healthcare and Other Professions business segment one of the campuses is no longer included as held for sale.
Effect of Inflation
Inflation has not had and is not expected to have a significant impact 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. On JulyMarch 31, 2015,2017, the Company repaid in full and terminated a previously existing revolving line of creditterm loan with the proceeds of a new $45 million Term Loan. revolving credit facility (the “Credit Facility”) provided by Sterling National Bank, which currently provides the Company with aggregate availability of $65 million. The Credit Facility is discussed in further detail under the heading “Liquidity and Capital Resources” in Item 7 of this report and in Note 7 to the consolidated financial statements included in this report.Our obligations under the Term LoanCredit Facility 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. Outstanding borrowings under the Credit Facility bear interest at the rate of 11.0%7.00% as of December 31, 2015.2017. As of December 31, 2015,2017, we had $44.7$53.4 million outstanding under the Term Loan.Credit Facility.
Based on our outstanding debt balance as of December 31, 2015,2017, a change of one percent in the interest rate would have caused a change in our interest expense of approximately $0.4$0.5 million, or $0.02 per basic share, on an annual basis. Changes in interest rates could have an impact however on our operations, which are greatly dependent on our students’ ability to obtain financing. Anyfinancing and, as such, 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 is not significant.
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
See “Index to Consolidated Financial Statements” on page F-1 of this Annual Report on Form 10-K.
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
ITEM 9A. | 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, 20152017 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, 2015,2017, 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 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 1934.1934, as amended. 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, 2015,2017, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013). Based on its assessment, management believes that, as of December 31, 2015,2017, 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, 2015,2017, as stated in their report included in this Form 10-K that follows.
/s/ Scott Shaw | |
Scott Shaw | |
Chief Executive Officer | |
March 10, 2016 | |
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/s/ Brian Meyers | |
Brian Meyers | |
Chief Financial Officer | |
March 10, 2016 | |
ITEM 9B. | OTHER INFORMATION |
None.
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Directors and Executive Officers
The information required by this item is incorporated herein by reference to our definitive Proxy Statement to be filed in connection with our 20162018 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 20162018 Annual Meeting of Shareholders.
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL 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 20162018 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 20162018 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 20162018 Annual Meeting of Shareholders.
ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULE |
See “Index to Consolidated Financial Statements” on page F-1 of this Annual Report on Form 10-K.
2. | Financial Statement Schedule |
See “Index to Consolidated Financial Statements” on page F-1 of this Annual Report on Form 10-K.
3. | Exhibits Required by Securities and Exchange Commission Regulation S-K |
Exhibit Number | Description |
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2.1 | Purchase and Sale Agreement, dated March 14, 2017, between New England Institute of Technology at Palm Beach, Inc. and Tambone Companies, LLC, as amended by First Amendment to Purchase and Sale Agreement dated as of April 18, 2017, and as further amended by Second Amendment to Purchase and Sale Agreement dated as of May 12, 2017 (1). |
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3.1 | Amended and Restated Certificate of Incorporation of the Company (23)(2). |
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3.2 | By-laws of the Company (1)(3). |
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4.1 | 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 (2)(4). |
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4.2 | 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 (3)(5). |
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4.3 | Registration Rights Agreement, dated as of June 27, 2005, between the Company and Back to School Acquisition, L.L.C. (1)(3). |
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4.4 | Specimen Stock Certificate evidencing shares of common stock (2)(6). |
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10.1 | Credit Agreement, dated as of July 31, 2015, among Lincoln Educational Services Corporation and its wholly-owned subsidiaries, the Lenders and Collateral Agents party thereto, and HPF Service, LLC, as Administrative Agent (17)(7). |
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10.2 | First Amendment to Credit Agreement, dated as of December 31, 2015, among Lincoln Educational Services Corporation and its wholly-owned subsidiaries, the Lenders and Collateral Agents party thereto, and HPF Service, LLC, as Administrative Agent (18)(8). |
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10.3 | Second Amendment to Credit Agreement, dated as of February 29, 2016, among Lincoln Educational Services Corporation and its wholly-owned subsidiaries, the Lenders party thereto, and HPF Service, LLC, as Administrative Agent and Tranche A Collateral Agent (22)(9). |
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10.4 | Credit Agreement, dated as of April 5, 2012,12, 2016, among the Company, the Guarantors from time to time parties thereto, the Lenders from time to time parties theretoLincoln Technical Institute, Inc. and its subsidiaries, and Sterling National Bank of America, N.A., as Administrative Agent (4)(10). |
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10.5 | First Amendment to the Credit Agreement, dated as of June 18, 2013,March 31, 2017, among the Company, the Guarantors from time to time parties thereto, the Lenders from time to time parties theretoLincoln Technical Institute, Inc. and its subsidiaries, and Sterling National Bank of America, N.A., as Administrative Agent (5)(11). |
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10.6 | Second Amendment to the Credit Agreement, dated as of December 20, 2013,April 28, 2017, among the Company, Lincoln Technical Institute, Inc. and its subsidiaries, and Sterling National Bank (12). |
10.7 | First Amendment to Credit Agreement, dated as of November 29, 2017, among the Guarantors from time to time parties thereto, the Lenders from time to time parties theretoCompany, Lincoln Technical Institute, Inc. and its subsidiaries, and Sterling National Bank of America, N.A., as Administrative Agent (6).(13) |
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10.710.8 | ThirdSecond Amendment to the Credit Agreement, dated as of December 29, 2014,February 23, 2018, among the Company, the Guarantors from time to time parties thereto, the Lenders from time to time parties theretoLincoln Technical Institute, Inc. and its subsidiaries, and Sterling National Bank of America, N.A., as Administrative Agent (7). |
10.8 | Fourth Amendment and Waiver to the Credit Agreement, dated as of March 4, 2015, 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 (8).(26) |
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10.9 | EmploymentPurchase and Sale Agreement, dated as of January 30, 2015,July 1, 2016, between the CompanyNew England Institute of Technology at Palm Beach, Inc. and Shaun E. McAlmont (9)School Property Development Metrocentre, LLC (14). |
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10.10 | SeparationEmployment Agreement, dated as of May 6, 2015,August 23, 2016, between the Company and Shaun E. McAlmont (17).Scott M. Shaw (15) |
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10.11 | Employment Agreement, dated as of January 30, 2015,November 8, 2017, between the Company and Scott M. Shaw (9)(16). |
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10.12 | Amendment to Employment Agreement, dated as of August 31, 2015, between the CompanySeparation and Scott M. Shaw (19). |
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10.13 | Employment Agreement, dated as of June 2, 2014, between the Company and Kenneth M. Swisstack (10). |
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10.14 | Amendment to Employment Agreement, dated as of March 12, 2015, between the Company and Kenneth M. Swisstack. (20) |
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10.15 | SeparationRelease Agreement, dated as of January 15, 2016, between the Company and Kenneth M. Swisstack (21)(17). |
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10.13 | Employment Agreement, dated as of August 23, 2016, between the Company and Brian K. Meyers (15). |
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10.14 | Employment Agreement, dated as of November 8, 2017, between the Company and Brian K. Meyers (16). |
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10.15 | Change in Control Agreement, dated August 31, 2016, between the Company and Deborah Ramentol (18). |
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10.16 | EmploymentSeparation and Release Agreement, dated as of March 12, 2015,January 24, 2018, between the Company and Brian K. MeyersDeborah Ramentol (19). |
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10.17 | Change in Control Agreement, dated as of November 8, 2017, between the Company and Deborah Ramentol (20). |
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10.1710.18 | Lincoln Educational Services Corporation Amended and Restated 2005 Long-Term Incentive Plan (11). |
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10.18 | Lincoln Educational Services Corporation 2005 Non-Employee Directors Restricted Stock Plan (12)(21). |
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10.19 | Lincoln Educational Services Corporation Amended and Restated 2005 Deferred CompensationNon-Employee Directors Restricted Stock Plan (2)(22). |
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10.20 | Lincoln Educational Services Corporation 2005 Deferred Compensation Plan (4). |
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10.21 | Lincoln Technical Institute Management Stock Option Plan, effective January 1, 2002 (2)(4). |
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10.2110.22 | Form of Stock Option Agreement, dated January 1, 2002, between Lincoln Technical Institute, Inc. and certain participants (2)(4). |
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10.2210.23 | Form of Stock Option Agreement under our 2005 Long-Term Incentive Plan (13)(23). |
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10.2310.24 | Form of Restricted Stock Agreement under our 2005 Long-Term Incentive Plan (14)(24). |
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10.2410.25 | Form of Performance-Based Restricted Stock Award Agreement under our Amended & Restated 2005 Long-Term Incentive Plan (15)(25). |
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10.2510.26 | Management Stock Subscription Agreement, dated January 1, 2002, among Lincoln Technical Institute, Inc. and certain management investors (2). |
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10.26 | Stock Repurchase Agreement, dated as of December 15, 2009, among Lincoln Educational Services Corporation and Back to School Acquisition, L.L.C (16)(4). |
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21.1* | Subsidiaries of the Company. |
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23* | Consent of Independent Registered Public Accounting Firm. |
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24* | Power of Attorney (included on the Signatures page of this Form 10-K). |
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31.1 * | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2 * | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32 * | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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101** | The following financial statements from Lincoln Educational Services Corporation’s Annual Report on Form 10-K for the year ended December 31, 2015,2017, formatted in XBRL: (i) Consolidated Statements of Operations, (ii) Consolidated Balance Sheets, (iii) Consolidated Statements of Cash Flows, (iv) Consolidated Statements of Comprehensive (Loss) Income, (v) Consolidated Statement of Changes in Stockholders’ Equity and (vi) the Notes to Consolidated Financial Statements, tagged as blocks of text and in detail. |
(1) | Incorporated by reference to the Company’s Form 8-K filed August 16, 2017. |
(2) | Incorporated by reference to the Company’s Registration Statement on Form S-1/A (Registration No. 333-123644) filed June 7, 2005. |
(3) | Incorporated by reference to the Company’s Form 8-K filed June 28, 2005. |
(2)(4) | Incorporated by reference to the Company’s Registration Statement on Form S-1 (Registration No. 333-123644). filed March 29, 2005. |
(3)(5) | Incorporated by reference to the Company’s Registration Statement on Form S-3 (Registration No. 333-148406). |
(4) | Incorporated by reference to the Company’s Form 8-K filed April 11, 2012. |
(5) | Incorporated by reference to the Company’s Form 8-K filed June 20, 2013.December 28, 2007. |
(6) | Incorporated by reference to the Company’s Registration Statement on Form 8-KS-1/A (Registration No. 333-123644) filed December 27, 2013.June 21, 2005. |
(7) | Incorporated by reference to the Company’s Form 8-K filed JanuaryAugust 5, 2015. |
(8) | Incorporated by reference to the Company’s Form 8-K filed March 10, 2015.January 7, 2016. |
(9) | Incorporated by reference to the Company’s Form 8-K filed February 5, 2015.March 4, 2016. |
(10) | Incorporated by reference to the Company’s AnnualForm 8-K filed April 18, 2016. |
(11) | Incorporated by reference to the Company’s Form 8-K filed April 6, 2017. |
(12) | Incorporated by reference to the Company’s Form 8-K filed May 4, 2017. |
(13) | Incorporated by reference to the Company’s Form 8-K filed December 1, 2017. |
(14) | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed August 8, 2014.9, 2016. |
(11)(15) | Incorporated by reference to the Company’s Form 8-K filed August 25, 2016. |
(16) | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 13, 2017. |
(17) | Incorporated by reference to the Company’s Form 8-K filed January 22, 2016. |
(18) | Incorporated by reference to the Company’s Annual Report on Form 10-K filed March 10, 2017. |
(19) | Incorporated by reference to the Company’s Form 8-K filed January 26, 2018. |
(20) | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 13, 2017. |
(21) | Incorporated by reference to the Company’s Form 8-K filed May 6, 2013. |
(12)(22) | Incorporated by reference to the Company’s Registration Statement on Form S-8 (Registration No. 333-188240).333-211213) filed May 6, 2016. |
(13)(23) | Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. |
(14)(24) | Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. |
(15)(25) | Incorporated by reference to the Company’s Form 8-K filed May 5, 2011. |
(16)(26) | Incorporated by reference to the Company’s Form 8-K filed December 21, 2009.February 26, 2018. |
(17) | Incorporated by reference to the Company’s Form 8-K filed May 6, 2015. |
(18) | Incorporated by reference to the Company’s Form 8-K filed January 7, 2016. |
(19) | Incorporated by reference to the Company’s Form 8-K filed September 3, 2015. |
(20) | Incorporated by reference to the Company’s Form 10-K for the year ended December 31, 2014. |
(21) | Incorporated by reference to the Company’s Form 8-K filed January 22, 2016. |
(22) | Incorporated by reference to the Company’s Form 8-K filed March 4, 2016 |
(23) | Incorporated by reference to the Company’s Registration Statement on Form S-1/A (Registration No. 333-123644). |
** | As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934 |
SIGNATURES
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.
Date: March 9, 2018
Date: March 10, 2016 | | | |
| LINCOLN EDUCATIONAL SERVICES CORPORATION |
| | | |
| By: | /s/ Brian Meyers | |
| | Brian Meyers | |
| | Executive Vice President, Chief Financial Officer and Treasurer |
| | (Principal Accounting and Financial Officer) | |
KNOW ALL PERSONS BY THESE PRESENTS, that each of the undersigned constitutes and appoints Scott M. Shaw and Brian K. Meyers, and each of them, as attorneys-in-fact and agents, with full power of substitution and re-substitution, for and in the name, place and stead of the undersigned, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that each of said attorney-in-fact or substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
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/ Scott M. Shaw | | | | |
Scott M. Shaw | | Chief Executive Officer and Director | | March 10, 20169, 2018 |
Scott M. Shaw | | | | |
| | | | |
/s/ Brian K. Meyers | | Executive Vice President, Chief Financial Officer and Treasurer | | March 10, 20169, 2018 |
Brian K. Meyers | | Treasurer (Principal(Principal Accounting and Financial Officer) | | |
| | | | |
/s/ Alvin O. Austin | | Director | | March 10, 20169, 2018 |
Alvin O. Austin | | | | |
| | | | |
/s/ Peter S. Burgess | | Director | | March 10, 20169, 2018 |
Peter S. Burgess | | | | |
| | | | |
/s/ James J. Burke, Jr. | | Director | | March 10, 20169, 2018 |
James J. Burke, Jr. | | | | |
| | | | |
/s/ Celia H. Currin | | Director | | March 10, 20169, 2018 |
Celia H. Currin | | | | |
| | | | |
/s/ Ronald E. Harbour | | Director | | March 10, 20169, 2018 |
Ronald E. Harbour | | | | |
| | | | |
/s/ J. Barry Morrow | | Director | | March 10, 20169, 2018 |
J. Barry Morrow | | | | |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| | Page Number |
Reports of Independent Registered Public Accounting Firm | | F-2 |
Consolidated Balance Sheets as of December 31, 20152017 and 20142016 | | F-4 |
Consolidated Statements of Operations for the years ended December 31, 2015, 20142017, 2016 and 20132015 | | F-6 |
Consolidated Statements of Comprehensive (Loss) Income for the years ended December 31, 2015, 20142017, 2016 and 20132015 | | F-7 |
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2015, 20142017, 2016 and 20132015 | | F-8 |
Consolidated Statements of Cash Flows for the years ended December 31, 2015, 20142017, 2016 and 20132015 | | F-9 |
Notes to Consolidated Financial Statements | | F-11 |
| | |
Schedule II-Valuation and Qualifying Accounts | F-36 | F-32 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors and Stockholders of
Lincoln Educational Services Corporation
West Orange, New Jersey
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Lincoln Educational Services Corporation and subsidiaries (the "Company"“Company”) as of December 31, 20152017 and 2014,2016, and the related consolidated statements of operations, comprehensive (loss) income, changes in stockholders'stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2015. Our audits also included2017, and the financial statementrelated notes and the schedule listed in the Index at Item 15. 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 9, 2018, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements and financial statement schedule based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. 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 includesmisstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ DELOITTE & TOUCHE LLP
Parsippany, New Jersey
March 9, 2018
We have served as the Company’s auditors since 1999.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Lincoln Educational Services Corporation
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Lincoln Educational Services Corporation and subsidiaries (the “Company”) as of December 31, 2017, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, such consolidated financial statements present fairly,the Company maintained, in all material respects, theeffective internal control over financial position of Lincoln Educational Services Corporation and subsidiariesreporting as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years2017, based on criteria established in the period ended December 31, 2015, 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, presents fairly, in all material respects, the information set forth therein.Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control overconsolidated financial reportingstatements as of and for the year ended December 31, 2015, based on the criteria established in Internal Control— Integrated Framework (2013) issued by the Committee of Sponsoring Organizations2017, of the Treadway CommissionCompany and our report dated March 10, 20169, 2018, expressed an unqualified opinion on the Company's internal control overthose financial reporting.statements.
/s/ DELOITTE & TOUCHE LLPBasis for Opinion
Parsippany, New Jersey
March 10, 2016
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, 2015, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company'sCompany’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 overOver Financial Reporting. Our responsibility is to express an opinion on the Company'sCompany’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. 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.
Definition and Limitations of Internal Control over Financial Reporting
A company'scompany’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'scompany’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'scompany’s assets that could have a material effect on the financial statements.
Because of theits 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 preventedprevent or detected on a timely basis.detect misstatements. 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, 2015, based on the criteria established in Internal Control — Integrated Framework (2013) 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, 2015 and the related consolidated statements of operations, comprehensive (loss) income, changes in stockholders’ equity, cash flows and financial statement schedule for the year ended December 31, 2015, and our report dated March 10, 2016 expressed an unqualified opinion on those consolidated financial statements and financial statement schedule.
/s/ DELOITTE & TOUCHE LLP
Parsippany, New Jersey
March 10, 20169, 2018
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
| | December 31, | | | December 31, | |
| | 2015 | | | 2014 | | | 2017 | | | 2016 | |
| | | | | | | | | | | | |
ASSETS | | | | | | | | | | | | |
CURRENT ASSETS: | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 38,420 | | | $ | 12,299 | | | $ | 14,563 | | | $ | 21,064 | |
Restricted cash | | | 7,362 | | | | 30,000 | | | | 7,189 | | | | 6,399 | |
Accounts receivable, less allowance of $9,126 and $12,193 at December 31, 2015 and 2014, respectively | | | 9,613 | | | | 13,533 | | |
Accounts receivable, less allowance of $12,806 and $12,375 at December 31, 2017 and 2016, respectively | | | | 15,791 | | | | 15,383 | |
Inventories | | | 1,043 | | | | 1,486 | | | | 1,657 | | | | 1,687 | |
Prepaid income taxes and income taxes receivable | | | 349 | | | | 879 | | | | 207 | | | | 262 | |
Assets held for sale | | | 45,911 | | | | 50,930 | | | | 2,959 | | | | 16,847 | |
Prepaid expenses and other current assets | | | 2,566 | | | | 3,937 | | | | 2,352 | | | | 2,894 | |
Total current assets | | | 105,264 | | | | 113,064 | | | | 44,718 | | | | 64,536 | |
| | | | | | | | | | | | | | | | |
PROPERTY, EQUIPMENT AND FACILITIES - At cost, net of accumulated depreciation and amortization of $122,037 and $136,910 at December 31, 2015 and 2014, respectively | | | 66,508 | | | | 69,740 | | |
PROPERTY, EQUIPMENT AND FACILITIES - At cost, net of accumulated depreciation and amortization of $163,946 and $157,152 at December 31, 2017 and 2016, respectively | | | | 52,866 | | | | 55,445 | |
| | | | | | | | | | | | | | | | |
OTHER ASSETS: | | | | | | | | | | | | | | | | |
Noncurrent restricted cash | | | 15,259 | | | | - | | | | 32,802 | | | | 20,252 | |
Noncurrent receivables, less allowance of $797 and $1,016 at December 31, 2015 and 2014, respectively | | | 4,993 | | | | 6,235 | | |
Deferred finance charges | | | 2,529 | | | | 158 | | |
Noncurrent receivables, less allowance of $978 and $977 at December 31, 2017 and 2016, respectively | | | | 8,928 | | | | 7,323 | |
Deferred income taxes, net | | | | 424 | | | | - | |
Goodwill | | | 14,536 | | | | 22,207 | | | | 14,536 | | | | 14,536 | |
Other assets, net | | | 1,190 | | | | 2,303 | | | | 939 | | | | 1,115 | |
Total other assets | | | 38,507 | | | | 30,903 | | | | 57,629 | | | | 43,226 | |
TOTAL | | $ | 210,279 | | | $ | 213,707 | | | $ | 155,213 | | | $ | 163,207 | |
See notes to consolidated financial statements.
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Continued)
| | December 31, | | | December 31, | |
| | 2015 | | | 2014 | | | 2017 | | | 2016 | |
| | | | | | | | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | | | | | |
CURRENT LIABILITIES: | | | | | | | | | | | | |
Current portion of term loan and credit agreement | | $ | 10,000 | | | $ | 30,000 | | |
Current portion of capital lease obligations | | | 114 | | | | 471 | | |
Current portion of credit agreement and term loan | | | $ | - | | | $ | 11,713 | |
Unearned tuition | | | 21,390 | | | | 26,469 | | | | 24,647 | | | | 24,778 | |
Accounts payable | | | 12,863 | | | | 11,894 | | | | 10,508 | | | | 13,748 | |
Accrued expenses | | | 12,157 | | | | 13,865 | | | | 11,771 | | | | 15,368 | |
Liabilities held for sale | | | 14,236 | | | | - | | |
Other short-term liabilities | | | 686 | | | | 780 | | | | 558 | | | | 653 | |
Total current liabilities | | | 71,446 | | | | 83,479 | | | | 47,484 | | | | 66,260 | |
| | | | | | | | | | | | | | | | |
NONCURRENT LIABILITIES: | | | | | | | | | | | | | | | | |
Long-term term loan | | | 34,653 | | | | - | | |
Long-term capital lease obligations | | | 3,785 | | | | 25,038 | | |
Long-term finance obligation | | | 9,672 | | | | 9,672 | | |
Long-term credit agreement and term loan | | | | 52,593 | | | | 30,244 | |
Pension plan liabilities | | | 5,549 | | | | 5,299 | | | | 4,437 | | | | 5,368 | |
Accrued rent | | | 4,177 | | | | 6,852 | | | | 4,338 | | | | 5,666 | |
Other long-term liabilities | | | - | | | | 357 | | | | 548 | | | | 743 | |
Total liabilities | | | 129,282 | | | | 130,697 | | | | 109,400 | | | | 108,281 | |
| | | | | | | | | | | | | | | | |
COMMITMENTS AND CONTINGENCIES | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
STOCKHOLDERS' EQUITY: | | | | | | | | | | | | | | | | |
Preferred stock, no par value - 10,000,000 shares authorized, no shares issued and outstanding at December 31, 2015 and 2014 | | | - | | | | - | | |
Common stock, no par value - authorized 100,000,000 shares at December 31, 2015 and 2014, issued and outstanding 29,727,555 shares at December 31, 2015 and 29,933,086 shares at December 31, 2014 | | | 141,377 | | | | 141,377 | | |
Preferred stock, no par value - 10,000,000 shares authorized, no shares issued and outstanding at December 31, 2017 and 2016 | | | | - | | | | - | |
Common stock, no par value - authorized 100,000,000 shares at December 31, 2017 and 2016, issued and outstanding 30,624,407 shares at December 31, 2017 and 30,685,017 shares at December 31, 2016 | | | | 141,377 | | | | 141,377 | |
Additional paid-in capital | | | 27,292 | | | | 26,350 | | | | 29,334 | | | | 28,554 | |
Treasury stock at cost - 5,910,541 shares at December 31, 2015 and 2014 | | | (82,860 | ) | | | (82,860 | ) | |
Retained earnings | | | 2,260 | | | | 5,610 | | |
Treasury stock at cost - 5,910,541 shares at December 31, 2017 and 2016 | | | | (82,860 | ) | | | (82,860 | ) |
Accumulated deficit | | | | (37,528 | ) | | | (26,044 | ) |
Accumulated other comprehensive loss | | | (7,072 | ) | | | (7,467 | ) | | | (4,510 | ) | | | (6,101 | ) |
Total stockholders' equity | | | 80,997 | | | | 83,010 | | | | 45,813 | | | | 54,926 | |
TOTAL | | $ | 210,279 | | | $ | 213,707 | | | $ | 155,213 | | | $ | 163,207 | |
See notes to consolidated financial statements.
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2015 | | | 2014 | | | 2013 | | | 2017 | | | 2016 | | | 2015 | |
| | | | | | | | | | | | | | | | | | |
REVENUE | | $ | 193,220 | | | $ | 202,889 | | | $ | 215,596 | | | $ | 261,853 | | | $ | 285,559 | | | $ | 306,102 | |
COSTS AND EXPENSES: | | | | | | | | | | | | | | | | | | | | | | | | |
Educational services and facilities | | | 92,165 | | | | 100,335 | | | | 102,489 | | | | 129,413 | | | | 144,426 | | | | 151,647 | |
Selling, general and administrative | | | 98,319 | | | | 110,901 | | | | 116,841 | | | | 138,779 | | | | 148,447 | | | | 151,797 | |
Loss (gain) on sale of assets | | | 1,742 | | | | (57 | ) | | | (282 | ) | |
(Gain) loss on sale of assets | | | | (1,623 | ) | | | 233 | | | | 1,738 | |
Impairment of goodwill and long-lived assets | | | 216 | | | | 3,201 | | | | - | | | | - | | | | 21,367 | | | | 216 | |
Total costs and expenses | | | 192,442 | | | | 214,380 | | | | 219,048 | | | | 266,569 | | | | 314,473 | | | | 305,398 | |
OPERATING INCOME (LOSS) | | | 778 | | | | (11,491 | ) | | | (3,452 | ) | |
OPERATING (LOSS) INCOME | | | | (4,716 | ) | | | (28,914 | ) | | | 704 | |
OTHER: | | | | | | | | | | | | | | | | | | | | | | | | |
Interest income | | | 52 | | | | 62 | | | | 37 | | | | 56 | | | | 155 | | | | 52 | |
Interest expense | | | (7,438 | ) | | | (5,169 | ) | | | (4,267 | ) | | | (7,098 | ) | | | (6,131 | ) | | | (8,015 | ) |
Other income | | | 4,142 | | | | 297 | | | | 18 | | | | - | | | | 6,786 | | | | 4,151 | |
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES | | | (2,466 | ) | | | (16,301 | ) | | | (7,664 | ) | |
PROVISION (BENEFIT) FOR INCOME TAXES | | | 242 | | | | (1,479 | ) | | | 19,591 | | |
LOSS FROM CONTINUING OPERATIONS | | | (2,708 | ) | | | (14,822 | ) | | | (27,255 | ) | |
LOSS FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES | | | (642 | ) | | | (41,311 | ) | | | (24,031 | ) | |
LOSS BEFORE INCOME TAXES | | | | (11,758 | ) | | | (28,104 | ) | | | (3,108 | ) |
(BENEFIT) PROVISION FOR INCOME TAXES | | | | (274 | ) | | | 200 | | | | 242 | |
NET LOSS | | $ | (3,350 | ) | | $ | (56,133 | ) | | $ | (51,286 | ) | | $ | (11,484 | ) | | $ | (28,304 | ) | | $ | (3,350 | ) |
Basic | | | | | | | | | | | | | | | | | | | | | | | | |
Loss per share from continuing operations | | $ | (0.12 | ) | | $ | (0.65 | ) | | $ | (1.21 | ) | |
Loss per share from discontinued operations | | | (0.02 | ) | | | (1.81 | ) | | | (1.07 | ) | |
Net loss per share | | $ | (0.14 | ) | | $ | (2.46 | ) | | $ | (2.28 | ) | | $ | (0.48 | ) | | $ | (1.21 | ) | | $ | (0.14 | ) |
Diluted | | | | | | | | | | | | | | | | | | | | | | | | |
Loss per share from continuing operations | | $ | (0.12 | ) | | $ | (0.65 | ) | | $ | (1.21 | ) | |
Loss per share from discontinued operations | | | (0.02 | ) | | | (1.81 | ) | | | (1.07 | ) | |
Net loss per share | | $ | (0.14 | ) | | $ | (2.46 | ) | | $ | (2.28 | ) | | $ | (0.48 | ) | | $ | (1.21 | ) | | $ | (0.14 | ) |
Weighted average number of common shares outstanding: | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | | 23,167 | | | | 22,814 | | | | 22,513 | | | | 23,906 | | | | 23,453 | | | | 23,167 | |
Diluted | | | 23,167 | | | | 22,814 | | | | 22,513 | | | | 23,906 | | | | 23,453 | | | | 23,167 | |
See notes to consolidated financial statements
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In thousands)
| | December 31, | | | December 31, | |
| | 2015 | | | 2014 | | | 2013 | | | 2017 | | | 2016 | | | 2015 | |
Net loss | | $ | (3,350 | ) | | $ | (56,133 | ) | | $ | (51,286 | ) | | $ | (11,484 | ) | | $ | (28,304 | ) | | $ | (3,350 | ) |
Other comprehensive loss | | | | | | | | | | | | | |
Employee pension plan adjustments, net of taxes of $0, $0 and $1,283 for the years ended December 31, 2015, 2014 and 2013, respectively | | | 395 | | | | (3,905 | ) | | | 3,214 | | |
Other comprehensive income | | | | | | | | | | | | | |
Employee pension plan adjustments | | | | 1,591 | | | | 971 | | | | 395 | |
Comprehensive loss | | $ | (2,955 | ) | | $ | (60,038 | ) | | $ | (48,072 | ) | | $ | (9,893 | ) | | $ | (27,333 | ) | | $ | (2,955 | ) |
See notes to consolidated financial statements
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands, except share amounts)
| | Common Stock | | | | | | Treasury | | | Retained | | | | | | | | | | | | | | | Additional | | | | | | Retained Earnings | | | Accumulated Other | | | | |
| | Shares | | | Amount | | | Capital | | | Stock | | | Earnings | | | Loss | | | Total | | | Common Stock | | | Paid-in | | | Treasury | | | (Accumulated | | | Comprehensive | | | | |
BALANCE - January 1, 2013 | | | 29,659,457 | | | $ | 141,377 | | | $ | 22,677 | | | $ | (82,860 | ) | | $ | 124,059 | | | $ | (6,776 | ) | | $ | 198,477 | | |
| | | Shares | | | Amount | | | Capital | | | Stock | | | Deficit) | | | Loss | | | Total | |
BALANCE - January 1, 2015 | | | | 29,933,086 | | | $ | 141,377 | | | $ | 26,350 | | | $ | (82,860 | ) | | $ | 5,610 | | | $ | (7,467 | ) | | $ | 83,010 | |
Net loss | | | - | | | | - | | | | - | | | | - | | | | (51,286 | ) | | | - | | | | (51,286 | ) | | | - | | | | - | | | | - | | | | - | | | | (3,350 | ) | | | - | | | | (3,350 | ) |
Employee pension plan adjustments, net of taxes | | | - | | | | - | | | | - | | | | - | | | | - | | | | 3,214 | | | | 3,214 | | |
Stock-based compensation expense | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Restricted stock | | | 400,779 | | | | - | | | | 2,893 | | | | - | | | | - | | | | - | | | | 2,893 | | |
Stock options | | | - | | | | - | | | | 102 | | | | - | | | | - | | | | - | | | | 102 | | |
Tax deficiency of stock-based awards and canceled | | | - | | | | - | | | | (698 | ) | | | - | | | | - | | | | - | | | | (698 | ) | |
Net share settlement for equity-based compensation | | | (140,475 | ) | | | - | | | | (797 | ) | | | - | | | | - | | | | - | | | | (797 | ) | |
Cash dividend of $0.28 per common share | | | - | | | | - | | | | - | | | | - | | | | (6,709 | ) | | | - | | | | (6,709 | ) | |
BALANCE - December 31, 2013 | | | 29,919,761 | | | | 141,377 | | | | 24,177 | | | | (82,860 | ) | | | 66,064 | | | | (3,562 | ) | | | 145,196 | | |
Net loss | | | - | | | | - | | | | - | | | | - | | | | (56,133 | ) | | | - | | | | (56,133 | ) | |
Employee pension plan adjustments, net of taxes | | | - | | | | - | | | | - | | | | - | | | | - | | | | (3,905 | ) | | | (3,905 | ) | |
Stock-based compensation expense | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Restricted stock | | | 158,308 | | | | - | | | | 2,517 | | | | - | | | | - | | | | - | | | | 2,517 | | |
Stock options | | | - | | | | - | | | | 104 | | | | - | | | | - | | | | - | | | | 104 | | |
Net share settlement for equity-based compensation | | | (144,983 | ) | | | - | | | | (448 | ) | | | - | | | | - | | | | - | | | | (448 | ) | |
Cash dividend of $0.18 per common share | | | - | | | | - | | | | - | | | | - | | | | (4,321 | ) | | | - | | | | (4,321 | ) | |
BALANCE - December 31, 2014 | | | 29,933,086 | | | | 141,377 | | | | 26,350 | | | | (82,860 | ) | | | 5,610 | | | | (7,467 | ) | | | 83,010 | | |
Net loss | | | - | | | | - | | | | - | | | | - | | | | (3,350 | ) | | | - | | | | (3,350 | ) | |
Employee pension plan adjustments, net of taxes | | | - | | | | - | | | | - | | | | - | | | | - | | | | 395 | | | | 395 | | |
Employee pension plan adjustments | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 395 | | | | 395 | |
Stock-based compensation expense | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Restricted stock | | | (119,791 | ) | | | - | | | | 1,095 | | | | - | | | | - | | | | - | | | | 1,095 | | | | (119,791 | ) | | | - | | | | 1,095 | | | | - | | | | - | | | | - | | | | 1,095 | |
Stock options | | | - | | | | - | | | | 33 | | | | - | | | | - | | | | - | | | | 33 | | | | - | | | | - | | | | 33 | | | | - | | | | - | | | | - | | | | 33 | |
Net share settlement for equity-based compensation | | | (85,740 | ) | | | - | | | | (186 | ) | | | - | | | | - | | | | - | | | | (186 | ) | | | (85,740 | ) | | | - | | | | (186 | ) | | | - | | | | - | | | | - | | | | (186 | ) |
BALANCE - December 31, 2015 | | | 29,727,555 | | | $ | 141,377 | | | $ | 27,292 | | | $ | (82,860 | ) | | $ | 2,260 | | | $ | (7,072 | ) | | $ | 80,997 | | | | 29,727,555 | | | | 141,377 | | | | 27,292 | | | | (82,860 | ) | | | 2,260 | | | | (7,072 | ) | | | 80,997 | |
Net loss | | | | - | | | | - | | | | - | | | | - | | | | (28,304 | ) | | | - | | | | (28,304 | ) |
Employee pension plan adjustments | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 971 | | | | 971 | |
Stock-based compensation expense | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Restricted stock | | | | 1,029,267 | | | | - | | | | 1,440 | | | | - | | | | - | | | | - | | | | 1,440 | |
Net share settlement for equity-based compensation | | | | (71,805 | ) | | | - | | | | (178 | ) | | | - | | | | - | | | | - | | | | (178 | ) |
BALANCE - December 31, 2016 | | | | 30,685,017 | | | | 141,377 | | | | 28,554 | | | | (82,860 | ) | | | (26,044 | ) | | | (6,101 | ) | | | 54,926 | |
Net loss | | | | - | | | | - | | | | - | | | | - | | | | (11,484 | ) | | | - | | | | (11,484 | ) |
Employee pension plan adjustments | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1,591 | | | | 1,591 | |
Stock-based compensation expense | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Restricted stock | | | | 128,810 | | | | - | | | | 1,220 | | | | - | | | | - | | | | - | | | | 1,220 | |
Net share settlement for equity-based compensation | | | | (189,420 | ) | | | - | | | | (440 | ) | | | - | | | | - | | | | - | | | | (440 | ) |
BALANCE - December 31, 2017 | | | | 30,624,407 | | | $ | 141,377 | | | $ | 29,334 | | | $ | (82,860 | ) | | $ | (37,528 | ) | | $ | (4,510 | ) | | $ | 45,813 | |
See notes to consolidated financial statements.
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2015 | | | 2014 | | | 2013 | | | 2017 | | | 2016 | | | 2015 | |
| | | | | | | | | | | | | | | | | | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | | | | | | | | | |
Net loss | | $ | (3,350 | ) | | $ | (56,133 | ) | | $ | (51,286 | ) | | $ | (11,484 | ) | | $ | (28,304 | ) | | $ | (3,350 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | | | | | | | | | |
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | | | | | | | | | | | | | |
Depreciation and amortization | | | 14,506 | | | | 19,338 | | | | 23,701 | | | | 8,702 | | | | 11,066 | | | | 14,506 | |
Amortization of deferred finance costs | | | 554 | | | | 818 | | | | 474 | | | | 583 | | | | 949 | | | | 554 | |
Write-off of deferred finance charges | | | | 2,161 | | | | - | | | | - | |
Deferred income taxes | | | - | | | | (4,528 | ) | | | 26,490 | | | | (424 | ) | | | - | | | | - | |
Loss (gain) on disposition of assets | | | 1,738 | | | | 41 | | | | (506 | ) | |
Gain on capital lease termination | | | (3,062 | ) | | | - | | | | - | | |
(Gain) loss on disposition of assets | | | | (1,622 | ) | | | 223 | | | | 1,738 | |
Gain on capital lease termination, net | | | | - | | | | (6,710 | ) | | | (3,062 | ) |
Impairment of goodwill and long-lived assets | | | 216 | | | | 42,958 | | | | 6,194 | | | | - | | | | 21,367 | | | | 216 | |
Fixed asset donation | | | (20 | ) | | | (92 | ) | | | (37 | ) | | | (19 | ) | | | (123 | ) | | | (20 | ) |
Provision for doubtful accounts | | | 13,583 | | | | 15,500 | | | | 15,532 | | | | 13,720 | | | | 14,592 | | | | 13,583 | |
Stock-based compensation expense | | | 1,128 | | | | 2,621 | | | | 2,995 | | | | 1,220 | | | | 1,440 | | | | 1,128 | |
Deferred rent | | | (638 | ) | | | (740 | ) | | | (888 | ) | | | (1,312 | ) | | | (489 | ) | | | (638 | ) |
(Increase) decrease in assets, net of acquisition of business: | | | | | | | | | | | | | |
(Increase) decrease in assets: | | | | | | | | | | | | | |
Accounts receivable | | | (13,216 | ) | | | (14,470 | ) | | | (15,049 | ) | | | (15,733 | ) | | | (15,700 | ) | | | (13,216 | ) |
Inventories | | | 9 | | | | 372 | | | | 408 | | | | 30 | | | | 201 | | | | 9 | |
Prepaid income taxes and income taxes receivable | | | 530 | | | | 7,638 | | | | (1,432 | ) | | | 55 | | | | 87 | | | | 530 | |
Prepaid expenses and current assets | | | 444 | | | | (986 | ) | | | (106 | ) | | | 532 | | | | 412 | | | | 444 | |
Other assets | | | (1,460 | ) | | | 231 | | | | (1,177 | ) | | | (1,163 | ) | | | (1,701 | ) | | | (1,460 | ) |
Increase (decrease) in liabilities, net of acquisition of business: | | | | | | | | | | | | | |
Increase (decrease) in liabilities: | | | | | | | | | | | | | |
Accounts payable | | | 1,004 | | | | (2,732 | ) | | | 1,461 | | | | (3,193 | ) | | | 742 | | | | 1,004 | |
Accrued expenses | | | (450 | ) | | | 3,806 | | | | 829 | | | | (3,613 | ) | | | 1,195 | | | | (450 | ) |
Pension plan liabilities | | | - | | | | (271 | ) | | | (672 | ) | |
Unearned tuition | | | 2,627 | | | | (1,190 | ) | | | (4,453 | ) | | | (131 | ) | | | (6,854 | ) | | | 2,627 | |
Other liabilities | | | 194 | | | | (159 | ) | | | 768 | | | | 370 | | | | 1,500 | | | | 194 | |
Total adjustments | | | 17,687 | | | | 68,155 | | | | 54,532 | | | | 163 | | | | 22,197 | | | | 17,687 | |
Net cash provided by operating activities | | | 14,337 | | | | 12,022 | | | | 3,246 | | |
Net cash (used in) provided by operating activities | | | | (11,321 | ) | | | (6,107 | ) | | | 14,337 | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | | | | | |
Capital expenditures | | | (2,218 | ) | | | (7,472 | ) | | | (6,538 | ) | | | (4,755 | ) | | | (3,596 | ) | | | (2,218 | ) |
Restricted cash | | | | (790 | ) | | | 963 | | | | - | |
Proceeds from sale of property and equipment | | | 451 | | | | 67 | | | | 750 | | | | 15,462 | | | | 451 | | | | 451 | |
Net cash used in investing activities | | | (1,767 | ) | | | (7,405 | ) | | | (5,788 | ) | |
Net cash provided by (used in) investing activities | | | | 9,917 | | | | (2,182 | ) | | | (1,767 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | | | | | |
Proceeds from borrowings | | | 53,500 | | | | 47,500 | | | | 59,500 | | | | 75,900 | | | | - | | | | 53,500 | |
Payments on borrowings | | | (38,847 | ) | | | (72,000 | ) | | | (42,500 | ) | | | (66,766 | ) | | | (387 | ) | | | (38,847 | ) |
Reclassifications of payments from borrowings to restricted cash | | | 30,000 | | | | 24,500 | | | | - | | |
Reclassifications of payments from borrowings from restricted cash | | | | 20,252 | | | | - | | | | 30,000 | |
Reclassifications of proceeds from borrowings to restricted cash | | | (22,621 | ) | | | - | | | | (54,500 | ) | | | (32,802 | ) | | | (4,993 | ) | | | (22,621 | ) |
Proceeds of borrowings to restricted cash | | | | (5,000 | ) | | | - | | | | - | |
Payment of borrowings from restricted cash | | | | 5,000 | | | | - | | | | - | |
Payment of deferred finance fees | | | (2,823 | ) | | | - | | | | (863 | ) | | | (1,241 | ) | | | (645 | ) | | | (2,823 | ) |
Net share settlement for equity-based compensation | | | (186 | ) | | | (448 | ) | | | (797 | ) | | | (440 | ) | | | (178 | ) | | | (186 | ) |
Dividends paid | | | - | | | | (4,321 | ) | | | (6,709 | ) | |
Payments under capital lease obligations | | | (5,472 | ) | | | (435 | ) | | | (411 | ) | | | - | | | | (2,864 | ) | | | (5,472 | ) |
Net cash provided by (used in) financing activities | | | 13,551 | | | | (5,204 | ) | | | (46,280 | ) | |
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | | 26,121 | | | | (587 | ) | | | (48,822 | ) | |
Net cash (used in) provided by financing activities | | | | (5,097 | ) | | | (9,067 | ) | | | 13,551 | |
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | | | | (6,501 | ) | | | (17,356 | ) | | | 26,121 | |
CASH AND CASH EQUIVALENTS—Beginning of year | | | 12,299 | | | | 12,886 | | | | 61,708 | | | | 21,064 | | | | 38,420 | | | | 12,299 | |
CASH AND CASH EQUIVALENTS—End of year | | $ | 38,420 | | | $ | 12,299 | | | $ | 12,886 | | | $ | 14,563 | | | $ | 21,064 | | | $ | 38,420 | |
See notes to consolidated financial statements.
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Continued)
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2015 | | | 2014 | | | 2013 | | | 2017 | | | 2016 | | | 2015 | |
| | | | | | | | | | | | | | | | | | |
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | | | | | | | | | | | | | | | | | | |
Cash paid during the year for: | | | | | | | | | | | | | | | | | | |
Interest | | $ | 7,159 | | | $ | 4,597 | | | $ | 4,209 | | | $ | 2,790 | | | $ | 5,265 | | | $ | 7,159 | |
Income taxes | | $ | 89 | | | $ | 145 | | | $ | 410 | | | $ | 139 | | | $ | 150 | | | $ | 89 | |
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities accrued for or noncash purchases of fixed assets | | $ | 979 | | | $ | 1,613 | | | $ | 93 | | | $ | 1,447 | | | $ | 2,048 | | | $ | 979 | |
See notes to consolidated financial statements.
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 20152017 AND 20142016 AND FOR THE THREE YEARS ENDED DECEMBER 31, 20152017
(In thousands, except share and per share amounts, schools, training sites, campuses and unless otherwise stated)
1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Business Activities—Lincoln Educational Services Corporation and its subsidiaries (collectively, the “Company”), “we”, “our” and “us”, as applicable) provide diversified career-oriented post-secondary education to recent high school graduates and working adults. The Company, which currently operates 3123 schools in 1514 states, and offeroffers programs in automotive technology, skilled trades (which include HVAC, welding and computerized numerical control and electronic systems technology, among other programs), healthcare services (which include nursing, dental assistant, medical administrative assistant and pharmacy technician, among other programs), hospitality services (which include culinary, therapeutic massage, cosmetology and aesthetics) and business and information technology (which includes information technology and criminal justice programs). The schools operate under the Lincoln Technical Institute, Lincoln College of Technology, Lincoln College of New England, Lincoln Culinary Institute, and Euphoria Institute of Beauty Arts and Sciences and associated brand names. Most of the campuses serve major metropolitan markets and each typically offers courses in multiple areas of study. Five of the campuses are destination schools, which attract students from across the United States and, in some cases, from abroad. The Company’s other campuses primarily attract students from their local communities and surrounding areas. All of the campuses are nationally or regionally accredited and are eligible to participate in federal financial aid programs by the U.S. Department of Education (the “DOE”) and applicable state education agencies and accrediting commissions which allow students to apply for and access federal student loans as well as other forms of financial aid.
In the first quarter of 2015, the Company reorganized its operationsThe Company’s business is organized into three reportable business segments: (a) Transportation and Skilled Trades, (b) Healthcare and Other Professions (“HOPS”), and (c) Transitional, which refers to businesses that have been or are currently being phasedtaught out. InIn November 2015, the Board of Directors of the Company approved a plan for the Company to divest 17 of the 18 schools included in its Healthcare and Other Professions businesscampuses then comprising the HOPS segment and, then, in December, 2015, the Board of Directors approveddue to a plan to cease operations of the remaining school in this segment located in Hartford, Connecticut. That school is scheduled to close in the fourth quarter of 2016. Divestiture of the Healthcare and Other Professions business segment marks astrategic shift in the Company’s business strategy intendedstrategy. The Company underwent an exhaustive process to enabledivest the HOPS schools which proved successful in attracting various purchasers but, ultimately, did not result in a transaction that our Board believed would enhance shareholder value. By the end of 2017, we had strategically closed seven underperforming campuses leaving a total of 11 campuses remaining under the HOPS segment. The Company believes that the closures of the aforementioned campuses has positioned the HOPS segment and the Company to focus energybe more profitable going forward as well as maximizing returns for the Company’s shareholders.
The combination of several factors, including the inability of a prospective buyer of the HOPS segment to close on the purchase, the improvements the Company has implemented in the HOPS segment operations, the closure of seven underperforming campuses and resources predominantly on Transportationthe change in the United States government administration, resulted in the Board reevaluating its divestiture plan and Skilled Trades though some other programs willthe determination that shareholder value would more likely be enhanced by continuing to operate our HOPS segment as revitalized. Consequently, the Board of Directors has abandoned the plan to divest the HOPS segment and the Company now intends to retain and continue to be available at some campuses.operate the remaining campuses in the HOPS segment. The results of operations of the 17 campuses included in the Healthcare and Other ProfessionsHOPS segment that are being divested are reflected as discontinuedcontinuing operations in the consolidated financial statements.
In 2016, the Company completed the teach-out of its Hartford, Connecticut, Fern Park, Florida and Henderson (Green Valley), Nevada campuses, which originally operated in the HOPS segment. In 2017, the Company completed the teach-out of its Northeast Philadelphia, Pennsylvania; Center City Philadelphia, Pennsylvania; West Palm Beach, Florida; Brockton, Massachusetts; and Lowell, Massachusetts schools, which also were originally in our HOPS segment and all of which were taught out and closed by December 2017 and are included in the Transitional segment as of December 31, 2017.
On August 14, 2017, New England Institute of Technology at Palm Beach, Inc., a wholly-owned subsidiary of the Company, consummated the sale of the real property located at 2400 and 2410 Metrocentre Boulevard East, West Palm Beach, Florida, including the improvements and other personal property located thereon (the “West Palm Beach Property”) to Tambone Companies, LLC (“Tambone”), pursuant to a previously disclosed purchase and sale agreement (the “West Palm Sale Agreement”) entered into on March 14, 2017. Pursuant to the terms of the West Palm Sale Agreement, as subsequently amended, the purchase price for the West Palm Beach Property was $15.8 million. As a result, the Company recorded a gain on the sale in the amount of $1.5 million. As previously disclosed, the West Palm Beach Property served as collateral for a short term loan in the principal amount of $8.0 million obtained by the Company from its lender, Sterling National Bank, on April 28, 2017, which loan matured upon the earlier of the sale of the West Palm Beach Property or October 1, 2017. Accordingly, on August 14, 2017, concurrently with the consummation of the sale of the West Palm Beach Property, the Company repaid the term loan in an aggregate amount of $8.0 million, consisting of principal and accrued interest.
Liquidity—For the last several years, the Company and the proprietary school sector have faced deteriorating earnings. Government regulations have negatively impacted earnings by making it more difficult for prospectivepotential students to obtain loans, which, when coupled with the overall economic environment, have hindered prospectivediscouraged potential students from enrolling in post-secondary schools. In light of these factors, the Company has incurred significant operating losses as a result of lower student population. Despite these events,challenges, the Company believes that its likely sources of cash should be sufficient to fund operations for the next twelve months.months and thereafter for the foreseeable future. At December 31, 2015,2017, the Company’s sources of cash primarily included cash from operations, and cash and cash equivalents of $61.0$54.5 million (of which $22.6$40.0 million is restricted) which increased from December 31, 2014 mainly from $19.2and $4.4 million related toof availability under the Company’s new termrevolving loan net of finance fees.facility. Refer to Note 7 for more information on the Company’s revolving loan facility. The Company is also continuing to take actions to improve cash flow by aligning its cost structure to its student population.
In addition to the current sources of capital discussed above that provide short term liquidity, the Company planshas been making efforts to sell approximately $31.7 millionits Mangonia Park, Palm Beach County, Florida property and associated assets originally operated in assets net of liabilities,the HOPS segment, which are currentlyhas been classified as held for sale and are expected to be sold within one year from the date of classification in which up to $10 million will be required to pay down debt.sale.
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—Revenues are derived primarily from programs taught at the Company’sour schools. Tuition revenues, textbook sales 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 as the student proceeds through the 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, and the Company completeswe complete the performance of teaching the student which entitles the Companyus to the revenue. Other revenues, such as 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.
The Company evaluatesWe evaluate whether collectability of revenue is reasonably assured prior to the student attending class and reassessesreassess collectability of tuition and fees when a student withdraws from a course. The Company calculatesWe calculate the amount to be returned under Title IV and its stated refund policy to determine eligible charges and, if there is a balance due from the student after this calculation, the Companywe expect payment from the student and the Company hasstudent. We have a process to pursue uncollected accounts whereby, based upon the student’s financial means and ability to pay, a payment plan is established with the student to ensure that collectability is reasonable. The CompanyWe continuously monitors itsmonitor our historical collections to identify potential trends that may impact our determination that collectability of receivables for withdrawn students is realizable. 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. Generally, the amount to be refunded to a student is calculated based upon the period of time the student has attended classes and the amount of tuition and fees paid by the student as of his or her withdrawal date. These refunds typically reduce deferred tuition revenue and cash on our consolidated balance sheets as the Companywe generally doesdo not recognize tuition revenue in itsour consolidated statements of income (loss) until the related refund provisions have lapsed. Based on the application of itsour refund policies, the Companywe may be entitled to incremental revenue on the day the student withdraws from one of itsour schools. Prior to the year-ended December 31, 2015, the Company recorded this incremental revenue, any related student receivable and any estimate of the amount it did not expect to collect as bad debt expense during the quarter a student withdrew based on its analysis of the collectability of such amounts on an aggregate student portfolio basis, for which the Company had significant historical experience. Beginning in the three months ended December 31 2015, the Company recordedWe record revenue for students who withdraw from one of itsour schools when payment is received because collectability on an individual student basis is not reasonably assured. The Company determined incremental revenue recognized for students who withdrew during the nine-months ended September 30, 2015 to be an immaterial error which was corrected during the fourth quarter of 2015. This resulted in a reduction of net revenues by $0.3 million and bad debt expense by $0.2 million, which resulted in an increase to the loss from continuing operations of $0.1 million for the year ended December 31, 2015. Additionally, this correction reduced net student receivables from continuing operations by $0.1 million. Prior year amounts, including quarterly financial results were not restated because the effects were not material.
Cash and Cash Equivalents—Cash and cash equivalents include all cash balances and highly liquid short-term investments, which contain original maturities within three months of purchase. Pursuant to the Department of Education’s cash management requirements, the Company retains funds from financial aid programs under Title IV of the Higher Education Act in segregated cash management accounts. The segregated accounts do not require a restriction on use of the cash and, as such, these amounts are classified as cash and cash equivalents on the consolidated balance sheet.
Restricted Cash—Restricted cash consists of deposits maintained at financial institutions under a cash collateralizedcollateral agreement underpursuant to the Company’s credit agreement and cash collateralizedcollateral for letters of credit. $15.3The amount of $32.8 million and $20.3 million for the years ended December 31, 2017 and 2016, respectively, of restricted cash is included in long-term assets on the consolidated balance sheet as the restriction is greater than one year. Refer to Note 87 for more information on the Company’s term loan.revolving credit facility.
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, an allowance is established for uncollectible accounts with respect to tuition receivables. In establishing the allowance for uncollectible accounts, the Company considers, among other things, current and expected economic conditions, a student's status (in-school or out-of-school), whether or not a student is currently making payments, and overall collection history. Changes in trends in any of these areas may impact the allowance for uncollectible accounts. The receivables balances of withdrawn students with delinquent obligations are reserved for based on our collection history.
Inventories—Inventories consist mainly of textbooks, computers, 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 (loss) 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 rent and other long-term liabilities on the accompanying consolidated balance sheets.
Advertising Costs—Costs related to advertising are expensed as incurred and approximated $15.1$27.0 million, $15.1$28.0 million and $15.6$28.2 million from continuing operations for the years ended December 31, 2015, 20142017, 2016 and 2013,2015, respectively. These amounts are included in selling, general and administrative expenses in the consolidated statements of operations.
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, reductions in market value of the Company, 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.
When we test goodwill balances for impairment, we estimate the fair value of each of our reporting units based on projected future operating results and cash flows, market assumptions and/or comparative market multiple methods. Determining fair value requires significant estimates and assumptions based on an evaluation of a number of factors, such as marketplace participants, relative market share, new student interest, student retention, future expansion or contraction expectations, amount and timing of future cash flows and the discount rate applied to the cash flows. Projected future operating results and cash flows used for valuation purposes do reflect improvements relative to recent historical periods with respect to, among other things, modest revenue growth and operating margins. Although we believe our projected future operating results and cash flows and related estimates regarding fair values are based on reasonable assumptions, historically projected operating results and cash flows have not always been achieved. The failure of one of our reporting units to achieve projected operating results and cash flows in the near term or long term may reduce the estimated fair value of the reporting unit below its carrying value and result in the recognition of a goodwill impairment charge. Significant management judgment is necessary to evaluate the impact of operating and macroeconomic changes and to estimate future cash flows. Assumptions used in our impairment evaluations, such as forecasted growth rates and our cost of capital, are based on the best available market information and are consistent with our internal forecasts and operating plans. In addition to cash flow estimates, our valuations are sensitive to the rate used to discount cash flows and future growth assumptions.
At December 31, 2017 and December 31, 2015, the Companywe conducted itsour annual test for goodwill impairment and determined itwe did not have an impairment. The fair valueAt December 31, 2016, we conducted our annual test for goodwill impairment and determined we had an impairment of the Company’s reporting units were determined using Level 3 inputs included in its multiple of earnings and discounted cash flow approach. The Company$9.9 million. We concluded that as of September 30, 2015 there was an indicator of potential impairment as a result of a decrease in market capitalization and, accordingly, the Companywe tested goodwill for impairment. The test indicated that one of the Company’sour reporting units was impaired, which resulted in a pre-tax non-cash charge of $0.2 million ($0.2 million of which is included in the transportation and skilled trades segment) for the three months ended September 30, 2015.
At December 31, 2014, the Company conducted its annual test for goodwill impairment and determined it did not have an impairment. The fair value of the Company’s reporting units were determined using Level 3 inputs included in its multiple of earnings and discounted cash flow approach. The Company concluded that as of September 30, 2014 there was an indicator of potential impairment as a result of a decrease in market capitalization and, accordingly, the Company tested goodwill for impairment. The test indicated that ten of the Company’s reporting units were impaired, which resulted in a pre-tax non-cash charge of $39.0 million for the three months ended September 30, 2014 ($0.2 million and $38.8 million of which is included in the transportation and skilled trades segment and discontinued operations, respectively).
At December 31, 2013, the Company conducted its annual test for goodwill impairment and determined it did not have an impairment. The fair value of the Company’s reporting units were determined using Level 3 inputs included in its multiple of earnings and discounted cash flow approach. As of June 30, 2013, the Company concluded that current period losses at two reporting units, which resulted in a deterioration of current and projected cash flows, was an indicator of potential impairment and, accordingly, tested goodwill and long-lived assets for impairment. The tests indicated that these two reporting units were impaired, which resulted in a pre-tax non-cash charge of $3.1 million for the three months ended June 30, 2013 ($3.1 million of which is included in discontinued operations).
Impairment of Long-Lived Assets—The Company reviews the carrying value of its 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 using Level 3 inputs. 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.
The Company concluded that for the three monthsyear ended December 31, 2017 and December 31, 2015, there was no long-lived asset impairment. Long-lived assets were tested at the campuses as a result of classifying assets held for sale and certain financial indicators such as the Company’s history of losses, current respective period losses, as well as future projected losses at these campuses.
The Company concluded that, for the three monthsyear ended December 31, 2014 and September 30, 2014,2016, there was sufficient evidence to conclude that there was an impairment of certain long-lived assets at one and six of the Company’s campuses, respectively. Long-lived assets had been tested at these campuses as a result of certain financial indicators such as the Company’s history of losses, current respective period losses, as well as future projected losses at these campuses. The long-lived assets impairmentwhich resulted in a pre-tax charge of $1.5 million for leasehold improvements ($1.5 million included in the transportation and skilled trades segment) as of December 31, 2014 and $1.9 million for leasehold improvements ($1.5 million and $0.4 million included in the transitional segment and discontinued operations, respectively) and $0.5 million ($0.5 million included in discontinued operations) for intangible assets as of September 30, 2014.
The Company concluded that for the three months ended December 31, 2013, there was no long-lived asset impairment. The Company concluded that as of June 30, 2013 and March 31, 2013, there was sufficient evidence to conclude that there were impairments of certain long-lived assets at four and two of our campuses, respectively. Long lived assets had been tested at these campuses as a result of certain financial indicators such as our history of losses, our current respective period losses, as well as future projected losses at these campuses. The long-lived assets impairment resulted in a pre-tax charge of $1.4 million ($1.4 million included in discontinued operations) and $1.7 million ($1.7 million included in discontinued operations) for leasehold improvements as of June 30, 2013 and March 31, 2013, respectively.$11.5 million.
Concentration of Credit Risk—Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments. 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 $0.25 million. The Company's cash balances on deposit at December 31, 2015,2017, exceeded the balance insured by the FDIC Corporation (“FDIC”) by approximately $60.1$53.9 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, 20152017 and 2014.2016.
Use of Estimates in the Preparation of Financial Statements—The preparation of financial statements in conformity with generally accepted accounting principles in the United States (“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, impairments, 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 of stock options, net of estimated forfeitures, utilizing straight-line amortization of compensation expense over the requisite service period of the grant.
The Company measures the value of service and performance-based restricted stock on the fair value of a share of common stock on the date of the grant. The Company amortizes the fair value of service basedservice-based restricted stock utilizing straight-line amortization of compensation expense over the requisite service period of the grant.
The Company amortizes the fair value of the performance-based restricted stock based on determination of the probable outcome of the performance condition. If the performance condition is expected to be met, then the Company amortizes the fair value of the number of shares expected to vest utilizing straight-line basis over the requisite performance period of the grant. However, if the associated performance condition is not expected to be met, then the Company does not recognize the stock-based compensation expense.
Income Taxes—The Company accounts for income taxes in accordance with Financial Accounting Standards Board (“FASB”) ASC Topic 740, “Income Taxes” (“ASC 740”). This statement requires an asset and a liability approach for measuring deferred taxes based on temporary differences between the financial statement and tax bases of assets and liabilities existing at each balance sheet date using enacted tax rates for years in which taxes are expected to be paid or recovered.
In accordance with ASC 740, the Company assesses our deferred tax asset to determine whether all or any portion of the asset is more likely than not unrealizable. A valuation allowance is required to be established or maintained when, based on currently available information, it is more likely than not that all or a portion of a deferred tax asset will not be realized. In accordance with ASC 740, our assessment considers whether there has been sufficient income in recent years and whether sufficient income is expected in future years in order to utilize the deferred tax asset. In evaluating the realizability of deferred income tax assets, the Company considered, among other things, historical levels of income, expected future income, the expected timing of the reversals of existing temporary reporting differences, and the expected impact of tax planning strategies that may be implemented to prevent the potential loss of future income tax benefits. Significant judgment is required in determining the future tax consequences of events that have been recognized in our consolidated financial statements and/or tax returns. Differences between anticipated and actual outcomes of these future tax consequences could have a material impact on the Company’s consolidated financial position or results of operations. Changes in, among other things, income tax legislation, statutory income tax rates, or future income levels could materially impact the Company’s valuation of income tax assets and liabilities and could cause our income tax provision to vary significantly among financial reporting periods. See information regarding the impact of the Tax Cuts and Jobs Act in Note 10.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. During the years ended December 31, 20152017 and 2014, the2016, we did not record any interest and penalties expense associated with uncertain tax positions are not significant to the Company’s results of operations or financial position.positions.
Start-up Costs—Costs related to the start of new campuses are expensed as incurred.
Reclassification— On November 3, 2015During the Board of Directors approved a plan for the Company to divest 17 of the 18 schools included in its Healthcare and Other Professions business segment. In 2015,year ended December 31, 2017, the Company reclassified amount reflectedcertain amounts previously included in held for sale to held for use in the 20142016 Consolidated Balance Sheet. In addition, during the year ended December 31, 2017, the Company reclassified 2016 and 2013 consolidated statements2015 amounts from discontinued operations to continuing operations in Consolidated Statements of operations related to the 17 schools into discontinued operations.Operations.
New Accounting Pronouncements
In November 2015,The Financial Accounting Standards Board (the “FASB”) has issued Accounting Standards Update (“ASU”) 2017-09, “Compensation—Stock Compensation (Topic 718) — Scope of Modification Accounting.” ASU 2017-09 applies to entities that change the terms or conditions of a share-based payment award. The FASB issuedadopted ASU 2017-09 to provide clarity and reduce diversity in practice as well as cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, to the modification of the terms and conditions of a share-based payment award. The amendments provide guidance on determining which simplifieschanges to the balance sheet classificationterms and conditions of deferred taxes. The guidance requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. This guidanceshare-based payment award require an entity to apply modification accounting under Topic 718. ASU 2017-09 is effective for all entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for public business entities for annualreporting periods for which financial statements have not yet been issued. The adoption of ASU 2017-09 had no impact on the Company’s consolidated financial statements.
In March 2017, the FASB issued ASU 2017-07, "Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." ASU 2017-07 requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the statement of comprehensive income separately from the service cost component and outside a subtotal of operating income. The ASU is effective for interim periods within thoseannual periods beginning after December 15, 20162017. Early adoption is permitted. The adoption of ASU 2017-07 had no impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment.” ASU 2017-04 provides amendments to Accounting Standards Code (“ASC”) 350, “Intangibles - Goodwill and Other,” which eliminate Step 2 from the goodwill impairment test. Entities should perform their goodwill impairment tests by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. The amendments in this update are effective prospectively during interim and annual periods beginning after December 15, 2019, with early adoption permitted. The Company early adopted the provisions of ASU 2017-04 as of December 31, 2015. While the guidance does have anApril 1, 2017. As fair values for our operating units exceed their carrying values, there has been no impact on our balance sheet classification, it does not have a material impact on our results of operations,consolidated financial condition or the financial statement disclosures.statements.
In April 2015,November 2016, the FASB issued accountingASU 2016-18: “Statement of Cash Flows (Topic 230): Restricted Cash.” This guidance relatedwas issued to address the disparity that exists in the classification and presentation of debt issuance costschanges in restricted cash on the balance sheet as a direct reduction fromstatement of cash flows. The amendments will require that the carrying amountstatement of cash flows explain the debt liability, consistent with debt discounts, rather than as an asset. Amortization of debt issuance costs will continue to be reported as interest expense. Debt issuance costs related to revolving credit arrangements, however, will continue to be presented as an assetchange during the period in total cash, cash equivalents and amortized ratably over the term of the arrangement. In August 2015, the FASB issued accounting guidance related to the presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements which clarifies that companies may continue to present unamortized debt issuance costs associated with line of credit arrangements as an asset. These pronouncementsrestricted cash. The amendments are effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those years, beginning after December 15, 2015, with early adoption permitted.fiscal years. The amendments will be applied using a retrospective transition method to each period presented. The Company anticipates that the adoption will not early adopt this new guidance and it will not have a material impact on the Company’s financial statements.
In January 2015, the FASB issued Accounting Standards Update (“ASU”) No. 2015-01, Income Statement – Extraordinary and Unusual Items. ASU 2015-01 simplifies income statement classification by removing the concept of extraordinary items from U.S. GAAP. Under the existing guidance, an entity is required to separately disclose extraordinary items, net of tax, in the income statement after income from continuing operations if an event or transaction is of unusual nature and occurs infrequently. This separate, net-of-tax presentation (and corresponding earnings per share impact) will no longer be allowed. The existing requirement to separately present items that are of unusual nature or occur infrequently on a pre-tax basis within income from continuing operations has been retained. The new guidance also requires similar separate presentation of items that are both unusual and infrequent. The guidance, effective for the Company on January 1, 2016, with earlier application permitted as of the beginning of the fiscal year of adoption, is not expected to have a material impact on the Company’s consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” to address eight specific cash flow issues with the objective of reducing the existing diversity in practice. The amendments are effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company anticipates that the adoption will not have a material impact on the Company’s consolidated financial statements.
The Company prospectively adopted ASU 2016-09, “Improvements to Employee Share Based Payment Accounting,” to the consolidated statement of operations for the recognition of tax benefits within the provision for taxes, which previously would have been recorded to additional paid-in capital. The impact for the year ended December 31, 2017 was $0. In addition, the Company retrospectively recognized no tax benefits within operating activities within the consolidated statements of cash flow for the year ended December 31, 2017 and 2016. The presentation requirements for cash flows related to employee taxes paid for withheld shares had no impact to any of the periods presented in the consolidated statements of cash flows, since such cash flows have historically been presented in financing activities. The treatment of forfeitures has not changed as the Company is electing to continue the current process of estimating the number of forfeitures. There was no cumulative effect adjustment required to retained earnings under the prospective method as of the beginning of the year because all tax benefits had been previously recognized when the tax deductions related to stock compensation were utilized to reduce tax payable. The Company is not recording deferred tax assets or tax losses as a result of the adoption of ASU 2016-09.
In May 2014, the FASB issued a comprehensive new revenue recognition standard, ASU 2014-09, “Revenue from Contracts with Customers.” The amendments include ASU 2016-08, “Revenue from Contracts with Customers (Topic 606)—Principal versus Agent Considerations,” issued in March 2016, which clarifies the implementation guidance for principal versus agent considerations in ASU 2014-09, and ASU 2016-10, “Revenue from Contracts with Customers (Topic 606)—Identifying Performance Obligations and Licensing,” issued in April 2016, which amends the guidance in ASU No. 2014-09 related to identifying performance obligations. The new standard – ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Abilitywill supersede previous existing revenue recognition guidance. The standard creates a five-step model for revenue recognition that requires companies to Continue as a Going Concern - that will explicitly require managementexercise judgment when considering contract terms and relevant facts and circumstances. The five-step model includes (1) identifying the contract, (2) identifying the separate performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to evaluate whether therethe separate performance obligations and (5) recognizing revenue when each performance obligation has been satisfied. The standard also requires expanded disclosures surrounding revenue recognition. The standard is substantial doubt about an entity’s ability to continue as a going concerneffective for fiscal periods beginning after December 15, 2017 and to provide related footnote disclosures in certain circumstances. According toallows for either full retrospective or modified retrospective adoption.
We adopted the new standard substantial doubt about an entity’s abilityeffective January 1, 2018 using the modified retrospective approach. The Company’s revenue streams primarily consist of tuition and related services provided to continuestudents over the course of the program as well as other transactional revenue such as tools. Based on the Company's assessment, the analysis of the contract portfolio under Topic 606 results in the revenue for the majority of the Company's student contracts being recognized over time which is consistent with the Company's previous revenue recognition model. For all student contracts, there is continuous transfer of control to the student and the number of performance obligations under Topic 606 is consistent with those identified under the existing standard. The Company determined the impact of the adoption on revenue recognition for student contracts to be immaterial on its consolidated financial statements and disclosures.
In February 2016, the FASB issued guidance requiring lessees to recognize a going concern exists if itright-of-use asset and a lease liability on the balance sheet for substantially all leases, with the exception of short-term leases. Leases will be classified as either financing or operating, with classification affecting the pattern of expense recognition in the statements of income. The guidance is probableeffective for annual periods, including interim periods within those periods, beginning after December 15, 2018, with early adoption permitted. We are currently evaluating the impact that the entity will be unable to meet its obligations as they become due within one year after the date the entity’s financial statements are issued. In order to determine the specific disclosures, if any, that would be required, management will need to assess if substantial doubt exists, and, if so, whether its plans will alleviate such substantial doubt. The new standard requires assessment each annual and interim period and will be effective for the Company on December 31, 2016 with earlier application permitted. The Company does not believe this guidanceupdate will have any impact on itsthe Company’s consolidated financial statements.
In May 2014, the FASB issued a new standard related to revenue recognition, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The new standard will replace most of the existing revenue recognition standards in GAAP. In July 2015, the FASB voted to defer the effective date by one year to December 15, 2017 for annual reporting periods beginning after that date. In August 2015, the FASB issued ASU 2015-14, wherein it was approved to defer the effective date of revenue standard ASU 2014-09 by one year for all entities and permits early adoption on a limited basis. The new standard can be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of the change recognized at the date of the initial application. The Company is assessing the potential impact of the new standard on financial reporting and has not yet selected a transition method.
In April 2014, the FASB issued amended guidance on the use and presentation of discontinued operations in an entity's consolidated financial statements. The new guidance restricts the presentation of discontinued operations to business circumstances when the disposal of business operations represents a strategic shift that has or will have a major effect on an entity's operations and financial results. The guidance became effective on January 1, 2015. Adoption is on a prospective basis. The Company adopted the new guidance as of December 31, 2014.
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 (the "DOE"). During the years ended December 31, 2017, 2016 and 2015, 2014approximately 78%, 79% and 2013, approximately 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, 2015, 20142017, 2016 and 2013,2015, the Company calculated that no individual DOE reporting entity received more than 90% of its revenue, determined on a cash basis under DOE regulations, from the Title IV Program funds. The Company’s calculations may be subject to review by the DOE. Under DOE regulations, 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. If one of the Company’s 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.
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 Companyinstitution 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 resulting in a change of control of the institution. 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.
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 typically may be permitted by the DOE to continue to participate in the titleTitle IV programsPrograms by choosing one of two alternatives: 1) the “Zone Alternative” under which we arethe institution is required to make disbursements to students under the Heightened Cash Monitoring 1 (HCM1) payment method and to notify the DOE within 10 days after the occurrence of certain oversight and financial events or 2) submit a letter of credit to the DOE in an amount determined by the DOE and equal to at least 50 percent of the Title IV Program funds received by our institutionsthe institution during the most recent fiscal year. Under the HCM1 payment method, the institution is required to make Title IV Program disbursements to eligible students and parents before it requests or receives funds for the amount of those disbursements from the DOE. As long as the student accounts are credited before the funding requests are initiated, we arethe institution is permitted to draw down funds through the DOE’s electronic system for grants management and payments for the amount of disbursements made to eligible students. Unlike the Heightened Cash Monitoring 2 (HCM2) and reimbursement payment methods, the HCM1 payment method typically does not require schools to submit documentation to the DOE and wait for DOE approval before drawing down Title IV Program funds. If a Company’s composite score is below 1.5 for three consecutive years a Companyan institution may be able to continue to operate under the Zone Alternative; however, this determination is made solely by the DOE. If a Company’san institution’s composite score drops below 1.0 in a given year or if its composite score remains between 1.0 and 1.4 for three or more consecutive years, it may be required to meet alternative requirements for continuing to participate in Title IV programsPrograms by submitting a letter of credit, complying with monitoring requirements, disbursing Title IV Program funds under the HCM1, HCM2, or reimbursement payment methods, and complying with other requirements and conditions. Effective July 1, 2016, a school undersubject to HCM1, HCM2 or reimbursement payment methods must also pay any credit balances due to a student before drawing down funds for the amount of those disbursements from the DOE, even if the student or his or her parent provideprovides written authorization for the school to hold the credit balance. This requirement may have a material adverse effect on our cash flows, results of operations and financial position. The DOE permits an institution to participate under the “Zone Alternative” for a period of up to three consecutive fiscal years; however, this determination is made solely by the DOE. If an institution’s composite score is between 1.0 and 1.4 after three or more consecutive years with a composite score below 1.5, it may be required to meet alternative requirements for continuing to participate in Title IV programsPrograms by submitting a letter of credit, complying with monitoring requirements, disbursing Title IV Program funds under the HCM1, HCM2, or reimbursement payment methods, and complying with other requirements and conditions.
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 determined by the DOE 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 determined by the DOE 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. |
For the 2017 fiscal year, the Company calculated its composite score to be 1.1. The score is subject to determination by the DOE once it receives and reviews the Company’s audited financial statements for the 2017 fiscal year. The DOE has evaluated the financial responsibility of our institutions on a consolidated basis. The Company has submitted to the DOE our audited financial statements for the 20142016 and 20132015 fiscal year reflecting a composite score of 1.31.5 and 1.4,1.9, respectively, based upon its calculations. The Company chose
An institution participating in Title IV Programs must calculate the “Zone Alternative” option described above because, among other things, it does not requireamount 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 CompanyDOE 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 or if the regulatory auditor identifies a material weakness in the institution’s report on internal controls relating to the return of unearned Title IV Program funds, the institution may be required to 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 timely returned for students who withdrew in the institution's previous fiscal year.
On January 11, 2018, the DOE sent letters to our Columbia, Maryland and Iselin, New Jersey institutions requiring each institution to submit a letter of credit to the DOE and because the HCM1 payment method is less burdensome than the HCM2 or reimbursement methodsbased on findings of payment that the DOE has the authority to impose. The Company believes that, prior to moving to the HCM1 payment method on October 22, 2014, its procedures for processing Title IV payments were similar to those now required under the HCM1 payment method. As of this date, the Company not identified any impact on our ability to make disbursementslate returns of Title IV Program funds in the annual Title IV compliance audits submitted to its studentsthe DOE for the fiscal year ended December 31, 2016. Our Iselin institution provided evidence demonstrating that only 3% of the Title IV Program funds returned were late. However, the DOE concluded that a letter of credit would nevertheless be required for each institution because the regulatory auditor included a finding that there was a material weakness in our report on internal controls relating to return of unearned Title IV Program funds. We disagree with the regulatory auditor’s conclusion that a material weakness could exist if the error rate in the expanded audit sample is only 3% or approximately $20,000 and we believe that the regulatory auditor’s conclusion is erroneous. We requested the DOE to receive funds forreconsider the letter of credit requirement. However, by letter dated February 7, 2018, DOE maintained that the refund letters of credit were necessary but agreed that the amount of those disbursements from the DOE. If we remaineach letter of credit could be based on the HCM1 payment method on or after July 1,returns that were required to be made by each institution in the 2017 fiscal year rather than the 2016 fiscal year. Accordingly, we may have to modify our procedures for paymentsubmitted letters of credit balancesin the amounts of $0.5 million and $0.1 million to student to comply with the aforementioned new requirements to pay credit balances before drawing down funds from the DOE.
For the 2015 fiscal year, the Company calculated its composite score to be 1.9. This number is subject to determinationDOE by the DOE once it receivesFebruary 23, 2018 deadline and reviews the Company’s audited financial statementsexpect that these letters of credit will remain in place for the 2015 fiscal year. If the DOE determines that our composite score is 1.5 or higher, our composite score would be high enough for our institutions to be deemed financially responsible and could result in the DOE no longer requiring us to comply with the Zone Alternative requirements or the requirement to use the HCM1 payment method. Such determination would be subject to DOE determination and the absencea minimum of other factors supporting these requirements.two years.
3. | WEIGHTED AVERAGE COMMON SHARES |
The weighted average number of common shares used to compute basic and diluted income per share for the years ended December 31, 2015, 20142017, 2016 and 2013,2015, respectively were as follows:
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2015 | | | 2014 | | | 2013 | | | 2017 | | | 2016 | | | 2015 | |
Basic shares outstanding | | | 23,166,977 | | | | 22,814,105 | | | | 22,513,391 | | | | 23,906,395 | | | | 23,453,427 | | | | 23,166,977 | |
Dilutive effect of stock options | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Diluted shares outstanding | | | 23,166,977 | | | | 22,814,105 | | | | 22,513,391 | | | | 23,906,395 | | | | 23,453,427 | | | | 23,166,977 | |
For the yearyears ended December 31, 2015, 20142017, 2016 and 2013,2015, options to acquire 60,161; 119,722;570,306; 773,078; and 222,707119,722 shares, respectively, were excluded from the above table because the Company reported a net loss for the year and therefore their impact on reported loss per share would have been antidilutive. For the years ended December 31, 2015, 20142017, 2016 and 2013,2015, options to acquire 391,935; 795,985;167,667; 218,167; and 657,083391,935 shares; respectively, were excluded from the above table because they have an exercise price that is greater than the average market price of the Company’s common stock and, therefore, their impact on reported (loss) earningsloss per share would have been antidilutive.
In 2013 and 2014, the Company issued certain members of management performance shares that vest when certain performance conditions are met. As of December 31, 2015, 2014 and 2013 none of these performance conditions were not met. Accordingly, 152,837; 360,402; and 441,552 shares of outstanding performance shares have been excluded from the computation of diluted earnings per share for the year ended December 31, 2014 and 2013, respectively. Refer to Note 9 for more information on performance shares.
4. | DISCONTINUED OPERATIONS |
2015 Event
On November 3, 2015 the Board of Directors approved a plan for the Company to divest 17 of the 18 schools included in its Healthcare and Other Professions segment. The planned divestiture of the Company’s Healthcare and Other Professions segment constitutes a strategic shift for the Company. The results of operations of these campuses are reflected as discontinued operations in the consolidated financial statements. Implementation of the plan will result in the Company’s operations focused solely on the Transportation and Skilled Trades segment.
On December 3, 2015, our Board of Directors approved a plan to cease operations at the Hartford, Connecticut school which is scheduled to close in the fourth quarter of 2016.
In addition, as of September 30, 2015 the Company had two campuses held for sale. With the approval of the plan to divest the Healthcare and Other Professions segment one of the campuses is no longer included as held for sale as the Company plans to sell this campus have changed; the campus is included in the transportation and skilled trades segment.
The results of operations at these 17 campuses for the three year periods ended December 31, 2015 were as follows (in thousands):
| | Year Ended December 31, | |
| | 2015 | | | 2014 | | | 2013 | |
Revenue | | $ | 112,882 | | | $ | 122,133 | | | $ | 125,916 | |
| | | | | | | | | | | | |
Loss before income tax | | | (642 | ) | | | (37,411 | ) | | | (3,870 | ) |
Income tax benefit | | | - | | | | (2,746 | ) | | | - | |
Net loss from discontinued operations | | $ | (642 | ) | | $ | (34,665 | ) | | $ | (3,870 | ) |
Amounts include impairments of goodwill and long-lived assets for these campuses of $37.6 million and $3.9 million for the year ended December 31, 2014 and 2013, respectively.
2014 Event
On December 3, 2014, the Company’s Board of Directors approved a plan to cease operations at five training sites in Florida. The Company performed a cost benefit analysis on several schools and concluded that the training sites contained a high fixed cost component and has had difficulty attracting enough students due to high competition to maintain a stable profit margin. Accordingly, the Company ceased operations at these campuses as of December 31, 2014. This was a strategic shift to close all of the Company’s training sites and all locations that do not accept Title IV payments. The results of operations of these campuses are reflected as discontinued operations in the consolidated financial statements.
The results of operations at these five training sites for the two year periods ended December 31, 2014 were as follows (in thousands):
| | Year Ended December 31, | |
| | 2014 | | | 2013 | |
Revenue | | $ | 2,140 | | | $ | 3,512 | |
| | | | | | | | |
Loss before income tax | | | (6,731 | ) | | | (2,635 | ) |
Income tax benefit | | | (85 | ) | | | - | |
Net loss from discontinued operations | | $ | (6,646 | ) | | $ | (2,635 | ) |
Amounts include impairments of goodwill and long-lived assets for these campuses of $2.1 million for the year ended December 31, 2014.
2013 Event
On June 18, 2013, the Company’s Board of Directors approved a plan to cease operations at four campuses in Ohio and one campus in Kentucky consisting of the Company’s Dayton institution and its branch campuses. Federal legislation implemented on July 1, 2012 that prohibits “ability to benefit” (“ATB”) students from participating in federal student financial aid programs led to a dramatic decrease in the number of students attending these five campuses. Accordingly, the Company ceased operations at these campuses as of December 31, 2013. The results of operations of these campuses are reflected as discontinued operations in the consolidated financial statements.
The results of operations at these five campuses for the year ended December 31, 2013 were as follows (in thousands):
| | Year Ended December 31, | |
| | 2013 | |
Revenue | | $ | 7,724 | |
| | | | |
Loss before income tax | | | (17,287 | ) |
Income tax expense (benefit) | | | 239 | |
Net loss from discontinued operations | | $ | (17,526 | ) |
Amounts include impairments of goodwill and long-lived assets for these campuses of $2.3 million for the year ended December 31, 2013.
5. | GOODWILL AND OTHER INTANGIBLES |
Changes in the carrying amount of goodwill during the years ended December 31, 20152017 and 20142016 are as follows:
| | Gross Goodwill Balance | | | Accumulated Impairment Losses | | | Net Goodwill Balance | |
Balance as of January 1, 2014 | | $ | 117,176 | | | $ | (54,711 | ) | | $ | 62,465 | |
Asset held for sale (2) | | | (1,304 | ) | | | - | | | | (1,304 | ) |
Goodwill impairment (1) | | | - | | | | (38,954 | ) | | | (38,954 | ) |
Balance as of December 31, 2014 | | | 115,872 | | | | (93,665 | ) | | | 22,207 | |
Asset held for sale, net (2) | | | (7,455 | ) | | | - | | | | (7,455 | ) |
Goodwill impairment | | | - | | | | (216 | ) | | | (216 | ) |
Balance as of December 31, 2015 | | $ | 108,417 | | | $ | (93,881 | ) | | $ | 14,536 | |
| | Gross Goodwill Balance | | | Accumulated Impairment Losses | | | Net Goodwill Balance | |
Balance as of January 1, 2016 | | $ | 117,176 | | | $ | 93,881 | | | $ | 23,295 | |
Impairment | | | - | | | | 8,759 | | | | 8,759 | |
Balance as of December 31, 2016 | | | 117,176 | | | | 102,640 | | | | 14,536 | |
Adjustments | | | - | | | | - | | | | - | |
Balance as of December 31, 2017 | | $ | 117,176 | | | $ | 102,640 | | | $ | 14,536 | |
| (1) | $38.8 million included in discontinued operations in the year ended December 31, 2014. |
As of December 31, 2017 and 2016 the goodwill balance of $14.5 million is related to the Transportation and Skilled Trades segment. | (2) | Refer to Note 6 for more information on assets held for sale. |
Intangible assets, which are included in other assets in the accompanying consolidated balance sheets, consisted of the following:
| | Trade Name | | | Accreditation | | | Curriculum | | | Total | |
Gross carrying amount at December 31, 2014 | | $ | 310 | | | $ | 1,064 | | | $ | 550 | | | $ | 1,924 | |
Asset held for sale (2) | | | - | | | | (1,064 | ) | | | (390 | ) | | | (1,454 | ) |
Gross carrying amount at December 31, 2015 | | | 310 | | | | - | | | | 160 | | | | 470 | |
| | | | | | | | | | | | | | | | |
Accumulated amortization at December 31, 2014 | | | 264 | | | | - | | | | 469 | | | | 733 | |
Amortization | | | 44 | | | | - | | | | 21 | | | | 65 | |
Asset held for sale (2) | | | - | | | | - | | | | (378 | ) | | | (378 | ) |
Accumulated amortization at December 31, 2015 | | | 308 | | | | - | | | | 112 | | | | 420 | |
| | | | | | | | | | | | | | | | |
Net carrying amount at December 31, 2015 | | $ | 2 | | | $ | - | | | $ | 48 | | | $ | 50 | |
| | | | | | | | | | | | | | | | |
Weighted average amortization period (years) | | | 7 | | | Indefinite | | | | 10 | | | | | |
| | Curriculum | | | Total | |
Gross carrying amount at January 1, 2017 | | $ | 160 | | | $ | 160 | |
Additions | | | - | | | | - | |
Gross carrying amount at December 31, 2017 | | | 160 | | | | 160 | |
| | | | | | | | |
Accumulated amortization at January 1, 2017 | | | 128 | | | | 128 | |
Amortization | | | 16 | | | | 16 | |
Accumulated amortization at December 31, 2017 | | | 144 | | | | 144 | |
| | | | | | | | |
Net carrying amount at December 31, 2017 | | $ | 16 | | | $ | 16 | |
| | | | | | | | |
Weighted average amortization period (years) | | | 10 | | | | | |
| | Indefinite Trade Name | | | Trade Name | | | Accreditation | | | Curriculum | | | Non-compete | | | Total | |
Gross carrying amount at December 31, 2013 | | $ | 180 | | | $ | 335 | | | $ | 1,166 | | | $ | 1,124 | | | $ | 200 | | | $ | 3,005 | |
Impairment (1) | | | (180 | ) | | | (25 | ) | | | (102 | ) | | | (574 | ) | | | (200 | ) | | | (1,081 | ) |
Gross carrying amount at December 31, 2014 | | | - | | | | 310 | | | | 1,064 | | | | 550 | | | | - | | | | 1,924 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Accumulated amortization at December 31, 2013 | | | - | | | | 228 | | | | - | | | | 828 | | | | 68 | | | | 1,124 | |
Impairment (1) | | | - | | | | (12 | ) | | | - | | | | (448 | ) | | | (95 | ) | | | (555 | ) |
Amortization | | | - | | | | 48 | | | | - | | | | 89 | | | | 27 | | | | 164 | |
Accumulated amortization at December 31, 2014 | | | - | | | | 264 | | | | - | | | | 469 | | | | - | | | | 733 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net carrying amount at December 31, 2014 | | $ | - | | | $ | 46 | | | $ | 1,064 | | | $ | 81 | | | $ | - | | | $ | 1,191 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average amortization period (years) | | Indefinite | | | | 7 | | | Indefinite | | | | 10 | | | | 3 | | | | | |
| (1) | Refer to Note 1 for more information related to the impairment. |
| (2) | Refer to Note 6 for more information on assets held for sale. |
| | Trade Name | | | Curriculum | | | Total | |
Gross carrying amount at January 1, 2016 | | $ | 310 | | | $ | 160 | | | $ | 470 | |
Additions | | | - | | | | - | | | | - | |
Gross carrying amount at December 31, 2016 | | | 310 | | | | 160 | | | | 470 | |
| | | | | | | | | | | | |
Accumulated amortization at January 1, 2016 | | | 308 | | | | 112 | | | | 420 | |
Amortization | | | 2 | | | | 16 | | | | 18 | |
Accumulated amortization at December 31, 2016 | | | 310 | | | | 128 | | | | 438 | |
| | | | | | | | | | | | |
Net carrying amount at December 31, 2016 | | $ | - | | | $ | 32 | | | $ | 32 | |
| | | | | | | | | | | | |
Weighted average amortization period (years) | | | 7 | | | | 10 | | | | | |
Amortization of intangible assets for the years ended December 31, 2017, 2016 and 2015 2014 and 2013 was approximatelyless than $0.1 million $0.2 million and $0.4 million,for each of the three years, respectively.
The following table summarizes the estimated future amortization expense:
Year Ending December 31, | | | | | | |
2016 | | $ | 18 | | |
2017 | | | 16 | | |
2018 | | | 16 | | | $ | 16 | |
| | | | | |
| | $ | 50 | | |
6.5. | PROPERTY, EQUIPMENT AND FACILITIES |
Property, equipment and facilities consist of the following:
| | Useful life (years) | | | At December 31, | |
| | | | | 2015 | | | 2014 | |
Land | | | - | | | $ | 10,054 | | | $ | 5,338 | |
Buildings and improvements | | | 1-25 | | | | 112,270 | | | | 128,973 | |
Equipment, furniture and fixtures | | | 1-7 | | | | 65,445 | | | | 71,005 | |
Vehicles | | | 3 | | | | 617 | | | | 1,300 | |
Construction in progress | | | - | | | | 159 | | | | 34 | |
| | | | | | | 188,545 | | | | 206,650 | |
Less accumulated depreciation and amortization | | | | | | | (122,037 | ) | | | (136,910 | ) |
| | | | | | $ | 66,508 | | | $ | 69,740 | |
Included above in buildings and improvements are buildings acquired under capital leases as of December 31, 2015 and 2014 of $3.0 million and $26.8 million, respectively, net of accumulated depreciation of $1.4 million and $10.6 million, respectively. | | Useful life (years) | | | At December 31, | |
| | | | | 2017 | | | 2016 | |
Land | | | - | | | $ | 6,969 | | | $ | 6,969 | |
Buildings and improvements | | | 1-25 | | | | 127,027 | | | | 124,826 | |
Equipment, furniture and fixtures | | | 1-7 | | | | 81,772 | | | | 79,029 | |
Vehicles | | | 3 | | | | 883 | | | | 848 | |
Construction in progress | | | - | | | | 161 | | | | 925 | |
| | | | | | | 216,812 | | | | 212,597 | |
Less accumulated depreciation and amortization | | | | | | | (163,946 | ) | | | (157,152 | ) |
| | | | | | $ | 52,866 | | | $ | 55,445 | |
Included above in equipment, furniture and fixtures are assets acquired under capital leases as of December 31, 2015 and 2014 of $0.1 million and $0.4 million, respectively, net of accumulated depreciation of $0.1 million and $0.4 million, respectively.
Included above in buildings and improvements is capitalized interest as of December 31, 2015 and 2014 of $0.6 million and $0.6 million, respectively, net of accumulated depreciation of $0.6 million and $0.5 million, respectively.
Depreciation and amortization expense of property, equipment and facilities was $11.9$8.7 million, $15.3$11.0 million and $16.6$10.2 million for the years ended December 31, 2015, 20142017, 2016 and 2013,2015, respectively.
As discussed in Note 4, on November 3, 2015 the Board of Directors approved a plan for1, the Company sold two real properties in West Palm Beach, Florida in 2017 and the Company has been making efforts to divest 17 of the 18 schools included insell its Healthcareremaining Mangonia Park Palm Beach County, Florida property and Other Professions business segment. The Company anticipates that these properties will be sold during 2016. Accordingly, theassociated assets have been reflected as “held for sale”originally operated in the accompanying consolidated balance sheet. In addition, during the quarter ended September 30, 2015 the Company had two campuses held for sale. With the approval of the plan to divest the Healthcare and Other Professions businessHOPS segment, one of the campuses is no longer includedwhich has been classified as held for sale.
The assets and liabilities held for sale consist of the following:
| | | | | | |
Inventories | | $ | 845 | | | $ | 411 | |
Accounts receivable, less allowance of $3,923 and $1,545 at December 31, 2015 and 2014, respectively | | | 5,323 | | | | 1,527 | |
Prepaid expense and other current assets | | | 868 | | | | - | |
Noncurrent receivables, less allowance of $228 and $95 at December 31, 2015 and 2014, respectively | | | 1,669 | | | | 671 | |
Property, equipment and facilities - at cost, net of accumluated depreciation and amortization of $36,038 and $17,843 at December 31, 2015and 2014, respectively | | | 27,250 | | | | 50,252 | |
Goodwill | | | 8,759 | | | | 1,304 | |
Other assets, net | | | 1,197 | | | | - | |
Unearned tuition | | | (10,242 | ) | | | (2,536 | ) |
Accrued expenses | | | (1,720 | ) | | | (699 | ) |
Accrued rent | | | (2,274 | ) | | | - | |
Assets held for sale, net | | $ | 31,675 | | | $ | 50,930 | |
Accrued expenses consist of the following:
| | At December 31, | | | At December 31, | |
| | 2015 | | | 2014 | | | 2017 | | | 2016 | |
Accrued compensation and benefits | | $ | 6,526 | | | $ | 5,787 | | | $ | 3,114 | | | $ | 7,571 | |
Accrued rent and real estate taxes | | $ | 1,928 | | | $ | 3,251 | | | | 3,151 | | | | 3,365 | |
Other accrued expenses | | | 3,703 | | | | 4,827 | | | | 5,506 | | | | 4,432 | |
| | $ | 12,157 | | | $ | 13,865 | | | $ | 11,771 | | | $ | 15,368 | |
8. | 7. LONG-TERM DEBT AND LEASE OBLIGATIONS |
Long-term debt and lease obligations consist of the following:
| | At December 31, | |
| | 2015 | | | 2014 | |
Term loan (a) | | $ | 44,653 | | | $ | - | |
Credit agreement (a) | | | - | | | | 30,000 | |
Finance obligation (b) | | | 9,672 | | | | 9,672 | |
Capital lease-property (with a rate of 8.0%) (c) | | | 3,899 | | | | 25,509 | |
| | | 58,224 | | | | 65,181 | |
Less current maturities | | | (10,114 | ) | | | (30,471 | ) |
| | $ | 48,110 | | | $ | 34,710 | |
| | At December 31, | |
| | 2017 | | | 2016 | |
Credit agreement | | $ | 53,400 | | | $ | - | |
Term loan | | | - | | | | 44,267 | |
Deferred financing fees | | | (807 | ) | | | (2,310 | ) |
| | | 52,593 | | | | 41,957 | |
Less current maturities | | | - | | | | (11,713 | ) |
| | $ | 52,593 | | | $ | 30,244 | |
(a) On JulyMarch 31, 2015,2017, the Company entered into a secured revolving credit agreement (the “Credit Agreement”) with three lenders, AlostarSterling National Bank of Commerce (“Alostar”), HPF Holdco, LLC and Rushing Creek 4, LLC, led by HPF Service, LLC, as administrative agent and collateral agent (the “Agent”“Bank”), for an pursuant to which the Company obtained a credit facility in the aggregate principal amount of $45up to $55 million (the “Term Loan”“Credit Facility”). The July 31, 2015Credit Facility consists of (a) a $30 million loan facility (“Facility 1”), which is comprised of a $25 million revolving loan designated as “Tranche A” and a $5 million non-revolving loan designated as “Tranche B,” which Tranche B was repaid during the quarter ended June 30, 2017 and (b) a $25 million revolving loan facility (“Facility 2”), which includes a sublimit amount for letters of credit agreement, alongof $10 million. The Credit Agreement was subsequently amended, on November 29, 2017, to provide the Company with subsequent amendmentsan additional $15 million revolving credit loan (“Facility 3”), resulting in an increase in the aggregate availability under the Credit Facility to $65 million. The Credit Agreement was again amended on February 23, 2018, to, among other things, effect certain modifications to the financial covenants and other provisions of the Credit Agreement dated December 31, 2015 and to allow the Company to pursue the sale of certain real property assets. The February 29, 2016, are collectively referred23, 2018 amendment increased the interest rate for borrowings under Tranche A of Facility 1 to asa rate per annum equal to the “Credit Agreement.” Asgreater of December 31, 2015(x) the Bank’s prime rate plus 2.85% and prior(y) 6.00%. Prior to the most recent amendment of the Credit Agreement, revolving loans outstanding under Tranche A of Facility 1 bore interest at a rate per annum equal to the greater of (x) the Bank’s prime rate plus 2.50% and (y) 6.00%.
The Credit Facility replaces a term loan facility (the “Prior Credit Facility”) which was repaid and terminated concurrently with the effectiveness of a second amendment to the Credit AgreementFacility. The term of the Credit Facility is 38 months, maturing on February 29, 2016 (the “Second Amendment”),May 31, 2020, except that the Term Loan consisted of a $30 million term loan (the “Term Loan A”) from HPF Holdco, LLC, Rushing Creek 4, LLC and Tiger Capital Group, LLC,Facility 3 will mature one year earlier, on May 31, 2019.
The Credit Facility is secured by a first priority lien in favor of the AgentBank on substantially all of the real and personal property owned by the Company and a $15 million term loan (the “Term Loan B”) from Alostar securedas well as mortgages on four parcels of real property owned by a $15.3 million cash collateral account. Pursuant to the Second Amendment, the Company received an additional $5 million term loan from Alostar within Colorado, Tennessee and Texas at which three of the Company’s schools are located, as well as a former school property owned by the Company repaid $5 millionlocated in Connecticut.
At the closing of the principal amount ofCredit Facility, the Term Loan A. Accordingly, upon the effectiveness of the Second Amendment, the aggregate term loans outstanding under the Credit Agreement remains at approximately $45 million, consisting of an approximateCompany drew $25 million Term Loanunder Tranche A and a $20 million Term Loan B. In addition,of Facility 1, which, pursuant to the Second Amendment, the amount of cash collateral securing the Term Loan B was increased to $20.3 million. At the Company’s request, a percentage of the cash collateral may be released to the Company at the Agent’s sole discretion and with the consent of Alostar upon the satisfaction of certain criteria as outlined in the Credit Agreement. The Term Loan, which matures on July 31, 2019, replaces a previously existing $20 million revolving credit facility with Bank of America, N.A. and other lenders, which was due to expire on April 5, 2016. The previously existing revolving credit facility was terminated concurrently with the effective dateterms of the Credit Agreement, on July 31, 2015 (the “Closing Date”).was used to repay the Prior Credit Facility and to pay transaction costs associated with closing the Credit Facility. After the disbursements of such amounts, the Company retained approximately $1.8 million of the borrowed amount for working capital purposes.
A portionAlso, at closing, $5 million was drawn under Tranche B and, pursuant to the terms of the proceedsCredit Agreement, was deposited into an interest-bearing pledged account (the “Pledged Account”) in the name of the Term Loan were used byCompany maintained at the Bank in order to secure payment obligations of the Company with respect to (i) repay approximately $6.3the costs of remediation of any environmental contamination discovered at certain of the mortgaged properties based upon environmental studies undertaken at such properties. During the quarter ended June 30, 2017, the environmental studies were completed and revealed no environmental issues existing at the properties. Accordingly, pursuant to the terms of the Credit Agreement, the $5 million in the Pledged Account was released and used to repay the non-revolving loan outstanding under Tranche B. Upon the repayment of Tranche B, the maximum principal accrued interestamount of Facility 1 was permanently reduced to $25 million.
Pursuant to the terms of the Credit Agreement, all draws under Facility 2 for letters of credit or revolving loans and fees dueall draws under the previously existing revolving credit facility, (ii) fund the $20.3 millionFacility 3 must be secured by cash collateral account securing the portionin an amount equal to 100% of the Term Loan provided by Alostar, (iii) fund approximately $7.4 million in a cash collateral account securingaggregate stated amount of the letters of credit issued under the previously existingand revolving credit facility that remainloans outstanding after the termination of that facility and (iv) pay transaction expenses in connection with the Term Loan and the terminationthrough draws from Facility 1 or other available cash of the previously existing revolving credit facility. The remaining proceeds of the Term Loan of approximately $13.3 million may be used by the Company to finance capital expenditures and for general corporate purposes consistent with the terms of the Credit Agreement.Company.
Interest will accrueAccrued interest on the Term Loan at a per annum rate equal to the greater of (i) 11% or (ii) 90-day LIBOR plus 9% determined monthly by the Agent andeach revolving loan will be payable monthly in arrears. The principal balanceRevolving loans under Tranche A of Facility 1 will bear interest at a rate per annum equal to the greater of (x) the Bank’s prime rate plus 2.85% and (y) 6.00%. Prior to the February 23, 2018 amendment of the Term LoanCredit Agreement, the per annum interest rate for revolving loans outstanding under Tranche A of Facility 1 was equal to the greater of (x) the Bank’s prime rate plus 2.50% and (y) 6.00%. The amount borrowed under Tranche B of Facility 1 and revolving loans under Facility 2 and Facility 3 will be repaid inbear interest at a rate per annum equal monthly installments, commencing on August 1, 2017, determined asto the quotientgreater of (i) 10% of(x) the outstanding principal balance of the Term Loan as of July 2, 2017 divided by (ii) 12. A final installment of principalBank’s prime rate and all accrued and unpaid interest will be due on the maturity date of the Term Loan.(y) 3.50%.
The Term Loan may be prepaid in whole or in part at any time, subject toEach issuance of a letter of credit under Facility 2 will require the payment of a prepayment premiumletter of credit fee to the Bank equal to (i) 5%a rate per annum of the principal amount prepaid at any time up to but not including the second anniversary of the Closing Date and (ii) 3% of the principal amount prepaid at any time commencing1.75% on the second anniversarydaily amount available to be drawn under the letter of credit, which fee shall be payable in quarterly installments in arrears. Letters of credit totaling $6.2 million that were outstanding under a $9.5 million letter of credit facility previously provided to the Closing Date up to but not including the third anniversary of the Closing Date. In the event of any sale or other disposition of a school or real propertyCompany by the Company permittedBank, which letter of credit facility was set to mature on April 1, 2017, are treated as letters of credit under the Term Loan, the net proceedsFacility 2.
The terms of such sale or disposition must be used to prepay the Loan in an amount determined pursuant to the Credit Agreement subject to the applicable prepayment premium; provided, however, that no prepayment premium will be due with respect to up to $15 million of aggregate repayments of the Term Loan made during the first yearprovide that the Term LoanBank be paid an unused facility fee on the average daily unused balance of Facility 1 at a rate per annum equal to 0.50%, which fee is outstanding. A portion of the net cash proceeds of any disposition of a schoolpayable quarterly in an amount determined pursuant to the terms of the Term Loan, must be deposited and held as cash collateral in a deposit account controlled by the Agent until the conditions for release set forth in the Term Loan are satisfied.arrears. In connection with the assets which are currently classified as held for sale and are expected to be sold within one year,addition, the Company is required to classify $10.0maintain, on deposit in one or more non-interest bearing accounts, a minimum of $5 million as short term debt duein quarterly average aggregate balances. If in any quarter the required average aggregate account balance is not maintained, the Company is required to pay the Bank a fee of $12,500 for that quarter and, in the event that the Company terminates the Credit Facility or refinances with another lender within 18 months of closing, the Company is required to pay the Bank a breakage fee of $500,000.
In addition to the Term Loan prepayment minimum required with respect to any such disposition.
The Term Loanforegoing, the Credit Agreement contains customary representations, warranties and covenants such as minimum financial responsibility composite score, cohort default rate, and other financial covenants, including minimum liquidity, maximum capital expenditures, maximum 90/10 ratio and minimum EBITDA (as defined in the Term Loan), as well as affirmative and negative covenants, including financial covenants that restrict capital expenditures, prohibit the incurrence of a net loss commencing on December 31, 2018 and require a minimum adjusted EBITDA and a minimum tangible net worth, which is an annual covenant, as well as events of default customary for facilities of this type. TheAs of December 31, 2017, the Company wasis in compliance with all covenants as of December 31, 2015. Subsequent to the fiscal year end, pursuant to the Second Amendment, the financial covenants were adjusted and, at the Company’s election, will be adjusted for fiscal year 2017 and for each subsequent fiscal year until the maturity of the Term Loan at either the levels applicable to fiscal year 2016 (and each fiscal quarter thereof) contained in the Credit Agreement as of the Closing Date or the levels applicable to fiscal year 2016 (and each fiscal quarter thereof) contained in the Second Amendment. In the event that the Company elects to re-set the financial covenants at the 2016 covenant levels contained in the Second Amendment, the Company will be required to prepay on or before January 15, 2017, without prepayment penalty, amounts outstanding under the Term Loan up to $4 million.covenants.
The Credit Agreement contains events of default, the occurrence and continuation of which provide the Company’s lendersIn connection with the right to exercise remedies against the Company and the collateral securing the Term Loan, including the Company’s cash. These events of default include, among other things, the Company’s failure to pay any amounts due under the Term Loan, a breach of covenants under the Credit Agreement, the Company’s insolvencyCompany paid the Bank an origination fee in the amount of $250,000 and the insolvencyother fees and reimbursements that are customary for facilities of its subsidiaries, the occurrence of a material adverse effect, the occurrence of any default under certain other indebtedness, and a final judgment against the Company in an amount greater than $1,000,000.
Also, inthis type. In connection with the Term Loan,February 23, 2018 amendment of the Credit Agreement, the Company paid to the AgentBank a commitmentmodification fee in the amount of $1.0$50,000.
The Company incurred an early termination premium of approximately $1.8 million on the Closing Date and is required to pay to the Agent other customary fees for facilities of this type. Total fees for the Term Loan were $2.8 million during fiscal year 2015, which are included in deferred finance charges on the consolidated balance sheet. Subsequent to the fiscal year end, in connection with the effectivenesstermination of the Second Amendment, the Company paid to the Agent a loan modification fee of $.5 million.
For the year ended December 31, 2015, $0.4 million of the Term Loan was repaid in connection with the Company’s sale of real property located in Springdale, Ohio. The Company had $44.7 million outstanding under the Term Loan as of December 31, 2015.Prior Credit Facility.
On April 28, 2017, the Company entered into an additional secured credit agreement with the Bank, pursuant to which the Company obtained a short term loan in the principal amount of $8 million, the proceeds of which were used for working capital and general corporate purposes. The loan, which had an interest rate equal to the greater of the Bank’s prime rate plus 2.50% or 6.00%, was secured by two real property assets located in West Palm Beach, Florida at which schools operated by the Company were located and matured upon the earlier of October 1, 2017 and the date of the sale of the West Palm Beach, Florida property. The Company had $30.0 million outstandingsold the two properties located in West Palm Beach, Florida to Tambone under its previously existing revolving credit facility asCompanies, LLC in the third quarter of December 31, 2014, which was2017 and subsequently repaid on January 3, 2015. The interest rate on this borrowing was 7.25%.the $8 million.
(b) TheAs of December 31, 2017, the Company completed a salehad $53.4 million outstanding under the Credit Facility; offset by $0.8 million of deferred finance fees. As of December 31, 2016, the Company had $44.3 million outstanding under the Prior Credit Facility; offset by $2.3 million of deferred finance fees, which were written-off. As of December 31, 2017 and a leasebackDecember 31, 2016, there were letters of several facilities on December 28, 2001. The Company retained a continuing involvementcredit in the leaseaggregate outstanding principal amount of $7.2 million and as a result it is prohibited from utilizing sale-leaseback accounting. Accordingly, the Company has treated this transaction as a finance lease. Annual rent payments under this obligation for each of the three years in the period ended December 31, 2015 were $1.6$6.2 million, respectively. These payments have been reflected in the accompanying consolidated statements of operations 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 December 31, 2016. Beginning in January 2016 the lease was amended to cure issues related to continuing involvement and achieved sales treatment. In 2016, the lease will be converted to an operating lease and rent payments will be included in educational, services and facilities expense in the consolidate statement of operations. In addition, the finance obligation, net of land and buildings, will be amortized straight-line through December 31, 2016.
(c) In 2009, the Company assumed real estate capital leases in Fern Park, Florida and Hartford, Connecticut. These leases bear interest at 8%.
On December 3, 2015, the Company’s Board of Directors approved a plan to cease operations at the Hartford, Connecticut school which is scheduled to close in the fourth quarter of 2016. In connection therewith, the Company paid a $5 million lease termination fee on December 31, 2015 to its landlord in connection with the early termination of a lease agreement under which the Company leased property in Hartford, Connecticut for a term continuing through July 31, 2031. The terminated lease agreement was replaced with a short-term lease agreement in order to allow students currently enrolled at the school to complete their course of study.
On February 27, 2015, the Company’s Board of Directors approved a plan to cease operations at the Fern Park, Florida school which is scheduled to close in the first quarter of 2016. The Company paid a $2.8 million lease termination fee on February 12, 2016 to its landlord in connection with the early termination of a lease agreement under which the Company leased property in Fern Park, Florida for a term continuing through October 31, 2032. The early terminated lease agreement will continue in effect until April 10, 2016 in order to allow students currently enrolled at the school to complete their course of study.
Scheduled maturities of long-term debt and lease obligations at December 31, 20152017 are as follows:
Year ending December 31, | | | | | | |
2016 | | $ | 10,151 | | |
2017 | | | 1,566 | | |
2018 | | | 3,596 | | | $ | - | |
2019 | | | 29,858 | | | | - | |
2020 | | | 157 | | | | 53,400 | |
2021 | | | | - | |
2022 | | | | - | |
Thereafter | | | 3,224 | | | | - | |
| | $ | 48,552 | | | $ | 53,400 | |
The finance obligation of $9.7 million is excluded from the scheduled maturities schedule as it is a non-cash liability. The Fern Park, Florida capital lease is included in the scheduled maturities of $3.9 million ($0.1 million included in each year ended 2016, 2017, 2018, 2019 and 2020; $3.4 million included thereafter), however, as mentioned above, subsequent to December 31, 2015 the Company entered into an agreement to terminate the lease which included a termination fee of $2.8 million.
Restricted Stock
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 based on service and performance. The number of shares granted to each employee is based on the fair market value of a share of common stock on the date of grant.
The service-based restricted shares granted during 2012 vest ratably on the grant date and the first through fourth anniversaries of the grant date. The service-based restricted shares granted during 2014 vest ratably on the grant date and the first through third anniversaries of the grant date.
On June 2, 2014 and December 18, 2014,May 13, 2016, performance-based shares were granted which vest over threetwo years on March 15, 2017 and March 15, 2018 based upon the attainment of (i) a specified operating income marginfinancial responsibility ratio during any one or more of theeach fiscal years in the period beginning January 1, 2015 andyear ending December 31, 2016 and 2017. As of December 31, 2017 and (ii) the attainment of earnings before interest, taxes, depreciation and amortization targets during eachhalf of the fiscal years ended December 31, 2015 through 2017.shares have vested as the vesting criteria was achieved. There is no vesting periodrestriction on the right to vote or the right to receive dividends onwith respect to any of the restricted shares.
On April 29, 2013,December 18, 2014, performance-based shares were granted which vest over four years based upon the attainment of (i) a specified operating income margin during any one or more of the fiscal years in the period beginning January 1, 20132015 and ending December 31, 20162018 and (ii) the attainment of earnings before interest, taxes, depreciation and amortization targets during each of the fiscal years ended December 31, 20132015 through 2016.2018. As of December 31, 2017 half of the shares have vested as the vesting criteria was achieved. There is no vesting periodrestriction on the right to vote or the right to receive dividends onwith respect to any of the restricted shares.
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 on the first anniversary of the grant date; however, thereThere is no vesting periodrestriction on the right to vote or the right to receive dividends on thesewith respect to any of the restricted shares.
In 2015, 20142017, 2016 and 2013,2015, the Company completed a net share settlement for 85,740, 144,983189,420, 71,805 and 140,47585,740 restricted shares and stock options exercised, respectively, on behalf of certain employees that participate in the LTIP upon the vesting of the restricted shares pursuant to the terms of the LTIP or exercise of the stock options. The net share settlement was in connection with income taxes incurred on restricted shares or stock option exercises that vested and were transferred to the employee during 2015, 20142017, 2016 and/or 2013,2015, creating taxable income for the employee. At the employees’ request, the Company will pay these taxes on behalf of the employees in exchange for the employees returning an equivalent value of restricted shares or shares acquired upon the exercise of stock options to the Company. These transactions resulted in a decrease of approximately $0.4 million, $0.2 million $0.4 million and $0.8$0.2 million in 2015, 20142017, 2016 and 2013,2015, respectively, to equity as the cash payment of the taxes effectively was a repurchase of the restricted shares or shares acquired through the exercise of stock options granted in previous years.
The following is a summary of transactions pertaining to restricted stock:
| | Shares | | | Weighted Average Grant Date Fair Value Per Share | | | Shares | | | Weighted Average Grant Date Fair Value Per Share | |
Nonvested restricted stock outstanding at December 31, 2013 | | | 1,247,946 | | | $ | 6.77 | | |
Nonvested restricted stock outstanding at December 31, 2015 | | | | 450,494 | | | $ | 3.69 | |
Granted | | | 337,100 | | | | 3.50 | | | | 1,105,487 | | | | 1.67 | |
Cancelled | | | (178,792 | ) | | | 6.47 | | | | (76,200 | ) | | | 2.98 | |
Vested | | | (480,435 | ) | | | 5.36 | | | | (336,182 | ) | | | 3.33 | |
Nonvested restricted stock outstanding at December 31, 2014 | | | 925,819 | | | | 5.04 | | |
Nonvested restricted stock outstanding at December 31, 2016 | | | | 1,143,599 | | | | 1.89 | |
| | | | | | | | | | | | | | | | |
Granted | | | 234,651 | | | | 2.28 | | | | 181,208 | | | | 2.58 | |
Cancelled | | | (354,462 | ) | | | 4.97 | | | | (52,398 | ) | | | 5.63 | |
Vested | | | (355,514 | ) | | | 5.00 | | | | (664,415 | ) | | | 1.77 | |
Nonvested restricted stock outstanding at December 31, 2015 | | | 450,494 | | | | 3.69 | | |
Nonvested restricted stock outstanding at December 31, 2017 | | | | 607,994 | | | | 1.90 | |
The restricted stock expense for each of the years ended December 31, 2017, 2016 and 2015 2014 and 2013 was $1.1$1.2 million, $2.5$1.4 million and $2.9$1.1 million, respectively. The unrecognized restricted stock expense as of December 31, 20152017 and 20142016 was $1.3$0.3 million and $4.2$1.5 million, respectively. As of December 31, 2015,2017, unrecognized restricted stock expense will be expensed over the weighted-average period of approximately 1.2 years.3 months. As of December 31, 2015,2017, outstanding restricted shares under the LTIP had an aggregate intrinsic value of $0.9$1.2 million. For the year ended December 31, 2017 and 2016, respectively, 52,398 and 26,200 shares were cancelled as the performance criteria was not met.
Stock Options
During 2015, 20142017, 2016 and 20132015 there were no new stock option grants. The following is a summary of transactions pertaining to the option plans:
| | Shares | | | Weighted Average Exercise Price Per Share | | Weighted Average Remaining Contractual Term | | Aggregate Intrinsic Value | |
Outstanding December 31, 2012 | | | 655,875 | | | $ | 14.72 | | 4.89 years | | $ | - | |
Cancelled | | | (108,750 | ) | | | 14.64 | | | | | - | |
| | | | | | | | | | | | | |
Outstanding December 31, 2013 | | | 547,125 | | | | 14.73 | | 4.56 years | | | - | |
Cancelled | | | (122,958 | ) | | | 18.49 | | | | | - | |
| | | | | | | | | | | | | |
Outstanding December 31, 2014 | | | 424,167 | | | | 13.65 | | 4.18 years | | | - | |
Cancelled | | | (178,000 | ) | | | 15.20 | | | | | | |
| | | | | | | | | | | | | |
Outstanding December 31, 2015 | | | 246,167 | | | | 12.52 | | 3.98 years | | | - | |
| | | | | | | | | | | | | |
Vested or expected to vest as of December 31, 2015 | | | 246,167 | | | | 12.52 | | 3.98 years | | | - | |
| | | | | | | | | | | | | |
Exercisable as of December 31, 2015 | | | 246,167 | | | | 12.52 | | 3.98 years | | | - | |
| | Shares | | | Weighted Average Exercise Price Per Share | | Weighted Average Remaining Contractual Term | | Aggregate Intrinsic Value | |
Outstanding January 1, 2015 | | | 424,167 | | | $ | 13.65 | | 4.18 years | | $ | - | |
Cancelled | | | (178,000 | ) | | | 15.20 | | | | | - | |
| | | | | | | | | | | | | |
Outstanding December 31, 2015 | | | 246,167 | | | | 12.52 | | 3.98 years | | | - | |
Cancelled | | | (28,000 | ) | | | 15.76 | | | | | - | |
| | | | | | | | | | | | | |
Outstanding December 31, 2016 | | | 218,167 | | | | 12.11 | | 3.33 years | | | - | |
Cancelled | | | (50,500 | ) | | | 12.09 | | | | | | |
| | | | | | | | | | | | | |
Outstanding December 31, 2017 | | | 167,667 | | | | 12.11 | | 2.97 years | | | - | |
| | | | | | | | | | | | | |
Vested as of December 31, 2017 | | | 167,667 | | | | 12.11 | | 2.97 years | | | - | |
| | | | | | | | | | | | | |
Exercisable as of December 31, 2017 | | | 167,667 | | | | 12.11 | | 2.97 years | | | - | |
As of December 31, 2015,2017, there are no unrecognized pre-tax compensation expense for unvested stock option awards.
The following table presents a summary of options outstanding at December 31, 2015:2017:
| | | At December 31, 2017 | |
| | | Stock Options Outstanding | | | Stock Options Exercisable | |
Range of Exercise Prices | | | Shares | | | Contractual Weighted Average life (years) | | | Weighted Average Exercise Price | | | Shares | | | Weighted Average Exercise Price | |
$ | 4.00-$13.99 | | | | 119,667 | | | | 3.22 | | | $ | 8.79 | | | | 119,667 | | | $ | 8.79 | |
$ | 14.00-$19.99 | | | | 17,000 | | | | 1.84 | | | | 19.98 | | | | 17,000 | | | | 19.98 | |
$ | 20.00-$25.00 | | | | 31,000 | | | | 2.59 | | | | 20.62 | | | | 31,000 | | | | 20.62 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | 167,667 | | | | 2.97 | | | | 12.11 | | | | 167,667 | | | | 12.11 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | At December 31, 2015 | |
| | | Stock Options Outstanding | | | Stock Options Exercisable | |
Range of Exercise Prices | | | Shares | | | Contractual Weighted Average life (years) | | | Weighted Average Price | | | Shares | | | Weighted Exercise Price | |
$ | 4.00-$13.99 | | | | 172,667 | | | | 4.24 | | | $ | 9.57 | | | | 172,667 | | | $ | 9.57 | |
$ | 14.00-$19.99 | | | | 42,500 | | | | 2.48 | | | | 18.61 | | | | 42,500 | | | | 18.61 | |
$ | 20.00-$25.00 | | | | 31,000 | | | | 4.60 | | | | 20.62 | | | | 31,000 | | | | 20.62 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | 246,167 | | | | 3.98 | | | | 12.52 | | | | 246,167 | | | | 12.52 | |
The Company sponsors a noncontributory defined benefit pension plan covering substantially all of the Company's union employees. Benefits are provided based on employees' years of service and earnings. This plan was frozen on December 31, 1994 for non-union employees.
The following table sets forth the plan's funded status and amounts recognized in the consolidated financial statements:
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2015 | | | 2014 | | | 2013 | | | 2017 | | | 2016 | | | 2015 | |
CHANGES IN BENEFIT OBLIGATIONS: | | | | | | | | | | | | | | | | | | |
Benefit obligation-beginning of year | | $ | 24,299 | | | $ | 20,314 | | | $ | 23,169 | | | $ | 22,916 | | | $ | 23,341 | | | $ | 24,299 | |
Service cost | | | 28 | | | | 23 | | | | 37 | | | | 29 | | | | 28 | | | | 28 | |
Interest cost | | | 884 | | | | 892 | | | | 790 | | | | 840 | | | | 888 | | | | 884 | |
Actuarial (gain) loss | | | (782 | ) | | | 4,149 | | | | (2,614 | ) | |
Actuarial loss (gain) | | | | 721 | | | | (255 | ) | | | (782 | ) |
Benefits paid | | | (1,088 | ) | | | (1,079 | ) | | | (1,068 | ) | | | (1,014 | ) | | | (1,086 | ) | | | (1,088 | ) |
Benefit obligation at end of year | | | 23,341 | | | | 24,299 | | | | 20,314 | | | | 23,492 | | | | 22,916 | | | | 23,341 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
CHANGE IN PLAN ASSETS: | | | | | | | | | | | | | | | | | | | | | | | | |
Fair value of plan assets-beginning of year | | | 19,000 | | | | 18,792 | | | | 16,268 | | | | 17,548 | | | | 17,792 | | | | 19,000 | |
Actual return on plan assets | | | (120 | ) | | | 1,017 | | | | 2,919 | | | | 2,521 | | | | 842 | | | | (120 | ) |
Employer contributions | | | - | | | | 270 | | | | 673 | | |
Benefits paid | | | (1,088 | ) | | | (1,079 | ) | | | (1,068 | ) | | | (1,014 | ) | | | (1,086 | ) | | | (1,088 | ) |
Fair value of plan assets-end of year | | | 17,792 | | | | 19,000 | | | | 18,792 | | | | 19,055 | | | | 17,548 | | | | 17,792 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
BENEFIT OBLIGATION IN EXCESS OF FAIR VALUE FUNDED STATUS: | | $ | (5,549 | ) | | $ | (5,299 | ) | | $ | (1,522 | ) | | $ | (4,437 | ) | | $ | (5,368 | ) | | $ | (5,549 | ) |
For the year ended December 31, 2015,2017, the actuarial gainloss of $0.8$0.7 million was due to the increasedecrease in the discount rate from 3.66%3.81% to 3.94%3.36%.
Amounts recognized in the consolidated balance sheets consist of:
| | At December 31, | |
| | 2015 | | | 2014 | | | 2013 | |
Noncurrent liabilities | | $ | (5,549 | ) | | $ | (5,299 | ) | | $ | (1,522 | ) |
| | At December 31, | |
| | 2017 | | | 2016 | | | 2015 | |
Noncurrent liabilities | | $ | (4,437 | ) | | $ | (5,368 | ) | | $ | (5,549 | ) |
Amounts recognized in accumulated other comprehensive loss consist of:
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2015 | | | 2014 | | | 2013 | | | 2017 | | | 2016 | | | 2015 | |
Accumulated loss | | $ | (9,438 | ) | | $ | (9,833 | ) | | $ | (5,928 | ) | | $ | (6,876 | ) | | $ | (8,467 | ) | | $ | (9,438 | ) |
Deferred income taxes | | | 2,366 | | | | 2,366 | | | | 2,366 | | | | 2,366 | | | | 2,366 | | | | 2,366 | |
Accumulated other comprehensive loss | | $ | (7,072 | ) | | $ | (7,467 | ) | | $ | (3,562 | ) | | $ | (4,510 | ) | | $ | (6,101 | ) | | $ | (7,072 | ) |
The accumulated benefit obligation was $23.3$23.5 million and $24.3$22.9 million at December 31, 20152017 and 2014,2016, respectively.
The following table provides the components of net periodic cost for the plan:
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2015 | | | 2014 | | | 2013 | | | 2017 | | | 2016 | | | 2015 | |
COMPONENTS OF NET PERIODIC BENEFIT COST | | | | | | | | | | | | | | | | | | |
Service cost | | $ | 28 | | | $ | 23 | | | $ | 37 | | | $ | 29 | | | $ | 28 | | | $ | 28 | |
Interest cost | | | 884 | | | | 892 | | | | 790 | | | | 840 | | | | 888 | | | | 884 | |
Expected return on plan assets | | | (1,243 | ) | | | (1,287 | ) | | | (1,141 | ) | | | (1,058 | ) | | | (1,118 | ) | | | (1,243 | ) |
Recognized net actuarial loss | | | 976 | | | | 513 | | | | 955 | | | | 850 | | | | 991 | | | | 976 | |
Net periodic benefit cost | | $ | 645 | | | $ | 141 | | | $ | 641 | | | $ | 661 | | | $ | 789 | | | $ | 645 | |
The estimated net loss, transition obligation and prior service cost for the plan that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over the next year is $0.9$0.7 million.
Employee pension plan adjustments of $0.4 million for the year ended December 31, 2015 includes $1.0 million of recognized actuarial losses reclassified from accumulated other comprehensive income.
The following tables present plan assets using the fair value hierarchy as of December 31, 20152017 and 2014.2016. The fair value hierarchy has three levels based on the reliability of inputs used to determine fair value. Level 1 refers to fair values determined based on quoted prices in active markets for identical assets. Level 2 refers to fair values estimated using observable prices that are based on inputs not quoted in active markets but observable by market data, while Level 3 includes the fair values estimated using significant non-observable inputs. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
| | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Total | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Total | |
Equity securities | | $ | 8,473 | | | $ | - | | | $ | - | | | $ | 8,473 | | | $ | 6,856 | | | $ | - | | | $ | - | | | $ | 6,856 | |
Fixed income | | | 5,943 | | | | - | | | | - | | | | 5,943 | | | | 6,818 | | | | - | | | | - | | | | 6,818 | |
International equities | | | 3,288 | | | | - | | | | - | | | | 3,288 | | | | 3,490 | | | | - | | | | - | | | | 3,490 | |
Real estate | | | | 1,133 | | | | - | | | | - | | | | 1,133 | |
Cash and equivalents | | | 88 | | | | - | | | | - | | | | 88 | | | | 758 | | | | - | | | | - | | | | 758 | |
Balance at December 31, 2015 | | $ | 17,792 | | | $ | - | | | $ | - | | | $ | 17,792 | | |
Balance at December 31, 2017 | | | $ | 19,055 | | | $ | - | | | $ | - | | | $ | 19,055 | |
| | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Total | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Total | |
Equity securities | | $ | 9,566 | | | $ | - | | | $ | - | | | $ | 9,566 | | | $ | 8,509 | | | $ | - | | | $ | - | | | $ | 8,509 | |
Fixed income | | | 6,099 | | | | - | | | | - | | | | 6,099 | | | | 6,548 | | | | - | | | | - | | | | 6,548 | |
International equities | | | 3,328 | | | | - | | | | - | | | | 3,328 | | | | 2,484 | | | | - | | | | - | | | | 2,484 | |
Cash and equivalents | | | 7 | | | | - | | | | - | | | | 7 | | | | 7 | | | | - | | | | - | | | | 7 | |
Balance at December 31, 2014 | | $ | 19,000 | | | $ | - | | | $ | - | | | $ | 19,000 | | |
Balance at December 31, 2016 | | | $ | 17,548 | | | $ | - | | | $ | - | | | $ | 17,548 | |
Fair value of total plan assets by major asset category as of December 31:
| | 2015 | | | 2014 | | | 2013 | | | 2017 | | | 2016 | | | 2015 | |
Equity securities | | | 48 | % | | | 50 | % | | | 51 | % | | | 36 | % | | | 49 | % | | | 48 | % |
Fixed income | | | 33 | % | | | 32 | % | | | 31 | % | | | 36 | % | | | 37 | % | | | 33 | % |
International equities | | | 19 | % | | | 18 | % | | | 18 | % | | | 18 | % | | | 14 | % | | | 19 | % |
Real estate | | | | 6 | % | | | 0 | % | | | 0 | % |
Cash and equivalents | | | 0 | % | | | 0 | % | | | 0 | % | | | 4 | % | | | 0 | % | | | 0 | % |
Total | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % |
Weighted-average assumptions used to determine benefit obligations as of December 31:
| | 2015 | | | 2014 | | | 2013 | | | 2017 | | | 2016 | | | 2015 | |
Discount rate | | | 3.94 | % | | | 3.66 | % | | | 4.46 | % | | | 3.36 | % | | | 3.81 | % | | | 3.94 | % |
Rate of compensation increase | | | 2.50 | % | | | 1.13 | % | | | 2.00 | % | | | 2.50 | % | | | 2.50 | % | | | 2.50 | % |
Weighted-average assumptions used to determine net periodic pension cost for years ended December 31:
| | 2015 | | | 2014 | | | 2013 | | | 2017 | | | 2016 | | | 2015 | |
Discount rate | | | 3.94 | % | | | 4.46 | % | | | 3.55 | % | | | 3.36 | % | | | 3.81 | % | | | 3.94 | % |
Rate of compensation increase | | | 2.50 | % | | | 1.13 | % | | | 2.00 | % | | | 2.50 | % | | | 2.50 | % | | | 2.50 | % |
Long-term rate of return | | | 6.50 | % | | | 7.00 | % | | | 7.00 | % | | | 6.00 | % | | | 6.25 | % | | | 6.50 | % |
As this plan was frozen to non-union employees on December 31, 1994, the difference between the projected 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 does not expect to make contributions to the plan in 2016.2018. 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 zero and $0.3 million for the each of the years ended December 31, 20152017 and 2014,2016, respectively.
Information about the expected benefit payments for the plan is as follows:
Year Ending December 31, | | | | | | |
2016 | | $ | 1,225 | | |
2017 | | | 1,303 | | |
2018 | | | 1,373 | | | $ | 1,303 | |
2019 | | | 1,408 | | | | 1,334 | |
2020 | | | 1,416 | | | | 1,347 | |
Years 2021-2025 | | | 7,232 | | |
2021 | | | | 1,364 | |
2022 | | | | 1,381 | |
Years 2023-2027 | | | | 6,969 | |
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 wouldmay contribute up to an additional 30% of the employee's contributed amount up to 6% of compensation; however, the Company suspended the additional 30% match as of June 2015.compensation. For the years ended December 31, 2015, 20142017, 2016 and 2013,2015, the Company's expense for the 401(k) plan amounted to $0.1 million, $0.7 million $1.6 million and $1.9$0.7 million, respectively.
Components of the provision for income taxes from continuing operations were as follows:
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2015 | | | 2014 | | | 2013 | | | 2017 | | | 2016 | | | 2015 | |
Current: | | | | | | | | | | | | | | | | | | |
Federal | | $ | - | | | $ | - | | | $ | (7,369 | ) | | $ | - | | | $ | - | | | $ | - | |
State | | | 242 | | | | 200 | | | | 709 | | | | 150 | | | | 200 | | | | 242 | |
Total | | | 242 | | | | 200 | | | | (6,660 | ) | | | 150 | | | | 200 | | | | 242 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Deferred: | | | | | | | | | | | | | | | | | | | | | | | | |
Federal | | | - | | | | (1,420 | ) | | | 21,103 | | | | (424 | ) | | | - | | | | - | |
State | | | - | | | | (259 | ) | | | 5,148 | | | | - | | | | - | | | | - | |
Total | | | - | | | | (1,679 | ) | | | 26,251 | | | | (424 | ) | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total provision (benefit) | | $ | 242 | | | $ | (1,479 | ) | | $ | 19,591 | | |
Total (benefit) provision | | | $ | (274 | ) | | $ | 200 | | | $ | 242 | |
The components of the deferred tax assets are as follows:
| | At December 31, | | | At December 31, | |
| | 2015 | | | 2014 | | | 2017 | | | 2016 | |
Noncurrent deferred tax assets (liabilities) | | | | | | | | | | | | |
Allowance for bad debts | | $ | 5,617 | | | $ | 5,926 | | | $ | 3,792 | | | $ | 5,904 | |
Accrued rent | | | 2,952 | | | | 3,255 | | | | 1,723 | | | | 3,191 | |
Accrued bonus | | | | - | | | | 1,429 | |
Accrued benefits | | | | 105 | | | | 198 | |
Stock-based compensation | | | 498 | | | | 907 | | | | 387 | | | | 557 | |
Depreciation | | | 14,941 | | | | 15,754 | | | | 15,520 | | | | 20,372 | |
Goodwill | | | (380 | ) | | | 1,002 | | | | 594 | | | | 1,959 | |
Other intangibles | | | 274 | | | | 452 | | | | 291 | | | | 562 | |
Pension plan liabilities | | | 2,215 | | | | 2,115 | | | | 1,221 | | | | 2,142 | |
Net operating loss carryforwards | | | 14,765 | | | | 14,332 | | | | 17,367 | | | | 17,846 | |
Sale leaseback-deferred gain | | | 2,629 | | | | 2,580 | | |
AMT credit | | | 424 | | | | 424 | | | | 424 | | | | 424 | |
Total noncurrent deferred tax assets | | | 43,935 | | | | 46,747 | | | | 41,424 | | | | 54,584 | |
Less valuation allowance | | | (43,935 | ) | | | (46,747 | ) | | | (41,000 | ) | | | (54,584 | ) |
Noncurrent deferred tax assets, net of valuation allowance | | $ | - | | | $ | - | | | $ | 424 | | | $ | - | |
Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A significant piece of objective negative evidence was the cumulative losses incurred by the Company in recent years.
On the basis of this evaluation the Company believes it is not more likely than not that it will realize its net deferred tax assets. As a result, as of December 31, 20152017 and 2014,2016, the Company has recorded a valuation allowance of $43.9$41.0 million and $46.7$54.6 million, respectively, against its net deferred tax assets.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation known as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act establishes new tax laws that will take effect in 2018, including, but not limited to (1) reduction of the U.S. federal corporate tax rate from a maximum of 35% to 21%; (2) elimination of the corporate alternative minimum tax (AMT); (3) a new limitation on deductible interest expense; (4) the repeal of the domestic production activity deduction; (5) limitations on the deductibility of certain executive compensation; and (6) limitations on net operating losses (NOLs) generated after December 31, 2017, to 80% of taxable income. In addition, certain changes were made to the bonus depreciation rules that will impact 2017.
ASC 740, Income Taxes requires the effects of changes in tax laws to be recognized in the period in which the legislation is enacted. However, due to the complexity and significance of the Tax Act's provisions, the SEC staff issued Staff Accounting Bulletin 118 (SAB 118), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
At December 31, 2017, the Company has not completed its accounting for the tax effects of enactment of the Tax Act; however, the Company has made a reasonable estimate of the effects of the Tax Act’s change in the federal rate and revalued its deferred tax assets based on the rates at which they are expected to reverse in the future, which is generally the new 21% federal corporate tax rate plus applicable state tax rate. Based on the Company’s initial analysis of the impact, it consequently recorded a decrease related to deferred tax assets of $17.7 million. The expense is offset with a corresponding release of valuation allowance.
The Tax Act eliminates the corporate AMT and changes how existing corporate AMT credits can be realized either to offset regular tax liability or to be refunded. As a result of this change, the Company released the valuation allowance against corporate AMT credits deferred tax asset and recorded a deferred tax provision benefit of $0.4 million. Offsetting this benefit was $0.1 million of income tax expense from various minimal state tax expenses.
The Tax Act did not have a material impact on our financial statements because we are under a full valuation allowance and we do not have any significant offshore earnings from which to record the mandatory transition tax.
The Tax Act requires the Company to assess whether its valuation allowance analyses are affected by various aspects of the Tax Act. Since, as discussed herein, we have recorded provisional amounts related to certain portions of the Tax Act, any corresponding determination of the need for or change in a valuation allowance is also provisional. The Company’s valuation allowance position did not change as a result of tax reform except for AMT credits which is discussed above and a reduction related to the change in the deferred tax rate.
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:
| | Year Ended December 31, | | | Year Ended December 31, | | | | | | | �� | | | | | | |
| | 2015 | | | 2014 | | | 2013 | | | 2017 | | | | | | 2016 | | | | | | 2015 | | | | |
Loss from continuing operations before taxes | | $ | (2,466 | ) | | | | | $ | (16,301 | ) | | | | | $ | (7,664 | ) | | | | |
Loss before taxes | | | $ | (11,758 | ) | | | | | $ | (28,104 | ) | | | | | $ | (3,108 | ) | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Expected tax benefit | | $ | (863 | ) | | | 35.0 | % | | $ | (5,705 | ) | | | 35.0 | % | | $ | (2,682 | ) | | | 35.0 | % | | $ | (4,115 | ) | | | 35.0 | % | | $ | (9,836 | ) | | | 35.0 | % | | $ | 1,088 | | | | 35.0 | % |
State tax benefit (net of federal) | | | 242 | | | | (9.8 | ) | | | (43 | ) | | | 0.3 | | | | (92 | ) | | | 1.2 | | | | 150 | | | | (1.3 | ) | | | 200 | | | | (0.7 | ) | | | 242 | | | | 7.8 | |
Permanent impairment | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | |
Valuation allowance | | | 723 | | | | (29.3 | ) | | | 4,121 | | | | (25.3 | ) | | | 22,135 | | | | (288.8 | ) | | | (13,920 | ) | | | 118.4 | | | | 9,726 | | | | (34.6 | ) | | | (1,228 | ) | | | (39.5 | ) |
Federal tax reform - deferred rate change | | | | 17,671 | | | | (150.3 | ) | | | - | | | | - | | | | - | | | | - | |
Other | | | 140 | | | | (5.7 | ) | | | 148 | | | | (0.9 | ) | | | 230 | | | | (3.0 | ) | | | (60 | ) | | | 0.5 | | | | 110 | | | | (0.4 | ) | | | 140 | | | | 4.5 | |
Total | | $ | 242 | | | | -9.8 | % | | $ | (1,479 | ) | | | 9.1 | % | | $ | 19,591 | | | | -255.6 | % | | $ | (274 | ) | | | 2.3 | % | | $ | 200 | | | | -0.7 | % | | $ | 242 | | | | 7.8 | % |
As of December 31, 20152017 and 2014,2016, the Company has NOLnet operating loss (“NOL”) carryforwards of $32.6$57.7 million and $32.3$39.7 million, respectively, which, if unused, will expire beginning in 20272028 and ending in 2035.2037. Utilization of the NOL carryforwards may be subject to a substantial limitation due to ownership change limitations that may occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), as well as similar state and foreign provisions. These ownership changes may limit the amount of NOL and tax credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an “ownership change” as defined by Section 382 of the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points of the outstanding stock of a company by certain stockholders or public groups.
The following table summarizes the activity related to the Company’s uncertain tax positions:
| | Year Ended December 31, | |
| | 2015 | | | 2014 | | | 2013 | |
Balance at January 1, | | $ | - | | | $ | - | | | $ | 135 | |
Decrease for tax positions of prior years | | | - | | | | - | | | | (135 | ) |
Increase for tax positions of current year | | | - | | | | - | | | | - | |
Balance at December 31, | | $ | - | | | $ | - | | | $ | - | |
As of December 31, 2015, 20142017, 2016 and 2013,2015, the Company no longer has any liability for uncertain tax positions.
The Company recognizes accrued interest and penalties related to uncertain tax positions in income tax expense.
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 20142015 and, generally, is no longer subject to state and local income tax examinations by tax authorities for years before 2010.2012.
The carrying amount and estimated fair value of the Company’s financial instrument assets and liabilities, which are not measured at fair value on the Consolidated Balance Sheets, are listed in the table below:
| | | December 31, 2017 | |
| | December 31, 2015 | | | Carrying | | | Quoted Prices in Active Markets for Identical Assets | | | Significant Other Observable Inputs | | | Significant Unobservable Inputs | |
| | Carrying Amount | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Total | | | Amount | | | (Level 1) | | | (Level 2) | | | (Level 3) | | | Total | |
Financial Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 38,420 | | | $ | 38,420 | | | $ | - | | | $ | - | | | $ | 38,420 | | | $ | 14,563 | | | $ | 14,563 | | | $ | - | | | $ | - | | | $ | 14,563 | |
Restricted cash | | | 7,362 | | | | 7,362 | | | | - | | | | - | | | | 7,362 | | | | 39,991 | | | | 39,991 | | | | - | | | | - | | | | 39,991 | |
Prepaid expenses and other current assets | | | 2,566 | | | | - | | | | 2,566 | | | | - | | | | 2,566 | | | | 2,352 | | | | - | | | | 2,352 | | | | - | | | | 2,352 | |
Noncurrent restricted cash | | | 15,259 | | | | 15,259 | | | | - | | | | - | | | | 15,259 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Financial Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Accrued expenses | | $ | 10,999 | | | $ | - | | | $ | 10,999 | | | $ | - | | | $ | 10,999 | | | $ | 11,771 | | | $ | - | | | $ | 11,771 | | | $ | - | | | $ | 11,771 | |
Other short term liabilities | | | 686 | | | | - | | | | 686 | | | | - | | | | 686 | | | | 558 | | | | - | | | | 558 | | | | - | | | | 558 | |
Term loan | | | 44,653 | | | | - | | | | 36,795 | | | | - | | | | 36,795 | | |
Credit facility | | | | 52,593 | | | | - | | | | 47,200 | | | | - | | | | 47,200 | |
| | | December 31, 2016 | |
| | December 31, 2014 | | | Carrying | | | Quoted Prices in Active Markets for Identical Assets | | | Significant Other Observable Inputs | | | Significant Unobservable Inputs | |
| | Carrying Amount | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Total | | | Amount | | | (Level 1) | | | (Level 2) | | | (Level 3) | | | Total | |
Financial Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 12,299 | | | $ | 12,299 | | | $ | - | | | $ | - | | | $ | 12,299 | | | $ | 21,064 | | | $ | 21,064 | | | $ | - | | | $ | - | | | $ | 21,064 | |
Restricted cash | | | 30,000 | | | | 30,000 | | | | - | | | | - | | | | 30,000 | | | | 6,399 | | | | 6,399 | | | | - | | | | - | | | | 6,399 | |
Prepaid expenses and other current assets | | | 3,937 | | | | - | | | | 3,937 | | | | - | | | | 3,937 | | | | 2,434 | | | | - | | | | 2,434 | | | | - | | | | 2,434 | |
Noncurrent restricted cash | | | | 20,252 | | | | 20,252 | | | | - | | | | - | | | | 20,252 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Financial Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Accrued expenses | | $ | 13,865 | | | $ | - | | | $ | 13,865 | | | $ | - | | | $ | 13,865 | | | $ | 12,815 | | | $ | - | | | $ | 12,815 | | | $ | - | | | $ | 12,815 | |
Other short term liabilities | | | 780 | | | | - | | | | 780 | | | | - | | | | 780 | | | | 653 | | | | - | | | | 653 | | | | - | | | | 653 | |
Credit agreement | | | 30,000 | | | | - | | | | 30,000 | | | | - | | | | 30,000 | | |
Term loan | | | | 44,267 | | | | - | | | | 40,687 | | | | - | | | | 40,687 | |
The fair value of the Term loan is estimated based on a present value analysis utilizing aggregate market yields obtained from independent pricing sources for similar financial instruments.
The carrying amounts reported on the Consolidated Balance Sheets for Cash and cash equivalents, Restricted cash and Noncurrent restricted cash approximate fair value because they are highly liquid.
The carrying amounts reported on the Consolidated Balance Sheets for Prepaid expenses and otherOther current assets, Accrued expenses and Other short term liabilities approximate fair value due to the short-term nature of these items.