U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(MARK ONE)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
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COMMISSION FILE NUMBER 000-51371
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LINCOLN EDUCATIONAL SERVICES CORPORATION
(Exact name of registrant as specified in its charter)
NEW JERSEY 57-1150621
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
200 EXECUTIVE DRIVE, SUITE 340
WEST ORANGE, NJ 07052
(Address of principal executive offices)
(973) 736-9340
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one): Large accelerated filer|_| Accelerated filer|_| Non-accelerated filer|X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
As of August 3, 2006, there were 25,397,095 shares of the registrant's common
stock outstanding.
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LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDING JUNE 30, 2006
PART I. FINANCIAL INFORMATION
- ------- ---------------------
Item 1. Financial Statements 1
Condensed Consolidated Balance Sheets at June 30, 2006 and
December 31, 2005 (unaudited) 1
Condensed Consolidated Statements of Income for the three
and six months ended June 30, 2006 and 2005 (unaudited) 3
Condensed Consolidated Statement of Changes in Stockholders'
Equity for the six months ended June 30, 2006 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 2006 and 2005 (unaudited) 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Item 4. Controls and Procedures 21
PART II. OTHER INFORMATION 21
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Item 1. Legal Proceedings 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 6. Exhibits 22
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PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
JUNE 30, DECEMBER 31,
2006 2005
------------------ ------------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,467 $ 50,257
Restricted cash 2,069 -
Accounts receivable, less allowance of $11,631 and $7,647
at June 30, 2006 and December 31, 2005, respectively 15,769 13,950
Inventories 2,181 1,764
Deferred income taxes 4,013 3,545
Due from federal funds 314 -
Prepaid expenses and other current assets 4,964 3,190
Prepaid income taxes 2,517 -
Other receivable 235 452
------------------ ------------------
Total current assets 37,529 73,158
------------------ ------------------
PROPERTY, EQUIPMENT AND FACILITIES - At cost, net of accumulated
depreciation and amortization of $66,167 and $59,570 at
June 30, 2006 and December 31, 2005, respectively 94,293 68,932
------------------ ------------------
OTHER ASSETS:
Deferred finance charges 1,114 1,211
Benefit under interest rate swap 384 -
Prepaid pension cost 5,046 5,071
Deferred income taxes - 2,790
Goodwill 82,578 59,467
Other assets 5,213 4,163
------------------ ------------------
Total other assets 94,335 72,702
------------------ ------------------
TOTAL $ 226,157 $ 214,792
================== ==================
1
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and lease obligations $ 1,034 $ 283
Unearned tuition 27,309 34,930
Accounts payable 10,696 12,675
Accrued expenses 12,073 11,060
Advance payments of federal funds - 840
Income taxes payable - 4,085
------------------ ------------------
Total current liabilities 51,112 63,873
NONCURRENT LIABILITIES:
Deferred income taxes 1,923 -
Long-term debt and lease obligations, net of current portion 26,751 10,485
Other long-term liabilities 5,115 4,444
------------------ ------------------
Total liabilities 84,901 78,802
------------------ ------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, no par value - 10,000,000 shares authorized,
no shares issued and outstanding at June 30, 2006 and
December 31, 2005 - -
Common stock, no par value - authorized 100,000,000 shares at
June 30, 2006 and December 31, 2005, issued and outstanding
25,390,669 shares at June 30, 2006 and 25,168,390 shares at
December 31, 2005 119,875 119,453
Additional paid-in capital 7,008 5,665
Deferred compensation (587) (360)
Retained earnings 14,960 11,232
------------------ ------------------
Total stockholders' equity 141,256 135,990
------------------ ------------------
TOTAL $ 226,157 $ 214,792
================== ==================
See notes to unaudited condensed consolidated financial statements.
2
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2006 2005 2006 2005
-------------- -------------- -------------- --------------
REVENUES $ 75,363 $ 68,236 $ 150,876 $ 139,105
-------------- -------------- -------------- --------------
COSTS AND EXPENSES:
Educational services and facilities 32,609 29,559 64,746 58,643
Selling, general and administrative 40,955 37,865 79,623 77,149
-------------- -------------- -------------- --------------
Total costs & expenses 73,564 67,424 144,369 135,792
-------------- -------------- -------------- --------------
OPERATING INCOME
1,799 812 6,507 3,313
OTHER:
Interest income 306 22 777 30
Interest expense (570) (763) (1,044) (1,957)
Other income 54 - 70 -
-------------- -------------- -------------- --------------
INCOME BEFORE INCOME TAXES
1,589 71 6,310 1,386
PROVISION FOR INCOME TAXES 623 29 2,582 572
-------------- -------------- -------------- --------------
NET INCOME $ 966 $ 42 $ 3,728 $ 814
============== ============== ============== ==============
Earnings per share - basic: $ 0.04 $ 0.00 $ 0.15 $ 0.04
============== ============== ============== ==============
Net income available to common shareholders
Earnings per share - diluted: $ 0.04 $ 0.00 $ 0.14 $ 0.04
============== ============== ============== ==============
Net income available to common shareholders
Weighted average number of common shares outstanding:
Basic 25,303 21,950 25,245 21,825
Diluted 26,084 23,077 26,061 23,021
See notes to unaudited condensed consolidated financial statements.
3
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
(UNAUDITED)
ADDITIONAL
COMMON STOCK PAID-IN DEFERRED RETAINED
SHARES AMOUNT CAPITAL COMPENSATION EARNINGS TOTAL
-------- ---------- ----------- -------------- ---------- -----------
BALANCE - December 31, 2005 25,168 $119,453 $ 5,665 $ (360) $ 11,232 $ 135,990
Net income - - - - 3,728 3,728
Reduction of issuance expenses
associated with the initial
public offering - 150 - - - 150
Issuance of restricted stock
and amortization of deferred
compensation 19 - 300 (227) - 73
Stock-based compensation
expense - - 684 - - 684
Tax benefit of options
exercised - - 359 - - 359
Exercise of stock options 204 272 - - - 272
-------- ---------- ----------- -------------- ---------- -----------
BALANCE - June 30, 2006 25,391 $119,875 $ 7,008 $ (587) $ 14,960 $ 141,256
======== ========== =========== ============== ========== ===========
See notes to unaudited condensed consolidated financial statements.
4
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
2006 2005
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,728 $ 814
-------------- --------------
Adjustments to reconcile net income to net cash used
in operating activities:
Depreciation and amortization 7,136 6,134
Amortization of deferred finance charges 97 95
Write-off of deferred finance costs - 365
Deferred income taxes (1,469) (195)
Fixed asset donations (16) -
Provision for doubtful accounts 7,446 4,730
Stock-based compensation expense and issuance of restricted stock 757 708
Tax benefit associated with exercise of stock options 359 39
Deferred rent 618 959
(Increase) decrease in assets, net of acquisitions:
Restricted cash (2,069) -
Accounts receivable (8,544) (3,637)
Inventories (330) 20
Prepaid expenses and current assets (1,893) (362)
Other assets 40 608
Increase (decrease) in liabilities, net of acquisitions:
Accounts payable (2,863) 1,343
Other liabilities (1,062) (142)
Income taxes payable/prepaid (6,602) (2,225)
Accrued expenses 1,035 (1,007)
Unearned tuition (9,831) (9,942)
-------------- --------------
Total adjustments (17,191) (2,509)
-------------- --------------
Net cash used in operating activities (13,463) (1,695)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (8,643) (6,566)
Acquisitions, net of cash acquired (32,759) (19,877)
-------------- --------------
Net cash used in investing activities (41,402) (26,443)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 10,000 31,000
Payments on borrowings (55) (66,750)
Payments of deferred finance fees - (833)
Proceeds from exercise of stock options 272 256
Principal payments under capital lease obligations (142) (157)
Repayment from shareholder loans - 181
Proceeds from issuance of common stock, net of issuance costs of $6,882 - 53,118
-------------- --------------
Net cash provided by financing activities 10,075 16,815
-------------- --------------
NET DECREASE IN CASH AND CASH EQUIVALENTS
(44,790) (11,323)
CASH AND CASH EQUIVALENTS--Beginning of period 50,257 41,445
-------------- --------------
CASH AND CASH EQUIVALENTS--End of period $ 5,467 $ 30,122
============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 932 $ 1,573
============== ==============
Income taxes $ 10,294 $ 2,949
============== ==============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Cash paid during the period for:
Fair value of assets acquired $ 48,987 $ 23,425
Net cash paid for the acquisitions (39,973) (19,877)
-------------- --------------
Liabilities assumed $ 9,014 $ 3,548
============== ==============
See notes to unaudited condensed consolidated financial statements.
5
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2006 AND 2005
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS AND UNLESS OTHERWISE STATED)
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITIES - Lincoln Educational Services Corporation and its wholly
owned subsidiaries ("LESC" or the "Company") operate career-oriented
post-secondary schools in various locations, which offer technical programs of
study in several different specialties.
BASIS OF PRESENTATION - The accompanying unaudited condensed consolidated
financial statements have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission and in accordance with
accounting principles generally accepted in the United States of America
("GAAP"). Certain information and footnote disclosures normally included in
annual financial statements have been omitted or condensed pursuant to such
regulations. These statements, when read in conjunction with the December 31,
2005 consolidated financial statements of the Company reflect all adjustments,
consisting solely of normal recurring adjustments, necessary to present fairly
the consolidated financial position, results of operations, and cash flows for
such periods. The results of operations for the three and six months ended June
30, 2006 are not necessarily indicative of the results that may be expected for
the fiscal year ending December 31, 2006.
The unaudited condensed consolidated financial statements as of June 30, 2006
and the condensed consolidated financial statements as of December 31, 2005 and
for the three and six months ended June 30, 2006 and 2005 include the accounts
of the Company. All significant intercompany accounts and transactions have been
eliminated.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The preparation of
financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the period. On an ongoing basis, the Company evaluates the
estimates and assumptions, including those related to revenue recognition, bad
debts, fixed assets, goodwill and other intangible assets, stock-based
compensation, income taxes, benefit plans and certain accruals. Actual results
could differ from those estimates.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation ("FIN") No. 48, ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES. FIN
48 clarifies the accounting for uncertainty in income taxes recognized in an
enterprise's financial statements in accordance with FASB Statement of Financial
Accounting Standards ("SFAS" ) No. 109, "Accounting for Income Taxes". This
Interpretation defines the minimum recognition threshold a tax position is
required to meet before being recognized in the financial statements. FIN 48 is
effective for fiscal years beginning after December 15, 2006. The Company is
currently evaluating the effect that the adoption of FIN 48 will have on its
consolidated financial statements.
In March 2006, FASB issued SFAS No. 156, ACCOUNTING FOR SERVICING OF FINANCIAL
ASSETS." SFAS No. 156 provides guidance addressing the recognition and
measurement of separately recognized servicing assets and liabilities, common
with mortgage securitization activities, and provides an approach to simplify
efforts to obtain hedge accounting treatment. SFAS No. 156 is effective for all
separately recognized servicing assets and liabilities acquired or issued after
the beginning of an entity's fiscal year that begins after September 15, 2006,
with early adoption being permitted. The adoption of the provision of SFAS No.
156 is not expected to have a material effect on the Company's consolidated
financial statements.
In February 2006, the FASB issued SFAS No. 155, ACCOUNTING FOR CERTAIN HYBRID
FINANCIAL INSTRUMENTS." SFAS No. 155 is effective beginning January 1, 2007. The
adoption of the provision of SFAS No. 155 is not expected to have a material
effect on the Company's consolidated financial statements.
In June 2005, the FASB issued SFAS No. 154, ACCOUNTING CHANGES AND ERROR
CORRECTIONS, A REPLACEMENT OF APB OPINION NO. 20 AND FASB STATEMENT NO. 3. SFAS
No. 154 applies to all voluntary changes in accounting principle, and changes
the requirements for accounting for and reporting of a change in accounting
principle. SFAS No. 154 requires retrospective application to prior periods'
financial statements of a voluntary change in accounting principle unless it is
impracticable. Accounting Principles Boards ("APB") Opinion No. 20 previously
required that most voluntary changes in accounting principle be recognized by
including in net income of the period of the change the cumulative effect of
changing to the new accounting principle. SFAS No. 154 requires that a change in
method of depreciation, amortization, or depletion for long-lived, nonfinancial
assets be accounted for as a change in accounting estimate that is affected by a
change in accounting principle. APB Opinion No. 20 previously required that such
a change be reported
6
as a change in accounting principle. The Company adopted SFAS No. 154 on January
1, 2006. The adoption of the provisions of SFAS No. 154 had no effect on the
Company's consolidated financial statements.
In March 2005, the FASB issued FIN 47, ACCOUNTING FOR CONDITIONAL ASSET
RETIREMENT OBLIGATIONS. FIN 47 clarifies that a conditional asset retirement
obligation, as used in SFAS 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS,
refers to a legal obligation to perform an asset retirement activity in which
the timing and/or method of the settlement are conditional on a future event
that may or may not be within the control of the entity. Accordingly, an entity
is required to recognize a liability for the fair value of a conditional asset
retirement obligation if the fair value can be reasonably estimated. The Company
adopted FIN 47 on January 1, 2006. The adoption of the provisions of FIN 47 had
no effect on the Company's consolidated financial statements.
In December 2004, the FASB issued SFAS No. 153, EXCHANGES OF NONMONETARY ASSETS,
AN AMENDMENT OF APB OPINION NO. 29, ACCOUNTING FOR NONMONETARY TRANSACTIONS.
SFAS No. 153 addresses the measurement of exchanges of nonmonetary assets and
requires that such exchanges be measured at fair value, with limited exceptions.
SFAS No. 153 amends APB Opinion No. 29 ACCOUNTING FOR NONMONETARY TRANSACTIONS,
by eliminating the exception that required nonmonetary exchanges of similar
productive assets be recorded on a carryover basis. The Company adopted SFAS No.
153 on January 1, 2006. The adoption of the provisions of SFAS No. 153 had no
effect on the Company's consolidated financial statements.
3. STOCK-BASED COMPENSATION
In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 (revised 2004), SHARE-BASED PAYMENT,
("FAS 123R"). This Statement requires companies to expense the estimated fair
value of stock options and similar equity instruments issued to employees over
the requisite service period. On December 1, 2005, the Company adopted FAS 123R
in advance of the mandatory adoption date of the first quarter of 2006 to better
reflect the full cost of employee compensation. The Company adopted FAS 123R
using the modified prospective method, which requires it to record compensation
expense for all awards granted after the date of adoption, and for the unvested
portion of previously granted awards that remain outstanding at the date of
adoption. Prior to the adoption of FAS 123R, the Company recognized stock-based
compensation under FAS 123 "STOCK BASED Compensation" and as a result, the
implementation of FAS 123R did not have a material impact on the Company's
financial presentation. Reflected in the accompanying statements of income is
compensation expense of approximately $0.4 million and $0.3 million for the
three months ended June 30, 2006 and 2005 and $0.7 million and $0.7 million for
the six months ended June 30, 2006 and 2005, respectively, incurred under this
plan.
The fair value concepts were not changed significantly under FAS 123R from those
utilized under FAS No. 123; however, in adopting this Standard, companies must
choose among alternative valuation models and amortization assumptions. After
assessing these alternatives, the Company decided to continue using the
Black-Scholes valuation model, however, we decided to utilize straight-line
amortization of compensation expense over the requisite service period of the
grant, rather than over the individual grant requisite period as chosen under
FAS 123. Under FAS 123, the Company had recognized stock option forfeitures as
they incurred. Commencing with the adoption of FAS 123R, the Company make
estimates of expected forfeitures calculation upon grant issuance.
4. WEIGHTED AVERAGE COMMON SHARES
The weighted average numbers of common shares used to compute basic and diluted
income per share for the three and six months ended June 30, 2006 and 2005,
respectively, were as follows:
THREE MONTHS ENDING SIX MONTHS ENDING
JUNE 30, JUNE 30,
------------------------ ------------------------
2006 2005 2006 2005
---------- ---------- ---------- ----------
(IN THOUSANDS)
----------------------------------------------------
Basic shares outstanding 25,303 21,950 25,245 21,825
Dilutive effect of stock options 781 1,127 816 1,196
---------- ---------- ---------- ----------
Diluted shares outstanding 26,084 23,077 26,061 23,021
========== ========== ========== ==========
For the three months ended June 30, 2006 and 2005, options to acquire 208,500
and 71,000 shares, and six months ended June 30, 2006 and 2005, options to
acquire 208,500 and 71,000 shares, respectively, were excluded from the above
table as the result on reported earnings per share would have been antidilutive.
7
5. BUSINESS ACQUISITIONS
On May 22, 2006, Lincoln Technical Institute, Inc., a wholly-owned subsidiary of
the Company, acquired New England Institute of Technology at Palm Beach, Inc.
("FLA") for approximately $40.0 million, net of cash acquired. The FLA purchase
price has been preliminarily allocated to identifiable net assets with the
excess of the purchase price over the estimated fair value of the net assets
acquired recorded as goodwill.
On December 1, 2005, a wholly-owned subsidiary of the Company acquired Euphoria
Institute LLC ("EUP") for approximately $9.2 million, net of cash acquired.
On January 11, 2005, a wholly-owned subsidiary of the Company acquired New
England Technical Institute ("NETI") for approximately $18.8 million, net of
cash acquired.
The consolidated financial statements include the results of operations of FLA,
EUP and NETI from their respective acquisition dates. The purchase prices have
been allocated to identifiable net assets with the excess of the purchase price
over the estimated fair value of the net assets acquired recorded as goodwill.
None of the acquisitions were deemed material to the Company's financial
statements.
The following unaudited pro forma results of operations for the three and six
months ended June 30, 2006 and three and six months ended June 30, 2005 assumes
that the acquisitions occurred at the beginning of the year of acquisition. The
unaudited pro forma results of operations are based on historical results of
operations, include adjustments for depreciation, amortization, interest, and
taxes, but do not necessarily reflect the actual results that would have
occurred.
THREE MONTHS ENDING JUNE 30, 2006 SIX MONTHS ENDING JUNE 30, 2006
PRO PRO
FORMA FORMA
IMPACT PRO IMPACT PRO
HISTORICAL FLA FORMA HISTORICAL FLA FORMA
2006 2006 2006 2006 2006 2006
------------ ---------- ---------- ------------ ---------- ----------
Revenue $ 75,363 $ 2,289 $ 77,652 Revenue $ 150,876 $ 7,148 $158,024
Net Income $ 966 $ (460) $ 506 Net Income $ 3,728 $ (302) $ 3,426
Earnings per share -
Earnings per share - basic $ 0.04 $ 0.02 basic $ 0.15 $ 0.13
Earnings per share -
Earnings per share - diluted $ 0.04 $ 0.02 diluted $ 0.14 $ 0.13
THREE MONTHS ENDING JUNE 30, 2005
PRO FORMA PRO FORMA PRO FORMA
HISTORICAL IMPACT NETI IMPACT EUP IMPACT FLA PRO FORMA
2005 2005 2005 2005 2005
------------ ------------- ------------ ------------ -----------
Revenue $ 68,236 $ 278 $ 1,251 $ 4,358 $ 74,123
Net Income $ 42 $ 6 $ (69) $ (129) $ (150)
Earnings per share - basic $ 0.00 $ (0.01)
Earnings per share - diluted $ 0.00 $ (0.01)
8
SIX MONTHS ENDING JUNE 30, 2005
PRO FORMA PRO FORMA PRO FORMA
HISTORICAL IMPACT NETI IMPACT EUP IMPACT FLA PRO FORMA
2005 2005 2005 2005 2005
------------ ------------- ------------ ------------ -----------
Revenue $ 139,105 $ 278 $ 2,619 $ 9,172 $ 151,174
Net Income $ 814 $ 6 $ 20 $ 123 $ 963
Earnings per share - basic $ 0.04 $ 0.04
Earnings per share - diluted $ 0.04 $ 0.04
6. GOODWILL AND OTHER INTANGIBLE ASSETS
The Company accounts for its intangible assets in accordance with SFAS No. 142,
GOODWILL AND OTHER INTANGIBLE ASSETS. The Company reviews intangible assets with
an indefinite useful life for impairment when indicators of impairment exist.
Annually, or more frequently if necessary, the Company evaluates goodwill for
impairment, with any resulting impairment reflected as an operating expense.
Amortization of intangible assets was approximately $0.1 million for the three
months ended June 30, 2006 and 2005, respectively, and $0.4 million and $0.3
million for the six months ended June 30, 2006 and 2005, respectively.
Changes in the carrying amount of goodwill from the year ended December 31, 2005
to the six months ended June 30, 2006 were as follows:
Goodwill balance as of December 31, 2005 $ 59,467
Goodwill acquired pursuant to business acquisition of FLA 22,205
Goodwill adjustments 906
-------------
Goodwill balance as of June 30, 2006 $ 82,578
=============
Intangible assets, which are included in other assets in the accompanying
condensed consolidated balance sheets, consist of the following:
AT JUNE 30, 2006 AT DECEMBER 31, 2005
--------------------------------- ---------------------------------
WEIGHTED
AVERAGE GROSS GROSS
AMORTIZATION CARRYING ACCUMULATED CARRYING ACCUMULATED
PERIOD (YEARS) AMOUNT AMORTIZATION AMOUNT AMORTIZATION
---------------- ------------- ---------------- ------------- ----------------
Student Contracts 1 $ 3,050 $ 1,910 $ 1,920 $ 1,569
Trade name Indefinite 1,490 - 1,410 -
Curriculum 10 700 103 1,400 74
Non-compete 0 1,001 23 1 1
------------- ---------------- ------------- ----------------
Total N/A $ 6,241 $ 2,036 $ 4,731 $ 1,644
============= ================ ============= ================
The increase in trade name and decrease in curriculum from December 31, 2005 to
June 30, 2006 was due to the finalization of the EUP purchase valuation.
7. OTHER ACCOUNTS RECEIVABLE
Other accounts receivable represent amounts due from the previous owners of New
England Institute of Technology at Palm Beach, Inc. resulting from purchase
price adjustments in the closing balance sheet as stipulated in the stock
purchase agreement.
9
8. LONG-TERM DEBT
The Company has a credit agreement with a syndicate of banks. Under the terms of
the agreement, the syndicate provided the Company with a $100 million credit
facility. The credit agreement permits the issuance of up to $20 million in
letters of credit, the amount of which reduces the availability of permitted
borrowings under the agreement. In connection with entering into the credit
agreement, the Company wrote off approximately $0.4 million of unamortized
deferred finance charges under the old credit agreement for the three months
ended March 31, 2005. The Company incurred approximately $0.8 million of
deferred finance charges under the existing credit agreement. At June 30, 2006,
the Company had outstanding letters of credit aggregating $4.4 million.
The obligations of the Company under the credit agreement are secured by a lien
on substantially all of the assets of the Company and its subsidiaries and any
assets that it or its subsidiaries may acquire in the future, including a pledge
of substantially all of the subsidiaries' common stock. Outstanding borrowings
bear interest at the rate of adjusted LIBOR plus 1.0% to 1.75%, as defined, or a
base rate (as defined in the credit agreement). In addition to paying interest
on outstanding principal under the credit agreement, the Company and its
subsidiaries are required to pay a commitment fee to the lender with respect to
the unused amounts available under the credit agreement at a rate equal to 0.25%
to 0.40% per year, as defined. In connection with the Company's initial public
offering in 2005, the Company repaid the then outstanding loan balance of $31.0
million.
The credit agreement contains various covenants, including a number of financial
covenants. Furthermore, the credit agreement contains customary events of
default as well as an event of default in the event of the suspension or
termination of Title IV Program funding for the Company's and its subsidiaries'
schools aggregating 10% or more of the Company's EBITDA (as defined) or its
consolidated total assets and such suspension or termination is not cured within
a specified period.
On May 16, 2006, the Company borrowed $10.0 million under the credit agreement.
The interest rate under this borrowing is 6.17%.
As of June 30, 2006, the Company was in compliance with the financial covenants
contained in the credit agreement.
On May 22, 2006, the Company assumed a mortgage note payable as part of the
acquisition of the New England Institute of Technology at Palm Beach, Inc. in
the amount of $7.2 million. The mortgage note is payable to the bank in monthly
installments which varies due to the interest rate. The note has an interest
rate which is at the bank's LIBOR rate plus 2.0% with a maturity date of May 1,
2023. The Note is secured by a first position mortgage on real estate (See Note
15).
9. EQUITY
Pursuant to the Company's 2005 Non-Employee Directors Restricted Stock Plan (the
"Non-Employee Directors Plan"), two newly appointed non-employee directors
received an award of restricted shares of common stock equal to $0.06 million on
March 1, 2006. The number of shares granted to each non-employee director was
based on the fair market value of a share of common stock on that date. These
7,250 restricted shares (3,625 for each non-employee director) vest ratably on
the first, second and third anniversaries of the date of grant; however, there
is no vesting period on the right to vote or the right to receive dividends on
these restricted shares. Additionally, on May 23, 2006, the date of our annual
meeting, each non-employee Board member received an annual restricted award
equal to $0.03 million. The number of shares granted to each non-employee
director was based on the fair market value of a share of common stock on that
date. These 14,248 restricted shares (1,781 for each non-employee director) vest
ratably on the first, second and third anniversaries of the date of grant;
however, there is no vesting period on the right to vote or the right to receive
dividends on these restricted shares. As of June 30, 2006, there were a total of
39,912 shares awarded under the Non-Employee Directors Plan. None of these
shares are vested.
The fair value of the stock options used to compute stock-based compensation is
the estimated present value at the date of grant using the Black-Scholes option
pricing model. The weighted average fair values of options granted during 2006
were $9.65 using the following weighted average assumptions for grants:
JUNE 30,
2006
--------------
Expected volatility 55.10%
Expected dividend yield 0%
Expected life (term) 6 Years
Risk-free interest rate 4.13-4.84%
Weighted-average exercise price during the year $16.88
10
The following is a summary of transactions pertaining to the option plans:
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE PER SHARE
------------ ----------------------------
Outstanding December 31, 2005 1,839,173 $7.26
Granted 67,000 16.88
Cancelled (76,572) 13.02
Exercised (203,850) 3.10
------------
Outstanding June 30, 2006 1,625,751 7.89
============
The following table presents a summary of options outstanding at June 30, 2006:
AS OF JUNE 30, 2006
-------------------------------------------------------------------------------------
STOCK OPTIONS OUTSTANDING STOCK OPTIONS EXERCISABLE
-------------------------------------------------- -------------------------------
CONTRACTUAL
WEIGHTED
AVERAGE LIFE WEIGHTED WEIGHTED EXERCISE
RANGE OF EXERCISE PRICES SHARES (YEARS) AVERAGE PRICE SHARES PRICE
- -------------------------- ------------ ----------------- ----------------- ------------ -----------------
$1.55 50,898 2.98 $1.55 50,898 $1.55
$3.10 948,478 5.54 3.10 923,198 3.10
$4.00-$10.00 49,000 6.85 5.93 22,800 5.18
$14.00-$17.00 426,375 8.15 14.45 120,360 14.00
$20.00-$25.00 151,000 8.31 22.24 45,900 22.82
------------ ------------
1,625,751 6.44 7.89 1,163,156 4.98
============ ============
10. RECOURSE LOAN AGREEMENT
During 2005, the Company entered into an agreement with Student Loan Marketing
Association (Sallie Mae) to provide private recourse loans to qualifying
students. The following table reflects selected information with respect to the
recourse loan agreements, including cumulative loan disbursements and purchase
activity under the agreement from inception through June 30, 2006:
AGREEMENT EFFECTIVE DATE (1) LOANS WE MAY BE
DISBURSED LOANS DISBURSED TO LOANS PURCHASED REQUIRED TO
LOANS LIMIT DATE TO DATE PURCHASE (2)
------------- -------------------- ----------------- ---------------------
March 28, 2005 to June 30, 2006 $ 6,000 $ 4,652 $ - $ 1,396
(1) Either party may terminate the agreement by giving the other party 30 days
written notice of such termination.
(2) Represents the maximum amount of loans under the agreement that we may be
required to purchase in the future based on cumulative loans disbursed and
purchased through June 30, 2006.
Under the recourse loan agreement, the Company is required to fund 30% of all
loans disbursed into a Sallie Mae reserve account. The amount of our loan
purchase obligation may not exceed 30% of loans disbursed. We record such
amounts in accounts receivable on our condensed consolidated balance sheet.
Amounts on deposit may ultimately be utilized to purchase loans in default, in
which case recoverability of such amounts would be in question. Accordingly, the
Company has an allowance for the full amount of deposit.
11. INCOME TAXES
The effective tax rate for the three months ended June 30, 2006 and 2005 was
39.2% and 40.8%, and six months ended June 30, 2006 and 2005 was 40.9% and 41.3%
respectively.
12. RELATED PARTY TRANSACTIONS
The Company had a consulting agreement with Hart Capital LLC ("Hart Capital"),
which terminated by its terms in June 2004, to advise the Company in identifying
acquisition and merger targets and assisting with the due diligence reviews of
and negotiations with these targets. Hart Capital is the managing member of Five
Mile River Capital Partners LLC, which is the second largest stockholder of the
Company. Steven Hart, the President of Hart Capital, is a member of the
Company's board of directors. The Company paid Hart Capital a monthly retainer,
reimbursement of expenses and an advisory fee for its work on successful
acquisitions or mergers. In
11
accordance with the agreement, the Company paid Hart Capital $0 and
approximately $0.01 million for the three months ended June 30, 2006 and 2005,
respectively and $0 and approximately $0.3 million for the six months ended June
30, 2006 and 2005, respectively. In connection with the consummation of the NETI
acquisition, which closed on January 11, 2005, the Company paid Hart Capital
$0.3 million for its services.
In 2003, the Company entered into a management service agreement with its major
stockholder. In accordance with this agreement the Company paid Stonington
Partners a management fee of $0.75 million per year for management consulting
and financial and business advisory services. Such services included valuing
acquisitions and structuring their financing and assisting with new loan
agreements. The Company paid Stonington Partners $0 and $0.75 million for the
six months ended June 30, 2006 and 2005, respectively. Fees paid to Stonington
Partners were being amortized over a twelve month period. This agreement
terminated by its terms upon the Company's completion of its initial public
offering. Selling, general and administrative expenses for the six months ended
June 30, 2005 include $0.75 million resulting from the amortization of these
fees.
13. COMMITMENTS AND CONTINGENCIES
LITIGATION AND REGULATORY MATTERS - The Company has been named as a defendant in
actions resulting from the normal course of operations. Based, in part, on the
opinion of counsel, management believes that the resolution of these matters
will not have a material effect on its financial position, results of operations
and cash flows.
14. PENSION PLAN
The Company sponsors a noncontributory defined benefit pension plan covering
substantially all of the Company's union employees. Benefits are provided based
on employees' years of service and earnings. This plan was frozen on December
31, 1994 for non-union employees.
While the Company does not expect to make any contributions to the plan in 2006,
after considering the funded status of the plan, movements in the discount rate,
investment performance and related tax consequences, the Company may choose to
make contributions to the plan in any given year.
The net periodic benefit cost was $24,000 for the three months ended June 30,
2006. For the three months ended June 30, 2005, the net periodic benefit income
was $51,000. For the six months ended June 30, 2006 and 2005, the net periodic
benefit cost was $25,000 and $21,000.
15. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
On May 22, 2006, the Company assumed a mortgage note payable (See Note 8) with
an accompanying interest rate swap (the "SWAP") as part of the acquisition of
the New England Institute of Technology at Palm Beach, Inc. in the amount of
$7.2 million. The Company accounts for the interest rate swap agreement in
accordance with SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES, as amended. Under the swap agreement, the Company pays a fixed rate
tied to the one month LIBOR rate until May 1, 2013 and receives a variable rate
of 6.48%. The SWAP is being accounted for as an ineffective hedge as it did not
meet the requirements set forth under SFAS No. 133. Accordingly, other income
includes income of $0.05 million for the quarter ended June 30, 2006. As of June
30, 2006, $0.4 million of interest rate swap related assets is included in other
long term assets in the accompanying condensed consolidated balance sheet.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion may contain forward-looking statements regarding us,
our business, prospects and our results of operations that are subject to
certain risks and uncertainties posed by many factors and events that could
cause our actual business, prospects and results of operations to differ
materially from those that may be anticipated by such forward-looking
statements. Factors that could cause or contribute to such differences include,
but are not limited to, those described in the "Risk Factors" section of our
Annual Report on Form 10-K for the year ended December 31, 2005, as filed with
the Securities and Exchange Commission. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date of
this report. We undertake no obligation to revise any forward-looking statements
in order to reflect events or circumstances that may subsequently arise. Readers
are urged to carefully review and consider the various disclosures made by us in
this report and in our other reports filed with the Securities and Exchange
Commission that advise interested parties of the risks and factors that may
affect our business.
The interim financial statements filed on this Form 10-Q and the discussions
contained herein should be read in conjunction with the annual financial
statements and notes included in our Form 10-K for the year ended December 31,
2005, as filed with the Securities and Exchange Commission, which includes
audited consolidated financial statements for our three fiscal years ended
December 31, 2005.
GENERAL
We are a leading and diversified for-profit provider of career-oriented
post-secondary education. We offer recent high school graduates and adults
degree and diploma programs in five areas of study: automotive technology,
health sciences, skilled trades, business and information technology and
hospitality services. As of June 30, 2006, we enrolled 17,058 students at our 37
campuses across 17 states. Our campuses primarily attract students from their
local communities and surrounding areas, although our four destination schools
attract students from across the United States, and in some cases, from abroad.
We continue to expand our product offerings and our geographic reach. On March
27, 2006 we opened our new automotive campus in Queens, New York and on May 22,
2006 we completed the acquisition of New England Institute of Technology at Palm
Beach, Inc. ("FLA").
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussions of our financial condition and results of operations are based
upon our consolidated financial statements, which have been prepared in
accordance with accounting policies 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, stock-based compensation, income taxes and certain accruals. Actual
results could differ from those estimates. The critical accounting policies
discussed herein are not intended to be a comprehensive list of all of our
accounting policies. In many cases, the accounting treatment of a particular
transaction is specifically dictated by GAAP and does not result in significant
management judgment in the application of such principles. There are also areas
in which management's judgment in selecting any available alternative would not
produce a materially different result from the result derived from the
application of our critical accounting policies. We believe that the following
accounting policies are most critical to us in that they represent the primary
areas where financial information is subject to the application of management's
estimates, assumptions and judgment in the preparation of our consolidated
financial statements.
REVENUE RECOGNITION. Revenues are derived primarily from programs taught at our
schools. Tuition revenues and one-time fees, such as nonrefundable application
fees and course material fees, are recognized on a straight-line basis over the
length of the applicable program, which is the period of time from a student's
start date through his or her graduation date, including internships or
externships that take place prior to graduation. If a student withdraws from a
program prior to a specified date, any paid but unearned tuition is refunded.
Refunds are calculated and paid in accordance with federal, state and
accrediting agency standards. Other revenues, such as textbook sales, tool sales
and contract training revenues are recognized as services are performed or goods
are delivered. On an individual student basis, tuition earned in excess of cash
received is recorded as accounts receivable and cash received in excess of
tuition earned is recorded as unearned tuition.
ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS. Based upon experience and judgment, we
establish an allowance for uncollectible accounts with respect to tuition
receivables. We use an internal group of collectors, augmented by third-party
collectors as deemed appropriate, in our collection efforts. In establishing our
allowance for uncollectible accounts, we consider, among other things, a
student's status (in-school or out-of-school), whether or not additional
financial aid funding will be collected from Title IV Programs or other sources,
whether or not a student is currently making payments and overall collection
history. Changes in trends in any of these areas may impact the allowance for
uncollectible accounts. The receivables balances of withdrawn students with
delinquent obligations are reserved based on our collection history. Although we
believe that our reserves are adequate, if the financial condition of our
students deteriorates, resulting in an impairment of their ability to make
payments, or if we underestimate the allowances required, additional
13
allowances may be necessary, which will result in increased selling, general and
administrative expenses in the period such determination is made.
Our bad debt expense as a percentage of revenue for the three months ended June
30, 2006 and 2005 was 5.7% and 3.6%, respectively and for the six months ended
June 30, 2006 and 2005 was 4.9% and 3.7%. Our exposure to changes in our bad
debt expense could impact our operations.
Because a substantial portion of our revenue is derived from Title IV programs,
any legislative or regulatory action that significantly reduces the funding
available under Title IV programs or the ability of our students or schools to
participate in Title IV programs could have a material effect on the
realizability of our receivables.
GOODWILL. We test our goodwill for impairment annually, or whenever events or
changes in circumstances indicate impairment may have occurred, by comparing its
fair value to its carrying value. Impairment may result from, among other
things, deterioration in the performance of the acquired business, adverse
market conditions, adverse changes in applicable laws or regulations, including
changes that restrict the activities of the acquired business, and a variety of
other circumstances. If we determine that impairment has occurred, we are
required to record a write-down of the carrying value and charge the impairment
as an operating expense in the period the determination is made. In evaluating
the recoverability of the carrying value of goodwill and other indefinite-lived
intangible assets, we must make assumptions regarding estimated future cash
flows and other factors to determine the fair value of the acquired assets.
Changes in strategy or market conditions could significantly impact these
judgments in the future and require an adjustment to the recorded balances.
STOCK-BASED COMPENSATION. We currently account for stock-based employee
compensation arrangements in accordance with the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123R, "SHARE BASED PAYMENT."
Effective January 1, 2004, we elected to change our accounting policies from the
use of the intrinsic value method of Accounting Principles Board ("APB") Opinion
No. 25, "ACCOUNTING FOR STOCK-BASED COMPENSATION" to the fair value-based method
of accounting for options as prescribed by SFAS No. 123 "ACCOUNTING FOR
STOCK-BASED COMPENSATION". As permitted under SFAS No. 148, "ACCOUNTING FOR
STOCK-BASED COMPENSATION--TRANSITIONS AND DISCLOSURE--AN AMENDMENT TO SFAS
STATEMENT NO. 123," we elected to retroactively restate all periods presented.
Because no market for our common stock existed, our board of directors
determined the fair value of our common stock based upon several factors,
including our operating performance, forecasted future operating results, and
our expected valuation in an initial public offering.
Prior to our initial public offering on June 22, 2005, we valued the exercise
price of options issued to employees using a market based approach. This
approach took into consideration the value ascribed to our competitors by the
market. In determining the fair value of an option at the time of grant, we
reviewed contemporaneous information about our peers, which included a variety
of market multiples, including, but not limited to, revenue, EBITDA, net income,
historical growth rates and market/industry focus. Prior to our initial public
offering, the value we ascribed to stock options granted was based upon our
anticipated initial public offering as well as discussions with our investment
advisors. Due to the number of peer companies in our sector, we believed using
public company comparisons provided a better indication of how the market values
companies in the for-profit post secondary education sector.
During 2005, we adopted the provisions of SFAS No. 123R, "SHARE BASED PAYMENT."
The adoption of SFAS No. 123R did not have a material impact on our financial
statements.
EFFECT OF INFLATION
Inflation has not had a material effect on our operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation ("FIN") No. 48, ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES. FIN
48 clarifies the accounting for uncertainty in income taxes recognized in an
enterprise's financial statements in accordance with FASB Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". This
Interpretation defines the minimum recognition threshold a tax position is
required to meet before being recognized in the financial statements. FIN 48 is
effective for fiscal years beginning after December 15, 2006. We are currently
evaluating the effect that the adoption of FIN 48 will have on our consolidated
financial statements.
In March 2006, FASB issued SFAS No. 156, "ACCOUNTING FOR SERVICING OF FINANCIAL
ASSETS." SFAS No. 156 provides guidance addressing the recognition and
measurement of separately recognized servicing assets and liabilities, common
with mortgage securitization activities, and provides an approach to simplify
efforts to obtain hedge accounting treatment. SFAS No. 156 is effective for all
separately recognized servicing assets and liabilities acquired or issued after
the beginning of an entity's fiscal year that begins after September 15, 2006,
with early adoption being permitted. The adoption of the provision of SFAS No.
156 is not expected to have a material effect on our consolidated financial
statements.
14
In February 2006, the FASB issued SFAS No. 155, "ACCOUNTING FOR CERTAIN HYBRID
FINANCIAL INSTRUMENTS." SFAS No. 155 is effective beginning January 1, 2007. The
adoption of the provision of SFAS No. 155 is not expected to have a material
effect on our consolidated financial statements.
In June 2005, the FASB issued SFAS No. 154, "ACCOUNTING CHANGES AND ERROR
CORRECTIONS, A REPLACEMENT OF APB OPINION NO. 20 AND FASB STATEMENT NO. 3." SFAS
No. 154 applies to all voluntary changes in accounting principle, and changes
the requirements for accounting for and reporting of a change in accounting
principle. SFAS No. 154 requires retrospective application to prior periods'
financial statements of a voluntary change in accounting principle unless it is
impracticable. Accounting Principles Board "APB" Opinion No. 20 previously
required that most voluntary changes in accounting principle be recognized by
including in net income of the period of the change the cumulative effect of
changing to the new accounting principle. SFAS No. 154 requires that a change in
method of depreciation, amortization, or depletion for long-lived, nonfinancial
assets be accounted for as a change in accounting estimate that is effected by a
change in accounting principle. APB Opinion No. 20 previously required that such
a change be reported as a change in accounting principle. We adopted SFAS No.
154 on January 1, 2006. The adoption of the provisions of SFAS No. 154 had no
effect on our consolidated financial statements.
In March 2005, the FASB issued FIN 47, "ACCOUNTING FOR CONDITIONAL ASSET
RETIREMENT OBLIGATIONS." FIN 47 clarifies that a conditional asset retirement
obligation, as used in SFAS 143, "ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS",
refers to a legal obligation to perform an asset retirement activity in which
the timing and/or method of the settlement are conditional on a future event
that may or may not be within the control of the entity. Accordingly, an entity
is required to recognize a liability for the fair value of a conditional asset
retirement obligation if the fair value can be reasonably estimated. We adopted
FIN 47 on January 1, 2006. The adoption of the provisions of FIN 47 had no
effect on our consolidated financial statements.
In December 2004, the FASB issued SFAS No. 153, "EXCHANGES OF NONMONETARY
ASSETS, AN AMENDMENT OF APB OPINION NO. 29, ACCOUNTING FOR NONMONETARY
TRANSACTIONS". SFAS No. 153 addresses the measurement of exchanges of
nonmonetary assets and requires that such exchanges be measured at fair value,
with limited exceptions. SFAS No. 153 amends APB Opinion No. 29 "ACCOUNTING FOR
NONMONETARY TRANSACTIONS", by eliminating the exception that required
nonmonetary exchanges of similar productive assets be recorded on a carryover
basis. We adopted SFAS No. 153 on January 1, 2006. The adoption of the
provisions of SFAS No. 153 had no effect on our consolidated financial
statements.
RESULTS OF OPERATIONS
The following table sets forth selected consolidated statements of operations
data as a percentage of revenues for each of the periods indicated.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
Revenues 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Educational services and facilities 43.3% 43.3% 42.9% 42.2%
Selling, general and administrative 54.3% 55.5% 52.7% 55.4%
----------- ----------- ----------- -----------
Total costs and expenses 97.6% 98.8% 95.6% 97.6%
----------- ----------- ----------- -----------
Operating income 2.4% 1.2% 4.4% 2.4%
Interest expense, net (0.4)% (1.1)% (0.2)% (1.4)%
Other Income 0.1% 0.0% 0.0% 0.0%
----------- ----------- ----------- -----------
Income before income taxes 2.1% 0.1% 4.2% 1.0%
Provision for income taxes 0.8% 0.0% 1.7% 0.4%
----------- ----------- ----------- -----------
Net income 1.3% 0.1% 2.5% 0.6%
=========== =========== =========== ===========
THREE MONTHS ENDED JUNE 30, 2006 COMPARED TO THREE MONTHS ENDED JUNE 30, 2005
REVENUES. Our revenues for the quarter ended June 30, 2006 were $75.4 million,
representing an increase of $7.1 million, or 10.4%, as compared to $68.2 million
for the quarter ended June 30, 2005. Approximately $1.2 million and $1.9
million, , respectively of this increase was as a result of our acquisition of
Euphoria Institute LLC, or Euphoria, on December 1, 2005 and our acquisition of
New England Institute of Technology at Palm Beach, Inc, or FLA, on May 22, 2006.
The remainder of the increase was primarily due to tuition increases. For the
quarter ended June 30, 2006, our average undergraduate full-time student
enrollment increased 2.8% to 17,380 as compared to 16,909 for the quarter ended
June 30, 2005. Excluding our acquisition of Euphoria and FLA, our average
15
undergraduate student enrollment decreased by 1.9% to 16,592. For a discussion
of trends in our student enrollment, see "Seasonality and Trends" below.
EDUCATIONAL SERVICES AND FACILITIES EXPENSES. Our educational services and
facilities expenses for the quarter ended June 30, 2006 were $32.6 million,
representing an increase of $3.0 million, or 10.3%, as compared to $29.6 million
for the quarter ended June 30, 2005. The acquisitions of Euphoria and FLA
resulted in $0.7 million and $0.9 million, respectively, of this increase.
Instructional expenses increased by $0.3 million or 1.9% as compared to last
year primarily due to increased compensation and benefit costs. Books and tools
expenses increased $0.3 million or 10.6% over the prior year primarily due to
timing of class starts and from higher costs of books and tools. Additionally,
facilities expenses increased by approximately $0.9 million over the same
quarter in 2005 primarily due to normal rent escalation clauses and additional
square footage at some of our facilities as well as due to higher insurance and
property taxes. Additionally for the quarter ended June 30, 2006, depreciation
and amortization expense increased by approximately $0.4 million over the same
period in prior year primarily due to additional depreciation expense associated
with our Queens, New York facility, which opened on March 27, 2006.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Our selling, general and
administrative expenses for the quarter ended June 30, 2006 were $41.0 million,
representing an increase of $3.1 million, or 8.2%, as compared to $37.9 million
for the quarter ended June 30, 2005. Approximately $0.4 million and $0.7 million
of the $41.0 million incurred for the quarter ended June 30, 2006 related to the
acquisition of Euphoria and FLA, respectively. Excluding Euphoria and FLA, our
selling, general and administrative expenses would have increased 5.4% as
compared to the same period in 2005. This increase was primarily due to: (a) a
$0.4 million, or 2.9%, increase in sales and marketing expenses; and (b) a $1.7
million, or 9.0%, increase in administrative costs primarily due to the increase
in bad debt expenses during the period.
For the quarter ended June 30, 2006, our bad debt expense was 5.7% as compared
to 3.6% for the same quarter in 2005. This increase is primarily due to several
factors, including (1) higher accounts receivable balances at June 30, 2006 as
compared to June 30, 2005, (2) loans to our students under a recourse agreement
we entered into in 2005 with Student Marketing Association (Sallie Mae) to
provide private recourse loans to qualifying students, and (3) normal seasonal
patterns in our business. Accounts receivable at June 30, 2006 includes five new
campuses that did not exist in the prior period (our two Euphoria and two FLA
campuses as well as our new Queens New York campus, which opened on March 27,
2006). Under the terms of the Sallie Mae agreement, we are required to fund up
to 30% of all loans disbursed into a deposit account, which may ultimately be
utilized to purchase loans in default. Since recoverability of such amounts is
questionable, we reserve 100% of the amounts on deposit. As of June 30, 2006, we
had reserved $1.4 million under this agreement, which represents an increase of
approximately $1.0 million from amounts reserved at December 31, 2005.
NET INTEREST EXPENSE. Our net interest expense for the quarter ended June 30,
2006 was $0.3 million, representing a decrease of $0.5 million from the quarter
ended June 30, 2005. This decrease was primarily due to an increase in interest
income of $0.3 million due to higher cash balances during the period as well as
a decrease of $0.2 million in interest expense due to paying off our debt
outstanding under our credit facility with the proceeds from our initial public
offering.
INCOME TAXES. Our provision for income taxes for the quarter ended June 30, 2006
was $0.6 million, or 39.2% of pretax income, compared to $0.03 million, or 40.9%
of pretax income, for the quarter ended June 30, 2005. The decrease in our
effective tax rate for the three months ended June 30, 2006 is primarily
attributable to tax benefits related to stock option accounting.
SIX MONTHS ENDED JUNE 30, 2006 COMPARED TO SIX MONTHS ENDED JUNE 30, 2005
REVENUES. Our revenues for the six months ended June 30, 2006 were $150.9
million, representing an increase of $11.8 million, or 8.5%, as compared to
$139.1 million for the six months ended June 30, 2005. Approximately $2.7
million and $1.9 million, respectively of this increase was as a result of our
acquisition of Euphoria Institute LLC, or Euphoria, on December 1, 2005 and our
acquisition of New England Institute of Technology, or FLA on May 22, 2006. The
remainder of the increase was primarily due to tuition increases. For the six
months ended June 30, 2006, our average undergraduate full-time student
enrollment increased 1.3% to 17,528 as compared to 17,301 for the six months
ended June 30, 2005. Excluding our acquisition of Euphoria and FLA, our average
undergraduate student enrollment decreased by 1.7% to 17,000. For a discussion
of trends in our student enrollment, see "Seasonality and Trends" below.
EDUCATIONAL SERVICES AND FACILITIES EXPENSES. Our educational services and
facilities expenses for the six months ended June 30, 2006 were $64.7 million,
representing an increase of $6.1 million, or 10.4%, as compared to $58.6 million
for the six months ended June 30, 2005. The acquisitions of Euphoria and FLA
resulted in $1.5 million and $0.9 million respectively of this increase.
Instructional expenses increased by $1.0 million or 3.2% as compared to last
year primarily due to increased compensation and benefit costs. Books and tools
expenses increased $0.8 million or 15.3% over the prior year primarily due to
timing of class starts and from higher costs of books and tools. Additionally,
facilities expenses increased by approximately $1.7 million over the same
quarter in 2005 primarily due to normal rent escalation clauses and additional
square footage at some of our facilities as well as due to higher
16
insurance and property taxes. Additionally for the six months ended June 30,
2006, depreciation and amortization expense increased by approximately $0.6
million over the same period in 2005 primarily due to additional depreciation
expense associated with our Queens, New York facility which opened on March 27,
2006.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Our selling, general and
administrative expenses for the six months ended June 30, 2006 were $79.6
million, representing an increase of $2.5 million, or 3.2%, as compared to $77.1
million for the six months ended June 30, 2005. Approximately $0.8 million and
$0.7 million of the $79.6 million incurred for the six months ended June 30,
2006 related to the acquisition of Euphoria and FLA, respectively. Excluding
Euphoria and FLA, our selling, general and administrative expenses would have
increased 1.3% as compared to the same period in 2005. This increase was
primarily due to a $1.3 million, or 3.5%, increase in administrative costs which
is due to the increase in bad debt expenses during the period.
For the six months ended June 30, 2006, our bad debt expense was 4.9% as
compared to 3.4% for the same period in 2005. This increase is primarily due to
several factors, including (1) higher accounts receivable balances at June 30,
2006 as compared to June 30, 2005, (2) loans to our students under a recourse
agreement we entered into in 2005 with Student Marketing Association (Sallie
Mae) to provide private recourse loans to qualifying students, and (3) normal
seasonal patterns in our business. Accounts receivable at June 30, 2006 includes
five new campuses that did not exist in the prior period (our two Euphoria and
two FLA campuses as well as our new Queens New York campus, which opened on
March 27, 2006). Under the terms of the Sallie Mae agreement, we are required to
fund up to 30% of all loans disbursed into a deposit account, which may
ultimately be utilized to purchase loans in default. Since recoverability of
such amounts is questionable, we reserve 100% of the amounts on deposit. As of
June 30, 2006, we had reserved $1.4 million under this agreement, which
represents an increase of approximately $1.0 million from amounts reserved at
December 31, 2005.
NET INTEREST EXPENSE. Our net interest expense for the six months ended June 30,
2006 was $0.3 million, representing a decrease of $1.7 million from the six
months ended June 30, 2005. This decrease was primarily due to an increase in
interest income of $0.7 million due to higher cash balances during the period as
well as a decrease of $0.9 million in interest expense due to paying off our
debt outstanding under our credit facility with the proceeds from our initial
public offering.
INCOME TAXES. Our provision for income taxes for the six months ended June 30,
2006 was $2.6 million, or 40.9% of pretax income, compared to $0.6 million, or
41.3% of pretax income, for the six months ended June 30, 2005. The decrease in
our effective tax rate for the six months ended June 30, 2006 is primarily
attributable to tax benefits related to stock option accounting.
LIQUIDITY AND CAPITAL RESOURCES
Our primary capital requirements are for facility expansion and maintenance,
acquisitions and the development of new programs. Our principal sources of
liquidity have been cash provided by operating activities and borrowings under
our credit agreement. The following chart summarizes the principal elements of
our cash flow for the six months ended June 30, 2006 and 2005:
CASH FLOW SUMMARY
SIX MONTHS ENDED JUNE 30,
-------------------------------
2006 2005
--------------- -------------
Net cash used in operating activities $ (13,463) $ (1,695)
Net cash used in investing activities $ (41,402) $ (26,443)
Net cash provided by financing activities $ 10,075 $ 16,815
As of June 30, 2006 we had cash and cash equivalents of $5.5 million, compared
to $50.3 million as of December 31, 2005. For the six months ended June 30,
2006, cash and cash equivalents decreased by approximately $44.8 million from
December 31, 2005. This decrease is mainly attributable to our acquisition of
FLA on May 22, 2006 for net cash of $32.8 million and normal seasonal patterns.
Historically, we have financed our operating activities and organic growth
primarily through cash generated from operations. We have financed acquisitions
primarily through borrowings under our credit agreement and cash generated from
operations. In connection with our acquisition of FLA, we borrowed $10.0 million
under our credit facility. We currently anticipate that we will be able to meet
both our short-term cash needs, as well as our need to fund operations and meet
our obligations beyond the next twelve months with cash generated by operations,
existing cash balances and borrowings under our credit agreement. As of June 30,
2006, we had borrowings available under our credit agreement of approximately
$85.6 million, including a $16.6 million sub-limit on letters of credit.
Our primary source of cash is tuition collected from our students. Our students
fund their tuition payments from a variety of sources including Title IV
Programs, federal and state grants, private loans and their personal resources.
A significant majority of our students' tuition payments are derived from Title
IV Programs. Students must apply for a new loan for each academic period.
17
Federal regulations dictate the timing of disbursements of funds under Title IV
Programs and loan funds are generally provided by lenders in two disbursements
for each academic year. The first disbursement is usually received approximately
30 days after the start of a student's academic year and the second disbursement
is typically received at the beginning of the sixteenth week after the start of
the student's academic year. Certain types of grants and other funding are not
subject to a 30-day delay. Our programs range from 30 to 84 weeks and may cover
one or two academic years. In certain instances, if a student withdraws from a
program prior to a specified date, any paid but unearned tuition or prorated
Title IV financial aid is refunded and the amount of the refund varies by state.
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 is Title IV, which represented approximately 80% of our cash
receipts relating to revenues in 2005. As a result of the significance of the
Title IV funds received by our students, we are highly dependent on these funds
to operate our business. Any reduction in the level of Title IV funds that our
students are eligible to receive or any impact on our ability to receive Title
IV funds would have a significant impact on our operations and our financial
condition.
OPERATING ACTIVITIES
Net cash used in operating activities was $13.5 million for the six months ended
June 30, 2006 compared to $1.7 million for the six months ended June 30, 2005.
The $11.8 million decrease in cash used in operating activities was primarily
due to a $4.9 million increase in accounts receivable over the prior period.
This increase in accounts receivable is primarily attributable to the addition
of five campuses during the period as well as normal seasonal patterns.
Additionally, during the period we had increased tax payments of $7.3 million as
compared to the same period in 2005, offset by increased net income and other
changes in working capital items.
INVESTING ACTIVITIES
Net cash used in investing activities increased $15.0 million to $41.4 million
for the six months ended June 30, 2006 from $26.4 million for the six months
ended June 30, 2005. This increase is primarily due to our acquisition of FLA.
Our cash used in investing activities was primarily related to the purchase of
property and equipment and in acquiring schools. Our capital expenditures
primarily result from facility expansion, leasehold improvements, and
investments in classroom and shop technology and in operating systems. On
January 11, 2005, we acquired New England Technical Institute, or NETI, for
$19.9 million, net of cash acquired. This amount was subsequently adjusted to
$18.8 million as a result of purchase price adjustments. On May 22, 2006, we
acquired FLA for approximately $32.8 million plus the assumption of a $7.2
million mortgage, net of cash acquired.
We currently lease a majority of our campuses. In October 2005, we completed the
purchase of our Grand Prairie, Texas facility and which we opened in July 2006.
In addition, on May 22, 2006, with the purchase of FLA, we acquired real estate
valued at approximately $23.0 million. Our growth strategy is primarily focused
on internal growth, including campus expansions; however, we have in the past,
and expect to continue to, consider strategic acquisitions. To the extent that
these potential strategic acquisitions are large enough to require financing
beyond available cash from operations and borrowings under our credit
facilities, we may incur additional debt or issue additional debt or equity
securities.
Capital expenditures are expected to increase as we upgrade and expand current
equipment and facilities and open new facilities to meet increased student
enrollments. Additionally, we are evaluating several other expansion
opportunities. We anticipate capital expenditures to be approximately 12% to 15%
of revenues in 2006. We expect to be able to fund these capital expenditures
with cash generated from operating activities.
FINANCING ACTIVITIES
Net cash provided by financing activities was $10.0 million for the six months
ended June 30, 2006 compared to $16.8 million for the six months ended June 30,
2005. This decrease in 2006 is primarily attributable to the pay down of our
debt in 2005 from the proceeds of our initial public offering.
On February 15, 2005, we entered into a new credit agreement with a syndicate of
banks led by our existing lender. Under the terms of this agreement, the
syndicate provided us with a $100 million credit facility with a term of five
years. The credit agreement permits the issuance of letters of credit of up to
$20 million, the amount of which reduces the availability of permitted
borrowings under the agreement. In connection with of this new credit agreement,
we wrote off as a component of interest expense approximately $0.4 million of
unamortized deferred finance costs under our old credit agreement during the six
months ended June 30, 2005. We incurred approximately $0.8 million of deferred
finance costs under the new agreement.
18
The following table sets forth our long-term debt at the dates indicated:
JUNE 30, DECEMBER 31,
2006 2005
-------------- --------------
Credit agreement $ 10,000 $ -
Mortgage note payable 7,175 -
Automobile loans 64 81
Finance obligation 9,672 9,672
Capital leases-computers (with rates ranging
from 6.7% to 10.7%) 874 1,015
-------------- --------------
Subtotal
27,785 10,768
Less current portion (1,034) (283)
-------------- --------------
$ 26,751 $ 10,485
============== ==============
CONTRACTUAL OBLIGATIONS
LONG-TERM DEBT. As of June 30, 2006, our long-term debt consisted of amounts
borrowed under our credit agreement, a mortgage note payable assumed as part of
the acquisition of FLA, the finance obligation in connection with our
sale-leaseback transaction in 2001 and amounts due under capital lease
obligations.
LEASE COMMITMENTS. We lease offices, educational facilities and various
equipment for varying periods through the year 2020 at basic annual rentals
(excluding taxes, insurance, and other expenses under certain leases).
The following table contains supplemental information regarding our total
contractual obligations as of June 30, 2006, measured from the end of our fiscal
year, December 31, 2005:
PAYMENTS DUE BY PERIOD
--------------------------------------------------------------------
LESS THAN AFTER 5
TOTAL 1 YEAR 2-3 YEARS 4-5 YEARS YEARS
------------ ------------ ------------ ------------ ------------
Credit agreement $ 10,000 $ - $ - $ 10,000 $ -
Mortgage note payable (including interest) 7,175 242 534 607 5,792
Capital leases (including interest) 1,045 919 126 - -
Operating leases 142,174 15,854 30,738 24,104 71,478
Finance obligation 13,949 1,259 2,517 2,517 7,656
Automobile loans (including interest) 67 36 31 - -
------------ ------------ ------------ ------------ ------------
Total contractual cash obligations $ 174,410 $ 18,310 $ 33,946 $ 37,228 $ 84,926
============ ============ ============ ============ ============
OFF-BALANCE SHEET ARRANGEMENTS
We had no off-balance sheet arrangements as of June 30, 2006.
RELATED PARTY TRANSACTIONS
We had a consulting agreement with Hart Capital LLC ("Hart Capital"), which
terminated by its terms in June 2004, to advise us in identifying acquisition
and merger targets and assisting with the due diligence reviews of and
negotiations with these targets. Hart Capital is the managing member of Five
Mile River Capital Partners LLC, which is the second largest stockholder of our
Company. Steven Hart, the President of Hart Capital, is a member of our board of
directors. We paid Hart Capital a monthly retainer, reimbursement of expenses
and an advisory fee for its work on successful acquisitions or mergers. In
accordance with the agreement, we paid Hart Capital $0 and approximately $0.01
million for the three months ended June 30, 2006 and 2005, respectively, and $0
and approximately $0.3 million for the six months ended June 30, 2006 and 2005,
respectively. In connection with the consummation of the NETI acquisition, on
January 11, 2005, we paid Hart Capital $0.3 million for its services.
In 2003, we entered into a management service agreement with our majority
stockholder, Stonington Partners Inc. ("Stonington Partners"). In accordance
with this agreement, we paid Stonington Partners a management fee of $0.75
million per year for management consulting and financial and business advisory
services. Such services include valuing acquisitions and structuring their
financing and assisting with new loan agreements. We paid Stonington Partners $0
and $0.75 million for the six months ended June 30, 2006 and 2005, respectively.
Fees paid to Stonington Partners were being amortized over a twelve month
period. This agreement
19
terminated by its terms upon the completion of our initial public offering in
June 2005. Selling, general and administrative expenses for the quarter ended
March 31, 2005 include a $0.2 million charge resulting from the amortization of
these fees.
SEASONALITY AND TRENDS
Our net revenues and operating results normally fluctuate as a result of
seasonal variations in our business, principally due to changes in total student
population. Student population varies as a result of new student enrollments,
graduations and student attrition. Historically, our schools have had lower
student populations in our first and second quarters and we have experienced
large class starts in the third and fourth quarters and student attrition in the
first half of the year. Our second half growth is largely dependent on a
successful high school recruiting season. We recruit our high school students
several months ahead of their scheduled start dates, and thus, while we have
visibility on the number of students who have expressed interest in attending
our schools, we cannot predict with certainty the actual number of new student
enrollments and the related impact on revenue. Our expenses, however, do not
vary significantly over the course of a year with changes in our student
population and net revenues. During the first half of the year, we make
significant investments in marketing, staff, programs and facilities to ensure
that we have the proper staffing to meet our second half targets and, as a
result, such expenses do not fluctuate significantly on a quarterly basis. To
the extent new student enrollments, and related revenues, in the second half of
the year fall short of our estimates, our operating results could suffer. We
expect quarterly fluctuations in operating results to continue as a result of
seasonal enrollment patterns. Such patterns may change, however, as a result of
new school openings, new program introductions, increased enrollments of adult
students and/or acquisitions.
Similar to other public for-profit post secondary education companies, the
increase in our average undergraduate enrollments has not met our historical or
anticipated growth rates in 2005 and 2006. As a result of the slow down in 2005,
we entered 2006 with fewer students enrolled than we had in January of 2005. The
slow down that has occurred in the for-profit post secondary education sector
appears to have had a greater impact on companies, like ours, that are more
dependent on their on-ground business as opposed to on-line students. We believe
that the slow down can be attributed to many factors, including: (a) the
economy; (b) dependency on television to attract students to our school; (c)
turnover of our sales representatives; and (d) increasing competition in the
marketplace.
Despite soft organic enrollment trends and increased volatility in the near
term, we believe that our growth initiatives as well as the steps we have taken
to address the challenging trends that our industry and we are currently facing
will produce positive growth over the long-term. While our operating strategy,
business model and infrastructure are well suited for the short-term and we have
ample operating flexibility, we continue to be prudent and realistic and have
taken the necessary steps to ensure that operations that have not grown as
rapidly as expected are right sized. We also continue to make investments in
areas that are demonstrating solid growth.
Operating income is negatively impacted during the initial start-up phase of new
campus expansions. We incur sales and marketing costs as well as campus
personnel costs in advance of the opening of each campus. Typically we begin to
incur such costs approximately 15 months in advance of the campus opening with
the majority of such costs being incurred in the nine-month period prior to a
campus opening. During the current year, we initiated expansion efforts for one
new campus, located in Queens, New York, which opened on March 27, 2006.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to certain market risks as part of its on-going business
operations. The Company has a credit agreement with a syndicate of banks. The
obligations of the Company under the credit agreement are secured by a lien on
substantially all of the assets of the Company and its subsidiaries and any
assets that it or its subsidiaries may acquire in the future, including a pledge
of substantially all of the subsidiaries' common stock. Outstanding borrowings
bear interest at the rate of adjusted LIBOR plus 1.0% to 1.75%, as defined, or a
base rate (as defined in the credit agreement). As of June 30, 2006, the Company
has $10.0 million outstanding under the credit agreement. The interest rate
under this borrowing is 6.17% at June 30, 2006.
In conjunction with the acquisition of New England Institute of Technology at
Palm Beach, Inc., the Company assumed a mortgage note payable with an
accompanying interest rate swap (the "SWAP") in the amount of $7.2 million. The
fair value of the SWAP upon acquisition was $0.5 million and all future changes
in the market valuation of the SWAP will be recorded as other income or expense
on the consolidated statement of operations. The interest rate swap agreement
converts the mortgage note payable from a variable rate to a fixed rate of 6.48%
through May 1, 2013.
Based on our debt outstanding balance, an immediate change of one percent in the
interest rate would cause a change in interest expense of approximately $0.1
million, or less than $.01 per basic share, on an annual basis. Changes in
interest rates would also impact the fair value of the interest rate swap, which
would be recorded as interest income or expense on the condensed consolidated
income statement.
The remainder of our interest rate risk is associated with miscellaneous capital
equipment leases, which are not material.
20
ITEM 4. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Our Chief Executive
Officer and Chief Financial Officer, after evaluating the effectiveness of our
disclosure controls and procedures (as defined in Securities Exchange Act Rule
13a-15(e)) as of the end of the quarterly period covered by this report, have
concluded that our disclosure controls and procedures are adequate and effective
to reasonably ensure that material information required to be disclosed by us in
the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specific 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.
(b) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING. There were no changes
made during our most recently completed fiscal quarter in our internal control
over financial reporting that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary conduct of our business, we are periodically subject to
lawsuits, investigations and claims, including, but not limited to, claims
involving students or graduates and routine employment matters. Although we
cannot predict with certainty the ultimate resolution of lawsuits,
investigations and claims asserted against us, we do not believe that any
currently pending legal proceeding to which we are a party will have a material
adverse effect on our business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
At our annual meeting held on May 23, 2006, the shareholders voted to approve
all of management's proposals as follows:
1. For the election of nine directors to hold office until our next annual
meeting, the voting for each nominee was:
Votes for Votes Withheld
--------- --------------
David F. Carney 24,883,035 1,042
Alexis P. Michas 24,738,383 145,694
James J. Burke, Jr. 24,738,383 145,694
Steven W. Hart 24,739,483 144,594
Jerry G. Rubenstein 24,883,035 1,042
Paul E. Glaske 24,883,035 1,042
Peter S. Burgess 24,883,035 1,042
J. Barry Morrow 24,883,035 1,042
Celia Currin 24,883,035 1,042
2. For ratifying the appointment of Deloitte & Touche LLP as our independent
registered public accounting firm for our fiscal year ending December 31, 2006:
Votes for Votes Against Abstained
--------- ------------- ---------
24,878,725 502 4,850
3. For the approval of our 2006 Employee Stock Purchase Plan:
Votes for Votes Against Abstained Not Voted
--------- ------------- --------- ---------
23,736,532 123,824 344,832 678,889
21
ITEM 6. EXHIBITS
EXHIBIT INDEX
The following exhibits are filed or incorporated by reference with this Form
10-Q.
Exhibit
Number Description
- ------ -----------
3.1 Amended and Restated Certificate of Incorporation of the Company
(1).
3.2 Amended and Restated By-laws of the Company (2).
4.1 Stockholders' Agreement, dated as of September 15, 1999, among
Lincoln Technical Institute, Inc., Back to School Acquisition,
L.L.C., and Five Mile River Capital Partners LLC. (1).
4.2 Letter agreement, dated August 9, 2000, by Back to School
Acquisition, L.L.C., amending the Stockholders' Agreement (1).
4.3 Letter agreement, dated August 9, 2000, by Lincoln Technical
Institute, Inc., amending the Stockholders' Agreement (1).
4.4 Management Stockholders Agreement, dated as of January 1, 2002, by
and among Lincoln Technical Institute, Inc., Back to School
Acquisition, L.L.C. and the Stockholders and other holders of
options under the Management Stock Option Plan listed therein (1).
4.5 Registration Rights Agreement between the Company and Back to
School Acquisition, L.L.C. (2).
4.6 Specimen Stock Certificate evidencing shares of common stock (1).
10.1 Credit Agreement, dated as of February 15, 2005, among the Company,
the Guarantors from time to time parties thereto, the Lenders from
time to time parties thereto and Harris Trust and Savings Bank, as
Administrative Agent (1).
10.2 Employment Agreement, dated as of January 3, 2005, between the
Company and David F. Carney (1).
10.3 Amended Employment Agreement, dated as of March 1, 2005, between
the Company and David F. Carney (1).
10.4 Employment Agreement dated as of January 3, 2005, between the
Company and Lawrence E. Brown (1).
10.5 Amended Employment Agreement, dated as of March 1, 2005, between
the Company and Lawrence E. Brown (1).
10.6 Employment Agreement, dated as of January 3, 2005, between the
Company and Scott M. Shaw (1).
10.7 Amended Employment Agreement, dated as of March 1, 2005, between
the Company and Scott M. Shaw (1).
10.8 Employment Agreement, dated as of January 3, 2005, between the
Company and Cesar Ribeiro (1).
10.9 Amended Employment Agreement, dated as of March 1, 2005, between
the Company and Cesar Ribeiro (1).
22
10.10 Lincoln Educational Services Corporation 2005 Long Term Incentive
Plan (1).
10.11 Lincoln Educational Services Corporation 2005 Non Employee
Directors Restricted Stock Plan (1).
10.12 Lincoln Educational Services Corporation 2005 Deferred Compensation
Plan (1).
10.13 Lincoln Technical Institute Management Stock Option Plan, effective
January 1, 2002 (1).
10.14 Form of Stock Option Agreement, dated January 1, 2002, between
Lincoln Technical Institute, Inc. and certain participants (1).
10.15 Management Stock Subscription Agreement, dated January 1, 2002,
among Lincoln Technical Institute, Inc. and certain management
investors (1).
10.16 Stockholder's Agreement among Lincoln Educational Services
Corporation, Back to School Acquisition L.L.C., Steven W. Hart and
Steven W. Hart 2003 Grantor Retained Annuity Trust (2).
10.17 Stock Purchase Agreement, dated as of March 30, 2006, among Lincoln
Technical Institute, Inc., and Richard I. Gouse, Andrew T. Gouse,
individually and as Trustee of the Carolyn Beth Gouse Irrevocable
Trust, Seth A. Kurn and Steven L. Meltzer (3).
31.1 * Certification of Chairman & Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 * Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32 * Certification of Chairman & Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
- -----------------
* Filed herewith
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 333-123664).
(2) Incorporated by reference to the Company's Form 8-K dated June 28, 2005.
(3) Incorporated by reference to the Company's Form 10-Q, filed with the SEC
on May 15, 2006.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: August 10, 2006
LINCOLN EDUCATIONAL SERVICES CORPORATION
By: /s/ Cesar Ribeiro
-----------------------------------
Cesar Ribeiro
Chief Financial Officer
(Principal Accounting and Financial
Officer)
24