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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1999 COMMISSION FILE NUMBER 1-13722
WHITMAN EDUCATION GROUP, INC.
Incorporated under the laws of the I.R.S. Employer Identification Number
State of Florida 22-2246554
4400 BISCAYNE BOULEVARD
MIAMI, FLORIDA 33137
(305) 575-6510
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
COMMON STOCK, NO PAR VALUE AMERICAN STOCK EXCHANGE
Indicate by check mark whether the registrant (1) has filed all reports 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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of June 1, 1999, there were 13,431,550 shares of Common Stock
outstanding.
The aggregate market value of the voting stock held by non-affiliates of
the registrant on June 1, 1999 was approximately $46,220,440.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of our Definitive Proxy Statement for our 1999 Annual
Meeting of Stockholders scheduled to be held August 6, 1999 are incorporated by
reference into Part III of this Report.
WHITMAN EDUCATION GROUP, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED MARCH 31, 1999
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business.......................................... ....... 3
Item 2. Properties......... ...................................... 22
Item 3. Legal proceedings......................................... 23
Item 4. Submission of matters to a vote of security holders....... 23
Executive Officers of the Registrant...................... 23
PART II
Item 5. Market for registrant's common equity and related
stockholder matters....................................... 25
Item 6. Selected financial data................................... 26
Item 7. Management's discussion and analysis of financial condition
and results of operations................................. 27
Item 7A. Quantitative and qualitative disclosures about
market risk............................................... 33
Item 8. Financial statements and supplementary data............... 33
Item 9. Changes in and disagreements with accountants on
accounting and financial disclosure....................... 33
PART III
Item 10. Directors and executive officers of the registrant........ 33
Item 11. Executive compensation.................................... 33
Item 12. Security ownership of certain beneficial owners
and management............................................ 34
Item 13. Certain relationships and related transactions............ 34
PART IV
Item 14. Exhibits, financial statement schedules, and reports
on Form 8-K............................................... 34
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PART I
Item 1. Business
You are cautioned that the following text concerning our business should be
read in conjunction with the "Forward-Looking Statements; Business Risks"
appearing at the end of Item 1 and that certain statements made in this Item 1
are qualified by the risk factors set forth in that section. Please keep in mind
while reading this report that:
-"We," "Us" or "Whitman" Refers to Whitman Education Group, Inc. and Its
Subsidiaries.
-"Colorado Tech" refers to the three campuses of Colorado Technical
University, and except where otherwise noted, also includes its Huron
University campus.
-"Sanford-Brown" refers collectively to our five Sanford-Brown College
campuses.
-"UDS" refers collectively to the fifteen Ultrasound Diagnostic Schools.
GENERAL
We are a proprietary provider of career-oriented postsecondary education.
Through three wholly- owned subsidiaries, we currently operate 24 schools in 13
states offering a range of graduate, undergraduate and non-degree certificate or
diploma programs primarily in the fields of information technology, healthcare
and business to more than 8,000 students.
We are organized into a University Degree Division and an Associate Degree
Division through which we offer education programs. The University Degree
Division primarily offers doctorate, master's and bachelor's degrees through
Colorado Tech. The Associate Degree Division offers associate's degrees and
diplomas or certificates through Sanford-Brown and UDS.
Our students are predominantly adults, generally between the ages of 24 and
35, who commute to our schools and require limited ancillary student services.
The students are seeking to acquire basic knowledge and skills necessary for
entry-level employment in technical careers or to acquire new or additional
skills to either change careers or advance in their current careers.
Our executive offices are located at 4400 Biscayne Boulevard, 6th Floor,
Miami, Florida 33137, and our telephone number is (305) 575-6510.
BACKGROUND
We were originally incorporated in New Jersey in 1979. In 1983, we acquired
two UDS schools in New York which offered non-degree programs only in diagnostic
medical ultrasound. Enrollment in the two schools was less than 50 students.
Over the next nine years, we opened eight additional UDS schools and increased
our total enrollment to approximately 400 students.
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In 1992, Dr. Phillip Frost invested in Whitman and became our Chairman. At
the time of his investment, we had revenues of approximately $3.8 million from
UDS operations, and total enrollment at the ten existing UDS schools was
approximately 675. We continued to expand UDS by adding five additional
locations by 1994, for a total of 15 locations.
In 1994, we began to expand the scope of our business to offer a broader
range of certificate programs in our UDS schools. Beginning in late 1994, we
began offering cardiovascular technology and medical assisting programs in our
UDS schools. In addition, in 1994 we began to evaluate acquisition candidates
that would permit us to offer a broader range of career-oriented programs,
including degree-based programs.
In December 1994, we acquired Sanford-Brown, a nationally-accredited
college founded in 1868, which offers associate degree programs in business,
computer technology and healthcare. With three campuses in and around St. Louis,
Missouri, one in Kansas City, Missouri and one in Granite City, Illinois,
Sanford-Brown added approximately 1,500 students to our enrollment.
Sanford-Brown, together with UDS, created a network of 20 schools offering both
associate's degrees and non-degree programs in information technology,
healthcare and business. These 20 schools comprise our Associate Degree
Division.
In March 1996, we further broadened our degree program offerings by
acquiring Colorado Tech in Colorado Springs, Colorado. Founded in 1965, Colorado
Tech is a regionally-accredited institution offering doctorate, master and
bachelor degrees in various information technology and business fields. Through
the acquisition of Colorado Tech, we realized one of our goals of offering a
full range of degree programs. The maturity of Colorado Tech and the quality of
its programs also created the opportunity for us to expand by replicating the
Colorado Tech model either in new locations or through the conversion of
acquired institutions. Colorado Tech is the foundation of our University Degree
Division.
Colorado Tech began an expansion program in late 1996. In October 1996,
Colorado Tech opened its second campus in Denver, Colorado; and in December
1996, Colorado Tech expanded its educational content and geographic scope
through the acquisition of two campuses of Huron University in Huron and Sioux
Falls, South Dakota. Huron University, which was founded in 1883, offered an MBA
program as well as bachelor degree programs in healthcare, business, computer
technology and education. After the acquisition of Huron University, the Sioux
Falls campus was converted into an additional location of Colorado Tech because
both the Sioux Falls campus and Colorado Tech principally serve the adult
learner - generally, working adults seeking to advance in an existing career. In
addition, Huron University's MBA program was installed at the other Colorado
Tech campuses. Huron University's Huron campus, however, principally directs its
efforts to serving more traditional students, younger adults pursuing
degree-based higher education upon graduation from high school.
In order to sharpen our strategic focus, we have decided to divest our
Huron University campus and focus our efforts on adult learners. Although the
curricula is career-oriented at Huron University, there are fundamental
differences in a campus serving working adults and a campus serving more
traditional students. Accordingly, in February, 1999, we entered into an
agreement whereby the business operations of Huron University will be
transferred to a new ownership group to be formed by the current chancellor of
Huron University, who will remain with Huron University as its president once
the transaction has been completed.
Completion of the transaction is subject to various conditions,
including the obtaining of adequate financing by the new owners,
the obtaining of all necessary state and other governmental agency approvals,
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the attaining of independent accreditation of Huron University and Huron
University independently qualifying for participation in federal Title IV
student financial assistance programs administered by the United States
Department of Education. We anticipate that these conditions will be fulfilled
sometime in the second half of calendar 1999 after which we will close the
transaction, although there can be no assurance that the transaction will be
consummated.
In connection with the expansion of programs and locations and the
acquisition of new schools, we have continually focused on strengthening our
management and improving our facilities to foster effective oversight of our
operations. In March 1996, we relocated our headquarters from New Jersey to
Miami, Florida. In addition, through both recruitment and acquisition over the
past several years, we established an entirely new executive management team and
have broadened and upgraded our middle management team by adding individuals
with broad experience in proprietary education. We have also expanded the
breadth and depth of our Board of Directors to provide a diverse base of
knowledge and skills in education, regulated industry, mergers and acquisitions,
and business generally, particularly high-growth businesses.
In 1997, we reincorporated in the State of Florida, where we maintain our
corporate headquarters.
THE POSTSECONDARY EDUCATION MARKET
The postsecondary education market is estimated to exceed $210 billion
annually, with more than 14 million students enrolled in over 6,000 single and
multi-location institutions nationwide. According to the United States
Department of Education, the population enrolled in such institutions will
increase by nearly 1.5 million students to over 16 million students by the year
2005. Further, of the Title IV financial aid eligible institutions,
approximately 3,000 are for-profit, with approximately 500 of those offering
associate's degrees or higher. Total enrollment in for-profit institutions is
estimated to be less than 5% of the overall market.
Additionally, we believe that the market for entry-level associate's
degrees is enhanced by the increasing number of new high school graduates,
projected to increase from 2.5 million in 1994 to 3.1 million in 2004. It is
further enhanced by an increase in the percentage of recent high school
graduates who continue their education after graduation. According to the
National Center For Education Statistics, this percentage increased from
approximately 57% in 1987 to 67% in 1997. In addition, the number of adult
learners is increasing. Adults over the age of 24 constitute the largest
group of students measured by age category. The United States Department of
Education estimates that by the year 2001 approximately 6.6 million
or 42% of the students attending postsecondary institutions will be adults
over the age of 24.
Further, the continuing shift in the information age from non-skilled to
skilled workers is dramatic. According to economists, in 1950, 40% of the
workforce in the United States was considered skilled or professional; in 1991
this number had risen to 65% and, it is projected that in the year 2000, 85% of
jobs will require education or training beyond high school. This shift is
reflected by and further driven by the income premium placed on postsecondary
education. According to the United States Census Bureau, in 1995, a full- time
male worker with an associate degree earned an average of 37% more per year than
a comparable worker with only a high school diploma, and a full-time male worker
with a bachelor's degree earned an average of 72% more per year than a
comparable worker with only a high school diploma.
-5-
Based on these trends, we are focusing our efforts in serving two distinct
groups of postsecondary students: those seeking to rapidly enter new careers or
change careers and those seeking to advance in existing careers. Our Associate
Degree Division focuses principally on the former market segment and our
University Degree Division focuses principally on the latter market segment. We
believe that by organizing our business into two divisions, we will be able to
better capitalize on opportunities in both of these market segments.
BUSINESS STRATEGY
We intend to capitalize on what we believe are favorable trends in the
postsecondary education market by focusing on career-oriented education programs
designed primarily for adult learners seeking to acquire basic knowledge and
skills necessary for entry-level employment in new careers or advance in their
current careers. Having established a broad base of educational content offered
in a broad range of degree (associate's, bachelor's, master's and doctorate) and
non-degree programs, we believe we are well-positioned to focus our efforts on
further internal growth.
In the short term, we believe that our best opportunity for achieving
growth will come from the integration of existing operations with the basic
objectives of increasing revenues at existing schools and improving overall
operating efficiencies at each school and within our operations as a whole. To
accomplish our goal of increasing revenues from our existing schools, we intend
to increase enrollment by adding curricula at our existing locations and by
improving our marketing efforts. We also intend to expand our educational
programs. The expansion of educational programs will include the elevation of
certain certificate and diploma programs to associate degree programs as well as
the development of new curricula. We also intend to develop and offer continuing
education programs and corporate training programs for which our curricula is
well-suited and can be customized on a cost-effective basis.
While we will continue to strive for increased revenues and enhanced
operating efficiencies from our current operations in the short term, in the
intermediate and longer term, we will seek to expand our network of campuses by
opening new campuses. We may establish new locations where we believe the
population of working adults, the local employment market, the availability of
management talent and demographic trends will permit us to successfully
replicate our operational model. Establishment of new locations will be subject
to our ability to comply with or satisfy applicable regulatory requirements of
the United States Department of Education and state licensing and accreditation
requirements. We may also augment our expansion through selective strategic
acquisitions where an acquisition is a more feasible alternative both
financially and operationally.
OPERATING STRUCTURE
We operate as two divisions: the University Degree Division and the
Associate Degree Division. Each division focuses on a different segment of the
postsecondary career education market. Our corporate office provides various
centralized administrative services to each of our divisions and has a
management structure which develops and implements corporate policies and
procedures within each division. Each division has campus managers who oversee
the daily operations of their campuses and district directors who
oversee multiple campus locations. We believe that this management
structure allows local school management to develop valuable
local market experience and community and employer relationships that
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are vital to the adult career education market, while still realizing the
economies of scale and degree of control associated with centralization.
The University Degree Division is currently comprised of Colorado Tech, a
regionally-accredited institution. Huron University is an additional location of
Colorado Tech. Students attending the three principal Colorado Tech campuses are
typically working adults seeking to advance in their current careers. Huron
University, being a more traditional institution, primarily serves the
traditional student attending college immediately following high school.
Colorado Tech offers various bachelor's degrees in computer science, management,
engineering and education; master's degrees in computer science, computer
engineering, electrical engineering, management and business administration; and
doctorate degrees in computer science and management. We believe that flexible
course structures, class schedules designed for the working adult, and the
introduction of local-campus doctorate programs have solidified Colorado Tech's
position as a recognized leading source of adult education in its current
markets and have established a successful, replicable model for growth and
expansion into new markets. Huron University is a more traditional residential
based university. The sale of this campus is pending.
The Associate Degree Division focuses on the adult learner who desires to
rapidly change careers or to quickly enter a new career field. The Associate
Degree Division is currently comprised of Sanford- Brown and UDS, which provide
adult students with associate's degrees and professional certificate programs
primarily in the areas of healthcare, computer technology and business.
Sanford-Brown is a nationally- accredited institution that provides various
associate's degrees in computer technology, business, and various allied health
fields and similar professional certificate programs. UDS is also nationally
accredited and provides professional certificate programs in diagnostic medical
ultrasound, cardiovascular technology, medical assisting and surgical
technology. We anticipate offering a new program, Health Information Specialist,
at selected campuses this fiscal year.
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EDUCATIONAL PROGRAMS
We offer a range of career-oriented educational programs, substantially all
of which are in the areas of computer and electronic technology, healthcare and
business. We offer various concentrations in these programs at the associate's,
bachelor's, master's and doctorate levels as well as the professional diploma
and certificate levels. Our programs are designed primarily to serve the adult
learner seeking to acquire basic knowledge and skills necessary for entry-level
employment or to acquire new or additional skills to change careers or to
advance in their current careers. Each institution maintains curriculum action
groups, comprised of faculty, campus program directors and corporate curriculum
specialists, that periodically review and revise curricula as a result of
feedback from students, local advisory boards comprised of professionals in
career fields related to the programs and local employers.
Our educational programs, by degree level, are set forth below:
UNIVERSITY DEGREE DIVISION ASSOCIATE DEGREE DIVISION
- ------------------------------------------------------- -----------------------------------------------------------
COLORADO TECHNICAL UNIVERSITY HURON UNIVERSITY 1 SANFORD-BROWN COLLEGE ULTRASOUND DIAGNOSTIC SCHOOL
DOCTORATE PROGRAMS MASTER DEGREE PROGRAM ASSOCIATE DEGREE SPECIALIZED ASSOCIATE
Computer Science Business Administration PROGRAMS DEGREE PROGRAMS
Management Computer Information Systems (Florida campuses only)
BACHELOR DEGREE Network Administration Diagnostic Medical Ultrasound
MASTER DEGREE PROGRAMS PROGRAMS Interactive Multimedia Non-Invasive Cardiovascular
Computer Science Computer Science Physical Therapy Assistant Technology
Computer Engineering Management Information Systems Occupational Therapy Assistant
Electrical Engineering Financial Management Respiratory Therapy
Management Management Radiography PROFESSIONAL DIPLOMA
Business Administration Managerial Accounting Nursing PROGRAMS
Teacher Education Medical Assistant Diagnostic Medical Ultrasound
BACHELOR DEGREE Nursing Accounting/Business Management Non-Invasive Cardiovascular
PROGRAMS Criminal Justice Office Administration Technology
Computer Engineering Athletic Training Paralegal Studies Medical Assistant
Computer Science Computer Programming Surgical Technology
Information Technology ASSOCIATE DEGREE
Management Information Systems PROGRAMS PROFESSIONAL DIPLOMA
Telecommunication Electronics Management Information Systems PROGRAMS
Technology Business Management Computer Applications
Electrical Engineering Accounting Computer Programming
Electronic Engineering Technology Nursing Network Administration
Management Criminal Justice Interactive Multimedia
Criminal Justice Practical Nursing
Medical Assistant
Respiratory Therapy
ASSOCIATE DEGREE Accounting
PROGRAM Administrative Office Assistant
Information Technology
Electronics Technology
Business Management
Accounting
Medical Assisting
Criminal Justice
- -------------------
1 A campus of Colorado Technical University
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The following table provides information as of May 15, 1999 regarding the
programs offered by each of our schools:
LENGTH OF
TYPE OF NUMBER OF NUMBER OF PROGRAM
SCHOOL PROGRAM LOCATIONS STUDENTS (IN MONTHS1)
------ ------- --------- ---------- ------------
UNIVERSITY DEGREE DIVISION
- --------------------------
Colorado Technical University Doctoral 2 86 36
Master 3 639 21-25
Bachelor 3 1,394 36
Associate 3 197 18
Non-degree 3 185 Varies
School total 2,501
======
Huron University Master 1 23 21
Bachelor 1 418 48
Associate 1 48 24
Non-degree 1 20 Varies
School total 509
======
Associate Degree Division
Sanford-Brown College Associate 4 1,021 14-18
Non-degree 5 477 11-14
School Total 1,498
======
Ultrasound Diagnostic School Non-degree 15 3,320 9-18
Specialized
Associate 3 278 9-18
------
School Total 3,598
======
Total 8,106
======
Tuition and fees for our programs vary depending on the nature of the
program and the location of the school. Based on rates to be implemented during
the current fiscal year, tuition and fees for the non- degree
programs in the Associate Degree Division range from approximately $9,000
for the nine-month medical assistant program offered by UDS to approximately
$22,500 for the longest associate degree programs offered by Sanford-Brown.
At Colorado Tech, tuition and fees range from approximately $31,000
- -------------------
1 At Colorado Tech, the working adult student typically do not attend their
program on a full-time basis. Therefore, it generally takes longer than the
stated program length to complete the program.
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to $33,000 for the bachelor's degree programs, $13,500 to $19,000 for the
master's program and approximately $35,000 for the doctorate program.
Academic schedules are designed to meet the needs of the adult student. UDS
offers all three of its programs during the day or evening and classes begin
generally every five weeks. Sanford-Brown's programs begin quarterly and are
offered both during the day and evening. Degree programs at Colorado Tech's
Colorado Springs, Denver and Sioux Falls campuses are offered principally in the
evening to accommodate the Colorado Tech student who is typically a working
adult. Classes at Huron are offered principally during the day to meet the
demands of the more traditional student.
STUDENT RECRUITMENT
We utilize a wide array of advertising and marketing strategies to attract
students to our schools, including various combinations of newspaper, radio,
direct contact with human resources departments of various corporations,
television and direct mail. We market each of our schools on a local basis, and
draw the vast majority of our students from the local areas surrounding each
school. We measure the effectiveness of our marketing efforts by tracking the
enrollment rates and costs associated with each form of marketing. Typically,
approximately 25% of our schools' new enrollment is generated by referrals from
graduates or current students with the remainder resulting from advertising
efforts.
STUDENT ADMISSIONS
Each school employs several admissions representatives who interview and
enroll students on-site and a variety of support personnel to assist students in
the admissions process. Each of our schools has admission requirements designed
to ensure that entering students have the educational and work experience,
personal circumstances and the ability necessary to successfully complete their
program of study. Admission requirements differ from program to program and
school to school, but at a minimum, each applicant must be a high school
graduate or possess the recognized equivalent credential, perform successfully
on a personal interview, and in most cases, perform adequately on an entrance
examination. The admissions process is monitored by a director of admissions in
each location, and periodically reviewed for compliance by corporate personnel.
GRADUATE CAREER SERVICES
Each of our schools operates a career services department that provides
career development services to current students and alumni. These services
include various combinations of seminars/courses covering interviewing skills,
resume preparation and enhancement, job search skills, and career planning
advice. In addition, the career services departments of the various schools make
contact with potential employers on behalf of the schools and individual
graduates, schedule interviews, attempt to obtain feedback regarding graduate
performance on interviews and on the job, and provide on-going re-placement
assistance to graduates.
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COMPETITION
The postsecondary school industry is highly fragmented. Typically, no
single public or private school or group of schools dominates markets on a local
or national basis. Accordingly, each of our schools has various competitors,
including public and private colleges and other proprietary institutions. In
addition, in almost all of the geographic areas in which UDS campuses are
located, hospitals also operate programs to train medical sonographers.
Generally, however, hospitals operate these programs for their own staffing
requirements only.
Competition is typically based on the nature and quality of the programs
offered, flexibility of class scheduling, service to the student customers and
employability of graduates. Certain public and private colleges may offer
programs similar to ours at a lower tuition cost due in part to government
subsidies, foundation grants, tax deductible contributions and other financial
resources not available to proprietary institutions. However, tuition at
private, non-profit institutions is, on average, higher than the average tuition
rates of our schools.
SUPERVISION AND REGULATION
GENERAL. Each of our schools is subject to regulation by: (i) the state in
which it operates; (ii) its accrediting body; and (iii) the United States
Department of Education because they are certified to participate in federal
financial aid programs ("Title IV Programs") authorized under the Higher
Education Act of 1965, as amended. The loss of authorization to operate in
states in which we currently operate, the withdrawal of accreditation from our
schools, or the loss of the schools' eligibility to participate in Title IV
Programs would have a material adverse effect.
STATE AUTHORIZATION. Except for South Dakota which no longer regulates
educational institutions, we are required to have authorization to operate in
each state where we physically provide educational programs. Certain states
accept accreditation as evidence of meeting minimum state standards for
authorization. Other states require separate evaluations for authorization.
Generally, the addition of a program or the addition of a new location must be
included in the institution's accreditation and/or be approved by the
appropriate state authorization agency. Our schools are currently authorized to
operate in all states in which they have physical locations and such
authorization is required. State authorization is required for an institution to
become and remain eligible to participate in Title IV Programs.
ACCREDITATION. Accreditation is a non-governmental process through which an
institution submits itself to qualitative review by an organization of peer
institutions. There are three types of accrediting agencies: (i) national
accrediting agencies, which accredit institutions on the basis of the overall
nature of the institutions without regard to geographic location; (ii) regional
accrediting agencies, which primarily accredit institutions based within their
geographic areas; and (iii) programmatic accrediting agencies, which accredit
specific educational programs offered by institutions. Accreditation
serves as: the basis for the recognition and acceptance by
employers, other higher education institutions and governmental
entities of degrees and credits earned by our students; one of
the qualifications to participate in Title IV Programs; and the
qualification for authorization to operate in certain states. Accrediting
agencies primarily examine the academic quality of the instructional
programs of an institution, and a grant of accreditation is
generally viewed as validation that an institution's
programs meet generally accepted academic standards. Accrediting
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agencies also review the administrative and financial operations of the
institutions they accredit to ensure that each institution has the resources to
perform its educational mission.
Pursuant to provisions of the Higher Education Act, the Department of
Education relies on accrediting agencies and state licensing bodies to determine
whether institutions' educational programs qualify them to participate in the
Title IV Programs. The Higher Education Act requires each recognized accrediting
agency to submit to a periodic review of its procedures and practices by the
Department of Education as a condition of its continued recognition. Accrediting
agencies that meet the Department of Education standards are recognized as
reliable arbiters of educational quality. As required under the Title IV Program
rules, each of our schools is accredited by an accrediting body recognized by
the Department of Education.
The Higher Education Act requires accrediting agencies recognized by the
Department of Education to review many aspects of an institution's operations to
ensure that the education or training offered by the institution is of
sufficient quality to achieve, for the duration of the accreditation period, the
stated objective for which the education or training is offered. Under the
Higher Education Act, a recognized accrediting agency must perform regular
inspections and reviews of institutions of higher education.
If an accrediting agency believes that an institution may be out of
compliance with accrediting standards, it may place the institution on probation
or a similar warning status or direct the institution to show cause why its
accreditation should not be revoked. An accrediting agency may also place an
institution on "reporting" status in order to monitor one or more specific areas
of the institution's performance. An institution placed on reporting status is
required to report periodically to its accrediting agency on that institution's
performance in a specific area. Failure to demonstrate compliance with
accrediting standards in any of these instances could result in loss of
accreditation. While on probation, show cause or reporting status, an
institution may be required to seek permission of its accrediting agency to open
and commence instruction at new location.
FEDERAL FINANCIAL AID PROGRAMS. We derive a majority of our revenue from
students who participate in Title IV Programs under the Higher Education Act,
and the regulations promulgated thereunder by the Department of Education. The
potential loss of student financial aid due to our failure to comply with a
requirement of the regulations would have a material adverse effect.
A brief description of these programs follows:
FEDERAL PELL GRANT ("PELL"). Federal Pell Grants are a primary
component of the Title IV Programs under which the Department of Education makes
grants to students who demonstrate financial need. Every eligible student is
entitled to receive a Pell Grant; there is no institutional allocation or limit.
For the 1998-99 award year, Pell Grants range from $400 to $3,000 per year.
FEDERAL SUPPLEMENTAL EDUCATIONAL OPPORTUNITY GRANT ("FSEOG"). FSEOG
awards are designed to supplement Pell Grants for the neediest students. FSEOG
awards generally range in amount from $100 to $4,000
per year; however the availability of FSEOG awards is limited
by the amount of those funds allocated to an institution
under a formula that takes into account the size of the
institution, its costs and the income levels of its students.
We are required to make a 25% matching contribution for
all FSEOG program funds disbursed. Resources for this
institutional contribution may include institutional grants, scholarships
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and other eligible funds and, in certain states, portions of state scholarships
and grants. During the 1997-98 award year, our required 25% institutional match
was approximately $14,050.
FEDERAL FAMILY EDUCATION LOAN PROGRAM ("FFEL"). The FFEL program
consists of two types of loans; Stafford loans, which are made available to
students, and PLUS loans, which are made available to parents of students
classified as dependents. Under the Stafford loan program, a student may borrow
up to $2,625 for the first academic year, $3,500 for the second academic year
and, in some educational programs, $5,500 for each of the third and fourth
academic years. Students with financial need qualify for interest subsidies
while in school and during grace periods. Students who are classified as
independent can increase their borrowing limits and receive additional
unsubsidized Stafford loans. Such students can obtain an additional $4,000 for
each of the first and second academic years and, depending upon the educational
program, an additional $5,000 for each of the third and fourth academic years.
The obligation to begin repaying Stafford loans does not commence until six
months after a student ceases enrollment as at least a half-time student.
FEDERAL PERKINS LOAN PROGRAM ("PERKINS"). Eligible undergraduate
students may borrow up to $3,000 under the Perkins program during each academic
year, with an aggregate maximum of $15,000, at a 5% interest rate and with
repayment delayed until nine months after the borrower ceases to be enrolled on
at least a half-time basis. Perkins loans are made available to those students
who demonstrate the greatest financial need. Perkins loans are made from a
revolving account, 75% of which was initially capitalized by the Department of
Education. Subsequent federal capital contributions, with an institutional match
in the same proportion, may be received if an institution meets certain
requirements. Each institution collects payments on Perkins loans from its
former students and loans those funds to students currently enrolled. Collection
and disbursement of Perkins loans is the responsibility of each participating
institution. Presently, only Colorado Tech utilizes the Perkins program.
FEDERAL WORK STUDY ("FWS"). Under the FWS program, federal funds are
made available to pay up to 75% of the cost of part-time employment of eligible
students, based on their financial need, to perform work for the institution or
for off-campus public or non-profit organizations. At least 5% of an
institution's FWS allocation must be used to fund student employment in
community service positions.
FEDERAL OVERSIGHT OF TITLE IV PROGRAMS. In order to participate in Title IV
Programs, we must comply with complex standards set forth in the Higher
Education Act and the regulations including the demonstration of "financial
responsibility" and the "administrative capability" to handle and disburse Title
IV funds. Compliance with such standards is subject to periodic reviews by the
Department of Education and state and national agencies which guarantee the
loans made in the Title IV Programs. Disbursements made under the Title IV
Programs are subject to disallowance and repayment if such reviews result in
adverse findings and if such findings are sustained after an institution has
exhausted its right to appeal. We believe that our institutions are in
substantial compliance with the Higher Education Act and the regulations. We
cannot, however, predict with certainty how all of the Higher Education Act
provisions and the regulations will be applied. As described below, our
violation of the Title IV Program requirements could have a material adverse
effect on our financial condition or results of operations. In addition, it is
possible that the Higher Education Act and the regulations may be applied in a
way that could hinder our operations or expansion plans.
ELIGIBILITY AND CERTIFICATION PROCEDURES. The Higher Education Act and its
implementing regulations require each institution to apply to the
Department of Education for continued eligibility and certification to
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participate in the Title IV Programs at least every five years, or when it
undergoes a change of control, opens an additional location or raises the
highest academic credential it offers.
PROVISIONAL CERTIFICATION. An institution may be placed on provisional
certification status for a period not to exceed three years, if the Department
of Education finds that the institution does not fully satisfy all of its
eligibility and certification standards. Provisional certification differs from
full certification in that a provisionally certified school may be terminated
from eligibility to participate in Title IV Programs without the same
opportunity for a hearing before an independent hearing officer and an appeal to
the Secretary of Education afforded to a fully certified school. Further, the
Department of Education may impose additional conditions on a provisionally
certified institution's eligibility to continue participating in Title IV
Programs. If an institution successfully participates in Title IV Programs
during its period of provisional certification but fails to satisfy the full
certification criteria, the Department of Education may renew the institution's
provisional certification. Further, any institution seeking eligibility to
participate in Title IV Programs after a change in control will be provisionally
certified for a limited period, following which the institution will be required
to reapply for continued eligibility.
LEGISLATIVE ACTION
Political and budgetary concerns significantly affect the Title IV
Programs. Congress must re- authorize the Higher Education Act approximately
every six years. The most recent re-authorization in 1998 re-authorized the
Higher Education Act through September 30, 2004. Congress re-authorized
all of the Title IV Programs in which our schools participate, generally
in the same form and at funding levels no less than for the prior year. While
the 1998 re-authorization of the Higher Education Act made numerous changes to
Title IV Program requirements, we believe that these changes will not have a
material adverse effect on our business, results of operations or financial
condition. Changes made by the 1998 re-authorization of the Higher Education
Act include:
- expanding the adverse effects on schools of high student loan default
rates,
- increasing from 85% to 90% the limit of the proprietary school's revenue
that may be derived each year from Title IV Programs,
- revising the refund standards that require an institution to return a
portion of the Title IV Program funds for students who withdraw from
school,
- giving the Department of Education flexibility to continue an
institution's Title IV participation without interruption in some
circumstances following a change of ownership or control,
- changing the formula for calculating the interest rate on FFEL loans and
- modifying the definition of default from 180 days to 270 days past due
for loans payable in monthly installments.
In addition, Congress reviews and determines federal appropriations for
Title IV Programs on an annual basis. Congress can also make changes in
the laws affecting the Title IV Programs in the annual
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appropriation bills and in other laws it enacts between re-authorizations of the
Higher Education Act. Since a significant percentage of our revenue is derived
from the Title IV Programs, any action by Congress that significantly reduces
Title IV Program funding or the ability of our schools or students to
participate in the Title IV Programs could have a material adverse effect on our
business, results of operations or financial condition. Legislative action may
increase our administrative costs and require us to adjust our practices in
order for our schools to comply fully with the Title IV Program requirements.
THE 90/10 RULE. The Higher Education Act requires that an annual
calculation be made for each proprietary school of the percentage of its Title
IV Program receipts to its total receipts from Title IV eligible programs. Under
this rule, a proprietary school will be ineligible to participate in Title IV
Programs if, under a modified cash basis of accounting, more than 90% (for
fiscal years ending on or after October 1, 1998, and 85% for fiscal years ending
before that date) of revenues from its Title IV eligible programs for the prior
fiscal year, were derived from Title IV Program funds. If a school were to fail
the 90/10 rule fo r a particular fiscal year, it would be ineligible to
participate in Title IV Programs as of the first day of the following fiscal
year and would be unable to apply to regain its eligibility until the next
fiscal year. Furthermore, if one of our schools violated the 90/10 rule and
became ineligible to participate in Title IV Programs but continued to disburse
Title IV Program funds, the Department of Education would consider all Title IV
Program funds disbursed to the institution after the effective date of the loss
of eligibility to be a liability subject to repayment by the institution.
The Office of the Inspector General ("OIG") of the Department of Education
is currently conducting an audit of the SBC campus in Granite City, Illinois for
the fiscal year ended March 31, 1998. Although this audit has not yet been
completed and no audit report has been issued, the OIG representatives have
questioned the Granite City campus' inclusion of institutional scholarships as
non-Title IV funds in determining compliance with the 85/15 rule. We have
responded to the OIG. Although we believe that the Granite City campus was in
compliance with the 85/15 rule and that the OIG audit will be resolved without
any material adverse effect, as with any such audit, no assurance can be given
as to the final outcome since matters are not yet resolved.
ADMINISTRATIVE CAPABILITY. The Higher Education Act directs the Department
of Education to assess the administrative capability of each institution to
participate in Title IV Programs. The Department of Education has issued
regulations that require each institution to satisfy a series of separate
standards. Failure to satisfy any of the standards may lead the Department of
Education to determine that the institution lacks administrative capability and,
therefore, is not eligible to continue its participation in Title IV Programs or
must be placed on provisional certification status as a condition of such
continued participation.
Under regulations issued by the Department of Education in 1996, as of
January 1, 1998, each institution must utilize certain electronic processes
provided by the Department of Education in order to be considered
administratively capable. Our institutions fully comply with this new
requirement.
INCENTIVE COMPENSATION. An additional standard in the Higher Education Act
prohibits an institution from providing any commission, bonus or other incentive
payment based directly or indirectly on success in securing enrollments or
financial aid to any person or entity engaged in any student recruitment,
admission or financial aid awarding activity. The Department of Education has
provided only limited guidance respecting compliance with this requirement. Our
employees involved in student recruitment, admissions or financial aid receive a
salary and participate in a bonus plan available to all employees. Based on
written guidance from the Department of Education, we believe that our method of
compensating these employees complies with the requirements of the Higher
Education Act. The regulations do not, however, establish clear
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standards for compliance, and there can be no assurance that the Department of
Education will interpret its regulations in the same manner as we have.
STANDARDS OF FINANCIAL RESPONSIBILITY. Each eligible institution (except
for state-owned institutions) must satisfy certain standards of financial
responsibility to continue to participate in Title IV Programs. To be considered
financially responsible under the regulations, an institution must, among other
things, (i) have sufficient cash reserves to make required refunds; (ii) be
current in its debt payments; (iii) be meeting all of its financial obligations;
and (iv) meet prescribed financial standards. For purposes of these standards,
Sanford-Brown and Colorado Tech have historically been evaluated as distinct
entities, while the Department of Education has evaluated UDS on the basis of
the financial performance of Whitman as a whole. However, the regulations allow
the Department of Education to evaluate an institution based on its own
financial condition or that of its corporate parent and there can be no
assurance that the method by which the Department of Education evaluates our
schools will not change in the future.
In November 1997, the Department of Education revised the applicable
standards of financial responsibility. However, the new regulations provide a
transition year alternative for fiscal years beginning after July 1, 1997 and
prior to June 30, 1998. In its transition year, an institution can elect to be
evaluated under either the old or new standards of financial responsibility. Our
transition year is our 1999 fiscal year covered by this Report. The new
standards will become absolutely applicable to our financial statements in our
next fiscal year, ending March 31, 2000. We believe we currently meet both the
old and new standards of financial responsibility.
To be considered financially responsible under the new regulations, an
institution must achieve a composite score of at least 1.5 based on the
institution's Equity, Primary Reserve and Net Income ratios, as calculated on
the basis of the institution's annual audited financial statements. The Equity
Ratio measures capital resources, ability to borrow and financial viability. The
Primary Reserve Ratio measures an institution's ability to support current
operations from expendable resources. The Net Income Ratio measures an
institution's ability to operate profitably.
Once these ratios are computed on the basis of an institutions annual
audited financial statements, they are adjusted by strength factors, weighted
and added to create the composite score which may range from negative one to
three. If the resulting composite score is 1.5 or greater, the institution is
deemed to be financially responsible. If the institution's composite score is
below 1.5, the institution is deemed not to be financially responsible. If the
institution's composite score is more than 1.0 and less
than 1.5, the institution may continue to participate in Title
IV Programs, even though it is deemed not to be financially responsible,
for a period of no more than three years, provided its composite score remains
in the range of 1.0 to 1.4 in each of those years. An institution participating
in Title IV Programs on this basis must participate in the Title IV Programs on
the reimbursement or cash monitoring method of payment under which an
institution must disburse its own funds to students before receiving Title IV
Program funds and must provide the Department of Education with timely
information with respect to certain matters and financial events. The Department
of Education may also request from such institutions additional information
about their current operations and/or future plans. If an institution achieves a
composite score of 1.0 or below, the institution may establish financial
responsibility by posting an irrevocable letter of credit in favor of the
Department of Education in an amount equal to not less than one-half the Title
IV Program funds received by students enrolled at such institution during the
prior fiscal year.
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Under the new standards, our composite score on a consolidated basis (as
historically applied to UDS) is 2.2. Colorado Tech's composite score is 2.6 and
Sanford-Brown's composite score is 2.7. While we will constantly evaluate and
attempt to improve our composite score prior to March 31, 2000, there
can be no assurance that all of our institutions will meet the minimum composite
score of 1.5 at March 31, 2000 and therefore avoid the heightened monitoring
by the Department of Education or the requirement to submit a letter of credit
as described above.
Even if an institution achieved a composite score of at least 1.5, however,
it may be deemed to lack financially responsibility if (i) the
institution's audit report contains an adverse, qualified or disclaimed
opinion, (ii) the institution's participation in Title IV Programs has been
limited, suspended or terminated in the past five years, (iii) in the past two
years, as the result of a finding in its compliance audit or in a program review
by the Department of Education, the institution was required to repay an amount
greater than 5% of the funds the institution received under Title IV in the year
covered by the audit or program review, (iv) the institution has failed in the
past five years to timely submit compliance and financial statement audits, or
(v) the institution failed to resolve satisfactorily any compliance problems
identified in audit or program reviews. The institution may also be deemed to be
not financially responsible if certain controlling persons owe, or are
associated with another institution that owes, Title IV liabilities to the
Department of Education.
Under the old regulations, the three principal numeric standards of
financial responsibility are: profitability, the acid test ratio and tangible
net worth.
PROFITABILITY. A school may not have net operating losses, as defined by
the regulations, in either or both of its two most recent fiscal years that in
sum result in a decrease in tangible net worth in excess of ten percent of the
school's tangible net worth at the beginning of the two-year period. We were
profitable in both fiscal 1998 and fiscal 1999 and therefore meet this standard.
ACID TEST RATIO. A school must maintain a ratio of cash, cash equivalents,
certain restricted cash and current accounts receivable to total current
liabilities of at least one to one at the end of its fiscal year. At March 31,
1999, our acid test ratio (applicable to UDS) was 1.10 to 1.00, Colorado Tech's
acid test ratio was 1.32 to 1.00, and Sanford-Brown's acid ratio test was 1.08
to 1.00.
TANGIBLE NET WORTH. An eligible institution is required to have a positive
tangible net worth at the completion of its fiscal year. At March 31, 1999,
Colorado Tech, Sanford-Brown and Whitman each had a positive tangible net worth.
Under the Department of Educations's financial responsibility standards, an
institution that is determined by the Department of Education not to be
financially responsible on the basis of failing to meet one or more of the
specified financial responsibility standards is nonetheless entitled to
participate in Title IV Programs if it can demonstrate to the Department of
Education that it is financially responsible on an alternative basis. Generally,
an institution may submit an irrevocable letter of credit in favor of the
Department of Education, in an amount equal to at least one-half of the total
Title IV Program funds received by students enrolled at such institution during
the prior fiscal year or, in some circumstances, the institution may be required
to submit a letter of credit in an amount equal to at least ten percent of such
prior fiscal year's funds and agree to be provisionally certified and disburse
Title IV funds only after earned by the institution and approved by the
Department of Education. If required to do so, there is no assurance that we
would be able to secure the necessary funds or collateral to post a sufficient
letter of credit to comply with either alternative.
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Under a separate standard of financial responsibility, an institution that
has made late student refunds in more than 5% of cases in either of its last two
fiscal years must post a letter of credit in favor of the Department of
Education in an amount equal to 25% of the total Title IV Program refunds paid
by the institution in its prior fiscal year. Based on this standard, in
October 1998, we posted letters of credit amounting to $450,000 as a result
of late refund findings with respect to fiscal 1998.
COHORT DEFAULT RATES. The regulations also require the calculation of a
cohort default rate on FFEL received by current and former
students to attend the institution. The cohort default rate measures the
percentage of students who enter repayment in a particular federal fiscal year
on FFEL loans and default before the end of the following federal fiscal year.
If a school's official cohort default rate equals or exceeds 25% for each of its
three most recent federal fiscal years, it becomes ineligible to participate in
the FFEL programs as well as the Pell program for the remainder of the year in
which the Department of Education makes that determination and the subsequent
two years. A school may also become ineligible to participate in all Title IV
Programs if its official default rate exceeds 40% in any one fiscal year. A
school's cohort default rate is published annually by the Department of
Education. The most recent official cohort year published was for fiscal year
1996 (published in October 1998). UDS' official 1996 rates ranged from 5.1% to
14.1%; Sanford-Brown's official 1996 rates were 10.0% and 14.7% and Colorado
Tech's official 1996 rate was 5.9%. All of our schools' preliminary 1997 default
rates were below 25% with no preliminary rate exceeding 16.5%. The fiscal year
1996 cohort default rates for all of our schools average 10.5; the average rate
for all proprietary institutions in the United States for the same period was
approximately 18%.
In addition, the regulations provide that in the event that an institution
has an FFEL cohort default rate in excess of 25%, or a Perkins loan default rate
of more than 15% in a year, the Department of Education may place that
institution on provisional certification to participate in Title IV Programs.
Provisional certification may last no longer than three years. As a result of
high default rates at Sanford - Brown's Granite City and Missouri campuses in
federal fiscal years 1992 and 1993, Sanford-Brown's certification to participate
in Title IV Programs is provisional at this time. Sanford-Brown's default rates
in 1994, 1995 and, 1996 were all below the 25% threshold.
CHANGE OF CONTROL. A change of ownership which results in a change in
control (as defined below) of Whitman or one or more of our institutions could
result in all (if Whitman changes ownership) or some of our schools becoming
ineligible to participate in Title IV Programs pending recertification by the
Department of Education. Such change in ownership and control could also require
reauthorization to operate by individual states and trigger a
review by each of our school's accrediting bodies. However, the
1998 re-authorization of the Higher Education Act provides that the Department
of Education may provisionally and temporarily certify an institution undergoing
a change of control under certain circumstances while the Department of
Education reviews the institution's application for recertification.
With regard to publicly held companies, the Department of Education has
generally adopted the change of ownership and control standards used in
reporting such events under federal securities law. A change in control of
Whitman which would require the filing of a Current Report on Form 8-K with the
Securities and Exchange Commission would also require our schools to seek
recertification from the Department of Education as outlined above. A failure to
obtain such recertification would have a material adverse effect on our
financial condition.
Our acquisition of other institutions typically would result in a change of
ownership resulting in a change of control with regard to the acquired
institution. When a change in control does occur, the school's
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certification by the Department of Education following the change in control is
provisional. As a result of the change in ownership resulting in a change in
control that occurred in connection with our acquisition of Colorado Tech in
March 1996, Colorado Tech was provisionally certified for participation in Title
IV Programs until March 31, 1999, at which time it became fully certified.
Similarly, Sanford-Brown was provisionally certified for the three year period
following its acquisition in 1994 due to its change in control. Each accrediting
body and state agency which authorizes us to operate our schools has different
regulations regarding changes in control which could require re-authorization or
re-accreditation. Our failure to obtain state re-authorization or
re-accreditation of any of our schools subsequent to a change in control would
have a material adverse effect on our financial condition.
COMPLIANCE AUDITS. Our institutions are subject to audits or program
compliance reviews by various external agencies, including the Department of
Education, and state, guaranty and accrediting agencies. The Higher Education
Act and its implementing regulations also require that an institution's
administration of Title IV Program funds be audited annually by an independent
accounting firm. If the Department of Education or another regulatory agency
were to determine that one of our institutions had improperly disbursed Title IV
Program funds or had violated a provision of the Higher Education Act or the
implementing regulations, the affected institution could be required to repay
such funds to the Department of Education or the appropriate state agency or
lender and could be assessed an administrative fine. If the Department of
Education viewed the violation as significant, the Department of Education may
also transfer the institution from the advance system of receiving Title IV
Program funds to the reimbursement system, under which a school must disburse
its own funds to students and document students' eligibility for Title IV
Program funds before receiving such funds from the Department of Education.
Violations of Title IV Program requirements could also subject us to other civil
and criminal penalties. In addition, if one or more of the institutions commits
significant violations of regulatory standards governing Title IV Programs, the
Department of Education may initiate a proceeding to impose a fine, place
restrictions on an institution's participation in Title IV Programs or terminate
its eligibility to participate in Title IV Programs. The Department may also
initiate an emergency action to temporarily suspend an institution's
participation in the Title IV Programs without advance notice if it determines
that a regulatory violation creates an imminent risk of material loss of public
funds. An institution may appeal any such action initiated by the Department
with the exception of an action placing an institution on reimbursement,
although a provisionally certified institution has more limited appeal rights.
A fine, up to $25,000 per violation, may be assessed by the Department of
Education based on the gravity of the violation and taking into account the size
of the institution. Potential restrictions may include a suspension of an
institution's ability to participate in Title IV Programs for up to 60 days
and/or a limitation of an institution's participation in the Title IV Programs,
either by limiting the number or percentage of students enrolled who may
participate in Title IV Programs or by limiting the percentage of an
institution's total receipts derived from Title IV Programs. An institution may
apply for removal of a limitation no sooner than 12 months from the effective
date of the limitation and must demonstrate that the violation at issue has been
corrected. If the Department of Education terminates the eligibility of an
institution to participate in Title IV Programs, the institution in most
circumstances must wait 18 months before requesting a reinstatement of its
participation. An institution that loses its eligibility to participate in Title
IV Programs due to a violation of the 90/10 rule may not apply to resume
participation in Title IV Programs for at least one year. Depending on the
severity of the fine, suspension or limitation, such action could have a
material adverse effect on our financial condition. A termination of our
eligibility to participate in Title IV Programs would have a material adverse
effect on our fiancial condition. There is no proceeding pending to fine any
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of our institutions or to limit, suspend or terminate any of our institutions'
participation in the Title IV Programs.
EXPANSION OF PROGRAMS AND LOCATIONS. Generally, if an institution eligible
to participate in Title IV Programs adds an educational program after it has
been designated as an eligible institution, the institution must apply to the
Department of Education to have the additional program designated as eligible.
However, an institution is not obligated to obtain Department of Education
approval of an additional program that leads to a diploma, associate,
baccalaureate, professional or graduate degree or which prepares students for
gainful employment in the same or related recognized occupations as any
educational programs that had previously been designated as eligible programs at
that institution, and meets certain minimum length requirements.
An institution must notify the Department of Education of any location at
which it provides 50% or more of an academic program and may be required to file
an application seeking eligibility for any such location. An additional location
must satisfy all applicable requirements for institutional eligibility, with the
exception of the requirement that it operate for two years prior to obtaining
Title IV funds, but including the requirement that it obtain approval from the
institution's accrediting agency and the relevant state authorizing agency.
SEASONALITY
We experience seasonality in our quarterly results of operations as a
result of changes in the level of student enrollments. New enrollments in our
schools tend to be higher in the third and fourth fiscal quarters because these
quarters cover periods traditionally associated with the beginning of school
semesters. We expect that this seasonal trend will continue. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
EMPLOYEES
At March 31, 1999, we had approximately 695 full-time and 432 part-time
employees of whom 550 were faculty and 514 were administrative personnel at the
various schools. The remaining employees were employed by us at our
administrative offices.
FORWARD-LOOKING STATEMENTS; BUSINESS RISKS
Sections of this Report contain statements that are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 (the
"Securities Act") and Section 21E of the Securities Exchange Act of 1934 (the
"Exchange Act"), and we intend that such forward-looking statements be subject
to the safe harbors created thereby. Statements in this Report containing the
words "estimate," "project," "anticipate," "expect," "intend," "believe" and
similar expressions may be deemed to create forward-looking statements. These
statements are based on our current expectations and beliefs concerning future
events that are subject to risks and uncertainties. Actual results may differ
materially from the results suggested herein and from the results historically
experienced.
Forward-looking statements contained in this Report may relate to: (i) our
future operating plans and strategies; (ii) the expansion of our business
through the addition of new curricula or new locations, the elevation of certain
locations to degree-granting status or by acquisitions; (iii) the expectation of
Year 2000
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software failures; (iv) our anticipated need for and our ability to fund capital
expenditures associated with the relocation and upgrade of facilities in fiscal
2000; (v) the Department of Education's enforcement or interpretation of
existing regulations affecting our operations; (vi) the seasonality of our
results of operations; (vii) the outcome of pending legal or regulatory
proceedings; and (viii) the sufficiency of our working capital, financings
including our ability to increase our borrowing if necessary, and cash flow
from operating activities for our future operating and capital requirements.
We wish to caution you that in addition to the important factors described
elsewhere in this Form 10-K, the following important factors, among others,
sometimes have affected, and in the future could affect, our actual results and
could cause our actual consolidated results during fiscal 2000, and beyond, to
differ materially from those expressed in any forward-looking statements made by
us, or on behalf : (i) our plans, strategies, objectives, expectations and
intentions are subject to change at any time at our discretion; (ii) the
unanticipated impact of Year 2000 issues, particularly the failure of products
or services from third party vendors to function properly in the Year 2000;
(iii) our ability to successfully divest Huron University, and if not divested,
to increase enrollment to a level sufficient to achieve profitability at this
campus; (iv) the ultimate resolution of pending legal proceedings relating to
UDS' general ultrasound program; (v) the effect of, and our ability to comply
with, state and federal government regulations regarding education and
accreditation standards, or the interpretation or application thereof, including
the level of government funding for, and our eligibility to participate in,
student financial aid programs; (vi) our ability to assess and meet the
educational needs and demands of our customers and employers; (vii) the effect
of competitive pressures from other educational institutions; (viii) our ability
to manage planned internal growth; (ix) our ability to locate, obtain and
finance favorable school sites, negotiate acceptable lease terms, and hire and
train employees; (x) the effect of economic conditions in the postsecondary
education industry and in the economy generally; (xi) the role of the Department
of Education's, Congress' and the public's perception of for-profit education as
it relates to changes in the Higher Education Act and regulations promulgated
thereunder.
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ITEM 2. PROPERTIES
We lease all of our administrative and campus facilities. We, along with
our Associate Degree Division, maintain headquarters in Miami, Florida, where
combined we lease approximately 11,000 square feet of office space.
Sanford-Brown also has limited administrative facilities at its Des Peres
campus. Colorado Tech maintains its administrative offices at its campus in
Colorado Springs, Colorado.
Our schools are operated from the following leased premises:
ADDRESS OF SCHOOL SCHOOL SIZE OF FACILITY
(IN SQUARE FEET)
- ------------------ ------ ---------------------
Colorado Springs, Colorado Colorado Tech 80,000
Sioux Falls, South Dakota Colorado Tech 21,064
Denver, Colorado Colorado Tech 18,298
Huron, South Dakota Huron University 229,859*
North Kansas City, Missouri Sanford-Brown 38,500
Des Peres, Missouri Sanford-Brown 28,474
Hazelwood, Missouri Sanford-Brown 24,500
St. Charles, Missouri Sanford-Brown 14,650
Granite City, Illinois Sanford-Brown 12,253
New York, New York UDS 14,500
Carle Place, New York UDS 14,607
Iselin, New Jersey UDS 13,000
Atlanta, Georgia UDS 11,469
Bellaire, Texas UDS 10,398
Tampa, Florida UDS 10,263
Irving, Texas UDS 11,453
Trevose, Pennsylvania UDS 10,204
Elmsford, New York UDS 10,034
Jacksonville, Florida UDS 15,871
Springfield, Massachusetts UDS 12,819
Pittsburgh, Pennsylvania UDS 6,238
Fort Lauderdale, Florida UDS 11,800
Independence, Ohio UDS 11,282
Landover, Maryland UDS 7,703
_________________
* The Huron,South Dakota campus of Colorado Tech consists of seven buildings
on approximately 15 acres.
We believe that all of our present campus facilities are suitable and
adequate for their current uses. We monitor the suitability of our campus
facilities to anticipate where demand for our products will create overcrowding
or exceed capacity of existing facilities and seek to expand or relocate such
campuses.
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ITEM 3. LEGAL PROCEEDINGS
We are subject to litigation and claims in the ordinary course of business,
including the following:
In August 1998, three former students of the diagnostic medical ultrasound
program of the Philadelphia UDS school filed a lawsuit against Whitman, UDS,
certain of our current and former officers, directors and employees and a former
consultant, styled CULLEN, ET AL. V. WHITMAN EDUCATION GROUP, INC., in the
United States District Court for the Eastern District of Pennsylvania (Civil
Action No. 98-CV-4076). The complaint alleged, among other things, certain state
and federal statutory violations, breach of contract and fraud and sought to
have the action certified as a class action encompassing certain students from
both the Philadelphia and Pittsburgh UDS school. The plaintiffs seek injunctive
relief, compensatory, treble and punitive damages and attorneys' fees and costs.
In January 1999, plaintiffs amended their complaint to expand the purported
class to include students who attended the general ultrasound program at any of
the 15 UDS schools and received federal financial aid during the alleged class
period. Our motion to dismiss was denied on February 3, 1999 without prejudice
to raising the same issues at a later stage of the litigation. Oral argument on
class certification was held on March 23, 1999. No ruling on class certification
has been issued. We believe the lawsuit is without merit and intend to
vigorously defend it. While the outcome cannot be predicted with certainty, if
determined adversely to us, it could have a material adverse effect our
financial position and results of operations.
We are a party to other routine litigation incidental to our business,
including but not limited to, claims involving students or graduates and routine
employment matters. While there can be no assurance as to the ultimate outcome
of any such litigation, we do not believe that any pending proceeding will
result in a settlement or an adverse judgment that will have a material adverse
effect on our financial condition or results of operations. See "Forward-Looking
Statements; Business Risks" appearing in Item 1 of this Report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended March 31, 1999.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is a list of the names, ages, positions held and business
experience during the past five years of the persons serving as our executive
officers as of March 31, 1999. Officers serve at the discretion of our Board of
Directors. There is no family relationship between any of the executive
officers, and there is no arrangement or understanding between any executive
officer and any other person pursuant to which the executive officer was
selected.
RICHARD C. PFENNIGER, JR. Mr. Pfenniger, age 43, has been our Chief
Executive Officer and Vice Chairman since March 1997 and a
director since 1992. Mr. Pfenniger was Chief Operating Officer
of IVAX Corporation from 1994 to March 1997. He served
as Senior Vice President--Legal Affairs and General Counsel of
IVAX from 1989 to 1994, and as Secretary from 1990 to 1994.
Prior to joining IVAX, Mr. Pfenniger was engaged in private law
practice. Mr. Pfenniger is a director of North American Vaccine, Inc.
-23-
RANDY S. PROTO. Mr. Proto, age 41, has been our President since 1994. In
1997, Mr. Proto also assumed the duties of Chief Operating Officer. For seven
years prior thereto, Mr. Proto was Chief Executive Officer and had ownership
interests in 11 proprietary schools in four states. For eight years prior
thereto, Mr. Proto was employed by Computer Processing Institute. Among the
positions he held at that institution were Vice President and School Director,
Director of Admissions and Marketing, Director of Finance and Financial Aid,
Director of Placement and Director of Education.
DAVID D. O'DONNELL. Mr. O'Donnell, age 57, has been President and Chairman
of the Board of Colorado Tech since 1986. Since 1997, Mr. O'Donnell has also
been Acting Chancellor of Huron University. Prior to 1986, Mr. O'Donnell was
employed by ITT Educational Services, Inc., another provider of proprietary
education, from 1975 through February 1986 when he left to join Colorado Tech.
While at ITT Educational Services, Mr. O'Donnell served in many capacities
including Director of Marketing and Vice President and General Manager of ITT
Employment Training Systems, a subsidiary of ITT Educational Services.
FERNANDO L. FERNANDEZ. Mr. Fernandez, age 38, has served as our Vice
President--Finance, Treasurer and Chief Financial Officer since 1996. Prior to
joining us, Mr. Fernandez, a certified public accountant, served as Chief
Financial Officer of Frost-Nevada Limited Partnership from 1991 to 1996.
Previously, Mr. Fernandez served as Audit Manager for Coopers & Lybrand in
Miami.
RICHARD B. SALZMAN. Mr. Salzman, age 38, has served as our Vice
President--Legal Affairs and General Counsel and Secretary since 1996. For
approximately ten years prior to joining us, Mr. Salzman was engaged in private
law practice in Miami, Florida, primarily with the firm of Homer & Bonner, P.A.
-24-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
A. MARKET INFORMATION
Our common stock is traded on the American Stock Exchange under the symbol
WIX. The following table sets forth the high and low closing prices of our
common stock as reported by the composite tape of the American Stock Exchange
for each of the quarters indicated.
1999
--------------------------------
HIGH LOW
--------------- ---------------
Quarter Ended 6/30/98 $ 6.12 $ 4.62
Quarter Ended 9/30/98 5.37 3.12
Quarter Ended 12/31/98 4.25 2.62
Quarter Ended 3/31/99 4.94 3.50
1998
--------------------------------
HIGH LOW
--------------- ---------------
Quarter Ended 6/30/97 $ 5.48 $ 3.75
Quarter Ended 9/30/97 5.94 3.63
Quarter Ended 12/31/97 6.56 5.19
Quarter Ended 3/31/98 6.69 4.75
As of the close of business on June 1, 1999, there were approximately 279
record holders of our common stock. We have not paid dividends on our common
stock and do not contemplate paying dividends in the foreseeable future.
-25-
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED MARCH 31,
---------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)(1)(2)
OPERATING DATA
Revenues $ 73,977 $ 60,306 $ 46,993 $ 39,838 $ 19,332
Income (loss) from
operations 4,195 784 (3,245) 951 288
Net income (loss) 3,042 143 (4,363) (101) (147)
Diluted net income
(loss) per share (3) .22 0.01 (0.38) (0.01) (0.02)
Dividends None None None None None
BALANCE SHEET DATA
Total assets $ 62,580 $ 53,821 $ 48,017 $ 35,323 $ 31,600
Long-term debt and
capital lease obligations,
less current portion 12,022 14,350 11,109 11,494 9,467
Stockholders' equity 21,625 17,833 16,107 7,385 7,256
____________________
(1) Figures have been restated to reflect the acquisition of Colorado Tech
in March 1996 which was accounted for under the pooling of interests
method of accounting. Figures also reflect the acquisition of Huron
University on December 30, 1996 which was accounted for as a purchase.
(2) All references to per share amounts have been adjusted to give
retroactive effect to the two-for-one stock split effective on
May 13, 1996.
(3) The 1,021,612 shares issued in connection with the Sanford-Brown
acquisition that remained in escrow at March 31,1996 to be disbursed to
the seller or returned to us upon the occurrence or failure to occur of
certain events relating to the regulation of Sanford-Brown were not
considered outstanding for purposes of computing the net loss per share
for fiscal 1995 and 1996 as their effect was anti-dilutive. Due to the
substantial satisfaction of such contingencies in fiscal 1997, the
shares were disbursed to the seller and considered outstanding for
purposes of computing the net loss per share for fiscal 1997.
See Consolidated Financial Statements, Item 8 of this Report,
for supplementary financial information of Whitman.
-26-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the consolidated financial statements of Whitman and the notes thereto appearing
elsewhere in this report and in conjunction with "Forward-Looking Statements;
Business Risks" appearing at the end of Item 1 in that certain statements made
in this Item are qualified by the risk factors set forth in that section.
GENERAL
Through three wholly-owned subsidiaries, we currently operate 24 schools in
13 states offering a range of graduate, undergraduate and non-degree certificate
or diploma programs primarily in the fields of information technology,
healthcare and business to more than 8,000 students. We are organized into a
University Degree Division and an Associate Degree Division. The University
Degree Division offers primarily doctorate, master and bachelor degrees through
Colorado Tech and Huron University. The Associate Degree Division offers
associate degrees and diplomas or certificates through Sanford-Brown and UDS.
The revenues generated from these subsidiaries primarily consist of tuition and
fees paid by students. The majority of students rely on funds received from
Title IV Programs to pay for a substantial portion of their tuition.
Accordingly, a majority of our revenues are indirectly derived from Title IV
Programs.
Historically, our revenues have increased primarily as a result of the
expansion of program offerings and the opening or acquisition of campuses. At
UDS, the expansion of program offerings generated an increase in revenues from
$20.3 million in fiscal 1997 to $34.2 million in fiscal 1999. At Colorado Tech,
the expansion of program offerings, opening of a campus, and the acquisition of
Huron University generated an increase in revenues from $11.8 million in fiscal
1997 to $18.9 million in fiscal 1999.
Instructional and educational support consists primarily of costs related
to the educational activity of our schools. Instructional and educational
support includes faculty compensation, administrative salaries for departments
that provide services directly to the students, occupancy costs, costs of books
sold, and depreciation and amortization of equipment costs and leasehold
improvements.
Selling and promotional expenses consist primarily of advertising costs,
production costs of marketing materials, and salaries and benefits of personnel
engaged in student recruitment, admissions, and promotional functions.
General and administrative expenses consist primarily of administrative
salaries and benefits, occupancy costs, depreciation, bad debt, amortization of
intangibles, and other related costs for departments that do not provide direct
services to students.
-27-
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship of certain
statement of operations data to net revenues for the periods indicated:
YEAR ENDED MARCH 31,
----------------------------------------
1999 1998 1997
------------ ----------- -----------
Net revenues 100.0% 100.0% 100.0%
------------ ----------- -----------
Costs and expenses:
Instructional and educational
support 64.4 67.1 66.8
Selling and promotional 13.2 14.3 14.8
General and administrative 16.7 17.3 25.3
------------ ----------- -----------
Total costs and expenses 94.3 98.7 106.9
------------ ----------- -----------
Income (loss) from operations 5.7 1.3 (6.9)
Other (income) expenses:
Interest expense 1.9 2.2 2.1
Interest income (0.4) (0.3) (0.2)
Provision for writedown or
marketable securities - - 1.4
------------ ----------- -----------
Income (loss) before income tax benefit 4.2 (0.6) (10.2)
Income tax provision (benefit) 0.1 (0.8) (0.9)
------------ ----------- -----------
Net income (loss) 4.1% 0.2% (9.3)%
============ =========== ===========
YEAR ENDED MARCH 31, 1999 COMPARED TO YEAR ENDED MARCH 31, 1998
Net revenues increased by $13.7 million or 22.7% to $74.0 million for the
year ended March 31, 1999 from $60.3 million for the year ended March 31, 1998.
The increase was primarily due to an increase in average student enrollment.
Average student enrollment increased 17.7% overall with the University Degree
Division experiencing a 27.4% increase and the Associate Degree Division
experiencing a 12.8% increase.
The increase in student enrollment in the University Degree Division
resulted in increased net revenues of $2.9 million or 18.4%. The increase in
enrollment was primarily due to the addition of new information technology
programs, the implementation of on-site corporate programs and the relocation of
the Sioux Falls campus to a larger facility.
The increase in student enrollment and increase in earning rate in the
Associate Degree Division resulted in increased net revenues of $10.8 million or
24.2%. The increased enrollment related primarily to the medical assisting
program offered by UDS. The medical assisting program, which was introduced
during fiscal 1996 and offered at 12 of 15 campuses during fiscal 1998, was
extended to two additional campuses during fiscal 1999. In addition to the
extension of this program to additional campuses, the medical assisting program
continued to experience growth in student enrollment at the 12 campuses offering
the program prior to fiscal 1999. The increase in earning rate was primarily due
to the shortening of the length of the programs offered at Sanford-Brown
College.
Instructional and educational support expenses increased by $7.2 million or
17.7% to $47.7 million in fiscal 1999 from $40.5 million in fiscal 1998.
Instructional and educational support expenses increased by $2.3
million in the University Degree Division and $4.9 million in
the Associate Degree Division. The increase was primarily due to
the upgrade of equipment and facilities, and the addition of faculty, staff and
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management at the schools to support the increase in student enrollment. The
decrease in instructional and educational support expenses as a percentage of
net revenues was due to our ability to increase revenues as a result of an
increase in student enrollment at a greater rate than the rate of increase in
such expenses related to educational services.
Selling and promotional expenses increased by $1.2 million or 13.9% to $9.8
million in fiscal 1999 from $8.6 million in fiscal 1998. The increase in selling
and promotional expenses was primarily due to increased marketing and
advertising costs at the Associate Degree Division for the programs offered at
UDS. As a percentage of net revenues, selling and promotional expenses decreased
to 13.2% in fiscal 1999 from 14.3% in fiscal 1998. The decrease in selling and
promotional expenses as a percentage of net revenues was due to our ability to
increase enrollments with a proportionately lower increase in selling and
promotional expenses.
General and administrative expenses increased by $1.9 million or 18.0% to
$12.3 million in fiscal 1999 from $10.5 million in fiscal 1998. The increase in
general and administrative expense was due primarily to an increase in
administrative costs necessary to support the growth in student enrollments and
an increase in bad debt expense due to an increase in student receivables
resulting from an increase in student enrollment. As a percentage of net
revenues, general and administrative expenses decreased to 16.7% in fiscal 1999
from 17.3% in fiscal 1998. The decrease in general and administrative expenses
as a percentage of net revenues was due to our ability to increase revenues at a
greater rate than the rate of increase in administrative operating costs.
We periodically perform an analysis of the realizability of our deferred
tax assets based on our assessment of current and expected operating results. As
of March 31, 1999, we determined that a $50,000 valuation allowance for deferred
tax assets was necessary, which resulted in a decrease in the valuation
allowance of $1,154,000 in fiscal 1999.
We reported net income of $3.0 million and $0.1 million for the years ended
March 31, 1999 and 1998, respectively. The increase in net income in fiscal 1999
was primarily due to an increase in operating income of $3.3 million generated
from the Associate Degree Division and a decrease in operating losses of $0.4
million sustained by the University Degree Division. The increase in operating
income in the Associate Degree Division was due to an increase in revenues of
$10.8 million resulting from increased student enrollment and an increased
earning rate. The decrease in the operating loss sustained by the University
Degree Division was due to an increase in revenues of $2.9 million resulting
from an increase in student enrollment. The operating results of the University
Degree Division were significantly affected by the operating losses sustained by
Huron University of $2.5 million in fiscal 1999, an increase of $1.0 million
from fiscal 1998.
YEAR ENDED MARCH 31, 1998 COMPARED TO YEAR ENDED MARCH 31, 1997
Net revenues increased by $13.3 million or 28.3% to $60.3 million for the
year ended March 31, 1998 from $47.0 million for the year ended March 31, 1997.
The increase was primarily due to an increase in average student enrollment.
Average student enrollment increased 24.5% overall with the University Degree
Division experiencing a 41.2% increase and the Associate Degree Division
experiencing a 17.7% increase.
-29-
The increase in student enrollment in the University Degree Division
resulted in increased net revenues of $4.2 million or 35.4%. This increase was
primarily due to the opening of a new Colorado Tech campus in Denver in October
1996 and the acquisition of Huron University in December 1996.
The increase in student enrollment in the Associate Degree Division
resulted in increased net revenues of $9.1 million or 25.9%. The increased
enrollment was primarily in the medical assisting programs offered by UDS which
were introduced during fiscal 1996 and were offered at 12 of 15 campuses during
fiscal 1998.
Instructional and educational support expenses increased by $9.1 million or
29.1% to $40.5 million in fiscal 1998 from $31.4 million in fiscal 1997. As a
percentage of net revenues, instructional and educational support expenses
increased to 67.1% in fiscal 1998 as compared to 66.8% in fiscal 1997.
Instructional and educational support expenses increased by $5.2 million at the
University Degree Division due to the costs incurred to support a full year of
operations of Huron University and the new Denver Colorado Tech campus. At the
Associate Degree Division, the increase in such expenses of $3.9 million was
primarily due to the upgrade of equipment and facilities, and the addition of
faculty, staff and management at the schools to support the increase in student
enrollment.
Selling and promotional expenses increased by $1.6 million or 23.1% to $8.6
million in fiscal 1998 from $7.0 million in fiscal 1997. As a percentage of net
revenues, selling and promotional expenses decreased to 14.3% in fiscal 1998
from 14.8% in fiscal 1997. The increase in selling and promotional expenses was
primarily due to increased marketing and advertising costs at the Associate
Degree Division for the programs offered at UDS and to an increase in selling
and promotional costs at the University Degree Division for the new Denver
Colorado Tech campus and the recently acquired Huron University campuses in
Huron and Sioux Falls, South Dakota.
General and administrative expenses decreased by $1.4 million or 12.1% to
$10.5 million in fiscal 1998 from $11.9 million in fiscal 1997. As a percentage
of net revenues, general and administrative expenses decreased to 17.3% in
fiscal 1998 from 25.3% in fiscal 1997. These decreases were due primarily to a
decrease in bad debt expense at the Associate Degree Division due to improved
cash collections. The decrease in general and administrative expenses as a
percentage of net revenues was due to our ability to increase revenues as a
result of an increase in student enrollment at a greater rate than the rate of
increase in administrative operating costs necessary to support the increase in
enrollment.
Interest expense increased by $333,000 due to the increase in the average
outstanding debt balance necessary to fund capital expenditures.
We periodically perform an analysis of the realizability of our deferred
tax assets based on our assessment of current and expected operating results. As
of March 31, 1998, we determined that a $1.2 million valuation allowance for our
deferred tax assets was necessary, which resulted in the recognition of a
deferred income tax benefit of $489,000 in fiscal 1998.
We reported net income of $143,000 and a net loss of $4.4 million for the
years ended March 31, 1998 and 1997, respectively. The increase in net income
for fiscal 1998 was primarily due to an increase in operating income of $5.6
million generated from the Associate Degree Division which was partially offset
by the increase in operating losses of $1.9 million sustained by the University
Degree Division. The increase in operating income in the
Associate Degree Division was due to an increase in revenues of $9.1 million
-30-
resulting from increased student enrollment and a decrease in general and
administrative expenses resulting primarily from a decrease in bad debt expense.
The increased operating losses at the University Degree Division resulted from
operating losses sustained by the new Denver Colorado Tech campus and the Huron
University campus. The operating losses sustained by these two campuses, which
were added during fiscal 1997, increased by $1.7 million in fiscal 1998 to
$2.5 million.
SEASONALITY
We experience seasonality in our quarterly results of operations as a
result of changes in the level of student enrollment. New enrollment in our
schools tends to be higher in the third and fourth fiscal quarters because these
quarters cover periods traditionally associated with the beginning of school
semesters. Costs are generally not significantly affected by the seasonal
factors on a quarterly basis. Accordingly, quarterly variations in net revenues
will result in fluctuations in income from operations on a quarterly basis.
YEAR 2000 ISSUE
We have implemented a process for identifying, prioritizing and modifying
or replacing certain computer and other systems and programs that may be
affected by the Year 2000 issue. We are also monitoring the adequacy of the
manner in which certain third parties and third party vendors of systems are
attempting to address the Year 2000 issue. We have substantially completed an
assessment of our computer systems and believe that with the modifications made
to existing software and the conversions made to new software, the Year 2000
issue will not pose significant operational problems to our information systems.
We expect to complete testing of the Year 2000 issues by mid to late 1999, which
would be prior to any anticipated impact on our operating systems.
We are highly dependent on student funding provided through Title IV
programs. Processing of student applications for this funding and actual
disbursement of a significant portion of these funds are accomplished through
the Department of Education's computer systems. Should the Department of
Education experience Year 2000 related disruptions, it could result in
interruption of funding for our students. Any prolonged interruption would have
a material adverse impact on our business, results of operations, liquidity and
financial condition. In April 1999, the Department of Education announced that
all of its 175 data systems, including its 14 mission-critical systems, are Year
2000 compliant.
Based on the assessment performed to date, costs of addressing potential
problems are not currently expected to have a material adverse impact on our
financial position, results of operations or cash flows in future periods. While
we believe our process is designed to be successful, because of the complexity
of the Year 2000 issue, and the interdependence of organizations using computer
systems, it is possible that our efforts or those of third parties with whom we
interact, will not be successful or satisfactorily completed in a timely
fashion.
Based on the modifications and conversions of software made to date and the
assessment of embedded devices that have been identified at our facilities to
date, we do not believe that contingency planning is warranted at this time. The
assessment of outside third parties is underway, and the results of this
assessment, when completed, may reveal the need for contingency planning at a
later date. We will regularly evaluate the need for contingency planning based
on the progress and findings of the Year 2000 project.
-31-
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at March 31, 1999, 1998 and 1997 were $4.3
million, $3.4 million and $3.9 million, respectively. Our working capital
totaled $8.4 million at March, 31, 1999, $8.0 million at March 31, 1998 and $5.7
million at March 31, 1997.
Net cash of $6.5 million was provided by operating activities in fiscal
1999, an increase in cash provided of $6.4 million from fiscal 1998 and an
increase of $8.8 million from fiscal 1997. The increase in cash provided by
operating activities in fiscal 1999 was primarily due to an increase in net
income of $2.9 million and $7.4 million from fiscal 1998 and fiscal 1997,
respectively.
Net cash of $2.0 million was used for investing activities in fiscal 1999,
a decrease of $1.7 million from fiscal 1998 and a decrease of $1.8 million from
fiscal 1997. The decrease in fiscal 1999 was primarily due to a decrease in cash
used for capital expenditures from $3.7 million and $3.9 million in fiscal 1998
and fiscal 1997, respectively, to $2.3 million in fiscal 1999.
We estimate that the capital expenditures expected to be incurred during
fiscal 2000 will approximate $3.5 million. These anticipated capital
expenditures primarily relate to the costs associated with the relocation and
upgrade of campus facilities and the acquisition and upgrade of equipment for
the schools. Funds required to finance such capital expenditures are expected to
be obtained from additional capital lease obligations and from funds generated
from operations.
Net cash of $3.6 million was used in financing activities in fiscal 1999,
an increase in cash used of $6.7 million and $10.8 million from fiscal 1998 and
fiscal 1997, respectively. The increase in cash used in investing activities in
fiscal 1999 from fiscal 1998 and fiscal 1997 was due to an increase in the
repayment of debt and due to proceeds received from a private placement in
fiscal 1997 of 1,000,000 shares of our common stock to an unaffiliated
institutional investor for $6.5 million.
We had a $7.5 million revolving credit facility which was scheduled to
mature on April 14, 1999. At March 31, 1999, we had $6.9 million outstanding
under the credit facility and letters of credit outstanding of $555,000 which
reduced the amount available for borrowing. The amounts borrowed under this
facility in fiscal 1999 were primarily used for operations and capital
expenditures. At March 31, 1999, we had letters of credit outstanding of
$715,000, including the $555,000 of letters of credit under the credit facility.
On April 2, 1999, we extended the maturity date on the credit facility to July
31, 1999. On May 28, 1999, we entered into an $8.5 million line of credit with a
new lender, which expires on June 30, 2000, and repaid the outstanding balance
due under the old credit facility with borrowings under the new line of credit.
Of the $8.5 million line of credit, $715,000 is reserved (and thus not available
for borrowing) for draws which may be made under the outstanding letters of
credit.
Our primary source of operating liquidity is the cash received from
payments of tuition and fees. Most students attending our schools receive some
form of financial aid under Title IV Programs. UDS, Sanford-Brown and Colorado
Tech receive approximately 83%, 84% and 36% of their funding, respectively, from
the Title IV Programs. Disbursements under each program are subject to
disallowance and repayment by the schools.
We believe that with our working capital, our cash flow
from operations, our increased working capital facilities and our
expected increased financings under capital lease obligations to fund capital
-32-
expenditures, we will have adequate resources to meet our anticipated operating
requirements for the foreseeable future.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk associated with changes in interest rates. We
are subject to interest rate risk related to our variable-rate line of credit as
described in Note 9 of the Notes to Consolidated Financial Statements.
At March 31, 1999, our variable rate long-term debt had a carrying value of
$6.9 million. The fair value of the debt approximates the carrying value because
the variable rates approximate market rates. A 10% increase in the period end
interest rate would not have a material adverse affect on our results of
operations and financial condition.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by Regulation S-X
are included in this Form 10-K commencing on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning directors required by item 10 is incorporated by
reference to our Proxy Statement for our 1999 Annual Meeting of Shareholders
scheduled for August 6, 1999. The information concerning executive officers
required by item 10 is contained in the discussion entitled "Executive Officers
of the Registrant" in Part I hereof.
ITEM 11. EXECUTIVE COMPENSATION
The information required by item 11 is incorporated by reference to our
Proxy Statement for our 1999 Annual Meeting of Shareholders scheduled for August
6, 1999.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by item 12 is incorporated by reference to our
Proxy Statement for our 1999 Annual Meeting of Shareholders scheduled for August
6, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by item 13 is incorporated by reference to our
Proxy Statement for our 1999 Annual Meeting of Shareholders scheduled for August
6, 1999.
PART IV
1. ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
The following consolidated financial statements are filed as a part of this
report:
Report of Independent Certified Public Accountants
Consolidated Balance Sheet
Consolidated Statements of Operations
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flow
Notes to Consolidated Financial Statements
(a)(2) FINANCIAL STATEMENT SCHEDULES
All of the financial statement schedules have been omitted because of the
absence of the conditions under which they are required or because the required
information is included in the consolidated financial statements or the notes
thereto.
(a)(3) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION METHOD OF FILING
- ------- ---------------------- --------------------------------
2.1 Plan and Agreement of Incorporated by reference to our
Merger Form 10-Q for the quarter ended
September 30, 1997.
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3.1 Articles of Incorporation Incorporated by reference to our
Form 10-Q for the quarter ended
September 30, 1997.
3.2 By-Laws, as amended Filed herewith.
10.1 Registration Rights Agreement Incorporated by reference to our
dated as of April 6, 1992 Report on Form 8-K dated
April 6, 1992.
10.2 Amended and Restated 1986 Incorporated by reference to our
Directors and Consultants Registration Statement on Form
Stock Option Plan S-8 filed September 9, 1992.
10.3 1992 Incentive Stock Incorporated by reference to our
Option Plan Proxy Statement for the Annual
Meeting of Shareholders held on
November 19, 1992.
10.4 Whitman Education Group, Inc. Incorporated by reference to our
1996 Stock Option Plan, as Form 10-Q for the quarter ended
amended June 30, 1997.
10.5 Form of Stock Purchase Warrant Incorporated by reference to our
to purchase 575,000 shares Report on Form 8-K dated
of common stock to be issued December 21, 1994.
by Whitman Medical Corp. in
favor of Frost-Nevada,
Limited Partnership
10.6 Stock Purchase Warrant to Incorporated by reference to our
purchase 650,000 shares of Report on Form 8-K dated
common stock issued by February 26, 1996.
Whitman Medical Corp. in
favor of Phillip Frost
10.7 Employment Agreement dated as Incorporated by reference to our
of March 29, 1996 by and Report on Form 8-K/A-1 dated
between M.D.J.B., Inc. and April 11, 1996.
David O'Donnell
10.8 Credit Agreement dated as of Incorporated by reference to our
April 11, 1996 among Barnett Report on Form 10-Q for the
Bank of South Florida, quarter ended June 30, 1996.
N.A., Whitman Education Group,
Inc. and Phillip Frost, M.D.
10.9 Second Amendment to Credit Incorporated by reference to our
Agreement dated October 31, Report on Form 10-Q for the
1996 among Barnett Bank, N.A., quarter ended September 30,1996.
Bank, N.A., Whitman Education
Group, Inc.and Phillip Frost, M.D.
10.10 Form of Third Amendment to Incorporated by reference to our
Credit Agreement dated Report on Form 10-K for the year
May 19, 1997 among
-35-
Barnett Bank, N.A., Whitman ended March 31, 1997.
Education Group, Inc. and
Phillip Frost, M.D.
10.11 Form of Restated and Incorporated by reference to our
Consolidated Renewal Revolver Report on Form 10-K for the
Note dated May 19, 1997 by year ended March 31, 1997.
Whitman Education Group, Inc.
in favor of Barnett Bank, N.A.
10.12 Loan Agreement dated August 5, Incorporated by reference to our
1996 between Colorado Technical Report on Form 10-K for the
University and Bank One, March 31, 1997.
Colorado, N.A.
10.13 Form of promissory note Incorporated by reference to our
and Schedule Of Promissory Report on Form 10-K for the
Notes by Colorado Technical year ended March 31, 1997.
University, Inc. in favor of
Bank One, Colorado, N.A.
10.14 Form of commercial security Incorporated by reference to our
agreement and Schedule of Report on Form 10-K for the
Commercial Security Agreements year ended March 31, 1997.
between Colorado Technical
University, Inc. and Bank
One, Colorado, N.A.
10.15 First Amendment to Loan Incorporated by reference to our
Agreement dated December 27, Report on Form 10-K for the
1996 between Bank One, year ended March 31, 1997.
Colorado, N.A. and Colorado
Technical University, Inc.
10.16 Commercial Guaranty by Incorporated by reference to our
M.D.J.B., Inc. in favor of Report on Form 10-K for the
Bank One, Colorado, N.A. year ended March 31, 1997.
10.17 Second Amendment to Loan Incorporated by reference to our
Agreement dated February 24, Report on Form 10-K for the
1997 between Bank One, year ended March 31, 1997.
Colorado, N.A. and Colorado
Technical University, Inc.
10.18 Third Amendment to Loan Incorporated by reference to our
Agreement dated June 13, 1997 Report on Form 10-K for the
between Bank One, Colorado, year ended March 31, 1997.
N.A. and Colorado Technical
University, Inc.
10.19 Commercial Guaranty by Whitman Incorporated by reference to our
Education Group, Inc. in favor Report on Form 10-K for the
of Bank One, Colorado, N.A. year ended March 31, 1997.
10.20 Promissory Note dated June 13, Incorporated by reference to our
1997
-36-
by Colorado Technical Report on Form 10-K for the
University, Inc. in favor of year ended March 31, 1997.
The Pueblo Bank and Trust
Company
10.21 Form of Commercial Guaranty Incorporated by reference to our
given by Whitman Education Report on Form 10-K for the
Group, Inc. and M.D.J.B., year ended March 31, 1997.
Inc. in favor of The Pueblo
Bank and Trust Company
10.22 Commercial Security Agreement Incorporated by reference to our
dated June 13, 1997 between Report on Form 10-K for the
Colorado Technical University, year ended March 31, 1997.
Inc. and The Pueblo Bank and
Trust Company
10.23 Form of Registration Rights Incorporated by reference to our
Agreement among Whitman Report on Form 10-K for the
Education Group, Inc. and The year ended March 31, 1997.
Travelers Indemnity Company
10.24 Contribution Agreement, dated Incorporated by reference to our
February 3, 1999, by and among Report on Form 10-Q for the
Colorado Technical University, quarter ended December 31, 1998.
Inc., Huron University, Inc.,
Newco, Inc. and David O'Donnell
10.25 Amended and Restated Filed herewith.
Contribution Agreement, dated
June 2, 1999, by and among
Colorado Technical University,
Inc., Huron University, L.L.C.,
Newco, L.L.C. and David
O'Donnell*
10.26 Fourth Amendment to Credit Filed herewith.
Agreement, dated April 2, 1999,
by and among NationsBank, N.A.
(f/k/a Barnett Bank, N.A.),
Whitman Education Group, Inc.
and Phillip Frost, M.D.
10.27 Form of Amended, Restated and Filed herewith.
Consolidated Renewal Revolver
Note, dated April 2, 1999, by
Whitman Education Group, Inc.,
in favor of NationsBank, N.A.
10.28 Fifth Amendment to Credit Filed herewith.
Agreement, dated May 29, 1999,
by and among NationsBank, N.A.
(f/k/a Barnett Bank, N.A.),
Whitman Education
-37-
Group, Inc. and Phillip
Frost, M.D.
10.29 Form of Security Agreement, Filed herewith.
dated May 20, 1999, by each
of Colorado Technical
University, Inc., MDJB,
Inc., Sanford-Brown College,
Inc. and Ultrasound Technical
Services, Inc. in favor of
Merrill Lynch Business
Financial Services, Inc.
10.30 Form of Unconditional Guaranty, Filed herewith.
dated May 20, 1999 by each of
Colorado Technical University,
Inc., MDJB, Inc., Sanford-Brown
College, Inc. and Ultrasound
Technical Services, Inc. in
favor of Merrill Lynch Business
Financial Services, Inc.
10.31 WCMA Loan and Security Filed herewith.
Agreement, dated May 20, 1999,
by and between Merrill Lynch
Business Financial Services,
Inc. and Whitman Education
Group, Inc.
21 Subsidiaries Incorporated by reference to our
Report on Form 10-K for the
year ended March 31, 1996.
23.1 Consent of Ernst & Young LLP Filed herewith.
27 Financial Data Schedule Filed herewith.
______________________
* Certain exhibits and schedules to this document have not been filed. The
Registrant agrees to furnish a copy of any omitted schedule or exhibit to the
Securities and Exchange Commission upon request.
(b) We filed no reports on Form 8-K during the quarter ended March 31,
1999.
-38-
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, thereunto duly authorized.
WHITMAN EDUCATION GROUP, INC.
By: /s/ RICHARD C. PFENNIGER, JR.
-----------------------------
Richard C. Pfenniger, Jr.
Chief Executive Officer and
Vice Chairman of the Board of
Directors
Dated: June 11, 1999
-------------
Pursuant to the requirements of the Securities Act of 1934, this Report has
been signed below by the following persons on behalf of the registrant in the
capacities and on the dates indicated.
SIGNATURES TITLE DATE
- ----------------------------- --------------------------- -------------
/s/ PHILLIP FROST, M.D. Chairman of the Board June 11, 1999
- -----------------------------
Phillip Frost, M.D.
/s/ RICHARD C. PFENNIGER, JR. Vice Chairman of the Board June 11, 1999
- -----------------------------
Richard C. Pfenniger, Jr. and Chief Executive Officer
/s/ FERNANDO L. FERNANDEZ Chief Financial Officer June 11, 1999
- -----------------------------
Fernando L. Fernandez (Principal Financial
and Accounting Officer)
/s/ JACK R. BORSTING, Ph.D. Director June 11, 1999
- -----------------------------
Jack R. Borsting, Ph.D.
/s/ PETER S. KNIGHT Director June 11, 1999
- -----------------------------
Peter S. Knight
/s/ LOIS F. LIPSETT, Ph.D. Director June 11, 1999
- -----------------------------
Lois F. Lipsett, Ph.D.
/s/ RICHARD M. KRASNO, Ph.D. Director June 11, 1999
- -----------------------------
Richard M. Krasno, Ph.D.
/s/ PERCY A. PIERRE, Ph.D. Director June 11, 1999
- -----------------------------
Percy A. Pierre, Ph.D.
/s/ NEIL FLANZRAICH Director June 11, 1999
- -----------------------------
Neil Flanzraich
/s/ A. MARVIN STRAIT Director June 11, 1999
- -----------------------------
A. Marvin Strait
-39-
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
CONTENTS
Page
-----
Report of Independent Certified Public Accountants....................... F- 2
Consolidated Balance Sheets.............................................. F- 3
Consolidated Statements of Operations.................................... F- 4
Consolidated Statements of Changes in Stockholders' Equity............... F- 5
Consolidated Statements of Cash Flows.................................... F- 6
Notes to Consolidated Financial Statements............................... F- 8
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Whitman Education Group, Inc.
We have audited the accompanying consolidated balance sheets of Whitman
Education Group, Inc. and subsidiaries as of March 31, 1999 and 1998 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended March 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits, the financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Whitman Education Group, Inc. and subsidiaries at March 31, 1999 and 1998, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended March 31, 1999, in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
Miami, Florida
May 28, 1999
- F 2 -
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31,
---------------------------------
1999 1998
-------------- ---------------
Assets
Current assets:
Cash and cash equivalents................ $ 4,267,110 $ 3,384,336
Accounts receivable, net................. 27,114,533 21,354,104
Inventories.............................. 1,450,815 1,614,455
Deferred tax assets, net................. 2,562,705 1,471,043
Other current assets..................... 1,504,878 1,158,841
-------------- ---------------
Total current assets................. 36,900,041 28,982,779
Property and equipment, net................. 14,002,764 12,925,177
Marketable securities....................... - 262,500
Deposits and other assets, net of
accumulated amortization of $1,437,088
in 1999 and $1,184,657 in 1998........... 1,761,220 1,431,188
Goodwill, net............................... 9,915,590 10,219,525
-------------- ---------------
Total assets......................... $ 62,579,615 $ 53,821,169
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................... $ 1,942,740 $ 1,268,306
Accrued expenses......................... 3,049,371 2,115,220
Income taxes payable..................... 898,664 107,133
Short-term notes payable................. - 156,018
Current portion of capitalized
lease obligations.................... 1,517,912 1,061,767
Current portion of long-term debt........ 472,994 354,401
Deferred tuition revenue................. 20,575,914 15,966,150
-------------- ---------------
Total current liabilities............ 28,457,595 21,028,995
Other liabilities........................... 474,842 609,708
Capitalized lease obligations............... 3,249,934 2,535,673
Long-term debt.............................. 8,772,496 11,813,639
Commitment and contingencies
Stockholders' equity:
Common stock, no par value, authorized
100,000,000 shares issued and
outstanding 13,423,212 shares in 1999
and 13,193,582 in 1998............... 21,907,546 21,183,554
Additional paid-in capital............... 671,536 671,536
Accumulated deficit...................... (954,334) (3,995,978)
Accumulated other comprehensive loss..... - (25,958)
-------------- ---------------
Total stockholders' equity........... 21,624,748 17,833,154
-------------- ---------------
Total liabilities and
stockholders' equity............... $ 62,579,615 $ 53,821,169
============== ===============
See accompanying notes to financial statements.
- F 3 -
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended March 31,
----------------------------------------------
1999 1998 1997
------------- -------------- --------------
Net revenues..................... $ 73,977,362 $ 60,306,460 $ 46,992,954
Costs and expenses:
Instructional and
educational support.......... 47,666,624 40,485,802 31,369,601
Selling and promotional........ 9,780,727 8,585,716 6,976,430
General and administrative..... 12,335,186 10,450,527 11,891,881
------------- -------------- --------------
Total costs and expenses......... 69,782,537 59,522,045 50,237,912
------------- -------------- --------------
Income (loss) from operations.... 4,194,825 784,415 (3,244,958)
Other (income) and expenses:
Interest expense............... 1,381,564 1,334,201 1,001,152
Interest income................ (281,081) (203,456) (130,162)
Realization of (gain)loss
on marketable securities..... (43,489) - 656,250
------------- -------------- --------------
Income (loss) before income
tax provision (benefit)........ 3,137,831 (346,330) (4,772,198)
Income tax provision (benefit)... 96,187 (489,474) (408,841)
------------- -------------- --------------
Net income (loss)................ $ 3,041,644 $ 143,144 $ (4,363,357)
============= ============== ==============
Net income (loss) per share:
Basic....................... $ .23 $ 0.01 $ (0.38)
============= ============== ==============
Diluted..................... $ .22 0.01 $ (0.38)
============= ============== ==============
Weighted average common
shares outstanding:
Basic....................... 13,246,796 12,866,045 11,404,862
============= ============== ==============
Diluted..................... 13,829,714 14,071,970 11,404,862
============= ============== ==============
See accompanying notes to financial statements.
- F 4 -
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
ACCUMULATED
COMMON ADDITIONAL RETAINED OTHER
SHARES COMMON PAID-IN EARNINGS COMPREHENSIVE
OUTSTANDING STOCK CAPITAL (DEFICIT) LOSS TOTAL
----------- ----------- ---------- ----------- ----------- ------------
Balance at March 31, 1996 10,311,782 $ 6,816,020 $ 616,500 $ 62,040 $ (109,275) $ 7,385,285
Shares issued for exercise
of options 351,168 881,476 - - - 881,476
Value of stock options
issued for services
rendered - - 55,036 - - 55,036
Shares issued, previously
escrowed in connection
with purchase of SBC 1,021,612 5,632,126 - - - 5,632,126
Shares repurchased in
connection with exercise
of options (46,980) (437,500) - - - (437,500)
Shares issued in connection
with purchase of DFAS 40,000 203,000 - - - 203,000
Shares issued in connection
with a private placement 1,000,000 6,479,619 - - - 6,479,619
Comprehensive loss:
Realization of loss
on marketable securities - - - - 109,275 109,275
Net income for Colorado Tech
for the three months ended
March 31, 1996 - - - 162,195 - 162,195
Net loss - - - (4,363,357) - (4,363,357)
------------
Comprehensive loss (4,091,887)
----------- ------------ ---------- ----------- ----------- ------------
Balance at
March 31, 1997 12,677,582 19,574,741 671,536 (4,139,122) - 16,107,155
Shares issued in connection
with exercise of options 16,000 46,313 - - - 46,313
Shares issued in connection
with exercise of warrants 500,000 1,562,500 - - - 1,562,500
Comprehensive income:
Net unrealized loss on
non-current marketable
securities - - - - (25,958) (25,958)
Net income - - - 143,144 - 143,144
------------
Comprehensive income 117,186
----------- ------------ ---------- ----------- ----------- ------------
Balance at
March 31, 1998 13,193,582 21,183,554 671,536 (3,995,978) (25,958) 17,833,154
Shares issued in connection
with exercise of options 115,450 336,328 - - - 336,328
Shares issued in connection
with stock purchase plan 31,107 112,596 - - - 112,596
Shares issued in connection
with 401(K) employee match 83,073 275,068 - - - 275,068
Comprehensive income:
Realization of gain on
non-current marketable
securities - - - - 25,958 25,958
Net income - - - 3,041,644 - 3,041,644
------------
Comprehensive income - - - - - 3,067,602
----------- ------------ ---------- ----------- ----------- ------------
Balance at
March 31, 1999 13,423,212 $21,907,546 $ 671,536 $ (954,334) $ - $21,624,748
=========== =========== ========== =========== =========== ============
See accompanying notes to financial statements.
- F 5 -
Whitman Education Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
YEAR ENDED MARCH 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)..................... $ 3,041,644 $ 143,144 $(4,363,357)
Adjustments to reconcile net
income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization..... 3,958,553 3,365,544 2,772,520
Bad debt expense.................. 3,481,822 2,396,472 3,245,314
Deferred tax benefit.............. (1,091,662) (609,984) (408,841)
Realization of loss on
marketable securities........... - - 656,250
Changes in operating assets
and liabilities, net of effects
from purchase of SBC and Huron:
Restricted cash................. - 511,927 (169,481)
Accounts receivable............. (9,242,251) (5,591,193) (4,911,368)
Inventories..................... 163,640 (530,331) (199,634)
Other current assets............ (375,553) (244,931) (449,264)
Deposits and other assets....... (573,680) (160,766) (144,228)
Accounts payable................ 674,434 (1,121,977) 416,411
Accrued expenses................ 1,209,219 (758,703) 1,359,655
Income taxes payable............ 791,531 72,317 (163,980)
Deferred tuition revenue........ 4,609,764 2,966,802 243,393
Other liabilities............... (134,866) (312,151) (156,254)
------------ ------------ ------------
Net cash provided by (used in)
operating activities................ 6,512,595 126,170 (2,272,864)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.... (2,318,677) (3,722,988) (3,870,181)
Proceeds from sale of
marketable securities............... 288,458 - -
------------ ------------ ------------
Net cash used in
investing activities................ (2,030,219) (3,722,988) (3,870,181)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving line of
credit, long-term borrowings and
capital lease obligations........... 34,787,943 36,742,951 32,868,173
Principal payments on revolving line
of credit, long-term borrowings,
capital lease obligations and
other liabilities................... (38,680,451) (35,380,560) (33,742,193)
Principal (payments) proceeds from
short-term notes payable............ (156,018) 156,018 -
Proceeds from purchases in stock
purchase plan, exercise of options
and warrants........................ 448,924 1,608,813 443,976
Proceeds from sale of common stock.... - - 6,479,619
Proceeds from Huron acquisition....... - - 1,200,683
------------ ------------ ------------
Net cash (used in) provided by
financing activities................ (3,599,602) 3,127,222 7,250,258
------------ ------------ ------------
Increase (decrease) in cash
and cash equivalents................ 882,774 (469,596) 1,107,213
Cash and cash equivalents at
beginning of year................... 3,384,336 3,853,932 2,762,141
CTU activity for the three-months
ended March 31, 1997................ - - (15,422)
------------ ------------ ------------
Cash and cash equivalents
at end of year...................... $ 4,267,110 $ 3,384,336 $ 3,853,932
============ ============ ============
Continued on the following page.
See accompanying notes to financial statements.
- F 6 -
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
YEAR ENDED MARCH 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
SUPPLEMENTAL DISCLOSURES OF NONCASH
FINANCING AND INVESTMENT ACTIVITIES:
Equipment acquired under
capital leases...................... $ 2,140,364 $ 1,712,979 $ 1,181,153
============ ============ ============
Assets acquired in
Huron acquisition................... $ - $ - $ 1,467,220
============ ============ ============
Liabilities assumed in
Huron acquisition................... $ - $ - $ 2,667,903
============ ============ ============
Release of restricted cash previously
in escrow for SBC acquisition....... $ - $ - $ 2,400,000
============ ============ ============
Treasury stock issued
for purchase of DFAS................ $ - $ - $ 203,000
============ ============ ============
Value of stock options issued
for services rendered............... $ - $ - $ 55,036
============ ============ ============
Value of stock issued for
401(K) employee match............... $ 275,068 $ - $ -
============ ============ ============
Stock issued in connection
with acquisition of SBC............. $ - $ - $ 5,632,126
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Interest paid......................... $ 1,276,533 $ 1,234,201 $ 877,494
============ ============ ============
Income taxes paid..................... $ 422,852 $ - $ 211,479
============ ============ ============
See accompanying notes to financial statements.
- F 7 -
WHITMAN EDUCATION GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
The primary business of Whitman Education Group, Inc. and its Subsidiaries
("Whitman") is the operation of degree and non-degree granting proprietary
schools devoted to career training primarily in the medical, technical, and
business fields. Whitman's operations are conducted through its three
wholly-owned subsidiaries: Ultrasound Technical Services, Inc. ("UDS"), Sanford
Brown College, Inc. ("SBC") and M.D.J.B., Inc., the parent corporation of
Colorado Technical University ("CTU"). The revenues generated from these
subsidiaries primarily consist of tuition and fees paid by students. The
majority of students rely on funds received from federal financial aid programs
under Title IV of the Higher Education Act of 1965, as amended ("Title IV
Programs") to pay for a substantial portion of their tuition.
As an educational institution, Whitman is subject to licensure from various
accrediting and state authorities and other regulatory requirements of the
United States Department of Education ("Department of Education").
Principles of Consolidation
The consolidated financial statements include the accounts of Whitman
Education Group, Inc. and its subsidiaries, all of which are wholly-owned. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Cash and Cash Equivalents
Whitman considers all highly liquid short-term investments purchased with
an original maturity of three months or less to be cash equivalents.
Revenues, Accounts Receivable and Deferred Tuition Revenue
Upon enrollment, Whitman bills the student for the full contract amount of
the course, the academic year, or the academic term, as applicable, resulting in
the recording of an accounts receivable and a corresponding deferred tuition
revenue liability. The deferred tuition revenue liability is reduced and
recognized into income over the term of the relevant period being attended by
the student. If a student withdraws from a course or program, the unearned
portion of the program that the student has paid for is refunded generally on a
pro rata basis.
Inventory
Inventory consists primarily of books, uniforms and supplies and is valued
at the lower of cost or market using the first-in, first-out (FIFO) method.
- F 8 -
WHITMAN EDUCATION GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation.
Expenditures for maintenance and repairs which do not add to the value of the
related assets or materially extend their original lives are expensed as
incurred.
Depreciation of property and equipment is computed principally by the
straight-line method over the estimated useful lives of the assets ranging from
one to ten years. Leasehold improvements are amortized over the term of the
related leases, which approximates the estimated useful lives.
Goodwill
Whitman amortizes the goodwill associated with acquisitions using the
straight-line method, principally over a forty-year period. The realizability of
goodwill and other intangibles is evaluated periodically as events or
circumstances indicate a possible inability to recover their carrying amount.
Such evaluation is based on various analyses, including cash flow and
profitability projections that incorporate, as applicable, the impact on
existing businesses. The analyses involve significant management judgment to
evaluate the capacity of an acquired business to perform within projections. As
of March 31, 1999 and 1998, accumulated amortization was $899,000 and $595,000,
respectively.
Impairment of Long-Lived Assets
In fiscal 1997, Whitman adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets." SFAS No. 121 requires impairment losses to be recorded on
long-lived assets when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than the assets'
carrying amount. The effect of adopting SFAS No. 121 was not material.
Net Income (Loss) Per Common Share
In fiscal 1998, Whitman retroactively adopted SFAS No. 128, Earnings Per
Share. SFAS No. 128 replaced the calculation of primary and fully diluted
earnings per share (EPS) with basic and diluted EPS.
Basic net income per common share is computed using the weighted average
number of common shares outstanding during the period. Diluted net income per
share is computed using the weighted average number of common and common
equivalent shares outstanding during the period.
- F 9 -
WHITMAN EDUCATION GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Advertising
Whitman expenses advertising costs as incurred. Advertising expense which
is included in selling and promotional expenses amounted to approximately
$4,499,000, $3,957,000 and $3,223,000 for the years ended March 31, 1999, 1998
and 1997, respectively.
Income Taxes
Deferred income tax assets and liabilities are determined based on the
differences between the financial statements and income tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 encourages, but does not require, companies
to record compensation plans at fair value. Whitman has elected, in accordance
with provisions of SFAS 123, to apply Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations treatment for its stock plan. Under APB 25, because the exercise
price of Whitman's employee stock options is equal to the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassification
Certain prior year amounts have been reclassified to conform to the fiscal
1999 presentation. These changes had no effect on previously reported net income
(loss).
- F 10 -
WHITMAN EDUCATION GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
In fiscal 1999, Whitman adopted SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes new rules for the reporting and display of
comprehensive income and its components. SFAS 130 requires unrealized gains or
losses on Whitman's available-for-sale securities, which prior to its adoption
were recorded separately in stockholders' equity, to be included in "other
comprehensive income." For the years ended March 31, 1999, 1998 and 1997,total
comprehensive income (loss) was $3,067,602, $117,186 and ($4,091,887),
respectively.
In fiscal 1999, Whitman adopted SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports. It also establishes standards for related disclosures about products
and services, geographic areas, and major customers.
2. ACQUISITIONS
HURON UNIVERSITY
On December 30, 1996, CTU acquired the South Dakota operations and certain
assets at two campuses of Huron University. The purchase price consisted of $2.3
million of which approximately $2.0 million was paid in cash (of which $200,000
was placed in escrow for post- closing adjustments), acquisition costs of
$150,000 and the assumption of $1.4 million of net liabilities. In addition,
Whitman assigned the right to purchase the Huron real property to a third party,
Huron Education, Inc. ("HEI"), a South Dakota not-for-profit organization, in
exchange for $3.9 million and simultaneously leased the real property from HEI
upon the satisfaction of $757,000 in existing mortgages and after placing
$500,000 in escrow to be used for the satisfaction of assumed cash obligations
of Huron University. In connection with this transaction, the community of
Huron, South Dakota, through HEI paid to Whitman $527,000 (which is included in
the $3.9 million received from HEI) as an inducement for Whitman to acquire the
operations of Huron University. This inducement has been accounted for as a
deferred credit and wil be amortized over the lease period of nine years.
These transactions resulted in a net purchase price of $1,500,000 (comprised
of the receipt of cash totalling $1,200,000 and the assumption of current
liabilities totalling $2,700,000) which was allocated to current assets
totalling $1,500,000.
- F 11 -
WHITMAN EDUCATION GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. ACQUISITIONS - (CONTINUED)
HURON UNIVERSITY - CONTINUED
The acquisition was accounted for using the purchase method of accounting
and, accordingly, the net liabilities acquired are included in Whitman's balance
sheets as of March 31, 1997 and operations have been included in Whitman's
operations beginning on January 1, 1997.
The following unaudited pro forma information combines the results of
operations of Whitman and Huron University for the fiscal year ended March 31,
1997 as if the transaction had occurred at April 1, 1996, after giving effect to
certain adjustments including additional rent expense and reductions in interest
and depreciation expense. This pro forma information does not purport to be
indicative of the results that actually would have occurred if the acquisition
had been effective on the dates indicated or which may be obtained in the
future.
1997
-------------
Net revenues................................. $ 49,727,000
Net loss....................................... (5,029,000)
Basic net loss per share....................... (.44)
Diluted net loss per share.................... (.44)
At the date of acquisition, Huron University operated as a regionally
accredited degree granting institution with campuses in Huron and Sioux Falls,
South Dakota, enrolling approximately 600 students primarily in management,
health sciences, general studies and other programs. Huron University confers
degrees at the associate's, bachelor's and master's levels.
Effective December 30, 1996, CTU entered into a lease with HEI which
provides for a nine year term with an option to renew for an additional six year
term (see Note 14). The lease also provides CTU with an option to purchase the
property at any time during the lease term.
COLORADO TECHNICAL UNIVERSITY
On March 29, 1996, Whitman completed the merger with CTU, a regionally
accredited degree granting institution. CTU currently operates four campuses,
two in Colorado and two in South Dakota, and has approximately 3,000 students
enrolled primarily in computer science, engineering and management programs. CTU
confers degrees at the associate's, bachelor's, master's and doctoral levels.
- F 12 -
WHITMAN EDUCATION GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. ACQUISITIONS - (CONTINUED)
COLORADO TECHNICAL UNIVERSITY - CONTINUED
In connection with the merger, Whitman issued 2,499,870 shares of its
common stock in exchange for all of the issued and outstanding stock of CTU. The
merger was accounted for using the pooling of interests method of accounting
and, accordingly, Whitman's consolidated financial statements were previously
restated to include the accounts and operations of CTU for all periods prior to
the merger. Prior to the merger, CTU had reported its financial results on a
calendar year basis. The consolidated financial statements for the year ended
March 31, 1997 were previously adjusted to conform CTU's year end with that of
Whitman. The effect arising from the exclusion of net income of $162,195 for the
three month period ended March 31, 1996 in the accompanying consolidated
statements of operations and cash flows for the year ended March 31, 1997, is
presented in the accompanying consolidated statement of changes in stockholders'
equity as an adjustment to retained earnings for the change in fiscal year of
CTU. The consolidated financial statements for all periods prior to fiscal 1997
have not been restated for the change in fiscal year of CTU.
SANFORD-BROWN COLLEGE
On December 21, 1994, Whitman completed the purchase of SBC, a privately
held proprietary business and allied healthcare college. SBC was acquired for
$3.5 million cash and $500,000 (196,564 shares) in common stock and contingent
consideration of $2.4 million in cash and 1,021,612 shares of common stock held
in escrow. In the fourth quarter of fiscal 1997, the conditions for the release
of the cash and common stock held in escrow were satisfied. Accordingly, Whitman
released the funds and common stock held in escrow to the seller of SBC,
resulting in an increase in goodwill and equity of approximately $8.0 million
and $1.9 million, respectively, in the fourth quarter of fiscal 1997.
The acquisition of SBC has been accounted for as a purchase, and the net
assets and results of operations are included in Whitman's consolidated
financial statements since the date of acquisition. The purchase price has been
allocated to the assets and liabilities of SBC based on their relative fair
market value which approximated their net book value. The purchase price and
expenses associated with the acquisition exceeded the fair value of SBC's net
assets by approximately $10.6 million which has been assigned to goodwill. In
connection with the acquisition, Whitman acquired
3. DISPOSITION OF HURON UNIVERSITY
On May 3, 1999, Colorado Technical University, Inc., an indirect
wholly-owned subsidiary of Whitman, entered into an Amended and Restated
Contribution Agreement pursuant to which the assets and certain liabilities of
its Huron University campus in Huron, South Dakota will be transferred to Newco,
LLC., a South Dakota limited liability company formed by existing members of
Huron University's management team. In connection with the transaction, Colorado
Technical University will contribute the operating assets of Huron University
and $500,000 to Newco, and Newco will issue Colorado Technical University, Inc.
membership interests equal to 19.9% of the membership interests of Newco and
assume the third party liabilities of Huron University. The membership interests
would have a liquidation preference equal to the net value of the assets and
cash contributed by Colorado Technical University.
Completion of the transaction is subject to various conditions, including
the obtaining of adequate financing by the new ownership group, the obtaining of
all necessary state and other governmental agency approvals, the attaining of
independent accreditation of Huron University by the North Central Association
of Colleges and Schools and Huron University independently qualifying for
participation in federal Title IV student financial assistance programs
administered by the United States Department of Education. Subject to the
occurrence of these conditions, the parties will seek to close the transaction
in the second half of calendar 1999. There can be no assurance, however, that
any of the foregoing conditions will be satisfied. Accordingly, there can be no
assurance that the proposed transaction will be consummated.
- F 13 -
WHITMAN EDUCATION GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. FINANCIAL AID PROGRAMS
Approximately 71% of Whitman's net revenues were received from students who
participated in government sponsored financial aid programs under Title IV.
These programs are subject to program review by the Department of Education.
Disbursements under each program are subject to disallowance and repayment by
the schools. These programs also require that Whitman and certain of its
subsidiaries meet Standards of Financial Responsibility established by the
Department of Education. The standards require Whitman and certain of its
subsidiaries to maintain certain financial ratios and requirements, all of which
have been met at March 31, 1999.
5. ACCOUNTS RECEIVABLE
A summary of activity for the allowance for doubtful accounts is as
follows:
YEAR ENDED MARCH 31,
-------------------------------------------
1999 1998 1997
------------- ------------- ------------
Balance at beginning of year...... $ 4,208,777 $ 2,821,261 $ 1,314,631
Net activity of CTU for the three
months ended March 31, 1996..... - - 20,099
Acquisition of Huron.............. - - 40,000
Charged to expense................ 3,481,822 2,396,472 3,245,314
Accounts charged-off during the
year, net of recoveries......... (2,096,711) (1,008,956) (1,798,783)
------------- ------------- ------------
Balance at end of year............ $ 5,593,888 $ 4,208,777 $ 2,821,261
============= ============= ============
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
ESTIMATED MARCH 31,
USEFUL LIVES ------------------------------
(IN YEARS) 1999 1998
------------ ------------- --------------
Equipment...................... 2-5 $ 13,108,793 $ 11,061,621
Leasehold improvements......... 1-10 6,393,829 5,459,652
Furniture and fixtures......... 7-10 3,442,322 2,639,065
Other.......................... 5 3,100,080 2,554,939
------------- --------------
26,045,024 21,715,277
Less accumulated depreciation
and amortization............. (12,042,260) (8,790,100)
------------- --------------
$ 14,002,764 $ 12,925,177
============= ==============
- F 14 -
7. MARKETABLE SECURITIES
On December 16, 1998, Whitman sold its marketable equity securities and
realized a gain on the sale of $43,489. In fiscal 1998, an unrealized loss on
noncurrent marketable equity securities of $33,750 ($25,958 net of income taxes)
was recognized. During the fourth quarter of fiscal 1997, Whitman determined
that the marketable securities should be written down from its cost basis of
$952,500 to $296,250 as a result of an other than temporary decline in value.
The total write down in the fourth quarter of fiscal 1997 of $656,250 includes
$176,250 ($109,275 net of income taxes) which was previously reported as an
unrealized loss on noncurrent marketable securities in Whitman's March 31,1996
stockholders' equity.
8. Income Taxes
The components of the income tax provision (benefit) are as follows:
YEAR ENDED MARCH 31,
-----------------------------------------
1999 1998 1997
------------- ------------ -----------
Current.................. $ 1,187,849 $ 120,510 $ -
Deferred................. (1,091,662) (609,984) (408,841)
------------- ------------ -----------
Total income tax
provision (benefit).... $ 96,187 $ (489,474) $ (408,841)
============= ============ ===========
The differences between the federal statutory income tax rate and the
effective income tax rate are summarized below:
YEAR ENDED MARCH 31,
---------------------------------------
1999 1998 1997
----------- ------------ ----------
Statutory tax rate................... 34.0 % (34.0)% (34.0)%
State income taxes, net.............. 5.66 30.3 (4.5)
Permanent differences................ 0.84 12.3 0.9
Change in valuation allowance........ (36.77) (147.6) 35.9
Other, net........................... (0.66) (2.3) (6.9)
----------- ------------- ----------
Effective tax rate................... 3.07 % (141.3)% (8.6)%
=========== ============= ==========
- F 15 -
WHITMAN EDUCATION GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. INCOME TAXES - (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
Whitman's net deferred income taxes are as follows:
MARCH 31,
-------------------------
1999 1998
----------- ------------
Deferred tax assets:
Accrued expenses................... $ 350,000 $ 407,000
Reserves and allowances............ 2,186,000 1,248,000
Tax credits........................ 298,000 55,000
Net operating loss carryforwards... 239,000 1,257,000
Capital loss carryforward.......... 231,000 -
Unrealized depreciation in
equity security................. - 279,000
Other (net)........................ 13,000 36,000
----------- ------------
Total deferred tax assets............... 3,317,000 3,282,000
Valuation allowances.................... (50,000) (1,204,000)
----------- ------------
Total deferred tax assets............... 3,267,000 2,078,000
Deferred tax liabilities:
Prepaid expenses and other......... (25,000) (17,000)
Depreciation and amortization...... (680,000) (590,000)
----------- -----------
Total deferred tax liabilities.......... (705,000) (607,000)
----------- -----------
Total deferred tax assets, net.......... $2,562,000 $1,471,000
=========== ===========
SFAS 109 "Accounting for Income Taxes" requires a valuation allowance to
reduce the deferred tax assets reported if, based on the weight of the evidence,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. After consideration of all of the evidence, both positive
and negative, management has determined that a valuation allowance of $50,000 is
necessary at March 31, 1999. The valuation allowance decreased by $1,154,000 in
fiscal 1999, decreased by $510,000 in 1998, and increased by $1,714,000 in 1997.
At March 31, 1999 Whitman has available various state net operating loss
carryforwards approximating $6,600,000, expiring in the year 2010 through 2013.
Whitman has approximately $613,000 in capital loss carryforwards which begin to
expire in 2004. Whitman also has an alternative minimum tax credit of
approximately $259,000 which carries forward indefinitely.
- F 16 -
WHITMAN EDUCATION GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. DEBT
Long-term debt consists of the following:
MARCH 31,
--------------------------------
1999 1998
------------ ------------
$7.5 million revolver note expiring
April 14, 1999 with interest at
LIBOR plus 1.10%, 6.05% at
March 31, 1999 and 6.79%
at March 31, 1998.................... $ 6,923,035 $ 7,248,837
$2.0 million revolving credit
facility expiring May 30, 1998,
with interest at prime
(floor of 6% and ceiling of 11%),
8.5% at March 31, 1998............... - 2,000,000
Notes payable in monthly installments
through 2002, interest rates ranging
from 8.875% to 9%.................... 210,005 519,203
Note payable in monthly installments
through June 13, 2002, with interest
at prime plus 1.25% (adjusted every
three years), 9.75% at March 31, 1999
and at March 31, 1998................ 1,267,821 1,500,000
Note payable due June 3, 1999, with
interest at 12%...................... 844,629 900,000
------------ ------------
Total.................................. 9,245,490 12,168,040
Less current portion................... (472,994) (354,401)
------------ ------------
$ 8,772,496 $11,813,639
============ ============
The revolver note of $7.5 million is guaranteed by the Chairman of the
Board of Whitman.
The notes payable of $210,005 are secured by the furniture and equipment of
CTU.
The note payable of $844,629 is secured by equipment of SBC. The principal
balance and all unpaid interest was paid on May 28, 1999.
On June 13, 1997, Whitman entered into a $1.5 million loan agreement which
is secured by equipment at CTU and Huron. Under the terms of this agreement,
Whitman was required to draw down the $1.5 million on or before December 12,
1997 and is required to pay interest only through June 1998 and thereafter pay
monthly principal and interest installments through June 13, 2002 at prime plus
1.25%.
- F 17 -
WHITMAN EDUCATION GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. DEBT - (CONTINUED)
On May 29, 1998, Whitman repaid the $2.0 million revolving credit facility
by drawing down on the $7.5 million revolver note.
On April 2, 1999, the expiration date on the $7.5 revolver note was
extended from April 14, 1999 to July 31, 1999.
On May 28, 1999, Whitman entered into an $8.5 million line of credit which
is secured by all of the assets of Whitman. The interest rate on the line of
credit is variable and is equal to the sum of 2.90% and the 30-day commercial
paper rate. The line of credit has an expiration date of June 30, 2000. One May
28, 1999, Whitman repaid the outstanding balances due on the $7.5 million
revolver note and the notes payable of $210,005 and $844,629.
Aggregate maturities of long-term debt at March 31, 1999 are as follows:
Fiscal Year
2000.................... $ 472,994
2001.................... 8,232,241
2002.................... 467,555
2003.................... 72,700
2004.................... -
------------
$ 9,245,490
============
10. CAPITALIZED LEASE OBLIGATIONS
Whitman leases equipment under several lease agreements which are accounted
for as capital leases. The assets and liabilities under capital leases are
recorded at the lower of the net present value of the minimum lease payments or
the fair value of the asset. The assets are amortized over the related lease
term.
- F 18 -
WHITMAN EDUCATION GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. CAPITALIZED LEASE OBLIGATIONS - (CONTINUED)
During 1999 and 1998, Whitman entered into leases totaling approximately
$2,140,000 and $1,713,000, respectively, in connection with the purchase of
equipment. The amortization of leased assets of $1,022,000 and $869,000 for the
years ended March 31, 1999 and 1998, respectively, is included in depreciation.
The following is a summary of assets held under capital leases which are
included in property and equipment at March 31:
1999 1998
------------ -------------
Equipment...................... $6,283,003 $ 5,169,560
Furniture and fixtures......... 471,105 149,228
Automobiles.................... - 21,660
------------ -------------
6,754,108 5 ,340,448
Less accumulated amortization.. (2,923,865) (2,509,781)
------------ -------------
$ 3,830,243 $ 2,830,667
============ =============
Future minimum lease payments under capital leases at March 31, 1999 are as
follows:
FISCAL YEAR
-----------
2000 $ 1,992,280
2001 1,468,616
2002 1,358,712
2003 843,476
2004 153,028
-------------
Total minimum lease payments 5,816,112
Less amount representing interest (8%-12%) (1,048,266)
Less amount classified as current (1,517,912)
-------------
$ 3,249,934
=============
11. EMPLOYEE BENEFIT PLAN
Whitman has a 401(k) retirement savings plan covering all employees that
meet certain eligibility requirements. Eligible participating employees may
elect to contribute up to a maximum amount of tax deferred contribution allowed
by the Internal Revenue Code. Whitman matches a portion of such contributions up
to a maximum percentage of the employee's compensation. Whitman's contributions
to the plan were approximately $307,000, $125,000 and $97,000 for the years
ended March 31, 1999, 1998 and 1997, respectively.
- F 19 -
WHITMAN EDUCATION GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
12. STOCK OPTION PLANS AND WARRANTS
Whitman has adopted stock option plans under which employees, directors and
consultants of Whitman may be issued options covering up to 4,352,450 shares of
common stock. Options are granted at the fair market value of the stock at the
date of the grant, with vesting ranging up to five years. A summary of stock
option activity related to Whitman's stock option plans is as follows:
Weighted
Average Exercise Number
Price Per Share Of Shares
---------------- ---------
Outstanding March 31, 1996.............. 2.94 2,083,400
Granted................................. 5.83 993,750
Exercised............................... 2.51 (351,466)
Cancelled............................... 3.67 (98,584)
----------
Outstanding March 31, 1997.............. 4.07 2,627,100
Granted................................. 5.00 740,450
Exercised............................... 2.89 (16,000)
Cancelled............................... 5.29 (177,950)
----------
Outstanding March 31, 1998.............. 4.24 3,173,600
Granted................................. 4.84 699,200
Exercised............................... 2.91 (115,450)
Canceled................................ 5.36 (238,500)
----------
Outstanding March 31, 1999.............. 3,518,850
==========
As required by FAS 123, pro forma information regarding net income and
earnings per share has been determined as if Whitman had accounted for its
employee stock options under the fair value method of that statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
options pricing model with the following weighted-average assumptions for 1999
and 1998, respectively: risk-free rates of 5.2% and 6.1% ; no dividend yields
for both; volatility factors of the expected market price of Whitman's common
stock of 0.439 and 0.566; and a weighted-average expected life of the option of
7.0 for both years. The weighted-average fair value of the stock options for the
years 1999 and 1998 were $2.61 and $3.19, respectively.
- F 20 -
WHITMAN EDUCATION GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
12. STOCK OPTION PLANS AND WARRANTS - (CONTINUED)
The Black-Scholes options valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because Whitman's employee stock options have characteristics
significantly different from those traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, the
existing models, in management's opinion, do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Whitman's
fiscal 1999 and 1998 pro forma information follows:
1999 1998
----------- -------------
Net income (loss)................. $ 567,518 $ (1,763,020)
Basic and diluted net income
(loss) per share............... .04 (.13)
The 1999 and 1998 pro forma effect on net income (loss) is not necessarily
representative of the effect in future years because it does not take into
consideration pro forma compensation expense related to grants made prior to
1997.
The exercise price of options outstanding for fiscal years 1999 and 1998
ranged as follows:
NUMBER WEIGHTED AVERAGE REMAINING
EXERCISE PRICE OF OPTIONS CONTRACTUAL LIFE (YEARS)
-------------- ---------- --------------------------
$3.31 - $4.97 664,800 5.97
$4.98 - $7.47 774,850 6.95
Stock options totalling 2,087,692 and 1,679,649 were exercisable at the end
of fiscal 1999 and 1998, respectively. Common stock reserved for issuance under
the stock option plans and outstanding warrants aggregate 6,977,393 shares.
Whitman has 1,650,000 warrants outstanding at an average exercise price of
$4.01 maturing between January 2000 and February 2001.
- F 21 -
WHITMAN EDUCATION GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
13. RELATED PARTY TRANSACTIONS
The seller of SBC is the beneficial owner of three buildings occupied by
SBC under lease agreements. In the fiscal years ended March 31, 1999, 1998 and
1997, Whitman's SBC subsidiary paid the seller rent totalling $396,000, $453,000
and $432,000, respectively.
Whitman purchases certain textbooks and materials for resale to its
students from an entity that is 40% owned by Whitman's president. In the fiscal
years ended March 31, 1999, 1998 and 1997, Whitman purchased $120,300, $120,300
and $78,900 in textbooks and materials from that entity.
In February 1996, Whitman moved its headquarters to Miami, Florida. Whitman
occupies office space in a building owned by IVAX Corporation. A director and
shareholder of Whitman is also Chairman of IVAX Corporation. In the fiscal years
ended March 31, 1999, 1998 and 1997 Whitman incurred rent expense in the amount
of $ 146,000, $141,000 and $125,000 respectively.
14. COMMITMENTS AND CONTINGENCIES
Whitman leases classroom and office space under operating leases in various
buildings where the schools are located. Certain of Whitman's operating leases
contain rent escalation clauses. Future minimum annual rental commitments under
noncancellable operating leases as of March 31, 1999 are as follows:
FISCAL YEAR
-----------
2000............................................... $ 5,493,189
2001............................................... 4,465,890
2002............................................... 3,688,793
2003............................................... 3,411,488
2004............................................... 2,504,678
Thereafter......................................... 10,399,292
------------
Total minimum lease payments....................... $ 29,963,330
============
Rent expense during fiscal 1999, 1998 and 1997 was approximately
$5,397,801, $4,750,000 and $3,766,000, respectively.
In fiscal 1999 Whitman entered into financing agreements to acquire capital
equipment totaling $2,140,000. In fiscal 1999, $2,140,000 of capital equipment
was financed under these agreements and are included under capitalized lease
obligations. At March 31, 1999, Whitman had $715,000 of letters of credit
outstanding.
- F 22 -
WHITMAN EDUCATION GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
14. COMMITMENTS AND CONTINGENCIES - (CONTINUED)
The Office of the Inspector General ("OIG") of the Department of Education
is currently conducting an audit of the SBC campus in Granite City, Illinois for
the fiscal year ended March 31, 1998. Although this audit has not yet been
completed and no audit report has been issued, the OIG representatives have
questioned the Granite City campus' inclusion of institutional scholarships as
non-Title IV funds in determining compliance with the 85/15 rule. The Company
has responded to the OIG. Although the Company believes that the Granite City
campus was in compliance with the 85/15 rule and that the OIG audit will be
resolved without any material adverse effect, as with any such audit, no
assurance can be given as to the final outcome since matters are not yet
resolved.
Whitman is a party to routine litigation incidental to its business,
including but not limited to, claims involving students or graduates and routine
employment matters. While there can be no assurance as to the ultimate outcome
of any litigation involving Whitman, management does not believe that any
pending proceeding will result in a settlement or an adverse judgment that will
have a material adverse effect on Whitman's financial condition or results of
operations.
In August 1998, three former students of the diagnostic medical ultrasound
program of the Philadelphia UDS school filed a lawsuit against Whitman, UDS,
certain of our current and former officers, directors and employees and a former
consultant, styled Cullen, et al. v. Whitman Education Group, Inc., in the
United States District Court for the Eastern District of Pennsylvania (Civil
Action No. 98-CV-4076). The complaint, as subsequently amended alleges, among
other things, certain state and federal statutory violations, breach of contract
and fraud and seeks to have the action certified as a class action encompassing
certain students who attended the general ultrasound program at any of the 15
UDS schools and received federal financial aid during the alleged class period.
The plaintiffs seek injunctive relief, compensatory, treble and punitive damages
and attorneys' fees and costs. No ruling on class certification has been issued.
Management believes the lawsuit is without merit and intends to vigorously
defend it. While the outcome cannot be predicted with certainty, if determined
adversely to the Company, it could have a material adverse effect on its
financial position and results of operations.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable,
notes payable and accounts payable and accrued expenses approximate fair value
because of their short duration to maturity. The carrying amounts of revolving
credit facilities approximate fair value because the interest rate is tied to a
quoted variable index.
-F 23-
16. EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share. All earnings per
share amounts for all periods have been presented, and where necessary, related
to conform to the Statement 128 requirements.
The following table sets forth the computation of basic and diluted
earnings per share:
FOR THE YEAR ENDED MARCH 31,
------------------------------------------
1999 1998 1997
------------ ------------- -------------
Numerator:
Net income (loss)............. $ 3,041,644 $ 143,144 $ (4,363,357)
============ ============= =============
Denominator:
Denominator for basic
earnings per share -
weighted average shares... 13,246,796 12,866,045 11,404,862
Effect of dilutive securities:
Employee stock options........ 493,334 804,746 -
Warrants...................... 89,584 401,179 -
------------ ------------- -------------
Dilutive potential
common shares............... 582,918 1,205,925 -
Denominator for diluted
earnings per share -
adjusted weighted -
average shares and
assumed conversions... 13,829,714 14,071,970 11,404,862
============ ============= =============
Basic net income (loss) per share.. $ .23 $ 0.01 $ (0.38)
============ ============= =============
Diluted net income (loss)
per share........................ $ .22 $ 0.01 $ ( 0.38)
============ ============= =============
- F 24 -
WHITMAN EDUCATION GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
17. SEGMENT AND RELATED INFORMATION
In fiscal 1999, Whitman adopted the provision of SFAS No. 131, "Disclosures
About Segments of an Enterprise." Whitman is organized by two reportable
segments, the University Degree Division and the Associate Degree Division
through three wholly-owned subsidiaries. The University Degree Division
primarily offers bachelors, masters and doctorate degrees through Colorado
Technical University. The Associates Degree Division offers associate degrees
and diplomas or certificates through Sanford-Brown College and Ultrasound
Technical Services.
Whitman's revenues are not materially dependent on a single customer or
small group of customers.
Summarized financial information concerning the Whitman reportable segments
is shown in the following table:
FOR THE YEAR ENDED MARCH 31,
---------------------------------------------
1999 1998 1997
-------------- ------------- -------------
Net revenues:
Associate Degree Division...... $ 55,055,984 $ 44,319,376 $ 35,188,280
University Degree Division..... 18,921,378 15,987,084 11,804,674
Other.......................... - -
-------------- ------------- -------------
Total ......................... $ 73,977,362 $ 60,306,460 $ 46,992,954
============== ============= =============
Income (loss) before income taxes:
Associate Degree Division...... $ 6,496,891 $ 3,278,877 $ (2,156,666)
University Degree Division..... (1,097,029) (1,448,278) 15,662
Other.......................... $ (2,262,031) (2,176,929) (2,631,194)
-------------- ------------- -------------
Total.......................... $ 3,137,831 $ (346,330) $ (4,772,198)
============== ============= =============
Total assets:
Associate Degree Division...... $ 48,250,099 $ 41,113,240 $ 37,815,405
University Degree Division..... 13,341,559 12,072,072 9,518,904
Other.......................... 987,957 635,857 683,185
-------------- ------------- -------------
Total.......................... $ 62,579,615 $ 53,821,169 $ 48,017,494
============== ============= =============
Capital expenditures:
Associate Degree Division...... $ 3,325,791 $ 3,045,389 $ 3,224,843
University Degree Division..... 1,075,262 2,161,633 1,826,491
Other.......................... 57,988 228,945 -
-------------- ------------- -------------
Total.......................... $ 4,459,041 $ 5,435,967 $ 5,051,334
============== ============= =============
- F 25 -