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, 2002 Commission file number 1-13722
WHITMAN EDUCATION GROUP, INC.
(Exact Name of Registrant as Specified in its Charter)
State of Florida 22-2246554
-------------------------------------- --------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
4400 Biscayne Boulevard, Miami, FL , 33137 (305) 575-6510
------------------------------------------ ---------------------------------
(Address of Principal Executive Offices) (Registrant's Telephone Number,
Including Area Code)
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. [X]
As of June 3, 2002, there were 13,924,670 shares of Common Stock
outstanding.
The aggregate market value of the voting stock held by non-affiliates of
the registrant on June 3, 2002 was approximately $60,509,000.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of our Definitive Proxy Statement for our 2002 Annual
Meeting of Stockholders scheduled to be held in August 2002 are incorporated by
reference into Part III of this Report.
1
WHITMAN EDUCATION GROUP, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED MARCH 31, 2002
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business...................................................... 3
Item 2. Properties.................................................... 20
Item 3. Legal Proceedings............................................. 21
Item 4. Submission of Matters to a Vote of Security Holders........... 21
Executive Officers of the Registrant.......................... 21
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters....................................................... 22
Item 6. Selected Financial Data....................................... 24
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................... 25
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.... 35
Item 8. Financial Statements and Supplementary Data................... 35
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................... 35
PART III
Item 10. Directors and Executive Officers of the Registrant............ 36
Item 11. Executive Compensation........................................ 36
Item 12. Security Ownership of Certain Beneficial Owners and Management 36
Item 13. Certain Relationships and Related Transactions................ 36
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K...................................................... 36
2
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 Annual
Report on Form 10-K are qualified by the risk factors set forth in that section.
Please keep in mind while reading this report that:
"We," "Us," "Our" and "Whitman" refer to Whitman Education Group, Inc. and
its subsidiaries.
"Colorado Tech" refers collectively to the three campuses of Colorado
Technical University.
"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 23 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 and bachelor degrees through
Colorado Tech. The Associate Degree Division offers associate degrees and
diplomas or certificates through Sanford-Brown and UDS.
Our students are predominantly adults 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.
The majority of our students rely on funds received from federal financial
aid programs under Title IV of the Higher Education Act of 1965, as amended, to
pay for a substantial portion of their tuition. Accordingly, we are
substantially dependent upon Title IV funds for the majority of our revenues and
the loss of our ability to receive Title IV funds would have a material adverse
effect on our business and results of operations.
Our executive offices are located at 4400 Biscayne Boulevard, 6th Floor,
Miami, Florida 33137, and our telephone number is (305) 575-6510.
3
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.
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 degrees and non-degree programs in healthcare, information technology
and business. These 20 schools comprise our Associate Degree Division.
In March 1996, we relocated our headquarters from New Jersey to Miami,
Florida and 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 comprises 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.
Although the curricula was career-oriented at Huron University, Huron
University's Huron campus principally directed its efforts to serving more
traditional students, younger adults pursuing degree-based higher education upon
graduation from high school. There are fundamental differences in a campus
serving working adults and a campus serving more traditional students. As a
consequence of a strategic decision to focus our efforts on adult learners, in
August 1999 we sold our Huron University campus in Huron, South Dakota to an
investor group including members of the campus management team. As part of the
sale, we agreed to guarantee $1.1 million of the indebtedness that the purchaser
assumed in the transaction, and we retained a minority interest in the school.
In addition, we extended a loan of $500,000 to the former campus President to
assist him in funding the transaction.
4
In April 2001, the investor group sold the school to a not-for-profit
college. This transaction released us from any further obligations associated
with the school, including our guarantee. In connection with the sale we
recorded a one-time non-recurring non-cash charge of approximately $1.2 million,
or $0.05 per diluted share, in the fiscal quarter ended March 31, 2001 relating
to our minority interest in the campus. For further discussion of this
transaction see "Management's Discussion and Analysis of Financial Conditions
and Results of Operations - Divestiture of Huron University".
The UDS Pittsburgh campus stopped admitting new students in February 2002,
and is expected to close after existing students have completed their programs.
These students are expected to finish their programs by October 2002.
The Postsecondary Education Market
The postsecondary education market in the United States is estimated to
exceed $235 billion annually, with more than 15.2 million students enrolled in
over 6,600 postsecondary institutions eligible to participate in Title IV
federal aid programs. According to the United States Department of Education,
the population enrolled in such institutions will increase by nearly 1.8 million
students to over 17 million students by the year 2011. Further, of the Title IV
financial aid eligible institutions, approximately 2,500 are for-profit, with
approximately 800 of those offering associate degrees or higher. Total
enrollment in for-profit institutions is estimated to be less than 5% of the
overall postsecondary education market.
Additionally, we believe that the market for entry-level associate degree
candidates is enhanced by the increasing number of new high school graduates,
projected to increase from 2.8 million in 1999 to 3.1 million in 2011. Further,
we believe the market for entry level associate degree candidates is also
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 53% in 1983
to 63% in 2000. In addition, the number of adult learners is increasing. Adult
learners represent a large group of postsecondary students that has grown
significantly in recent years. Since 1970, the percentage of students over the
age of 24 has risen from 28% of all postsecondary students to more than 39% or
5.8 million in 1999, according to the National Center for Education Statistics.
Further, the continuing shift in the information age from non-skilled to
skilled workers is dramatic and is expected to continue to drive growth in the
postsecondary education market. 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, in the year 2000 it was projected, 85% of the
jobs required education or training beyond high school. This shift is reflected
by the income premium placed on postsecondary education. According to the United
States Census Bureau, in 2000, a full-time male worker over the age of 24 with
an associate degree earned an average of 29% more per year than a comparable
worker with only a high school diploma, and a full-time male worker over the age
of 24 with a bachelor degree earned an average of 88% more per year than a
comparable worker with only a high school diploma.
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, bachelor, master and doctorate) and
non-degree programs, we believe we are well-positioned to focus our efforts on
further internal growth.
5
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 by developing new curricula. To accomplish our goal of increasing
operating efficiencies at each school and within our operations as a whole, we
intend to continue to leverage our infrastructure by increasing our marketing
efforts, improving the distribution of our curricula among our existing campuses
and developing new high demand programs.
Also, in the short term, we are seeking to expand the geographic scope of
our business by offering Colorado Tech's degree and professional certificate
programs at the site of large employers. Currently, we offer employer on-site
programs at four locations. In addition, in July 2000, Colorado Tech began
offering internet delivered higher education courses. Initially, it will focus
on masters level courses and professional certificate programs. Ultimately,
Colorado Tech will seek to offer full on-line degree programs.
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
relationships with both the community and employers that 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. Students attending the three principal
Colorado Tech campuses are typically working adults seeking to advance in their
current careers. Colorado Tech offers various bachelor, master and doctorate
degrees in information technology, business and management. We believe that
flexible course structures, class schedules designed for the working adult,
small class sizes and the use of state of the practice computer laboratories
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.
6
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 degrees and professional certificate programs
primarily in the areas of healthcare, information technology and business.
Sanford-Brown is a nationally-accredited institution that provides various
associate 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,
health information specialist and surgical technology.
For financial and other information relating to our two divisions see Note
15 to our Consolidated Financial Statements filed herewith.
Educational Programs
We offer a range of career-oriented postsecondary educational programs,
substantially all of which are in the areas of healthcare, information
technology and business. We offer various concentrations in these programs at
the associate, bachelor, master 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.
7
Our educational programs are set forth below:
UNIVERSITY DEGREE DIVISION
Colorado Technical University
--------------------------------------------------------------------------------
DOCTORATE PROGRAMS ASSOCIATE DEGREE PROGRAMS
Computer Science e-Business
Management Information Technology
Information Technology System Support
MASTER DEGREE PROGRAMS Electronic Technology
Computer Science Management Information Systems
Computer Engineering Business Management
Electrical Engineering Accounting
Management Medical Assisting
Business Administration Criminal Justice
CERTIFICATE PROGRAMS
BACHELOR DEGREE PROGRAMS C++ Programming
Computer Engineering Comp TIA A+
Computer Science Comp TIA Network
e-Business Computer Network Telecommunications
Information Technology Computer Systems Security
Information Technology Management Contract Management
Telecommunications Engineering Technology Digital Telecommunications
Electrical Engineering e-Business Entrepreneurship
Electrical Engineering Technology e-Business Management
Management Logistics Systems Management
Management Information Systems MCSE Preparation
Criminal Justice Object-Oriented Development
Accounting Professional Communication
Finance Project Management
Project Management Semiconductor Manufacturing
Software Engineering
Quality Management
Visual Basic Programming
Java Programming
Oracle Application Development
Oracle Database Administration
Software Project Management
Web Administration
Web Application Development
Web Page Development
Web Programming & e-Commerce
UNIX Programming and Administration
ASSOCIATE DEGREE DIVISION
Sanford-Brown College
--------------------------------------------------------------------------------
ASSOCIATE DEGREE PROGRAMS PROFESSIONAL DIPLOMA PROGRAMS
Network Technology Network Technology
Computer Support Specialist Computer Support Specialist
Computer Support Technician Computer and Internet Programming
Computer and Internet Programming Practical Nursing
Respiratory Therapy Medical Assistant
Radiography Accounting
Nursing Office Technology
Medical Assistant Medical Coding/Billing Specialist
Business Administration
Office Administration CERTIFICATE PROGRAM
Paralegal Studies Network Specialist
Network Administration
Web Programming
Health Information Technology
Ultrasound Diagnostic School
--------------------------------------------------------------------------------
SPECIALIZED ASSOCIATE DEGREE PROFESSIONAL DIPLOMA PROGRAMS
PROGRAMS (Florida campuses only) Diagnostic Medical Ultrasound
Diagnostic Medical Ultrasound Non-Invasive Cardiovascular Technology
Non-Invasive Cardiovascular Technology Medical Assistant
Surgical Technology
Health Information Specialist
8
The following table provides information as of April 30, 2002 regarding the
programs offered by each of our schools:
LENGTH OF
TYPE OF NUMBER OF NUMBER OF PROGRAM
SCHOOL PROGRAM LOCATIONS STUDENTS (IN MONTHS)1
--------------------- ---------- ------------ ----------- -------------
University Degree Division
--------------------------
Colorado Technical
University Doctorate 1 51 36
Master 3 512 18-21
Bachelor 3 1,664 36
Associate 3 391 18
Non-degree 3 156 Varies
---
School Total 2,774
=====
Associate Degree Division
--------------------------
Sanford-Brown College Associate 4 712 14-21
Non-degree 5 863 8-14
-----
School total 1,575
=====
Ultrasound Diagnostic
School Non-degree 15 4,360 8-19
Specialized
Associate 3 293 12-19
-----
School total 4,653
=====
Total 9,002
=====
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 $11,000 for the eight-month
medical assistant program offered by UDS to approximately $24,000 for the
longest associate degree programs offered by Sanford-Brown. At Colorado Tech,
tuition and fees range from approximately $37,000 to $40,000 for the bachelor
degree programs, $15,000 to $16,000 for the master's program and approximately
$31,000 for the doctorate program.
Academic schedules are designed to meet the needs of the adult student. UDS
offers all of its programs during both day and evening classes beginning
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.
--------------------------
1 At Colorado Tech, the working adult students typically do not attend
their programs on a full-time basis. Therefore, it generally takes longer than
the stated program length to complete the program.
9
Student Recruitment
We utilize a wide array of advertising and marketing strategies to attract
students to our schools, including various combinations of newspaper, radio,
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.
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 assess whether the entering students have the educational and work
experience, personal circumstances and the ability necessary to 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 some 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 replacement
assistance to graduates.
Competition
The postsecondary education 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,
which may include public and private colleges, other proprietary institutions,
hospital based programs and institutions offering Internet-based curricula. As
discussed above, Colorado Tech is exploring Internet-based courses and programs
and is considering offering entire degree programs over the Internet. To the
extent that Colorado Tech enters the market for Internet-based degree programs,
it will become subject to competition from a larger group of educational
institutions both public and private, including institutions out of the
geographic areas in which Colorado Tech campuses are located with which Colorado
Tech has not traditionally competed.
Competition in the career-oriented postsecondary education market for adult
learners 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 generally higher than the average tuition
rates of our schools.
10
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) because they are
certified to participate in federal financial aid programs ("Title IV Programs")
authorized under the Higher Education Act of 1965, as amended, by the United
States Department of Education. The loss of authorization to operate in states
in which we currently operate, the withdrawal of accreditation from our schools,
the loss of our schools' accrediting bodies accreditations, or the loss of the
schools' eligibility to participate in Title IV Programs would have a material
adverse effect on our operations.
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 school's accreditation and/or be approved by the appropriate
state authorization agency. Our schools are currently authorized to operate in
all states in which we 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 accredit institutions on the basis of the
institution's overall nature but are primarily limited to defined geographic
areas; and (iii) programmatic accrediting agencies, which accredit specific
educational programs offered by institutions without regard to geographic
location. 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 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. Accreditation
can serve as the basis for the recognition and acceptance by employers, other
higher education institutions and governmental entities of degrees and credits
awarded by an institution.
Pursuant to provisions of the Higher Education Act, the Department of
Education relies in part on accrediting agencies and state licensing bodies to
determine whether an institution's educational programs qualify it to
participate in the Title IV Programs. As required under the Title IV Program
rules, each of our schools is accredited by an accrediting agency recognized by
the Department of Education. If one of our schools' accrediting agencies were to
lose its recognition with the Department of Education we would be required to
obtain a new accrediting agency for that school or risk that school losing its
eligibility to receive Title IV funds.
The Higher Education Act requires accrediting agencies recognized by the
Department of Education to review many aspects of an institution's operations to
ensure, among other things, 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 or program may be out
of compliance with accrediting standards, it may require the institution to take
appropriate action to bring it into compliance, place the institution on
probation or a similar warning status or it may direct the institution to show
cause why its accreditation should not be revoked. An accrediting agency also
may place an institution on "reporting" status in order to monitor one or more
specific areas of the institution's performance. 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 locations or initiate
new academic programs. Failure to demonstrate compliance with accrediting
standards in any of these instances could result in loss of accreditation. Each
of our schools currently maintains institutional accreditation.
11
Federal Financial Aid Programs. We derive a majority of our revenue from
students who participate in Title IV Programs under the Higher Education Act.
The potential loss of any of our school's eligibility to participate in these
programs would have a material adverse effect on our operations.
A brief description of the Title IV Programs in which we participate
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 on the
number of eligible students. For the 2001-2002 award year, Pell Grants range
from $400 to $3,750 per year.
Federal Supplemental Educational Opportunity Grant ("FSEOG"). FSEOG awards
are designed to supplement Pell Grants for the neediest students. FSEOG awards
for eligible students generally range in amount from $100 to $4,000 per year.
The availability of FSEOG awards to a particular institution is limited by the
amount of those funds allocated to the 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 and other eligible funds and, in
certain states, portions of state scholarships and grants. During the 2000-2001
award year, our required 25% institutional match was approximately $132,000.
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, an eligible undergraduate 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. A graduate student may borrow up to $8,500 per
academic year. Eligible students with financial need qualify for interest
subsidies while in school and during grace periods. Eligible students who are
classified as independent can increase their borrowing limits and receive
additional unsubsidized Stafford loans. Such undergraduate 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. Graduate students may borrow an additional
$10,000 per academic year. The aggregate amount of FFEL funds a student may
receive is capped at $46,000 for undergraduate students and $138,500 for
graduate or professional students. 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. Our schools and their students use a number of
lenders and guaranty agencies. While we believe that other lenders would be
willing to make federally guaranteed student loans to our students if loans were
no longer available from our current lenders, we can make no assurances in this
regard. The Higher Education Act requires the establishment of lenders of last
resort in every state to make certain loans to students at any school that
cannot otherwise identify lenders willing to make federally guaranteed loans to
its students.
Federal Perkins Loan Program ("Perkins"). Eligible undergraduate students
may borrow up to $4,000 under the Perkins program during each academic year,
with an aggregate maximum of $20,000, 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. During the 2000-2001
award year, its 25% institutional match was approximately $6,000.
12
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 7% of an
institution's FWS allocation must be used to fund student employment in
community service positions. During the 2000-2001 award year, our 25%
institutional match was approximately $59,000.
Federal Oversight of Title IV Programs. In order to participate in Title IV
Programs, we must comply with standards set forth in the Higher Education Act
and the regulations promulgated thereunder, 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, among others, 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 administrative and judicial appeals. 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, a 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 participate in the
Title IV Programs at least every six years, when it undergoes a change of
control, raises the highest academic credential it offers, or, under certain
defined circumstances, if the institution opens an additional location offering
50% or more of an educational program. Each of our schools (other than
Sanford-Brown which is provisionally certified as discussed below) is currently
eligible and certified to participate in the Title IV programs.
Provisional Certification. Under certain circumstances, an institution may
be placed on provisional certification status for a period not to exceed three
years. Provisional certification generally does not limit an institution's
access to Title IV funds but differs from full certification in that (i) 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; (ii) a provisionally certified institution must
seek approval before disbursing Title IV funds to students attending any newly
established additional location that provides 50% or more of an educational
program; and (iii) 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 a period of provisional certification but fails to satisfy the
full certification criteria, the Department of Education may renew the
institution's provisional certification. 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 may be required
to reapply for continued eligibility. Sanford-Brown recently has received
provisional certification effective through March 2004 as a result of a "merger"
of the Sanford-Brown Colleges in Missouri and Illinois in which Sanford-Brown
College in Illinois, formerly a freestanding institution, became an additional
location of Sanford-Brown College in Missouri.
13
Legislative Action
Political and budgetary concerns significantly affect the Title IV
Programs. Congress must reauthorize the Higher Education Act approximately every
six years. Accordingly, the statutory and regulatory provisions described herein
are subject to change. The most recent reauthorization in 1998 reauthorized the
Higher Education Act through 2003. Congress reauthorized 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 reauthorization
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.
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 appropriation bills and in other
laws it enacts between reauthorizations of the Higher Education Act. Because 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 also 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 program funds.
Under this rule, a proprietary school will be ineligible to participate in Title
IV Programs if, under a modified cash basis of accounting and according to
certain assumptions imposed by the Department of Education, more than 90% of its
revenues from its Title IV eligible programs for the prior fiscal year, were
derived from Title IV Program funds. If one of our schools were to fail the
90/10 rule for 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. For the fiscal year
ended March 31, 2002, our schools met the 90/10 rule with percentages of
revenues derived from Title IV Program funds ranging from 29% to 78%.
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. For the fiscal year ended March 31, 2002, our schools
met all of the administrative capability requirements.
Incentive Compensation. 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 or admission activities or in
making decisions regarding the awarding of student financial assistance. 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 profit-sharing 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 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.
14
Financial Responsibility. Each eligible institution participating in the
Title IV Programs (except for state-owned institutions) must satisfy certain
standards of financial responsibility. 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) 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 institution's 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 Department of Education determines
that an institution's composite score is below 1.5, the institution is deemed
not to be financially responsible. If such an institution's composite score is
1.0 or greater but less than 1.5, and the institution otherwise meets the
requisite financial responsibility requirements, the institution may continue to
participate in Title IV Programs as a financially responsible institution for a
period of no more than three consecutive 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 also may request from such institutions additional information
about their current operations and/or future plans. In addition, if an
institution is deemed not to be financially responsible because it has achieved
a composite score of less than 1.5, 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.
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.
Under these standards, our composite score on a consolidated basis (as
historically applied to UDS) is 2.3, Colorado Tech's composite score is 3.0 and
Sanford-Brown's composite score is 2.9.
Even if an institution achieves a composite score of at least 1.5, however,
it may be deemed to lack financial 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.
15
Another measure of financial responsibility is an institution's ability to
make timely refunds to students and the Title IV programs. If as a result of an
audit conducted by the Department of Education, Whitman's independent auditor,
or a guaranty or state authorizing agency, there is a finding that one or more
of our schools did not make timely refunds in either of its last two fiscal
years, that school could be required to submit an irrevocable letter of credit
to the Secretary of the Department of Education equal to 25 percent of the total
amount of Title IV Higher Education Act program refunds the school made or
should have made during its most recently completed fiscal year, in order to
maintain financial responsibility. Based on this standard, in October 2001, we
posted letters of credit amounting to $420,000 as a result of late refund
findings with respect to fiscal years 2000 and 2001.
Cohort Default Rates. The regulations require the calculation of a cohort
default rate on FFEL loans received by current and former students who have
attended our institutions. The cohort default rate measures the percentage of
students who enter repayment on FFEL loans in a particular federal fiscal year
and default before the end of the following federal fiscal year. If a
institution's official cohort default rate equals or exceeds 25% for each of its
three most recent federal fiscal years for which data is available, it becomes
ineligible to participate in the FFEL and Pell programs for the remainder of the
year in which the Department of Education makes that determination and the
subsequent two years. An institution also may become ineligible to participate
in all Title IV Programs if its official default rate exceeds 40% in any one
fiscal year. Such actions may be appealed. 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 1999 (published in October 2001).
UDS's official 1999 rates ranged from 6.3% to 10.3%; Sanford-Brown's official
1999 rate was 6.3% and Colorado Tech's official 1999 rate was 3.3%. All of our
schools' preliminary 2000 default rates were below 25% with no preliminary rate
exceeding 11.4%. The fiscal year 1999 cohort default rates for all of our
schools were 6.7% on a weighted average basis; the average rate for all
proprietary institutions in the United States for the same period was
approximately 9.3%.
In addition, as of October, 1999 an institution whose Perkins cohort
default rate is 50% or greater for three consecutive federal award years will
lose eligibility to participate in the Perkins program for the remainder of the
federal fiscal year in which the Department of Education determines that the
institution has lost its eligibility and for the two subsequent federal fiscal
years. Such action may be appealed. The Higher Education Act also imposes a
penalty on institutions that have a default rate of 25% or above, by eliminating
additional federal funds allocated annually to the institution for use in the
Perkins program. Only Colorado Tech participates in the Perkins program, and the
cohort default rate for that program is 11.4%.
Change in Ownership Resulting in a Change in Control. A change of ownership
which results in a change in control (as defined below) of Whitman or one or
more of our institutions will trigger a review of the certification and
eligibility of all (if Whitman changes ownership) or some of our schools to
participate in Title IV Programs, and may cause all or some of our institutions
to lose their eligibility 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. The 1998 reauthorization 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. The Department of Education has implemented
regulations that permit institutions to apply for such temporary provisional
certification within ten days after a change of ownership and control. As a
result, it is possible for an institution to change ownership resulting in a
change of control without experiencing an interruption in Title IV funding.
16
With regard to publicly held companies, the Department of Education
generally has adopted the change of ownership and control standards used in
reporting such events under federal securities laws. 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. In addition,
in accordance with Department of Education regulations effective July 1, 2001, a
publicly held company participating in the Title IV Programs is deemed to
experience a change in ownership and control when a person who is a controlling
shareholder of the corporation ceases to be a controlling shareholder. The
Department of Education defines a controlling shareholder to be a shareholder
who holds or controls through agreement both (i) 25 percent or more of the total
outstanding voting stock of the corporation and (ii) more shares of voting stock
than any other shareholder. A controlling shareholder does not include a
shareholder whose sole stock ownership is held (i) as a U.S. institution's
investor as defined under securities laws, (ii) in mutual funds, (iii) through a
profit-sharing plan in which all full-time permanent employees are included, or
(iv) through an Employee Stock Ownership Plan.
According to Department of Education regulations, individual schools may be
deemed to experience a change in control if: the institution is sold; there is a
merger of one or more eligible institutions; the institution is divided into two
or more institutions; the institution is permitted to transfer its liabilities
to its parent corporation; assets comprising a substantial portion of the
educational business of its institution are transferred; or the institution
changes its status as a for-profit, nonprofit or public institution.
A failure to obtain recertification subsequent to a change in ownership and
control of Whitman would have a material adverse effect on our financial
condition. A failure to obtain recertification subsequent to a change in
ownership and control of an individual Whitman school would have a material
adverse effect on that school's financial condition. Our acquisition of other
institutions typically would result in a change of ownership resulting in a
change of control of the acquired institution and not of Whitman or its existing
schools. When a change in control does occur, the school's certification by the
Department of Education following the change in control is provisional.
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 threaten the school's eligibility to participate in the
Title IV programs.
Compliance Audits. Our institutions are subject to audits or program
compliance reviews by various external agencies, including the Department of
Education, its Office of Inspector General 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 also could transfer the institution from the advance
system of receiving Title IV Program funds to the cash monitoring or
reimbursement method of payment, 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 also could subject us to other civil and criminal
sanctions including a proceeding to impose a fine, place restrictions on an
institution's participation in Title IV Programs or terminate its eligibility to
participate in the Title IV Programs. 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 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. The Department of
Education also may 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.
17
An institution may appeal any such action initiated by the Department with
the exception of an action placing an institution on reimbursement, although, as
described above, a provisionally certified institution has more limited appeal
rights. 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 financial condition.
There is no proceeding pending to fine any 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 an 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 have previously been designated as eligible programs at that
institution, and the program 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 such a location. Under Department of
Education regulations effective July 1, 2001, an institution must apply for
approval for any new additional location at which the institution offers 50% or
more of an educational program if: 1) the institution is provisionally
certified; 2) the institution receives Title IV Program funds under the
reimbursement or cash monitoring payment method; 3) the institution acquires the
assets of another Title IV participating institution that provided educational
programs at that location; 4) the institution would be subject to loss of
eligibility based on its merger or entrance into a similar transaction
(including a change of name or address) with an institution that operated at
substantially the same address as the new location and has lost its Title IV
eligibility due to high cohort rates (as described above); or 5) the Secretary
of Education previously notified the institution that it must apply for approval
of an additional location. Under this standard, only Sanford-Brown would be
required under regulation to seek approval for a new additional location at
which the Sanford-Brown provides 50% or more of an educational program.
18
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.
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, 2002, we had 752 full-time and 465 part-time employees of whom
565 were faculty and 559 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,"
"will," "could," "should," "may," 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 growth of the postsecondary
education market due to (a) the increasing number of high school graduates and
adult learners and (b) because of the focus placed on postsecondary education,
the continuing shift from non-skilled to skilled workers; (iii) the expansion of
our business through the addition of new curricula or new locations, or by
acquisitions; (iv) our anticipated need for and our ability to fund capital
expenditures associated with the relocation and upgrade of facilities in fiscal
2003; (v) the Department of Education's enforcement or interpretation of
existing regulations affecting our operations; (vi) the seasonality of our
results of operations; and (vii) 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 2003, and beyond, to
differ materially from those expressed in any forward-looking statements made by
us, or on our behalf: (i) our plans, strategies, objectives, expectations and
intentions, are subject to change at any time at our discretion; (ii) the effect
of, and our and our accrediting bodies' 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; (iii) our ability to assess and meet the educational needs and demands
of our students and the employers with whom they seek employment; (iv) the
effect of competitive pressures from other educational institutions; (v) our
ability to execute our growth strategy and manage planned internal growth; (vi)
our ability to locate, obtain and finance favorable school sites, negotiate
acceptable lease terms, and hire and train employees; (vii) the effect of
economic conditions in the postsecondary education industry and in the economy
generally including changes and fluctuations in interest rates; (viii) our
ability to adapt to technological and other developments, including
Internet-based curricula; (ix) 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; and
(x) the effects of changes in taxation and other government regulations.
19
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 13,750 square feet of office space.
Sanford-Brown also has limited administrative facilities at its Fenton campus.
Colorado Tech maintains its administrative offices at its campus in Colorado
Springs, Colorado.
Our schools are operated from the following leased premises:
Size of facility
Location of School School (in square feet)
------------------ ------ ------------------
Colorado Springs, Colorado Colorado Tech 80,000
Sioux Falls, South Dakota Colorado Tech 21,064
Denver, Colorado Colorado Tech 18,298
North Kansas City, Missouri Sanford-Brown 38,500
Fenton, Missouri Sanford-Brown 25,200
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 15,478
Iselin, New Jersey UDS 15,490
Atlanta, Georgia UDS 11,469
Bellaire, Texas UDS 15,395
Tampa, Florida UDS 14,412
Dallas, Texas UDS 15,235
Trevose, Pennsylvania UDS 10,204
Elmsford, New York UDS 10,034
Jacksonville, Florida UDS 15,800
Springfield, Massachusetts UDS 17,617
Pittsburgh, Pennsylvania UDS 6,238
Fort Lauderdale, Florida UDS 14,808
Independence, Ohio UDS 11,282
Landover, Maryland UDS 7,703
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. In connection with the expected "teach out" of our UDS campus in
Pittsburgh, Pennsylvania, we expect that the leased premise located there will
be closed upon the conclusion of that program.
20
Item 3. Legal Proceedings.
We are a party to 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 fourth
quarter of the fiscal year ended March 31, 2002.
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, 2002. 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 46, has been our Chief
Executive Officer and Vice Chairman since 1997 and a director since 1992. Mr.
Pfenniger was Chief Operating Officer of IVAX Corporation from 1994 to 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.
Fernando L. Fernandez. Mr. Fernandez, age 41, has served as our Vice
President--Finance, Chief Financial Officer, Secretary and Treasurer 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 PricewaterhouseCoopers LLP
(formerly Coopers & Lybrand) in Miami.
21
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Our common stock is traded on the American Stock Exchange under the symbol
"WIX". The following table sets forth the high and low sale prices of our common
stock as reported by the composite tape of the American Stock Exchange for each
of the quarters indicated.
2002
-------------------------------
High Low
--------------- --------------
Quarter Ended 6/30/01 $ 3.05 $ 2.00
Quarter Ended 9/30/01 3.70 2.75
Quarter Ended 12/31/01 4.80 3.00
Quarter Ended 3/31/02 5.92 4.40
2001
-------------------------------
High Low
-------------- ---------------
Quarter Ended 6/30/00 $ 2.38 $ 1.13
Quarter Ended 9/30/00 2.50 1.19
Quarter Ended 12/31/00 3.13 1.00
Quarter Ended 3/31/01 3.26 1.94
As of the close of business on June 3, 2002, there were approximately 282
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.
22
Securities Authorized for Issuance under Equity Compensation Plans
We maintain our Amended and Restated 1996 Stock Option Plan, our 1992
Incentive Stock Option Plan, our 1986 Directors and Consultants Stock Option
Plan, and our Employee Stock Purchase Plan. Additionally, we have entered into
an individual arrangement outside of these equity plans with Richard C.
Pfenniger, Jr., our Chief Executive Officer providing for the award to Mr.
Pfenniger of options to acquire shares of our common stock. The following table
provides summary information of the equity awards under these compensation
plans.
Equity Compensation Plan Information
Number of
securities
Number of remaining available
securities for future issuance
to be issued Weighted-average under equity
upon exercise exercise price of compensation plans
of outstanding outstanding (excluding
options, options, warrants securities
warrants and rights reflected in column
Plan Category and rights (a))
-------------- ------------------ ------------------ --------------------
(a) (b) (c)
Equity
compensation
plans
approved by
security
holders 3,923,937 $ 3.79 4,715,250
Equity
compensation
plans not
approved by
security
holders 185,000 $ 5.25
-
------------------ --------------------
Total 4,108,937 $ 3.86 4,715,250
================== ================== ====================
On March 3, 1997, we retained Mr. Pfenniger as our Chief Executive Officer.
In connection with the commencement of his employment with us we granted him
options to acquire 300,000 shares of our common stock. We granted Mr. Pfenniger
options covering 115,000 of these shares under our 1996 Plan and granted the
remaining options to him outside of our equity compensation plans in a grant
that was not approved by our shareholders. The terms of the grants are identical
and the options have a per share exercise price equal to $5.25, the per share
fair market value of the common stock on the date of grant. Mr. Pfenniger's
options vest ratably over 4 years after the date of grant and expire 7 years
after the date of grant. Vested options held by Mr. Pfenniger may be exercised
after termination of his employment (other than as a result of a termination of
his employment for "cause" as defined in the applicable grant) until either the
original expiration date for the option or the date which is one year after the
effective date of the termination of his employment, whichever is earlier. In
the event of a "change of control" of Whitman (as defined in the applicable
grant), all of Mr. Pfenniger's outstanding unvested options will vest and become
fully exercisable.
23
Item 6. Selected Financial Data.
Year Ended March 31,
---------------------------------------------------
2002 2001 2000 1999 1998
---------- -------- -------- -------- --------
(In thousands, except per share data) (1)
Operating Data
Net revenues................ $91,927 $79,629 $77,611 $73,977 $60,306
Income (loss) from
operations................ 5,060 576 (26) 4,195 784
Net income (loss)........... 2,602 (1,422) (502) 3,042 143
Diluted net income (loss)
per share(2) ............. 0.18 (0.11) (0.04) 0.22 0.01
Dividends................... None None None None None
Balance Sheet Data
Total assets................ $67,109 $62,867 $ 62,526 $ 62,580 $53,821
Long-term debt and
capitalized lease
obligations, less current
portion.................. 7,473 11,128 11,119 12,022 14,350
Stockholders' equity........ 23,727 20,544 21,285 21,625 17,833
--------------------
(1) Figures reflect the acquisition of Huron University on December 30,
1996, which was accounted for as a purchase, the sale of Huron University
in August 1999 and the disposition of our minority interest in Huron
University in April 2001.
(2) We calculate historical diluted net income (loss) per share using the
weighted average number of shares of common stock and common stock
equivalents outstanding during the period. We calculate our projected
diluted net income (loss) per share for periods not yet completed using the
treasury stock method. Under the treasury stock method we assume that all
outstanding "in the money" stock options and other common stock equivalents
are exercised at the beginning of the financial period. As a result,
fluctuations in the market price of our common stock could result in
variances between our projected and our actual diluted net income (loss)
per share.
See Consolidated Financial Statements, Item 8 of this Report, for
supplementary financial information of Whitman.
24
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 23 schools in
13 states offering a range of graduate, undergraduate and non-degree certificate
or diploma programs primarily in the fields of healthcare, information
technology 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. The Associate Degree Division offers associate degrees and
diplomas or certificates through Sanford-Brown and UDS.
Revenues consist primarily of tuition and fees paid by students. The
majority of our 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.
Instructional and educational support expenses consist primarily of costs
related to the educational activity of our schools. Instructional and
educational support expenses include salaries and benefits of faculty, academic
administrators and student support personnel. Instructional and educational
support expenses also include 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. Effective April 1, 2001, in compliance with SFAS 142,
goodwill is no longer subject to amortization but rather reviewed for impairment
on a periodic basis.
25
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,
-------------------------------------------
2002 2001 2000
------------- ------------ ------------
Net revenues 100.0% 100.0% 100.0%
------------- ------------ ------------
Costs and expenses:
Instructional and educational
support................... 63.6 66.1 66.4
Selling and promotional....... 15.7 18.0 15.9
General and administrative.... 15.2 15.2 15.7
Legal settlement.............. - - 2.0
------------- ------------ ------------
Total costs and expenses.......... 94.5 99.3 100.0
------------- ------------ ------------
Income from operations............ 5.5 0.7 -
Other (income) and expenses:
Interest expense.............. 1.0 1.4 1.5
Interest income............... (0.4) (0.4) (0.4)
Loss on Huron investment...... - 1.5 -
------------- ------------ ------------
Income (loss) before income tax
provision (benefit)
and cumulative effect of
change in accounting
principle..................... 4.9 (1.8) (1.1)
Income tax provision (benefit).... 2.1 (0.7) (0.4)
------------- ------------ ------------
Income (loss) before cumulative
effect of change in accounting
principle..................... 2.8 (1.1) (0.7)
Cumulative effect of change in
accounting principle, net of
tax........................... - (0.7) -
------------- ------------ ------------
Net income (loss)................. 2.8% (1.8)% (0.7)%
============= ============ ============
Year ended March 31, 2002 compared to the year ended March 31, 2001
Net revenues increased by $12.3 million or 15.4% to $91.9 million for the
year ended March 31, 2002 from $79.6 million for the year ended March 31, 2001.
This increase was primarily due to a 6.6% increase in average student enrollment
and an increase in tuition rates.
The Associate Degree Division experienced a 9.8% increase in average
student enrollment and the University Degree Division experienced a 0.1%
increase in average student enrollment. The increase in student enrollment in
the Associate Degree Division was primarily due to increased enrollment in the
medical assisting program and the health information specialist program offered
by UDS and the information technology and allied health programs offered at
Sanford-Brown. The increase in student enrollment in the Associate Degree
Division was due to our improved marketing and admissions efforts which
permitted us to increase the rate at which we converted leads to new student
starts.
Instructional and educational support expenses increased by $5.8 million,
or 11.0%, to $58.5 million for the year ended March 31, 2002 from $52.7 million
for the year ended March 31, 2001. As a percentage of net revenues,
instructional and educational support expenses decreased to 63.6% for the year
ended March 31, 2002 as compared to 66.1% for the year ended March 31, 2001. The
increase in instructional and educational support expenses was primarily due to
an increase in payroll expenses and related benefits for faculty, academic
administrators and student support personnel to support the increase in
enrollment. The decrease in instructional and educational support expenses as a
percentage of net revenues was due to our ability to better leverage our
instructional and educational support expenses to support an increased revenue
base.
26
Selling and promotional expenses increased by $0.1 million, or 0.8%, to
$14.4 million for the year ended March 31, 2002 from $14.3 million for the year
ended March 31, 2001. As a percentage of net revenues, selling and promotional
expenses decreased to 15.7% for the year ended March 31, 2002 as compared to
18.0% for the year ended March 31, 2001. The decrease in selling and promotional
expenses as a percentage of net revenues was due to our ability to maintain such
expenses relatively unchanged while supporting a growth in revenues.
General and administrative expenses increased by $1.9 million, or 15.8%, to
$14.0 million for the year ended March 31, 2002 from $12.1 million for the year
ended March 31, 2001. As a percentage of net revenues, general and
administrative expenses remained consistent at 15.2% for the years ended March
31, 2002 and 2001. The increase in general and administrative expenses was
primarily due to an increase in administrative payroll expenses and related
benefits and an increase in bad debt expense. As a percentage of net revenues,
bad debt expense increased to 5.1% for the year ended March 31, 2002 from 5.0%
for the year ended March 31, 2001. The increase in bad debt expense was
primarily due to the negative impact of the October 2000 required adoption of
the Department of Education's new methodology for calculating the amount of
previously disbursed federal student financial aid that we must return to the
federal government with respect to students who have since withdrawn from our
schools. This new regulation increases the student's obligation to the school
from which they have withdrawn and decreases the amount of student federal
financial aid received by the school on behalf of the student who withdrew.
We reported income from operations of $5.1 million and $0.6 million for the
years ended March 31, 2002 and 2001, respectively. This increase in
profitability was primarily due to an increase in income from operations of $6.9
million in the Associate Degree Division which was partially offset by a
decrease in income from operations in the University Degree Division of $2.0
million.
We reported net income of $2.6 million for the year ended March 31, 2002
and a net loss of $1.4 million for the year ended March 31, 2001. The increase
in net income was primarily due to an increase in profitability in the Associate
Degree Division, losses sustained in the prior year relating to the sale of our
minority ownership of Huron University, which resulted in a loss after taxes of
$0.7 million, and the implementation of SEC Staff Accounting Bulletin No. 101
effective April 1, 2000, which resulted in a one-time charge after taxes of $0.6
million.
Year Ended March 31, 2001 Compared to Year Ended March 31, 2000
Net revenues increased by $2.0 million, or 2.6%, to $79.6 million for the
year ended March 31, 2001 from $77.6 million for the year ended March 31, 2000.
Excluding Huron University, which was sold in August 1999, net revenues
increased by $3.5 million, or 4.5%, to $79.6 million for the year ended March
31, 2001 from $76.2 million for the year ended March 31, 2000. This increase was
primarily due to a 2.3% increase in average student enrollment and an increase
in tuition rates.
27
Excluding Huron University, the University Degree Division experienced a
7.2% increase in average student enrollment. Average student enrollment in the
Associate Degree Division remained relatively unchanged. The increase in student
enrollment in the University Degree Division was primarily due to increased
enrollment at Colorado Tech's Sioux Falls campus and in Colorado Tech's
information technology programs.
Instructional and educational support expenses increased by $1.1 million,
or 2.1%, to $52.7 million for the year ended March 31, 2001 from $51.6 million
for the year ended March 31, 2000. As a percentage of net revenues,
instructional and educational support expenses decreased to 66.1% for the year
ended March 31, 2001 as compared to 66.4% for the year ended March 31, 2000.
Excluding Huron University, instructional and educational support expenses
increased by $3.3 million, or 6.6%, to $52.7 million for the year ended March
31, 2001 from $49.4 million for the year ended March 31, 2000. Excluding Huron
University, as a percentage of net revenues, instructional and educational
support expenses increased to 66.1% for the year ended March 31, 2001 as
compared to 64.8% for the year ended March 31, 2000. This increase in
instructional and educational support expenses was primarily due to an increase
of $2.2 million in the University Degree Division and $1.0 million in the
Associate Degree Division. The increase in instructional and educational support
expenses in the University Degree Division was primarily due to increases in
payroll and related benefits for faculty and student support personnel to
support the increase in enrollments and an increase in expenses related to the
start up of Colorado Tech's online program. The increase in instructional and
educational support expenses in the Associate Degree Division was primarily due
to an increase in payroll and related benefits for faculty, academic
administrators and student support personnel at UDS to support an increase in
enrollment.
Selling and promotional expenses increased by $2.0 million, or 16.2%, to
$14.3 million for the year ended March 31, 2001 from $12.3 million for the year
ended March 31, 2000. As a percentage of net revenues, selling and promotional
expenses increased to 18.0% for the year ended March 31, 2001 as compared to
15.9% for the year ended March 31, 2000. Excluding Huron University, selling and
promotional expenses increased by $2.3 million, or 18.9%, to $14.3 million for
the year ended March 31, 2001 from $12.0 million for the year ended March 31,
2000. Excluding Huron University, as a percentage of net revenues, selling and
promotional expenses increased to 18.0% for the year ended March 31, 2001 as
compared to 15.8% for the year ended March 31, 2000. This increase in selling
and promotional expenses was primarily due to an increase in advertising
expenses in the Associate Degree Division resulting from our marketing efforts
directed at increasing enrollment.
General and administrative expenses decreased by $0.1 million, or 1.1%, to
$12.1 million for the year ended March 31, 2001 from $12.2 million for the year
ended March 31, 2000. As a percentage of net revenues, general and
administrative expenses decreased to 15.2% for the year ended March 31, 2001 as
compared to 15.7% for the year ended March 31, 2000. Excluding Huron University,
general and administrative expenses decreased by $0.1 million, or 0.9%, to $12.1
million for the year ended March 31, 2001 from $12.2 million for the year ended
March 31, 2000. Excluding Huron University, as a percentage of net revenues,
general and administrative expenses decreased to 15.2% for the year ended March
31, 2001 as compared to 16.0% for the year ended March 31, 2000. The decrease in
general and administrative expenses was primarily due to a reduction in
administrative payroll expenses and consulting fees in the University Degree
Division. The decrease in these expenses was partially offset by an increase in
bad debt expense. As a percentage of net revenues, bad debt expense increased to
5.0% for the year ended March 31, 2001 from 4.4% for the year ended March 31,
2000. Bad debt expense was negatively impacted by the October 2000 required
adoption of the Department of Education's new methodology for calculating the
amount of previously disbursed federal student financial aid that we must return
to the federal government with respect to students who have since withdrawn from
our schools. This new regulation results in an increase in the student's
obligation to the school from which they have withdrawn that will not be paid by
federal student financial aid funds.
28
We reported income from operations of $0.6 million for the year ended March
31, 2001 as compared to a loss from operations of $26,333 for the year ended
March 31, 2000. Excluding Huron University, income from operations decreased by
$0.4 million to $0.6 million for the year ended March 31, 2001 from $1.0 million
for the year ended March 31, 2000. This decrease in profitability was primarily
due to a decrease in income from operations of $0.5 million in the University
Degree Division due to an increase in expenses related to the start up of
Colorado Tech's online program.
On April 26, 2001, Huron University was sold to a not-for-profit college by
the investor group that acquired it from us. Colorado Tech recorded a one-time
non-recurring non-cash charge of approximately $1.2 million or $0.05 per diluted
share in the fiscal quarter ended March 31, 2001 relating to the sale of its
minority ownership of Huron University. See "Management's Discussion and
Analysis of Financial Conditions and Results of Operations - Divestiture of
Huron University."
We reported net losses of $1.4 million and $0.5 million for the years ended
March 31, 2001 and 2000, respectively. The increase in net loss was primarily
due to the loss of $0.7 million, after taxes realized in fiscal 2001 in
connection with the sale of our minority ownership of Huron University and the
implementation of SEC Staff Accounting Bulletin No. 101 effective April 1, 2000,
which resulted in a one-time charge after taxes of $0.6 million. These losses
were partially offset by operating losses of $1.0 million sustained at Huron
University in fiscal 2000 prior to the divestiture of this campus in August
1999.
Divestiture of Huron University
In 1999, we sold the Huron, South Dakota, campus of Huron University to a
group of investors, including members of the campus management team. In
connection with the transaction, we contributed the operating assets of the
school, certain of its liabilities and $550,000 in cash to the purchaser and
agreed to guarantee a portion of the assumed liabilities. We also retained a
minority interest in the school. We extended a loan of $500,000 to the campus
President to assist him in funding the transaction.
The terms of the transaction were established through an arm's length
negotiation, and we recorded no gain or loss. We recorded our minority
investment in the school at a cost of approximately $1.2 million, which then
approximated fair value. We recorded the investment under the cost method due to
our inability to exercise significant influence over the operating and financial
policies of the purchaser.
On April 26, 2001, the investor group sold the school to a not-for-profit
college. This transaction released us from any further obligations associated
with the school, including our guarantee. We did not receive any proceeds from
this transaction, and recorded a one-time non-recurring non-cash charge of
approximately $1.2 million in the fiscal quarter ended March 31, 2001 relating
to our minority ownership of the school.
Our loan of $500,000 to the former campus President remained outstanding
after the sale. The loan is due in August 2005 with monthly interest payments at
the prime rate which commenced in October 1999. The loan is secured by 80,000
shares of our common stock owned by the former campus President. The
not-for-profit college that purchased the school has also agreed to guarantee
this loan. In October 2001, the loan went into default by virtue of the failure
of the required monthly interest payments to be made and we accelerated all
amounts due under the loan. In May 2002, we received a default judgment against
the not-for-profit college that guaranteed the loan and are commencing
collection efforts to enforce the judgment. We believe the collateral securing
the loan is adequate and, therefore, have elected not to take action against the
principal obligor of the loan at this time.
29
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.
Liquidity and Capital Resources
Cash and cash equivalents at March 31, 2002, 2001 and 2000 were $14.0
million, $5.9 million and $6.1 million, respectively. Our working capital
totaled $9.9 million at March 31, 2002, $9.3 million at March 31, 2001 and $8.8
million at March 31, 2000.
Net cash of $13.3 million was provided by operating activities in fiscal
2002, an increase of $10.8 million from fiscal 2001 and $6.7 million from fiscal
2000. The increase in cash provided by operating activities of $10.8 million in
fiscal 2002 from fiscal 2001 was primarily due to an increase in net profits of
$4.0 million, a net increase in accounts payable and accrued expenses of $4.3
million and a decrease in deferred income taxes of $2.4 million. The increase in
cash provided by operating activities of $6.7 million in fiscal 2002 from fiscal
2000 was primarily due to an increase in net profits of $3.1 million, a decrease
in accounts receivable of $1.1 million and a decrease in deferred income taxes
of $1.7 million.
Net cash of $1.4 million was used for investing activities in fiscal 2002,
a decrease of $0.6 million from fiscal 2001 and $1.0 million from fiscal 2000.
The decrease in fiscal 2002 from 2001 was primarily due to a decrease in cash
used for capital expenditures. The decrease in fiscal 2002 from fiscal 2000 was
primarily due to our investment of $1.2 million in Huron University in fiscal
2000.
We estimate that the capital expenditures expected to be incurred during
fiscal 2003 will approximate $3.4 million. These anticipated capital
expenditures primarily relate to the costs associated with the acquisition and
upgrade of equipment for the schools and the relocation and upgrade of campus
facilities. Funds required to finance such capital expenditures are expected to
be obtained from funds generated from operations.
Net cash of $3.8 million was used in financing activities in fiscal 2002,
an increase in cash used of $3.1 million from fiscal 2001 and $1.3 million from
fiscal 2000. The increase in cash used in financing activities in fiscal 2002
from fiscal 2001 and fiscal 2000 was due to an increase in net payments on
long-term debt and capital lease obligations.
In March 2001, our $8.5 million credit facility was restructured into a
$2.0 million line of credit and a $6.5 million capital expenditure term note. In
November 2001, we extended the expiration date on the $2.0 million line of
credit to October 31, 2002. We intend to further extend the expiration date on
our line of credit prior to October 31, 2002 or, in the alternative, to seek a
replacement credit facility. At March 31, 2002, we had no outstanding balance
under this facility and letters of credit outstanding of $0.5 million which
reduced the amount available for borrowing. The $6.5 million term note is
payable in seven monthly installments of interest only commencing on April 21,
2001 and thereafter in 52 monthly installments of principal and interest with a
balloon payment due in April 2006. The amounts borrowed under this facility were
used for capital expenditures in prior years.
30
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, and a majority of our revenue is
derived from Title IV Programs. UDS, Sanford-Brown and Colorado Tech receive
approximately 75%, 77% and 29% 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 given our working capital, our cash flow from operations
and our line of credit, we will have adequate resources to meet our anticipated
operating requirements for the foreseeable future.
Numerous risks and uncertainties could affect our short-term and long-term
liquidity. See "Forward-Looking Statements; Business Risks" for discussion of
material factors that could affect our liquidity.
Contractual Obligations and Other Commercial Commitments
The following summarizes our contractual obligations at March 31, 2002, and
the effect such obligations are expected to have on our liquidity and cash flow
in future periods (in thousands):
Payments Due by Period
-----------------------------------------------------
Within After
Total 1 Year 2-3 Years 4-5 Years 5 Years
------- -------- ---------- ---------- ---------
Note Payable $ 5,958 $1,300 $ 2,600 $ 2,058 $ -
Capital Lease Obligations 4,597 1,782 2,227 588 -
Operating Leases 30,995 5,802 9,963 7,607 7,623
------- -------- ---------- ---------- ---------
$41,550 $8,884 $14,790 $10,253 $ 7,623
======= ======== ========== ========== =========
We have a contractual commitment related to a $2.0 million line of credit
which expires on October 31, 2002. We intend to further extend the expiration
date on our line of credit prior to October 31, 2002 or, in the alternative, to
seek a replacement line of credit. At March 31, 2002, we had no outstanding
balance under this facility and letters of credit outstanding of $0.5 million,
which reduced the amount available for borrowing.
Transactions with Former Management
We purchase certain textbooks and materials for resale to our students from
an entity that is 40% owned by Randy S. Proto, our former Chief Operating
Officer and President. In the fiscal years ended March 31, 2002, 2001 and 2000,
we purchased approximately $147,900, $97,500 and $148,800, respectively, in
textbooks and materials from that entity.
31
Critical Accounting Policies
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the 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. On an on-going basis, we evaluate our
estimates, including those related to allowance for doubtful accounts,
intangible assets, accrued liabilities, income and other tax accruals, revenue
recognition and contingencies and litigation. Management bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Critical accounting policies are
defined as those that are reflective of significant judgments by management and
uncertainties, and that could potentially result in materially different results
under different assumptions and conditions. Although historically, actual
results have not significantly deviated from those determined using management's
estimates, as discussed below, our financial position or results of operations
could be materially different if we were to report under different conditions or
when using different assumptions in the application of such policies. We believe
the following accounting policies are the most critical to us, in that they are
the primary areas where financial information is subject to the use of
management's estimates, assumptions and the application of management's judgment
in the preparation of our consolidated financial statements. The critical
accounting policies discussed herein are not intended to be a comprehensive list
of all of our accounting policies. In many cases, the accounting treatment of a
particular transaction is specifically dictated by accounting principles
generally accepted in the United States of America, with no need for
management's judgment in their application. There are also areas in which
management's judgment in selecting any available alternative would not produce a
materially different result. Other accounting policies also have a significant
effect on our financial statements, and some of these policies also require the
use of estimates and assumptions. Our significant accounting policies are
discussed in Note 1 to the Consolidated Financial Statements included in Item 8
of this Form 10-K.
Revenues, Accounts Receivable and Deferred Tuition Revenue
Revenues consist primarily of tuition and fees paid by students.
Approximately 65% of our net revenues collected during the fiscal year ended
March 31, 2002 were received from students who received funds from Title IV
Programs to pay for their tuition.
We charge our students for the full contract amount at the beginning of the
course, the academic year, or the academic term, as applicable, resulting in the
recording of an account 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.
We continuously monitor collections and payments from our students and
maintain an allowance for doubtful accounts for estimated losses resulting from
the inability of our students to make required payments. We determine the
adequacy of this allowance by regularly reviewing the accounts receivable aging
and applying various expected loss percentages to certain student account
receivable categories based on historical bad debt experience. We charge-off
accounts receivable balances deemed to be uncollectible usually after they have
been sent to a collection agency and returned uncollected. While such losses
have historically been within our expectations, there can be no assurance that
we will continue to experience the same level of losses that we have in the
past. Furthermore, because a significant percentage of our revenue is derived
from the Title IV Programs, any legislative or regulatory action 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 the collectability of our accounts receivable and our future operating
results, including a reduction in future revenues and additional allowances for
doubtful accounts.
32
Goodwill
We have made acquisitions in the past that have resulted in the recognition
of goodwill. Prior to April 1, 2001 we amortized the goodwill associated with
these acquisitions using the straight-line method, principally over a forty-year
period and evaluated the realizability of the goodwill periodically to determine
if the carrying amount was recoverable from operating earnings on an
undiscounted basis over their estimated useful lives.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142"). Under the new rules, goodwill (and identifiable intangible assets
deemed to have indefinite lives) will no longer be amortized but will be subject
to annual impairment tests or more frequently if impairment indicators arise.
Other intangible assets will continue to be amortized over their estimated
useful lives.
Effective April 1, 2001, we elected to early adopt SFAS 142. During
September 2001, we completed our transitional impairment test of goodwill in
accordance with SFAS 142. As a result of this test, it was determined that there
was no impairment of goodwill.
In assessing the recoverability of our goodwill, we must make assumptions
regarding estimated future cash flows and other factors to determine the fair
value of the respective asset. If these estimates or their related assumptions
change in the future, we may be required to record impairment charges for this
asset not previously recorded which would adversely impact our operating results
for the period in which we made the determination. There are many assumptions
and estimates underlying the determination of an impairment loss. Another
estimate using different, but still reasonable, assumptions could produce a
significantly different result. Therefore, impairment losses could be recorded
in the future.
Income Taxes
We account for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109") which
requires that deferred tax assets and liabilities be recognized using enacted
tax rates for the effect of temporary differences between the book and tax bases
of recorded assets and liabilities. SFAS No. 109 also requires that deferred tax
assets be reduced by a valuation allowance if it is more likely than not that
some portion or all of the deferred tax asset will not be realized.
As part of the process of preparing our consolidated financial statements
we are required to estimate our income taxes in each of the jurisdictions in
which we operate. This process involves estimating our actual current tax
exposure together with assessing temporary differences resulting from differing
treatment of items for tax and accounting purposes. We also recognize as
deferred tax assets the future tax benefits from net operating and capital loss
carryforwards. We evaluate the realizability of these deferred tax assets by
assessing their valuation allowances and by adjusting the amount of such
allowances, if necessary. Among the factors used to assess the likelihood of
realization are our projections of future taxable income streams, the expected
timing of the reversals of existing temporary differences, and the impact of tax
planning strategies that could be implemented to avoid the potential loss of
future tax benefits. However, changes in tax codes, statutory tax rates or
future taxable income levels could materially impact our valuation of tax
accruals and assets and could cause our provision for income taxes to vary
significantly from period to period.
33
At March 31, 2002, we had deferred tax assets in excess of deferred tax
liabilities of approximately $2.4 million. During the year, we determined that
it is more likely than not that $2.3 million of those assets will be realized
(although realization is not assured), resulting in a valuation allowance of
$100,000 at March 31, 2002.
New Accounting Pronouncements
On December 3, 1999, the Securities Exchange Commission released Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," to provide guidance on the recognition, presentation, and
disclosure of revenue in financial statements. SAB 101 outlines basic criteria
that must be met before we may recognize revenue, including persuasive evidence
of the existence of an arrangement, the delivery of products or services, a
fixed and determinable sales price, and reasonable assurance of collection. SAB
101 became effective beginning the first fiscal quarter of the first fiscal year
beginning after December 15, 1999. Prior to the release of SAB 101, our revenue
recognition policy was in compliance with accounting principles generally
accepted in the United States of America. Effective April 1, 2000, we
implemented SAB 101 and changed the method by which we recognize revenue for
laboratory and registration fees charged to a student. In fiscal 2001, we began
recognizing revenue for these fees ratably over the life of an education
program. Previously, we recognized laboratory and registration fees as revenue
at the beginning of our academic term or year, as applicable. We recorded the
cumulative effect of the change in accounting of approximately $564,000, net of
taxes, in the first quarter of fiscal 2001.
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations," and No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 141 and 142"), effective for
fiscal years beginning after December 15, 2001. SFAS 141 requires all business
combinations initiated after June 30, 2001, to be accounted for using the
purchase method and establishes specific criteria for the recognition of
acquired intangible assets apart from goodwill. Under SFAS 142, goodwill is no
longer subject to amortization over its useful life. Rather, goodwill will be
subject to, at least, an annual assessment for impairment by applying a
fair-value-based test. Other intangible assets will continue to be amortized
over their useful lives. Whitman elected to adopt the provisions of SFAS 141 and
142 effective April 1, 2001. Application of the nonamortization provision of
SFAS 142 resulted in an increase in net income of $162,000, net of taxes, for
the year ended March 31, 2002. During September 2001, the Company completed its
transitional impairment test of goodwill in accordance with SFAS 142. As a
result of this test, it was determined that there was no impairment of goodwill.
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 requires that one
accounting model be used for long-lived assets to be disposed of by sale and
broadens the presentation of discontinued operations to include more disposal
transactions. SFAS 144 supercedes FASB Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets to Be Disposed Of" ("SFAS 121") and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual, and Infrequently Occurring Events and
Transactions" ("APB 30") for the disposal of a segment of a business. However,
SFAS 144 retains the fundamental provisions of SFAS 121 for recognition and
measurement of the impairment of long-lived assets to be held and used and the
measurement of long-lived assets to be disposed of by sale. SFAS 144 also
retains the requirement under APB 30 to report discontinued operations
separately from continuing operations and extends that reporting to a component
of an entity that either has been disposed of or is classified as held for sale.
The provisions of SFAS 144 are effective for financial statements issued for
fiscal years beginning after December 15, 2001, and interim periods within those
fiscal years. We do not expect the adoption of SFAS 144 to have a significant
impact on our financial position or results of operations.
34
In April 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections"
("SFAS 145"). SFAS 145 updates, clarifies and simplifies existing accounting
pronouncements. While the technical corrections to existing pronouncements are
not substantive in nature, in some instances, they may change accounting
practice. The provisions of this standard related to SFAS No. 13 are effective
for transactions occurring after May 15, 2002. All other provisions of this
standard must be applied for financial statements issued on or after May 15,
2002, with early application encouraged. The adoption of SFAS 145 did not have a
material effect on our results of operations or financial position.
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
and capital expenditure term note as described in Note 7 of the Notes to
Consolidated Financial Statements.
At March 31, 2002, our variable rate long-term debt had a carrying value of
$6.0 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, together with the report
of independent Certified Public Accountants, 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.
35
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 2002 Annual Meeting of Shareholders
scheduled for August 2002. 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 2002 Annual Meeting of Shareholders scheduled for August
2002.
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 2002 Annual Meeting of Shareholders scheduled for August
2002.
Item 13. Certain Relationships and Related Transactions.
The information required by Item 13 is incorporated by reference to our
Proxy Statement for our 2002 Annual Meeting of Shareholders scheduled for August
2002.
PART IV
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 Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
36
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
-------- ------------ ------------------
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 Incorporated by reference to our
Report on Form 10-K for the year
ended March 31, 1999.
10.1 Registration Rights Incorporated by reference to our
Agreement dated as Report on Form 8-K dated April 6,
of April 6, 1992 1992.
10.2 Amended and Restated 1986 Incorporated by reference to our
Directors and Consultants Registration Statement on Form S-8
Stock Option Plan filed September 9, 1992.
10.3 1992 Incentive Stock Incorporated by reference to our
Option Plan, as amended Proxy Statement for the Annual
Meeting of Shareholders held on
November 19, 1992.
10.4 Whitman Education Group, Incorporated by reference to our
Inc.1996 Stock Option Form 10-Q for the quarter ended June
Plan, as amended 30, 1997.
10.5 Form of Security Incorporated by reference to our
Agreement, dated May 20, Report on Form 10-K for the year
1999, by each of Colorado ended March 31, 1999.
Technical University,
Inc., MDJB, Inc.,
Sanford-Brown College,
Inc.and Ultrasound
Technical Services, Inc.
in favor of Merrill Lynch
Business Financial
Services, Inc.
10.6 Form of Unconditional Incorporated by reference to our
Guaranty, dated May 20, Report on Form 10-K for the year
1999 by each of Colorado ended March 31, 1999.
Technical University,
Inc., MDJB, Inc.,
Sanford-Brown College,
Inc. and Ultrasound
Technical Services, Inc.
in favor of Merrill Lynch
Business Financial
Services, Inc.
37
10.7 WCMA Loan and Security Incorporated by reference to our
Agreement dated May 20, Report on Form 10-K for the year
1999, by and between ended March 31, 1999.
Merrill Lynch Business
Financial Services, Inc.
and Whitman Education
Group, Inc.
10.8 Term Loan and Security Incorporated by reference to our Report
Agreement dated March 21, on Form 10-K for the year ended
2001, by and between March 31, 2001.
Merrill Lynch Business
Financial Services, Inc.
and Whitman Education
Group, Inc.
10.9 Collateral Installment Incorporated by reference to our Report
Note dated March 21,2001, on Form 10-K for the year ended
by and between Merrill March 31, 2001.
Lynch Business Financial
Services, Inc. and
Whitman Education Group,
Inc.
10.10 Form of Unconditional Incorporated by reference to our Report
Guaranty, dated March 21, on Form 10-K for the year ended
2001 by each of Colorado March 31, 2001.
Technical University,
Inc., CTU Corporation
(f/k/a MDJB, Inc.),
Sanford-Brown College,
Inc. and Ultrasound
Technical Services, Inc.
in favor of Merrill Lynch
Business Financial
Services, Inc.
10.11 Form of Security Incorporated by reference to our Report
Agreement dated March 21, on Form 10-K for the year ended
2001 by each of Colorado March 31, 2001.
Technical University,
Inc., CTU Corporation
(f/k/a MDJB, Inc.),
Sanford-Brown College,
Inc. and Ultrasound
Technical Services,
Inc. in favor of Merrill
Lynch Business Financial
Services, Inc.
10.12 Richard C. Pfenniger Filed herewith.
Stock Option Agreement
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 Filed herewith.
LLP
_______________________
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, 2002.
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/ FERNANDO L. FERNANDEZ
Fernando L. Fernandez
Vice President - Finance,Chief Financial Officer,
Secretary and Treasurer
Dated: June 12, 2002
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 12, 2002
------------------------------
Phillip Frost, M.D.
/s/ RICHARD C. PFENNIGER, JR. Vice Chairman of the Board June 12, 2002
------------------------------ and Chief Executive Officer
Richard C. Pfenniger, Jr. (Principal Executive Officer)
/s/ FERNANDO L. FERNANDEZ Vice President, Chief
------------------------------ Financial Officer, June 12, 2002
Fernando L. Fernandez Secretary and Treasurer
(Principal Financial and
Accounting Officer)
/s/ JACK R. BORSTING, Ph.D. Vice Chairman of the Board June 12, 2002
------------------------------
Jack R. Borsting, Ph.D.
/s/ PETER S. KNIGHT Director June 12, 2002
------------------------------
Peter S. Knight
/s/ LOIS F. LIPSETT, Ph.D. Director June 12, 2002
------------------------------
Lois F. Lipsett, Ph.D.
/s/ RICHARD M. KRASNO, Ph.D. Director June 12, 2002
------------------------------
Richard M. Krasno, Ph.D.
/s/ PERCY A. PIERRE, Ph.D. Director June 12, 2002
------------------------------
Percy A. Pierre, Ph.D.
/s/ NEIL FLANZRAICH Director June 12, 2002
------------------------------
Neil Flanzraich
/s/ A. MARVIN STRAIT, C.P.A. Director June 12, 2002
------------------------------
A. Marvin Strait, C.P.A.
Whitman Education Group, Inc. And Subsidiaries
Consolidated Financial Statements
March 31, 2002
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
-F 1-
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, 2002 and 2001 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended March 31, 2002. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, 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, 2002 and 2001, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended March 31, 2002, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, in 2001 the
Company changed its method of revenue recognition for certain fees effective
April 1, 2000.
/s/ ERNST & YOUNG LLP
Miami, Florida
May 29, 2002
-F 2-
Whitman Education Group, Inc. and Subsidiaries
Consolidated Balance Sheets
March 31,
----------------------------------------
2002 2001
----------------- ------------------
Assets
Current assets:
Cash and cash equivalents...... $ 14,010,878 $ 5,892,779
Accounts receivable, net....... 23,425,589 26,134,128
Inventories.................... 1,633,917 1,516,439
Deferred tax assets, net....... 3,376,197 4,571,905
Other current assets........... 2,273,607 1,551,714
----------------- ------------------
Total current assets...... 44,720,188 39,666,965
Property and equipment, net......... 10,804,417 11,727,583
Deposits and other assets........... 2,296,002 2,183,324
Goodwill, net....................... 9,288,622 9,288,622
----------------- ------------------
Total assets.............. $ 67,109,229 $ 62,866,494
================= ==================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable............... $ 1,716,674 $ 2,356,996
Accrued expenses............... 6,749,811 3,106,146
Current portion of capitalized
lease obligations............ 1,781,501 1,859,195
Current portion of capital
expenditure note payable..... 1,300,000 541,667
Deferred tuition revenue....... 23,269,177 22,500,137
----------------- ------------------
Total current liabilities.. 34,817,163 30,364,141
Capitalized lease obligations....... 2,815,136 3,379,826
Capital expenditure note payable.... 4,658,333 5,958,333
Line of credit...................... - 1,789,897
Deferred tax liability.............. 1,091,960 829,867
Commitments and contingencies
Stockholders' equity:
Common stock, no par value;
authorized 100,000,000 shares;
issued 14,262,648 shares in 2002
and 14,077,266 shares in 2001;
outstanding 13,827,854 shares
in 2002 and 13,642,472 shares in
2001............................ 23,198,153 22,748,613
Additional paid-in capital....... 805,309 674,173
Accumulated deficit.............. (276,825) (2,878,356)
----------------- ------------------
Total stockholders' equity.. 23,726,637 20,544,430
----------------- ------------------
Total liabilities and
stockholders' equity........ $ 67,109,229 $62,866,494
================= ==================
See accompanying notes to financial statements.
-F 3-
Whitman Education Group, Inc. and Subsidiaries
Consolidated Statements of Operations
Year Ended March 31,
----------------------------------------------
2002 2001 2000
------------- ------------- ------------
Net revenues................... $ 91,926,806 $ 79,629,315 $ 77,611,312
Costs and expenses:
Instructional and
educational support......... 58,470,054 52,670,430 51,567,309
Selling and promotional...... 14,425,245 14,312,141 12,314,109
General and
administrative.............. 13,971,977 12,070,282 12,206,227
Legal settlement............. - - 1,550,000
------------- ------------- ------------
Total costs and expenses....... 86,867,276 79,052,853 77,637,645
------------- ------------- ------------
Income (loss) from operations.. 5,059,530 576,462 (26,333)
Other (income) and expenses:
Interest expense............. 932,083 1,142,886 1,128,876
Interest income.............. (369,280) (334,983) (320,508)
Loss on Huron investment....... - 1,164,613 -
------------- ------------- ------------
Income (loss) before income tax
provision (benefit)and
cumulative effect of change
in accounting principle...... 4,496,727 (1,396,054) (834,701)
Income tax provision (benefit). 1,895,196 (538,159) (332,545)
------------- ------------- ------------
Income (loss) before cumulative
effect of change in
accounting principle......... 2,601,531 (857,895) (502,156)
Cumulative effect of change in
accounting principle, net of
tax benefit of $375,981...... - (563,971) -
------------- ------------- ------------
Net income (loss).............. $ 2,601,531 $ (1,421,866) $ (502,156)
============= ============= ============
Basic income (loss) per share:
Income (loss) before cumulative
effect of change in
accounting principle......... $ 0.19 $ (0.07) $ (0.04)
Cumulative effect of change in
accounting principle, net of
tax.......................... - (0.04) -
------------- ------------- ------------
Net income (loss) ............. $ 0.19 $ (0.11) $ (0.04)
============= ============= ============
Diluted income (loss) per share:
Income (loss) before cumulative
effect of change in
accounting principle......... $ 0.18 $ (0.07) $ (0.04)
Cumulative effect of change in
accounting principle, net of
tax.......................... - (0.04) -
------------- ------------- ------------
Net income (loss) ............. $ 0.18 $ (0.11) $ (0.04)
============= ============= ============
Weighted average common shares
outstanding:
Basic........................ 13,696,354 13,370,030 13,392,696
============= ============= ============
Diluted...................... 14,318,169 13,370,030 13,392,696
============= ============= ============
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, 2002, 2001 and 2000
Common Additional
Shares Common Paid-In Accumulated
Outstanding Stock Capital Deficit Total
Balance at ------------------------------------------------------------------
March 31,
1999 13,423,212 $21,907,546 $ 671,536 $ (954,334) $ 21,624,748
Repurchase
of treasury
shares....... (195,100) (370,406) - - (370,406)
Shares issued
in connection
with exercise
of options... 5,000 19,375 2,637 - 22,012
Shares issued
in connection
with stock
purchase
plan......... 31,625 104,530 - - 104,530
Shares issued
in connection
with 401(k)
employee
match........ 147,718 406,226 - - 406,226
Comprehensive
loss:
Net loss..... - - - (502,156) (502,156)
Comprehensive -------------
loss......... (502,156)
Balance at ----------- ------------ --------- ----------- -------------
March 31,
2000 13,412,455 22,067,271 674,173 (1,456,490) 21,284,954
Repurchase of
treasury
shares....... (90,000) (127,935) - - (127,935)
Shares issued
in connection
with exercise
of options... 150,000 418,875 - - 418,875
Shares issued
in connection
with stock
purchase
plan......... 55,865 89,436 - - 89,436
Shares issued
in connection
with 401(k)
employee
match........ 114,152 300,966 - - 300,966
Comprehensive
loss:
Net loss..... - - - (1,421,866) (1,421,866)
Comprehensive -------------
loss......... (1,421,866)
----------- -------------- ----------- ------------ -------------
Balance at
March 31,
2001 13,642,472 22,748,613 674,173 (2,878,356) 20,544,430
Shares issued
in connection
with exercise
of options... 159,350 387,956 131,136 - 519,092
Shares issued
in connection
with stock
purchase
plan ........ 26,032 61,584 - - 61,584
Comprehensive
income:
Net income... - - - 2,601,531 2,601,531
-------------
Comprehensive
income....... - - - - 2,601,531
Balance at ------------ ------------ ---------- ----------- -------------
March 31,
2002 13,827,854 $23,198,153 $ 805,309 $ (276,825) $ 23,726,637
============ ============ ========== =========== =============
See accompanying notes to financial statements.
-F 5-
Whitman Education Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year Ended March 31,
----------------------------------------------------
2002 2001 2000
--------------- ---------------- -----------------
Cash flows from operating
activities:
Net income (loss)........ $ 2,601,531 $ (1,421,866) $ (502,156)
Adjustments to reconcile
net income (loss) to net
cash provided by
operating activities:
Depreciation and
amortization.......... 3,744,494 3,872,444 4,323,135
Bad debt expense....... 4,657,498 3,984,551 3,427,524
Deferred tax provision
(benefit).............. 1,457,801 (941,070) (238,263)
Loss on Huron
investment............ - 1,164,613 -
Changes in operating
assets and liabilities:
Accounts receivable.... (1,948,959) (3,919,876) (3,011,711)
Inventories............ (117,478) (106,990) (67,668)
Other current assets... (722,552) 269,199 (444,007)
Deposits and other
assets................ (130,978) 21,733 (495,412)
Accounts payable....... (640,322) 1,011,258 (157,546)
Accrued expenses....... 3,643,665 (2,324,771) 2,907,971
Income taxes payable... - - (898,664)
Deferred tuition
revenue............... 769,040 910,314 2,264,331
Other liabilities...... - - (474,842)
--------------- ---------------- -----------------
Net cash provided by
operating activities.... 13,313,740 2,519,539 6,632,692
--------------- ---------------- -----------------
Cash flows from investing
activities:
Purchase of property
and equipment........... (1,404,301) (1,964,273) (1,236,511)
Investment in Huron
University.............. - - (1,164,613)
--------------- ----------------- -----------------
Net cash used in
investing activities.... (1,404,301) (1,964,273) (2,401,124)
--------------- ----------------- -----------------
Cash flows from financing
activities:
Proceeds from line of
credit and long-term
debt.................... 163,846 28,382,490 39,000,577
Principal payments on
line of credit,long-term
debt and capital lease
obligations............. (4,535,862) (29,482,091) (41,198,653)
Repurchase of treasury
shares.................. - (127,935) (370,406)
Proceeds from purchases
in stock purchase plan
and exercise of options. 580,676 508,311 126,542
-------------- ----------------- ------------------
Net cash used in
financing activities.... (3,791,340) (719,225) (2,441,940)
-------------- ----------------- ------------------
Increase (decrease) in
cash and cash
equivalents............. 8,118,099 (163,959) 1,789,628
Cash and cash equivalents
at beginning of year.... 5,892,779 6,056,738 4,267,110
-------------- ----------------- ------------------
Cash and cash equivalents
at end of year.......... $ 14,010,878 $ 5,892,779 $ 6,056,738
============== ================= ==================
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,
----------------------------------------------------
2002 2001 2000
---------------- --------------- --------------
Supplemental disclosures
of noncash financing and
investment activities:
Equipment acquired under
capital leases.......... $ 1,398,068 $ 2,054,462 $ 1,749,303
================ =============== ==============
Value of stock issued for
401(k) employee match... $ - $ 300,966 $ 406,226
================ =============== ==============
Supplemental disclosures
of cash flow information:
Interest paid............ $ 932,083 $ 1,142,886 $ 1,128,876
================ =============== ==============
Income taxes paid........ $ 481,176 $ 22,783 $ 1,494,433
================ =============== ==============
See accompanying notes to financial statements.
-F 7-
Whitman Education Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Business
The primary business of Whitman Education Group, Inc. and its subsidiaries
("Whitman" or the "Company") is the operation of proprietary schools offering a
range of graduate, undergraduate and non-degree certificate or diploma programs
primarily in the fields of healthcare, information technology and business.
Whitman's operations are conducted through its three wholly-owned subsidiaries:
Ultrasound Technical Services, Inc. ("UDS"), Sanford Brown College, Inc. ("SBC")
and CTU Corporation, the parent corporation of Colorado Technical University,
Inc. ("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"), 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 wholly-owned subsidiaries. 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
Whitman charges the student for the full contract amount at the beginning
of the course, the academic year, or the academic term, as applicable, resulting
in the recording of an account 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.
Accounts receivable balances are reviewed no less than quarterly for the
purpose of determining appropriate levels of allowance for doubtful accounts.
The Company establishes the allowance for doubtful accounts using an objective
model, which applies various expected loss percentages to certain student
accounts receivable categories based on historical bad debt experience. The
Company charges-off accounts receivable balances deemed to be uncollectible
usually after they have been sent to a collection agency and returned
uncollected. All charge-offs are recorded as reductions in the allowance for
doubtful accounts, with any recoveries of previously written-off accounts
receivable recorded as increases to the allowance for doubtful accounts.
-F 8-
Whitman Education Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
1. Summary of Significant Accounting Policies - (Continued)
The Securities and Exchange Commission ("SEC") issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101") in
December 1999. Prior to the release of SAB 101, the Company's revenue
recognition policy was in compliance with accounting principles generally
accepted in the United States of America. In order to conform with SAB 101,
however, Whitman changed the method by which it recognizes revenue for
laboratory and registration fees charged to a student. Previously, laboratory
and registration fees were recognized as revenue at the beginning of an academic
term or year, as applicable. As of April 1, 2000, Whitman began recognizing
revenue for these fees ratably over the life of an education program and
recorded a cumulative effect of a change in accounting principle of
approximately $564,000, net of taxes of approximately $376,000. The effect of
the change for the year ended March 31, 2001 was to decrease the loss before the
cumulative effect of a change in accounting principle by approximately $43,000.
Pro forma net loss and net loss per share amounts for the year ended March 31,
2000, had the new accounting principle been applied retroactively, are
$(483,000) and $(0.04), respectively.
For the three months ended June 30, 2000, September 30, 2000 and December
31, 2000, the Company recognized $614,000, $223,000 and $103,000, respectively,
in revenue that was included in the cumulative effect adjustment as of April 1,
2000. The effect of recognizing that revenue in the first and second quarter was
to decrease the net loss by approximately $369,000 and $134,000, respectively,
and to increase net income in the third quarter by approximately $61,000 (all
net of taxes).
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.
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. Depreciation
expense amounted to approximately $3,726,000, $3,576,000 and $3,954,000 for the
years ended March 31 2002, 2001, and 2000, respectively.
-F 9-
Whitman Education Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
1. Summary of Significant Accounting Policies - (Continued)
Goodwill
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations", and No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 141 and 142"), effective for
fiscal years beginning after December 15, 2001. Under the new rules, goodwill
(and intangible assets deemed to have indefinite lives) will no longer be
amortized but will be subject to annual impairment tests, or more frequently if
impairment indicators arise. Other identifiable intangible assets will continue
to be amortized over their estimated useful lives.
Whitman elected to early adopt the provisions of SFAS 141 and 142 effective
April 1, 2001. Prior to the release of SFAS 141 and 142, the Company amortized
the goodwill associated with acquisitions using the straight-line method,
principally over a forty-year period. Application of the nonamortization
provision of SFAS 142 resulted in an increase in net income of $162,000, net of
taxes, for the year ended March 31, 2002. Pro forma net loss and net loss per
basic and diluted share amounts, for the years ended March 31, 2001 and 2000,
had SFAS 142 been applied retroactively, would have been approximately
$(1,251,000) and $(.09) and $(334,000) and $(.02), respectively.
During September 2001, the Company completed its transitional impairment
test of goodwill in accordance with SFAS 142. As a result of this test, it was
determined that there was no impairment of goodwill. As of March 31, 2002 and
2001, accumulated goodwill amortization was approximately $1,295,000.
Impairment of Long-Lived Assets
Whitman accounts for the impairment of long-lived assets under Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets ("SFAS 121"). "SFAS 121 requires impairment losses to be
recorded on long-lived assets used in operations 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. Based on current
circumstances, Whitman does not believe that any impairment indicators are
present.
Income (Loss) Per Common Share
Basic income (loss) before cumulative effect of change in accounting
principle, cumulative effect of change in accounting principle, net of tax and
net income (loss) per common share is computed using the weighted average number
of common shares outstanding during the period. Diluted income (loss) before
cumulative effect of change in accounting principle, cumulative effect of change
in accounting principle, net of tax and net income (loss) per share is computed
using the weighted average number of common and common equivalent shares
outstanding during the period.
-F 10-
Whitman Education Group, Inc. and Subsidiaries
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
$8,573,000, $8,274,000, and $6,862,000 for the years ended March 31, 2002, 2001
and 2000, 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
Whitman has elected, in accordance with the provisions of SFAS No. 123
"Accounting for Stock-Based Compensation" ("SFAS 123") to account for its stock
plans under Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25") and related interpretations. 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.
Stock options granted to non-employees have been accounted for in
accordance with SFAS 123, and Emerging Issues Task Force Bulletin 96-18,
"Accounting for Equity Instruments that are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services". Accordingly,
compensation expense is determined using the fair value of the consideration
received or the fair value of the equity instruments issued, whichever is more
reliably measured. For the years ended March 31, 2002, 2001 and 2000, no
compensation expense was incurred.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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.
-F 11-
Whitman Education Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
1. Summary of Significant Accounting Policies - (Continued)
New Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," ("SFAS 144"), which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS 144 is effective for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years, with early adoption encouraged. The
provisions of SFAS 144 generally are to be applied prospectively. Whitman does
not expect the adoption of SFAS 144 to have a material effect on its results of
operations or financial position.
In April 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections"
("SFAS 145"). SFAS 145 updates, clarifies and simplifies existing accounting
pronouncements. While the technical corrections to existing pronouncements are
not substantive in nature, in some instances, they may change accounting
effective for transactions occurring after May 15, 2002. All other provisions of
this standard must be applied for financial statements issued on or after May
15, 2002, with early application encouraged. The adoption of SFAS No. 145 did
not have a material effect on Whitman's results of operations or financial
position.
Segment Reporting
Whitman complies with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards
-F 12-
Whitman Education Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
1. Summary of Significant Accounting Policies - (Continued)
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.
Reclassification
Certain prior year amounts have been reclassified to conform to the fiscal
year 2002 presentation. These changes had no effect on previously reported net
loss.
2. Divestiture of Huron University
In August 1999, CTU completed the divestiture of its Huron University
campus ("Huron") in Huron, South Dakota to a newly formed entity ("Newco")
capitalized by several investors and members of Huron's existing management. In
connection with the transaction, CTU contributed the operating assets of Huron
and $550,000 to Newco, and Newco issued to CTU units of limited liability
company membership interests and assumed certain liabilities of Huron. The
liabilities assumed by Newco included the principal balance due of $1.1 million
under a loan agreement. The loan was guaranteed by Whitman, which had a first
priority security interest in certain assets of Newco, and had a maturity date
of July 2005.
Under the terms of the transaction, the units of limited liability company
membership interests equaled 19.9% of the total outstanding limited liability
company membership interests in Newco. CTU's units included a liquidation
preference right and the same voting privileges as all other units sold by
Newco. Additionally, Whitman purchased for $110,000 a warrant to acquire 20
units of limited liability company interests in Newco, which would have
represented approximately 4% of the total outstanding limited liability company
membership interests in Newco upon exercise. The warrant had a term of five
years and had an exercise price of $10,000 per unit. The investment in Newco was
recorded at a cost of approximately $1.2 million, which then approximated fair
value. No gain or loss was recorded on the transaction. The effective date of
the transaction for accounting, tax, and financial statement purposes was
September 1, 1999. The terms of the transaction were established through an
arm's length negotiation.
CTU's remaining investment in Huron was accounted for under the cost method
due to CTU's inability to exercise significant influence over the operating and
financial policies of Newco. CTU's inability to exercise significant influence
over the operating and financial policies of Newco was based on its limited
ownership of only 19.9% of the voting interests of Newco and other facts and
circumstances related to its investment in Newco. For instance, Whitman had no
representation on the board of managers of Newco, no participation in Newco's
policymaking processes, no technological dependency and no support of Newco's
administrative or accounting services. Additionally, the president of Newco
owned 52% of the voting interests of Newco and as the manager of Newco, had the
authority to act on its behalf without consent from other members.
-F 13-
2. Divestiture of Huron University - (Continued)
During the year ended March 31, 2001, Newco had a net loss of approximately
$1,884,000.
The following unaudited pro forma information excludes the results of
operations of Huron University for the fiscal year ended March 31, 2000 as if
Whitman's sale of Huron University to Newco had occurred at April 1, 1999. This
pro forma information does not purport to be indicative of the results that
actually would have occurred if the disposition had been effective on the dates
indicated.
Net revenues......................................... $76,172,000
Net income........................................... $ 157,000
Basic and diluted net income per share............... $ .01
On April 26, 2001, a not-for-profit college acquired the assets and assumed
certain liabilities of Newco. This transaction released Whitman from any further
obligations associated with Huron, including its guarantee of the $1.1 million
loan assumed by Newco. Because Whitman did not receive any proceeds from this
transaction, CTU recorded a one-time non-recurring non-cash charge of
approximately $1,165,000, or $0.05 per diluted share, in the fiscal quarter
ended March 31, 2001 relating to its minority ownership of Newco.
In connection with the 1999 divestiture of Huron, Whitman provided a loan
of $500,000 to the former president of Huron for the purpose of investing such
funds in Newco. The loan is due in August 2005 with monthly interest payments at
the prime rate which commenced in October 1999. The loan is secured by 80,000
shares of Whitman common stock owned by the former president of Huron. The
not-for-profit college that acquired Newco has also agreed to guarantee this
loan. In October 2001, the loan went into default by virtue of the failure of
the required monthly interest payments to be made and Whitman accelerated all
amounts due under the loan. In May 2002, Whitman received a default judgment
against the not-for-profit college that guaranteed the loan and commenced
collection efforts to enforce the judgment. Whitman believes the collateral of
80,000 shares of Whitman common stock is adequate and has elected not to take
action against the former president of Huron at this time.
3. Financial Aid Programs
Approximately 65% of Whitman's net revenues collected during the fiscal
year ended March 31, 2002 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, 2002.
-F 14-
Whitman Education Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
4. Accounts Receivable
A summary of activity for the allowance for doubtful accounts is as
follows:
Year Ended March 31,
------------------------------------------------------
2002 2001 2000
------------------ ------------------- --------------
Balance at beginning
of year............... $ 6,768,688 $ 5,672,824 $ 5,593,888
Charged to expense..... 4,657,498 3,984,551 3,427,524
Accounts charged-off
during the year, net
of recoveries......... (4,595,112) (2,888,687) (3,348,588)
------------------ ------------------ ---------------
Balance at end of year. $ 6,831,074 $ 6,768,688 $ 5,672,824
================== ================== ===============
5. Property and Equipment
Property and equipment consist of the following:
Estimated March 31,
Useful Lives -----------------------------------
(In Years) 2002 2001
------------ ------------------ ---------------
Equipment.............. 2-5 $ 18,104,898 $ 16,841,757
Leasehold improvements. 1-10 6,293,753 5,633,959
Furniture and fixtures. 7-10 4,842,630 4,402,911
Other.................. 5 3,049,023 2,653,827
------------------- ---------------
32,290,304 29,532,454
Less accumulated
depreciation and
amortization.......... (21,485,887) (17,804,871)
------------------- ---------------
$ 10,804,417 $ 11,727,583
=================== ===============
6. Income Taxes
The components of the income tax provision (benefit) are as follows:
Year ended March 31,
-------------------------------------------------
2002 2001 2000
----------- --------------- ---------------
Current................ $ 437,395 $ 26,930 $ (94,282)
Deferred............... 1,457,801 (941,070) (238,263)
----------- --------------- ---------------
Total income tax
provision (benefit)... $1,895,196 $ (914,140) $ (332,545)
=========== =============== ===============
-F 15-
Whitman Education Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
6. Income Taxes - (Continued)
The differences between the federal statutory income tax rate and the
effective income tax rate are summarized below:
Year ended March 31,
----------------------------------------
2002 2001 2000
------------- ------------ -----------
Statutory tax rate...................... 34.0% (34.0)% (34.0)%
State income taxes, net................. 6.4 (1.9) (5.7)
Permanent differences................... (1.3) (1.5) 6.6
Change in valuation allowance........... 2.2 - (5.9)
Other, net.............................. 0.8 (1.7) (0.9)
------------- ------------ -----------
Effective tax rate...................... 42.1% (39.1)% (39.9)%
============= ============ ===========
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,
---------------------------------
2002 2001
----------------- ---------------
Current deferred tax assets:
Accrued expenses....................... $ 366,000 $ 498,000
Reserves and allowances................ 2,274,000 2,278,000
Unrealized depreciation in
investments........................... 96,000 404,000
Deferred income........................ 98,000 87,000
Tax credits............................ 408,000 420,000
Net operating loss carryforwards....... 295,000 732,000
Capital loss carryfowards.............. 167,000 231,000
----------------- ---------------
Total current deferred tax assets before
valuation allowance.................... 3,704,000 4,650,000
Valuation allowance.................... (100,000) -
----------------- ---------------
Total current deferred tax assets....... 3,604,000 4,650,000
----------------- ---------------
Current deferred tax liability:
Prepaid expenses and other............. (228,000) (78,000)
----------------- ---------------
Total current deferred tax liability.... (228,000) (78,000)
----------------- ---------------
Total current deferred tax assets, net.. $ 3,376,000 $4,572,000
================= ===============
Non-current deferred tax liability:
Amortization of goodwill................ $(1,092,000) $ (830,000)
================= ===============
-F 16-
Whitman Education Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
6. Income Taxes - (Continued)
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 $100,000 valuation allowance at
March 31, 2002 is necessary to reduce the deferred tax assets to the amount that
will more likely than not be realized. The valuation allowance increased by
$100,000 in fiscal 2002, increased by $0 in fiscal 2001, and decreased by
$50,000 in fiscal 2000. At March 31, 2002, Whitman has no remaining available
federal net operating loss carryforwards. At March 31, 2002, Whitman has
available various state net operating loss carryforwards approximating
$8,243,000 expiring in the years 2011 through 2022. Whitman has approximately
$444,000 in capital loss carryforwards which begin to expire in 2004. Whitman
also has an alternative minimum tax credit of approximately $408,000 which
carries forward indefinitely.
7. Debt
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 contains certain covenants, that among other
things, require maintenance of minimum levels of tangible net worth and net cash
flow. The line of credit also contains a restriction that limits Whitman's
ability to acquire other entities at a cost in excess of $1.5 million.
On March 21, 2001, Whitman restructured the $8.5 million line of credit
into a $6.5 million capital expenditure term note and a $2.0 million line of
credit. The $6.5 million capital expenditure term note was established to
provide long term capital expenditure financing for Whitman's investments in
property, plant and equipment acquired in prior years. The capital expenditure
term note is payable in seven monthly installments of interest only commencing
on April 21, 2001, and thereafter 52 monthly installments of principal and
interest, with a balloon payment due April 2006. The capital expenditure term
note is collateralized by property, plant and equipment and all other assets of
Whitman. The line of credit is also secured by all of the assets of Whitman. The
interest rate of the capital expenditure term note and the line of credit is
variable and is equal to the sum of 2.90% and the 30-day commercial paper rate.
At March 31, 2002 and 2001, the interest rates were 4.70% and 6.92%,
respectively. The capital expenditure term note and the line of credit contain
certain covenants, that among other things, require the maintenance of minimum
levels of tangible net worth and net cash flow. The capital expenditure term
note and line of credit also contain a restriction that limits Whitman's ability
to acquire other entities at a cost in excess of $1.5 million. At March 31,
2002, Whitman was in compliance with the covenants of the term note and the line
of credit. At March 31, 2002, the outstanding balance of the line of credit was
$0 and letters of credit of $0.5 million were outstanding under the facility
which reduced the amount available for borrowing. The maturity date of the line
of credit is October 31, 2002.
-F 17-
Whitman Education Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
7. Debt - (Continued)
Aggregate maturities of long-term debt at March 31, 2002 are as follows:
Fiscal Year
2003....................... $ 1,300,000
2004....................... 1,300,000
2005....................... 1,300,000
2006....................... 1,300,000
2007....................... 758,333
-----------------
Total...................... $ 5,958,333
=================
8. 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.
During 2002 and 2001, Whitman entered into leases totaling approximately
$1,398,000 and $2,054,000, respectively, in connection with the purchase of
equipment. The amortization of leased assets of approximately $1,976,000,
$1,225,000 and $993,000 for the years ended March 31, 2002, 2001, and 2000,
respectively, is included in depreciation and amortization. The following is a
summary of assets held under capital leases which are included in property and
equipment at March 31:
2002 2001
-------------------- -----------------
Equipment..................... $ 10,311,374 $ 9,533,844
Furniture and fixtures........ 1,816,294 1,417,300
Software...................... 464,731 456,725
-------------------- -----------------
12,592,399 11,407,869
Less accumulated amortization. (7,740,480) (6,002,726)
-------------------- -----------------
$ 4,851,919 $ 5,405,143
==================== =================
-F 18-
Whitman Education Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
8. Capitalized Lease Obligations - (Continued)
Future minimum lease payments under capital leases at March 31, 2002 are as
follows:
Fiscal Year
2003..................................... $ 2,140,447
2004..................................... 1,483,683
2005..................................... 1,052,477
2006..................................... 579,565
2007..................................... 43,352
------------------
Total minimum lease payments............. 5,299,524
Less amount representing interest
(8%-13%)................................. (702,887)
Less amount classified as current........ (1,781,501)
------------------
$ 2,815,136
==================
9. 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 $305,000, $301,000 and $329,000 for the years
ended March 31, 2002, 2001 and 2000, respectively. In April 2002, Whitman
distributed 66,212 shares of common stock to its employees for the fiscal year
2002 matching contribution.
-F 19-
Whitman Education Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
10. Stock Option Plans
Whitman has adopted stock option plans under which employees, directors and
consultants of Whitman may be issued options covering up to 4,715,250 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 and a maximum term of
7-10 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, 1999.... $ 5.24 3,518,850
Granted....................... 3.68 575,500
Exercised..................... 3.88 (5,000)
Cancelled..................... 5.01 (274,139)
----------------
Outstanding March 31, 2000.... 4.16 3,815,211
Granted....................... 2.25 708,150
Exercised..................... 2.79 (150,000)
Cancelled..................... 6.49 (411,811)
----------------
Outstanding March 31, 2001.... 3.83 3,961,550
Granted....................... 3.62 659,500
Exercised..................... 2.43 (159,350)
Cancelled..................... 3.68 (352,763)
----------------
Outstanding March 31, 2002.... 3.86 4,108,937
================
As required by SFAS 123, pro forma information regarding net income (loss)
and income (loss) per share has been determined as if Whitman had accounted for
its employee stock options under the fair value method of SFAS 123. 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 fiscal
years 2002, 2001 and 2000, respectively: risk-free rates of 2.9%, 5.7% and 6.1%;
no dividend yields for the three years; volatility factors of the expected
market price of Whitman's common stock of 0.394, 0.614, and 0.593; and a
weighted-average expected life of the option of 7.0 years for the three years.
The weighted-average fair value of the stock options granted in fiscal years
2002, 2001 and 2000 was $1.65, $1.49 and $2.38, respectively.
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 traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, the
-F 20-
Whitman Education Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
10. Stock Option Plans - (Continued)
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 2002, 2001 and 2000 pro forma information follows:
2002 2001 2000
-------------- ------------- ------------
Net income (loss)................ $ 1,743,460 $(2,777,748) $(2,150,937)
Net income (loss) per share:
Basic........................... $ .13 $ (.21) $ (.16)
Diluted......................... $ .12 $ (.21) $ (.16)
The exercise price of options outstanding at March 31, 2002 ranged as
follows:
Number Weighted Average Remaining
Exercise Plan Of Options Contractual Life (Years)
------------------ ------------- ---------------------------
$1.50 - $2.25 815,650 3.4
$2.26 - $3.38 1,067,625 5.0
$3.39 - $5.06 1,201,750 4.0
$5.07 - $7.59 948,912 2.7
$7.60 - $11.39 75,000 1.6
-------------
4,108,937
=============
Stock options totaling 3,339,849, 3,162,645, and 2,774,452 were exercisable
at the end of fiscal 2002, 2001 and 2000, respectively. Common stock reserved
for issuance under the stock option plans aggregate to 4,715,250 shares at March
31, 2002.
11. Related Party Transactions
Whitman purchases certain textbooks and materials for resale to its
students from an entity that is 40% owned by Whitman's former president and
Chief Operating Officer. In the fiscal years ended March 31, 2002, 2001 and
2000, Whitman purchased approximately $147,900, $97,500, and $148,800,
respectively, 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. Whitman's
Chairman is also Chairman and Chief Executive Officer of IVAX Corporation and
another of our directors is also a Vice Chairman and President of IVAX
-F 21-
Whitman Education Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Corporation. Whitman's Vice Chairman and Chief Executive Officer is also a
director of IVAX Corporation. Whitman incurred rent expense of approximately
$284,000, $146,000 and $146,000 for fiscal years ended March 31, 2002, 2001 and
2000, respectively.
12. Commitments and Contingencies
Whitman leases classroom and office space under operating leases in various
buildings where the schools are located. Certain of Whitman's operating leases
contain rent escalation clauses. Future minimum annual rental commitments under
noncancellable operating leases as of March 31, 2002 are as follows:
Fiscal Year
2003........................................$ 5,801,936
2004......................................... 5,110,992
2005......................................... 4,852,227
2006......................................... 4,358,533
2007......................................... 3,248,761
Thereafter................................... 7,622,561
--------------
Total minimum lease payments................$30,995,010
==============
Rent expense during fiscal 2002, 2001 and 2000 was approximately
$6,080,000, $6,035,000, and $5,766,000, respectively.
In fiscal 2002 Whitman entered into financing agreements to acquire capital
equipment totaling approximately $1,398,000. In fiscal 2002, approximately
$1,398,000 of capital equipment was financed under these agreements and are
included under capitalized lease obligations. At March 31, 2002, Whitman had
$463,000 of letters of credit outstanding.
On May 4, 2000, Whitman, in conjunction with its insurance carriers,
reached an agreement in principle to settle the class action lawsuit, Cullen,
et. al. v. Whitman Education Group, Inc., et. al. The settlement agreement
covers students who attended Whitman's Ultrasound Diagnostic Schools any time
from August 1, 1994 to August 1, 1998 in either the general ultrasound program
or the non-invasive cardiovascular technology program. The settlement agreement
provided for payment of $5,970,000 in cash and approximately $1,346,000 in loan
forgiveness of delinquent obligations owed by students to Whitman's Ultrasound
Diagnostic schools. The actual cash payment of approximately $5,970,000 was
funded by Whitman contributing $1,170,000 and Whitman's insurance carriers
contributing $4,800,000. Whitman also contributed $1,346,000 in debt
forgiveness, all of which was fully reserved or previously written-off at March
31, 2000. Whitman also provided for a reserve for potential claims from members
of the class action lawsuit who elected not to participate in the settlement.
This reserve was estimated based on historical student settlement experience. As
a result of the cash settlement payment and estimated reserves, Whitman recorded
-F 22-
Whitman Education Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
12. Commitments and Contingencies - (Continued)
a one-time, after-tax charge to earnings of approximately $930,000, or $.07 per
share in the fiscal quarter ended March 31, 2000. Although management denied the
allegations of the lawsuit, and believed the key allegations to be without
merit, Whitman entered into the settlement to resolve litigation in a
satisfactory business manner, to avoid disruption of Whitman's business, and to
allow Whitman to pursue its mission of providing quality education to its
students.
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 such litigation, 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.
13. 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 and the capital expenditure note payable approximate fair
value because the interest rate is tied to a quoted variable index.
-F 23-
14. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
For the Year Ended March 31,
-----------------------------------------------
2002 2001 2000
-------------- ------------- ----------------
Numerator:
Income (loss) before cumulative
effect of change in accounting
principle....................... $ 2,601,531 $ (857,895) $ (502,156)
Cumulative effect of change in
accounting principle, net of
tax............................. - (563,971) -
--------------- ------------ ---------------
Net income (loss)............... $ 2,601,531 $(1,421,866) $ (502,156)
=============== ============ ===============
Denominator:
Denominator for basic earnings
per share - weighted average
shares........ 13,696,354 13,370,030 13,392,696
Effect of dilutive securities:
Employee stock options......... 621,815 - -
--------------- ------------ ---------------
Dilutive potential common
shares......................... 621,815 - -
Denominator for diluted
earnings per share -
adjusted weighted -
average shares and
assumed conversions........ 14,318,169 13,370,030 13,392,696
=============== ============ ===============
Basic income (loss) before
cumulative effect of change in
accounting principle........... $ 0.19 $ (0.07) $ (0.04)
Cumulative effect of change in
accounting principle, net of
tax............................ - (0.04) -
--------------- ------------ ---------------
Basic net income (loss) per
share.......................... $ 0.19 $ (0.11) $ (0.04)
=============== ============ ===============
Diluted income (loss) before
cumulative effect of change in
accounting principle............ $ 0.18 $ (0.07) $ (0.04)
Cumulative effect of change in
accounting principle, net of
tax............................. - (0.04) -
--------------- ------------ ---------------
Diluted net income (loss)
per share....................... $ 0.18 $ (0.11) $ (0.04)
=============== ============ ===============
15. Segment and Related Information
Whitman is organized into two reportable segments, the University Degree
Division and the Associate Degree Division, through three wholly-owned
subsidiaries. The University Degree Division primarily offers bachelor, master
and doctorate degrees through CTU. The Associate Degree Division offers
associate degrees and diplomas or certificates through SBC and UDS.
-F 24-
15. Segment and Related Information - (Continued)
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,
---------------------------------------------
2002 2001 2000
------------- ------------- -------------
Net revenues:
Associate Degree Division...... $71,839,438 $60,084,422 $ 58,473,078
University Degree Division..... 20,087,368 19,544,893 19,138,234
------------- ------------- -------------
Total.......................... $91,926,806 $79,629,315 $ 77,611,312
============= ============= =============
Income (loss) before income
tax provision (benefit) and
cumulative effect of change in
accounting principle:
Associate Degree Division...... $ 6,524,956 $ (446,768) $ (307,690)
University Degree Division..... 541,137 1,204,701 1,757,834
Other.......................... (2,569,366) (2,153,987) (2,284,845)
------------- ------------- -------------
Total.......................... $ 4,496,727 $(1,396,054) $ (834,701)
============= ============= =============
Capital expenditures:
Associate Degree Division...... $ 1,711,502 $ 2,819,719
University Degree Division.... 1,087,837 1,191,542
Other.......................... 3,030 7,474
------------- -------------
Total.......................... $ 2,802,369 $ 4,018,735
============= =============
March 31,
------------- -------------
2002 2001
------------- -------------
Total assets:
Associate Degree Division...... $52,696,673 $49,157,580
University Degree Division..... 10,773,292 11,895,647
Other.......................... 3,639,264 1,813,267
------------- -------------
Total.......................... $67,109,229 $62,866,494
============= =============
-F 25-
16. Quarterly Financial Data (Unaudited)
Summarized unaudited quarterly financial data for the fiscal years ended
March 31, 2002 and 2001 are as follows:
2002
---------------------------------------------------------------
First Second Third Fourth
-------------- -------------- ------------- ------------
Net revenues $ 20,518,116 $ 21,384,299 $ 24,369,149 $25,655,242
Income from
operations 320,976 211,418 2,338,916 2,188,220
Income before
cumulative
effect of
change in
accounting
principle 97,027 29,627 1,328,886 1,145,991
Net income 97,027 29,627 1,328,886 1,145,991
Net income per
share:
Basic $ .01 $ .00 $ .10 $ .08
Diluted $ .01 $ .00 $ .09 $ .08
2001
---------------------------------------------------------------
First Second Third Fourth
-------------- -------------- ------------- ------------
Net revenues $ 18,879,430 $ 18,521,239 $ 20,878,235 $21,350,411
(Loss) income
from operations (363,718) (1,266,026) 1,103,990 1,102,216
(Loss) income
before
cumulative
effect of change
in accounting
principle (301,766) (900,583) 518,022 (173,568)
Net (loss) income (865,737) (900,583) 518,022 (173,568)
Net (loss) income
per share before
cumulative
effect of change
in accounting
principle $ (0.02) $ (0.07) $ 0.04 $ (0.01)
Net (loss) income
per share (basic
and diluted) $ (0.06) $ (0.07) $ 0.04 $ (0.01)
-F 26-
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-94200 and Form S-8 No. 33-52588) pertaining to the 1986 Amended
and Restated Directors and Consultants Stock Option Plan, Registration
Statements (Form S-8 No. 33-58068 and Form S-8 No. 33-94230) pertaining to the
1992 Incentive Stock Option Plan, Registration Statements (Form S-8 No.
333-16007, Form S-8 No. 333-67477 and Form S-8 No. 333-67834) pertaining to the
1996 Stock Option Plan, Registration Statement (Form S-8 No. 333-42109)
pertaining to the Employee Stock Purchase Plan and Registration Statement (Form
S-8 No. 333-67473) pertaining to the Richard C. Pfenniger, Jr. Stock Option Plan
of Whitman Education Group, Inc. of our report dated May 29, 2002, with respect
to the consolidated financial statements of Whitman Education Group, Inc.
included in this Annual Report (Form 10-K) for the year ended March 31, 2002.
/s/ ERNST & YOUNG LLP
Miami, Florida
June 7, 2002