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, 2003 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]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
As of May 15, 2003, there were 15,171,730 shares of Common Stock
outstanding.
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant on September 30, 2002 computed by reference
to the price at which the common equity was last sold as of that date was
approximately $55,688,000.
DOCUMENTS INCORPORATED BY REFERENCE: None
1
WHITMAN EDUCATION GROUP, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED MARCH 31, 2003
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
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters........................................................ 21
Item 6. Selected Financial Data........................................ 23
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 24
Item 7A. Quantitative and Qualitative Disclosures about Market Risk...... 34
Item 8. Financial Statements and Supplementary Data..................... 34
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................ 34
PART III
Item 10. Directors and Executive Officers of the Registrant............... 35
Item 11. Executive Compensation........................................... 37
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Shareholder Matters.................................. 39
Item 13. Certain Relationships and Related Transactions................... 41
Item 14. Controls and Procedures.......................................... 41
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form
8-K.............................................................. 42
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 the 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 fourteen Ultrasound Diagnostic
Schools.
General
We are a proprietary provider of career-oriented postsecondary education.
Through three wholly-owned subsidiaries, we currently operate 22 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 9,000 students.
We are organized into a University Degree Division and an Associate Degree
Division. The University Degree Division primarily offers doctorate, master and
bachelor degrees through Colorado Tech. The Associate Degree Division primarily
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.
Merger Agreement
On March 26, 2003, we signed a definitive merger agreement with Career
Education Corporation ("CEC") under which CEC will acquire all of our
outstanding shares of common stock for a combination of cash and CEC stock.
Under the terms of the agreement, we will become a wholly-owned subsidiary of
CEC and our shareholders will receive $6.00 in cash and shares of CEC common
stock valued at approximately $8.25 for a total of approximately $14.25 for each
share of our common stock. The stock portion of the consideration is subject to
adjustment based on CEC's average closing share price during a specified period
prior to closing. The value of the stock component based on such average closing
price will not be less than $7.55, nor more than $8.95, unless we and CEC agree
otherwise. The estimated purchase price, including the estimated fair value of
CEC common stock to be issued to our shareholders, cash to be paid to our
shareholders, estimated cash to be paid to our option holders and estimated
acquisition costs, is expected to be approximately $254.3 million.
3
The merger agreement contains certain termination provisions, including,
among others, the failure to receive shareholder approval and the failure to
obtain required regulatory approvals. In addition, we may elect to terminate the
merger agreement if the value of the CEC common stock that our shareholders will
receive in the merger would be less than $7.55 per share of our common stock,
subject to CEC's right to agree to provide our shareholders with $7.55 per share
in CEC common stock. Likewise, CEC may elect to terminate the merger agreement
if the adjusted value of the stock consideration would be greater than $8.95 per
share of our common stock, subject to our right to agree to accept $8.95 per
share in CEC common stock.
A vote of a majority of our outstanding common stock will be required to
approve the merger. The transaction is expected to close during the beginning of
the third quarter of the 2003 calendar year, and is subject to customary closing
conditions including regulatory approvals and the approval of our shareholders.
There can be no assurance that the conditions to the merger will be satisfied or
that the merger will close in the expected time frame or at all.
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. In February 2002, UDS closed its campus in Pittsburgh,
Pennsylvania. UDS currently operates 14 campuses.
In 1994, we also began to expand the scope of our business to offer a
broader range of certificate programs in our UDS schools. Beginning in late
1994, UDS began offering cardiovascular technology and medical assisting
programs at selected campuses. In June 1998, at selected campuses, UDS began
offering a surgical technology program and in June 1999, UDS began offering a
medical billing and coding specialist program.
In December 1994, we acquired Sanford-Brown, a nationally-accredited
college founded in 1866, which offered associate degree programs in business,
information technology and healthcare. Sanford-Brown operates three campuses in
and around St. Louis, Missouri, one in Kansas City, Missouri and one in Granite
City, Illinois. In October 2002, we expanded Sanford-Brown's program offerings
to include bachelor degree programs in business, information technology
management and healthcare administration.
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.
4
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.
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".
In July 2000, we began an online campus at Colorado Tech. Initially, we
offered internet delivered courses to students enrolled at our Colorado Tech
campuses. In 2003, we began offering our first full online degree - a Master's
of Science degree in Management.
The Postsecondary Education Market
The postsecondary education market in the United States is estimated to
exceed $250 billion annually, with more than 15.7 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 to over 18 million
students by the year 2012. 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 2012. 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 49% in 1980
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
6.0 million in 2000, 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 it is projected that by the year 2010, 85% of
the jobs will require 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 1999, a full-time worker over the age of 24
with an associate degree earned an average of 26% more per year than a
comparable worker with only a high school diploma, and a full-time worker over
the age of 24 with a bachelor degree earned an average of 72% more per year than
a comparable worker with only a high school diploma.
5
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.
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 Colorado Tech's online
programs. In July 2000, Colorado Tech began offering internet delivered higher
education courses. Initially, it focused on master's level courses and
professional certificate programs. In December 2002, Colorado Tech received
approval from its institutional accrediting body to offer a full online Master's
of Science Degree in Management. This program is offered with concentrations in
Information Technology Project Management, Information Systems Security, Project
Management, Criminal Justice, Information Technology and Business
Transformation, and Supply Chain Management. In 2003, we initiated a marketing
program that is designed to attract potential students to Colorado Tech's online
program.
In the intermediate and longer term, we intend to establish additional 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. In fiscal 2004, we
anticipate opening a new UDS campus.
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 institutional presidents who
supervise campus managers who oversee the daily operations of the individual
campuses. 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.
6
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.
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 primarily 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 and bachelor degrees in various allied health fields,
business, and computer technology and similar professional certificate programs.
UDS is also nationally-accredited and provides professional certificate programs
in diagnostic medical ultrasound, cardiovascular technology, medical assisting,
medical billing and coding and surgical technology.
For financial and other information relating to our two divisions see Note
16 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
adult learners 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 DEGREE PROGRAMS ASSOCIATE DEGREE PROGRAMS
Computer Science e-Business
Management Information Technology
Network Systems and Security
MASTER DEGREE PROGRAMS Electronics Technology
Computer Science Communication Systems Technology
Computer Engineering Business Administration
Electrical Engineering Accounting
Management Medical Assisting
Business Administration Criminal Justice
BACHELOR DEGREE PROGRAMS CERTIFICATE PROGRAM AREAS
Computer Engineering Technology/Business Integration
Computer Science Software Engineering
e-Business Information Security
Information Technology Programming
Information Technology Management Project Management
Electrical Engineering Networking
Business Administration Information Technology
Criminal Justice Finance & Accounting
Accounting Computer & Electrical Engineering
Finance e-Business
Project Management Criminal Justice
Business & Management
Business Fundamentals
ASSOCIATE DEGREE DIVISION
Sanford-Brown College
--------------------------------------------------------------------------------
BACHELOR DEGREE PROGRAMS PROFESSIONAL DIPLOMA PROGRAMS
Business Administration Network Administration
Information Technology Management Computer Support Specialist
Healthcare Administration Computer and Internet Programming
Practical Nursing
Medical Assistant
ASSOCIATE DEGREE PROGRAMS Accounting
Network Administration Office Technology
Computer and Internet Programming Medical Coding/Billing Specialist
Respiratory Therapy Business Administration
Radiography Administrative Support
Nursing
Health Information Technology CERTIFICATE PROGRAM
Business Administration Network Specialist
Office Administration
Paralegal Studies
Administrative Support
Ultrasound Diagnostic School
--------------------------------------------------------------------------------
OCCUPATIONAL ASSOCIATE DEGREE PROFESSIONAL DIPLOMA PROGRAMS
PROGRAMS (Florida campuses only) Diagnostic Medical Sonography
Diagnostic Medical Sonography Non-Invasive Cardiovascular Technology
Non-Invasive Cardiovascular Technology Medical Assistant
Surgical Technology
Medical Billing and Coding Specialist
8
The following table provides information as of April 30, 2003 regarding the
programs offered by each of our schools:
LENGTH OF
TYPE OF NUMBER OF NUMBER OF PROGRAM
SCHOOL PROGRAM LOCATIONS STUDENTS (IN MONTHS1)
--------------- ------------- ------------- ---------- ------------
University Degree
Division
-----------------
Colorado Technical
University Doctorate 1 52 36
Master 3 690 18-21
Bachelor 3 1,482 36
Associate 3 399 18
Non-degree 3 152 Varies
----
School total 2,775
======
Associate Degree
Division
----------------
Sanford-Brown
College Bachelor 2 58 24
Associate 4 912 14-36
Non-degree 5 857 7-14
----
School total 1,827
======
Ultrasound Diagnostic
School Non-degree 14 5,182 8-19
Occupational 3 215 17
associate ----
School total 5,397
======
Total 9,999
======
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.
Tuition and fees for our programs vary depending on the nature of the
program and the location of the school. Based on rates expected to be
implemented during the current fiscal year, tuition and fees for the non-degree
programs in the Associate Degree Division range from approximately $12,000 for
the eight-month medical assistant program offered by UDS to approximately
$30,000 for the longest associate degree programs offered by Sanford-Brown. At
Colorado Tech, tuition and fees range from approximately $41,000 to $45,000 for
the bachelor degree programs, $17,000 to $18,000 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.
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 placement
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 intends to expand its internet-based courses and
programs and will be offering entire degree programs over the internet. As
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) the United States
Department of Education because the schools are certified to participate in
federal financial aid programs (the "Title IV Programs") authorized under the
Higher Education Act of 1965, as amended. The loss of authorization to operate
in states in which we currently operate, the withdrawal of accreditation from
our schools, the loss of our schools' accreditations, or the loss of the
schools' eligibility to participate in the 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. A limited number of
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 the 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 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 itself or the program into compliance, place the
institution on probation or a similar warning status, or direct the institution
to show cause why its accreditation should not be revoked. An accrediting agency
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
from 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 and certain of the schools' programs maintain programmatic
accreditation.
11
Federal Financial Aid Programs. We derive a majority of our revenue from
students who participate in the 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 2002-2003 award year, Pell Grants range
from $400 to $4,000 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 2001-2002
award year, our required 25% institutional match was approximately $183,000.
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, and some dependent students - 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. Eligible graduate students may borrow up to $6,000 under the
Perkins program during each academic year, with an aggregate maximum of $40,000,
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 2001-2002 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 2001-2002 award year, our 25%
institutional match was approximately $79,000.
Federal Oversight of Title IV Programs. In order to participate in the
Title IV Programs, we must comply with standards set forth in the Higher
Education Act and the regulations promulgated thereunder, including a
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 corresponding 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, or when it undergoes a change of
control, and to apply for approval of an increase in the highest academic
credential it offers, or, under certain defined circumstances when the
institution opens an additional location offering 50% or more of an educational
program. Each of our schools (other than Sanford-Brown and the UDS locations in
Elmsford, New York and Springfield, Massachusetts, which are provisionally
certified as discussed below) is currently eligible and fully 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 the 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 the Title IV Programs. If an institution successfully participates in the
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 the Title IV Programs after a change in control will be
provisionally certified for up to three years, following which the institution
may be required to reapply for continued eligibility. In 2001, Sanford-Brown
received provisional certification effective through March 2004. The UDS school
locations in Elmsford, New York and Springfield, Massachusetts recently
underwent a routine recertification review and has been informed that it will
receive a three year provisional certification as a result of that review.
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, and we expect Congress to extend the current
reauthorization through 2004. 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,
those changes have not had a material adverse effect on our business, results of
operations or financial condition.
In addition, Congress reviews and determines federal appropriations for the
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.
Statutory and Regulatory Compliance
The 90/10 Rule. The Higher Education Act requires each proprietary
institution to calculate annually the percentage of its Title IV Program
receipts as compared to its total receipts from Title IV eligible program funds.
Under this rule, a proprietary school will be ineligible to participate in the
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 the 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 the 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, 2003, our schools met the 90/10 rule with
percentages of revenues derived from Title IV Program funds ranging from 41% to
79%.
Administrative Capability. The Higher Education Act directs the Department
of Education to assess the administrative capability of each institution to
participate in the Title IV Programs. The Department of Education has issued
regulations that require each institution to satisfy a series of standards in
this regard. 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 the 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, 2003, our
schools were in substantial compliance with 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. On
November 1, 2002, the Department of Education issued regulations describing a
limited number of compensation plans and bonus arrangements permissible under
its interpretation of the Higher Education Act. 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. We
believe that our method of compensating these employees complies with the
requirements of the Higher Education Act. There can be no assurance, however,
that the Department of Education will interpret its regulations in the same
manner 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 the 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 the 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, or it may choose to submit a letter of credit equal to
not less than 10% of the Title IV Program funds received by students enrolled at
such institution during the prior fiscal year, provided that it agrees to
participate in the Title IV Programs under provisional certification and
disburse funding under heightened cash monitoring or the reimbursement method of
payment.
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 2.6, Colorado Tech's composite score is 2.7 and
Sanford-Brown's composite score is 2.8.
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 the 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, we currently have
posted letters of credit amounting to $575,000 as a result of late refund
findings with respect to fiscal years 2001 and 2002.
Cohort Default Rates. The regulations require the calculation of a cohort
default rate on FFEL loans received by students who have attended our
institutions. The cohort default rate measures the percentage of student
borrowers who enter repayment on FFEL loans in a particular federal fiscal year
and default before the end of the following federal fiscal year. If an
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 2000 (published in September 2002).
UDS's official 2000 rates ranged from 4.7% to 11.3%; Sanford-Brown's official
2000 rate was 5.3% and Colorado Tech's official 2000 rate was 4.8%. All of our
schools' preliminary 2001 default rates were below 25% with no preliminary rate
exceeding 8.0%. The fiscal year 2000 cohort default rates for all of our schools
were 6.4% on a weighted average basis; the average rate for all proprietary
institutions in the United States for the same period was approximately 9.4%.
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 (such as the proposed merger with CEC) will trigger a
review of the certification and eligibility of all (if Whitman changes
ownership) or some of our schools to participate in the Title IV Programs. Such
change in ownership and control also will require reauthorization to operate by
individual states and trigger a review by certain 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 instituted procedures to allow an institution to
submit a pre-acquisition review application to the Department prior to the
closing of a proposed change of ownership transaction, and seek preliminary
guidance as to whether the Department knows of any substantial impediment to
approving the proposed change of ownership. Department regulations also 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. institutional
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 the 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 the Title IV
Programs for up to 60 days and/or a limitation of an institution's participation
in the Title IV programs, either by limiting the number or percentage of
students enrolled who may participate in the Title IV Programs or by limiting
the percentage of an institution's total receipts derived from the 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 the 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 the Title IV Programs due to a violation of the 90/10 rule may
not apply to resume participation in the 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 the 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 the 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 and the
Elmsford, New York and Springfield, Massachusetts UDS campuses would be required
under regulation to seek approval for a new additional location at which 50% or
more of an educational program is provided.
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.
18
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, 2003, we had 840 full-time and 493 part-time employees of whom
619 were faculty and 610 were administrative personnel at the various schools.
The remaining employees were employed by us at our administrative offices.
Forward-Looking Statements; Business Risks
This Report contains 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) 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, new online programs 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 and the opening of a new campus in fiscal 2004; (v) the Department of
Education's enforcement or interpretation of existing regulations affecting our
operations; (vi) the seasonality of our results of operations; (vii) the
sufficiency of our working capital, financings, including our ability to
increase our borrowings if necessary, and cash flow from operating activities
for our future operating and capital requirements; and (viii) our proposed
merger with CEC.
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 2004, 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 and in
particular, if the merger occurs, are subject to CEC's plans, strategies,
objectives, expectations, and intentions; (ii) costs, delays, and any other
difficulties related to the merger; (iii) failure of the parties to satisfy
closing conditions to the merger; (iv) 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; (v)
our ability to assess and meet the educational needs and demands of our students
and the employers with whom they seek employment; (vi) the effect of competitive
pressures from other educational institutions; (vii) our ability to execute our
growth strategy and manage planned internal growth; (viii) our ability to
locate, obtain and finance favorable school sites, negotiate acceptable lease
terms, and hire and train employees; (ix) the effect of economic conditions in
the postsecondary education industry and in the economy generally including
changes and fluctuations in interest rates; (x) our ability to adapt to
technological and other developments, including Internet-based curricula; (xi)
the role of the Department of Education's, Congress' and the public's perception
of for-profit education as it relates to changes in the Higher Education Act and
regulations promulgated thereunder; and (xii) 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 13,849 square feet of office space.
Sanford-Brown also has limited administrative facilities near 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 85,314
Sioux Falls, South Dakota Colorado Tech 21,064
Denver, Colorado Colorado Tech 18,529
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 13,690
Houston, Texas UDS 18,134
Tampa, Florida UDS 19,337
Dallas, Texas UDS 15,235
Trevose, Pennsylvania UDS 10,204
Elmsford, New York UDS 11,134
Jacksonville, Florida UDS 15,871
Springfield, Massachusetts UDS 19,247
Fort Lauderdale, Florida UDS 18,894
Cleveland, Ohio UDS 11,282
Landover, Maryland UDS 13,351
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 March 2003, we entered into a lease for 14,701 square feet of property
in Houston, Texas for a UDS school which we anticipate opening in fiscal 2004.
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, 2003.
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.
2003
----------------------------
High Low
------------- --------------
Quarter Ended 6/30/02 $ 7.00 $ 5.00
Quarter Ended 9/30/02 6.22 4.28
Quarter Ended 12/31/02 7.75 5.20
Quarter Ended 3/31/03 13.95 6.45
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
As of the close of business on May 15, 2003, there were approximately 265
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.
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.
21
Equity Compensation Plan Information
Number of
securities to Number of securities
be issued upon Weighted-average remaining available for
exercise of exercise price future issuance under
outstanding of outstanding equity compensation
options, options, plans (excluding
warrants and warrants and securities reflected in
Plan Category rights rights column (a))
------------------- --------------- ---------------- -----------------------
(a) (b) (c)
Equity compensation
plans
approved by
security
holders 3,301,539 $ 4.24 743,600
Equity compensation
plans
not approved by
security
holders 185,000 $ 5.25 0
--------------- -----------------------
Total 3,486,539 $ 4.29 743,600
=============== ================ =======================
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 four years after the date of grant and expire seven
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.
22
Item 6. Selected Financial Data.
Year Ended March 31,
-----------------------------------------------------------
2003 2002 2001 2000 1999
-----------------------------------------------------------
(In thousands, except per share data) (1)
Operating Data
Net revenues........ $109,796 $ 91,927 $ 79,629 $ 77,611 $ 73,977
Income (loss) from
operations......... 12,911 5,060 576 (26) 4,195
Net income (loss)... 7,511 2,602 (1,422) (502) 3,042
Diluted net income
(loss) per share... 0.49 0.18 (0.11) (0.04) 0.22
Dividends........... None None None None None
Balance Sheet Data
Total assets........ $ 81,771 $ 67,075 $ 62,867 $ 62,526 $ 62,580
Long-term debt and
capitalized
lease obligations,
less current
portion........... 4,710 7,473 11,128 11,119 12,022
Stockholders'
equity............ 34,261 23,727 20,544 21,285 21,625
(1) Figures reflect the the disposition of our minority interest in Huron
University in April 2001.
See Consolidated Financial Statements, Item 8 of this Report, for
supplementary financial information of Whitman.
23
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 22 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 9,000 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 primarily 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.
Merger Agreement
On March 26, 2003, we signed a definitive merger agreement with CEC under
which CEC will acquire all of our outstanding shares of common stock for a
combination of cash and CEC stock. Under the terms of the agreement, we will
become a wholly-owned subsidiary of CEC and our shareholders will receive $6.00
in cash and shares of CEC common stock valued at approximately $8.25 for a total
of approximately $14.25 for each share of our common stock. The stock portion of
the consideration is subject to adjustment based on CEC's average closing share
price during a specified period prior to closing. The value of the stock
component based on such average closing price will not be less than $7.55, nor
more than $8.95, unless we and CEC agree otherwise.
The estimated purchase price, including estimated acquisition costs, is
expected to be approximately $254.3 million. The estimated purchase price
includes the estimated fair value of CEC common stock to be issued to our
shareholders of $130.4 million, cash to be paid to our shareholders of $92.7
million, estimated cash to be paid to holders of options of $27.2 million, and
estimated acquisition costs of $4.0 million. Consideration to be paid to our
option holders under the 1996 stock option plan, representing the difference
between the exercise price and per share merger consideration, will be recorded
by us as compensation expense in our statement of operations prior to closing as
a result of amendments expected to be made to the 1996 stock option plan in
connection with the merger.
24
The merger agreement contains certain termination provisions, including,
among others, the failure to receive shareholder approval and the failure to
obtain required regulatory approvals. In addition, we may elect to terminate the
merger agreement if the value of the CEC stock that our shareholders will
receive in the merger would be less than $7.55 per share of our common stock,
subject to CEC's right to agree to provide our shareholders with $7.55 per share
in CEC common stock. Likewise, CEC may elect to terminate the merger agreement
if the adjusted value of the stock consideration would be greater than $8.95 per
share of our common stock, subject to our right to agree to accept $8.95 per
share in CEC common stock.
A vote of a majority of our outstanding common stock will be required to
approve the merger. The transaction is expected to close during the beginning of
the third quarter of the 2003 calendar year, and is subject to customary closing
conditions including regulatory approvals and the approval of our shareholders.
There can be no assurance that the conditions to the merger will close in the
expected time frame or at all.
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,
----------------------------------
2003 2002 2001
---------- ---------- ----------
Net revenues 100.0% 100.0% 100.0%
---------- ---------- ----------
Costs and expenses:
Instructional and educational support... 58.7 63.6 66.1
Selling and promotional................. 14.4 15.7 18.0
General and administrative.............. 14.7 15.2 15.2
Merger related expenses................. 0.4 - -
---------- ---------- ----------
Total costs and expenses.................... 88.2 94.5 99.3
---------- ---------- ----------
Income from operations...................... 11.8 5.5 0.7
Other (income) and expenses:
Interest expense........................ 0.7 1.0 1.4
Interest income......................... (0.3) (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.................... 11.4 4.9 (1.8)
Income tax provision (benefit).............. 4.6 2.1 (0.7)
---------- ---------- ----------
Income (loss) before cumulative effect of
change in accounting principle.......... 6.8 2.8 (1.1)
Cumulative effect of change in accounting
principle, net of tax................... - - (0.7)
---------- ---------- ----------
Net income (loss)........................... 6.8% 2.8% (1.8)%
========== ========== ==========
25
Year ended March 31, 2003 compared to the year ended March 31, 2002
Net revenues increased by $17.9 million or 19.4% to $109.8 million for the
year ended March 31, 2003 from $91.9 million for the year ended March 31, 2002.
This increase was primarily due to a 10.6% increase in average student
enrollment and an increase in tuition rates.
Net revenues in the Associate Degree Division increased 21.9% due primarily
to a 17.0% increase in average student enrollment and an increase in tuition
rates. The increase in student enrollment in the Associate Degree Division was
primarily due to increased enrollment in the medical assisting and medical
billing and coding specialist programs offered by UDS and the allied health
programs offered at Sanford-Brown.
Net revenues in the University Degree Division increased 10.7% due
primarily to a 14.5% increase in the average revenue earned per student which
offset a 3.2% decrease in average student enrollment. The increase in the
average revenue earned per student was primarily due to an increase in the
number of credit hours taken by students at Colorado Tech, and an increase in
tuition rates. The decrease in average student enrollment in the University
Degree Division was primarily due to a decline in enrollment in the information
technology programs which was partially offset by an increase in enrollment in
the business programs offered at Colorado Tech.
Instructional and educational support expenses increased by $6.0 million,
or 10.3%, to $64.5 million for the year ended March 31, 2003 from $58.5 million
for the year ended March 31, 2002. As a percentage of net revenues,
instructional and educational support expenses decreased to 58.7% for the year
ended March 31, 2003 as compared to 63.6% for the year ended March 31, 2002. The
increase in instructional and educational support expenses was primarily due to
an increase in payroll 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.
Selling and promotional expenses increased by $1.4 million, or 9.3%, to
$15.8 million for the year ended March 31, 2003 from $14.4 million for the year
ended March 31, 2002. As a percentage of net revenues, selling and promotional
expenses decreased to 14.4% for the year ended March 31, 2003 as compared to
15.7% for the year ended March 31, 2002. The increase in selling and promotional
expenses was primarily due to an increase in payroll and related benefits for
additional admissions personnel and an increase in advertising expenses
resulting from our marketing efforts directed at increasing enrollment. The
decrease in selling and promotional expenses as a percentage of net revenues was
due to our ability to better leverage such expenses while supporting a growth in
revenues.
General and administrative expenses increased by $2.1 million, or 15.5%, to
$16.1 million for the year ended March 31, 2003 from $14.0 million for the year
ended March 31, 2002. As a percentage of net revenues, general and
administrative expenses decreased to 14.7% for the year ended March 31, 2003 as
compared to 15.2% for the year ended March 31, 2002. The increase in general and
administrative expenses was primarily due to an increase in administrative
payroll expenses and related benefits to support the growth in student
population and an increase in bad debt expense. As a percentage of net revenues,
bad debt expense decreased to 5.0% for the year ended March 31, 2003 from 5.1%
for the year ended March 31, 2002. The decrease in general and administrative
expenses as a percentage of net revenues was due to our ability to increase
revenues at a greater rate than the rate of increase in administrative operating
costs.
Merger and related expenses of $0.5 million consist primarily of investment
banking and legal fees incurred in connection with the proposed merger with CEC.
26
We reported income from operations of $12.9 million and $5.1 million for
the years ended March 31, 2003 and 2002, respectively. This increase in
profitability was primarily due to increases in income from operations of $7.4
million and $1.0 million in the Associate Degree Division and the University
Degree Division, respectively.
Income tax provision increased by $3.2 million or 166.7% to $5.1 million
for the year ended March 31, 2003 from $1.9 million for the year ended March 31,
2002. This increase was due to an increase in pretax income during fiscal 2003,
which was partially offset by a reduction in the effective income tax rate from
42.1% in fiscal 2002 to 40.2% in fiscal 2003. The decrease in the effective
income tax rate was primarily due to the reduced tax effect of the change in the
valuation allowance in comparison to the higher statutory tax expense incurred
in fiscal 2003 resulting from the increase in pretax income.
We reported net income of $7.5 million and $2.6 million for the years ended
March 31, 2003 and 2002, respectively. The increase in net income was primarily
due to the increase in profitability in the Associate Degree Division.
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.
Net revenues in the Associate Degree Division increased 19.6% due primarily
to a 9.8% increase in average student enrollment and an increase in tuition
rates. The increase in student enrollment in the Associate Degree Division was
primarily due to increased enrollment in the medical assisting program and the
medical billing and coding 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. Net revenues in the University
Degree Division increased 2.8% due primarily to an increase in tuition rates.
Average student enrollment in the University Degree Division remained relatively
unchanged.
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.
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.
27
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.
Income tax provision was $1.9 million for the year ended March 31, 2002 as
compared to a tax benefit of $0.5 million for the year ended March 31, 2001, due
primarily to the increase in profitability in fiscal 2002.
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.
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 commenced collection
efforts to enforce the judgment. In September 2002, we collected $166,000 for
principal and interest due under the loan. 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.
28
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, 2003, 2002 and 2001 were $25.2
million, $14.0 million and $5.9 million, respectively. Our working capital
totaled $18.0 million at March 31, 2003, $9.9 million at March 31, 2002 and $9.3
million at March 31, 2001.
Net cash of $16.1 million was provided by operating activities in fiscal
2003, an increase of $2.7 million from fiscal 2002 and $13.6 million from fiscal
2001. The increase in cash provided by operating activities of $2.7 million in
fiscal 2003 from fiscal 2002 was primarily due to an increase in net profits of
$4.9 million combined with an increase in deferred revenue, which was partially
offset by an increase in accounts receivable. The increase in cash provided by
operating activities of $13.6 million in fiscal 2003 from fiscal 2001 was
primarily due to an increase in net profits of $9.0 million, and an increase in
accrued expenses of $5.1 million.
Net cash of $4.0 million was used for investing activities in fiscal 2003,
an increase of $2.6 million from fiscal 2002 and $2.0 million from fiscal 2001.
The increase in fiscal 2003 from 2002 and 2001 was primarily due to the purchase
of property and equipment.
We estimate that the capital expenditures expected to be incurred during
fiscal 2004 will approximate $4.5 million to $5.0 million. These anticipated
capital expenditures primarily relate to the costs associated with the
acquisition and upgrade of equipment for the schools, the relocation and upgrade
of campus facilities and the opening of a new UDS campus. Funds required to
finance such capital expenditures are expected to be obtained from funds
generated from operations.
Net cash of $1.0 million was used in financing activities in fiscal 2003, a
decrease in cash used of $3.0 million from fiscal 2002 and $0.2 million from
2001. The decrease in cash used in financing activities in fiscal 2003 from
fiscal 2002 was primarily due to $2.0 million of proceeds received from the
exercise of employee stock options and a decrease of $1.0 million in net
payments on long-term debt and capitalized 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
June 2002, we increased the line of credit to $3.5 million and extended the
expiration date to October 31, 2003. At March 31, 2003, we had no outstanding
balance under this facility and letters of credit outstanding of $0.6 million
which reduced the amount available for borrowing to $2.9 million. The $6.5
million term note is payable in seven monthly installments of interest that
commenced on April 21, 2001 and thereafter in 52 monthly installments of
principal and interest with a balloon payment due in April 2006. For the fiscal
year ended March 31, 2003, we made principal payments of $1.3 million reducing
the balance due on our capital expenditure term note to $4,658,333. For the
fiscal year ending March 31, 2004, scheduled principal payments on our capital
expenditure term note amount to $1.3 million. The amounts borrowed under this
facility were used for capital expenditures in prior years. In accordance with
the terms under the merger agreement with CEC, any balance due under the capital
expenditure term note and line of credit will be repaid by CEC or Whitman at or
prior to the closing of the merger.
29
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 78%, 78%, and 41% 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, 2003, and
the effect such obligations are expected to have on our liquidity and cash flow
in future periods (in thousands):
Principal Payments Due by Period
----------------------------------------------------
Within After
Total 1 Year 2-3 Years 4-5 Years 5 Years
-------- -------- ---------- ---------- --------
Note Payable $ 4,658 $ 1,300 $ 2,600 $ 758 $ -
Capital Lease Obligations 2,575 1,223 1,310 42 -
Operating Leases 25,946 5,459 9,605 6,266 4,616
-------- -------- ---------- ---------- --------
$33,179 $ 7,982 $13,515 $ 7,066 $ 4,616
======== ======== ========== ========== ========
We have a contractual commitment related to a $3.5 million line of credit
which expires on October 31, 2003. At March 31, 2003, we had no outstanding
balance under this facility and letters of credit outstanding of $0.6 million,
which reduced the amount available for borrowing to $2.9 million.
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, 2003, 2002 and 2001,
we purchased approximately $161,500, $147,900 and $97,500, respectively, in
textbooks and materials from that entity.
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.
30
Critical accounting policies are defined as those that are reflective of
significant judgments by management and uncertainties, 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 70% of our net revenues collected during the fiscal year ended
March 31, 2003 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.
31
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) is no longer amortized but is 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 fiscal
2003, we performed our annual impairment test of goodwill and concluded that
there was no impairment of goodwill. We had approximately $9.3 million of
goodwill reflected on our balance sheet at March 31, 2003. 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.
Recoverability of Long-lived Assets
On an ongoing basis, we review property and equipment, definite-lived
intangible assets and other long-lived assets for impairment whenever events or
circumstances indicate that carrying amounts may not be recoverable. To date, no
such events or changes in circumstances have occurred. If such events or changes
in circumstances occur, we will recognize an impairment loss if the undiscounted
future cash flows expected to be generated by the asset (or acquired business)
are less than the carrying value of the related asset. The impairment loss would
adjust the asset to its fair value.
In evaluating the recoverability of long-lived assets, we must make
assumptions regarding estimated future cash flows and other factors to determine
the fair value of such assets. If our fair value estimates or related
assumptions change in the future, we may be required to record impairment
charges related to goodwill and other long-lived assets.
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.
At March 31, 2003, we had deferred tax assets in excess of deferred tax
liabilities of approximately $1.4 million. During the year, we determined that
it is more likely than not that $1.3 million of those assets will be realized
(although realization is not assured), resulting in a valuation allowance of
$134,000 at March 31, 2003.
32
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 (FASB) 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 is
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. We 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 fiscal 2003 we performed our annual impairment
test of goodwill and concluded that there was no impairment of goodwill.
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
("SFAS 146"). SFAS 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities. This statement is effective for
exit or disposal activities initiated after December 31, 2002. We are not
currently engaged in any significant exit or disposal activities and therefore,
the adoption of SFAS 146 did not have any impact on our financial position or
results of operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). The interpretation elaborates
on the existing disclosure requirements for most guarantees, including loan
guarantees such as standby letters of credit. It also clarifies that at the time
a company issues a guarantee, the company must recognize an initial liability
for the fair value, or market value, of the obligations it assumes under the
guarantee and must disclose that information in its interim and annual financial
statements. The provisions related to recognizing a liability at inception of
the guarantee for the fair value of the guarantor's obligations does not apply
to product warranties or to guarantees accounted for as derivatives. The initial
recognition and initial measurement provisions apply on a prospective basis to
guarantees issued or modified after December 31, 2002. The disclosure
requirements are effective for financial statements of periods ending after
December 15, 2002. We believe the adoption of the recognition and measurement
provisions of FIN 45 will not have a material impact on our financial position,
results of operations or cash flows.
33
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" ("SFAS 148"). SFAS 148 amends FASB Statement No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123"). In response to a growing number of
companies announcing plans to record expenses for the fair value of stock
options, SFAS 148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS
123 to require more prominent and more frequent disclosures in financial
statements about the effects of stock-based compensation. SFAS 148 is effective
for financial statements for annual periods ending after December 15, 2002 and
interim periods beginning after December 31, 2002. We have adopted the
amendments to SFAS 123 disclosure provisions required under SFAS 148 but will
continue to use the intrinsic value method under Opinion 25 to account for
stock-based compensation. As such, our adoption of this statement has not had
any impact on our financial position or results of operations.
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, 2003, our variable rate long-term debt had a carrying value of
$4.7 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.
34
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information concerning directors required by Item 10 is set forth
below. There is no family relationship between any of the directors or executive
officers and there is no arrangement or understanding between any director or
executive officer and any other person pursuant to which the director or
executive officer was selected.
Dr. Jack R. Borsting, age 74, has served as a director since 1994 and has
been Vice Chairman of the Board since 2000. Dr. Borsting is a Professor of
Business Administration and Dean Emeritus at the University of Southern
California Marshall School of Business. From 1988 to 1994, Dr. Borsting was Dean
of the University of Southern California School of Business Administration, and
from 1994 to 2001 E. Morgan Stanley Professor of Business Administration and
Executive Director of the Center of Telecommunication Management. Dr. Borsting,
a former Assistant Secretary of Defense (Comptroller), is a director of IVAX
Diagnostics, Inc. (laboratory instruments) and a trustee for the Rose Hill
Foundation, the Los Angeles Orthopedic Hospital Foundation and Met Life
Investors. Dr. Borsting is also a member of the Army Science Board.
Mr. Neil Flanzraich, age 59, has served as a director since 1997. In 1998,
Mr. Flanzraich became Vice Chairman and President of IVAX Corporation
(pharmaceuticals). Mr. Flanzraich serves on the Board of Directors of IVAX
Diagnostics, Inc. (laboratory instruments), Continucare Corporation (healthcare
services) and RAE Systems Inc. (gas detection and security monitoring system).
From 1995 through 1998, Mr. Flanzraich was a shareholder and Chairman of the
Life Sciences Legal Practice Group of Heller Ehrman White & McAuliffe, Palo
Alto, California. From 1981 to 1994, Mr. Flanzraich was Senior Vice President,
General Counsel and member of the Corporate Executive Committee of Syntex
Corporation, an international pharmaceutical company that was acquired by Roche
Holdings Ltd.
Dr. Phillip Frost, age 66, has been Chairman of the Board of Directors
since 1992. Dr. Frost has been Chairman of the Board of Directors and Chief
Executive Officer of IVAX Corporation (pharmaceuticals) since 1987. Dr. Frost
served as President of IVAX Corporation from 1991 until 1995. Dr. Frost was
Chairman of the Board of Directors of Key Pharmaceuticals, Inc. from 1972 to
1986. Dr. Frost is Chairman of the Board of Directors of IVAX Diagnostics, Inc.
(laboratory instruments). He is also director of Northrup Grumman Corporation
(aerospace). He is Chairman of the Board of Trustees of the University of Miami
and a member of the Board of Governors of the American Stock Exchange.
Mr. Peter S. Knight, age 52, has served as a director since 1994. Mr.
Knight is a Managing Director of MetWest Financial, a Los Angeles based
financial services company. Mr. Knight started his career with the Antitrust
Division of the Department of Justice. From 1977 to 1989, Mr. Knight served as
Chief of Staff to Al Gore when Mr. Gore was a member of the U.S. House of
Representatives and later the U.S. Senate. Mr. Knight served as General Counsel
of Medicis Pharmaceutical Corporation from 1989 to 1991 and then established his
law practice representing numerous Fortune 500 companies as a named partner in a
Washington, D.C. law firm. In 2000, he started Sage Venture Partners, an
investment firm focusing on the technology and biotechnology sector. Mr. Knight
has held senior positions in the last four presidential campaigns including
services as campaign manager for the successful 1996 re-election campaign of
President Clinton. Mr. Knight serves on the Board of Directors of Medicis
Pharmaceutical Corporation, the Schroder Family of Mutual Funds and EntreMed.
Dr. Richard M. Krasno, age 61, has served as a director since 1996. In
1999, Dr. Krasno became Executive Director of the William R. Kenan, Jr.
Charitable Trust and President of the four William R. Kenan, Jr. funds. From
1998 to 1999, Dr. Krasno was president of the Monterey Institute of
International Studies in Monterey, California. From 1983 to 1998, Dr. Krasno was
President and Chief Executive Officer of the Institute of International
Education (private not-for-profit education organization), New York City, New
York. He served as its Executive Vice President and Chief Operating Officer from
1981 to 1983. Dr. Krasno was Deputy Assistant Secretary of Education with the
U.S. Department of Education from 1980 to 1981.
35
Dr. Lois F. Lipsett, age 69, has served as a director since 1996. Dr.
Lipsett is the President of Health Education Associates, Washington, D.C. Since
1995, Dr. Lipsett has served as a consultant to several companies, including the
Robert Wood Johnson Foundation. Dr. Lipsett was Vice President, Scientific and
Medical Affairs, of the American Diabetes Association from 1992 to 1995. Prior
to 1992, Dr. Lipsett founded and was Director of the National Diabetes
Information Clearinghouse and was also Director for several training and career
development programs at the National Institutes of Health.
Mr. Richard C. Pfenniger, Jr., age 47, has served as a director since 1992.
Mr. Pfenniger has been Chief Executive Officer and Vice Chairman of the Company
since 1997 and President since 2001. Mr. Pfenniger was Chief Operating Officer
of IVAX Corporation (pharmaceuticals) from 1994 to 1997. He served as Senior
Vice President -- Legal Affairs and General Counsel of IVAX Corporation from
1989 to 1994. Prior to joining IVAX Corporation, Mr. Pfenniger was engaged in
private law practice. Mr. Pfenniger is also the Chairman of the Board of
Continucare Corporation (healthcare services) and a director of IVAX
Corporation.
Dr. Percy A. Pierre, age 64, has served as a director since 1997. Dr.
Pierre has been Professor of Electrical Engineering at the College of
Engineering of Michigan State University since 1995. Prior to 1995, he was the
Vice President for Research and Graduate Studies, as well as Professor of
Electrical Engineering at Michigan State University from 1990 to 1995; President
of Prairie View A & M University from 1983 to 1989; Assistant Secretary of the
Army for Research, Development and Acquisition, Department of the U.S. Army,
from 1977 to 1981; and Dean of the School of Engineering at Howard University
from 1971 to 1977. Dr. Pierre serves as a director of CMS Energy Corp.
(diversified energy company), and Fifth-Third Bank (Western Michigan).
A. Marvin Strait, age 69, has served as a director since 1998. Mr. Strait
presently practices as a Certified Public Accountant under the name A. Marvin
Strait, CPA. He has practiced in the field of public accountancy in Colorado for
over forty years. Mr. Strait has served on the Board of Directors of Colorado
Technical University since 1986. He also presently serves as a member of the
Board of Directors of AutoTradeCenter.Com, Inc., and a member of the Board of
Trustees of the Colorado Springs Fine Arts Center Foundation, and the Sam S.
Bloom Foundation. He also presently serves on the Community Advisory Panels of
Western National Bank and Intel Corporation. Mr. Strait previously served as the
Chairman of the Board of Directors of the American Institute of Certified Public
Accountants (AICPA), as President of the Colorado Society of Certified Public
Accountants and the Colorado State Board of Accountancy, and serves as a
permanent member of the AICPA Governing Council.
Executive Officers of the Registrant
Set forth below is the name, age, position held and business experience
during the past five years of our other executive officer as of March 31, 2003.
Our executive 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.
36
Fernando L. Fernandez. Mr. Fernandez, age 42, 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 (Dr. Frost's
investment partnership) from 1991 to 1996. Previously, Mr. Fernandez served as
Audit Manager for PricewaterhouseCoopers LLP (formerly Coopers & Lybrand) in
Miami.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors, executive officers and 10% shareholders to file initial
reports of ownership and reports of changes in ownership of Common Stock and
other equity securities with the Securities and Exchange Commission. Directors,
executive officers and 10% shareholders are required to furnish the Company with
copies of all Section 16(a) forms they file. Based on a review of the copies of
such reports furnished to the Company and written representations from the
Company's directors and executive officers that no other reports were required,
the Company believes that during fiscal 2003 the Company's directors, executive
officers and 10% shareholders complied with all Section 16(a) filing
requirements applicable to them.
Item 11. Executive Compensation.
The following table contains certain information regarding aggregate
compensation paid or accrued by the Company during fiscal 2003 to the Chief
Executive Officer of the Company and to our only other executive officer whose
combined salary and bonus during fiscal 2003 exceeded $100,000.
Summary Compensation Table
Long-Term All Other
Annual Compensation Compensation Compensation
-------------------------- ------------ ------------
Securities
Name and Year Ended Underlying
Principal Position March 31, Salary Bonus Options
------------------------- ---------- -------- ----- -----------
($) ($) (#) ($)(1)
Richard C. Pfenniger,Jr. 2003 305,000 (2) 30,000 4,422
Chief Executive Officer 2002 291,000 150,000 0 4,337
2001 291,000 0 0 3,100
Fernando L. Fernandez 2003 150,000 (2) 20,000 4,226
Vice President - Finance, 2002 138,000 70,000 0 4,025
Chief Financial Officer, 2001 138,000 0 0 3,100
Secretary and Treasurer
(1) The amounts included in the "All Other Compensation" column represent
matching contributions made by the Company under the Whitman Employee
Retirement Savings Plan maintained under Section 401 (k) of the Internal
Revenue Code.
(2) The Compensation Committee of the Board of Directors generally meets
subsequent to the end of our fiscal year to determine if any bonus payments
will be made to the executive officers. The Compensation Committee has not
yet met to determine if any bonuses will be paid to the executive officers
in connection with their performance for the fiscal year ended March 31,
2003.
During the fiscal year ended March 31, 2003, stock options were granted to
the executive officers named in the "Summary Compensation Table" in connection
with their performance in fiscal 2002. The stock options were granted at an
exercise price of $6.20 per share, the fair market value of the Company's Common
Stock on the date of grant, and have a seven-year term.
37
The following table sets forth information concerning stock option grants
made during fiscal 2003 to the executive officers named in the "Summary
Compensation Table."
Stock Option Grants During the Year Ended
March 31, 2003
Potential
Realizable
Value at Assumed
Percent of Annual Rates of
Number of Total Options Stock Price
Securities Granted to Appreciation for
Underlying Employees Option Term
Options in Fiscal Exercise Expiration ----------------
Granted Year Price Date 5% 10%
----------- ----------- -------- ---------- ----------------
(#) % $ % %
Richard C. 30,000 13.8 6.20 6/06/2009 75,721 176,461
Pfenniger, Jr.
Chief Executive
Officer
Fernando L. 20,000 9.2 6.20 6/06/2009 50,480 117,641
Fernandez
Vice President -
Finance,
CFO and Treasurer
The following table sets forth information concerning stock option
exercises during fiscal 2003 by each of the executive officers named in the
"Summary Compensation Table" above and the fiscal year-end value of unexercised
options held by each of the executive officers named in the "Summary
Compensation Table" above.
38
Aggregated Stock Option Exercises in
Fiscal 2003 And Fiscal Year-End Option Values
Securities Underlying
Number of Unexercised Value of Unexercised
Options at Fiscal In-the-Money Options
Year End at Fiscal Year End
---------------------- --------------------
Shares
Acquired
on Value Ex- Un- Ex- Un-
Exercise Realized ercisable exercisable ercisable exercisable
-------- -------- --------- ----------- --------- -----------
(#) ($) (#) (#) ($) (1) ($) (1)
Richard C. 0 0 435,000 37,500 3,666,287 285,563
Pfenniger, Jr.
Chief Executive
Officer
Fernando L. 20,000 81,975 197,500 22,500 1,894,337 169,188
Fernandez
Vice President-
Finance, Chief
Financial Officer,
Secretary and
Treasurer
(1) The value of unexercised in-the-money options represents the number of
options held at March 31, 2003 multiplied by the difference between the
exercise price and $13.60, the closing price of the Common Stock at March
31, 2003.
Compensation Committee Interlocks and Insider Participation
During fiscal 2003, the following directors served on the Compensation
Committee of the Board of Directors: Dr. Frost, Dr. Krasno and Dr. Lipsett. Dr.
Frost is an executive officer and Chairman of the Board of Directors of IVAX
Corporation. Richard C. Pfenniger, Jr. is the Company's Chief Executive Officer
and Vice Chairman and a director of the Company and is also a director of IVAX.
In September 2002, Dr. Frost resigned from the Compensation Committee.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Shareholder Matters.
The following table sets forth certain information as of May 1, 2003
concerning the number of shares of Common Stock beneficially owned by: (a) each
director, (b) each executive officer named above in the "Summary Compensation
Table", (c) all directors and executive officers as a group, and (d) each person
known to the Company to be the beneficial owner of more than 5% of the Common
Stock, and the percentage such shares represent of the total outstanding shares
of Common Stock. Unless otherwise indicated, all shares are owned directly by
the person indicated who holds sole voting and investment power.
39
Shares Beneficially
Name of Beneficial Holder Owned (1) Percentage Owned
------------------------- -------------------- ----------------
Bedford Oak Advisors, LLC 1,256,400(2) 8.8
Jack R. Borsting, Ph.D. 129,100(3) *
Neil Flanzraich 96,875(3) *
Phillip Frost, M.D. 4,383,528(4) 28.4
Peter S. Knight 110,000(3) *
Richard M. Krasno, Ph.D. 90,000(3) *
Lois F. Lipsett, Ph.D. 90,000(3) *
Richard C. Pfenniger, Jr. 638,630(3) 4.1
Percy A. Pierre, Ph.D. 78,125(3) *
A. Marvin Strait, C.P.A. 112,528(3) *
Fernando L. Fernandez 231,457(3) 1.5
All directors and executive
officers as a group (10 persons) 5,960,243(5) 35.6
___________________
* Represents beneficial ownership of less than one percent.
(1) For purposes of this table, beneficial ownership is computed pursuant to
Rule 13d-3 under the Securities Exchange Act of 1934; the inclusion of
shares as beneficially owned should not be construed as an admission that
such shares are beneficially owned for purposes of Section 16 of the
Securities Exchange Act of 1934.
(2) Based on information contained in a Schedule 13G/A dated February 11, 2003.
As reported therein, Bedford Oak Advisors, LLC ("BOA") in its capacity as
investment manager of two private investment partnerships and an offshore
investment fund, and Harvey Eisen, in his capacity as managing member of
BOA, are deemed to have beneficial ownership of the 1,256,400 shares.
(3) Includes shares which may be acquired pursuant to stock options exercisable
within 60 days of May 1, 2003: Dr. Borsting (122,500); Mr. Knight
(110,000); Dr. Krasno (90,000); Mr. Flanzraich (96,875); Dr. Lipsett
(90,000); Dr. Pierre (78,125); Mr. Strait (75,000); Mr. Pfenniger
(450,000); and Mr. Fernandez (205,000).
(4) Includes (a) 402,500 shares which may be acquired pursuant to stock options
held by Dr. Frost exercisable within 60 days of May 1, 2003, and (b)
3,971,028 shares held by Frost-Nevada Investments Trust (the "Trust") of
which Dr. Frost is the sole trustee and Frost-Nevada, Limited Partnership
is the sole and exclusive beneficiary. The Trust's principal business
address is 4400 Biscayne Boulevard, Miami, Florida 33137. Dr. Frost's
business address is 4400 Biscayne Boulevard, Miami, Florida 33137.
(5) Includes shares described in footnotes (3) and (4) as beneficially owned.
40
Item 13. Certain Relationships and Related Transactions.
The Company currently occupies approximately 13,849 square feet of
administrative offices in Miami, Florida which are owned by IVAX Corporation.
The lease between the Company and IVAX may be terminated on 180 days notice and
provides for an annual rental of $311,609. Dr. Frost, the Chairman of the Board
and a principal shareholder of the Company, is also the Chairman of the Board,
Chief Executive Officer and a principal shareholder of IVAX and Neil Flanzraich,
a director of the Company, is Vice Chairman and President of IVAX. Mr.
Pfenniger, the Company's Chief Executive Officer and a director, is also a
director of IVAX.
Carolyn Orr, the sister-in-law of Dr. Frost, is employed by the Company as
Legal/Compliance Specialist with an annual compensation of $72,500. Ms. Orr has
been granted options to purchase 32,200 shares of our common stock.
Item 14. Controls and Procedures.
Within 90 days prior to the date of this report, we completed an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective to ensure that all material
information relating to us and our consolidated subsidiaries required to be
included in this quarterly report has been made known to them in a timely
fashion. However, that conclusion should be considered in light of the various
limitations described below on the effectiveness of those controls and
procedures, some of which pertain to most if not all business enterprises, and
some of which arise as a result of the nature of our business.
Our management, including our Chief Executive Officer and Chief Financial
Officer, does not expect that our disclosure controls and procedures will
prevent all error and all improper conduct. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the design of a
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs. Because of
the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of improper
conduct, if any, have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the control.
Further, the design of any system of controls also is based in part upon
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions; over time, controls may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
No significant changes were made in our internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of their evaluation.
41
PART IV
Item 15. 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
All of the financial statement schedules have been omitted because of the
absence of the conditions under which they are required or because the required
information is included in the consolidated financial statements or the notes
thereto.
(a)(3) Exhibits
Exhibit
Number Description Method of Filing
------- ----------- ----------------
2.1 Agreement and Plan of Merger Incorporated by reference to
dated March 26, 2003, by and our Form 8-K dated March 26,
among Career Education 2003. 2003.
Corporation, Marlin Acquisition
Corporation and Whitman
Education Group, Inc.
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 Agreement Incorporated by reference to
dated as of April 6, 1992 our Report on Form 8-K
dated April 6, 1992.
10.2 Amended and Restated 1986 Incorporated by reference to
Directors and Consultants Stock our Registration Statement on
Option Plan Form S-8 filed September 9,
1992.
10.3 1992 Incentive Stock Option Plan, Incorporated by reference to
as amended our Proxy Statement for the
Annual Meeting of Shareholders
held on November 19, 1992.
42
10.4 Whitman Education Group, Inc. Incorporated by reference to
1996 Stock Option Plan, as amended our Form 10-Q for the quarter
ended June 30, 1997.
10.5 Form of Security Agreement, dated Incorporated by reference to
May 20, 1999, by each of Colorado our Report on Form 10-K for
Technical University, Inc., the year ended March 31, 1999.
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 Guaranty, Incorporated by reference to
dated May 20, 1999 by each of our Report on Form 10-K for
Colorado Technical University, the year ended March 31, 1999.
Inc., MDJB, Inc., Sanford-Brown
College, Inc. and Ultrasound
Technical Services, Inc. in
favor of Merrill Lynch Business
Financial Services, Inc.
10.7 WCMA Loan and Security Agreement Incorporated by reference to
dated May 20, 1999, by and between our Report on Form 10-K for
Merrill Lynch Business Financial the year ended March 31, 1999.
Services, Inc. and Whitman
Education Group, Inc.
10.8 Term Loan and Security Agreement Incorporated by reference to
dated March 21, 2001, by and between our Report on Form 10-K for
Merrill Lynch Business Financial the year ended March 31, 2001.
Services, Inc. and Whitman
Education Group, Inc.
10. 9 Collateral Installment Note dated Incorporated by reference to
March 21, 2001, by and between our Report on Form 10-K for
Merrill Lynch Business Financial the year ended March 31, 2001.
Services, Inc. and Whitman
Education Group, Inc.
10.10 Form of Unconditional Guaranty, Incorporated by reference to
dated March 21, 2001 by each of our Report on Form 10-K for
Colorado Technical University, Inc., the year ended March 31, 2001.
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.
43
10.11 Form of Security Agreement dated Incorporated by reference to
March 21, 2001 by each of Colorado our Report on Form 10-K for
Technical University, Inc., CTU the year ended March 31, 2001.
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 Stock Option Incorporated by reference to
Agreement our Report on Form 10-K for
the year ended March 31, 2002.
10.14 Letter agreement dated December 4, Incorporated by reference to
2002 by and between Merrill Lynch our Report on Form 10-Q for
Business Financial Services, Inc. the quarter ended December
and Whitman Education Group, Inc. 31, 2002.
10.15 Lease dated as of February 28 ,1997, Incorporated by reference to
by and between Whitman Education our Report on Form 8-K dated
Group, Inc. and IVAX Corporation March 25, 2003.
21 Subsidiaries Incorporated by reference to
our Report on Form 10-K for
the year ended March 31, 1996.
23.1 Consent of Ernst & Young LLP Filed herewith.
99.1 Certification of Chief Executive Filed herewith.
Officer
99.2 Certification of Chief Financial Filed herewith.
Officer
_______________________
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) Reports on Form 8-K
On March 25, 2003, Whitman filed a Current Report on Form 8-K. In that
report, Whitman furnished information relating to an office lease dated as of
February 28, 1997, by and between Whitman Education Group, Inc. and IVAX
Corporation.
On March 28, 2003, Whitman filed a Current Report on Form 8-K. In that
report Whitman announced the signing of the Agreement and Plan of Merger dated
March 26, 2003, by and among Career Education Corporation, Marlin Acquisition
Corporation and Whitman.
44
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: May 29, 2003
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 May 29, 2003
-----------------------------
Phillip Frost, M.D.
/s/RICHARD C. PFENNIGER, JR. Vice Chairman of the Board May 29, 2003
----------------------------- and Chief Executive Officer
Richard C. Pfenniger, Jr. (Principal Executive Officer)
/s/FERNANDO L. FERNANDEZ Vice President, Chief Financial May 29, 2003
----------------------------- Officer, Secretary and Treasurer
Fernando L. Fernandez (Principal Financial and Accounting
Officer)
/s/JACK R. BORSTING, Ph.D. Vice Chairman of the Board May 29, 2003
-----------------------------
Jack R. Borsting, Ph.D.
/s/PETER S. KNIGHT Director May 29, 2003
-----------------------------
Peter S. Knight
/s/LOIS F. LIPSETT, Ph.D. Director May 29, 2003
-----------------------------
Lois F. Lipsett, Ph.D.
/s/RICHARD M. KRASNO, Ph.D. Director May 29, 2003
-----------------------------
Richard M. Krasno, Ph.D.
/s/PERCY A. PIERRE, Ph.D. Director May 29, 2003
-----------------------------
Percy A. Pierre, Ph.D.
/s/NEIL FLANZRAICH Director May 29, 2003
-----------------------------
Neil Flanzraich
/s/A. MARVIN STRAIT, C.P.A. Director May 29, 2003
-----------------------------
A. Marvin Strait, C.P.A.
45
CERTIFICATION
I, Richard C. Pfenniger, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of Whitman Education Group,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
May 29, 2003 By:/s/RICHARD C. PFENNIGER, JR.
-----------------------------
Richard C. Pfenniger, Jr.
Chief Executive Officer
46
CERTIFICATION
I, Fernando L. Fernandez, certify that:
1. I have reviewed this annual report on Form 10-K of Whitman Education Group,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
May 29, 2003 By:/s/ FERNANDO L. FERNANDEZ
------------------------------
Fernando L. Fernandez.
Vice President-Finance, Chief
Financial Officer,
Treasurer and Secretary
47
Whitman Education Group, Inc. And Subsidiaries
Consolidated Financial Statements
March 31, 2003
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, 2003 and 2002 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended March 31, 2003. 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, 2003 and 2002, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended March 31, 2003, 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 16, 2003
-F 2-
Whitman Education Group, Inc. and Subsidiaries
Consolidated Balance Sheets
March 31,
---------------------------------
2003 2002
--------------- ---------------
Assets
Current assets:
Cash and cash equivalents.............. $ 25,214,854 $ 14,010,878
Accounts receivable, net............... 26,907,255 23,425,589
Inventories............................ 2,091,909 1,633,917
Deferred tax assets, net............... 2,895,336 3,342,026
Other current assets................... 2,092,734 2,273,607
--------------- ---------------
Total current assets................ 59,202,088 44,686,017
Property and equipment, net................. 11,181,458 10,804,417
Deposits and other assets................... 2,099,268 2,296,002
Goodwill, net............................... 9,288,622 9,288,622
--------------- ---------------
Total assets........................ $ 81,771,436 $ 67,075,058
=============== ===============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable....................... $ 2,407,830 $ 1,716,674
Accrued expenses....................... 8,263,870 6,749,811
Current portion of capitalized lease
obligations......................... 1,223,395 1,781,501
Current portion of capital expenditure
note payable........................ 1,300,000 1,300,000
Deferred tuition revenue............... 27,962,885 23,269,177
--------------- ---------------
Total current liabilities........... 41,157,980 34,817,163
Capitalized lease obligations............... 1,351,455 2,815,136
Capital expenditure note payable............ 3,358,333 4,658,333
Deferred tax liability...................... 1,642,265 1,057,789
Commitments and contingencies
Stockholders' equity:
Common stock, no par value; authorized
100,000,000 shares; issued
15,113,759 shares in 2003 and
14,262,648 shares in 2002;
outstanding 14,678,965 shares
in 2003 and 13,827,854 shares
in 2002............................. 25,902,278 23,198,153
Additional paid-in capital............. 1,124,874 805,309
Retained earnings (accumulated
deficit)............................ 7,234,251 (276,825)
--------------- ---------------
Total stockholders' equity............ 34,261,403 23,726,637
--------------- ---------------
Total liabilities and stockholders'
equity.............................. $ 81,771,436 $ 67,075,058
=============== ===============
See accompanying notes to financial statements.
-F 3-
Whitman Education Group, Inc. and Subsidiaries
Consolidated Statements of Operations
Year Ended March 31,
-------------------------------------------
2003 2002 2001
-------------- ------------- -------------
Net revenues..................... $ 109,795,556 $ 91,926,806 $ 79,629,315
Costs and expenses:
Instructional and educational
support....................... 64,478,968 58,470,054 52,670,430
Selling and promotional........ 15,765,424 14,425,245 14,312,141
General and administrative..... 16,137,637 13,971,977 12,070,282
Merger related expenses........ 502,654 - -
-------------- ------------- -------------
Total costs and expenses......... 96,884,683 86,867,276 79,052,853
-------------- ------------- -------------
Income from operations........... 12,910,873 5,059,530 576,462
Other (income) and expenses:
Interest expense............... 714,904 932,083 1,142,886
Interest income................ (369,226) (369,280) (334,983)
Loss on Huron investment......... - - 1,164,613
-------------- ------------- -------------
Income (loss) before income tax
provision (benefit) and
cumulative effect of change in
accounting principle........... 12,565,195 4,496,727 (1,396,054)
Income tax provision (benefit)... 5,054,119 1,895,196 (538,159)
-------------- ------------- -------------
Income (loss) before cumulative
effect of change in accounting
principle...................... 7,511,076 2,601,531 (857,895)
Cumulative effect of change in
accounting principle, net of
tax benefit of $375,981........ - - (563,971)
-------------- ------------- -------------
Net income (loss)................ $ 7,511,076 $ 2,601,531 $ (1,421,866)
============= ============= =============
Basic income (loss) per share:
Income (loss) before cumulative
effect of change in accounting
principle...................... $ 0.53 $ 0.19 $ (0.07)
Cumulative effect of change in
accounting principle, net of
tax............................ - - (0.04)
-------------- ------------- -------------
Net income (loss) ............... $ 0.53 $ 0.19 $ (0.11)
============== ============= =============
Diluted income (loss) per share:
Income (loss) before cumulative
effect of change in accounting
principle...................... $ 0.49 $ 0.18 $ (0.07)
Cumulative effect of change in
accounting principle, net of
tax............................ - - (0.04)
-------------- ------------- -------------
Net income (loss) ............... $ 0.49 $ 0.18 $ (0.11)
============== ============= =============
Weighted average common shares
outstanding:
Basic.......................... 14,116,848 13,696,354 13,370,030
============== ============= =============
Diluted........................ 15,435,490 14,318,169 13,370,030
============== ============= =============
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, 2003, 2002 and 2001
Retained
Common Additional Earnings
Shares Common Paid-In (Accumulated
Outstanding Stock Capital Deficit) Total
----------- ----------- ----------- ----------- -------------
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
Shares issued in
connection with
exercise of
options......... 769,723 2,325,566 319,565 - 2,645,131
Shares issued in
connection with
stock purchase
plan............ 15,176 73,288 - - 73,288
Shares issued in
connection with
401(k) employee
match........... 66,212 305,271 - - 305,271
Comprehensive
income:
Net income...... - - - 7,511,076 7,511,076
-------------
Comprehensive
income.......... 7,511,076
----------- ----------- ----------- ----------- -------------
Balance at March
31, 2003....... 14,678,965 $25,902,278 $1,124,874 $ 7,234,251 $ 34,261,403
========== =========== =========== =========== =============
See accompanying notes to financial statements.
-F 5-
Whitman Education Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year Ended March 31,
------------------------------------------
2003 2002 2001
------------- ------------- --------------
Cash flows from operating
activities:
Net income (loss).................. $ 7,511,076 $ 2,601,531 $ (1,421,866)
Adjustments to reconcile net
income (loss) to net cash provided
by operating activities:
Depreciation and amortization... 3,635,897 3,744,494 3,872,444
Bad debt expense................ 5,534,143 4,657,498 3,984,551
Deferred tax provision
(benefit)....................... 1,031,166 1,457,801 (941,070)
Loss on Huron investment........ - - 1,164,613
Changes in operating assets and
liabilities:
Accounts receivable........... (9,015,809) (1,948,959) (3,919,876)
Inventories................... (457,992) (117,478) (106,990)
Other current assets.......... 180,873 (591,416) 269,199
Deposits and other assets..... 196,734 (130,978) 21,733
Accounts payable.............. 691,156 (640,322) 1,011,258
Accrued expenses.............. 2,138,894 3,643,665 (2,324,771)
Deferred tuition revenue...... 4,693,708 769,040 910,314
------------- ------------- --------------
Net cash provided by operating
activities....................... 16,139,846 13,444,876 2,519,539
------------- ------------- --------------
Cash flows from investing
activities:
Purchase of property and
equipment........................ (3,967,316) (1,404,301) (1,964,273)
------------- ------------- --------------
Net cash used in investing
activities....................... (3,967,316) (1,404,301) (1,964,273)
------------- ------------- --------------
Cash flows from financing
activities:
Proceeds from line of credit and
long-term debt................... - 163,846 28,382,490
Principal payments on line of
credit, long-term debt and
capital lease obligations........ (3,367,409) (4,535,862) (29,482,091)
Repurchase of treasury shares...... - - (127,935)
Proceeds from purchases in stock
purchase plan and exercise of
options.......................... 2,398,855 449,540 508,311
------------- ------------- --------------
Net cash used in financing
activities....................... (968,554) (3,922,476) (719,225)
------------- ------------- --------------
Increase (decrease) in cash and
cash equivalents................. 11,203,976 8,118,099 (163,959)
Cash and cash equivalents at
beginning of year................ 14,010,878 5,892,779 6,056,738
------------- ------------- --------------
Cash and cash equivalents at end of
year............................. $25,214,854 $ 14,010,878 $ 5,892,779
============= ============= ==============
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,
------------------------------------------
2003 2002 2001
------------- ------------- --------------
Supplemental disclosures of noncash
financing and investment
activities:
Equipment acquired under capital
leases........................... $ 45,622 $ 1,398,068 $ 2,054,462
============= ============= ==============
Value of stock issued for 401(k)
employee match................... $ 305,270 $ - $ 300,966
============= ============= ==============
Supplemental disclosures of cash
flow information:
Interest paid...................... $ 714,904 $ 932,083 $ 1,142,886
============= ============= ==============
Income taxes paid.................. $ 3,461,158 $ 481,176 $ 22,783
============= ============= ==============
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.
Whitman 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. Whitman
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.
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 $3,636,000, $3,726,000 and $3,576,000 for the
years ended March 31, 2003, 2002, and 2001, 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 (FASB) 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) is no
longer amortized but is 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, Whitman 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 year ended March 31, 2001, had SFAS 142
been applied retroactively, would have been approximately $(1,251,000) and
$(.09).
During fiscal 2003, Whitman performed its annual 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, 2003 and
2002, accumulated goodwill amortization was approximately $1,295,000.
Impairment of Long-Lived Assets
Effective April 1, 2002, Whitman adopted Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). SFAS 144 superseded Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("SFAS 121") and the accounting and
reporting provisions of Accounting Principles Board 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.
Consistent with SFAS 121, SFAS 144 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
$9,174,000, $8,573,000, and $8,274,000 for the years ended March 31, 2003, 2002
and 2001, respectively.
Income Taxes
Whitman uses the liability method of accounting for income taxes. Deferred
income tax assets and liabilities are determined based on the differences
between the financial statements and income tax basis of assets and liabilities
using enacted tax rates in effect for the year in which the differences are
expected to reverse.
Stock-Based Compensation
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" ("SFAS 148"). SFAS 148 amends FASB Statement No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123"). In response to a growing number of
companies announcing plans to record expenses for the fair value of stock
options, SFAS 148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS
123 to require more prominent and more frequent disclosures in financial
statements about the effects of stock-based compensation. SFAS 148 is effective
for financial statements for annual periods ending after December 15, 2002 and
interim periods beginning after December 31, 2002. Whitman has adopted the
amendments to SFAS 123 disclosure provisions required under SFAS 148 but will
continue to use the intrinsic value method under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and
related interpretations to account for stock-based compensation. 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 has been recognized. As such, Whitman's adoption of this statement has
not had any impact on its financial position or results of operations.
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, 2003, 2002 and 2001, no
compensation expense was incurred.
-F 11-
Whitman Education Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
1. Summary of Significant Accounting Policies - (Continued)
The following table illustrates the effect on net income and earnings per
share if Whitman had applied the fair value recognition provisions of SFAS 123
to stock-based employee compensation:
Year Ended March 31,
------------------------------------------
2003 2002 2001
------------- ------------ -------------
Net income (loss), as reported..... $ 7,511,076 $ 2,601,531 $ (1,421,866)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax
effects.......................... 760,879 858,071 1,355,882
------------- ------------ -------------
Pro forma net income (loss)........ $ 6,750,197 $ 1,743,460 $ (2,777,748)
============= ============ =============
Net income (loss) per share:
Basic- as reported............... $ 0.53 $ 0.19 $ (0.11)
============= ============ =============
Basic- pro forma................. $ 0.48 $ 0.13 $ (0.21)
============= ============ =============
Diluted- as reported............. $ 0.49 $ 0.18 $ (0.11)
============= ============ =============
Diluted- pro forma............... $ 0.44 $ 0.12 $ (0.21)
============= ============ =============
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 12-
Whitman Education Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
1. Summary of Significant Accounting Policies - (Continued)
New Accounting Pronouncements
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
("SFAS 146"). SFAS 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities. This statement is effective for
exit or disposal activities initiated after December 31, 2002. Whitman is not
currently engaged in any significant exit or disposal activities and therefore,
the adoption of SFAS 146 did not have any impact on Whitman's financial position
or results of operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). The interpretation elaborates
on the existing disclosure requirements for most guarantees, including loan
guarantees such as standby letters of credit. It also clarifies that at the time
a company issues a guarantee, the company must recognize an initial liability
for the fair value, or market value, of the obligations it assumes under the
guarantee and must disclose that information in its interim and annual financial
statements. The provisions related to recognizing a liability at inception of
the guarantee for the fair value of the guarantor's obligations does not apply
to product warranties or to guarantees accounted for as derivatives. The initial
recognition and initial measurement provisions apply on a prospective basis to
guarantees issued or modified after December 31, 2002. The disclosure
requirements are effective for financial statements of periods ending after
December 15, 2002. Whitman believes the adoption of the recognition and
measurement provisions of FIN 45 will not have a material impact on its
financial position, results of operations or cash flows.
Segment Reporting
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information", establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports. It also establishes standards for related disclosures about products
and services, geographic areas, and major customers. Whitman is organized into
two reportable segments, the University Degree Division and the Associate Degree
Division, through three wholly-owned subsidiaries.
Reclassification
Certain prior year amounts have been reclassified to conform to the fiscal
year 2003 presentation.
-F 13-
Whitman Education Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
2. Merger Agreement
On March 26, 2003, Whitman signed a definitive merger agreement with Career
Education Corporation ("CEC") under which CEC will acquire all of Whitman's
shares for a combination of cash and CEC stock. Under the terms of the
agreement, Whitman's shareholders will receive $6.00 in cash and $8.25 in CEC
common stock for a total of approximately $14.25 per each share of our common
stock. The stock portion of the consideration is subject to adjustment based on
CEC's average closing share price during a specified period prior to closing.
The value of the stock component based on such average closing price will not be
less than $7.75, nor more than $8.75, unless CEC and Whitman agree otherwise.
The estimated purchase price, including estimated acquisition costs, is
expected to be approximately $254.3 million. The estimated purchase price
includes the estimated fair value of CEC common stock to be issued to Whitman's
shareholders of $130.4 million, cash to be paid to Whitman's shareholders of
$92.7 million, estimated cash to be paid to Whitman's option holders of $27.2
million, and estimated acquisition costs of $4.0 million. Consideration to be
paid to Whitman's option holders, representing the difference between the
exercise price and per share merger consideration, will be recorded by Whitman
as compensation expense in Whitman's statement of operations prior to closing as
a result of modifications to be made to Whitman's stock option plan in advance
of the merger. In the fourth quarter ended March 31, 2003, Whitman incurred
professional fees of approximately $0.5 million in connection with the proposed
merger with CEC.
The merger agreement contains certain termination provisions including,
among others, the failure to receive shareholder approval and the failure to
obtain required regulatory approvals. In addition, Whitman may elect to
terminate the merger agreement if the value of the stock consideration that
Whitman's shareholders will receive in the merger would be less than $7.75 per
share of Whitman's common stock, subject to CEC's right to agree to provide our
shareholders with $7.75 per share in CEC common stock. Likewise, CEC may elect
to terminate the merger agreement if the adjusted value of the stock
consideration would be greater than $8.75 per share of Whitman's common stock,
subject to Whitman's right to agree to accept $8.75 per share in CEC common
stock.
A vote of a majority of our outstanding common stock will be required to
approve the merger. The transaction is expected to close during the beginning of
the third quarter of the 2003 calendar year, and is subject to customary closing
conditions including regulatory approvals and the approval of our shareholders.
There can be no assurance that the conditions to the merger will close in the
expected time frame or at all.
3. 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.
-F 14-
Whitman Education Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
3. Divestiture of Huron University - (Continued)
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.
During the year ended March 31, 2001, Newco had a net loss of approximately
$1,884,000.
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. In September 2002, Whitman collected
$166,000 for principal and interest due under the loan. Whitman believes the
collateral of 80,000 shares of Whitman common stock is adequate for the
remaining receivable balance of approximately $360,000 and has elected not to
take action against the former president of Huron at this time.
4. Financial Aid Programs
Approximately 70% of Whitman's net revenues collected during the fiscal
year ended March 31, 2003 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, 2003.
-F 15-
Whitman Education Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
5. Accounts Receivable
A summary of activity for the allowance for doubtful accounts is as
follows:
Year Ended March 31,
---------------------------------------
2003 2002 2001
------------- ----------- -------------
Balance at beginning of year........... $ 6,831,074 $ 6,768,688 $ 5,672,824
Charged to expense..................... 5,534,143 4,657,498 3,984,551
Accounts charged-off during the year,
net of recoveries.................... (5,147,205) (4,595,112) (2,888,687)
------------- ----------- ------------
Balance at end of year................. $ 7,218,012 $ 6,831,074 $ 6,768,688
============= =========== ============
6. Property and Equipment
Property and equipment consist of the following:
Estimated March 31,
Useful Lives -------------------------
(In Years) 2003 2002
--------------- ----------- ------------
Equipment......................... 2-5 $19,426,181 $18,104,898
Leasehold improvements............ 1-10 7,212,570 6,293,753
Furniture and fixtures............ 7-10 5,462,339 4,842,630
Other............................. 5 2,944,423 3,049,023
------------ -----------
35,045,513 32,290,304
Less accumulated depreciation and
amortization................... (23,864,055) (21,485,887)
------------ ------------
$11,181,458 $10,804,417
============ ============
7. Income Taxes
The components of the income tax provision (benefit) are as follows:
Year Ended March 31,
----------------------------------------
2003 2002 2001
----------- ------------- ------------
Current............................... $4,022,953 $ 437,395 $ 26,930
Deferred.............................. 1,031,166 1,457,801 (941,070)
----------- ------------- ------------
Total income tax provision (benefit).. $5,054,119 $1,895,196 $(914,140)
=========== ============= ============
-F 16-
Whitman Education Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
7. 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,
-----------------------------------
2003 2002 2001
--------- ---------- -----------
Statutory tax rate.................... 34.0% 34.0% (34.0)%
State income taxes, net............... 5.8 4.5 (1.9)
Permanent differences................. (0.2) 1.5 (1.5)
Change in valuation allowance......... 0.3 2.2 -
Other, net............................ 0.3 (0.1) (1.7)
--------- ---------- -----------
Effective tax rate.................... 40.2% 42.1% (39.1)%
========= ========== ===========
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,
-------------------------
2003 2002
------------ ------------
Current deferred tax assets:
Accrued expenses.............................. $ 128,000 $ 332,000
Reserves and allowances....................... 2,467,000 2,274,000
Unrealized depreciation in investments........ 95,000 130,000
Rent leveling................................. 134,000 98,000
Tax credits................................... - 408,000
Net operating loss carryforwards.............. 233,000 295,000
Capital loss carryfowards..................... 180,000 167,000
------------ ------------
Total current deferred tax assets before
valuation allowance............................. 3,237,000 3,704,000
Valuation allowance........................... (134,000) (100,000)
------------ ------------
Total current deferred tax assets................ 3,103,000 3,604,000
------------ ------------
Current deferred tax liability:
Prepaid expenses and other..................... (208,000) (262,000)
------------ ------------
Total current deferred tax liability............. (208,000) (262,000)
------------ ------------
Total current deferred tax assets, net........... $ 2,895,000 $ 3,342,000
============ ============
Non-current deferred tax liability:
Amortization of goodwill....................... $(1,359,000) $(1,092,000)
Depreciation................................... (283,000) 34,000
------------ ------------
Total non-current deferred tax liability......... $(1,642,000) $(1,058,000)
============ ============
-F 17-
Whitman Education Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
7. 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 $134,000 valuation allowance at
March 31, 2003 is necessary to reduce the deferred tax assets to the amount that
will more likely than not be realized. The valuation allowance increased by
$34,000 in fiscal 2003, $100,000 in fiscal 2002, and $0 in fiscal 2001. At March
31, 2003, Whitman has no remaining available federal net operating loss
carryforwards. At March 31, 2003, Whitman has available various state net
operating loss carryforwards approximating $6,419,000 expiring in the years 2011
through 2023. Whitman has approximately $478,000 in capital loss carryforwards
which begin to expire in 2004.
8. 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. In June 2002, Whitman increased the line of credit to $3.5 million. 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, as of
March 31, 2002, was equal to the sum of 2.90% and the 30-day commercial paper
rate. In December 2002, the interest rate on the capital expenditure term note
and the line of credit was reduced to the sum of 2.40% and the one-month LIBOR
rate. At March 31, 2003 and 2002, the interest rates were 3.71% and 4.70%,
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,
2003, Whitman was in compliance with the covenants of the term note and the line
of credit. At March 31, 2003, the outstanding balance of the line of credit was
$0 and letters of credit of $0.6 million were outstanding under the facility
which reduced the amount available for borrowing to $2.9 million at March 31,
2003. The maturity date of the line of credit is October 31, 2003.
In accordance with the terms under the merger agreement with CEC, any
balance due under the capital expenditure term note and the line of credit will
be repaid by CEC or Whitman at or prior to the closing of the merger.
-F 18-
Whitman Education Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
8. Debt-(Continued)
Aggregate maturities of long-term debt at March 31, 2003 are as follows:
Fiscal Year
2004.................. $ 1,300,000
2005.................. 1,300,000
2006.................. 1,300,000
2007.................. 758,333
-------------
Total................. $ 4,658,333
=============
9. Capitalized Lease Obligations
Whitman leases equipment, furniture and fixtures and software 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 2003 and 2002, Whitman entered into leases totaling approximately
$46,000 and $1,398,000, respectively, in connection with the purchase of
equipment. The amortization of leased assets of approximately $1,888,000,
$1,976,000 and $1,225,000 for the years ended March 31, 2003, 2002, and 2001,
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:
2003 2002
-------------- -------------
Equipment.................... $ 8,186,929 $ 10,311,374
Furniture and fixtures....... 1,593,435 1,816,294
Software..................... 459,211 464,731
-------------- -------------
10,239,575 12,592,399
Less accumulated
amortization............... (7,230,390) (7,740,480)
-------------- -------------
$ 3,009,185 $ 4,851,919
============== =============
Future minimum lease payments under capital leases at March 31, 2003 are as
follows:
Fiscal Year
2004..................................... $ 1,414,689
2005..................................... 937,138
2006..................................... 487,437
2007..................................... 42,862
--------------
Total minimum lease payments............. 2,882,126
Less amount representing interest
(8%-13%)............................... (307,276)
Less amount classified as current........ (1,223,395)
---------------
Total long-term portion.................. $ 1,351,455
===============
-F 19-
Whitman Education Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
10. 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 $363,000, $305,000 and $301,000 for the years
ended March 31, 2003, 2002 and 2001, respectively. In June 2003, Whitman will
distribute 46,347 shares of common stock to its employees for the fiscal year
2003 matching contribution.
11. Stock Option Plans
Whitman has adopted stock option plans under which employees, directors and
consultants of Whitman may be issued options covering up to 4,230,139 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, 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
Granted............................. 6.24 318,000
Exercised........................... 3.02 (769,723)
Cancelled........................... 3.29 (170,675)
------------
Outstanding March 31, 2003.......... 4.29 3,486,539
============
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 2003, 2002 and 2001, respectively: risk-free rates of 1.6%, 2.9% and 5.7%;
no dividend yields for the three years; volatility factors of the expected
market price of Whitman's common stock of 0.416, 0.394, and 0.614; 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
2003, 2002 and 2001 was $2.81, $1.65 and $1.49, respectively.
-F 20-
Whitman Education Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
11. Stock Option Plans - (Continued)
The Black-Scholes options valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because Whitman's employee stock options have characteristics
significantly different from traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, the
existing models, in management's opinion, do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
The exercise price of options outstanding at March 31, 2003 ranged as
follows:
Number Weighted Average Remaining
Exercise Plan Of Options Contractual Life (Years)
-------------- ------------ --------------------------
$1.50 - $2.25 272,164 3.2
$2.26 - $3.38 981,025 4.0
$3.39 - $5.06 994,250 3.3
$5.07 - $7.59 1,144,100 2.8
$7.60 - $11.39 95,000 0.6
-----------
3,486,539
===========
Stock options totaling 2,845,814, 3,339,849, and 3,162,645 were exercisable
at the end of fiscal 2003, 2002 and 2001, respectively. Common stock reserved
for issuance under the stock option plans aggregate to 4,230,139 shares at March
31, 2003.
12. 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, 2003, 2002 and
2001, Whitman purchased approximately $161,500, $147,900, and $97,500
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 Whitman's directors is also a Vice Chairman and President of IVAX
Corporation. Whitman's Vice Chairman and Chief Executive Officer is also a
director of IVAX Corporation. Whitman incurred rent expense of approximately
$293,000, $284,000 and $146,000 for fiscal years ended March 31, 2003, 2002 and
2001, respectively.
-F 21-
Whitman Education Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
13. 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, 2003 are as follows:
Fiscal Year
-----------
2004................................. $ 5,458,660
2005................................. 5,124,908
2006................................. 4,479,865
2007................................. 3,259,518
2008................................. 3,006,467
Thereafter........................... 4,616,088
------------
Total minimum lease payments......... $25,945,506
============
Rent expense during fiscal 2003, 2002 and 2001 was approximately
$6,281,000, $6,080,000, and $6,035,000, respectively.
In fiscal 2003 Whitman entered into financing agreements to acquire capital
equipment totaling approximately $46,000. In fiscal 2003, approximately $46,000
of capital equipment was financed under these agreements and are included under
capitalized lease obligations. At March 31, 2003, Whitman had $575,000 of
letters of credit outstanding.
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.
14. 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 22-
Whitman Education Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
15. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
For the Year Ended March 31,
--------------------------------------------
2003 2002 2001
------------- ------------- --------------
Numerator:
Income (loss) before cumulative
effect of change in accounting
principle....................... $ 7,511,076 $ 2,601,531 $ (857,895)
Cumulative effect of change in
accounting principle, net of
tax............................. - - (563,971)
------------- ------------- --------------
Net income (loss)............... $ 7,511,076 $ 2,601,531 $ (1,421,866)
============= ============= ==============
Denominator:
Denominator for basic earnings
per share - weighted average
shares.......................... 14,116,848 13,696,354 13,370,030
Effect of dilutive securities:
Employee stock options.......... 1,318,642 621,815 -
------------- ------------- --------------
Dilutive potential common
shares.......................... 1,318,642 621,815 -
Denominator for diluted
earnings per share -
adjusted weighted
average shares and assumed
conversions.................. 15,435,490 14,318,169 13,370,030
============= ============= ==============
Basic income (loss) before
cumulative effect of change in
accounting principle............ $ 0.53 $ 0.19 $ (0.07)
Cumulative effect of change in
accounting principle, net of
tax............................. - - (0.04)
------------- ------------- --------------
Basic net income (loss) per
share........................... $ 0.53 $ 0.19 $ (0.11)
============= ============= ==============
Diluted income (loss) before
cumulative effect of change in
accounting principle............ $ 0.49 $ 0.18 $ (0.07)
Cumulative effect of change in
accounting principle, net of
tax............................. - - (0.04)
------------- ------------- --------------
Diluted net income (loss) per
share........................... $ 0.49 $ 0.18 $ (0.11)
============= ============= ==============
-F 23-
Whitman Education Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
16. 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 primarily
offers associate degrees and diplomas or certificates through SBC and UDS.
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,
--------------------------------------------
2003 2002 2001
------------- ------------- --------------
Net revenues:
Associate Degree Division..... $ 87,559,522 $ 71,839,438 $ 60,084,422
University Degree Division.... 22,236,034 20,087,368 19,544,893
------------- ------------- --------------
Total......................... $109,795,556 $ 91,926,806 $ 79,629,315
============= ============= ==============
Income (loss) before income
tax provision (benefit) and
cumulative effect of change in
accounting principle:
Associate Degree Division..... $ 13,944,732 $ 6,524,956 $ (446,768)
University Degree Division.... 1,581,947 541,137 1,204,701
Other......................... (2,961,484) (2,569,366) (2,153,987)
------------- ------------- --------------
Total......................... $ 12,565,195 $ 4,496,727 $ (1,396,054)
============= ============= ==============
Capital expenditures:
Associate Degree Division..... $ 3,543,590 $ 1,711,502
University Degree Division.... 465,745 1,087,837
Other......................... 3,603 3,030
------------- -------------
Total......................... $ 4,012,938 $ 2,802,369
============= =============
March 31,
----------------------------
2003 2002
------------- -------------
Total assets:
Associate Degree Division..... $ 67,400,808 $ 52,709,153
University Degree Division.... 13,896,845 10,726,685
Other......................... 473,783 3,639,220
------------- -------------
Total....................... $ 81,771,436 $ 67,075,058
============= =============
-F 24-
Whitman Education Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
17. Quarterly Financial Data (Unaudited)
Summarized unaudited quarterly financial data for the fiscal years ended
March 31, 2003 and 2002 are as follows:
2003
-------------------------------------------------------
First Second Third Fourth
------------ ------------- ------------- -------------
Net revenues $25,424,115 $25,349,696 $28,951,285 $30,070,460
Income from operations 2,460,611 1,199,375 4,510,468 4,740,419
Net income 1,421,817 658,683 2,609,485 2,821,091
Net income per share:
Basic $ 0.10 $ 0.05 $ 0.18 $ 0.19
Diluted $ 0.09 $ 0.04 $ 0.17 $ 0.17
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
Net income 97,027 29,627 1,328,886 1,145,991
Net income per share:
Basic $ 0.01 $ 0.00 $ 0.10 $ 0.08
Diluted $ 0.01 $ 0.00 $ 0.09 $ 0.08
-F 25-