FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
Commission File Number 1-13722
WHITMAN EDUCATION GROUP, INC.
(Exact Name of Registrant as Specified in its Charter)
Florida 22-2246554
------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
4400 Biscayne Boulevard, Miami, Florida 33137
----------------------------------------------------
(Address of Principal Executive Offices)
(305) 575-6510
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ______
Indicate the number of shares outstanding of each of issuer's classes of
common stock, as of the latest practicable date.
As of October 31, 2002, there were 14,125,042 shares of common stock
outstanding.
1
WHITMAN EDUCATION GROUP, INC.
Form 10-Q
September 30, 2002
TABLE OF CONTENTS
Page No.
PART I - Financial Information
Item 1. Financial Statements...................................... 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 11
Item 4. Controls and Procedures................................... 18
PART II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders....... 18
Item 6. Exhibits and Reports on Form 8-K.......................... 18
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Whitman Education Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
September 30, March 31,
2002 2002
-------------- -------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents................. $ 14,261,132 $ 14,010,878
Accounts receivable, net.................. 28,886,516 23,425,589
Inventories............................... 1,860,252 1,633,917
Deferred tax assets, net.................. 3,333,027 3,376,197
Other current assets...................... 2,261,651 2,273,607
-------------- -------------
Total current assets..................... 50,602,578 44,720,188
Property and equipment, net................... 10,640,090 10,804,417
Deposits and other assets, net................ 1,970,891 2,296,002
Goodwill, net................................. 9,288,622 9,288,622
-------------- -------------
Total assets............................. $ 72,502,181 $ 67,109,229
============== =============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable.......................... $ 2,301,568 $ 1,716,674
Accrued expenses.......................... 6,108,918 6,749,811
Current portion of capitalized
lease obligations....................... 1,549,825 1,781,501
Current portion of capital
expenditure note payable................ 1,300,000 1,300,000
Deferred tuition revenue.................. 27,417,349 23,269,177
-------------- -------------
Total current liabilities................ 38,677,660 34,817,163
Capitalized lease obligations................. 2,199,970 2,815,136
Capital expenditure note payable.............. 4,008,334 4,658,333
Deferred tax liability........................ 1,225,680 1,091,960
Stockholders' equity:
Common stock, no par value; authorized
100,000,000 shares; issued 14,369,414
shares at September 30, 2002 and
14,262,648 shares at March 31, 2002;
outstanding 13,934,620 shares at
September 30, 2002 and 13,827,854 shares
at March 31, 2002....................... 23,781,553 23,198,153
Additional paid-in capital............... 805,309 805,309
Retained earnings (accumulated deficit).. 1,803,675 (276,825)
-------------- -------------
Total stockholders' equity............... 26,390,537 23,726,637
-------------- -------------
Total liabilities and stockholders'
equity.................................. $ 72,502,181 $ 67,109,229
============== =============
See accompanying notes to financial statements.
3
Whitman Education Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
For the Three Months Ended
September 30,
-----------------------------
2002 2001
-------------- -------------
Net revenues.................................. $ 25,349,696 $ 21,384,299
Costs and expenses:
Instructional and educational support..... 16,159,548 14,036,833
Selling and promotional................... 4,186,704 3,837,463
General and administrative................ 3,804,069 3,298,585
-------------- -------------
Total costs and expenses...................... 24,150,321 21,172,881
-------------- -------------
Income from operations........................ 1,199,375 211,418
Other (income) and expenses:
Interest expense.......................... 184,182 245,273
Interest income........................... (91,837) (83,233)
-------------- -------------
Income before income tax provision............ 1,107,030 49,378
Income tax provision.......................... 448,347 19,751
-------------- -------------
Net income.................................... $ 658,683 $ 29,627
============== =============
Net income per share:
Basic..................................... $ 0.05 $ 0.00
============== =============
Diluted................................... $ 0.04 $ 0.00
============== =============
Weighted average common shares outstanding:
Basic..................................... 13,967,803 13,668,586
============== =============
Diluted................................... 15,096,907 14,050,324
============== =============
See accompanying notes to financial statements.
4
Whitman Education Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
For the Six Months Ended
September 30,
-----------------------------
2002 2001
-------------- -------------
Net revenues.................................. $ 50,773,812 $ 41,902,415
Costs and expenses:
Instructional and educational support..... 31,218,411 27,775,521
Selling and promotional................... 8,073,244 7,200,216
General and administrative................ 7,822,171 6,394,283
-------------- -------------
Total costs and expenses...................... 47,113,826 41,370,020
-------------- -------------
Income from operations........................ 3,659,986 532,395
Other (income) and expenses:
Interest expense.......................... 359,251 513,986
Interest income........................... (195,903) (192,681)
-------------- -------------
Income before income tax provision............ 3,496,638 211,090
Income tax provision.......................... 1,416,138 84,436
-------------- -------------
Net income.................................... $ 2,080,500 $ 126,654
============== =============
Net income per share:
Basic..................................... $ 0.15 $ 0.01
============== =============
Diluted................................... $ 0.14 $ 0.01
============== =============
Weighted average common shares outstanding:
Basic............................. 13,944,028 13,658,737
============== =============
Diluted........................... 15,233,793 13,990,198
============== =============
See accompanying notes to financial statements.
5
Whitman Education Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the Six Months Ended
September 30,
-----------------------------
2002 2001
-------------- -------------
Cash flows from operating activities:
Net income.................................... $ 2,080,500 $ 126,654
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............... 1,827,809 1,979,719
Bad debt expense............................ 2,751,942 2,329,326
Deferred tax provision...................... 176,890 -
Changes in operating assets and liabilities:
Accounts receivable........................ (8,212,869) (3,940,133)
Inventories................................ (226,335) 30,912
Other current assets....................... 11,956 (20,263)
Deposits and other assets.................. 325,111 (210,515)
Accounts payable........................... 584,894 (1,019,253)
Accrued expenses........................... (335,623) 1,225,333
Income taxes payable....................... - 69,815
Deferred tuition revenue................... 4,148,172 953,851
-------------- -------------
Net cash provided by operating activities..... 3,132,447 1,525,446
-------------- -------------
Cash flows from investing activity:
Purchase of property and equipment............ (1,617,860) (710,705)
-------------- -------------
Net cash used in investing activity........... (1,617,860) (710,705)
-------------- -------------
Cash flows from financing activities:
Proceeds from line of credit and long-term
debt......................................... - 163,846
Principal payments on line of credit,
long-term debt and capital lease obligations. (1,542,463) (3,104,530)
Proceeds from purchases in stock purchase plan
and exercise of options...................... 278,130 29,550
-------------- -------------
Net cash used in financing activities......... (1,264,333) (2,911,134)
-------------- -------------
Increase (decrease) in cash and cash
equivalents.................................. 250,254 (2,096,393)
Cash and cash equivalents at beginning of
year......................................... 14,010,878 5,892,779
-------------- -------------
Cash and cash equivalents at end of period..... $ 14,261,132 $ 3,796,386
============== =============
Supplemental disclosures of noncash financing
and investing activities:
Equipment acquired under capital leases....... $ 45,622 $ 513,108
============== =============
Value of stock issued for 401(k)employee
match........................................ $ 305,270 $ -
============== =============
Supplemental disclosures of cash flow
information:
Interest paid................................. $ 359,251 $ 513,986
============== =============
Income taxes paid............................. $ 1,494,179 $ 5,000
============== =============
See accompanying notes to financial statements.
6
Whitman Education Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. General
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the instructions to Form 10-Q and, in the
opinion of management, include all adjustments, which are of a normal recurring
nature, necessary for a fair presentation, in all material respects, of
financial position and the results of operations and cash flows for the periods
presented. However, the financial statements do not include all information and
footnotes required for a presentation in accordance with accounting principles
generally accepted in the United States of America. These condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and the notes thereto included or incorporated by reference
in our Form 10-K for the fiscal year ended March 31, 2002. The results of
operations for the interim periods are not necessarily indicative of the results
of operations to be expected for the full year.
The accompanying financial statements include the accounts of Whitman
Education Group, Inc., and its wholly-owned subsidiaries, Ultrasound Technical
Services, Inc. ("Ultrasound Diagnostic Schools"), Sanford Brown College, Inc.
("Sanford-Brown College") and CTU Corporation ("Colorado Technical University").
All intercompany accounts and transactions have been eliminated. Hereafter,
reference to "Whitman" shall include collectively Whitman Education Group, Inc.
and its operating subsidiaries, Ultrasound Diagnostic Schools, Sanford-Brown
College and Colorado Technical University.
Whitman experiences seasonality in its quarterly results of operations as a
result of changes in the level of student enrollment. New enrollment in
Whitman's schools tends to be lower in the first and second fiscal quarters
covering the summer months which are traditionally associated with recess from
school. Costs are generally not significantly affected by seasonal factors on a
quarterly basis. Accordingly, quarterly variations in net revenues will result
in fluctuations in income from operations on a quarterly basis.
7
Whitman Education Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) - (Continued)
2. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
For the Three Months For the Six Months
Ended September 30, Ended September 30,
-------------------------- --------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Numerator:
Net income............... $ 658,683 $ 29,627 $ 2,080,500 $ 126,654
============ ============ ============ ============
Denominator:
Denominator for basic
earnings per share -
weighted average
shares............... 13,967,803 13,668,586 13,944,028 13,658,737
Effect of dilutive
securities:
Employee stock options. 1,129,104 381,738 1,289,765 331,461
------------ ------------ ------------ ------------
Dilutive potential
common shares........ 1,129,104 381,738 1,289,765 331,461
Denominator for diluted
earnings per share-
adjusted weighted-
average shares and
assumed conversions.. 15,096,907 14,050,324 15,233,793 13,990,198
============ ============ ============ ============
Basic net income per
share.................. $ 0.05 $ 0.00 $ 0.15 $ 0.01
============ ============ ============ ============
Diluted net income per
share.................. $ 0.04 $ 0.00 $ 0.14 $ 0.01
============ ============ ============ ============
3. New Accounting Pronouncement
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 requires that one
accounting model be used for long-lived assets to be disposed of by sale and
broadens the presentation of discontinued operations to include more disposal
transactions. SFAS 144 supercedes FASB Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets to Be Disposed Of" and the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual, and Infrequently Occurring Events and Transactions" for
the disposal of a segment of a business. The adoption of SFAS 144, which was
effective April 1, 2002, did not have an impact on Whitman's financial position
or results of operations.
In June 2002, the Financial Accounting Standards Board 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 does not expect the adoption of SFAS 146 to have any
impact on its financial position or results of operations.
8
Whitman Education Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) - (Continued)
4. Net Income Per Common Share
Basic net income per common share is computed using the weighted average
number of common shares outstanding during the period. Diluted net income per
share is computed using the weighted average number of common and common
equivalent shares outstanding during the period.
5. Comprehensive Income
Whitman complies with the provisions of Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
establishes rules for the reporting and display of comprehensive income and its
components. SFAS 130 requires unrealized gains or losses on available-for-sale
securities to be included in "other comprehensive income." Net income was the
only component of comprehensive income for the three and six months ended
September 30, 2002 and September 30, 2001.
6. Segment and Related Information
Whitman complies with the provisions of Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers.
Whitman is organized into two reportable segments, the University Degree
Division and the Associate Degree Division. The University Degree Division
primarily offers bachelor, master and doctorate degrees through Colorado
Technical University. The Associate Degree Division primarily offers associate
degrees and diplomas or certificates through Sanford-Brown College and
Ultrasound Diagnostic Schools.
Whitman's revenues are not materially dependent on a single customer or
small group of customers.
9
Whitman Education Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) - (Continued)
6. Segment and Related Information - (Continued)
Summarized financial information concerning Whitman's reportable segments
is shown in the following table:
For the Three Months For the Six Months
Ended September 30, Ended September 30,
--------------------------- ----------------------------
2002 2001 2002 2001
------------- ------------- ------------- --------------
Net revenues:
Associate Degree
Division........ $ 21,079,832 $ 17,400,635 $ 41,051,117 $ 32,688,843
University Degree
Division........ 4,269,864 3,983,664 9,722,695 9,213,572
------------- ------------- ------------- --------------
Total............. $ 25,349,696 $ 21,384,299 $ 50,773,812 $ 41,902,415
============= ============= ============= ==============
Income (loss) before
income tax provision:
Associate Degree
Division........ $ 2,789,947 $ 1,458,389 $ 5,474,943 $ 1,527,244
University Degree
Division........ (1,125,700) (797,795) (858,188) (93,371)
Other............. (557,217) (611,216) (1,120,117) (1,222,783)
------------- ------------- ------------- --------------
Total............. $ 1,107,030 $ 49,378 $ 3,496,638 $ 211,090
============= ============= ============= ==============
September 30, March 31,
2002 2002
------------- -------------
Total assets:
Associate Degree
Division........ $ 63,297,067 $ 52,696,673
University Degree
Division........ 7,577,808 10,773,292
Other............. 1,627,306 3,639,264
------------- -------------
Total............. $ 72,502,181 $ 67,109,229
============= =============
10
Item 2. 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, the related notes to the
consolidated financial statements and Management's Discussion and Analysis of
Financial Condition and Results of Operations included in Whitman's Form 10-K
for the year ended March 31, 2002 and the condensed consolidated financial
statements and the related notes to the condensed consolidated financial
statements included in Item 1 of this Quarterly Report on Form 10-Q. Except for
the historical matters contained herein, statements made in this report are
forward-looking and are made pursuant to the safe harbor provisions of the
Securities Litigation Reform Act of 1995. Such statements may include, but are
not limited to, statements regarding our anticipated financial performance, our
financing needs and plans for future resources, working capital and operations.
Investors are cautioned that forward-looking statements involve risks and
uncertainties, including, but not limited to, risks and uncertainties relating
to the rate of student enrollment growth, 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, the level of government funding for, and
our eligibility to participate in, student financial aid programs, our ability
to assess and meet the educational needs and demands of our customers and their
employers, the effect of competitive pressures from other educational
institutions, our ability to execute our growth strategy and manage planned
internal growth, the effect of economic conditions in the postsecondary
education industry and in the economy generally, the effect of changes in
taxation and other government regulations, risks relating to the recoverability
of our goodwill and the realization of our deferred tax assets, and risks and
uncertainties relating to the availability of financing which may cause our
actual results, performance or achievements to differ materially from the
results expressed in the forward-looking statements made in this report. Other
factors that may affect our future results include certain economic,
competitive, governmental and other factors discussed in our filings with the
Securities and Exchange Commission. We assume no responsibility to update
forward-looking statements made herein or otherwise.
Results of Operations
The following table sets forth the percentage relationship of certain
statement of operations data to net revenues for the periods indicated:
For the Three Months Ended For the Six Months Ended
September 30, September 30,
--------------------------- -------------------------
2002 2001 2002 2001
------------ ------------ ----------- -----------
Net revenues........ 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Instructional and
educational
support......... 63.8 65.7 61.5 66.2
Selling and
promotional..... 16.5 17.9 15.9 17.2
General and
administrative.. 15.0 15.4 15.4 15.3
------------ ------------ ----------- -----------
Total costs and
expenses.......... 95.3 99.0 92.8 98.7
------------ ------------ ----------- -----------
Income from
operations........ 4.7 1.0 7.2 1.3
Other (income) and
expenses:
Interest expense.. 0.7 1.1 0.7 1.2
Interest income... (0.4) (0.3) (0.4) (0.4)
------------ ------------ ----------- -----------
Income before income
tax provision..... 4.4 0.2 6.9 0.5
Income tax
provision......... 1.8 0.1 2.8 0.2
------------ ------------ ------------ -----------
Net income.......... 2.6% 0.1% 4.1% 0.3%
============ ============ ============ ===========
11
Results of Operations - (Continued)
Three Months Ended September 30, 2002 Compared to Three Months Ended
September 30, 2001
Net revenues increased by $3.9 million, or 18.5%, to $25.3 million for the
three months ended September 30, 2002 from $21.4 million for the three months
ended September 30, 2001. This increase was primarily due to a 10.9% increase in
average student enrollment and an increase in tuition rates.
The Associate Degree Division experienced a 16.9% increase in average
student enrollment and the University Degree Division experienced a 5.5%
decrease in average student enrollment. The increase in student enrollment in
the Associate Degree Division was primarily due to increased enrollment in the
medical assisting and health information specialist programs offered at the
Ultrasound Diagnostic Schools and the allied health programs offered at
Sanford-Brown College. The decrease in student enrollment in the University
Degree Division was primarily due to a decline in enrollment in the information
technology programs offered at Colorado Technical University. The decrease in
average student enrollment in the University Degree Division was offset by an
increase in the revenue earned per student due to an increase in tuition rates
and an increase in auxiliary sales.
Instructional and educational support expenses increased by $2.1 million,
or 15.1%, to $16.1 million for the three months ended September 30, 2002 from
$14.0 million for the three months ended September 30, 2001. However, as a
percentage of net revenues, instructional and educational support expenses
decreased to 63.8% for the three months ended September 30, 2002 as compared to
65.7% for the three months ended September 30, 2001. 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 $0.4 million, or 9.1%, to
$4.2 million for the three months ended September 30, 2002 from $3.8 million for
the three months ended September 30, 2001. As a percentage of net revenues,
selling and promotional expenses decreased to 16.5% for the three months ended
September 30, 2002 as compared to 17.9% for the three months ended September 30,
2001. The increase in selling and promotional expenses was primarily due to 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 $0.5 million, or 15.3%, to
$3.8 million for the three months ended September 30, 2002 from $3.3 million for
the three months ended September 30, 2001. As a percentage of net revenues,
general and administrative expenses decreased to 15.0% for the three months
ended September 30, 2002 as compared to 15.4% for the three months ended
September 30, 2001. The increase in general and administrative expenses was
primarily due to an increase in bad debt expense. However, as a percentage of
net revenues, bad debt expense decreased to 5.5% for the three months ended
September 30, 2002 from 5.6% for the three months ended September 30, 2001.
We reported income from operations of $1.2 million and $0.2 million for the
three months ended September 30, 2002 and 2001, respectively. This increase in
profitability was primarily due to an increase in income from operations of $1.3
million in the Associate Degree Division which was partially offset by an
increase in losses from operations of $0.3 million in the University Degree
Division.
12
Results of Operations - (Continued)
We reported net income of $0.7 million and $29,627 for the three months
ended September 30, 2002 and 2001, respectively. The increase in net income was
primarily due to the increase in profitability in the Associate Degree Division.
Six Months Ended September 30, 2002 Compared to Six Months Ended September 30,
2001
Net revenues increased by $8.9 million, or 21.2%, to $50.8 million for the
six months ended September 30, 2002 from $41.9 million for the six months ended
September 30, 2001. This increase was primarily due to a 10.4% increase in
average student enrollment and an increase in tuition rates.
The Associate Degree Division experienced a 17.8% increase in average
student enrollment and the University Degree Division experienced a 6.0%
decrease in average student enrollment. The increase in student enrollment in
the Associate Degree Division was primarily due to increased enrollment in the
medical assisting and health information specialist programs offered at the
Ultrasound Diagnostic Schools and the allied health programs offered at
Sanford-Brown College. The decrease in student enrollment in the University
Degree Division was primarily due to a decline in enrollment in the information
technology programs offered at Colorado Technical University. The decrease in
average student enrollment in the University Degree Division was offset by an
increase in the revenue earned per student due to an increase in the number of
credit hours taken by students at Colorado Technical University, an increase in
tuition rates, and an increase in auxiliary sales.
Instructional and educational support expenses increased by $3.4 million,
or 12.4%, to $31.2 million for the six months ended September 30, 2002 from
$27.8 million for the six months ended September 30, 2001. As a percentage of
net revenues, instructional and educational support expenses decreased to 61.5%
for the six months ended September 30, 2002 as compared to 66.2% for the six
months ended September 30, 2001. 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 $0.9 million, or 12.1%, to
$8.1 million for the six months ended September 30, 2002 from $7.2 million for
the six months ended September 30, 2001. As a percentage of net revenues,
selling and promotional expenses decreased to 15.9% for the six months ended
September 30, 2002 as compared to 17.2% for the six months ended September 30,
2001. The increase in selling and promotional expenses was primarily due to 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 $1.4 million, or 22.3%, to
$7.8 million for the six months ended September 30, 2002 from $6.4 million for
the six months ended September 30, 2001. As a percentage of net revenues,
general and administrative expenses increased to 15.4% for the six months ended
September 30, 2002 as compared to 15.3% for the six months ended September 30,
2001. 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. However,
for the six months ended September 30, 2002, bad debt expense as a percentage of
net revenues decreased to 5.4% from 5.6% for the six months ended September 30,
2001.
13
Results of Operations - (Continued)
We reported income from operations of $3.7 million and $0.5 million for the
six months ended September 30, 2002 and 2001, respectively. This increase in
profitability was primarily due to an increase in income from operations of $3.9
million in the Associate Degree Division which was partially offset by an
increase in losses from operations of $0.8 million in the University Degree
Division.
We reported net income of $2.1 million and $0.1 million for the six months
ended September 30, 2002 and 2001, respectively. The increase in net income was
primarily due to the increase in profitability in the Associate Degree Division.
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 lower in the first and second fiscal quarters covering the
summer months, which are traditionally associated with recess from school. 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 September 30, 2002 and March 31, 2002 were
$14.3 million and $14.0 million, respectively. Our working capital totaled $11.9
million at September 30, 2002 and $9.9 million at March 31, 2002.
Net cash of $3.1 million and $1.5 million were provided by operating
activities for the six months ended September 30, 2002 and 2001, respectively.
The increase in cash provided by operating activities of $1.6 million was
primarily due to an increase in net profits of $2.0 million.
Net cash of $1.6 million and $0.7 million were used in investing activities
for the six months ended September 30, 2002 and 2001, respectively. The net cash
used in investing activities related to the purchase of property and equipment.
Net cash of $1.3 million and $2.9 million were used in financing activities
for the six months ended September 30, 2002 and 2001, respectively. The net cash
used in financing activities related to principal payments made on our long-term
debt, line of credit and capital lease obligations net of proceeds received from
such financings, and proceeds received from purchases in our employee stock
purchase plan and from the exercise of stock options. The decrease in cash used
in financing activities was due to a decrease of $1.4 million in net payments on
long-term debt and capitalized lease obligations.
14
Liquidity and Capital Resources - (Continued)
We have a $3.5 million line of credit which expires on October 31, 2003. At
September 30, 2002, we had no outstanding balance under this facility and
letters of credit outstanding of $0.5 million which reduced the amount available
for borrowing.
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. Approximately 65% of our cash
collections are from students who received funds from Title IV Programs.
Disbursements under each program are subject to disallowance and repayment by
the schools. 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 our
short-term and long-term liquidity.
We believe that with 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.
Contractual Obligations and Other Commercial Commitments
The following summarizes our contractual obligations at September 30, 2002,
and the effect such obligations are expected to have on our liquidity and cash
flow in future periods (in thousands):
Payments Due by Period
-----------------------------------------------------
Within After
Total 1 Year 2-3 Years 4-5 Years 5 Years
------- -------- --------- --------- -------
Note payable $ 5,308 $ 1,300 $ 2,600 $ 1,408 $ -
Capital lease obligations 3,750 1,550 1,926 274 -
Operating leases 28,122 5,427 9,626 6,987 6,082
------- -------- --------- --------- -------
$37,180 $ 8,277 $ 14,152 $ 8,669 $ 6,082
======= ======== ========= ========= =======
We have a contractual commitment related to a $3.5 million line of credit
which expires on October 31, 2003. At September 30, 2002, we had no outstanding
balance under this facility and letters of credit outstanding of $0.5 million,
which reduced the amount available for borrowing.
Transactions with Former Management
We purchase certain textbooks and materials for resale to our students from
an entity that is 40% owned by Randy S. Proto, our former Chief Operating
Officer and President. For the six months ended September 30, 2002 and 2001, we
purchased approximately $69,000 and $73,000, respectively, in textbooks and
materials from that entity.
15
Critical Accounting Policies and Estimates
Financial Reporting Release No. 60 encourages all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Note 1 to the Consolidated Financial Statements of Whitman
Education Group, Inc. for the fiscal year ended March 31, 2002 included in our
Form 10-K as filed with the Securities and Exchange Commission includes a
summary of the significant accounting policies and methods used in the
preparation of our Consolidated Financial Statements. The following is a brief
discussion of the more significant accounting policies and methods used by us.
Our discussions 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
us 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 reported 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, and
contingencies and litigation. We base our 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. Actual results may differ from these estimates under different
conditions or if our assumptions change.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our financial
statements:
o We maintain an allowance for doubtful accounts for estimated losses
resulting from the inability, failure or refusal 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.
o We have made acquisitions in the past that have resulted in the recognition
of goodwill. In assessing the recoverability of our goodwill, we must make
assumptions regarding estimated future cash flows and other factors to
determine the fair value of the respective asset. If these estimates or
their related assumptions change in the future, we may be required to
record impairment charges for this asset not previously recorded which
would adversely impact our operating results for the period in which we
made the determination. There are many assumptions and estimates underlying
the determination of an impairment loss. Another estimate using different,
but still reasonable assumptions could produce a significantly different
result. Therefore, impairment losses could be recorded in the future.
16
Critical Accounting Policies and Estimates - (Continued)
o We currently have deferred tax assets which are subject to periodic
recoverability assessments. Realization of our deferred tax assets is
principally dependent upon achievement of projected future taxable income.
We evaluate the realizability of our deferred tax assets quarterly.
New Accounting Pronouncement
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 requires that one
accounting model be used for long-lived assets to be disposed of by sale and
broadens the presentation of discontinued operations to include more disposal
transactions. SFAS 144 supercedes FASB Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets to Be Disposed Of" and the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual, and Infrequently Occurring Events and Transactions" for
the disposal of a segment of a business. The adoption of SFAS 144, which was
effective April 1, 2002, did not have an impact on our financial position or
results of operations.
In June 2002, the Financial Accounting Standards Board 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 do not expect the adoption of SFAS 146 to have any
impact on our financial position or results of operations.
Outlook
The principal factors that we now expect will influence our 2003 financial
outlook include changes and trends in:
o our student population;
o our allowance for doubtful accounts and bad debt expense;
o the level of governmental funding for student financial aid programs; and
o governmental regulations, accreditation standards, or taxation.
Other factors that could impact our 2003 financial outlook are discussed
above and in our other filings with the Securities and Exchange Commission.
Based on information and forecasts available to us, we now expect revenues
for the year ending March 31, 2003 to increase to the range of approximately
$103.0 million to $105.0 million, operating income to increase to approximately
$9.1 million to $9.7 million, and net income to increase to approximately $5.2
million to $5.6 million. In such case, we would expect diluted earnings per
share to increase to approximately $0.34 to $0.36 based on our expectation of
approximately 15.6 million diluted common shares to be outstanding under the
treasury stock method.
17
Item 4. Controls and Procedures
Within 90 days prior to the date of this report, we carried out 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. 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.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Annual Shareholders' Meeting
On August 15, 2002, Whitman held its annual meeting of shareholders. At the
meeting, all of the nominees for director were elected by the vote set forth
opposite their names in the table below:
Election of Directors For Withheld
--------------------- --- --------
Phillip Frost, M.D. 13,648,374 1,113
Richard C. Pfenniger, Jr. 13,590,234 59,253
Jack R. Borsting, Ph.D 13,648,122 1,365
Neil Flanzraich 13,648,122 1,365
Peter S. Knight 13,646,374 3,113
Richard M. Krasno, Ph.D. 13,646,374 3,113
Lois F. Lipsett, Ph.D. 13,648,374 1,113
Percy A. Pierre, Ph.D. 13,648,374 1,113
A. Marvin Strait, C.P.A. 13,648,374 1,113
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
Exhibit
Number Description Method of Filing
-------- ----------- ----------------
99.1 Certification of Chief Executive Officer Filed herewith.
99.2 Certification of Chief Financial Officer Filed herewith.
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed by Whitman during the quarter ended
September 30, 2002.
18
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.
Date: November 7, 2002 By: /s/ FERNANDO L. FERNANDEZ
-------------------------
Fernando L. Fernandez
Vice President - Finance,
Chief Financial Officer,
Treasurer and Secretary
19
CERTIFICATION
-------------
I, Richard C. Pfenniger, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Whitman Education
Group, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly report;
4. The registrant's other certifying officers 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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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 officers 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 officers and I have indicated in this
quarterly 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.
Date: November 7, 2002 By: /s/RICHARD C. PFENNIGER, JR.
----------------------------
Richard C. Pfenniger, Jr.
Chief Executive Officer
20
CERTIFICATION
-------------
I, Fernando L. Fernandez, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Whitman Education
Group, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly report;
4. The registrant's other certifying officers 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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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 officers 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 officers and I have indicated in this
quarterly 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.
Date: November 7, 2002 By: /s/FERNANDO L. FERNANDEZ
------------------------
Fernando L. Fernandez
Vice President-Finance,
Chief Financial Officer,
Treasurer and Secretary
21