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 December 31, 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
Incorporation or Organization) Identification No.)
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes_______ No X
Indicate the number of shares outstanding of each of issuer's classes of
common stock, as of the latest practicable date.
As of January 24, 2003, there were 14,205,867 shares of common stock
outstanding.
1
WHITMAN EDUCATION GROUP, INC.
Form 10-Q
December 31, 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 6. Exhibits and Reports on Form 8-K....................... 19
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Whitman Education Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
December 31, March 31,
2002 2002
-------------- --------------
Assets (Unaudited)
Current assets:
Cash and cash equivalents................ $ 18,482,946 $ 14,010,878
Accounts receivable, net................. 23,908,139 23,425,589
Inventories.............................. 1,960,537 1,633,917
Deferred tax assets, net................. 2,804,735 3,376,197
Other current assets..................... 1,570,539 2,273,607
-------------- --------------
Total current assets.................... 48,726,896 44,720,188
Property and equipment, net................... 10,865,875 10,804,417
Deposits and other assets..................... 2,133,825 2,296,002
Goodwill, net................................. 9,288,622 9,288,622
-------------- --------------
Total assets............................ $ 71,015,218 $ 67,109,229
============== ==============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable......................... $ 1,731,917 $ 1,716,674
Accrued expenses......................... 7,030,116 6,749,811
Current portion of capitalized lease
obligations............................. 1,445,132 1,781,501
Current portion of capital expenditure
note payable............................ 1,300,000 1,300,000
Deferred tuition revenue................. 23,295,540 23,269,177
-------------- --------------
Total current liabilities............... 34,802,705 34,817,163
Capitalized lease obligations................. 1,610,056 2,815,136
Capital expenditure note payable.............. 3,683,334 4,658,333
Deferred tax liability........................ 1,292,539 1,091,960
Stockholders' equity:
Common stock, no par value; authorized
100,000,000 shares; issued 14,603,611
shares at December 31, 2002 and
14,262,648 shares at March 31, 2002;
outstanding 14,168,817 shares at
December 31, 2002 and 13,827,854 shares
at March 31, 2002....................... 24,198,117 23,198,153
Additional paid-in capital............... 1,015,307 805,309
Retained earnings (accumulated deficit).. 4,413,160 (276,825)
-------------- --------------
Total stockholders' equity............... 29,626,584 23,726,637
-------------- --------------
Total liabilities and stockholders'
equity.................................. $ 71,015,218 $ 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
December 31,
-------------------------------
2002 2001
-------------- --------------
Net revenues................................... $ 28,951,285 $ 24,369,149
Costs and expenses:
Instructional and educational support..... 16,615,350 14,770,480
Selling and promotional................... 3,810,959 3,630,829
General and administrative................ 4,014,508 3,628,924
-------------- --------------
Total costs and expenses....................... 24,440,817 22,030,233
-------------- --------------
Income from operations......................... 4,510,468 2,338,916
Other (income) and expenses:
Interest expense.......................... 174,395 215,070
Interest income........................... (86,783) (90,964)
-------------- --------------
Income before income tax provision............. 4,422,856 2,214,810
Income tax provision........................... 1,813,371 885,924
-------------- --------------
Net income..................................... $ 2,609,485 $ 1,328,886
============== ==============
Net income per share:
Basic..................................... $ 0.18 $ 0.10
============== ==============
Diluted................................... $ 0.17 $ 0.09
============== ==============
Weighted average common shares outstanding:
Basic..................................... 14,115,424 13,691,976
============== ==============
Diluted................................... 15,539,072 14,524,031
============== ==============
See accompanying notes to financial statements.
4
Whitman Education Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
For the Nine Months Ended
December 31,
-------------------------------
2002 2001
-------------- --------------
Net revenues.................................. $ 79,725,097 $ 66,271,563
Costs and expenses:
Instructional and educational support.... 47,833,761 42,546,001
Selling and promotional.................. 11,884,203 10,831,045
General and administrative............... 11,836,679 10,023,206
-------------- --------------
Total costs and expenses...................... 71,554,643 63,400,252
-------------- --------------
Income from operations........................ 8,170,454 2,871,311
Other (income) and expenses:
Interest expense......................... 533,645 729,057
Interest income.......................... (282,685) (283,646)
-------------- --------------
Income before income tax provision............ 7,919,494 2,425,900
Income tax provision.......................... 3,229,509 970,360
-------------- --------------
Net income.................................... $ 4,689,985 $ 1,455,540
============== ==============
Net income per share:
Basic.................................... $ 0.33 $ 0.11
============== ==============
Diluted.................................. $ 0.31 $ 0.10
============== ==============
Weighted average common shares outstanding:
Basic.................................... 14,001,368 13,669,833
============== ==============
Diluted.................................. 15,274,727 14,150,767
============== ==============
See accompanying notes to financial statements.
5
Whitman Education Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the Nine Months Ended
December 31,
-------------------------------
2002 2001
-------------- --------------
Cash flows from operating activities:
Net income..................................... $ 4,689,985 $ 1,455,540
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization................ 2,651,880 2,868,912
Bad debt expense............................. 4,168,518 3,530,641
Deferred tax provision....................... 772,041 776,288
Changes in operating assets and liabilities:
Accounts receivable......................... (4,651,068) (220,932)
Inventories................................. (326,620) (177,997)
Other current assets........................ 703,068 (87,050)
Deposits and other assets................... 162,177 (317,417)
Accounts payable............................ 15,243 (623,557)
Accrued expenses............................ 585,575 1,532,123
Deferred tuition revenue.................... 26,363 (1,675,603)
-------------- --------------
Net cash provided by operating activities...... 8,797,162 7,060,948
-------------- --------------
Cash flows from investing activity:
Purchase of property and equipment............. (2,667,716) (1,008,413)
-------------- --------------
Net cash used in investing activity............ (2,667,716) (1,008,413)
-------------- --------------
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........... (2,562,070) (3,777,343)
Proceeds from purchases in stock purchase plan
and exercise of options...................... 904,692 166,435
-------------- --------------
Net cash used in financing activities.......... (1,657,378) (3,447,062)
-------------- --------------
Increase in cash and cash equivalents.......... 4,472,068 2,605,473
Cash and cash equivalents at beginning of
year......................................... 14,010,878 5,892,779
-------------- --------------
Cash and cash equivalents at end of period..... $ 18,482,946 $ 8,498,252
============== ==============
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.................................. $ 533,645 $ 729,057
============== ==============
Income taxes paid.............................. $ 2,084,368 $ 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:
Three Months Ended Nine Months Ended
December 31, December 31,
------------------------ ------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Numerator:
Net income................ $ 2,609,485 $ 1,328,886 $ 4,689,985 $ 1,455,540
=========== =========== =========== ===========
Denominator:
Denominator for basic
earnings per share -
weighted average
shares................ 14,115,424 13,691,976 14,001,368 13,669,833
Effect of dilutive
securities:
Employee stock options.. 1,423,648 832,055 1,273,359 480,934
----------- ----------- ----------- -----------
Dilutive potential
common shares......... 1,423,648 832,055 1,273,359 480,934
----------- ----------- ----------- -----------
Denominator for diluted
earnings per share-
adjusted weighted-
average shares and
assumed conversions... 15,539,072 14,524,031 15,274,727 14,150,767
=========== =========== =========== ===========
Basic net income per
share................... $ 0.18 $ 0.10 $ 0.33 $ 0.11
=========== =========== =========== ===========
Diluted net income per
share................... $ 0.17 $ 0.09 $ 0.31 $ 0.10
=========== =========== =========== ===========
3. New Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board (FASB) 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 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 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)
3. New Accounting Pronouncements - (Continued)
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. The disclosure
provisions will be effective for Whitman beginning with Whitman's year ending
March 31, 2003. Whitman does not expect this statement to have a significant
impact on its financial position or results of operations.
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 nine months ended
December 31, 2002 and 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.
9
Whitman Education Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) - (Continued)
6. Segment and Related Information - (Continued)
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.
Summarized financial information concerning Whitman's reportable segments
is shown in the following table:
For the Three Months Ended For the Nine Months Ended
December 31, December 31,
---------------------------- ---------------------------
2002 2001 2002 2001
------------- ------------- ------------- ------------
Net revenues:
Associate Degree
Division......... $ 22,805,797 $ 18,961,395 $ 63,856,914 $ 51,650,238
University Degree
Division......... 6,145,488 5,407,754 15,868,183 14,621,325
------------- ------------- ------------- -------------
Total.............. $ 28,951,285 $ 24,369,149 $ 79,725,097 $ 66,271,563
============= ============= ============= =============
Income (loss) before
income tax provision:
Associate Degree
Division......... $ 4,001,881 $ 2,324,627 $ 9,476,824 $ 3,851,871
University Degree
Division......... 1,003,520 418,205 145,332 324,834
Other.............. (582,545) (528,022) (1,702,662) (1,750,805)
------------- ------------- ------------- -------------
Total.............. $ 4,422,856 $ 2,214,810 $ 7,919,494 $ 2,425,900
============= ============= ============= =============
December 31, March 31,
2002 2002
------------- -------------
Total assets:
Associate Degree
Division......... $ 58,956,493 $ 52,696,673
University Degree
Division......... 7,468,007 10,773,292
Other.............. 4,590,718 3,639,264
------------- -------------
Total.............. $ 71,015,218 $ 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, 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 Nine Months Ended
December 31, December 31,
--------------------------- -------------------------
2002 2001 2002 2001
------------- ------------ ------------ -----------
Net revenues......... 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Instructional and
educational
support........... 57.4 60.6 60.0 64.2
Selling and
promotional....... 13.1 14.9 14.9 16.4
General and
administrative.... 13.9 14.9 14.9 15.1
------------- ------------ ------------ -----------
Total costs and
expenses........... 84.4 90.4 89.8 95.7
------------- ------------ ------------ -----------
Income from
operations......... 15.6 9.6 10.2 4.3
Other (income) and
expenses:
Interest expense... 0.6 0.9 0.7 1.1
Interest income.... (0.3) (0.4) (0.4) (0.5)
------------- ------------ ------------ -----------
Income before income
tax provision...... 15.3 9.1 9.9 3.7
Income tax provision. 6.3 3.6 4.0 1.5
------------- ------------ ------------ -----------
Net income........... 9.0% 5.5% 5.9% 2.2%
============= ============ ============ ===========
11
Results of Operations - (Continued)
Three Months Ended December 31, 2002 Compared to Three Months Ended December 31,
2001
Net revenues increased by $4.6 million, or 18.8%, to $29.0 million for the
three months ended December 31, 2002 from $24.4 million for the three months
ended December 31, 2001. This increase was primarily due to an 11.0% increase in
average student enrollment and an increase in tuition rates.
The Associate Degree Division experienced a 16.3% increase in average
student enrollment and the University Degree Division experienced a 0.2%
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 medical billing and coding 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 which was partially offset by an increase in enrollment in
the business 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, and an increase
in tuition rates.
Instructional and educational support expenses increased by $1.8 million,
or 12.5%, to $16.6 million for the three months ended December 31, 2002 from
$14.8 million for the three months ended December 31, 2001. As a percentage of
net revenues, instructional and educational support expenses decreased to 57.4%
for the three months ended December 31, 2002 as compared to 60.6% for the three
months ended December 31, 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 and an increase in the cost of auxiliary
sales as a result of the increase in auxiliary sales. 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 $0.2 million, or 5.0%, to
$3.8 million for the three months ended December 31, 2002 from $3.6 million for
the three months ended December 31, 2001. As a percentage of net revenues,
selling and promotional expenses decreased to 13.1% for the three months ended
December 31, 2002 as compared to 14.9% for the three months ended December 31,
2001. The increase in selling and promotional expenses was primarily due to an
increase in payroll and related benefits for additional admissions personnel
needed to support the increase in 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 $0.4 million, or 10.6%, to
$4.0 million for the three months ended December 31, 2002 from $3.6 million for
the three months ended December 31, 2001. As a percentage of net revenues,
general and administrative expenses decreased to 13.9% for the three months
ended December 31, 2002 as compared to 14.9% for the three months ended December
31, 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, as a percentage of net revenues, bad debt expense remained consistent
at 4.9% for the three months ended December 31, 2002 and 2001. The decrease in
general and administrative expenses as a percentage of net revenues was due to
our ability to increase revenues at a greater rate than the rate of increase in
administrative operating costs.
We reported income from operations of $4.5 million and $2.3 million for the
three months ended December 31, 2002 and 2001, respectively. This increase in
profitability was primarily due to an increase in income from operations of $1.7
million in the Associate Degree Division and $0.6 million in the University
Degree Division.
12
Results of Operations - (Continued)
We reported net income of $2.6 million and $1.3 million for the three
months ended December 31, 2002 and 2001, respectively. The increase in net
income was primarily due to the increase in profitability in the Associate
Degree Division.
Nine Months Ended December 31, 2002 Compared to Nine Months Ended December 31,
2001
Net revenues increased by $13.4 million, or 20.3%, to $79.7 million for the
nine months ended December 31, 2002 from $66.3 million for the nine months ended
December 31, 2001. This increase was primarily due to a 10.6% increase in
average student enrollment and an increase in tuition rates.
The Associate Degree Division experienced a 17.3% increase in average
student enrollment and the University Degree Division experienced a 4.0%
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 medical billing and coding 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 which was partially offset by an increase in enrollment in
the business 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 $5.3 million,
or 12.4%, to $47.8 million for the nine months ended December 31, 2002 from
$42.5 million for the nine months ended December 31, 2001. As a percentage of
net revenues, instructional and educational support expenses decreased to 60.0%
for the nine months ended December 31, 2002 as compared to 64.2% for the nine
months ended December 31, 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 and an increase in the cost of auxiliary
sales as a result of the increase in auxiliary sales. 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 $1.1 million, or 9.7%, to
$11.9 million for the nine months ended December 31, 2002 from $10.8 million for
the nine months ended December 31, 2001. As a percentage of net revenues,
selling and promotional expenses decreased to 14.9% for the nine months ended
December 31, 2002 as compared to 16.4% for the nine months ended December 31,
2001. 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 $1.8 million, or 18.1%, to
$11.8 million for the nine months ended December 31, 2002 from $10.0 million for
the nine months ended December 31, 2001. As a percentage of net revenues,
general and administrative expenses decreased to 14.9% for the nine months ended
December 31, 2002 as compared to 15.1% for the nine months ended December 31,
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 nine months ended December 31, 2002, bad debt expense as a percentage of
net revenues decreased to 5.2% from 5.3% for the nine months ended December 31,
2001. 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.
13
Results of Operations - (Continued)
We reported income from operations of $8.2 million and $2.9 million for the
nine months ended December 31, 2002 and 2001, respectively. This increase in
profitability was primarily due to an increase in income from operations of $5.6
million in the Associate Degree Division which was partially offset by an
increase in losses from operations of $0.2 million in the University Degree
Division.
We reported net income of $4.7 million and $1.5 million for the nine months
ended December 31, 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 December 31, 2002 and March 31, 2002 were
$18.5 million and $14.0 million, respectively. The increase in cash and cash
equivalents was primarily due to net income of $4.7 million generated for the
nine months ended December 31, 2002. Our working capital totaled $13.9 million
at December 31, 2002 and $9.9 million at March 31, 2002.
Net cash of $8.8 million and $7.1 million were provided by operating
activities for the nine months ended December 31, 2002 and 2001, respectively.
The increase in cash provided by operating activities of $1.7 million was
primarily due to an increase in net profits of $3.2 million combined with an
increase in deferred revenue which was partially offset by an increase in
accounts receivable.
Net cash of $2.7 million and $1.0 million were used in investing activities
for the nine months ended December 31, 2002 and 2001, respectively. The net cash
used in investing activities related to the purchase of property and equipment.
Net cash of $1.7 million and $3.4 million were used in financing activities
for the nine months ended December 31, 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 primarily due to a decrease of $1.1 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
December 31, 2002, we had no outstanding balance under this facility and letters
of credit outstanding of $0.6 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 December 31, 2002,
and the effect such obligations are expected to have on our liquidity and cash
flow in future periods (in thousands):
Payments Due by Period
------------------------------------------------------
Within After
Total 1 Year 2-3 Years 4-5 Years 5 Years
-------- -------- ---------- ---------- ---------
Note payable $ 4,983 $ 1,300 $ 2,600 $ 1,083 $ -
Capital lease obligations 3,055 1,445 1,492 118 -
Operating leases 26,614 5,296 9,404 6,592 5,322
-------- -------- ---------- ---------- ---------
$34,652 $ 8,041 $ 13,496 $ 7,793 $ 5,322
======== ======== ========== ========== =========
We have a contractual commitment related to a $3.5 million line of credit
which expires on October 31, 2003. At December 31, 2002, we had no outstanding
balance under this facility and letters of credit outstanding of $0.6 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 nine months ended December 31, 2002 and 2001, we
purchased approximately $122,000 and $112,000, 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.
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.
16
New Accounting Pronouncement
In August 2001, the Financial Accounting Standards Board (FASB) 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 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 do not
expect the adoption of SFAS 146 to have any impact on our financial position or
results of operations.
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. The disclosure
provisions will be effective for us beginning with our year ending March 31,
2003. We do not expect this statement to have a significant 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
$107 million to $108 million, operating income to increase to approximately
$11.5 million to $12.0 million, and net income to increase to approximately $6.7
million to $7.0 million. In such case, we would expect diluted earnings per
share to increase to approximately $0.43 to $0.45 based on our expectation of
approximately 15.5 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. 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.
18
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
Exhibit
Number Description Method of Filing
------- ----------- ----------------
10.14 Letter Agreement dated December 4, Filed herewith.
2002 by and between Merrill Lynch
Business Financial Services, Inc.
and Whitman Education Group, Inc.
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
December 31, 2002.
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: February 5, 2003 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.
February 5, 2003 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.
February 5, 2003 By: /s/ FERNANDO L. FERNANDEZ
-------------------------
Fernando L. Fernandez
Vice President - Finance,
Chief Financial Officer,
Treasurer and Secretary