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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1997 COMMISSION FILE NUMBER 1-13722
WHITMAN EDUCATION GROUP, INC.
INCORPORATED UNDER THE LAWS OF THE I.R.S. EMPLOYER IDENTIFICATION NUMBER
STATE OF NEW JERSEY 22-2246554
4400 BISCAYNE BOULEVARD, 6TH FLOOR
MIAMI, FLORIDA 33137
(305) 575-6534
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
COMMON STOCK, NO PAR VALUE AMERICAN STOCK EXCHANGE
Indicate by check mark whether the registrant (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of June 17, 1997, there were 12,677,882 shares of Common Stock
outstanding.
The aggregate market value of the voting stock held by non-affiliates of
the registrant on June 17, 1997 was approximately $33,537,136.
DOCUMENTS INCORPORATED BY REFERENCE: None
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WHITMAN EDUCATION GROUP, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED MARCH 31, 1997
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 17
Item 3. Legal proceedings........................................... 18
Item 4. Submission of matters to a vote of security holders......... 19
PART II
Item 5. Market for registrant's common equity and related stockholder
matters...................................................... 19
Item 6. Selected financial data...................................... 20
Item 7. Management's discussion and analysis of financial condition
and results of operations.................................... 21
Item 8. Financial statements and supplementary data.................. 30
Item 9. Changes in and disagreements with accountants on accounting
and financial disclosure..................................... 30
PART III
Item 10. Directors and executive officers of the registrant............ 30
Item 11. Executive compensation........................................ 33
Item 12. Security ownership of certain beneficial owners and
management.................................................... 36
Item 13. Certain relationships and related transactions................ 40
PART IV
Item 14. Exhibits, financial statement schedules, and reports
on Form 8-K................................................... 40
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PART I
ITEM 1. BUSINESS
Readers are cautioned that the following text concerning the business
of the Company should be read in conjunction with the "Safe Harbor Statement"
appearing at the end of Item 7 of this Report and that certain statements made
in this Item 1 are qualified by the risk factors set forth in the Safe Harbor
Statement.
GENERAL
Whitman Education Group, Inc. ("the Company") is a proprietary provider
of career-oriented postsecondary education. The Company currently operates 24
schools in 13 states offering a range of graduate, undergraduate and non-degree
certificate or diploma programs primarily in the fields of healthcare, business
and computer and electronic technology to more than 6,000 students.
The Company is organized into a University Degree Division and an
Associate Degree Division through which its education programs are offered
through three wholly-owned subsidiaries. The University Degree Division
primarily offers doctorate, master's and bachelor's degrees through Colorado
Technical University ("Colorado Tech") and its Huron University division. The
Associate Degree Division offers associate's degrees and diplomas or
certificates through Sanford-Brown College ("Sanford-Brown") and the Ultrasound
Diagnostic School ("UDS").
The Company's students are predominantly adults, generally between the
ages of 24 and 35, who commute to its schools and require limited ancillary
student services. The students are seeking to acquire basic knowledge and skills
necessary for entry-level employment in technical careers or to acquire new or
additional skills to either change careers or advance in their current careers.
The Company's executive offices are located at 4400 Biscayne Boulevard,
6th Floor, Miami, Florida 33137, and its telephone number is (305) 575-6534.
COMPANY DEVELOPMENT
The Company was founded in New Jersey in 1979. In 1983, the Company
acquired two UDS schools in New York which offered non-degree programs only in
diagnostic medical ultrasound. Enrollment in the two schools was less than 50
students. Over the next nine years, the Company opened eight additional UDS
schools and increased its total enrollment to approximately 400 students.
In 1992, Dr. Phillip Frost invested in the Company and became its
Chairman. At the time of his investment, the Company had revenues of
approximately $3.8 million from UDS operations, and total enrollment at the ten
then existing UDS schools was approximately 675. Following this, the Company
continued to expand UDS by adding five additional locations by 1994, for a total
of 15 locations.
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In 1994, the Company determined to expand the scope of its business to
offer a broader range of certificate programs in UDS schools. Beginning in late
1994, the Company began introducing cardiovascular technology and medical
assisting programs to its UDS schools. In addition, in 1994 the Company decided
to expand its educational offerings and began to evaluate acquisition candidates
that would permit the Company to offer a broad range of career-oriented
programs, including degree programs, in addition to its healthcare diploma and
certificate programs.
In December 1994, the Company acquired Sanford-Brown, a college founded
in 1868, which offers associate degree programs in business, computer technology
and healthcare. With three campuses in and around St. Louis, Missouri, one in
Kansas City, Missouri and one in Granite City, Illinois, Sanford-Brown added
approximately 1,500 students to the Company's enrollment. The purchase price
paid for Sanford-Brown consisted of $5,900,000 in cash and 1,218,076 shares of
the Company's common stock. Sanford-Brown, together with UDS, created a network
of 20 schools offering both associate's degrees and non-degree programs in
business, computer technology and healthcare. These 20 schools have become the
foundation of the Company's Associate Degree Division.
In March 1996, the Company further broadened its degree program
offerings by acquiring Colorado Tech in Colorado Springs, Colorado. Founded in
1965, Colorado Tech is a regionally- accredited institution offering bachelor's,
master's and doctorate degrees in management, engineering, computer science and
other technology fields. The Company issued 2,499,870 shares of common stock in
connection with the merger with Colorado Tech. Through the acquisition of
Colorado Tech, the Company realized one of its goals of offering a full range of
degree programs. The maturity of Colorado Tech and the quality of its programs
also created the opportunity for the Company to expand by replicating the
Colorado Tech model either in new locations or through the conversion of
acquired institutions. Colorado Tech was acquired as the foundation for the
Company's University Degree Division.
Colorado Tech began an expansion program in late 1996. In October 1996, Colorado
Tech opened its second campus in Denver, Colorado; and in December 1996,
Colorado Tech expanded its educational content and infrastructure through the
acquisition of two campuses of Huron University ("Huron") in Huron and Sioux
Falls, South Dakota. Huron, which was founded in 1883, offers an MBA program as
well as bachelor degree programs in healthcare, business, computer information
systems and education. The acquisition of Huron served two primary purposes: it
introduced the Company to another niche market of more traditional yet still
career-oriented adults in the 18 to 24 year-old range while, at the same time,
allowing for the more rapid expansion of Colorado Tech through the conversion of
the Huron Sioux Falls campus into an additional location of Colorado Tech.
Moreover, as a result of the dedication of the City of Huron to the university,
the Company was able to acquire Huron on what management believes were very
attractive terms. The City of Huron created a non-profit entity to acquire all
of the real property of Huron, consisting of seven buildings on approximately 15
acres of land, all of which was simultaneously leased to Colorado Tech upon
consummation of the transaction. The City's new financing of the real property
provided the purchase price to the seller in the amount of $2.25 million, the
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pay-off of existing liens on the Huron real property of approximately $750,000
and a working capital infusion to Colorado Tech in the approximate amount of
$1,200,000 at closing. In addition, Colorado Tech assumed $500,000 in payables
of the university.
In connection with the expansion of programs and locations and the
acquisition of new schools, the Company has continually focused on strengthening
its management and improving its facilities to foster effective oversight of its
operations. In March 1996, the Company relocated its headquarters from New
Jersey to Miami, Florida. In addition, the Company, through both recruitment and
acquisition, has since 1994 established an entirely new executive management
team and has broadened and upgraded its middle management team by adding
individuals with broad experience in proprietary education. The Company has also
expanded the breadth and depth of its Board of Directors to provide a diverse
base of knowledge and skills in education, regulated industry, mergers and
acquisitions, and business generally, particularly high-growth businesses.
THE POSTSECONDARY EDUCATION MARKET
The postsecondary education market is estimated to be approximately
$200 billion market, with nearly 15 million students enrolled in over 6,000
single and multi-location institutions nationwide. According to the United
States Department of Education, the population enrolled in such institutions
will increase by nearly 1.5 million students to over 16 million students by the
year 2005. Further, of the 6,000 Title IV financial aid eligible institutions,
approximately 3,000 are for-profit, with approximately 500 of those offering
associate's degrees or higher. Total enrollment in for-profit institutions is
estimated to be less than 5% of the overall market.
The United States Department of Education estimates that by the year
2001 approximately 6.6 million or 42% of the students attending postsecondary
institutions will be adults over the age of 24. Additionally, the Company
believes that the market for entry-level associate's degrees is enhanced by the
increasing number of new high school graduates, projected to increase from 2.5
million in 1994 to 3.1 million in 2004. It is further enhanced by an increase in
the percentage of recent high school graduates who continue their education
after graduation. According to the National Center For Education Statistics,
this percentage increased from 53% in 1983 to 63% in 1993.
Further, the continuing shift in the information age from non-skilled
to skilled workers is dramatic. According to economists, in 1950, 40% of the
workforce in the United States was considered skilled or professional; in 1991
this number had risen to 65% and, it is projected that in the year 2000, 85% of
jobs will require education or training beyond high school. This shift is
reflected by and further driven by the income premium placed on postsecondary
education. According to the United States Census Bureau, in 1995, a full-time
male worker with an associate degree earned an average of 37% more per year than
a comparable worker with only a high school diploma, and a full-time male worker
with a bachelor's degree earned an average of 72% more per year than a
comparable worker with only a high school diploma. Based on these trends, the
Company believes that with its associate and graduate program offerings it can
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capitalize on the different submarkets of the 52% of adults over 25 who have not
yet attained an associate's or higher degree.
The Company believes that these trends fuel two distinct groups toward
postsecondary education: those who desire rapid career change or entry, and
those who desire career enhancement. The Company believes that providing both an
associate degree focus to the former market segment and a university degree
focus to the latter market segment will enable it to capitalize on both these
growing markets.
BUSINESS STRATEGY
The Company intends to capitalize on what management believes are
favorable trends in the postsecondary education market by focusing on
career-oriented education programs designed primarily for adult learners seeking
to acquire basic knowledge and skills necessary for entry-level employment or to
acquire new or additional skills to change careers or advance in their current
careers. Having established a broad base of educational content offered in a
broad range of degree (associate's, bachelor's, master's and doctorate) and
non-degree programs, management believes the Company is now well-positioned to
focus its efforts on further internal growth.
In the short term, management believes that its best opportunity for
achieving growth will come from the integration of existing operations with the
basic objectives of increasing revenues at existing schools and improving
overall operating efficiencies at each school and within the Company as a whole.
To accomplish the Company's goal of increasing revenues from its existing
schools, the Company intends to increase enrollment by improving its student
recruitment efforts and programs and by adding existing curricula to more
locations. In addition, the Company intends to improve operating efficiencies by
centralizing numerous administrative functions which had previously been
performed by the schools. These functions include accounting, finance,
purchasing, human resources, real estate, legal, regulatory affairs and
compliance monitoring, information systems and technology support services and
certain curriculum development. The Company believes that the centralization of
these functions will not only reduce, and permit better control of, overhead
costs, but it will allow local school personnel to better concentrate their
efforts on service to their students. In addition, the Company intends to
further enhance operating efficiencies by the implementation of an integrated
information network linking schools with each other and with the Company's
corporate headquarters.
While management expects to continue to strive for increased revenues
and enhanced operating efficiencies from its current operations in the short
term, in the intermediate and longer term, management believes that its best
opportunities for growth will result from the expansion of its educational
programs and the opening or acquisition of additional schools. The expansion of
educational programs will include the elevation of certain certificate and
diploma programs to associate degree programs as well as the development of new
curricula. The Company also intends to develop and offer continuing education
programs and corporate training programs for which the Company's curricula is
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well-suited and can be customized on a cost-effective basis. The Company is also
exploring various alternatives to offer certain of its programs on a
distance-learning basis to new and existing students.
Management also intends in the long term to establish new locations of
its existing schools. The Company may seek to establish new locations where
management believes the population of working adults, the local employment
market, the availability of management talent and demographic trends will enable
its schools to successfully replicate their operational models. Establishment of
new locations will be subject to the Company's ability to comply with or satisfy
applicable regulatory requirements of the United States Department of Education
and state licensing and accreditation requirements.
In addition to the establishment of new locations and the elevation of
certain schools to a higher degree level, the Company will augment its expansion
through selective strategic acquisitions where an acquisition is a more feasible
alternative both financially and operationally. The Company intends to focus on
acquisition candidates that provide the Company with additional geographic scope
or educational content, that are historically profitable, compliant with
applicable regulations, have low student loan default rates and that can be
efficiently assimilated into the Company's operations.
OPERATING STRUCTURE
The Company operates as two divisions: the University Degree Division
and the Associate Degree Division. Each division focuses on a different segment
of the postsecondary career education market. The Company provides various
centralized administrative services to each of its divisions and has a
management structure which projects and implements corporate strategies and
approaches within each division. Each division has a divisional president,
regional supporting staff and local operating managers who oversee the daily
operations of their respective areas of responsibility. The Company believes
that this management structure allows local school management to develop
valuable local market experience and community and employer relationships that
are vital to the adult career education market, while still realizing the
economies of scale and degree of control associated with centralization.
The University Degree Division is currently comprised of Colorado Tech,
a regionally- accredited institution which, except for its Huron University
division, grants degrees primarily to working adults seeking career enhancement,
primarily in the areas of healthcare, computer and electronic technology and
business. Huron University, being a more traditional institution, primarily
serves the traditional student attending college immediately following high
school. Colorado Tech, including Huron, has approximately 2,500 students
enrolled at four campuses. Colorado Tech and Huron offer various bachelor's
degrees in computer science, management, engineering and education; master's
degrees in computer science and business administration; and doctorate degrees
in computer science and management. The Company believes that flexible course
structures, class schedules designed for the working adult, and the recent
introduction of local-campus doctorate programs have solidified Colorado Tech's
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position as a recognized leading source of adult education in its current
markets and have established a successful, replicable model for growth and
expansion into new markets.
The Associate Degree Division focuses on the adult learner who desires
rapid career change or to quickly enter a new career field. The Associate Degree
Division is currently comprised of Sanford-Brown and UDS, which provide adult
students with associate's degrees and professional certificate programs
primarily in the areas of healthcare, computer technology and business.
Sanford-Brown is a nationally-accredited institution that provides various
associate's degrees in computer science, including networking and multimedia,
business management, and allied health, including nursing, and similar
professional certificate programs. UDS is also nationally accredited and
provides professional certificate programs in diagnostic medical ultrasound,
cardiovascular technology and medical assisting. The Associate Degree Division
has approximately 3,900 students enrolled at 20 campuses, of which 1,600
students are enrolled at five Sanford-Brown campuses and 2,300 students are
enrolled at 15 UDS campuses.
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EDUCATIONAL PROGRAMS
The Company offers a range of career-oriented educational programs,
substantially all of which are in the areas of healthcare, business and computer
and electronic technology. The Company offers various concentrations in these
programs at the associate's, bachelor's, master's and doctorate levels as well
as the professional diploma and certificate levels. The programs are designed
primarily to serve the adult learner seeking to acquire basic knowledge and
skills necessary for entry-level employment or to acquire new or additional
skills to change careers or to advance in their current careers. Program
revisions occur frequently as a result of feedback from students, local advisory
boards, comprised of professionals in career fields related to the programs, and
local employers.
The Company's educational programs, by degree level, are set forth
below:
UNIVERSITY DEGREE DIVISION ASSOCIATE DEGREE DIVISION
- --------------------------------------------------------------- -----------------------------------------------------------------
Colorado Technical University Huron University Sanford-Brown College Ultrasound Diagnostic School
- ----------------------------- ---------------------------- -------------------------------- -------------------------------
DOCTORATE PROGRAMS MASTERS PROGRAM ASSOCIATE OF APPLIED PROFESSIONAL CERTIFICATE
Computer Science Business Administration SCIENCE DEGREE PROGRAMS PROGRAMS
Management Accounting/Business Management Diagnostic Medical Ultrasound
BACHELOR OF SCIENCE Computer Information Systems Non-Invasive Cardiovascular
MASTER OF SCIENCE DEGREE DEGREE PROGRAMS Network Administration Technology
PROGRAMS Elementary Education Computer Multimedia Medical Assistant
Computer Engineering Secondary Education Paralegal Studies
Computer Science Criminal Justice Office Administration
Electrical Engineering Business Administration Travel and Hospitality Management
Accounting Medical Administrative Assistant
BACHELOR OF SCIENCE Computer Information Systems Physical Therapy Assistant
DEGREE PROGRAMS Applied Management Occupational Therapy Assistant
Business Management Nursing
Computer Engineering ASSOCIATE DEGREE
Computer Science PROGRAMS PROFESSIONAL CERTIFICATE
Electrical Engineering Business Administration PROGRAMS
Electronic Engineering Technology Microcomputers/Business Intermediate Accounting
Logistics Systems Management Applied Management Computer Applications
Management Information Systems Nursing Computer Programming
Systems Management Network Administration
Legal Office Assistant
ASSOCIATE DEGREE Administrative Office Assistant
PROGRAM Travel and Hospitality Service
Electronics Technology Medical Administrative Assistant
Practical Nursing Program
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The following table provides information as of June 1, 1997 regarding
the programs offered by each of the Company's schools:
LENGTH OF
TYPE OF NUMBER OF NUMBER OF PROGRAM
SCHOOL PROGRAM LOCATIONS STUDENTS (IN MONTHS)
- ----------------------------- -------- --------- --------- ----------
UNIVERSITY DEGREE DIVISION
Colorado Technical University Doctoral 2 110 24
Master 3 376 21
Bachelor 3 1,204 48
Associate 1 84 24
Non-degree 3 185 N/A
-----
School Total 1,959
=====
Huron University Master 1 32 11
Bachelor 1 230 48
Associate 1 50 24
Non-degree 1 20 N/A
----
School Total 332
====
ASSOCIATE DEGREE DIVISION
Sanford-Brown College Associate 5 1,098 18-24
Diploma 5 493 12-15
-----
School Total 1,591
=====
Ultrasound Diagnostic School Diploma 15 2,326 9-18
-----
Company Total 6,208
=====
Tuition and fees for the Company's programs vary depending on the
nature of the program and the location of the school. Tuition and fees for the
non-degree programs in the Associate Degree Division range from $8,950 for the
nine-month medical assistant program offered by UDS to $15,000 for the six
quarter associate degree programs offered by Sanford-Brown. In the University
Degree Division, tuition and fees range from $26,000 to $32,000 for the 48-month
bachelor's degree programs, $11,000 for the 21-month master's program and
$22,000 for the 24-month doctorate program.
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Academic schedules are designed flexibly to meet the needs of the adult
student. UDS offers all three of its programs during the day or night and
classes begin generally every five weeks. Sanford-Brown's non-degree programs
begin quarterly and are offered both during the day and night. Sanford-Brown's
associate degree programs also begin quarterly and are currently offered
principally during the day, although Sanford-Brown has redesigned its associate
degree program to enable evening students to complete the program in the same
time-frame as day students. Degree programs at Colorado Tech's Colorado Springs,
Denver and Sioux Falls campuses are offered principally at night to accommodate
the typical Colorado Tech student who is a working adult. Classes at Huron, a
more traditional university, are offered principally during the day.
STUDENT RECRUITMENT
The Company utilizes a wide array of advertising and marketing
strategies to attract students to its schools, including various combinations of
newspaper, radio, direct contact with human resources departments of various
corporations, television and direct mail. The Company markets each of its
schools on a local basis, and draws the vast majority of its students from the
local areas surrounding each school. The Company measures the effectiveness of
its marketing efforts by tracking the enrollment rates and costs associated with
each form of marketing on an individual basis. Typically, 25% to 30% of the
Company's schools' new enrollment is generated by referrals from graduates or
in-school students with the remainder resulting from advertising efforts.
STUDENT ADMISSIONS
Each school employs several admissions representatives who interview
and enroll students on-site and a variety of support personnel to assist
students in the admissions process. Each of the Company's schools has admission
requirements designed to ensure that entering students have the educational and
work background, personal circumstances and the ability necessary to
successfully complete their program of study. Admission requirements differ from
program to program and school to school, but at a minimum, each applicant must
be a high school graduate or possess the recognized equivalent credential,
perform successfully on a personal interview, and in most cases, successfully
pass an entrance examination. The admissions process is monitored by a director
or dean of admissions in each location, and reviewed by the Company's compliance
department.
GRADUATE CAREER SERVICES
Each of the Company's schools operates a career services department
which provides career development services to in-school students and alumni.
These services include various combinations of seminars/courses covering
interviewing skills, resume preparation and enhancement, job search skills, and
career planning advice. In addition, the career services departments of the
various schools make contact with potential employers on behalf of the schools
and individual graduates, schedule interviews, attempt to obtain feedback
regarding graduate performance on interviews, and provide on-going re-placement
assistance to employed graduates.
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COMPETITION
The postsecondary school industry is highly fragmented. Typically, no
single school or group of schools dominates markets on a local or national
basis. However, on a local level, each of the Company's schools has varied
levels of competition. Competition is typically based on the nature and quality
of the programs offered, flexibility of class scheduling and service to the
student customers.
Colorado Tech competes with various educational institutions in its
market area. The University of Colorado at Colorado Springs, the University of
Phoenix, Colorado Christian University, Chapman University, Webster University
and Regis University are all located in Colorado Tech's Colorado Springs market
area. In Denver, Colorado Tech competes with the University of Denver,
University of Phoenix, Metro State University, Colorado University, Regis
University and Colorado Christian University. The Colorado Tech campus in Sioux
Falls, South Dakota competes with Dakota Wesleyan, Augustana University,
University of South Dakota, Nettleton College, National College and Southeast
Vocational Technical Institute. All such institutions represent postsecondary
education options to that of Colorado Tech. Colorado Tech competes with these
and other universities in its market areas by offering business degree programs
that combine contemporary leadership strategies with technical working knowledge
which the Company believes make Colorado Tech's business degrees a unique
alternative to the traditional business graduate degrees offered by traditional
liberal arts and business-oriented universities and colleges.
The Huron campus is unique within the Company in that it is a more
traditional university serving a younger student, most of which attend Huron
directly after graduating high school. In a market area of only approximately
15,000, Huron attracts students from South Dakota and surrounding states, other
states across the country and, due to its former ownership, from the Far East as
well. In the City of Huron, the Huron campus has no direct competition. Students
are attracted to Huron for its focus on teaching, the small class sizes, the
safe campus and environment and the appeal of a university that is an integral
part of the surrounding community.
In the St. Louis, Missouri and Granite City, Illinois area,
Sanford-Brown has ten competitors, four of which are regionally accredited,
which provide selected comparable educational degrees and curriculum of which
four offer comparable healthcare programs. In the Kansas City area, Sanford-
Brown has two principal competitors to its practical nursing program.
In almost all of the geographic areas in which UDS teaching facilities
are located, hospitals and community colleges operate programs to train medical
sonographers. Generally, hospitals operate these programs for their own staffing
requirements. Community colleges and the proprietary and private schools compete
directly with UDS. However, there are few proprietary schools or community
colleges that offer the cardiovascular technology program. Currently, most of
the teaching of this program is hospital-based for the hospital's own staffing
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needs. Medical assisting is a commonly offered healthcare program and is not
exclusive to healthcare education institutions. Both proprietary schools and
community colleges also offer medical assisting programs.
REGULATION
FEDERAL AND STATE REGULATION. Each of the Company's schools is subject
to regulation by: (i) the state in which it operates; (ii) accrediting bodies;
and (iii) because they are certified to participate in Title IV Federal
financial aid programs ("Title IV Programs"), the United States Department of
Education (the "DOE"). The loss of authorization to operate in states in which
the Company currently operates, the withdrawal of accreditation from the
Company's schools, or the loss of the schools' eligibility to participate in
Title IV Programs would have a material adverse effect on the Company.
ACCREDITATION. The Company's schools are accredited by accrediting
bodies recognized by the DOE. Accreditation serves as: (i) the basis for the
recognition and acceptance by employers, other higher education institutions and
governmental entities of degrees and credits earned by students; (ii) one of the
qualifications to participate in Title IV Programs; and (iii) the qualification
for authorization to operate in certain states.
STATE AUTHORIZATION. The Company is required to have authorization to
operate in each state where it physically provides educational programs. Certain
states accept accreditation as evidence of meeting minimum state standards for
authorization. Other states require separate evaluations for authorization.
Depending on the state, the addition of a program not offered previously or the
addition of a new location must be included in the institution's accreditation
and/or be approved by the appropriate state authorization agency. The Company's
schools are currently authorized to operate in all states in which they have
physical locations.
FEDERAL FINANCIAL AID PROGRAMS. The Company derives a majority of its
revenue from students who participate in Title IV Programs under the Higher
Education Act of 1965, as amended (the "HEA"), and the regulations promulgated
thereunder by the DOE (the "Regulations"). In order to participate in Title IV
Programs, the Company must comply with complex standards set forth in the HEA
and the Regulations. Compliance with such standards is subject to periodic
reviews by the DOE and state and national agencies which guarantee the loans
made in the Title IV Programs. Disbursements made under the Programs are subject
to disallowance as a result of such reviews and to repayment by the schools. In
1992, in reauthorizing the HEA, Congress imposed more stringent standards upon
proprietary institutions participating in Title IV Programs. The new standards
placed proprietary institutions under increased regulatory scrutiny. It is
anticipated that the HEA will again be reauthorized in early 1998 which again
may change certain standards applicable to proprietary institutions.
THE 85/15 RULE. The HEA requires that an annual comparison be made for
each proprietary school of the percentage of its Title IV Program receipts to
its total receipts from Title IV eligible programs. Under the 85/15 Rule, a
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proprietary school will be ineligible to participate in Title IV programs if, on
a cash basis of accounting, more than 85% of its revenues from Title IV eligible
Programs for the prior fiscal year were derived from Title IV Program funds.
Each of the Company's schools is currently in compliance with the 85/15 Rule.
STANDARDS OF FINANCIAL RESPONSIBILITY. Under the Regulations, each
eligible proprietary institution must satisfy certain standards of financial
responsibility to continue to participate in Title IV Programs. For purposes of
these standards, Sanford-Brown and Colorado Tech have been evaluated as distinct
entities, while the DOE has evaluated UDS on the basis of the financial
performance of the Company as a whole. The three principal standards of
financial responsibility are profitability, the acid test ratio and tangible net
worth.
PROFITABILITY. A school may not have operating losses, as
defined by the Regulations, in either or both of its two most recent fiscal
years that in sum result in a decrease in tangible net worth in excess of ten
percent of the school's tangible net worth at the beginning of the two-year
period. The Company has incurred operating losses (applicable to UDS) in both
fiscal 1997 and fiscal 1996. However, as a result of increases in capital of the
Company from a private placement of the Company's common stock in October 1996
and the exercise of outstanding options to purchase the Company's common stock,
the operating losses have not resulted in a ten percent decrease in the
Company's tangible net worth from the beginning of fiscal 1996. In fact, the
Company's tangible net worth increased over the two-year period. Although there
is no interpretive guidance available as to when the tangible net worth is to be
measured for purposes of determining compliance with this regulation, the
Company believes it is in compliance with the profitability standards based on a
reasonable reading of the regulation. However, in the event the DOE adopts a
different interpretation, the Company could be subject to the disciplinary
measures outlined below.
ACID TEST RATIO. A second standard of financial responsibility
is the "acid test ratio." A school must maintain a ratio of cash, cash
equivalents, certain restricted cash and current accounts receivable to total
current liabilities of at least one to one at the end of its fiscal year. At
March 31, 1997, the Company's acid test ratio (applicable to UDS) was 1.19 to
1.00, Colorado Tech's acid test ratio was 1.22 to 1.00, and Sanford-Brown's acid
test ratio was 1.21 to 1.00.
TANGIBLE NET WORTH. An eligible institution is required to have
a positive tangible net worth at the completion of its fiscal year. At March 31,
1997, Colorado Tech, Sanford-Brown and the Company each had a positive tangible
net worth.
An institution that is determined by the DOE not to meet the standards of
financial responsibility on the basis of failing to meet one or more of the
specified standards is nonetheless entitled to participate in Title IV Programs
if it can demonstrate to the DOE that it is financially responsible on an
alternative basis. An institution may do so by demonstrating, with the support
of a statement from a certified public accountant, that it has the ability to
meet all of its financial obligations and, by proof of compliance with certain
standards specified in the regulations, that it is not subject to precipitous
closure. Alternatively, an institution may submit an irrevocable letter of
credit in favor of the DOE, either in an amount equal to at least one-half of
-14-
the total Title IV Program funds received by students enrolled at such
institution during the prior award year or in an amount equal to at least ten
percent of such prior award year's funds if the institution agrees to disburse
Title IV funds only after earned by the institution and approved by the DOE. If
required to do so, there is no assurance that the Company would be able to
secure the necessary funds or collateral to post a sufficient letter of credit
to comply with this alternative.
If an institution fails to satisfy any one of the foregoing financial
responsibility standards or the alternative means described in the preceding
paragraph, the DOE may impose a fine, place restrictions on an institution's
participation in Title IV Programs or terminate its eligibility to participate
in Title IV Programs. A fine, up to $25,000 per violation, is determined by the
DOE based on the gravity of the violation and taking into account the size of
the institution. Potential restrictions may include a suspension of an
institution's ability to participate in Title IV Programs for up to 60 days
and/or a limitation of an institution's participation in the Title IV Programs,
either by limiting the number or percentage of students enrolled who may
participate in Title IV aid or by limiting the percentage of an institution's
total receipts derived from Title IV Programs. A limitation may also include a
requirement that the institution obtain surety in an amount specified by the
DOE, to assure its ability to meet its financial obligations to students who
participate in Title IV Programs. An institution may apply for removal of a
limitation no sooner than 12 months from the effective date of the limitation
and must demonstrate that the violation at issue has been corrected. Depending
on the severity of the fine, suspension or limitation, such action could have a
material adverse effect on the Company. A termination of eligibility to
participate in Title IV Programs would have a material adverse effect on the
Company.
COHORT DEFAULT RATES. The Regulations also require the calculation of a
cohort default rate on Federal Family Education Loans ("FFEL") received by
current and former students to attend the institution. The cohort default rate
measures the percentage of students who enter repayment in a particular federal
fiscal year on FFEL loans and default before the end of the following federal
fiscal year. If a school's official cohort default rate exceeds 25% for each of
its three most recent federal fiscal years, it becomes ineligible to participate
in the FFEL programs. A school's cohort default rate is published annually by
the DOE. The most recent official cohort year published was 1994. UDS' official
1994 rates ranged from 3.6% to 10.5%; Sanford-Brown's official 1994 rates were
22.5% and 22.0% and Colorado Tech's official 1994 rate was 11.0%. In addition,
all of the Company's schools' preliminary 1995 default rates were below 25%.
Sanford-Brown's Granite City, Illinois campus, however, had a default
rate for 1993 of 41.3%. A default rate of greater than 40% in any one year may
also result in a loss of FFEL eligibility. The Company believes that it is
highly unlikely that the DOE would take any adverse action against the Granite
City campus for the excess 1993 rate in that the 1994 official rate for that
campus was less than 25% and the 1995 preliminary rate just released was 11.7%.
In the event the DOE does take such action, however, the failure of
Sanford-Brown to maintain FFEL eligibility at its Illinois campus would not have
a material adverse effect on the operations or financial condition of the
Company.
-15-
CHANGE OF CONTROL. A change of ownership in the Company which results
in a change in control may result in the schools operated by the Company
becoming ineligible to participate in Title IV Programs pending recertification
by the DOE, require reauthorization to operate by individual states and could
trigger a review by each of its school's accrediting bodies.
With regard to the participation in Title IV Programs of institutions
owned by publicly held companies, the DOE has adopted the change of ownership
and control standards used in federal securities law. A change in control which
would require the filing of a Current Report on Form 8-K with the Securities and
Exchange Commission would result in the Company's schools becoming ineligible to
participate in Title IV Programs pending recertification by the DOE. A failure
to obtain such recertification would have a material adverse impact on the
Company.
Each of the Company's school's accrediting bodies and the state
agencies which authorize the Company to operate schools have different
regulations regarding changes in control which could require re-authorization or
re-accreditation. The failure of the Company to obtain state authorization or
re-accreditation of any of its schools subsequent to a change in control would
have a material adverse effect on the Company.
Acquisitions of other institutions by the Company typically would
result in a change of ownership resulting in a change of control. The
acquisition of Sanford-Brown in December 1994 automatically terminated the
participation of Sanford-Brown in Title IV Programs. After the closing, the
Company applied for eligibility, and Sanford-Brown was declared eligible for
participation in the Title IV Programs in early May 1995. Students who enrolled
in Sanford-Brown during the period in which its participation was terminated
could not utilize some Title IV funds which they would otherwise have been
entitled to utilize. Therefore, as a result of Sanford-Brown's interruption in
eligibility, a portion of the monies due from its students were not received and
were unrecoverable. This adversely affected Sanford-Brown's fiscal 1995 and 1996
operating income by approximately $353,000. In addition, the period during which
Sanford-Brown was ineligible to participate in Title IV Programs had an adverse
effect on the cash flow of Sanford-Brown.
The acquisition of Colorado Tech in March 1996 likewise automatically
terminated its eligibility to participate in Title IV Programs. Colorado Tech
was recertified by DOE in June 1996. Colorado Tech's operating income and cash
flow was not materially impacted by its period of ineligibility. Colorado Tech's
acquisition of Huron University in December 1996 terminated that institution's
eligibility until certification of Huron as additional locations of Colorado
Tech, which occurred in April 1997. Huron's operating income and cash flow was
also not materially impacted by its period of ineligibility.
Generally, when a change in control does occur, the school's
certification by the DOE following the change in control is provisional.
Provisional certification may last no longer than three years. Provisional
certification differs from full certification in that a provisionally certified
school may be terminated from eligibility to participate in Title IV Programs
without the same opportunity for a hearing before an independent hearing officer
-16-
and an appeal to the Secretary of Education afforded to a fully certified
school. Additionally, the DOE may impose additional conditions on a
provisionally certified institution's eligibility to continue participating in
Title IV Programs. As a result of the change in ownership resulting in a change
in control that occurred in connection with the acquisition of Sanford-Brown and
Colorado Tech, each of those schools is provisionally certified for
participation in Title IV Programs at this time. Huron, as a division of
Colorado Tech, now falls under Colorado Tech's provisional certification.
SEASONALITY
The Company experiences seasonality in its quarterly results of
operations as a result of changes in the level of student enrollments. New
enrollments in the Company's schools tend to be higher in the third and fourth
fiscal quarters because these quarters cover periods traditionally associated
with the beginning of school semesters. The Company expects that this seasonal
trend will continue. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
EMPLOYEES
At March 31, 1997, the Company had approximately 540 full-time and 375
part-time employees of whom 478 were faculty and 427 were administrative
personnel at the various schools. The remaining employees were employed by the
Company at its administrative offices.
ITEM 2. PROPERTIES
The Company and its subsidiaries lease all of their administrative and
campus facilities. The Company, along with UDS, maintains headquarters in Miami,
Florida, where combined they lease approximately 7,000 square feet of office
space. Sanford-Brown's administrative offices are located in St. Louis,
Missouri, where Sanford-Brown leases approximately 3,900 square feet. In
connection with the consolidation of certain administrative functions at the
Company's headquarters in Miami, Sanford-Brown expects to vacate this space in
the near term and relocate certain remaining administrative personnel to its Des
Peres campus. Colorado Tech maintains its administrative offices at its campus
in Colorado Springs, Colorado.
The Company's schools are operated from the following leased premises:
ADDRESS OF SCHOOL SCHOOL SIZE OF FACILITY
(IN SQUARE FEET)
- ------------------ ------------------------- -----------------
Huron, South Dakota Colorado Tech 229,859*
(d/b/a Huron University)
Colorado Springs, Colorado Colorado Tech 80,000
Denver, Colorado Colorado Tech 18,298
Sioux Falls, South Dakota Colorado Tech 10,100
-17-
North Kansas City, Missouri Sanford-Brown 38,500
Des Peres, Missouri Sanford-Brown 28,474
Hazelwood, Missouri Sanford-Brown 26,592
St. Charles, Missouri Sanford-Brown 14,650
Granite City, Illinois Sanford-Brown 12,253
New York, New York UDS 14,500
Iselin, New Jersey UDS 11,360
Tampa, Florida UDS 10,263
Carle Place, New York UDS 9,866
Irving, Texas UDS 9,499
Jacksonville, Florida UDS 9,370
Trevose, Pennsylvania UDS 8,200
Atlanta, Georgia UDS 8,092
Elmsford, New York UDS 7,534
Bellaire, Texas UDS 7,424
Pittsburgh, Pennsylvania UDS 6,238
Pompano Beach, Florida UDS 5,600
Marlborough, Massachusetts UDS 3,577
Independence, Ohio UDS 3,505
Silver Spring, Maryland UDS 2,615
- ---------------
* The Huron, South Dakota campus of Colorado Tech consists of seven
buildings on approximately 15 acres.
The Company believes that all of its present facilities are suitable and
adequate for their current uses. The Company constantly monitors the suitability
of its campus facilities to anticipate where demand for its products will create
overcrowding or exceed capacity of existing facilities. In fiscal 1997, the
Company relocated its New York UDS school from a facility of approximately 3,000
square feet to a facility of approximately 15,000 square feet and relocated its
Kansas City Sanford- Brown school from approximately 16,700 square feet to a new
facility of approximately 38,500 square feet. In May 1997, UDS leased
approximately 11,500 square feet of space into which it intends to relocate its
Atlanta school in August 1977. Additionally, UDS is currently seeking to expand
or relocate its space in Pompano Beach and Colorado Tech is seeking to relocate
its Sioux Falls facility.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to routine litigation incidental to its business,
including but not limited to, claims involving students or graduates and routine
employment matters. While there can be no assurance as to the ultimate outcome
of any litigation involving the Company, management does not believe that any
-18-
pending proceeding will result in a settlement or an adverse judgment that will
have a material adverse effect on the Company's financial condition or results
of operations. See "Safe Harbor Statement" appearing in Item 7 of this Report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended March 31, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
A. MARKET INFORMATION
On May 1, 1995, the Company's common stock began trading on the American
Stock Exchange under the symbol WIX.(1) The following table sets forth the high
and low closing prices of the Company's common stock as reported by the
composite tape of the American Stock Exchange for each of the quarters
indicated.
1996(2)
-----------------
HIGH LOW
------ ------
Period from 5/1/95 through 6/30/95.......... $3.38 $2.75
Quarter Ended 9/30/95....................... 4.47 2.53
Quarter Ended 12/31/95...................... 3.69 2.75
Quarter Ended 3/31/96....................... 5.69 3.44
1997(2)
-------------------
HIGH LOW
------ -------
Quarter Ended 6/30/96....................... $14.25 $5.44
Quarter Ended 9/30/96....................... 9.88 6.88
Quarter ended 12/31/96...................... 8.56 5.37
Quarter ended 3/31/97....................... 6.69 4.31
- --------------------
(1) From April 1 through April 30, 1995, the Company's common stock was
traded on the over-the-counter market. As provided by the National
Quotation Bureau based upon quotations from the National Association of
Securities Dealers Automated Quotation System, the high and low bid
prices for the common stock for that period were $3.25 and $2.75,
respectively, and the high and the low asking prices were $3.50 and
$3.13, respectively. These quotes represent inter-dealer prices,
without retail mark-up, mark-down, or commissions, and do not
necessarily represent actual transactions.
-19-
(2) Adjusted to give effect to the two-for-one stock split effected as of
May 13, 1996.
As of the close of business on June 17, 1997, there were approximately
203 record holders of the Company's common stock.
The Company has not paid dividends on its common stock and does not
contemplate paying dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED MARCH 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)(1)(2)
OPERATING DATA
Revenues ................................... $ 46,993 $ 39,838 $ 19,332 $ 13,221 $ 10,781
(Loss) income from operations .............. (3,245) 951 288 539 414
(Loss) income from continuing operations ... (4,363) (101) (147) 353 (166)
Net (loss) income .......................... (4,363) (101) (147) 353 (331)
(Loss) income from continuing operations
per share (3) ............................ (.38) (.01) (.02) .04 (.02)
Dividends .................................. None None None None None
Balance Sheet Data
Total assets ............................... $ 48,017 $ 35,323 $ 31,600 $ 12,967 $ 11,616
Long-term debt and capital lease
obligations, less current portion ........ 11,109 11,494 9,467 699 577
Stockholders' equity ....................... 16,107 7,385 7,256 5,718 4,876
--------
- ------------------
(1) Figures have been restated to reflect the acquisition of Colorado Tech
in March 1996 which was accounted for under the pooling of interests
method of accounting. Figures also reflect the acquisitions of
Sanford-Brown on December 21, 1994 and Huron University on December 30,
1996 which were accounted for as purchases.
(2) All references to per share amounts have been adjusted to give
retroactive effect to the two-for-one stock split effective on May 13,
1996.
(3) The 1,021,612 shares issued in connection with the Sanford-Brown
acquisition that remained in escrow at March 31, 1996 to be disbursed
to the seller or returned to the Company upon the occurrence or
failure to occur of certain events relating to the regulation of
Sanford- Brown were not considered outstanding for purposes of
computing the net loss per share for fiscal 1995 and 1996 as their
effect was anti-dilutive. Due to the substantial satisfaction of such
contingencies in fiscal 1997, these shares have been disbursed to the
seller and are considered outstanding for purposes of computing the
net loss per share for fiscal 1997.
-20-
See Consolidated Financial Statements, Item 8 of this Report, for
supplementary financial information of the Company.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the consolidated financial statements of the Company and the notes thereto
appearing elsewhere in this report and in conjunction with the "Safe Harbor
Statement" appearing at the end of this Item 7 in that certain statements made
in this Item are qualified by the risk factors set forth in the Safe Harbor
Statement.
All prior period consolidated financial statements presented have been
restated to include the acquisition of Colorado Tech on March 29, 1996, which
was accounted for as a pooling of interests, as if the merger took place at the
beginning of such period. The financial statements of Colorado Tech have been
consolidated based on its calendar year end, December 31, for all periods prior
to fiscal 1997. The consolidated financial statements for fiscal 1997 have been
adjusted to conform Colorado Tech's year-end with that of the Company. In
addition, all references to the number of shares outstanding and per share
amounts have been restated to reflect the two-for-one stock split effected as of
May 13, 1996.
GENERAL
The Company is organized into a University Degree Division and an
Associate Degree Division through which its education programs are offered
through three wholly-owned subsidiaries. The University Degree Division offers
primarily doctorate, master's and bachelor's degrees through Colorado Tech and
its Huron University division. The Associate Degree Division offers associate
degrees and diplomas or certificates through Sanford-Brown and UDS. The revenues
generated from these subsidiaries primarily consist of tuition and fees paid by
students. The majority of students rely on funds received from Title IV Programs
to pay for a substantial portion of their tuition. Accordingly, a majority of
the Company's revenues are indirectly derived from Title IV Programs.
Historically, the Company's revenues have increased primarily as a
result of the expansion of program offerings and the opening or acquisition of
campuses. At UDS, the expansion of program offerings generated an increase in
its revenues from $7.3 million in fiscal 1995 to $20.3 million in fiscal 1997.
-21-
At Colorado Tech, the expansion of program offerings and the opening of a
campus in October 1996 generated an increase in revenues from $7.9 million
in fiscal 1995 to $10.7 million(excluding Huron University) in fiscal 1997.
On December 30, 1996, Colorado Tech acquired the South Dakota
operations and certain assets of Huron University. The acquisition was accounted
for using the purchase method of accounting. Huron University generated $1.1
million in net revenues and sustained $22,000 in operating losses for the three
months ended March 31, 1997. Huron University has two campuses with a total
enrollment of approximately 600 students.
Instruction and educational support consists primarily of costs related
to the educational activity of the Company's schools. Instruction and
educational support includes faculty compensation, administrative salaries for
departments that provide services directly to the students, occupancy costs,
costs of books sold, and depreciation and amortization of equipment costs and
leasehold improvements.
Selling and promotional expenses consist primarily of advertising
costs, production costs of marketing materials, and salaries and benefits of
personnel engaged in student recruitment, admissions, and promotional functions.
General and administrative expenses consist primarily of administrative
salaries and benefits, occupancy costs, depreciation, bad debt, amortization of
intangibles, and other related costs for departments that do not provide direct
services to students.
The Company intends to discontinue the operations of two of its UDS
schools during fiscal 1998 due to their historical operating losses and
management's assessment of their future prospects. Net revenues and operating
losses for the two schools were approximately $659,000 and $232,000,
respectively, in fiscal 1997.
-22-
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship of certain
statement of operations data to net revenues for the periods indicated:
Year Ended March 31,
1997 1996 1995
------ ------ -------
Net revenues 100.0% 100.0% 100.0%
------ ------ ------
Costs and expenses:
Instruction and educational support 66.7 60.6 72.6
Selling and promotional 14.3 14.3 9.6
General and administrative 25.9 22.7 16.3
------ ------ -----
Total costs and expenses 106.9 97.6 98.5
------ ------ -----
(Loss) income from operations (6.9) 2.4 1.5
Other expenses:
Interest expense, net 1.9 3.0 1.6
Provision for writedown of
marketable securities 1.4 -- --
----- ------ ------
Loss before income tax
(benefit) provision (10.2) (0.6) (0.1)
Income tax (benefit) provision (0.9) (0.3) 0.7
------ ------ -----
Net loss (9.3)% (0.3)% (0.8)%
======= ======= ========
YEAR ENDED MARCH 31, 1997 COMPARED TO YEAR ENDED MARCH 31, 1996
Net revenues increased by $7.2 million or 18.0% to $47.0 million for
the year ended March 31, 1997 from $39.8 million for the year ended March
31, 1996. The increase was primarily due to an increase in average student
enrollment and tuition increases. Student enrollment increased 21.7% overall
with the University Degree Division experiencing a 29.7% increase and the
Associate Degree Division experiencing an 18.0% increase. Tuition increases
averaged three to five percent.
The increase in student enrollment in the University Degree Division
resulted in increased net revenues of $2.9 million or 32.2%. This increase was
primarily due to the introduction of additional business programs, the opening
of a Colorado Tech campus in October 1996 and the acquisition of Huron
University in December 1996.
The increase in student enrollment in the Associate Degree Division
resulted in increased net revenues of $4.3 million or 13.8%. The increased
-23-
enrollment was primarily in the cardiovascular and medical assisting
programs offered by UDS which were introduced during fiscal 1996. The increased
revenues derived from increased student enrollment at UDS were partially offset
by decreased revenues at Sanford-Brown. This decline in revenues resulted from a
decrease in the average monthly earning rate per student that occurred as a
result of the lengthening of the curriculum, a decrease in the frequency of
class starts and the negative effect of the change in the billing rates for
general education courses and core courses.
Instruction and educational support increased by $7.2 million or 29.8%
to $31.3 million in fiscal 1997 from $24.1 million in fiscal 1996. As a
percentage of net revenues, instruction and educational support expenses
increased to 66.7% in fiscal 1997 as compared to 60.6% in fiscal 1996. These
increases were primarily due to investments made during fiscal 1997 for the
purpose of enhancing the quality of the education being provided to students,
improving student satisfaction, and enhancing the management and staff at the
schools in order to strengthen the procedures and controls over regulatory
compliance. These investments primarily related to the upgrade of equipment and
the relocation of facilities, the addition of faculty, staff and management at
the schools and the implementation of new education programs. Such investments
resulted in an increase in salaries, occupancy costs, and depreciation expense.
Management believes that the benefits provided to the students from these
investments will support higher placement rates and higher retention rates which
should contribute to increased future enrollments. In addition, instruction and
educational support expenses increased in fiscal 1997 due to the related costs
incurred to support the opening of a Colorado Tech campus and the acquisition of
Huron University.
Selling and promotional expenses increased by $1.0 million or 17.5% to $6.7
million in fiscal 1997 from $5.7 million in fiscal 1996. As a percentage of net
revenues, selling and promotional expenses were stable at 14.3% in both fiscal
1997 and fiscal 1996. The increase in selling nd promotional expenses was
primarily due to increased marketing and advertising costs at the Associate
Degree Division for the programs offered at UDS and to an increase in selling
and promotional costs at the University Degree Division for the new Colorado
Tech campus and Huron University.
General and administrative expenses increased by $3.2 million or 34.9%
to $12.2 million in fiscal 1997 from $9.0 million in fiscal 1996. As a
percentage of revenues, general and administrative expenses increased to 25.9%
in fiscal 1997 from 22.7% in fiscal 1996. These increases were due primarily to
additional administrative costs and the amortization of start-up costs required
to support the increase in the number of campuses at the University Degree
Division, an increase in salaries and depreciation expense to support the
increase in student enrollment at the Associate Degree Division, and an increase
in bad debt expense at the Associate Degree Division due to an increase in
student enrollment and an increase in student receivable balances due to cash
collection delays resulting from staff turnover in certain of the schools. The
Company believes that such collection delays have been corrected.
Net interest expense decreased $317,000 due to a reduction in the
average outstanding debt balance and a reduction in interest rates.
-24-
The provision of $656,000 for the writedown of marketable securities
considered available- for-sale related to the recognition of a loss in the
fourth quarter of fiscal 1997 for the decline in the fair value of such
securities below their cost basis that was considered to be other than
temporary.
The Company recognized an income tax benefit of $409,000 in fiscal 1997
due to the recognition of deferred tax assets related to certain of the net
operating losses. The Company has valuation allowances of $1.7 million in
connection with deferred tax assets not recognized.
The Company reported a net loss of $4.4 million and a net loss of
$100,571 for the years ended March 31, 1997 and 1996, respectively. The increase
in the net loss for fiscal 1997 was primarily due to the investments made for
the addition of personnel, the upgrade of equipment and facilities, and the
opening and acquisition of new campuses.
YEAR ENDED MARCH 31, 1996 COMPARED TO YEAR ENDED MARCH 31, 1995
Net revenues increased by $20.5 million or 106.1% to $39.8 million in
fiscal 1996 from $19.3 million in fiscal 1995. The increase was primarily due to
an increase in average student enrollment and tuition price increases. Student
enrollment increased 38.2% overall with the Associate Degree Division
experiencing a 53.5% increase and the University Degree Division experiencing an
8.8% increase. Tuition increases averaged three to five percent.
The increase in net revenues of $19.5 million at the Associate Degree
Division was due to an increase of 142.9% in average student enrollment at UDS
and a full year of operations for Sanford-Brown in fiscal 1996 as compared to
approximately three months of operations from the date of acquisition, December
21, 1994, included in fiscal 1995. Sanford-Brown's revenues were $11.8 million
greater in the full fiscal 1996 than in the partial fiscal 1995. The increase in
student enrollment at UDS was primarily due to the introduction of the
cardiovascular technology and medical assisting programs which generated a $7.7
million increase in tuition revenues.
The University Degree Division had an 8.8% increase in average student
enrollment generating an increase in net revenues of $1.0 million due primarily
to the introduction of the doctorate programs in January 1995.
Instruction and educational support increased by $10.1 million or 71.9%
to $24.1 million in fiscal 1996 from $14.0 million in fiscal 1995. As a
percentage of net revenues, instruction and educational support expenses
decreased to 60.6% in fiscal 1996 as compared to 72.6% in fiscal 1995. The
increase in instructional and educational support was primarily due to an
increase in such costs of $9.6 million at the Associate Degree Division due to
the additional salaries and occupancy costs incurred to support the introduction
of new programs, the increase in student enrollment and the difference in the
period of operations reflected in fiscal 1996 and 1995 for Sanford-Brown. As a
percentage of net revenues, instruction and educational support expenses
decreased in fiscal 1996 due to the increase in salary and occupancy costs
-25-
incurred during fiscal 1995 in advance of the increased enrollment
resulting from the introduction of the cardiovascular technology and medical
assisting programs.
Selling and promotional expenses increased by $3.9 million or 209.0% to
$5.7 million in fiscal 1996 from $1.8 million in fiscal 1995. As a percentage of
net revenues, selling and promotional expenses increased to 14.3% in fiscal 1996
as compared to 9.6% in fiscal 1995. The increases were due to an increase in
advertising costs at the Associate Degree Division for the introduction of the
cardiovascular and medical assisting programs, an increase in advertising costs
at the University Degree Division for the introduction of the doctorate
programs, and the difference in the period of operations reflected in fiscal
1996 and 1995 for Sanford-Brown.
General and administrative expenses increased by $5.9 million or 186.6%
to $9.0 million in fiscal 1996 from $3.1 million in fiscal 1995 due primarily to
an increase of $4.8 million at the Associate Degree Division. As a percentage of
revenues, general and administrative expenses increased to 22.7% in fiscal 1996
as compared to 16.3% in fiscal 1995. This increase was due to the additional
administrative support for the increase in student enrollment at UDS and
consisted primarily of increases in salaries, taxes and benefits and the
increase in general and administrative expenses and bad debt at Sanford-Brown of
$2.2 million due primarily to the difference in the period of operations
reflected in fiscal 1996 and 1995. Bad debt expense at Sanford-Brown increased
from the prior year due to the amount of student balances that were not funded
under the Title IV Programs as a result of the length of time that elapsed
before Title IV eligibility was reinstated in connection with the acquisition
and its related change in ownership process. The lack of Title IV funding for
such students required a higher than normal level of reserve against those
receivables.
Net interest expense increased by $875,000 as a result of the debt
incurred in the Sanford- Brown acquisition and the working capital facility
being outstanding for a full year in 1996 as opposed to approximately three
months in fiscal 1995.
The Company recognized an income tax benefit of $136,000 in fiscal 1996
due to the reversal of valuation allowances and the recognition of deferred
tax assets related to net operating losses. In fiscal 1995, the Company had
an income tax provision of $122,000.
The Company reported a net loss of $100,571 and a net loss of $146,611
for the years ended March 31, 1996 and 1995, respectively.
SEASONALITY
The Company experiences seasonality in its quarterly results of
operations as a result of changes in the level of student enrollment. New
enrollment in the Company's schools tends to be higher in the third and fourth
fiscal quarters because these quarters cover periods traditionally associated
with the beginning of school semesters. Costs are generally not significantly
affected by the seasonal factors on a quarterly basis. Accordingly, quarterly
variations in net revenues will result in fluctuations in income from operations
on a quarterly basis.
-26-
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at March 31, 1997, 1996 and 1995 were $3.9
million, $2.8 million and $1.8 million, respectively. The Company's working
capital totalled $5.7 million at March 31, 1997, compared to $4.8 million at
March 31, 1996 and $4.6 million at March 31, 1995. In accordance with Department
of Education regulations, the Company maintained $512,000, $363,000 and $346,000
in restricted cash at March 31, 1997, 1996 and 1995, respectively, as funds to
be available for student refunds.
Net cash of $2.2 million was used for operating activities in fiscal
1997, an increase in cash utilized of $4.4 million and $122,000 from fiscal 1996
and 1995, respectively. The increase in cash utilized for operating activities
in fiscal 1997 was primarily due to an increase in net losses of $4.3 million.
In fiscal 1996, the Company generated $2.2 million in cash from operating
activities due primarily to cash provided from operations of Sanford-Brown of
$3.0 million, an increase of $4.6 million from fiscal 1995.
Net cash of $3.9 million was used for investing activities in fiscal 1997,
an increase of $1.9 million from fiscal 1996 and a decrease of $1.7 million from
fiscal 1995. The increase in fiscal 1997 was due to an increase in capital
expenditures. The increase in capital expenditures was due primarily to the
purchase of computer equipment for the schools and leasehold improvements
incurred for the expansion and opening of school facilities. The decrease in
fiscal 1996 from fiscal 1995 was due to the net cash payment of $5.0 million in
fiscal 1995 for the acquisition of Sanford-Brown which was partially offset by
the increase in the cash utilized for capital expenditures in fiscal 1996 of
$1.2 million.
Net cash of $7.3 million was provided by financing activities in fiscal
1997, an increase of $6.5 million from fiscal 1996 and a decrease of $848,000
from fiscal 1995. The increase in fiscal 1997 from fiscal 1996 was primarily due
to a private placement of 1,000,000 shares of the Company's common stock to an
unaffiliated institutional investor for $6.5 million. The decrease in fiscal
1996 from 1995 was primarily due to the proceeds of $6.0 million received in
fiscal 1995 from the long-term loan obtained in connection with the
Sanford-Brown acquisition.
The Company has bank lines of credit of $2.0 million expiring in May
1998 and a revolver note maturing in April 1999 in the amount of $5.5 million.
At March 31, 1997, the Company had $7.5 million outstanding under these
facilities. The amounts borrowed under these facilities in fiscal 1997 were
primarily used for operations and capital expenditures. In May 1997, the
revolver note was increased from $5.5 million to $7.5 million. In addition, the
Company increased its term loan availability by $1.5 million in June 1997 in
anticipation of financing expected for capital expenditures at Huron University.
The Company's primary source of operating liquidity is the cash
received from payments of tuition and fees. Most students attending the
Company's schools receive some form of financial aid under Title IV Programs.
UDS, Sanford-Brown and Colorado Tech receive approximately 77%,
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82% and 40% of their funding, respectively, from the Title IV Programs.
Disbursements under each program are subject to disallowance and repayment by
the schools. In fiscal 1995, the DOE conducted a Federal program review on
Sanford-Brown's Title IV activity for the award years 1992 through 1994. On
November 7, 1996, the DOE issued its program review reports which cited various
deficiencies in the administration of federal student financial aid programs at
Sanford-Brown. The Company has disputed some of the DOE's findings and is
currently working with the DOE to resolve all of the remaining issues. The asset
purchase agreement with respect to Sanford-Brown provides for the seller's
indemnification of the Company for any material liability that may result from
the program reviews and the seller has already deposited $500,000 with the
Company in recognition of that obligation.
As a result of the program reviews, the DOE placed Sanford-Brown on the
reimbursement method of payment for Federal Pell Grant and federal campus-based
programs. Under the reimbursement method, an institution must demonstrate
student eligibility for disbursement of financial aid prior to receiving payment
for those students from the DOE and may only make requests for payment on a
monthly basis. Management believes that although reimbursement for these
programs results in some delay in the receipt of funds, Sanford-Brown will
continue to generate sufficient cash flow to meet its operating requirements.
As of August 1, 1997, as a result of new DOE regulations (scheduled for
implementation on July 1, 1997, but delayed until August 1), if an institution
is on reimbursement for Pell and campus- based programs, then it will also be
required to obtain prior approval from the DOE before it may disburse and/or
certify a student's eligibility for an FFEL. Although management anticipates
that in connection with the final resolution of the Sanford-Brown program
reviews its FFEL participation will not be subject to this new requirement,
there can be no assurance that the program reviews will be resolved timely and
that the new requirement will not become applicable to Sanford-Brown. In the
event the Sanford-Brown Title IV Programs remain on reimbursement, and,
therefore, Sanford- Brown is required to obtain the approvals for FFEL loans
described above, this may have a material adverse effect on the cash flow of the
Company. In such an event, the Company anticipates that it will be able to
increase its financings if necessary; however, there can be no assurance that it
will be able to do so.
The Company believes that with its working capital, its cash flow from
operations, its increased working capital facilities and its increased
financings, it will have adequate resources to meet its anticipated operating
requirements for the foreseeable future, however, there can be no assurance that
this will be the case.
SAFE HARBOR STATEMENT
The preceding "Business," "Legal Proceedings" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
sections of this Report contain certain forward- looking statements within the
meaning of Section 27A of the Securities Act of 1933 (the "Securities Act") and
Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"), and the
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Company intends that such forward-looking statements be subject to the safe
harbors created thereby. Statements in this Report containing the words
"estimate," "project," "anticipate," "expect," "intend," "believe" and similar
expressions may be deemed to create forward-looking statements which, if so
deemed, speak only as of the date the statement was made. The Company undertakes
no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.
The reader is cautioned that forward-looking statements are subject to
risks and uncertainties which could cause actual results to differ materially
from historical results or those anticipated. Forward-looking statements
contained in this Report may relate to: (i) the Company's ability to capitalize
on perceived favorable demographic trends; (ii) the expansion of the Company's
business through the addition of new curricula or new locations, the elevation
of certain locations to degree- granting status or by acquisitions; (iii) the
ability of the Company to realize increased enrollments from investments in
infrastructure made over the past fiscal year; (iv) the Company's remedy of cash
collection delays resulting from staff turnover; (v) Sanford-Brown's ability to
fully resolve the program reviews, be removed from the reimbursement method of
payment for Pell Grants and campus-based loan programs and its ability to avoid
the effect of new regulations which may require that it obtain prior approval
from the DOE to certify eligibility for an FFEL; (vi) the reauthorization of the
HEA; (vii) the DOE's enforcement or interpretation of existing regulations
affecting the Company's operations; (vi) the seasonality of the Company's
results of operations; (viii) the outcome of legal proceedings involving the
Company; (ix) the discontinuance of certain operations; and (x) the sufficiency
of the Company's working capital, financings and cash flow from operating
activities for the Company's future operating and capital requirements.
The forward-looking statements are qualified by important factors that
could cause actual results to differ materially from those in the
forward-looking statements, including, without limitation, the following: (i)
the Company's plans, strategies, objectives, expectations and intentions are
subject to change at any time at the discretion of the Company; (ii) the ability
of the Company to gauge the educational needs of its customers and provide
curricula that satisfies customer demand; (iii) the level of demand for the
curricula offered by the Company; (iv) the ability of the Company to locate and
obtain favorable school sites, negotiate acceptable lease terms, and hire and
train employees; (v) management's ability to manage the Company's planned
internal growth; (vi) the ability of the Company to successfully integrate
acquired operations and to bring its newly-opened and newly-acquired campuses of
Colorado Tech to profitability; (vii) the effect of economic conditions in the
postsecondary education industry and in the nation as a whole; (viii) the
vagaries of the judicial process as it relates to the resolution of legal
proceedings involving the Company; (ix) the effect of competitive pressures from
other educational institutions; (x) the Company's ability to reduce staff
turnover and the attendant operating inefficiencies; (xi) the uncertainty
associated with the final resolution of program reviews and the application of
new regulations dependent thereon; (xii) the effect of government regulations
regarding education and accreditation standards, or the interpretation or
application thereof, including the level of government funding for, and the
Company's eligibility to participate in, student financial aid programs; and
(xiii) the role of the DOE's, Congress' and the public's perception of
for-profit education as it relates to changes in the HEA in connection with the
reauthorization or the interpretation or enforcement of existing regulations.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by Regulation
S-X are included in this Form 10-K commencing on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is a list of the names, ages, positions held, and
business experience during the past five years of the persons serving as
directors and executive officers of the Company as of June 17, 1997. Each
director holds office until the next annual meeting of shareholders or until his
successor is elected and qualified. Officers serve at the discretion of the
Board of Directors.
DIRECTORS
JACK R. BORSTING, PH.D. Dr. Borsting, age 68, has been a director of the
Company since 1994. Dr. Borsting is the E. Morgan Stanley Professor of Business
Administration at the University of Southern California and Director of its
Center for Telecommunication Management. From 1988 to 1994, Dr. Borsting was
Dean of the University of Southern California School of Business Administration,
and from 1983 to 1988, he was Dean of the University of Miami School of Business
Administration. Dr. Borsting, a former Assistant Secretary of Defense
(Comptroller), is a director of Northrop Grumman Corporation (aerospace), TRO
Learning, Inc. (proprietary education) and Bristol Technology (point-of-sale
software and service). Dr. Borsting is a trustee of the Institute for Defense
Analysis, the Rose Hill Foundation and the Los Angeles Orthopedic Hospital
Foundation.
NEIL FLANZRAICH. Mr. Flanzraich, age 53, has been a director of the Company
since March 1997. Mr. Flanzraich has been a Shareholder and Chairman of the Life
Sciences Legal Practice Group of Heller Ehrman White & McAuliffe, Palo Alto,
California, since 1995. From 1981 to 1994, Mr. Flanzraich was Senior Vice
President, General Counsel and member of the Corporate Executive Committee of
Syntex Corporation, an international pharmaceutical company that was acquired by
Roche Holdings Ltd. Mr. Flanzraich serves as Chairman of the Board of North
American Vaccine, Inc. (vaccines).
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PHILLIP FROST, M.D. Dr. Frost, age 60, has been a director of the Company
since April 1992 and Chairman of the Board of Directors since November 1992. Dr.
Frost has been Chairman of the Board of Directors and Chief Executive Officer of
IVAX Corporation (pharmaceuticals) since 1987. Dr. Frost served as President of
IVAX from 1991 until 1995. Dr. Frost was Chairman of the Board of Directors of
Key Pharmaceuticals, Inc. from 1972 to 1986. Dr. Frost is Vice Chairman of the
Board of Directors of North American Vaccine, Inc., Vice Chairman of the Board
of Directors of Continucare Corporation (managed health care), Vice Chairman of
the Board of Directors of Pan Am Corporation (airline), and a director of
Northrop Grumman Corp. and American Exploration Company (oil and gas exploration
and production). He is a trustee of the University of Miami and a member of the
Board of Governors of the American Stock Exchange.
PETER S. KNIGHT. Mr. Knight, age 46, has been a director of the Company
since 1994. Mr. Knight is a partner in the law firm of Wunder, Knight, Levine,
Thelen & Forscey, in Washington, D.C. In 1996, Mr. Knight took a leave of
absence from his firm to serve as President Clinton's Campaign Manager for
Clinton/Gore '96. From 1989 to 1991, Mr. Knight was General Counsel and
Secretary of Medicis Pharmaceutical Corporation. From 1977 to 1989, Mr. Knight
served as the Chief of Staff to Congressman, and later Senator, Al Gore. Mr.
Knight is a director of COMSAT Corp. (an international satellite services and
digital networking company), Medicis Pharmaceutical Corporation (a
pharmaceutical company specializing in dermatology), and the Schroder Series
Trust (a mutual fund company).
RICHARD M. KRASNO, PH.D. Dr. Krasno, age 55, has been a director of the
Company since August 1996. Since 1983, Dr. Krasno has been President and Chief
Executive Officer of the Institute of International Education (private
not-for-profit education organization), New York City, New York. He served as
its Executive Vice President and Chief Operating Officer from 1981 to 1983. Dr.
Krasno was Deputy Assistant Secretary of Education with the U.S. Department of
Education from 1980 to 1981.
LOIS F. LIPSETT, PH.D. Dr. Lipsett, age 63, has been a director of the
Company since 1996. Dr. Lipsett is the President of Health Education Associates,
Washington, D.C. Since 1995, Dr. Lipsett has served as a consultant to several
companies, including the Robert Wood Johnson Foundation. Dr. Lipsett was Vice
President, Scientific and Medical Affairs, American Diabetes Association from
1992 to 1995. Prior to 1992, Dr. Lipsett founded, and was Director of, the
National Diabetes Information Clearinghouse and also was Director for several
training and career development programs at the National Institutes of Health.
RICHARD C. PFENNIGER, JR. Mr. Pfenniger, age 41, has been Chief Executive
Officer and Vice Chairman of the Company since March 1997 and a director of the
Company since 1992. Mr. Pfenniger was Chief Operating Officer of IVAX
Corporation from May 1994 to March 1997. He served as Senior Vice
President--Legal Affairs and General Counsel of IVAX from 1989 to May 1994, and
as Secretary from 1990 to 1994. Prior to joining IVAX, Mr. Pfenniger was engaged
in private law practice. Mr. Pfenniger is a director of NaPro BioTherapeutics,
Inc. (biopharmaceutical research and development), North American Vaccine, Inc.
and Pan Am Corporation.
-31-
PERCY A. PIERRE, PH.D. Dr. Pierre, age 58, has been a director of the
Company since January 1997. Dr. Pierre has been Professor of Electrical
Engineering at the College of Engineering of Michigan State University since
1995. Prior to 1995, he was Vice President for Research and Graduate Studies, as
well as Professor of Electrical Engineering at Michigan State University from
1990 to 1995; President of Prairie View A & M University from 1983 to 1989;
Assistant Secretary of the Army for Research, Development and Acquisition,
Department of the U.S. Army, from 1977 to 1981; and Dean of the School of
Engineering at Howard University from 1971 to 1977. Dr. Pierre serves as a
director of CMS Energy Corp. (diversified energy company) and a director of Old
Kent Financial Corporation (bank holding company).
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
RANDY S. PROTO. Mr. Proto, age 39, has been President of the Company since
1994. In March 1997, Mr. Proto also assumed the duties of Chief Operating
Officer. For seven years prior thereto, Mr. Proto was Chief Executive Officer
and had ownership interests in 11 proprietary schools in four states. For eight
years prior thereto, Mr. Proto was employed by Computer Processing Institute.
Among the positions he held at that institution were Vice President and School
Director, Director of Admissions and Marketing, Director of Finance and
Financial Aid, Director of Placement and Director of Education.
DAVID D. O'DONNELL. Mr. O'Donnell, age 55, has been President and Chairman
of the Board of Colorado Tech since 1986. In 1997, Mr. O'Donnell also became
Chancellor of Colorado Tech in Sioux Falls and Huron University in Huron, South
Dakota.
FERNANDO L. FERNANDEZ. Mr. Fernandez, age 36, has served as Vice
President--Finance, Treasurer and Chief Financial Officer of the Company since
1996. Prior to joining the Company, Mr. Fernandez, a certified public
accountant, served as Chief Financial Officer of Frost-Nevada Limited
Partnership from 1991 to 1996. Previously, Mr. Fernandez served as Audit Manager
for Coopers & Lybrand in Miami.
RICHARD B. SALZMAN. Mr. Salzman, age 36, has served as Vice
President--Legal Affairs and General Counsel and Secretary of the Company since
1996. For approximately ten years prior to joining the Company, Mr. Salzman was
engaged in private law practice in Miami, Florida, primarily with the firm of
Homer & Bonner, P.A.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's directors, executive officers and 10% shareholders to
file initial reports of ownership and reports of changes in ownership of the
Company's common stock and other equity securities with the Securities and
Exchange Commission and the American Stock Exchange. Directors, executive
officers and 10% shareholders are required to furnish the Company with copies of
all Section 16(a) forms they file. Based on a review of the copies of such
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reports furnished to the Company and written representations from the
Company's directors and executive officers that no other reports were required,
the Company believes that during fiscal 1997 the Company's directors, executive
officers and 10% shareholders complied with all Section 16(a) filing
requirements applicable to them, except that Brett Combs (former President of
Sanford-Brown) and David O'Donnell each filed one late report with respect to
changes in their beneficial ownership of shares of the Company's common stock.
ITEM 11. EXECUTIVE COMPENSATION
The following table contains certain information regarding aggregate
compensation paid or accrued by the Company during fiscal 1997 to the Chief
Executive Officer of the Company and to each of the four most highly compensated
executive officers other than the Chief Executive Officer.
SUMMARY COMPENSATION TABLE
LONG-TERM ALL OTHER
ANNUAL COMPENSATION COMPENSATION COMPENSATION
-------------------------------------- --------------- -------------------
NAME AND YEAR ENDED
PRINCIPAL POSITION MARCH 31, SALARY BONUS STOCK OPTIONS
- ---------------------------- ---------- -------- --------- --------------- --------------------
($) ($) (#)(1) ($)
Richard C. Pfenniger, Jr.(2) 1997 17,187 0 300,000(3) 0
CHIEF EXECUTIVE OFFICER .... 1996 -- -- --(3) --
1995 -- -- --(3) --
Randy S. Proto(4) .......... 1997 150,000 0 0 10,000(5)
PRESIDENT AND CHIEF ........ 1996 150,000 0 0 0
OPERATING OFFICER .......... 1995 43,269 0 550,000 0
David D. O'Donnell(6) ...... 1997 145,325 10,000 0 31,031(7)
PRESIDENT - COLORADO ....... 1996 -- -- 150,000 --
TECHNICAL UNIVERSITY ....... 1995 -- -- -- --
Fernando L. Fernandez(8) ... 1997 120,000 0 0 0
VICE PRESIDENT - FINANCE, .. 1996 11,846 0 130,000 0
CFO AND TREASURER .......... 1995 -- -- 20,000 0
Richard B. Salzman(9) ...... 1997 120,000 0 0 0
VICE PRESIDENT - LEGAL ..... 1996 10,000 0 100,000 0
AFFAIRS AND GENERAL COUNSEL 1995 -- -- -- --
- ---------------
(1) All share amounts have been adjusted for a two-for-one stock split effected
as of May 13, 1996.
(2) Mr. Pfenniger's employment with the Company commenced in March 1997 and his
salary is $275,000 annually. Mr. Pfenniger has served as a director of the
Company since 1992.
(3) Excludes options to purchase 7,500 shares granted to Mr. Pfenniger in
fiscal 1997 automatically pursuant to the Company's 1996 Stock Option
Plan in connection with his services as a director of the Company. Mr.
Pfenniger was also automatically granted options to purchase 10,000
shares in fiscal 1996 and options to purchase 10,000 shares in fiscal
1995 in connection with his services as a director.
(4) Mr. Proto's employment with the Company commenced in November 1994.
(5) The additional compensation set forth for Mr. Proto represents taxable
relocation expenses incurred by Mr. Proto in connection with relocation of
the Company's headquarters from New Jersey to Florida.
(6) The Company entered into an employment agreement with Mr. O'Donnell on
March 29, 1996 in connection with the acquisition of Colorado Tech.
The agreement is for a three-year term ending March 28 , 1999 and
provides for an annual salary of $145,000 for Mr. O'Donnell's services as
President of Colorado Tech.
(7) The additional compensation for Mr. O'Donnell consists of employee
benefits in the approximate amount of $3,200, automobile allowance in
the amount of $7,000 and the remainder as compensation for Mr.
O'Donnell's personal guarantee of certain indebtedness of Colorado
Technical University.
(8) Mr. Fernandez' employment with the Company commenced in February 1996.
(9) Mr. Salzman's employment with the Company commenced in March 1996.
The following table sets forth information concerning stock option
grants made during 1997 to the executive officers named in the "Summary
Compensation Table."
STOCK OPTION GRANTS DURING THE YEAR ENDED
MARCH 31, 1997
POTENTIAL REALIZABLE
VALUE AT ASSUMED
PERCENT OF ANNUAL RATES OF
TOTAL OPTIONS STOCK PRICE APPRECIATION
NAME AND OPTIONS GRANTED TO EXERCISE EXPIRATION FOR OPTION TERM
PRINCIPAL POSITION GRANTED EMPLOYEES PRICE DATE 5% 10%
- ------------------ ------- ------------- ----------- ------------- -------- ------
(#) % $ $ $
Richard C. Pfenniger, Jr. 300,000(1) 40% $5.25 03/02/04 642,000 1,494,000
CHIEF EXECUTIVE OFFICER
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- --------------------
(1) Excludes options to purchase 7,500 shares granted to Mr. Pfenniger
automatically pursuant to the Company's 1996 Stock Option Plan in
connection with his services as a director of the Company. These
options were granted on October 14, 1996 at an exercise price of $8.625
and have a term of seven years.
The following table sets forth information concerning stock option
exercises during fiscal 1997 by each of the executive officers named in the
"Summary Compensation Table" above and the fiscal year-end value of unexercised
options held by each such executive officer.
STOCK OPTION EXERCISES IN FISCAL 1997 AND FISCAL YEAR END OPTION VALUES
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END
--------------------------------- -------------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------- -------------- ----------- -------------
(#)(1) (#)(1) ($)(1) ($)(1)(2)
Richard C. Pfenniger, Jr. 97,500 300,000 216,850 0
CHIEF EXECUTIVE OFFICER
Randy Proto 265,000 285,000 828,125 890,625
PRESIDENT AND CHIEF
OPERATING OFFICER
David D. O'Donnell 50,000 100,000 0 0
PRESIDENT - COLORADO TECH
Fernando L. Fernandez 90,000 90,000 153,300 133,650
VICE PRESIDENT - FINANCE,
CHIEF FINANCIAL OFFICER
AND TREASURER
Richard B. Salzman 25,000 75,000 14,062 42,187
VICE PRESIDENT - LEGAL
AFFAIRS AND GENERAL COUNSEL
- --------------------
(1) All share amounts have been adjusted for a two-for-one stock split
effected as of May 13, 1996.
(2) The value of unexercised in-the-money options represents the number of
options held at year-end 1997 multiplied by the difference between the
exercise price and $5.25, the closing price of the Company's common
stock at March 31, 1997.
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DIRECTOR COMPENSATION
Each director who is not employed by the Company receives $4,800 per year
for his service as a director, $1,000 for each Board of Directors meeting
personally attended, and is reimbursed for expenses incurred in attending board
and committee meetings. Pursuant to the Company's 1996 Stock Option Plan,
non-employee directors are granted automatically each year, on the first
business day following the Company's annual meeting of shareholders,
non-qualified options to purchase 7,500 shares (37,500 to the Chairman of the
Board) of the Company's common stock at an exercise price equal to the fair
market value of the common stock on the date of the grant, and having a term of
seven years. In fiscal 1997, pursuant to that provision, options at an exercise
price of $8.625 per share were automatically granted to Dr. Frost (37,500
shares), and to Mr. Pfenniger, Dr. Borsting, Mr. Knight, Dr. Lipsett and Dr.
Krasno (7,500 shares each).
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1997, the following directors served on the Compensation and
Stock Option Committee of the Board of Directors: Dr. Frost, Mr. Isaac Kaye, Mr.
Pfenniger, Dr. Borsting, and Dr. Krasno. No person serving as a member of the
Committee during fiscal 1997 was an executive officer of the Company at the time
of service on the Committee, and no interlocking relationships exist between
such persons and any director or executive officer of the Company. Mr. Kaye
resigned as a director of the Company effective July 1, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL SECURITY HOLDERS
The following table sets forth certain information as of June 17, 1997
concerning stock ownership of all persons known by the Company to own
beneficially in excess of five percent of the Company's common stock. Unless
otherwise indicated, all shares are beneficially owned and the sole investment
and voting power is held by each person set forth herein.
NAME AND ADDRESS OF NUMBER PERCENT
BENEFICIAL HOLDER OF SHARES(1) OF CLASS
- ---------------------- -------------- ---------
Frost-Nevada, 5,421,528(2) 36.0%
Limited Partnership
3500 Lakeside Court
Suite 200
Reno, Nevada 89509
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TRAL & CO 1,000,000 7.9%
The Travelers Indemnity Company
One Tower Square
Hartford, Connecticut 06183-1051
David D. O'Donnell 884,956(3) 7.0%
Colorado Technical University
4435 N. Chestnut Street
Colorado Springs, Colorado 80907
The Marilyn O. Sullivan 649,285 5.1%
Family Trust
P.O. Box 7399-151
Breckenridge, Colorado 80424
- --------------------
(1) All share amounts have been adjusted for a two-for-one stock split of
the Company's common stock effected as of May 13, 1996.
(2) Includes 237,500 shares which may be acquired pursuant to stock options
held by Dr. Frost exercisable within 60 days of June 17, 1997 and
2,150,000 shares which may be acquired pursuant to stock purchase
warrants held by Frost-Nevada, Limited Partnership (of which Dr. Frost
is the sole limited partner and sole shareholder of Frost-Nevada
Corporation, the general partner), exercisable within 60 days of June
17, 1997. Exercise of these warrants and options are subject to the
restrictions of the New Jersey Shareholders Protection Act. Dr. Frost
is the Chairman of the Board of Directors of the Company.
(3) Includes 50,000 shares which may be acquired pursuant to stock options
held by Mr. O'Donnell within 60 days of June 17, 1997 and 834,956
shares held in trust by Mr. O'Donnell for various family members.
STOCK OWNERSHIP BY MANAGEMENT
The following table sets forth certain information as of June 17, 1997
concerning the number of shares of common stock beneficially owned by each
director, each executive officer named above in the "Summary Compensation Table"
and by all directors and executive officers as a group. Unless otherwise
indicated, all shares are owned directly by the person indicated who holds sole
voting and investment power.
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NAME AND ADDRESS OF SHARES BENEFICIALLY PERCENT
BENEFICIAL HOLDER OWNED(1)(2) OF CLASS
- ------------------------------------ --------------------- --------
Jack R. Borsting, Ph.D. 29,100(3) *
University of Southern California
School of Business
Administration, DCC-217
Los Angeles, California 90089-0871
Neil Flanzraich 0 N/A
Heller Ehrman White & McAuliffe
525 University Avenue
Palo Alto, California 94301-1900
Phillip Frost, M.D. 5,421,528(4) 36.0%
IVAX Corp.
4400 Biscayne Boulevard
Miami, Florida 33137
Peter S. Knight 27,500(3) *
1615 L. Street, N.W., Suite 650
Washington, D.C. 20036
Richard M. Krasno, Ph.D. 7,500(3) *
Institute of International Education
809 United Nations Plaza
New York, New York 10017-3580
Lois F. Lipsett, Ph.D. 7,700(3) *
3724 Jenifer Street, N.W.
Washington, D.C. 20015
Richard C. Pfenniger, Jr. 100,000(3) *
4400 Biscayne Boulevard, 6th Floor
Miami, Florida 33137
Percy A. Pierre, Ph.D. 0 N/A
Michigan State University
College of Engineering
357 Engineering Building
East Lansing, Michigan 48824-1226
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Randy S. Proto 267,200(3) 2.06%
4400 Biscayne Boulevard, 6th Floor
Miami, Florida 33137
David D. O'Donnell 884,956(5) 6.95%
Colorado Technical University
4435 N. Chestnut Street
Colorado Springs, Colorado 80907
Fernando L. Fernandez 90,000(3) *
4400 Biscayne Boulevard, 6th Floor
Miami, Florida 33137
Richard B. Salzman 25,000(3) *
4400 Biscayne Boulevard, 6th Floor
Miami, Florida 33137
All directors and executive officers
as a group (12 persons) 6,860,484(6) 43.8%
- ---------------------
* Represents beneficial ownership of less than one percent.
(1) All share amounts have been adjusted for a two-for-one stock split of
the Company's common stock effected as of May 13, 1996.
(2) For purposes of this table, beneficial ownership is computed pursuant
to Rule 13d-3 under the Securities Exchange Act of 1934; the inclusion
of shares as beneficially owned should not be construed as an admission
that such shares are beneficially owned for purposes of Section 16 of
the Securities Exchange Act of 1934.
3) Includes shares which may be acquired pursuant to stock options
exercisable within 60 days of June 17, 1997 as follows: Dr. Borsting
(27,500); Mr. Knight (27,500); Dr. Krasno (7,500); Dr. Lipsett
(7,500); Mr. Pfenniger (97,500); Mr. Proto (265,000); Mr. Fernandez
(90,000); and Mr. Salzman (25,000).
(4) Includes 2,150,000 shares which may be acquired pursuant to stock
purchase warrants held by Frost-Nevada, Limited Partnership (of which
Dr. Frost is the sole limited partner and sole shareholder of
Frost-Nevada Corporation, the general partner), exercisable within 60
days of June 17, 1997 and 237,500 shares which may be acquired pursuant
to stock options held by Dr. Frost exercisable within 60 days of June
17, 1997. Exercise of these warrants and options are subject to the
restrictions of the New Jersey Shareholders Protection Act.
-39-
(5) Includes 50,000 shares which may be acquired pursuant to stock options
exercisable within 60 days of June 17, 1997, and 834,956 shares held in
trust by Mr. O'Donnell for various family members.
(6) Includes shares described in footnotes (2) through (5) as beneficially
owned.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company currently occupies administrative offices in Miami, Florida
which are owned by IVAX Corporation. The lease between the Company and IVAX
Corporation provides for an annual rental of $103,999. The Chairman of the Board
of the Company is also the Chairman of the Board and a principal shareholder of
IVAX Corporation.
In April 1995, Career Master, a company 40% owned by Randy S. Proto,
entered into an agreement with Ultrasound Diagnostic School pursuant to which
Career Master would implement at Ultrasound Diagnostic School its system of
organizing and operating job placement departments for use at the Ultrasound
Diagnostic School teaching facilities. In addition to paying a small fee for the
service, Ultrasound Diagnostic School agreed to purchase, over a two-year
period, approximately $160,000 in text books and related materials from Career
Master to be resold to Ultrasound Diagnostic School students. In connection with
the transaction, options to purchase 20,000 shares (10,000 shares before giving
effect to the two-for-one stock split effected as of May 13, 1996) were granted
to David Royka, Vice President of Career Services for the Associate Degree
Division and a principal of Career Master. In fiscal 1997, Ultrasound Diagnostic
School purchased $78,866.65 in textbooks from Career Master pursuant to this
agreement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The following consolidated financial statements are filed as a part of
this report:
Report of Independent Certified Public Accountants
Consolidated Balance Sheet
Consolidated Statements of Operations
Consolidated Statements of Changes in Stockholders' Equity
-40-
Consolidated Statements of Cash Flow
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
All of the financial statement schedules have been omitted because of
the absence of the conditions under which they are required or because the
required information is included in the consolidated financial statements or the
notes thereto.
(a)(3) Exhibits
EXHIBIT
NUMBER DESCRIPTION METHOD OF FILING
- ------- --------------- ----------------------------------------
3.1 Certificate of Incorporation, Incorporated by reference to Whitman's
as amended Form 8-K/A-1 dated April 11, 1996.
3.2 By-Laws, as amended Filed herewith.
10.1 Registration Rights Agreement Incorporated by reference to Whitman's
dated as of April 6, 1992 Report on Form 8-K dated April 6, 1992.
10.2 Amended and Restated 1986 Directors Incorporated by reference to Whitman's
and Consultants Stock Option Plan Registration Statement on Form S-8
filed September 9, 1992.
10.3 1992 Incentive Stock Option Plan Incorporated by reference to Whitman's
Proxy Statement for the Annual Meeting
of Shareholders held on November 19,
1992.
10.4 Whitman Education Group, Inc. Filed herewith.
1996 Stock Option Plan, as amended
10.5 Asset Purchase Agreement, dated Incorporated by reference to Whitman's
November 30, 1994 among Whitman Report on Form 8-K dated
Medical Corp., Whitman Acquisition November 30, 1994.
Corporation, Sanford-Brown College,
Inc., James L. Combs*
-41-
10.6 Escrow Agreement dated Incorporated by reference to Whitman's
December 21, 1994, among Whitman Report on Form 8-K dated
Acquisition Corporation, Sanford-Brown December 21, 1994.
College, Inc., and Midlantic Bank, N.A.,
as Escrow Agent
10.7 Amendment No. 1 to Asset Purchase Filed herewith.
Agreement and Escrow Agreement
among Sanford Brown College, Inc.
(f/k/a Whitman Acquisition Corp.),
James L. Combs, as successor-in-
interest to Sanford Brown College, Inc.,
a Missouri corporation and Midlantic
Bank, N.A., as Escrow Agent
10.8 Non-Competition Agreement dated Incorporated by reference to Whitman's
December 21, 1994 among Whitman Report on Form 8-K dated
Acquisition Corporation, Sanford Brown December 21, 1994.
College, Inc., James L. Combs
10.9 Form of Stock Purchase Warrant to purchase Incorporated by reference to Whitman's
575,000 shares of common stock to be Report on Form 8-K dated
issued by Whitman Medical Corp. in favor December 21, 1994.
of Frost-Nevada, Limited Partnership
10.10 Agreement and Plan of Merger Incorporated by reference to Whitman's
dated September 12, 1995 among Form 8-K/A-1 dated April 11, 1996.
Whitman Education Group, Inc.,
Whitman Medical Acquisition Corp.
and M.D.J.B., Inc. *
10.11 First Amendment to Agreement and Incorporated by reference to Whitman's
Plan of Merger dated December 13, Form 8-K/A-1 dated April 11, 1996.
1995 among Whitman Education Group,
Inc., Whitman Medical Acquisition
Corp. and M.D.J.B., Inc.
10.12 Form of Amendment to Credit Agreement Incorporated by reference to Whitman's
Agreement dated February 26, 1996 among Report on Form 8-K dated February 26,
Bank of America Illinois, Whitman Medical 1996.
Corp. and Phillip Frost
-42-
10.13 Form of Term Note dated February 26, Incorporated by reference to Whitman's
1996 by Whitman Medical Corp. in favor Report on Form 8-K dated February 26,
of Bank of America Illinois 1996.
10.14 Form of Revolver Note dated February 26, Incorporated by reference to Whitman's
1996 by Whitman Medical Corp. in favor Report on Form 8-K dated February 26,
of Bank of America Illinois 1996.
10.15 Stock Purchase Warrant to purchase 650,000 Incorporated by reference to Whitman's
shares of common stock issued by Whitman Report on Form 8-K dated February 26,
Medical Corp. in favor of Phillip Frost 1996.
10.16 Employment Agreement dated as of Incorporated by reference to Whitman's
March 29, 1996 by and between M.D.J.B., Report on Form 8-K/A-1 dated
Inc. and David O'Donnell April 11, 1996.
10.17 Credit Agreement dated as of April 11, Incorporated by reference to Whitman's
1996 among Barnett Bank of South Florida, Report on Form 10-Q for the quarter
N.A., Whitman Education Group, Inc. and ended June 30, 1996.
Phillip Frost, M.D.
10.18 Form of Term Note dated April 11, 1996 Incorporated by reference to Whitman's
by Whitman Education Group, Inc. in Report on Form 10-Q for the quarter
favor of Barnett Bank of South Florida, N.A. ended June 30, 1996.
10.19 Form of Revolver Note dated April 11, Incorporated by reference to Whitman's
1996 by Whitman Education Group, Inc. Report on Form 10-Q for the quarter
in favor of Barnett Bank of South Florida, ended June 30, 1996.
N.A.
10.20 Second Amendment to Credit Agreement Incorporated by reference to Whitman's
dated October 31, 1996 among Barnett Report on Form 10-Q for the quarter
Bank, N.A., Whitman Education ended September 30, 1996.
Group, Inc. and Phillip Frost, M.D.
10.21 Form of Revolver Note dated October 31, Incorporated by reference to Whitman's
1996 by Whitman Education Group, Inc. Report on Form 10-Q for the quarter
in favor of Barnett Bank, N.A. ended September 30, 1996.
-43-
10.22 Form of Amended, Restated and Incorporated by reference to Whitman's
Consolidated Renewal Revolver Note Report on Form 10-Q for the quarter
dated October 31, 1996 by Whitman ended September 30, 1996.
Education Group, Inc. in favor of Barnett
Bank, N.A.
10.23 Form of Third Amendment to Credit Filed herewith.
Agreement dated May 19, 1997 among
Barnett Bank, N.A., Whitman Education
Group, Inc. and Phillip Frost, M.D.
10.24 Form of Revolver Note dated May 19, Filed herewith.
1997 by Whitman Education Group, Inc.
in favor of Barnett Bank, N.A.
10.25 Form of Restated and Consolidated Filed herewith.
Renewal Revolver Note dated May 19,
1997 by Whitman Education Group, Inc.
in favor of Barnett Bank, N.A.
10.26 Form of Promissory Note dated Filed herewith.
September 25, 1996 by Sanford Brown
College, Inc. in favor of Bank One,
Colorado, N.A.
10.27 Business Loan Agreement dated Filed herewith.
September 25, 1996 by Sanford Brown
College, Inc. and Bank One, Colorado,
N.A.
10.28 Commercial Security Agreement dated Filed herewith.
September 25, 1996 between Sanford
Brown College, Inc. and Bank One,
Colorado, N.A.
10.29 Loan Agreement dated August 5, 1996 Filed herewith.
between Colorado Technical University
and Bank One, Colorado, N.A.
10.30 Form of promissory note and Schedule Filed herewith.
of Promissory Notes by Colorado
Technical University, Inc. in favor of
Bank One, Colorado, N.A.
-44-
10.31 Form of commercial security agreement Filed herewith.
and Schedule of Commercial Security
Agreements between Colorado Technical
University, Inc. and Bank One,
Colorado, N.A.
10.32 First Amendment to Loan Agreement Filed herewith.
dated December 27, 1996 between
Bank One, Colorado, N.A. and Colorado
Technical University, Inc.
10.33 Commercial Guaranty by M.D.J.B., Inc. Filed herewith.
in favor of Bank One, Colorado, N.A.
10.34 Second Amendment to Loan Agreement Filed herewith.
dated February 24, 1997 between Bank
One, Colorado, N.A. and Colorado Technical
University, Inc.
10.35 Third Amendment to Loan Agreement Filed herewith.
dated June 13, 1997 between Bank One,
Colorado, N.A. and Colorado Technical
University, Inc.
10.36 Commercial Guaranty by Whitman Filed herewith
Education Group, Inc. in favor of
Bank One, Colorado, N.A.
10.37 Promissory Note dated June 13, 1997 Filed herewith.
by Colorado Technical University, Inc.
in favor of The Pueblo Bank and Trust
Company
10.38 Form of Commercial Guaranty given Filed herewith.
by Whitman Education Group, Inc. and
M.D.J.B., Inc. in favor of The Pueblo
Bank and Trust Company
10.39 Commercial Security Agreement dated Filed herewith.
June 13, 1997 between Colorado
Technical University, Inc. and The Pueblo
Bank and Trust Company
-45-
10.40 Stock Purchase Agreement dated Filed herewith.
October 15, 1996 by and between
Whitman Education Group, Inc. and
The Travelers Indemnity Company
10.41 Form of Registration Rights Agreement Filed herewith.
among Whitman Education Group, Inc.
and The Travelers Indemnity Company
10.42 Form of Asset Purchase Agreement dated Incorporated by reference to Whitman's
December 30, 1996 among Colorado Report on Form 10-Q for the quarter
Technical University, Inc., Lansdowne ended December 31, 1996.
University, Ltd., EIEA America, Inc.,
Eastern International Educational
Association and Dr. Chikara Higashi.*
11 Statement re computation of per Filed herewith.
share earnings
21 Subsidiaries Incorporated by reference to Whitman's
Report on Form 10-K for the year
ended March 31, 1996.
23.1 Consent of Ernst & Young LLP Filed herewith.
23.2 Consent of Stockman Kast Ryan Filed herewith.
& Scruggs, P.C.
27 Financial Data Schedule Filed herewith.
- ----------------------
* Certain exhibits and schedules to this document have not been filed. The
Registrant agrees to furnish a copy of any omitted schedule or exhibit to the
Securities and Exchange Commission upon request.
(b) Whitman filed a Current Report on Form 8-K dated January 27,
1997 reporting that on December 31, 1996, Colorado Technical University
completed the acquisition of Huron University. The Form 8-K was amended by Form
8-K/A on February 28, 1997 to include the following financial statements and pro
forma financial information with respect to Lansdowne University, Ltd. d/b/a
Huron University, United States Branches: (i) audited balance sheets as of May
31, 1996 and 1995 and the related statements of operations, stockholders' equity
and cash flows for each of the three years ended May 31, 1996; (ii) Huron
University unaudited balance sheet and
-46-
stockholders' equity as of December 30, 1996 and the related statements of
operations and cash flows for the seven months ended December 30, 1996 and 1995;
and (iii) Whitman Education Group, Inc. and Huron University unaudited pro forma
condensed combined statements of operations for the year ended March 31, 1996
and the nine months ended December 31, 1996.
-47-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WHITMAN EDUCATION GROUP, INC.
BY: /S/ RICHARD C. PFENNIGER, JR.
--------------------------------------------
RICHARD C. PFENNIGER, JR.
CHIEF EXECUTIVE OFFICER AND
VICE CHAIRMAN OF THE BOARD OF DIRECTORS
DATED: JUNE 30, 1997
-48-
Pursuant to the requirements of the Securities Act of 1934, this Report
has been signed below by the following persons on behalf of the registrant in
the capacities and on the dates indicated.
SIGNATURES TITLE Date
- ------------------------------- -------------------------- ---------
/s/ PHILLIP FROST Chairman of the Board June 30, 1997
- -------------------------------
Phillip Frost, M.D.
/s/ RICHARD C. PFENNIGER, JR. Vice Chairman of the Board June 30, 1997
- ------------------------------- and Chief Executive Officer
Richard C. Pfenniger, Jr.
/s/ FERNANDO L. FERNANDEZ Chief Financial Officer June 30, 1997
- ------------------------------- (Principal Financial and
Fernando L. Fernandez Accounting Officer)
/s/ JACK R. BORSTING Director June 30, 1997
- -------------------------------
Jack R. Borsting, Ph.D.
/s/ PETER S. KNIGHT Director June 30, 1997
- -------------------------------
Peter S. Knight
/s/ LOIS F. LIPSETT Director June 30, 1997
- -------------------------------
Lois F. Lipsett, Ph.D.
/s/ RICHARD M. KRASNO Director June 30, 1997
- -------------------------------
Richard M. Krasno, Ph.D.
/s/ PERCY A. PIERRE Director June 30, 1997
- -------------------------------
Percy A. Pierre, Ph.D.
/s/ NEIL FLANZRAICH Director June 30, 1997
- -------------------------------
Neil Flanzraich
-49-
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
CONTENTS
PAGE
Report of Independent Certified Public Accountants................ F-2
Consolidated Balance Sheets....................................... F-3
Consolidated Statements of Operations............................. F-4
Consolidated Statements of Changes in Stockholders' Equity........ F-5
Consolidated Statements of Cash Flows............................. F-6
Notes to Consolidated Financial Statements........................ F-8
F-1
Report of Independent Certified Public Accountants
The Board of Directors and Stockholders
Whitman Education Group, Inc.
We have audited the accompanying consolidated balance sheets of Whitman
Education Group, Inc. and subsidiaries as of March 31, 1997 and 1996 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended March 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. We did not audit the 1996 and 1995 financial
statements of M.D.J.B., Inc., a wholly-owned subsidiary, which statements
reflect total assets constituting 15% in 1996, and total revenues constituting
22% in 1996 and 40% in 1995 of the related consolidated totals. Those statements
were audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to data included for M.D.J.B., Inc., is based
solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits, and for 1996 and 1995 the report of other
auditors, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Whitman Education
Group, Inc. and subsidiaries at March 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended March 31, 1997, in conformity with generally accepted
accounting principles.
/s/ [ERNST & YOUNG LLP]
=======================================
ERNST & YOUNG LLP
Miami, Florida
June 6, 1997
F-2
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31,
1997 1996
---- ----
Assets
Current assets:
Cash and cash equivalents.................................................... $ 3,853,932 $ 2,762,141
Restricted cash.............................................................. 511,927 363,314
Accounts receivable, less allowance for doubtful accounts
of $2,821,261 in 1997 and $1,314,631 in 1996 ............................. 18,159,383 15,619,237
Inventories.................................................................. 1,084,124 795,350
Deferred income taxes........................................................ 853,267 511,401
Other current assets......................................................... 1,072,511 805,137
-------------- ---------------
Total current assets......................................................... 25,535,144 20,856,580
Property and equipment, net.................................................. 10,062,815 7,017,181
Marketable securities........................................................ 296,250 776,250
Deferred costs, net of accumulated amortization
of $1,410,039 in 1997 and $1,043,703 in 1996 ............................. 93,567 553,929
Deposits and other assets, net of accumulated amortization
of $272,078 in 1997 and $110,664 in 1996................................. 1,497,495 1,025,633
Goodwill, net................................................................ 10,516,165 2,529,693
Restricted cash -escrow...................................................... 16,058 2,563,999
----------------- ---------------
$ 48,017,494 $ 35,323,265
============= ===============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable............................................................. $ 2,390,283 $ 1,549,494
Accrued expenses............................................................. 2,873,923 1,537,216
Income taxes payable......................................................... 34,816 348,851
Current portion of capitalized lease obligations............................. 1,040,403 919,050
Current portion of long-term debt............................................ 540,565 --
Deferred tuition revenue..................................................... 12,999,348 11,705,521
-------------- --------------
Total current liabilities.................................................... 19,879,338 16,060,132
Other liabilities............................................................ 921,859 383,813
Capitalized lease obligations................................................ 2,013,125 1,994,035
Long-term debt............................................................... 9,096,017 9,500,000
Commitments and contingencies
Stockholders' equity:
Common stock, no par value, authorized 100,000,000 shares, issued and
outstanding 12,677,582 shares in 1997 and 10,311,782 shares in 1996,
excluding shares held in escrow in 1996................................ 20,584,014 7,590,793
Additional paid-in capital................................................ 671,536 616,500
Retained earnings (accumulated deficit)................................... (4,139,122) 62,040
Treasury stock, 239,694 shares in 1997 and 232,714 shares in 1996 ........ (1,009,273) (774,773)
Net unrealized loss on noncurrent marketable securities................... -- (109,275)
-------------- ---------------
Total stockholders' equity................................................... 16,107,155 7,385,285
-------------- ---------------
$ 48,017,494 $ 35,323,265
============== ===============
See accompanying notes to financial statements.
F-3
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED MARCH 31,
1997 1996 1995
---- ---- ----
Net revenues........................................... $46,992,954 $39,837,949 $19,331,602
Costs and Expenses:
Instructional and educational support............... 31,349,524 24,150,421 14,046,044
Selling and promotion............................... 6,708,430 5,708,361 1,847,526
General and administrative.......................... 12,179,958 9,028,607 3,149,741
---------------- -------------- -------------
Total costs and expenses............................... 50,237,912 38,887,389 19,043,311
(Loss) income from operations.......................... (3,244,958) 950,560 288,291
Other expenses:
Interest expense, net............................. 870,990 1,187,604 312,730
Realization of loss on
marketable securities........................... 656,250 -- --
---------------- -------------- -------------
Loss before income taxes provision.................... (4,772,198) (237,044) (24,439)
Income tax (benefit) provision........................ (408,841) (136,473) 122,172
---------------- -------------- -------------
Net loss ............................................. $(4,363,357) $ (100,571) $(146,611)
================ ============== =============
Loss per share of common stock........................ $ (0.38) $ (0.01) $ (0.02)
================ ============== =============
Average number of common stock and common stock
equivalent shares outstanding, excluding common
stock shares held in escrow in 1996 and 1995....... 11,404,862 10,235,956 9,273,816
================ ============= =============
See accompanying notes to financial statements.
F-4
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED MARCH 31, 1997, 1996 AND 1995
NET
UNREALIZED
(LOSS)
GAIN ON
COMMON ADDITIONAL RETAINED NONCURRENT
SHARES COMMON PAID-IN EARNINGS TREASURY MARKETABLE
OUTSTANDING STOCK CAPITAL (DEFICIT) STOCK SECURITIES TOTAL
----------- ---------- ---------- ---------- ---------- ----------- -----------
Balance at March 31, 1994 9,201,942 $6,041,461 $ -- $ 309,222 $(430,500) $(202,500) $5,717,683
Shares issued for exercise
of stock options and warrants 810,960 1,002,942 -- -- -- -- 1,002,942
Shares issued in acquisition 196,464 500,000 -- -- -- -- 500,000
Value of warrants issued
for loan guarantee -- -- 280,500 -- -- -- 280,500
Shares repurchased and cancelled -- (98,626) -- -- -- -- (98,626)
Net loss -- -- -- (146,611) -- -- (146,611)
----------- ---------- ---------- ----------- ---------- ---------- -----------
Balance at March 31, 1995 10,209,366 7,445,777 280,500 162,611 (430,500) (202,500) 7,255,888
Shares issued for exercise
of options 218,382 426,121 -- -- -- -- 426,121
Shares repurchased in connection
with exercise of options (115,966) -- -- -- (344,273) -- (344,273)
Value of warrants issued
for loan guarantee -- -- 336,000 -- -- -- 336,000
Shares repurchased and cancelled -- (306,000) -- -- -- -- (306,000)
Shares issued for cash -- 24,895 -- -- -- -- 24,895
Net unrealized gain on non-current
marketable securities -- -- -- -- -- 93,225 93,225
Net loss -- -- -- (100,571) -- -- (100,571)
----------- ----------- --------- ------------ ---------- ---------- ------------
Balance at March 31, 1996 10,311,782 7,590,793 616,500 62,040 (774,773) (109,275) 7,385,285
Shares issued for exercise of options 351,168 881,476 -- -- -- -- 881,476
Value of stock options issued for
services rendered -- -- 55,036 -- -- -- 55,036
Shares issued, previously escrowed
in connection with purchase of SBC 1,021,612 5,632,126 -- -- -- -- 5,632,126
Shares repurchased in connection with
exercise of options (46,980) -- -- -- (437,500) -- (437,500)
Shares issued in connection with
purchase of DFAS 40,000 -- -- -- 203,000 -- 203,000
Shares issued in connection with a
private placement 1,000,000 6,479,619 -- -- -- -- 6,479,619
Realization of loss on
marketable securities -- -- -- -- -- 109,275 109,275
Net income of Colorado Tech for
the three months ended March 31, 1996 -- -- -- 162,195 -- -- 162,195
Net loss -- -- -- (4,363,357) -- -- (4,363,357)
----------- ----------- --------- ------------- ---------- ---------- ------------
Balance at March 31, 1997 12,677,582 $20,584,014 $671,536 $(4,139,122) $(1,009,273) $ -- $16,107,155
=========== =========== ========= ============ ============ ========== ============
See accompanying notes to financial statements.
F-5
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31,
1997 1996 1995
------------- ------------- -------------
Cash flows from operating activities:
Net loss ............................................. $ (4,363,357) $ (100,571) $ (146,611)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization ...................... 2,772,520 1,930,116 1,058,971
Bad debt expense ................................... 3,245,314 1,835,736 893,043
Deferred tax (benefit) provision ................... (408,841) (482,917) 32,456
Loss on sale of equipment .......................... -- 21,828 9,338
Realization of loss on marketable securities........ 656,250 -- --
Changes in operating assets and liabilities, net of
effects from purchase of SBC and Huron:
Restricted cash ................................ (169,481) (17,288) (346,026)
Accounts receivable ............................ (4,911,368) (1,488,120) (6,410,532)
Inventories .................................... (199,634) (269,811) (220,665)
Other current assets ........................... (449,264) 208,402 (174,540)
Deferred costs ................................. (98,047) (4,878) (191,792)
Deposits and other assets ...................... 15,086 (172,592) (90,377)
Accounts payable ............................... 416,411 97,113 187,189
Accrued expenses ............................... 1,359,655 477,102 32,120
Income taxes payable ........................... (163,980) 190,701 17,272
Deferred tuition revenue ....................... 243,393 6,252 3,226,597
Other .......................................... (156,254) (24,427) 34,041
------------- ------------ ------------
Net cash (used in) provided by operating activities (2,211,597) 2,206,646 (2,089,516)
------------- ------------ ------------
Cash flows from investing activities:
Acquisition of Sanford-Brown College ................. -- -- (2,590,110)
Payments into escrow for acquisition of
Sanford-Brown College .............................. (61,267) (163,999) (2,400,000)
Purchase of property and equipment ................... (3,870,181) (1,882,873) (682,224)
Proceeds from sale of equipment ...................... -- 24,048 45,700
------------- ------------ ------------
Net cash used in investing activities ................ (3,931,448) (2,022,824) (5,626,634)
------------- ------------ ------------
Cash flows from financing activities:
Proceeds from long-term bank loan .................... -- -- 6,000,000
Proceeds from revolving line of credit
and long-term borrowings ........................... 32,868,173 7,390,000 2,428,621
Principal payments on revolving line of credit,
long-term borrowings and other liability ........... (32,731,592) (5,623,533) (842,000)
Principal payments on capitalized lease obligations .. (1,010,601) (776,172) (392,985)
Proceeds from exercise of options and warrants ....... 443,976 81,848 1,002,942
Proceeds from sale of common stock ................... 6,479,619 24,895 --
Repurchase of common stock ........................... -- (153,000) (98,626)
Principal payments on note to former stockholder ..... -- (153,000) --
Proceeds from Huron acquisition ...................... 1,200,683 -- --
------------ ------------ ------------
Net cash provided by financing activities ............ 7,250,258 791,038 8,097,952
------------ ------------ ------------
Increase in cash and cash equivalents ................ 1,107,213 974,860 381,802
Cash and cash equivalents at beginning of year ....... 2,762,141 1,787,281 1,405,479
CTU activity for the three-months ended March 31, 1996 (15,422) -- --
------------ ------------ ------------
Cash and cash equivalents at end of year ............. $ 3,853,932 $ 2,762,141 $ 1,787,281
============ ============ ============
Continued on the following page.
F-6
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS --(CONTINUED)
YEAR ENDED MARCH 31,
1997 1996 1995
----------- ----------- ----------
Supplemental disclosures of noncash financing
and investing activities:
Long-term maintenance contract financed
through leasing company ............................. -- $ 621,000 --
============= ============ ==========
Equipment acquired under capital leases ............... $ 1,181,153 $ 1,157,133 $1,782,960
============= ============ ==========
Note issued in connection with repurchase of
common stock ....................................... -- $ 153,000 --
============= ============ ==========
Assets acquired in Huron acquisition .................. $ 1,467,220 -- --
------------- ============ ==========
Liabilities assumed in Huron acquisition .............. $ 2,667,903 -- --
------------- ============ ==========
Release of restricted cash previously in escrow for SBC
acquisition ....................................... $ 2,400,000 -- --
------------- ============ ==========
Treasury stock issued for purchase of DFAS ............ $ 203,000 -- --
============= ============ ==========
Value of stock options issued for services rendered ... $ 55,036 -- --
============= ============ ==========
Stock issued in connection with acquisition of SBC .... $ 5,632,126 -- $ 500,000
============= ============ ==========
Supplemental disclosures of cash flow information:
Interest paid ......................................... $ 877,494 $ 984,992 $ 324,375
============= ============ ==========
Income taxes paid ..................................... $ 211,479 $ 148,405 $ 141,955
============= ============ ==========
See accompanying notes to financial statements.
F-7
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Whitman Education Group, Inc. and Subsidiaries' ("Whitman" or the
"Company") primary business is the operation of degree and non-degree granting
proprietary schools devoted to career training primarily in the medical,
technical, and business fields. The Company's operations are conducted through
its three wholly-owned subsidiaries: Ultrasound Technical Services, Inc.
("UDS"), Sanford Brown College, Inc. ("SBC") and M.D.J.B., Inc., the parent
corporation of Colorado Tech University ("CTU"). The revenues generated from
these subsidiaries primarily consist of tuition and fees paid by students. The
majority of students rely on funds received from federal financial aid programs
under Title IV of the Higher Education Act of 1965 to pay for a substantial
portion of their tuition.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Whitman
Education Group, Inc. and its subsidiaries, all of which are wholly-owned. All
significant intercompany balances and transactions have been eliminated in
consolidation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid short-term investments with an
original maturity of three months or less to be cash equivalents.
RESTRICTED CASH
Restricted cash represents 25% of the Company's Title IV program
refunds made in the previous fiscal year, as required by the United States
Department of Education ("DOE"). Such funds are held in separate bank accounts
and other short-term investments.
REVENUES, ACCOUNTS RECEIVABLE AND DEFERRED TUITION REVENUE
Upon enrollment, the Company bills the student for the full contract
amount of the course, the academic year, or the academic term, as applicable,
resulting in the recording of an accounts receivable and a corresponding
deferred tuition revenue liability. The deferred tuition revenue liability is
reduced and recognized into income over the term of the relevant period being
attended by the student.
F-8
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
INVENTORY
Inventory consists primarily of books, uniforms and supplies and is
valued at the lower of cost or market using the FIFO (first-in, first-out)
method.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, less accumulated
depreciation. Expenditures for maintenance and repairs which do not add to the
value of the related assets or materially extend their original lives are
expensed as incurred.
Depreciation of property and equipment is computed principally by the
straight-line method over the estimated useful lives of the assets ranging from
one to ten years. Leasehold improvements are amortized over the term of the
related leases, which approximates the estimated useful lives.
DEFERRED COSTS
Deferred costs consist primarily of costs associated with the opening
of new school locations, the expansion of facilities to accommodate new programs
and the development of new curriculum at existing locations. Prior to January
1996, such costs had been amortized on a straight-line basis over thirty-six
months.
Effective January 1, 1996, the Company changed the amortization period
of deferred costs from a 36 month period to a 12 month period. The change in
estimate was accounted for on a prospective basis and increased amortization
expense in the fourth quarter ended March 31, 1996 by approximately $16,000 and
increased amortization expense in fiscal year 1997 by approximately $129,000.
Had this change in accounting estimate been implemented in prior periods, the
estimated effect on amortization expense for the year ended March 31, 1996 and
March 31, 1995 would have approximated an increase of $2,000 and a decrease of
$94,000, respectively.
GOODWILL
The Company amortizes the goodwill associated with acquisitions using
the straight-line method, principally over a forty-year period. The
realizability of goodwill and other intangibles is evaluated periodically as
events or circumstances indicate a possible inability to recover their carrying
amount. Such evaluation is based on various analyses, including cash flow and
profitability projections that incorporate, as applicable, the impact on
existing Company businesses. The analyses involve significant management
judgment to evaluate the capacity of an acquired business to perform
F-9
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
within projections. As of March 31, 1997 and 1996, accumulated amortization was
$306,965 and $184,951, respectively.
LOSS PER COMMON SHARE
Loss per common share is computed by dividing net loss by the weighted
average number of common shares outstanding during each period. The effect of
escrowed shares, outstanding stock options and warrants is not included because
it would be antidilutive.
ADVERTISING
Advertising expense which is included in selling and promotion amounted
to approximately $3,223,000, $2,628,000 and $1,045,000 for 1997, 1996 and 1995,
respectively.
In December 1993, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
93-7 (SOP), "Reporting on Advertising Costs." The SOP generally requires
advertising costs to be expensed as incurred. Adoption of the SOP in fiscal year
1996, resulted in a charge of $90,000, which is included in advertising expense
described above, related to the amortization of the prepaid marketing balance at
March 31, 1995 for CTU. Prior to adopting the SOP, CTU's marketing costs were
deferred and amortized to expense in the subsequent quarter.
INCOME TAXES
Deferred income tax assets and liabilities are determined based on the
differences between the financial statements and income tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform to the
current year's presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
F-10
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
statements and the reported amounts of income and expenses during the reporting
period. Actual results could differ from those estimates.
IMPAIRMENT OF LONG-LIVED ASSETS
In fiscal 1997, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 121," Accounting for the Impairment
of Long-Lived Assets." SFAS No. 121 requires impairment losses to be recorded on
long-lived assets when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than the assets'
carrying amount. The effect of adopting SFAS No. 121 was not material.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 encourages, but does not require, companies
to record compensation plans at fair value. The Company has chosen, in
accordance with provisions of SFAS 123, to apply Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and
related interpretations treatment for its stock plan. Under APB 25, because the
exercise price of the Company's employee stock options are less than the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued a new
accounting pronouncement, SFAS No. 128, "Earnings per Share," which will change
the current method of computing earnings per share. The new standard requires
presentation of "basic earnings per share" and "diluted earnings per share"
amounts, as defined. SFAS No. 128 will be effective for the Company's quarter
ending December 31, 1997, and, upon adoption, all prior-period earnings per
share data presented shall be restated to conform with the provisions of the new
pronouncement. Application earlier than the Company's quarter ending December
31, 1997 is not permitted. The restated basic and diluted earnings or loss per
share to be reported upon adoption of SFAS No. 128 will not differ from amounts
reported under existing accounting rules for all periods reported by the Company
through March 31, 1997.
F-11
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. ACQUISITIONS
HURON UNIVERSITY
On December 30, 1996 CTU acquired the South Dakota operations and
certain assets at two campuses of Huron University. The purchase price consisted
of $2.25 million of which approximately $1.95 million was paid in cash (of which
$200,000 was placed in escrow for post-closing adjustments), acquisition costs
of $150,000 and the assumption of $1.4 million of net liabilities. In addition,
the Company assigned the right to purchase the Huron real property to a third
party, Huron Education, Inc. ("HEI"), a South Dakota not-for-profit
organization, in exchange for $3.9 million and simultaneously leased the real
property from HEI upon the satisfaction of $757,000 in existing mortgages and
after placing $500,000 in escrow to be used for the satisfaction of assumed cash
obligations of Huron University. In connection with this transaction, the
community of Huron, South Dakota, through HEI paid to the Company $527,000
(which is included in the $3.9 million received from HEI) as an inducement for
the Company to acquire the operations of Huron University. This inducement has
been accounted for as a deferred credit and will be amortized over the lease
period of nine years. These transactions resulted in a net purchase price of
$1,500,000 (comprised of the receipt of cash totalling $1,200,000 and the
assumption of current liabilities totalling $2,700,000) which was allocated to
current assets totalling $1,500,000. The purchase price allocation is based on
preliminary data.
The acquisition was accounted for using the purchase method of
accounting and, accordingly, the net liabilities acquired are included in the
Company's balance sheets as of March 31, 1997 and operations have been included
in the Company's operations beginning on January 1, 1997.
The following unaudited pro forma information combines the results of
operations of Whitman and Huron University for the fiscal year ended March 31,
1997 and 1996 as if the transaction had occurred at April 1, 1996 and 1995,
respectively, after giving effect to certain adjustments including additional
rent expense and reductions in interest and depreciation expense. This pro forma
information does not purport to be indicative of the results that actually would
have occurred if the acquisition had been effective on the dates indicated or
which may be obtained in the future (amounts are in thousands, except per share
amounts).
1997 1996
-------- -------
Net revenues.............. $ 49,727 $ 45,670
Net loss ................. (5,029) (949)
Loss per common share..... (0.44) (0.09)
Huron University operated as a regionally accredited degree granting
institution with campuses in Huron and Sioux Falls, South Dakota, enrolling
approximately 600 students primarily
F-12
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. ACQUISITIONS - (CONTINUED)
in management, health sciences, general studies and other programs. Huron
University confers degrees at the associate's, bachelor's and master's levels.
Effective December 30, 1996, CTU entered into a lease with HEI which
provides for a nine year term with an option to renew for an additional six year
term (See Note 11). The lease also provides CTU with an option to purchase the
property at any time during the lease term.
Huron was a participating institution under one or more of the student
financial assistance programs of Title IV of the Higher Education Act of 1965,
as amended ("Title IV Programs"). The Title IV Programs are administered by the
United States Department of Education ("DOE"). The sale of the assets described
above terminated Huron University's access to the Title IV Program funds until
its certification as additional locations of CTU which occurred in April of
1997. The previous owner of Huron University has established a $300,000 letter
of credit for the benefit of DOE and CTU for any Title IV liabilities relating
to periods prior to December 30, 1996.
COLORADO TECHNICAL UNIVERSITY
On March 29, 1996, the Company completed the merger with CTU, a
regionally accredited degree granting institution. CTU currently operates four
campuses, two in Colorado and two in South Dakota, and has approximately 2,400
students enrolled primarily in computer science, engineering and management
programs. CTU confers degrees at the associate's, bachelor's, master's and
doctoral levels.
In connection with the merger, the Company issued 2,499,870 shares of
its common stock in exchange for all of the issued and outstanding stock of CTU.
The merger was accounted for using the pooling of interests method of accounting
and, accordingly, the Company's consolidated financial statements have been
restated to include the accounts and operations of CTU for all periods prior to
the merger. Prior to the merger, CTU had reported its financial results on a
calendar year basis. The consolidated financial statements for the year ended
March 31, 1997 have been adjusted to conform CTU's year end with that of the
Company. The effect arising from the exclusion of net income of of $162,195 for
the three month period ended March 31, 1996 in the accompanying consolidated
statements of operations and cash flows for the year ended March 31, 1997, is
presented in the accompanying consolidated statement of changes in stockholders'
equity as an adjustment to retained earnings for the change in fiscal year of
CTU. The consolidated financial statements for all periods prior to fiscal 1997
have not been restated for the change in fiscal year of CTU. Accordingly, the
consolidated financial statements for the periods ending on or prior to March
31, 1996 include the operating results of the Company on a March 31 fiscal year
basis and of CTU on a calendar year
F-13
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. ACQUISITIONS - (CONTINUED)
basis. If the consolidated financial statements for the year ended March 31,
1996 had been adjusted to conform CTU's year end with that of the Company, the
net effect would have resulted in an increase in net revenues of approximately
$152,000 and an increase in net loss of $55,000.
Combined and separate results of the merged entities, Whitman and CTU, are
presented in the following table (unaudited):
YEAR ENDED MARCH 31,
1996 1995
----------- -----------
Total revenues
Whitman................ $30,910,437 $11,464,080
CTU.................... 8,927,512 7,867,522
----------- -----------
Combined............... $39,837,949 $19,331,602
----------- -----------
Net (loss) income
Whitman................ $ (398,146) $ (354,979)
CTU.................... 297,575 208,368
------------ -----------
Combined............... $ (100,571) $ (146,611)
============ ===========
(Loss) income per share
Whitman................ $ (0.04) $ (0.04)
CTU.................... 0.03 0.02
------------ -----------
Combined............... $ (0.01) $ (0.02)
============ ===========
In connection with the merger, approximately $560,000 of costs and
expenses were incurred and were charged to administrative expenses in the fourth
quarter of 1996. Merger and acquisition expenses include legal, accounting and
other costs of consolidating.
SANFORD-BROWN COLLEGE
On December 21, 1994, the Company completed the purchase of SBC, a
privately held proprietary business and allied healthcare college. SBC was
acquired for $3.5 million cash and $500,000 (196,564 shares) in common stock and
contingent consideration of $2.4 million in cash and 1,021,612 shares of common
stock held in escrow. In the fourth quarter of fiscal 1997, the conditions for
the release of the cash and common stock held in escrow were satisfied.
Accordingly, the Company released the funds and common stock held in escrow to
the seller of SBC, resulting
F-14
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. ACQUISITIONS - (CONTINUED)
in an increase in goodwill and equity of approximately $8.0 million and $1.9
million, respectively, in the fourth quarter of fiscal 1997.
The acquisition of SBC has been accounted for as a purchase, and the
net assets and results of operations are included in the Company's consolidated
financial statements since the date of acquisition. The purchase price has been
allocated to the assets and liabilities of SBC based on their relative fair
market value which approximated their net book value. The purchase price and
expenses associated with the acquisition exceeded the fair value of SBC's net
assets by approximately $10.6 million which has been assigned to goodwill. In
connection with the acquisition, the Company acquired assets with a fair market
value of approximately $6.3 million and assumed liabilities of approximately
$4.6 million.
The following table summarizes, on an unaudited pro forma basis, the
combined results of operation of the Company and its subsidiaries assuming the
acquisition of SBC, described above, occurred at the beginning of fiscal 1995:
Net revenues............ $30,312,125
Income before taxes..... 584,424
Net income.............. 324,254
Net income per share.... .03
3. ACCOUNTS RECEIVABLE
A summary of activity for the allowance for doubtful accounts is as
follows:
YEAR ENDED MARCH 31,
1997 1996 1995
----------- ----------- -----------
Balance at beginning of year ....... $ 1,314,631 $ 1,011,808 $ 150,250
Net activity of CTU for the three
months ended March 31, 1996 ...... 20,099 -- --
Acquisition of Huron ............... 40,000 -- --
Acquisition of SBC ................. -- -- 943,999
Charged to expense ................. 3,245,314 1,835,736 892,983
Accounts charged-off during the year (1,798,783) (1,532,913) (975,424)
----------- ----------- -----------
Balance at end of year ............. $ 2,821,261 $ 1,314,631 $ 1,011,808
=========== =========== ===========
During the fourth quarter of fiscal year 1997, $1,333,000 was charged
to expense.
F-15
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
MARCH 31,
1997 1996
----------- ----------
Equipment........................................ $ 9,657,690 $ 7,013,501
Leasehold improvements........................... 3,263,828 2,021,854
Furniture and fixtures........................... 1,964,677 1,247,927
Other............................................ 1,353,705 979,068
----------- -----------
16,239,900 11,262,350
Less accumulated depreciation and amortization... (6,177,085) (4,245,169)
------------ -----------
$10,062,815 $ 7,017,181
=========== ===========
5. MARKETABLE SECURITIES
The Company's marketable equity securities, which are considered
available-for-sale, have been classified as non-current as it is the Company's
intention to hold such securities for the foreseeable future. During the fourth
quarter of fiscal 1997, the Company determined that the marketable securities
should be written down as a result of an other than temporary decline in value.
The total writedown in the fourth quarter of fiscal 1997 of $656,250 includes
$176,250 ($109,275 net of income taxes) which was previously reported as an
unrealized loss on noncurrent marketable securities in the Company's March
31,1996 stockholders' equity.
Noncurrent marketable securities--IVAX Common Stock, 30,000 shares:
MARCH 31,
-----------------------
1997 1996
-------- --------
Cost...................... $952,500 $952,500
Gross unrealized loss..... -- (176,250)
Realized loss............. (656,250) --
--------- --------
Estimated fair value...... $296,250 $776,250
======== ========
F-16
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. INCOME TAXES
The components of the income tax (benefit) provision are as follows:
YEAR ENDED MARCH 31,
-----------------------------------
1997 1996 1995
---------- ---------- --------
Current........... $ -- $ 346,444 $ 89,716
Deferred.......... (408,841) (482,917) 32,456
--------- --------- -------
Total............. $(408,841) $(136,473) $122,172
========== ========== ========
The differences between the federal statutory income tax rate and the
effective income tax rate are summarized below:
YEAR ENDED MARCH 31,
----------------------------
1997 1996 1995
-------- ------- -------
Statutory tax rate ............. (34.0)% (34.0)% (34.0)%
State income taxes, net ........ (4.5) 4.0 4.0
Permanent differences .......... 0.9 22.7 128.3
Change in valuation allowance .. 35.9 (54.4) 328.6
Other, net ..................... (6.9) (3.1) 4.2
Results of separate MDJB filings -- 7.2 68.9
------ ------ ------
Effective tax rate ............. (8.6)% (57.6)% 500.0%
====== ======= ======
F-17
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. INCOME TAXES - (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's net deferred income taxes are as follows:
MARCH 31,
--------------------------
1997 1996
----------- -----------
Deferred tax assets:
Accrued expenses ......................... $ 321,000 $ 45,000
Reserves and allowances .................. 748,000 190,000
Tax credits .............................. 39,000 34,000
Net operating loss carryforwards ......... 1,463,000 310,000
Unrealized depreciation in equity security 266,000 67,000
Other (net) .............................. 47,000 --
----------- -----------
Total deferred tax assets ..................... 2,884,000 646,000
Valuation allowance ........................... (1,714,000) --
----------- -----------
Total deferred tax assets` .................... 1,170,000 646,000
Deferred tax liabilities:
Prepaid expenses ......................... (22,000) (44,000)
Depreciation and amortization ............ (295,000) (91,000)
----------- -----------
Total deferred tax liabilities ................ (317,000) (135,000)
------------ -----------
Total net deferred taxes ...................... $ 853,000 $511,000
============ ===========
SFAS 109 requires a valuation allowance to reduce the deferred tax assets
reported if, based on the weight of the evidence, it is more likely than not
that some portion or all of the deferred tax assets will not be realized. After
consideration of all the evidence, both positive and negative, management has
determined that a $1,714,000 valuation allowance at March 31, 1997 is necessary
to reduce the deferred tax assets to the amount that will more likely than not
be realized. The change in the valuation allowance for the current year is
$1,714,000. At March 31, 1997, the Company has available net operating loss
carryforwards of $3,789,000 expiring in the years 2010 through 2012.
F-18
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. DEBT
Long-term debt consists of the following:
MARCH 31,
-----------------------
1997 1996
---------- ----------
Term note due April 14, 1999, (as amended on February 26, 1996,
see Note 10) with interest at prime less 1/2%, 7.75%
at March 31, 1996 ............................................... $ -- $6,000,000
$2.5 million revolving credit facility expiring October 15,
1997, (as amended on February 26, 1996, see Note 10)
with interest at prime less 1/2%, 7.75% at
March 31, 1996 (terminated on October 31, 1996).................... -- 2,500,000
$5.5 million revolving credit facility expiring April 14, 1999
with interest at the lower of prime less 1.25% or LIBOR
plus 1.50%, 7.25% at March 31, 1997 ............................. 5,500,000 --
$2.0 million revolving credit facility expiring May 30,
1998, with interest at prime (floor of 6% and ceiling of
11%), 8.5% at March 31, 1997 and at prime plus 1%,
9.25% at March 31, 1996 ......................................... 2,000,000 1,000,000
Notes payable in monthly installments through 2002, interest
rates ranging from 8.875% to 9% ................................. 1,210,161 --
Note payable in monthly installments due January 1, 2000,
with interest at 9% ............................................. 926,421 --
---------- -----------
Total .............................................................. 9,636,582 9,500,000
Less current portion ............................................... (540,565) --
---------- ----------
$9,096,017 $9,500,000
========== ==========
F-19
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. DEBT - (CONTINUED)
In October 1996, the Company made a $3.0 million principal reduction to its
$6.0 million term note. The remaining $3.0 million balance was replaced by a
$3.0 million revolving credit facility, which was then combined with the
Company's $2.5 million revolving credit facility into a $5.5 million revolving
credit facility which matures on April 14, 1999.
The note payable of $1.2 million and the $2.0 million revolving credit
facility are secured by the accounts receivable, inventory and furniture and
equipment of CTU and by a life insurance policy on the President of CTU. The
$2.0 million credit facility also requires the Company to maintain certain
minimum financial ratios, all of which have been met at March 31, 1997.
The revolving credit facility of $5.5 million is guaranteed by the Chairman
of the Board of the Company. On May 21, 1997, the $5.5 million revolving credit
facility was increased from $5.5 million to $7.5 million under the same terms
and conditions.
On June 13, 1997, the Company entered into a $1.5 million loan agreement
with a new lender. Under the terms of this agreement, the Company is required to
draw down the $1.5 million or on before December 12, 1997 and shall pay interest
only through July 1998 and thereafter pay monthly principal and interest
installments through June 2002 at prime plus 1.25%.
On June 4, 1997, the remaining balance of the $926,421 note payable was
refinanced with the former owner of SBC, and is payable in monthly installments
of interest of $9,000 bearing interest at 12% secured by equipment. The
principal balance and all unpaid interest is due on June 3, 1998.
Aggregate maturities of long-term debt at March 31, 1997 are as
follows:
FISCAL YEAR
1998......... $ 540,565
1999......... 2,992,143
2000......... 6,017,783
2001......... 43,760
2002......... 42,331
-----------
$ 9,636,582
===========
8. CAPITALIZED LEASE OBLIGATIONS
The Company leases equipment under several lease agreements which are
accounted for as capitalized leases. The assets and liabilities under capital
leases are recorded at the lower of the net present value of the minimum lease
payments or the fair value of the asset. The assets are amortized over the
related lease term.
F-20
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. CAPITALIZED LEASE OBLIGATIONS - (CONTINUED)
During 1997 and 1996, the Company entered into leases totaling
approximately $1,181,000 and $1,250,000, respectively, in connection with the
purchase of equipment . The amortization of leased assets of $740,809 and
$225,866 for the year ended March 31, 1997 and 1996, respectively, is included
in depreciation. The following is a summary of assets held under capital leases
which are included in property and equipment at March 31:
1997 1996
----------- ----------
Equipment.......................... $ 4,685,243 $3,844,881
Furniture and fixtures............. 66,971 66,971
Automobiles........................ 21,789 76,667
Leasehold improvements............. -- 58,453
----------- ---------
4,774,003 4,046,972
Less accumulated amortization...... (1,659,732) (733,144)
----------- ---------
$ 3,114,271 $3,313,828
=========== ==========
Amortization of leased assets is included in depreciation.
Future minimum lease payments under capital leases are as follows:
YEAR ENDED MARCH 31:
1998............................................. $1,310,933
1999............................................. 1,016,288
2000............................................. 807,219
2001............................................. 295,595
2002............................................. 223,154
----------
Total minimum lease payments..................... 3,653,189
Less amount representing interest (8%-12%)....... (599,661)
Less amount classified as current................ (1,040,403)
------------
$2,013,125
============
F-21
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) retirement savings plan covering all employees
that meet certain eligibility requirements. Eligible participating employees may
elect to contribute up to a maximum amount of tax deferred contribution allowed
by the Internal Revenue Code. The Company matches a portion of such
contributions up to a maximum percentage of the employee's compensation. The
Company's contributions to the plan were approximately $97,000, $85,000 and
$14,000 for the years ended March 31, 1997, 1996 and 1995, respectively.
10. STOCK OPTION PLANS AND WARRANTS
The Company has adopted stock option plans under which employees,
directors and consultants of the Company may be issued options covering up to
3,367,000 shares of common stock. Options are granted at the fair market value
of the stock at the date of the grant, with vesting ranging up to five years. A
summary of stock option activity related to the Company's stock option plans is
as follows:
WEIGHTED
AVERAGE EXERCISE NUMBER
PRICE PER SHARE OF SHARES
---------------- ---------
Outstanding March 31, 1994........... $2.78 1,110,000
Granted.............................. 2.34 754,100
Exercised............................ 2.37 (40,000)
Cancelled............................ 2.46 (67,500)
----------
Outstanding March 31, 1995........... 2.62 1,756,600
Granted.............................. 3.46 600,000
Exercised............................ 1.95 (218,382)
Cancelled............................ 2.24 (54,818)
----------
Outstanding March 31, 1996........... 2.94 2,083,400
Granted.............................. 5.83 993,750
Exercised............................ 2.51 (351,466)
Cancelled............................ 3.67 (98,584)
-----------
Outstanding March 31, 1997........... 4.07 2,627,100
===========
F-22
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. STOCK OPTION PLANS AND WARRANTS - (CONTINUED)
As required by FAS 123, pro forma information regarding net income and
earnings per share has been determined as if the Company had accounted for its
employee stock options under the fair value method of that statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
options pricing model with the following weighted-average assumptions for 1997
and 1996, respectively: risk-free rates of 6.4% and 6.1%; no dividend yields for
both; volatility factors of the expected market price of the Company's common
stock of 0.773 and 0.723 for both; and a weighted-average expected life of the
option of 9.1 years for both. The weighted-average fair value of the stock
options for the years 1997 and 1996 were $4.12 and $3.09, respectively.
The Black-Scholes options valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, the
existing models, in management's opinion, do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
fiscal 1997 and 1996 pro forma information follows:
1997 1996
------------ ----------
Net loss $(5,198,899) $(156,226)
Loss per common and common
equivalent share $ (0.46) $ (0.02)
The 1997 pro forma effect on net income is not necessarily
representative of the effect in future years because it does not take into
consideration pro forma compensation expense related to grants made prior to
1996.
The exercise price of options outstanding for fiscal years 1997 and
1996 ranged as follows:
NUMBER WEIGHTED AVERAGE REMAINING
EXERCISE PRICE OF OPTIONS CONTRACTUAL LIFE (YEARS)
$2.84 - $4.26 485,000 8.61
$4.27 - $6.39 971,750 9.65
$6.40 - $8.63 137,000 9.51
F-23
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. STOCK OPTION PLANS AND WARRANTS - (CONTINUED)
Stock options totalling 1,155,766 and 1,162,668 were exercisable at the end
of fiscal 1997 and 1996, respectively. Common stock reserved for issuance under
the stock option plans and outstanding warrants aggregate 6,608,843 shares.
The Company has 2,150,000 warrants outstanding at an average exercise price
of $3.81 maturing between January 2000 and February 2001.
11. LEASE COMMITMENTS
The Company leases classroom and office space under operating leases in
various buildings where the schools are located. Certain of the Company's
operating leases contain rent escalation clauses. Future minimum annual rental
commitments under noncancellable operating leases are as follows:
YEAR ENDED MARCH 31,
- --------------------
1998................................. $ 3,768,455
1999................................. 3,722,051
2000................................. 3,558,602
2001................................. 2,961,143
2002................................. 2,139,095
Thereafter........................... 7,651,011
-----------
Total minimum lease payments........ $23,800,357
===========
Rent expense during fiscal 1997, 1996 and 1995 was $3,765,952,
$3,017,036 and $1,604,891, respectively.
12. RELATED PARTY TRANSACTIONS
The Seller of SBC is the beneficial owner of three buildings occupied
by SBC under lease agreements. In the fiscal years ended March 31, 1997 and
1996, the Company's SBC subsidiary paid the Seller rent totalling $432,000 and
$429,000, respectively.
In April 1995, the Company entered into an agreement with another
company 40% owned by the Company's president. In addition to paying a fee for
services, the Company agreed to purchase textbooks and materials totaling
$160,000 over a two-year period. These textbooks and materials will be resold to
the Company's students. In the fiscal years ended March 31, 1997 and 1996, the
Company purchased $78,900 and $66,600 in textbooks from that entity.
In February 1996, the Company moved its headquarters to Miami, Florida.
The Company occupies office space in a building owned by the IVAX Corporation. A
director and shareholder of the Company is also Chairman of IVAX Corporation. In
fiscal 1997, the Company incurred rent expense in the amount of $125,000, which
is included in accrued expenses in the consolidated balance sheet at March 31,
1997.
F-24
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
13. COMMITMENTS AND CONTINGENCIES
In fiscal 1997 the Company entered into financing agreements to acquire
capital equipment totaling $1,738,000. In fiscal 1997, $847,000 of capital
equipment was financed under these agreements and are included under capitalized
lease obligations. The Company has $361,000 of letters of credit outstanding at
March 31, 1997.
The schools and colleges operated by the Company participate in various
student financial aid programs. These programs are subject to respective
periodic review by the United States Department of Education. Disbursements
under each program are subject to disallowance and repayment by the schools. In
fiscal 1995, the DOE conducted a Federal program review on SBC's Title IV
activity for the award years 1992 through 1994. On November 7, 1996, the DOE
issued its program review reports which cited various deficiencies in the
administration of federal student financial aid programs at SBC. The Company has
disputed some of the DOE's findings and is currently working with the DOE to
resolve all of the remaining issues. The asset purchase agreement with SBC
provides for the seller's indemnification of the Company for any material
liability that may result from the program reviews and the seller has deposited
$500,000 with the Company in recognition of that obligation. It is the Company's
belief that the program review liability will not materially exceed $500,000.
The Company is a party to routine litigation incidental to its business,
including but not limited to, claims involving students or graduates and routine
employment matters. While there can be no assurance as to the ultimate outcome
of any litigation involving the Company, management does not believe that any
pending proceeding will result in a settlement or an adverse judgment that will
have a material adverse effect on the Company's financial condition or results
of operations.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable,
notes payable and accounts payable and accrued expense approximate fair value
because of their short duration to maturity. The carrying amounts of revolving
credit facilities approximate fair value because the interest rate is tied to a
quoted variable index.
F-25