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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, 1998 COMMISSION FILE NUMBER 1-13722
WHITMAN EDUCATION GROUP, INC.
INCORPORATED UNDER THE LAWS OF THE I.R.S. EMPLOYER IDENTIFICATION NUMBER
STATE OF FLORIDA 22-2246554
4400 BISCAYNE BOULEVARD
MIAMI, FLORIDA 33137
(305) 575-6510
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 15, 1998, there were 13,200,435 shares of Common Stock
outstanding.
The aggregate market value of the voting stock held by non-affiliates of
the registrant on June 15, 1998 was approximately $44,565,293.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's Definitive Proxy Statement for its
1998 Annual Meeting of Stockholders (which is expected to be filed with the
Commission within 120 days after the end of the Registrant's 1998 fiscal year)
are incorporated by reference into Part III of this Report.
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WHITMAN EDUCATION GROUP, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED MARCH 31, 1998
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business................................................. 3
Item 2. Properties............................................... 20
Item 3. Legal proceedings........................................ 21
Item 4. Submission of matters to a vote of security holders...... 21
Executive Officers of the Registrant..................... 21
PART II
Item 5. Market for registrant's common equity and related
stockholder matters...................................... 23
Item 6. Selected financial data.................................. 24
Item 7. Management's discussion and analysis of financial
condition and results of operations...................... 25
Item 8. Financial statements and supplementary data.............. 31
Item 9. Changes in and disagreements with accountants on
accounting and financial disclosure...................... 31
PART III
Item 10. Directors and executive officers of the registrant....... 31
Item 11. Executive compensation................................... 31
Item 12. Security ownership of certain beneficial owners
and management........................................... 31
Item 13. Certain relationships and related transactions........... 31
PART IV
Item 14. Exhibits, financial statement schedules, and
reports on Form 8-K...................................... 32
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PART I
ITEM 1. BUSINESS
Readers are cautioned that the following text concerning the business
of Whitman Education Group, Inc. ("Whitman") should be read in conjunction with
the "Forward-Looking Statements; Business Risks" appearing at the end of Item 1
and that certain statements made in this Item 1 are qualified by the risk
factors set forth in that section.
GENERAL
Whitman Education Group, Inc. ("Whitman") is a proprietary provider of
career-oriented postsecondary education. Whitman 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 information
technology, healthcare and business to more than 7,500 students.
Whitman 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 branch campus. The Associate Degree
Division offers associate's degrees and diplomas or certificates through
Sanford-Brown College ("Sanford-Brown") and the Ultrasound Diagnostic School
("UDS").
Whitman'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.
Whitman's executive offices are located at 4400 Biscayne Boulevard, 6th
Floor, Miami, Florida 33137, and its telephone number is (305) 575-6510.
WHITMAN DEVELOPMENT
Whitman was founded in New Jersey in 1979. In 1983, Whitman 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, Whitman opened eight additional UDS schools and
increased its total enrollment to approximately 400 students.
In 1992, Dr. Phillip Frost invested in Whitman and became its Chairman.
At the time of his investment, Whitman had revenues of approximately $3.8
million from UDS operations, and total enrollment at the ten then existing UDS
schools was approximately 675. Whitman continued to expand UDS by adding five
additional locations by 1994, for a total of 15 locations.
In 1994, Whitman determined to expand the scope of its business to
offer a broader range of certificate programs in UDS schools. Beginning in late
1994, Whitman began introducing cardiovascular technology and medical assisting
programs to its UDS schools. In addition, in 1994 Whitman decided to expand its
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educational offerings and began to evaluate acquisition candidates that would
permit Whitman to offer a broad range of career-oriented programs, including
degree programs, in addition to its healthcare diploma and certificate programs.
In December 1994, Whitman 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 Whitman's enrollment. Sanford-Brown, together
with UDS, created a network of 20 schools offering both associate's degrees and
non-degree programs in information technology, healthcare and business. These 20
schools have become the foundation of Whitman's Associate Degree Division.
In March 1996, Whitman 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 various information technologies and business
fields. Through the acquisition of Colorado Tech, Whitman 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 Whitman to
expand by replicating the Colorado Tech model either in new locations or through
the conversion of acquired institutions. Colorado Tech is the foundation of
Whitman'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 Whitman 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,
Whitman 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, the pay-off of existing liens on the
Huron real property and a working capital infusion to Colorado Tech at closing.
In addition, Colorado Tech assumed certain payables of the university.
In connection with the expansion of programs and locations and the
acquisition of new schools, Whitman has continually focused on strengthening its
management and improving its facilities to foster effective oversight of its
operations. In March 1996, Whitman relocated its headquarters from New Jersey to
Miami, Florida. In addition, Whitman, 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. Whitman 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.
In 1997, Whitman reincorporated in the State of Florida, where it
maintains its corporate headquarters.
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THE POSTSECONDARY EDUCATION MARKET
The postsecondary education market is estimated to be $200 billion
annually, with more than 14 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, Whitman 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,
Whitman believes that with its broad range of program offerings it can
capitalize on the different submarkets of the 52% of adults over 25 who have not
yet attained an associate or higher degree.
Whitman believes that these trends particularly support two distinct
groups toward pursuing postsecondary education: those who desire rapid career
change or entry, and those who desire career enhancement. Whitman's Associate
Degree Division focuses principally on the former market segment and its
University Degree Division focuses principally on the latter market segment.
Whitman believes that by organizing its business into two segments, it will be
able to better capitalize on opportunities in both of these market segments.
BUSINESS STRATEGY
Whitman 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 Whitman is now well-positioned to focus its
efforts on further internal growth.
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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 Whitman as a whole. To
accomplish Whitman's goal of increasing revenues from its existing schools,
Whitman intends to increase enrollment by adding existing curricula to more
locations and by improving its student recruitment efforts and programs. In
addition, Whitman intends to continue 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. Whitman 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, Whitman intends to further
enhance operating efficiencies by the implementation of an integrated
information network linking schools with each other and with Whitman'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 opening or acquisition of
additional schools and the expansion of its educational programs.
Whitman 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 Whitman's ability to comply with or satisfy applicable
regulatory requirements of the United States Department of Education and state
licensing and accreditation requirements.
Management also intends to expand Whitman's educational programs. 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. Whitman also intends to develop and offer
continuing education programs and corporate training programs for which
Whitman's curricula is well-suited and can be customized on a cost-effective
basis.
In addition to the establishment of new locations and the elevation of
certain schools to a higher degree level, Whitman will augment its expansion
through selective strategic acquisitions where an acquisition is a more feasible
alternative both financially and operationally. Whitman intends to focus on
acquisition candidates that provide Whitman with additional geographic scope or
educational content, that are historically profitable, compliant with applicable
regulations, and that can be efficiently assimilated into Whitman's operations.
OPERATING STRUCTURE
Whitman 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. Whitman 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. Whitman believes that this management
structure allows local school management to develop valuable local market
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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
campus, grants degrees primarily to working adults seeking career enhancement,
primarily in the areas of computer and electronic technology, healthcare 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 2,800 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. Whitman 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
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 4,500 students enrolled at 20 campuses, of which 1,500
students are enrolled at five Sanford-Brown campuses and 3,000 students are
enrolled at 15 UDS campuses.
EDUCATIONAL PROGRAMS
Whitman offers a range of career-oriented educational programs,
substantially all of which are in the areas of computer and electronic
technology, healthcare and business. Whitman 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.
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Whitman'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 MASTER DEGREE PROGRAM ASSOCIATE DEGREE PROFESSIONAL DIPLOMA
Computer Science Business PROGRAMS PROGRAMS
Management Computer Information Systems Diagnostic Medical Ultrasound
BACHELOR DEGREE Network Administration Non-Invasive Cardiovascular
MASTER DEGREE PROGRAMS PROGRAMS Interactive Multimedia Technology
Computer Science Computer Science Physical Therapy Assistant Medical Assistant
Computer Engineering Management Information Systems Occupational Therapy Assistant
Electrical Engineering Financial Management Respiratory Therapy
Management Business Administration Radiography
Business Accounting Surgical Technology
Education Nursing
BACHELOR DEGREE Nursing Medical Assistant
PROGRAMS Criminal Justice Accounting/Business Management
Computer Engineering Office Administration
Computer Science ASSOCIATE DEGREE Paralegal Studies
Management Information Systems PROGRAMS
Telecommunication Electronics Management Information Systems PROFESSIONAL DIPLOMA
Technology Business Management PROGRAMS
Systems Management Accounting Computer Applications
Electrical Engineering Nursing Computer Programming
Electronic Engineering Technology Criminal Justice Network Administration
Health Science Management Interactive Multimedia
Business Management Practical Nursing
Human Resources Management Medical Assistant
Logistics Systems Management Respiratory Therapy
Accounting
ASSOCIATE DEGREE Administrative Office Assistant
PROGRAM
Management Information Systems
Electronics Technology
Business Management
Accounting
Medical Assisting
Criminal Justice
- ------------------
* A campus of Colorado Technical University.
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The following table provides information as of May 15, 1998 regarding
the programs offered by each of Whitman's schools:
LENGTH OF
TYPE OF NUMBER OF NUMBER OF PROGRAM
SCHOOL PROGRAM LOCATIONS STUDENTS (IN MONTHS)
- -------------------------------- ---------- --------- --------- -----------
UNIVERSITY DEGREE DIVISION
Colorado Technical University Doctoral 2 108 24-36
Master 3 590 18-21
Bachelor 3 1,359 36-48
Associate 3 110 18-24
Non-degree 3 187 Varies
------
School Total 2,354
======
Huron University Master 1 39 18-21
Bachelor 1 377 36-48
Associate 1 58 18-24
Non-degree 1 20 Varies
------
School Total 494
======
ASSOCIATE DEGREE DIVISION
Sanford-Brown College Associate 4 1,114 18-21
Non-degree 5 419 11
------
School Total 1,593
======
Ultrasound Diagnostic School Non-degree 15 3,117 9-18
------
3,117
======
Whitman Total 7,558
======
Tuition and fees for Whitman'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 approximately $9,000 for
the nine-month medical assistant program offered by UDS to $21,000 for the
longest associate degree programs offered by Sanford-Brown. In the University
Degree Division, tuition and fees range from $26,000 to $30,000 for the 48-month
bachelor's degree programs, $11,000 to $12,000 for the 21- month master's
program and $22,400 for the 24-month doctorate program.
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.
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STUDENT RECRUITMENT
Whitman 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. Whitman markets each of its schools on a local
basis, and draws the vast majority of its students from the local areas
surrounding each school. Whitman 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 Whitman'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 Whitman'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, perform
adequately on an entrance examination. The admissions process is monitored by a
director or dean of admissions in each location, and reviewed by Whitman's
compliance department.
GRADUATE CAREER SERVICES
Each of Whitman'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.
COMPETITION
The postsecondary school industry is highly fragmented. Typically,
no single public or private school or group of schools dominates markets on a
local or national basis. Accordingly, each of Whitman's schools has various
competitors, including public and private colleges and other proprietary
institutions. In addition, in almost all of the geographic areas in which UDS
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teaching facilities are located, hospitals also operate programs to train
medical sonographers. Generally, however, hospitals operate these programs for
their own staffing requirements.
Competition is typically based on the nature and quality of the
programs offered, flexibility of class scheduling, service to the student
customers and employability of graduates. Certain public and private colleges
may offer programs similar to those of Whitman at a lower tuition cost due in
part to government subsidies, foundation grants, tax deductible contributions
and other financial resources not available to proprietary institutions.
However, tuition at private, non-profit institutions is, on average, higher than
the average tuition rates of Whitman's schools.
LICENSING AND FINANCIAL AID REGULATION
FEDERAL AND STATE REGULATION. Each of Whitman'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 Whitman
currently operates, the withdrawal of accreditation from Whitman's schools, or
the loss of the schools' eligibility to participate in Title IV Programs would
have a material adverse effect on Whitman.
STATE AUTHORIZATION. Whitman 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. Whitman's
schools are currently authorized to operate in all states in which they have
physical locations.
ACCREDITATION. Accreditation is a non-governmental process through
which an institution submits itself to qualitative review by an organization of
peer institutions. Accrediting agencies primarily examine the academic quality
of the instructional programs of an institution, and a grant of accreditation is
generally viewed as certification that an institution's programs meet generally
accepted academic standards. Accrediting agencies also review the administrative
and financial operations of the institutions they accredit to ensure that each
institution has the resources to perform its educational mission.
Pursuant to provisions of the Higher Education Act of 1965, as amended
(the "HEA"), the DOE relies on accrediting agencies and state licensing bodies
to determine whether institutions' educational programs qualify them to
participate in the programs of federal student financial assistance administered
pursuant to Title IV of the HEA. The HEA requires each recognized accrediting
agency to submit to a periodic review of its procedures and practices by the DOE
as a condition of its continued recognition. Accrediting agencies that meet the
DOE standards are recognized as reliable arbiters of educational quality.
The HEA requires accrediting agencies recognized by the DOE to review
many aspects of an institution's operations to ensure that the education or
training offered by the institution is of sufficient quality to achieve, for the
duration of the accreditation period, the stated objective for which the
education or training is offered. Under the HEA, a recognized accrediting agency
must perform regular inspections and reviews of institutions of higher
education.
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Each of Whitman's schools is accredited by an accrediting body
recognized by the DOE. This 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.
FEDERAL FINANCIAL AID PROGRAMS. Whitman derives a majority of its
revenue from students who participate in Title IV Programs under the HEA, and
the regulations promulgated thereunder (the "Regulations") by the DOE. The
potential loss of student financial aid due to Whitman's failure to comply with
any aspect of the Regulations would have a material adverse effect on Whitman.
A brief description of these programs follows:
FEDERAL PELL GRANT ("PELL"). Federal Pell Grants are a primary
component of the Title IV Programs under which the DOE makes grants to students
who demonstrate financial need. Every eligible student is entitled to receive a
Pell Grant; there is no institutional allocation or limit. For the 1997-98 award
year, Pell Grants range from $400 to $2,700 per year.
FEDERAL SUPPLEMENTAL EDUCATIONAL OPPORTUNITY GRANT ("FSEOG").
FSEOG awards are designed to supplement Pell Grants for the neediest students.
FSEOG awards generally range in amount from $100 to $4,000 per year; however the
availability of FSEOG awards is limited by the amount of those funds allocated
to an institution under a formula that takes into account the size of the
institution, its costs and the income levels of its students. Whitman is
required to make a 25% matching contribution for all FSEOG program funds
disbursed. Resources for this institutional contribution may include
institutional grants, scholarships and other eligible funds and, in certain
states, portions of state scholarships and grants. During the 1996-97 award
year, Whitman's required 25% institutional match was met by approximately
$23,000 in funds from its institutions.
FEDERAL FAMILY EDUCATION LOAN PROGRAM ("FFEL"). The FFEL
program consists of two types of loans; Stafford loans, which are made available
to students, and PLUS loans, which are made available to parents of students
classified as dependents. Under the Stafford loan program, a student may borrow
up to $2,625 for the first academic year, $3,500 for the second academic year
and, in some educational programs, $5,500 for each of the third and fourth
academic years. Students with financial need qualify for interest subsidies
while in school and during grace periods. Students who are classified as
independent can increase their borrowing limits and receive additional
unsubsidized Stafford loans. Such students can obtain an additional $4,000 for
each of the first and second academic years and, depending upon the educational
program, an additional $5,000 for each of the third and fourth academic years.
The obligation to begin repaying Stafford loans does not commence until six
months after a student ceases enrollment as at least a half- time student.
FEDERAL PERKINS LOAN PROGRAM ("PERKINS"). Eligible
undergraduate students may borrow up to $3,000 under the Perkins program during
each academic year, with an aggregate maximum of $15,000, at a 5% interest rate
and with repayment delayed until nine months after the borrower ceases to be
enrolled on at least a half-time basis. Perkins loans are made available to
those students who demonstrate the greatest financial need. Perkins loans are
made from a revolving account, 75% of which was initially capitalized by the
DOE. Subsequent federal capital contributions, with an institutional match in
the same proportion, may be received if an institution meets certain
requirements. Each institution collects payments on Perkins loans from its
former students and loans those funds to currently enrolled students. Collection
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and disbursement of Perkins loans is the responsibility of each
participating institution. Presently, only Colorado Tech utilizes the Perkins
program.
FEDERAL WORK STUDY ("FWS"). Under the FWS program, federal
funds are made available to pay up to 75% of the cost of part-time employment of
eligible students, based on their financial need, to perform work for the
institution or for off-campus public or non-profit organizations. At least 5% of
an institution's FWS allocation must be used to fund student employment in
community service positions.
REGULATORY OVERSIGHT. In order to participate in Title IV Programs,
Whitman must comply with complex standards set forth in the HEA and the
Regulations including the demonstration of "financial responsibility" and the
"administrative capability" to handle and disburse Title IV funds. Compliance
with such standards is subject to periodic reviews by 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. Whitman believes that its
institutions are in substantial compliance with the HEA and its implementing
regulations. Whitman cannot, however, predict with certainty how all of the HEA
provisions and the implementing regulations will be applied. As described below,
the violation of the Title IV Program requirements by Whitman or any of its
institutions could have a material adverse effect on the financial condition or
results of operations of Whitman. In addition, it is possible that the HEA and
its implementing regulations may be applied in a way that could hinder Whitman's
operations or expansion plans. It is anticipated that the HEA will again be
reauthorized in late 1998 or early 1999 which again may change certain standards
applicable to proprietary institutions. There can be no assurance that the
reauthorization will continue the availability of funding for Title IV Programs
at current levels or that existing requirements for institutional or student
eligibility to participate in Title IV Programs will not change in a manner that
has an adverse effect on Whitman.
PROVISIONAL CERTIFICATION. An institution may be placed on provisional
certification status for a period not to exceed three years, if the DOE finds
that the institution does not fully satisfy all DOE eligibility and
certification standards. 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 and an appeal to the Secretary
of Education afforded to a fully certified school. Further, the DOE may impose
additional conditions on a provisionally certified institution's eligibility to
continue participating in Title IV Programs. If an institution successfully
participates in the Title IV Programs during its period of provisional
certification but fails to satisfy the full certification criteria, the DOE may
renew the institution's provisional certification. Further, any institution
seeking eligibility to participate in Title IV Programs after a change in
control will be provisionally certified for a limited period, following which
the institution will be required to reapply for continued eligibility.
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
proprietary school will be ineligible to participate in Title IV Programs if, on
a cash basis of accounting, more than 85% of revenues from its Title IV eligible
programs for the prior fiscal year were derived from Title IV Program funds. If
a school were to fail the 85/15 rule for a particular fiscal year, it would be
ineligible to participate in Title IV Programs as of the first day of the
following fiscal year and would be unable to apply to regain its eligibility
until the next fiscal year. Furthermore, if one of Whitman's schools violated
the 85/15 Rule and became ineligible to participate in Title IV Programs but
continued to disburse Title IV Program funds, the DOE would consider all Title
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IV Program funds disbursed to the institution after the effective date of
the loss of eligibility to be a liability subject to repayment by the
institution. Each of Whitman's institution's is currently in compliance with the
85/15 Rule.
ADMINISTRATIVE CAPABILITY. The HEA directs the DOE to assess the
administrative capability of each institution to participate in Title IV
Programs. The DOE has issued regulations that require each institution to
satisfy a series of separate standards. Failure to satisfy any of the standards
may lead the DOE to determine that the institution lacks administrative
capability and, therefore, is not eligible to continue its participation in
Title IV Programs or must be placed on provisional certification status as a
condition of such continued participation. One standard that is applicable to
certain programs with the stated objective of preparing students for employment
requires that the institution show a reasonable relationship between the length
of the program and the entry-level job requirements of the relevant field of
employment.
An additional standard in the HEA prohibits an institution from
providing any commission, bonus or other incentive payment based directly or
indirectly on success in securing enrollments or financial aid to any person or
entity engaged in any student recruitment, admission or financial aid awarding
activity. The DOE has provided only limited guidance respecting compliance with
this requirement. Whitman's employees involved in student recruitment,
admissions or financial aid receive a salary and participate in a bonus
plan available to all employees. Based on written guidance from the DOE, Whitman
believes that its method of compensating these employees complies with the
requirements of the HEA. The Regulations do not, however, establish clear
standards for compliance, and there can be no assurance that the DOE will
interpret its regulations in the same manner as has Whitman.
Under new regulations issued by the DOE in November 1996, starting
January 1, 1998, each institution must utilize certain electronic processes
provided by the DOE in order to be considered administratively capable. Whitman
has adjusted its current practices in order for its institutions to comply
fully with this new requirement. Whitman does not believe that its financial
condition will be materially affected by this new standard.
TITLE IV PROGRAM FUNDS MANAGEMENT. The DOE issued new regulations in
November 1996 which became effective July 1, 1997 and which revised the
procedures governing how an institution participating in Title IV Programs
requests, maintains, disburses and otherwise manages Title IV Program funds. One
significant change is the requirement that institutions disburse all Title IV
Program funds by payment period which, in the case of some of Whitman's
institutions, corresponds to an academic quarter. Other significant changes
include expanding the requirements for institutions to notify Title IV Program
fund recipients of certain information and reducing the time by which an
institution must return undisbursed Title IV Program funds. These new
regulations do not materially affect Whitman's cash flow but do increase
Whitman's administrative burden; however, they should not have a material
adverse effect on Whitman's financial condition or results of operations.
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. To be considered
financially responsible under the Regulations, an institution (i) must have
sufficient cash reserves to make required refunds; (ii) must be current in its
debt payments; (iii) must be meeting all of its financial obligations; and (iv)
must meet prescribed financial standards. For purposes of these standards,
Sanford- Brown and Colorado Tech have historically been evaluated as distinct
entities, while the DOE has evaluated UDS on the basis of the financial
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performance of Whitman as a whole. However, the Regulations give the DOE
discretion in this regard and there can be no assurance that the method by which
the DOE evaluates Whitman's schools will not change in the future.
The three principal numeric standards of financial responsibility under
which each of Whitman's schools will be evaluated for the federal fiscal year
ending June 30, 1998 are profitability, the acid test ratio and tangible net
worth.
PROFITABILITY. A school may not have net 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. Although
Whitman had net income in fiscal 1998, Whitman incurred a net loss in fiscal
1997. However, as a result of increases in capital of Whitman from a private
placement of Whitman's common stock in October 1996 and the exercise of
outstanding options and warrants to purchase Whitman's common stock, the
operating losses have not resulted in a ten percent decrease in Whitman's
tangible net worth from the beginning of fiscal 1997. In fact, Whitman'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, Whitman
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, Whitman 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, 1998, Whitman's acid test ratio (applicable to UDS) was 1.18 to 1.00,
Colorado Tech's acid test ratio was 1.22 to 1.00, and Sanford- Brown's acid test
ratio was 1.48 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,
1998, Colorado Tech, Sanford-Brown and Whitman each had a positive tangible net
worth.
An institution that is determined by the DOE not to be financially
responsible 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 submit an irrevocable letter of credit in favor of the
DOE, either in an amount equal to at least one-half of 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 be provisionally certified and
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 Whitman would be able to
secure the necessary funds or collateral to post a sufficient letter of credit
to comply with either alternative. The institution may also qualify by
demonstrating to the satisfaction of the DOE, 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.
Even if an institution meets all of these numerically-based standards,
however, it may be deemed not to be financially responsible if (i) the
institution's audit report contains an adverse, qualified or disclaimed opinion,
(ii) the institution's participation in Title IV Programs has been limited,
suspended or terminated in the past five years, (iii) the institution in the
past two years, as the result of a finding in its compliance audit or in a
program review by the DOE, was required to repay an amount greater than 5% of
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the funds the institution received under Title IV in the year covered by the
audit or program review, (iv) the institution has failed in the past five
years to timely submit compliance and financial statement audits, or (v) the
institution failed to resolve satisfactorily any compliance problems identified
in audit or program reviews. The institution may also be deemed to be not
financially responsible if certain controlling persons owe, or are associated
with another institution that owes, Title IV liabilities to the DOE.
In November 1997, the DOE revised the standards of financial
responsibility applicable to Whitman's schools effective for fiscal years
beginning after June 30, 1998. To be considered financially responsible under
the new Regulations, an institution must achieve a composite score of at least
1.5 on the new Equity, Primary Reserve and Net Income ratios, as determined in
accordance with the new regulations.
The Equity Ratio measures capital resources, ability to borrow and
financial viability. The Primary Reserve Ratio measures an institution's ability
to support current operations from expendable resources. The Net Income Ratio
measures an institution's ability to operate profitably.
Once the ratios are computed, they are adjusted by strength factors,
weighted and added to create the composite score. If the resulting composite
score is 1.5 or greater, the institution is deemed to be financially
responsible. If the institution's composite score is below 1.5, the institution
is deemed not to be financially responsible. If the institution's composite
score is between 1.0 and 1.4, however, it may continue to participate in Title
IV Programs, even though it is deemed not to be financially responsible, for a
period of no more than three years, provided its composite score remains in the
range of 1.0 to 1.4 in each of those years. An institution participating in
Title IV Programs on this basis must comply with alternative methods of
disbursing Title IV funds prescribed by the DOE and must provide the DOE with
timely information with respect to certain matters and financial events. The DOE
may also request from such institutions additional information about their
current operations and/or future plans.
The regulations in effect prior to July 1, 1998 will govern analysis
of Whitman's financial statements for its fiscal year ended March 31, 1998. The
new regulations also provide a transition year alternative for fiscal years
beginning after July 1, 1997 and prior to June 30, 1998. Whitman's transition
year is its 1999 fiscal year which began April 1, 1998. In the transition year,
an institution may qualify as a financially responsible institution by meeting
either the new or the old standards of financial responsibility at its election.
Thus the new standards will not become absolutely applicable to Whitman's
financial statemens until March 31, 2000. However, if the new standards were
applied to Whitman's financial statements for the fiscal year ended March 31,
1998, Whitman's composite score on a consolidated basis (as historically applied
to UDS) would be 1.4. Colorado Tech's composite score would be 1.6, and Sanford-
Brown's composite score would be 2.9. While Whitman will constantly evaluate and
attempt to improve its composite score prior to March 31, 2000, there can be no
assurance that all of Whitman's institutions will meet the minimum composite
score of 1.5 at March 31, 2000 and therefore not be subject to the heightened
monitoring described above.
COHORT DEFAULT RATES. The Regulations also require the calculation of
a cohort default rate on 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 may
also become ineligible if its official default rate exceeds 40% in any one
fiscal year. A school's cohort default rate is published annually by the DOE.
The most recent official cohort year published was 1995. UDS' official 1995
rates ranged from 4.3% to 10.8%; Sanford-Brown's official 1995 rates were 7.9%
and 10.7% and Colorado Tech's official 1995 rate was 7.3%. All of Whitman's
schools' preliminary 1996 default rates were below 25% with no preliminary rate
exceeding 15%.
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In addition, the Regulations provide that in the event that an
institution has a cohort default rate in excess of 25%, the DOE may place that
institution on provisional certification to participate in Title IV Programs.
Provisional certification may last no longer than three years. As a result of
default rates in excess of 25% at Sanford-Brown's Granite City and Missouri
campuses in federal fiscal years 1992 and 1993, Sanford-Brown's certification to
participate in Title IV Programs is provisional at this time. Sanford-Brown's
default rates in 1994, 1995 and its preliminary 1996 rate, as stated above, were
all below the 25% threshold. If Sanford-Brown's official cohort default rate for
1996 remains below 25%, the institution may apply to DOE for full certification.
CHANGE OF CONTROL. A change of ownership in Whitman which results in a
change in control (as defined below) typically results in the schools operated
by Whitman 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 Whitman'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 effect on the
financial condition of Whitman.
Each of Whitman's accrediting bodies and the state agencies which
authorize Whitman to operate schools have different regulations regarding
changes in control which could require re-authorization or re- accreditation.
The failure of Whitman 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 Whitman.
Acquisitions of other institutions by Whitman typically would result in
a change of ownership resulting in a change of control with regard to the
acquired institution. The acquisition of Sanford-Brown in December 1994
automatically terminated the participation of Sanford-Brown in Title IV
Programs. After the closing, Whitman 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 operating income during that period. 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 the DOE in June 1996. Colorado Tech's operating income and
cash flow were 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 were 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. As a
result of the change in ownership resulting in a change in control that occurred
in connection with the acquisition of Colorado Tech, Colorado Tech is
provisionally certified for participation in Title IV Programs at this time.
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Huron, as a division of Colorado Tech, now falls under Colorado Tech's
provisional certification. Similarly, Sanford-Brown was provisionally certified
for the three year period following its acquisition in 1994.
COMPLIANCE AUDITS. Whitman's institutions are subject to audits or
program compliance reviews by various external agencies, including the DOE, and
state, guaranty and accrediting agencies. The HEA and its implementing
regulations also require that an institution's administration of Title IV
Program funds be audited annually by an independent accounting firm. If the DOE
or another regulatory agency were to determine that one of Whitman's
institutions had improperly disbursed Title IV Program funds or had violated a
provision of the HEA or the implementing regulations, the affected institution
could be required to repay such funds to the DOE or the appropriate state agency
or lender and could be assessed an administrative fine. If the DOE viewed the
violation as significant, the DOE would also transfer the institution from the
advance system of receiving Title IV Program funds to the reimbursement system,
under which a school must disburse its own funds to students and document
students' eligibility for Title IV Program funds before receiving such funds
from the DOE. Violations of Title IV Program requirements could also subject an
institution or Whitman to other civil and criminal penalties. In addition, if
one or more of the institutions commits significant violations of regulatory
standards governing Title IV Programs, 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 Programs or by limiting the percentage of an institution's total
receipts derived from Title IV Programs. With respect to financial
responsibility compliance, 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. If the DOE terminates the eligibility
of an institution to participate in Title IV Programs, the institution in most
circumstances must wait 18 months before requesting a reinstatement of its
participation. An institution that loses its eligibility to participate in the
FFEL and FDL programs due to high cohort default rates for three consecutive
years normally may not apply to resume participation in those programs for at
least two federal fiscal years. An institution that loses its eligibility to
participate in Title IV Programs due to a violation of the 85/15 Rule may not
apply to resume participation in Title IV Programs for at least one year.
Depending on the severity of the fine, suspension or limitation, such action
could have a material adverse effect on Whitman. A termination of eligibility to
participate in Title IV Programs would have a material adverse effect on
Whitman.
EXPANSION OF PROGRAMS AND LOCATIONS. Generally, if an institution
eligible to participate in Title IV Programs adds an educational program after
it has been designated as an eligible institution, the institution must apply to
the DOE to have the additional program designated as eligible. However, an
institution is not obligated to obtain DOE approval of an additional program
that leads to a diploma, associate, baccalaureate, professional or graduate
degree or which prepares students for gainful employment in the same or related
recognized occupations as any educational programs that had previously been
designated as eligible programs at that institution, and meets certain minimum
length requirements.
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SEASONALITY
Whitman experiences seasonality in its quarterly results of operations as
a result of changes in the level of student enrollments. New enrollments in
Whitman'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. Whitman expects that this seasonal trend will continue. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
EMPLOYEES
At March 31, 1998, Whitman had approximately 591 full-time and 418
part-time employees of whom 539 were faculty and 470 were administrative
personnel at the various schools. The remaining employees were employed by
Whitman at its administrative offices.
FORWARD-LOOKING STATEMENTS; BUSINESS RISKS
Sections of this Report contain statements that are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 (the
"Securities Act") and Section 21E of the Securities Exchange Act of 1934 (the
"Exchange Act"), and Whitman 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. These statements are based on current expectations and beliefs
concerning future events that are subject to risks and uncertainties. Actual
results may differ materially from the results suggested herein and from the
results historically experienced.
Forward-looking statements contained in this Report may relate to: (i)
Whitman's ability to capitalize on perceived favorable demographic trends; (ii)
the expansion of Whitman'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 Whitman to realize increased enrollments from
investments in infrastructure; (iv) the expected impact of Year 2000 software
failures; (v) Whitman's ability to fund the capital expenditures associated with
the relocation of facilities; (vi) the reauthorization of the HEA; (vii) the
DOE's enforcement or interpretation of existing regulations affecting Whitman's
operations; (viii) the seasonality of Whitman's results of operations; (ix) the
outcome of legal proceedings involving Whitman; (x) Whitman's anticipated need
for capital expenditures; and (xi) the sufficiency of Whitman's working capital,
financings, including its ability to increase its borrowing if necessary, and
cash flow from operating activities for Whitman's future operating and capital
requirements.
Whitman wishes to caution readers that in addition to the important
factors described elsewhere in this Form 10-K, the following important factors,
among others, sometimes have affected, and in the future could affect, Whitman's
actual results and could cause Whitman's actual consolidated results during
fiscal 1999, and beyond, to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, Whitman: (i) Whitman's
plans, strategies, objectives, expectations and intentions are subject to change
at any time at the discretion of Whitman; (ii) the ability of Whitman 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 Whitman;
(iv) the ability of Whitman to locate and obtain favorable school sites,
negotiate acceptable lease terms, and hire and train employees; (v) the
unanticipated impact of Year 2000 issues, particularly the failure of products
or services from third party vendors to function properly in the Year 2000; (vi)
the ability of Whitman to meet the lending guidelines of commercial landlords
with respect to prospective capital lease obligations and the willingness of
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such landlords to finance Whitman's buildout of new facilities; (vii)
Whitman's ability to manage planned internal growth; (viii) the ability of
Whitman to successfully integrate acquired operations and to bring its newer
Colorado Tech campuses and Huron University to profitability; (ix) the effect of
economic conditions in the postsecondary education industry and in the nation as
a whole; (x) the vagaries of the judicial process as it relates to the
resolution of legal proceedings involving Whitman; (xi) the effect of
competitive pressures from other educational institutions; (xii) the effect of,
and Whitman's ability to comply with, state and federal government regulations
regarding education and accreditation standards, or the interpretation or
application thereof, including the level of government funding for, and
Whitman'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.
ITEM 2. PROPERTIES
Whitman and its subsidiaries lease all of their administrative and
campus facilities. Whitman, along with the Associate Degree Division, maintains
headquarters in Miami, Florida, where combined they lease approximately 11,000
square feet of office space. Sanford-Brown also has limited administrative
facilities at its Des Peres campus. Colorado Tech maintains its administrative
offices at its campus in Colorado Springs, Colorado.
Whitman'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
Sioux Falls, South Dakota Colorado Tech 21,064
Denver, Colorado Colorado Tech 18,298
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
Carle Place, New York UDS 14,607
Iselin, New Jersey UDS 13,000
Atlanta, Georgia UDS 11,469
Bellaire, Texas UDS 10,398
Tampa, Florida UDS 10,263
Irving, Texas UDS 10,253
Trevose, Pennsylvania UDS 10,204
Elmsford, New York UDS 10,034
Jacksonville, Florida UDS 9,370
Springfield, Massachusetts** UDS 9,150
Pittsburgh, Pennsylvania UDS 6,238
Pompano Beach, Florida UDS 5,600
Independence, Ohio UDS 3,505
Silver Spring, Maryland UDS 2,615
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- -----------------
* The Huron, South Dakota campus of Colorado Tech consists of seven
buildings on approximately 15 acres.
** In March 1998, the Marlborough campus was relocated to Springfield,
Massachusetts.
Whitman believes that all of its present facilities are suitable and
adequate for their current uses. Whitman 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 1998, Whitman
relocated its Atlanta UDS school from a facility of approximately 8,092 square
feet to a facility of approximately 11,469 square feet and in April 1998,
Colorado Tech relocated its Sioux Falls facility to a new 21,064 square foot
facility. Presently, Whitman is in the process of finalizing plans to relocate
its Pompano Beach, Florida, Independence, Ohio and Silver Spring, Maryland UDS
schools to larger facilities.
ITEM 3. LEGAL PROCEEDINGS
Whitman is a party to routine litigation incidental to its business,
including but not limited to, claims involving students or graduates and routine
employment matters. While there can be no assurance as to the ultimate outcome
of any litigation involving Whitman, management does not believe that any
pending proceeding will result in a settlement or an adverse judgment that will
have a material adverse effect on Whitman's financial condition or results of
operations. See "Forward-Looking Statements; Business Risks" appearing in Item 1
of this Report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
quarter ended March 31, 1998.
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
executive officers of Whitman as of March 31, 1998. Officers serve at the
discretion of the Board of Directors. There is no family relationship between
any of the executive officers, and there is no arrangement or understanding
between any executive officer and any other person pursuant to which the
executive officer was selected.
RICHARD C. PFENNIGER, JR. Mr. Pfenniger, age 42, has been Chief
Executive Officer and Vice Chairman of Whitman since March 1997 and a director
of Whitman since 1992. Mr. Pfenniger was Chief Operating Officer of IVAX
Corporation from 1994 to March 1997. He served as Senior Vice President--
Legal Affairs and General Counsel of IVAX from 1989 to 1994, and as Secretary
from 1990 to 1994. Prior to joining IVAX, Mr. Pfenniger was engaged in private
law practice. Mr. Pfenniger is a director of North American Vaccine, Inc., and
Pan Am Corporation.
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RANDY S. PROTO. Mr. Proto, age 40, has been President of Whitman
since 1994. In 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 56, has been President and
Chairman of the Board of Colorado Tech since 1986. Since 1997, Mr. O'Donnell has
also been Acting Chancellor of Huron University, a campus of Colorado Technical
University in Huron, South Dakota. Prior to 1986, Mr. O'Donnell was employed by
ITT Educational Services, Inc., another provider of proprietary education, from
1975 through February 1986 when he left to join Colorado Technical University.
While at ITT Educational Services, Mr. O'Donnell served in many capacities
including Director of Marketing and Vice President and General Manager of ITT
Employment Training Systems, a subsidiary of ITT Educational Services.
FERNANDO L. FERNANDEZ. Mr. Fernandez, age 37, has served as
Vice President--Finance, Treasurer and Chief Financial Officer of Whitman since
1996. Prior to joining Whitman, 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 37, has served as Vice President
- --Legal Affairs and General Counsel and Secretary of Whitman since 1996. For
approximately ten years prior to joining Whitman, Mr. Salzman was engaged in
private law practice in Miami, Florida, primarily with the firm of Homer &
Bonner, P.A.
-22-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
A. MARKET INFORMATION
Whitman's common stock is traded on the American Stock Exchange under
the symbol WIX. The following table sets forth the high and low closing prices
of Whitman's common stock as reported by the composite tape of the American
Stock Exchange for each of the quarters indicated.
1998
--------------------------
High Low
--------------------------
Quarter Ended 6/30/97............... $ 5.48 $ 3.75
Quarter Ended 9/30/97............... 5.94 3.63
Quarter Ended 12/31/97.............. 6.56 5.19
Quarter Ended 3/31/98............... 6.69 4.75
1997
--------------------------
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
As of the close of business on June 15, 1998, there were approximately
247 record holders of Whitman's common stock.
Whitman has not paid dividends on its common stock and does not
contemplate paying dividends in the foreseeable future.
-23-
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED MARCH 31,
----------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)(1)(2)
OPERATING DATA
Revenues.................................. $ 60,306 $ 46,993 $ 39,838 $ 19,332 $ 13,221
Income (loss) from operations............. 784 (3,245) 951 288 539
Net income (loss) ........................ 143 (4,363) (101) (147) 353
Net income (loss) per share(3)............ .01 (.38) (.01) (.02) .04
Dividends................................. None None None None None
BALANCE SHEET DATA
Total assets.............................. $ 53,821 $ 48,017 $ 35,323 $ 31,600 $ 12,967
Long-term debt and capital lease
obligations, less current portion....... 14,350 11,109 11,494 9,467 699
Stockholders' equity...................... 17,833 16,107 7,385 7,256 5,718
- --------------------
(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 Whitman 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, the shares were disbursed to the seller and considered
outstanding for purposes of computing the net loss per share for fiscal
1997.
See Consolidated Financial Statements, Item 8 of this Report, for
supplementary financial information of Whitman.
-24-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the consolidated financial statements of Whitman and the notes thereto
appearing elsewhere in this report and in conjunction with "Forward-Looking
Statements; Business Risks" appearing at the end of Item 1 in that certain
statements made in this Item are qualified by the risk factors set forth in that
section.
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 Whitman. 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
Whitman 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 Huron
University. 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 Whitman's
revenues are indirectly derived from Title IV Programs.
Historically, Whitman'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 $15.0 million in fiscal 1996 to $27.5 million in fiscal 1998.
At Colorado Tech, the expansion of program offerings, opening of a campus, and
the acquisition of Huron University generated an increase in revenues from $8.9
million in fiscal 1996 to $16.0 million in fiscal 1998.
On December 30, 1996, Colorado Tech acquired the South Dakota
operations and certain assets at two campuses of Huron University. The Sioux
Falls campus of Huron University was subsequently converted to a Colorado
Technical University campus. The acquisition was accounted for using the
purchase method of accounting. For the year ended March 31, 1998 and the
three months ended March 31, 1997, the two campuses of Huron University
generated net of revenues of $4.7 million and $1.1 million, respectively, and
sustained operating losses of $1.6 million and $22,000, respectively.
Instructional and educational support consists primarily of costs
related to the educational activity of Whitman's schools. Instructional 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.
-25-
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.
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,
---------------------------------
1998 1997 1996
-------- -------- --------
Net revenues............................................ 100.0% 100.0% 100.0%
-------- -------- --------
Costs and expenses:
Instructional and educational support.................. 67.1 66.8 60.6
Selling and promotional................................ 14.3 14.8 14.3
General and administrative............................. 17.3 25.3 22.7
-------- -------- --------
Total costs and expenses............................... 98.7 106.9 97.6
-------- -------- --------
Income (loss) from operations........................... 1.3 (6.9) 2.4
Other (income) expenses:
Interest expense....................................... 2.2 2.1 3.1
Interest income........................................ (0.3) (0.2) (0.1)
Provision for writedown of marketable securities....... -- 1.4 --
-------- -------- --------
Loss before income tax benefit......................... (0.6) (10.2) (0.6)
Income tax benefit...................................... (0.8) (0.9) (0.3)
-------- -------- --------
Net income (loss)....................................... 0.2% (9.3)% (0.3)%
======== ======== ========
YEAR ENDED MARCH 31, 1998 COMPARED TO YEAR ENDED MARCH 31, 1997
Net revenues increased by $13.3 million or 28.3% to $60.3 million for
the year ended March 31, 1998 from $47.0 million for the year ended March 31,
1997. The increase was primarily due to an increase in average student
enrollment. Average student enrollment increased 20.5% overall with the
University Degree Division experiencing a 26.2% increase and the Associate
Degree Division experiencing a 17.7% increase.
The increase in student enrollment in the University Degree Division
resulted in increased net revenues of $4.2 million or 35.4%. This increase was
primarily due to 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 $9.1 million or 25.9%. The increased
enrollment was primarily in the medical assisting programs offered by UDS which
were introduced during fiscal 1996 and were offered at 12 of 15 campuses during
fiscal 1998.
-26-
Instructional and educational support expenses increased by $9.1
million or 29.1% to $40.5 million in fiscal 1998 from $31.4 million in fiscal
1997. As a percentage of net revenues, instructional and educational support
expenses increased to 67.1% in fiscal 1998 as compared to 66.8% in fiscal 1997.
Instructional and educational support expenses increased by $5.2 million at the
University Degree Division due to the costs incurred to support a full year of
operations of Huron University and its new Denver Colorado Tech campus. At the
Associate Degree Division, the increase in such expenses of $3.9 million was
primarily due to the upgrade of equipment and facilities, and the addition of
faculty, staff and management at the schools to support the increase in student
enrollment.
Selling and promotional expenses increased by $1.6 million or 23.1% to
$8.6 million in fiscal 1998 from $7.0 million in fiscal 1997. As a percentage of
net revenues, selling and promotional expenses decreased to 14.3% in fiscal 1998
from 14.8% in fiscal 1997. The increase in selling and 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 Denver
Colorado Tech campus and the acquired campuses of Huron University in Huron and
Sioux Falls, South Dakota.
General and administrative expenses decreased by $1.4 million or 12.1%
to $10.5 million in fiscal 1998 from $11.9 million in fiscal 1997. As a
percentage of net revenues, general and administrative expenses decreased to
17.3% in fiscal 1998 from 25.3% in fiscal 1997. These decreases were due
primarily to a decrease in bad debt expense at the Associate Degree Division due
to improved cash collections. The decrease in general and administrative
expenses as a percentage of net revenues was due to Whitman's ability to
increase revenues as a result of an increase in student enrollment at a greater
rate than the rate of increase in administrative operating costs necessary to
support the increase in enrollment.
Interest expense increased by $333,000 due to the increase in the
average outstanding debt balance necessary to fund capital expenditures.
Whitman periodically performs an analysis of the realizability of its
deferred tax assets based on management's assessment of current and expected
operating results. As of March 31, 1998, Whitman determined that a $1.2 million
valuation allowance for its deferred tax assets was necessary, which resulted in
the recognition of a deferred income tax benefit of $489,000 in fiscal 1998.
Whitman reported net income of $143,000 and a net loss of $4.4 million
for the years ended March 31, 1998 and 1997, respectively. The increase in net
income for fiscal 1998 was primarily due to an increase in operating income of
$5.6 million generated from the Associate Degree Division as a result of an
increase in revenues of $9.1 million. The increased revenues were due to an
increase in student enrollment and a decrease in its general and administrative
expenses resulting primarily from a decrease in bad debt expense. The increase
in operating income at the Associate Degree Division was offset by the increase
in operating losses of $1.9 million sustained by the new Denver Colorado Tech
campus and the two acquired campuses of Huron University.
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,
-27-
1996. The increase was primarily due to an increase in average student
enrollment. Average 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.
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
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.
Instructional and educational support increased by $7.2 million or
29.9% to $31.4 million in fiscal 1997 from $24.2 million in fiscal 1996. As
a percentage of net revenues, instructional and educational support expenses
increased to 66.8% 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 $1.3 million or 22.2% to
$7.0 million in fiscal 1997 from $5.7 million in fiscal 1996. As a percentage of
net revenues, selling and promotional expenses increased to 14.8% in fiscal 1997
as compared to 14.3% in fiscal 1996. The increase in selling and 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 $2.9 million or 31.7%
to $11.9 million in fiscal 1997 from $9.0 million in fiscal 1996. As a
percentage of revenues, general and administrative expenses increased to 25.3%
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. Such
collection delays have been corrected.
-28-
Interest expense decreased $223,000 due to a reduction in the average
outstanding debt balance and a reduction in interest rates.
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.
Whitman periodically performs an analysis of the realizability of its
deferred tax assets based on management's assessment of current and expected
operating results. As of March 31, 1997, Whitman determined that a $1.7 million
valuation allowance for its deferred tax assets was necessary, which resulted in
the recognition of a deferred income tax benefit of $409,000 in fiscal 1997.
Whitman 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.
SEASONALITY
Whitman experiences seasonality in its quarterly results of operations
as a result of changes in the level of student enrollment. New enrollment in
Whitman's schools tends to be 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.
YEAR 2000 ISSUE
Whitman is currently working to resolve the potential impact of the
Year 2000 on the processing of date-sensitive information by Whitman's
computerized information systems. The Year 2000 issue is the result of computer
programs being written using two digits (rather than four) to define the
applicable year. Whitman's programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the Year 2000,
which could result in miscalculations or system failures. Based on a recent
assessment, Whitman currently believes that with the modifications made to
existing software and the conversions made to new software, the Year 2000 issue
will not pose significant operational problems to its information systems.
In addition, formal communications with all significant suppliers have been
initiated to determine the extent to which related interfaces with company
systems are vulnerable if these third parties fail to remediate theirown
Year 2000 issues. Whitman expects to substantially complete and test the
Year 2000 issues by the early part of fiscal 1999. Based on preliminary
information, costs of addressing potential problems are not currently expected
to have a material adverse impact on Whitman's financial position, results of
operations or cash flows in future periods. There can be no assurance, however,
that modifications to information systems and conversion of third-party systems
to remediate Year 2000 issues will be made on a timely basis and that they will
not adversely affect Whitman's systems.
-29-
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at March 31, 1998, 1997 and 1996 were $3.4
million, $3.9 million and $2.8 million, respectively. Whitman's working capital
totalled $8.0 million at March 31, 1998, compared to $5.7 million at March 31,
1997 and $4.8 million at March 31, 1996. In accordance with Department of
Education regulations, Whitman maintained $512,000 and $363,000 in restricted
cash at March 31, 1997 and 1996, respectively, as funds to be available for
student refunds. Whitman was not required to maintain such restricted funds at
March 31, 1998.
Net cash of $110,000 was provided by operating activities in fiscal
1998, an increase in cash provided of $2.3 million from fiscal 1997 and a
decrease of $2.1 million from fiscal 1996. The increase in cash provided by
operating activities in fiscal 1998 was primarily due to an increase in net
income of $4.5 million from fiscal 1997. In fiscal 1996, Whitman generated $2.2
million in cash from operating activities due primarily to cash provided from
operations of Sanford-Brown of $3.0 million.
Net cash of $3.7 million was used for investing activities in fiscal
1998, a decrease of $225,000 from fiscal 1997 and an increase of $1.7 million
from fiscal 1996. The decrease in fiscal 1998 was primarily due to a decrease in
capital expenditures from $3.9 million in fiscal 1997 to $3.7 million in fiscal
1998. The increase in fiscal 1997 from fiscal 1996 was due to an increase in
capital expenditures due primarily to the purchase of computer equipment for the
schools and leasehold improvements incurred for the expansion and opening of
school facilities.
Whitman estimates that the capital expenditures expected to be incurred
during fiscal 1999 will approximate $5 million. These anticipated capital
expenditures primarily relate to the costs associated with the relocation and
upgrade of campus facilities and the acquisition and upgrade of equipment for
the schools. Funds required to finance such capital expenditures are expected to
be obtained from additional capital lease obligations and from funds generated
from operations.
Net cash of $3.1 million was provided by financing activities in fiscal
1998, an decrease of $4.1 million from fiscal 1997 and an increase of $2.3
million from fiscal 1996. The decrease in fiscal 1998 from fiscal 1997 and the
increase in fiscal 1997 from fiscal 1996 was primarily due to a private
placement in fiscal 1997 of 1,000,000 shares of Whitman's common stock to an
unaffiliated institutional investor for $6.5 million.
Whitman had a revolving credit facility of $2.0 million expiring in May
1998 and a revolver note maturing in April 1999 in the amount of $7.5 million.
At March 31, 1998, Whitman had $9.2 million outstanding under these facilities.
The amounts borrowed under these facilities in fiscal 1998 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, Whitman increased its
term loan availability by $1.5 million in June 1997 in order to finance capital
expenditures at Huron University. On May 29, 1998, Whitman repaid the $2.0
million revolving credit facility by drawing down on the $7.5 million revolver
note.
Whitman's primary source of operating liquidity is the cash received
from payments of tuition and fees. Most students attending Whitman's schools
receive some form of financial aid under Title IV Programs. UDS, Sanford-Brown
and Colorado Tech receive approximately 81%, 83% and 39% of their funding,
respectively, from the Title IV Programs. Disbursements under each program are
subject to disallowance and repayment by the schools.
-30-
Whitman believes that with its working capital, its cash flow from
operations, its increased working capital facilities and its expected increased
financings under capital lease obligations to fund capital expenditures, it will
have adequate resources to meet its anticipated operating requirements for the
foreseeable future except that, due to the seasonality of Whitman's revenues,
Whitman may need to borrow additional funds in the second fiscal quarter. If
such funds not exceed necessary, Whitman anticipates the additional borrowings
will approximate $500,000. While Whitman believes that it will be able to secure
such additional financing, there can be no assurance that it will be able to do
so.
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
The information concerning directors required by item 10 is
incorporated by reference to Whitman's Proxy Statement for its 1998 Annual
Meeting of Shareholders which is expected to be filed by July 29, 1998. The
information concerning executive officers required by item 10 is contained in
the discussion entitled "Executive Officers of the Registrant" in Part I hereof.
ITEM 11. EXECUTIVE COMPENSATION
The information required by item 11 is incorporated by reference to
Whitman's Proxy Statement for its 1998 Annual Meeting of Shareholders which is
expected to be filed by July 29, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by item 12 is incorporated by reference to
Whitman's Proxy Statement for its 1998 Annual Meeting of Shareholders which is
expected to be filed by July 29, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by item 13 is incorporated by reference to
Whitman's Proxy Statement for its 1998 Annual Meeting of Shareholders which is
expected to be filed by July 29, 1998.
-31-
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
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
- ------- ---------------------------------- ---------------------------------------
2.1 Plan and Agreement of Merger Incorporated by reference to Whitman's
Form 10-Q for the quarter ended
September 30, 1997.
3.1 Articles of Incorporation Incorporated by reference to Whitman's
Form 10-Q for the quarter ended
September 30, 1997.
3.2 By-Laws Incorporated by reference to Whitman's
Form 10-Q for the quarter ended
September 30, 1997.
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.
-32-
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. Incorporated by reference to Whitman's
1996 Stock Option Plan, as amended Form 10-Q for the quarter ended
June 30, 1997.
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*
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 Incorporated by reference to Whitman's
Agreement and Escrow Agreement Form 10-K for the year ended
among Sanford Brown College, Inc. March 31, 1997.
(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. *
-33-
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 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.
10.13 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.
10.14 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.
10.15 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.
10.16 Form of Third Amendment to Credit Incorporated by reference to Whitman's
Agreement dated May 19, 1997 among Report on Form 10-K for the year ended
Barnett Bank, N.A., Whitman Education March 31, 1997.
Group, Inc. and Phillip Frost, M.D.
10.17 Form of Restated and Consolidated Incorporated by reference to Whitman's
Renewal Revolver Note dated May 19, Report on Form 10-K for the year ended
1997 by Whitman Education Group, Inc. March 31, 1997.
in favor of Barnett Bank, N.A.
10.18 Loan Agreement dated August 5, 1996 Incorporated by reference to Whitman's
between Colorado Technical University Report on Form 10-K for the year ended
and Bank One, Colorado, N.A. March 31, 1997.
10.19 Form of promissory note and Schedule Incorporated by reference to Whitman's
of Promissory Notes by Colorado Report on Form 10-K for the year ended
Technical University, Inc. in favor of March 31, 1997.
Bank One, Colorado, N.A.
10.20 Form of commercial security agreement Incorporated by reference to Whitman's
and Schedule of Commercial Security Report on Form 10-K for the year ended
Agreements between Colorado Technical March 31, 1997.
University, Inc. and Bank One,
Colorado, N.A.
-34-
10.21 First Amendment to Loan Agreement Incorporated by reference to Whitman's
dated December 27, 1996 between Report on Form 10-K for the year ended
Bank One, Colorado, N.A. and Colorado March 31, 1997.
Technical University, Inc.
10.22 Commercial Guaranty by M.D.J.B., Inc. Incorporated by reference to Whitman's
in favor of Bank One, Colorado, N.A. Report on Form 10-K for the year ended
March 31, 1997.
10.23 Second Amendment to Loan Agreement Incorporated by reference to Whitman's
dated February 24, 1997 between Bank Report on Form 10-K for the year ended
One, Colorado, N.A. and Colorado Technical March 31, 1997.
University, Inc.
10.24 Third Amendment to Loan Agreement Incorporated by reference to Whitman's
dated June 13, 1997 between Bank One, Report on Form 10-K for the year ended
Colorado, N.A. and Colorado Technical March 31, 1997.
University, Inc.
10.25 Commercial Guaranty by Whitman Incorporated by reference to Whitman's
Education Group, Inc. in favor of Report on Form 10-K for the year ended
Bank One, Colorado, N.A. March 31, 1997.
10.26 Promissory Note dated June 13, 1997 Incorporated by reference to Whitman's
by Colorado Technical University, Inc. Report on Form 10-K for the year ended
in favor of The Pueblo Bank and Trust March 31, 1997.
Company
10.27 Form of Commercial Guaranty given Incorporated by reference to Whitman's
by Whitman Education Group, Inc. and Report on Form 10-K for the year ended
M.D.J.B., Inc. in favor of The Pueblo March 31, 1997.
Bank and Trust Company
10.28 Commercial Security Agreement dated Incorporated by reference to Whitman's
June 13, 1997 between Colorado Report on Form 10-K for the year ended
Technical University, Inc. and The Pueblo March 31, 1997.
Bank and Trust Company
10.29 Stock Purchase Agreement dated Incorporated by reference to Whitman's
October 15, 1996 by and between Report on Form 10-K for the year ended
Whitman Education Group, Inc. and March 31, 1997.
The Travelers Indemnity Company
10.30 Form of Registration Rights Agreement Incorporated by reference to Whitman's
among Whitman Education Group, Inc. Report on Form 10-K for the year ended
and The Travelers Indemnity Company March 31, 1997.
-35-
10.31 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) No reports on Form 8-K were filed by Whitman during the quarter
ended March 31, 1998.
-36-
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 29, 1998
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 29, 1998
- -----------------------------
Phillip Frost, M.D.
/s/ RICHARD C. PFENNIGER, JR. Vice Chairman of the Board June 26, 1998
- ----------------------------- and Chief Executive Officer
Richard C. Pfenniger, Jr.
/s/ FERNANDO L. FERNANDEZ Chief Financial Officer June 26, 1998
- ----------------------------- (Principal Financial and
Fernando L. Fernandez Accounting Officer)
/s/ JACK R. BORSTING Director June 26, 1998
- -----------------------------
Jack R. Borsting, Ph.D.
/s/ PETER S. KNIGHT Director June 26, 1998
- -----------------------------
Peter S. Knight
/s/ LOIS F. LIPSETT Director June 26, 1998
- -----------------------------
Lois F. Lipsett, Ph.D.
/s/ RICHARD M. KRASNO Director June 24, 1998
- -----------------------------
Richard M. Krasno, Ph.D.
/s/ PERCY A. PIERRE Director June 26, 1998
- -----------------------------
Percy A. Pierre, Ph.D.
/s/ NEIL FLANZRAICH Director June 29, 1998
- -----------------------------
Neil Flanzraich
-37-
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
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, 1998 and 1997 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended March 31, 1998. 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 financial statements
of M.D.J.B., Inc., a wholly-owned subsidiary, which statements reflect total
revenues constituting 22% in 1996 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 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, 1998 and 1997, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended March 31, 1998, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
------------------------------------
ERNST & YOUNG LLP
Miami, Florida May 1, 1998,
except for the 6th paragraph
of Note 8, as to which
the date is May 29, 1998
F-2
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31,
-----------------------------------
1998 1997
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 3,384,336 $ 3,853,932
Restricted cash..................................................... -- 511,927
Accounts receivable, less allowance for doubtful accounts
of $4,208,777 in 1998 and $2,821,261 in 1997 .................... 21,354,104 18,159,383
Inventories......................................................... 1,614,455 1,084,124
Deferred income taxes............................................... 1,471,043 853,267
Other current assets................................................ 1,158,841 1,072,511
-------------- --------------
Total current assets................................................ 28,982,779 25,535,144
Property and equipment, net......................................... 12,925,177 10,062,815
Marketable securities............................................... 262,500 296,250
Deposits and other assets, net of accumulated amortization
of $1,184,657 in 1998 and $1,682,117 in 1997..................... 1,431,188 1,607,120
Goodwill, net....................................................... 10,219,525 10,516,165
-------------- --------------
$ 53,821,169 $ 48,017,494
============== ==============
LIABILITY AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES:
Accounts payable.................................................... $ 1,268,306 $ 2,390,283
Accrued expenses.................................................... 2,115,220 2,873,923
Income taxes payable................................................ 107,133 34,816
Short-term notes payable............................................ 156,018 --
Current portion of capitalized lease obligations.................... 1,061,767 1,040,403
Current portion of long-term debt................................... 354,401 540,565
Deferred tuition revenue............................................ 15,966,150 12,999,348
-------------- ---------------
Total current liabilities........................................... 21,028,995 19,879,338
Other liabilities................................................... 609,708 921,859
Capitalized lease obligations....................................... 2,535,673 2,013,125
Long-term debt...................................................... 11,813,639 9,096,017
Commitments and contingencies
Stockholders' equity:
Common stock, no par value, authorized 100,000,000 shares
issued and outstanding 13,193,582 in 1998 and 12,677,582
shares in 1997................................................. 21,183,554 19,574,741
Additional paid-in capital....................................... 671,536 671,536
Accumulated deficit.............................................. (3,995,978) (4,139,122)
Net unrealized loss on noncurrent marketable securities.......... (25,958) --
-------------- ---------------
Total stockholders' equity.......................................... 17,833,154 16,107,155
-------------- ---------------
$ 53,821,169 $ 48,017,494
============== ===============
See accompanying notes to financial statements.
F-3
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED MARCH 31,
--------------------------------------------------
1998 1997 1996
-------------- -------------- --------------
Net revenues................................................. $ 60,306,460 $ 46,992,954 $ 39,837,949
Costs and Expenses:
Instructional and educational support..................... 40,485,802 31,369,601 24,150,421
Selling and promotional................................... 8,585,716 6,976,430 5,708,361
General and administrative................................ 10,450,527 11,891,881 9,028,607
-------------- -------------- --------------
Total costs and expenses..................................... 59,522,045 50,237,912 38,887,389
-------------- -------------- --------------
Income (loss) from operations................................ 784,415 (3,244,958) 950,560
Other (income) and expenses:
Interest expense.......................................... 1,334,201 1,001,152 1,224,604
Interest income........................................... (203,456) (130,162) (37,000)
Realization of loss on marketable securities.............. -- 656,250 --
-------------- -------------- --------------
Loss before income tax benefit............................... (346,330) (4,772,198) (237,044)
Income tax benefit........................................... (489,474) (408,841) (136,473)
-------------- -------------- --------------
Net income (loss)............................................ $ 143,144 $ (4,363,357) $ (100,571)
============== ============== ==============
Net income (loss) per share:
Basic..................................................... $ .01 $ (.38) $ (.01)
============== ============== ==============
Diluted................................................... $ .01 $ (.38) $ (.01)
============== ============== ==============
Weighted average common shares outstanding:
Basic .................................................... 12,866,045 11,404,862 10,235,956
============== =============== ==============
Diluted................................................... 14,071,970 11,404,862 10,235,956
============== =============== ==============
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, 1998, 1997 AND 1996
NET
UNREALIZED
(LOSS)
GAIN ON
COMMON ADDITIONAL RETAINED NONCURRENT
SHARES COMMON PAID-IN EARNINGS MARKETABLE
OUTSTANDING STOCK CAPITAL (DEFICIT) SECURITIES TOTAL
------------- ------------- ------------- ------------- ------------- --------------
Balance at March 31, 1995 10,209,366 $ 7,015,277 $ 280,500 $ 162,611 $ (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 6,816,020 616,500 62,040 (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 19,574,741 671,536 (4,139,122) -- 16,107,155
Shares issued in connection
with exercise of options 16,000 46,313 -- -- -- 46,313
Shares issued in connection
with exercise of warrants 500,000 1,562,500 -- -- -- 1,562,500
Net unrealized loss on
noncurrent marketable
securities -- -- -- -- (25,958) (25,958)
Net income -- -- -- 143,144 -- 143,144
------------- ------------- ------------- ------------- ------------- --------------
Balance at March 31, 1998 13,193,582 $ 21,183,554 $ 671,536 $(3,995,978) $ (25,958) $ 17,833,154
============= ============= ============= ============= ============= ==============
See accompanying notes to financial statements.
F-5
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended March 31,
-------------------------------------------------
1998 1997 1996
-------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)............................................ $ 143,144 $ (4,363,357) $ (100,571)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization........................... 3,365,544 2,772,520 1,930,116
Bad debt expense........................................ 2,396,472 3,245,314 1,835,736
Deferred tax benefit.................................... (609,984) (408,841) (482,917)
Loss on sale of equipment............................... -- -- 21,828
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...................................... 511,927 (169,481) (17,288)
Accounts receivable.................................. (5,591,193) (4,911,368) (1,488,120)
Inventories.......................................... (530,331) (199,634) (269,811)
Other current assets................................. (244,931) (449,264) 208,402
Deposits and other assets............................ (176,824) (82,961) (177,470)
Accounts payable..................................... (1,121,977) 416,411 97,113
Accrued expenses..................................... (758,703) 1,359,655 477,102
Income taxes payable................................. 72,317 (163,980) 190,701
Deferred tuition revenue............................. 2,966,802 243,393 6,252
Other liabilities.................................... (312,151) (156,254) (24,427)
-------------- -------------- --------------
Net cash provided by (used in) operating activities.......... 110,112 (2,211,597) 2,206,646
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments into escrow for acquisition of
Sanford-Brown College..................................... 16,058 (61,267) (163,999)
Purchase of property and equipment........................... (3,722,988) (3,870,181) (1,882,873)
Proceeds from sale of equipment.............................. 24,048
-------------- -------------- --------------
Net cash used in investing activities........................ (3,706,930) (3,931,448) (2,022,824)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving line of credit and
long-term borrowings...................................... 36,742,951 32,868,173 7,390,000
Principal payments on revolving line of credit,
long-term borrowings and other liability.................. (34,211,493) (32,731,592) (5,623,533)
Principal payments on capitalized lease obligations.......... (1,169,067) (1,010,601) (776,172)
Proceeds from short term notes payable....................... 156,018 -- --
Proceeds from exercise of options and warrants............... 1,608,813 443,976 81,848
Proceeds from sale of common stock........................... -- 6,479,619 24,895
Repurchase of common stock................................... -- -- (153,000)
Principal payments on note to former stockholder............. -- -- (153,000)
Proceeds from Huron acquisition.............................. -- 1,200,683 --
-------------- -------------- --------------
Net cash provided by financing activities.................... 3,127,222 7,250,258 791,038
-------------- -------------- --------------
(Decrease) increase in cash and cash equivalents............. (469,596) 1,107,213 974,860
Cash and cash equivalents at beginning of year............... 3,853,932 2,762,141 1,787,281
CTU activity for the three-months ended March 31, 1997 -- (15,422) --
-------------- -------------- --------------
Cash and cash equivalents at end of year..................... $ 3,384,336 $ 3,853,932 $ 2,762,141
============== ============== ==============
Continued on the following page.
See accompanying notes to financial statements.
F-6
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
YEAR ENDED MARCH 31,
------------------------------------------------
1998 1997 1996
-------------- -------------- --------------
SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING
AND INVESTMENT ACTIVITIES:
Long-term maintenance contract financed
through leasing company................................... $ -- $ -- $ 621,000
============== ============== ==============
Equipment acquired under capital leases...................... $ 1,712,979 $ 1,181,153 $ 1,157,133
============== ============== ==============
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 $ --
============== ============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid................................................ $ 1,234,201 $ 877,494 $ 984,992
============== ============== ==============
Income taxes paid............................................ $ -- $ 211,479 $ 148,405
============== ============== ==============
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
The primary business of Whitman Education Group, Inc. and its
Subsidiaries' ("Whitman") is the operation of degree and non-degree granting
proprietary schools devoted to career training primarily in the medical,
technical, and business fields. Whitman'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, as amended ("Title IV
Programs") to pay for a substantial portion of their tuition.
As an educational institution, Whitman is subject to licensure from
various accrediting and state authorities and other regulatory requirements of
the United States Department of Education ("USDOE").
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
Whitman 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 Whitman's Title IV Programs refunds
made in the previous fiscal year, as required by the USDOE. Such funds are held
in separate bank accounts and other short-term investments.
Effective July 1, 1997, Whitman was not required to maintain restricted
cash accounts for prior year refunds due to a change in the regulations which
provides an exception to companies that are in compliance with certain
regulations.
REVENUES, ACCOUNTS RECEIVABLE AND DEFERRED TUITION REVENUE
Upon enrollment, Whitman 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. If a student withdraws from a course or program, the unearned
portion of the program that the student has paid for is refunded generally on a
pro rata basis.
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.
GOODWILL
Whitman 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 businesses. The analyses involve significant management judgment to
evaluate the capacity of an acquired business to perform within projections. As
of March 31, 1998 and 1997, accumulated amortization was $595,000 and $307,000,
respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
In fiscal 1997, Whitman 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.
NET INCOME (LOSS) PER COMMON SHARE
In fiscal 1998, Whitman retroactively adopted SFAS No. 128, Earnings
Per Share. SFAS No. 128 replaced the calculation of primary and fully diluted
earnings per share (EPS) with basic and diluted EPS.
Net income per common share is calculated using the weighted average
number of common shares for the basic EPS presentation, and the weighted average
number of common and common equivalent shares for the diluted EPS presentation,
outstanding during the respective periods.
F-9
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
ADVERTISING
Whitman expenses advertising costs as incurred. Advertising expense
which is included in selling and promotional expenses amounted to approximately
$3,957,000, $3,223,000 and $2,628,000 for the years ended March 31, 1998, 1997
and 1996, 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.
INCOME TAXES
Deferred income tax assets and liabilities are determined based on the
differences between the financial statements and income tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
STOCK-BASED COMPENSATION
In 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. Whitman 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 Whitman's employee stock options is equal to the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
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
statements and the reported amounts of income and expenses during the reporting
period. Actual results could differ from those estimates.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform to the
current year's presentation.
F-10
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
In June, 1997, FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in financial statements. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997. Reclassification
of financial statements for earlier periods provided for comparative purposes
is required. Whitman is in the process of evaluating the disclosure requirements
of SFAS No. 130. The adoption of SFAS No. 130 is not expected to have a material
impact on Whitman's consolidated operations, financial condition or cash flows.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," which is effective for years
beginning after December 15, 1997. SFAS No. 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports. It
also establishes standards for related disclosures about products and services,
geographic areas, and major customers. SFAS No. 131 is effective for financial
statements for fiscal years beginning after December 15, 1997, and therefore
Whitman will adopt the new requirements retroactively in fiscal 1999. Management
has not completed its review of SFAS No. 131, but does not anticipate that the
adoption of this statement will result in a significant change from the current
required disclosures.
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 $2.3 million of which approximately $2.0 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,
Whitman 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 Whitman $527,000 (which is included in
the $3.9 million received from HEI) as an inducement for Whitman 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 acquisition was accounted for using the purchase method of
accounting and, accordingly, the net liabilities acquired are included in
Whitman's balance sheets as of March 31, 1997 and operations have been included
in Whitman's operations beginning on January 1, 1997.
F-11
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. ACQUISITIONS - (CONTINUED)
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)
Basic loss per share........ (.44) (.09)
Diluted loss per share...... (.44) (.09)
At the date of acquisition, Huron University operated as a regionally
accredited degree granting institution with campuses in Huron and Sioux Falls,
South Dakota, enrolling approximately 600 students primarily 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 Programs. The Title IV Programs are
administered by the USDOE. The sale of the assets described above terminated
Huron University's access to the Title IV Programs 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 USDOE and CTU for any Title IV Programs liabilities relating to
periods prior to December 30, 1996, which remains in place at March 31, 1998.
COLORADO TECHNICAL UNIVERSITY
On March 29, 1996, Whitman 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 2,600 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, Whitman 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, Whitman's consolidated financial statements were previously
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 were previously adjusted to conform CTU's year end with that of
Whitman. The effect arising from the exclusion of net income of $162,195 for the
F-12
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. ACQUISITIONS - (CONTINUED)
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 period ending on March 31, 1996
include the operating results of Whitman on a March 31 fiscal year basis and of
CTU on a calendar year 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 Whitman, 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,
for the year ended March 31, 1996 are presented in the following table
(unaudited):
Total revenues:
Whitman................................. $ 30,910,437
CTU..................................... 8,927,512
-------------
Combined................................ $ 39,837,949
=============
Net (loss) income:
Whitman................................. $ (398,146)
CTU..................................... 297,575
-------------
Combined................................ $ (100,571)
=============
Basic and diluted (loss) income per share:
Whitman................................. $ (0.04)
CTU..................................... 0.03
-------------
Combined................................ $ (0.01)
=============
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, Whitman 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, Whitman released the funds and common stock held in escrow to the
seller of SBC, resulting in an increase in goodwill and equity of approximately
$8.0 million and $1.9 million, respectively, in the fourth quarter of fiscal
1997.
F-13
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. ACQUISITIONS - (CONTINUED)
The acquisition of SBC has been accounted for as a purchase, and the
net assets and results of operations are included in Whitman'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, Whitman acquired assets with a fair market
value of approximately $6.3 million and assumed liabilities of approximately
$4.6 million.
3. FINANCIAL AID PROGRAMS
Approximately 70% of Whitman's net revenues were received from students
who participated in government sponsored financial aid programs under Title IV
Programs. These programs are subject to program review by the USDOE.
Disbursements under each program are subject to disallowance and repayment by
the schools. These programs also require that Whitman and certain of its
subsidiaries meet Standards of Financial Responsibility established by the
USDOE. The standards require Whitman and certain of its subsidiaries to maintain
certain financial ratios and requirements, all of which have been met at March
31, 1998.
In fiscal 1995, the USDOE conducted a federal program review of SBC's
Title IV activity for the award years 1992 through 1994. On November 7, 1996,
the USDOE issued its program review reports, which cited various deficiencies in
the administration of federal student financial aid programs at SBC. As of March
31, 1998, all findings have been resolved with the USDOE. The asset purchase
agreement with SBC provides for the seller's indemnification of Whitman for any
material liability that may result from the program reviews, and the seller
deposited $500,000 with Whitman in recognition of that obligation. The program
review liability did not materially exceed $500,000 and accordingly, resolution
of such findings had no effect on Whitman's results of operations.
4. ACCOUNTS RECEIVABLE
A summary of activity for the allowance for doubtful accounts is as
follows:
YEAR ENDED MARCH 31,
----------------------------------------------
1998 1997 1996
------------- ------------ -------------
Balance at beginning of year............. $ 2,821,261 $ 1,314,631 $ 1,011,808
Net activity of CTU for the three
months ended March 31, 1996............ -- 20,099 --
Acquisition of Huron..................... -- 40,000 --
Charged to expense....................... 2,396,472 3,245,314 1,835,736
Accounts charged-off during the year..... (1,008,956) (1,798,783) (1,532,913)
------------- ------------ -------------
Balance at end of year................... $ 4,208,777 $ 2,821,261 $ 1,314,631
============= =========== ============
F-14
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
ESTIMATED MARCH 31,
USEFUL LIVES --------------------------------
(IN YEARS) 1998 1997
------------ ------------- -------------
Equipment................................... 2-5 $ 11,061,621 $ 9,657,690
Leasehold improvements...................... 1-10 5,459,652 3,263,828
Furniture and fixtures...................... 7-10 2,639,065 1,964,677
Other....................................... 5 2,554,939 1,353,705
------------- -------------
21,715,277 16,239,900
Less accumulated depreciation and
amortization............................. (8,790,100) (6,177,085)
------------- -------------
$ 12,925,177 $ 10,062,815
============= =============
6. MARKETABLE SECURITIES
Whitman's marketable equity securities, which is considered
available-for-sale, has been classified as non-current as it is Whitman's
intention to hold such securities for the foreseeable future. During the fourth
quarter of fiscal 1997, Whitman 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 Whitman's March 31,1996
stockholders' equity.
Noncurrent marketable securities--IVAX Common Stock, 30,000 shares:
MARCH 31,
-----------------------------
1998 1997
------------- -------------
Cost............................ $ 296,250 $ 952,500
Gross unrealized loss........... (33,750) --
Realized loss................... -- (656,250)
------------- -------------
Estimated fair value............ $ 262,500 $ 296,250
============= =============
F-15
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. INCOME TAXES
The components of the income tax (benefit) provision are as follows:
YEAR ENDED MARCH 31,
---------------------------------------------
1998 1997 1996
------------- ------------- -------------
Current............ $ 120,510 $ -- $ 346,444
Deferred........... (609,984) (408,841) (482,917)
------------- ------------- -------------
Total.............. $ (489,474) $ (408,841) $ (136,473)
============= ============= =============
The differences between the federal statutory income tax rate and the
effective income tax rate are summarized below:
YEAR ENDED MARCH 31,
-----------------------------
1998 1997 1996
-------- -------- ---------
Statutory tax rate.................. (34.0)% (34.0)% (34.0)%
State income taxes, net............. 30.3 (4.5) 4.0
Permanent differences............... 12.3 0.9 22.7
Change in valuation allowance....... (147.6) 35.9 (54.4)
Other, net.......................... (2.3) (6.9) (3.1)
Results of separate MDJB filings.... -- -- 7.2
-------- -------- ---------
Effective tax rate.................. 141.3% (8.6)% (57.6)%
======== ======== =========
F-16
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. 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 Whitman's net deferred income taxes are as follows:
MARCH 31,
------------------------------
1998 1997
------------- -------------
Deferred tax assets:
Accrued expenses.................................... $ 407,000 $ 321,000
Reserves and allowances............................. 1,248,000 748,000
Tax credits......................................... 55,000 39,000
Net operating loss carryforwards.................... 1,257,000 1,463,000
Unrealized depreciation in equity security.......... 279,000 266,000
Other (net)......................................... 36,000 47,000
------------- ------------
Total deferred tax assets................................ 3,282,000 2,884,000
Valuation allowance...................................... (1,204,000) (1,714,000)
------------- ------------
Total deferred tax assets................................ 2,078,000 1,170,000
Deferred tax liabilities:
Prepaid expenses and other.......................... (17,000) (22,000)
Depreciation and amortization....................... (590,000) (295,000)
------------- ------------
Total deferred tax liabilities........................... (607,000) (317,000)
------------- ------------
Total net deferred taxes................................. $ 1,471,000 $ 853,000
============= ============
SFAS 109 "Accounting for Income Taxes" requires a valuation allowance
to reduce the deferred tax assets reported if, based on the weight of the
evidence, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. After consideration of all of the evidence,
both positive and negative, management has determined that a $1,204,000
valuation allowance at March 31, 1998 is necessary to reduce the deferred tax
assets to the amount that will more likely than not be realized. The valuation
allowance decreased by $510,000 in 1998, increased by $1,714,000 in 1997 and
decreased by $129,000 in 1996. At March 31, 1998, Whitman has available net
operating loss carryforwards of $3,276,000 expiring in the years 2010 through
2012.
F-17
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. Debt
Long-term debt consists of the following:
MARCH 31,
--------------------------------
1998 1997
------------- -------------
$7.5 million revolver note expiring April 14, 1999 with interest
at the lower of prime less 1.25% or LIBOR plus 1.10%, 6.79%
at March 31, 1998 and 7.25% at March 31, 1997.................. $ 7,248,837 $ 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, 1998 and at March 31, 1997............. 2,000,000 2,000,000
Notes payable in monthly installments through 2002, interest
rates ranging from 8.875% to 9%.................................. 519,203 1,210,161
Note payable in monthly installments through June 13, 2002,
with interest at prime plus 1.25%, 9.75% at March 31, 1998....... 1,500,000 --
Note payable in monthly installments due January 1, 2000,
with interest at 9%.............................................. -- 926,421
Note payable due June 3, 1999, with interest at 12%................. 900,000 --
------------- -------------
Total............................................................... 12,168,040 9,636,582
Less current portion................................................ (354,401) (540,565)
------------- -------------
$ 11,813,639 $ 9,096,017
============= =============
The notes payable of $519,203 and the $2.0 million revolving credit
facility are secured by accounts receivable, inventory and furniture and
equipment of CTU and by a life insurance policy on the President of CTU.
The revolver note of $7.5 million is guaranteed by the Chairman of the
Board of Whitman. On May 21, 1997, the $5.5 million revolver note was increased
from $5.5 million to $7.5 million under the same terms and conditions.
F-18
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. DEBT - (CONTINUED)
On June 4, 1997, the remaining balance of the $926,421 note payable was
refinanced with the former owner of SBC. Interest, at 12%, is payable in monthly
installments of $9,000. The note payable is secured by equipment. The principal
balance and all unpaid interest is due on June 3, 1999.
On June 13, 1997, Whitman entered into a $1.5 million loan agreement
which is secured by equipment at CTU and Huron. Under the terms of this
agreement, Whitman was required to draw down the $1.5 million on or before
December 12, 1997 and is required to pay interest only through June 1998 and
thereafter pay monthly principal and interest installments through June 13, 2002
at prime plus 1.25%.
On May 29, 1998, Whitman repaid the $2.0 million revolving credit
facility by drawing down on the $7.5 million revolver note.
Aggregate maturities of long-term debt at March 31, 1998 are as
follows:
FISCAL YEAR
-----------
1999.................... $ 354,401
2000.................... 10,811,969
2001.................... 425,764
2002.................... 463,857
2003.................... 112,049
-------------
$ 12,168,040
=============
9. CAPITALIZED LEASE OBLIGATIONS
Whitman 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.
During 1998 and 1997, Whitman entered into leases totaling
approximately $1,713,000 and $1,181,000, respectively, in connection with the
purchase of equipment . The amortization of leased assets of $869,154 and
$740,809 for the years ended March 31, 1998 and 1997, 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:
1998 1997
------------ ------------
Equipment............................. $ 5,169,560 $ 4,685,243
Furniture and fixtures................ 149,228 66,971
Automobiles........................... 21,660 21,789
------------ ------------
5,340,448 4,774,003
Less accumulated amortization......... (2,509,781) (1,659,732)
------------ ------------
$ 2,830,667 $ 3,114,271
============ ============
F-19
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. CAPITALIZED LEASE OBLIGATIONS - CONTINUED)
Future minimum lease payments under capital leases are as follows:
YEAR ENDED MARCH 31:
--------------------
1999 $ 1,495,201
2000 1,269,707
2001 747,662
2002 710,436
2003 167,287
-------------
Total minimum lease payments 4,390,293
Less amount representing interest (8%-12%) (792,853)
Less amount classified as current (1,061,767)
-------------
$ 2,535,673
=============
10. EMPLOYEE BENEFIT PLAN
Whitman has a 401(k) retirement savings plan covering all employees
that meet certain eligibility requirements. Eligible participating employees may
elect to contribute up to a maximum amount of tax deferred contribution allowed
by the Internal Revenue Code. Whitman matches a portion of such contributions up
to a maximum percentage of the employee's compensation. Whitman's contributions
to the plan were approximately $125,000, $97,000 and $85,000 for the years ended
March 31, 1998, 1997 and 1996, respectively.
11. STOCK OPTION PLANS AND WARRANTS
Whitman has adopted stock option plans under which employees, directors
and consultants of Whitman may be issued options covering up to 3,350,000 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 Whitman's stock option plans is as follows:
F-20
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
11. STOCK OPTION PLANS AND WARRANTS - (CONTINUED)
WEIGHTED
AVERAGE EXERCISE NUMBER
PRICE PER SHARE OF SHARES
---------------- ---------
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
Granted..................................... 5.00 740,450
Exercised................................... 2.89 (16,000)
Cancelled................................... 5.29 (177,950)
----------
Outstanding March 31, 1998.................. 4.24 3,173,600
==========
As required by FAS 123, pro forma information regarding net income and
earnings per share has been determined as if Whitman 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 1998
and 1997, respectively: risk-free rates of 6.1% and 6.4%; no dividend yields for
both; volatility factors of the expected market price of Whitman's common stock
of 0.566 and 0.773; and a weighted-average expected life of the option of 7.0
and 9.1 years. The weighted-average fair value of the stock options for the
years 1998 and 1997 were $3.19 and $4.81, respectively.
The Black-Scholes options valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because Whitman's employee stock options have characteristics
significantly different from 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. Whitman's
fiscal 1998 and 1997 pro forma information follows:
F-21
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
11. STOCK OPTION PLANS AND WARRANTS - (CONTINUED)
1998 1997
------------ ------------
Net loss................................. $(1,763,020) $(5,198,899)
Basic and diluted loss per share......... (.13) (.46)
The 1998 and 1997 pro forma effect on net loss 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 1998 and
1997 ranged as follows:
NUMBER WEIGHTED AVERAGE REMAINING
EXERCISE PRICE OF OPTIONS CONTRACTUAL LIFE (YEARS)
-------------- ---------- --------------------------
$3.88 - $5.82 883,300 8.20
$5.83 - $8.63 692,500 7.85
Stock options totalling 1,679,649 and 1,155,766 were exercisable at the
end of fiscal 1998 and 1997, respectively. Common stock reserved for issuance
under the stock option plans and outstanding warrants aggregate 6,091,643
shares.
Whitman has 1,650,000 warrants outstanding at an average exercise price
of $4.01 maturing between January 2000 and February 2001.
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, 1998, 1997
and 1996, Whitman's SBC subsidiary paid the Seller rent totalling $453,000,
$432,000 and $429,000, respectively.
Whitman purchases certain textbooks and materials for resale to its
students from an entity that is 40% owned by Whitman's president. In the fiscal
years ended March 31, 1998, 1997 and 1996, Whitman purchased $120,300, $78,900
and $66,600 in textbooks and materials from that entity.
In February 1996, Whitman moved its headquarters to Miami, Florida.
Whitman occupies office space in a building owned by the IVAX Corporation. A
director and shareholder of Whitman is also Chairman of IVAX Corporation. In the
fiscal years ended March 31, 1998 and 1997, Whitman incurred rent expense in the
amount of $141,000 and $125,000, respectively.
F-22
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
13. COMMITMENTS AND CONTINGENCIES
Whitman leases classroom and office space under operating leases in
various buildings where the schools are located. Certain of Whitman's operating
leases contain rent escalation clauses. Future minimum annual rental commitments
under noncancellable operating leases are as follows:
YEAR ENDED MARCH 31,
-------------------
1999............................. $ 4,976,302
2000............................. 4,694,283
2001............................. 4,117,205
2002............................. 3,133,853
2003............................. 2,720,081
Thereafter....................... 10,077,561
------------
Total minimum lease payments..... $ 29,719,285
============
Rent expenses during fiscal 1998, 1997 and 1996 was approximately
$4,750,000, $3,766,000 and $3,017,000, respectively.
In fiscal 1998 Whitman entered into financing agreements to acquire
capital equipment totaling $1,713,000. In fiscal 1998, $1,713,000 of capital
equipment was financed under these agreements and are included under capitalized
lease obligations. At March 31, 1998, Whitman had $361,000 of letters of credit
outstanding.
Whitman is a party to routine litigation incidental to its business,
including but not limited to, claims involving students or graduates and routine
employment matters. While there can be no assurance as to the ultimate outcome
of any litigation involving Whitman, management does not believe that any
pending proceeding will result in a settlement or an adverse judgment that will
have a material adverse effect on Whitman's financial condition or results of
operations.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable,
notes payable and accounts payable and accrued 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.
15. EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share. All earnings per
share amounts for all periods have been presented, and where necessary, related
to conform to the Statement 128 requirements.
F-23
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
15. EARNINGS PER SHARE - (CONTINUED)
The following table sets forth the computation of basic and diluted
earnings per share:
FOR THE YEAR ENDED MARCH 31,
------------------------------------------------
1998 1997 1996
------------- ------------- -------------
Numerator:
Net income (loss)......................... $ 143,144 $ (4,363,357) $ (100,571)
============= ============= =============
Denominator:
Denominator for basic
earnings per share -
weighted-average shares................. 12,866,045 11,404,862 10,235,956
Effect of dilutive securities:
Employee stock options.................... 804,746 -- --
Warrants.................................. 401,179 -- --
------------- ------------- -------------
Dilutive potential common
shares.................................. 1,205,925 -- --
Denominator for diluted
earnings per share -
adjusted weighted -
average shares and
assumed conversions................... 14,071,970 11,404,862 10,235,956
============= ============= =============
Basic earnings (loss) per share.............. $ .01 $ (.38) $ (.01)
============= ============= =============
Diluted earnings (loss) per share............ $ .01 $ (.38) $ (.01)
============= ============= =============
F-24