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, 2000 Commission file number 1-13722
WHITMAN EDUCATION GROUP, INC.
(Exact Name of Registrant as Specified in its Charter)
State of Florida 22-2246554
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
4400 Biscayne Boulevard, Miami, FL , 33137 (305) 575-6510
(Address of Principal Executive Offices) (Registrant's Telephone Number,
Including Area Code)
SECURITIES TO BE 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 1, 2000, there were 13,424,917 shares of Common Stock outstanding.
The aggregate market value of the voting stock held by non-affiliates of the
registrant on June 1, 2000 was approximately $14,259,000.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of our Definitive Proxy Statement for our 2000 Annual
Meeting of Stockholders scheduled to be held in August 2000 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, 2000
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business.................................................. 3
Item 2. Properties................................................ 21
Item 3. Legal Proceedings......................................... 22
Item 4. Submission of Matters to a Vote of Security Holders....... 22
Executive Officers of the Registrant...................... 22
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 7A.Quantitative and Qualitative Disclosures about Market Risk 32
Item 8. Financial Statements and Supplementary Data............... 32
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 32
PART III
Item 10.Directors and Executive Officers of the Registrant........ 33
Item 11.Executive Compensation.................................... 33
Item 12.Security Ownership of Certain Beneficial Owners
and Management............................................ 33
Item 13.Certain Relationships and Related Transactions............ 33
PART IV
Item 14.Exhibits, Financial Statement Schedules, and
Reports on Form 8-K....................................... 33
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PART I
ITEM 1. BUSINESS.
You are cautioned that the following text concerning our business should
be read in conjunction with the "Forward-Looking Statements; Business Risks"
appearing at the end of Item 1 and that certain statements made in this Item 1
are qualified by the risk factors set forth in that section. Please keep in mind
while reading this report that:
o "We," "Us" or "Whitman" refers to Whitman Education Group, Inc. and its
subsidiaries.
o "Colorado Tech" refers to the three campuses of Colorado Technical
University.
o "Sanford-Brown" refers collectively to our five Sanford-Brown College
campuses.
o "UDS" refers collectively to the fifteen Ultrasound Diagnostic Schools.
GENERAL
We are a proprietary provider of career-oriented postsecondary education.
Through three wholly-owned subsidiaries, we currently operate 23 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 8,000 students.
We are organized into a University Degree Division and an Associate Degree
Division through which we offer education programs. The University Degree
Division primarily offers doctorate, master's and bachelor's degrees through
Colorado Tech. The Associate Degree Division offers associate's degrees and
diplomas or certificates through Sanford-Brown and UDS.
Our students are predominantly adults, generally between the ages of 24
and 35, who commute to our schools and require limited ancillary student
services. The students are seeking to acquire basic knowledge and skills
necessary for entry-level employment in technical careers or to acquire new or
additional skills to either change careers or advance in their current careers.
Our executive offices are located at 4400 Biscayne Boulevard, 6th Floor,
Miami, Florida 33137, and our telephone number is (305) 575-6510.
BACKGROUND
We were originally incorporated in New Jersey in 1979. In 1983, we
acquired two UDS schools in New York which offered non-degree programs only in
diagnostic medical ultrasound. Enrollment in the two schools was less than 50
students. Over the next nine years, we opened eight additional UDS schools and
increased our total enrollment to approximately 400 students.
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In 1992, Dr. Phillip Frost invested in Whitman and became our Chairman. At
the time of his investment, we had revenues of approximately $3.8 million from
UDS operations, and total enrollment at the ten existing UDS schools was
approximately 675. We continued to expand UDS by adding five additional
locations by 1994, for a total of 15 locations.
In 1994, we began to expand the scope of our business to offer a broader
range of certificate programs in our UDS schools. Beginning in late 1994, we
began offering cardiovascular technology and medical assisting programs in our
UDS schools. In addition, in 1994 we began to evaluate acquisition candidates
that would permit us to offer a broader range of career-oriented programs,
including degree-based programs.
In December 1994, we acquired Sanford-Brown, a nationally-accredited
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 our 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 comprise our Associate Degree
Division.
In March 1996, we further broadened our degree program offerings by
acquiring Colorado Tech in Colorado Springs, Colorado. Founded in 1965, Colorado
Tech is a regionally-accredited institution offering doctorate, master and
bachelor degrees in various information technology and business fields. Through
the acquisition of Colorado Tech, we realized one of our goals of offering a
full range of degree programs. The maturity of Colorado Tech and the quality of
its programs also created the opportunity for us to expand by replicating the
Colorado Tech model either in new locations or through the conversion of
acquired institutions. Colorado Tech comprises our University Degree Division.
Colorado Tech began an expansion program in late 1996. In October 1996,
Colorado Tech opened its second campus in Denver, Colorado; and in December
1996, Colorado Tech expanded its educational content and geographic scope
through the acquisition of two campuses of Huron University in Huron and Sioux
Falls, South Dakota. Huron University, which was founded in 1883, offered an MBA
program as well as bachelor degree programs in healthcare, business, computer
technology and education. After the acquisition of Huron University, the Sioux
Falls campus was converted into an additional location of Colorado Tech because
both the Sioux Falls campus and Colorado Tech principally serve the adult
learner - generally, working adults seeking to advance in an existing career. In
addition, Huron University's MBA program was installed at the other Colorado
Tech campuses. Huron University's Huron campus, however, principally directed
its efforts to serving more traditional students, younger adults pursuing
degree-based higher education upon graduation from high school.
Although the curricula was career-oriented at Huron University, there are
fundamental differences in a campus serving working adults and a campus serving
more traditional students. As a consequence of a strategic decision to focus our
efforts on adult learners, we divested our Huron University campus in South
Dakota in August 1999 to a newly formed entity capitalized by several investors
and members of Huron's management. For terms of this transaction see
Management's Discussion and Analysis of Financial Conditions and Results of
Operations.
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In connection with the expansion of programs and locations, we have
continually focused on strengthening our management and improving our
facilities. In March 1996, we relocated our headquarters from New Jersey to
Miami, Florida. In addition, through both recruitment and acquisition, we
established a new executive management team and have broadened and upgraded our
middle management team by adding individuals with broad experience in
proprietary education. We have also expanded the breadth and depth of our Board
of Directors to provide a diverse base of knowledge and skills in education,
regulated industry, mergers and acquisitions, and business generally,
particularly high-growth businesses.
THE POSTSECONDARY EDUCATION MARKET
The postsecondary education market is estimated to exceed $230 billion
annually, with more than 14.5 million students enrolled in over 6,000 Title IV
eligible postsecondary 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 2009. Further, of the Title IV financial aid
eligible institutions, approximately 2,700 are for-profit, with approximately
700 of those offering associate's degrees or higher. Total enrollment in
for-profit institutions is estimated to be less than 6% of the overall market.
Additionally, we believe that the market for entry-level associate's
degrees is enhanced by the increasing number of new high school graduates,
projected to increase from 2.6 million in 1996 to 3.2 million in 2008. Further,
we believe the market for entry level associate's degree is also enhanced by an
increase in the percentage of recent high school graduates who continue their
education after graduation. According to the National Center For Education
Statistics, this percentage increased from approximately 57% in 1987 to 67% in
1997. In addition, the number of adult learners is increasing. Adult learners
represent a large group of postsecondary students that has grown significantly
in recent years. Since 1970, the percentage of students over the age of 24 has
risen from 28% of all postsecondary students to more than 42% or 6.3 million in
the year 2000, according to the National Center for Education Statistics.
Further, the continuing shift in the information age from non-skilled to
skilled workers is dramatic. 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
the 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 1998, a full-time
male worker with an associate degree earned an average of 35% 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 75% more per year than a
comparable worker with only a high school diploma.
BUSINESS STRATEGY
We intend to capitalize on what we believe are favorable trends in the
postsecondary education market by focusing on career-oriented education programs
designed primarily for adult learners seeking to acquire basic knowledge and
skills necessary for entry-level employment in new careers or advance in their
current careers. Having established a broad base of educational content offered
in a broad range of degree (associate's, bachelor's, master's and doctorate) and
non-degree programs, we believe we are well-positioned to focus our efforts on
further internal growth.
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In the short term, we believe that our best opportunity for achieving
growth will come from the integration of existing operations with the basic
objectives of increasing revenues at existing schools and improving overall
operating efficiencies at each school and within our operations as a whole. To
accomplish our goal of increasing revenues from our existing schools, we intend
to increase enrollment by adding curricula at our existing locations and by
improving our marketing efforts. We also intend to expand our educational
programs by developing new curricula.
Also, in the short term, we are seeking to expand the geographic scope of
our business by offering Colorado Tech's degree and professional certificate
programs at the site of large employers. Currently, we offer employer on-site
programs at seven locations. In addition, in July 2000, Colorado Tech will begin
offering internet delivered higher education courses. Initially, it will focus
on masters level courses and professional certificate programs. Ultimately,
Colorado Tech will seek to offer full on-line degree programs.
While we will continue to strive for increased revenues and enhanced
operating efficiencies from our current operations in the short term, in the
intermediate and longer term, we will seek to expand our network of campuses by
opening new campuses. We may establish new locations where we believe the
population of working adults, the local employment market, the availability of
management talent and demographic trends will permit us to successfully
replicate our operational model. Establishment of new locations will be subject
to our ability to comply with or satisfy applicable regulatory requirements of
the United States Department of Education and state licensing and accreditation
requirements. We may also augment our expansion through selective strategic
acquisitions where an acquisition is a more feasible alternative both
financially and operationally.
OPERATING STRUCTURE
We operate as two divisions: the University Degree Division and the
Associate Degree Division. Each division focuses on a different segment of the
postsecondary career education market. Our corporate office provides various
centralized administrative services to each of our divisions and has a
management structure which develops and implements corporate policies and
procedures within each division. Each division has campus managers who oversee
the daily operations of their campuses and district directors who oversee
multiple campus locations. We believe that this management structure allows
local school management to develop valuable local market experience and
community and employer relationships that are vital to the adult career
education market, while still realizing the economies of scale and degree of
control associated with centralization.
The University Degree Division is currently comprised of Colorado Tech, a
regionally-accredited institution. Students attending the three principal
Colorado Tech campuses are typically working adults seeking to advance in their
current careers. Colorado Tech offers various bachelor's, master's and doctorate
degrees in information technology, business and management. We believe that
flexible course structures, class schedules designed for the working adult, and
the 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.
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The Associate Degree Division focuses on the adult learner who desires to
rapidly change careers or to quickly enter a new career field. The Associate
Degree Division is currently comprised of Sanford-Brown and UDS, which provide
adult students 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 technology, business, and various allied health
fields and similar professional certificate programs. UDS is also nationally
accredited and provides professional certificate programs in diagnostic medical
ultrasound, cardiovascular technology, medical assisting and surgical
technology.
EDUCATIONAL PROGRAMS
We offer a range of career-oriented educational programs, substantially
all of which are in the areas of information technology, healthcare and
business. We offer 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. Our 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. Each institution maintains curriculum action
groups, comprised of faculty, campus program directors and corporate curriculum
specialists, that periodically review and revise curricula as a result of
feedback from students, local advisory boards comprised of professionals in
career fields related to the programs and local employers.
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<PAGE>
Our educational programs are set forth below:
<TABLE>
<CAPTION>
UNIVERSITY DEGREE DIVISION ASSOCIATE DEGREE DIVISION
-------------------------- -------------------------
Colorado Technical University Sanford-Brown College Ultrasound Diagnostic School
<S> <C> <C>
DOCTORATE PROGRAM ASSOCIATE DEGREE SPECIALIZED ASSOCIATE
Computer Science PROGRAMS DEGREE PROGRAMS
Management Network Technology (Florida campuses only)
Computer Support Specialist Diagnostic Medical Ultrasound
MASTER DEGREE PROGRAMS Computer and Internet Programmer Non-Invasive Cardiovascular
Computer Science Occupational Therapy Assistant Technology
Computer Engineering Respiratory Therapy Health Information Specialist
Electrical Engineering Radiography
Management Nursing PROFESSIONAL DIPLOMA
Business Administration Medical Assistant PROGRAMS
Accounting/Business Managment Diagnostic Medical Ultrasound
BACHELOR DEGREE Office Administration Non-Invasive Cardiovascular
PROGRAMS Paralegal Studies Technology
Computer Engineering Medical Assistant
Computer Science Surgical Technology
Information Technology PROFESSIONAL DIPLOMA Health Information Specialist
Management Information Systems PROGRAMS
Telecommunications Electronics Network Technology
Technology Computer Support Specialist
Electronal Engineering Practical Nursing
Electronic Engineering Medical Assistant
Technology Respiratory Therapy
Management Accounting
Criminal Justice Administrative Office Assistant
Accounting
Finance
ASSOCIATE DEGREE CERTIFICATE PROGRAM
PROGRAMS Networking Specialist
Information Technology
Electronic Technology
Business Management
Accounting
Medical Assisting
Criminal Justice
PROFESSIONAL CERTIFICATES
C++ Programming
Computer Design
Computer Technology
Contract Management
Digital Communications
Logistic Systems Management
Object-Oriented Development
Professional Communications
Software Engineering
Total Quality Management
Visual Basic Applications
Java Programming
Oracle Application Developer
Oracle Database Administrator
Web Applications Development
Web-Based Business Management
Unix Programming and Administration
</TABLE>
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The following table provides information as of April 30, 2000 regarding the
programs offered by each of our schools:
<TABLE>
<CAPTION>
LENGTH OF
TYPE OF NUMBER OF NUMBER OF PROGRAM
SCHOOL PROGRAM LOCATIONS STUDENTS (IN MONTHS)1
------ ------- --------- -------- -----------
UNIVERSITY DEGREE DIVISION
<S> <C> <C> <C> <C>
Colorado Technical Doctoral 2 69 36
University Master 3 730 21-25
Bachelor 3 1,284 36
Associate 3 290 18
Non-degree 3 327 Varies
-----
School total 2,700
=====
ASSOCIATE DEGREE DIVISION
Sanford-Brown College Associate 4 781 14-21
Non-degree 5 539 11-14
-----
School Total 1,320
=====
Ultrasound Diagnostic Non-degree 15 3,722 8-19
Schools Specialized 3 366 12-19
Associate -----
School Total 4,088
=====
Total 8,108
=====
Tuition and fees for our programs vary depending on the nature of the
program and the location of the school. Based on rates to be implemented during
the current fiscal year, tuition and fees for the non-degree programs in the
Associate Degree Division range from approximately $9,400 for the eight-month
medical assistant program offered by UDS to approximately $21,000 for the
longest associate degree programs offered by Sanford-Brown. At Colorado Tech,
tuition and fees range from approximately $31,000 to $34,000 for the bachelor's
degree programs, $13,000 to $14,000 for the master's program and approximately
$35,000 for the doctorate program.
Academic schedules are designed to meet the needs of the adult student.
UDS offers all of its programs during the day or evening and classes begin
generally every five weeks. Sanford-Brown's programs begin quarterly and are
offered both during the day and evening. Degree programs at Colorado Tech's
Colorado Springs, Denver and Sioux Falls campuses are offered principally in the
evening to accommodate the Colorado Tech student who is typically a working
adult.
----------
<FN>
1 At Colorado Tech, the working adult students typically do not attend
their programs on a full-time basis. Therefore, it generally takes longer than
the stated program length to complete the program.
</FN>
</TABLE>
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STUDENT RECRUITMENT
We utilize a wide array of advertising and marketing strategies to attract
students to our schools, including various combinations of newspaper, radio,
television and direct mail. We market each of our schools on a local basis, and
draw the vast majority of our students from the local areas surrounding each
school.
STUDENT ADMISSIONS
Each school employs several admissions representatives who interview and
enroll students on-site and a variety of support personnel to assist students in
the admissions process. Each of our schools has admission requirements designed
to assess whether the entering students have the educational and work
experience, personal circumstances and the ability necessary to complete their
program of study. Admission requirements differ from program to program and
school to school, but at a minimum, each applicant must be a high school
graduate or possess the recognized equivalent credential, perform successfully
on a personal interview, and in most cases, perform adequately on an entrance
examination. The admissions process is monitored by a director of admissions in
each location, and periodically reviewed for compliance by corporate personnel.
GRADUATE CAREER SERVICES
Each of our schools operates a career services department that provides
career development services to current students and alumni. These services
include various combinations of seminars/courses covering interviewing skills,
resume preparation and enhancement, job search skills, and career planning
advice. In addition, the career services departments of the various schools make
contact with potential employers on behalf of the schools and individual
graduates, schedule interviews, attempt to obtain feedback regarding graduate
performance on interviews and on the job, and provide on-going replacement
assistance to 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 our schools has various competitors,
which may include public and private colleges, other proprietary institutions
and hospital based programs.
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 ours at a lower tuition cost due in part to government
subsidies, foundation grants, tax deductible contributions and other financial
resources not available to proprietary institutions. However, tuition at
private, non-profit institutions is, on average, higher than the average tuition
rates of our schools.
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SUPERVISION AND REGULATION
General. Each of our schools is subject to regulation by: (i) the state in
which it operates; (ii) its accrediting body; and (iii) because they are
certified to participate in federal financial aid programs ("Title IV Programs")
authorized under the Higher Education Act of 1965, as amended, by the United
States Department of Education. The loss of authorization to operate in states
in which we currently operate, the withdrawal of accreditation from our schools,
or the loss of the schools' eligibility to participate in Title IV Programs
would have a material adverse effect.
STATE AUTHORIZATION. Except for South Dakota which no longer regulates
educational institutions, we are required to have authorization to operate in
each state where we physically provide educational programs. Certain states
accept accreditation as evidence of meeting minimum state standards for
authorization. Other states require separate evaluations for authorization.
Generally, the addition of a program or the addition of a new location must be
included in the institution's accreditation and/or be approved by the
appropriate state authorization agency. Our schools are currently authorized to
operate in all states in which we have physical locations and such authorization
is required. State authorization is required for an institution to become and
remain eligible to participate in Title IV Programs.
ACCREDITATION. Accreditation is a non-governmental process through which
an institution submits itself to qualitative review by an organization of peer
institutions. There are three types of accrediting agencies: (i) national
accrediting agencies, which accredit institutions on the basis of the overall
nature of the institutions without regard to geographic location; (ii) regional
accrediting agencies, which primarily accredit institutions based within their
geographic areas; and (iii) programmatic accrediting agencies, which accredit
specific educational programs offered by institutions. Accreditation serves as:
the basis for the recognition and acceptance by employers, other higher
education institutions and governmental entities of degrees and credits earned
by our students; one of the qualifications to participate in Title IV Programs;
and the qualification for authorization to operate in certain states.
Accrediting agencies primarily examine the academic quality of the instructional
programs of an institution, and a grant of accreditation is generally viewed as
validation that an institution's programs meet generally accepted academic
standards. Accrediting agencies also review the administrative and financial
operations of the institutions they accredit to ensure that each institution has
the resources to perform its educational mission.
Pursuant to provisions of the Higher Education Act, the Department of
Education relies on accrediting agencies and state licensing bodies to determine
whether institutions' educational programs qualify them to participate in the
Title IV Programs. The Higher Education Act requires each recognized accrediting
agency to submit to a periodic review of its procedures and practices by the
Department of Education as a condition of its continued recognition. Accrediting
agencies that meet the Department of Education standards are recognized as
reliable arbiters of educational quality. As required under the Title IV Program
rules, each of our schools is accredited by an accrediting body recognized by
the Department of Education.
The Higher Education Act requires accrediting agencies recognized by the
Department of Education 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
Higher Education Act, a recognized accrediting agency must perform regular
inspections and reviews of institutions of higher education.
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If an accrediting agency believes that an institution may be out of
compliance with accrediting standards, it may place the institution on probation
or a similar warning status or direct the institution to show cause why its
accreditation should not be revoked. An accrediting agency may also place an
institution on "reporting" status in order to monitor one or more specific areas
of the institution's performance. An institution placed on reporting status is
required to report periodically to its accrediting agency on that institution's
performance in a specific area. Failure to demonstrate compliance with
accrediting standards in any of these instances could result in loss of
accreditation. While on probation, show cause or reporting status, an
institution may be required to seek permission of its accrediting agency to open
and commence instruction at new locations. Each of our schools currently
maintains institutional accreditation.
FEDERAL FINANCIAL AID PROGRAMS. We derive a majority of our revenue from
students who participate in Title IV Programs under the Higher Education Act.
The potential loss of student financial aid due to our failure to comply with a
requirement of the regulations would have a material adverse effect.
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 Department of Education
makes grants to students who demonstrate financial need. Every eligible
student is entitled to receive a Pell Grant; there is no institutional
allocation or limit. For the 1999-2000 award year, Pell Grants range from
$400 to $3,125 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. We are required to make a 25% matching contribution for all FSEOG
program funds disbursed. Resources for this institutional contribution may
include institutional grants, scholarships and other eligible funds and, in
certain states, portions of state scholarships and grants. During the
1998-99 award year, our required 25% institutional match was approximately
$72,000.
FEDERAL FAMILY EDUCATION LOAN PROGRAM ("FFEL"). The FFEL program
consists of two types of loans; Stafford loans, which are made available to
students, and PLUS loans, which are made available to parents of students
classified as dependents. Under the Stafford loan program, 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. While we believe that other
lenders would be willing to make federally guaranteed student loans to our
students if loans were no longer available from our current lenders, we can
make no assurances in this regard. The HEA requires the establishment of
lenders of last resort in every state to make certain loans to students at
any school that can not otherwise identify lenders willing to make
federally guaranteed loans to its students.
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FEDERAL PERKINS LOAN PROGRAM ("PERKINS"). Eligible undergraduate students
may borrow up to $4,000 under the Perkins program during each academic year,
with an aggregate maximum of $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 Department of Education.
Subsequent federal capital contributions, with an institutional match in the
same proportion, may be received if an institution meets certain requirements.
Each institution collects payments on Perkins loans from its former students and
loans those funds to students currently enrolled. Collection and disbursement of
Perkins loans is the responsibility of each participating institution.
Presently, only Colorado Tech utilizes the Perkins program. During the 1998-99
award year, our 25% institutional match was approximately $8,000.
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. During the 1998-1999 award year, our 25%
institutional match was approximately $51,000.
FEDERAL OVERSIGHT OF TITLE IV PROGRAMS. In order to participate in Title
IV Programs, we must comply with complex standards set forth in the Higher
Education Act 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
Department of Education and state and national agencies which guarantee the
loans made in the Title IV Programs. Disbursements made under the Title IV
Programs are subject to disallowance and repayment if such reviews result in
adverse findings and if such findings are sustained after an institution has
exhausted its right to appeal. We believe that our institutions are in
substantial compliance with the Higher Education Act and the regulations. We
cannot, however, predict with certainty how all of the Higher Education Act
provisions and the regulations will be applied. As described below, our
violation of the Title IV Program requirements could have a material adverse
effect on our financial condition or results of operations. In addition, it is
possible that the Higher Education Act and the regulations may be applied in a
way that could hinder our operations or expansion plans.
ELIGIBILITY AND CERTIFICATION PROCEDURES. The Higher Education Act and its
implementing regulations require each institution to apply to the Department of
Education for continued eligibility and certification to participate in the
Title IV Programs at least every five years, when it undergoes a change of
control, raises the highest academic credential it offers, or, at the
Department's request, if the institution opens an additional location offering
50% or more of an educational program. Each of our schools is currently eligible
and certified to participate in the Title IV programs. SBC in Missouri and
Granite City are scheduled to seek recertification through applications to be
filed no later than December 31, 2000, based on a certification expiration date
of March 31, 2001.
PROVISIONAL CERTIFICATION. An institution may be placed on provisional
certification status for a period not to exceed three years, if the Department
of Education finds that the institution does not fully satisfy all of its
eligibility and certification standards. Provisional certification does not
limit institutions access to Title IV funds but 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
13
<PAGE>
Education afforded to a fully certified school. Further, the Department of
Education may impose additional conditions on a provisionally certified
institution's eligibility to continue participating in Title IV Programs. If an
institution successfully participates in Title IV Programs during its period of
provisional certification but fails to satisfy the full certification criteria,
the Department of Education 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. As a result of high default rates at SBC's Granite
City and Missouri campuses in federal fiscal years 1992 and 1993, SBC's
certification to participate in the Title IV programs is provisional at this
time. SBC will apply for recertification in December 2000.
LEGISLATIVE ACTION
Political and budgetary concerns significantly affect the Title IV
Programs. Congress must reauthorize the Higher Education Act approximately every
six years. The most recent reauthorization in 1998 reauthorized the Higher
Education Act through September 30, 2004. Congress reauthorized all of the Title
IV Programs in which our schools participate, generally in the same form and at
funding levels no less than for the prior year. While the 1998 reauthorization
of the Higher Education Act made numerous changes to Title IV Program
requirements, we believe that these changes will not have a material adverse
effect on our business, results of operations or financial condition. Changes
made by the 1998 reauthorization of the Higher Education Act include:
o expanding the adverse effects on schools of high student loan default
rates,
o increasing from 85% to 90% the limit of the proprietary school's revenue
that may be derived each year from Title IV Programs,
o revising the refund standards that require an institution to return a
portion of the Title IV Program funds for students who withdraw from
school,
o giving the Department of Education flexibility to continue an institution's
Title IV participation without interruption in some circumstances following
a change of ownership or control,
o changing the formula for calculating the interest rate on FFEL loans and
o modifying the definition of default from 180 days to 270 days past due for
loans payable in monthly installments.
In addition, Congress reviews and determines federal appropriations for
Title IV Programs on an annual basis. Congress can also make changes in the laws
affecting the Title IV Programs in the annual appropriation bills and in other
laws it enacts between reauthorizations of the Higher Education Act. Since a
significant percentage of our revenue is derived from the Title IV Programs, any
action by Congress that significantly reduces Title IV Program funding or the
ability of our schools or students to participate in the Title IV Programs could
have a material adverse effect on our business, results of operations or
financial condition. Legislative action may also increase our administrative
14
<PAGE>
costs and require us to adjust our practices in order for our schools to comply
fully with the Title IV Program requirements.
THE 90/10 RULE. The Higher Education Act requires that an annual
calculation 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
this rule, a proprietary school will be ineligible to participate in Title IV
Programs if, under a modified cash basis of accounting, more than 90% (for
fiscal years ending on or after October 1, 1998, and 85% for fiscal years ending
before that date) of its revenues from its Title IV eligible programs for the
prior fiscal year, were derived from Title IV Program funds. If one of our
schools were to fail the 90/10 rule for a particular fiscal year, it would be
ineligible to participate in Title IV Programs as of the first day of the
following fiscal year and would be unable to apply to regain its eligibility
until the next fiscal year. Furthermore, if one of our schools violated the
90/10 rule and became ineligible to participate in Title IV Programs but
continued to disburse Title IV Program funds, the Department of Education would
consider all Title IV Program funds disbursed to the institution after the
effective date of the loss of eligibility to be a liability subject to repayment
by the institution.
During Spring 1999, the Office of the Inspector General ("OIG") of the
Department of Education conducted an audit of the Sanford-Brown campus in
Granite City, Illinois for the fiscal year ended March 31, 1998. The audit
focused on Sanford-Brown's campus compliance with the 85/15 rule. Although the
OIG did not issue an audit report, the OIG issued a "potential issue" document
asserting that Sanford-Brown did not comply with the 85/15 rule for the year
ending March 31, 1998 because it improperly included institutional scholarships
as non-Title IV revenues in determining its compliance with that rule. Whitman
responded to the OIG and has not received further correspondence from the OIG
since May, 1999. Although we believe that SBC was in compliance with the 85/15
rule, and that this position is supported by recent guidance issued to all
schools by the Department of Education, and therefore, that the OIG audit will
be resolved without any material adverse effect, as with any such audit, no
assurance can be given as to the final outcome since matters are not yet
resolved.
ADMINISTRATIVE CAPABILITY. The Higher Education Act directs the Department
of Education to assess the administrative capability of each institution to
participate in Title IV Programs. The Department of Education has issued
regulations that require each institution to satisfy a series of separate
standards. Failure to satisfy any of the standards may lead the Department of
Education to determine that the institution lacks administrative capability and,
therefore, is not eligible to continue its participation in Title IV Programs or
must be placed on provisional certification status as a condition of such
continued participation.
INCENTIVE COMPENSATION. An additional standard in the Higher Education Act
prohibits an institution from providing any commission, bonus or other incentive
payment based directly or indirectly on success in securing enrollments or
financial aid to any person or entity engaged in any student recruitment,
admission or financial aid awarding activity. The Department of Education has
provided only limited guidance respecting compliance with this requirement. Our
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 Department of Education, we believe that our method of
compensating these employees complies with the requirements of the Higher
Education Act. The regulations do not, however, establish clear standards for
compliance, and there can be no assurance that the Department of Education will
interpret its regulations in the same manner as we have.
15
<PAGE>
STANDARDS OF FINANCIAL RESPONSIBILITY. Each eligible institution (except
for state-owned institutions) 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 must, among other
things, (i) have sufficient cash reserves to make required refunds; (ii) be
current in its debt payments; (iii) be meeting all of its financial obligations;
and (iv) meet prescribed financial standards. For purposes of these standards,
Sanford-Brown and Colorado Tech have historically been evaluated as distinct
entities, while the Department of Education has evaluated UDS on the basis of
the financial performance of Whitman as a whole. However, the regulations allow
the Department of Education to evaluate an institution based on its own
financial condition or that of its corporate parent and there can be no
assurance that the method by which the Department of Education evaluates our
schools will not change in the future.
In November 1997, the Department of Education revised the applicable
standards of financial responsibility. To be considered financially responsible
under the new regulations, an institution must achieve a composite score of at
least 1.5 based on the institution's Equity, Primary Reserve and Net Income
ratios, as calculated on the basis of the institution's annual audited financial
statements. The Equity Ratio measures capital resources, ability to borrow and
financial viability. The Primary Reserve Ratio measures an institution's ability
to support current operations from expendable resources. The Net Income Ratio
measures an institution's ability to operate profitably.
Once these ratios are computed on the basis of an institution's annual
audited financial statements, they are adjusted by strength factors, weighted
and added to create the composite score which may range from negative one to
three. If the resulting composite score is 1.5 or greater, the institution is
deemed to be financially responsible. If the Department of Education determines
that an institution's composite score is below 1.5, the institution is deemed
not to be financially responsible. If the institution's composite score is more
than 1.0 and less than 1.5, the institution 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 participate in the Title IV Programs on the
reimbursement or cash monitoring method of payment under which an institution
must disburse its own funds to students before receiving Title IV Program funds
and must provide the Department of Education with timely information with
respect to certain matters and financial events. The Department of Education may
also request from such institutions additional information about their current
operations and/or future plans. If an institution achieves a composite score of
1.0 or below, the institution may establish financial responsibility by posting
an irrevocable letter of credit in favor of the Department of Education in an
amount equal to not less than one-half the Title IV Program funds received by
students enrolled at such institution during the prior fiscal year.
Under the new standards, our composite score on a consolidated basis (as
historically applied to UDS) is 1.6, Colorado Tech's composite score is 2.9 and
Sanford-Brown's composite score is 2.6.
Even if an institution achieved a composite score of at least 1.5, however,
it may be deemed to lack financially responsibility 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) in the past two years, as the result of
a finding in its compliance audit or in a program review by the Department of
Education, the institution was required to repay an amount greater than 5% of
the funds the institution received under Title IV in the year covered by the
audit or program review, (iv) the institution has failed in the past five years
16
<PAGE>
to timely submit compliance and financial statement audits, or (v) the
institution failed to resolve satisfactorily any compliance problems identified
in audit or program reviews. The institution may also be deemed to be not
financially responsible if certain controlling persons owe, or are associated
with another institution that owes, Title IV liabilities to the Department of
Education.
Another measure of financial responsibility is an institution's ability to
make timely refunds to students and the Title IV programs. If as a result of an
audit conducted by the Department, Whitman's independent auditor, or a guaranty
or state authorizing agency, there is a finding that one or more of our schools
does not make timely refunds in either of its last two fiscal years, that school
could be required to submit an irrevocable letter of credit to the Secretary,
equal to 25 percent of the total amount of Title IV HEA program refunds the
school made or should have made during its most recently completed fiscal year,
in order to maintain financial responsibility. Based on this standard, in
October 1999, we posted letters of credit amounting to $645,000 as a result of
late refund findings with respect to fiscal 1998.
COHORT DEFAULT RATES. The regulations also require the calculation of a
cohort default rate on FFEL loans received by current and former students who
have attended our institutions. The cohort default rate measures the percentage
of students who enter repayment on FFEL loans in a particular federal fiscal
year and default before the end of the following federal fiscal year. If a
school's official cohort default rate equals or exceeds 25% for each of its
three most recent federal fiscal years, it becomes ineligible to participate in
the FFEL programs as well as the Pell program for the remainder of the year in
which the Department of Education makes that determination and the subsequent
two years. A school may also become ineligible to participate in all Title IV
Programs if its official default rate exceeds 40% in any one fiscal year. A
school's cohort default rate is published annually by the Department of
Education. The most recent official cohort year published was for fiscal year
1997 (published in October 1999). UDS' official 1997 rates ranged from 12.4%
to16.4%; Sanford-Brown's official 1997 rates were 11.9% and 15.3% and Colorado
Tech's official 1997 rate was 5.1%. All of our schools' preliminary 1998 default
rates were below 25% with no preliminary rate exceeding 10.8%. The fiscal year
1997 cohort default rates for all of our schools average 12.1%; the average rate
for all proprietary institutions in the United States for the same period was
approximately 15.4%.
The regulations provide that in the event that an institution has an FFEL
cohort default rate in excess of 25%, or a Perkins loan default rate of more
than 15% in a year, the Department of Education 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 high default
rates 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, 1996 and 1997 were all below the 25% threshold.
In addition, as of October, 1999 an institution whose Perkins cohort
default rate is 50% or greater for three consecutive federal award years will
lose eligibility to participate in the Perkins program for the remainder of the
federal fiscal year in which the DOE determines that the institution has lost
its eligibility and for the two subsequent federal fiscal years. Such action may
be appealed. The HEA also imposes a penalty on institutions that have a default
rate of 25% or above, by eliminating additional federal funds allocated annually
to the institution for use in the Perkins program. Only Colorado Tech uses
Perkins, and the cohort default rate for that program is 13.7%.
CHANGE OF CONTROL. A change of ownership which results in a change in
control (as defined below) of Whitman or one or more of our institutions will
trigger a review of the certification and eligibility of all (if Whitman changes
ownership) or some of our schools to participate in Title IV Programs, and may
cause all or some of our institutions to lose their eligibility pending
recertification by the Department of Education. Such change in ownership and
17
<PAGE>
control could also require reauthorization to operate by individual states and
trigger a review by each of our school's accrediting bodies. The 1998
reauthorization of the Higher Education Act provides that the Department of
Education may provisionally and temporarily certify an institution undergoing a
change of control under certain circumstances while the Department of Education
reviews the institution's application for recertification.
With regard to publicly held companies, the Department of Education has
generally adopted the change of ownership and control standards used in
reporting such events under federal securities law. A change in control of
Whitman which would require the filing of a Current Report on Form 8-K with the
Securities and Exchange Commission would also require our schools to seek
recertification from the Department of Education as outlined above. A failure to
obtain such recertification would have a material adverse effect on our
financial condition. According to Department regulations, individual schools may
be deemed to experience a change in control if: the institution is sold; there
is a merger of one or more eligible institutions; the institution is divided
into two or more institutions; the institution is permitted to transfer its
liabilities to its parent corporation; assets comprising a substantial portion
of the educational business of its institution are transferred; or the
institution converts from for-profit to nonprofit.
Our acquisition of other institutions typically would result in a change
of ownership resulting in a change of control with regard to the acquired
institution. When a change in control does occur, the school's certification by
the Department of Education 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 our acquisition of Colorado Tech in March 1996, Colorado Tech
was provisionally certified for participation in Title IV Programs until March
31, 1999, at which time it became fully certified. Similarly, Sanford-Brown was
provisionally certified for the three year period following its acquisition in
1994 due to its change in control.
Each accrediting body and state agency which authorizes us to operate our
schools has different regulations regarding changes in control which could
require re-authorization or re-accreditation. Our failure to obtain state
re-authorization or re-accreditation of any of our schools subsequent to a
change in control would have a material adverse effect on our financial
condition and would threaten our eligibility to participate in the Title IV
programs.
COMPLIANCE AUDITS. Our institutions are subject to audits or program
compliance reviews by various external agencies, including the Department of
Education, and state, guaranty and accrediting agencies. The Higher Education
Act and its implementing regulations also require that an institution's
administration of Title IV Program funds be audited annually by an independent
accounting firm. If the Department of Education or another regulatory agency
were to determine that one of our institutions had improperly disbursed Title IV
Program funds or had violated a provision of the Higher Education Act or the
implementing regulations, the affected institution could be required to repay
such funds to the Department of Education or the appropriate state agency or
lender and could be assessed an administrative fine. If the Department of
Education viewed the violation as significant, the Department of Education could
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 Department of Education.
Violations of Title IV Program requirements could also subject us 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
Department of Education may initiate a proceeding to impose a fine, place
restrictions on an institution's participation in Title IV Programs or terminate
its eligibility to participate in the Title IV Programs. The Department may also
18
<PAGE>
initiate an emergency action to temporarily suspend an institution's
participation in the Title IV Programs without advance notice if it determines
that a regulatory violation creates an imminent risk of material loss of public
funds. An institution may appeal any such action initiated by the Department
with the exception of an action placing an institution on reimbursement,
although a provisionally certified institution has more limited appeal rights as
described above.
A fine, of up to $25,000 per violation may be assessed by the Department
of Education 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. An institution may
apply for removal of a limitation no sooner than 12 months from the effective
date of the limitation and must demonstrate that the violation at issue has been
corrected. If the Department of Education terminates the eligibility of an
institution to participate in 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 Title
IV Programs due to a violation of the 90/10 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 our financial condition. A termination of our
eligibility to participate in Title IV Programs would have a material adverse
effect on our financial condition.
There is no proceeding pending to fine any of our institutions or to
limit, suspend or terminate any of our institutions' participation in the Title
IV Programs.
EXPANSION OF PROGRAMS AND LOCATIONS. Generally, if an institution eligible
to participate in Title IV Programs adds an educational program after it has
been designated as an eligible institution, the institution must apply to the
Department of Education to have the additional program designated as eligible.
However, an institution is not obligated to obtain Department of Education
approval of an additional program that leads to 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.
An institution must notify the Department of Education of any location at
which it provides 50% or more of an academic program and may be required to file
an application seeking eligibility for any such location. An additional location
must satisfy all applicable requirements for institutional eligibility, with the
exception of the requirement that it operate for two years prior to obtaining
Title IV funds, but including the requirement that it obtain approval from the
institution's accrediting agency and the relevant state authorizing agency.
SEASONALITY
We experience seasonality in our quarterly results of operations as a
result of changes in the level of student enrollments. New enrollments in our
schools tend to be higher in the third and fourth fiscal quarters because these
quarters cover periods traditionally associated with the beginning of school
semesters. We expect that this seasonal trend will continue. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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EMPLOYEES
At March 31, 2000, we had approximately 673 full-time and 426 part-time
employees of whom 540 were faculty and 481 were administrative personnel at the
various schools. The remaining employees were employed by us at our
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 we intend that such forward-looking statements be subject
to the safe harbors created thereby. Statements in this Report containing the
words "estimate," "project," "anticipate," "expect," "intend," "believe" and
similar expressions may be deemed to create forward-looking statements. These
statements are based on our current expectations and beliefs concerning future
events that are subject to risks and uncertainties. Actual results may differ
materially from the results suggested herein and from the results historically
experienced.
Forward-looking statements contained in this Report may relate to: (i) our
future operating plans and strategies; (ii) the growth of the postsecondary
education market due to (a) the increasing number of high school graduates and
adult learners and (b) because of the focus placed on postsecondary education,
the continuing shift from non-skilled to skilled workers; (iii) the expansion of
our business through the addition of new curricula or new locations, or by
acquisitions; (iv) our anticipated need for and our ability to fund capital
expenditures associated with the relocation and upgrade of facilities in fiscal
2001; (v) the Department of Education's enforcement or interpretation of
existing regulations affecting our operations; (vi) the seasonality of our
results of operations; (vii) the outcome of pending legal or regulatory
proceedings; and (viii) the sufficiency of our working capital, financings,
including our ability to increase our borrowing if necessary, and cash flow from
operating activities for our future operating and capital requirements.
We wish to caution you that in addition to the important factors described
elsewhere in this Form 10-K, the following important factors, among others,
sometimes have affected, and in the future could affect, our actual results and
could cause our actual consolidated results during fiscal 2000, and beyond, to
differ materially from those expressed in any forward-looking statements made by
us, or on behalf : (i) our plans, strategies, objectives, expectations and
intentions are subject to change at any time at our discretion; (ii) the
ultimate resolution of pending legal proceedings related to UDS general
ultrasound program; (iii) the effect of, and our ability to comply with, state
and federal government regulations regarding education and accreditation
standards, or the interpretation or application thereof, including the level of
government funding for, and our eligibility to participate in, student financial
aid programs; (iv) our ability to assess and meet the educational needs and
demands of our customers and employers; (v) the effect of competitive pressures
from other educational institutions; (vi) our ability to manage planned internal
growth; (vii) our ability to locate, obtain and finance favorable school sites,
negotiate acceptable lease terms, and hire and train employees; (viii) the
effect of economic conditions in the postsecondary education industry and in the
economy generally; (ix) the role of the Department of Education's, Congress' and
the public's perception of for-profit education as it relates to changes in the
Higher Education Act and regulations promulgated thereunder.
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ITEM 2. PROPERTIES.
We lease all of our administrative and campus facilities. We, along with
our Associate Degree Division, maintain headquarters in Miami, Florida, where
combined we lease approximately 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.
Our schools are operated from the following leased premises:
<TABLE>
<CAPTION>
Location of School School Size of facility
(in square feet)
<S> <C> <C>
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
Fenton, Missouri Sanford-Brown 25,200
Hazelwood, Missouri Sanford-Brown 24,500
St. Charles, Missouri Sanford-Brown 14,650
Granite City, Illinois Sanford-Brown 12,253
New York, New York UDS 14,500
Carle Place, New York UDS 14,607
Iselin, New Jersey UDS 15,000
Atlanta, Georgia UDS 11,469
Bellaire, Texas UDS 15,395
Tampa, Florida UDS 10,263
Irving, Texas UDS 11,453
Trevose, Pennsylvania UDS 10,204
Elmsford, New York UDS 10,034
Jacksonville, Florida UDS 15,800
Springfield, Massachusetts UDS 12,819
Pittsburgh, Pennsylvania UDS 6,238
Fort Lauderdale, Florida UDS 11,800
Independence, Ohio UDS 11,282
Landover, Maryland UDS 7,703
</TABLE>
We believe that all of our present campus facilities are suitable and
adequate for their current uses. We monitor the suitability of our campus
facilities to anticipate where demand for our products will create overcrowding
or exceed capacity of existing facilities and seek to expand or relocate such
campuses.
21
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
We are subject to litigation and claims in the ordinary course of
business, including the following:
In May 2000, we (in conjunction with our insurance carriers) reached an
agreement in principle to settle the previously reported case styled Cullen, et.
al. v. Whitman Education Group, Inc., et. al., in the United States District
Court for the Eastern District of Pennsylvania (Civil Action No. 98-CV-4076).
The settlement, which still must be approved by the Court, covers students who
attended our Ultrasound Diagnostic Schools any time from August 1, 1994 to
August 1, 1998 in either the general ultrasound program or the non-invasive
cardiovascular technology program. As a result of the proposed settlement, we
have taken a one-time, after-tax charge to earnings of approximately $900,000,
or $0.07 per share in the fiscal quarter ended March 31, 2000. Although
Management denied the allegations of the lawsuit (and believed the key
allegations to be without merit), we entered into the settlement to resolve
litigation in a satisfactory business manner and to avoid disruption of our
business.
We are a party to routine litigation incidental to our business, including
but not limited to, claims involving students or graduates and routine
employment matters. While there can be no assurance as to the ultimate outcome
of any such litigation, we do not believe that any pending proceeding will
result in a settlement or an adverse judgment that will have a material adverse
effect on our financial condition or results of operations. See "Forward-Looking
Statements; Business Risks" appearing in Item 1 of this Report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended March 31, 2000.
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 our executive
officers as of March 31, 2000. Officers serve at the discretion of our Board of
Directors. There is no family relationship between any of the executive
officers, and there is no arrangement or understanding between any executive
officer and any other person pursuant to which the executive officer was
selected.
Richard C. Pfenniger, Jr. Mr. Pfenniger, age 44, has been our Chief
Executive Officer and Vice Chairman since March 1997 and a director 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.
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Randy S. Proto. Mr. Proto, age 42, has been our President 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.
Fernando L. Fernandez. Mr. Fernandez, age 39, has served as our Vice
President--Finance, Treasurer and Chief Financial Officer since 1996. Prior to
joining us, 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.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock is traded on the American Stock Exchange under the symbol
"WIX". The following table sets forth the high and low closing prices of our
common stock as reported by the composite tape of the American Stock Exchange
for each of the quarters indicated.
<TABLE>
<CAPTION>
2000
----------------------
High Low
---------- -----------
<S> <C> <C>
Quarter Ended 6/30/99 $ 6.00 $ 3.75
Quarter Ended 9/30/99 6.06 2.50
Quarter Ended 12/31/99 3.06 1.69
Quarter Ended 3/31/00 2.50 1.56
</TABLE>
<TABLE>
<CAPTION>
1999
----------------------
High Low
---------- -----------
<S> <C> <C>
Quarter Ended 6/30/98 $ 6.12 $ 4.62
Quarter Ended 9/30/98 5.37 3.12
Quarter Ended 12/31/98 4.25 2.62
Quarter Ended 3/31/99 4.94 3.50
</TABLE>
As of the close of business on June 1, 2000, there were approximately 283
record holders of our common stock. We have not paid dividends on our common
stock and do not contemplate paying dividends in the foreseeable future.
23
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------------------
2000 1999 1998 1997 1996
--------- ---------- --------- --------- ---------
(In thousands, except per share data) (1) (2)
-------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Operating Data
Net revenues $ 77,611 $ 73,977 $ 60,306 $ 46,993 $ 39,838
(Loss) income
from operations (26) 4,195 784 (3,245) 951
Net (loss) income (502) 3,042 143 (4,363) (101)
Diluted net (loss)
income per share (3) (0.04) .22 0.01 (0.38) (0.01)
Dividends None None None None None
Balance Sheet Data
Total assets $62,526 $ 62,580 $ 53,821 $ 48,017 $ 35,323
Long-term debt, and
capitalized lease
obligations, less
current portion 11,119 12,022 14,350 11,109 11,494
Stockholders' equity 21,285 21,625 17,833 16,107 7,385
----------
<FN>
(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 acquisition of Huron University on
December 30, 1996 which was accounted for as a purchase, and the sale of
Huron University in August 1999.
(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 us 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 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.
</FN>
</TABLE>
See Consolidated Financial Statements, Item 8 of this Report, for
supplementary financial information of Whitman.
24
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with
the consolidated financial statements of Whitman and the notes thereto appearing
elsewhere in this report and in conjunction with "Forward-Looking Statements;
Business Risks" appearing at the end of Item 1 in that certain statements made
in this Item are qualified by the risk factors set forth in that section.
GENERAL
Through three wholly-owned subsidiaries, we currently operate 23 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 8,000 students. We are organized into a
University Degree Division and an Associate Degree Division. The University
Degree Division offers primarily doctorate, master and bachelor degrees through
Colorado Tech. The Associate Degree Division 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 our
revenues are indirectly derived from Title IV Programs.
Historically, our 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 revenues from
$27.5 million in fiscal 1998 to $39.0 million in fiscal 2000. At Colorado Tech,
the expansion of program offerings, opening of a campus, and the acquisition of
Huron University generated an increase in revenues from $16.0 million in fiscal
1998 to $19.1 million in fiscal 2000.
Instructional and educational support expenses consist primarily of costs
related to the educational activity of our schools. Instructional and
educational support expenses include salaries and benefits of faculty, academic
administrators and student support personnel. Instructional and educational
support expenses also include occupancy costs, costs of books sold, and
depreciation and amortization of equipment costs and leasehold improvements.
Selling and promotional expenses consist primarily of advertising costs,
production costs of marketing materials, and salaries and benefits of personnel
engaged in student recruitment, admissions, and promotional functions.
General and administrative expenses consist primarily of administrative
salaries and benefits, occupancy costs, depreciation, bad debt, amortization of
intangibles, and other related costs for departments that do not provide direct
services to students.
25
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship of certain
statement of operations data to net revenues for the periods indicated:
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------------------
2000 1999 1998
------------- ------------ ------------
Net revenues 100.0% 100.0% 100.0%
------------- ------------ ------------
<S> <C> <C> <C>
Costs and expenses:
Instructional and
educational support 66.4 65.4 66.9
Selling and promotional 15.9 13.2 14.9
General and administration 15.7 15.7 16.9
Legal settlement 2.0 - -
------------- ------------ ------------
Total costs and expenses 100.0 94.3 98.7
------------- ------------ ------------
Income from operations - 5.7 1.3
Other (income) expenses:
Interest expense 1.5 1.9 2.2
Interest income (.4) (0.4) (0.3)
------------- ------------ ------------
(Loss) income before income
tax (benefit) provision (1.1) 4.2 (0.6)
Income tax (benefit) provision (0.4) 0.1 (0.8)
------------- ------------ ------------
Net (loss) income (0.7) % 4.1 % 0.2%
============= ============ ============
</TABLE>
Year ended March 31, 2000 compared to the year ended March 31, 1999
Net revenues increased by $3.6 million or 4.9% to $77.6 million for the
year ended March 31, 2000 from $74.0 million for the year ended March 31, 1999.
Excluding Huron University, which was sold in August 1999, net revenues
increased by $5.7 million or 8.0% to $76.2 million for the year ended March 31,
2000 from $70.5 million for the year ended March 31, 1999. This increase was
primarily due to an 8.2% increase in average student enrollment.
Excluding Huron University, the University Degree Division experienced a
9.2% increase in average student enrollment and the Associate Degree Division
experienced a 7.7% increase in average student enrollment. The increase in
student enrollment in the Associate Degree Division was primarily due to
increased enrollments in the medical assisting programs offered by the
Ultrasound Diagnostic Schools. The increase in student enrollment in the
University Degree Division was primarily due to increased enrollment at Colorado
Technical University's Sioux Falls campus and in Colorado Technical University's
information technology programs.
Instructional and educational support increased by $3.2 million or 6.5% to
$51.6 million for the year ended March 31, 2000 from $48.4 million for the year
ended March 31, 1999. As a percentage of net revenues, instructional and
educational support expenses increased to 66.4% for the year ended March 31,
2000 as compared to 65.4% for the year ended March 31, 1999. Excluding Huron
University, instructional and educational support expenses increased by $6.1
million or 14.2% to $49.4 million for the year ended March 31, 2000 from $43.3
million for the year ended March 31, 1999. Excluding Huron University, as a
percentage of net revenues, instructional and educational support expenses
increased to 64.8% for the year ended March 31, 2000 as compared to 61.4% for
the year ended March 31, 1999. This increase in instructional and educational
support expenses was primarily due to an increase of $6.7 million in the
Associate Degree Division. The increase in instructional and educational support
26
<PAGE>
Results of Operations - (Continued)
expenses in the Associate Degree Division was primarily due to an increase in
payroll and related benefits for faculty, academic administrators and student
support personnel to support the increase in enrollment and the offering of the
new Health Information Specialist program at certain of the Ultrasound
Diagnostic Schools, and increases in occupancy and depreciation expenses in the
Associate Degree Division related to the expansion of facilities and the upgrade
of equipment.
Selling and promotional expenses increased by $2.5 million or 25.9% to
$12.3 million for the year ended March 31, 2000 from $9.8 million for the year
ended March 31, 1999. As a percentage of net revenues, selling and promotional
expenses increased to 15.9% for the year ended March 31, 2000 as compared to
13.2% for the year ended March 31, 1999. Excluding Huron University, selling and
promotional expenses increased by $3.0 million or 32.8% to $12.0 million for the
year ended March 31, 2000 from $9.0 million for the year ended March 31, 1999.
Excluding Huron University, as a percentage of net revenues, selling and
promotional expenses increased to 15.8% for the year ended March 31, 2000 as
compared to 12.8% for the year ended March 31, 1999. This increase in selling
and promotional expenses was primarily due to an increase in advertising
expenses in the Associate Degree Division resulting from our marketing efforts
directed at increasing enrollment.
General and administrative expenses increased by $0.6 million or 5.2% to
$12.2 million for the year ended March 31, 2000 from $11.6 million for the year
ended March 31, 1999. As a percentage of net revenues, general and
administrative expenses remained constant at 15.7% for the years ended March 31,
2000 and March 31, 1999. The increase in general and administrative expenses was
primarily due to an increase in administrative payroll expenses in the Associate
Degree Division to support the growth in student enrollment. This increase was
partially offset by a decrease in general and administrative expenses in the
University Degree Division due to a reduction in administrative payroll expenses
due to the consolidation of certain administrative functions with the corporate
office.
Legal settlement costs of $1.6 million were incurred in fiscal 2000 in
connection with the settlement of the lawsuit filed against the Ultrasound
Diagnostic Schools.
We reported a loss from operations of $26,000 for the year ended March 31,
2000 as compared to operating income of $4.2 million for the year ended March
31, 1999. Excluding Huron University, income from operations decreased by $5.7
million to $1.0 million for the year ended March 31, 2000 from $6.7 million for
the year ended March 31, 1999.
27
<PAGE>
We reported a net loss of $0.5 million and net income of $3.0 million for
the years ended March 31, 2000 and 1999, respectively. The decrease in net
income was primarily due to a decrease in pre-tax profits of $6.8 million in the
Associate Degree Division, which was partially offset by an increase in pre-tax
profits of $2.9 million in the University Degree Division. The decrease in
profitability in the Associate Degree Division was primarily due to an increase
in instructional and educational support expenses to support the anticipated
increase in student enrollment and the offering of a new program, an increase in
selling and promotional expenses, and legal settlement costs of $1.6 million
incurred in fiscal 2000. Due to a shortfall in anticipated new student
enrollments for the year ended March 31, 2000, the revenues generated in the
Associate Degree Division did not offset the increase in operating expenses. The
increase in profitability in the University Degree Division was due to an
increase of $1.3 million in operating profits at the three Colorado Technical
University campuses, net of related general and administrative expenses,
resulting from increased enrollment with the primary increase at the Sioux Falls
campus. Also, operating losses sustained at Huron University decreased by $1.5
million due to the divestiture of this campus in August 1999. Huron University
sustained operating losses of $1.0 million and $2.5 million for the years ended
March 31, 2000 and March 31, 1999 respectively.
Year Ended March 31, 1999 Compared to Year Ended March 31, 1998
Net revenues increased by $13.7 million or 22.7% to $74.0 million for the
year ended March 31, 1999 from $60.3 million for the year ended March 31, 1998.
The increase was primarily due to an increase in average student enrollment.
Average student enrollment increased 17.7% overall with the University Degree
Division experiencing a 27.4% increase and the Associate Degree Division
experiencing a 12.8% increase.
The increase in student enrollment in the University Degree Division
resulted in increased net revenues of $2.9 million or 18.4%. The increase in
enrollment was primarily due to the addition of new information technology
programs, the implementation of on-site corporate programs and the relocation of
the Sioux Falls campus to a larger facility.
The increase in student enrollment and increase in the revenue earned per
student in the Associate Degree Division resulted in increased net revenues of
$10.8 million or 24.2%. The increased enrollment related primarily to the
medical assisting program offered by UDS. The medical assisting program, which
was introduced during fiscal 1996 and offered at 12 of 15 campuses during fiscal
1998, was extended to two additional campuses during fiscal 1999. In addition to
the extension of this program to additional campuses, the medical assisting
program continued to experience growth in student enrollment at the 12 campuses
offering the program prior to fiscal 1999. The increase in the revenue earned
per student was primarily due to the shortening of the length of the programs
offered at Sanford-Brown College.
28
<PAGE>
Instructional and educational support expenses increased by $8.1 million or
20.0% to $48.4 million in fiscal 1999 from $40.3 million in fiscal 1998.
Instructional and educational support expenses increased by $2.5 million in the
University Degree Division and $5.6 million in the Associate Degree Division.
The increase 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. As a percentage of net revenues, instructional
and educational support expenses decreased to 65.4% in fiscal 1999 from 66.9% in
fiscal 1998. The decrease in instructional and educational support expenses as a
percentage of net revenues was due to our ability to increase revenues as a
result of an increase in student enrollment at a greater rate than the rate of
increase in such expenses related to educational services.
Selling and promotional expenses increased by $0.8 million or 8.9% to $9.8
million in fiscal 1999 from $9.0 million in fiscal 1998. 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. As a percentage of net revenues, selling and promotional expenses decreased
to 13.2% in fiscal 1999 from 14.9% in fiscal 1998. The decrease in selling and
promotional expenses as a percentage of net revenues was due to our ability to
increase enrollments with a proportionately lower increase in selling and
promotional expenses.
General and administrative expenses increased by $1.4 million or 13.8% to
$11.6 million in fiscal 1999 from $10.2 million in fiscal 1998. The increase in
general and administrative expense was due primarily to an increase in
administrative costs necessary to support the growth in student enrollments and
an increase in bad debt expense due to an increase in student receivables
resulting from an increase in student enrollment. As a percentage of net
revenues, general and administrative expenses decreased to 15.7% in fiscal 1999
from 16.9% in fiscal 1998. The decrease in general and administrative expenses
as a percentage of net revenues was due to our ability to increase revenues at a
greater rate than the rate of increase in administrative operating costs.
We periodically perform an analysis of the realizability of our deferred
tax assets based on our assessment of current and expected operating results. As
of March 31, 1999, we determined that a $50,000 valuation allowance for deferred
tax assets was necessary, which resulted in a decrease in the valuation
allowance of $1,154,000 in fiscal 1999.
We reported net income of $3.0 million and $0.1 million for the years ended
March 31, 1999 and 1998, respectively. The increase in net income in fiscal 1999
was primarily due to an increase in operating income of $3.3 million generated
from the Associate Degree Division and a decrease in operating losses of $0.4
million sustained by the University Degree Division. The increase in operating
income in the Associate Degree Division was due to an increase in revenues of
$10.8 million resulting from increased student enrollment and an increase in the
revenue earned per student. The decrease in the operating loss sustained by the
University Degree Division was due to an increase in revenues of $2.9 million
resulting from an increase in student enrollment. The operating results of the
University Degree Division were significantly affected by the operating losses
sustained by Huron University of $2.5 million in fiscal 1999, an increase of
$1.0 million from fiscal 1998.
29
<PAGE>
DIVESTITURE OF HURON UNIVERSITY
In August 1999, Colorado Technical University, Inc., completed the
divestiture of its Huron University campus ("Huron") in Huron, South Dakota to a
newly formed unaffiliated entity ("Newco") capitalized by several investors and
members of Huron's existing management. In connection with the transaction,
Colorado Technical University contributed the operating assets of Huron and
$550,000 to Newco, and Newco issued to Colorado Technical University units of
limited liability company membership interests and assumed certain liabilities
of Huron. The liabilities assumed by Newco include the principal balance due of
$1.1 million under a loan agreement. The loan is guaranteed by Whitman, which
has a first priority security interest in certain assets of Newco, and has a
maturity date of July 2005.
Under the terms of the transaction, the units of limited liability company
membership interests equal 19.9% of the total outstanding limited liability
company membership interests in Newco. Additionally, Whitman purchased for
$110,000 a warrant to acquire 20 units of limited liability company interests in
Newco, which would represent approximately 4% of the total outstanding limited
liability company membership interests in Newco upon exercise. The warrant has a
term of five years and has an exercise price of $10,000 per unit. The investment
in Newco is recorded at a cost of $1.2 million, which approximates fair value.
No gain or loss was recorded on the transaction. The effective date of the
transactions for accounting, tax, and financial statement purposes was September
1, 1999. The terms of the transaction were established through an arm's length
negotiation. Whitman's remaining investment in Huron is accounted for under the
cost method.
In connection with the divestiture of Huron, Whitman provided a loan of
$500,000 to the president of Huron for the purpose of investing such funds in
Newco. The loan is due in August 2005 with monthly interest payments commencing
in October 1999 at the prime rate. The loan is secured by Whitman common stock
owned by the president of Huron.
SEASONALITY
We experience seasonality in our quarterly results of operations as a
result of changes in the level of student enrollment. New enrollment in our
schools tends to be higher in the third and fourth fiscal quarters because these
quarters cover periods traditionally associated with the beginning of school
semesters. Costs are generally not significantly affected by the seasonal
factors on a quarterly basis. Accordingly, quarterly variations in net revenues
will result in fluctuations in income from operations on a quarterly basis.
30
<PAGE>
IMPACT OF YEAR 2000
In prior periods, we discussed the nature and progress of our plans to
become Year 2000 ready. In late 1999, we completed our remediation and testing
of systems. As a result of our planning and implementation efforts, we did not
experience significant disruptions in our computer systems or embedded systems
and we believe those systems successfully responded to the Year 2000 date
change. Year 2000 costs were not material to our financial position, results of
operations or cash flows. We are not aware of any material problems resulting
from Year 2000 issues, either with our computer systems, our embedded systems,
or the products and services of third parties. We will continue to monitor our
computer systems and embedded systems throughout the year 2000 to ensure that
any latent Year 2000 matters that may arise are addressed promptly.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at March 31, 2000, 1999 and 1998 were $6.0
million, $4.3 million and $3.4 million, respectively. Our working capital
totaled $8.2 million at March 31, 2000, $8.4 million at March 31, 1999 and $8.0
million at March 31, 1998.
Net cash of $6.6 million was provided by operating activities in fiscal
2000 and $6.5 million from fiscal 1999, an increase of $0.1 million from fiscal
1999 and $6.5 million from fiscal 1998. The increase in cash provided by
operating activities of $6.5 million in fiscal 2000 from fiscal 1998 was
primarily due to decreases in accounts receivable and increases in accounts
payable, and accrued expenses.
Net cash of $2.4 million was used for investing activities in fiscal 2000,
an increase of $0.4 million from fiscal 1999 and a decrease of $1.3 million from
fiscal 1998. The increase in fiscal 2000 from fiscal 1999 was primarily due to
our investment of $1.2 million in Huron University in fiscal 2000. The decrease
in cash used for investing activities in fiscal 2000 from fiscal 1998 was due to
a decrease in capital expenditures.
We estimate that the capital expenditures expected to be incurred during
fiscal 2001 will approximate $3.4 million. These anticipated capital
expenditures primarily relate to the costs associated with the acquisition and
upgrade of equipment for the schools and the relocation and upgrade of campus
facilities.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 $2.4 million was used in financing activities in fiscal 2000, a
decrease in cash used of $1.1 million from fiscal year 1999 and an increase of
$5.6 million from fiscal 1998. The decrease in cash used in investing activities
in fiscal 2000 from fiscal 1999 was due to a decrease in the repayment of debt.
The increase in cash used for financing activities in fiscal 2000 from fiscal
1998 was due to an increase in the repayment of debt and a decrease in proceeds
from the exercise of options and warrants.
We have an $8.5 million line of credit which was scheduled to mature on
October 31, 2000. On May 15, 2000, we extended the maturity date on the line of
credit to June 30, 2002. At March 31, 2000, we had $7.6 million outstanding
under the line of credit and letters of credit outstanding of $0.9 million which
reduced the amount available for borrowing. The amounts borrowed under this
facility in fiscal 2000 were primarily used for operations and capital
expenditures.
On November 5, 1999, our Board of Directors authorized the repurchase of up
to $1.0 million of our common stock. The repurchases will be made from time to
time in the open market or through privately negotiated transactions. We
anticipate that the repurchase of shares will be funded through cash from
operations. As of June 1, 2000, we had repurchased 285,100 shares of our common
stock for approximately $498,000.
31
<PAGE>
Our primary source of operating liquidity is the cash received from
payments of tuition and fees. Most students attending our schools receive some
form of financial aid under Title IV Programs. UDS, Sanford-Brown and Colorado
Tech receive approximately 85%, 86% and 41% of their funding, respectively, from
the Title IV Programs. Disbursements under each program are subject to
disallowance and repayment by the schools.
We believe that given our working capital, our cash flow from operations,
our line of credit and our expected increased financings under capital lease
obligations to fund capital expenditures, we will have adequate resources to
meet our anticipated operating requirements for the foreseeable future.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). We will begin following the guidance provided by SAB 101 effective April
1, 2000. We anticipate that SAB 101 will result in the deferral of our
recognition of certain types of revenues and will require a one-time, cumulative
adjustment that will reduce our after-tax earnings by approximately $550,000 in
the first quarter of fiscal 2001.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to market risk associated with changes in interest rates. We
are subject to interest rate risk related to our variable-rate line of credit as
described in Note 7 of the Notes to Consolidated Financial Statements.
At March 31, 2000, our variable rate long-term debt had a carrying value of
$7.6 million. The fair value of the debt approximates the carrying value because
the variable rates approximate market rates. A 10% increase in the period end
interest rate would not have a material adverse affect on our results of
operations and financial condition.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data 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.
32
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information concerning directors required by Item 10 is incorporated by
reference to our Proxy Statement for our 2000 Annual Meeting of Shareholders
scheduled for August 2000. 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 our
Proxy Statement for our 2000 Annual Meeting of Shareholders scheduled for August
2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 12 is incorporated by reference to our
Proxy Statement for our 2000 Annual Meeting of Shareholders scheduled for August
2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 is incorporated by reference to our
Proxy Statement for our 2000 Annual Meeting of Shareholders scheduled for August
2000.
PART IV
1. 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 Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
33
<PAGE>
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
<TABLE>
<CAPTION>
Exhibit
Number Description Method of Filing
------ ----------- ----------------
<S> <C> <C>
2.1 Plan and Agreement of Merger Incorporated by reference
to our Form 10-Q for
the quarter ended
September 30, 1997.
3.1 Articles of Incorporation Incorporated by reference
to our Form 10-Q for
the quarter ended
September 30, 1997.
3.2 By-Laws, as amended Incorporated by reference
to our Report on Form
10-K for the year ended
March 31, 1999.
10.1 Registration Rights Agreement Incorporated by reference
dated as of April 6, 1992 to our Report on Form
8-K dated April 6, 1992.
10.2 Amended and Restated 1986 Directors Incorporated by reference
and Consultants Stock Option Plan to our Registration
Statement on Form S-8
filed September 9, 1992.
10.3 1992 Incentive Stock Option Plan Incorporated by reference
to our Proxy Statement
for the Annual Meeting
of Shareholders held on
November 19, 1992.
10.4 Whitman Education Group, Inc. Incorporated by reference to
1996 Stock Option Plan, as amended to our Form 10-Q for the
quarter ended June 30, 1997.
34
<PAGE>
10.5 Form of Stock Purchase Warrant to Incorporated by reference
purchase 575,000 shares of common to our Report on Form 8-K
stock to be issued by Whitman dated December 21, 1994.
Medical Corp. in favor of
Frost-Nevada, Limited Partnership
10.6 Stock Purchase Warrant to purchase Incorporated by reference
650,000 shares of common stock to our Report on Form 8-K
issued by Whitman Medical Corp. dated February 26,1996.
in favor of Phillip Frost
10.7 Employment Agreement dated as of Incorporated by reference
March 29, 1996 by and between to or report on Form 8-K/A-1
M.D.J.B., Inc. and David O'Donnell dated April 11, 1996.
10.8 Credit Agreement dated as of Incorporated by reference to
April 11, 1996 among Barnett Bank our Report on Form 10-Q for
of South Florida, N.A., Whitman the quarter ended
Education Group, Inc. and June 30, 1999.
Phillip Frost, M.D.
10.9 Second Amendment to Credit Agreement Incorporated by reference to
dated October 31, 1996 among Barnett to our Report on Form 10-Q for
Bank, N.A., Whitman Education the quarter ended
Group, Inc. and Phillip Frost, M.D. September 30, 1996.
10.10 Form of Third Amendment to Credit Incorporated by reference to
Agreement dated May 19, 1997 among to our Report on Form 10-K for
Barnett Bank, N.A., Whitman Education the year ended March 31, 1997.
Group, Inc. and Phillip Frost, M.D.
10.11 Form of Restated and Consolidated Incorporated by reference to
Renewal Revolver Note dated May 19, Report on Form 10-K for the
1997 by Whitman Education Group, Inc. year ended March 31, 1997.
in favor of Barnett Bank, N.A.
10.12 Loan Agreement dated August 5, 1996 Incorporated by reference to
between Colorado Technical University our Report on Form 10-K for
and Bank One, Colorado, N.A. the year ended March 31, 1997.
10.13 Form of promissory note and Schedule Incorporated by reference to
of Promissory Notes by Colorado to our Report on Form 10-K for
Technical University, Inc. in favor the year ended March 31, 1997.
of Bank One, Colorado, N.A.
10.14 Form of commercial security agreement Incorporated by reference to
and Schedule of Commercial Security our Report on Form 10-K for
Agreements between Colorado Technical for the year ended
University, Inc. and Bank One, March 31, 1997.
Colorado, N.A.
35
<PAGE>
10.15 First Amendment to Loan Agreement Incorporated by reference to
dated December 27, 1996 between to our Report on Form 10-K for
Bank One, Colorado, N.A. and Colorado the year ended March 31, 1997.
Technical University, Inc.
10.16 Commercial Guaranty by M.D.J.B., Inc. Incorporated by reference to
in favor of Bank One, Colorado, N.A. our Report on Form 10-K for
the year ended March 31, 1997.
10.17 Second Amendment to Loan Agreement Incorporated by reference to
dated February 24, 1997 between Bank to our Report on Form 10-K for
One, Colorado, N.A. and Colorado the year ended March 31, 1997.
Technical University, Inc.
10.18 Third Amendment to Loan Agreement Incorporated by reference to
dated June 13, 1997 between Bank One, to our Report on Form 10-K for
Colorado, N.A. and Colorado Technical the year ended March 31, 1997.
University, Inc.
10.19 Commercial Guaranty by Whitman Incorporated by reference to
Education Group, Inc. in favor of our Report on Form 10-K for
Bank One, Colorado, N.A. the year ended March 31, 1997.
10.20 Promissory Note dated June 13, 1997 Incorporated by reference to
by Colorado Technical University, Inc. our Report on Form 10-K for
in favor of The Pueblo Bank and Trust the year ended March 31, 1997.
Company
10.21 Form of Commercial Guaranty given Incorporated by reference to
by Whitman Education Group, Inc. and our Report on Form 10-K for
M.D.J.B., Inc. in favor of The Pueblo the year ended March 31, 1997.
Bank and Trust Company
10.22 Commercial Security Agreement dated Incorporated by reference to
June 13, 1997 between Colorado our Report on Form 10-K for
Technical University, Inc. and The the year ended March 31, 1997.
Pueblo Bank and Trust Company
10.23 Form of Registration Rights Agreement Incorporated by reference to
between Whitman Education Group, Inc. our Report on Form 10-K for
and The Travelers Indemnity Company the year ended March 31, 1997.
10.24 Contribution Agreement, dated Incorporated by reference to
February 3, 1999, by and among to our Report on Form 10-Q for
Colorado Technical University, Inc., the quarter ended December 31,
Huron University, Inc., Newco, Inc. December 31, 1998.
and David O'Donnell.
36
<PAGE>
10.25 Amended and Restated Contribution Incorporated by reference to
Agreement, dated June 2, 1999, by our Report on Form 10-K for
and among Colorado Technical the year ended March 31, 1999.
University, Inc., Huron University,
L.L.C., Newco, L.L.C. and David
O'Donnell*
10.26 Fourth Amendment to Credit Agreement, Incorporated by reference to
dated April 2, 1999, by and among our Report on Form 10-K for
NationsBank, N.A. (f/k/a Barnett Bank, the year ended March 31, 1999.
N.A.), Whitman Education Group, Inc.
and Phillip Frost, M.D.
10.27 Form of Amended, Restated and Incorporated by reference to
Consolidated Renewal Revolver Note, our Report on Form 10-K for
dated April 2, 1999, by Whitman the year ended March 31, 1999.
Education Group, Inc., in favor of
NationsBank, N.A.
10.28 Fifth Amendment to Credit Incorporated by reference to
Agreement, dated May 29, 1999, by and our Report on Form 10-K for
among NationsBank, N.A. (f/k/a Barnett the year ended March 31, 1999.
Bank, N.A.), Whitman Education
Group, Inc. and Phillip Frost, M.D.
10.29 Form of Security Agreement, dated Incorporated by reference to
May 20, 1999, by each of Colorado our Report on Form 10-K for
Technical University, Inc., MDJB, the year ended March 31, 1999.
Inc., Sanford-Brown College, Inc.
and Ultrasound Technical Services,
Inc. in favor of Merrill Lynch
Business Financial Services, Inc.
10.30 Form of Unconditional Guaranty, Incorporated by reference to
dated May 20, 1999 by each of our Report on Form 10-K for
Colorado Technical University, the year ended March 31, 1999.
Inc., MDJB, Inc., Sanford-Brown
College, Inc. and Ultrasound
Technical Services, Inc. in
favor of Merrill Lynch Business
Financial Services, Inc.
10.31 WCMA Loan and Security Agreement, Incorporated by reference to
dated May 20, 1999, by and between our Report on Form 10-K for
Merrill Lynch Business Financial the year ended March 31, 1999.
Services, Inc. and Whitman
Education Group, Inc.
37
<PAGE>
10.32 Amended and Restated Contribution Incorporated by reference to
Agreement, dated June 2, 1999, by our Report on Form 8-K dated
and between Colorado Technical September 2, 1999.
University, Inc., Huron University,
L.L.C., Newco, L.L.C., and
David O'Donnell
10.33 Amendment to Awarded and Restated Incorporated by reference to
Contribution Agreement, dated August our Report on Form 8-K dated
27, 1999, by and between Colorado dated September 2, 1999.
Technical University, Inc., Huron
University, L.L.C., Newco, L.L.C.,
and David O'Donnell
10.34 Warrant to purchase 20 units Incorporated by reference to
of Membership Interests in our Report on Form 8-K dated
Newco, L.L.C. September 2, 1999.
21 Subsidiaries Incorporated by reference to
our Report on Form 10-K for
the year ended March 31, 1996.
23.1 Consent of Ernst & Young LLP Filed herewith.
27 Financial Data Schedule Filed herewith.
______________________
<FN>
* 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) We filed no reports on Form 8-K during the quarter ended March 31,
2000.
</FN>
</TABLE>
38
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WHITMAN EDUCATION GROUP, INC.
By: /s/ FERNANDO L. FERNANDEZ
Fernando L. Fernandez
Vice President - Finance, Chief Financial Officer and
Treasurer
Dated: June 13,2000
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.
<TABLE>
<CAPTION>
Signatures Title Date
<S> <C> <C>
/s/ PHILLIP FROST, M.D. Chairman of the June 13, 2000
Phillip Frost, M.D. Board
/s/ RICHARD C. PFENNIGER, JR. Vice Chairman of June 13, 2000
Richard C. Pfenniger, Jr. the Board and Chief
Executive Officer
/s/ FERNANDO L. FERNANDEZ Chief Financial Officer June 13, 2000
Fernando L. Fernandez (Principal Financial and
Accounting Officer)
/s/ JACK R. BORSTING, Ph.D. Director June 13, 2000
Jack R. Borsting, Ph.D.
/s/ PETER S. KNIGHT Director June 13, 2000
Peter S. Knight
/s/ LOIS F. LIPSETT, Ph.D. Director June 13, 2000
Lois F. Lipsett, Ph.D.
/s/ RICHARD M. KRASNO, Ph.D. Director June 13, 2000
Richard M. Krasno, Ph.D.
/s/ PERCY A. PIERRE, Ph.D. Director June 13, 2000
Percy A. Pierre, Ph.D.
/s/ NEIL FLANZRAICH Director June 13, 2000
Neil Flanzraich
/s/ A. MARVIN STRAIT, C.P.A. Director June 13, 2000
A. Marvin Strait, C.P.A.
</TABLE>
<PAGE>
Whitman Education Group, Inc. And Subsidiaries
Consolidated Financial Statements
March 31, 2000
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
<PAGE>
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, 2000 and 1999 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended March 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, based on our audits, 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, 2000 and
1999, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended March 31, 2000, in conformity with
accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Miami, Florida
June 2, 2000
- F 2 -
<PAGE>
Whitman Education Group, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31,
------------------------------------
2000 1999
---- ----
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents........................ $ 6,056,738 $ 4,267,110
Accounts receivable, net......................... 26,198,803 27,099,674
Inventories...................................... 1,409,449 1,450,815
Deferred tax assets, net......................... 2,800,968 2,562,705
Other current assets............................. 1,830,882 1,519,737
--------- ----------
Total current assets............................. 38,296,840 36,900,041
Property and equipment, net..................... 11,284,404 14,002,764
Deposits and other assets,
net of accumulated amortization
of $1,491,815 in 2000 and
$1,437,088 in 1999............................. 3,351,370 1,761,220
Goodwill, net.................................... 9,593,841 9,915,590
--------- ---------
Totall assets..................................... $62,526,455 $62,579,615
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable................................. $ 1,345,738 $ 1,942,740
Accrued expenses................................ 5,731,883 3,049,371
Income taxes payable............................. - 898,664
Current portion of capitalized
lease obligations.............................. 1,454,792 1,517,912
Current portion of
long-term debt................................. - 472,994
Deferred tuition revenue......................... 21,589,823 20,575,914
---------- ----------
Total current liabilities........................ 30,122,236 28,457,595
Other liabilities................................ - 474,842
Capitalized lease obligations.................... 3,561,818 3,249,934
Long-term debt................................... 7,557,447 8,772,496
Commitments and contingencies
Stockholders' equity:
Common stock, no par value; authorized
100,000,000 shares; issued and outstanding
13,412,455 shares in 2000 and 13,423,212 shares
in 1999........................................ 22,067,271 21,907,546
Additional paid-in capital ..................... 674,173 671,536
Accumulated deficit ............................. (1,456,490) (954,334)
---------- --------
Total stockholders' equity ...................... 21,284,954 21,624,748
---------- ----------
Total liabilities and stockholders' equity....... $62,526,455 $62,579,615
=========== ===========
</TABLE>
See accompanying notes to financial statements.
- F 3 -
<PAGE>
Whitman Education Group, Inc. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net revenues........................ $ 77,611,312 $ 73,977,362 $ 60,306,460
Costs and expenses:
Instructional and
educational support................ 51,567,309 48,402,227 40,348,882
Selling and
promotional........................ 12,314,109 9,780,727 8,984,153
General and
administrative..................... 12,206,227 11,599,583 10,189,010
Legal setttlement.................. 1,550,000 - -
--------- --------- ---------
Total costs and expenses............ 77,637,645 69,782,537 59,522,045
---------- ---------- ----------
(Loss)income from operations........ (26,333) 4,194,825 784,415
Other (income) and expenses:
Interest expense................... 1,128,876 1,381,564 1,334,201
Interest income.................... (320,508) (281,081) (203,456)
Realization of gain on
marketable securities.............. - (43,489) -
------- --------- -------
(Loss) income before income tax
(benefit) provision................. (834,701) 3,137,831 (346,330)
Income tax (benefit)provision....... (332,545) 96,187 (489,474)
-------- ------ --------
Net (loss) income................... $ (502,156) $ 3,041,644 $ 143,144
============ ============ ===========
Net (loss) income per share:
Basic .............................. $ (0.04) $ 0.23 $ 0.01
============ ============ ===========
Diluted............................. $ (0.04) $ 0.22 $ 0.01
============ ============ ===========
Weighted average common shares outstanding:
Basic.............................. 13,392,696 13,246,796 12,866,045
========== ========== ==========
Diluted ........................... 13,392,696 13,829,714 14,071,970
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
- F 4 -
<PAGE>
Whitman Education Group, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
Years Ended March 31, 2000, 1999 and 1998
<TABLE>
<CAPTION>
Accumulated
Other
Common Additional Comprehensive
Shares Common Paid-In Accumulated (Loss)
Outstanding Stock Capital Deficit Income
----------- ----- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1997 12,677,582 $ 19,574,741 $ 671,536 $(4,139,122) $ - $
Shares issued in connection with
exercise of options 16,000 46,313 - - -
Shares issued in connection with
exercise of warrants 500,000 1,562,500 - - -
Comprehensive income:
Net unrealized loss on
non-current marketable securities - - - - (25,958)
Net income - - - 143,144 -
Comprehensive income
------- ------- ------- ------- -------
Balance at March 31, 1998 13,193,582 21,183,554 671,536 (3,995,978) (25,958)
Shares issued in connection with
exercise of options 115,450 336,328 - - -
Shares issued in connection with
stock purchase plan 31,107 112,596 - - -
Shares issued in connection with
401(K) employee match 83,073 275,068 - - -
Comprehensive income:
Realization of gain on
non-current marketable securities - - - - 25,958
Net income - - - 3,041,644 -
Comprehensive income
--------- --------- --------- --------- ---------
Balance at March 31, 1999 13,423,212 21,907,546 671,536 (954,334) -
Repurchase of treasury shares (195,100) (370,406) - - -
Shares issued in connection with
exercise of options 5,000 19,375 2,637 - -
Shares issued in connection with
stock purchase plan 31,625 104,530 - - -
Shares issued in connection with
401(K)employee match 147,718 406,226 - - -
Comprehensive loss:
Net loss - - - (502,156) -
Comprehensive loss
------- ------- ------- ------ -------
Balance at March 31, 2000 13,412,455 $22,067,271 $674,173 $(1,456,490) $ -
========== =========== ======== =========== ========
</TABLE>
See accompanying notes to financial statements.
- F 5 -
<PAGE>
Whitman Education Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------------------------
2000 1999 1998
----------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income............................ $ (502,156) $ 3,041,644 $ 143,144
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Depreciation and amortization............... 4,323,135 3,958,553 3,365,544
Bad debt expense............................ 3,427,524 3,481,822 2,396,472
Deferred tax benefit........................ (238,263) (1,091,662) (609,984)
Changes in operating assets and liabilities:
Restricted cash............................. - - 511,927
Accounts receivable......................... (3,011,711) (9,227,394) (5,591,193)
Inventories................................. (67,668) 163,640 (530,331)
Other current assets........................ (444,007) (390,410) (244,931)
Deposits and other assets................... (495,412) (573,680) (160,766)
Accounts payable............................ (157,546) 674,434 (1,121,977)
Accrued expenses............................ 2,907,971 1,209,219 (758,703)
Income taxes payable........................ (898,664) 791,531 72,317
Deferred tuition revenue.................... 2,264,331 4,609,764 2,966,802
Other liabilities........................... (474,842) (134,866) (312,151)
-------- -------- --------
Net cash provided by operating activities..... 6,632,692 6,512,595 126,170
--------- --------- -------
Cash flows from investing activities:
Purchase of property and equipment............ (1,236,511) (2,318,677) (3,722,988)
Investment in Huron University................ (1,164,613) - -
Proceeds from sale of marketable securities... - 288,458 -
Net cash used in investing activities......... (2,401,124) (2,030,219) (3,722,988)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from revolving line of credit and
long-term debt............................... 39,000,577 34,787,943 36,742,951
Principal payments on revolving line of
credit, long-term debt, capital lease
obligations and other liabilities............ (41,198,653) (38,680,451) (35,380,560)
Principal (payments) proceeds from short-term
notes payable................................ - (156,018) 156,018
Repurchase of treasury shares................. (370,406) - -
Proceeds from purchases in stock purchase
plan, exercise of options and warrants...... 126,542 448,924 1,608,813
------- ------- ---------
Net cash (used in) provided by financing
activities.................................. (2,441,940) (3,599,602) 3,127,222
---------- ---------- ---------
Increase (decrease) in cash and cash
equivalents................................. 1,789,628 882,774 (469,596)
Cash and cash equivalents at beginning of
year........................................ 4,267,110 3,384,336 3,853,932
--------- --------- ---------
Cash and cash equivalents at end of year...... $ 6,056,738 $ 4,267,110 $ 3,384,336
============ ============ ===========
</TABLE>
Continued on the following page.
See accompanying notes to financial statements.
- F 6 -
<PAGE>
Whitman Education Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statement - (Continued)
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------------------------------
2000 1999 1998
---------------------------------------------
<S> <C> <C> <C>
Supplemental disclosures of
noncash financing
and investment activities:
Equipment acquired under
capital leases.................... $ 1,749,303 $ 2,140,364 $ 1,712,979
=========== =========== ===========
Value of stock issued
for 401(k) employee match......... $ 406,226 $ 275,068 $
=========== =========== ===========
Supplemental disclosures
of cash flow information:
Interest paid...................... $ 1,128,876 $ 1,276,533 $ 1,234,201
=========== =========== ===========
Income taxes paid................. $ 1,494,433 $ 422,852 $ -
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
- F 7 -
<PAGE>
Whitman Education Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statement - (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 CTU Corporation, the parent corporation of
Colorado Technical University, Inc. ("CTU"). The revenues generated from these
subsidiaries primarily consist of tuition and fees paid by students. The
majority of students rely on funds received from federal financial aid programs
under Title IV of the Higher Education Act of 1965, as amended, ("Title IV") to
pay for a substantial portion of their tuition.
As an educational institution, Whitman is subject to licensure from various
accrediting and state authorities and other regulatory requirements of the
United States Department of Education ("Department of Education").
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Whitman
Education Group, Inc. and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Whitman considers all highly liquid short-term investments purchased with
an original maturity of three months or less to be cash equivalents.
REVENUES, ACCOUNTS RECEIVABLE AND DEFERRED TUITION REVENUE
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. Certain nonrefundable fees and charges are fully recognized as
revenue at the time a student begins classes.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). Whitman will begin following the guidance provided by SAB 101 effective
April 1, 2000. Whitman anticipates that SAB 101 will result in the deferral of
its recognition of certain types of revenues and will require a cumulative
adjustment that will reduce its net income by approximately $550,000 in the
first quarter of fiscal 2001.
- F 8 -
<PAGE>
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 first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, less accumulated depreciation.
Expenditures for maintenance and repairs which do not add to the value of the
related assets or materially extend their original lives are expensed as
incurred.
Depreciation of property and equipment is computed principally by the
straight-line method over the estimated useful lives of the assets ranging from
one to ten years. Leasehold improvements are amortized over the term of the
related leases, which approximates the estimated useful lives.
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, 2000 and 1999, accumulated goodwill amortization was $1,220,000 and
$899,000 respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
Whitman accounts for the impairment of long-lived assets under Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets." SFAS 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. Based on current circumstances, Whitman
does not believe that any impairment indicators are present.
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.
- F 9 -
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Basic net income (loss) per common share is computed using the weighted
average number of common shares outstanding during the period. Diluted net
income (loss) per share is computed using the weighted average number of common
and common equivalent shares outstanding during the period.
ADVERTISING
Whitman expenses advertising costs as incurred. Advertising expense which
is included in selling and promotional expenses amounted to approximately
$6,862,000, $4,499,000 and $3,957,000 for the years ended March 31, 2000, 1999
and 1998, respectively.
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 elected, in accordance
with provisions of SFAS 123, to account for its stock plans under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") and related interpretations. 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 revenues 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 fiscal
2000 presentation. These changes had no effect on previously reported net
income.
- F 10 -
<PAGE>
Whitman Education Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statement - (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
In fiscal 1999, Whitman adopted SFAS No. 130, "Reporting Comprehensive
Income." SFAS 130 establishes new rules for the reporting and display of
comprehensive income and its components. SFAS 130 requires unrealized gains or
losses on Whitman's available-for-sale securities, which prior to its adoption
were recorded separately in stockholders' equity, to be included in "other
comprehensive income." For the years ended March 31, 2000, 1999 and 1998, total
comprehensive income (loss) was $(502,156), $3,067,602 and $117,186,
respectively.
In fiscal 1999, Whitman adopted SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports. It also establishes standards for related disclosures about products
and services, geographic areas, and major customers.
2. DIVESTITURE OF HURON UNIVERSITY
In August 1999, CTU completed the divestiture of its Huron University
campus ("Huron") in Huron, South Dakota to a newly formed entity ("Newco")
capitalized by several investors and members of Huron's existing management. In
connection with the transaction, CTU contributed the operating assets of Huron
and $550,000 to Newco, and Newco issued to CTU units of limited liability
company memberships interests and assumed certain liabilities of Huron. The
liabilities assumed by Newco include the principal balance due of $1.1 million
under a loan agreement. The loan is guaranteed by Whitman, which has a first
priority security interest in certain assets of Newco, and has a maturity date
of July 2005.
Under the terms of the transaction, the units of limited liability company
membership interests equal 19.9% of the total outstanding limited liability
company memberships interests in Newco. Additionally, Whitman purchased for
$110,000 a warrant to acquire 20 units of limited liability company interests in
Newco, which would represent approximately 4% of the total outstanding limited
liability company membership interests in Newco upon exercise. The warrant has a
term of five years and has an exercise price of $10,000 per unit. The investment
in Newco is recorded at a cost of approximately $1.2 million, which approximates
fair value. No gain or loss was recorded on the transaction. The effective date
of the transactions for accounting, tax, and financial statement purposes was
September 1, 1999. The terms of the transaction were established through an
arm's length negotiation. CTU's remaining investment in Huron is accounted for
under the cost method.
In connection with the divestiture of Huron, Whitman provided a loan of
$500,000 to the president of Huron for the purpose of investing such funds in
Newco. The loan is due in August 2005 with monthly interest payments commencing
in October 1999 at the prime rate. The loan is secured by Whitman common stock
owned by the president of Huron.
- F 11 -
<PAGE>
DIVESTITURE OF HURON UNIVERSITY - (CONTINUED)
The following unaudited pro forma information excludes the results of
operations of Huron University for the fiscal year ended March 31, 2000 as if
the transaction had occurred at April 1, 1999. This pro forma information does
not purport to be indicative of the results that actually would have occurred if
the disposition had been effective on the dates indicated.
Net revenues............................. $ 76,172,000
Net income............................... 157,000
Basic and diluted
netincome per share.................... .01
3. FINANCIAL AID PROGRAMS
Approximately 75% of Whitman's net revenues were received from students who
participated in government sponsored financial aid programs under Title IV.
These programs are subject to program review by the Department of Education.
Disbursements under each program are subject to disallowance and repayment by
the schools. These programs also require that Whitman and certain of its
subsidiaries meet Standards of Financial Responsibility established by the
Department of Education. The standards require Whitman and certain of its
subsidiaries to maintain certain financial ratios and requirements, all of which
have been met at March 31, 2000.
4. ACCOUNTS RECEIVABLE
A summary of activity for the allowance for doubtful accounts is as
follows:
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------------
2000 1999 1998
--------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year......... $ 5,593,888 $4,208,777 $ 2,821,261
Charged to expense................... 3,427,524 3,481,822 2,396,472
Accounts charged-off during the year,
net of recoveries................... (3,348,588) (2,096,711) (1,008,956)
---------- ---------- ----------
Balance at end of year............... $ 5,672,824 $ 5,593,888 $ 4,208,777
========== ========== ==========
</TABLE>
- F 12 -
<PAGE>
Whitman Education Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statement - (Continued)
5.PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
Useful Lives March 31,
----------------------------------------------
(In Years) 2000 1999
---------- -------------- ----------------
<S> <C> <C> <C>
Equipment.................. 2-5 $ 14,372,129 $13,108,793
Leasehold
improvements............... 1-10 5,747,105 6,393,829
Furniture and
fixtures................... 7-10 3,461,439 3,442,322
Other...................... 5 2,916,994 3,100,080
- --------- ---------
26,497,667 26,045,024
Less accumulated depreciation
and amortization............ (15,213,263) (12,042,260)
----------- -----------
$ 11,284,404 $14,002,764
============ ===========
</TABLE>
6. MARKETABLE SECURITIES
On December 16, 1998, Whitman sold its marketable equity securities and
realized a gain on the sale of $43,489. In fiscal 1998, an unrealized loss on
noncurrent marketable equity securities of $33,750 ($25,958 net of income taxes)
was recorded as part of stockholders' equity.
7. INCOME TAXES
The components of the income tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
Year ended March 31,
----------------------------------------------
2000 1999 1998
---------------- ------------------ ----------
<S> <C> <C> <C>
Current...................... $ (94,282) $ 1,187,849 $ 120,510
Deferred..................... (238,263) (1,091,662) (609,984)
----------- ------------ ----------
Total income tax
provision (benefit)....... $ (332,545) $ 96,187 $(489,474)
=========== ============ ==========
</TABLE>
- F 13 -
<PAGE>
Whitman Education Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statement - (Continued)
7.INCOME TAXES - (CONTINUED)
The differences between the federal statutory income tax rate and the
effective income tax rate are summarized below:
<TABLE>
<CAPTION>
Year ended March 31,
-------------------------------------------
2000 1999 1998
--------------- ----------------- -------
<S> <C> <C> <C>
Statutory tax rate.................... (34.0)% 34.0% (34.0)%
State income taxes, net............... (5.7) 5.7 30.3
Permanent differences................. 6.6 0.8 12.3
Change in valuation allowance......... (5.9) (36.8) (147.6)
Other,net ............................ (0.9) (0.6) (2.3)
------ ----- ------
Effective tax rate.................... (39.9)% 3.1% (141.3)%
====== ====== ======
</TABLE>
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:
<TABLE>
<CAPTION>
March 31,
--------------------------------
2000 1999
---------- --------------
<S> <C> <C>
Deferred tax assets:
Accrued expenses................. $ 933,000 $ 350,000
Reserves and allowances.......... 1,864,000 2,186,000
Tax credits...................... 118,000 298,000
Net operating loss carry forwards 195,000 239,000
Capital loss carryforward........ 231,000 231,000
Other(net)....................... 6,000 13,000
---------- --------------
Total deferred tax assets......... 3,347,000 3,317,000
Valuation allowances.............. - (50,000)
---------- --------------
Total deferred tax assets......... 3,347,000 3,267,000
Deferred tax liabilities:
Prepaid expenses and other ...... (71,000) (25,000)
Depreciation and amortization.... (475,000) (680,000)
---------- --------------
Total deferred tax liabilities.... (546,000) (705,000)
---------- --------------
Total deferred tax assets, net.... $2,801,000 $ 2,562,000
========== ==============
</TABLE>
- F 14 -
<PAGE>
Whitman Education Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statement - (Continued)
SFAS 109, "Accounting for Income Taxes", requires a valuation allowance to
reduce the deferred tax assets reported if, based on the weight of the evidence,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. After consideration of all of the evidence, both positive
and negative, management has determined that no valuation allowance is necessary
at March 31, 2000. The valuation allowance decreased by $50,000 in fiscal 2000,
decreased by $1,154,000 in 1999, and decreased by $510,000 in 1998. At March 31,
2000 Whitman has available various state net operating loss carryfowards
approximating $6,230,000 expiring in the years 2010 through 2014. Whitman has
approximately $613,000 in capital loss carry forwards which begin to expire in
2004. Whitman also has an alternative minimum tax credit of approximately
$118,000 which carries forward indefinitely.
8.DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
March 31,
-------------------------------------
2000 1999
-------------------------------------
<S> <C> <C>
$8.5 million line of credit
expiring on June 30, 2002, with
interest at the 30 day commercial
paper rate plus 2.90%,
8.98% at March 31, 2000 ............ $ 7,557,447 $ -
$7.5 million revolver note expiring
April 14, 1999, with
interest at LIBOR plus
1.10%, 6.05% at
March 31, 1999...................... - 6,923,035
Notes payable in monthly
installments through 2002,
interest rates ranging
from 8.875% to 9%................... - 210,005
Note payable in monthly
installments through
June 13, 2002, with
interest at prime plus 1.25%
(adjusted every three years),
9.75% at March 31, 1999............. - 1,267,821
Note payable due June 3, 1999,
with interest at 12%................ - 844,629
--------- ---------
Total................................ 7,557,447 9,245,490
Less current portion................. - (472,994)
--------- ---------
$ 7,557,447 $8,772,496
=========== ==========
</TABLE>
On May 28, 1999, Whitman entered into an $8.5 million line of credit which
is secured by all of the assets of Whitman. The interest rate on the line of
credit is variable and is equal to the sum of 2.90% and the 30-day commercial
paper rate. The line of credit contains certain covenants, that among other
things, require the maintenance of minimum levels of tangible net worth and net
cash flow. The line of credit also contains a restriction that limits Whitman's
ability to acquire other entities at a cost in excess of $1.5 million. At March
31, 2000, Whitman was in compliance with the covenants of the line of credit. On
May 15, 2000, the maturity date on the line of credit was extended from October
31, 2000 to June 30, 2002.
- F 15 -
<PAGE>
Whitman Education Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statement - (Continued)
8.DEBT - (CONTINUED)
On May 28, 1999, Whitman repaid the outstanding balances due on the $7.5
million revolver note, and the notes payable whose balances were $210,005 and
$844,629 at March 31, 1999.
In June 1997, Whitman entered into a $1.5 million loan agreement due in
June 2002. In connection with the divestiture of Huron in August 1999, as
described in Note 2 of the financial statements, the purchaser assumed the
principal balance due of $1.1 million under the loan agreement. At such time,
the purchaser extended the maturity date on the loan to July 2005. The loan is
guaranteed by Whitman, which has a first priority security interest in certain
assets of the purchaser.
Aggregate maturities of long-term debt at March 31, 2000 are as follows:
Fiscal Year
2001.................... $ -
2002.................... -
2003.................... 7,557,447
2004.................... -
2005.................... -
--------------
$ 7,557,447
==============
9. CAPITALIZED LEASE OBLIGATIONS
Whitman leases equipment under several lease agreements which are accounted
for as capital leases. The assets and liabilities under capital leases are
recorded at the lower of the net present value of the minimum lease payments or
the fair value of the asset. The assets are amortized over the related lease
term.
During 2000 and 1999, Whitman entered into leases totaling approximately
$1,749,000 and $2,140,000, respectively, in connection with the purchase of
equipment. The amortization of leased assets of $993,000 and $1,022,000 for the
years ended March 31, 2000 and 1999, respectively, is included in depreciation
and amortization. The following is a summary of assets held under capital leases
which are included in property and equipment at March 31:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Equipment......................... $6,399,928 $6,283,003
Furniture and fixtures............ 884,402 471,105
Software.......................... 454,742 -
------- ---------
7,739,072 6,754,108
Less accumulated amortization...... (3,987,890) (2,923,865)
---------- ----------
$3,751,182 $3,830,243
========== ==========
</TABLE>
- F 16 -
<PAGE>
9. CAPITALIZED LEASE OBLIGATIONS - (CONTINUED)
Future minimum lease payments under capital leases at March 31, 2000 are as
follows:
Fiscal Year
2001 $2,131,793
2002 1,816,131
2003 1,282,435
2004 554,172
2005 170,467
---- ----------
Total minimum lease payments 5,954,998
Less amount representing interest (8%-12%) (938,388)
Less amount classified as current (1,454,792)
----------
$3,561,818
==========
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 $329,000, $307,000 and $125,000 for the years
ended March 31, 2000, 1999 and 1998, 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 4,352,450 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:
<TABLE>
<CAPTION>
Weighted
Average Exercise Number
Price Per Share Of Shares
--------------- ---------
<S> <C> <C>
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
Granted................................. 4.84 699,200
Exercised............................... 2.91 (115,450)
Cancelled............................... 5.36 (238,500)
----------
Outstanding March 31, 1999.............. 5.24 3,518,850
Granted................................. 3.68 575,500
Exercised............................... 3.88 (5,000)
Cancelled............................... 5.01 (274,139)
----------
Outstanding March 31, 2000.............. 4.16 3,815,211
==========
</TABLE>
- F 17 -
<PAGE>
Whitman Education Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statement - (Continued)
As required by SFAS 123, pro forma information regarding net income (loss)
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 2000
and 1999, respectively: risk-free rates of 6.1% and 5.2%; no dividend yields for
both; volatility factors of the expected market price of Whitman's common stock
of 0.593 and 0.439; and a weighted-average expected life of the option of 7.0
years for both years. The weighted-average fair value of the stock options for
the years 2000 and 1999 was $2.38 and $2.61, 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 2000, 1999 and 1998 pro forma information follows:
2000 1999 1998
---- ---- ----
Net income (loss)........... $(3,240,995) $ 567,518 (1,763,020)
Basic and diluted net income
(loss) per share........... (.24) .04 (.13)
The 2000, 1999 and 1998 pro forma effect on net income (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 1998.
The exercise price of options outstanding at March 31, 2000 ranged as
follows:
<TABLE>
<CAPTION>
Number Weighted Average Remaining
Exercise Price of Options Contractual Life (Years)
-------------- ---------- ------------------------
<S> <C> <C>
$1.47 - $ 2.21 827,500 4.4
$2.22 - $ 3.31 582,450 5.8
$3.32 - $ 4.96 912,400 4.9
$4.97 - $ 7.44 1,417,861 4.9
$7.45 - $ 11.16 75,000 3.6
---------
3,815,211
=========
</TABLE>
Stock options totalling 2,774,452, 2,087,692 and 1,709,724 were exercisable
at the end of fiscal 2000, 1999 and 1998 respectively. Common stock reserved for
issuance under the stock option plans and outstanding warrants aggregate
5,652,450 shares at March 31, 2000.
Whitman has 1,300,000 warrants outstanding at an exercise price of $4.25
maturing February 2001.
- F 18 -
<PAGE>
12. RELATED PARTY TRANSACTIONS
Whitman purchases certain textbooks and materials for resale to its
students from an entity that is 40% owned by Whitman's president. In the fiscal
years ended March 31, 2000, 1999 and 1998, Whitman purchased $148,800, $120,300,
and $120,300, respectively, in textbooks and materials from that entity.
In February 1996, Whitman moved its headquarters to Miami, Florida. Whitman
occupies office space in a building owned by IVAX Corporation. A director and
shareholder of Whitman is also Chairman of IVAX Corporation. In the fiscal years
ended March 31, 2000, 1999 and 1998 Whitman incurred rent expense in the amount
of $154,000, $146,000 and $141,000, respectively.
13. COMMITMENTS AND CONTINGENCIES
Whitman leases classroom and office space under operating leases in various
buildings where the schools are located. Certain of Whitman's operating leases
contain rent escalation clauses. Future minimum annual rental commitments under
noncancellable operating leases as of March 31, 2000 are as follows:
Fiscal Year
-----------
2001..................................... $ 5,405,857
2002..................................... 4,365,187
2003..................................... 4,125,469
2004..................................... 3,813,154
2005..................................... 3,443,233
Thereafter............................... 11,833,594
-------------
Total minimum lease payments............. $ 32,986,494
=============
Rent expense during fiscal 2000, 1999 and 1998 was approximately
$5,766,000, $5,398,000 and $4,750,000, respectively.
In fiscal 2000 Whitman entered into financing agreements to acquire capital
equipment totaling $1,749,000. In fiscal 2000, $1,749,000 of capital equipment
was financed under these agreements and are included under capitalized lease
obligations. At March 31, 2000, Whitman had $1,131,116 of letters of credit
outstanding.
During Spring 1999, the Office of the Inspector General ("OIG") of the
Department of Education conducted an audit of the SBC campus in Granite City,
Illinois for the fiscal year ended March 31, 1998. The audit focused on SBC's
compliance with the 85/15 rule. Although the OIG did not issue an audit report,
the OIG issued a "potential issue" document asserting that SBC did not comply
with the 85/15 rule for the year ending March 31, 1998 because it improperly
included institutional scholarships as non-Title IV revenues in determining its
compliance with that rule. Whitman responded to the OIG and has not received
further correspondence from the OIG since May, 1999. Whitman believes that SBC
was in compliance with the 85/15 rule and that this position is supported by
recent guidance issued to all schools by the Department of Education. Although,
- F 19 -
<PAGE>
13. COMMITMENTS AND CONTINGENCIES - (CONTINUED)
Whitman believes that the OIG audit will be resolved without any material
adverse effect. As with any such audit, no assurance can be given as to the
final outcome since matters are not yet resolved.
In May 2000, Whitman (in conjunction with its insurance carriers) reached
an agreement in principle to settle the previously reported case styled Cullen,
et. al. v. Whitman Education Group, Inc., et. al., in the United States District
Court for the Eastern District of Pennsylvania (Civil Action No. 98-CV-4076).
The settlement, which still must be approved by the Court, covers students who
attended Whitman's Ultrasound Diagnostic Schools any time from August 1, 1994 to
August 1, 1998 in either the general ultrasound program or the non-invasive
cardiovascular technology program. As a result of the proposed settlement,
Whitman has taken a one-time, after-tax charge to earnings of approximately
$900,000, or $0.07 per share in the fiscal quarter ended March 31, 2000.
Although management denied the allegations of the lawsuit, and believed the key
allegations to be without merit, Whitman entered into the settlement to resolve
litigation in a satisfactory business manner, to avoid disruption of Whitman's
business, and to allow Whitman to pursue its mission of providing quality
education to its enrolled students.
Whitman is a party to routine litigation incidental to its business,
including but not limited to, claims involving students or graduates and routine
employment matters. While there can be no assurance as to the ultimate outcome
of any such litigation, management does not believe that any pending proceeding
will result in a settlement or an adverse judgment that will have a material
adverse effect on Whitman's financial condition or results of operations.
14. Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable,
notes payable and accounts payable and accrued expenses approximate fair value
because of their short duration to maturity. The carrying amounts of revolving
credit facilities approximate fair value because the interest rate is tied to a
quoted variable index.
- F 20 -
<PAGE>
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, restated
to conform to the SFAS 128 requirements.
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
For the Year Ended March 31,
----------------------------------------------
2000 1999 1998
------------- ------------------ -------------
<S> <C> <C> <C>
Numerator:
Net (loss) income........................ $ 502,156) $ 3,041,644 $ 143,144
=========== ========= =========
Denominator:
Denominator for basic
earnings per share -
weighted average shares.................. 13,392,696 13,246,796 12,866,045
Effect of dilutive securities:
Employee stock options.................... - 493,334 804,746
Warrants.................................. 89,584 401,179
---------- ---------- ----------
Dilutive potential common shares.......... - 582,918 1,205,925
Denominator for diluted earnings per
share - adjusted weighted - average
shares and assumed conversions.......... 13,392,696 13,829,714 14,071,970
========== ========== ==========
Basic net(loss)income per share........... $ (0.04) $ 0.23 $ 0.01
========== ========== ==========
Diluted net (loss)income per share........ $ (0.04) $ 0.22 $ 0.01
========== ========== ==========
</TABLE>
- F 21 -
<PAGE>
Whitman Education Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statement - (Continued)
16.SEGMENT AND RELATED INFORMATION
In fiscal 1999, Whitman adopted the provision of SFAS No. 131, "Disclosures
About Segments of an Enterprise.' Whitman is organized by two reportable
segments, the University Degree Division and the Associate Degree Division
through three wholly-owned subsidiaries. The University Degree Division
primarily offers bachelor, master and doctorate degrees through Colorado
Technical University. The Associates Degree Division offers associate degrees
and diplomas or certificates through Sanford-Brown College and Ultrasound
Technical Services.
Whitman's revenues are not materially dependent on a single customer or
small group of customers.
Summarized financial information concerning the Whitman reportable segments
is shown in the following table:
<TABLE>
<CAPTION>
For the Year Ended March 31,
---------------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net revenues:
Associate Degree Division...... $ 58,473,078 $ 55,055,984 $ 44,319,376
University Degree Division..... 19,138,234 18,921,378 15,987,084
Other......................... ------------ ------------- -------------
Total............................ $ 77,611,312 $ 73,977,362 $ 60,306,460
============ ============== =============
Income (loss) before income taxes:
Associate Degree Division..... $ (307,690) $ 6,496,891 $ 3,278,877
University Degree Division.... 1,757,834 (1,097,029) (1,448,278)
Other ........................ (2,284,845) (2,262,031) (2,176,929)
------------- -------------- -------------
Total............................ $ (834,701) $ 3,137,831 $ (346,330)
============= ============== =============
Capital expenditures:
Associate Degree Division $ 2,405,237 $ 3,325,791 $ 3,045,389
University Degree Division 700,239 1,075,262 2,161,633
Other.......................... 13,168 57,988 228,945
------------- -------------- -------------
Total............................ $ 3,118,644 $ 4,459,041 $ 5,435,967
============= ============== =============
</TABLE>
<TABLE>
<CAPTION>
March 31
-------------------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Total assets:
Associate Degree Division...... $ 49,223,023 $ 48,250,099 $ 41,113,240
University Degree Division..... 11,152,738 13,341,559 12,072,072
Other.......................... 2,150,694 987,957 635,857
------------- ------------ -------------
Total............................ $62,526,455 $ 62,579,615 $ 53,821,169
============= ============ =============
</TABLE>
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 333-16007 and Form S-8 No. 333-67477) pertaining to the 1996 Stock
Option Plan, Registration Statement (Form S-8 No. 333-42109) pertaining to the
Employee Stock Purchase Plan and Registration Statement (Form S-8 No. 333-67473)
pertaining to the Richard C. Pfenniger, Jr. Stock Option Plan of Whitman
Education Group, Inc. and in the related Prospectuses, of our report dated June
2, 2000, with respect to the consolidated financial statements of Whitman
Education Group, Inc. included in this Annual Report (Form 10-K) for the year
ended March 31, 2000.
/s/ ERNST & YOUNG LLP
Miami, Florida
June 8, 2000
<PAGE>
Whitman Education Group, Inc. and Subsidiaries
Financial Data Schedule
Period Type............................12 Months
Fiscal Year-End........................March 31, 2000
Period Start...........................April 1, 1999
Period-End.............................March 31, 2000
Cash...................................6,056,738
Securities.............................0
Receivables............................31,871,627
Allowances.............................(5,672,824)
Inventory..............................1,409,449
Current Assets.........................38,296,840
PP&E...................................26,497,667
Accumulated Depreciation...............(15,213,263)
Total Assets...........................62,526,455
Current Liabilities....................30,122,236
Bonds..................................0
Preferred - Mandatory..................0
Preferred..............................0
Common.................................22,067,271
Other Shareholders' Equity.............(782,317)
Total Liability and Equity............62,526,455
Sales..................................77,611,312
Total Revenues........................77,611,312
CGS....................................53,117,309
Total Costs...........................65,431,418
Other Expenses........................0
Loss Provision........................0
Interest Expense (Net)................808,368
Income Pretax.........................(834,701)
Income Tax.............................(332,545)
Income Continuing......................(502,156)
Discontinued...........................0
Extraordinary..........................0
Changes................................0
Net Income.............................(502,156)
EPS Basic..............................(.04)
EPS Diluted............................(.04)
