FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
Commission File Number 1-13722
WHITMAN EDUCATION GROUP, INC.
Florida 22-2246554
- -------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4400 Biscayne Boulevard, Miami, Florida 33137
--------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(305) 575-6510
--------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
-------- --------
Indicate the number of shares outstanding of each of issuer's classes of
common stock, as of the latest practicable date.
As of February 3, 2000, there were 13,265,781 shares of common stock
outstanding.
1
<PAGE>
WHITMAN EDUCATION GROUP, INC.
FORM 10-Q
DECEMBER 31, 1999
TABLE OF CONTENTS
PAGE NO.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements................................... 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...................................... 18
Item 6. Exhibits and Reports on Form 8-K....................... 18
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 1999
------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ 1,920,927 $ 4,267,110
Accounts receivable, net.................... 26,134,433 27,114,533
Inventories................................. 1,498,119 1,450,815
Deferred income taxes....................... 2,861,070 2,562,705
Other current assets........................ 2,019,589 1,504,878
------------- -------------
Total current assets................... 34,434,138 36,900,041
Property and equipment, net...................... 11,829,955 14,002,764
Deposits and other assets, net................... 3,326,532 1,761,220
Goodwill, net.................................... 9,674,282 9,915,590
------------- -------------
Total assets........................... $ 59,264,907 $ 62,579,615
============= =============
LIABILITY AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................ $ 1,640,873 $ 1,942,740
Accrued expenses............................ 3,920,836 3,049,371
Income taxes payable........................ - 898,664
Current portion of capitalized
lease obligations........................ 1,544,974 1,517,912
Current portion of long-term debt........... - 472,994
Deferred tuition revenue.................... 20,742,641 20,575,914
------------- -------------
Total current liabilities.............. 27,849,324 28,457,595
Other liabilities................................ - 474,842
Capitalized lease obligations.................... 3,698,442 3,249,934
Long-term debt................................... 6,450,331 8,772,496
Commitment and contingencies
Stockholders' equity:
Common stock, no par value, authorized
100,000,000 shares issued and outstanding
13,278,981at December 31, 1999 and
13,423,212 shares at March 31, 1999....... 21,997,067 21,907,546
Additional paid-in capital.................. 674,173 671,536
Accumulated deficit......................... (1,404,430) (954,334)
------------- -------------
Total stockholders' equity............. 21,266,810 21,624,748
------------- -------------
Total liabilities and
stockholders' equity............... $ 59,264,907 $ 62,579,615
============= =============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
DECEMBER 31,
-------------------------------
1999 1998
-------------- ---------------
<S> <C> <C>
Net revenues................................... $ 20,316,640 $ 19,028,641
Costs and expenses:
Instructional and educational support..... 12,368,099 12,469,054
Selling and promotional................... 3,423,209 2,317,264
General and administrative................ 3,378,238 2,976,012
-------------- ---------------
Total costs and expenses....................... 19,169,546 17,762,330
-------------- ---------------
Income from operations......................... 1,147,094 1,266,311
Other (income) and expenses:
Interest expense.......................... 274,380 343,904
Interest income........................... (79,878) (65,824)
-------------- ---------------
Income before income tax provision............. 952,592 988,231
Income tax provision........................... 379,513 -
-------------- ---------------
Net income..................................... $ 573,079 $ 988,231
============== ===============
Net income per share:
Basic and diluted ........................ $ .04 $ .07
============== ===============
Weighted average common shares outstanding:
Basic..................................... 13,406,795 13,247,716
============== ===============
Diluted................................... 13,464,655 13,661,481
============== ===============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
DECEMBER 31,
--------------------------------
1999 1998
------------- --------------
<S> <C> <C>
Net revenues................................. $ 56,749,702 $ 53,129,240
Costs and expenses:
Instructional and educational support... 37,755,604 34,964,896
Selling and promotional................. 9,094,902 7,409,017
General and administrative.............. 9,999,589 9,730,458
------------- --------------
Total costs and expenses..................... 56,850,095 52,104,371
------------- --------------
(Loss) income from operations................ (100,393) 1,024,869
Other (income) and expenses:
Interest expense........................ 868,186 1,020,554
Interest income......................... (220,414) (189,472)
------------- --------------
(Loss) income before income tax benefit...... (748,165) 193,787
Income tax benefit........................... 298,069 343,000
------------- --------------
Net (loss) income............................ $ (450,096) $ 536,787
============= ==============
Net (loss) income per share:
Basic and diluted....................... $ (.03) $ .04
============= ==============
Weighted average common shares outstanding:
Basic................................... 13,424,156 13,217,488
============= ==============
Diluted.................................. 13,424,156 13,803,602
============= ==============
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
DECEMBER 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss........................................... $ (450,096) $ 536,787
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciated and amortization................. 3,304,079 3,061,469
Bad debt expense............................. 2,528,388 2,530,741
Deferred tax benefit......................... (298,365) (837,000)
Changes in operating assets and liabilities:
Accounts receivable..................... (2,033,346) (1,833,373)
Inventories............................. (156,338) (44,927)
Other current assets.................... (647,572) (916,935)
Deposits and other assets............... (458,703) (139,827)
Accounts payable........................ 137,589 671,121
Accrued expenses........................ 690,697 2,482,249
Income taxes payable ................... (898,664) 298,349
Deferred tuition revenue................ 1,417,149 (421,909)
Other liabilities....................... (475,203) (100,262)
------------ ------------
Net cash provided by operating activities........... 2,659,615 5,286,483
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.................. (959,212) (1,955,197)
Investment in Huron University...................... (1,164,613) -
Net proceeds from sale of marketable securities..... - 288,458
------------ ------------
Net cash used in investing activities............... (2,123,825) (1,666,739)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving line of credit and
long-term borrowings and capitalized
lease obligations.............................. 25,233,467 25,721,795
Principal payments on revolving line of credit,
long-term borrowings and other liability....... (28,207,598) (30,852,387)
Proceeds from exercise of options and warrants...... 92,158 165,515
------------ ------------
Net cash used in financing activities............... (2,881,973) (4,965,077)
------------ ------------
Decrease in cash and cash equivalents............... (2,346,183) (1,345,333)
Cash and cash equivalents at beginning of period.... 4,267,110 3,384,336
------------ ------------
Cash and cash equivalents at end of period.......... $ 1,920,927 $ 2,039,003
============ ============
</TABLE>
Continued on following page.
See accompanying notes to financial statements.
6
<PAGE>
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
(UNAUDITED)
FOR THE NINE MONTHS ENDED
DECEMBER 31,
------------------------------
1999 1998
------------- --------------
SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING
ACTIVITIES:
Equipment acquired under capital leases........ $ 1,778,239 $ 1,845,790
============= ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid.................................. $ 868,186 $ 878,496
============= ==============
Income taxes paid.............................. $ 1,341,656 $ 414,077
============= ==============
See accompanying notes to financial statements.
7
<PAGE>
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
PART I - FINANCIAL INFORMATION
1. GENERAL
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the instructions to Form 10-Q and, in the
opinion of the management of Whitman, include all adjustments, which are of a
normal recurring nature, necessary for a fair presentation of financial position
and the results of operations and cash flows for the periods presented. However,
the financial statements do not include all information and footnotes required
for a presentation in accordance with generally accepted accounting principles.
These condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements and the notes thereto included or
incorporated by reference in Whitman's Form 10-K for the fiscal year ended March
31, 1999. The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the full year.
The accompanying financial statements include the accounts of Whitman
Education Group, Inc., and its wholly-owned subsidiaries, Ultrasound Technical
Services, Inc. ("Ultrasound Diagnostic Schools"), Sanford Brown College, Inc.
("Sanford-Brown College") and CTU Corporation ("Colorado Technical University").
All intercompany accounts and transactions have been eliminated. Hereafter,
references to "Whitman" shall include collectively Whitman Education Group, Inc.
and its operating subsidiaries, Ultrasound Diagnostic Schools, Sanford-Brown
College and Colorado Technical University.
Whitman experiences seasonality in its quarterly results of operations as a
result of changes in the level of student enrollment. New enrollment in
Whitman's schools tends to be lower in the first and second fiscal quarters
covering the summer months which are traditionally associated with recess from
school. Costs are generally not significantly affected by 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.
2. 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
(loss).
8
<PAGE>
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------- -----------------------
1999 1998 1999 1998
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $ 573,079 $ 988,231 $ (450,096) $ 536,787
============ =========== =========== ===========
Denominator:
Denominator for basic net
income (loss) per share -
weighted average shares 13,406,795 13,247,716 13,424,156 13,217,488
Effect of dilutive securities:
Employee stock options 57,860 365,906 - 499,667
Warrants - 47,859 - 86,447
------------ ----------- ----------- -----------
Dilutive potential
common shares 57,860 413,765 - 586,114
Denominator for diluted
net income (loss)per
share - adjusted weighted
average shares and
assumed conversions 13,464,655 13,661,481 13,424,156 13,803,602
============ =========== =========== ===========
Basic and diluted net income
(loss) per share $ .04 $ .07 (.03) $ .04
============ =========== =========== ===========
</TABLE>
4. COMPREHENSIVE INCOME (LOSS)
In fiscal 1999, Whitman adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income." Statement 130 establishes new rules
for the reporting and display of comprehensive income and its components.
Statement 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
loss."
For the three months ended December 31, 1999 and 1998, total comprehensive
income was $573,079 and $988,231, respectively. For the nine months ended
December 31, 1999 and 1998, total comprehensive losses were $450,096 and
comprehensive income was $536,787, respectively. On December 16, 1998, a gain on
the sale of marketable securities of $43,489 was realized.
5. CONTINGENCIES
In July 1999, in the previously reported case styled, Cullen, et al. v.
Whitman Education Group, Inc., in the United States District Court for the
Eastern District of Pennsylvania (Civil Action No. 98-CV-4076), the Court
certified a class of all students in the general ultrasound program who incurred
financial obligations (federally guaranteed student loans or aid) from August 1,
1994 to August 1, 1998 to attend an Ultrasound Diagnostic School. The Court,
however, rejected the plaintiffs' attempts to certify a class action based on
theories that the Ultrasound Diagnostic School made misrepresentations to
students and to its accrediting body. The Court allowed the case to proceed as a
class action only to the extent that the plaintiffs could prove that the schools
"did not meet even the most minimal requirements of a vocational
program." The Court subsequently modified the class definition to
all students in the general ultrasound program who attended
9
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WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
5. CONTINGENCIES - (CONTINUED)
from August 1, 1994 to August 1, 1998 and who, at any time, paid with federally
guaranteed student loans or aid. Management believes that the lawsuit is without
merit and intends to continue to vigorously defend it. While the outcome cannot
be predicted with certainty, if determined adversely to Whitman, it could have a
material adverse effect on its financial position and results of operations.
6. 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 entity ("Newco") capitalized by several investors and members of
Huron's existing management pursuant to an Amended and Restated Contribution
Agreement, dated June 2, 1999, as amended. 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. 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 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. There was no gain or loss
recorded on the transaction.
7. SEGMENT AND RELATED INFORMATION
In fiscal 1999, Whitman adopted the provision of Statement of Financial
Accounting Standards 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 Associate Degree Division
offers associate degrees and diplomas or certificates through Sanford-Brown
College and Ultrasound Diagnostic Schools.
10
<PAGE>
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
7. SEGMENT AND RELATED INFORMATION - (CONTINUED)
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 THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------------- -------------------------
1999 1998 1999 1998
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Net revenues:
Associate Degree
Division.............. $15,386,361 $ 13,320,645 $42,506,290 $39,465,138
University Degree
Division.............. 4,930,279 5,664,507 14,243,412 13,620,613
Other.................. - 43,489 - 43,489
------------ ------------- ------------ ------------
Total ................. $20,316,640 $ 19,028,641 $56,749,702 $53,129,240
============ ============= ============ ============
Income (loss) before
income tax (provision)
benefit:
Associate Degree
Division.............. $ 408,176 $ 996,829 $ 110,481 $ 3,258,588
University Degree
Division.............. 1,112,923 555,019 891,222 (1,318,040)
Other.................. (568,507) (563,617) (1,749,868) (1,746,761)
------------ ------------ ------------ ------------
Total.................. $ 952,592 $ 988,231 $ (748,165) $ 193,787
============ ============ ============ ============
DECEMBER 31, MARCH 31,
1999 1999
------------ -------------
Total assets:
Associate Degree
Division.............. $47,333,665 $ 48,250,099
University Degree
Division.............. 8,483,125 13,341,559
Other.................. 3,448,117 987,957
------------ -------------
Total.................. $59,264,907 $ 62,579,615
============ =============
</TABLE>
11
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WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the consolidated financial statements of Whitman, the related notes to
consolidated financial statements and Management's Discussion and Analysis of
Financial Condition and Results of Operations included in Whitman's Form 10-K
for the year ended March 31, 1999 and the condensed consolidated financial
statements and the related notes to the condensed consolidated financial
statements included in Item 1 of this Quarterly Report on Form 10-Q. Except for
the historical matters contained herein, statements made in this report are
forward looking and are made pursuant to the safe harbor provisions of the
Securities Litigation Reform Act of 1995. Such statements may include, but are
not limited to our expectations regarding revenues, income, expenses, and cash
flows or other future financial performance, program introductions, and our
financing needs and plans for future operations. Investors are cautioned that
forward looking statements involve risks and uncertainties, including, but not
limited to, regulatory, licensing and accreditation risks inherent in operating
proprietary post- secondary educational institutions, risks relating to
unanticipated attrition or reductions in student enrollment, risks that
marketing efforts may not achieve anticipated results, risks that new programs
may not be implemented on a timely basis or be successful, and risks relating to
our ability to refinance or extend our line of credit, which may cause our
actual results, performance or achievements to differ materially from the
forward looking statements made in the report or otherwise made by or on our
behalf. Other factors that may affect our future results include the
unanticipated operational impact of Year 2000 issues and certain economic,
competitive, governmental and other factors discussed in our filings with the
Securities and Exchange Commission. We assume no responsibility to update
forward-looking statements made herein or otherwise.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship of certain
statement of operations data to net revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------ ------------------
<S> <C> <C> <C> <C>
1999 1998 1999 1998
-------- -------- ------- -------
Net revenues 100.0% 100.0% 100.0% 100.0%
-------- -------- -------- ------
Costs and expenses:
Instructional and
educational support........ 60.9 65.5 66.5 65.8
Selling and promotional...... 16.8 12.2 16.0 14.0
General and administrative... 16.6 15.6 17.7 18.3
------- ------- -------- ------
Total costs and expenses....... 94.3 93.3 100.2 98.1
------- ------- -------- ------
Income (loss)from operations... 5.7 6.7 (0.2) 1.9
Other (income) expenses:
Interest expense............. 1.4 1.8 1.5 1.9
Interest income.............. (0.4) (.3) (.4) (.4)
------- ------- -------- ------
Income (loss) before income
tax provision (benefit)....... 4.7 5.2 (1.3) .4
Income tax provision
(benefit)..................... 1.9 - (.5) (.6)
------- ------- -------- ------
Net income (loss) ............. 2.8% 5.2% (0.8)% 1.0%
======= ======= ======== ======
</TABLE>
12
<PAGE>
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
RESULTS OF OPERATIONS - (CONTINUED)
THREE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THE THREE MONTHS
ENDED DECEMBER 31, 1998
Net revenues increased by $1.3 million or 6.8% to $20.3 million for the
three months ended December 31, 1999 from $19.0 million for the three months
ended December 31, 1998. Excluding Huron University, which was sold in August
1999, net revenues increased by $2.4 million or 13.5% to $20.3 million for the
three months ended December 31, 1999 from $17.9 million for the three months
ended December 31, 1998. This increase was primarily due to a 7% increase in
average student enrollment and an increase in revenue earned per student.
Excluding Huron University, the University Degree Division experienced a
6.0% increase in average student enrollment and the Associate Degree Division
experienced a 7.4% 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 program 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. The increase in the revenue earned per student
was primarily due to an increase of approximately 7% in tuition rates in the
University Degree Division and the effect of the timing of the class start at
Sanford-Brown College in the third fiscal quarter in comparison to the prior
year.
Instructional and educational support decreased by $0.1 million or 0.8% to
$12.4 million for the three months ended December 31, 1999 from $12.5 million
for the three months ended December 31, 1998. As a percentage of net revenues,
instructional and educational support expenses decreased to 60.9% for the three
months ended December 31, 1999 as compared to 65.5% for the three months ended
December 31, 1998. Excluding Huron University, instructional and educational
support expenses increased by $1.3 million or 11.3% to $12.4 million for the
three months ended December 31, 1999 from $11.1 million for the three months
ended December 31, 1998. Excluding Huron University, as a percentage of net
revenues, instructional and educational support expenses increased to 60.9% for
the three months ended December 31, 1999 as compared to 62.10% for the three
months ended December 31, 1998. The increase in instructional and educational
support expenses was primarily due to an increase of $1.0 million in the
Associate Degree Division. The increase in instructional and educational support
expenses in the Associate Degree Division was primarily due to increases in
payroll and related benefits for faculty and staff to support the increased
enrollment and the offering of the new Health Information Specialist program at
certain of our Ultrasound Diagnostic Schools, and increases in occupancy and
depreciation expenses in the Associate Degree Division primarily related to the
expansion of facilities and the upgrade of equipment.
Selling and promotional expenses increased by $1.1 million or 47.7% to $3.4
million for the three months ended December 31, 1999 from $2.3 million for the
three months ended December 31, 1998. As a percentage of net revenues, selling
and promotional expenses increased to 16.8% for the three months ended December
31, 1999, as compared to 12.2% for the three months ended December 31, 1998.
This increase in selling and promotional expenses was primarily due to an
increase in advertising expenses and an increase in the admissions staffing in
the Associate Degree Division. We expect selling and promotional expenses to
represent a higher percentage of net revenues in the fourth quarter than in the
prior year due to higher advertising costs anticipated in connection with
marketing efforts directed at increasing enrollment.
13
<PAGE>
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
RESULTS OF OPERATIONS - (CONTINUED)
General and administrative expenses increased by $0.4 million or 13.5% to
$3.4 million for the three months ended December 31, 1999 from $3.0 million for
the three months ended December 31, 1998. As a percentage of net revenues,
general and administrative expenses increased to 16.6% for the three months
ended December 31, 1999 as compared to 15.6% for the three months ended December
31, 1998. The increase in general and administrative expenses was primarily due
to an increase of $0.5 million in the Associate Degree Division due to an
increase in administrative payroll expenses to support the growth in student
enrollment.
Income from operations was $1.2 million for the three months ended December
31, 1999 as compared to net income of $1.3 million for the three months ended
December 31, 1998. Excluding Huron University, income from operations decreased
by $0.5 million to $1.1 million for the three months ended December 31, 1999
from $1.6 million for the three months ended December 31, 1998.
Net income was $0.6 million for the three months ended December 31, 1999 as
compared to net income of $1.0 million for the three months ended December 31,
1998. The decrease in profitability was primarily due to the effect of a 39.8%
tax rate for the three months ended December 31, 1999 and no tax provision as a
result of the utilization of net operating loss carryforwards for the three
months ended December 31, 1998.
NINE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THE NINE MONTHS
ENDED DECEMBER 31, 1998
Net revenues increased by $3.6 million or 6.8% to $56.7 million for the
nine months ended December 31, 1999 from $53.1 million for the nine months ended
December 31, 1998. Excluding Huron University, which was sold in August 1999,
net revenues increased by $4.6 million or 9.1% to $55.3 million for the nine
months ended December 31, 1999 from $50.7 million for the nine months ended
December 31, 1998. This increase was primarily due to an 8.0% increase in
average student enrollment.
Excluding Huron University, the University Degree Division experienced a
9.7% increase and the Associate Degree Division experienced a 7.2% increase. 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 increased in Colorado Technical
University's information technology programs.
Instructional and educational support increased by $2.8 million or 8.0% to
$37.8 million for the nine months ended December 31, 1999 from $35.0 million for
the nine months ended December 31, 1998. As a percentage of net revenues,
instructional and educational support expenses increased to 64.3% for the nine
months ended December 31, 1999 as compared to 61.4% for the nine months ended
December 31, 1998. Excluding Huron University, instructional and educational
support expenses increased by $4.4 million or 14.3% to $35.6 million for the
nine months ended December 31, 1999 from $31.2 million for the nine months ended
December 31, 1998. Excluding Huron University, as a percentage of net revenues,
instructional and educational support expenses increased to 64.3% for
the nine months ended December 31, 1999 as compared to 61.4% for the
nine months ended December 31, 1998. This increase in instructional
and educational support expenses was primarily due to an
increase of $3.8 million in the Associate Degree Division. The
14
<PAGE>
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
RESULTS OF OPERATIONS - (CONTINUED)
increase in instructional and educational support expenses in the Associate
Degree Division was primarily due to an increase in payroll and related benefits
for faculty and staff 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 $1.7 million or 22.8% to $9.1
million for the nine months ended December 31, 1999 from $7.4 million for the
nine months ended December 31, 1998. As a percentage of net revenues, selling
and promotional expenses increased 16.0% for the nine months ended December 31,
1999 as compared to 14.0% for the nine months ended December 31, 1998. The
increase in selling and promotional expenses was primarily due to an increase in
advertising expenses in the Associate Degree Division. We expect selling and
promotional expenses to continue to represent a higher percentage of net
revenues for the fiscal year than in the prior year due to higher advertising
costs anticipated in connection with marketing efforts directed at increasing
enrollment.
General and administrative expenses increased by $0.3 million or 2.8% to
$10.0 million for the nine months ended December 31, 1999 from $9.7 million for
the nine months ended December 31, 1998. As a percentage of net revenues,
general and administrative expenses decreased to 17.7% for the nine months ended
December 31, 1999 as compared to 18.3% for the nine months ended December 31,
1998. 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 positions at the corporate office.
We reported a loss from operations of $.1 million for the three months
ended December 31, 1999 as compared to operating income of $1 million for the
year ended December 31, 1998. Excluding Huron University, income from operations
decreased from $2.1 million to $0.9 million for the nine months ended December
31, 1999 from $3.0 million for the nine months ended December 31, 1998.
We reported a net loss of $0.5 million and net income of $0.5 million for
the nine months ended December 31, 1999 and 1998, respectively. The decrease in
net income was primarily due a decrease in pre- tax profits of $3.1 million in
the Associate Degree Division, which was partially offset by an increase in pre-
tax profits of $2.2 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, and an
increase in selling and promotional expenses . Due to a shortfall in anticipated
new student enrollments for the nine months ended December 31, 1999, the
revenues generated in the Associate Degree Division did not offset the increase
in operating expenses.
15
<PAGE>
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
SEASONALITY
We experience seasonality in our quarterly results of operations as a
result of changes in the level of student enrollment. New enrollment in our
schools tends to be lower in the first and second fiscal quarters covering the
summer months which are traditionally associated with recess from school. Costs
are generally not significantly affected by the seasonal factors on a quarterly
basis. Accordingly, quarterly variations in net revenues will result in
fluctuations in income from operations on a quarterly basis.
The operating results of Huron University, which was sold in August 1999,
were significantly affected by seasonality. As a more traditional university,
Huron University experienced a significant decline in revenues during the late
spring and summer. The decline in revenues combined with a relatively constant
level of operating expenses resulted in operating losses of $377,000 at Huron
University for the three months ended December 31, 1998, and $2.0 million for
the nine months ended December 31, 1998. Due to the sale of Huron University,
our operating results were not affected by the operations of Huron University
for the three months ended December 31, 1999. For the nine months ended December
31, 1999, Huron University sustained operating losses of $1.0 million.
YEAR 2000 ISSUE
The Year 2000 issue refers to a condition in computer software where a two
digit field rather than a four digit field is used to distinguish a calendar
year. Unless corrected, some information technology hardware and software
systems ("IT systems") and non-information technology systems ("non-IT systems")
could be unable to process information containing dates subsequent to December
31, 1999. As a result, such programs and systems could experience
miscalculations, malfunctions or disruptions.
In order to ensure that our IT systems and non-IT systems function properly
in the year 2000, we implemented a process for identifying, prioritizing and
modifying or replacing certain computer and other systems and programs that may
be affected by the Year 2000 issue. We completed an assessment, remediation and
testing of our IT systems and assessed material non-IT systems that we utilize.
To date, we have not experienced any significant Year 2000 problems. While we
have not experienced any significant Year 2000 problems with respect to
significant suppliers, we can provide no assurance that these third parties will
not experience business interruption in the future.
The costs incurred with respect to the procedures performed to address the
Year 2000 issue were not material to our financial position, results of
operations or cash flows.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at December 31, 1999 and March 31, 1999 were $1.9
million and $4.3 million, respectively. The decrease in cash and cash
equivalents was primarily due to the net repayment of debt of $2.9 million. Our
working capital totalled $6.6 million at December 31, 1999 and $8.4 million at
March 31, 1999.
Net cash of $2.7 million was provided by operating activities
for the nine months ended December 31, 1999 compared to net cash
provided by operating activities of $5.3 million for the nine months ended
16
<PAGE>
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES - (CONTINUED)
December 31, 1998. The decrease of $2.6 million was primarily due to an decrease
in net income of $1.0 million and a decrease in accounts payable and accrued
expenses due to the timing of payments.
Net cash of $2.1 million and $1.7 million was used for investing activities
for the nine months ended December 31, 1999 and 1998, respectively. The increase
of $0.4 million was primarily due to the increase in net cash used for
investment in Newco.
Net cash of $2.9 million was used in financing activities for the nine
months ended December 31, 1999, compared to net cash of $5.0 million used in
financing activities for the nine months ended December 31, 1998. The decrease
in cash used in financing activities was due to a decrease of $2.6 million in
net payments on long-term borrowings.
We have an $8.5 million line of credit which expires on October 31, 2000.
At December 31, 1999, we had $6.5 million outstanding under this facility and
letters of credit outstanding of $956,000 which reduced the amount available for
borrowing. The amounts borrowed under this facility for the nine months ended
December 31, 1999 were primarily used for operations, repayment of debt and
capital expenditures. We intend to refinance or extend our line of credit
facility on a long-term basis prior to October 31, 2000.
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 February 4, 2000, we had repurchased 183,900 shares of our
common stock for approximately $350,000.
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. We receive approximately 71% of
our funding from the Title IV Programs. Disbursements under each program are
subject to disallowance and repayment by the schools.
We believe that with our working capital, our cash flow from operations,
our credit facilities 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.
17
<PAGE>
WHITMAN EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In July 1999, in the previously reported case styled, Cullen, et al.
v. Whitman Education Group, Inc., in the United States District Court for
the Eastern District of Pennsylvania (Civil Action No. 98-CV-4076), the
Court certified a class of all students in the general ultrasound program
who incurred financial obligations (federally guaranteed student loans or
aid) from August 1, 1994 to August 1, 1998 to attend an Ultrasound
Diagnostic School. The Court, however, rejected the plaintiffs' attempts to
certify a class action based on theories that the Ultrasound Diagnostic
School made misrepresentations to students and to its accrediting body. The
Court allowed the case to proceed as a class action only to the extent that
the plaintiffs could prove that the schools "did not meet even the most
minimal requirements of a vocational program." The Court subsequently
modified the class definition to all students in the general ultrasound
program who attended from August 1, 1994 to August 1, 1998 and who, at any
time, paid with federally guaranteed student loans or aid. Management
believes that the lawsuit is without merit and intends to continue to
vigorously defend it. While the outcome cannot be predicted with certainty,
if determined adversely to Whitman, it could have a material adverse effect
on its financial position and results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
27 Financial Data Schedule
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed by Whitman during the quarter ended
December 31, 1999.
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.
(Registrant)
By: /s/ Fernando L. Fernandez
-----------------------------------------
Fernando L. Fernandez
Vice President - Finance, Chief Financial
Officer and Treasurer
Date: Feburary 8, 2000
----------------
18
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