UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 

Form 10-Q

(Mark One)
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2015

or
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____
 

Commission File Number 000-51371

 
LINCOLN EDUCATIONAL SERVICES CORPORATION
(Exact name of registrant as specified in its charter)

New Jersey
 
57-1150621
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)

200 Executive Drive, Suite 340
 
07052
West Orange, NJ
 
(Zip Code)
(Address of principal executive offices)
   

(973) 736-9340
(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 ☒  No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒  No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ☐
Accelerated filer    ☒
   
Non-accelerated filer   ☐   (Do not check if a smaller reporting company)
Smaller reporting company  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of November 4 2015, there were 23,867,201 shares of the registrant’s common stock outstanding.
 


LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES

INDEX TO FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2015

PART I.
FINANCIAL INFORMATION
 
Item 1.
1
 
1
 
3
 
4
 
5
 
6
 
8
Item 2.
19
Item 3.
33
Item 4.
34
PART II.
34
Item 1.
34
Item 6.
35
 
36
 
PART I – FINANCIAL INFORMATION

Item 1.
Financial Statements
 
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)

   
September 30,
2015
   
December 31,
2014
 
   
(Unaudited)
     
ASSETS
       
CURRENT ASSETS:
       
Cash and cash equivalents
 
$
32,422
   
$
12,299
 
Restricted cash
   
7,358
     
30,000
 
Accounts receivable, less allowance of $12,366 and $12,193 at September 30, 2015 and December 31, 2014, respectively
    17,016        13,533   
Inventories
   
1,611
     
1,486
 
Prepaid income taxes and income taxes receivable
   
695
     
879
 
Assets held for sale
   
44,762
     
50,930
 
Prepaid expenses and other current assets
   
2,765
     
3,937
 
Total current assets
   
106,629
     
113,064
 
                 
PROPERTY, EQUIPMENT AND FACILITIES - At cost, net of accumulated depreciation and amortization of $147,102 and $136,910 at September 30, 2015 and December 31, 2014, respectively
   
66,627
     
69,740
 
                 
OTHER ASSETS:
               
Noncurrent restricted cash
   
15,254
     
-
 
Noncurrent receivables, less allowance of $943 and $1,016 at September 30, 2015 and December 31, 2014, respectively
   
5,921
     
6,235
 
Deferred finance charges
   
2,783
     
158
 
Goodwill
   
21,991
     
22,207
 
Other assets, net
   
2,703
     
2,303
 
Total other assets
   
48,652
     
30,903
 
TOTAL
 
$
221,908
   
$
213,707
 

See notes to unaudited condensed consolidated financial statements.
 
1

LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Continued)

   
September 30,
2015
   
December 31,
2014
 
   
(Unaudited)
     
LIABILITIES AND STOCKHOLDERS' EQUITY
       
CURRENT LIABILITIES:
       
Current portion of credit agreement
 
$
5,813
   
$
30,000
 
Current portion of  capital lease obligations
   
515
     
471
 
Unearned tuition
   
26,803
     
26,469
 
Accounts payable
   
15,184
     
11,894
 
Accrued expenses
   
15,083
     
13,865
 
Other short-term liabilities
   
730
     
780
 
Total current liabilities
   
64,128
     
83,479
 
                 
NONCURRENT LIABILITIES:
               
Long-term credit agreement
   
38,837
     
-
 
Long-term capital lease obligations
   
24,644
     
25,038
 
Long-term finance obligation
   
9,672
     
9,672
 
Pension plan liabilities
   
5,250
     
5,299
 
Accrued rent
   
6,584
     
6,852
 
Other long-term liabilities
   
215
     
357
 
Total liabilities
   
149,330
     
130,697
 
                 
COMMITMENTS AND CONTINGENCIES
               
                 
STOCKHOLDERS' EQUITY:
               
Preferred stock, no par value - 10,000,000 shares authorized, no shares issued and outstanding at September 30, 2015 and December 31, 2014
   
-
     
-
 
Common stock, no par value - authorized: 100,000,000 shares at September 30 2015 and December 31, 2014; issued and outstanding: 29,777,742 shares at September 30, 2015 and 29,933,086 shares at December 31, 2014
   
141,377
     
141,377
 
Additional paid-in capital
   
27,131
     
26,350
 
Treasury stock at cost - 5,910,541 shares at September 30, 2015 and December 31, 2014
   
(82,860
)
   
(82,860
)
(Accumulated deficit) retained earnings
   
(6,297
)
   
5,610
 
Accumulated other comprehensive loss
   
(6,773
)
   
(7,467
)
Total stockholders' equity
   
72,578
     
83,010
 
TOTAL
 
$
221,908
   
$
213,707
 

See notes to unaudited condensed consolidated financial statements.
 
2

LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2015
   
2014
   
2015
   
2014
 
                 
REVENUE
 
$
79,046
   
$
83,982
   
$
228,159
   
$
239,573
 
COSTS AND EXPENSES:
                               
Educational services and facilities
   
39,026
     
42,440
     
114,572
     
124,879
 
Selling, general and administrative
   
34,944
     
41,712
     
120,200
     
132,901
 
Loss (gain) on sale of assets
   
228
     
-
     
188
     
(61
)
Impairment of goodwill and long-lived assets
   
216
     
39,315
     
216
     
39,315
 
Total costs & expenses
   
74,414
     
123,467
     
235,176
     
297,034
 
OPERATING INCOME (LOSS)
   
4,632
     
(39,485
)
   
(7,017
)
   
(57,461
)
OTHER:
                               
Interest income
   
19
     
53
     
40
     
125
 
Interest expense
   
(2,216
)
   
(1,637
)
   
(5,570
)
   
(4,131
)
Other income
   
196
     
149
     
790
     
149
 
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
   
2,631
     
(40,920
)
   
(11,757
)
   
(61,318
)
PROVISION (BENEFIT) FOR INCOME TAXES
   
50
     
(5,556
)
   
150
     
(4,719
)
INCOME (LOSS) FROM CONTINUING OPERATIONS
   
2,581
     
(35,364
)
   
(11,907
)
   
(56,599
)
LOSS FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES
   
-
     
(2,717
)
   
-
     
(4,172
)
NET INCOME (LOSS)
 
$
2,581
   
$
(38,081
)
 
$
(11,907
)
 
$
(60,771
)
Basic
                               
Income (loss) per share from continuing operations
 
$
0.11
   
$
(1.55
)
 
$
(0.51
)
 
$
(2.48
)
Loss per share from discontinued operations
   
-
     
(0.12
)
   
-
     
(0.18
)
Net income (loss) per share
 
$
0.11
   
$
(1.67
)
 
$
(0.51
)
 
$
(2.66
)
Diluted
                               
Income (loss) per share from continuing operations
 
$
0.11
   
$
(1.55
)
 
$
(0.51
)
 
$
(2.48
)
Loss per share from discontinued operations
   
-
     
(0.12
)
   
-
     
(0.18
)
Net income (loss) per share
 
$
0.11
   
$
(1.67
)
 
$
(0.51
)
 
$
(2.66
)
Weighted average number of common shares outstanding:
                               
Basic
   
23,230
     
22,843
     
23,140
     
22,789
 
Diluted
   
23,270
     
22,843
     
23,140
     
22,789
 

See notes to unaudited condensed consolidated financial statements.
 
3

LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2015
   
2014
   
2015
   
2014
 
Net income (loss)
 
$
2,581
   
$
(38,081
)
 
$
(11,907
)
 
$
(60,771
)
Other comprehensive income                                
Employee pension plan adjustments, net of taxes
   
231
     
113
     
694
     
338
 
Comprehensive income (loss)
 
$
2,812
   
$
(37,968
)
 
$
(11,213
)
 
$
(60,433
)

See notes to unaudited condensed consolidated financial statements.
 
4

LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
(Unaudited)

   
Common Stock
   
Additional
Paid-in
   
Treasury
   
Retained Earnings (Accumulated
   
Accumulated Other Comprehensive
     
   
Shares
   
Amount
   
Capital
   
Stock
   
Deficit)
   
Loss
   
Total
 
BALANCE - January 1, 2015
   
29,933,086
   
$
141,377
   
$
26,350
   
$
(82,860
)
 
$
5,610
   
$
(7,467
)
 
$
83,010
 
Net loss
   
-
     
-
     
-
     
-
     
(11,907
)
   
-
     
(11,907
)
Employee pension plan adjustments, net of taxes
   
-
     
-
     
-
     
-
     
-
     
694
     
694
 
Stock-based compensation expense
                                                       
Restricted stock
   
(106,269
)
   
-
     
852
     
-
     
-
     
-
     
852
 
Stock options
   
-
     
-
     
33
     
-
     
-
     
-
     
33
 
Net share settlement for equity-based compensation
   
(49,075
)
   
-
     
(104
)
   
-
     
-
     
-
     
(104
)
BALANCE - September 30, 2015
   
29,777,742
   
$
141,377
   
$
27,131
   
$
(82,860
)
 
$
(6,297
)
 
$
(6,773
)
 
$
72,578
 

   
Common Stock
   
Additional
Paid-in
   
Treasury
   
Retained Earnings (Accumulated
   
Accumulated Other Comprehensive
     
   
Shares
   
Amount
   
Capital
   
Stock
   
Deficit)
   
Loss
   
Total
 
BALANCE - January 1, 2014
   
29,919,761
   
$
141,377
   
$
24,177
   
$
(82,860
)
 
$
66,064
   
$
(3,562
)
 
$
145,196
 
Net loss
   
-
     
-
     
-
     
-
     
(60,771
)
           
(60,771
)
Employee pension plan adjustments, net of taxes
   
-
     
-
     
-
     
-
     
-
     
338
     
338
 
Stock-based compensation expense
                                                       
Restricted stock
   
79,582
     
-
     
2,408
     
-
     
-
     
-
     
2,408
 
Stock options
   
-
     
-
     
78
     
-
     
-
     
-
     
78
 
Net share settlement for equity-based compensation
   
(27,682
)
   
-
     
(112
)
   
-
     
-
     
-
     
(112
)
Cash Dividend of $0.16 per common share
                                   
(3,841
)
           
(3,841
)
BALANCE - September 30, 2014
   
29,971,661
   
$
141,377
   
$
26,551
   
$
(82,860
)
 
$
1,452
   
$
(3,224
)
 
$
83,296
 
 
See notes to unaudited condensed consolidated financial statements.
 
5

LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

   
Nine Months Ended
September 30,
 
   
2015
   
2014
 
         
CASH FLOWS FROM OPERATING ACTIVITIES:
       
Net loss
 
$
(11,907
)
 
$
(60,771
)
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Depreciation and amortization
   
10,727
     
14,756
 
Amortization of deferred finance charges
   
356
     
615
 
Deferred income taxes
   
-
     
(4,528
)
Loss (gain) on sale of assets
   
188
     
(61
)
Impairment of goodwill and long-lived assets
   
216
     
41,437
 
Fixed asset donation
   
(20
)
   
(62
)
Provision for doubtful accounts
   
10,886
     
11,836
 
Stock-based compensation expense
   
885
     
2,486
 
Deferred rent
   
(505
)
   
(499
)
(Increase) decrease in assets:
               
Accounts receivable
   
(14,216
)
   
(15,508
)
Inventories
   
(135
)
   
47
 
Prepaid income taxes and income taxes receivable
   
184
     
7,161
 
Prepaid expenses and current assets
   
1,128
     
281
 
Other assets and charges
   
(1,382
)
   
286
 
Increase (decrease) in liabilities:
               
Accounts payable
   
3,326
     
(5,026
)
Accrued expenses
   
1,274
     
4,370
 
Pension plan liabilities
   
-
     
(180
)
Unearned tuition
   
1,034
     
4,663
 
Other liabilities
   
453
     
18
 
Total adjustments
   
14,399
     
62,092
 
Net cash provided by operating activities
   
2,492
     
1,321
 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Capital expenditures
   
(1,606
)
   
(4,796
)
Proceeds from sale of property and equipment
   
447
     
67
 
Net cash used in investing activities
   
(1,159
)
   
(4,729
)
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Payments on borrowings
   
(38,850
)
   
(64,500
)
Reclassifications of payments of borrowings from restricted cash
   
30,000
     
54,500
 
Reclassifications of proceeds of borrowings from restricted cash
   
(22,612
)
   
-
 
Payment of deferred finance fees
   
(2,794
)
   
-
 
Proceeds from borrowings
   
53,500
     
17,500
 
Net share settlement for equity-based compensation
   
(104
)
   
(112
)
Dividends paid
   
-
     
(3,841
)
Principal payments under capital lease obligations
   
(350
)
   
(323
)
Net cash provided by financing activities
   
18,790
     
3,224
 
NET DECREASE IN CASH AND CASH EQUIVALENTS
   
20,123
     
(184
)
CASH AND CASH EQUIVALENTS—Beginning of period
   
12,299
     
12,886
 
CASH AND CASH EQUIVALENTS—End of period
 
$
32,422
   
$
12,702
 
 
See notes to unaudited condensed consolidated financial statements.
 
6

LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
(Continued)

   
Nine Months Ended
September 30,
 
   
2015
   
2014
 
         
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
       
Cash paid during the year for:
       
Interest
 
$
5,162
   
$
3,315
 
Income taxes
 
$
79
   
$
120
 
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
               
Liabilities accrued for or noncash purchases of fixed assets
 
$
757
   
$
1,333
 

See notes to unaudited condensed consolidated financial statements.
 
7

LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014
(In thousands, except share and per share amounts and unless otherwise stated)
(Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business Activities – Lincoln Educational Services Corporation and its subsidiaries (collectively, the “Company”) is a provider of diversified career-oriented post-secondary education. The Company reorganized its operations in the first quarter of 2015 into three reportable segments:  a) Transportation and Skilled Trades, b) Healthcare and Other Professions, and c) Transitional.  The Company offers recent high school graduates and working adults career-oriented programs in these segments.  The Company currently has 31 campuses in 15 states across the United States.

LiquidityFor the last several years, the Company and the proprietary school sector have faced deteriorating earnings. Government regulations have negatively impacted earnings by making it more difficult for potential students to obtain loans, which, when coupled with the overall economic environment, have hindered potential students from enrolling in its post-secondary schools. In light of these factors, the Company has incurred significant operating losses as a result of lower student population. The Company also recorded a pre-tax goodwill impairment charge of $39.0 million for the year ended December 31, 2014 as a result of a significant decline in market capitalization. Despite these events, the Company believes that its likely sources of cash should be sufficient to fund operations for the next twelve months. At September 30, 2015, the Company’s available sources of cash primarily included cash from operations, and cash and cash equivalents of $32.4 million which increased from December 31, 2014 mainly from $19.6 million related to our new term loan agreement net of finance fees.

To fund the Company’s business plans, including any anticipated future losses, purchase commitments, capital expenditures and principal and interest payments on borrowings, the Company leveraged its owned real estate that is not classified as held for sale. The Company is also continuing to take actions to improve cash flow by aligning its cost structure to its student population.
                                   
In addition to the current sources of capital discussed above that provide short term liquidity, the Company plans to sell approximately $44.8 million in assets which are currently classified as held for sale and are expected to be sold within one year from the date of classification.
                             
Basis of Presentation – The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements.  Certain information and footnote disclosures normally included in annual financial statements have been omitted or condensed pursuant to such regulations.  These statements, which should be read in conjunction with the December 31, 2014 consolidated financial statements and related disclosures of the Company included in the Annual Report on Form 10-K filed with the SEC on March 16, 2015, reflect all adjustments, consisting of normal recurring adjustments necessary to present fairly the consolidated financial position, results of operations and cash flows for such periods.  The results of operations for the three and nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2015.

The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries.  All significant intercompany accounts and transactions have been eliminated.

Use of Estimates in the Preparation of Financial Statements – The preparation of financial statements in conformity with GAAP 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 consolidated financial statements and the reported amounts of revenues and expenses during the period. On an ongoing basis, the Company evaluates the estimates and assumptions including those related to revenue recognition, bad debts, fixed assets, goodwill and other intangible assets, stock-based compensation, income taxes, benefit plans and certain accruals and contingencies. Actual results could materially differ from those estimates.
 
New Accounting Pronouncements In April 2015, the Financial Accounting Standards Board (“FASB”) issued accounting guidance related to the presentation of debt issuance costs in the balance sheet as a direct reduction from the carrying amount of the debt liability, consistent with debt discounts, rather than as an asset.  Amortization of debt issuance costs will continue to be reported as interest expense.  Debt issuance costs related to revolving credit arrangements, however, will continue to be presented as an asset and amortized ratably over the term of the arrangement.  In August 2015, the FASB issued accounting guidance related to the presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements which clarifies that companies may continue to present unamortized debt issuance costs associated with line of credit arrangements as an asset.  These pronouncements are effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, with early adoption permitted.  The Company will not early adopt this new guidance and it will not have a significant impact on the Company’s financial statements.
 
8

In January 2015, the FASB issued Accounting Standards Update (“ASU”) No. 2015-01, Income Statement – Extraordinary and Unusual Items. ASU 2015-01 simplifies income statement classification by removing the concept of extraordinary items from U.S. GAAP. Under the existing guidance, an entity is required to separately disclose extraordinary items, net of tax, in the income statement after income from continuing operations if an event or transaction is of unusual nature and occurs infrequently. This separate, net-of-tax presentation (and corresponding earnings per share impact) will no longer be allowed. The existing requirement to separately present items that are of unusual nature or occur infrequently on a pre-tax basis within income from continuing operations has been retained. The new guidance also requires similar separate presentation of items that are both unusual and infrequent. The guidance, effective for the Company on January 1, 2016, with earlier application permitted as of the beginning of the fiscal year of adoption, is not expected to have a material impact on our consolidated financial statements.

In August 2014, the FASB issued a new standard – ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern - that will explicitly require management to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures in certain circumstances. According to the new standard, substantial doubt about an entity’s ability to continue as a going concern exists if it is probable that the entity will be unable to meet its obligations as they become due within one year after the date the entity’s financial statements are issued. In order to determine the specific disclosures, if any, that would be required, management will need to assess if substantial doubt exists, and, if so, whether its plans will alleviate such substantial doubt. The new standard requires assessment each annual and interim period and will be effective for the Company on December 31, 2016 with earlier application permitted.

In May 2014, the FASB issued a new standard related to revenue recognition, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The new standard will replace most of the existing revenue recognition standards in GAAP.  In July 2015, the FASB voted to defer the effective date by one year to December 15, 2017 for annual reporting periods beginning after that date.  In August 2015, the FASB issued ASU 2015-14, wherein it was approved to defer the effective date of the Boards revenue standard ASU 2014-09 by one year for all entities and permits early adoption on a limited basis.  The new standard can be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of the change recognized at the date of the initial application. The Company is assessing the potential impact of the new standard on financial reporting and has not yet selected a transition method.

In April 2014, the FASB issued amended guidance on the use and presentation of discontinued operations in an entity's consolidated financial statements. The new guidance restricts the presentation of discontinued operations to business circumstances when the disposal of business operations represents a strategic shift that has or will have a major effect on an entity's operations and financial results. The guidance became effective on January 1, 2015. Adoption is on a prospective basis.  The Company adopted the new guidance as of December 31, 2014 and based on the guidance did not present the schools that are held for sale as discontinued operations in the consolidated financial statements.  As discussed in Note 4, the Company did include the five training sites from Florida in discontinued operations in the consolidated financial statements for the year ended December 31, 2014 as they qualify for such treatment under the amended guidance.

Revenue recognitionRevenues are derived primarily from programs taught at the Company’s schools.  Tuition revenues, textbook sales and one-time fees, such as nonrefundable application fees and course material fees, are recognized on a straight-line basis over the length of the applicable program as the student proceeds through the program, which is the period of time from a student’s start date through his or her graduation date, including internships or externships that take place prior to graduation, and the Company completes the performance of teaching the student which entitles the Company to the revenue. The Company evaluates whether collectability of revenue is reasonably assured prior to the student attending class and reassess collectability of tuition and fees when a student withdraws from a course.  The Company calculates the amount to be returned under Title IV and its stated refund policy to determine eligible charges and, if there is a balance due from the student after this calculation, the Company expect payment from the student and the Company has a process to pursue uncollected accounts whereby, based upon the student’s financial means and ability to pay, a payment plan is established with the student to ensure that collectability is reasonable.  The Company continuously monitors its historical collections to identify potential trends that may impact our determination that collectability of receivables for withdrawn students is realizable.  If a student withdraws from a program prior to a specified date, federal and state regulations permit us to retain a fixed percentage of the total tuition received from the student, which varies with, but generally equals or exceed, the percentage of the term completed by the student.  Tuition amount received by the Company in excess of such fixed percentage of tuition are refunded to the student or the appropriate funding source, as applicable with all refunds netted against revenue during the applicable academic term. Refunds are calculated and paid in accordance with federal, state and accrediting agency standards.  When a student withdraws from a program after a specified date with a balance due to the Company, it takes a reserve of a percentage of the student’s balance based on our current collection history.

Stock-Based Compensation – The Company measures the value of stock options on the grant date at fair value, using the Black-Scholes option valuation model.  The Company amortizes the fair value of stock options, net of estimated forfeitures, utilizing straight-line amortization of compensation expense over the requisite service period of the grant.
 
9

The Company measures the value of service and performance-based restricted stock on the fair value of a share of common stock on the date of the grant. The Company amortizes the fair value of service-based restricted stock utilizing straight-line amortization of compensation expense over the requisite service period of the grant.

The Company amortizes the fair value of the performance-based restricted stock based on the determination of the probable outcome of the performance condition.  If the performance condition is expected to be met, then the Company amortizes the fair value of the number of shares expected to vest utilizing straight-line basis over the requisite performance period of the grant.  However, if the associated performance condition is not expected to be met, then the Company does not recognize the stock-based compensation expense.

Income Taxes – The Company accounts for income taxes in accordance with FASB Accounting Standards Code Topic 740, “Income Taxes” (“ASC 740”). This statement requires an asset and liability approach for measuring deferred taxes based on temporary differences between the financial statement and tax bases of assets and liabilities existing at each balance sheet date using enacted tax rates for years in which taxes are expected to be paid or recovered.
 
In accordance with ASC 740, the Company assesses its deferred tax asset to determine whether all or any portion of the asset is more likely than not unrealizable.  A valuation allowance is required to be established or maintained when, based on currently available information, it is more likely than not that all or a portion of a deferred tax asset will not be realized. In accordance with ASC 740, the Company’s assessment considers whether there has been sufficient income in recent years and whether sufficient income is expected in future years in order to utilize the deferred tax asset. In evaluating the realizability of deferred income tax assets, the Company considered, among other things, historical levels of income, expected future income, the expected timing of the reversals of existing temporary reporting differences, and the expected impact of tax planning strategies that may be implemented to prevent the potential loss of future income tax benefits. Significant judgment is required in determining the future tax consequences of events that have been recognized in the Company’s consolidated financial statements and/or tax returns.  Differences between anticipated and actual outcomes of these future tax consequences could have a material impact on the Company’s consolidated financial position or results of operations.  Changes in, among other things, income tax legislation, statutory income tax rates, or future income levels could materially impact the Company’s valuation of income tax assets and liabilities and could cause the Company’s income tax provision to vary significantly among financial reporting periods.
 
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense.  During the three and nine months ended September 30, 2015 and 2014, the Company did not have any interest and penalties expense associated with uncertain tax positions.
 
2. WEIGHTED AVERAGE COMMON SHARES

The weighted average number of common shares used to compute basic and diluted income (loss) per share for the three and nine months ended September 30, 2015 and 2014 was as follows:

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2015
   
2014
   
2015
   
2014
 
Basic shares outstanding
   
23,230,438
     
22,843,247
     
23,140,006
     
22,789,254
 
Dilutive effect of stock options
   
39,197
     
-
     
-
     
-
 
Diluted shares outstanding
   
23,269,635
     
22,843,247
     
23,140,006
     
22,789,254
 

For the three months ended September 30, 2014, options to acquire 132,595 shares were excluded from the above table because the Company reported a net loss for each quarter and therefore their impact on reported loss per share would have been antidilutive.  For the nine months ended September 30, 2015 and 2014, options to acquire 47,015 and 121,269 shares, respectively, were excluded from the above table because the Company reported a net loss for each quarter and therefore their impact on reported loss per share would have been antidilutive.  For the three and nine months ended September 30, 2015 and 2014, options to acquire 540,567 and 476,625 shares, respectively, were excluded from the above table because they have an exercise price that is greater than the average market price of the Company’s common stock and therefore their impact on reported loss per share would have been antidilutive.

In each of 2013 and 2014, the Company issued performance shares that vest when certain performance conditions are satisfied.  As of September 30, 2015, these performance conditions were not met.  As a result, the Company has determined these shares to be contingently issuable.  Accordingly, 152,837 shares of outstanding performance shares have been excluded from the computation of diluted earnings per share for the three and nine months ended September 30, 2015, and 398,250 shares have been excluded for the three and nine months ended September 30, 2014.  Refer to Note 6 for more information on performance shares.
 
10

3. DISCONTINUED OPERATIONS

On December 3, 2014, the Company’s Board of Directors approved a plan to cease operations at five training sites in Florida.  The Company performed a cost benefit analysis on several schools and concluded that the training sites contained a high fixed cost component and had difficulty attracting a sufficient number of students due to high competition to maintain a stable profit margin. Accordingly, the Company ceased operations at these campuses as of December 31, 2014.  This was a strategic shift to close all of the Company’s training sites and all locations that do not accept Title IV payments.  The results of operations of these campuses are reflected as discontinued operations in the condensed consolidated financial statements.

The results of operations at these five training sites for the three and nine months ended September 30, 2014 was as follows (in thousands):

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2014
   
2014
 
Revenue
 
$
677
   
$
2,205
 
Operating expenses
   
3,504
     
6,462
 
Operating loss
 
$
(2,827
)
 
$
(4,257
)

4. GOODWILL AND LONG-LIVED ASSETS

The Company reviews long-lived assets for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable.

The Company reviews goodwill and intangible assets for impairment when indicators of impairment exist.  Annually, or more frequently if necessary, the Company evaluates goodwill and intangible assets with indefinite lives for impairment, with any resulting impairment reflected as an operating expense.

The Company concluded that as of September 30, 2015 there was an indicator of potential impairment as a result of a decrease in market capitalization and, accordingly, the Company tested goodwill for impairment.  The test indicated that one of the Company’s reporting units was impaired, which resulted in a pre-tax non-cash charge of $0.2 million for the three months ended September 30, 2015.

As of September 30, 2014, the Company concluded that there was an indicator of potential impairment as a result of a decrease in market capitalization and, accordingly, the Company tested goodwill for impairment.  The test indicated that 10 of the Company’s reporting units were impaired, which resulted in a pre-tax charge of $39.0 million for the three months ended September 30, 2014.

As of September 30, 2015, the Company concluded that there was sufficient evidence to conclude that there was no impairment of long-lived assets.  Long-lived assets were tested at these campuses as a result of certain financial indicators such as the Company’s history of losses, current respective period losses, as well as future projected losses at these campuses.

As of September 30, 2014, the Company concluded that there was sufficient evidence to conclude that there were impairments of certain long-lived assets at six of the Company’s campuses.  Long-lived assets were tested at these campuses as a result of certain financial indicators such as the Company’s history of losses, current respective period losses, as well as future projected losses at these campuses.  The long-lived impairment resulted in a pre-tax charge of $1.9 million for leasehold improvements and a $0.5 million for intangible assets.
 
11

The carrying amount of goodwill at September 30, 2015 and 2014 is as follows:
 
   
Gross
Goodwill Balance
   
Accumulated Impairment Losses
   
Net
Goodwill Balance
 
Balance as of January 1, 2015
 
$
115,872
   
$
(93,665
)
 
$
22,207
 
Goodwill impairment
   
-
     
(216
)
   
(216
)
Balance as of September 30, 2015
 
$
115,872
   
$
(93,881
)
 
$
21,991
 

   
Gross
Goodwill Balance
   
Accumulated Impairment Losses
   
Net
Goodwill Balance
 
Balance as of January 1, 2014
 
$
117,176
   
$
(54,711
)
 
$
62,465
 
Goodwill impairment
   
-
     
(38,954
)
   
(38,954
)
Balance as of September 30, 2014
 
$
117,176
   
$
(93,665
)
 
$
23,511
 
 
Intangible assets, which are included in other assets in the accompanying condensed consolidated balance sheets, consist of the following:

   
Trade
Name
   
Accreditation
   
Curriculum
   
Total
 
Gross carrying amount at December 31, 2014
 
$
310
   
$
1,062
   
$
550
   
$
1,922
 
Adjustments
   
-
     
-
     
-
     
-
 
Gross carrying amount at September 30, 2015
   
310
     
1,062
     
550
     
1,922
 
                                 
Accumulated amortization at December 31, 2014
   
264
     
-
     
469
     
733
 
Amortization
   
33
     
-
     
15
     
48
 
Accumulated amortization at September 30, 2015
   
297
     
-
     
484
     
781
 
                                 
Net carrying amount at September 30, 2015
 
$
13
   
$
1,062
   
$
66
   
$
1,141
 
                                 
Weighted average amortization period (years)
   
7
   
Indefinite
     
10
         

Amortization of intangible assets was less than $0.1 million for each of the three months ended September 30, 2015 and 2014.  Amortization of intangible assets was $0.1 million for each of the nine months ended September 30, 2015 and 2014.
 
12

The following table summarizes the estimated future amortization expense:
 
Year Ending December 31,
   
Remainder of 2015
 
$
16
 
2016
   
22
 
2017
   
20
 
2018
   
20
 
2019
   
1
 
Thereafter
   
-
 
         
   
$
79
 

5. LONG-TERM DEBT AND LEASE OBLIGATIONS

Long-term debt and lease obligations consist of the following:

   
September 30,
2015
   
December 31,
2014
 
Term loan (a)
 
$
44,650
   
$
-
 
Credit agreement (a)
   
-
     
30,000
 
Finance obligation (b)
   
9,672
     
9,672
 
Capital lease-property (rate of 8.0%) (c)
   
25,159
     
25,509
 
     
79,481
     
65,181
 
Less current maturities
   
(6,328
)
   
(30,471
)
   
$
73,153
   
$
34,710
 
 
(a) On July 31, 2015, the Company entered into a credit agreement (the “Agreement”) with three lenders, Alostar Bank of Commerce (“Alostar”), HPF Holdco, LLC and Rushing Creek 4, LLC, led by HPF Service, LLC, as administrative agent and collateral agent (the “Agent”), for an aggregate principal amount of $45 million (the “Loan”).  The Loan consists of a $30 million term loan agreement from HPF Holdco, LLC and Rushing Creek 4, LLC secured by a first priority lien in favor of the Agent on substantially all of the real and personal property owned by the Company, and a $15 million term loan agreement from Alostar secured by a $15.3 million cash collateral account. At the Borrowers’ request, a percentage of the cash collateral may be released to the Borrowers in the Agent’s sole discretion and with the consent of Alostar upon the satisfaction of certain criteria as outlined in the Term Loan Agreement. The Loan, which matures on July 31, 2019, replaces the Company’s previously existing $20 million revolving credit facility with Bank of America, N.A. and other lenders, which was due to expire on April 5, 2016.  The previously existing revolving credit facility was terminated concurrently with the effective date of the Term Loan Agreement on July 31, 2015 (the “Closing Date”).
 
A portion of the proceeds of the Loan were used by the Company to (i) repay approximately $6.3 million in outstanding principal, accrued interest and fees due under the previously existing revolving credit facility, (ii) fund the $15.3 million cash collateral account securing the portion of the Loan provided by Alostar, (iii) fund approximately $7.4 million in a cash collateral account securing the letters of credit issued under the previously existing revolving credit facility that remain outstanding after the termination of that facility and (iv) pay transaction expenses in connection with the Loan and the termination of the previously existing revolving credit facility.  The remaining proceeds of the Loan of approximately $13.8 million may be used by the Borrowers to finance capital expenditures and for general corporate purposes consistent with the terms of the Term Loan Agreement.
 
Interest will accrue on the Loan at a per annum rate equal to the greater of (i) 11% or (ii) 90-day LIBOR plus 9%  determined monthly by the Agent and will be payable monthly in arrears.  The principal balance of the Loan will be repaid in equal monthly installments, commencing on August 1, 2017, determined as the quotient of (i) 10% of the outstanding principal balance of the Loan as of July 2, 2017 divided by (ii) 12.  A final installment of principal and all accrued and unpaid interest will be due on the maturity date of the Loan.

The Loan may be prepaid in whole or in part at any time, subject to the payment of a prepayment premium equal to (i) 5% of the principal amount prepaid at any time up to but not including the second anniversary of the Closing Date and (ii) 3% of the principal amount prepaid at any time commencing on the second anniversary of the Closing Date up to but not including the third anniversary of the Closing Date.  In the event of any sale or other disposition of a school or real property by the Company permitted under the Term Loan Agreement, the net proceeds of such sale or disposition must be used to prepay the Loan in an amount determined pursuant to the Term Loan Agreement, subject to the applicable prepayment premium; provided, however, that no prepayment premium will be due with respect to up to $15 million of aggregate repayments of the Loan made during the first year that the Loan is outstanding.  A portion of the net cash proceeds of any disposition of a school in an amount determined pursuant to the terms of the Term Loan Agreement, must be deposited and held as cash collateral in a deposit account controlled by the Agent until the conditions for release set forth in the Term Loan Agreement are satisfied.  In connection with the assets which are currently classified as held for sale and are expected to be sold within one year, we are required to classify $5.8 million as short term debt because of prepayment minimum as required with any disposition.
13

For the three months ended September 30, 2015, $0.4 million of the Term Loan Agreement was repaid in connection with the Company’s sale of real property located in Springdale, Ohio. The Company had $44.7 million outstanding under the Term Loan Agreement as of September 30, 2015.
 
The Company had $30.0 million outstanding under its previously existing revolving credit facility as of December 31, 2014 which was repaid on January 3, 2015.  The interest rate on this borrowing was 7.25%.

The Term Loan Agreement contains customary representations, warranties and covenants such as minimum financial responsibility composite score, cohort default rate, and other financial covenants, including minimum liquidity, maximum capital expenditures, minimum fixed charge coverage ratio, maximum 90/10 ratio and minimum EBITDA (as defined in the Term Loan Agreement), as well as affirmative and negative covenants and events of default customary for facilities of this type.  The Company was in compliance with all covenants as of September 30, 2015.
 
The Term Loan Agreement contains-events of default, the occurrence and continuation of which provide the lenders with the right to exercise remedies against the Company and the cash and other collateral securing the Loan. These events of default include, among other things, the failure to pay principal, interest or any other amounts when due with respect to the Loan, the breach of covenants in the Term Loan Agreement and related collateral security agreements, the occurrence of an insolvency event for the Company or any of its subsidiaries, the issuance of a notice of intent to suspend, terminate or limit Title IV program eligibility or an educational approval  of the Company or any of its subsidiaries that could reasonably be expected to result in a Material Adverse Change (as defined in the Term Loan Agreement), the occurrence of a default respect to other indebtedness of the Company or any of its subsidiaries that involves an aggregate amount of $0.5 million or more, and the entry of a final judgment against the Company or any of its subsidiaries in the aggregate amount of $1 million or more.
                   
Also, in connection with the Term Loan Agreement, the Company paid to the Agent a commitment fee of $1.0 million and is required to pay to the Agent other customary fees for facilities of this type. Total fees for the Term Loan Agreement were $2.8 million which are included in deferred finance charges on the consolidated balance sheet.

(b) The Company completed a sale and a leaseback of several facilities on December 28, 2001. The Company retains a continuing involvement in the lease and, as a result, it is prohibited from utilizing sale-leaseback accounting. Accordingly, the Company has treated this transaction as a finance lease. The lease expires on December 31, 2016.

(c) In 2009, the Company assumed real estate capital leases in Fern Park, Florida and Hartford, Connecticut.  These leases bear interest at 8% and expire in 2032 and 2031, respectively.

Scheduled maturities of long-term debt and lease obligations at September 30, 2015 are as follows:
 
Year ending December 31,
   
2015
 
$
121
 
2016
   
6,384
 
2017
   
2,610
 
2018
   
5,275
 
2019
   
33,388
 
Thereafter
   
22,031
 
   
$
69,809
 

The finance obligation of $9.7 million is excluded from the scheduled maturities schedule as it is a non-cash liability.

6. STOCKHOLDERS’ EQUITY

Restricted Stock

The Company has two stock incentive plans:  a Long-Term Incentive Plan (the “LTIP”) and a Non-Employee Directors Restricted Stock Plan (the “Non-Employee Directors Plan”).

Under the LTIP, certain employees received awards of restricted shares of common stock based on service and performance.  The number of shares granted to each employee is based on the fair market value of a share of common stock on the date of grant.
 
14

The service-based restricted shares granted during 2012 vest ratably on the grant date and the first through fourth anniversaries of the grant date. The service-based restricted shares granted during 2014 vest ratably on the grant date and the first through third anniversaries of the grant date.
                                                 
On June 2, 2014 and December 18, 2014, performance-based shares were granted which vest over three years based upon the attainment of (i) a specified operating income margin during any one or more of the fiscal years in the period beginning January 1, 2015 and ending December 31, 2017 and (ii) the attainment of earnings before interest, taxes, depreciation and amortization targets during each of the fiscal years ended December 31, 2015 through 2017.  There is no vesting period on the right to vote or the right to receive dividends on any of the restricted shares.

On April 29, 2013, performance-based shares were granted which vest over four years based upon the attainment of (i) a specified operating income margin during any one or more of the fiscal years in the period beginning January 1, 2013 and ending December 31, 2016 and (ii) the attainment of earnings before interest, taxes, depreciation and amortization targets during each of the fiscal years ended December 31, 2013 through 2016.  There is no vesting period on the right to vote or the right to receive dividends on any of the restricted shares.

Pursuant to the Non-Employee Directors Plan, each non-employee director of the Company receives an annual award of restricted shares of common stock on the date of the Company’s annual meeting of shareholders.  The number of shares granted to each non-employee director is based on the fair market value of a share of common stock on that date.  The restricted shares vest on the first anniversary of the grant date; however, there is no vesting period on the right to vote or the right to receive dividends on these restricted shares.

For the nine months ended September 30, 2015 and 2014, the Company completed a net share settlement for 49,075 and 27,682 restricted shares, respectively, on behalf of certain employees that participate in the LTIP upon the vesting of the restricted shares pursuant to the terms of the LTIP.  The net share settlement was in connection with income taxes incurred on restricted shares that vested and were transferred to the employee during 2015 and/or 2014, creating taxable income for the employee.   At the employees’ request, the Company will pay these taxes on behalf of the employees in exchange for the employee’s return of an equivalent value of restricted shares to the Company.  These transactions resulted in a decrease of approximately $0.1 million for each of the nine months ended September 30, 2015 and 2014, respectively, to equity on the consolidated balance sheets as the cash payment of the taxes effectively was a repurchase of the restricted shares granted in previous years.

The following is a summary of transactions pertaining to restricted stock:
 
   
Shares
   
Weighted
Average Grant
Date Fair Value
Per Share
 
Nonvested restricted stock outstanding at December 31, 2014
   
925,819
   
$
5.04
 
Canceled
   
(340,940
)
   
5.00
 
Awards
   
234,651
     
2.28
 
Vested
   
(254,046
)
   
5.36
 
                 
Nonvested restricted stock outstanding at September 30, 2015
   
565,484
     
3.77
 

The restricted stock expense for the three months ended September 30, 2015 and 2014 was $0.1 million and $0.8 million, respectively.  The restricted stock expense for the nine months ended September 30, 2015 and 2014 was $0.9 million and $2.4 million, respectively.  The unrecognized restricted stock expense as of September 30, 2015 and December 31, 2014 was $1.6 million and $4.5 million, respectively.  As of September 30, 2015, outstanding restricted shares under the LTIP had aggregate intrinsic value of $0.3 million.
 
15

Stock Options

The fair value of the stock options used to compute stock-based compensation is the estimated present value at the date of grant using the Black-Scholes option pricing model.  The following is a summary of transactions pertaining to stock options:
 
   
Shares
   
Weighted
Average
 Exercise Price
 Per Share
 
Weighted
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic Value
 (in thousands)
 
Outstanding at December 31, 2014
   
424,167
   
$
13.65
 
 4.18 years
 
$
-
 
Canceled
   
(151,500
)
   
16.22
       
-
 
                           
Outstanding at September 30, 2015
   
272,667
     
12.22
 
 4.30 years
   
-
 
                           
Vested or expected to vest
   
272,667
     
12.22
 
 4.30 years
   
-
 
                           
Exercisable as of September 30, 2015
   
272,667
     
12.22
 
 4.30 years
   
-
 

As of September 30, 2015, there was no unrecognized pre-tax compensation expense.

The following table presents a summary of stock options outstanding:

   
At September 30, 2015
 
   
Stock Options Outstanding
   
Stock Options Exercisable
 
Range of Exercise Prices
 
Shares
   
Contractual
Weighted
Average Life
(years)
   
Weighted
Average Price
   
Shares
   
Weighted
Average Exercise
Price
 
$4.00-$13.99
   
192,667
     
4.69
   
$
9.39
     
192,667
   
$
9.39
 
$14.00-$19.99
   
49,000
     
2.40
     
18.02
     
49,000
     
18.02
 
$20.00-$25.00
   
31,000
     
4.85
     
20.62
     
31,000
     
20.62
 
                                         
     
272,667
     
4.30
     
12.22
     
272,667
     
12.22
 

7. INCOME TAXES

The provision for income taxes for the three months ended September 30, 2015 was $0.1 million, or 1.9% of pretax income, compared to a benefit for income taxes of $5.6 million, or 13.6%, of pretax loss for the quarter ended September 30, 2014.  The provision for income taxes for the nine months ended September 30, 2015 was $0.2 million, or 1.3% of pretax loss, compared to a benefit for income taxes of $4.7 million, or 7.7% of pretax loss.  Income tax expense for the three and nine months ended September 30, 2015 resulted from various state tax expenses.

Previously, the Company had a deferred tax liability related to an indefinite life intangible that was not available to offset the net deferred tax asset when evaluating the amount of the valuation allowance needed.  As a result of the Company’s impairment of goodwill for the three months ended September 30, 2014, the deferred tax liability related to the indefinite life intangible reversed resulting in a decrease in the valuation allowance needed. This release of the valuation allowance resulted in an income tax benefit.

The Company assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets.  A significant piece of objective negative evidence was the cumulative losses incurred by the Company in recent years.  On the basis of this evaluation the realization of the Company’s deferred tax assets was not deemed to be more likely than not and thus the Company maintained a full valuation allowance on its net deferred tax assets as of September 30, 2015.

8. CONTINGENCIES

In the ordinary conduct of its business, the Company is subject to lawsuits, investigations and claims, including, but not limited to, claims involving students or graduates and routine employment matters. Although the Company cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against it, the Company does not believe that any currently pending legal proceedings to which it is a party will have a material adverse effect on the Company’s business, financial condition, and results of operations or cash flows.
 
16

On November 21, 2012, the Company received a Civil Investigation Demand from the Attorney General of the Commonwealth of Massachusetts relating to its investigation of whether the Company and certain of its academic institutions have complied with certain Massachusetts state consumer protection laws.  On July 29, 2013, and January 17, 2014, the Company received additional Civil Investigative Demands.  Pursuant to the Civil Investigative Demands, the Attorney General requested from the Company and certain of its academic institutions in Massachusetts documents and detailed information for the time period from January 1, 2008 to the present.

On July 13, 2015, the Commonwealth of Massachusetts filed a complaint against the Company in the Suffolk County Superior Court alleging certain violations of the Massachusetts Consumer Protection Act since at least 2010 and continuing through 2013.  At the same time, the Company agreed to the entry of a Final Judgment by Consent in order to avoid the time, burden, and expense of contesting such liability.  As part of the Final Judgment by Consent, the Company denied all allegations of wrongdoing and any liability for the claims asserted in the complaint.  The Company agreed, however, to pay the sum of $850,000 to the Attorney General and to forgive $165,000 of debt consisting of unpaid balances owed to the Company by certain graduates in the sole discretion of the Massachusetts Attorney General which were previously accrued for at December 31, 2014.  The Final Judgment by Consent also provided certain requirements for calculation of job placement rates in Massachusetts and imposed certain disclosure obligations that are consistent with the regulations that have been previously enacted by the Massachusetts Attorney General’s Office.

9. PENSION PLAN

The Company sponsors a noncontributory defined benefit pension plan covering some of the Company’s employees who were employed by the Company prior to 1995.  Benefits are provided based on employees’ years of service and earnings.  This plan was frozen on December 31, 1994.  The Company did not make any contributions to the pension plan for the three and nine months ended September 30, 2015, and paid $0.2 million for the nine months ended September 30, 2014.  The net periodic benefit cost was $0.5 million and less than $0.1 million for the three months ended September 30, 2015 and 2014, respectively.  The net periodic benefit cost was $0.6 million and $0.1 million for the nine months ended September 30, 2015 and 2014, respectively.

10. SEGMENTS

The for-profit education industry has been impacted by numerous regulatory changes, the changing economy and an onslaught of negative articles in the press. As a result of these actions, student populations have declined and operating costs have increased.  Over the past few years, the Company has closed over 10 locations and exited its online business.  The Company reviewed how it has been structured and decided to change its organization including reorganizing its Group Presidents to oversee each of the reporting segments.  By aggregating the remaining 31 operating segments into three reporting segments the Company is better able to allocate financial and human resources to respond to its markets and with the goal of improving its profitability and competitive advantage.

In the past, the Company offered any combination of programs at any campus.  The Company has changed its focus to program offerings that create greater differentiation and attain excellence to attract more students and gain market share.  Also strategically, the Company began offering continuing education training to employers who hire its students and this is best achieved at campuses focused on their profession.

As a result of these environmental, market forces and strategic decisions, the Company now operates in three reportable segments: a) Transportation and Skilled Trades, b) Healthcare and Other Professions and c) Transitional.

Our reportable segments have been determined based on the method by which our chief operating decision maker now evaluates performance and allocates resources.  Each reportable segment represents a group of postsecondary education providers that offer a variety of degree and non-degree academic programs.  These segments are organized by key market segments to enhance operational alignment within each segment to more effectively execute our strategic plan.  Each of the Company’s schools is a reporting unit and an operating segment.  The Company’s operating segments have been aggregated into three reportable segments because, in the Company’s judgment, the reporting units have similar services, types of customers, regulatory environment and economic characteristics.  Our reporting segments are described below.

Transportation and Skilled Trades – Transportation and Skilled Trades offers academic programs mainly in the career-oriented disciplines of transportation and skilled trades (e.g. automotive, diesel, HVAC, welding and manufacturing).

Healthcare and Other Professions – Healthcare and Other Professions offers academic programs in the career-oriented disciplines of health sciences, hospitality and business and information technology (e.g. dental assistant, medical assistant, practical nursing, culinary arts and cosmetology).
 
17

Transitional – Transitional refers to operations that are being phased out and consists of our Fern Park, Florida campus that is currently being taught out.  This school is employing a gradual teach-out process that enables the school to continue to operate while current students complete their course of study. The school is no longer enrolling new students.  In the fourth quarter of 2014, we announced that we are teaching out our campus in Fern Park, Florida which is expected to be complete by March 2016.

We evaluate segment performance based on operating results.  Adjustments to reconcile segment results to consolidated results are included under the caption “Corporate,” which primarily includes unallocated corporate activity.

Summary financial information by reporting segment is as follows:

   
For the Three Months Ended September 30,
 
   
Revenue
   
Operating (Loss) Income
 
   
2015
   
%
 of Total
   
2014
   
%
of Total
   
2015
   
2014
 
Transportation and Skilled Trades
 
$
49,696
     
62.9
%
 
$
51,272
     
61.1
%
 
$
10,592
   
$
6,193
 
Healthcare and Other Professions
   
29,086
     
36.8
%
   
31,874
     
38.0
%
   
(894
)
   
(38,566
)
Transitional
   
264
     
0.3
%
   
836
     
1.0
%
   
(460
)
   
(553
)
Corporate
   
-
     
0.0
%
   
-
     
0.0
%
   
(4,606
)
   
(6,559
)
Total
 
$
79,046
     
100
%
 
$
83,982
     
100
%
 
$
4,632
   
$
(39,485
)

   
For the Nine Months Ended September 30,
 
   
Revenue
   
Operating (Loss) Income
 
   
2015
   
%
of Total
   
2014
   
%
of Total
   
2015
   
2014
 
Transportation and Skilled Trades
 
$
136,987
     
60.0
%
 
$
139,076
     
58.1
%
 
$
18,334
   
$
9,417
 
Healthcare and Other Professions
   
89,911
     
39.4
%
   
97,971
     
40.9
%
   
(3,443
)
   
(41,538
)
Transitional
   
1,261
     
0.6
%
   
2,526
     
1.1
%
   
(1,697
)
   
(1,563
)
Corporate
   
-
     
0.0
%
   
-
     
0.0
%
   
(20,211
)
   
(23,777
)
Total
 
$
228,159
     
100
%
 
$
239,573
     
100
%
 
$
(7,017
)
 
$
(57,461
)

   
Total Assets
 
   
September 30, 2015
   
December 31, 2014
 
Transportation and Skilled Trades
 
$
93,576
   
$
97,650
 
Healthcare and Other Professions
   
60,622
     
62,377
 
Transitional
   
1,873
     
2,184
 
Corporate
   
65,837
     
51,473
 
Discontinued Operations
   
-
     
23
 
Total
 
$
221,908
   
$
213,707
 

11. SUBSEQUENT EVENT
                              
As previously reported, on November 3, 2015, the Board of Directors approved a plan for the Company to divest its Healthcare and Other Professions business segment.  Implementation of the plan will result in the Company’s operations being focused solely on the Transportation and Skilled Trades business segment.  Due to the Board’s decision to divest the Healthcare and Other Professions business segment, beginning in the fourth quarter of 2015, this segment is anticipated to be classified as discontinued operations and the associated assets and liabilities will be classified as held for sale.  This decision will trigger an impairment test at the segment level which may result in a non-cash impairment charge.  In addition, as of September 30, 2015 the Company has two campuses held for sale.  With the approval of the plan to divest the Healthcare and Other Professions business segment one of the campuses will no longer be included as held for sale.                             
                              
This decision will trigger an impairment test at the segment level which may result in a non-cash impairment charge.  In addition, as of September 30, 2015 the Company has two campuses held for sale.  With the approval of the plan to divest the Healthcare and Other Professions business segment one of the campuses, in the transportation segment, will no longer be included as held for sale.
 
18

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion may contain forward-looking statements regarding the Company, our business, prospects and our results of operations that are subject to certain risks and uncertainties posed by many factors and events that could cause our actual business, prospects and results of operations to differ materially from those that may be anticipated by such forward-looking statements.  Factors that could cause or contribute to such differences include, but are not limited to, those described in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the Securities and Exchange Commission (the “SEC”) and in our other filings with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report.  We undertake no obligation to revise any forward-looking statements in order to reflect events or circumstances that may subsequently arise.  Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the SEC that advise interested parties of the risks and factors that may affect our business.

The interim financial statements and related notes thereto filed in this Form 10-Q and the discussions contained herein should be read in conjunction with the annual financial statements and notes included in our Form 10-K for the year ended December 31, 2014, as filed with the SEC, which includes audited consolidated financial statements for our three fiscal years ended December 31, 2014.

General

We are a leading provider of diversified career-oriented post-secondary education. We reorganized our operations in the first quarter of 2015 into three reportable segments:  a) Transportation and Skilled Trades, b) Healthcare and Other Professions, and c) Transitional.  We offer recent high school graduates and working adults career-oriented programs. Each area of study is specifically designed to appeal to and meet the educational objectives of our student population, while also satisfying the criteria established by industry and employers. The resulting diversification limits dependence on any one industry for enrollment growth or placement opportunities and broadens potential branches for introducing new programs. As of September 30, 2015, we had 13,840 students enrolled at our 31 campuses in 15 states. Our campuses primarily attract students from their local communities and surrounding areas, although our five destination campuses attract students from across the United States, and in some cases, from abroad.

Discontinued Operations

On December 3, 2014, our Board of Directors approved a plan to cease operations at five training sites in Florida.  We performed a cost benefit analysis on several schools and concluded that the training sites contained a high fixed cost component and had difficulty attracting a sufficient number of students due to high competition to maintain a stable profit margin. Accordingly, we ceased operations at these campuses as of December 31, 2014.  This was a strategic shift to close all of our training sites and all locations that do not accept Title IV payments.  The results of operations of these campuses are reflected as discontinued operations in the condensed consolidated financial statements.

The results of operations at these five training sites for the three and nine months ended September 30, 2014 was as follows (in thousands):

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2014
   
2014
 
Revenue
 
$
677
   
$
2,205
 
Operating expenses
   
3,504
     
6,462
 
Operating loss
 
$
(2,827
)
 
$
(4,257
)

Critical Accounting Policies and Estimates

Our discussions of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP.  The preparation of financial statements in conformity with GAAP 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 consolidated financial statements and the reported amounts of revenues and expenses during the period.  On an ongoing basis, we evaluate our estimates and assumptions, including those related to revenue recognition, bad debts, fixed assets, goodwill and other intangible assets, income taxes and certain accruals and contingencies.  Actual results could differ from those estimates.  The critical accounting policies discussed herein are not intended to be a comprehensive list of all of our accounting policies.  In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not result in significant management judgment in the application of such principles.  We believe that the following accounting policies are most critical to us in that they represent the primary areas where financial information is subject to the application of management’s estimates, assumptions and judgment in the preparation of our consolidated financial statements.
 
19

Revenue recognition.  Revenues are derived primarily from programs taught at our schools.  Tuition revenues, textbook sales and one-time fees, such as nonrefundable application fees and course material fees, are recognized on a straight-line basis over the length of the applicable program as the student proceeds through the program, which is the period of time from a student’s start date through his or her graduation date, including internships or externships that take place prior to graduation, and the Company completes the performance of teaching the student which entitles the Company to the revenue. We evaluate whether collectability of revenue is reasonably assured prior to the student attending class and we reassess collectability of tuition and fees when a student withdraws from a course.  We calculate the amount to be returned under Title IV and the company’s stated refund policy to determine eligible charges and, if there is a balance due from the student after this calculation, we expect payment from the student and we have a process to pursue uncollected accounts whereby, based upon the student’s financial means and ability to pay, a payment plan is established with the student to ensure that collectability is reasonable.  We continuously monitor our historical collections to identify potential trends that may impact our determination that collectability of receivables for withdrawn students is realizable.  If a student withdraws from a program prior to a specified date, federal and state regulations permit us to retain a fixed percentage of the total tuition received from the student, which varies with, but generally equals or exceed, the percentage of the term completed by the student.  Tuition amount received by the Company in excess of such fixed percentage of tuition are refunded to the student or the appropriate funding source, as applicable with all refunds netted against revenue during the applicable academic term. Refunds are calculated and paid in accordance with federal, state and accrediting agency standards.  When a student withdraws from a program after a specified date with a balance due to the Company, we take a reserve of a percentage of the student’s balance based on our current collection history.

Allowance for uncollectible accounts.  Based upon our experience and judgment, we establish an allowance for uncollectible accounts with respect to tuition receivables.  We use an internal group of collectors, augmented by third-party collectors as deemed appropriate, in our collection efforts.  In establishing our allowance for uncollectible accounts, we consider, among other things, current and expected economic conditions, a student’s status (in-school or out-of-school), whether or not a student is currently making payments and overall collection history.  Changes in trends in any of these areas may impact the allowance for uncollectible accounts.  The receivables balances of withdrawn students with delinquent obligations are reserved based on our collection history.  Although we believe that our reserves are adequate, if the financial condition of our students deteriorates, resulting in an impairment of their ability to make payments, additional allowances may be necessary, which will result in increased selling, general and administrative expenses in the period such determination is made.

Our bad debt expense as a percentage of revenue for the three months ended September 30, 2015 and 2014 was 4.3% and 5.2%, respectively.  Our bad debt expense as a percentage of revenue for the nine months ended September 30, 2015 and 2014 was 4.8% and 4.9%, respectively.  Our exposure to changes in our bad debt expense could impact our operations.  A 1% increase in our bad debt expense as a percentage of revenues for the three months ended September 30, 2015 and 2014 would have resulted in an increase in bad debt expense of $0.8 million in each case.  A 1% increase in our bad debt expense as a percentage of revenues for the nine months ended September 30, 2015 and 2014 would have resulted in an increase in bad debt expense of $2.3 million and $2.4 million, respectively.

We do not believe that there is any direct correlation between tuition increases, the credit we extend to students and our loan commitments.  Our loan commitments to our students are made on a student-by-student basis and are predominantly a function of the specific student’s financial condition.   We only extend credit to the extent there is a financing gap between the tuition charged for the program and the amount of grants, loans and parental loans each student receives.  Each student’s funding requirements are unique.  Factors that determine the amount of aid available to a student are student status (whether they are dependent or independent students), Pell Grants awarded, Plus loans awarded or denied to parents and family contributions. As a result, it is extremely difficult to predict the number of students that will need us to extend credit to them. Our tuition increases have ranged historically from 2% to 5% annually and have not meaningfully impacted overall funding requirements.

Because a substantial portion of our revenue is derived from Title IV programs, any legislative or regulatory action that significantly reduces the funding available under Title IV programs or the ability of our students or schools to participate in Title IV programs could have a material effect on the realizability of our receivables.

Goodwill.  We test our goodwill for impairment annually, or whenever events or changes in circumstances indicate an impairment may have occurred, by comparing its fair value to its carrying value. Impairment may result from, among other things, deterioration in the performance of the acquired business, adverse market conditions, adverse changes in applicable laws or regulations, including changes that restrict the activities of the acquired business, and a variety of other circumstances. If we determine that impairment has occurred, we are required to record a write-down of the carrying value and charge the impairment as an operating expense in the period the determination is made. In evaluating the recoverability of the carrying value of goodwill and other indefinite-lived intangible assets, we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the acquired assets. Changes in strategy or market conditions could significantly impact these judgments in the future and require an adjustment to the recorded balances.
 
20

Goodwill represents a significant portion of our total assets. As of September 30, 2015, goodwill represented approximately $22.0 million, or 9.9%, of our total assets.

The Company concluded that as of September 30, 2015 there was an indicator of potential impairment as a result of a decrease in market capitalization and, accordingly, the Company tested goodwill for impairment.  The test indicated that one of the Company’s reporting units was impaired, which resulted in a pre-tax non-cash charge of $0.2 million for the three months ended September 30, 2015.

As of September 30, 2014 the Company concluded that there was an indicator of potential impairment as a result of a decrease in market capitalization and, accordingly, the Company tested goodwill for impairment.  The test indicated that 10 of the Company’s reporting units were impaired, which resulted in a pre-tax charge of $39.0 million for the three months ended September 30, 2014.

Long-lived assets.  We review the carrying value of our long-lived assets and identifiable intangibles for possible impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. We evaluate long-lived assets for impairment by examining estimated future cash flows. These cash flows are evaluated by using weighted probability techniques as well as comparisons of past performance against projections. Assets may also be evaluated by identifying independent market values. If we determine that an asset’s carrying value is impaired, we will record a write-down of the carrying value of the asset and charge the impairment as an operating expense in the period in which the determination is made.

As of September 30, 2015 the Company concluded that there was sufficient evidence to conclude that there was no impairment of long-lived assets.  Long-lived assets had been tested at these campuses as a result of certain financial indicators such as the Company’s history of losses, current respective period losses, as well as future projected losses of these campuses.

As of September 30, 2014 the Company concluded that there was sufficient evidence to conclude that there were impairments of certain long-lived assets at six of the Company’s campuses.  Long-lived assets had been tested at these campuses as a result of certain financial indicators such as the Company’s history of losses, current respective period losses, as well as future projected losses of these campuses.  The long-lived impairment resulted in a pre-tax charge of $1.9 million for leasehold improvements and a $0.5 million for intangible assets.

Bonus costsWe accrue the estimated cost of our bonus programs using current financial information as compared to target financial achievements and key performance objectives.  Although our recorded liability for bonuses is based on our best estimate of the obligation, actual results could differ and require adjustment of the recorded balance.

Income taxes. We account for income taxes in accordance with FASB ASC Topic 740, “Income Taxes” (“ASC 740”). This statement requires an asset and liability approach for measuring deferred taxes based on temporary differences between the financial statement and tax bases of assets and liabilities existing at each balance sheet date using enacted tax rates for years in which taxes are expected to be paid or recovered.
 
In accordance with ASC 740, we assess our deferred tax asset to determine whether all or any portion of the asset is more likely than not unrealizable.  A valuation allowance is required to be established or maintained when, based on currently available information, it is more likely than not that all or a portion of a deferred tax asset will not be realized. In accordance with ASC 740, our assessment considers whether there has been sufficient income in recent years and whether sufficient income is expected in future years in order to utilize the deferred tax asset. In evaluating the realizability of deferred income tax assets, we considered, among other things, historical levels of income, expected future income, the expected timing of the reversals of existing temporary reporting differences, and the expected impact of tax planning strategies that may be implemented to prevent the potential loss of future income tax benefits. Significant judgment is required in determining the future tax consequences of events that have been recognized in our consolidated financial statements and/or tax returns.  Differences between anticipated and actual outcomes of these future tax consequences could have a material impact on our consolidated financial position or results of operations.  Changes in, among other things, income tax legislation, statutory income tax rates, or future income levels could materially impact our valuation of income tax assets and liabilities and could cause our income tax provision to vary significantly among financial reporting periods.  On the basis of this evaluation the realization of our deferred tax assets was not deemed to be more likely than not and thus we have provided a full valuation allowance on our net deferred tax assets.
 
We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense.  During the three and nine months ended September 30, 2015 and 2014, there were no interest and penalties expense associated with uncertain tax positions.
 
21

Effect of Inflation

Inflation has not had a material effect on our operations.

Results of Continuing Operations

Certain reported amounts in our analysis have been rounded for presentation purposes.  The following table sets forth selected consolidated statements of continuing operations data as a percentage of revenues for each of the periods indicated:

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2015
   
2014
   
2015
   
2014
 
Revenue
   
100.0
%
   
100.0
%
   
100.0
%
   
100.0
%
Costs and expenses:
                               
Educational services and facilities
   
49.4
%
   
50.5
%
   
50.2
%
   
52.1
%
Selling, general and administrative
   
44.2
%
   
49.7
%
   
52.7
%
   
55.5
%
(Loss) gain on sale of assets
   
0.3
%
   
0.0
%
   
0.1
%
   
0.0
%
Impairment of goodwill and long-lived assets
   
0.3
%
   
46.8
%
   
0.1
%
   
16.4
%
Total costs and expenses
   
94.1
%
   
147.0
%
   
103.1
%
   
124.0
%
Operating income (loss)
   
5.9
%
   
-47.0
%
   
-3.1
%
   
-24.0
%
Interest expense, net
   
-2.5
%
   
-1.7
%
   
-2.1
%
   
-1.6
%
Gain (loss) from continuing opeartions before income taxes
   
3.3
%
   
-48.7
%
   
-5.2
%
   
-25.6
%
Provision (benefit) for income taxes
   
0.1
%
   
-6.6
%
   
0.1
%
   
-2.0
%
Income (loss) from continuing operations
   
3.3
%
   
-42.1
%
   
-5.2
%
   
-23.6
%

Three Months Ended September 30, 2015 Compared to Three Months Ended September 30, 2014

Consolidated Results of Operations

Revenue.   Revenue decreased by $4.9 million, or 5.9%, to $79.0 million for the three months ended September 30, 2015 from $84.0 million in the prior comparable period of 2014.  The decrease was a result of a 9.5% decline in average student population, which decreased to 12,815 in the third quarter of 2015 from 14,153 in the comparable period in 2014.  Offsetting the revenue decline from lower student population was a 3.8% increase in average revenue per student due to improved student retention and a shift in program mix.

We began 2015 with approximately 300, or 2.1%, fewer students than we had on January 1, 2014.

We continue to face countercyclical challenges from a low unemployment rate, which is also affecting our industry peers as well as community colleges.  We remain focused on our strategy including the implementation of sales software, corporate training and partnerships relationship to increase student population.

For a general discussion of trends in our student enrollment, see “Seasonality and Outlook” below.

Educational services and facilities expense.   Our educational services and facilities expense decreased by $3.4 million, or 8.0%, to $39.0 million for the three months ending September 30, 2015 from $42.4 million in the prior comparable period.

The expense reductions were primarily due to a $2.0 million, or 7.9%, decrease in instructional and books and tools expense. Instructional savings were a result of a reduction in the number of instructors and other related costs resulting from lower average student population.  The decrease in books and tools expense is also attributable to lower student starts.

Our facilities expenses decreased by $1.4 million, or 8.3%, primarily due to lower depreciation expense as a result of discontinued depreciation expense in connection with two campuses classified as assets held for sale and prior long-lived asset impairment expenses.

Our educational expenses contain a high fixed cost component and are not as scalable as some of our other expenses.  As our student population decreases, we typically experience a reduction in average class size and, therefore, are not always able to align these expenses with the corresponding decrease in population.  Educational services and facilities expenses, as a percentage of revenue, decreased to 49.4% from 50.5%.
 
22

Selling, general and administrative expense.    Our selling, general and administrative expense decreased by $6.8 million, or 16.2%, to $34.9 million for the three months ending September 30, 2015 from $41.7 million in the prior comparable period of 2014.

Administrative expense was lower by $5.3 million, or 22.8%, as a result of management restructuring resulting in lower salaries and benefit expenses. The decrease was primarily driven by a reduction of salaries and benefit costs.  Furthermore, sales and marketing expenses decreased by $0.9 million, or 6.1%, as a result of a reduction of $1.4 million in sales expense partially offset by increased marketing expenses of $0.6 million.  The reduction in sales expense was mainly attributable a reduction in the number of admissions representatives, dedicated to the destination schools replaced with a centralized call center, reducing travel costs and salary expense. Bad debt expense as a percentage of revenue was 4.3% for the three months ended September 30, 2015, compared to 5.2% for the same period in 2014.

Student services expense also decreased by $0.6 million, or 15.2%, to $3.4 million as a result of our smaller student population.

As a percentage of revenues, selling, general and administrative expense decreased to 44.2% in the third quarter of 2015 from 49.7% in the third quarter of the prior year.

As of September 30, 2015, we had outstanding loan commitments to our students of $32.6 million, as compared to $34.1 million at December 31, 2014.  Loan commitments, net of interest that would be due on the loans through maturity, were $24.0 million at September 30, 2015, as compared to $24.1 million at December 31, 2014.  Loan commitments decreased as a result of lower population and fewer campuses.

Impairment of goodwill and long-lived assets.    As of September 30, 2015, we tested goodwill for impairment and determined that an impairment of approximately $0.2 million existed for one reporting unit related to goodwill.  As of September 30, 2014, we tested goodwill and long-lived assets for impairment and determined that an impairment of approximately $41.4 million existed for 10 reporting units related to goodwill and six asset groups related to long-lived assets and intangible assets.

Net interest expense.    Our net interest expense increased by $0.6 million due to a higher outstanding loan balance and financing fees expensed associated with our term loan agreement.
 
Income taxes.    Our provision for income taxes was $0.1 million, or 1.9% of pretax income in the third quarter of 2015, compared to a benefit for income taxes of $5.6 million, or 13.6% of pretax loss in the same period in 2014. No federal or state income tax benefit was recognized for the current period loss due to the recognition of a full valuation allowance.  Income tax expense for the third quarter of 2015 resulted from various minimal state tax expenses.

Previously, we had a deferred tax liability related to an indefinite life intangible that was not available to offset the net deferred tax asset when evaluating the amount of the valuation allowance needed.  As a result of our impairment of goodwill during the three months ended September 30, 2014, the deferred tax liability related to the indefinite life intangible reversed resulting in a decrease in the valuation allowance needed. This release of the valuation allowance resulted in an income tax benefit.

Nine Months Ended September 30, 2015 Compared to Nine Months Ended September 30, 2014

Consolidated Results of Operations

Revenue.   Revenue decreased by $11.4 million, or 4.8%, to $228.2 million for the nine months ended September 30, 2015 from $239.6 million in the prior comparable period of 2014.  The decrease was a result of a 6.7% decline in average student population, which decreased to 12,969 from 13,893, respectively.  Offsetting the revenue decline from lower student population was a 2.0% increase in average revenue per student due to improved student retention and a shift in program mix diluted by scholarships granted by the Company.

Scholarships are recognized ratably over the term of the student’s program.  Scholarship discounts increased by $1.0 million for the first nine months of 2015 as compared to the comparable period of 2014.  While scholarships have negatively impacted revenue, we believe we provide more students with the opportunity to pursue their educational goals by assisting in their affordability challenge.

Revenue for the Las Vegas, Nevada and Hamden, Connecticut campuses which, during the second half of 2014 merged into their neighboring campuses (the “merged campuses”) were $0 and $1.9 million for the nine months ended September 30, 2015 and 2014 respectively.  Excluding the merged campuses, 2015 revenue decreased by $9.5 million, or 4.0%, and average student population declined 5.7%.

We began 2015 with approximately 300, or 2.1%, fewer students than we had on January 1, 2014; however, excluding the merged campuses, student population was essentially flat for the respective periods.
 
23

We continue to face countercyclical challenges from a low unemployment rate, which is also affecting our industry peers as well as community colleges.  We remain focused on our strategy including the implementation of sales software, corporate training and partnerships relationship to increase student population.

For a general discussion of trends in our student enrollment, see “Seasonality and Outlook” below.

Educational services and facilities expense.   Our educational services and facilities expense decreased by $10.3 million, or 8.3%, to $114.6 million for the nine months ending September 30, 2015 from $124.9 million in the prior comparable period.

The expense reductions were primarily due to a $5.6 million, or 7.5%, decrease in instructional expenses and books and tools expense. Instructional savings were a result of a reduction in the number of instructors and other related costs resulting from lower average student population. The decrease in books and tools expense is also attributable to lower student starts.

Our facilities expenses decreased by $4.8 million, or 9.4%, primarily due to lower depreciation expense as a result of discontinued depreciation expense in connection with two campuses classified as assets held for sale and prior long-lived asset impairment expenses.  In addition, rent and utilities expense decreased as a result of the merged campuses partially offset by higher insurance costs.

Our educational expenses contain a high fixed cost component and are not as scalable as some of our other expenses.  As our student population decreases, we typically experience a reduction in average class size and, therefore, are not always able to align these expenses with the corresponding decrease in population.  Educational services and facilities expenses, as a percentage of revenue, decreased to 50.2% from 52.1%.

Selling, general and administrative expense.    Our selling, general and administrative expense decreased by $12.7 million, or 9.6%, to $120.2 million for the nine months ending September 30, 2015 from $132.9 million in the prior comparable period of 2014.

Administrative expense was lower by $8.2 million, or 11.3%, as a result of management restructuring resulting in lower salaries and benefit expenses.  Bad debt expense as a percentage of revenue was 4.8% for the nine months ended September 30, 2015, compared to 4.9% for the same period in 2014.

Sales and marketing expenses decreased by $2.6 million, or 5.5%, as a result of a reduction of $3.9 million in sales expense partially offset by increased marketing expenses of $1.3 million. The reduction in sales expense was mainly attributable to a reduction in the number of admissions representatives dedicated to the destination schools as a result of our implementation of a centralized call center, thus reducing travel costs and salary expense.

The increase in marketing expenses is reflective of our strategic investment and effort to improve student enrollments during 2015.  The additional investment includes costs associated with our new marketing campaign, “Lincoln Tech, America’s Technical Institute”, which were offset by savings as a result of the merged campuses.

Student services expense also decreased by $1.9 million, or 14.7%, to $10.8 million as a result of our smaller student population.

As a percentage of revenues, selling, general and administrative expense decreased to 52.7% in the third quarter of 2015 from 55.5% in the prior year.

As of September 30, 2015, we had outstanding loan commitments to our students of $32.6 million, as compared to $34.1 million at December 31, 2014.  Loan commitments, net of interest that would be due on the loans through maturity, were $24.0 million at September 30, 2015, as compared to $24.1 million at December 31, 2014.  Loan commitments decreased as a result of lower population and fewer campuses.

Impairment of goodwill and long-lived assets.    As of September 30, 2015, we tested goodwill for impairment and determined that an impairment of approximately $0.2 million existed for one reporting unit related to goodwill.  As of September 30, 2014, we tested goodwill and long-lived assets for impairment and determined that an impairment of approximately $41.4 million existed for 10 reporting units related to goodwill and six asset groups related to long-lived assets and intangible assets.

Net interest expense.    Our net interest expense increased by $1.5 million due a higher loan balance and financing fees associated with changes in our term loan  agreement.
 
Income taxes.    Our provision for income taxes was $0.2 million, or 1.3% of pretax loss in the nine months ending September 30, 2015, compared to a benefit for income taxes of $4.7 million, or 7.7% of pretax loss in the prior year period. No federal or state income tax benefit was recognized for the current period loss due to the recognition of a full valuation allowance.  Income tax expense for the nine months ended September 30, 2015 resulted from various minimal state tax expenses.
 
24

Previously, we had a deferred tax liability related to an indefinite life intangible that was not available to offset the net deferred tax asset when evaluating the amount of the valuation allowance needed.  As a result of our impairment of goodwill during the three months ended September 30, 2014, the deferred tax liability related to the indefinite life intangible reversed resulting in a decrease in the valuation allowance needed. This release of the valuation allowance resulted in an income tax benefit.
 
Segment Results of Operations
 
The for-profit education industry has been impacted by numerous regulatory changes, the changing economy and an onslaught of negative media attention. As a result of these actions, student populations have declined and operating costs have increased.  Over the past few years, the Company has closed over 10 locations and exited its online business.  The Company reviewed how it is structured and changed its organization including reorganizing its Group Presidents to oversee each of the reporting segments.  By aggregating the remaining 31 operating segments into three reporting segments the Company is better able to allocate financial and human resources to respond to its markets with the goal of improving its profitability and competitive advantage.

In the past, we offered any combination of programs at any campus.  We have changed our focus to program offerings that create greater differentiation and attain excellence to attract more students and gain market share.  Also strategically, we began offering continuing education training to employers who hire our students and this is best achieved at campuses focused on their profession.

As a result of these environmental, market forces and strategic decisions, we now operate in three reportable segments: a) Transportation and Skilled Trades, b) Healthcare and Other Professions and c) Transitional.

Our reportable segments have been determined based on the method by which our chief operating decision maker now evaluates performance and allocates resources.  Each reportable segment represents a group of postsecondary education providers that offer a variety of degree and non-degree academic programs.  These segments are organized by key market segments to enhance operational alignment within each segment to more effectively execute our strategic plan.  Each of the Company’s schools is a reporting unit and an operating segment.  Our operating segments have been aggregated into three reportable segments because, in our judgment, the reporting units have similar services, types of customers, regulatory environment and economic characteristics.  Our reporting segments are described below.

Transportation and Skilled Trades – Transportation and Skilled Trades offers academic programs mainly in the career-oriented disciplines of transportation and skilled trades (e.g. automotive, diesel, HVAC, welding and manufacturing).

Healthcare and Other Professions – Healthcare and Other Professions offers academic programs in the career-oriented disciplines of health sciences, hospitality and business and information technology (e.g. dental assistant, medical assistant, practical nursing, culinary arts and cosmetology).

Transitional – Transitional refers to operations that are being phased out and consists of our campus that is currently being taught out.  This school is employing a gradual teach-out process that enables the school to continue to operate while current students complete their course of study.  The school is no longer enrolling new students.  In the fourth quarter of 2014, we announced that we are teaching out our campus in Fern Park, Florida and the teach-out is expected to be complete by March 2016.

We evaluate segment performance based on operating results.  Adjustments to reconcile segment results to consolidated results are included under the caption “Corporate,” which primarily includes unallocated corporate activity.
 
25

The following table present results for our three reportable segments for the three months ended September 30, 2015 and 2014.
 
   
Three Months Ended September 30,
 
   
2015
   
2014
   
% Change
 
Revenue:
           
Transportation and Skilled Trades
 
$
49,696
   
$
51,272
     
-3.1
%
Healthcare and Other Professions
   
29,086
     
31,874
     
-8.7
%
Transitional
   
264
     
836
     
-68.4
%
Total
 
$
79,046
   
$
83,982
     
-5.9
%
                         
Operating Income (Loss):
                       
Transportation and Skilled Trades
 
$
10,592
   
$
6,193
     
71.0
%
Healthcare and Other Professions
   
(894
)
   
(38,566
)
   
97.7
%
Transitional
   
(460
)
   
(553
)
   
16.8
%
Corporate
   
(4,606
)
   
(6,559
)
   
29.8
%
Total
 
$
4,632
   
$
(39,485
)
   
111.7
%
                         
Starts:
                       
Transportation and Skilled Trades
   
3,158
     
3,428
     
-7.9
%
Healthcare and Other Professions
   
2,403
     
2,618
     
-8.2
%
Transitional
   
-
     
50
     
-100.0
%
Total
   
5,561
     
6,096
     
-8.8
%
                         
Average Population:
                       
Transportation and Skilled Trades
   
7,446
     
8,108
     
-8.2
%
Healthcare and Other Professions
   
5,307
     
5,846
     
-9.2
%
Transitional
   
62
     
199
     
-68.8
%
Total
   
12,815
     
14,153
     
-9.5
%
                         
End of Period Population:
                       
Transportation and Skilled Trades
   
7,852
     
8,312
     
-5.5
%
Healthcare and Other Professions
   
5,932
     
6,671
     
-11.1
%
Transitional
   
56
     
206
     
-72.8
%
Total
   
13,840
     
15,189
     
-8.9
%

Three Months Ended September 30, 2015 Compared to Three Months Ended September 30, 2014
 
Transportation and Skilled Trades
 
Revenue decreased to $49.7 million in the three months ending September 30, 2015, as compared to $51.3 million in the comparable period, primarily driven by an 8.2% decline in average student population, which decreased to 7,446 from 8,108 in the prior year.  The revenue decline from lower population was slightly offset by a 5.3% increase in average per student revenue due to improved student retention and a shift in program mix.

Operating income improved by $4.4 million, or 71.0%, to $10.6 million from $6.2 million driven by the following expense reductions:
 
· Educational services and facilities expense reduced by $2.0 million comprised of (a) $1.1 million, or 11.7%, reduction in facilities expense, primarily due to lower depreciation expense as a result of discontinued depreciation for one campus included in assets held for sale and lower asset base due to prior long-lived asset impairments; and (b) lower instructional expenses of $0.9 million, or 6.6%, as a result of lower student population.
· Selling, general and administrative expenses reduced by $2.5 million comprised of (a) $0.7 million, or 13.8%, reduction in sales expenses attributable to a reduction in the number of admissions representatives dedicated to the destination schools replaced with a centralized call center thus reducing travel costs and salary expense; and (b) $0.3 million reduction in student services driven by lower student population; and (c) $2.0 million, or 20.7% reduction in administrative expenses primarily as a result of a reduction in bad debt expense.
 
26

Healthcare and Other Professions
Revenue decreased by $2.8 million, or 8.7%, to $29.1 million in the three months ending September 30, 2015 from $31.9 million in the comparable period primarily attributable to a 9.2% decrease in average student population.

Operating loss improved by $37.7 million, or 97.7%, to $0.9 million from $38.6 million. Excluding goodwill and long-lived assets impairments of $37.6 million in 2014 operating loss was essentially flat as a result of the net revenue decrease partially offset by the following expense reductions:
 
· Educational services and facilities expense reduced by $1.2 million comprised of (a) $0.2 million, or 3.0%, reduction in facilities expense primarily due to lower depreciation expense as a result of discontinued depreciation for one campus included in assets held for sale and lower asset base due to prior long-lived asset impairments; and (b) lower instructional expenses of $1.0 million, or 8.4% due to smaller student population.
· Selling, general and administrative expenses reduced by $1.7 million comprised of (a) $0.6 million, or 24.4%, reduction in sales expenses attributable to a reduction in the number of admissions personnel offset by increased marketing expenses of $0.4 million, or 13.7%; and (b) $0.3 million decrease in student services resulting from fewer students; and (c) $1.1 million, or 15.9%, cost savings in administrative expenses attributable to management regionalization at certain campuses.

Included in the Healthcare and Other Professions segment is our Hartford, Connecticut campus which offers culinary programs.  For the year ended December 31, 2014, the campus had a net loss before income taxes of $5.7 million.  For the three months ending September 30, 2015, the Hartford campus has a net loss of $1.4 million which includes other income from a sublease of a portion of the building.
 
Transitional
This segment consists of our Fern Park, Florida campus where we have ceased student enrollment and existing students are being trained through March 2016.

Revenue decreased by $0.6 million, or 68.4%, to $0.3 million from $0.8 million, as compared to the current and prior year quarter, attributable to a 68.8% decrease in average student population due to suspension of new student enrollment effective February 2015.
 
Operating loss was essentially flat at $0.5 million compared to $0.6 million quarter over quarter.

Corporate and Other
This category includes unallocated expenses incurred on behalf of the entire company.  Corporate and Other costs decreased by $2.0 million, or 29.8% to $4.6 from $6.6 million, respectively, as compared to the prior year quarter. This decrease was primarily a result of cost restructuring efforts during the second half of 2014.
 
27

The following table present results for our three reportable segments for the nine months ended September 30, 2015 and 2014.
 
   
Nine Months Ended September 30,
 
   
2015
   
2014
   
% Change
 
Revenue:
           
Transportation and Skilled Trades
 
$
136,987
   
$
139,076
     
-1.5
%
Healthcare and Other Professions
   
89,911
     
97,971
     
-8.2
%
Transitional
   
1,261
     
2,526
     
-50.1
%
Total
 
$
228,159
   
$
239,573
     
-4.8
%
                         
Operating Income (Loss):
                       
Transportation and Skilled Trades
 
$
18,334
   
$
9,417
     
94.7
%
Healthcare and Other Professions
   
(3,443
)
   
(41,538
)
   
91.7
%
Transitional
   
(1,697
)
   
(1,563
)
   
-8.6
%
Corporate
   
(20,211
)
   
(23,777
)
   
15.0
%
Total
 
$
(7,017
)
 
$
(57,461
)
   
87.8
%
                         
Starts:
                       
Transportation and Skilled Trades
   
6,875
     
7,355
     
-6.5
%
Healthcare and Other Professions
   
5,289
     
5,959
     
-11.2
%
Transitional
   
31
     
172
     
-82.0
%
Total
   
12,195
     
13,486
     
-9.6
%
                         
Average Population:
                       
Transportation and Skilled Trades
   
7,216
     
7,529
     
-4.2
%
Healthcare and Other Professions
   
5,649
     
6,163
     
-8.3
%
Transitional
   
104
     
201
     
-48.3
%
Total
   
12,969
     
13,893
     
-6.7
%
                         
End of Period Population:
                       
Transportation and Skilled Trades
   
7,852
     
8,312
     
-5.5
%
Healthcare and Other Professions
   
5,932
     
6,671
     
-11.1
%
Transitional
   
56
     
206
     
-72.8
%
Total
   
13,840
     
15,189
     
-8.9
%

Nine Months Ended September 30, 2015 Compared to Nine Months Ended September 30, 2014
 
Transportation and Skilled Trades
Revenue decreased to $137.0 million in the first nine months of 2015, as compared to $139.1 million in the comparable period, primarily driven by a 4.2% decrease in average student population and $0.4 million increase in scholarship recognition in the current period compared to the prior year period.   The decline was partially offset by a 2.7% increase in average revenue per student due to improved student retention and a shift in program mix.

Operating income improved by $8.9 million, or 94.7%, to $18.3 million from $9.4 million mainly driven by the following expense reductions:
 
· Educational services and facilities expense reduced by $5.3 million comprised of (a) $3.1 million, or 10.9%, reduction in facilities expense, primarily due to lower depreciation expense as a result of discontinued depreciation for one campus included in assets held for sale and lower asset base due to prior long-lived asset impairments, and (b) $2.2 million, or 5.7%, lower instructional expenses.
· Selling, general and administrative expenses reduced by $4.3 million comprised of (a) $1.6 million, or 5.7%, reduction in sales and marketing expenses attributable to $2.5 million lower sales salary and travel expenses offset by $0.9 million increase in marketing expenses; (b) $0.9 million reduction in student services due to the smaller student population; and (c) $1.8 million, or 6.9% reduction in administrative expenses primarily as a result of a reduction in bad debt expense.
 
28

Healthcare and Other Professions
Revenue decreased by $8.1 million, or 8.2%, to $89.9 million in the first nine months of 2015 from $98.0 million in the comparable period primarily attributable to an 8.3% decrease in average student population. Furthermore, revenue declined from higher scholarship recognition of $0.7 million in the current period compared to the prior year period.

Revenue for the merged campuses were $0 and $1.9 million for the nine months ended September 30, 2015 and 2014 respectively.  Excluding the merged campuses, 2015 revenue decreased by $6.2 million, or 6.3%, to $89.9 million from $96.1 million and average student population declined 6.0%.

Operating loss improved by $38.1 million to $3.4 million from $41.5 million.  Excluding goodwill and long-lived assets impairments of $37.6 million in 2014 operating loss improved $0.5 million.
                               
Operating loss for the merged campuses were $0 and $1.6 million for the nine months ended September 30, 2015 and 2014 respectively. Excluding the merged campuses and the goodwill and long-lived asset impairment, operating loss improved by $1.1 million to $3.4 million from $2.3 million in the prior period as a result of the net revenue decrease partially offset by the following expense reductions:
                                 
· Educational services and facilities expense reduced by $2.6 million, or 4.9%, comprised of (a) $0.9 million, or 4.2%, reduction in facilities expense primarily due to lower depreciation expense as a result of discontinued depreciation for one campus included in assets held for sale and lower asset base due to prior long-lived asset impairments, and (b) lower instructional expenses of $1.8 million, or 5.3%, as a result of fewer students.
· Selling, general and administrative expenses reduced by $2.4 million, or 5.3%, comprised of (a) $0.8 million, or 14.6%, reduction in student services; (b) $1.7 million, or 8.3%, cost savings in administrative expenses in connection with management regionalization at certain campuses; and (c) $0.2 million net increase in sales and marketing as a result of an increase in marketing expenses to improve student enrollments partially offset by savings in sales expenses attributable to a reduction in the number of admissions personnel.

Included in the Healthcare and Other Professions segment is our Hartford, Connecticut campus which offers culinary programs.  For the year ended December 31, 2014, the campus had a net loss before income taxes of $5.7 million.   For the nine months ended September 30, 2015, the Hartford campus had lower net loss before income taxes of $4.3 million compared to $4.9 million due to cost savings and other income from a sublease of a portion of the building.
 
Transitional
This segment consists of our Fern Park, Florida campus where we have ceased student enrollment and existing students are being trained through March 2016.

Revenue decreased by $1.3 million, or 50.1%, to $1.3 million from $2.5 million, as compared to the current and prior year quarter, attributable to a 48.1% decrease in average student population due to suspension of new student enrollment effective February 2015.

Operating loss increased by $0.1 million, to $1.7 million from $1.6 million resulting primarily from revenue decline offset by eliminated expenses including sales and marketing.

Corporate and Other
This category includes unallocated expenses incurred on behalf of the entire company.  Corporate and Other costs decreased by $3.6 million, or 15.0% to $20.2 from $23.8 million, respectively, as compared to the prior year quarter. This decrease was primarily a result of cost restructuring efforts in 2014 and 2015.
 
29

LIQUIDITY AND CAPITAL RESOURCES
 
Our primary capital requirements are for facilities expansion and maintenance, and the development of new programs. Our principal sources of liquidity have been cash provided by operating activities and borrowings under our term loan agreement. The following chart summarizes the principal elements of our cash flow:

   
Nine Months Ended
September 30,
 
   
2015
   
2014
 
Net cash provided by operating activities
 
$
2,492
   
$
1,321
 
Net cash used in investing activities
   
(1,159
)
   
(4,729
)
Net cash provided by financing activities
   
18,790
     
3,224
 

As of September 30, 2015, we had cash and cash equivalents of $32.4 million, representing an increase of approximately $20.1 million as compared to $12.3 million of cash, and cash equivalents as of December 31, 2014.  This increase for the nine months ended September 30, 2015 is primarily due to our new term loan agreement which increased our cash and cash equivalents by $19.6 million net of finance fees.  In addition, cash and cash equivalents increased due to other working capital items partially offset by a net loss during the year of $11.9 million.
 
For the last several years, we and the proprietary school sector generally have faced deteriorating earnings growth. Government regulations have negatively impacted earnings by making it more difficult for potential students to obtain loans, which when coupled with the overall economic environment have hindered potential students from enrolling in our schools. In light of these factors, we have incurred significant operating losses as a result of lower student population. We also recorded a pre-tax goodwill impairment charge of $39.0 million for the year ended December 31, 2014 as a result of a significant decline in market capitalization. Despite these events, we believe that our likely sources of cash should be sufficient to fund operations for the next twelve months. At September 30, 2015, our available sources of cash primarily included cash from operations, cash and cash equivalents of $32.4 million.

To fund our business plans, including any anticipated future losses, purchase commitments, capital expenditures and principal and interest payments on borrowings, we leveraged our owned real estate that is not classified as held for sale. We are also continuing to take actions to improve cash flow by aligning our cost structure to our student population.

In addition to the aforementioned current sources of capital that will provide short term liquidity, we also plan to sell approximately $44.8 million in assets which are currently classified as assets held for sale and are expected to be sold within one year from the date of classification. All net proceeds of future sales of real property by the Company and its subsidiaries must be used to prepay revolving loans and permanently reduce the principal amount of revolving loans available under the Credit Facility.
                                 
Our primary source of cash is tuition collected from our students. The majority of students enrolled at our schools rely on funds received under various government-sponsored student financial aid programs to pay a substantial portion of their tuition and other education-related expenses. The largest of these programs are Title IV Programs which represented approximately 80% of our cash receipts relating to revenues in 2014. Students must apply for a new loan for each academic period. Federal regulations dictate the timing of disbursements of funds under Title IV Programs and loan funds are generally provided by lenders in two disbursements for each academic year. The first disbursement is usually received approximately 31 days after the start of a student's academic year and the second disbursement is typically received at the beginning of the sixteenth week from the start of the student's academic year. Certain types of grants and other funding are not subject to a 30-day delay.  In certain instances, if a student withdraws from a program prior to a specified date, any paid but unearned tuition or prorated Title IV financial aid is refunded according to federal, state and accrediting agency standards.

As a result of the significance of the Title IV funds received by our students, we are highly dependent on these funds to operate our business. Any reduction in the level of Title IV funds that our students are eligible to receive or any impact on our ability to be able to receive Title IV funds would have a significant impact on our operations and our financial condition.  See “Risk Factors” in Item 1A, included in our Annual Report on Form 10-K for the year ended December 31, 2014.

Operating Activities

Net cash provided by operating activities was $2.5 million for the nine months ended September 30, 2015 compared to $1.3 million for the comparable period of 2014.  The $1.2 million increase in net cash primarily resulted from a reduction in net loss net of impairments of $7.6 million partially offset by other working capital items.
 
30

Investing Activities

Net cash used in investing activities was $1.2 million compared to $4.7 million for the nine months ended September 30, 2015 and 2014, respectively. Our primary use of cash in investing activities was capital expenditures associated with investments in training technology classroom furniture, and new program build outs.

We currently lease a majority of our campuses. We own our campuses in Grand Prairie, Texas; West Palm Beach, Florida; Nashville, Tennessee; Suffield, Connecticut; and Denver, Colorado.  We have two properties that are held for sale.

Capital expenditures are expected to approximate 1% of revenues in 2015.  We expect to fund future capital expenditures with cash generated from operating activities and cash from our real estate monetization.

Financing Activities

Net cash provided by financing activities was $18.8 million as compared to $3.2 million for the nine months ended September 30, 2015 and 2014, respectively. The increase of $15.6 million was due to net borrowing of $22.0 million for the new term loan agreement for the nine months ended September 30, 2015 compared to $7.5 million for the nine months ended September 30, 2014.  In addition, the increase was due to $3.8 million in savings as a result of the previously reported dividend discontinuation for the nine months ended September 30, 2015 as compared to the nine months ended September 30, 2014, partially offset by $2.8 million of finance fees in relation to the term loan agreement.
                                          
Credit Agreement

On July 31, 2015, the Company entered into a credit agreement (the “Term Loan Agreement”) with three lenders, Alostar Bank of Commerce (“Alostar”), HPF Holdco, LLC and Rushing Creek 4, LLC, led by HPF Service, LLC, as administrative agent and collateral agent (the “Agent”), for an aggregate principal amount of $45 million (the “Loan”).  The Loan consists of a $30 million term loan agreement from HPF Holdco, LLC and Rushing Creek 4, LLC secured by a first priority lien in favor of the Agent on substantially all of the real and personal property owned by the Company, and a $15 million term loan agreement from Alostar secured by a $15.3 million cash collateral account. At the Borrowers’ request, a percentage of the cash collateral may be released to the Borrowers in the Agent’s sole discretion and with the consent of Alostar upon the satisfaction of certain criteria as outlined in the Term Loan Agreement. The Loan, which matures on July 31, 2019, replaces the Company’s previously existing $20 million revolving credit facility with Bank of America, N.A. and other lenders, which was due to expire on April 5, 2016.  The previously existing revolving credit facility was terminated concurrently with the effective date of the Term Loan Agreement on July 31, 2015 (the “Closing Date”); however, letters of credit in the aggregate amount of approximately $7.1 million issued by Bank of America, N.A. under the previously existing revolving credit facility remain outstanding following the termination of that facility.
 
A portion of the proceeds of the Loan were used by the Company to (i) repay approximately $6.3 million in outstanding principal, accrued interest and fees due under the existing revolving credit facility, (ii) fund the $15.3 million cash collateral account securing the portion of the Loan provided by Alostar, (iii) fund approximately $7.4 million in a cash collateral account securing the letters of credit issued under the previously existing revolving credit facility that remain outstanding after the termination of that facility and (iv) pay transaction expenses in connection with the Loan and the termination of the previously existing revolving credit facility.  The remaining proceeds of the Loan of approximately $13.8 million may be used by the Company to finance capital expenditures and for general corporate purposes consistent with the terms of the Term Loan Agreement.
 
Interest will accrue on the Loan at a per annum rate equal to the greater of (i) 11% or (ii) 90-day LIBOR plus 9%  determined monthly by the Agent and will be payable monthly in arrears.  The principal balance of the Loan will be repaid in equal monthly installments, commencing on August 1, 2017, determined as the quotient of (i) 10% of the outstanding principal balance of the Loan as of July 2, 2017 divided by (ii) 12.  A final installment of principal and all accrued and unpaid interest will be due on the maturity date of the Loan.

The Loan may be prepaid in whole or in part at any time, subject to the payment of a prepayment premium equal to (i) 5% of the principal amount prepaid at any time up to but not including the second anniversary of the Closing Date and (ii) 3% of the principal amount prepaid at any time commencing on the second anniversary of the Closing Date up to but not including the third anniversary of the Closing Date.  In the event of any sale or other disposition of a school or real property by the Company permitted under the Term Loan Agreement, the net proceeds of such sale or disposition must be used to prepay the Loan in an amount determined pursuant to the Term Loan Agreement, subject to the applicable prepayment premium; provided, however, that no prepayment premium will be due with respect to up to $15 million of aggregate repayments of the Loan made during the first year that the Loan is outstanding.  A portion of the net cash proceeds of any disposition of a school in an amount determined pursuant to the terms of the Term Loan Agreement, must be deposited and held as cash collateral in a deposit account controlled by the Agent until the conditions for release set forth in the Term Loan Agreement are satisfied.
 
31

For the three months ended September 30, 2015, $0.4 million of the Term Loan Agreement was repaid in connection with the Company’s sale of real property located in Springdale, Ohio. The Company had $44.7 million outstanding under the Term Loan Agreement as of September 30, 2015.
 
The Company had $30.0 million outstanding under the previously existing revolving credit facility as of December 31, 2014 which was repaid on January 3, 2015.  The interest rate on this borrowing was 7.25%.

The Term Loan Agreement contains customary representations, warranties and covenants such as minimum financial responsibility composite score, cohort default rate, and other financial covenants, including minimum liquidity, maximum capital expenditures, minimum fixed charge coverage ratio, maximum 90/10 ratio, and minimum EBITDA (as defined in the Term Loan Agreement), as well as affirmative and negative covenants and events of default customary for facilities of this type.  We were in compliance with all covenants as of September 30, 2015.
 
The Term Loan Agreement contains events of default, the occurrence and continuation of which provide the lenders with the right to exercise remedies against the Company and the cash and other collateral securing the Loan. These events of default include, among other things, the failure to pay principal, interest or any other amounts when due with respect to the Loan, the breach of covenants in the  Term Loan Agreement and related collateral security agreements, the occurrence of an insolvency event for the Company or any of its subsidiaries, the issuance of a notice of intent to suspend, terminate or limit Title IV program eligibility or an educational approval  of the Company or any of its subsidiaries that could reasonably be expected to result in a Material Adverse Change (as defined in the  Term Loan Agreement), the occurrence of a default respect to other indebtedness of the Company or any of its subsidiaries that involves an aggregate amount of $0.5 million or more, and the entry of a final judgment against the Company or any of its subsidiaries in the aggregate amount of $1 million or more.
                       
Also, in connection with the Term Loan Agreement, the Company paid to the Agent a commitment fee of $1.0 million and is required to pay to the Agent other customary fees for facilities of this type.  Total fees for the Term Loan Agreement were $2.8 million which is included in deferred finance charges on the consolidated balance sheet.

The following table sets forth our long-term debt (in thousands):

   
September 30,
2015
   
December 31,
2014
 
Term loan
 
$
44,650
   
$
-
 
Credit agreement
   
-
     
30,000
 
Finance obligation
   
9,672
     
9,672
 
Capital lease-property (rate of 8.0%)
   
25,159
     
25,509
 
     
79,481
     
65,181
 
Less current maturities
   
(6,328
)
   
(30,471
)
   
$
73,153
   
$
34,710
 

Contractual Obligations

Long-term Debt.  As of September 30, 2015, our long-term debt consisted of our term loan agreement, the finance obligation in connection with our sale-leaseback transaction in 2001 and amounts due under capital lease obligations.

Lease Commitments.  We lease offices, educational facilities and equipment for varying periods through the year 2032 at base annual rentals (excluding taxes, insurance, and other expenses under certain leases).

The following table contains supplemental information regarding our total contractual obligations as of September 30, 2015 (in thousands):

   
Payments Due by Period
 
   
Total
   
Less than
1 year
   
2-3 years
   
4-5 years
   
After 5
years
 
Capital leases (including interest)
 
$
45,672
   
$
2,510
   
$
5,356
   
$
5,356
   
$
32,450
 
Term loan
   
62,537
     
10,724
     
14,722
     
37,091
     
-
 
Operating leases
   
96,730
     
18,996
     
32,532
     
25,201
     
20,001
 
Rent on finance obligation
   
1,985
     
1,588
     
397
     
-
     
-
 
Total contractual cash obligations
 
$
206,924
   
$
33,818
   
$
53,007
   
$
67,648
   
$
52,451
 

32

Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements as of September 30, 2015.

Seasonality and Outlook

Seasonality

Our revenue and operating results normally fluctuate as a result of seasonal variations in our business, principally due to changes in total student population. Student population varies as a result of new student enrollments, graduations and student attrition. Historically, our schools have had lower student populations in our first and second quarters and we have experienced larger class starts in the third quarter and higher student attrition in the first half of the year. Our second half growth is largely dependent on a successful high school recruiting season. We recruit our high school students several months ahead of their scheduled start dates, and thus, while we have visibility on the number of students who have expressed interest in attending our schools, we cannot predict with certainty the actual number of new student enrollments and the related impact on revenue. Our expenses, however, typically do not vary significantly over the course of the year with changes in our student population and revenue. During the first half of the year, we make significant investments in marketing, staff, programs and facilities to meet our second half of the year targets and, as a result, such expenses do not fluctuate significantly on a quarterly basis. To the extent new student enrollments, and related revenue, in the second half of the year fall short of our estimates, our operating results could be negatively impacted. We expect quarterly fluctuations in operating results to continue as a result of seasonal enrollment patterns. Such patterns may change as a result of new school openings, new program introductions, and increased enrollments of adult students and/or acquisitions.

Outlook

Similar to many companies in the proprietary education sector, we have experienced significant deterioration in student enrollments over the last several years. This can be attributed to many factors including the economic environment, numerous regulatory changes such as changes to admissions advisor compensation policies, elimination of the ability-to-benefit (“ATB”), changes to the 90/10 Rule and cohort default rates, gainful employment and modifications to Title IV amounts and eligibility. While demand from employers in most of our fields are increasing we have yet to see an increase in demand from new students.

As the economy continues to improve and the unemployment rate continues to decline, our student enrollment has been negatively impacted due to a portion of our potential student base which has entered the workforce prematurely without obtaining any post-secondary training. Offsetting this short term decline in available students is the fact that an increasing number of the “baby boom” generation are retiring from the workforce.  The retirement of baby boomers coupled with a growing economy has resulted in additional employers looking to us to help solve their workforce needs.  With schools in 15 states, we are a very attractive employment solution for large regional and national employers.

To fund our business plans, including any anticipated future losses, purchase commitments, capital expenditures and principal and interest payments on borrowings, we have entered into a new term loan agreement described above and continue to have the ability to sell our assets that are classified as held for sale. We are also continuing to take actions to improve cash flow by aligning our cost structure to our student population.
                                      
As previously reported, on November 3, 2015, the Board of Directors approved a plan for the Company to divest its Healthcare and Other Professions business segment.  Implementation of the plan will result in the Company’s operations being focused solely on the Transportation and Skilled Trades business segment.  Due to the Board’s decision to divest the Healthcare and Other Professions business segment, beginning in the fourth quarter of 2015, this segment is anticipated to be classified as discontinued operations and the associated assets and liabilities will be classified as held for sale.  This decision will trigger an impairment test at the segment level which may result in a non-cash impairment charge.  In addition, as of September 30, 2015 the Company has two campuses held for sale.  With the approval of the plan to divest the Healthcare and Other Professions business segment one of the campuses will no longer be included as held for sale.
                                            
This decision will trigger an impairment test at the segment level which may result in a non-cash impairment charge.  In addition, as of September 30, 2015 we have two campuses held for sale.  With the approval of the plan to divest the Healthcare and Other Professions business segment one of the campuses, in the transportation segment, will no longer be included as held for sale.
                                     
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to certain market risks as part of our on-going business operations.  On July 31, 2015, the Company repaid in full and terminated the revolving line of credit with the proceeds of a new $45 million term loan agreement.
 
Based on our outstanding debt balance as of September 30, 2015, a change of one percent in the interest rate would have caused a change in our interest expense of approximately $0.5 million, or $0.02 per basic share, on an annual basis.  Changes in interest rates could have an impact however on our operations, which are greatly dependent on students’ ability to obtain financing. Any increase in interest rates could greatly impact our ability to attract students and have an adverse impact on the results of our operations. The remainder of our interest rate risk is associated with miscellaneous capital equipment leases, which is not significant.
 
33

Item 4. CONTROLS AND PROCEDURES

(a)   Evaluation of disclosure controls and procedures.  Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Securities Exchange Act Rule 13a-15(e)) as of the end of the quarterly period covered by this report, have concluded that our disclosure controls and procedures are adequate and effective to reasonably ensure that material information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s Rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

(b) Changes in Internal Control Over Financial Reporting.  There were no changes made during our most recently completed fiscal quarter in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

In the ordinary conduct of our business, we are subject to periodic lawsuits, investigations and claims, including, but not limited to, claims involving students or graduates and routine employment matters.  Although we cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against us, we do not believe that any currently pending legal proceeding to which we are a party will have a material adverse effect on our business, financial condition, results of operations or cash flows.

On November 21, 2012, we received a Civil Investigation Demand from the Attorney General of the Commonwealth of Massachusetts relating to its investigation of whether we and certain of our academic institutions have complied with certain Massachusetts state consumer protection laws.  On July 29, 2013, and January 17, 2014, we received additional Civil Investigative Demands.  Pursuant to the Civil Investigative Demands, the Attorney General requested from us and certain of our academic institutions in Massachusetts documents and detailed information for the time period from January 1, 2008 to the present.

On July 13, 2015, the Commonwealth of Massachusetts filed a complaint against us in the Suffolk County Superior Court alleging certain violations of the Massachusetts Consumer Protection Act since at least 2010 and continuing through 2013.  At the same time, we agreed to the entry of a Final Judgment by Consent in order to avoid the time, burden, and expense of contesting such liability.  As part of the Final Judgment by Consent, we denied all allegations of wrongdoing and any liability for the claims asserted in the complaint.  We agreed, however, to pay the sum of $850,000 to the Attorney General and to forgive $165,000 of debt consisting of unpaid balances owed to us by certain graduates in the sole discretion of the Massachusetts Attorney General which were previously accrued for at December 31, 2014.  The Final Judgment by Consent also provided certain requirements for calculation of job placement rates in Massachusetts and imposed certain disclosure obligations that are consistent with the regulations that have been previously enacted by the Massachusetts Attorney General’s Office.
 

34

Item 6. EXHIBITS

EXHIBIT INDEX

Exhibit
Number
 
Description
   
10.1
Amendment to Employment Agreement dated as of August 31, 2015 between the Company and Scott M. Shaw (1) #.
   
10.2
Credit Agreement dated as of July 31, 2015 among Lincoln Educational Services Corporation and its wholly-owned subsidiaries, the Lenders and Collateral Agents party thereto, and HPF Service, LLC, as Administrative Agent (2).
   
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
101**
The following financial statements from Lincoln Educational Services Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015, filed on November 6, 2015, formatted in XBRL: (i) Condensed Consolidated Statements of Operations, (ii) Condensed Consolidated Balance Sheets, (iii) Condensed Consolidated Statements of Cash Flows, (iv) Condensed Consolidated Statement of Changes in Stockholders’ Equity, and (v) the Notes to Condensed Consolidated Financial Statements, tagged as blocks of text and in detail.
 

* Filed herewith.

** As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

# Indicates management contract or compensatory plan or arrangement required to be identified pursuant to Item 6 of this Quarterly Report on Form 10-Q.

(1) Incorporated by reference to the Company’s Form 8-K filed September 3, 2015.

(2) Incorporated by reference to the Company’s Form 8-K filed May 5, 2015.
 
35

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 hereunto duly authorized.
 
   
LINCOLN EDUCATIONAL SERVICES CORPORATION
       
Date: November 6, 2015
By:
/s/ Brian Meyers
 
   
Brian Meyers
 
   
Executive Vice President, Chief Financial Officer and Treasurer
   
(Principal Accounting and Principal Financial Officer)
 
 
36


EXHIBIT 31.1
 
CERTIFICATION
 
I, Scott M. Shaw, certify that:
 
1. I have reviewed this quarterly report on Form 10-Q of Lincoln Educational Services Corporation;
 
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
(a)            Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
(b)            Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
(c)            Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d)            Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
 
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
(a)            All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
(b)            Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date: November 6, 2015
 
   
/s/ Scott M. Shaw
 
Scott M. Shaw
 
Chief Executive Officer
 
 
 


EXHIBIT 31.2
 
CERTIFICATION
 
I, Brian Meyers, certify that:
 
1. I have reviewed this quarterly report on Form 10-Q of Lincoln Educational Services Corporation;
 
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
(a)            Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
(b)            Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
(c)            Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d)            Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
 
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
(a)            All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
(b)            Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date: November 6, 2015
 
   
/s/ Brian Meyers
 
Brian Meyers
 
Chief Financial Officer
 

 


EXHIBIT 32

CERTIFICATION

Pursuant to 18 U.S.C. 1350 as adopted by
Section 906 of the Sarbanes-Oxley Act of 2002
 
Each of the undersigned, Scott M. Shaw, Chief Executive Officer of Lincoln Educational Services Corporation (the “Company”), and Brian Meyers, Chief Financial Officer of the Company, has executed this certification in connection with the filing with the Securities and Exchange Commission of the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2015 (the “Report”).
 
Each of the undersigned hereby certifies that, to his respective knowledge:
 
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
Date: November 6, 2015
 
   
/s/ Scott M. Shaw
 
Scott M. Shaw
 
Chief Executive Officer
 
   
/s/ Brian Meyers
 
Brian Meyers
 
Chief Financial Officer