View:
Mail Stop 0407
April 28, 2005
David F. Carney
Chairman of the Board and CEO
Lincoln Educational Services Corporation
200 Executive Drive, Suite 340
West Orange, NJ 07052
Re: Lincoln Educational Services Corporation
Form S-1
Filed March 29, 2005
File No. 333-123644
Dear Mr. Carney:
We have reviewed your filing and have the following
comments.
Where indicated, we think you should revise your document in
response
to these comments. If you disagree with any of our comments, we
will
consider your explanation as to why our comment is inapplicable or
a
revision is unnecessary. Please be as detailed as necessary in
your
explanation. In some of our comments, we may ask you to provide
us
with supplemental information so we may better understand your
disclosure. After reviewing this information, we may or may not
raise additional comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or on any other
aspect
of our review. Feel free to call us at the telephone numbers
listed
at the end of this letter.
General
1. We encourage you to file all exhibits with the next amendment
to
your Form S-1 or otherwise furnish us drafts of the legality
opinion
and the underwriting agreement. We may have additional comments
upon
review of those documents.
2. We note a number of blank spaces throughout your registration
statement for information that you are not entitled to omit under
Rule 430A, such as the anticipated price range. Please note that
we
may have additional comments once you have provided this
disclosure.
Therefore, please allow us sufficient time to review your complete
disclosure prior to any distribution of preliminary prospectuses.
3. Please provide us with copies of any graphical materials or
artwork you intend to use in your prospectus. Since we may have
comments that could result in material revisions to your artwork,
we
suggest that you provide us with enough time to finish commenting
on
your artwork prior to circulating preliminary prospectuses. See
Item
VIII of the March 31, 2001 quarterly update to the Division of
Corporation Finance`s "Current Issues and Rulemaking Projects
Outline."
4. We note the growth estimate data and other figures cited
throughout the document, such as those provided by the U.S.
Departments of Education and Labor. Please provide us with marked
copies of any materials that support these and other third party
statements, clearly cross-referencing each statement with the
underlying factual support. Also provide factual support for your
assertion that you are a "leading" for-profit provider of career-
oriented post-secondary education based on total enrollment and
number of graduates.
5. Please amend the signature page of the registration statement
to
include the signature of the person acting in the capacity of your
controller or principal accounting officer.
Inside front cover, page i
6. Limit the inside cover page to the information required by Item
502 of Regulation S-K by repositioning the paragraph relating to
your
trademarks to another location in the registration statement.
Prospectus Summary, page 1
7. Please delete the second sentence of the italicized
introductory
paragraph. In this regard, the second sentence is not necessary
because a summary, by its nature, does not contain all the
information.
8. Revise your disclosure throughout to remove unnecessary defined
terms. In this regard, please delete the fourth sentence of the
introductory paragraph on page 1. Once you make your disclosure
clear from the context, you will not need to define terms such as
"Lincoln," "we," "our" "Us," and "the Company."
9. Please revise to clearly explain the meaning of the terms
"allied
health" and "the Electronic System Technology program" the first
time
they appear on pages 1 and 2. For instance, you can clarify that
"allied health" includes instruction to become a medical assistant
or
a pharmacy technician.
10. Revise the prospectus summary and risk factors section to
remove
the use of unnecessary acronyms such as "LTI," "NADC," "DADC,"
"CEI,"
"NETI," "LESC," "HEA," "ACCSCT," "TPPPA," and "ACICSC" since their
meanings are unclear without the benefit of an explanation. See
Securities Act Rule 421(b). In addition, please consider deleting
other unnecessary abbreviations appearing throughout the remainder
of
the prospectus.
11. Please revise to decrease the length of your summary. It
should
discuss only the key aspects of the offering and your operations.
Much of the discussion you currently include does not appear so
highly material to merit inclusion in the summary. For example,
consider eliminating or substantially reducing the extensive
discussion of your market opportunity, business strengths and
strategy, which is more appropriate for your business section.
Also
consider reducing the description of the company to one or two
paragraphs summarizing your business operations.
12. As part of your revisions, ensure your summary disclosure
provides a balanced picture of your operations and financial
condition, including a brief discussion of the following:
* the fact that you operate in a highly regulated industry;
* your heavy reliance on Title IV funds, the numerous conditions
placed on your ability to participate in Title IV programs, and
how
you have not fulfilled some of those conditions; and
* your receipt of a financial responsibility composite score of
less
than 1.0 and the placement of your institutions on "Heightened
Cash
Monitoring, Type 1 status."
Market Opportunity, page 2
13. It appears that "career-oriented for-profit post-secondary
education" is a part of the more general "for-profit post-
secondary
education" sector, which in turn is part of the broader market for
"post-secondary education." As a result, revise to clarify that
expenditures on and enrollment in post-secondary education
generally
does not necessarily reveal the market opportunity for your
educational services. In addition, include a statement that you
cannot provide any assurance that you will benefit from the
projected
growth discussed in this section.
14. We note your citation to a Labor Department estimate that
"there
will be approximately 1.7 million job openings each year from 2000
to
2010 in careers related to the areas of study we offer" (emphasis
added). Please revise to identify the specific careers in which
there will be an estimated 1.7 million job openings per year, and
how
those careers are related to the areas of study you offer.
Risk Factors, page 9
15. Please revise your risk factor captions to clearly convey the
specific risk to investors. For example:
* the risk factor caption "If we or our eligible institutions do
not
meet the financial responsibility standards..." does not convey
the
fact that your company did not comply with the financial
responsibility standards;
* the caption "We are subject to sanctions if we fail to correctly
calculate and timely return Title IV Program funds..." does not
indicate the potential impact those sanctions may have on your
business or financial condition; and
* the caption "Regulatory agencies or third parties may conduct
compliance reviews..." merely states a fact about you and does not
convey the potential adverse effect on you.
16. Please avoid the generic conclusion in the captions and
discussions that if a risk occurs, your business and results of
operations could be adversely affected or be harmed. This does
not
represent meaningful disclosure. Instead, replace this language
with
specific disclosure of the possible impact upon your operating
results, business, liquidity, cash flow, financial condition,
share
price, etc.
17. Provide only that amount of detail necessary to understand the
risk faced by investors. In this regard, the amount of detail
that
you provide in several of your risk factors overwhelms the risk
you
are trying to convey. See, for example, the first two risk
factors.
In the first risk factor, can you do without the bullet point list
of
requirements that you discuss in further detail in subsequent risk
factors? Is it necessary to provide such detailed information
about
the three financial ratios and the calculation of the composite
score
to convey the risk presented in the second risk factor? Move
extraneous information and background to your business or MD&A
sections, as appropriate.
18. Please remove any mitigating language from your risk factors.
See, for example:
* "Although no assurance can be given, we do not believe that the
actions of the DOE specified above will have a material effect..."
under the heading "If we or our eligible institutions do not meet
the
financial responsibility standards..." (though you should consider
discussing the anticipated effect of the DOE actions on your
financial position in your MD&A); and
* "Our other institutions were not required to submit a letter of
credit..." under the heading "We are subject to sanctions if we
fail
to correctly calculate...."
If we or our eligible institutions do not meet the financial
responsibility..., page 10
19. Please revise this risk factor to explain the significance to
investors of your being placed on "Heightened Cash Monitoring,
Type 1
status." Is there a risk that your business might be limited by
the
requirement to notify the Department of Education of "certain
enumerated oversight and financial events"? Or is there a risk
that
you will have to post additional letters of credit or will not be
eligible to participate in Title IV programs if you continue to
fail
to meet the financial responsibility standards?
20. In an appropriate location in the prospectus, discuss whether
or
not the Department of Education has calculated your financial
responsibility score for the December 31, 2003 fiscal year end,
and
if so, the score you received. In addition, consider explaining
in
your MD&A the basis for your belief that the actions taken by the
Department of Education in response to your financial
responsibility
score will not have a material effect on your financial position
or
results of operations. Also indicate whether or not the receipt
of a
score below 1.0 is or is likely to be a default under your new
credit
agreement.
Our institutions may lose eligibility to participate in Title IV
Programs..., page 12
21. It appears that you discuss multiple risks under this caption:
(1) risks related to deriving more than 90% of revenues from Title
IV
funds; and (2) risks related to student default rates exceeding a
certain threshold. Please separate these risks into two
appropriately-worded risk factor headings.
If regulators do not approve or delay their approval..., page
13
22. Indicate whether this offering is conditioned upon the receipt
of
the confirmation from the Department of Education. If not, then
discuss the potential risks if you proceed with the offering
without
such confirmation.
Following the consummation of the offering, we do not
anticipate..., page 21
23. Advise why you think the fact that you do not plan to pay
dividends is a significant risk. If retained, provide more
disclosure as to the reasons why you consider this a risk.
Otherwise, delete the risk factor.
Anti-Takeover provisions in our certificate of incorporation...,
page
21
24. Consider creating a separately captioned risk factor
describing
Lincoln Educational`s power to issue preferred stock and how that
preferred stock would affect common stockholders` voting rights,
dividend rights, and rights to receive payment upon liquidation of
your company, if material.
Our principal stockholder will continue to own..., page 21
25. Please revise this risk factor caption and discussion to
clarify
that your principal stockholder will have the ability to control
substantially all matters requiring shareholder approval. Also
address the fact that Stonington has representatives on the
company`s
board of directors and thus has an added ability to influence
matters, such as executive compensation.
Use of Proceeds, page 24
26. To the extent possible, please revise to more specifically
identify and quantify the amount of proceeds to be used for
particular purposes. Do you intend to pay down the entire amount
outstanding under your credit agreement? How much will be used to
finance additional acquisitions as opposed to funding your capital
expenditures such as the expansion of existing facilities? In
addition, indicate whether you currently have any agreements or
understandings to make any strategic acquisitions and, if so,
provide
the applicable information required by Instruction 6 to Item 504
of
Regulation S-K. Finally, disclose how you expect to allocate the
net
proceeds of the offering if the underwriters exercise their over-
allotment option, to the extent practicable.
Dilution, page 26
27. Please quantify the further dilution to new investors that
will
occur assuming the exercise of all of your outstanding stock
options.
Also quantify the dilution to new investors if your underwriters
fully exercise their over-allotment option.
Management`s Discussion and Analysis of Financial Condition and
Results of Operations, page 32
28. The Commission`s Interpretive Release no. 33-8350, "Commission
Guidance Regarding Management`s Discussion and Analysis of
Financial
Condition and Results of Operations," located on our website at
http://www.sec.gov/rules/interp/33-8350.htm, requires companies to
identify and disclose known trends, events, demands, commitments
and
uncertainties that are reasonably likely to have a material effect
on
financial condition or operating performance. For example,
consider
expanding your discussion of any known trends or uncertainties
that
could materially affect your revenues in the future, such as the
potential impact of losing your eligibility to participate in
Title
IV programs as a result of not meeting the Department of
Education`s
financial responsibility standards. As another example, address
the
estimated increase to your general and administrative expenses
associated with the costs related to being a public company and
how
you intend to pay for the expenses, if material.
Critical Accounting Policies and Estimates, page 35
Revenue recognition, page 35
29. Tell us what you mean by the "length of the applicable
program."
Also tell us if there are any internships or externships that are
required after the period of the applicable programs and if those
required internships or externships are included in the period
over
which you recognize revenue.
Allowance for uncollectible accounts, page 36
30. Please provide quantitative disclosure on what impact a change
in
your estimates for allowance for doubtful accounts could have on
your
results of operations. Refer to Section V of Release no. 33-8350.
Goodwill, page 36
31. Revise your disclosure regarding goodwill to disclose the
estimates and assumptions used to determine the fair value of
goodwill and provide a sensitivity analysis depicting reasonably
likely scenarios had other variables been chosen in the
determination
of your estimates. Refer to Release no. 33-8350.
Liquidity and Capital Resources, page 40
32. We note your belief that you will be able to meet your
anticipated cash needs "for the foreseeable future." Please
provide
a more detailed discussion of your ability to meet both your
short-
term and long-term liquidity needs. We consider "long-term" to be
the period in excess of the next twelve months. See Section
III.C.
of Release no. 33-6835 and footnote 43 of Release no. 33-8350.
Clarify whether management believes the company will have
sufficient
cash and other financial resources to fund operations and meet its
obligations beyond the next twelve months.
33. Also address the anticipated impact on your plans as a result
of
the capital expenditure covenant limits contained in your new
credit
agreement.
Operating Activities, page 40
34. Disclose the impact that the Department of Education`s
"Heightened Cash Monitoring, Type 1 status," as discussed on page
F-
11, could have on your liquidity. Also, please disclose the fact
that Title IV programs represented 81% of cash receipts related to
revenue in 2004, and the impact not participating in those
programs
could have on your liquidity.
Contractual obligations, page 43
35. Disclose if interest payments on debt are included in your
contractual obligations table.
Business, page 46
Growth Strategy, page 50
36. We note your brief reference to your relationship with
eCollege.com on page 52. Expand to discuss the nature of your
relationship with eCollege.com and disclose the material terms of
any
agreements between you and eCollege.com.
Faculty and Employees, page 56
37. Disclose the status of any negotiations to replace the
collective
bargaining agreements that expire this year. Consider including a
risk factor to discuss labor relations and the possible effects of
work stoppages, if material.
Competition, page 56
38. To the extent reasonably known, provide an estimate of the
number
of competitors in the for-profit post-secondary education industry
and quantified disclosure of your market shares in each of your
markets. See Item 101(c)(x) of Regulation S-K.
39. Please expand your discussion to clarify the types of
institutions you believe are your competitors. For example, you
state that competition between career-oriented schools and
traditional four-year colleges or universities is limited, but you
state in a risk factor on page 17 that "our schools compete for
students and faculty with traditional public and private two-year
and
four-year colleges and universities...." Please revise to resolve
these items.
Legal Proceedings, page 58
40. Describe the nature of the relief sought in the litigation
brought by the "relators" pursuant to Item 103 of Regulation S-K.
Regulation of Federal Student Financial Aid Programs, page 63
41. Under "Compliance with Regulatory Standards and Effect of
Regulatory Violations" on page 72, briefly describe how
Southwestern
and NADC failed to comply with the Department of Education
requirements.
Management, page 74
42. For those executive officers who have been employed by you for
less than five years, briefly explain the nature of the
responsibilities undertaken in their prior positions. See Item
401(e) of Regulation S-K and revise the biographical sketches for
Messrs. Shaw and Abrams accordingly.
Employment-Related Agreements, page 82
43. To the extent possible, provide more specific disclosure about
the parameters that the board or compensation committee will
evaluate
in determining whether cash bonuses are to be paid. Are the
bonuses
based on revenue levels or earnings goals that can be expressed in
qualitative terms?
Principal and Selling Stockholders, page 98
44. Revise to provide the beneficial ownership information as of
the
most recent date practicable in accordance with Item 403 of
Regulation S-K.
45. Given your disclosure in footnotes 16-18 that Messrs. Michas,
Burke and Hart may be deemed to beneficially own the shares held
by
Back to School Acquisition, LLC, and Hart Capital, LLC, please
revise
the table to attribute beneficial ownership of those shares to
them.
46. It appears that Stonington Partners, Inc. II is affiliated
with
Stonington Corp., a registered broker-dealer. Please revise your
table to disclose which of the selling stockholders are affiliates
of
broker-dealers. For each stockholder identified as an affiliate
of a
broker-dealer, disclose (1) whether or not the seller purchased in
the ordinary course of business; and (2) whether or not, at the
time
of purchase of the securities to be resold, the seller had no
agreements or understandings, directly or indirectly, with any
person
to distribute the securities. If you cannot provide this
representation for each affiliate, tell us in your response
letter.
Underwriting, page 110
47. Revise the underwriters` compensation table so that it
complies
with the requirements of Item 508(e) of Regulation S-K and its
instructions. In this regard, the table should indicate the
amount
of the discounts and commissions to be paid by the selling
shareholders separate from the company.
Reserved Shares, page 111
48. We note that you plan to reserve shares for certain business
associates, employees, and other persons. Please describe in your
response letter the mechanics of how and when these shares were or
will be offered and sold to investors in the directed share
program
for this offering. For example, tell us how the prospective
recipients and number of reserved shares are determined. Tell us
how
and when the issuer and underwriter notified or will notify the
directed share investors, including the types of communications
used.
Discuss the procedures these investors must follow in order to
purchase the offered securities, including how and when any
communications are sent or received or funds are received by the
underwriters or you. How do the procedures for the directed share
program differ from the procedures for the general offering to the
public? Provide us with copies of all written communications with
prospective purchasers about the directed share program.
No Sales of Similar Securities, page 111
49. We note in the risk factor on page 20 that Merrill Lynch may
release the securities from the restrictions contained in the
lock-up
agreement at any time. Revise to disclose what factors the
underwriters will use in any determination to release the shares
subject to the lock-up, and indicate any current intention to
release
those shares. Furthermore, disclose how many shares are subject
to
the lock-up.
Electronic Distributions, page 113
50. You state that "certain of the underwriters may be
facilitating
Internet distribution for this offering to certain of its Internet
subscription customers." Identify in your response letter any
members of the underwriting syndicate that will engage in any
electronic offer, sale or distribution of the shares and describe
their procedures to us. If you become aware of any additional
members of the underwriting syndicate that may engage in
electronic
offers, sales or distributions after you respond to this comment,
promptly supplement your response to identify those members and
provide us with a description of their procedures.
Briefly describe any electronic distribution in the filing.
Also, tell us how your procedures ensure that the distribution
complies with Section 5 of the Securities Act. In particular,
please
address:
* the communications used;
* the availability of the preliminary prospectus;
* the manner of conducting the distribution and sale, such as the
use
of indications of interest or conditional offers; and
* the funding of an account and payment of the purchase
price.
Alternatively, to the extent that our Division has reviewed your
procedures, please confirm this and tell us if you have changed or
revised your procedures subsequent to our clearance.
Further, tell us whether you or the underwriters have any
arrangements with a third party to host or access your preliminary
prospectus on the internet. If so, identify the party and the
website, describe the material terms of your agreement, and
provide
us with a copy of any written agreement. Provide us also with
copies
of all information concerning your company or prospectus that have
appeared on their website. Again, if you subsequently enter into
any
such arrangements, promptly supplement your response.
Finally, tell us whether any members of the selling group have
made
copies of the preliminary prospectus available over the internet.
If
so, tell us when. If not, tell us if they intend to do so. In
this
regard, note that we would consider this posting a circulation of
the
preliminary prospectus.
Other Relationships, page 113
51. Prior to the effectiveness of this registration statement,
please
provide us with a copy of the letter or a call from the NASD
informing us that the NASD has cleared the amount of compensation
to
be allowed or paid to the underwriters.
Notes to Consolidated Financial Statement for the Years ended
December 31, 2002, 2003 and 2004
Note 1. Summary of Significant Accounting Policies
Property, Equipment and Facilities, page F-7
52. Disclose your accounting policy for impairment of long- lived
assets.
Goodwill and other intangible assets, page F-8
53. Tell us what your reporting units are and the method you used
to
determining the fair value of the reporting units in testing
goodwill
for impairment. Tell how you allocated goodwill amongst the
reporting units.
54. In a separate footnote to your financial statements comply
with
the disclosure requirements in paragraphs 44 and 45 of SFAS No.
142,
Goodwill and Other Intangible Assets."
Concentration of Credit Risk, page F-8
55. Please disclose here or in a separate footnote the specific
factors you consider in determining your allowance for doubtful
accounts. Please include your consideration of in-school
students,
out-of-school students, and accounts receivable aging schedules.
Also tell us the factors behind the increased write-offs of
receivables in 2004 as disclosed on your valuation schedule.
Note 3. Financial Aid and Regulatory Compliance
Regulatory Compliance, page F-11
56. Tell us if the Department of Education has calculated your
composite scores for 2003 and how they compare to your calculation
for 2003.
Note 5. Business Acquisitions, page F-12
57. Tell us the factors you considered in valuing other
intangibles
in your business acquisitions. Also tell us why you believe your
acquired trade names have an indefinite life and should not be
amortized.
Note 9. Stockholders` Equity, page F-17
58. Tell us if your method used for determining the fair value of
your options is a market, income, or asset-based approach.
Also, revise your stockholders` equity footnote to disclose the
following information for equity instruments granted during the 12
months prior to the date of the most recent balance sheet included
in
the registration statement:
* for each grant date, the number of options or shares granted,
the
exercise price, the fair value of the common stock, and the
intrinsic
value, if any per option (the number of options may be aggregated
by
month or quarter and the information presented as weighted average
per-share amounts); and
* whether the valuation used to determine the fair value of the
common stock was contemporaneous or retrospective.
Further, since it appears that the fair value of your common stock
was determined by a related party, you should provide
enhanced
disclosures to investors because reliance has been placed on an
internally generated valuation rather than by an independent
third-
party specialist. Accordingly, please revise Management`s
Discussion
and Analysis of Financial Condition and Results of Operations to
include the following information:
* a discussion of the significant factors, assumptions, and
methodologies used in determining the fair value of your common
stock;
* a discussion of each significant factor contributing to the
difference between the fair value as of the date of each grant and
the estimated IPO price; and
* the valuation method you employed and the reason that management
chose not to obtain a valuation from an unrelated valuation
specialist.
Note 13. Segment Reporting, page F-25
59. It appears that you concluded that all of the campuses have
similar economic characteristics and therefore you can aggregate
them
in one reportable segment under the guidance of paragraph 17 of
SFAS
131. Demonstrate how you concluded that the destination schools
have
similar economic characteristics than the rest of your campuses.
* * * *
Please amend your Form S-1 in response to these comments.
You
may wish to provide us with marked copies of the amendment to
expedite our review. Please furnish a cover letter with your
amendment that keys your responses to our comments and provides
any
requested supplemental information. Detailed cover letters
greatly
facilitate our review. Please understand that we may have
additional
comments after reviewing your amendment and responses to our
comments.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filings reviewed by the staff to
be
certain that they have provided all information investors require
for
an informed decision. Since the company and its management are in
possession of all facts relating to a company`s disclosure, they
are
responsible for the accuracy and adequacy of the disclosures that
they have made.
Notwithstanding our comments, in the event the company
requests
acceleration of the effective date of the pending registration
statement, it should furnish a letter, at the time of such
request,
acknowledging that:
* should the Commission or the staff, acting pursuant to delegated
authority, declare the filing effective, it does not foreclose the
Commission from taking any action with respect to the filing;
* the action of the Commission or the staff, acting pursuant to
delegated authority, in declaring the filing effective, does not
relieve the company from its full responsibility for the adequacy
and
accuracy of the disclosure in the filing; and
* the company may not assert this action as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in connection with our review of
your
filing or in response to our comments on your filing.
We will consider a written request for acceleration of the
effective date of the registration statement as confirmation of
the
fact that those requesting acceleration are aware of their
respective
responsibilities under the Securities Act of 1933 and the
Securities
Exchange Act of 1934 as they may relate to the proposed public
offering of the securities specified in the above registration
statement. We will act on the request and, pursuant to delegated
authority, grant acceleration of the effective date.
We direct your attention to Rules 460 and 461 regarding
requesting acceleration of a registration statement. Please allow
adequate time after the filing of any amendment for further review
before submitting a request for acceleration. Please provide this
request at least two business days in advance of the requested
effective date.
You may contact Robert Carroll, Staff Accountant, at (202)
551-
3362 or Kyle Moffatt, Accountant Branch Chief, at (202) 551-3810
if
you have questions regarding comments on the financial statements
and
related matters. Please contact Derek Swanson, Staff Attorney, at
(202) 551-3366 or me at (202) 551-3810 with any other questions.
Sincerely,
Michele M. Anderson
Legal Branch Chief
cc: via facsimile (212) 848-7179
Rohan S. Weerasinghe, Esq.
Shearman & Sterling LLP
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Mr. David F. Carney
Lincoln Educational Services Corporation
April 28, 2005
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