U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
- --------------------------------------------------------------------------------
Form 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2005
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
- --------------------------------------------------------------------------------
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 (IRS Employer Identification No.)
incorporation or organization)
200 Executive Drive, Suite 340
West Orange, NJ 07052
(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 |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
As of November 9, 2005, there were 25,154,390 shares of the registrant's common
stock outstanding.
- --------------------------------------------------------------------------------
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDING SEPTEMBER 30, 2005
PART I. FINANCIAL INFORMATION
- ------- ---------------------
Item 1. Financial Statements
- ------- --------------------
Condensed Consolidated Balance Sheets at September 30, 2005 and
---------------------------------------------------------------
December 31, 2004 (unaudited)
-----------------------------
Condensed Consolidated Statements of Income for the three and nine
------------------------------------------------------------------
months ended September 30, 2005 and 2004 (unaudited)
----------------------------------------------------
Condensed Consolidated Statements of Changes in Stockholders' Equity
--------------------------------------------------------------------
for the nine months ended September 30, 2005 (unaudited)
--------------------------------------------------------
Condensed Consolidated Statement of Cash Flows for the nine months
------------------------------------------------------------------
ended September 30, 2005 and 2004 (unaudited)
---------------------------------------------
Notes to Unaudited Condensed Consolidated Financial Statements
--------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- ------- -----------------------------------------------------------------------
of Operations
-------------
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- ------- ----------------------------------------------------------
Item 4. Controls and Procedures
- ------- -----------------------
PART II. OTHER INFORMATION
- --------------------------
Item 1. Legal Proceedings
- ------- -----------------
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
- ------- -----------------------------------------------------------
Item 6. Exhibits
- ------- --------
- --------------------------------------------------------------------------------
2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)
September 30, December 31,
2005 2004
---------------- -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 44,695 $ 41,445
Accounts receivable, less allowance of $8,347 and $7,023 at September 30, 2005 and December
31, 2004, respectively 15,211 12,820
Inventories 1,987 1,664
Assets held for sale -- 893
Deferred income taxes 4,816 4,509
Prepaid expenses and other current assets 2,032 2,893
Prepaid income taxes 899 --
Other accounts receivable 76 --
---------------- -----------------
Total current assets 69,716 64,224
---------------- -----------------
PROPERTY, EQUIPMENT AND FACILITIES--At cost, net of accumulated depreciation and 59,578 55,149
amortization ---------------- -----------------
OTHER ASSETS:
Deferred finance charges 1,263 943
Prepaid pension cost 4,852 4,820
Deferred income taxes 2,201 2,166
Goodwill 51,253 32,802
Other assets 3,631 2,625
---------------- -----------------
Total other assets 63,200 43,356
---------------- -----------------
TOTAL $ 192,494 $ 162,729
---------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and lease obligations $ 311 $ 5,311
Unearned tuition 30,439 31,185
Accounts payable 11,992 10,664
Accrued expenses 12,172 12,147
Advance payments of federal funds 94 330
Income taxes payable -- 17
---------------- -----------------
Total current liabilities 55,008 59,654
---------------- -----------------
COMMITMENTS AND CONTINGENCIES
NONCURRENT LIABILITIES
Long-term debt and lease obligations, net of current portion 10,534 41,518
Other long-term liabilities 3,667 3,471
---------------- -----------------
Total liabilities 69,209 104,643
---------------- -----------------
STOCKHOLDERS' EQUITY:
Preferred stock, no par value--10,000,000 shares authorized, no shares issued and outstanding
at September 30, 2005 and no shares authorized, issued and outstanding at December 31, 2004 -- --
Common stock, no par value--authorized 100,000,000 shares at September 30, 2005 and
50,000,000 shares authorized at December 31, 2004, issued and outstanding 25,143,740 shares
at September 30, 2005 and 21,698,785 shares at December 31, 2004 119,446 62,482
Additional paid-in capital 5,017 3,262
Accumulated deficit (1,178) (7,477)
Less loan receivable from stockholders -- (181)
---------------- -----------------
Total stockholders' equity 123,285 58,086
---------------- -----------------
TOTAL $ 192,494 $ 162,729
---------------- -----------------
See notes to unaudited condensed consolidated financial statements.
3
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------- -------------------------------
2005 2004 2005 2004
-------------- ----------------- -------------- ---------------
REVENUES $ 78,352 $ 69,159 $ 217,457 $ 187,934
-------------- ----------------- -------------- ---------------
COSTS AND EXPENSES:
Educational services and facilities 32,514 27,666 91,158 76,060
Selling, general and administrative 37,943 33,237 115,091 97,550
Loss (gain) on sale of assets (3) -- (3) 323
-------------- ----------------- -------------- ---------------
Total costs and expenses 70,454 60,903 206,246 173,933
-------------- ----------------- -------------- ---------------
OPERATING INCOME 7,898 8,256 11,211 14,001
INTEREST INCOME 278 32 308 66
INTEREST EXPENSE (472) (771) (2,429) (2,323)
OTHER INCOME 243 36 243 42
-------------- ----------------- -------------- ---------------
INCOME BEFORE INCOME TAXES 7,947 7,553 9,333 11,786
PROVISION FOR INCOME TAXES 2,462 3,160 3,034 4,915
-------------- ----------------- -------------- ---------------
NET INCOME $ 5,485 $ 4,393 $ 6,299 $ 6,871
-------------- ----------------- -------------- ---------------
Earnings per share--basic:
Net income available to common shareholders $ 0.22 $ 0.20 $ 0.27 $ 0.32
-------------- ----------------- -------------- ---------------
Earnings per share--diluted:
Net income available to common shareholders $ 0.21 $ 0.19 $ 0.26 $ 0.30
-------------- ----------------- -------------- ---------------
Weighted average number of common share outstanding:
Basic 25,037 21,672 22,908 21,670
-------------- ----------------- -------------- ---------------
Diluted 25,992 23,147 24,011 23,147
-------------- ----------------- -------------- ---------------
See notes to unaudited condensed consolidated financial statements.
4
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
(Unaudited)
Loan
Additional Receivable
Common Paid-in From Accumulated
Stock Capital Stockholders Deficit Total
----------------- ----------------- ----------------- ----------------- -----------------
BALANCE--December 31, 2004 $ 62,482 $ 3,262 $ (181) $ (7,477) $ 58,086
Net income -- -- -- 6,299 6,299
Issuance of common stock, net of
issuance expenses 56,343 -- -- -- 56,343
Issuance of restricted stock 25 -- -- -- 25
Stock-based compensation expense -- 1,135 -- -- 1,135
Stockholders loan repayment -- -- 181 -- 181
Tax benefit of options exercised -- 620 -- -- 620
Exercise of stock options 596 -- -- -- 596
----------------- ----------------- ----------------- ----------------- -----------------
BALANCE--September 30, 2005 $ 119,446 $ 5,017 $ -- $ (1,178) $ 123,285
----------------- ----------------- ----------------- ----------------- -----------------
See notes to unaudited condensed consolidated financial statements.
5
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share amounts)
(Unaudited)
Nine Months Ended September 30,
2005 2004
----------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,299 $ 6,871
----------------- ----------------
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 9,602 7,764
Amortization of deferred finance charges 148 287
Write-off of deferred finance costs 365 --
Deferred income taxes (342) (416)
Loss (gain) on sale of assets (3) 323
Provision for doubtful accounts 8,055 6,739
Stock-based compensation expense and issuance of restricted stock 1,160 1,330
Tax benefit associated with exercise of stock options 620 --
(Increase) decrease in assets, net of acquisitions:
Accounts receivable (9,704) (9,830)
Inventories (323) (714)
Prepaid expenses and current assets 738 103
Other assets 510 557
Increase (decrease) in liabilities, net of acquisitions:
Accounts payable 1,157 5,742
Other liabilities (40) (78)
Income taxes payable/prepaid (916) (3,923)
Accrued expenses (503) 891
Unearned tuition (3,594) 2,174
----------------- ----------------
Total adjustments 6,930 10,949
----------------- ----------------
Net cash provided by operating activities 13,229 17,820
----------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (11,527) (19,556)
Acquisition of a business, net of cash acquired (18,755) (14,415)
----------------- ----------------
Net cash used in investing activities (30,282) (33,971)
----------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 31,000 525
Payments on borrowings (66,750) (19,500)
Payments of deferred finance fees (833) --
Proceeds from exercise of stock options 596 80
Principal payments under capital lease obligations (234) (604)
Proceeds from shareholder loans 181 251
Proceeds from issuance of common stock, net of issuance costs of $6,956 56,343 --
----------------- ----------------
Net cash provided by (used in) financing activities 20,303 (19,248)
----------------- ----------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 3,250 (35,399)
CASH AND CASH EQUIVALENTS--Beginning of period 41,445 48,965
----------------- ----------------
CASH AND CASH EQUIVALENTS--End of period $ 44,695 $ 13,566
----------------- ----------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 2,002 $ 2,178
----------------- ----------------
Income taxes 4,456 9,269
----------------- ----------------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Fair value of assets acquired $ 22,303 $ 14,510
Net cash paid for the acquisitions (18,755) (14,415)
----------------- ----------------
Liabilities assumed $ 3,548 $ 95
----------------- ----------------
See notes to unaudited condensed consolidated financial statements.
6
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(In thousands, except share and per share amounts)
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Activities--Lincoln Educational Services Corporation and its wholly
owned subsidiaries ("LESC" or the "Company") operate trade schools in various
locations, which offer technical programs of study in several different
specialties.
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 and in accordance with
accounting principles generally accepted in the United States of America
("GAAP"). Certain information and footnote disclosures normally included in
annual financial statements have been omitted or condensed pursuant to such
regulations. These statements, when read in conjunction with the December 31,
2004 consolidated financial statements of the Company reflect all adjustments,
consisting solely 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, 2005 are not necessarily indicative of the results that may be
expected for the fiscal year ending December 31, 2005.
The unaudited consolidated financial statements as of September 30, 2005 and the
consolidated financial statements as of December 31, 2004 and for the three and
nine months ended September 30, 2005 and 2004 include the accounts of the
Company. 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, income taxes, benefit plans and certain accruals. Actual
results could differ from those estimates.
Reclassifications--Certain 2004 amounts have been reclassified to conform to the
current year presentation.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123R, Share Based
Payment, which eliminates the alternative to measure stock-based compensation
awards using the intrinsic value approach permitted by Accounting Principles
Board ("APB") Opinion No. 25, Accounting for Stock-Based Compensation and by
SFAS No. 123 Accounting for Stock-Based Compensation. The Company has not yet
determined what impact, if any, the adoption of SFAS No. 123R will have on the
consolidated financial statements; however, as discussed in Note 3 to the
unaudited consolidated financial statements, the Company adopted the fair value
method of accounting for stock-based
7
compensation provisions of SFAS No. 123 and the retroactive transitional
provisions of SFAS No. 148, Accounting for Stock-Based Compensation--Transition
and Disclosure. As a result, the Company has been recording stock-based
compensation expense for all employee stock awards that were granted or
modified.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets,
an Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions.
SFAS No. 153 addresses the measurement of exchanges of nonmonetary assets and
requires that such exchanges be measured at fair value, with limited exceptions.
SFAS No. 153 amends APB Opinion No. 29 Accounting for Nonmonetary Transactions,
by eliminating the exception that required nonmonetary exchanges of similar
productive assets be recorded on a carryover basis. The provisions of SFAS No.
153 are effective for nonmonetary asset exchanges occurring in fiscal periods
beginning after June 15, 2005. The adoption of the provisions of SFAS No. 153 is
not expected to have a material effect on the Company's consolidated financial
statements.
In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS
No. 154 applies to all voluntary changes in accounting principle, and changes
the requirements for accounting for and reporting of a change in accounting
principle. SFAS No. 154 requires retrospective application to prior periods'
financial statements of a voluntary change in accounting principle unless it is
impracticable. APB Opinion No. 20 previously required that most voluntary
changes in accounting principle be recognized by including in net income of the
period of the change the cumulative effect of changing to the new accounting
principle. SFAS No. 154 requires that a change in method of depreciation,
amortization, or depletion for long-lived, nonfinancial assets be accounted for
as a change in accounting estimate that is effected by a change in accounting
principle. APB Opinion No. 20 previously required that such a change be reported
as a change in accounting principle. SFAS No. 154 is effective for accounting
changes and corrections of errors in fiscal years beginning after December 15,
2005. Earlier application is permitted for accounting changes and corrections of
errors in fiscal years beginning after June 1, 2005. SFAS No. 154 does not
change the transition provisions of any existing accounting pronouncements,
including those that are in a transition phase as of the effective date of this
Statement. The adoption of the provisions of SFAS No. 154 is not expected to
have a material effect on the Company's consolidated financial statements.
3. STOCK-BASED COMPENSATION
The Company accounts for the fair value of its grants under its stock-based
compensation plan in accordance with the provisions of SFAS No. 123, Accounting
for Stock-Based Compensation. The compensation cost that has been charged
against income under this plan was approximately $0.4 million and $0.1 million
for the three months ended September 30, 2005 and 2004 and $1.1 million and $1.3
million for the nine months ended September 30, 2005 and 2004, respectively.
4. WEIGHTED AVERAGE COMMON SHARES
The weighted average numbers of common shares used to compute basic and diluted
income per share for the three and nine months ended September 30, 2005 and
2004, respectively, were as follows:
Three Months Ending Nine Months Ending
September 30, September 30,
----------------------------------- -----------------------------------
2005 2004 2005 2004
---------------- ----------------- ----------------- -----------------
Basic shares outstanding 25,037 21,672 22,908 21,670
Dilutive effect of stock options 955 1,475 1,103 1,477
---------------- ----------------- ----------------- -----------------
Diluted shares outstanding 25,992 23,147 24,011 23,147
---------------- ----------------- ----------------- -----------------
5. BUSINESS ACQUISITIONS
On January 11, 2005, a newly formed wholly-owned subsidiary of LESC, New England
Acquisition, LLC, a Delaware limited liability company, acquired New England
Technical Institute ("NETI") in New Britain, Hamden, Shelton and Cromwell,
Connecticut for approximately $18.8 million, net of cash acquired. The post
acquisition consolidated financial statements include the results of operations
of NETI from the acquisition date. The purchase price has been allocated to
NETI's identifiable net assets with the excess of the purchase price over the
estimated fair value of the net assets acquired recorded as goodwill. Intangible
assets acquired, included in other assets in the accompanying consolidated
balance sheet, include curriculum of $0.7 million which is being amortized over
its useful life of ten years from the date of acquisition, student contracts of
$0.8 million which are being amortized over a 15 month period from the date of
acquisition and trade name of $0.6 million which is not subject to amortization.
Intangible asset amortization expense for the three and nine months ended
September 30, 2005 was $0.2 million and $0.5 million, respectively. Goodwill of
approximately $18.5 million, which is deductible for tax purposes, is also not
subject to amortization. The following table summarizes the estimated fair value
of assets acquired and liabilities assumed at January 11, 2005, the date of
acquisition.
8
Property, equipment and facilities $ 1,000
Goodwill and intangible assets 20,521
Current assets, excluding cash acquired 782
Current liabilities (3,548)
------------
Cost of acquisition, net of cash acquired $ 18,755
------------
The following unaudited pro forma results of operations for the nine months
ended September 30, 2005 and 2004, assumes that the acquisition of NETI occurred
at the beginning of the year preceding the year of acquisition. The unaudited
pro forma results of operations are based on historical results of operations,
include adjustments for depreciation, amortization, interest, and taxes, but do
not necessarily reflect the actual results that would have occurred.
September 30, September 30,
2005 2004
------------------ ----------------
(unaudited)
Pro forma revenues $ 217,735 $ 199,264
Pro forma net income $ 6,300 $ 6,653
Earnings per share - basic - pro forma $ 0.28 $ 0.31
Earnings per share - diluted - pro forma $ 0.26 $ 0.29
6. GOODWILL AND OTHER INTANGIBLES
The Company accounts for its intangible assets in accordance with SFAS No. 142,
Goodwill and Other Intangible Assets. The Company reviews intangible assets with
an indefinite useful life for impairment when indicators of impairment exist, as
defined by SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. Annually, or more frequently if necessary, the Company evaluates
goodwill for impairment, with any resulting impairment reflected as an operating
expense.
Amortization of intangible assets for the three months ended September 30, 2005
and 2004 was approximately $0.2 million and $0.1 million, respectively, and for
the nine months ended September 30, 2005 and 2004 was approximately $0.5 million
and $0.2 million, respectively.
Changes in the carrying amount of goodwill from the year ended December 31, 2004
to the nine months ended September 30, 2005 were as follows:
Goodwill balance as of December 31, 2004 $ 32,802
Goodwill acquired pursuant to business acquisition 18,451
--------------
Goodwill balance as of September 30, 2005 $ 51,253
--------------
Intangible assets, which are included in other assets in the accompanying
consolidated balance sheet, consist of the following:
At September 30, 2005 At December 31, 2004
Weighted
Gross Average
Carrying Accumulated Amortization Gross Carrying Accumulated
Amount Amortization Period (years) Amount Amortization
Purchased student contracts $1,720 $1,361 1 $950 $928
Trade name 1,410 --- Indefinite 810 ---
Curriculum 700 51 10 --- ---
Non-compete 1 1 0 1 1
------------- ---------------- -------------------- ------------------ ---------------
Total $3,831 $1,413 N/A $1,761 $929
7. LONG-TERM DEBT
On February 15, 2005, the Company entered into a new credit agreement with a
syndicate of banks led by its existing lender. Under
9
the terms of the agreement, the syndicate provided the Company with a $100
million credit facility with a term of five years. The credit agreement permits
the issuance of letters of credit, up to $20 million, the amount of which
reduces the availability of permitted borrowings under the agreement. As a
result of this new credit agreement, the Company wrote off as a component of
interest expense approximately $0.4 million of unamortized deferred finance
costs under the old credit agreement in the three months ended March 31, 2005.
The Company incurred approximately $0.8 million of deferred finance costs under
the new agreement.
The obligations of the Company under the credit agreement are secured by a lien
on substantially all of the assets of the Company and its subsidiaries and any
assets that it or its subsidiaries may acquire in the future, including a pledge
of substantially all of the subsidiaries' common stock. Outstanding borrowings
bear interest at the rate of adjusted LIBOR plus 1.0% to 1.75%, as defined, or a
base rate (as defined in the credit agreement). In addition to paying interest
on outstanding principal under the credit agreement, the Company and its
subsidiaries are required to pay a commitment fee to the lender with respect to
the unused amounts available under the credit agreement at a rate equal to 0.25%
to 0.40% per year, as defined. In connection with the public offering discussed
in Note 8, the Company repaid the outstanding loan balance of $31.0 million.
8. EQUITY
On June 28, 2005, the Company sold 3.0 million shares of common stock in an
initial public offering for approximately $53.1 million in net cash proceeds,
after deducting underwriting commissions and offering expenses of approximately
$6.9 million. A portion of the $53.1 million in net proceeds received from the
sale of common stock was used to repay all the outstanding indebtedness under
the credit facility discussed in Note 7, totaling $31.0 million.
On June 23, 2005, the Amended and Restated Certificate of Incorporation became
effective. The Amended and Restated Certificate of Incorporation increased the
number of authorized common shares from 50.0 million shares to 100.0 million
shares and increased the number of authorized preferred shares from 0 shares to
10.0 million shares of preferred stock.
On July 18, 2005, the underwriters of the initial public offering exercised a
portion of their over-allotment option resulting in the Company's sale on July
22, 2005 of 177,425 shares of common stock and net proceeds to the Company of
$3.3 million.
Pursuant to our 2005 Non-Employee Directors Restricted Stock Plan, each of the
Company's seven non-employee directors received an award of restricted shares of
common stock equal to $60,000 on July 29, 2005. The number of shares granted to
each non-employee director was based on the fair market value of a share of
common stock on that date. These restricted shares (3,069 for each non-employee
director) vest ratably on the first, second and third anniversaries of the date
of grant; however, there is no vesting period on the right to vote or receive
dividends on these restricted shares.
9. INCOME TAXES
The effective tax rate for the third quarter and first nine months of 2005 was
31.0% and 32.5%, respectively. The effective rate for the third quarter and
first nine months of 2004 was 41.8% and 41.7%, respectively. For the quarter
ended September 30, 2005, the Company recognized a benefit of approximately $0.8
million resulting from the resolution of certain tax contingencies.
10. RELATED PARTY TRANSACTIONS
The Company had a consulting agreement with Hart Capital LLC, which terminated
by its terms in June 2004, to advise the Company in identifying acquisition and
merger targets and assisting with the due diligence reviews of and negotiations
with these targets. Hart Capital is the managing member of Five Mile River
Capital Partners LLC, which is the second largest stockholder of the Company.
Steven Hart, the President of Hart Capital, is a member of the Company's board
of directors. The Company paid Hart Capital a monthly retainer, reimbursement of
expenses and an advisory fee for its work on successful acquisitions or mergers.
In accordance with the agreement, the Company paid Hart Capital approximately
$0.04 million and $0 for the three months ended September 30, 2005 and 2004,
respectively, and $0.4 million, and $0.4 million for the nine months ended
September 30, 2005 and 2004, respectively. In connection with the consummation
of the NETI acquisition, which closed on January 11, 2005, the Company paid Hart
Capital $0.3 million for its services.
In 2003, the Company entered into a management service agreement with its
majority stockholder, Stonington Partners. In accordance with this agreement the
Company pays Stonington Partners a management fee of $0.75 million per year for
management consulting and financial and business advisory services. Such
services include valuing acquisitions and structuring their financing and
assisting with new loan agreements. The Company paid Stonington Partners $0.75
million in January 2005 and 2004. Fees paid to Stonington Partners were
amortized over a twelve month period. This agreement terminated by its terms
upon the Company's completion of its initial public offering. Selling, general
and administrative expenses for the nine months ended September 30, 2005 include
a $0.4 million charge resulting from the write-off of the remaining unamortized
fees.
During 2002, the Company advanced certain members of senior management
approximately $0.4 million in connection with their purchase of Company Stock.
These notes have been reflected as a reduction in stockholders' equity. In the
first quarter of 2005 the remainder of these loans was repaid.
10
11. CLASSIFICATION OF PROPERTY HELD FOR SALE
During 2004, the Company vacated its former facility in Indianapolis, Indiana.
On June 30, 2004, the Company began efforts to sell the property and accordingly
classified the assets as assets held for sale and ended depreciation on the
property. While the Company has received several offers, to date the Company has
been unable to sell the property. While the Company continues to market the
property and continues to have interested parties, as a result of the passage of
time, the Company has reclassified the property from property held for sale back
to property, equipment and facilities in the accompanying balance sheet. As a
result of the reclassification, the Company took a depreciation charge of
approximately $0.2 million for the three month period ending September 30, 2005.
12. COMMITMENTS AND CONTINGENCIES
Litigation and Regulatory Matters--The Company has been named as a defendant in
actions resulting from the normal course of operations. Based, in part, on the
opinion of counsel, management believes that the resolution of these matters
will not have a material effect on its financial position, results of operations
and cash flows.
13. PENSION PLAN
The Company sponsors a noncontributory defined benefit pension plan covering
substantially all of the Company's union employees. Benefits are provided based
on employees' years of service and earnings. This plan was frozen on December
31, 1994 for non-union employees.
The Company adopted the provisions of SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits (revised December 2003),"
("SFAS No. 132R") as of December 31, 2003. SFAS No. 132R revises employers'
disclosures about pension plans and other postretirement benefit plans. It does
not change the measurement or recognition of those plans required by SFAS No.
87, "Employers' Accounting for Pensions," SFAS No. 88, "Employers' Accounting
for Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits" and SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." SFAS No. 132R retains the
disclosure requirements contained in the original SFAS No. 132, which it
replaces, and also requires additional disclosures about the assets,
obligations, cash flows and net periodic benefit cost of defined benefit pension
plans and other defined benefit postretirement plans as well as certain interim
disclosures.
The total amount of the Company's contributions paid, and expected to be paid,
under its group insurance plan in 2005 has not changed from amounts previously
reported. The net periodic benefit income was $11,000 and $10,000 for the three
months ended September 30, 2005 and 2004 respectively. For the nine months ended
September 30, 2005, the net periodic benefit income was $31,000. For the nine
months ended September 30, 2004, the net periodic benefit cost was $150,000.
11
******
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion may contain forward-looking statements regarding us,
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 the
final prospectus relating to our initial public offering, as filed with the
Securities and Exchange Commission. 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 Securities and Exchange
Commission that advise interested parties of the risks and factors that may
affect our business.
These interim financial statements filed on this Form 10-Q and the discussions
contained herein should be read in conjunction with the annual financial
statements and notes included in the final prospectus relating to our initial
public offering, as filed with the Securities and Exchange Commission, which
includes audited consolidated financial statements for our three fiscal years
ended December 31, 2004.
General
We are a leading and diversified for-profit provider of career-oriented
post-secondary education. We offer recent high school graduates and working
adults degree and diploma programs in four areas of study: automotive
technology, allied health, skilled trades, and business and information
technology. As of September 30, 2005, we enrolled 19,824 students at our 32
campuses across 15 states. Our campuses primarily attract students from their
local communities and surrounding areas, although our four destination schools
attract students from across the United States, and in some cases, from abroad.
We continue to expand our product offering. In the third quarter of 2005, we
received approval to offer our new medical coding and billing program at
thirteen of our campuses. In addition, we completed a 14,000 square foot
addition to our Marietta, Georgia campus in June 2005 which enables us to offer
a new program, Electronic Systems Technician, as well as additional capacity for
allied health programs.
Critical Accounting Policies and Estimates
Our discussions of our financial condition and results of operations are based
upon our consolidated financial statements, which have been prepared in
accordance with accounting policies 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. 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. There are also areas in which management's
judgment in selecting any available alternative would not produce a materially
different result from the result derived from the application of our critical
accounting policies. 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.
Revenue recognition. Revenues are derived primarily from programs taught at our
schools. Tuition revenues 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, 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. If a student withdraws from a
program prior to a specified date, any paid but unearned tuition is refunded.
Refunds are calculated and paid in accordance with federal, state and
accrediting agency standards. Other revenues, such as textbook sales, tool sales
and contract training revenues are recognized as services are performed or goods
are delivered. On an individual student basis, tuition earned in excess of cash
received is recorded as accounts receivable and cash received in excess of
tuition earned is recorded as unearned tuition.
Allowance for uncollectible accounts. Based upon 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, a
student's status (in-school or out-of-school), whether or not additional
financial aid funding will be collected from Title IV Programs or other sources,
whether or not a student is currently making payments and overall collection
history. Changes in trends in any of these areas may
12
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, or if we underestimate the allowances required,
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, 2005 and 2004 was 4.2% and 4.1%, respectively, and the nine months
ended September 30, 2005 and 2004 was 3.7% and 3.6%, respectively. Our exposure
to changes in our bad debt expense could impact our operations.
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 assess the impairment of goodwill in accordance with SFAS No. 142,
"Goodwill and Other Intangible Assets." Accordingly, 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 an 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.
Stock-based compensation. We account for stock-based employee compensation
arrangements in accordance with the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation." Effective January 1, 2004, we elected to change our
accounting policies from the use of the intrinsic value method of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock-Based
Compensation" to the fair value-based method of accounting for options.
We valued the exercise price of options issued to employees using a market based
approach. This approach took into consideration the value ascribed to our
competitors by the market. In determining the fair value of an option at the
time of grant, we reviewed contemporaneous information about our peers, which
included a variety of market multiples, including, but not limited to, revenue,
EBITDA, net income, historical growth rates and market/industry focus. During
2004, the value we ascribed to stock options granted was based upon our
anticipated initial public offering as well as discussions with our investment
advisors. Due to the number of peer companies in our sector, we believe using
public company comparisons provided a better indication of how the market values
companies in the for-profit post secondary education sector.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123R, Share Based Payment, which
eliminates the alternative to measure stock-based compensation awards using the
intrinsic value approach permitted by Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock-Based Compensation and by SFAS No. 123
Accounting for Stock-Based Compensation. We have not yet determined what impact,
if any, the adoption of SFAS No. 123R will have on our consolidated financial
statements; however, discussed in Note 3 to the unaudited consolidated financial
statements, included in this report, we have adopted the fair value method of
accounting for stock-based compensation provisions of SFAS No. 123 and the
retroactive transitional provisions of SFAS No. 148, Accounting for Stock-Based
Compensation--Transition and Disclosure. As a result, we have been recording
stock-based compensation expense for all employee stock awards that were granted
or modified.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets,
an Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions.
SFAS No. 153 addresses the measurement of exchanges of nonmonetary assets and
requires that such exchanges be measured at fair value, with limited exceptions.
SFAS No. 153 amends APB Opinion No. 29, Accounting for Nonmonetary Transactions,
by eliminating the exception that required nonmonetary exchanges of similar
productive assets be recorded on a carryover basis. The provisions of SFAS No.
153 are effective for nonmonetary asset exchanges occurring in fiscal periods
beginning after June 15, 2005. The adoption of the provisions of SFAS No. 153 is
not expected to have a material effect on our consolidated financial statements.
In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS
No. 154 applies to all voluntary changes in accounting principle, and changes
the requirements for accounting for and reporting of a change in accounting
principle. SFAS No. 154 requires retrospective application to prior periods'
financial statements of a voluntary change in accounting principle unless it is
impracticable. APB Opinion No. 20 previously required that most voluntary
changes in accounting principle be recognized by including in net income of the
period of the change the cumulative effect of changing to the new accounting
principle. SFAS No. 154 requires that a change in method of depreciation,
13
amortization, or depletion for long-lived, nonfinancial assets be accounted for
as a change in accounting estimate that is effected by a change in accounting
principle. APB Opinion No. 20 previously required that such a change be reported
as a change in accounting principle. SFAS No. 154 is effective for accounting
changes and corrections of errors in fiscal years beginning after December 15,
2005. Earlier application is permitted for accounting changes and corrections of
errors in fiscal years beginning after June 1, 2005. SFAS No. 154 does not
change the transition provisions of any existing accounting pronouncements,
including those that are in a transition phase as of the effective date of this
Statement. The adoption of the provisions of SFAS No. 154 is not expected to
have a material effect on our consolidated financial statements.
Results of Operations
The following table sets forth selected consolidated statements of operations
data as a percentage of revenues for each of the periods indicated.
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ---------------------------
2005 2004 2005 2004
-------------- ------------ ------------- -----------
Revenues 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Educational services and facilities 41.5% 40.0% 41.9% 40.5%
Selling, general and administrative 48.4% 48.1% 52.9% 51.9%
Loss on sale of assets 0.0% 0.0% 0.0% 0.2%
-------------- ------------ ------------- -----------
Total costs and expenses 89.9% 88.1% 94.8% 92.6%
-------------- ------------ ------------- -----------
Operating income 10.1% 11.9% 5.2% 7.4%
-------------- ------------ ------------- -----------
Interest expense, net (0.3)% (1.0)% (1.0)% (1.2)%
-------------- ------------ ------------- -----------
Other Income 0.3% 0.0% 0.1% 0.0%
-------------- ------------ ------------- -----------
Income before income taxes 10.1% 10.9% 4.3% 6.3%
Provision for income taxes 3.1% 4.6% 1.4% 2.6%
-------------- ------------ ------------- -----------
Net income 7.0% 6.3% 2.9% 3.7%
-------------- ------------ ------------- -----------
Three Months Ended September 30, 2005 Compared to Three Months Ended September
30, 2004
Revenues. Our revenues for the three months ended September 30, 2005 were $78.4
million, representing an increase of $9.2 million, or 13.3%, as compared to
$69.2 million for the three months ended September 30, 2004. Of this increase,
approximately $4.6 million, or 6.7%, was the result of our acquisition of New
England Technical Institute ("NETI") on January 11, 2005, while the remainder of
the increase was primarily due to a 2.2% increase in our average undergraduate
full-time student enrollment, which increased to 16,975 for the three months
ended September 30, 2005, exclusive of NETI, as compared to 16,607 for the three
months ended September 30, 2004 as well as from tuition increases, which
averaged between 2% to 5% annually depending on the program. For a discussion of
trends in our student enrollment, see "Seasonality and Trends" below.
Educational services and facilities expenses. Our educational services and
facilities expenses for the three months ended September 30, 2005 were $32.5
million, representing an increase of $4.8 million, or 17.5%, as compared to
$27.7 million for the three months ended September 30, 2004. The acquisition of
NETI on January 11, 2005 resulted in $2.8 million or 9.9% of this increase.
Instructional expenses increased by $0.3 million or 2.2% over the comparable
period last year primarily due to increased compensation and benefits. The
increase in average population also resulted in an increase of books and tools
expense of approximately $0.2 million over the comparable period last year.
Additionally, facilities expenses increased consistent with our growth
initiatives by approximately $1.1 million as compared to the three months ended
September 30, 2004 due to rent on our new Queens, New York facility in 2005, our
expanded campus facilities in Lincoln, Rhode Island and Marietta, Georgia, which
opened during the later part of 2004. Our facility expenses also included a
charge of $0.2 million related to catch-up depreciation resulting from the
reclassification of our property in Indianapolis, Indiana from property held for
sale to property, equipment and facilities as of September 30, 2005.
Selling, general and administrative expenses. Our selling, general and
administrative expenses for the three months ended September 30, 2005 were $37.9
million, an increase of $4.7 million, or 14.2%, as compared to $33.2 million for
the three months ended September 30, 2004. Approximately $1.8 million, or 5.4%,
of the increase was due to the acquisition of NETI. The remainder of the
increase was primarily due to: (a) a 25.5%, or $1.5 million, increase in
marketing costs as a result of increased advertising expenses associated with
the development of student leads and enrollment; and (b) a 13.3% increase in
student services expenses as a result of our increase in average student
enrollment as well as a $0.3 million increase in transportation services for our
students. The $0.8 million, or 4.6%, increase in administrative costs was
primarily due to: (1) an increase in bad debt expense of $0.5 million related to
the timing of student enrollments; and (2) an increase of $0.3 million
associated with expenses incurred to roll out a new student software and
management reporting system at some of our schools.
14
Net Interest expense. Our net interest expense for the three months ended
September 30, 2005 was $0.2 million, representing a decrease of $0.5 million, or
73.7%, from $0.7 million for the three months ended September 30, 2004. This
decrease was primarily due to an increase in interest income of $0.2 million due
to higher cash balances during the period as well as a decrease of $0.3 million
due to paying off our debt outstanding under our credit facility with the
proceeds from our initial public offering.
Other Income. Other income for the three months ended September 30, 2005 was
$0.24 million representing an increase of $0.2 million from $0.04 million for
the three months ended September 30, 2004. Other income relates primarily to
donations received by our technical schools during the period. We periodically
receive donations from vendors, which we value at fair market value based upon
third party appraisals.
Income taxes. Our provision for income taxes for the three months ended
September 30, 2005 was $2.5 million, or 31.0% of pretax income, compared to $3.2
million, or 41.8% of pretax income, for the three months ended September 30,
2004. The reduction in our effective tax rate for the three months ended
September 30, 2005 was primarily attributable to the recognition of a benefit of
$0.8 million related to favorable resolution of a tax contingency.
Nine Months Ended September 30, 2005 Compared to Nine Months Ended September 30,
2004
Revenues. Our revenues for the nine months ended September 30, 2005 were $217.5
million, representing an increase of $29.5 million, or 15.7%, as compared to
revenues of $187.9 million for the nine months ended September 30, 2004. Of this
increase, approximately $11.8 million, or 6.3%, was the result of our
acquisition of NETI on January 11, 2005, while the remainder of the increase was
primarily due to a 4.8% increase in our average undergraduate full-time student
enrollment, which increased to 16,509, exclusive of NETI, for the nine months
ended September 30, 2005 as compared to 15,757 for the nine months ended
September 30, 2004, as well as from tuition increases, which averaged between 2%
to 5% annually depending on the program. For a discussion of trends in our
student enrollment, see "Seasonality and Trends" below.
Educational services and facilities expenses. Our educational services and
facilities expenses for the nine months ended September 30, 2005 were $91.2
million, representing an increase of $15.1 million, or 19.9%, as compared to
$76.1 million for the nine months ended September 30, 2004. The acquisition of
NETI on January 11, 2005 resulted in $7.5 million of this increase.
Instructional expenses increased $3.5 million over the comparable period last
year primarily due to increased compensation and benefits related to current and
anticipated higher average student enrollments, which required additional
educational and operations personnel, and the gear up for anticipated growth
that was expected in the second half of the year. The increase in average
population for the period also resulted in an increase in books and tools
expense of approximately $0.9 million over the comparable period in prior year.
Additionally, our facilities expenses increased by approximately $2.4 million as
compared to the nine months ended September 30, 2004 due to rental payments on
our new Queens, New York facility in 2005 and our expanded campus facilities in
Lincoln, Rhode Island and Marietta, Georgia, which opened during the later part
of 2004.
Selling, general and administrative expenses. Our selling, general and
administrative expenses for the nine months ended September 30, 2005 were $115.1
million, an increase of $17.5 million, or 18.0%, as compared to $97.6 million
for the nine months ended September 30, 2004. Approximately $4.3 million, or
4.4%, of the increase was due to the acquisition of NETI. The remainder of the
increase was due to: (a) a $3.7 million, or 7.4%, increase in administrative
costs; (b) a 29.8% increase in marketing costs as a result of increased
advertising expenses associated with student leads and enrollment; (c) a 12.9%
increase in sales expenses primarily attributable to additional compensation and
benefit expenses related to additional sales representatives; and (d) a 17.4%
increase in student services expenses as a result of our 2.2% increase in
average student enrollment as well as a $0.6 million increase in bus services
for our students. The $3.7 million increase in administrative costs was
primarily due to (1) a one-time charge of $0.4 million related to the write-off
of prepaid management fees resulting from the termination of our management fee
agreement with our principal shareholders; (2) an increase of $1.2 million over
the prior year period associated with expenses incurred to roll out a new
student software and management reporting system at some of our schools; (3) an
increase of approximately $1.3 million in bad debt expense due to the
approximately $29.5 million increase in revenue; and (4) an annual increase in
compensation and benefits expenses offset by a decrease of $2.0 million due to
the one-time charge recorded in the first and second quarters of the previous
year of the write-off of deferred offering costs due to a delay in filing the
registration statement for our initial public offering.
Net Interest expense. Our net interest expense for the nine months ended
September 30, 2005 was $2.1 million, representing a decrease of $0.2 million or
6.0% from $2.3 million for the nine months ended September 30, 2004. This
decrease was primarily due to higher levels of interest income during the period
end offset by the write-off of deferred financing costs related to our old
credit agreement.
Income taxes. Our provision for income taxes for the nine months ended September
30, 2005 was $3.0 million, or 32.5% of pretax income, compared to $4.9 million,
or 41.7% of pretax income, for the nine months ended September 30, 2004. The
lower effective tax rate for the nine months ended September 30, 2005 was
primarily attributable to the recognition of a benefit of $0.8 million related
to the favorable resolution of a tax contingency.
15
Liquidity and Capital Resources
Our primary capital requirements are for facility expansion and maintenance,
acquisitions and the development of new programs. Our principal sources of
liquidity have been cash provided by operating activities and borrowings under
our credit agreement. The following chart summarizes the principal elements of
our cash flow for the nine months ended September 30, 2005 and 2004:
Cash Flow Summary
Nine Months Ended September 30,
----------------------------------
2005 2004
---------------- ----------------
(dollars in thousands)
Net cash provided by operating activities $ 13,229 $ 17,820
---------------- ----------------
Net cash used in investing activities (30,282) (33,971)
---------------- ----------------
Net cash provided by (used in) financing activities $ 20,303 $ (19,248)
---------------- ----------------
Operating Activities
As of September 30, 2005, we had cash and cash equivalents of $44.7 million,
compared to $41.4 million as of December 31, 2004. Historically, we have
financed our operating activities and organic growth primarily through cash
generated from operations. We have financed acquisitions primarily through
borrowings under our credit agreement and cash generated from operations. We
currently anticipate that we will be able to meet both our short-term cash
needs, as well as our need to fund operations and meet our obligations beyond
the next twelve months with cash generated by operations, existing cash balances
and, if necessary, borrowings under our credit agreement. As of September 30,
2005, we had borrowings available under our credit agreement of approximately
$95.7 million, including a $4.3 million sub-limit on letters of credit.
Our primary source of cash is tuition collected from our students. Our students
fund their tuition payments from a variety of sources including Title IV
Programs, federal and state grants, private loans and their personal resources.
A significant majority of our students' tuition payments are derived from Title
IV Programs. 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
30 days after the start of a student's academic year and the second disbursement
is typically received at the beginning of the sixteenth week after the start of
the student's academic year. Certain types of grants and other funding are not
subject to a 30-day delay. Our programs range from 30 to 84 weeks and may cover
one or two academic years. 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 and the amount of the refund varies by state.
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 is Title IV, which represented approximately 81% of our cash
receipts relating to revenues in 2004. 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 receive Title
IV funds would have a significant impact on our operations and our financial
condition.
Net cash provided by operating activities was $13.2 million for the nine months
ended September 30, 2005 compared to $17.8 million for the nine months ended
September 30, 2004. The $4.6 million decrease was primarily due to a decrease in
unearned tuition, resulting from large prime starts in third quarter of the
year, which is a function of the seasonality of our business, as well as due to
a lower level of accounts payable as of September 30, 2005 as compared to the
comparable period in 2004. The remaining difference resulted from changes in
other working capital items.
Investing Activities
We currently lease almost all of our campuses. As part of our growth strategy,
we may consider strategic acquisitions of campuses. In October, 2005, we
completed the purchase of our Grand Prairie, Texas facility and expect it to
open in the first half of 2006.
In addition, although our growth strategy is primarily focused on internal
growth, including campus expansions, we may also consider strategic
acquisitions. To the extent that these potential strategic acquisitions are
large enough to require financing beyond available cash from operations and
borrowings under our credit facilities, we may incur additional debt or issue
additional debt or equity securities.
Our credit agreement limits the amount of capital expenditures to $35 million
for any of the four fiscal quarterly periods ending March 31, 2005, June 30,
2005, September 30, 2005 and December 31, 2005. We believe that this capital
expenditure limit will not have any material impact on our operations.
16
Our cash used in investing activities is primarily related to the purchase of
property and equipment and acquisitions. Our capital expenditures result
primarily from facility expansion, leasehold improvements and investments in
classroom and shop technology and in operating systems. On January 11, 2005, we
acquired NETI for approximately $18.8 million, net of cash acquired.
Net cash used in investing activities decreased $3.7 million to $30.3 million
for the nine months ended September 30, 2005 from $34.0 million for the nine
months ended September 30, 2004. This decrease is primarily attributable to a
decrease in capital expenditures of $8.1 million, offset by an increase of $4.4
million in connection with the acquisition of NETI. The decrease of $8.1 million
in capital expenditures for the nine months ended September 30, 2005 compared to
the nine months ended September 30, 2004 is due entirely to the timing of
expenditures. We expect our spending on capital expenditures to increase in the
fourth quarter of 2005 due to the purchase of our Grand Prairie, Texas facility
as well as capital expenditures associated with our Queens, New York campus.
17
Capital expenditures are expected to increase as we upgrade and expand current
equipment and facilities and open new facilities to meet increased student
enrollments. Additionally, we are evaluating several other expansion
opportunities. We anticipate capital expenditures relative to our mature
locations to be approximately 8% to 10% of revenues. We expect to be able to
fund these capital expenditures with cash generated from operating activities.
Financing Activities
Net cash provided by financing activities was $20.3 million for the nine months
ended September 30, 2005 compared to $19.3 million for the nine months ended
September 30, 2004. This increase is mainly attributable to the $56.3 million of
net cash received from our initial public offering in June 2005 and the exercise
of the over-allotment option in July 2005, offset by the repayment of our debt
of $35.7 million during the first half of 2005.
On February 15, 2005, we entered into a new credit agreement with a syndicate of
banks led by our existing lender. Under the terms of this agreement, the
syndicate provided us with a $100 million credit facility with a term of five
years. The credit agreement permits the issuance of letters of credit of up to
$20 million, the amount of which reduces the availability of permitted
borrowings under the agreement. In connection with this new credit agreement,
we wrote off as a component of interest expense approximately $0.4 million of
unamortized deferred finance costs under our old credit agreement in the three
months ended March 31, 2005. We incurred approximately $0.8 million of deferred
finance costs under the new agreement.
The following table sets forth our long-term debt at the dates indicated:
September 30, December 31,
2005 2004
-------------------- --------------------
Credit agreement $ -- $ 35,750
Automobile loans 89 113
Finance obligation 9,672 9,672
Capital leases--computers (with rates ranging from 6.97% to
19.9%) 1,084 1,294
-------------------- --------------------
Subtotal 10,845 46,829
Less current maturities (311) (5,311)
-------------------- --------------------
$ 10,534 $ 41,518
-------------------- --------------------
Contractual Obligations
Long-Term Debt. As of September 30, 2005, our long-term debt consisted entirely
of 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 various
equipment for varying periods through the year 2020 at basic 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, 2005, measured from the end of our
fiscal year, December 31, 2004:
Payments Due by Period
-----------------------------------------------------------------------------
Total Less than 1 2-3 years 4-5 years After 5
year years
-------------- -------------- ------------- -------------- --------------
(dollars in thousands)
Capital leases (including interest) $ 1,321 $ 357 $ 470 $ 335 $ 159
Operating leases 128,391 14,825 28,857 23,934 60,775
Finance obligation 14,264 1,258 2,517 2,517 7,972
Automobile Loans (including interest) 93 36 57 -- --
-------------- -------------- ------------- -------------- --------------
Total contractual cash obligations $ 144,069 $ 16,476 $ 31,901 $ 26,786 $ 68,906
-------------- -------------- ------------- -------------- --------------
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of September 30, 2005.
Related Party Transactions
18
We had a consulting agreement with Hart Capital LLC, which terminated by its
terms in June 2004, to advise us in identifying acquisition and merger targets
and to assist with the due diligence reviews of and negotiations with these
targets. Hart Capital is the managing member of Five Mile River Capital Partners
LLC, which is our second largest stockholder. Steven Hart, the President of Hart
Capital, is a member of our board of directors. We paid Hart Capital a monthly
retainer, reimbursement of expenses and an advisory fee for its work on
successful acquisitions or mergers. In accordance with the agreement, we paid
Hart Capital approximately $0.04 million and $0 for the three months ended
September 30, 2005 and 2004 and $0.4 million, and $0.4 million for the nine
months ended September 30, 2005 and 2004, respectively. In connection with the
consummation of the NETI acquisition, which closed on January 11, 2005, we paid
Hart Capital $0.3 million for its services.
In 2003, we entered into a management services agreement with our majority
stockholder, Stonington Partners. In accordance with this agreement we paid
Stonington Partners a management fee of $0.75 million per year for management
consulting and financial and business advisory services. Such services include
valuing acquisitions and structuring their financing and assisting with new loan
agreements. We paid Stonington Partners $0.75 million in January 2005 and 2004.
Fees paid to Stonington Partners were amortized over a twelve month period. This
agreement terminated by its terms upon our completion of an initial public
offering. Selling, general and administrative expenses for the nine months ended
September 30, 2005 includes a $0.4 million charge resulting from the write-off
of the remaining unamortized fees.
During 2002, we advanced certain members of senior management approximately $0.4
million in connection with their purchase of shares of our common stock. These
advances have been reflected as a reduction in stockholders' equity. In the
first quarter of 2005 the remainder of these loans was repaid.
Seasonality and Trends
Our net revenues 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
large class starts in the third and fourth quarters and student attrition in the
first half of the year. Our expenses, however, do not vary significantly with
changes in our student population and net revenues. During the first half of the
year, we make significant investments in marketing, staff, programs and
facilities to ensure that we have the proper staffing to meet our second half
targets and, as a result, such expenses do not fluctuate significantly on a
quarterly basis. We expect quarterly fluctuations in operating results to
continue as a result of seasonal enrollment patterns. Such patterns may change,
however, as a result of new school openings, new program introductions,
increased enrollments of adult students and/or acquisitions.
Similar to many other for-profit post secondary education companies, the
increase in our average undergraduate enrollments has not met our historical or
our 2005 anticipated growth rates. The slow down that has occurred in the
for-profit post secondary education sector appears to have had a greater impact
on companies, like ours, that are more dependent on their on-ground business as
opposed to on-line students. We believe that the slow down can be attributed to
many factors, including: (a) the economy; (b) dependency on television to
attract students to our school; (c) turnover of our sales representatives; and
(d) increasing competition in the marketplace.
Despite soft organic enrollment trends and increased volatility in the near
term, we believe that our growth initiatives as well as the steps we have taken
to address the challenging trends that our industry and we are currently facing
will produce positive growth over the long-term. While our operating strategy,
business model and infrastructure are well suited for the short-term and we have
ample operating flexibility, we continue to be prudent and realistic and have
taken the necessary steps to ensure that operations that have not grown as
rapidly as expected are right sized. We also continue to make investments in
areas that are demonstrating solid growth. As a result, during September of
2005, we eliminated approximately $6.4 million of expenses that were forecasted
for the fourth quarter of 2005. These expenses had been forecasted to support
much higher levels of student enrollments.
Operating income is negatively impacted during the initial start-up phase of new
campus expansions. We incur sales and marketing costs as well as campus
personnel costs in advance of the opening of each campus. Typically we begin to
incur such costs approximately 15 months in advance of the campus opening with
the majority of such costs being incurred in the nine-month period prior to a
campus opening. During the current year, we initiated expansion efforts for one
new campus, located in Queens, New York, which is scheduled to open in the first
quarter of 2006.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our principal exposure to market risk relates to interest rate changes. However,
as a result of completing our initial public offering, we have been able to
repay in full our line of credit leaving only miscellaneous capital equipment
leases, which are not material.
Item 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Our Chief Executive
Officer and Chief Financial Officer, after evaluating the
19
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 specific by Securities and Exchange Commissions' 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 periodically subject to
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 or financial condition.
Beginning in May 2002, we were involved in litigation brought by two former
employees acting as "relators" under the qui tam provisions of the federal False
Claims Act, 31 U.S.C. ss.ss. 3729-33 (FCA). The relators alleged that we
violated Title IV Program requirements that prohibit the payment of commissions,
bonuses or other incentive payments to admissions and recruitment personnel
based upon their success in securing enrollments, and that our participation in
the federal student aid programs under these circumstances constituted
actionable "false claims" within the meaning of federal law. The relators
pursued the litigation against us on their own, without the involvement or
support of the U.S. Department of Justice, which had given notice, after
investigation, of its intention not to participate in the case. On September 3,
2003, after full briefing of the issues by the parties, the district court
granted our motion and dismissed the entire action, with prejudice. The relators
appealed the ruling to the United States Court of Appeals for the Fifth Circuit,
which affirmed the District Court's dismissal of the case on October 15, 2004.
The relators subsequently served upon us a petition for a Writ of Certiorari
with the Supreme Court of the United States and the petition was docketed in the
Supreme Court on March 10, 2005. The Supreme Court denied the writ on May 16,
2005. On June 10, 2005, the relators submitted a petition for rehearing with the
Supreme Court. The Supreme Court denied the petition for rehearing on August 1,
2005, thus finally terminating all proceedings in this case.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Use of Proceeds
We completed our initial public offering of 4,000,000 shares of our common stock
on June 28, 2005. The offer and sale of these shares were registered under the
Securities Act of 1933, as amended, pursuant to a registration statement on Form
S-1, as amended (File No. 333-123644), which was declared effective by the
Securities and Exchange Commission on June 22, 2005. The managing underwriters
of this offering were Merrill Lynch, Pierce, Finner & Smith Incorporated, Banc
of America Securities LLC, Lehman Brothers Inc., Harris Nesbitt Corp., Jeffries
& Company, Inc. and Robert W. Baird & Co. Incorporated. In this offering, we
sold an aggregate of 3,000,000 shares of our common stock and selling
stockholders sold 1,000,000 shares for their own accounts. We received $53.1
million in net proceeds for the sale of 3,000,000 shares, based on our initial
public offering price of $20.00 per share, after deducting the underwriting
discounts and commissions and the estimated offering expenses payable by us. We
received none of the proceeds from the 1,000,000 shares that were sold by the
selling stockholders.
In addition, we granted the underwriters the right to purchase up to an
additional 600,000 shares at the initial public offering price to cover
over-allotments. On July 18, 2005, the underwriters exercised their
over-allotment option and purchased 177,425 shares on July 22, 2005. The net
proceeds to us from the exercise of the underwriters' over-allotment option were
approximately $3.3 million, after deducting the underwriting discounts and
commissions and the estimated offering expenses payable by us.
We used the net proceeds from the initial public offering and the exercise of
the underwriters' over-allotment option to repay all amounts outstanding under
our credit agreement and intend to use the remainder for working capital and
general corporate purposes.
Item 6. EXHIBITS
EXHIBIT INDEX
The following exhibits are filed or incorporated by reference with this
Form 10-Q.
Exhibit
Number Description
- -------------- --------------------------------------------------------------
**3.1 Amended and Restated Certificate of Incorporation of
the Company.
***3.2 Amended and Restated By-laws of the Company.
**4.1 Stockholders' Agreement, dated as of September 15, 1999, among
Lincoln Technical Institute, Inc., Back to School Acquisition,
L.L.C., and Five Mile River Capital Partners LLC.
**4.2 Letter agreement, dated August 9, 2000, by Back to School
Acquisition, L.L.C., amending the Stockholders' Agreement.
**4.3 Letter agreement, dated August 9, 2000, by Lincoln Technical
Institute, Inc., amending the Stockholders' Agreement.
**4.4 Management Stockholders Agreement, dated as of January 1,
2002, by and among Lincoln Technical Institute, Inc., Back to
School Acquisition, L.L.C. and the Stockholders and other
holders of options under the Management Stock Option Plan
listed therein.
***4.5 Registration Rights Agreement between Lincoln Educational
Services Corporation and Back to School Acquisition, L.L.C.
**10.1 Credit Agreement, dated as of February 15, 2005, among Lincoln
Educational Services Corporation, the Guarantors from time to
time parties thereto, the Lenders from time to time parties
thereto and Harris Trust and Savings Bank, as Administrative
Agent.
**10.2 Employment Agreement, dated as of January 3, 2005, between
Lincoln Educational Services Corporation and David F. Carney.
**10.3 Amended Employment Agreement, dated as of March 1, 2005,
between Lincoln Educational Services Corporation and David F.
Carney.
20
**10.4 Employment Agreement dated as of January 3, 2005, between
Lincoln Educational Services Corporation and Lawrence E.
Brown.
**10.5 Amended Employment Agreement, dated as of March 1, 2005,
between Lincoln Educational Services Corporation and Lawrence
E. Brown.
**10.6 Employment Agreement, dated as of January 3, 2005, between
Lincoln Educational Services Corporation and Scott M. Shaw.
**10.7 Amended Employment Agreement, dated as of March 1, 2005,
between Lincoln Educational Services Corporation and Scott M.
Shaw.
**10.8 Employment Agreement, dated as of January 3, 2005, between
Lincoln Educational Services Corporation and Cesar Ribeiro.
**10.9 Amended Employment Agreement, dated as of March 1, 2005,
between Lincoln Educational Services Corporation and Cesar
Ribeiro.
**10.10 Lincoln Educational Services Corporation 2005 Long Term
Incentive Plan.
**10.11 Lincoln Educational Services Corporation 2005 Non Employee
Directors Restricted Stock Plan.
**10.12 Lincoln Educational Services Corporation 2005 Deferred
Compensation Plan.
**10.13 Lincoln Technical Institute Management Stock Option Plan,
effective January 1, 2002.
**10.14 Form of Stock Option Agreement, dated January 1, 2002, between
Lincoln Technical Institute, Inc. and certain participants.
**10.15 Management Stock Subscription Agreement, dated January 1,
2002, among Lincoln Technical Institute, Inc. and certain
management investors.
***10.16 Stockholder's Agreement among Lincoln Educational Services,
Steven W. Hart and Steven W. Hart 2003 Grantor Retained
Annuity Trust.
*31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
*31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
*32 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.
* Filed herewith
** Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (Registration No. 333-123644) and incorporated by reference herein.
*** Previously filed as an exhibit to the Company's Form 8-K on June 28, 2005
and incorporated by reference herein.
21
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.
Date: November 10, 2005
LINCOLN EDUCATIONAL SERVICES CORPORATION
By: /s/ Cesar Ribeiro
--------------------------------------------
Cesar Ribeiro
Chief Financial Officer
(Principal Accounting and Financial Officer)
22
EXHIBIT 31.1
CERTIFICATION
I, David F. Carney, 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(s) 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)) 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) 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
(c) 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;
and
5. The registrant's other certifying officer(s) 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 10, 2005
/s/ David F. Carney
- ----------------------------------
David F. Carney
Chairman & Chief Executive Officer
23
EXHIBIT 31.2
CERTIFICATION
I, Cesar Ribeiro, 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(s) 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)) 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) 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
(c) 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;
and
5. The registrant's other certifying officer(s) 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 10, 2005
/s/ Cesar Ribeiro
- -------------------------
Cesar Ribeiro
Chief Financial Officer
24
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, David F. Carney, Chairman and Chief Executive
Officer of Lincoln Educational Services Corporation (the "Company"), and Cesar
Ribeiro, 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, 2005 (the "Report").
Each of the undersigned hereby certifies that:
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 10, 2005
/s/ David F. Carney
- ----------------------------------
David F. Carney
Chairman & Chief Executive Officer
/s/ Cesar Ribeiro
- ----------------------------------
Cesar Ribeiro
Chief Financial Officer
25