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font-weight: bold; font-style: italic;">Business Activities</font> &#8211; Lincoln Educational Services Corporation and Subsidiaries (the &#8220;Company&#8221;) is a provider of diversified career-oriented post-secondary education. The Company offers recent high school graduates and working adults career-oriented programs in five areas of study: Automotive Technology, Health Sciences, Skilled Trades, Hospitality Services and Business and Information Technology. The Company currently has 31 campuses and five training sites in 15 states across the United States.</div><div><br /></div><div style="font-size: 10pt; font-family: ''Times New Roman'', Times, serif; text-align: left;">For the last several years, the Company<font style="font-size: 10pt; font-family: ''Times New Roman'', Times, serif;"> and the proprietary school sector</font> has faced various forms of adversity which have contributed to deteriorating earnings growth. Government regulations have negatively impacted earnings by making it more difficult for potential students to obtain loans, which when coupled with the overall economic environment have hindered potential students from enrolling in our schools. In light of these factors, the Company has incurred significant operating losses as a result of lower student population. The Company also experienced a significant decline in market capitalization during the quarter ended September 30, 2014. Despite these events, management believes that its likely sources of cash should be sufficient to fund operations for the next twelve months. <font style="font-size: 10pt; font-family: ''Times New Roman'', Times, serif;">The Company's available sources of cash primarily include results of operations, cash and cash equivalents and available borrowings under the revolving line of credit. </font>The Company's revolving credit facility expires in April 2015. To fund the Company's business plans, including any anticipated future losses, purchase commitments, capital expenditures, and principal and interest payments on borrowings, the Company has the ability to leverage <font style="font-size: 10pt; font-family: ''Times New Roman'', Times, serif;">up to $ 50 million of </font>its existing properties. In addition, the Company is also continuing to take actions to improve cash flow by aligning its cost structure to its student population. However, if the Company is unable to leverage certain of its properties and improve operating performance, the Company's business plans may be adversely affected and the Company will have to modify its business plans to conserve available cash.</div></div> In 2009, the Company assumed real estate capital leases in Fern Park, Florida and Hartford, Connecticut. These leases bear interest at 8% and expire in 2032 and 2031, respectively. The Company completed a sale and a leaseback of several facilities on December 28, 2001. The Company retains a continuing involvement in the lease and, as a result, it is prohibited from utilizing sale-leaseback accounting. Accordingly, the Company has treated this transaction as a finance lease. The lease expires on December 31, 2016. On April 5, 2012, the Company, as borrower, and certain of its wholly-owned subsidiaries, as guarantors, entered into a secured revolving credit agreement with a syndicate of four lenders led by Bank of America, N.A., as administrative agent and letter of credit issuer (the "Credit Facility"). The April 5, 2012 agreement, along with subsequent amendments dated June 18, 2013 and December 20, 2013, are collectively referred to as the "Credit Agreement." As of December 31, 2013, the aggregate principal amount available under the Credit Facility was $60 million. Under the terms of the Credit Agreement, amended January 16, 2014, this amount was reduced to $40 million. The Credit Facility may be used to finance capital expenditures and permitted acquisitions, to pay transaction expenses, for the issuance of letters of credit and for general corporate purposes. The Credit Agreement includes a $25 million letter of credit sublimit. The original term of the Credit Facility is 36 months, maturing on April 5, 2015. The Credit Agreement provides that the lenders will receive first priority lien on substantially all of the tangible and intangible non-real property assets of the Company and its subsidiaries as well as a first priority lien on substantially all real property owned by the Company and its subsidiaries and that all net proceeds of future sales of real property by the Company and its subsidiaries be used to prepay revolving loans and permanently reduce the principal amount of revolving loans available under the Credit Facility. Amounts borrowed as revolving loans under the Credit Facility will bear interest, at the Company's option, at either (i) an interest rate based on LIBOR and adjusted for any reserve percentage obligations under Federal Reserve Bank regulations (the "Eurodollar Rate") for specified interest periods or (ii) the Base Rate (as defined in the Credit Agreement), in each case, plus an applicable margin rate as determined under the Credit Agreement. The "Base Rate", as defined under the Credit Agreement, is the highest of (a) the rate of interest announced from time to time by Bank of America, N.A. as its prime rate, (b) the Federal Funds rate plus 0.50% and (c) a daily rate equal to the one-month LIBOR rate plus 1.0%. Pursuant to the Credit Agreement, the margin interest rate is subject to adjustment within a range of 2.50% to 6.00% based upon changes in the Company's consolidated leverage ratio and depending on whether the Company has chosen the Eurodollar Rate or the Base Rate option. Letters of credit will require a fee equal to the applicable margin rate multiplied by the daily amount available to be drawn under each issued letter of credit plus an agreed upon fronting fee and customary issuance, presentation, amendment and other processing fees associated with letters of credit. At September 30, 2014, the Company had outstanding letters of credit aggregating $5.3 million, which were primarily comprised of letters of credit for the Department of Education, or DOE, matters and real estate leases. The Credit Agreement contains representations, warranties and covenants including consolidated adjusted net worth, consolidated leverage ratio, consolidated fixed charge coverage ratio, minimum financial responsibility composite score, cohort default rate and other financial covenants, certain restrictions on capital expenditures as well as affirmative and negative covenants and events of default customary for facilities of this type. In addition, the Company is paying fees to the lenders that are customary for facilities of this type. As of September 30, 2014 the Company is in compliance with all financial covenants. During the three months ended September 30, 2014 the Company had net repayments of $7.5 under the Credit Facility during the three months ended September 30, 2014. The Company had $7.5 million outstanding under the Credit Facility as of September 30, 2014. The interest rates on these borrowings ranged from 4.2% to 7.3%. The Company had $54.5 million outstanding under the Credit Agreement as of December 31, 2013 which was repaid on January 3, 2014. The interest rate on this borrowing was 7.3%.