-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FDN4LiePxIKvqFPQkAK1wjWVsKdJGO+pb2fM/51BccgSblLgjOuKKPyzVQCm12h1 s+NCZJVZJ+L3Be2UgVXr7A== 0001140361-10-011374.txt : 20100311 0001140361-10-011374.hdr.sgml : 20100311 20100311162550 ACCESSION NUMBER: 0001140361-10-011374 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20091231 FILED AS OF DATE: 20100311 DATE AS OF CHANGE: 20100311 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LINCOLN EDUCATIONAL SERVICES CORP CENTRAL INDEX KEY: 0001286613 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EDUCATIONAL SERVICES [8200] IRS NUMBER: 571150621 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-51371 FILM NUMBER: 10674315 BUSINESS ADDRESS: STREET 1: 200 EXECUTIVE DRIVE CITY: WEST ORANGE STATE: NJ ZIP: 07052 BUSINESS PHONE: 9737369340 MAIL ADDRESS: STREET 1: 200 EXECUTIVE DRIVE CITY: WEST ORANGE STATE: NJ ZIP: 07052 10-K 1 form10k.htm LINCOLN EDUCATIONAL SERVICES CORP 10-K 12-31-2009 form10k.htm


U.S. SECURITIES AND EXCHANGE COMMISSION
 
WASHINGTON, D.C. 20549
 

Form 10-K
 
 x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2009
 

Commission File Number 000-51371
 

LINCOLN EDUCATIONAL SERVICES CORPORATION
(Exact name of registrant as specified in its charter)
 
 
New Jersey
 
57-1150621
 
 
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)
 

200 Executive Drive, Suite 340
West Orange, NJ 07052
(Address of principal executive offices)
 
(973) 736-9340
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
None
 
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value per share
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No  x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No  x
 
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  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o  No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  o
 
Accelerated filer  x
 
Non-accelerated filer o
 
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No  x
 
The aggregate market value of the 11,373,470 shares of common stock held by non-affiliates of the registrant issued and outstanding as of June 30, 2009, the last business day of the registrant’s most recently completed second fiscal quarter, was $238,046,727. This amount is based on the closing price of the common stock on the Nasdaq Global Select Market of $20.93 per share on June 30, 2009. Shares of common stock held by executive officers and directors and persons who own 5% or more of outstanding common stock have been excluded since such persons may be deemed affiliates. This determination of affiliate status is not a determination for any other purpose.
 
The number of shares of the registrant’s common stock outstanding as of March 9, 2010 was 25,924,518.
 
Documents Incorporated by Reference
Portions of the Proxy Statement for the Registrant’s 2010 Annual Meeting of Stockholders are incorporated by reference in Part III of this Annual Report on Form 10-K.  With the exception of those portions that are specifically incorporated by reference in this Annual Report on Form 10-K, such Proxy Statement shall not be deemed filed as part of this Report or incorporated by reference herein.
 


 
 

 

LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
 
INDEX TO FORM 10-K
 
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009
 
PART I.
 
 
 
1
ITEM 1.
   
1
ITEM 1A.
   
22
ITEM 1B.
   
33
ITEM 2.
   
34
ITEM 3.
   
35
ITEM 4.
   
35
 
 
 
 
 
PART II.
 
 
 
35
ITEM 5.
   
35
ITEM 6.
   
39
ITEM 7.
   
41
ITEM 7A.
   
52
ITEM 8
   
53
ITEM 9.
   
53
ITEM 9A.
   
53
ITEM 9B.
   
53
 
 
 
 
 
PART III.
 
 
 
54
ITEM 10.
   
54
ITEM 11.
   
54
ITEM 12.
   
54
ITEM 13.
   
54
ITEM 14.
   
54
 
 
 
 
 
PART IV.
 
 
 
55
ITEM 15.
   
55

 
 


Forward-Looking Statements
 
This Form 10-K contains “forward-looking statements,” within the meaning of Section 21E of the Securities and Exchange Act of 1934, as amended, which include information relating to future events, future financial performance, strategies, expectations, competitive environment, regulation and availability of resources. These forward-looking statements include, without limitation, statements regarding: proposed new programs; expectations that regulatory developments or other matters will not have a material adverse effect on our consolidated financial position, results of operations or liquidity; statements concerning projections, predictions, expectations, estimates or forecasts as to our business, financial and operating results and future economic performance; and statements of management’s goals and objectives and oth er similar expressions concerning matters that are not historical facts. Words such as “may,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” and similar expressions, as well as statements in future tense, identify forward-looking statements.
 
Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made and/or management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to:
 
·
our failure to comply with the extensive regulatory framework applicable to our industry or our failure to obtain timely regulatory approvals in connection with a change of control of our company or acquisitions;
·
our success in updating and expanding the content of existing programs and developing new programs in a cost-effective manner or on a timely basis;
·
risks associated with the opening of new campuses;
·
risks associated with integration of acquired schools;
·
industry competition;
·
our ability to continue to execute our growth strategies;
·
conditions and trends in our industry;
·
general economic conditions; and
·
other factors discussed under the headings “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
Forward-looking statements speak only as of the date the statements are made.  Except as required under the federal securities laws and rules and regulations of the SEC, we undertake no obligation to update or revise forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information.  We caution you not to unduly rely on the forward-looking statements when evaluating the information presented herein.

 
 


PART I.
 
ITEM 1.
BUSINESS
 
OVERVIEW
 
We are a leading provider of diversified career-oriented post-secondary education as measured by total enrollment.   As of December 31, 2009, we operated 43 campuses in 17 states.  We offer recent high school graduates and working adults degree and diploma programs in five areas of study: health sciences, automotive technology, skilled trades, hospitality services and business and information technology. For the year ended December 31, 2009, our health science program, our automotive technology program, our skilled trades program, our hospitality services program and our business and information technology program accounted for approximately 37%, 31%, 13%, 10%, and 9%, respectively, of our average enrollment. We had 29,340 students enrolled as of December 31, 2009 and our average enrollment for the year ended Dece mber 31, 2009 was 27,808 students, an increase of 39.0% from our average enrollment of 20,006 for the year ended December 31, 2008. For the year ended December 31, 2009, our revenues were $552.5 million, which represents an increase of 46.6% from the year ended December 31, 2008. Excluding our acquisitions of Lincoln College of New England (formerly known as Briarwood College) or BRI on December 1, 2008, six of the seven schools comprising Baran Institute of Technology or BAR on January 20, 2009 and Clemens College, the seventh BAR school, or Clemens on April 20, 2009 or collectively, the Acquisitions, our revenues and average enrollment would have increased by 31.5% and 26.5%, respectively, compared to the year ended December 31, 2008. For the year ended December 31, 2008, our revenues were $376.9 million, which represented a 15.0% increase from the year ended December 31, 2007.  Excluding our acquisition of BRI, our revenues and average enrollment for 2008 would have increased by 14.7% and 13.0%, respectively, compared to the year ended December 31, 2007.
 
All of our schools operate under the Lincoln Technical Institute, Lincoln College of Technology and Lincoln College of New England brand names, except for Nashville Auto-Diesel College, or NADC, Southwestern College, Clemens College and Euphoria Institute of Beauty Arts and Sciences, which continue to operate under their previous names.  Most of our campuses serve major metropolitan markets and each typically offers courses in multiple areas of study. Five of our campuses are destination schools, which attract students from across the United States and, in some cases, from abroad. Our other campuses primarily attract students from their local communities and surrounding areas.  All of our schools are nationally or regionally accredited and are eligible to participate in federal financial aid programs by the U.S. Depart ment of Education, or DOE, and applicable state education agencies and accrediting commissions which allow students to apply for and access federal student loans as well as other forms of financial aid.
 
We believe that we provide our students with the highest quality career-oriented training available for our areas of study in our markets. We offer programs in areas of study that we believe are typically underserved by traditional providers of post-secondary education and for which we believe there exists significant demand among students and employers. Furthermore, we believe our convenient class scheduling, career focused curricula and emphasis on job placement offer our students valuable advantages that have been neglected by the traditional academic sector. By combining substantial hands-on training with traditional classroom-based training led by experienced instructors, we believe we offer our students a unique opportunity to develop practical job skills in many of the key areas of expected job demand. We believe these job skills e nable our students to compete effectively for employment opportunities and to pursue on-going salary and career advancement.
 
Each of our schools is an operating segment.  Our operating segments have been aggregated into one reportable segment because, in our judgment, the operating segments have similar products, production processes, types of customers, methods of distribution, regulatory environment and economic characteristics.
 
DISCONTINUED OPERATIONS

On July 31, 2007, our Board of Directors approved a plan to cease operations at three of our campuses.  As a result of that decision, we recognized a non-cash impairment charge related to goodwill at these three campuses of approximately $2.1 million as of June 30, 2007.  Additionally, we determined that certain long-lived assets would not be recoverable at June 30, 2007 and recorded a non-cash charge of $0.9 million to reduce the carrying value of these assets to their estimated fair value.

As of September 30, 2007, all operations had ceased at these campuses, and accordingly, the results of operations of these campuses have been reflected in the accompanying statements of operations as “Discontinued Operations” for all periods presented.

 
1


The following amounts relate to discontinued operations at these three campuses (in thousands):

   
Year Ended December 31, 2007
 
Revenues
  $ 4,230  
Operating expenses
    (13,760 )
      (9,530 )
Benefit for income taxes
    (4,043 )
Loss from discontinued operations
  $ (5,487 )

AVAILABLE INFORMATION
 
Our website is www.lincolnedu.com. We make available on this website our Annual Reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, annual proxy statement on Schedule 14A and amendments to those reports as soon as reasonably practicable after we electronically file or furnish such materials to the Securities and Exchange Commission. You can access this information on our website, free of charge, by clicking on “Investor Relations.” The information contained on or connected to our website is not a part of this Annual Report on Form 10-K.
 
BUSINESS STRATEGY
 
Our goal is to strengthen our position as a leading and diversified provider of career-oriented post-secondary education by continuing to pursue the following strategy:
 
Expand Existing Areas of Study and Existing Facilities.  We believe we can leverage our operations to expand our program offerings in existing areas of study and expand into new areas of study to capitalize on demand from students and employers in our target markets. Whenever possible we seek to replicate programs across our campuses. We also expect to continue expanding some of our existing facilities and relocating other facilities to expand capacity. In 2008 and 2009, we increased capacity at four of our Southwestern College campuses and at our campus in Melrose Park, Illinois, and moved into a new and larger campus in Brockton, Massachusetts.  In 2009, we acquired a property which is currently being expanded and which will serve as the new home for our Lincoln College of Technology in Denver, Colorado.
 
Maximize Utilization of Existing Facilities.  We are focused on improving capacity utilization of existing facilities through increased enrollments and the introduction of new programs. We expect to continue investing in marketing, recruiting and retention resources to increase enrollment.
 
Expand Geographic Presence.  We believe that we can leverage our marketing and recruiting programs by opening additional campuses in selected markets and obtaining greater market penetration. For example, in 2008, we expanded our presence in Las Vegas with the opening of our third Euphoria campus in the north end of Las Vegas which will enable us to better serve that market. In 2009, we expanded our presence in Ohio by opening our sixth Southwestern College in Toledo. We believe we can also increase our student enrollments by entering selected new geographic markets that we believe have significant growth potential and where we can leverage our reputation and operating expertise.
 
Pursue Strategic Acquisitions.  We continue to evaluate acquisition candidates. In evaluating potential acquisitions, we seek to identify schools that provide the potential for program replication at our existing campuses, expand our program and degree offerings, and extend our presence into markets with attractive growth opportunities. For example, during the first and second quarters of 2009, we completed the acquisition of BAR, which consists of seven campuses serving 2,273 students as of December 31, 2009 and offers associate’s degree and diploma programs in the fields of automotive, skilled trades, health sciences and culinary arts.
 
Expand Market.  We believe that we can enter new markets and broaden the Lincoln brand by operating regionally accredited schools that offer associate’s and bachelor’s degrees, both on ground and online. To launch this effort we acquired BRI on December 1, 2008. BRI operates one campus in Southington, Connecticut and is regionally accredited by the New England Association of Schools and Colleges, and currently offers two bachelor’s degree programs and 31 associate’s degree programs to 668 students as of December 31, 2009 from Connecticut and surrounding states.
 
Expand Online Programs.  We offer online programs with a view towards capitalizing on the growing demand for, and flexibility provided by, online education alternatives. In 2008, we launched online associate’s and bachelor’s degree programs under our national accreditation. We believe that our online programs are an attractive option for students without the geographic or financial flexibility to enroll in campus-based programs and will continue to broaden our market. Furthermore, with the addition of BRI we expect to offer regionally accredited online degree programs that we believe will make our online offerings more attractive and competitive compared to those of our peers.

 
2


PROGRAMS AND AREAS OF STUDY
 
We structure our program offerings to provide our students with a practical, career-oriented education and position them for attractive entry-level job opportunities in their chosen fields. Our diploma/certificate programs typically take between 16 to 105 weeks to complete, with tuition ranging from $7,000 to $35,000.  Our associate’s degree programs typically take between 47 to 92 weeks to complete, with tuition ranging from $18,000 to $33,000.  Our bachelor’s degree programs typically take between 132 and 193 weeks to complete, with tuition ranging from $55,000 to $70,000. As of December 31, 2009, all of our schools offer diploma and certificate programs, 22 of our schools are currently approved to offer associate’s degree programs and three schools are approved to offer a bachelor’s degree pr ogram. In order to accommodate the schedules of our students and maximize classroom utilization, we typically offer courses four to five days a week in three shifts per day and start new classes every month. Also for those students who do not live near one of our campuses or whose schedules prevent them from attending school we offer several programs online.  We update and expand our programs frequently to reflect the latest technological advances in the field, providing our students with the specific skills and knowledge required in the current marketplace. Classroom instruction combines lectures and demonstrations by our experienced faculty with comprehensive hands-on laboratory exercises in simulated workplace environments.

 
3


The following table lists the programs offered as of December 31, 2009 with the average number of students enrolled in each area of study for the year ended December 31, 2009:

Programs Offered
 
Area of Study
 
Bachelor's
 
Associate
 
Diploma and Certificate
 
Average Enrollment
   
Percent of Total Enrollment
 
                         
Health Sciences
  -  
Medical Assisting Technology, Medical Assisting & Administrative Technology, Dental Office Management, Child Development, Health Information Technology, Medical Office Management, Medical Assistant, Mortuary Science, Nuclear Medicine Technology, Occupational Therapy Assistant, Dental Hygeine, Dental Administrative Assistant, Surgical Technologist, Advanced Medical Coding & Billing, Pharmacy Technician
 
Medical Administrative Assistant, Medical Assistant, Pharmacy Technician, Medical Coding & Billing, Dental Assistant, Licensed Practical Nursing, Phlebotomy, Nuclear Medicine Technology, Medical Assistant w/Basic X-ray, Basic X-Ray Technician, Patient Care Technician, Surgical Technologist
    10,220       37 %
                             
Automotive
  -  
Automotive Technology, MasterCertified Auto Service Management, Collision Repair & Refinishing Service Management, Diesel Technology, Master Certified Diesel & Truck Service Management
 
Automotive Mechanics, Master Certified Automotive Technology, Collision Repair & Refinishing Technology, Diesel & Truck Mechanics, Diesel Technology, Master Certified Diesel & Truck Technology, Master Certified Automotive w/Diesel Technology, Motorcycle Technology
    8,676       31 %
                             
Skilled Trades
  -  
Mechanical / Architectural Drafting & CAD Technology, Electronic Engineering Technology, HVAC, Electronics Systems Service Management, Security Systems Service Management
 
Electrical Technology, Electronics Engineering Technology, Electronics Systems Technician, Air Conditioning Refridgeration & Heating Technology, Electrician, Welding Technology, Security Systems Technician
    3,526       13 %

 
4


Program Offered (Continued)
 
Area of Study
 
Bachelor's
 
Associate
 
Diploma and Certificate
 
Average Enrollment
   
Percent of Total Enrollment
 
                         
Hospitality Services
 
Culinary Arts Management
 
Culinary Arts, Salon Management, Food and Beverage, International Baking and Pastry, Culinary Management, Hotel Restaurant Management, Dietetic Technician, Travel and Tourism, Hospitality Management
 
Culinary Arts, Advanced Culinary Arts, Baking & Pastry Essentials, Cosmetology, Aesthetics, Therapeutic Massage & Bodywork Technician, Advanced Italian Culinary Arts
    2,720       10 %
                             
Business and Information Technology
 
Business Management, Business Marketing, Criminal Justice, Funeral Service Management, Integrated Marketing Communication & Design, Information Mangement & Security, Human Resource Management
 
PC Systems & Networking Technician, Business Administration, Criminal Justice, Network Communications & Information Systems, Business Management, Business Marketing, Human Resource Management, Accounting Technology, Broadcasting and Communications, Fashion Merchandising, Paralegal, Graphic Design, Web Design
 
PC Support Technician, Criminal Justice, Network Communications and Information Systems, Business Office Technology
    2,666       9 %
                             
       
Total:
        27,808       100 %

 
5


Health Sciences.    For the year ended December 31, 2009, health sciences represented our largest area of study, representing 37% of our total average student enrollment. Our health science programs are 24 to 92 weeks in length, with tuition rates of $7,000 to $30,000. Graduates of our programs are qualified to obtain positions such as licensed practical nurse, medical administrative assistant, EKG technician, claims examiner and pharmacy technician. Our graduates are employed by a wide variety of employers, including hospitals, laboratories, insurance companies, doctors' offices and pharmacies. Our medical assistant and medical administrative assistant programs are our largest health science programs.
 
As of December 31, 2009, we offered health science programs at 27 schools, including six Southwestern College schools, BRI, and 20 Lincoln College of Technology and Lincoln Technical Institute schools.
 
Automotive Technology.    Automotive technology represents our second largest area of study, with 31% of our total average student enrollment for the year ended December 31, 2009. Our automotive technology programs are 24 to 105 weeks in length, with tuition rates of $10,000 to $35,000. We believe we are a leading provider of automotive technology education in each of our local markets. Graduates of our programs are qualified to obtain entry level employment ranging from positions as technicians and mechanics to various apprentice level positions. Our graduates are employed by a wide variety of employers, ranging from automotive and diesel dealers, independent auto body paint and r epair shops, to trucking and construction companies.

As of December 31, 2009, each of our Lincoln Technical Institute schools, with the exception of our Allentown, Pennsylvania campus, offers programs in automotive technology and most of these schools offer other technical programs. Our campuses in East Windsor, Connecticut; Nashville, Tennessee; Grand Prairie, Texas; Indianapolis, Indiana; and Denver Colorado are destination schools, attracting students throughout the United States and, in some cases, from abroad.

Skilled Trades.    For the year ended December 31, 2009, 13% of our total average student enrollment was in our skilled trades programs. Our skilled trades programs are 41 to 91 weeks in length, with tuition rates of $16,000 to $30,000. Our skilled trades programs include electrician, heating, ventilation and air conditioning repair, welding, drafting and computer-aided design and electronic system technician. Graduates of our programs are qualified to obtain entry level employment positions such as electrician, cable, wiring and HVAC installer and servicer and drafting technician. Our graduates are employed by a wide variety of employers, including residential and commercial construction, telecommunications installation companies and architect ural firms.
 
In the first quarter of 2008, we launched our first welding program.  This program was developed based on the National Center for Construction Education and Research (“NCCER”) curriculum.  NCCER is a not-for-profit education foundation created to help address the critical workforce shortage facing the construction industry and to develop industry-driven standardized craft training programs with portable credentials.
 
As of December 31, 2009, we offered skilled trades programs at 14 of our 29 Lincoln Technical Institute and Lincoln College of Technology campuses.
 
Hospitality Services.    For the year ended December 31, 2009, 10% of our total average student enrollment was in our hospitality services programs. Our hospitality services programs are 16 to 132 weeks in length, with tuition rates of $9,000 to $55,000.  Our spa programs include therapeutic massage, cosmetology and aesthetics.  Graduates work in salons, spas, cruise ships or are self-employed.  We offer massage programs at 15 campuses and cosmetology programs at five campuses.  Our culinary graduates are employed by restaurants, hotels, cruise ships and bakeries.  As of December 31, 2009, we offered culinary programs at six Lincoln Culinary Institutes.
 
Business and Information Technology.    For the year ended December 31, 2009, 9% of our total average student enrollment was in our business and information technology programs, which include our diploma and degree criminal justice programs. Our business and information technology programs are 30 to 193 weeks in length, with tuition rates of $11,000 to $70,000.  We have focused our current IT program offerings on those that are most in demand, such as our PC systems technician, network systems administrator and business administration specialist programs.  Our IT and business graduates work in entry level positions for both small and large corporations.  Our criminal justice graduates work in the security industry and for various government agencies and departments.  As of December 31, 2009, we offered these programs at 20 of our campuses.

MARKETING AND STUDENT RECRUITMENT
 
We utilize a variety of marketing and recruiting methods to attract students and increase enrollment. Our marketing and recruiting efforts are targeted at potential students who are entering the workforce, or who are underemployed or unemployed and require additional training to enter or re-enter the workforce.
 
Marketing and Advertising.    Our marketing program utilizes integrated advertising such as the Internet, television, and various print media, direct mail, and event marketing campaigns.  These campaigns are enhanced by student and alumni referrals.  Internet lead generation is our most successful medium, built upon successful search engine optimization and specific keywords.  Our website leads incorporate integrated campaigns that drive prospects to the website for lead capture.  Our internal systems enable us to closely monitor and track the effectiveness of each advertisement on a daily or weekly basis and make adjustments accordingly to enhance efficiency and limit our student acquisition costs.

 
6


Referrals.    Referrals from current students, high school counselors and satisfied graduates and their employers have historically represented over 17% of our new enrollments. Our school administrators actively work with our current students to encourage them to recommend our programs to potential students. We continue to build strong relationships with high school guidance counselors and instructors by offering annual seminars at our training facilities to further educate these individuals on the strengths of our programs. Graduates who have gone on to enjoy success in the workforce frequently recommend our programs, as do local business owners who are pleased with the performance of ou r graduates whom they have hired.
 
Recruiting.    Our recruiting efforts are conducted by a group of approximately 475 field and campus-based representatives who meet directly with potential students during presentations conducted at high schools, in the potential student's home or during a visit to one of our campuses.
 
Field-Based Recruiting.    Our field-based recruiting representatives make presentations at high schools to attract students to both our local and destination campuses. Our field-based representatives also visit directly with potential students in their homes. During 2009, we recruited approximately 20% of our students directly out of high school.
 
Campus-Recruiting.    When a potential student is identified through our marketing and recruiting efforts, one of our representatives is paired with the potential student to follow up on an individual basis. Our media advertisements contain a unique toll-free number and our telephone system automatically directs the call to the campus nearest to the caller. At this point, a recruiting representative will respond to the inquiry, typically within 24 hours. The representatives are trained to explain in detail the opportunities available within each program and schedule an appointment for the potential student to visit the school and tour the school's facilities.
 
STUDENT ADMISSIONS, ENROLLMENT AND RETENTION
 
Admissions.    In order to attend our schools, students must complete an application and pass an entrance examination. While each of our programs has different admissions criteria, we screen all applications and counsel the students on the most appropriate program to increase the likelihood that our students complete the requisite coursework and obtain and sustain employment following graduation.
 
Enrollment.    We enroll students continuously throughout the year, with our largest classes enrolling in late summer or early fall following high school graduation. We had 29,340 students enrolled as of December 31, 2009 and our average enrollment for the year ended December 31, 2009 was 27,808 students, an increase of 39.0% from December 31, 2008. Excluding the Acquisitions, our average student enrollment increased by 26.5%. Our average student enrollment for the year ended December 31, 2008 was 20,006 students, an increase of 13.1% from December 31, 2007.  Excluding our acquisition of BRI in December 2008, our 2008 average student enrollment increased by 13.0%.
 
Retention.    To maximize student retention, the staff at each school is trained to recognize the early warning signs of a potential drop and to assist and advise students on academic, financial, employment and personal matters. We monitor our retention rates by instructor, course, program and school. When we notice that a particular instructor or program is experiencing a higher than normal dropout rate, we quickly seek to determine the cause of the problem and attempt to correct it. When we notice that a student is having trouble academically, we offer tutoring.

JOB PLACEMENT
 
We believe that securing employment for our graduates is critical to our ability to attract high quality students. In addition, high job placement rates result in low student loan default rates, an important requirement for continued participation in Title IV Programs. See "Regulatory Environment—Regulation of Federal Student Financial Aid Programs." Accordingly, we dedicate significant resources to maintaining an effective graduate placement program. Our non-destination schools work closely with local employers to ensure that we are training students with skills that employers need. Each school has an advisory council made up of local employers who provide us with direct feedback on how well we are preparing our students to succeed in the workplace. This enables us to tailor our programs to the market. The placement staff in each o f our destination schools maintains databases of potential employers throughout the country, allowing us to place students in their career field upon graduation. We also have internship programs that provide our students with opportunities to work with employers prior to graduation. For example, some of the students in our automotive programs have the opportunity to complete a portion of their hands-on training while working with a potential employer. In addition, some of our allied health students are required to participate in an internship program during which they work in the field as part of their career training. Students that participate in these programs often go on to work for the same business upon graduation. We also assist students with resume writing, interviewing and other job search skills.

 
7


FACULTY AND EMPLOYEES
 
We hire our faculty in accordance with established criteria, including relevant work experience, educational background and accreditation and state regulatory standards. We require meaningful industry experience of our teaching staff in order to maintain the quality of instruction in all of our programs and to address current and industry-specific issues in our course content. In addition, we provide intensive instructional training and continuing education, including quarterly instructional development seminars, annual reviews, technical upgrade training, faculty development plans and weekly staff meetings.
 
The staff of each school typically includes a school director, a director of graduate placement, an education director, a director of student services, a financial-aid director, an accounting manager, a director of admissions and instructors, all of whom are industry professionals with experience in our areas of study.
 
As of December 31, 2009, we had approximately 4,250 employees, including 1,038 full-time faculty and 834 part-time instructors.   At six of our campuses, the teaching professionals are represented by unions. These employees are covered by collective bargaining agreements that expire between 2010 through 2016. We believe that we generally have good relationships with these unions and our employees.

COMPETITION

The for-profit, post-secondary education industry is highly competitive and highly fragmented, with no one provider controlling significant market share. Direct competition between career-oriented schools and traditional four-year colleges or universities is limited. Thus, our main competitors are other for-profit, career-oriented schools, as well as public and private two-year junior and community colleges. Competition is generally based on location, the type of programs offered, the quality of instruction, placement rates, reputation, recruiting and tuition rates. Public institutions are generally able to charge lower tuition than our schools, due in part to government subsidies and other financial sources not available to for-profit schools. In addition, some of our other competitors have a more extensive network of schools and campuse s than we do, which enables them to recruit students more efficiently from a wider geographic area. Nevertheless, we believe that we are able to compete effectively in our local markets because of the diversity of our program offerings, quality of instruction, the strength of our brands, our reputation and our success in placing students with employers.
 
We compete with other institutions that are eligible to receive Title IV funding. This includes four-year, not-for-profit public and private colleges and universities, community colleges and all for-profit institutions whether they are four years, two years or less. Our competition differs in each market depending on the curriculum that we offer. For example, a school offering automotive, allied health and skilled trades programs will have a different group of competitors than a school offering allied health, business/IT and skilled trades. Also, because schools can add new programs within six to twelve months, new competition can emerge relatively quickly. Moreover, with the introduction of online learning, the number of competitors in each market has increased because students can now stay local but learn from a non-local institution.
 
Notwithstanding the above, we mainly compete with community colleges and other career schools, both for-profit and not-for-profit. We focus on programs that are in high demand. We compete against community colleges by seeking to offer more frequent start dates, more flexible hours, better instructional resources, more hands on training, shorter program length and greater assistance with job placement. We compete against the other career schools by seeking to offer a higher quality of education, higher quality instructional equipment and a better overall value. On average, each of our schools has at least three direct competitors and at least a dozen indirect competitors. As we continue to add courses and degree programs, our competitors within a given market increase and thus we face increased competition.
 
ENVIRONMENTAL MATTERS
 
We use hazardous materials at our training facilities and campuses, and generate small quantities of waste such as used oil, antifreeze, paint and car batteries. As a result, our facilities and operations are subject to a variety of environmental laws and regulations governing, among other things, the use, storage and disposal of solid and hazardous substances and waste, and the clean-up of contamination at our facilities or off-site locations to which we send or have sent waste for disposal. We are also required to obtain permits for our air emissions and to meet operational and maintenance requirements. In the event we do not maintain compliance with any of these laws and regulations, or are responsible for a spill or release of hazardous materials, we could incur significant costs for clean-up, damages, and fines or penalties. Climate change has not had and is not expected to have a significant effect on our operations.
 
REGULATORY ENVIRONMENT
 
Students attending our schools finance their education through a combination of family contributions, individual resources, private loans and federal financial aid programs. Each of our schools participates in the federal programs of student financial aid authorized under the Title IV Programs, which are administered by the DOE. For the year ended December 31, 2009, approximately 81% (calculated based on cash receipts) of our revenues were derived from the Title IV Programs. Students obtain access to federal student financial aid through a DOE prescribed application and eligibility certification process. Student financial aid funds are generally made available to students at prescribed intervals throughout their predetermined expected length of study. Students typically use the funds received from the federal financial aid programs to pay their tuition and fees. The transfer of funds from the financial aid programs are to the student, who then applies those funds to the cost of his or her education.

 
8


In connection with the students' receipt of federal financial aid, our schools are subject to extensive regulation by governmental agencies and licensing and accrediting bodies. In particular, the Title IV Programs, and the regulations issued thereafter by the DOE, subject us to significant regulatory scrutiny in the form of numerous standards that each of our schools must satisfy in order to participate in the various federal student financial aid programs. To participate in the Title IV Programs, a school must be authorized to offer its programs of instruction by the applicable state education agencies in the states in which it is physically located, be accredited by an accrediting commission recognized by the DOE and be certified as an eligible institution by the DOE. The DOE will certify an institution to participate in Title IV Progr ams only after the institution has demonstrated compliance with the Higher Education Act of 1965, as amended, or HEA, and the DOE's extensive regulations regarding institutional eligibility. The DOE defines an eligible institution to consist of both a main campus and its additional locations, if any. Each of our schools is either a main campus or an additional location of a main campus. Each of our schools is subject to extensive regulatory requirements imposed by state education agencies, accrediting commissions, and the DOE. Because the DOE periodically revises its regulations and changes its interpretations of existing laws and regulations, we cannot predict with certainty how Title IV Program requirements will be applied in all circumstances. Our schools also participate in other federal and state financial aid programs that assist students in paying the cost of their education.

State Authorization
 
Each of our schools must be authorized by the applicable education agencies in the states in which the school is physically located, and in some cases other states, in order to operate and to grant degrees, diplomas or certificates to its students. Some states have sought to assert jurisdiction over online educational institutions that offer educational services to residents in the state, notwithstanding the lack of a physical location in that state.  State agency authorization is also required in each state in which a school is physically located in order for the school to become and remain eligible to participate in Title IV Programs.  If we are found not to be in compliance with the applicable state regulation and a state seeks to restrict one or more of our business activities within its boundaries, we may not be a ble to recruit or enroll students in that state and may have to stop providing services in that state, which could have a material adverse effect on our business and results of operations.  Currently, each of our schools is authorized by the applicable state education agencies in the states in which the school is physically located and in which it recruits students.
 
Our schools are subject to extensive, ongoing regulation by each of these states. State laws typically establish standards for instruction, curriculum, qualifications of faculty, location and nature of facilities and equipment, administrative procedures, marketing, recruiting, financial operations, student outcomes and other operational matters. State laws and regulations may limit our ability to offer educational programs and to award degrees, diplomas or certificates. Some states prescribe standards of financial responsibility that are different from, and in certain cases more stringent than, those prescribed by the DOE. Some states require schools to post a surety bond. We have posted surety bonds on behalf of our schools and education representatives with multiple states in a total amount of approximately $14.2 million. These bonds ar e backed by $2.4 million of letters of credit.
 
If any of our schools fail to comply with state licensing requirements, they are subject to the loss of state licensure or authorization. If any one of our schools lost its authorization from the education agency of the state in which the school is located, that school and its related main campus and/or additional locations would lose its eligibility to participate in Title IV Programs, be unable to offer its programs and we could be forced to close that school. If one of our schools lost its state authorization from a state other than the state in which the school is located, the school would not be able to recruit students in that state. As of December 31, 2009, we believe that each of our schools is in substantial compliance with the applicable education agency requirements in each state in which it is physically located.

We were notified by the State of Connecticut Department of Higher Education, or the DHE, that each of Lincoln Technical Institute—East Windsor, or “East Windsor”, and Lincoln Technical Institute—Hartford, or “Hartford”, two of the schools we acquired in January 2009 in connection with our acquisition of BAR, did not meet the DHE’s fiscal viability standards requiring sufficient liquid assets or other evidence of fiscal soundness for the year ended December 31, 2008, which preceded our acquisition of BAR. Specifically, according to the DHE’s calculations, East Windsor’s composite score for 2008 was -1.0 and Hartford’s composite score was -1.0, both of which are less than the 1.5 required by the DHE. The DHE held a compliance meeting in September 2009 which was attended by certain of our personnel.  At this meeting, we informed the DHE that we believe that each school would have met or exceeded the DHE requirement if its financial results had been consolidated with our financial results for the year ended December 31, 2008.  We have been informed that the DHE will not make its determination until we submit our 2009 financial statements.  If the DHE’s determination stands, the two schools may be required to submit letters of credit to the DHE or be subject to revocation of authorizations to operate as a for-profit provider, loss of federal funding, limitations on the operations on their business, injunctions or fines, money damages, or other penalties, including being placed on probation for a period of up to one year.
 
Due to state budget constraints in certain states in which we operate, it is possible that those states may reduce the number of employees in, or curtail the operations of, the state education agencies that authorize our schools. A delay or refusal by any state education agency in approving any changes in our operations that require state approval could prevent us from making such changes or could delay our ability to make such changes.

 
9


Accreditation
 
Accreditation is a non-governmental process through which a school submits to ongoing qualitative and quantitative review by an organization of peer institutions. Accrediting commissions primarily examine the academic quality of the school's instructional programs, and a grant of accreditation is generally viewed as confirmation that the school's programs meet generally accepted academic standards. Accrediting commissions also review the administrative and financial operations of the schools they accredit to ensure that each school has the resources necessary to perform its educational mission.
 
Accreditation by an accrediting commission recognized by the DOE is required for an institution to be certified to participate in Title IV Programs. In order to be recognized by the DOE, accrediting commissions must adopt specific standards for their review of educational institutions. As of December 31, 2009, nineteen of our campuses are accredited by the Accrediting Commission of Career Schools and Colleges or ACCSC; twenty of our campuses are accredited by the Accrediting Council for Independent Colleges and Schools or ACICS; two of our campuses are accredited by the New England Association of Schools and Colleges or NEASC; and two of our campuses are accredited by Accrediting Bureau of Health Education Schools or ABHES. All of these accrediting commissions are recognized by the DOE. The following is a list of the dates on which each c ampus was accredited by its accrediting commission and the date by which its accreditation must be renewed.
 
Accrediting Commission of Career Schools and Colleges Reaccreditation Dates

School
 
Last Accreditation Letter
 
Next Accreditation
Philadelphia, PA
 
December 5, 2008
 
May 1, 2013
Union, NJ
 
December 9, 2009
 
February 1, 2014
Mahwah, NJ*
 
December 9, 2004
 
August 1, 2009****
Melrose Park, IL
 
March 11, 2005
 
November 1, 2009****
Denver, CO
 
September 8, 2006
 
February 1, 2011
Columbia, MD
 
March 13, 2007
 
February 1, 2012
Grand Prairie, TX
 
May 29, 2007
 
August 1, 2011
Allentown, PA
 
March 7, 2008
 
January 1, 2012
Nashville, TN
 
September 5, 2008
 
May 1, 2012
Indianapolis, IN
 
December 5, 2008
 
November 1, 2012
New Britain, CT
 
September 5, 2008
 
January 1, 2013
Shelton, CT**
 
December 9, 2009
 
September 1, 2013
Cromwell, CT**
 
March 13, 2007
 
November 1, 2011
Hamden, CT**
 
September 7, 2007
 
July 1, 2012
Queens, NY*
 
September 5, 2008
 
June 1, 2012
Hartford, CT
 
June 3, 2005
 
November 1, 2009 ****
Suffield, CT***
 
August 1, 2007
 
August 1, 2012
East Windsor, CT
 
September 5, 2008
 
February 1, 2013
South Plainfield, NJ
 
September 11, 2009
 
August 1, 2014

*
Branch campus of main campus in Union, NJ
**
Branch campus of main campus in New Britain, CT
***
Branch campus of main campus in Hartford, CT
****
Currently undergoing re-accreditation

 
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Accrediting Council for Independent Colleges and Schools Reaccreditation Dates

School
 
Last Accreditation Letter
 
Next Accreditation
Brockton, MA****
 
December 16, 2008
 
December 31, 2014
Lincoln, RI
 
December 16, 2008
 
December 31, 2014
Lowell, MA**
 
December 16, 2008
 
December 31, 2014
Somerville, MA
 
December 16, 2008
 
December 31, 2014
Philadelphia (Center City), PA*
 
April 23, 2007
 
December 31, 2012
Edison, NJ
 
April 23, 2007
 
December 31, 2012
Marietta, GA****
 
December 16, 2008
 
December 31, 2014
Mt. Laurel, NJ*
 
April 23, 2007
 
December 31, 2012
Paramus, NJ*
 
April 23, 2007
 
December 31, 2012
Philadelphia (Northeast), PA*
 
April 23, 2007
 
December 31, 2012
Dayton, OH
 
August 13, 2009
 
December 31, 2015
Cincinnati (Vine Street), OH***
 
August 13, 2009
 
December 31, 2015
Cincinnati (Northland Blvd.), OH***
 
August 13, 2009
 
December 31, 2015
Franklin, OH***
 
August 13, 2009
 
December 31, 2015
Florence, KY***
 
August 13, 2009
 
December 31, 2015
Toledo, OH***
 
December 9, 2009
 
December 31, 2015
West Palm Beach, FL
 
April 16, 2008
 
December 31, 2014
Summerlin, NV****
 
December 16, 2008
 
December 31, 2014
Green Valley, NV****
 
December 16, 2008
 
December 31, 2014
Aliante, NV****
 
April 8, 2009
 
December 31, 2014
 
*
Branch campus of main campus in Edison, NJ
**
Branch campus of main campus in Somerville, MA
***
Branch campus of main campus in Dayton, OH
****
Branch campus of main campus in Lincoln, RI
 
New England Association of Schools and Colleges of Technology Reaccreditation Dates

School
 
Last Accreditation Letter
 
Next Accreditation
Southington, CT
 
November 31, 2006
 
November 31, 2011
Suffield, CT
 
November 1, 2006
 
November 1, 2011

Accrediting Bureau of Health Education Schools Reaccreditation Dates

School
 
Last Accreditation Letter
 
Next Accreditation
Fern Park, FL
 
December 15, 2003
 
December 31, 2010
St. Petersburg, FL
 
July 23, 2007
 
December 31, 2010

If one of our schools fails to comply with accrediting commission requirements, the institution and its main and/or branch campuses are subject to the loss of accreditation. If any one of our schools lost its accreditation, students attending that school would no longer be eligible to receive Title IV Program funding, and we could be forced to close that school.  Any institution required to submit retention data to the ACICS is required to obtain prior permission from the ACICS for the initiation of any new program and new branch campus or learning site.

Prior to our acquisition of the Americare School of Nursing in January 2009, ABHES, directed the school to show cause why its accreditation should not be withdrawn based upon a visit to the school’s branch campus in St. Petersburg, Florida. We were informed that at ABHES’s December 2009 board meeting, the ABHES board acknowledged that all the concerns covered by the show cause order were resolved to their satisfaction.  However, the show cause order was extended until the next ABHES commission meeting in July 2010, due to ASN’s composite score under Department of Education financial responsibility regulations.  See “Regulatory Environment – Financial Responsibility Standards.”
 
Prior to our acquisition of BRI, the American Board of Funeral Service Education, or ABFSE, the accrediting agency that provides programmatic accreditation of the college’s mortuary sciences program, directed BRI to show cause why its accreditation should not be withdrawn.  BRI submitted a response and hosted a follow-up visit from the agency in February 2009. BRI received a visit report and submitted a response to that report which was reviewed by ABFSE at its commission meeting. ABFSE informed the school that the show cause will stay in place until 2010, subject to improvement in the pass rate of the certification test.  The pass rate for 2009 graduates exceeded the required threshold.  Although no assurance can be given, we believe that BRI has addressed the remaining concern of ABFSE and that ABFSE will vacate the show cause order at its next commission meeting in April 2010.

 
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Nature of Federal and State Support for Post-Secondary Education
 
The federal government provides a substantial part of the support for post-secondary education through Title IV Programs, in the form of grants and loans to students who can use those funds at any institution that has been certified as eligible by the DOE. Most aid under Title IV Programs is awarded on the basis of financial need, generally defined as the difference between the cost of attending the institution and the expected amount a student and his or her family can reasonably contribute to that cost. All recipients of Title IV Program funds must maintain a satisfactory grade point average and progress in a timely manner toward completion of their program of study. In addition, each school must ensure that Title IV Program funds are properly accounted for and disbursed in the correct amounts to eligible students.
 
Students at our schools receive grants and loans to fund their education under the following Title IV Programs: (1) the Federal Family Education Loan program, (2) the Federal Pell Grant, or Pell, program, (3) the Federal Supplemental Educational Opportunity Grant program, and (4) the Federal Perkins Loan, or Perkins, program.
 
Federal Family Education Loan.    Under the Federal Family Education Loan program, banks and other lending institutions make loans to students or their parents. If a student or parent defaults on a loan, payment is guaranteed by a federally recognized guaranty agency, which is then reimbursed by the DOE. Students with financial need qualify for interest subsidies while in school and during grace periods. For the year ended December 31, 2009, we derived approximately 64% of our Title IV revenues (calculated based on cash receipts) from the Federal Family Education Loan program.
 
Pell.    Under the Pell program, the DOE makes grants to students who demonstrate the greatest financial need. For the year ended December 31, 2009, we derived approximately 22% of our revenues (calculated based on cash receipts) from the Pell program.
 
Federal Supplemental Educational Opportunity Grant.    Under the Federal Supplemental Educational Opportunity Grant program, the DOE issues grants which are designed to supplement Pell grants for students with the greatest financial needs. An institution is required to make a 25% matching contribution for all funds received from the DOE under this program. For the year ended December 31, 2009, we received less than 1% of our revenues (calculated based on cash receipts) from the Federal Supplemental Educational Opportunity Grant program.
 
Perkins.    Perkins loans are made from a revolving institutional account, 75% of which is funded by the DOE and the remainder by the institution. Each institution is responsible for collecting payments on Perkins loans from its former students and lending those funds to currently enrolled students. Defaults by students on their Perkins loans reduce the amount of funds available in the applicable school's revolving account to make loans to additional students, but the school does not have any obligation to guarantee the loans or repay the defaulted amounts. For the year ended December 31, 2009, we derived less than 1% of our revenues (calculated based on cash receipts) from the Perkins program.
 
Other Financial Assistance Programs
 
Some of our students receive financial aid from federal sources other than Title IV Programs, such as the programs administered by the U.S. Department of Veterans Affairs and programs administered under the Workforce Investment Act. In addition, many states also provide financial aid to our students in the form of grants, loans or scholarships. The eligibility requirements for state financial aid and these other federal aid programs vary among the funding agencies and by program. Many states that provide financial aid to our students are facing significant budgetary constraints. We believe that the overall level of state financial aid for our students is likely to decrease in the near term, but we cannot predict how significant any such reductions will be or how long they will last.
 
In addition to Title IV and other government-administered programs, all of our schools participate in alternative loan programs for their students. Alternative loans fill the gap between what the student receives from all financial aid sources and what the student may need to cover the full cost of their education. Students or their parents can apply to a number of different lenders for this funding at current market interest rates.

Effective February 2008, Sallie Mae, Inc. (“SLM”) terminated its tiered discount loan agreement with us pursuant to which SLM provided private party loans to our students.  As a result, we continue to search for alternative sub-prime loan providers but in the meantime we have decided to make financing available to students through our internal funding sources.

 
12


Regulation of Federal Student Financial Aid Programs
 
To participate in Title IV Programs, an institution must be authorized to offer its programs by the relevant state education agencies in the state in which it is physically located, be accredited by an accrediting commission recognized by the DOE and be certified as eligible by the DOE. The DOE will certify an institution to participate in Title IV Programs only after the institution has demonstrated compliance with the Higher Education Act of 1965, as amended, HEA, or Higher Education Act, and the DOE's extensive regulations regarding institutional eligibility. The DOE defines an institution to consist of both a main campus and its additional locations, if any. Under this definition, for DOE purposes, we had the following 21 institutions as of December 31, 2009, collectively consisting of 21 main campuses and 22 additional locations:

Brand
 
Main Campus (es)
 
Additional Location (s)
Lincoln Technical Institute
 
Union, NJ
 
Mahwah, NJ
       
Queens, NY
   
Philadelphia, PA
   
   
Allentown, PA
   
   
Edison, NJ
 
Mount Laurel, NJ
       
Paramus, NJ
       
Philadelphia, PA (Center City)
       
Northeast Philadelphia, PA (Northeast)
   
Somerville, MA
 
Lowell, MA
   
Lincoln, RI
 
Marietta, GA*
       
Brockton, MA
       
Henderson, NV (Green Valley)**
       
Las Vegas, NV (Summerlin)**
       
Las Vegas, NV (Aliante)**
   
New Britain, CT
 
Shelton, CT
       
Cromwell, CT
       
Hamden, CT
   
East Windsor, CT
   
   
Hartford, CT
 
Suffield, CT
   
South Plainfield, NJ
   
   
Fern Park, FL
 
St. Petersburg, FL
         
Lincoln College of Technology
 
Indianapolis, IN
   
   
Grand Prairie, TX
   
   
Melrose Park, IL
   
   
Columbia, MD
   
   
Denver, CO
   
   
West Palm Beach, FL
   
         
Nashville Auto Diesel College
 
Nashville, TN
   
         
Southwestern College
 
Dayton, OH
 
Cincinnati, OH (Vine Street)
       
Franklin, OH
       
Cincinnati, OH (Northland Blvd.)
       
Florence, KY
       
Toledo, OH
         
Lincoln College of New England
 
Southington, CT
   
         
Clemens College
 
Suffield, CT
   

*
This campus operates under the Lincoln College of Technology brand.
**
These campuses operate under the Euphoria Institute of Beauty Arts & Sciences brands.

All of our main campuses, including their additional locations, are currently certified by the DOE to participate in the Title IV Programs.  In connection with our acquisitions of New England Technical Institute, and New England Institute of Technology at Palm Beach, we have received in each case an executed provisional program participation agreement from the DOE.  In connection with our acquisition of BRI and BAR we have received a provisional program participation agreement from the DOE.

 
13


The DOE, accrediting commissions and state education agencies have responsibilities for overseeing compliance with Title IV Program requirements. As a result, each of our schools is subject to detailed oversight and review, and must comply with a complex framework of laws and regulations. Because the DOE periodically revises its regulations and changes its interpretation of existing laws and regulations, we cannot predict with certainty how the Title IV Program requirements will be applied in all circumstances.
 
Significant factors relating to Title IV Programs that could adversely affect us include the following:
 
Congressional Action.    Political and budgetary concerns significantly affect Title IV Programs. On August 14, 2008, the Higher Education Opportunity Act, Public Law 110-315, reauthorized the Title IV HEA programs through at least September 30, 2014. The HEA reauthorization among other things revises the 90/10 Rule, as described below, revises the calculation of an institution's cohort default rate, requires additional disclosures and certifications with respect to non-Title IV alternative loans, prohibits certain activities or relations between lenders and schools to discourage preferential treatment of lenders based on factors not in students' best interests, and makes other changes.
 
In addition, Congress reviews and determines federal appropriations for Title IV Programs on an annual basis. Congress can also make changes in the laws affecting Title IV Programs in the annual appropriations bills and in other laws it enacts between the Higher Education Act reauthorizations. Because a significant percentage of our revenues are derived from Title IV Programs, any action by Congress that significantly reduces Title IV Program funding or the ability of our schools or students to participate in Title IV Programs could reduce our student enrollment and our revenues. Congressional action may also increase our administrative costs and require us to modify our practices in order for our schools to comply fully with Title IV Program requirements.  The College Cost Reduction & Access Act, which was signed into law i n September 2007, cut approximately $22 billion in subsidies to federal student lenders and guarantors as an offset to increases to federal financial aid.  This resulted in significant changes to the terms that alternative lending providers were willing to make and resulted in the tiered discount programs.

The College Cost Reduction & Access Act reduced payments to lenders and guaranty agencies participating in the Federal Family Education Loan (FFEL) Program. This, in turn, reduced the profitability of the FFEL Program and made access to these loans, as well as private loans more difficult. The widening sub-prime mortgage crisis has negatively impacted student loans.  Lenders are experiencing difficulty in securing funding from the debt markets to make new student loans, however through the Ensuring Continued Access to Student Loans Act the Department of Education will provide liquidity support to FFEL lenders by purchasing loans and providing long term financing for FFEL loans.  This program is designed to continue access to these funds for students and their parents.

On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act which further increased the maximum Pell grant to $4,860 for the July 1, 2009 through June 30, 2010 award year.  When these funds are combined with the funding authorized and appropriated by the College Cost Reduction and Access Act – which increased the maximum award by $490 – the maximum Pell award for the July 1, 2009 through June 30, 2010 award year is $5,350.

In September 2009, the House of Representatives passed the Student Aid and Fiscal Responsibility Act of 2009, H.R. 3221. This legislation, which was designed to address the goals outlined by the U.S. federal budget, would amend the Higher Education Act to prohibit new federally guaranteed loans from being made under the FFEL Program, beginning on July 1, 2010, at which time all new federal education loans would be originated through the Federal Direct Loan Program. The legislation would also, among other matters, provide for automatic increases in the maximum amount of the Pell Grant for which a student would be eligible (subject to appropriations), create a new Federal Direct Perkins Loan program (to replace the current Perkins loan program) and provide relief to for-profit institutions by amending the 90/10 rule to: (i) extend to July 2 012 the ability of for-profit institutions to exclude from their Title IV revenues the additional $2,000 per student in certain annual federal student loan amounts that became available in June 2008, (ii) exclude from the 90/10 rule calculation for the period July 1, 2010 through July 1, 2012 the revenue received from loans disbursed under the Federal Direct Perkins Loan program and (iii) give for-profit institutions three years (as opposed to two) to come into compliance with the 90/10 rule before becoming ineligible to participate in the Title IV programs if the second year ends between July 1, 2008 and June 30, 2011. The Student Aid and Fiscal Responsibility Act of 2009 has not been passed by Congress and is subject to further review and amendment. If the legislation passes, our institutions would be required to certify loans through the Federal Direct Loan Program rather than through the FFEL Program. Each of our institutions is eligible to participate in, and some of our institutions are currently parti cipating in, the Federal Direct Loan Programs. We expect to be able to fully transition from the FFEL Program to the Federal Direct Loan Program by the proposed July 1, 2010 phase-out date, if necessary.

DOE Development of New Regulations. The DOE published new regulations in October 2009 to implement the amendments made to the HEA by the Higher Education Opportunity Act enacted in August 2008. The new regulations cover a broad range of topics including the 90/10 rule, cohort default rates and other matters. The new regulations have an effective date of July 1, 2010 with certain exceptions and with certain provisions subject to early implementation as of November 1, 2009 at the discretion of an institution.
 
 
14


The DOE convened two negotiated rulemaking committees in November 2009 with the objective of developing new regulations in the areas of program integrity and foreign schools, respectively.  With respect to program integrity, the DOE released to negotiators on the negotiated rulemaking committee issue papers containing preliminary drafts of proposed regulations for discussion purposes on topics which include the definition of high school diploma for the purpose of establishing institutional eligibility to participate in the Title IV programs and student eligibility to receive Title IV aid, ability to benefit students, misrepresentation of information provided to students and prospective students, incentive compensation, state authorization as a component of institutional eligibility, gainful employment in a recognized occupation, the definition of a credit hour, agreements between institutions of higher education, verification of information included on student aid applications, satisfactory academic progress, monitoring grade point averages, retaking coursework, return of Title IV funds with respect to term-based programs with modules or compressed courses and with respect to taking attendance, and the timeliness and method of disbursements of Title IV funds. The proposed regulations in the issue paper for incentive compensation would eliminate the 12 “safe harbors” established in the current regulations which permit certain types of activities related to the compensation of individuals engaged in student recruiting or admission activities or in making decisions regarding the awarding of Title IV program funds.  The proposed regulations in the issue paper regarding gainful employment would require educational programs to prepare students for “gainful employment” in a recognized occupation, which in cludes all of our educational programs currently offered, to meet a standard under which the average student annual loan repayments cannot exceed eight percent of a student’s starting annual income  as calculated under a regulatory formula, or that the educational programs meet other alternative thresholds.  The implementation of any of these regulatory changes, or other changes the DOE might propose and implement, could have a materially adverse effect on our business and results of operations.  However, the proposals presented to the negotiated rulemaking committee are not final regulations, nor do they necessarily represent the final position of the DOE on these subjects, and remain subject to further review and change during the subsequent rulemaking process.  The negotiated rulemaking committee did not reach consensus on all of the proposed regulations, which means that DOE may publish proposed regulations which differ from thos e presented to the committee.  The DOE is expected to publish proposed regulations later this year which will be subject to public comment and further revision by the DOE before publication of final regulations.  The DOE has stated that its intention is to publish final regulations by November 1, 2010, which would result in a general effective date of July 1, 2011.  We are closely monitoring any policy or regulatory changes resulting from these rulemaking sessions which could materially impact our institutions, our business and results of operations.
 
The "90/10 Rule."    Under the HEA reauthorization, a proprietary institution that derives more than 90% of its total revenue from the Title IV programs for two consecutive fiscal years becomes immediately ineligible to participate in the Title IV programs and may not reapply for eligibility until the end of two fiscal years. An institution with revenues exceeding 90% for a single fiscal year ending after August 14, 2008 will be placed on provisional certification and may be subject to other enforcement measures.  Under prior law, an institution would immediately lose its eligibility to participate in Title IV Programs if it derived more than 90% of its revenue (calculated based on cash receipts) from those programs in any fiscal year as calculated in accordance with DOE regulation s and would be ineligible to apply to regain its eligibility until the following fiscal year.  If one of our institutions violated the 90/10 Rule and became ineligible to participate in Title IV Programs but continued to disburse Title IV Program funds, the DOE would require the institution to repay all Title IV Program funds received by the institution after the effective date of the loss of eligibility. Effective July 1, 2008, the annual Stafford loans available for undergraduate students under the Federal Family Education Loan Program, or FFEL, increased. This loan limit increase, coupled with recent increases in grants from the Pell program and other Title IV loan limits, will result in some of our schools experiencing an increase in the revenues they receive from the Title IV programs. The HEA reauthorization provided some relief from this effect by excluding portions of the loan limit increase from the Title IV component of the 90/10 rule calcu lation.

We have calculated that, for each of our 2009, 2008 and 2007 fiscal years, none of our institutions derived more than 88.5% of its revenues from Title IV Programs. For our 2009 fiscal year, our institutions' 90/10 Rule percentages ranged from 64.6% to 88.5%. We regularly monitor compliance with this requirement to minimize the risk that any of our institutions would derive more than the maximum percentage of its revenues from Title IV Programs for any fiscal year.
 
Student Loan Defaults.    An institution may lose its eligibility to participate in some or all Title IV Programs if the rates at which the institution's current and former students default on their federal student loans exceed specified percentages. The DOE calculates these rates based on the number of students who have defaulted, not the dollar amount of such defaults. The DOE calculates an institution's cohort default rate (as defined by the DOE regulations) on an annual basis as the rate at which borrowers scheduled to begin repayment on their loans in one year default on those loans by the end of the next year (two year ratio). An institution whose Federal Family Education Loan cohort default rate is 25% or greater for three consecutive fe deral fiscal years loses eligibility to participate in the Federal Family Education Loan, Federal Direct Loan, and Pell programs for the remainder of the federal fiscal year in which the DOE determines that such institution has lost its eligibility and for the two subsequent federal fiscal years. An institution whose Federal Family Education Loan cohort default rate for any single federal fiscal year exceeds 40% loses its eligibility to participate in the Federal Family Education Loan and Federal Direct Loan programs for the remainder of the federal fiscal year in which the DOE determines that such institution has lost its eligibility and for the two subsequent federal fiscal years.  If an institution’s cohort default rate equals or exceeds 25% in any of its three most recent fiscal years, the institution may be placed on provisional certification status.

The HEA has been amended by the Higher Education Opportunity Act, or HEOA, to provide for the calculation of an institution’s cohort default rate using a three year period, beginning with the cohort default rate for the 2009 federal fiscal year.  Under the HEA reauthorization, an institution's cohort default rate is redefined to be based on the rate at which its former students default on their FFEL loans over a period of time that is one year longer than the period of time over which rates currently are calculated. As a result, most institutions' respective cohort default rates are expected to increase under the new provision, which first would apply to cohort default rates for the 2009 federal fiscal year. The DOE will not impose sanctions based on rates calculated under the new provision until three consecutive years ha ve been calculated under the new method.  Until that time, the DOE will continue to calculate rates under the old method and impose sanctions based on those rates.  The HEOA also increases the cohort default three-year threshold from 25% to 30% effective for three year cohort default rates issued beginning in federal fiscal year 2012. On September 15, 2009, the DOE published the cohort default rate for each of our schools for the 2007 federal fiscal year which range from 0% to 22.9%.

 
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As of December 31, 2009, none of our institutions had a Federal Family Education Loan cohort default rate (as defined by the DOE) of 25% or greater for any of the federal fiscal years 2007, 2006 and 2005, the three most recent years for which the DOE has published such rates. The following table sets forth the Federal Family Education Loan cohort default rates for each of our 21 DOE institutions as of December 31, 2009 for those fiscal years:

Institution
 
2007
   
2006
   
2005
 
Union, NJ
    12.6 %     10.8 %     9.9 %
Indianapolis, IN
    13.0 %     12.3 %     7.5 %
Philadelphia, PA
    19.9 %     15.0 %     9.2 %
Columbia, MD
    12.5 %     12.0 %     7.5 %
Allentown, PA
    10.3 %     10.1 %     11.5 %
Melrose Park, IL
    18.1 %     11.8 %     11.6 %
Grand Prairie, TX
    22.0 %     19.3 %     14.6 %
Edison, NJ
    16.3 %     14.5 %     6.7 %
Denver, CO
    11.0 %     11.1 %     7.0 %
Nashville, TN
    7.2 %     5.6 %     5.2 %
Lincoln, RI
    12.9 %     14.9 %     12.8 %
Somerville, MA
    12.3 %     12.3 %     8.5 %
Dayton, OH
    13.5 %     9.9 %     7.6 %
New Britain, CT
    9.1 %     11.2 %     4.6 %
West Palm Beach, FL
    10.3 %     9.9 %     4.7 %
Southington, CT*
    22.9 %     10.2 %     13.9 %
South Plainfied**
    9.4 %     6.3 %     5.6 %
Fern Park**
    5.9 %     6.2 %     2.0 %
Hartford**
    6.5 %     5.3 %     6.7 %
East Windsor**
    9.5 %     6.1 %     7.0 %
Clemens College***
    0.0 %     0.0 %     0.0 %

*This institution was acquired on December 1, 2008.
**These institutions were acquired on January 20, 2009.
***This institution was acquired on April 20, 2009.

On February 8, 2010, the DOE issued draft cohort default rates for the 2008 federal fiscal year.  The draft rates are not final and may be subject to appeal and further upward or downward revisions before the DOE publishes final rates, which is expected to occur in October 2010.  Our 2008 rates ranged from 4.6% to 26.4%.  The preliminary cohort default rate of one institution was over 25%.

In December 2009, the DOE issued an electronic announcement explaining the future changes to the methodology for calculating an institution’s cohort default rate based on defaults occurring over a three-year period, rather than a two-year period, and released unofficial trial three-year cohort default rates for the 2005, 2006, and 2007 federal fiscal years.  These unofficial rates are for information purposes only and are intended to provide institutions with an indication of what their cohort default rates would be for the 2005, 2006 and 2007 federal fiscal years if calculated under the new methodology.
 
The rates for our institutions under the new methodology ranged from 7.2% to 31.7% for the 2005 federal fiscal year, from 10.6% to 37.0% for the 2006 federal fiscal year and from 16.2% to 42.2% for the 2007 federal fiscal year.   Our official cohort default rates for institutions for these same time periods as published by the DOE range from 0% to 14.6% for the 2005 federal fiscal year, from 0% to 19.3% for the 2006 federal fiscal year and from 0% to 22.9% for the 2007 federal fiscal year.  The DOE stated in the electronic announcement that the publication of these rates is for informational purposes only and that no sanctions will be imposed based on these rates.
 
Perkins Loan Program

An institution whose Perkins cohort default rate is 50% or greater for three consecutive federal award years loses eligibility to participate in the Perkins program for the remainder of the federal award year in which DOE determines that the institution has lost its eligibility and for the two subsequent federal award years. None of our institutions has had a Perkins cohort default rate of 50% or greater for any of the last three federal award years. The DOE also will not provide any additional federal funds to an institution for Perkins loans in any federal award year in which the institution's Perkins cohort default rate is 25% or greater. Such institutions also may be subject to provisional certification.  Our Denver, Colorado institution, or Denver, and NETI are our only institutions participating in the Perkins program. Den ver’s Perkins cohort default rate was 30.4% for students scheduled to begin repayment in the 2008-2009 federal award year. The DOE did not provide any additional Federal Capital Contribution Funds for Perkins loans to Denver. Denver continues to make loans out of its existing Perkins loan fund. Lincoln Technical Institute (New Britain, CT) is provisionally certified by the DOE based on its change in ownership and on a finding by the DOE prior to the change in ownership that NETI had not transmitted certain data related to the Perkins program to the National Student Loan Data System during periods prior to the acquisition. Our New Britain, CT institution’s cohort default rate was 19.0% for students scheduled to begin repayment in the 2008-2009 federal award year.

 
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Financial Responsibility Standards.    All institutions participating in Title IV Programs must satisfy specific standards of financial responsibility. The DOE evaluates institutions for compliance with these standards each year, based on the institution's annual audited financial statements, as well as following a change in ownership resulting in a change of control of the institution.
 
The most significant financial responsibility measurement is the institution's composite score, which is calculated by the DOE based on three ratios:
 
 
·
The equity ratio, which measures the institution's capital resources, ability to borrow and financial viability;
 
·
The primary reserve ratio, which measures the institution's ability to support current operations from expendable resources; and
 
·
The net income ratio, which measures the institution's ability to operate at a profit.

The DOE assigns a strength factor to the results of each of these ratios on a scale from negative 1.0 to positive 3.0, with negative 1.0 reflecting financial weakness and positive 3.0 reflecting financial strength. The DOE then assigns a weighting percentage to each ratio and adds the weighted scores for the three ratios together to produce a composite score for the institution. The composite score must be at least 1.5 for the institution to be deemed financially responsible without the need for further oversight. If an institution's composite score is below 1.5, but is at least 1.0, it is in a category denominated by the DOE as "the zone." Under the DOE regulations, institutions that are in the zone are deemed to be financially responsible for a period of up to three years but are required to accept payment of Title IV Program funds unde r the cash monitoring or reimbursement method of payment and to provide to the DOE timely information regarding various oversight and financial events.

If an institution's composite score is below 1.0, the institution is considered by the DOE to lack financial responsibility. If the DOE determines that an institution does not satisfy the DOE's financial responsibility standards, depending on its composite score and other factors, that institution may establish its financial responsibility on an alternative basis by, among other things:
 
 
·
Posting a letter of credit in an amount equal to at least 50% of the total Title IV Program funds received by the institution during the institution's most recently completed fiscal year;
 
·
Posting a letter of credit in an amount equal to at least 10% of such prior year's Title IV Program funds, accepting provisional certification, complying with additional DOE monitoring requirements and agreeing to receive Title IV Program funds under an arrangement other than the DOE's standard advance funding arrangement; and/or
 
·
Complying with additional DOE monitoring requirements and agreeing to receive Title IV Program funds under an arrangement other than the DOE's standard advance funding arrangement.

The DOE has evaluated the financial responsibility of our institutions on a consolidated basis.  We have submitted to the DOE our audited financial statements for the 2007 and 2008 fiscal year reflecting a composite score of 1.8 and 1.8, respectively, based upon our calculations, and that our schools meet the DOE standards of financial responsibility. For the 2009 fiscal year, we have calculated our composite score to be 2.0.

Prior to our acquisition, all of the former Baran institutions (East Windsor, South Plainfield, Fern Park, Hartford and Clemens/Suffield) were placed on Heightened Cash Monitoring Type 1 status, resulting from their failure to meet their financial responsibility composite scores for the years ended December 31, 2008 and December 31, 2007.    As a result, these institutions were subject to a less favorable Title IV funding system that required us to credit student accounts before drawing down Title IV funds and also required us to timely notify the DOE with respect to certain enumerated oversight and financial events.  In addition, the institutions w ere required to submit letters of credit to the DOE in the amount of $2.0 million with an expiration date of December 31, 2009 based on the composite score review for December 31, 2007. Based on the composite score review for December 31, 2008, the DOE subsequently required the institutions to increase the letter of credit to approximately $2.9 million to reflect the increase of Title IV participation during 2008.  The letter of credit was posted as of December 31, 2009 with an expiration date of December 31, 2010.  We expect that once we file our 2009 consolidated financial statements with the DOE, which we believe reflects a composite score of 2.0 that the requirement for the letter of credit will be vacated, but this outcome remains subject to DOE review.
 
Return of Title IV Funds.    An institution participating in Title IV Programs must calculate the amount of unearned Title IV Program funds that have been disbursed to students who withdraw from their educational programs before completing them, and must return those unearned funds to the DOE or the applicable lending institution in a timely manner, which is generally within 45 days from the date the institution determines that the student has withdrawn.

 
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If an institution is cited in an audit or program review for returning Title IV Program funds late for 5% or more of the students in the audit or program review sample, the institution must post a letter of credit in favor of the DOE in an amount equal to 25% of the total amount of Title IV Program funds that should have been returned for students who withdrew in the institution's previous fiscal year.  None of our institutions are currently required to submit a letter of credit to the DOE based on late return of Title IV funds.
 
School Acquisitions.    When a company acquires a school that is eligible to participate in Title IV Programs, that school undergoes a change of ownership resulting in a change of control as defined by the DOE. Upon such a change of control, a school's eligibility to participate in Title IV Programs is generally suspended until it has applied for recertification by the DOE as an eligible school under its new ownership, which requires that the school also re-establish its state authorization and accreditation. The DOE may temporarily and provisionally certify an institution seeking approval of a change of control under certain circumstances while the DOE reviews the institution's application. The time required for the DOE to act on such an appli cation may vary substantially. DOE recertification of an institution following a change of control will be on a provisional basis. Our expansion plans are based, in part, on our ability to acquire additional schools and have them certified by the DOE to participate in Title IV Programs. Our expansion plans take into account the approval requirements of the DOE and the relevant state education agencies and accrediting commissions.

 Change of Control.  In addition to school acquisitions, other types of transactions can also cause a change of control. The DOE, most state education agencies and our accrediting commissions have standards pertaining to the change of control of schools, but these standards are not uniform. DOE regulations describe some transactions that constitute a change of control, including the transfer of a controlling interest in the voting stock of an institution or the institution's parent corporation. For a publicly traded corporation, DOE regulations provide that a change of control occurs in one of two ways: (a) if a person acquires ownership and control of the corporatio n so that the corporation is required to file a Current Report on Form 8-K with the Securities and Exchange Commission disclosing the change of control or (b) if the corporation has a shareholder that owns at least 25% of the total outstanding voting stock of the corporation and is the largest shareholder of the corporation, and that shareholder ceases to own at least 25% of such stock or ceases to be the largest shareholder.  These standards are subject to interpretation by the DOE. In the event that the largest shareholder’s interest falls below 25%, it will result in a change of ownership as defined by ACCSC (15 Campuses) standards as well as defined by Title IV regulations (all campuses) and would require approval, and advance approval in some cases, by these and any other agencies that deem the transaction to constitute a change of control.

A significant purchase or disposition of our common stock could be determined by the DOE to be a change of control under this standard. Most of the states and our accrediting commissions include the sale of a controlling interest of common stock in the definition of a change of control although some agencies could determine that the sale or disposition of a smaller interest would result in a change of control. A change of control under the definition of one of these agencies would require the affected school to reaffirm its state authorization or accreditation. Some agencies would require approval prior to a sale or disposition that would result in a change of control in order to maintain authorization or accreditation.  The requirements to obtain such reaffirmation from the states and our accrediting commissions vary widely.
 
A change of control could occur as a result of future transactions in which our company or schools are involved. Some corporate reorganizations and some changes in the board of directors are examples of such transactions. Moreover, the potential adverse effects of a change of control could influence future decisions by us and our stockholders regarding the sale, purchase, transfer, issuance or redemption of our stock. In addition, the adverse regulatory effect of a change of control also could discourage bids for your shares of common stock and could have an adverse effect on the market price of our shares.
 
Opening Additional Schools and Adding Educational Programs.    For-profit educational institutions must be authorized by their state education agencies and be fully operational for two years before applying to the DOE to participate in Title IV Programs. However, an institution that is certified to participate in Title IV Programs may establish an additional location and apply to participate in Title IV Programs at that location without reference to the two-year requirement, if such additional location satisfies all other applicable DOE eligibility requirements. Our expansion plans are based, in part, on our ability to open new schools as additional locations of our existing institutions and take into account the DOE's approval requirements.
 
A student may use Title IV Program funds only to pay the costs associated with enrollment in an eligible educational program offered by an institution participating in Title IV Programs. Generally, an institution that is eligible to participate in Title IV Programs may add a new educational program without DOE approval if that new program leads to an associate’s level or higher degree and the institution already offers programs at that level, or if that program prepares students for gainful employment in the same or a related occupation as an educational program that has previously been designated as an eligible program at that institution and meets minimum length requirements. If an institution erroneously determines that an educational program is eligible for purposes of Title IV Programs, the institution would likely be liable fo r repayment of Title IV Program funds provided to students in that educational program. Our expansion plans are based, in part, on our ability to add new educational programs at our existing schools. We do not believe that current DOE regulations will create significant obstacles to our plans to add new programs.
 
Some of the state education agencies and our accrediting commission also have requirements that may affect our schools' ability to open a new campus, establish an additional location of an existing institution or begin offering a new educational program. Any institution required to submit retention data to the ACICS may be required to obtain prior permission from the ACICS for the initiation of any new program or new branch campus or learning site. We do not believe that these standards will create significant obstacles to our expansion plans.

 
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Administrative Capability.    The DOE assesses the administrative capability of each institution that participates in Title IV Programs under a series of separate standards. Failure to satisfy any of the standards may lead the DOE to find the institution ineligible to participate in Title IV Programs or to place the institution on provisional certification as a condition of its participation. These criteria require, among other things, that the institution:
 
 
·
Comply with all applicable federal student financial aid regulations;
 
·
Have capable and sufficient personnel to administer the federal student financial aid programs;
 
·
Administer Title IV programs with adequate checks and balances in its system of internal controls over financial reporting;
 
·
Divides the function of authorizing and disbursing or delivering Title IV Program Funds so that no office has the responsibility for both functions;
 
·
Establish and maintain records required under the Title IV regulations;
 
·
Develop and apply an adequate system to identify and resolve discrepancies in information from sources regarding a student’s application for financial aid under Title IV;
 
·
Have acceptable methods of defining and measuring the satisfactory academic progress of its students;
 
·
Refer to the Office of the Inspector General any credible information indicating that any applicant, student, employee or agent of the school has been engaged in any fraud or other illegal conduct involving Title IV Programs;
 
·
Not be, and not have any principal or affiliate who is, debarred or suspended from federal contracting or engaging in activity that is cause for debarment or suspension;
 
·
Provide financial aid counseling to its students;
 
·
Submit in a timely manner all reports and financial statements required by the regulations; and
 
·
Not otherwise appear to lack administrative capability.

Failure by an institution to satisfy any of these or other administrative capability criteria could cause the institution to lose its eligibility to participate in Title IV Programs, which would have a material adverse effect on our business and results of operations.

Other standards provide that an institution may be found to lack administrative capability and be placed on provisional certification if its student loan default rate under the Federal Family Education Loan program is 25% or greater for any of the three most recent federal fiscal years, or if its Perkins cohort default rate exceeds 15%. None of our institutions had a Federal Family Education Loan cohort default rate above 25% for any of the three most recent fiscal years for which the DOE has published official rates. Denver and NETI are our only institutions participating in the Perkins program. Denver's cohort default rate was 30.4% for students scheduled to begin repayment in the 2008-2009 federal award year. The DOE did not provide any additional Federal Capital Contribution Funds for Perkins loans to Denver.  Denver continu es to make loans out of its existing Perkins loan fund. As was the case prior to our acquisition of NETI, the institution remains provisionally certified by the DOE based on its change in ownership and on a finding by the DOE prior to the change in ownership that NETI had not transmitted certain data related to the Perkins program to the National Student Loan Data System during periods prior to the acquisition. NETI 's cohort default rate was 19.0% for students scheduled to begin repayment in the 2008-2009 federal award year.
 
Ability to Benefit Regulations.    Under certain circumstances, an institution may elect to admit non-high school graduates, or "ability to benefit," students, into certain of its programs of study. In order for ability to benefit students to be eligible for Title IV Program participation, the institution must comply with the ability to benefit requirements set forth in the Title IV Program requirements. The basic evaluation method to determine that a student has the ability to benefit from the program is the student's achievement of a minimum score on a test approved by the DOE and independently administered in accordance with DOE regulations. The HEOA provisions also permit students to demonstrate their ability to benefit and become eligible to receive Title IV funds upon satisfactory completion of six credit hours or the equivalent coursework. In addition to the testing requirements, the DOE regulations also prohibit ability to benefit student enrollments from constituting 50% or more of the total enrollment of the institution. In 2009, the following schools were authorized to enroll “ability to benefit” applicants: Southwestern College, New Britain, Cromwell, Shelton, Hamden, Union, Mahwah, Indianapolis, Melrose Park, Grand Prairie, Somerville, Denver, West Palm Beach, Center City Philadelphia, Northeast Philadelphia, Paramus, Mt. Laurel, Marietta, Lowell, Edison, Brockton, Allentown Summerlin, Hartford, Suffield, Fern Park, St. Petersberg, BRI and South Plainfield.
 
Restrictions on Payment of Commissions, Bonuses and Other Incentive Payments.    An institution participating in Title IV Programs may not provide any commission, bonus or other incentive payment based directly or indirectly on success in securing enrollments or financial aid to any person or entity engaged in any student recruiting or admission activities or in making decisions regarding the awarding of Title IV Program funds. In November 2002, the DOE published new regulations which attempt to clarify the "incentive compensation rule." Failure to comply with the incentive compensation rule could result in loss of ability to participate in Title IV Programs or in fines or liabilities. We believe that our current compensation plans are in compl iance with the Higher Education Act and the DOE's new regulations, although we cannot assure you that the DOE will not find deficiencies in our compensation plans.  The DOE is in the process of considering amendments to the incentive compensation rule.  See “Regulatory Environment – DOE Development of New Regulations.”

 
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Eligibility and Certification Procedures.    Each institution must periodically apply to the DOE for continued certification to participate in Title IV Programs. The institution must also apply for recertification when it undergoes a change in ownership resulting in a change of control. The institution also may come under DOE review when it undergoes a substantive change that requires the submission of an application, such as opening an additional location or raising the highest academic credential it offers.
 
The DOE may place an institution on provisional certification status if it determines that the institution does not fully satisfy certain administrative and financial standards or if the institution undergoes a change in ownership resulting in a change of control. The DOE may withdraw an institution's provisional certification with the institution having fewer due process protections than if it were fully certified. In addition, the DOE may more closely review an institution that is provisionally certified if it applies for approval to open a new location, add an educational program, acquire another school or make any other significant change. Provisional certification does not otherwise limit an institution's access to Title IV Program funds.
 
Our acquisitions of BRI and of the BAR resulted in a change in ownership of such schools requiring each of those schools and their campuses to reapply for eligibility to participate in the Title IV programs and for approvals from their accrediting and state licensing agencies. BRI and each of the BAR schools have each received a Provisional Program Participation Agreement from the DOE following completion of the DOE’s review of the change in ownership, and have received approval of the change in ownership from their accrediting agencies and from their state licensing agencies.

All institutions are recertified on various dates for various amounts of time.  The following table sets forth the expiration dates for each of our institutions' current program participation agreement as of December 31, 2009:
 
Institution
 
Expiration Date of Current Program Participation Agreement
Allentown, PA
 
March 31, 2014
Columbia, MD
 
June 30, 2013
Philadelphia, PA
 
December 31, 2013
Denver, CO
 
September 30, 2012*
Lincoln, RI
 
March 31, 2014
Nashville, TN
 
March 31, 2014
Somerville, MA
 
March 31, 2014
Edison, NJ
 
June 30, 2011
Union, NJ
 
June 30, 2011
Grand Prairie, TX
 
December 31, 2014
Indianapolis, IN
 
December 31, 2014
Melrose Park, IL
 
December 31, 2014
Dayton, OH
 
March 31, 2014
New Britain, CT
 
September 30, 2013*
West Palm Beach, FL
 
June 30, 2010*
Southington, CT
 
September 30, 2011*
East Windsor, CT
 
June 30, 2012*
Suffield, CT
 
June 30, 2012*
Fern Park, FL
 
June 30, 2012*
South Plainfield, NJ
 
June 30, 2012*
Hartford, CT
 
June 30, 2012*

* Provisionally certified
 
Compliance with Regulatory Standards and Effect of Regulatory Violations.    Our schools are subject to audits, program reviews, and site visits by various regulatory agencies, including the DOE, the DOE's Office of Inspector General, state education agencies, student loan guaranty agencies, the U.S. Department of Veterans Affairs and our accrediting commissions. In addition, each of our institutions must retain an independent certified public accountant to conduct an annual audit of the institution's administration of Title IV Program funds. The institution must submit the resulting audit report to the DOE for review.

BRI self-reported a matter of potential regulatory non-compliance to the DOE regarding the eligibility of certain students to receive Title IV funds for their enrollment in certain educational programs. The institution received a letter from the DOE requesting that the school provide a list of all students who attended the program and the total amount of their Title IV disbursements. The DOE informed us in November 2009 that the total liability due to the DOE as a result of this letter is approximately $290,000.  We have notified the prior owners of the results and recovered $205,000 of the amount under the escrow and indemnity arrangement in the related purchase agreement.

 
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In December 2009, the DOE performed its new Compliance Assurance Program Review at BRI.  The review assessed BRI’s administration of Title IV programs during the period from July 1, 2008 through June 30, 2009.  The review has been completed and the exit interview conducted by the DOE revealed several minor concerns.  BRI is waiting for a formal report from the DOE with its findings and recommendations.
 
If one of our schools failed to comply with accrediting or state licensing requirements, such school and its main and/or branch campuses could be subject to the loss of state licensure or accreditation, which in turn could result in a loss of eligibility to participate in Title IV Programs. If the DOE determined that one of our institutions improperly disbursed Title IV Program funds or violated a provision of the Higher Education Act or DOE regulations, the institution could be required to repay such funds and related costs to the DOE and lenders, and could be assessed an administrative fine. The DOE could also place the institution on provisional certification and/or transfer the institution to the reimbursement or cash monitoring system of receiving Title IV Program funds, under which an institution must disburse its own funds to stude nts and document the students' eligibility for Title IV Program funds before receiving such funds from the DOE.  An institution that is operating under this "Heightened Cash Monitoring, Type 1 status," is required to credit student accounts before drawing down funds under Title IV Programs and to draw down funds in an amount no greater than the previous disbursement to students and parents. Additionally, an institution's compliance audit is required to contain verification that this did occur throughout the year. In addition to the above, the DOE requires institutions to comply with certain requirements if they are operating in "the zone," which is indicative of a composite score between 1.0 and 1.4. Those requirements include providing timely information regarding any of the following oversight and financial events:
 
 
·
Any adverse action, including a probation or similar action, taken against the institution by its accrediting agency;
 
·
Any event that causes the institution, or related entity to realize any liability that was noted as a contingent liability in the institution's or related entity's most recent audit financial statement;
 
·
Any violation by the institution of any loan agreement;
 
·
Any failure of the institution to make a payment in accordance with its debt obligations that results in a creditor filing suit to recover funds under those obligations;
 
·
Any withdrawal of owner's equity from institution by any means, including declaring a dividend; or
 
·
Any extraordinary losses, as defined in accordance with Accounting Principles Board Opinion No. 30.

Operating under the zone requirements may also require the institution to submit its financial statement and compliance audits earlier than the date previously required and require the institution to provide information about its current operations and future plans. An institution that continues to fail to meet the financial responsibility standards set by the DOE or does not comply with the zone requirements may lose its eligibility to continue to participate in Title IV funding.  If eligibility is lost, the institution may be required to post irrevocable letters of credit, for an amount determined by the DOE at a minimum of 50% of the Title IV Program funds received by the institution during its most recently completed fiscal year. The institution may also be required to post irrevocable letters of credit at a minimum of 10% o f such funds and be provisionally certified and subject to other reporting and monitoring requirements.
 
Significant violations of Title IV Program requirements by us or any of our institutions could be the basis for a proceeding by the DOE to limit, suspend or terminate the participation of the affected institution in Title IV Programs or to civil or criminal penalties. Generally, such a termination extends for 18 months before the institution may apply for reinstatement of its participation. There is no DOE proceeding pending to fine any of our institutions or to limit, suspend or terminate any of our institutions' participation in Title IV Programs.
 
We and our schools are also subject to complaints and lawsuits relating to regulatory compliance brought not only by our regulatory agencies, but also by third parties, such as present or former students or employees and other members of the public. If we are unable to successfully resolve or defend against any such complaint or lawsuit, we may be required to pay money damages or be subject to fines, limitations, loss of federal funding, injunctions or other penalties. Moreover, even if we successfully resolve or defend against any such complaint or lawsuit, we may have to devote significant financial and management resources in order to reach such a result.
 
Lenders and Guaranty Agencies.    In 2009, six lenders provided funding to more than 90% of the students at the schools we owned during that year: Sallie Mae Education Trust, AMS Trust, Fifth Third Bank, Student Funding Group, Federal Direct Student Loans, and Nelnet. While we believe that other lenders might be willing to make federally guaranteed student loans to our students if loans were no longer available from our current lenders, there can be no assurances in this regard. In addition, the Higher Education Act requires the establishment of lenders of last resort in every state to ensure that loans are available to students at any school that cannot otherwise identify lenders willing to make federally guaranteed loans to its students.
 
Our primary guarantors for Title IV loans are USA Group, a subsidiary of Sallie Mae, and New Jersey Higher Education Assistance Authority, an independent agency of the State of New Jersey. These two agencies currently guarantee a majority of the federally guaranteed student loans made to students enrolled at our schools. There are six other guaranty agencies that guarantee student loans made to students enrolled at our schools. We believe that other guaranty agencies would be willing to guarantee loans to our students if any of the guaranty agencies ceased guaranteeing those loans or reduced the volume of loans they guarantee, although there can be no assurances in this regard.

 
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Item 1A.
RISK FACTORS

The following risk factors and other information included in this Form 10-K should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently believe are not material may also adversely affect our business, financial condition, operating results, cash flows and prospects.
 
RISKS RELATED TO OUR INDUSTRY
 
Failure of our schools to comply with the extensive regulatory requirements for school operations could result in financial penalties, restrictions on our operations and loss of external financial aid funding, which could affect our revenues and impose significant operating restrictions on us.
 
Our schools are subject to extensive regulation by federal and state governmental agencies and by accrediting commissions. In particular, the Higher Education Act of 1965, as amended, and the regulations promulgated thereunder by the DOE, set forth numerous standards that our schools must satisfy to participate in various federal student financial assistance programs under Title IV Programs. In 2009, we derived approximately 81% of our revenues, calculated based on cash receipts, from Title IV Programs. To participate in Title IV Programs, each of our schools must receive and maintain authorization by the applicable education agencies in the state in which each school is physically located, be accredited by an accrediting commission recognized by the DOE and be certified as an eligible institution by the DOE. These regulatory requirements cover the vast majority of our operations, including our educational programs, facilities, instructional and administrative staff, administrative procedures, marketing, recruiting, student performances and outcomes, financial operations and financial condition. These regulatory requirements also affect our ability to acquire or open additional schools, add new educational programs, expand existing educational programs, and change our corporate structure and ownership.
 
If any of our schools fails to comply with applicable regulatory requirements, the school and its related main campus and/or additional locations could be subject to the loss of state licensure or accreditation, the loss of eligibility to participate in and receive funds under the Title IV Programs, the loss of the ability to grant degrees, diplomas and certificates, provisional certification, or the imposition of liabilities or monetary penalties, each of which could adversely affect our revenues and impose significant operating restrictions upon us. In addition, the loss by any of our schools of its accreditation, its state authorization or license, or its eligibility to participate in Title IV Programs constitutes an event of default under our credit agreement, which we and our subsidiaries entered into with a syndicate of banks on Dec ember 1, 2009. An event of default on our credit agreement could result in the acceleration of all amounts then outstanding under our credit agreement. The various regulatory agencies periodically revise their requirements and modify their interpretations of existing requirements and restrictions. We cannot predict with certainty how any of these regulatory requirements will be applied or whether each of our schools will be able to comply with these requirements or any additional requirements instituted in the future.
 
If we or our eligible institutions do not meet the financial responsibility standards prescribed by the DOE, as is the case with some of our institutions, we may be required to post letters of credit or our eligibility to participate in Title IV Programs could be terminated or limited, which could significantly reduce our student population and revenues.
 
To participate in Title IV Programs, an eligible institution must satisfy specific measures of financial responsibility prescribed by the DOE or post a letter of credit in favor of the DOE and possibly accept other conditions on its participation in Title IV Programs.  Any obligation to post one or more letters of credit would increase our costs of regulatory compliance.  Our inability to obtain a required letter of credit or limitations on, or termination of, our participation in Title IV Programs could limit our students' access to various government-sponsored student financial aid programs, which could significantly reduce our student population and revenues.
 
Each year, based on the financial information submitted by an eligible institution that participates in Title IV Programs, the DOE calculates three financial ratios for the institution: an equity ratio, a primary reserve ratio and a net income ratio. Each of these ratios is scored separately and then combined into a composite score to measure the institution's financial responsibility. If the composite score for an institution falls below thresholds established by the DOE, the DOE could place the institution on provisional certification and/or transfer the institution to the reimbursement or cash monitoring system of receiving Title IV Program funds, under which an institution must disburse its own funds to students and document the student's eligibility for Title IV Program funds before receiving such funds from the DOE.  If an institution has a composite score between 1.0 and 1.4, the institution will be required to operate under "Heightened Cash Monitoring, Type 1 status."  If an institution's composite score is below 1.0, the institution is considered by the DOE to lack financial responsibility and, as a condition of Title IV Program participation, the institution may be required to, among other things, post a letter of credit in an amount of at least 10 to 50 percent of the institution's annual Title IV Program participation for its most recent fiscal year.  Certain of our institutions currently do not comply with DOE financial responsibility requirements.  See “Regulatory Environment – Financial Responsibility Standards.”

 
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Based on our calculations, our 2009 and 2008 consolidated financial statements reflect a composite score for the Company of 2.0 and 1.8, respectively.
 
If we fail to demonstrate "administrative capability" to the DOE, our business could suffer.
 
DOE regulations specify extensive criteria an institution must satisfy to establish that it has the requisite "administrative capability" to participate in Title IV Programs. These criteria require, among other things, that the institution:
 
·
Comply with all applicable Title IV regulations;
 
·
Have capable and sufficient personnel to administer Title IV Programs;
 
·
Administer the Title IV Programs with adequate checks and balance in its system of internal controls over financial reporting;
 
·
Divide the function of authorizing and disbursing or delivering Title IV Program Funds so that no office has the responsibility for both functions;
 
·
Establish and maintain records required under the Title IV regulations;
 
·
Develop and apply an adequate system to identify and resolve discrepancies in information from sources regarding a student’s application for financial aid under Title IV;
 
·
Have acceptable methods of defining and measuring the satisfactory academic progress of its students;
 
·
Refer to the Office of the Inspector General any credible information indicating that any applicant, student, employee or agent of the school has been engaged in any fraud or other illegal conduct involving Title IV Programs;
 
·
Not be, and not have any principal or affiliate who is, debarred or suspended from federal contracting or engaging in activity that is cause for debarment or suspension;
 
·
Provide financial aid counseling to its students; and
 
·
Submit in a timely manner all reports and financial statements required by the regulations.

If an institution fails to satisfy any of these criteria or any other DOE regulation, the DOE may:
 
·
Require the repayment of Title IV funds;
 
·
Impose a less favorable payment system for the institution's receipt of Title IV funds;
 
·
Place the institution on provisional certification status; or
 
·
Commence a proceeding to impose a fine or to limit, suspend or terminate the participation of the institution in Title IV Programs.

If we are found not to have satisfied the DOE's "administrative capability" requirements, one or more of our institutions, including its additional locations, could be limited in its access to, or lose, Title IV Program funding. A decrease in Title IV funding could adversely affect our revenues, as we received approximately 81% of our revenues (calculated based on cash receipts) from Title IV Programs in 2009.
 
We are subject to fines and other sanctions if we pay impermissible commissions, bonuses or other incentive payments to individuals involved in certain recruiting, admissions or financial aid activities, which could increase our cost of regulatory compliance and adversely affect our results of operations.
 
A school participating in Title IV Programs may not provide any commission, bonus or other incentive payment based on directly or indirectly on success in enrolling students or securing financial aid to any person involved in any student recruiting or admission activities or in making decisions regarding the awarding of Title IV Program funds. The law and regulations governing this requirement do not establish clear criteria for compliance in all circumstances. If we are found to have violated this law, we could be fined or otherwise sanctioned by the DOE or we could face litigation filed under the qui tam provisions of the Federal False Claims Act.
 
If we were involved in conflicts of interest with student loan lenders, we could be subject to penalties and otherwise suffer adverse impacts on our business.
 
The New York Attorney General, several other attorneys-general, the United States Senate and House of Representatives Education Committees, and the DOE have all launched investigations of potential conflicts of interest between university officials and various private lending organizations that provide student loans.  Several universities and lending organizations agreed to pay fines to settle claims in this regard.  In addition, several financial aid officials at other universities were suspended or placed on leaves of absence.  While no allegations were raised concerning our institutions, we received general requests for information from the offices of two state attorneys-general in 2007.  We have no reason to believe that any of our employees have engaged in improper conduct in this regard.   If any such impropriety were found, we could be subject to penalties and other adverse consequences.

If our schools do not maintain their state authorizations and their accreditation, they may not participate in Title IV Programs, which could adversely affect our student population and revenues.
 
An institution that grants degrees, diplomas or certificates must be authorized by the appropriate education agency of the state in which it is located and, in some cases, other states. Requirements for authorization vary substantially among states. The school must be authorized by each state in which it is physically located in order for its students to be eligible for funding under Title IV Programs. Loss of state authorization by any of our schools from the education agency of the state in which the school is located would end that school's eligibility to participate in Title IV Programs and could cause us to close the school.

 
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A school must be accredited by an accrediting commission recognized by the DOE in order to participate in Title IV Programs. Accreditation is a non-governmental process through which an institution submits to qualitative review by an organization of peer institutions, based on the standards of the accrediting agency and the stated aims and purposes of the institution, including achieving and maintaining stringent retention, completion and placement outcomes. Certain states require institutions to maintain accreditation as a condition of continued authorization to grant degrees. The Higher Education Act requires accrediting commissions recognized by the DOE to review and monitor many aspects of an institution's operations and to take appropriate disciplinary action when the institution fails to comply with the accrediting agency's standard s. Loss of accreditation by any of our main campuses would result in the termination of eligibility of that school and all of its branch campuses to participate in Title IV Programs and could cause us to close the school and its branches.

Our institutions would lose eligibility to participate in Title IV Programs if the percentage of their revenues derived from those programs were too high, which could reduce our student population and revenues.
 
Under the HEA reauthorization, a proprietary institution that derives more than 90% of its total revenue from the Title IV programs for two consecutive fiscal years becomes immediately ineligible to participate in the Title IV programs and may not reapply for eligibility until the end of two fiscal years.  An institution with revenues exceeding 90% for a single fiscal year ending after August 14, 2008, will be placed on provisional certification and may be subject to other enforcement measures.  Under prior law, an institution would immediately lose its eligibility to participate in Title IV Programs if it derived more than 90% of its revenues (calculated based on cash receipts) from those programs in any fiscal year as calculated in accordance with DOE regulations and would be ineligible to apply to regain its eligibi lity until the following fiscal year. Based on our calculations, none of our institutions received more than 90% of its revenues in fiscal year 2009, and our institution with the highest percentage received approximately 88.5% of its revenues, from Title IV Programs. If one of our institutions violated the 90/10 Rule and became ineligible to participate in Title IV Programs but continued to disburse Title IV Program funds, the DOE would require the institution to repay all title IV Program funds received by the institution after the effective date of the loss of eligibility. If any of our institutions loses eligibility to participate in Title IV Programs, that loss would cause an event of default under our credit agreement, which could result in the acceleration of any indebtedness then outstanding under our credit agreement, and would also adversely affect our students' access to various government-sponsored student financial aid programs, which could reduce our student population and revenues. These calcul ations are required to be made based on cash receipts and in accordance with rules prescribed under the HEA and DOE regulations.
 
Our institutions would lose eligibility to participate in Title IV Programs if their former students defaulted on repayment of their federal student loans in excess of specified levels, which could reduce our student population and revenues.
 
An institution of higher education, such as each of our institutions, loses its eligibility to participate in some or all Title IV Programs if its former students default on the repayment of their federal student loans in excess of specified levels. If any of our institutions exceeds the specified levels based on official student loan default rates published by the DOE, it will lose eligibility to participate in some or all Title IV Programs. That loss would adversely affect our students' access to various government-sponsored student financial aid programs, which could reduce our student population and revenues.
 
We are subject to sanctions if we fail to correctly calculate and timely return Title IV Program funds for students who withdraw before completing their educational program, which could increase our cost of regulatory compliance and decrease our profit margin.
 
An institution participating in Title IV Programs must correctly calculate the amount of unearned Title IV Program funds that have been credited to students who withdraw from their educational programs before completing them and must return those unearned funds in a timely manner, generally within 45 days of the date the institution determines that the student has withdrawn. If the unearned funds are not properly calculated and timely returned, we may have to post a letter of credit in favor of the DOE or may be otherwise sanctioned by the DOE, which could increase our cost of regulatory compliance and adversely affect our results of operations.
 
If regulators do not approve our acquisition of a school that participates in Title IV Programs, the acquired school would no longer be permitted to participate in Title IV Programs, which could impair our ability to operate the acquired school as planned or to realize the anticipated benefits from the acquisition of that school.
 
If we acquire a school that participates in Title IV Programs, we must obtain approval from the DOE and applicable state education agencies and accrediting commissions in order for the school to be able to continue operating and participating in Title IV Programs. An acquisition can result in the temporary suspension of the acquired school's participation in Title IV Programs unless we submit to the DOE a timely and materially complete application for recertification and the DOE issues a temporary provisional program participation agreement. If we were unable to timely re-establish the state authorization, accreditation or DOE certification of the acquired school, our ability to operate the acquired school as planned or to realize the anticipated benefits from the acquisition of that school could be impaired.

 
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Issuance or sales of a substantial amount of our common stock could result in a change in control of our schools, which could require any affected schools to reaffirm their DOE approvals, state authorizations and accreditations and their ability to participate in Title IV Programs.
 
A significant issuance or disposition of our common stock could result in a change in control under the standards of the DOE and applicable state education agencies and accrediting commissions. The DOE, most state education agencies and our accrediting commissions have standards pertaining to the change in control of schools, which are not uniform and are subject to interpretation by these respective agencies. A change in control under the definition of one of these agencies would require the affected school to reaffirm the applicable DOE approval, state authorization or accreditation. Each school that undergoes a change in control under the standards of the DOE must apply for recertification for continued ability to participate in Title IV Programs. Some agencies would require approval prior to an issuance or disposition that would resul t in a change in control in order to maintain authorization or accreditation. The requirements to obtain such reaffirmation from the states and our accrediting commissions vary widely.
 
DOE regulations describe some transactions that constitute a change in control, including the transfer of a controlling interest in the voting stock of an institution or the institution’s parent corporation. For a publicly traded corporation, DOE regulations provide that a change in ownership resulting in a change of control occurs in one of two ways: (a) if a person acquires ownership and control of the corporation so that the corporation is required to file a Current Report on Form 8-K with the Securities and Exchange Commission disclosing the change in control or (b) if the corporation has a stockholder that owns at least 25% of the total outstanding voting stock of the corporation and is the largest stockholder of the corporation, and that stockholder ceases to own at least 25% of such stock or ceases to be the largest stockhold er. The DOE regulations state that an institution that undergoes a change in ownership that results in a change in control ceases to qualify as an institution eligible to participate in the Title IV programs upon the change in ownership and control.  However, the DOE regulations provide that the DOE may continue the institution’s participation in the Title IV programs on a provisional basis provided that the institution submits to the DOE a materially complete application (as defined in the DOE regulations) for approval to participate in the Title IV programs no later than 10 business days after the change in ownership occurs.  If a change in ownership occurs, we intend to submit a materially complete application to the DOE for each of our institutions prior to this deadline.
 
If the DOE determines that the institution has submitted a materially complete application, the DOE provides the institution with a Temporary Provisional Program Participation Agreement, or Temporary PPPA, which extends the terms and conditions of the program participation agreement that were in effect for the institution before its change in ownership pending the DOE’s consideration of the institution’s application for approval to participate in the Title IV programs.  The Temporary PPPA expires on the last day of the month following the month in which the change in ownership resulting in a change of control occurred unless the institution provides documentation outlined in the DOE regulations to the DOE on or before that date.  If the Temporary PPPA were to expire, the institution would become ineligible to participate in the Title IV programs until the DOE completed its review of the institution’s application for approval to participate in the Title IV programs.  If the institution provides the DOE with the required documentation, the DOE extends the Temporary PPPA on a month-to-month basis until the DOE completes its review of the application for approval to participate in the Title IV programs and either signs a new provisional program participation agreement with the institution or notifies the institution that its application is denied.  If the DOE denies the application of one or more of our institutions, each of such institutions, including its main campus and all of its additional locations, would be ineligible to participate in the Title IV programs.  As of December 31, 2009, our principal stockholder owned 31.8% of our outstanding common stock.  Future issuances of common stock by us or sales of common stock by our principal stockholder may result in a change in control under any of the DOE or state authorization and accreditation standards.  See A disposition by our principal stockholder of all or a significant portion of its shares of our outstanding stock could impact the market price of our shares and result in a change of control.”  We cannot assure you that each of the aforementioned agencies would approve any application it will or may require in connection with a change in control.
 
Congress may change the law or reduce funding for Title IV Programs, which could reduce our student population, revenues or profit margin.
 
Congress periodically revises the Higher Education Act and other laws governing Title IV HEA Programs and annually determines the funding level for each Title IV Program. On August 14, 2008, the Higher Education Opportunity Act, Public Law 110-315 was enacted. The HEA reauthorized the Title IV programs through at least September 30, 2014.  Any action by Congress that significantly reduces funding for Title IV Programs or the ability of our schools or students to receive funding through those programs could result in increased administrative costs and decreased profit margin.
 
In addition, current requirements for student and school participation in Title IV Programs may change or one or more of the present Title IV Programs could be replaced by other programs with materially different student or school eligibility requirements. If we cannot comply with the provisions of the Higher Education Act, as they may be revised, or if the cost of such compliance is excessive, our revenues or profit margin could be adversely affected.  Congress is currently considering amendments to the HEA.  See “Regulatory Environment - Congressional Action.”

 
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Regulatory agencies or third parties may conduct compliance reviews, bring claims or initiate litigation against us. If the results of these reviews or claims are unfavorable to us, our results of operations and financial condition could be adversely affected.
 
Because we operate in a highly regulated industry, we are subject to compliance reviews and claims of noncompliance and lawsuits by government agencies and third parties. If the results of these reviews or proceedings are unfavorable to us, or if we are unable to defend successfully against third-party lawsuits or claims, we may be required to pay money damages or be subject to fines, limitations on the operations of our business, loss of federal funding, injunctions or other penalties. Even if we adequately address issues raised by an agency review or successfully defend a third-party lawsuit or claim, we may have to divert significant financial and management resources from our ongoing business operations to address issues raised by those reviews or defend those lawsuits or claims.  Certain of our institutions are subject to o ngoing reviews and proceedings.  See “Regulatory Environment – State Authorization,” “Regulatory Environment – Accreditation,” and “Regulatory Environment - Compliance with Regulatory Standards and Effect of Regulatory Violations.

Our failure to comply with regulations promulgated by the DOE could result in financial penalties, or the limitation, suspension, or termination of our continued participation in the Title IV programs.

The issues addressed in the regulations that have been or are expected to be proposed by the DOE, which are described under "Regulatory Environment” in this Annual Report on Form 10-K are broad and complex and address a number of significant aspects of the Title IV programs, including eligibility and certification, administrative capability, school-lender relationships, the 90/10 rule, incentive compensation, student loan default rates and gainful employment.  Failure of an institution to comply with new or existing DOE regulations could result in sanctions, including loss of eligibility to participate in Title IV programs; requirement to repay Title IV funds and related costs to the DOE and lenders; transfer of the institution to the heightened cash monitoring level two method of payment or to the reimbursement method of payment, which would adversely affect the timing of the institution's receipt of Title IV funds; requirement to post a letter of credit in favor of the DOE as a condition for continued Title IV certification; requirement to provide timely information regarding certain oversight and financial events; proceedings to impose a fine or to limit, suspend or terminate the institution's participation in Title IV programs; an emergency action to suspend the institution's participation in Title IV programs without prior notice or a prior opportunity for a hearing; denial or refusal to consider an institution's application for renewal of its certification to participate in Title IV programs; or referral of a matter for possible civil or criminal investigation.

The DOE may change its regulations in a manner which could require us to incur additional costs in connection with our administration of the Title IV programs, affect our ability to remain eligible to participate in the Title IV programs, or otherwise have a material adverse effect on our business and results of operations.
 
The DOE convened two negotiated rulemaking committees in November 2009 with the objective of developing new regulations in the areas of program integrity and foreign schools, respectively.  With respect to program integrity, the DOE released to negotiators on the negotiated rulemaking committee issue papers containing preliminary drafts of proposed regulations for discussion purposes on topics which include the definition of high school diploma for the purpose of establishing institutional eligibility to participate in the Title IV programs and student eligibility to receive Title IV aid, ability to benefit students, misrepresentation of information provided to students and prospective students, incentive compensation, state authorization as a component of institutional eligibility, gainful employment in a recognized occupation, the definition of a credit hour, agreements between institutions of higher education, verification of information included on student aid applications, satisfactory academic progress, monitoring grade point averages, retaking coursework, return of Title IV funds with respect to term-based programs with modules or compressed courses and with respect to taking attendance, and the timeliness and method of disbursements of Title IV funds. The proposed regulations in the issue paper for incentive compensation would eliminate the 12 “safe harbors” established in the current regulations which permit certain types of activities related to the compensation of individuals engaged in student recruiting or admission activities or in making decisions regarding the awarding of Title IV program funds.  The proposed regulations in the issue paper regarding gainful employment would require educational programs to prepare students for “gainful employment” in a recognized occupation, which in cludes all of our educational programs currently offered, to meet a standard under which the average student annual loan repayments cannot exceed eight  percent of a student’s starting annual income  as calculated under a regulatory formula, or that the educational programs meet other alternative thresholds.  The implementation of any of these regulatory changes, or other changes the DOE might propose and implement, could have a materially adverse effect on our business.  However, the proposals presented to the negotiated rulemaking committee are not final regulations, nor do they necessarily represent the final position of the DOE on these subjects, and remain subject to further review and change during the subsequent rulemaking process.  The negotiated rulemaking committee did not reach consensus on all of the proposed regulations, which means that DOE may publish proposed regulations which differ from those presented to the committee.   The DOE is expected to publish proposed regulations later this year which will be subject to public comment and further revision by the DOE before publication of final regulations.  The DOE has stated that its intention is to publish final regulations by November 1, 2010, which would result in a general effective date of July 1, 2011.  We are closely monitoring any policy or regulatory changes resulting from these rulemaking sessions which could materially impact our institutions, our business and results of operations.
 
Our regulatory environment and our reputation may be negatively influenced by the actions of other postsecondary institutions.

In recent years, regulatory investigations and civil litigation have been commenced against several postsecondary educational institutions. These investigations and lawsuits have alleged, among other things, deceptive trade practices and non-compliance with DOE regulations. These allegations have attracted adverse media coverage and have been the subject of federal and state legislative hearings. Although the media, regulatory and legislative focus has been primarily on the allegations made against these specific companies, broader allegations against the overall postsecondary sector may negatively impact public perceptions of postsecondary educational institutions, including us. Such allegations could result in increased scrutiny and regulation by the DOE, U.S. Congress, accrediting bodies, state legislatures or other governmental author ities on all postsecondary institutions, including us.

 
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A decline in the overall growth of enrollment in postsecondary institutions, or in our core disciplines or in the number of students seeking degrees online, could cause us to experience lower enrollment at our schools, which could negatively impact our future growth.

The growth rate of enrollment in degree-granting, postsecondary institutions over the next ten years is expected to be slower than in the prior ten years.  Growth rates of online postsecondary education enrollment are also expected to be slower in future periods. In addition, according to a March 2008 report from the Western Interstate Commission for Higher Education, the number of high school graduates that are eligible to enroll in degree-granting, postsecondary institutions is expected to peak at approximately 3.3 million for the class of 2008, falling in the period between 2007–08 and 2013–14 by about 150,000 in total before resuming a growth pattern for the foreseeable future. Although, as of December 31, 2009, only 23.1 % of our students were enrolled in degree granting programs (primarily at the associate's de gree level), our strategy is to expand our degree granting offerings. In order to increase our current growth rates in degree granting programs, we will need to attract a larger percentage of students in existing markets and expand our markets by creating new academic programs. In addition, if job growth in the fields related to our core disciplines is weaker than expected, as a result of any regional or national economic downturn or otherwise, fewer students may seek the types of diploma or degree granting programs that we offer and seek to offer. Our failure to attract new students, or the decisions by prospective students to seek diploma or degree programs in other disciplines, would have an adverse impact on our future growth.
 
RISKS RELATED TO OUR BUSINESS
 
If we fail to effectively manage our growth, we may incur higher costs and expenses than we anticipate in connection with our growth.
 
We have experienced a period of significant growth since 1999. Our continued growth has strained and may in the future strain our management, operations, employees or other resources. We will need to continue to assess the adequacy of our staff, controls and procedures to meet the demands of our continued growth. We may not be able to maintain or accelerate our current growth rate, effectively manage our expanding operations or achieve planned growth on a timely or profitable basis. If we are unable to manage our growth effectively while maintaining appropriate internal controls, we may experience operating inefficiencies that likely will increase our expected costs.
 
We may not be able to successfully integrate acquisitions into our business, which may materially adversely affect our business, financial condition, results of operations and could cause the market value of our common stock to decline.
   
 Since 1999, we have acquired a number of schools and we intend to continue to grow our business through acquisitions and internal expansion of our programs. The anticipated benefits of an acquisition may not be achieved unless we successfully integrate the acquired school or schools into our operations and are able to effectively manage, market and apply our business strategy to any acquired schools. Integration challenges include, among others, regulatory approvals, significant capital expenditures, assumption of known and unknown liabilities and our ability to control costs. The successful integration of future acquisitions may also require substantial attention from our senior management and the senior management of t he acquired schools, which could decrease the time that they devote to the day-to-day management of our business. The difficulties of integration may initially be increased by the necessity of integrating personnel with disparate business backgrounds and corporate cultures. Management's focus on the integration of acquired schools and on the application of our business strategy to those schools could interrupt or cause loss of momentum in our other ongoing activities.  Our inability to properly manage or support the growth may have a material adverse effect on our business, financial condition, and results of operations and could cause the market value of our common stock to decline.
 
Failure on our part to establish and operate additional schools or campuses or effectively identify suitable expansion opportunities could reduce our ability to implement our growth strategy.
 
As part of our business strategy, we anticipate opening and operating new schools or campuses. Establishing new schools or campuses poses unique challenges and requires us to make investments in management and capital expenditures, incur marketing expenses and devote financial and other resources that are different, and in some cases greater than those required with respect to the operation of acquired schools.
 
To open a new school or campus, we would be required to obtain appropriate state and accrediting commission approvals, which may be conditioned or delayed in a manner that could significantly affect our growth plans. In addition, to be eligible for federal Title IV Program funding, a new school or campus would have to be certified by the DOE and would require federal authorization and approvals. In the case of entirely separate, freestanding U.S. schools, a minimum of two years' operating history is required to be eligible for Title IV Program funding. We cannot be sure that we will be able to identify suitable expansion opportunities to maintain or accelerate our current growth rate or that we will be able to successfully integrate or profitably operate any new schools or campuses. A failure by us to effectively identify suitable expansi on opportunities and to establish and manage the operations of newly established schools or online offerings could slow our growth and make any newly established schools or our online programs unprofitable or more costly to operate than we had planned.

 
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Our success depends in part on our ability to update and expand the content of existing programs and develop new programs in a cost-effective manner and on a timely basis.
 
Prospective employers of our graduates increasingly demand that their entry-level employees possess appropriate technological skills. These skills are becoming more sophisticated in line with technological advancements in the automotive, diesel, information technology, or IT, skilled trades, healthcare industries and hospitality services. Accordingly, educational programs at our schools must keep pace with those technological advancements. The expansion of our existing programs and the development of new programs may not be accepted by our students, prospective employers or the technical education market. Even if we are able to develop acceptable new programs, we may not be able to introduce these new programs as quickly as our competitors or as quickly as employers demand. If we are unable to adequately respond to changes in market requi rements due to financial constraints, unusually rapid technological changes or other factors, our ability to attract and retain students could be impaired, our placement rates could suffer and our revenues could be adversely affected.
 
In addition, if we are unable to adequately anticipate the requirements of the employers we serve, we may offer programs that do not teach skills useful to prospective employers or students seeking a technical or career-oriented education which could affect our placement rates and our ability to attract and retain students, causing our revenues to be adversely affected.
 
Risks specific to our schools’ online campuses could have a material adverse effect on our business.
 
Our schools’ online campuses intend to increase student enrollment, and more resources will be required to support this growth, including additional faculty, admissions, academic, and financial aid personnel. This growth may place a strain on the operational resources of our schools’ online campuses. Our schools’ online campuses’ success depends, in part, on their ability to expand the content of their programs, develop new programs in a cost-effective manner, maintain good standings with their regulators and accreditors, and meet their students’ needs in a timely manner. The expansion of our schools’ online campuses’ existing programs and the development of new programs may not be accepted by their students or the online education market, and new programs could be delayed due to current and futur e unforeseen regulatory restrictions. The performance and reliability of the program infrastructure at our schools’ online campuses is critical to the reputation of these campuses and the campuses ability to attract and retain students. Any computer system error or failure, or a sudden and significant increase in traffic on our computer networks that host our schools’ online campuses, may result in the unavailability of our schools’ online campuses’ computer networks. Individual, sustained, or repeated occurrences could significantly damage the reputation of our schools’ online campuses and result in a loss of potential or existing students. Additionally, our schools’ online campuses’ computer systems and operations are vulnerable to interruption or malfunction due to events beyond our control, including natural disasters and network and telecommunications failures. Any interruption to our schools’ online campuses’ computer systems or operations could hav e a material adverse effect on the ability of our schools’ online campuses to attract and retain students.
 
Our computer networks—either administrative network or those supporting educational programs— may also be vulnerable to unauthorized access, computer hackers, computer viruses, and other security threats. A user who circumvents security measures could misappropriate proprietary information or cause interruptions or malfunctions in our operations. Due to the sensitive nature of the information contained on our networks, such as students’ grades, our networks may be targeted by hackers. As a result, we may be required to expend significant resources to protect against the threat of these security breaches or to alleviate problems caused by these breaches.
 
We may not be able to retain our key personnel or hire and retain the personnel we need to sustain and grow our business.
 
Our success has depended, and will continue to depend, largely on the skills, efforts and motivation of our executive officers who generally have significant experience within the post-secondary education industry. Our success also depends in large part upon our ability to attract and retain highly qualified faculty, school directors, administrators and corporate management. Due to the nature of our business, we face significant competition in the attraction and retention of personnel who possess the skill sets that we seek. In addition, key personnel may leave us and subsequently compete against us. Furthermore, we do not currently carry "key man" life insurance on any of our employees. The loss of the services of any of our key personnel, or our failure to attract and retain other qualified and experienced personnel on acceptable terms, could have an adverse effect on our ability to operate our business efficiently and to execute our growth strategy.
 
If we are unable to hire, retain and continue to develop and train our employees responsible for student recruitment, the effectiveness of our student recruiting efforts would be adversely affected.
 
In order to support revenue growth, we need to hire new employees dedicated to student recruitment and retain and continue to develop and train our current student recruitment personnel. Our ability to develop a strong student recruiting team may be affected by a number of factors, including our ability to integrate and motivate our student recruiters; our ability to effectively train our student recruiters; the length of time it takes new student recruiters to become productive; regulatory restrictions on the method of compensating student recruiters; the competition in hiring and retaining student recruiters; and our ability to effectively manage a multi-location educational organization. If we are unable to hire, develop or retain our student recruiters, the effectiveness of our student recruiting efforts would be adversely affected.

 
28


Competition could decrease our market share and cause us to lower our tuition rates.
 
The post-secondary education market is highly competitive. Our schools compete for students and faculty with traditional public and private two-year and four-year colleges and universities and other proprietary schools, many of which have greater financial resources than we do. Some traditional public and private colleges and universities, as well as other private career-oriented schools, offer programs that may be perceived by students to be similar to ours. Most public institutions are able to charge lower tuition than our schools, due in part to government subsidies and other financial resources not available to for-profit schools. Some of our competitors also have substantially greater financial and other resources than we have which may, among other things, allow our competitors to secure strategic relationships with some or all of o ur existing strategic partners or develop other high profile strategic relationships, or devote more resources to expanding their programs and their school network, or provide greater financing alternatives to their students, all of which could affect the success of our marketing programs. In addition, some of our competitors have a larger network of schools and campuses than we do, enabling them to recruit students more effectively from a wider geographic area. If we are unable to compete effectively with these institutions for students, our student enrollment and revenues will be adversely affected.
 
We may be required to reduce tuition or increase spending in response to competition in order to retain or attract students or pursue new market opportunities. As a result, our market share, revenues and operating margin may be decreased. We cannot be sure that we will be able to compete successfully against current or future competitors or that the competitive pressures we face will not adversely affect our revenues and profitability.
 
We may experience business interruptions resulting from natural disasters, inclement weather, transit disruptions, or other events in one or more of the geographic areas in which we operate.

We may experience business interruptions resulting from natural disasters, inclement weather, transit disruptions, or other events in one or more of the geographic areas in which we operate. These events could cause us to close schools — temporarily or permanently — and could affect student recruiting opportunities in those locations, causing enrollment and revenues to decline.
 
Our financial performance depends in part on our ability to continue to develop awareness and acceptance of our programs among high school graduates and working adults looking to return to school.
 
The awareness of our programs among high school graduates and working adults looking to return to school is critical to the continued acceptance and growth of our programs. Our inability to continue to develop awareness of our programs could reduce our enrollments and impair our ability to increase our revenues or maintain profitability. The following are some of the factors that could prevent us from successfully marketing our programs:
 
 
·
Student dissatisfaction with our programs and services;
 
·
Diminished access to high school student populations;
 
·
Our failure to maintain or expand our brand or other factors related to our marketing or advertising practices; and
 
·
Our inability to maintain relationships with automotive, diesel, healthcare, skilled trades and IT, and hospitality services manufacturers and suppliers.

If students fail to pay their outstanding balances, our profitability will be adversely affected.
 
We offer a variety of payment plans to help students pay the portion of their education expense not covered by financial aid programs. These balances are unsecured and not guaranteed.  As a result of SLM’s tiered discount loan program termination, effective February 18, 2008, our internal gap financing between Title IV and tuition has increased.  Although we have reserved for estimated losses related to unpaid student balances, losses in excess of the amounts we have reserved for bad debts will result in a reduction in our profitability.
 
An increase in interest rates could adversely affect our ability to attract and retain students.
 
Interest rates have reached historical lows in recent years, creating a favorable borrowing environment for our students. Much of the financing our students receive is tied to floating interest rates. Increases in interest rates result in a corresponding increase in the cost to our existing and prospective students of financing their education which could result in a reduction in the number of students attending our schools and could adversely affect our results of operations and revenues. Higher interest rates could also contribute to higher default rates with respect to our students' repayment of their education loans. Higher default rates may in turn adversely impact our eligibility for Title IV Program participation or the willingness of private lenders to make private loan programs available to students who attend our schools, which could result in a reduction in our student population.

 
29


Seasonal and other fluctuations in our results of operations could adversely affect the trading price of our common stock.
 
Our results of operations 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 enrollment, 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 second half growth is largely dependent on a successful recruiting season. Our expenses, however, do not vary significantly over the course of the year with changes in our student population and net revenues. We expect quarterly fluctuations in results of operations to continue as a result of seasonal enrollment patterns. Such patterns may change, however, as a result of acqui sitions, new school openings, new program introductions and increased enrollments of adult students. These fluctuations may result in volatility or have an adverse effect on the market price of our common stock.
 
Our total assets include substantial intangible assets. In the event that our schools do not achieve satisfactory operating results, we may be required to write-off of a significant portion of unamortized intangible assets which would negatively affect our results of operations.
 
Our total assets reflect substantial intangible assets. At December 31, 2009, goodwill and identified intangibles, net, represented approximately 30.9% of total assets. Intangible assets consist of goodwill and other identified intangible assets associated with our acquisitions. On at least an annual basis, we assess whether there has been an impairment in the value of goodwill and other intangible assets with indefinite lives. If the carrying value of the tested asset exceeds its estimated fair value, impairment is deemed to have occurred.  In this event, the amount is written down to fair value.  Under current accounting rules, this would result in a charge to operating earnings. Any determination requiring the write-off of a significant portion of goodwill or unamortized identified intangible assets would negatively affect our results of operations and total capitalization, which could be material.  At December 31, 2009, we tested our goodwill for impairment and determined that an impairment of approximately $215,000 existed for one of our reporting units.
 
We cannot predict our future capital needs, and if we are unable to secure additional financing when needed, our operations and revenues would be adversely affected.
 
We may need to raise additional capital in the future to fund acquisitions, working capital requirements, expand our markets and program offerings or respond to competitive pressures or perceived opportunities. We cannot be sure that additional financing will be available to us on favorable terms, or at all particularly during times of uncertainty in the financial markets similar to that which is currently being experienced. If adequate funds are not available when required or on acceptable terms, we may be forced to forego attractive acquisition opportunities, cease our operations and, even if we are able to continue our operations, our ability to increase student enrollment and revenues would be adversely affected.
 
Our schools' failure to comply with environmental laws and regulations governing our activities could result in financial penalties and other costs which could adversely impact our results of operations.
 
We use hazardous materials at some of our schools and generate small quantities of waste, such as used oil, antifreeze, paint and car batteries. As a result, our schools are subject to a variety of environmental laws and regulations governing, among other things, the use, storage and disposal of solid and hazardous substances and waste, and the clean-up of contamination at our facilities or off-site locations to which we send or have sent waste for disposal. In the event we do not maintain compliance with any of these laws and regulations, or are responsible for a spill or release of hazardous materials, we could incur significant costs for clean-up, damages, and fines or penalties which could adversely impact our results of operations.
 
Approximately 42% of our schools are concentrated in the states of New Jersey, Connecticut and Pennsylvania and a change in the general economic or regulatory conditions in these states could increase our costs and have an adverse effect on our revenues.
 
As of December 31, 2009, we operated 43 campuses in 17 states. 18 of those schools are located in the states of New Jersey, Connecticut and Pennsylvania. As a result of this geographic concentration, any material change in general economic conditions in New Jersey, Connecticut or Pennsylvania could reduce our student enrollment in our schools located in these states and thereby reduce our revenues. In addition, the legislatures in the states of New Jersey, Connecticut and/or Pennsylvania could change the laws in those states or adopt regulations regarding private, for-profit post-secondary coeducation institutions which could place additional burdens on us. If we were unable to comply with any such new legislation, we could be prohibited from operating in those jurisdictions, which could reduce our revenues.

 
30


A substantial decrease in student financing options, or a significant increase in financing costs for our students, could have a material adverse affect on our student population, revenues and financial results.
 
The consumer credit markets in the United States have recently suffered from increases in default rates and foreclosures on mortgages.  Adverse market conditions for consumer and federally guaranteed student loans could result in providers of alternative loans reducing the attractiveness and/or decreasing the availability of alternative loans to post-secondary students, including students with low credit scores who would not otherwise be eligible for credit-based alternative loans. Prospective students may find that these increased financing costs make borrowing prohibitively expensive and abandon or delay enrollment in post-secondary education programs. Private lenders could also require that we pay them new or increased fees in order to provide alternative loans to prospective students. If any of these scenarios were to occur, our students’ ability to finance their education could be adversely affected and our student population could decrease, which could have a material adverse effect on our financial condition, results of operations and cash flows.
 
In 2009, six lenders provided funding to more than 90% of the students at the schools we owned.  In addition, the primary guarantors for the Title IV loans of our students are USA Group, a subsidiary of Sallie Mae, and New Jersey Higher Education Assistance Authority, an independent agency of the State of New Jersey. These two agencies currently guarantee a majority of the federally guaranteed student loans made to students enrolled at our schools. There are six other guaranty agencies that guarantee student loans made to students enrolled at our schools. While we believe that other lenders may be willing to make federally guaranteed student loans to our students if loans were no longer available from our current lenders, and that other guaranty agencies would be willing to guarantee loans to our students if any of the current g uarantee agencies ceased guaranteeing those loans or reduced the volume of loans they guarantee, we cannot assure you that we would be successful in locating alternative lenders or guarantors.  If such alternative lenders or guarantors were not forthcoming, our enrollment and our results of operations could be materially and adversely affected.
 
In February 2008, Sallie Mae terminated its tiered discount loan program with us.  Students who obtained funding through Sallie Mae programs continue to have access to funding either through alternative lenders or through our own internal financing.  However, if we opted to no longer provide financing to our students and/or were unable to obtain other alternative loan providers, our student population could decrease, which could have a material adverse effect on our financial condition, results of operations and cash flows.
 
In addition, any actions by the U.S. Congress that significantly reduce funding for Title IV Programs or the ability of our students to participate in these programs, or establish different or more stringent requirements for our schools to participate in Title IV Programs, could have a material adverse effect on our student population, results of operations and cash flows.

Anti-takeover provisions in our amended and restated certificate of incorporation, our amended and restated bylaws and New Jersey law could discourage a change of control that our stockholders may favor, which could negatively affect our stock price.
 
Provisions in our amended and restated certificate of incorporation and our amended and restated bylaws and applicable provisions of the New Jersey Business Corporation Act may make it more difficult and expensive for a third party to acquire control of us even if a change of control would be beneficial to the interests of our stockholders. These provisions could discourage potential takeover attempts and could adversely affect the market price of our common stock. For example, applicable provisions of the New Jersey Business Corporation Act may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of five years after the person becomes an interested stockholder. Furthermore, our amended and restated certificate of incorporation and amended an d restated bylaws:
 
 
·
Authorize the issuance of blank check preferred stock that could be issued by our board of directors to thwart a takeover attempt;
 
·
Prohibit cumulative voting in the election of directors, which would otherwise allow holders of less than a majority of stock to elect some directors;
 
·
Require super-majority voting to effect amendments to certain provisions of our amended and restated certificate of incorporation;
 
·
Limit who may call special meetings of both the board of directors and stockholders;
 
·
Prohibit stockholder action by non-unanimous written consent and otherwise require all stockholder actions to be taken at a meeting of the stockholders;
 
·
Establish advance notice requirements for nominating candidates for election to the board of directors or for proposing matters that can be acted upon by stockholders at stockholders' meetings; and
 
·
Require that vacancies on the board of directors, including newly created directorships, be filled only by a majority vote of directors then in office.
 
We can issue shares of preferred stock without shareholder approval, which could adversely affect the rights of common stockholders.
 
Our amended and restated certificate of incorporation permits us to establish the rights, privileges, preferences and restrictions, including voting rights, of future series of our preferred stock and to issue such stock without approval from our stockholders. The rights of holders of our common stock may suffer as a result of the rights granted to holders of preferred stock that may be issued in the future. In addition, we could issue preferred stock to prevent a change in control of our company, depriving common stockholders of an opportunity to sell their stock at a price in excess of the prevailing market price.

 
31


Our principal stockholder owns a large percentage of our voting stock which allows it to have significant influence over substantially all matters requiring shareholder approval.
 
Stonington Partners Inc. II, or Stonington, our principal stockholder, directly or indirectly holds approximately 31.8% of our outstanding shares. Accordingly, it has significant influence to determine the outcome of the election of our directors, to amend our certificate of incorporation and bylaws and to take other actions requiring the vote or consent of stockholders, including mergers, going private transactions and other extraordinary transactions, and the terms of any of these transactions. The ownership positions of this stockholder may have the effect of delaying, deterring or preventing a change in control or a change in the composition of our board of directors. In addition, two members of our board of directors are partners of Stonington. As a result, Stonington has an added ability to influence certain matters, such as determi ning compensation of our executive officers.
 
A disposition by our principal stockholder of all or a significant portion of its shares of our outstanding stock could impact the market price of our shares and result in a change of control.

Stonington, our largest stockholder, has in 2009 sold approximately 47.9% of its ownership of our common stock and is currently considering its options with respect to its investment in us, including selling all shares of our outstanding common stock it owns, in one or more transactions, over the next 12 to 24 months. A sale by Stonington of all or a significant portion of its shares of our outstanding common stock, whether to a single buyer, through open market sales or otherwise, could cause the price of our common stock to decline. Such a sale could also result in a change of control under the standards of the DOE and applicable state education agencies and accrediting commissions. See “Business - Change of Control” and “Risk Factors -- Risks Related to Our Industry.”

A protracted economic slowdown and rising unemployment could harm our business if our students are unable to obtain employment upon completion of their programs, are unable to repay student loans or elect not to pursue an education with us.

 We believe that many students pursue postsecondary education to be more competitive in the job market. However, the current economic recession has adversely affected job markets and a protracted economic slowdown could further increase unemployment and diminish job prospects and placement rates. Our placement rates declined in 2008 compared to 2007, and further diminished job prospects and placement rates and heightened financial worries could affect the willingness of students to incur loans to pay for postsecondary education and to pursue postsecondary education in general. As a result, our enrollment and operating performance could suffer. The recent weakness in the job markets could also affect the prospects for long-term job growth, and there can be no assurance that the growth projected by the U.S. Bureau of Labor Statistics t hrough 2016 will materialize.

 In addition, many of our students borrow Title IV loans to pay for tuition, fees and other expenses. A protracted economic slowdown could negatively impact our students' ability to repay those loans which could negatively impact the cohort default rates of our institutions. Our 2006 cohort default rates at our institutions, including BRI and BAR, as reported by the DOE range from 0% to 19.3%. Our 2007 cohort default rates as reported by the DOE range from 0% to 22.9%, and were higher than the 2006 cohort default rates for most of our schools, and the weakness in the economy could continue to increase default rates. For information regarding the historical default rates for our schools, see "Business—Regulatory Environment—Federal Family Education Loan Program" in this Annual Report. An increase in our cohort default rate s in excess of specified levels could cause our institutions to lose their eligibility to participate in some or all Title IV Programs which could have a material adverse effect on our operations. See “Risk Factors – Risks Related to Our Industry.  Our institutions would lose eligibility to participate in Title IV Programs if their former students defaulted on repayment of their federal student loans in excess of specified levels, which could reduce our student population and revenues" in this Annual Report on Form 10-K.

System disruptions to our technology infrastructure could impact our ability to generate revenue and could damage the reputation of our institutions.

The performance and reliability of our technology infrastructure is critical to our reputation and to our ability to attract and retain students. We license the software and related hosting and maintenance services for our online platform and our student information system from third-party software providers. Any system error or failure, or a sudden and significant increase in bandwidth usage, could result in the unavailability of systems to us or our students. Any such system disruptions could impact our ability to generate revenue and affect our ability to access information about our students and could also damage the reputation of our institutions.
 
 
32

 
Although we are no longer a “controlled company” under rules of the Nasdaq Global Select Market, a transition period is allowed before we will be required to fully comply with certain corporate governance requirements applicable to  companies whose stock is quoted on the Nasdaq Global Select Market.
 
Prior to September 30, 2009, we were a “controlled company” under rules of the Nasdaq Global Select Market and availed ourselves of exemptions from certain corporate governance requirements, which provide protection to shareholders of companies whose stock is quoted on the Nasdaq Global Select Market.  Specifically, these corporate governance requirements are:
 
 
a majority of our board of directors must consist of independent directors;
 
 
the compensation of executive officers must be determined, or recommended to our board of directors for determination, either by (a) a majority of the independent directors or (b) a compensation committee comprised solely of independent directors; and
 
 
director nominees must be selected, or recommended for our board of directors’ selection, either by (a) a majority of the independent directors or (b) a nominations committee comprised solely of independent directors.
 
As of September 30, 2009, we ceased to be a “controlled company” and must fully comply with these requirements by September 30, 2010.
 

ITEM 1B.
UNRESOLVED STAFF COMMENTS
 
None.

 
33


ITEM 2.
PROPERTIES
 
As of December 31, 2009, we leased all of our facilities, except for our campuses in West Palm Beach, Florida, Nashville, Tennessee, Grand Prairie, Texas, and Cincinnati (Tri-County), Ohio, all of which we own. Additionally in 2009, we purchased a building in Denver, Colorado which will be occupied by our existing Denver, Colorado school once construction is complete.  Four of our facilities (Union, New Jersey; Allentown, Pennsylvania; Philadelphia, Pennsylvania; and Grand Prairie, Texas) were also accounted for by us under a finance lease obligation. We continue to re-evaluate our facilities to maximize our facility utilization and efficiency and to allow us to introduce new programs and attract more students. As of December 31, 2009, all of our existing leases expire between May 2010 and March 2032.
 
The following table provides information relating to our facilities as of December 31, 2009, including our corporate office:
 
Location
 
Brand
 
Approximate Square Footage
Henderson, Nevada
 
Euphoria Institute
 
20,000
Las Vegas, Nevada
 
Euphoria Institute
 
13,000
North Las Vegas, Nevada
 
Euphoria Institute
 
12,000
Henderson, Nevada
 
Lincoln College of New England
 
7,000
Southington, Connecticut
 
Lincoln College of New England
 
113,000
Suffield, Connecticut
 
Lincoln College of New England
 
132,000
Columbia, Maryland
 
Lincoln College of Technology
 
110,000
Denver, Colorado*
 
Lincoln College of Technology
 
290,000
Grand Prairie, Texas
 
Lincoln College of Technology
 
146,000
Indianapolis, Indiana
 
Lincoln College of Technology
 
189,000
Marietta, Georgia
 
Lincoln College of Technology
 
30,000
Melrose Park, Illinois
 
Lincoln College of Technology
 
88,000
West Palm Beach, Florida
 
Lincoln College of Technology and Lincoln Culinary Institute
 
117,000
Hartford, Connecticut
 
Lincoln Technical Institute
 
367,000
Allentown, Pennsylvania
 
Lincoln Technical Institute
 
26,000
Brockton, Massachusetts
 
Lincoln Technical Institute
 
22,000
Cromwell, Connecticut
 
Lincoln Technical Institute
 
12,000
East Windsor, Connecticut
 
Lincoln Technical Institute
 
323,000
Edison, New Jersey
 
Lincoln Technical Institute
 
64,000
Fern Park, Florida
 
Lincoln Technical Institute
 
46,000
Hamden, Connecticut
 
Lincoln Technical Institute
 
14,000
Lincoln, Rhode Island
 
Lincoln Technical Institute
 
59,000
Lowell, Massachusetts
 
Lincoln Technical Institute
 
21,000
Mahwah, New Jersey
 
Lincoln Technical Institute
 
79,000
Mt. Laurel, New Jersey
 
Lincoln Technical Institute
 
26,000
New Britain, Connecticut
 
Lincoln Technical Institute
 
35,000
Northeast Philadelphia, Pennsylvania
 
Lincoln Technical Institute
 
25,000
Paramus, New Jersey
 
Lincoln Technical Institute
 
30,000
Philadelphia, Pennsylvania
 
Lincoln Technical Institute
 
30,000
Philadelphia, Pennsylvania
 
Lincoln Technical Institute
 
29,000
Queens, New York
 
Lincoln Technical Institute
 
48,000
Shelton, Connecticut
 
Lincoln Technical Institute
 
42,000
Somerville, Massachusetts
 
Lincoln Technical Institute
 
33,000
South Plainfield, New Jersey
 
Lincoln Technical Institute
 
48,000
St. Peterburg, Florida
 
Lincoln Technical Institute
 
13,000
Union, New Jersey
 
Lincoln Technical Institute
 
56,000
Nashville, Tennessee
 
Nashville Auto-Diesel College
 
278,000
Cincinnati (Tri-County), Ohio
 
Southwestern College
 
38,000
Cincinnati, Ohio
 
Southwestern College
 
16,000
Dayton, Ohio
 
Southwestern College
 
19,000
Florence, Kentucky
 
Southwestern College
 
11,000
Franklin, Ohio
 
Southwestern College
 
14,000
Toledo, Ohio
 
Southwestern College
 
16,000
West Orange, New Jersey
 
Corporate Office
 
47,000

*Denver, Colorado includes 212,000 square feet of space which we purchased in December 2009.
We believe that our facilities are suitable for their present intended purposes.

 
34


ITEM 3.
LEGAL PROCEEDINGS
 
In the ordinary conduct of our business, we are subject to periodic lawsuits, investigations and claims, including, but not limited to, claims involving students or graduates and routine employment matters. Although we cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against us, we do not believe that any currently pending legal proceeding to which we are a party will have a material adverse effect on our business, financial condition, results of operation or cash flows.
 
ITEM 4.
RESERVED
 
 
PART II.
 
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Market for our Common Stock
Our common stock is quoted on the Nasdaq Global Select Market under the symbol “LINC”.
 
The following table sets forth the range of high and low sales prices per share for our common stock, as reported by the Nasdaq Global Select Market, for the periods indicated:
 
   
Price Range of Common Stock
 
   
High
   
Low
 
Fiscal Year Ended December 31, 2009
           
First Quarter
  $ 18.32     $ 10.88  
Second Quarter
  $ 20.93     $ 14.49  
Third Quarter
  $ 23.50     $ 18.44  
Fourth Quarter
  $ 24.49     $ 19.66  
                 
   
Price Range of Common Stock
 
   
High
   
Low
 
Fiscal Year Ended December 31, 2008:
               
First Quarter
  $ 14.55     $ 11.62  
Second Quarter
  $ 12.55     $ 10.79  
Third Quarter
  $ 15.64     $ 11.23  
Fourth Quarter
  $ 14.46     $ 10.75  
 
On March 9, 2010, the last reported sale price of our common stock on the Nasdaq Global Select Market was $25.55 per share.  As of March 9, 2010, based on the information provided by Continental Stock Transfer & Trust Company, there were approximately 16 stockholders of record of our common stock.
 
Dividend Policy
We have never declared or paid dividends on our common stock and we do not anticipate declaring or paying dividends on our common stock in the foreseeable future.  Instead, we currently anticipate that we will retain all of our future earnings, if any, to fund the operation and expansion of our business and to use as working capital and for other general corporate purposes.  Our board of directors will determine whether to pay cash dividends in the future based on conditions then existing and the financial responsibility standards prescribed by the DOE, as well as any economic and other conditions that our board of directors may deem relevant.  In addition, our ability to declare and pay dividends is subject to certain restrictions under our existing credit agreement.

 
35


Issuer Purchases of Equity Securities
On December 15, 2009, we entered into a definitive stock repurchase agreement with Back to School Acquisition, L.L.C., or BTS, our principal shareholder, relating to our repurchase of 1,250,000 shares of our common stock owned by BTS at a purchase price of $20.95 per share or an aggregate purchase price of $26.2 million.  The following table outlines repurchases of our common stock during the quarter ended December 31, 2009:

Period
 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased
 
Maximum Number of Shares That May Yet Be Purchased
                 
October 1, 2009 -- October 31, 2009
 
--
 
--
 
--
 
N/A
November 1, 2009 -- November 30, 2009
 
--
 
--
 
--
 
N/A
December 1, 2009 -- December 31, 2009
 
1,250,000
 
$20.95
 
1,250,000
 
N/A
Total
 
1,250,000
 
$20.95
 
1,250,000
 
N/A

 
36


Stock Performance Graph
 
This stock performance graph compares our total cumulative stockholder return on our common stock during the period from June 23, 2005 (the date on which our common stock first traded on the Nasdaq Global Market) through December 31, 2009 with the cumulative return on the Russell 2000 Index and a Peer Issuer Group Index. The peer issuer group consists of the companies identified below, which were selected on the basis of the similar nature of their business. The graph assumes that $100 was invested on June 23, 2005, and any dividends were reinvested on the date on which they were paid.
 
The information provided under the heading "Stock Performance Graph" shall not be considered "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 or incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that we specifically incorporates it by reference into a filing.

 
Companies in the Peer Group include Apollo Group, Inc., Corinthian Colleges, Inc., Career Education Corp., DeVry, Inc., ITT Educational Services, Inc., Strayer Education, Inc. and Universal Technical Institute, Inc.

 
37


Securities Authorized for Issuance under Equity Compensation Plans
   
We have various equity compensation plans under which equity securities are authorized for issuance. Information regarding these securities as of December 31, 2009 is as follows:
 
Plan Category
 
Number of Securities to be issued upon exercise of outstanding options, warrants and rights
   
Weighted-average exercise price of outstanding options, warrants and rights
   
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column
 
Equity compensation plans approved by security holders
    1,183,921     $ 11.74       768,630  
Equity compensation plans not approved by security holders
    -       -       -  
Total
    1,183,921     $ 11.74       768,630  

 
38


ITEM 6.
SELECTED FINANCIAL DATA
 
SELECTED FINANCIAL INFORMATION
 
The following table sets forth our selected historical consolidated financial and operating data as of the dates and for the periods indicated. You should read these data together with Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the notes thereto included in Part II. Item 8 of this filing. The selected historical consolidated statement of income data for each of the years in the three-year period ended December 31, 2009 and historical consolidated balance sheet data at December 31, 2009 and 2008 have been derived from our audited consolidated financial statements which are included elsewhere in this Form 10-K. The selected historical consolidated statements of income data for the fiscal years ended December 31, 2006 and 2005 and historical c onsolidated balance sheet data as of December 31, 2007, 2006 and 2005 have been derived from our audited consolidated financial information not included in this Form 10-K. Our historical results are not necessarily indicative of our future results.
 
   
2009
   
2008
   
2007
   
2006
   
2005
 
   
(In thousands, except per share amounts)
 
                               
Statement of Income Data, Year Ended December 31:
                             
Revenues
  $ 552,536     $ 376,907     $ 327,774     $ 310,630     $ 287,368  
Cost and expenses:
                                       
Educational services and facilities (1)
    211,295       153,530       139,500       129,311       114,161  
Selling, general and administrative
    252,673       187,722       162,396       151,136       138,125  
Loss (gain) on sale of assets
    35       80       (15 )     (435 )     (7 )
Impairment of goodwill
    215       -       -       -       -  
Total costs and expenses
    464,218       341,332       301,881       280,012       252,279  
Operating income
    88,318       35,575       25,893       30,618       35,089  
Other:
                                       
Interest income
    29       113       180       981       775  
Interest expense (2)
    (4,275 )     (2,152 )     (2,341 )     (2,291 )     (2,892 )
Other income (loss)
    35       -       27       (132 )     243  
Income from continuing operations before income taxes
    84,107       33,536       23,759       29,176       33,215  
Provision for income taxes
    34,868       13,341       9,932       12,092       12,931  
Income from continuing operations
    49,239       20,195       13,827       17,084       20,284  
Loss from discontinued operations, net of income taxes
    -       -       (5,487 )     (1,532 )     (1,575 )
Net income
  $ 49,239     $ 20,195     $ 8,340     $ 15,552     $ 18,709  
Basic
                                       
Earnings per share from continuing operations
  $ 1.87     $ 0.80     $ 0.54     $ 0.67     $ 0.86  
Loss per share from discontinued operations
    -       -       (0.21 )     (0.06 )     (0.06 )
Net income per share
  $ 1.87     $ 0.80     $ 0.33     $ 0.61     $ 0.80  
Diluted
                                       
Earnings per share from continuing operations
  $ 1.82     $ 0.78     $ 0.53     $ 0.65     $ 0.83  
Loss per share from discontinued operations
    -       -       (0.21 )     (0.05 )     (0.07 )
Net income per share
  $ 1.82     $ 0.78     $ 0.32     $ 0.60     $ 0.76  
Weighted average number of common shares outstanding:
                                       
Basic
    26,337       25,308       25,479       25,336       23,475  
Diluted
    27,095       25,984       26,090       26,086       24,503  
Other Data:
                                       
Capital expenditures
  $ 24,018     $ 20,166     $ 24,766     $ 19,341     $ 22,621  
Depreciation and amortization from continuing operations
    24,240       17,920       15,111       13,829       12,099  
Number of campuses
    43       36       34       34       31  
Average student population
    27,808       20,006       17,687       17,397       17,064  
Balance Sheet Data, At December 31:
                                       
Cash and cash equivalents
  $ 46,076     $ 15,324     $ 3,502     $ 6,461     $ 50,257  
Working capital (deficit) (3)
    4,494       (19,840 )     (17,952 )     (20,943 )     8,531  
Total assets
    388,368       268,042       246,183       226,216       214,792  
Total debt (4)
    57,328       10,174       15,378       9,860       10,768  
Total stockholders' equity
    218,636       174,949       162,467       151,783       135,990  

 
39


(1)           Selling, general and administrative expenses include (a) a $0.5 million write-off for the year ended December 31, 2005 resulting from our decision not to purchase the site we had considered for expansion of our facility in Philadelphia, Pennsylvania, (b) $0.9 million of re-branding cost for the year ended December 31, 2006, and (c) $1.4 million and $0.9 million of acquisition costs incurred during the year ended December 31, 2009 and 2008, respectively, in connection with the acquisition of BAR which was completed on January 20, 2009.

(2)           Interest expense includes a $0.4 million non-cash charge for the year ended December 31, 2005 resulting from the write-off of deferred finance costs related to our previous credit agreement.

(3)           Working (deficit) capital is defined as current assets less current liabilities.

(4)           Total debt consists of long-term debt including current portion, capital leases, auto loans and a finance obligation of $9.7 million for each of the years in the five-year period ended December 31, 2009 incurred in connection with a sale-leaseback transaction as further described in Note 8 to the consolidated financial statements included in Part II. Item 8 of this Form 10-K.

 
40


ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
You should read the following discussion together with the “Selected Financial Data,” “Forward Looking Statements” and the consolidated financial statements and the related notes thereto included elsewhere in this Form 10-K. This discussion contains forward-looking statements that are based on management’s current expectations, estimates and projections about our business and operations. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of a number of factors, including those we discuss under “Risk Factors,” “Forward Looking Statements” and elsewhere in this Form 10-K.
 
GENERAL
 
We are a leading provider of diversified career-oriented post-secondary education as measured by total enrollment. We offer recent high school graduates and working adults degree and diploma programs in five areas of study: health sciences, automotive technology, skilled trades, hospitality services and business and information technology. Each area of study is specifically designed to appeal to and meet the educational objectives of our student population, while also satisfying the criteria established by industry and employers. The resulting diversification limits dependence on any one industry for enrollment growth or placement opportunities and broadens potential branches for introducing new programs. As of December 31, 2009, we enrolled 29,340 students at our 43 campuses across 17 states. Our campuses primarily attract students from their local communities and surrounding areas, although our seven destination schools attract students from across the United States, and in some cases, from abroad.
 
From 1999 through 2009, we increased our geographic footprint and added 26 additional schools through our acquisitions of: Denver Automotive & Diesel College in 2000 (one school), Career Education Institute in 2001 (two schools), Nashville Auto-Diesel College in 2003 (one school), Southwestern College in 2004 (five schools), New England Technical Institute in 2005 (four schools), Euphoria Institute of Beauty Arts and Sciences in 2005 (two schools), New England Institute of Technology at Palm Beach, Inc. in 2006 (two schools), BRI in 2008 (one school) and BAR in 2009 (seven schools. Our campuses, a majority of which serve major metropolitan markets, are located throughout the United States. Seven of our campuses are destination schools, which attract students from across the United States and, in some cases, from abroad. Our other camp uses primarily attract students from their local communities and surrounding areas. All of our schools are either nationally or regionally accredited and are eligible to participate in federal financial aid programs.
 
Our revenues consist primarily of student tuition and fees derived from the programs we offer.  Our revenues are reduced by our scholarships granted to our students. We recognize revenues from tuition and one-time fees, such as application fees, ratably over the length of a program, including internships or externships that take place prior to graduation. We also earn revenues from our bookstores, dormitories, cafeterias and contract training services. These non-tuition revenues are recognized upon delivery of goods or as services are performed and represent less than 10% of our revenues.
 
Tuition varies by school and by program and on average we increase tuition once a year by 3% to 5%. Our ability to raise tuition is influenced by the demand for our programs and by the rate of tuition increase at other post-secondary schools. If historical trends continue, we expect to be able to continue to raise tuition annually at comparable rates.
 
We have historically enjoyed revenue growth as a result of strategic acquisitions coupled with organic growth.  Our revenues increased 46.6% in 2009 and 15.0% in 2008, over the prior years as we grew from 34 campuses at December 31, 2007 to 43 campuses at December 31, 2009. Our average student population increased from 20,006 for the year ended December 31, 2008 to 27,808 for the year ended December 31, 2009. While we expect to increase our revenues and enrollment in the foreseeable future as a result of both organic growth and strategic acquisitions, we can give no assurance as to our ability to continue to increase our revenues at historical rates and expect our rate of revenue increases to moderate over time as we become a larger and more mature company.
 
Our operating expenses, while also a function of our revenue growth, contain a high fixed cost component. Our educational services and facilities expenses as a percentage of revenues decreased to 38.3% in 2009 from 40.7% in 2008 and 42.6% in 2007, and selling, general and administrative expenses decreased as a percentage of revenue to 45.7% in 2009 from 49.9% in 2008 and 49.5% in 2007. We expect that in the future these expenses will decline slightly as a percentage of revenues as we achieve better operating efficiencies and utilization at our schools.
 
Our revenues are directly dependent on the average number of students enrolled in our schools and the courses in which they are enrolled. Our average enrollment is impacted by the number of new students starting, re-entering, graduating and withdrawing from our schools. In addition, our diploma/certificate programs range from 16 to 105 weeks, our associate’s degree programs range from 47 to 92 weeks, and our bachelor’s degree programs range from 132 to 193 weeks, and students attend classes for different amounts of time per week depending on the school and program in which they are enrolled. Because we start new students every month, our total student population changes monthly. The number of students enrolling or re-entering our programs each month is driven by the demand for our programs, the effectiveness of our marketing a nd advertising, the availability of financial aid and other sources of funding, the number of recent high school graduates, the job market and seasonality. Our retention and graduation rates are influenced by the quality and commitment of our teachers and student services personnel, the effectiveness of our programs, the placement rate and success of our graduates and the availability of financial aid. Although similar courses have comparable tuition rates, the tuition rates vary among our numerous programs. As more of our schools receive approval to offer associate’s degree and bachelor’s degree programs, which are longer than our diploma degree programs, we would expect our average enrollment and the average length of stay of our students to increase.

 
41


The majority of students enrolled at our schools rely on funds received under various government-sponsored student financial aid programs to pay a substantial portion of their tuition and other education-related expenses. The largest of these programs are Title IV Programs which represented approximately 81% of our cash receipts relating to revenues in 2009.
 
We extend credit for tuition and fees to many of our students that attend our campuses. Our credit risk is mitigated through the student’s participation in federally funded financial aid programs unless students withdraw prior to the receipt by us of Title IV funds for those students. Under Title IV programs, the government funds a certain portion of a students’ tuition, with the remainder, referred to as “the gap,” financed by students themselves under private party loans, including credit extended by us. The gap amount has continued to increase over the last several years as we have raised tuition on average for the last several years by 3% to 5% per year, while funds received from Title IV programs have remained constant.

We entered into a tiered discount loan program agreement, effective September 1, 2007, with SLM Financial Corporation or SLM, to provide up to $16.0 million of private non-recourse loans to qualifying students.  Under this agreement, we were required to pay SLM either 20% or 30% of all loans disbursed, depending on each student borrower’s credit score.  We were billed at the beginning of each month based on loans disbursed during the prior month. For the year ended December 31, 2008, $0.5 million of loans were disbursed, resulting in a $0.1 million loss on sale of receivables.  Loss on sale of receivables is included in selling, general and administrative expenses in our financial statements.

In February 2008, SLM terminated its tiered discount loan program with us.  It is our understanding that SLM also terminated its tiered discount loan programs with our peer companies. The College Cost Reduction & Access Act, which was signed into law in September 2007, cut approximately $22 billion in subsidies to federal student lenders and guarantors as an offset to increases in federal financial aid.  This resulted in significant changes to the terms that alternative lending providers including SLM were willing to make and resulted in the termination of the tiered discount loan programs described above.  As a result of the costs associated with these programs and, in anticipation of additional changes, we concluded that the cost of using the tiered discount loan program was too high and would lead to significant margin erosion over time and that we would be better served by financing the gap between Title IV and tuition internally, while also examining other alternative loan sources.

SLM’s termination of its tiered discount loan program had a limited impact on our business.  Our current expectations are that students who previously received funding through the program will continue to have access to funding either through alternative lenders or through our own internal financing.

The additional financing that we are providing to students may expose us to greater credit risk and can impact our liquidity. We believe that these risks are however somewhat mitigated due to:

 
·
Annual federal Title IV loan limits, including grants have increased.  Title IV funds represented 81% of our 2009 revenue on a cash basis;
 
·
Our internal financing is provided to students only after all other funding resources have been exhausted; thus, by the time this funding is available, students have completed approximately two-thirds of their curriculum and are more likely to graduate;
 
·
Funding for students who interrupt their education is typically covered by Title IV funds as long as they have been properly packaged for financial aid; and
 
·
We have an excellent collection history with our graduates.  Historically, 90% of all graduates have repaid their balances in full.

For the year ended December 31, 2009, approximately 81% of our revenue on a cash basis was derived from Title IV funds, approximately 10% was derived from state grants and cash payments made by students, and approximately 3% was funded under third-party private loan programs, which included SLM programs.  For the year ended December 31, 2008, approximately 79% of our revenue on a cash basis was derived from Title IV funds, approximately 13% was derived from state grants and cash payments made by students, and approximately 4% was funded under third-party private loan programs, which include SLM programs. The credit crisis that has impacted the financial markets has had a limited impact on our ability to finance our credit worthy students.  However, no assurance can be given that the worsening of the current econom ic downturn or tightening of the credit markets would not have a negative impact on our ability to continue to finance our creditworthy students.  There are a number of lenders that will finance the Title IV funds or alternatively we may choose to finance Title IV funds directly with the government under the government’s Direct Loan Program.  Additionally, we have several alternative lenders that will provide private party loans to credit worthy students.  In addition, commencing in late 2007, we decided to assist students in financing the gap in student tuition for which students are unable to obtain third-party financing.  As of December 31, 2009, we had outstanding loan commitments to our students of $28.9 million as compared to $24.0 million at December 31, 2008.  Loan commitments, net of interest that would be due on the loans through maturity, were $20.5 million at December 31, 2009 as compared to $16.5 million at December 31, 2008.  Com mitments at December 31, 2009 represented an average commitment balance, including interest of approximately $7,200.

 
42


Our bad debt expense as a percentage of revenue increased to 6.7% for 2009 from 5.7% and 5.3%, respectively, in 2008 and 2007.  This increase was attributable to several factors, including:
   
 
·
a slight deterioration in the performance of our loan portfolio, as we experienced a 5% increase in defaults for students who dropped out;
 
·
an increase in our reserve for graduate receivables of 7% in 2009 based upon our consideration of the current economic environment and high unemployment rates which could impact our students ability to repay their loans; and
 
·
the increase in our internal commitments and the associated credit risk of maintaining loans on our balance sheet that may take up to 7 years to repay.

All institutions participating in Title IV Programs must satisfy specific standards of financial responsibility. The DOE evaluates institutions for compliance with these standards each year, based on the institution’s annual audited financial statements, as well as following a change in ownership resulting in a change of control of the institution.

The most significant financial responsibility measurement is the institution's composite score, which is calculated by the DOE based on three ratios:
 
 
·
the equity ratio, which measures the institution's capital resources, ability to borrow and financial viability;
 
·
the primary reserve ratio, which measures the institution's ability to support current operations from expendable resources; and
 
·
the net income ratio, which measures the institution's ability to operate at a profit.

The DOE assigns a strength factor to the results of each of these ratios on a scale from negative 1.0 to positive 3.0, with negative 1.0 reflecting financial weakness and positive 3.0 reflecting financial strength. The DOE then assigns a weighting percentage to each ratio and adds the weighted scores for the three ratios together to produce a composite score for the institution. The composite score must be at least 1.5 for the institution to be deemed financially responsible without the need for further oversight. If an institution's composite score is below 1.5, but is at least 1.0, it is in a category denominated by the DOE as "the zone." Under the DOE regulations, institutions that are in the zone are deemed to be financially responsible for a period of up to three years but are required to accept payment of Title IV Program funds unde r the cash monitoring or reimbursement method of payment and to provide to the DOE timely information regarding various oversight and financial events.
 
Based on audited financial statements for the 2009, 2008 and 2007 fiscal years our calculations resulted in a composite score of 2.0, 1.8 and 1.8, respectively.
 
The operating expenses associated with an existing school do not increase proportionally as the number of students enrolled at the school increases. We categorize our operating expenses as (1) educational services and facilities and (2) selling, general and administrative.
 
 
·
Major components of educational services and facilities expenses include faculty compensation and benefits, expenses of books and tools, facility rent, maintenance, utilities, depreciation and amortization of property and equipment used in the provision of education services and other costs directly associated with teaching our programs and providing educational services to our students.
 
 
·
Selling, general and administrative expenses include compensation and benefits of employees who are not directly associated with the provision of educational services (such as executive management and school management, finance and central accounting, legal, human resources and business development), marketing and student enrollment expenses (including compensation and benefits of personnel employed in sales and marketing and student admissions), costs to develop curriculum, costs of professional services, bad debt expense, rent for our corporate headquarters, depreciation and amortization of property and equipment that is not used in the provision of educational services and other costs that are incidental to our operations. All marketing and student enrollment expenses are recognized in the period incurred.
 
We use advertising to attract a substantial portion of our yearly student enrollment. We utilize a mix of different advertising mediums, including television, internet and direct mail.
 
DISCONTINUED OPERATIONS

On July 31, 2007, our Board of Directors approved a plan to cease operations at our Plymouth Meeting, Pennsylvania, Norcross, Georgia and Henderson, Nevada campuses.  As a result, we reviewed the related goodwill and long-lived assets for possible impairment as of June 30, 2007.  In connection with that review, we recognized a non-cash impairment charge of approximately $2.1 million as of June 30, 2007.

As of September 30, 2007, all operations had ceased at these campuses and, accordingly, the results of operations of these campuses have been reflected in the accompanying statements of operations as “Discontinued Operations” for all periods presented.

 
43


The results of operations at these three campuses for each of the two year period ended December 31, 2007 were comprised of the following (in thousands):

   
Year Ended December 31, 2007
 
Revenue
  $ 4,230  
Operating Expenses
    (13,760 )
      (9,530 )
Benefit for income taxes
    (4,043 )
Loss from discontinued operations
  $ (5,487 )

ACQUISITIONS
 
Acquisitions have been, and are expected to continue to be, a component of our growth strategy. We have a team of professionals who conduct financial, operational and regulatory due diligence as well as a team that integrates acquisitions with our policies, procedures and systems.
 
On January 20, 2009, we completed the acquisition of six of the seven schools comprising BAR, for approximately $24.9 million in cash, net of cash acquired.  BAR consists of seven schools serving approximately 2,300 students as of December 31, 2009 and offers associate’s degree and diploma programs in the fields of automotive, skilled trades, health sciences and culinary arts.  On April 20, 2009, we acquired the seventh BAR school, Clemens, for $2.7 million, in cash, net of cash acquired.  In connection with these acquisitions, we incurred approximately $1.4 million of transaction expenses for the year ended December 31, 2009.

On December 1, 2008, we acquired all of the rights, title and interest in the assets of BRI for approximately $10.6 million, net of cash acquired.  BRI is regionally accredited by NEASC, and offered bachelor’s degree programs to approximately 670 students as of December 31, 2009 from Connecticut and surrounding states.
 
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 principles generally accepted in the United States of America, or GAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. On an ongoing basis, we evaluate our estimates and assumptions, including those related to revenue recognition, bad debts, fixed assets, goodwill and other intangible assets, income taxes and certain accruals. 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 serv ices 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 impact the allowance for uncollectible accounts. The receivables balances of withdr awn students with delinquent obligations are reserved for based on our collection history. Although we believe that our reserves are adequate, if the financial condition of our students deteriorates, resulting in an impairment of their ability to make payments, additional allowances may be necessary, which will result in increased selling, general and administrative expenses in the period such determination is made.

 
44


Our bad debt expense as a percentage of revenues for the years ended December 31, 2009, 2008 and 2007 was 6.7%, 5.7% and 5.3%, respectively. Our exposure to changes in our bad debt expense could impact our operations. A 1% increase in our bad debt expense as a percentage of revenues for the years ended December 31, 2009, 2008 and 2007 would have resulted in an increase in bad debt expense of $5.5 million, $3.8 million and $3.3 million, respectively.
 
Because a substantial portion of our revenues are derived from Title IV Programs, any legislative or regulatory action that significantly reduces the funding available under Title IV Programs or the ability of our students or schools to participate in Title IV Programs could have a material effect on the realizability of our receivables.
 
Goodwill.    We test our goodwill for impairment annually, or whenever events or changes in circumstances indicate an impairment may have occurred, by comparing its fair value to its carrying value. Impairment may result from, among other things, deterioration in the performance of the acquired business, adverse market conditions, adverse changes in applicable laws or regulations, including changes that restrict the activities of the acquired business, and a variety of other circumstances. If we determine that impairment has occurred, we are required to record a write-down of the carrying value and charge the impairment as an operating expense in the period the determination is made. In evaluating the recoverability of the carrying value of goo dwill 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.
 
As discussed in “Discontinued Operations” above, as a result of a decision to close three of our campuses we conducted a review of our goodwill as of June 30, 2007.  In connection with that review, we recognized a non-cash impairment charge of approximately $2.1 million as of June 30, 2007.  Goodwill represents a significant portion of our total assets. As of December 31, 2009, goodwill was approximately $113.0 million, or 29.1%, of our total assets.

We test our goodwill for impairment using a two-step approach.  The first step is conducted utilizing the multiple of earnings approach and comparing the carrying value of our reporting units to their implied fair value; if necessary, the second step is conducted utilizing a discounted cash flow approach and comparing the carrying value of our reporting units to their implied fair value.

At December 31, 2009, we tested our goodwill for impairment and determined that an impairment of approximately $215,000 existed for one of our reporting units.  No other reporting unit’s carrying goodwill amount exceeded its implied value.  At December 31, 2008, we tested our goodwill and determined we did not have an impairment.
 
Stock-based compensation.    We currently account for stock-based employee compensation arrangements by using the Black-Scholes valuation model and utilize straight-line amortization of compensation expense over the requisite service period of the grant.  We make an estimate of expected forfeitures at the time options are granted.

The fair value of the stock options used to compute stock-based compensation is the estimated present value at the date of grant using the Black-Scholes option pricing model. The weighted average fair values of options granted during 2009, 2008, and 2007 were $8.75, $6.69, and $6.78, respectively, using the following weighted average assumptions for grants:
 
   
At December 31,
 
   
2009
   
2008
   
2007
 
Expected volatility
    51.95%       57.23%       55.42%  
Expected dividend yield
    0%       0%       0%  
Expected life (term)
 
4.8-6 Years
   
6 Years
   
6 Years
 
Risk-free interest rate
    2.29-2.36%       2.76-3.29%       4.36%  
Weighted-average exercise price during the year
  $ 18.48     $ 11.97     $ 11.96  

The expected volatility considers the volatility of our common stock and certain of our competitors’ common stock that has been traded for a period commensurate with the expected life.  The expected term of options granted represents the period of time that options granted are expected to be outstanding. The risk-free rate used is based on the published U.S. Treasury yield curve in effect at the time of grant for instruments with a similar life.  The dividend yield is 0% as we have never declared or paid dividends on our common stock and we do not anticipate declaring or paying dividends on our common stock in the foreseeable future.

 
45


Results of Continuing Operations for the Three Years Ended December 31, 2009
 
The following table sets forth selected consolidated statements of continuing operations data as a percentage of revenues for each of the periods indicated:

   
Year Ended December 31,
 
   
2009
   
2008
   
2007
 
Revenues
    100.0 %     100.0 %     100.0 %
Costs and expenses:
                       
Educational services and facilities
    38.3 %     40.7 %     42.6 %
Selling, general and administrative
    45.7 %     49.9 %     49.5 %
Loss (gain) on sale of assets
    0.0 %     0.0 %     0.0 %
Impairment of goodwill
    0.0 %     0.0 %     0.0 %
Total costs and expenses
    84.0 %     90.6 %     92.1 %
Operating income
    16.0 %     9.4 %     7.9 %
Interest expense, net
    -0.8 %     -0.6 %     -0.7 %
Other income
    0.0 %     0.0 %     0.0 %
Income from continuing operations before income taxes
    15.2 %     8.8 %     7.2 %
Provision for income taxes
    6.3 %     3.5 %     3.0 %
Income from continuing operations
    8.9 %     5.3 %     4.2 %

Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
 
Revenues.    Revenues increased by $175.6 million, or 46.6%, to $552.5 million for 2009 from $376.9 million for 2008. Approximately $57.0 million of this increase was a result of our acquisitions of BRI on December 1, 2008, six of the seven schools comprising BAR on January 20, 2009 and Clemens on April 20, 2009, which we refer to collectively as the “Acquisitions”.  The remainder of the increase in revenues was primarily attributable to a 26.5% increase in average student population, which increased to 25,277 for the year ended December 31, 2009, from 19,983 for the year ended December 31, 2008. Average revenue per student on a same school basis increased 4.0% for the year ended December 31, 2009, from the year ended Dece mber 31, 2008, primarily from tuition increases which ranged from 3% to 5% annually and from a shift from lower to higher tuition programs.

Educational services and facilities expenses.   Our educational services and facilities expenses increased by $57.8 million, or 37.6%, to $211.3 million for the year ended December 31, 2009 from $153.5 million for the year ended December 31, 2008. The Acquisitions accounted for $32.0 million of this increase. The remainder of the increase in educational services and facilities expenses was primarily due to instructional expenses which increased by $15.3 million, or 19.2%, and books and tools expenses, which increased by $7.2 million, or 34.2%, respectively, over 2008. These increases were attributable to a 26.7% increase in student starts for the year ended December 31, 2009 as compared to 2008 coupled with a 26.5% increase in average student popula tion and higher tool sales during the year ended December 31, 2009 compared to 2008.  On a same school basis, we began 2009 with approximately 3,000 more students than we had on January 1, 2008, and as of December 31, 2009, our population on a same school basis was approximately 5,300 higher than as of December 31, 2008.  Also contributing to the increase in educational services and facilities expenses were higher facilities expenses, which increased by approximately $3.2 million over 2008.  Educational services and facilities expenses as a percentage of revenues decreased to 38.3% from 40.7% for the year ended December 31, 2009 compared to 2008.
 
Selling, general and administrative expenses. Our selling, general and administrative expenses for the year ended December 31, 2009 were $252.7 million, an increase of $65.0 million, or 34.6%, from $187.7 million for the year ended December 31, 2008.  Approximately $29.9 million of this increase was attributable to the Acquisitions. The remainder of the increase in our selling, general and administrative expenses for the year ended December 31, 2009 was primarily due to: (a) a $2.9 million, or 17.9%, increase in student services; (b) a $7.5 million, or 10.7%, increase in sales and marketing; and (c) a $24.6 million, or 24.2%, increase in administrative expenses as compared to 2008.

The increase in student services during the year ended December 31, 2009 as compared to 2008 was primarily due to annual increases in compensation and benefit expenses to our financial aid and career services personnel.  Additionally, during 2009, we slightly increased the number of financial aid personnel as a result of a larger student population during the year ended December 31, 2009 as compared to 2008.  We also increased by 31.2% the number of career service personnel during 2009 to further aid our students in obtaining job placement during these difficult economic times.

The increase in sales and marketing expense during the year ended December 31, 2009 as compared to 2008 was primarily due to: (a) annual compensation increases to sales representatives; (b) additional sales representatives to facilitate our recent and anticipated growth; and (c) increased call center personnel as compared to 2008.  In addition, we continued to invest in marketing initiatives in an effort to continue to grow our student population.

 
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The increase in administrative expenses during the year ended December 31, 2009 as compared to 2008 was due to: (a) a $9.0 million increase in personnel costs relating to (i) annual compensation increases and an increase in the number of personnel needed to serve the needs of a higher student population during the year ended December 31, 2009 as compared to 2008,  (ii) an increase in accruals for incentive compensation and increased cost of benefits provided to employees; (b) a $11.3 million increase in bad debt expense; (c) $0.5 million increase in stationary and supplies due to our re-branding; (d) $0.3 million incurred due to the re-branding of our Florida Culinary Institute in West Palm Beach, Florida; (e) $0.4 million in connection with our acquisition of BAR on January 20, 2009; and (f) a $1.0 million increase in our net p eriodic benefit cost of our defined benefit pension plan.
 
For the year ended December 31, 2009, including the Acquisitions, our bad debt expense as a percentage of revenue was 6.7% as compared to 5.7% for 2008.  This increase was primarily attributable to a slight deterioration in the performance of our loan portfolio, due to the current economic environment.  During 2009, we considered the current economic environment which has produced high unemployment rates and concluded to increase our reserve on graduate receivables to 17% from 10% in 2008. Our number of days sales outstanding for the fourth quarter of 2009 were 25.0 days, compared to 22.4 days for the fourth quarter of 2008. As of December 31, 2009, we had outstanding loan commitments to our students of $28.9 million as compared to $24.0 million at December 31, 2008.  Loan commitments, net of interest that wo uld be due on the loans through maturity, were $20.5 million at December 31, 2009 as compared to $16.5 million at December 31, 2008.
 
As a percentage of revenues, selling, general and administrative expenses decreased to 45.7% of revenues for 2009 from 49.9% for 2008.
 
Net interest expense.    Our net interest expense for the year ended December 31, 2009 was $4.2 million, an increase of $2.2 million, from $2.0 million for the same period in 2008.  This increase was attributable to real estate capital leases assumed in connection with the Acquisitions.
 
Income taxes.    Our provision for income taxes for the year ended December 31, 2009 was $34.9 million, or 41.5% of pretax income, compared to $13.3 million, or 39.8% of pretax income for the year ended December 31, 2009. The increase in our effective tax rate for the year ended December 31, 2009 was primarily attributable to nondeductible acquisition costs.

Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
 
Revenues.    Revenues increased by $49.1 million, or 15.0%, to $376.9 million for 2008 from $327.8 million for 2007. Approximately $1.0 million of this increase was a result of our acquisition of BRI, on December 1, 2008.  Excluding BRI, the increase in revenues was primarily attributable to a 13.0% increase in average student population, which increased to 19,983 for the year ended December 31, 2008, from 17,687 for the year ended December 31, 2007.  Revenues were also favorably impacted during the year by tuition increases, which averaged from 3.0% to 3.5%, and increases in book and tool sales and interest income collected on student loans, which increased by $0.7 million and $0.8 million, respectively, for the year ended December 2008.   Average revenue per student increased 1.5% for the year ended December 31, 2008, from the year ended December 31, 2007, primarily due to tuition increases during the year, offset by a shift in our student population enrolled in lower tuition programs.
 
Historically, our schools have lower student populations in our first and second quarters and we have experienced large class starts in the third and fourth quarters. Our second half growth is largely dependent on a successful high school recruiting season. We recruit our high school students several months ahead of their scheduled start dates, and thus, while we have visibility on the number of students who have expressed interest in attending our schools, we cannot predict with certainty the actual number of new student starts and its related impact on revenue.
 
Educational services and facilities expenses.   Our educational services and facilities expenses increased by $14.0 million, or 10.1%, to $153.5 million for the year ended December 31, 2008 from $139.5 million for the year ended December 31, 2007. BRI accounted for $0.5 million or, 0.4%, of this increase. Excluding BRI, the increase in educational services and facilities expenses was primarily due to instructional expenses, and books and tools expenses, which increased by $6.1 million, or 8.4%, and $3.6 million, or 20.9%, respectively, over the prior year. This increase was attributable to a 12.4% increase in student starts for the year ended December 31, 2008 as compared to the prior year and the overall increase in student population and higher to ol sales during 2008 compared to 2007.  We began 2008 with approximately 1,400 more students than we had on January 1, 2007 and as of December 31, 2008 our population was approximately 3,600 higher than as of December 31, 2007.  The remainder of the increase in educational services and facilities expenses was due to facilities expenses, which increased by $3.8 million for the year ended December 31, 2008 over the prior year.  This increase was primarily due to an increase in depreciation expense of $2.7 million resulting from higher capital expenditures during 2008 and 2007.  The remainder of the increase in facilities expenses was due to higher utilities, rent and repairs and maintenance expenses at our campuses.  Capital expenditures in 2008 included the renovation and conversion of our former auto school in Grand Prairie, Texas to a skilled trades school, as well as the opening of our new campus, Aliante, in North Las Vegas, Nevada.  Educational services and facilities expenses as a percentage of revenues decreased to 40.7% of revenues for the year ended December 31, 2008 from 42.6% for the year ended December 31, 2007.
 
Selling, general and administrative expenses.    Our selling, general and administrative expenses for the year ended December 31, 2008 were $187.7 million, an increase of $25.3 million, or 15.6%, from $162.4 million for the year ended December 31, 2007. Approximately $0.3 million, or 1.2%, of this increase was attributable to BRI. Excluding BRI, the increase in our selling, general and administrative expenses for the year ended December 31, 2008 was primarily due to a $1.9 million, or 13.4%, increase in student services, a $4.8 million, or 7.4%, increase in sales and marketing and an $18.3 million, or 22.0%, increase in administrative expenses as compared to the prior year.

 
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The increase in student services was primarily due to increases in compensation and benefit expenses attributed to additional financial aid and career services personnel as a result of a larger student population during the year ended December 31, 2008 as compared to the prior year. In addition, we expanded a pilot program, which we began in 2007, to centralize the back office administration of our financial aid department in an effort to improve the effectiveness of our financial aid processing.  This resulted in the hiring of additional financial aid representatives during 2008.

The increase in sales and marketing expense was due to (a) annual compensation increases to sales representatives; (b) the hiring of additional sales representatives; and (c) increased call center support for the year ended December 31, 2008 as compared to the prior year. In addition, we increased our marketing investments in an effort to continue to grow our student population.

The increase in administrative expenses was primarily due to (a) a $9.8 million increase in compensation and benefits, resulting from annual compensation increases, including increases in employee bonuses, stock compensation expense and the cost of benefits provided to employees; (b)  a $4.2 million increase in bad debt expense; (c) $0.2 million refunded to the U.S. Department of Education resulting from a program review at Southwestern College; (d) a $0.6 million increase in software maintenance expenses resulting from increased software licenses for our student management system; (e) $0.9 million of  acquisition costs incurred in 2008 related to our acquisition of BAR in January 2009 in accordance with the transitional guidance to SFAS No. 141; and (f ) $0.9 million of expenses incurred in connection with two registr ation statements on Form S-3, filed with the SEC during 2008, and other related expenses.

For year ended December 31, 2008, our bad debt expense as a percentage of revenue was 5.7% as compared to 5.3% for the year ended December 31, 2007.  This increase was primarily attributable to higher accounts receivable due to an increase of 13.0% in average student population for 2008 as compared to the same period in 2007.  The number of days sales outstanding for 2008 decreased to 25.4 days compared to 27.7 days for 2007, primarily due to the timing of the collection of federal funds.   Commencing in late 2007, we decided to assist students in financing the gap in student tuition for which students were unable to obtain third-party financing.  As of December 31, 2008, we had outstanding loan commitments to our students of $24.0 million as compared to $15.7 million at December 31, 2007.  ; Loan commitments, net of interest that would be due on the loans through maturity, were $16.5 million at December 31, 2008 as compared to $10.8 million at December 31, 2007.
 
As a percentage of revenues, selling, general and administrative expenses increased to 49.9% of revenues for 2008 from 49.5% for 2007.
 
Net interest expense.    Our net interest expense for the year ended December 31, 2008 decreased slightly to $2.0 million from $2.2 million for the same period in 2007 due to lower interest rates as well as lower average borrowings outstanding during the year.
 
Income taxes.    Our provision for income taxes for the year ended December 31, 2008 was $13.3 million, or 39.8% of pretax income, compared to $9.9 million, or 41.8% of pretax income for the year ended December 31, 2007. The decrease in our effective tax rate for the year ended December 31, 2008 was primarily attributable to shifts in state taxable income among various states.
 
LIQUIDITY AND CAPITAL RESOURCES
 
Our primary capital requirements are for facilities 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 each of the three years in the period ended December 31, 2009:

   
Year Ended December 31,
 
   
2009
   
2008
   
2007
 
   
(In thousands)
 
Net cash provided by operating activities
  $ 73,169     $ 54,176     $ 15,735  
Net cash used in investing activities
  $ (51,593 )   $ (31,205 )   $ (23,830 )
Net cash provided by (used in) financing activities
  $ 9,266     $ (11,239 )   $ 5,136  

As of December 31, 2009, we had cash and cash equivalents of $46.1 million, representing an increase of approximately $30.9 million as compared to $15.2 million as of December 31, 2008.  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 facility and cash generated from operations.  During 2009, we borrowed an additional $64.0 million to finance our working capital needs and repaid $44.0 million outstanding under our credit facility.  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, existi ng cash balances and, if necessary, borrowings under our credit facility. On February 18, 2009, we sold common stock in a public offering and received net proceeds of approximately $14.9 million.  The proceeds of this offering were used to repay borrowings under our credit agreement used to finance the BAR acquisitions.  We may consider accessing the financial markets again as a source of liquidity for capital requirements, acquisitions and general corporate purposes to the extent such requirements are not satisfied by cash on hand, borrowings under our credit facility or operating cash flows.  However, we cannot assure you that we will be able to raise additional capital on favorable terms, if at all.  On December 15, 2009, we repurchased 1,250,000 shares of common stock for $26.2 million from our principal stockholder, Back to School Acquisition, L.L.C., concurrently with its sale of an additional 750,000 shares of common stock in a block trade pursuant to Rule 144 u nder the Securities Act of 1933.  At December 31, 2009, we had net borrowings available under our $115 million credit agreement of approximately $88.2 million, including an $18.2 million sub-limit on letters of credit.  The line of credit matures on December 1, 2012.
 
 
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Our primary source of cash is tuition collected from the students. The majority of students enrolled at our schools rely on funds received under various government-sponsored student financial aid programs to pay a substantial portion of their tuition and other education-related expenses. The largest of these programs are Title IV Programs which represented approximately 81% of our cash receipts relating to revenues in 2008. Students must apply for a new loan for each academic period. Federal regulations dictate the timing of disbursements of funds under Title IV Programs and loan funds are generally provided by lenders in two disbursements for each academic year. The first disbursement is usually received approximately 31 days after the start of a student's academic year and the second disbursement is typically received at the beginning o f the sixteenth week from the start of the student's academic year. Certain types of grants and other funding are not subject to a 30-day delay. Our programs range from 14 to 193 weeks. In certain instances, if a student withdraws from a program prior to a specified date, any paid but unearned tuition or prorated Title IV financial aid is refunded according to state and federal regulations.
 
As a result of the significance of the Title IV funds received by our students, we are highly dependent on these funds to operate our business. Any reduction in the level of Title IV funds that our students are eligible to receive or any impact on our ability to be able to receive Title IV funds would have a significant impact on our operations and our financial condition.
 
Operating Activities

Year Ended December 31, 2009 Compared to Year Ended December 31, 2008.  Net cash provided by operating activities was $73.2 million for the year ended December 31, 2009 as compared to $54.2 million for the year ended December 31, 2008.  The $19.0 million increase in net cash provided by operating activities was driven by an increase in net income of approximately $29.0 million offset by $23.2 million of higher tax payments and by the increase in net accounts receivable of $51.1 million which represented 28.3 days revenue outstanding for 2009 as compared to 25.4 days revenue outstanding for 2008.  The increase in days revenues outstanding is attributable to the increase in loans that we provided to our students. The remainder of the in crease was attributable to cash provided by other working capital items.

Year Ended December 31, 2008 Compared to Year Ended December 31, 2007.  Net cash provided by operating activities was $54.2 million for the year ended December 31, 2008 as compared to $15.7 million for the year ended December 31, 2007.  The $38.5 million increase in net cash provided by operating activities was driven by an increase in net income of approximately $11.9 million coupled with better collection on accounts receivable as our days sales outstanding decreased from 27.7 to 25.4 due to, among other things, the successful centralization of the back office administration of our financial aid department. Additionally, during the year we were favorably impacted by the timing of cash collections from federal fund programs.  The rem ainder of the increase was due to increases in cash provided by other working capital items.
 
The increase in loans to our students adversely impacts our accounts receivable, our allowance for doubtful accounts and our cash flow from operations. Although we reserved for estimated losses related to unpaid student balances, losses in excess of the amounts we have reserved for bad debts will result in a reduction in our profitability and can have an adverse impact on the results of our operations.
 
Investing Activities
 
Our cash used in investing activities was primarily related to capital expenditures and the acquisition of BAR. Our capital expenditures included facility expansion, leasehold improvements, improvements of classroom, furniture and shop training equipment and the purchase of a building in Denver, Colorado. On January 20, 2009 and April 20, 2009, we acquired the schools comprising BAR for approximately $27.6 million in cash, net of cash acquired.   On December 1, 2008 we acquired all the rights, title and interest in the assets of BRI for $10.6 million in cash, net of cash acquired.
 
We currently lease a majority of our campuses. We own our campuses in Grand Prairie, Texas; West Palm Beach, Florida; Nashville, Tennessee; and Cincinnati (Tri-County), Ohio. In addition, we purchased a building in Denver, Colorado in 2009 which will be occupied by our existing Denver, Colorado school once construction is complete.  As we execute our growth strategy, strategic acquisitions of campuses may be considered. In addition, although our current growth strategy is to continue our organic growth, strategic acquisitions of operations will be considered. 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.

 
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Year Ended December 31, 2009 Compared to the Year Ended December 31, 2008.    Net cash used in investing activities increased $20.4 million to $51.6 million for the year ended December 31, 2009 from $31.2 million for the year ended December 31, 2008. This increase was primarily attributable to a $17.0 million increase in cash used in acquisitions and a $3.9 million increase in capital expenditures for the year ended December 31, 2009 from the year ended December 31, 2008.  Our capital expenditures primarily resulted from facility expansion, leasehold improvements, investments in classroom and shop technology, and the purchase of the building in Denver, Colorado.
 
Year Ended December 31, 2008 Compared to the Year Ended December 31, 2007.    Net cash used in investing activities increased $7.4 million to $31.2 million for the year ended December 31, 2008 from $23.8 million for the year ended December 31, 2007. This increase was primarily attributable to a $10.5 million increase in cash used in the acquisition of BRI offset by a $4.6 million decrease in capital expenditures due to the timing of payments for the year ended December 31, 2008 from the year ended December 31, 2007.
 
Capital expenditures are expected to increase in 2010 as we build out our new Denver, Colorado facility, open a new start-up campus, upgrade and expand current equipment and facilities and expand new facilities to meet increased student enrollment. We anticipate capital expenditures to range from 8% to 9% of revenues in 2010 and expect to fund these capital expenditures with cash generated from operating activities and, if necessary, with borrowings under our credit facility.
 
Financing Activities
 
Year Ended December 31, 2009 Compared to the Year Ended December 31, 2008. Net cash provided by financing activities was $9.3 million for the year ended December 31, 2009, as compared to net cash used in financing activities of $11.2 million for the year ended December 31, 2008. This increase of $20.5 million was primarily due to: (a) $14.9 million received from our sale of common stock in a public offering during the year ended December 31, 2009; (b) a $25.0 million increase in net borrowings under our credit agreement; (c) $1.9 million increase in proceeds from the exercise of stock options; offset by (d) $6.6 million in repurchases of our common stock during the year ended December 31, 2008 as compared to $26.2 million repurchases of our common stock during the year ended December 31, 2009;  (e) offset by $0.8 increase in capital lease payments and (f) $1.0 million increase in payments on deferred finance fees.

Year Ended December 31, 2008 Compared to the Year Ended December 31, 2007. Net cash used in financing activities was $11.2 million for the year ended December 31, 2008, as compared to net cash provided by financing activities of $5.1 million for the year ended December 31, 2007. This decrease of $16.4 million was attributable to the repayment of debt resulting in a decrease in net borrowings of $10.0 million as compared to 2007 and to repurchases of our common stock for $6.6 million during 2008.

On December 15, 2009, we entered into a definitive stock repurchase agreement with BTS, relating to our repurchase of 1,250,000 shares of our common stock owned by BTS at a purchase price of $20.95 per share or an aggregate purchase price of $26.2 million.  The repurchased shares represent approximately 4.6% of our total shares of common stock outstanding on December 15, 2009. In accordance with the terms of the repurchase agreement, consummation of the share repurchase was conditioned upon the completion of the sale by BTS of an additional 750,000 shares of our common stock in a block trade pursuant to Rule 144 under the Securities Act of 1933, as amended. The completion of the block trade and the concurrent closing of the share repurchase occurred on December 21, 2009. We used cash on hand to pay the purchase price for the rep urchased shares.  Approximately 25.9 million shares of our common stock remained outstanding after the completion of the share repurchase.  The sale of stock by BTS in the share repurchase and the block trade have resulted in the reduction of BTS’s beneficial ownership interest in us from approximately 37.9% to approximately 31.8% as of December 31, 2009.

On April 1, 2008, our Board of Directors approved the repurchase of up to 1,000,000 shares of our common stock over the period of one year.  In 2008, we repurchased 615,000 shares of our common stock for approximately $6.6 million.

On December 1, 2009, we, as borrower, and all of our wholly-owned subsidiaries, as guarantors, entered into a secured revolving credit agreement with a syndicate of seven lenders led by Bank of America, N.A., as administrative agent, swing line lender and letter of credit issuer, for an aggregate principal amount of up to $115 million, which we refer to as the “Credit Facility”.  Banc of America Securities LLC acted as sole lead arranger and book manger under the credit agreement.  The Credit Facility replaces our prior $100 million credit facility with Harris N.A. and other lenders which was due to expire on February 15, 2010.  The prior facility was terminated concurrently with the effective date of the credit agreement.

Amounts borrowed as revolving loans under the Credit Facility will bear interest, at our option, at either (i) an interest rate based on LIBOR and adjusted for any reserve percentage obligations under Federal Reserve Bank regulations, or the “Euro Dollar 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 prime rate, (b) the Federal Funds rate plus 0.50% and (c) a daily rate equal to one-month of the Euro Dollar Rate plus 1.0%.  Under the credit agreement, the margin interest rate is subject to adjustment within a range of 1.50% to 3.25% based upon changes in our consolidated leverag e ratio and depending on whether we have chosen the Euro Dollar Rate or the Base Rate option.  Swing line loans will bear interest at the Base Rate plus the applicable margin rate.  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 a fronting fee of 0.125% of the amount available to be drawn and customary issuance, presentation, amendment and other processing fees associated with letters of credit.  At December 31, 2009, we had outstanding letters of credit aggregating $6.8 million which is primarily comprised of letters of credit for the DOE matters and security deposits in connection with certain of our real estate leases.

 
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The credit agreement contains customary 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, we are paying fees to the lenders that are customary for facilities of this type.

   
As of December 31,
 
   
2009
   
2008
 
Credit agreement
  $ 20,000     $ -  
Finance obligation
    9,672       9,672  
Note payable
    11       -  
Capital lease-property (with a rate of 8.0%)
    27,202       -  
Capital leases-equipment (with rates ranging from 5.0% to 8.5%)
    443       502  
Subtotal
    57,328       10,174  
Less current maturities
    (383 )     (130 )
Total long-term debt
  $ 56,945     $ 10,044  

We believe that our working capital, cash flow from operations, access to operating leases and borrowings available from our amended credit agreement will provide us with adequate resources for our ongoing operations through 2009 and our currently identified and planned capital expenditures.
 
Climate Change

Climate change has not had and is not expected to have a significant effect on our operations.

Contractual Obligations
 
Long-Term Debt and Lease Commitments.    As of December 31, 2009, our long-term debt consisted of amounts borrowed under our credit agreement, the finance obligation in connection with our sale-leaseback transaction in 2001, notes payable, and amounts due under capital lease obligations. We lease offices, educational facilities and various equipment for varying periods through the year 2032 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 December 31, 2009:
 
   
Payments Due by Period
 
   
Total
   
Less than 1 year
   
2-3 years
   
4-5 years
   
After 5 years
 
Credit agreement
  $ 20,000     $ -     $ 20,000     $ -     $ -  
Capital leases (including interest)
    60,324       2,570       5,212       4,999       47,543  
Note payable (including interest)
    11       11       -       -       -  
Uncertain income taxes
    200       200       -       -       -  
Operating leases
    194,630       22,543       43,540       39,403       89,144  
Interest on finance obligation
    9,991       1,427       2,854       2,854       2,856  
Total contractual cash obligations
  $ 285,156     $ 26,751     $ 71,606     $ 47,256     $ 139,543  
 
Capital Expenditures.    We have entered into commitments to expand or renovate campuses. These commitments are in the range of $13.0 to $16.0 million in the aggregate and are due within the next 12 months. We expect to fund these commitments from cash generated from operations.
 
OFF-BALANCE SHEET ARRANGEMENTS
 
We had no off-balance sheet arrangements as of December 31, 2009, except for our letters of credit of $6.8 million which are primarily comprised of letters of credit for the DOE and security deposits in connection with certain of our real estate leases. These off-balance sheet arrangements do not adversely impact our liquidity or capital resources.

 
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RELATED PARTY TRANSACTIONS
 
On December 15, 2009, we entered into a definitive stock repurchase agreement with BTS, relating to our repurchase of 1,250,000 shares of our common stock owned by BTS at a purchase price of $20.95 per share or an aggregate purchase price of $26.2 million.  The repurchased shares represent approximately 4.6% of our total shares of common stock outstanding on December 15, 2009. In accordance with the terms of the repurchase agreement, consummation of the share repurchase was conditioned upon the completion of the sale by BTS of an additional 750,000 shares of our common stock in a block trade pursuant to Rule 144 under the Securities Act of 1933, as amended. The completion of the block trade and the concurrent closing of the share repurchase occurred on December 21, 2009.

On May 12, 2008, we repurchased from Five Mile River Capital Partners and Steven W. Hart an aggregate 100,000 shares of our common stock for $11.25 per share for a total cost of $1.1 million.  Hart Capital LLC is the managing member of Five Mile River Capital Partners LLC, our second largest stockholder.  Steven W. Hart is the owner and president of Hart Capital LLC and is a former member of our board of directors.  At the time of the transaction Hart Capital beneficially owned, through Five Mile River Capital LLC, 8.3% of our outstanding shares of common stock.

On October 15, 2007, we entered into a Separation and Release Agreement with Lawrence E. Brown, our former Vice Chairman.  Under this agreement Mr. Brown’s employment terminated as of the close of business on October 31, 2007.  For a period of 14 months following the date of separation of employment, Mr. Brown continued to provide transitional services to us, not to exceed ten hours per month.  In consideration for a release of claims, we paid Mr. Brown a lump sum cash payment of $0.5 million and reimbursed Mr. Brown for the employer-portion of the premiums due for continuation of co