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 campuses 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 and 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.
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.
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 economic 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. Commitments at December 31, 2009 represented an average commitment balance, including interest of approximately $7,200.
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.
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 under 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.
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.