Business Context and Reporting Period
This Form 8-K Current Report was filed by Lincoln Educational Services Corporation on June 18, 2013. The filing discloses two material events: an amendment to the company's secured revolving credit agreement and a strategic decision to cease operations at five specific campuses in Ohio and Kentucky.
Key Financial Metrics and Obligations
- Credit Facility: The aggregate principal amount available under the Credit Facility was reduced from $85 million to $60 million. The facility retains a $25 million letter of credit sublimit and a $5 million swing line sublimit.
- Discontinued Operations Revenue: The five campuses scheduled for closure were expected to contribute approximately $24.0 million in revenue and 1,800 student starts for fiscal year 2013.
- Historical Performance of Closing Campuses:
- Three months ended March 31, 2013: Revenue of $3.8 million; Operating loss of $3.7 million (including $1.6 million in impairments).
- Year ended December 31, 2012: Revenue of $19.9 million; Operating loss of $13.6 million (including $8.7 million in impairments).
- Exit Costs: The company expects to incur approximately $12.5 million in additional pre-tax expenses during the second half of 2013 to cease operations.
Material Changes and Strategic Actions
The primary material change is the closure of five campuses driven by federal legislation implemented on July 1, 2012, which prohibited "ability to benefit" students from accessing federal student financial aid. This regulation caused a dramatic decrease in student attendance at these locations. Consequently, the company stopped admitting new students at these campuses effective immediately, though currently enrolled students graduating before December 31, 2013, may complete their studies. Future results for these campuses will be reported as discontinued operations.
Outlook, Risks, and Management Commentary
- Financial Impact: Expected losses for fiscal year 2013 attributable to the five campuses, including cessation costs, are projected to range between $0.60 and $0.65 per share.
- Mitigation Strategy: Management hopes to offset a portion of the cash charges by subleasing impacted properties and transferring students to other accredited institutions.
- Credit Agreement Revisions: The amendment to the Credit Facility includes revisions to the calculation of the consolidated leverage ratio and consolidated fixed charge coverage ratio. The company retains the right to increase the facility by up to $50 million upon satisfying certain conditions.
- Risks: The filing includes standard forward-looking statement disclaimers, noting that actual results may differ due to risks identified in the company's Form 10-K and 10-Q filings.
Investor Verification Checklist
- Verify the specific terms of the Credit Facility amendment regarding leverage and fixed charge coverage ratios in Exhibit 10.1.
- Monitor the actual realization of the $12.5 million exit cost estimate and the success of subleasing efforts.
- Confirm the timeline for the complete cessation of operations and the transition to discontinued operations reporting.
- Assess the impact of the $0.60 to $0.65 per share loss on the company's overall fiscal year 2013 earnings guidance.