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BVII > SEC Filings for BVII > Form 10-K on 28-Jun-2013All Recent SEC Filings

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Form 10-K for BROADVIEW INSTITUTE INC


28-Jun-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following information should be read in conjunction with "Selected Financial Data" contained in Item 6 of this Report, our consolidated financial statements and the notes thereto contained in Item 8 of this Report, the "Cautionary Notice Regarding Forward-Looking Statements" contained in Part 1 of this Report, "Risk Factors" contained in Item 1A of this Report, and the other information appearing elsewhere in, or incorporated by reference into, in this Report.

Overview

We are a career-focused post-secondary education services company. Our mission is to demonstrate a "we care" philosophy by preparing career-focused, community-minded graduates for the global workforce. We care about our students, our employees, and about the employers who hire our students. We strive to help our students build knowledge and skills for a specific career field, make professional connections through service learning experiences, and provide them with placement assistance.

We work to fulfill this mission by offering a variety of academic programs through Broadview University. Broadview University is accredited to award diplomas, undergraduate degrees, and master's degrees in various fields of study. The University delivers these programs through traditional classroom settings as well as through online instruction. Our campuses are located in the Utah cities of Layton, Orem, Salt Lake City and West Jordan, as well as Boise, Idaho. Our mission places the achievement of our students first, demonstrating the Company's focus on delivering a high quality product.

Key Financial Metrics and Trends

We are committed to a long-term program of sustainable revenue growth. Our downturn in profitability over the past two years has largely been due to the slowed growth of our industry as a whole, but has been compounded by the capital expenditures of two campus openings, and related period of operating loss expected at new campuses until they mature.

We believe our strategies will ultimately position the Company for future growth and a return to profitability in the long term. Failure to successfully implement the strategies addressed in the following discussion of key financial metrics and trends could have a negative impact on our revenues, financial condition, results of operations and cash flows.

Revenues

Approximately 96% of our revenues are tuition collected from Broadview University's students. Effective July 1, 2012, we implemented a tiered tuition rate program with a goal of increasing the average number of credits taken per student. Numerous studies have shown that students who carry higher credit loads per quarter have a greater likelihood of completing their academic program. Thus, students attending full-time (taking between 11 and 16 credits) are charged a tuition rate of $400 per credit. Students attending at less than full time are charged a tuition rate of $435 per credit. As in prior years, all credits taken above 16 credits in a quarter are free of tuition charges. As of March 31, 2012, we charged $410 per credit hour for most of our programs.


We believe our enrollments are influenced by a number of factors, including, but not limited to:

? the attractiveness of our program offerings;

? our ability to offer flexible class scheduling;

? the relative cost of our educational services compared to competitors;

? our mix of residential and online course offerings;

? the effectiveness of our marketing and recruiting efforts;

? the availability of federal and other financial aid;

? general economic conditions in the regions we operate; and

? the regulatory environment of our industry.

Since October 2010, we have opened two new branch campuses, including our first campus outside the state of Utah. Despite these openings, Broadview University's average enrollment has declined over the past two years, from 1,178 students in 2012 to 979 students in 2013 (a decrease of 16.9%). We continue to experience declining new enrollments and average student population, a trend that has been evident throughout the for-profit post-secondary industry for several quarters. Prospective student interest has been dampened by the prolonged economic downturn, and competition for high-quality leads has increased. Declining enrollments have adversely impacted our revenues, financial condition, results of operations and cash flows. We expect this trend to continue in the near term.

Additionally, our nursing program operated out of our West Jordan campus voluntarily ceased enrolling new students effective November 2011, in response to a warning letter from the Utah State Board of Nursing stating that our nursing graduates' average pass rate on the National Council Licensure Examination ("NCLEX") was not meeting required regulatory levels set by the Utah Administrative Code. In a Memorandum of Understanding and Order ("MOU") from the State of Utah Department of Commerce's Division of Occupational and Professional Licensing ("the Licensing Division") dated December 9, 2011, we agreed to disciplinary action which placed our nursing program under a probationary period of three years from the date of the MOU, and required us to write a remediation plan to address deficiencies in our program which may be contributing to the low test scores.

We did not achieve the mandated test score levels during the probationary period, and on August 8, 2012, we received formal communication from the Licensing Division that Broadview shall immediately begin transferring the majority of its nursing students to another institution pursuant to a teach-out agreement between Broadview and that institution. Broadview's nursing program effectively ceased operations on December 31, 2012. This action has adversely impacted our revenues, financial condition, results of operations and cash flows. Broadview had 87 nursing students enrolled for our quarter ended March 31, 2012 (7.8% of total enrollments).

In reaction to these negative trends, we have taken a variety of actions, including:

? In November 2011, we rebranded our Salt Lake City campus to focus solely on academic programs in the fields of studio arts, production arts, and the entertainment business. The Salt Lake City campus was rebranded as Broadview Entertainment Arts University, or BEAU. Programs currently offered include Digital Video Media Production, Graphic Design, Sequential Imaging and Media Business. Average enrollments at BEAU increased 94.2% from 2012 to 2013, and we had 135 students enrolled at BEAU for our quarter ended March 31, 2013.

We believe this strategic move will better position us to capitalize on the demand for such skills in the workforce, and provide a clear focus for the BEAU campus while our other campuses will continue to offer our variety of traditional academic programs.


? We have discontinued enrollments for certain programs at our mature campuses deemed internally as unprofitable, and are in the final stages of teaching out students in these programs. Completion of these teach-outs will have a positive impact on our payroll to revenue ratio, as teach-out classes have relatively small class sizes.

? We continue to review and expand our program and degree offerings to match the demand in the marketplace.

Educational Services and Facilities Expenses

Our educational services and facilities expenses generally consist of expense items directly attributable to the educational activities of Broadview University. These items include campus administrative and instructional salaries and related costs, student materials and academic program supplies, and facility rent and maintenance.

Payroll and related expenses represent our single largest expense category, accounting for 51.5% and 44.9% of our revenues for the years ended March 31, 2013 and 2012. While the largest individual expense category, such expenses also should be driven by revenue levels. As our student population has declined, we have taken measures to match labor costs to revenue levels. However, these measures have failed to keep pace with our declining student population. Management is continuing to explore additional measures to bring payroll costs in line with revenue levels, while maintaining a focus on exceptional student service.

Selling, General and Administrative Expenses

Our selling, general and administrative costs primarily include marketing and promotional expenses incurred through various forms of advertising and distribution of promotional materials. We also utilize executive, administrative, accounting and consulting services provided by related parties pursuant to a Service Level Agreement. Some of the services provided by the related parties under this arrangement include chief financial and chief executive officer services, information technology support, finance and accounting services, human resources support, student financial aid consulting and curriculum consulting.

Marketing expenses accounted for 23.8% and 20.5% of revenues for the years ended March 31, 2013 and 2012. Management recognizes that spending wisely on advertising will be critical to our efforts to increase our student population. We intend to aggressively seek out the most effective means of promoting the value of both long-standing as well as new programs, including the media and entertainment offerings at our Salt Lake City campus.

Goodwill Impairment

Goodwill represented the excess purchase price over the appraised value of the portion of identifiable assets not under common control that were acquired from Broadview University. Management performed its annual impairment test at the close of each fiscal year, and considered several factors in evaluating goodwill for impairment, including the Company's financial position and results, general economic and industry conditions and legal and regulatory conditions. After completing the annual impairment test for the year ended March 31, 2012, the Company recorded a $622,016 impairment charge related to goodwill. The primary factor contributing to the impairment was continued negative enrollment trends, specifically in Broadview University's nursing program.


During the fourth quarter, management determined that it was more likely than not that the nursing program would receive significant regulatory sanctions during the first quarter of fiscal 2013. On May 31, 2012, the Company received regulatory notice that Broadview will be required to teach out its remaining students and discontinue the program entirely upon completion of the teach-out period. The nursing program was Broadview's second largest individual academic program, representing 7.8% of total enrollments as of March 31, 2012. See Note 4 to the consolidated financial statements included in Item 8 of this Report for further discussion of the goodwill impairment charge. No impairment charges were recognized during the year ended March 31, 2013.

Critical Accounting Policies and Estimates

The discussion and analysis of the Company's financial condition and results of operations is based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements 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 reported amount of expenses during the period reported. Management bases its estimates and judgments on historical experience, observance of trends in the industry, information provided by outside sources and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. Our significant accounting policies are described in Note 2 to the consolidated financial statements contained in Item 8 of this Report. The most significant estimates include allowance for uncollectible student receivables, accrued expenses, valuation of goodwill and the provision for income taxes.

Results of Operations

The following table presents consolidated statements of operations data as percentages of revenues for each of the periods indicated:

                                            Year ended March 31,
                                       2013         2012         2011
Revenues                                100.0 %      100.0 %      100.0 %
Operating expenses
Educational services and facilities     101.1         87.5         72.0
Selling, general and administrative      33.8         34.0         29.0
Total operating expenses                134.9        121.5        101.0
Operating loss                          (34.9 )      (21.5 )       (1.0 )
Other income (expense)                    0.0          0.0          0.1
Loss before income taxes                (34.9 )      (21.5 )       (0.9 )
Income tax expense (benefit)                -          1.9         (0.3 )
Net loss                                (34.9 )%     (23.4 )%      (0.6 )%


Year ended March 31, 2013 compared to year ended March 31, 2012

Revenues



The following table presents year-over-year changes in our primary revenue
components.



                                               Year Ended March 31,                    Change
                                               2013             2012            Amount         Percent
Tuition                                    $ 14,567,763     $ 17,872,478     $ (3,304,715 )        (18.5 )%
Commissions, fees and other charges             576,285          659,713          (83,428 )        (12.7 )
Refunds                                        (552,381 )       (705,359 )        152,978          (21.7 )
Total revenue                              $ 14,591,667     $ 17,826,832     $ (3,235,165 )        (18.1 )%


Tuition

Our tuition revenue decrease was primarily attributable to decreased enrollments. Average enrollments for 2013 were 979, a decrease of 16.9% from the average of 1,178 for the prior year. This decrease was partially offset by a 4.8% increase in average tuition cost per credit from 2012 to 2013.

Commissions, Fees and Other Charges

We outsource textbook sales to a third-party service provider. Under the current arrangement, our students purchase textbooks directly from the service provider, and we receive commission revenue from the service provider based on the overall net sales; we no longer recognize textbook sales revenue or textbook purchasing expense. Fees and other charges represent various student charges for use of academic laboratories, online subscription services and other various products or services not covered by our base tuition cost per credit. Overall decline in these revenues is consistent with declining student population.

Educational services and facilities operating expenses

Expenses related to educational services and facilities decreased 5.4% to $14,754,797 for the year ended March 31, 2013, from $15,593,785 for the previous year. The $838,988 decrease was primarily due to decreased payroll-related expenses, which decreased $486,141, or 6.1%, year over year. Additionally, student materials cost decreased $238,522, or 36.4%, year over year.

The following table summarizes certain educational services and facilities expenses as a percentage of revenue:

                             Percentage of Revenue
                             Year Ended March 31,
Expense                      2013             2012
Payroll and related             51.5 %           44.9 %
Rent and other facility         26.1 %           21.4 %
Scholarships                     6.5 %            5.6 %


Selling, general and administrative expenses

Expenses related to selling and general administrative activities decreased 9.4% to $4,928,852 in 2013 from $5,439,321 in 2012. The $510,469 decrease was primarily due to decreased marketing expenditures and a decrease in our monthly management fee.

Marketing costs decreased $180,150, or 4.9%, to $3,473,838 in 2013 from $3,653,988 in 2012, primarily due to management's efforts to be more selective with advertising buys. As a percentage of revenues, marketing expense was 23.8% and 20.5% for the years ended March 31, 2013 and 2012.

Effective October 1, 2012, our monthly management fee paid under the SLA decreased to $50,000 from $75,000. As such, annual management fee expense decreased $150,000, or 16.7%, from $900,000 in 2012 to $750,000 in 2013. The management fee is reviewed as needed, but at a minimum, on an annual basis. As a percentage of revenues, the management fee was 5.1% and 5.0% for the years ended March 31, 2013 and 2012. We believe the monthly charges under the SLA are competitive with, or less than, what the Company would have to pay to provide these services or to obtain them from another third party.

Goodwill Impairment

After completing the annual impairment test for the year ended March 31, 2012, the Company recorded a $622,016 impairment charge related to goodwill. No impairment charges were recognized during the year ended March 31, 2013. See Note 4 to the consolidated financial statement included in Item 8 of this Report for further discussion of the goodwill impairment charge.

Operating income (loss)

Operating income (loss) is the primary measure used by management in assessing the Company's performance. Our operating loss increased $1,263,692, from $3,828,290 in 2012 to $5,091,982 in 2013. The variance was primarily the result of the aforementioned factors.

Income taxes

The Company recognized no income tax expense in 2013, compared to income tax expense of $346,000 in 2012. The variance was due to recording a full valuation allowance against the Company's net deferred tax assets in the fourth quarter of 2012.

Liquidity and Capital Requirements

A significant portion of our revenues are derived from Title IV programs administered by the USDE. Federal regulations dictate the timing of disbursements under Title IV programs. Students must apply for new loans and grants each award year, which starts July 1. Loan funds are generally provided by lenders in multiple disbursements for each academic year. The disbursements are usually received beginning in the second week of each academic quarter. These factors, together with the timing of our students beginning their programs, affect our operating cash flow.


Cash and cash equivalents were $6,340,609 at March 31, 2013 compared to $2,542,293 at March 31, 2012. Most of our excess cash is typically held in an interest-bearing bank savings account. Our capital position has been significantly influenced by transactions with Mr. Terry Myhre, the Company's Chairman and majority shareholder ("Mr. Myhre"). Since March 2012, Mr. Myhre has executed transactions with the Company that have resulted in cash inflows from financing activities totaling $8,437,500. These cash infusions have come against a two-year total of $6,426,594 of cash used in operating activities. The transactions with Mr. Myhre are as follows:

On March 29, 2013, the Company entered into an Investment Representation Letter and Subscription Agreement with Mr. Myhre, whereby Mr. Myhre purchased 4,500,000 shares of Series B Preferred Stock at a price of $1.00 per share. Each share of Series B Preferred Stock included a detachable warrant to purchase two shares of the Company's Common Stock for $0.50 per share. Additionally, on the same date, Mr. Myhre purchased 4,500,000 shares of Common Stock at a price of $0.25 per share. Total cash proceeds from the two transactions were $5,625,000.

On March 30, 2012, Mr. Myhre exercised his right to purchase 650,000 shares of Common Stock from the Company at an exercise price of $1.25 per share, for a total cash payment of $812,500. Also on that date, we entered into a Line of Credit Authorization agreement (the "Line of Credit") with Mr. Myhre. The Line of Credit is unsecured, and allows for the Company to borrow from Mr. Myhre up to $3,000,000 of aggregate principal borrowings upon the request of the Company. The Line of Credit has a fixed annual interest rate of 4.0% and, effective June 13, 2013, the expiration date was extended from March 31, 2014 to April 1, 2015. As of March 31, 2013, the Company's outstanding balance on the Line of Credit was $2,000,000. This balance was repaid in full subsequent to March 31, 2013.

Without the financial support from Mr. Myhre, the Company would likely have been unable to meet its current obligations, absent material changes to the Company's operations. Additionally, these transactions have greatly aided the Company's ability to comply with various regulatory requirements that concern an institution's financial health. Due to projected losses continuing in the near future, we anticipate that the Company may continue to rely on Mr. Myhre for financial support, the degree of such support depending on management's ability to adequately contain costs against projected future revenue.

The net cash provided by (used in) each of the operating, investing and financing activities are summarized in the following table and discussed in further detail below:

                                                            Year Ended March 31,
                                                   2013             2012            Change
Net cash used in operating activities          $ (4,176,837 )   $ (2,249,757 )   $ (1,939,880 )
Net cash used in investing activities              (110,139 )       (615,919 )        505,780
Net cash provided by financing activities         8,085,292          880,554        7,217,538
Net decrease in cash and cash equivalents      $  3,798,316     $ (1,985,122 )   $  5,783,438

Our cash flows used in operating activities has been primarily driven by net losses of $5,093,932 and $4,164,571 for the years ended March 31, 2013 and 2012, an increased loss of $929,361. Offsetting the 2013 and 2012 net losses were depreciation and amortization of $697,809 and $664,679. The variance in cash used in operating activities from year to year was primarily due to the following 2012 items: a goodwill impairment charge of $622,016, a decrease in deferred income taxes of $396,000, and increased deferred rents of $150,970. There was no material impact on cash flows used in operating activities related to these items in 2013.


The variance in cash flows related to investing activities is primarily due to fewer property and equipment additions in 2013.

The variance in cash flows related to financing activities is primarily due to the transactions with Mr. Myhre on March 29, 2013 described more fully above.

Management anticipates that the Company will use a substantial portion of its cash reserves available at March 31, 2013 to fund operating losses in its fiscal year ending March 31, 2014. However, the combination of cash provided by the March 29, 2013 transactions with Mr. Myhre and the available borrowings under the Line of Credit leads management to believe the Company will be able to fund operations for the next 12 months.

A portion of our revenues is received from students who receive financial loans from Myhre Investments, LLC, an entity owned by Mr. Myhre. As of March 31, 2013, Myhre Investments, LLC had $1,233,571 in loans outstanding to Broadview University students.

Management believes that inflation will not have a significant impact on our business.

Off-Balance Sheet Arrangements

As of March 31, 2013, the Company does not have any off-balance sheet arrangements as defined by Item 303(a)(4) of Regulation S-K.

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