UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
x
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010
OR
¨
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
FOR THE TRANSITION PERIOD FROM TO
Commission File Number: 0-23245
CAREER EDUCATION CORPORATION
(Exact name of registrant as specified in its charter)
|
|
|
Delaware
|
|
36-3932190
|
(State or other jurisdiction of
incorporation or organization)
|
|
(I.R.S. Employer
Identification No.)
|
|
|
2895 Greenspoint Parkway, Suite 600,
Hoffman Estates, Illinois
|
|
60169
|
(Address of principal executive offices)
|
|
(Zip Code)
|
Registrants telephone number, including area code: (847) 781-3600
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
¨
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
x
No
¨
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 the definitions of large accelerated
filer accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
|
|
|
|
|
|
|
Large accelerated filer
x
|
|
Accelerated filer
¨
|
|
Non-accelerated filer
¨
|
|
Smaller reporting company
¨
|
|
|
|
|
(Do not check if a smaller reporting company)
|
Indicate by check mark whether the registrant is a shell company, as defined in Rule 12b-2 of the Securities Exchange Act of
1934. Yes
¨
No
x
Number of shares of registrants common stock, par value $0.01, outstanding October 29, 2010: 81,259,251
CAREER EDUCATION CORPORATION
INDEX
2
PART
IFINANCIAL INFORMATION
Item 1.
|
Financial Statements
|
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
September 30,
2010
|
|
|
December 31,
2009
|
|
ASSETS
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
283,515
|
|
|
$
|
284,473
|
|
Short-term investments
|
|
|
158,988
|
|
|
|
200,379
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents and short-term investments
|
|
|
442,503
|
|
|
|
484,852
|
|
Student receivables, net of allowance for doubtful accounts of $50,054 and $34,963 as of September 30, 2010 and December 31,
2009, respectively
|
|
|
64,366
|
|
|
|
57,823
|
|
Receivables, other, net
|
|
|
5,514
|
|
|
|
5,256
|
|
Prepaid expenses
|
|
|
43,561
|
|
|
|
41,090
|
|
Inventories
|
|
|
11,078
|
|
|
|
11,271
|
|
Deferred income tax assets, net
|
|
|
12,983
|
|
|
|
12,983
|
|
Other current assets
|
|
|
7,810
|
|
|
|
9,442
|
|
Assets of discontinued operations
|
|
|
5,297
|
|
|
|
6,118
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
593,112
|
|
|
|
628,835
|
|
|
|
|
|
|
|
|
|
|
NON-CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
335,836
|
|
|
|
306,279
|
|
Goodwill
|
|
|
383,821
|
|
|
|
377,515
|
|
Intangible assets, net
|
|
|
182,351
|
|
|
|
178,520
|
|
Student receivables, net of allowance for doubtful accounts of $31,741 and $18,394 as of September 30, 2010 and December 31,
2009, respectively
|
|
|
14,426
|
|
|
|
21,455
|
|
Deferred income tax assets, net
|
|
|
3,984
|
|
|
|
3,659
|
|
Other assets, net
|
|
|
36,099
|
|
|
|
23,178
|
|
Assets of discontinued operations
|
|
|
23,491
|
|
|
|
24,401
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
1,573,120
|
|
|
$
|
1,563,842
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Current maturities of capital lease obligations
|
|
$
|
784
|
|
|
$
|
880
|
|
Accounts payable
|
|
|
47,613
|
|
|
|
51,108
|
|
Accrued expenses:
|
|
|
|
|
|
|
|
|
Payroll and related benefits
|
|
|
62,571
|
|
|
|
88,439
|
|
Advertising and production costs
|
|
|
25,186
|
|
|
|
21,436
|
|
Income taxes
|
|
|
1,206
|
|
|
|
17,849
|
|
Earnout payments
|
|
|
17,061
|
|
|
|
18,009
|
|
Other
|
|
|
92,391
|
|
|
|
46,182
|
|
Deferred tuition revenue
|
|
|
210,618
|
|
|
|
184,411
|
|
Liabilities of discontinued operations
|
|
|
19,371
|
|
|
|
13,695
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
476,801
|
|
|
|
442,009
|
|
|
|
|
|
|
|
|
|
|
NON-CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Capital lease obligations, net of current maturities
|
|
|
1,336
|
|
|
|
2,262
|
|
Deferred rent obligations
|
|
|
105,011
|
|
|
|
91,725
|
|
Earnout payments
|
|
|
11,898
|
|
|
|
23,680
|
|
Other liabilities
|
|
|
13,140
|
|
|
|
19,124
|
|
Liabilities of discontinued operations
|
|
|
43,464
|
|
|
|
62,997
|
|
|
|
|
|
|
|
|
|
|
Total non-current liabilities
|
|
|
174,849
|
|
|
|
199,788
|
|
|
|
|
|
|
|
|
|
|
SHARE-BASED AWARDS SUBJECT TO REDEMPTION
|
|
|
160
|
|
|
|
521
|
|
|
|
|
STOCKHOLDERS EQUITY:
|
|
|
|
|
|
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|
|
Preferred stock, $0.01 par value; 1,000,000 shares authorized; none issued or outstanding
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; 300,000,000 shares authorized; 96,383,089 and 95,399,192 shares issued, 81,264,576 and 85,785,478
shares outstanding as of September 30, 2010 and December 31, 2009, respectively
|
|
|
964
|
|
|
|
954
|
|
Additional paid-in capital
|
|
|
262,040
|
|
|
|
244,992
|
|
Accumulated other comprehensive income
|
|
|
2,356
|
|
|
|
8,408
|
|
Retained earnings
|
|
|
1,035,090
|
|
|
|
889,057
|
|
Cost of 15,118,513 and 9,613,714 shares in treasury as of September 30, 2010 and December 31, 2009, respectively
|
|
|
(379,140
|
)
|
|
|
(221,887
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
921,310
|
|
|
|
921,524
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
|
|
$
|
1,573,120
|
|
|
$
|
1,563,842
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
3
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
September 30,
|
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
REVENUE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tuition and registration fees
|
|
$
|
497,172
|
|
|
$
|
434,932
|
|
|
$
|
1,516,181
|
|
|
$
|
1,271,207
|
|
Other
|
|
|
27,034
|
|
|
|
23,359
|
|
|
|
65,579
|
|
|
|
57,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
524,206
|
|
|
|
458,291
|
|
|
|
1,581,760
|
|
|
|
1,328,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Educational services and facilities
|
|
|
159,104
|
|
|
|
149,822
|
|
|
|
477,419
|
|
|
|
444,899
|
|
General and administrative
|
|
|
308,627
|
|
|
|
251,935
|
|
|
|
830,421
|
|
|
|
706,566
|
|
Depreciation and amortization
|
|
|
17,843
|
|
|
|
15,908
|
|
|
|
51,813
|
|
|
|
48,399
|
|
Goodwill and asset impairment
|
|
|
354
|
|
|
|
2,500
|
|
|
|
354
|
|
|
|
2,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
485,928
|
|
|
|
420,165
|
|
|
|
1,360,007
|
|
|
|
1,202,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
38,278
|
|
|
|
38,126
|
|
|
|
221,753
|
|
|
|
126,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
189
|
|
|
|
326
|
|
|
|
689
|
|
|
|
1,968
|
|
Interest expense
|
|
|
(30
|
)
|
|
|
(10
|
)
|
|
|
(75
|
)
|
|
|
(32
|
)
|
Miscellaneous income (expense)
|
|
|
760
|
|
|
|
62
|
|
|
|
(506
|
)
|
|
|
(704
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
919
|
|
|
|
378
|
|
|
|
108
|
|
|
|
1,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PRETAX INCOME
|
|
|
39,197
|
|
|
|
38,504
|
|
|
|
221,861
|
|
|
|
127,695
|
|
Provision for income taxes
|
|
|
12,304
|
|
|
|
11,626
|
|
|
|
73,842
|
|
|
|
43,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM CONTINUING OPERATIONS
|
|
|
26,893
|
|
|
|
26,878
|
|
|
|
148,019
|
|
|
|
84,344
|
|
LOSS FROM DISCONTINUED OPERATIONS, net of tax
|
|
|
(762
|
)
|
|
|
(6,086
|
)
|
|
|
(2,348
|
)
|
|
|
(33,805
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
26,131
|
|
|
$
|
20,792
|
|
|
$
|
145,671
|
|
|
$
|
50,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) PER SHAREBASIC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.34
|
|
|
$
|
0.32
|
|
|
$
|
1.85
|
|
|
$
|
0.97
|
|
Loss from discontinued operations
|
|
|
(0.01
|
)
|
|
|
(0.07
|
)
|
|
|
(0.03
|
)
|
|
|
(0.39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
|
|
$
|
0.33
|
|
|
$
|
0.25
|
|
|
$
|
1.82
|
|
|
$
|
0.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) PER SHAREDILUTED:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.34
|
|
|
$
|
0.32
|
|
|
$
|
1.82
|
|
|
$
|
0.97
|
|
Loss from discontinued operations
|
|
|
(0.01
|
)
|
|
|
(0.07
|
)
|
|
|
(0.03
|
)
|
|
|
(0.39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
|
|
$
|
0.33
|
|
|
$
|
0.25
|
|
|
$
|
1.79
|
|
|
$
|
0.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE SHARES OUTSTANDING:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
78,919
|
|
|
|
83,120
|
|
|
|
80,206
|
|
|
|
86,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
79,819
|
|
|
|
83,669
|
|
|
|
81,195
|
|
|
|
87,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
4
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months
Ended
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
145,671
|
|
|
$
|
50,539
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Goodwill and asset impairment
|
|
|
354
|
|
|
|
2,500
|
|
Depreciation and amortization expense
|
|
|
51,813
|
|
|
|
50,038
|
|
Bad debt expense
|
|
|
77,374
|
|
|
|
38,927
|
|
Compensation expense related to share-based awards
|
|
|
14,390
|
|
|
|
12,313
|
|
Loss on disposition of property and equipment
|
|
|
546
|
|
|
|
1,196
|
|
Changes in operating assets and liabilities
|
|
|
(72,633
|
)
|
|
|
61,883
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
217,515
|
|
|
|
217,396
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchases of available-for-sale investments
|
|
|
(229,771
|
)
|
|
|
(464,163
|
)
|
Sales of available-for-sale investments
|
|
|
271,035
|
|
|
|
502,383
|
|
Purchases of property and equipment
|
|
|
(81,944
|
)
|
|
|
(50,329
|
)
|
Acquisition of the rights to the Le Cordon Bleu brand
|
|
|
(12,729
|
)
|
|
|
(25,000
|
)
|
Business acquisition, net of acquired cash
|
|
|
(6,194
|
)
|
|
|
|
|
Other
|
|
|
81
|
|
|
|
(370
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(59,522
|
)
|
|
|
(37,479
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase of treasury stock
|
|
|
(154,913
|
)
|
|
|
(181,126
|
)
|
Issuance of common stock
|
|
|
2,453
|
|
|
|
2,166
|
|
Tax benefit associated with stock option exercises
|
|
|
216
|
|
|
|
194
|
|
Payment of assumed loans upon business acquisition
|
|
|
(4,279
|
)
|
|
|
|
|
(Payments)/borrowings of capital lease obligations & other long term debt
|
|
|
(2,085
|
)
|
|
|
1,214
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(158,608
|
)
|
|
|
(177,552
|
)
|
|
|
|
|
|
|
|
|
|
EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS:
|
|
|
(942
|
)
|
|
|
888
|
|
|
|
|
|
|
|
|
|
|
NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(1,557
|
)
|
|
|
3,253
|
|
DISCONTINUED OPERATIONS CASH ACTIVITY INCLUDED ABOVE:
|
|
|
|
|
|
|
|
|
Add: Cash balance of discontinued operations, beginning of the period
|
|
|
599
|
|
|
|
2,004
|
|
Less: Cash balance of discontinued operations, end of the period
|
|
|
|
|
|
|
987
|
|
CASH AND CASH EQUIVALENTS, beginning of the period
|
|
|
284,473
|
|
|
|
242,854
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of the period
|
|
$
|
283,515
|
|
|
$
|
247,124
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
5
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
1. DESCRIPTION OF THE COMPANY
The colleges, schools and universities that are part of the Career Education Corporation (CEC) family offer
high-quality education to a diverse student population of more than 118,000 students across the world in a variety of career-oriented disciplines through online, on-ground and hybrid learning program offerings. The more than 90 campuses that serve
these students are located throughout the United States and in France, Italy, the United Kingdom and Monaco, and offer doctoral, masters, bachelors and associate degrees and diploma and certificate programs.
CEC is an industry leader whose institutions are recognized globally. Those institutions include, among others, American InterContinental
University (AIU); Brooks Institute; Colorado Technical University (CTU); Harrington College of Design; INSEEC Group (INSEEC) Schools; International University of Monaco (IUM); International Academy of
Design & Technology (IADT); Istituto Marangoni; Le Cordon Bleu North America (LCB); and Sanford-Brown Institutes and Colleges. Through its schools, CEC is committed to providing high-quality education, enabling
students to graduate and pursue rewarding career opportunities.
For more information, see CECs website at
www.careered.com. The website includes a detailed listing of individual campus locations and web links to CECs colleges, schools, and universities.
As used in this Quarterly Report on Form 10-Q, the terms we, us, our, and CEC refer to Career Education Corporation and our wholly-owned subsidiaries. The
terms school and university refer to an individual, branded, proprietary educational institution, owned by us and includes its campus locations. The term campus refers to an individual main or branch campus
operated by one of our schools or universities.
2. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States (GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the financial statements do not include all of the information and notes required by
GAAP for complete financial statements. In the opinion of management, all adjustments, including normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the three and nine months ended
September 30, 2010, are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.
The unaudited consolidated financial statements presented herein include the accounts of CEC. All inter-company transactions and balances have been eliminated.
On January 15, 2010, we realigned our resources to more effectively execute our strategic growth plan. We began the integration of
our schools which previously comprised the Art & Design Strategic Business Unit (SBU) alongside AIU and CTU, within the University SBU. This realignment facilitates synergies between the programs in Art & Design and
University, especially in the areas of fashion design, merchandising and interior design and technology. It also enabled the sharing of student-focused online platforms and expertise and aids IADT as it pursues its longer-term strategy of
regional accreditation. Harrington College of Design, Collins College and Brooks Institute joined the IADT schools in the alignment of the Art & Design group into the University SBU. The realignment also shifted Brown College and
Briarcliffe College into the Health Education SBU. We expect Briarcliffes regional accreditation to be beneficial in providing greater opportunity for Sanford-Brown students to enroll in higher degree programs. This realignment resulted in new
reportable segments, and prior period results have been revised to reflect these new reportable segments. See Note 14 Segment Reporting of the notes to our unaudited consolidated financial statements for further discussion.
6
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(In thousands, except per share amounts)
In addition to the
realignment, we completed a detailed review of our shared service costs to determine which of these costs should be charged to the SBUs as well as how these shared service costs should be allocated. These services include legal, finance, human
resources, marketing, certain academic functions and certain centralized activities related to student finance, including financial aid processing, student account posting and collections. These costs, recorded within Corporate and Other, were
previously allocated to our SBUs based upon a percentage of revenue. Improved data and analytical capabilities have provided us insight into costs being incurred to support the SBUs versus costs being incurred to support the corporation as a whole.
The new methodology allocates costs based on usage and consumption factors such as student population, employee headcount, advertising spend, number of financial aid recipients and revenue where appropriate. In the case of certain services which are
shared evenly across the SBUs, we allocate evenly. The new methodology is intended to provide improved transparency into the costs of the shared services. The effect of these changes impacts the costs reported within each SBU and reduces the level
of unallocated shared service costs. Results beginning in 2010 are presented under the new methodology and prior period results have been revised to be comparable to the current reporting.
3. BUSINESS ACQUISITION
On April 15, 2010, the Company acquired 100%
of the issued and outstanding stock of International University of Monaco (IUM) for a purchase price of $6.3 million plus assumption of $4.3 million related to outstanding loans which were immediately paid after the acquisition closed.
The purchase price was funded with cash generated from operating activities. IUM is a leading international business university located in Monte Carlo, offering bachelors, masters and doctoral programs in such areas as finance,
international business and luxury goods and services.
The following table summarizes the estimated fair values of assets
acquired and liabilities assumed as of April 15, 2010 (dollars in thousands):
|
|
|
|
|
Current assets (including cash of $79)
|
|
$
|
559
|
|
Property and equipment
|
|
|
524
|
|
Intangible assets not subject to amortization
|
|
|
|
|
Trade names
|
|
|
2,383
|
|
Accreditation rights
|
|
|
740
|
|
Intangible assets subject to amortization
|
|
|
|
|
Program curriculum (useful life of 15 years)
|
|
|
407
|
|
Covenant not to compete (useful life of 4 years)
|
|
|
62
|
|
Goodwill
|
|
|
8,360
|
|
Other assets
|
|
|
17
|
|
|
|
|
|
|
Total assets acquired
|
|
|
13,052
|
|
|
|
|
|
|
Assumed loans
|
|
|
4,279
|
|
Deferred tuition revenue
|
|
|
1,104
|
|
Other current liabilities
|
|
|
1,396
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
6,779
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
6,273
|
|
|
|
|
|
|
Goodwill of $8.4 million represents the premium the Company paid over the fair value of the net tangible and
intangible assets it acquired. The Company paid this premium due to the strategic location and brand
7
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(In thousands, except per share amounts)
recognition that IUM contributes to its international operations. We do not expect any portion of this goodwill balance to be deductible for income tax reporting purposes. Acquisition costs of
approximately $0.8 million were incurred in conjunction with this acquisition and are recorded in general and administrative expense on our unaudited consolidated statements of operations. IUMs operating results are included in our unaudited
consolidated financial statements from the date of acquisition.
Supplemental pro forma financial statement disclosures have
not been included as this acquisition was not material to our unaudited consolidated financial position or results of operations.
4.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2010, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update (ASU) No. 2010-20,
Receivables (Topic 310):Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.
This ASU is effective for disclosures as of the end of
a reporting period for interim and annual reporting periods ending on or after December 15, 2010 and for disclosures about activity that occurs during a reporting period for interim and annual reporting periods beginning on or after
December 15, 2010. Management is currently evaluating the impact that the adoption of ASU 2010-20 will have and does not believe the adoption will result in a material level of new disclosures.
In January 2010, the FASB issued ASU No. 2010-06,
Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures
about Fair Value Measurements
. This ASU requires new disclosures regarding transfers within the fair value hierarchy and the Level 3 reconciliation, and clarifies existing disclosure requirements. This guidance is effective for interim
and annual reporting periods beginning after December 15, 2009, except for the requirement to present the Level 3 roll forward on a gross basis, which is effective for fiscal years beginning after December 15, 2010. Management
has fully considered this guidance when determining the fair value and related disclosures of our financial assets as of September 30, 2010 and our adoption did not have a material impact on our unaudited consolidated financial statements.
In October 2009, the FASB issued ASU No. 2009-13,
Revenue Recognition (Topic 605): Multiple-Deliverable Revenue
Arrangements
, which provides guidance on whether multiple deliverables exist and how arrangement consideration should be measured and allocated to the separate units of accounting in the arrangement. ASU 2009-13, which is effective for
fiscal years beginning on or after June 15, 2010, is effective for us on January 1, 2011. Management is currently evaluating the impact that the adoption of ASU 2009-13 will have on our financial condition, results of operations, and
disclosures.
In January 2009, the Securities and Exchange Commission (SEC) issued Release No. 33-9002,
Interactive Data to Improve Financial Reporting
. The rule requires all companies to provide their financial statements and financial statement schedules to the SEC and on their corporate websites in interactive data format using the
eXtensible Business Reporting Language (XBRL), which is an electronic language specifically for the communication of business and financial data. The intention of XBRL is to improve its usefulness to users and to automate regulatory
filings and business information processing. Interactive data has the potential to improve efficiencies and the analyses of financial disclosures by investors and other users. The Company was required to adopt this rule by June 15, 2010. The
Company elected to early adopt this rule in the first quarter of 2010 and has made the necessary filings.
8
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(In thousands, except per share amounts)
5. DISCONTINUED OPERATIONS
As of September 30, 2010, the results of operations for schools that have ceased operations or were sold are
presented within discontinued operations. The Company expects to recognize approximately $9.0 million in the fourth quarter 2010 of future remaining lease obligations upon the closure of our AIU Los Angeles, CA campus. The results for this
campus will be recast as a component of discontinued operations upon the completion of its teach out.
Results of Discontinued Operations
Combined summary unaudited results of operations for our discontinued operations for the three and nine months ended
September 30, 2010 and 2009, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended September 30,
|
|
|
For the Nine Months
Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
Revenue
|
|
$
|
|
|
|
$
|
1,641
|
|
|
$
|
|
|
|
$
|
9,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax loss
|
|
$
|
(1,111
|
)
|
|
$
|
(9,261
|
)
|
|
$
|
(3,583
|
)
|
|
$
|
(51,628
|
)
|
Income tax benefit
|
|
|
(349
|
)
|
|
|
(3,175
|
)
|
|
|
(1,235
|
)
|
|
|
(17,823
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
(762
|
)
|
|
$
|
(6,086
|
)
|
|
$
|
(2,348
|
)
|
|
$
|
(33,805
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(In thousands, except per share amounts)
Assets and Liabilities of
Discontinued Operations
Assets and liabilities of discontinued operations on our unaudited consolidated balance sheets as
of September 30, 2010 and December 31, 2009 include the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
2010
|
|
|
December 31,
2009
|
|
|
|
(Dollars in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
|
|
|
$
|
599
|
|
Receivables, net
|
|
|
71
|
|
|
|
242
|
|
Prepaid expenses and other current assets
|
|
|
1,764
|
|
|
|
1,815
|
|
Deferred income tax assets
|
|
|
3,462
|
|
|
|
3,462
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
5,297
|
|
|
|
6,118
|
|
|
|
|
Non-current assets:
|
|
|
|
|
|
|
|
|
Deferred income tax assets
|
|
|
21,474
|
|
|
|
21,474
|
|
Other assets, net
|
|
|
2,017
|
|
|
|
2,927
|
|
|
|
|
|
|
|
|
|
|
Total assets of discontinued operations
|
|
$
|
28,788
|
|
|
$
|
30,519
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
50
|
|
|
$
|
173
|
|
Accrued expenses
|
|
|
2,504
|
|
|
|
5,912
|
|
Deferred tuition revenue
|
|
|
|
|
|
|
44
|
|
Remaining lease obligations
|
|
|
16,817
|
|
|
|
7,566
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
19,371
|
|
|
|
13,695
|
|
Non-current liabilities:
|
|
|
|
|
|
|
|
|
Remaining lease obligations
|
|
|
43,464
|
|
|
|
62,997
|
|
|
|
|
|
|
|
|
|
|
Total liabilities of discontinued operations
|
|
$
|
62,835
|
|
|
$
|
76,692
|
|
|
|
|
|
|
|
|
|
|
Remaining Lease Obligations
A number of the campuses that ceased operations in 2008 and 2009 have remaining lease obligations that expire during the years 2011 to 2019. A liability is recorded representing the fair value of the
remaining lease obligation at the time in which the space is no longer being utilized. Changes in our future remaining lease obligations, which are reflected within current and non-current liabilities of discontinued operations on our unaudited
consolidated balance sheets, for our discontinued operations for the three and nine months ended September 30, 2010 and 2009, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
Beginning
of Period
|
|
|
Charges
Incurred
(1)
|
|
|
Net Cash
Payments
|
|
|
Other
(2)
|
|
|
Balance,
End of
Period
|
|
|
|
(Dollars in thousands)
|
|
For the three months ended September 30, 2010
|
|
$
|
62,707
|
|
|
$
|
930
|
|
|
$
|
(3,356
|
)
|
|
$
|
|
|
|
$
|
60,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2009
|
|
$
|
25,941
|
|
|
$
|
2,954
|
|
|
$
|
(2,128
|
)
|
|
$
|
153
|
|
|
$
|
26,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2010
|
|
$
|
70,563
|
|
|
$
|
1,627
|
|
|
$
|
(11,909
|
)
|
|
$
|
|
|
|
$
|
60,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2009
|
|
$
|
14,468
|
|
|
$
|
31,302
|
|
|
$
|
(22,013
|
)
|
|
$
|
3,163
|
|
|
$
|
26,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(In thousands, except per share amounts)
(1)
|
Includes charges for newly vacated spaces and subsequent adjustments for accretion, revised estimates, and variances between estimated and actual charges.
|
(2)
|
Includes existing deferred rent liability balances for newly vacated spaces that offset the losses incurred in the period recorded.
|
6. FINANCIAL INSTRUMENTS
Cash and
Cash Equivalents and Investments
Cash and cash equivalents and investments from our continuing operations consist of the
following as of September 30, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
|
|
|
|
|
(Dollars in thousands)
Gross Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gain
|
|
|
(Loss)
|
|
|
Fair Value
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
202,380
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
202,380
|
|
Money market funds
|
|
|
80,867
|
|
|
|
268
|
|
|
|
|
|
|
|
81,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
|
283,247
|
|
|
|
268
|
|
|
|
|
|
|
|
283,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments (available-for-sale):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury bills
|
|
|
158,979
|
|
|
|
21
|
|
|
|
(12
|
)
|
|
|
158,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents and short-term investments
|
|
$
|
442,226
|
|
|
$
|
289
|
|
|
$
|
(12
|
)
|
|
$
|
442,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bondsauction rate securities
|
|
$
|
12,325
|
|
|
$
|
|
|
|
$
|
(423
|
)
|
|
$
|
11,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
(Dollars in thousands)
Gross Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gain
|
|
|
(Loss)
|
|
|
Fair Value
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
180,571
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
180,571
|
|
Money market funds
|
|
|
103,530
|
|
|
|
372
|
|
|
|
|
|
|
|
103,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
|
284,101
|
|
|
|
372
|
|
|
|
|
|
|
|
284,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments (available-for-sale):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury bills
|
|
|
200,320
|
|
|
|
61
|
|
|
|
(2
|
)
|
|
|
200,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents and short-term investments
|
|
$
|
484,421
|
|
|
$
|
433
|
|
|
$
|
(2
|
)
|
|
$
|
484,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bondsauction rate securities
|
|
$
|
12,325
|
|
|
$
|
|
|
|
$
|
(745
|
)
|
|
$
|
11,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(In thousands, except per share amounts)
In the table
above, unrealized holding losses as of September 30, 2010 relate to cash equivalents and short-term investments that have been in a continuous unrealized loss position for less than one year. The table also includes unrealized holding losses
that relate to our long-term investments in municipal bonds, which are auction rate securities (ARS). When evaluating our investments for possible impairment, we review factors such as the length of time and extent to which fair value
has been less than the cost basis, the financial condition of the investee, and our ability and intent to hold the investment for a period of time that may be sufficient for anticipated recovery in fair value. The decline in the fair value of our
municipal bonds through September 30, 2010 is attributable to the continued lack of activity in the ARS market, exposing these investments to liquidity risk.
Included in cash and cash equivalents above are amounts related to certain of our European campuses that are operated on a not-for-profit basis. The cash and cash equivalents related to these schools have
restrictions which require that the funds be utilized for these particular not-for-profit schools. The amount of cash and cash equivalents of our not-for-profit schools with restrictions was $47.7 million and $49.9 million at September 30, 2010
and December 31, 2009, respectively. Restrictions on cash balances have not affected our ability to fund operations.
Money market funds.
Money market funds are mutual funds that invest in lower risk securities and generate low yields. Such funds
maintain clear investment guidelines and seek to limit credit, market and liquidity risks.
Municipal bonds:
Municipal
bonds represent debt obligations issued by states, cities, counties, and other governmental entities, which earn federally tax-exempt interest. ARS generally have stated terms to maturity of greater than one year. We classify investments in ARS as
non-current on our unaudited consolidated balance sheets within other assets. Auctions can fail when the number of sellers of the security exceeds the buyers for that particular auction period. In the event that an auction fails, the
interest rate resets at a rate based on a formula determined by the individual security. The ARS for which auctions have failed continue to accrue interest and are auctioned on a set interval until the auction succeeds, the issuer calls the
securities, or they mature. As of September 30, 2010, we have determined these investments are at risk for impairment due to the nature of the liquidity of the market over the past year. Cumulative unrealized losses as of September 30,
2010, amount to $0.4 million and are reflected within other comprehensive income as a component of stockholders equity. We believe this impairment is temporary, as we do not intend to sell the investments and it is unlikely we will be required
to sell the investments before recovery of their amortized cost basis.
U.S. Treasury bills:
Debt obligations issued by
the U.S. government that pay interest at maturity. U.S. Treasury bills are traded at discounts to par value and mature in one year or less.
Fair Value Measurements
The fair value measure of accounting for financial instruments establishes a three-tier fair value hierarchy, which prioritizes the inputs
used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly
observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
As of September 30, 2010, our long term student receivables, net, balances are presented within non-current assets on the unaudited consolidated balance sheets. It is not practicable to estimate the
fair value of these financial instruments, since observable market data is not readily available.
12
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(In thousands, except per share amounts)
As of
September 30, 2010, we held investments that are required to be measured at fair value on a recurring basis. Investments (available-for-sale) consist of U.S. Treasury bills that are publicly traded and for which market prices are readily
available.
As of September 30, 2010, we also held investments in auction rate securities, which are classified as
available-for-sale and reflected at fair value. The auction events for these investments have failed for the past year. The fair values of these securities are estimated utilizing a discounted cash flow analysis as of September 30, 2010. These
analyses consider, among other items, the collateralization underlying the security investments, the creditworthiness of the counterparty, the timing of expected future cash flows, and the expectation of the next time the security is expected to
have a successful auction. These securities were also compared, when possible, to other observable market data with similar characteristics.
Investments measured at fair value on a recurring basis subject to the disclosure requirements issued by the FASB ASC under Topic 820
Fair Value Measurements and Disclosures
at
September 30, 2010 and December 31, 2009, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010
|
|
|
|
(Dollars in thousands)
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Municipal bonds
|
|
$
|
|
|
|
$
|
|
|
|
$
|
11,902
|
|
|
$
|
11,902
|
|
U.S. Treasury bills
|
|
|
158,988
|
|
|
|
|
|
|
|
|
|
|
|
158,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
158,988
|
|
|
$
|
|
|
|
$
|
11,902
|
|
|
$
|
170,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
(Dollars in thousands)
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Municipal bonds
|
|
$
|
|
|
|
$
|
|
|
|
$
|
11,580
|
|
|
$
|
11,580
|
|
U.S. Treasury bills
|
|
|
200,379
|
|
|
|
|
|
|
|
|
|
|
|
200,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
200,379
|
|
|
$
|
|
|
|
$
|
11,580
|
|
|
$
|
211,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents our assets measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) as defined in FASB ASC Topic 820 at September 30, 2010 (dollars in thousands):
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
11,580
|
|
Unrealized gain
|
|
|
322
|
|
|
|
|
|
|
Balance at September 30, 2010
|
|
$
|
11,902
|
|
|
|
|
|
|
Credit Agreement
As of September 30, 2010, we had letters of credit totaling $8.7 million outstanding under our $185.0 million U.S. Credit Agreement. Credit availability under our U.S. Credit Agreement as of
September 30, 2010, was $176.3 million.
13
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(In thousands, except per share amounts)
7. RECEIVABLES
Student Receivables Valuation Allowance
Changes in our short-term and long-term receivables allowance for the three and nine months ended September 30, 2010 and 2009 were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
Beginning of
Period
|
|
|
Charges to
Expense
(1)
|
|
|
Amounts
Written-off
|
|
|
Balance,
End of
Period
|
|
For the three months ended September 30, 2010
|
|
$
|
68,692
|
|
|
$
|
31,934
|
|
|
$
|
(18,831
|
)
|
|
$
|
81,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2009
|
|
$
|
49,447
|
|
|
$
|
14,238
|
|
|
$
|
(13,827
|
)
|
|
$
|
49,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2010
|
|
$
|
53,357
|
|
|
$
|
77,865
|
|
|
$
|
(49,427
|
)
|
|
$
|
81,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2009
|
|
$
|
47,895
|
|
|
$
|
39,158
|
|
|
$
|
(37,195
|
)
|
|
$
|
49,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
In the first and third quarters 2010, we increased the reserve rates applied to outstanding student receivables balances attributed to our student extended payment
plans and our previously terminated recourse loan programs. We recorded pretax expense of $8.1 million and $8.3 million during the first and third quarters 2010, respectively. The bad debt reserve rates are continually reviewed for appropriateness
based upon historical data as it becomes available.
|
Recourse Loan Agreements
Previously, we had recourse loan agreements with Sallie Mae and Stillwater National Bank and Trust Company (Stillwater) which
required us to repurchase loans originated by them to our students after a certain period of time. Our recourse loan agreement with Stillwater was terminated on April 29, 2007. Our recourse loan agreement with Sallie Mae ended on March 31,
2008.
Outstanding net recourse loan receivable balances for continuing operations as of September 30, 2010 and
December 31, 2009 were $3.6 million and $8.5 million, respectively. These receivables are reported under non-current assets as a component of student receivables, net within the unaudited consolidated balance sheets.
8. GOODWILL AND ASSET IMPAIRMENT
Changes in the carrying amount of goodwill for continuing operations for the nine months ended September 30, 2010, are as follows by segment (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
University
|
|
|
Health
Education
|
|
|
Culinary
Arts
|
|
|
International
|
|
|
Transitional
|
|
|
Total
|
|
Goodwill balance at December 31, 2009
|
|
$
|
120,192
|
|
|
$
|
136,610
|
|
|
$
|
75,148
|
|
|
$
|
45,565
|
|
|
$
|
|
|
|
$
|
377,515
|
|
Acquisition of IUM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,360
|
|
|
|
|
|
|
|
8,360
|
|
Effect of foreign currency exchange rate changes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,054
|
)
|
|
|
|
|
|
|
(2,054
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill balance at September 30, 2010
|
|
$
|
120,192
|
|
|
$
|
136,610
|
|
|
$
|
75,148
|
|
|
$
|
51,871
|
|
|
$
|
|
|
|
$
|
383,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(In thousands, except per share amounts)
As a result of the
realignment of our IADT schools, Harrington College of Design, Collins College and Brooks Institute into the University SBU as well as Briarcliffe College and Brown College into the Health Education SBU as of January 15, 2010, we reassigned the
goodwill balances to each reporting unit in accordance with FASB ASC Topic 350
Intangibles Goodwill and Other.
During the third quarter of 2010, we recorded a $0.4 million asset impairment charge for one of our leased facilities. This noncash charge is reflected within University and relates to the repurposing of
a facility. During the third quarter of 2009, we recorded a $2.5 million asset impairment charge for one of our owned facilities, resulting from its carrying value exceeding its current fair value. This noncash charge is reflected within
Corporate and Other.
9. COMMITMENTS AND CONTINGENCIES
Our estimated accrual for legal fees and settlements is presented within other current liabilities on our unaudited consolidated balance sheets. This accrual increased approximately $40.9 million from
$3.8 million at December 31, 2009 to $44.7 million at September 30, 2010. The Company recorded legal expenses of $47.3 million in the third quarter 2010 resulting from the settlements of certain legal matters. Of this pretax amount, $40.0
million was recorded within the Culinary Arts segment in connection with the settlement of the
Amador
and
Adams
actions described in Student Litigation below. The remaining $7.3 million was recorded within the University
segment.
Litigation
We are, or were, a party to the following legal proceedings that are outside the scope of ordinary routine litigation incidental to our business.
Student Litigation
Amador, et al. v. California Culinary Academy
and Career Education Corporation; Adams, et al. v. California Culinary Academy and Career Education Corporation.
On September 27, 2007, Allison Amador and 36 other current and former students of the California Culinary Academy
(CCA) filed a complaint in the California Superior Court in San Francisco. Plaintiffs plead their original complaint as a putative class action and allege four causes of action: fraud; constructive fraud; violation of the California
Unfair Competition Law; and violation of the California Consumer Legal Remedies Act. Plaintiffs contend that CCA made a variety of misrepresentations to them, primarily oral, during the admissions process. The alleged misrepresentations relate
generally to the schools reputation, the value of the education, the competitiveness of the admissions process, and the students employment prospects upon graduation, including the accuracy of statistics published by CCA.
On April 3, 2008, the same counsel representing plaintiffs in the Amador action filed the Adams action on behalf of Jennifer Adams
and several other unnamed members of the Amador putative class. The Adams action also is styled as a class action and is based on the same allegations underlying the Amador action and attempts to plead the same four causes of action pled in the
Amador action. The Adams action has been deemed related to the Amador action and is being handled by the same judge. The Adams action has been stayed.
Plaintiffs filed a Fourth Amended Complaint on or about March 19, 2010 alleging the same causes of action, but included a new claim based on violations of the California Education Code, which
was recently reinstated by the California legislature. Defendants filed a motion to dismiss this new claim. The motion was taken under submission by the Court and has not been ruled on.
15
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(In thousands, except per share amounts)
In October 2010,
the parties reached agreement on all the material terms of a settlement and executed a formal settlement agreement as of November 1, 2010. The settlement is subject to court approval. The monetary component of the settlement involves payment by the
Company of approximately $40.0 million to pay claims by all students who enrolled in CCA and/or graduated from CCA from September 28, 2003 through October 8, 2008. The payment includes plaintiffs attorneys fees and certain
expenses to be incurred in connection with the implementation of the settlement. During the third quarter of 2010, the Company recorded a pretax charge of $40.0 million which represents our best estimate of the loss related to this matter.
Lilley, et al. v. Career Education Corporation, et al.
On February 11, 2008, a class action complaint was filed
in the Circuit Court of Madison County, Illinois, naming as defendants Career Education Corporation and Sanford-Brown College, Inc. Plaintiffs filed amended complaints on September 5, 2008 and September 24, 2010. The five plaintiffs named
in the amended complaint are former students who attended a medical assistant program at Sanford-Brown College located in Collinsville, Illinois. The class is alleged to be all persons who enrolled in that program since July 1, 2003. The
amended class action complaint asserts claims for alleged violations of the Illinois Private Business and Vocational Schools Act, for alleged unfair conduct and deceptive conduct under the Illinois Consumer Fraud and Deceptive Business Practices
Act, as well as common law claims of fraudulent misrepresentation and fraudulent omission.
In the amended complaint filed on
September 24, 2010, the plaintiffs allege that the schools enrollment agreements contained false and misleading information regarding placement statistics, job opportunities and salaries and that Admissions, Financial Aid and Career
Services personnel used standardized materials that allegedly contained false and/or deceptive information. Plaintiffs also allege that the school misused a standardized admissions test to determine program placement when the test was not intended
for that purpose; failed to provide allegedly statutorily required loan repayment information; and misrepresented the transferability of credits. Plaintiffs seek compensatory, treble and punitive damages, disgorgement and restitution of all tuition
monies received from medical assistant students, attorneys fees, costs and injunctive relief.
Defendants filed a motion
to dismiss the amended complaint on October 20, 2010. On October 27, 2010 the Court granted defendants motion with respect to plaintiffs fraudulent omission claims. The Court denied the Motion with respect to the statutory claims under
the Private Schools Act and the Illinois Consumer Fraud Act and the common law fraudulent misrepresentation claim. Defendants brief in opposition to plaintiffs motion for class certification is expected to be filed on November 5, 2010.
The Court has set a hearing on plaintiffs motion for class certification for November 15, 2010.
Schuster, et al.
v. Western Culinary Institute, Ltd. and Career Education Corporation.
On March 5, 2008, original named plaintiffs Shannon Gozzi and Megan Koehnen filed a complaint in Portland, Oregon in the Circuit Court of the State of Oregon in and for
Multnomah County. Plaintiffs filed the complaint individually and as a putative class action and alleged two claims for equitable relief: violation of Oregons Unlawful Trade Practices Act and unjust enrichment. Plaintiffs filed an amended
complaint on April 10, 2008, which added two claims for money damages: fraud and breach of contract. Plaintiffs allege that Western Culinary Institute, Ltd. (WCI) made a variety of misrepresentations to them, relating generally to
WCIs placement statistics, students employment prospects upon graduation from WCI, the value and quality of an education at WCI, and the amount of tuition students could expect to pay as compared to salaries they may earn after
graduation. On May 21, 2008, plaintiffs filed a second amended complaint in which they simply changed the statement Claims Subject to Mandatory Arbitration on the caption to Claims
Not
Subject to Mandatory
Arbitration (emphasis added). WCI and CEC filed an answer on June 13, 2008 and WCI subsequently moved to dismiss certain of plaintiffs claims under Oregons Unlawful Trade Practices Act; that motion was granted on
September 12, 2008. Shannon Gozzi subsequently withdrew as a named plaintiff and is now asserting claims merely as an absent class member, and
16
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(In thousands, except per share amounts)
former named plaintiff Meghan Koehnens claims have been dismissed. Jennifer Schuster became a Plaintiff, and when Ms. Koehnens claims were dismissed, she became
the sole named Plaintiff. Ms. Schuster filed a third amended complaint on November 20, 2008. Defendants filed an answer on December 5, 2008. Plaintiffs filed their most recent pleading, a fourth amended complaint, on
September 2, 2009, and Defendants filed an answer on October 15, 2009. The parties completed written discovery on class issues. Plaintiffs filed their motion for class certification on August 31, 2009, and oral argument on the motion
was heard on October 29, 2009. On February 5, 2010, the Court entered a formal Order granting class certification on part of the UTPA and fraud claims purportedly based on omissions, denying certification of the rest of those claims
and denying certification of the breach of contract and unjust enrichment claims. On April 30, 2010, the Court addressed the issue of whether the class should include students who enrolled prior to March 5, 2006, provided that they were
attending the school on or after March 6, 2006. Defendants argued that the class cannot include pre-March 6, 2006 enrollees (two years prior to the filing of the lawsuit, corresponding with the two year statute of limitations on the
fraud claim) because of the individual questions associated with determining whether the statute of limitations may be tolled. The Court agreed with Defendants position and limited the class as Defendants suggested. Because
Ms. Schuster was not a member of the certified class (she enrolled before March 5, 2006), Plaintiffs counsel is proposing to substitute in a new class representative for her named Nathan Surrett. The parties are negotiating
the terms of that potential substitution, allowing WCI the right to challenge whether the new class representative is adequate (with Plaintiff retaining the burden of proof on that issue). Class notice has not been sent due to the complications
associated with the impending withdrawal of the named Plaintiff and potential substitution of a new plaintiff. The parties are currently engaged in merits discovery. The class will consist of students who enrolled at WCI between
March 5, 2006 and March 1, 2010, excluding those who dropped out or were dismissed from the school for academic reasons.
Vasquez, et al. v. California School of Culinary Arts, Inc. and Career Education Corporation.
On June 23, 2008, a putative class action lawsuit was filed in the Los Angeles County Superior
Court entitled
Daniel Vasquez and Cherish Herndon v. California School of Culinary Arts, Inc. and Career Education Corporation
. The plaintiffs allege causes of action for fraud, constructive fraud, violation of the California Unfair
Competition Law and violation of the California Consumer Legal Remedies Act. The plaintiffs allege improper conduct in connection with the admissions process during the alleged class period. The alleged class is defined as including all
persons who purchased educational services from California School of Culinary Arts, Inc. (CSCA), or graduated from CSCA, within the limitations periods applicable to the herein alleged causes of action (including, without limitation, the
period following the filing of the action). Defendants successfully demurred to the constructive fraud claim and the Court has dismissed it. The parties are engaged in class discovery. The Court has set a deadline of January 28, 2011 for
plaintiffs to file their motion for class certification.
Due to the inherent uncertainties of litigation, we cannot predict
the ultimate outcome of these matters. An unfavorable outcome of any one or more of these matters could have a material adverse impact on our business, results of operations, cash flows, and financial position.
False Claims Act
False Claims Act Lawsuit.
On July 28, 2009, we were served with a complaint filed in the U.S. District Court for the
Northern District of Georgia, Atlanta Division. The complaint was originally filed under seal on July 14, 2008 by four former employees of the Dunwoody campus of our American InterContinental University on behalf of themselves and the
federal government. The case is captioned
United States of America, ex rel. Melissa Simms Powell, et al. v. American InterContinental University, Inc., a Georgia Corporation, Career Education Corp., a Delaware Corporation and John Doe Nos. 1-100.
17
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(In thousands, except per share amounts)
On July 27,
2009, the Court ordered the complaint unsealed and we were notified that the U.S. Department of Justice declined to intervene in the action. When the federal government declines to intervene in a False Claims Act action, as it has done in this case,
the private plaintiffs may elect to pursue the litigation on behalf of the federal government and, if they are successful, receive a portion of the federal governments recovery. The action alleges violations of the False Claims Act, 31 U.S.C.
§ 3729(a)(1) and (2), and promissory fraud, including allegedly providing false certifications to the federal government regarding compliance with certain provisions of the Higher Education Act and accreditation standards. On
September 1, 2009, we timely filed a Motion to Dismiss all of the claims. It was denied by the Court in its Order of June 2, 2010. On June 16 and 17, 2010, we filed separate Motions for Reconsideration, for Certification for
Interlocutory Appeal, and to Strike certain allegations in the complaint. Briefing on these Motions was completed on July 15, 2010. Discovery in the matter is stayed pending their resolution.
Telephone Consumer Protection Act Litigation
Fahey, et al v. Career Education Corporation; Rojas, et al v. Career Education Corporation.
On August 4, 2010, a putative class action lawsuit was filed in the Circuit Court of Cook County,
Illinois, by Sheila Fahey alleging that she had received an unauthorized text message advertisement in violation of the Telephone Consumer Protection Act. On September 3, 2010, CEC removed this case to the U.S. District Court for the Northern
District of Illinois. On August 18, 2010, the same counsel representing plaintiffs in the Fahey action filed a similar lawsuit in the U.S. District Court for the Northern District of Illinois on behalf of Sergio Rojas containing similar allegations.
Rojas, like Fahey, seeks class certification of his claims. The alleged classes are defined to include persons who received unauthorized text message advertisements from CEC. Rojas and Fahey seek an award trebling the statutory damages to the class
members, together with costs and reasonable attorneys fees.
Other Litigation
In addition to the legal proceedings and other matters described above, we are also subject to a variety of other claims, suits, and
investigations that arise from time to time in the ordinary conduct of our business, including, but not limited to, claims involving students or graduates and routine employment matters. While we currently believe that such claims, individually or
in aggregate, will not have a material adverse impact on our financial position, cash flows, or results of operations, the litigation and other claims noted above are subject to inherent uncertainties, and managements view of these matters may
change in the future. Were an unfavorable final outcome to occur in any one or more of these matters, there exists the possibility of a material adverse impact on our business, reputation, financial position, cash flows, and the results of
operations for the period in which the effect becomes probable and reasonably estimable.
Accrediting Body and Federal Regulatory
Matters
AIUs accrediting agency, the Higher Learning Commission of the North Central Association of Colleges and
Schools (HLC), commissioned an advisory team to visit AIU in January 2010. The advisory team conducted a review of AIU, with particular focus on program integrity. Based on the results of its review, the HLC advisory team did not cite
AIU for any violations of any HLC accreditation criteria, including but not limited to those related to program length and credit hours, and did not recommend any sanction or limitation on AIUs accreditation status. The advisory team
recommended a focused visit for 2011 or 2012 to evaluate AIUs transition to a new undergraduate credit structure which was introduced in February 2010. All new undergraduate students starting at AIU are enrolled in programs with this new
credit structure. The recommended focused visit will supersede the focused visit concerning credit equivalence previously scheduled for 2010. The focused visit is currently scheduled for September 19 20, 2011.
18
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(In thousands, except per share amounts)
In accordance with
HLC policy, the advisory teams recommendation that HLC conduct a focused visit to evaluate AIUs transition to a new undergraduate structure was subject to review and approval by the HLC Institutional Actions Council (IAC) and
validation by the HLC Board of Trustees. The advisory teams recommendation was approved by the IAC on June 14, 2010, and the decision of the IAC was validated by the HLC Board of Trustees on June 23, 2010. AIUs updated
Statement of Affiliation Status and Organizational Profile were posted to the HLCs website on Friday, July 9, 2010.
AIU has recently submitted new academic program applications to HLC, which are being reviewed by HLC in accordance with its regular
practices.
Due to their participation in Title IV programs, our schools and universities are subject to periodic program
reviews by the U.S. Department of Education (ED) for the purpose of evaluating an institutions compliance with Title IV requirements, identifying any liabilities to the ED caused by errors in compliance, and improving future
institutional capabilities.
As previously disclosed, the ED conducted a program review of AIU in November 2009. On
July 14, 2010, AIU received a copy of the EDs Program Review Report, which is a preliminary report of the EDs findings from its program review. The Program Review Report identified six findings, two of which were deemed to be
systemic findings by the EDs program review team. These two findings relate to AIUs policy for determining student attendance in online courses for purposes of determining such students enrollment status, withdrawal dates and
associated timing respecting the return of unearned Title IV funds. AIU disagrees with these two findings and intends to contest the program review teams proposed determination of what constitutes appropriate documentation or verification
of online academic activity. The remaining four findings were isolated and generally relate to processing errors. We believe the amounts involved in these four findings are immaterial. AIU intends to submit a response to the findings contained
in the Program Review Report. After the ED receives AIUs response, it will issue a Final Program Review Determination letter that will specify any required corrective action and amounts owed to the ED, if any.
In addition, an ED program review report for Gibbs College Livingston, New Jersey (school closed) and final determination letters
for Briarcliffe College and Katharine Gibbs School New York, New York (school closed) are currently pending. The program review report and/or final determination letter will, generally, cover a schools main campus and any branch
campuses. We are committed to resolving all issues identified in connection with these program reviews to the EDs satisfaction and ensuring that our schools operate in compliance with all ED regulations.
Our schools and universities are also subject to periodic audits by various regulatory bodies, including the U.S. Department of
Educations Office of Inspector General (OIG). The OIG audit services division commenced a compliance audit of CTU in June 2010, covering the period July 1, 2009 to June 30, 2010, to determine whether CTU has policies
and procedures to ensure that CTU administers Title IV and other federal program funds in accordance with applicable federal regulations. The OIG audit is ongoing.
While we believe that our schools operate in substantial compliance with applicable statutes and regulations, we cannot predict the outcome of these matters, and any unfavorable outcomes could have a
material adverse effect on our business, results of operations, cash flows and financial position.
10. INCOME TAXES
The determination of the annual effective tax is based upon a number of significant estimates and judgments, including the estimated
annual pretax income in each tax jurisdiction in which we operate and the
19
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(In thousands, except per share amounts)
ongoing development of tax planning strategies during the year. In addition, our provision for income taxes can be impacted by changes in tax rates or laws, the finalization of tax audits and
reviews, as well as other factors that cannot be predicted with certainty. As such, there can be significant volatility in interim tax provisions.
The following is a summary of our income tax provision and effective tax rate for continuing operations (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended September 30,
|
|
|
For the Nine Months
Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Pretax income
|
|
$
|
39,197
|
|
|
$
|
38,504
|
|
|
$
|
221,861
|
|
|
$
|
127,695
|
|
Provision for income taxes
|
|
$
|
12,304
|
|
|
$
|
11,626
|
|
|
$
|
73,842
|
|
|
$
|
43,351
|
|
Effective tax rate
|
|
|
31.4
|
%
|
|
|
30.2
|
%
|
|
|
33.3
|
%
|
|
|
33.9
|
%
|
The increase in our
effective tax rate for the three months ended September 30, 2010 as compared to the prior year quarter was primarily due to the recording of a higher tax benefit in the prior year resulting from the expiration of the statute of limitations
periods on various uncertain tax positions. In addition, the current quarter results include lower levels of both non-profit income and tax-exempt interest as a percentage of pretax income.
The decrease in our effective tax rate for the nine months ended September 30, 2010 as compared to the prior year to date was
primarily due to the recording of a $4.2 million tax benefit in the second quarter 2010 resulting from a recently closed federal tax audit for credits associated with curriculum development. This tax credit reduced our effective tax rate by 1.9% for
the nine months ended September 30, 2010. This reduction in the effective tax rate was partially offset by lower levels of both non-profit income and tax-exempt interest as a percentage of pretax income.
We estimate that it is reasonably possible that the liability for unrecognized tax benefits for a variety of uncertain tax positions will
decrease by up to $8.8 million in the next twelve months as a result of the completion of various tax audits currently in process and the expiration of the statute of limitations in several jurisdictions. The income tax rate for the three and nine
months ended September 30, 2010 does not take into account the possible reduction of the liability for unrecognized tax benefits. The impact of a reduction to the liability will be treated as a discrete item in the period the reduction occurs.
We recognize interest and penalties related to unrecognized tax benefits in tax expense. As of September 30, 2010, we had accrued $3.4 million as an estimate for reasonably possible interest and accrued penalties.
Our tax returns are routinely audited by federal, state and foreign tax authorities and these audits are at various stages of completion
at any given time. The Internal Revenue Service completed its examination of our U.S. income tax returns through our tax year ending December 31, 2007.
11. STOCK REPURCHASE PROGRAM
During the nine months ended
September 30, 2010, we repurchased 5.4 million shares of our common stock for approximately $154.9 million at an average price of $28.56 per share. We did not repurchase shares of our common stock during the third quarter 2010.
As of September 30, 2010, approximately $290.5 million was available under our authorized stock repurchase program to repurchase
outstanding shares of our common stock. Stock repurchases under this program may be made on the open market or in privately negotiated transactions from time to time, depending on various factors, including market conditions and corporate and
regulatory requirements. The stock repurchase
20
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(In thousands, except per share amounts)
program does not have an expiration date and may be suspended or discontinued at any time. The repurchase of shares of our common stock reduces the amount of cash available to pay cash dividends
to our stockholders. We have never paid cash dividends on our common stock.
12. SHARE-BASED COMPENSATION
Overview of Share-Based Compensation Plans
On May 13, 2008, the stockholders of CEC approved the Career Education Corporation 2008 Incentive Compensation Plan (the 2008 Plan). The 2008 Plan authorizes awards of stock options,
stock appreciation rights, restricted stock, restricted stock units, deferred stock, performance units, annual incentive awards, and substitute awards. Any shares of CEC common stock that are subject to awards of stock options or stock appreciation
rights payable in shares will be counted as 1.0 share for each share granted for purposes of the aggregate share limit and any shares of CEC common stock that are subject to any other form of award will be counted as 1.67 shares for each share
granted for purposes of the aggregate share limit. The 2008 Plan replaced our 1998 Employee Incentive Compensation Plan, as amended (the 1998 Employee Plan) and our 1998 Non-Employee Directors Stock Option Plan (the
Directors Plan). As of September 30, 2010 there were approximately 5.9 million shares of common stock available for future share-based awards under the 2008 Plan.
As of September 30, 2010, we estimate that pretax compensation expense of $21.8 million will be recognized over the next four years
for all unvested share-based awards that have been granted to participants, including both stock options and shares of restricted stock. We expect to satisfy the exercise of stock options and future distribution of shares of restricted stock by
issuing new shares of common stock or by using treasury shares.
Stock Options.
The exercise price of stock
options granted under each of the plans is equal to the fair market value of our common stock on the date of grant. Employee stock options generally become exercisable 25% per year over a four-year service period beginning on the date of grant
and expire ten years from the date of grant, unless an earlier expiration date is set at the time of the grant. Non-employee directors stock options expire ten years from the date of grant and generally become exercisable as follows:
one-third on the grant date, one-third on the first anniversary of the grant date, and one-third on the second anniversary of the grant date. Both employee stock options and non-employee director stock options are subject to possible earlier vesting
and termination in certain circumstances. Generally, if a plan participant terminates his or her employment for any reason other than by death or disability during the vesting period, he or she forfeits the right to unvested stock option awards.
Since the inception of the plans, grants of stock options have only been subject to the service conditions discussed previously. No stock option grants have included performance or market conditions or other factors that affect stock option vesting.
Stock option activity during the nine months ended September 30, 2010, under all of our stock option plans was as
follows (options in thousands):
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
Weighted Average
Exercise Price
|
|
Outstanding as of December 31, 2009
|
|
|
3,213
|
|
|
$
|
28.30
|
|
Granted
|
|
|
627
|
|
|
|
29.53
|
|
Exercised
|
|
|
(49
|
)
|
|
|
15.01
|
|
Forfeited
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(123
|
)
|
|
|
37.51
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of September 30, 2010
|
|
|
3,668
|
|
|
|
28.38
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of September 30, 2010
|
|
|
2,446
|
|
|
$
|
30.23
|
|
|
|
|
|
|
|
|
|
|
21
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(In thousands, except per share amounts)
Restricted
Stock.
Shares of restricted stock generally become vested either three years after the date of grant or 25% per year over a four-year service period beginning on the date of grant. Generally, if a plan participant terminates his or her
employment for any reason other than by death or disability during the vesting period, he or she forfeits the right to the unvested shares of restricted stock. The vesting of shares of restricted stock is subject to possible acceleration in certain
circumstances. Certain of the shares of restricted stock that we have granted to plan participants are subject to performance conditions that, even if the requisite service period is met, may reduce the number of shares of restricted stock that vest
at the end of the requisite service period or result in all shares being forfeited. These awards are referred to as performance-based restricted stock.
The following table summarizes information with respect to all outstanding shares of restricted stock under our plans during the nine months ended September 30, 2010 (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted Average
Grant-Date Fair
Value Per Share
|
|
Outstanding as of December 31, 2009
|
|
|
1,708
|
|
|
$
|
20.46
|
|
Granted
|
|
|
1,033
|
|
|
|
29.00
|
|
Vested
|
|
|
(244
|
)
|
|
|
28.98
|
|
Forfeited
|
|
|
(190
|
)
|
|
|
22.93
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of September 30, 2010
|
|
|
2,307
|
|
|
$
|
23.18
|
|
|
|
|
|
|
|
|
|
|
Change in Control Provisions
Each of the share-based awards granted under the 2008 Plan, the 1998 Employee Plan and the Directors Plan, including stock options and shares of restricted stock, are subject to change in
control provisions that accelerate vesting of outstanding equity awards under the plans under certain circumstances. As defined by these plans and their related amendments, a change in control generally is deemed to have occurred if, among
other things, any corporation, person, or other entity (other than CEC, a majority-owned subsidiary of CEC or any of CECs subsidiaries, or an employee benefit plan sponsored or maintained by CEC), including a group as defined in
Section 13(d)(3) of the Exchange Act, becomes the beneficial owner of our common stock representing more than 20% under our 1998 Employee Plan and Directors Plan (35% for any awards held by members of our Board of Directors and executives
subject to reporting under Section 16 of the Exchange Act), or 35% under our 2008 Plan, of the combined voting power of our then outstanding common stock. Generally, under the 1998 Plans, accelerated vesting of outstanding awards occurs
upon a change in control; under the 2008 Plan, which is a double-trigger plan, accelerated vesting occurs when an award holder is terminated involuntarily not for cause within two years after a change in control of the Company.
If any person or entity, including a group, beneficially owned 20% or more, of the combined voting power of our then
outstanding common stock as of September 30, 2010, triggering the accelerated vesting provisions of our 1998 Employee Plan discussed above, we would have recognized accelerated share-based compensation expense of approximately $1.2 million
during the third quarter of 2010.
As of September 30, 2010, we are not aware of any person or entity, including a group,
who beneficially owns 20% or more of the combined voting power of our outstanding common stock, and no individual shareholder owned more than 19.7% of the combined voting power of our then outstanding common stock.
22
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(In thousands, except per share amounts)
13. WEIGHTED AVERAGE
COMMON SHARES
The weighted average numbers of common shares used to compute basic and diluted net income per share for the
three and nine months ended September 30, 2010 and 2009 were as follows (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended September 30,
|
|
|
For the Nine Months
Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Basic common shares outstanding
|
|
|
78,919
|
|
|
|
83,120
|
|
|
|
80,206
|
|
|
|
86,570
|
|
Common stock equivalents
|
|
|
900
|
|
|
|
549
|
|
|
|
989
|
|
|
|
501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted common shares outstanding
|
|
|
79,819
|
|
|
|
83,669
|
|
|
|
81,195
|
|
|
|
87,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in stock options outstanding are options to purchase shares of our common stock that were not
included in the computation of diluted net income per share. These shares were excluded because the options exercise prices were greater than the average market price of our common stock during the periods, and, therefore, the effect would
have been anti-dilutive. The shares that would have had an anti-dilutive effect on our diluted net income per share for the three and nine months ended September 30, 2010 and 2009 were as follows (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended September 30,
|
|
|
For the Nine Months
Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Options that would have had an anti-dilutive effect
|
|
|
2,891
|
|
|
|
2,277
|
|
|
|
2,379
|
|
|
|
2,187
|
|
During each of the
three months ended September 30, 2010 and 2009, we issued less than 0.1 million shares, and during each of the nine months ended September 30, 2010 and 2009, we issued less than 0.2 million shares of our common stock upon the
exercise of employee stock options and the purchase of common stock pursuant to our employee stock purchase plan.
14. SEGMENT REPORTING
During the first quarter of 2010, we realigned our resources by integrating our schools which previously comprised our
Art & Design SBU alongside AIU and CTU within the University SBU. Harrington College of Design, Collins College and Brooks Institute joined the IADT schools in the alignment of the Art & Design group into the University SBU. The
realignment also shifted Brown College and Briarcliffe College into the Health Education SBU.
As a result of the realignment,
the Company now has five reportable segments consisting of University, Health Education, Culinary Arts, International and Transitional schools.
University
includes our AIU, CTU, IADT, Harrington College of Design, Collins College and Brooks Institute schools. These schools collectively offer regionally and nationally accredited
academic programs in the career-oriented disciplines of business studies, visual communications and design technologies, film and video production, photography, health education, information technology, criminal justice, and education in an online,
classroom or laboratory setting.
Health Education
includes our Sanford-Brown schools, along with Brown College,
Briarcliffe College, Missouri College and Gibbs College Boston, MA. These schools collectively offer academic programs in the career-oriented disciplines of health education, complemented by certain programs in business studies and
information technology in a classroom, laboratory or online setting.
23
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(In thousands, except per share amounts)
Culinary
Arts
includes our LCB schools that collectively offer culinary arts programs in the career-oriented disciplines of culinary arts, baking and pastry arts, and hotel and restaurant management in a classroom, kitchen or online setting.
International
includes our INSEEC schools, IUM, and Istituto Marangoni schools located in France, Italy, the
United Kingdom and Monaco, which collectively offer academic programs in the career-oriented disciplines of business studies, health education, fashion and design, visual communications and technologies and luxury goods and services in a classroom
or laboratory setting.
Transitional Schools
includes those schools that are currently being taught out. As of
September 30, 2010, AIU Los Angeles, CA is the only school included in Transitional Schools. We anticipate AIU-Los Angeles will complete its teach out by the fourth quarter 2010, and the results of its operations for all periods
presented will then be reflected within Discontinued Operations.
Segment performance is evaluated by the Company and its
chief operating decision maker based on operating income. Adjustments to reconcile segment results to unaudited consolidated results are included under the caption Corporate and Other, which primarily includes unallocated corporate
activity and eliminations.
Summary financial information by reportable segment is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
Operating Income (Loss)
|
|
|
|
For the Three Months
Ended September
30,
|
|
|
For the Three Months
Ended September
30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
University
(1)
|
|
$
|
290,512
|
|
|
$
|
260,167
|
|
|
$
|
64,824
|
|
|
$
|
45,421
|
|
Health Education
|
|
|
110,421
|
|
|
|
90,718
|
|
|
|
12,820
|
|
|
|
9,030
|
|
Culinary Arts
(2)
|
|
|
108,305
|
|
|
|
91,654
|
|
|
|
(23,867
|
)
|
|
|
6,793
|
|
International
|
|
|
15,061
|
|
|
|
15,333
|
|
|
|
(6,740
|
)
|
|
|
(4,498
|
)
|
Transitional Schools
|
|
|
63
|
|
|
|
565
|
|
|
|
(1,287
|
)
|
|
|
(1,187
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
524,362
|
|
|
|
458,437
|
|
|
|
45,750
|
|
|
|
55,559
|
|
Corporate and Other
(3)
|
|
|
(156
|
)
|
|
|
(146
|
)
|
|
|
(7,472
|
)
|
|
|
(17,433
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
524,206
|
|
|
$
|
458,291
|
|
|
$
|
38,278
|
|
|
$
|
38,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
Operating Income (Loss)
|
|
|
|
For the Nine Months
Ended September
30,
|
|
|
For the Nine Months
Ended September
30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
University
(1)
|
|
$
|
878,283
|
|
|
$
|
749,185
|
|
|
$
|
212,995
|
|
|
$
|
133,789
|
|
Health Education
|
|
|
322,256
|
|
|
|
260,205
|
|
|
|
35,434
|
|
|
|
26,052
|
|
Culinary Arts
(2)
|
|
|
293,881
|
|
|
|
241,178
|
|
|
|
(3,267
|
)
|
|
|
2,545
|
|
International
|
|
|
87,378
|
|
|
|
76,119
|
|
|
|
9,689
|
|
|
|
9,950
|
|
Transitional Schools
|
|
|
452
|
|
|
|
2,485
|
|
|
|
(4,135
|
)
|
|
|
(3,853
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
1,582,250
|
|
|
|
1,329,172
|
|
|
|
250,716
|
|
|
|
168,483
|
|
Corporate and Other
(3)
|
|
|
(490
|
)
|
|
|
(345
|
)
|
|
|
(28,963
|
)
|
|
|
(42,020
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,581,760
|
|
|
$
|
1,328,827
|
|
|
$
|
221,753
|
|
|
$
|
126,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
Total Assets as of
(4)
|
|
|
|
September 30,
2010
|
|
|
December 31,
2009
|
|
University
|
|
$
|
253,990
|
|
|
$
|
251,438
|
|
Health Education
|
|
|
278,102
|
|
|
|
269,121
|
|
Culinary Arts
|
|
|
375,294
|
|
|
|
366,694
|
|
International
|
|
|
264,198
|
|
|
|
242,214
|
|
Transitional Schools
|
|
|
3,622
|
|
|
|
3,955
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
1,175,206
|
|
|
|
1,133,422
|
|
Corporate and Other
|
|
|
369,126
|
|
|
|
399,901
|
|
Discontinued Operations
|
|
|
28,788
|
|
|
|
30,519
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,573,120
|
|
|
$
|
1,563,842
|
|
|
|
|
|
|
|
|
|
|
(1)
|
During the third quarter 2010, University recorded $7.3 million of pretax legal expenses related to the settlements of legal matters.
|
(2)
|
During the third quarter 2010, Culinary Arts recorded a $40.0 million pretax charge related to the settlement of a legal matter. For the first and third quarters 2010,
Culinary Arts recorded $3.2 million and $7.3 million, respectively, of additional bad debt expense for increases in reserve rates related to our student extended payment plans.
|
(3)
|
Corporate and Other costs decreased primarily due to the prior year including additional performance-based compensation expense related to incentive plan outperformance
of $7.3 million and $9.7 million for the prior year quarter and prior year to date, respectively.
|
(4)
|
Total assets do not include the following intercompany activity: a) receivable or payable activity between schools and corporate and b) investments in subsidiaries.
|
15. TOTAL COMPREHENSIVE INCOME
The following table presents the components of comprehensive income for the periods presented (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
Months
Ended September 30,
|
|
|
For the Nine Months
Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Net income
|
|
$
|
26,131
|
|
|
$
|
20,792
|
|
|
$
|
145,671
|
|
|
$
|
50,539
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
13,004
|
|
|
|
4,182
|
|
|
|
(6,133
|
)
|
|
|
6,358
|
|
Unrealized gains/(losses) on investments, net of tax
|
|
|
86
|
|
|
|
(48
|
)
|
|
|
81
|
|
|
|
(370
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
39,221
|
|
|
$
|
24,926
|
|
|
$
|
139,619
|
|
|
$
|
56,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
Item 2.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
The discussion below contains forward-looking statements, as defined in Section 21E of the Securities Exchange Act of
1934, as amended, that reflect our current expectations regarding our future growth, results of operations, cash flows, performance and business prospects, and opportunities, as well as assumptions made by, and information currently available to,
our management. We have tried to identify forward-looking statements by using words such as anticipate, believe, plan, expect, intend, will, and similar expressions, but these
words are not the exclusive means of identifying these forward-looking statements. These statements are based on information currently available to us and are subject to various risks, uncertainties, and other factors, including, but not limited to,
those discussed in Part II, Item 1A Risk Factors in this Quarterly Report on Form 10-Q, that could cause our actual growth, results of operations, cash flows, performance, business prospects and opportunities to differ materially
from those expressed in, or implied by, these statements. Except as expressly required by federal securities laws, we undertake no obligation to update such factors or to publicly announce the results of any of the forward-looking statements
contained herein to reflect future events, developments, or changed circumstances, or for any other reason.
Overview
The colleges, schools and universities that are part of the Career Education Corporation (CEC) family offer high-quality
education to a diverse student population of more than 118,000 students across the world in a variety of career-oriented disciplines through online, on-ground and hybrid learning program offerings. The more than 90 campuses that serve these students
are located throughout the United States and in France, Italy, the United Kingdom and Monaco, and offer doctoral, masters, bachelors and associate degrees and diploma and certificate programs.
CEC is an industry leader whose institutions are recognized globally. Those institutions include, among others, American InterContinental
University (AIU); Brooks Institute; Colorado Technical University (CTU); Harrington College of Design; INSEEC Group (INSEEC) Schools; International University of Monaco (IUM); International Academy of
Design & Technology (IADT); Istituto Marangoni; Le Cordon Bleu North America (LCB); and Sanford-Brown Institutes and Colleges. Through its schools, CEC is committed to providing high-quality education, enabling
students to graduate and pursue rewarding
career opportunities.
On January 15, 2010, we realigned our resources
to more effectively execute our strategic growth plan. We began the integration of our schools which previously comprised the Art & Design Strategic Business Unit (SBU) alongside AIU and CTU, within the University SBU. This
realignment facilitates synergies between the programs in Art & Design and University, especially in the areas of fashion design, merchandising and interior design and technology. It also enabled the sharing of student-focused online
platforms and expertise and aids IADT as it pursues its longer-term strategy of regional accreditation. Harrington College of Design, Collins College and Brooks Institute joined the IADT schools in the alignment of the Art & Design
group into the University SBU. The realignment also shifted Brown College and Briarcliffe College into the Health Education SBU. We expect Briarcliffes regional accreditation to be beneficial in providing greater opportunity for Sanford-Brown
students to enroll in higher degree programs. This realignment resulted in new reportable segments, and prior period results have been revised to reflect these new reportable segments. See Note 14 Segment Reporting of the notes to
our unaudited consolidated financial statements for further discussion.
In addition to the realignment, we completed a
detailed review of our shared service costs to determine which of these costs should be charged to the SBUs as well as how these shared service costs should be allocated. These services include legal, finance, human resources, marketing, certain
academic functions and certain centralized activities related to student finance, including financial aid processing, student account posting and collections. These costs, recorded within Corporate and Other, were previously allocated to our SBUs
based upon a percentage of revenue. Improved data and analytical capabilities have provided us insight into costs being
26
incurred to support the SBUs versus costs being incurred to support the corporation as a whole. The new methodology allocates costs based on usage and consumption factors such as student
population, employee headcount, advertising spend, number of financial aid recipients and revenue where appropriate. In the case of certain services which are shared evenly across the SBUs, we allocate evenly. The new methodology is intended to
provide improved transparency into the costs of the shared services. The effect of these changes impacts the costs reported within each SBU and reduces the level of unallocated shared service costs. Results beginning in 2010 are presented under the
new methodology and prior period results have been revised to be comparable to the current reporting.
Our reportable segments
are:
University
includes our AIU, CTU, IADT, Harrington College of Design, Collins College and Brooks Institute
schools. These schools collectively offer regionally and nationally accredited academic programs in the career-oriented disciplines of business studies, visual communications and design technologies, film and video production, photography, health
education, information technology, criminal justice, and education in an online, classroom or laboratory setting.
Health Education
includes our Sanford-Brown schools, along with Brown College, Briarcliffe College, Missouri College and
Gibbs CollegeBoston, MA. These schools collectively offer academic programs in the career-oriented disciplines of health education, complemented by certain programs in business studies and information technology in a classroom, laboratory or
online setting.
Culinary Arts
includes our LCB schools that collectively offer culinary arts programs in the
career-oriented disciplines of culinary arts, baking and pastry arts, and hotel and restaurant management in a classroom, kitchen or online setting.
International
includes our INSEEC schools, IUM, and Istituto Marangoni schools located in France, Italy, the United Kingdom and Monaco, which collectively offer academic programs in the
career-oriented disciplines of business studies, health education, fashion and design, visual communications and technologies and luxury goods and services in a classroom or laboratory setting.
Transitional Schools
includes those schools that are currently being taught out. As of September 30, 2010,
AIU Los Angeles, CA is the only school included in Transitional Schools. We anticipate AIU-Los Angeles will complete its teach out by the fourth quarter 2010, and the results of its operations for all periods presented will then be
reflected within Discontinued Operations.
See Note 14 Segment Reporting of the notes to our unaudited
consolidated financial statements for further discussion.
2010 Third Quarter Overview
During the third quarter 2010, we continued to focus on ensuring quality student experiences and outcomes, our expansion of Health
Education institutions to meet the high demand for skills in this sector, and improving our institutions compliance to ensure that our students have clear information about our programs, including their financial obligations, the demands of
our programs and the range of potential outcomes. We continue to invest in key areas such as preparing students for success in their chosen field or career as well as, ongoing student engagement in the process of life-long learning which we believe
will position us for long-term growth in student population. Over its history, our commitment and dedication to student success has resulted in the Company having graduated over 490,000 students.
Total revenue increased 14.4% to $524.2 million as compared to $458.3 million in the prior year quarter. Operating income increased
slightly from $38.1 million in the prior year quarter to $38.3 million for the third quarter 2010, and operating margin decreased 100 basis points to 7.3%. The current year quarters operating
27
income included $47.3 million of pretax expense associated with the settlements of legal matters. See Note 9 Commitments and Contingencies of the notes to our unaudited consolidated
financial statements for further discussion. The prior year quarter included $18.8 million of additional pretax performance-based compensation expense related to incentive plan outperformance, for which a similar level of outperformance is not
expected for 2010. Student population grew 16% over the prior year quarter driven by double-digit new student starts in the first half of 2010 and a 6% increase in third quarter new student starts as compared to the prior year quarter.
Our University segment student population grew by 13% as of September 30, 2010 as compared to the prior year quarter, resulting in a
revenue increase of nearly 12% compared to the prior year quarter and operating margins increased to approximately 22% from approximately 18%. New student starts for the third quarter 2010 grew 4% as compared to the prior year quarter. Current year
administrative expense included $7.3 million of pretax expense related to the settlements of legal matters. As disclosed previously, the Higher Learning Commissions (HLC) Board of Trustees had validated the HLC advisory teams
recommendation related to its review of AIU. During the third quarter, we submitted two new programs to HLC for approval. HLC is reviewing these programs in accordance with its regular practices. We believe this is another positive step for the AIU
institution.
Throughout the quarter, we continued to experience significant growth in our Health Education segment, which
reported an 18% increase in new student starts and a 21.7% revenue increase as compared to the prior year quarter. Operating margin increased by 160 basis points to 11.6% as compared to 10.0% in the prior year quarter. During the third quarter 2010,
we opened our SBC SkokieSkokie, IL campus, and in October 2010 opened our SBC PortlandPortland, OR campus, bringing our total to six newly opened campuses in 2010. These campuses provide us with the opportunity to continue to expand our
presence in key locations throughout the United States.
Within our International segment, revenue decreased approximately
$0.3 million, as compared to the prior year quarter, primarily due to a $2.9 million unfavorable impact of foreign currency exchange rates being partially offset by increased revenue resulting from higher student population at both INSEEC and
Istituto Marangoni. In addition, the current quarters revenue included approximately $0.5 million of revenue attributable to our April 2010 acquisition of IUM. Operating loss increased $2.2 million as compared to the prior year quarter due to
increased administrative expenses as a result of increased spending related to the integration of IUM and other support services.
In the third quarter 2010, Culinary Arts increased new student starts by 4% which, combined with strong student population at the beginning of the current quarter, resulted in a 20% increase in student
population as compared to the prior year quarter. The increase in student population drove an 18.2% increase in revenue for the third quarter 2010 as compared to the prior year quarter. The current year quarter included a $40.0 million charge
related to the settlement of an outstanding legal matter. In addition, the third quarter 2010 results include a $7.3 million increase in bad debt expense related to increasing the reserve rates attributable to our student extended payment plans.
These charges were partially offset by decreased operating costs in academics and advertising as we continued to leverage existing cost structures and optimize marketing channels.
The Company monitors the use of student extended payment plans as a means for providing students with the financing necessary to enroll
in our programs. When determining the level of future commitment we expect to make to student extended payment plans, we consider factors including the availability of third-party financing, the programs offered by our institutions and the mix of
students enrolled in our programs. As of September 30, 2010, the amount of earned student receivables under student extended payment plans, net of allowance for doubtful accounts was $21.2 million.
28
The results of
operations for those campuses previously taught out or sold are reflected as a component of discontinued operations. Currently, we estimate 2010 charges totaling approximately $9.0 million related to real estate actions resulting from the closure of
our Transitional School, AIULos Angeles, CA. The AIULos Angeles, CA campus is the one remaining Transitional School, and it is scheduled to cease operations in the fourth quarter 2010. See Note 5 Discontinued Operations of
the notes to our unaudited consolidated financial statements for further discussion of our accounting for discontinued operations.
Industry Environment
We
operate in a highly regulated environment subject to changes in government regulations as well as changes in academic accreditation agencies and state education regulatory authorities. We have instituted systems, processes and programs in all of our
schools to ensure substantial compliance with all regulations. Recent and pending regulations released and to be released by the U.S. Department of Education (ED) may impact several key areas related to Title IV Program funding
eligibility in the for-profit postsecondary education sector.
On October 29, 2010, ED issued final regulations pertaining to
certain aspects of the administration of the Title IV Programs, including, but not limited to state authorization, gainful employment, compensation rules for persons engaged in certain aspects of admissions and financial aid, determination of
attendance and definition of credit hours. With minor exception these regulations will become effective July 1, 2011. ED previously announced that it was delaying until early 2011 publication of final regulations on certain further proposed gainful
employment regulations, which are expected to become effective on July 1, 2012 or thereafter.
The October 29, 2010
regulations contain substantial changes from the proposed regulations issued by ED in June 2010. The Company is in process of analyzing the final regulations, to identify and assess potential impacts to our business. The new and proposed regulations
could have significant impacts on our business. Among the most significant regulatory changes that we have identified to date for our business are:
|
|
|
the elimination of certain safe harbors that had allowed, under limited and prescribed circumstances, payment of certain types of
compensation to employees (including higher level employees) and third parties involved in student enrollment, certain recruiting, admissions or financial aid activities;
|
|
|
|
imposing extensive record-keeping and disclosure requirements respecting the employment of graduates, as a precursor to proposed future regulations,
described above, that would base the eligibility of specific programs to enroll students receiving Title IV Program funds on certain yet-to-be defined metrics including but not limited to cost of education, future earnings, student loan defaults and
debt incurred in the securing of such education;
|
|
|
|
defining a credit hour for purposes of determining program eligibility for Title IV student financial aid;
|
|
|
|
establishing more stringent state approval criteria that may require or encourage states to modify existing state approval and licensing processes;
|
|
|
|
requiring an institution that offers distance learning programs to secure the approval of each state where it enrolls students to the extent any such
state requires such approval; and
|
|
|
|
strengthening the definition of proscribed misrepresentation to include, among other things, erroneous statements, including erroneous
statements made by certain third-party vendors under contract to an institution, which may increase institutional liability and subject institutions to sanctions for statements containing inadvertent errors, and expose institutions to costly
third-party litigation.
|
As of the date of this filing, we are still assessing the most recently released
regulations. We cannot predict the outcome of the portion of the gainful employment rules that are expected to be issued in 2011, or predict with certainty the impact of the new regulations on our operations. These rules could affect the manner in
which we conduct our business and compliance with these rules could have a material adverse effect on our business, financial condition, results of operations and cash flows. We anticipate that our Culinary Arts and Art & Design institutions
will be most impacted by the gainful employment rules that are expected to be issued in 2011. We continue to review our business models and expect to be in a position to respond with action plans to address changes that may be required as a result
of the final gainful employment rules.
29
CONSOLIDATED RESULTS
The summary of selected financial data table below should be referenced in connection with a review of the following
discussion of our results of operations for the three months ended September 30, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30,
|
|
|
%
Change
|
|
|
|
2010
|
|
|
% of
Total
Revenue
|
|
|
2009
|
|
|
% of
Total
Revenue
|
|
|
2010
vs.
2009
|
|
|
|
(Dollars in thousands)
|
|
TOTAL REVENUE
|
|
$
|
524,206
|
|
|
|
|
|
|
$
|
458,291
|
|
|
|
|
|
|
|
14.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Educational services and facilities
|
|
|
159,104
|
|
|
|
30.4
|
%
|
|
|
149,822
|
|
|
|
32.7
|
%
|
|
|
6.2
|
%
|
General and administrative:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
|
77,440
|
|
|
|
14.8
|
%
|
|
|
76,933
|
|
|
|
16.8
|
%
|
|
|
0.7
|
%
|
Admissions
|
|
|
53,120
|
|
|
|
10.1
|
%
|
|
|
48,228
|
|
|
|
10.5
|
%
|
|
|
10.1
|
%
|
Administrative
|
|
|
146,133
|
|
|
|
27.9
|
%
|
|
|
112,536
|
|
|
|
24.6
|
%
|
|
|
29.9
|
%
|
Bad debt
|
|
|
31,934
|
|
|
|
6.1
|
%
|
|
|
14,238
|
|
|
|
3.1
|
%
|
|
|
124.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general and administrative expense
|
|
|
308,627
|
|
|
|
58.9
|
%
|
|
|
251,935
|
|
|
|
55.0
|
%
|
|
|
22.5
|
%
|
Depreciation and amortization
|
|
|
17,843
|
|
|
|
3.4
|
%
|
|
|
15,908
|
|
|
|
3.5
|
%
|
|
|
12.2
|
%
|
Goodwill and asset impairment
|
|
|
354
|
|
|
|
0.1
|
%
|
|
|
2,500
|
|
|
|
0.5
|
%
|
|
|
-85.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME
|
|
|
38,278
|
|
|
|
7.3
|
%
|
|
|
38,126
|
|
|
|
8.3
|
%
|
|
|
0.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PRETAX INCOME
|
|
|
39,197
|
|
|
|
7.5
|
%
|
|
|
38,504
|
|
|
|
8.4
|
%
|
|
|
1.8
|
%
|
PROVISION FOR INCOME TAXES
|
|
|
12,304
|
|
|
|
2.3
|
%
|
|
|
11,626
|
|
|
|
2.5
|
%
|
|
|
5.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
31.4
|
%
|
|
|
|
|
|
|
30.2
|
%
|
|
|
|
|
|
|
|
|
INCOME FROM CONTINUING OPERATIONS
|
|
$
|
26,893
|
|
|
|
5.1
|
%
|
|
$
|
26,878
|
|
|
|
5.9
|
%
|
|
|
0.1
|
%
|
LOSS FROM DISCONTINUED OPERATIONS, net of tax
|
|
|
(762
|
)
|
|
|
-0.1
|
%
|
|
|
(6,086
|
)
|
|
|
-1.3
|
%
|
|
|
-87.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
26,131
|
|
|
|
5.0
|
%
|
|
$
|
20,792
|
|
|
|
4.5
|
%
|
|
|
25.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Educational services and facilities expense includes costs directly attributable to the
educational activities of our schools, including, among other things, (1) salaries and benefits of faculty, academic administrators, and student support personnel, (2) costs of educational supplies and facilities, including rents on school
leases, certain costs of establishing and maintaining computer laboratories, costs of student housing, and owned and leased facility costs, (3) royalty fees paid to Le Cordon Bleu Limited through August 2009, and (4) certain student
financing costs. Also included in educational services and facilities expense are costs of other goods and services provided by our schools, including, among other things, costs of textbooks, laptop computers, dormitory services, restaurant
services, contract training and cafeteria services.
General and administrative expense includes salaries and benefits of
personnel in corporate and school administration, marketing, admissions, financial aid, accounting, human resources, legal and compliance. Costs of promotion and development, advertising and production of marketing materials, occupancy of the
corporate offices and bad debt expense are also included in this expense category.
30
Three Months Ended
September 30, 2010 as Compared to Three Months Ended September 30, 2009
Revenue
Total revenue increased $65.9 million, or 14.4% as compared to the prior year quarter, driven by revenue growth in the majority of our
operating segments: University, Health Education and Culinary Arts. The overall increase in revenue is due to a 16% increase in student population. Internationals revenue, which decreased slightly as compared to the prior year quarter, was
negatively impacted by a $2.9 million unfavorable effect of foreign currency exchange rates.
Educational Services and Facilities
Expense
Educational services and facilities expense increased $9.3 million, or 6.2% as compared to the prior year
quarter primarily driven by increased academics expense within University and Health Education, as we continue to invest in the expansion and support of academic functions in order to support the growing student population. As a percentage of
revenue, educational services and facilities decreased 2.3% as compared to the prior year quarter, as our operating segments continue to leverage their existing cost structure in providing the appropriate services to our students.
General and Administrative Expense
General and administrative expense increased $56.7 million, or 22.5%, and increased 3.9% as a percentage of revenue as compared to the prior year quarter. The current year quarter results include $47.3
million of pretax charges related to legal matters within Culinary Arts and University and a $17.7 million increase in bad debt expense. The prior year quarter includes $18.8 million of pretax additional performance-based compensation expense
related to incentive plan outperformance. The increased costs as compared to the prior year quarter were partially offset by decreases in advertising and admissions expenses as a percent of revenue, as we continue to focus on cost effectiveness in
key acquisition channels and leverage our existing infrastructure.
Bad debt expense incurred by each of our reportable
segments during the quarters ended September 30, 2010 and 2009 was as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30,
|
|
|
|
2010
|
|
|
As a % of
Segment
Revenue
|
|
|
2009
|
|
|
As a % of
Segment
Revenue
|
|
Bad debt expense by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
University
|
|
$
|
9,433
|
|
|
|
3.2
|
%
|
|
$
|
4,853
|
|
|
|
1.9
|
%
|
Health Education
|
|
|
3,375
|
|
|
|
3.1
|
%
|
|
|
2,090
|
|
|
|
2.3
|
%
|
Culinary Arts
|
|
|
19,028
|
|
|
|
17.6
|
%
|
|
|
7,717
|
|
|
|
8.4
|
%
|
International
|
|
|
(75
|
)
|
|
|
-0.5
|
%
|
|
|
(344
|
)
|
|
|
-2.2
|
%
|
Transitional Schools
|
|
|
(3
|
)
|
|
|
-4.8
|
%
|
|
|
10
|
|
|
|
1.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
31,758
|
|
|
|
|
|
|
|
14,326
|
|
|
|
|
|
Corporate and Other
|
|
|
176
|
|
|
|
N/A
|
|
|
|
(88
|
)
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
31,934
|
|
|
|
6.1
|
%
|
|
$
|
14,238
|
|
|
|
3.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bad debt expense increased approximately $17.7 million as compared to the prior year quarter,
primarily within Culinary Arts as a result of increased reserve rates being applied to outstanding student receivables associated with our student extended payment plans. The bad debt reserve rates are continually reviewed for appropriateness based
upon updated historical data as it becomes available, and as a result, the Company recorded an additional $8.3 million in bad debt expense in the current year quarter. Approximately $7.3 million of this charge was recorded within Culinary Arts.
31
Operating Income
Operating income increased $0.2 million, or approximately 0.4% as compared to the prior year quarter, as we
experienced increased profitability within University and Health Education, offset by operating losses within Culinary Arts and International. The 16% increase in total student population, as well as the continued focus on gaining cost efficiencies
which resulted in a decrease in several expense categories as a percent of revenue, were partially offset by the increases in administrative and bad debt expense. The decrease in operating income as a percent of revenue was primarily due to $47.3
million of pretax charges recorded in the third quarter 2010 related to legal matters within Culinary Arts and University.
Provision
for Income Taxes
Our consolidated effective income tax rate for continuing operations was 31.4% for the three months
ended September 30, 2010 and 30.2% for the three months ended September 30, 2009. The increase in our effective tax rate for the three months ended September 30, 2010 as compared to the prior year quarter was primarily due to the
recording of a higher tax benefit in the prior year resulting from the expiration of the statute of limitations on various uncertain tax positions. In addition, the current quarter results include lower levels of both non-profit income and
tax-exempt interest as a percentage of pretax income.
Loss from Discontinued Operations
The results of operations for schools that have ceased operations or were sold are presented within discontinued operations. As the last
campus within Transitional Schools ceases operations in the fourth quarter of 2010, we will reclassify its results of operations for all periods presented to discontinued operations. See Note 5 Discontinued Operations of the notes
to our unaudited consolidated financial statements for further discussion of our discontinued operations.
32
Nine Months Ended
September 30, 2010 as Compared to Nine Months Ended September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30,
|
|
|
% Change
|
|
|
|
2010
|
|
|
% of
Total
Revenue
|
|
|
2009
|
|
|
% of
Total
Revenue
|
|
|
2010
vs.
2009
|
|
|
|
(Dollars in thousands)
|
|
TOTAL REVENUE
|
|
$
|
1,581,760
|
|
|
|
|
|
|
$
|
1,328,827
|
|
|
|
|
|
|
|
19.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Educational services and facilities
|
|
|
477,419
|
|
|
|
30.2
|
%
|
|
|
444,899
|
|
|
|
33.5
|
%
|
|
|
7.3
|
%
|
General and administrative:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
|
228,142
|
|
|
|
14.4
|
%
|
|
|
218,801
|
|
|
|
16.5
|
%
|
|
|
4.3
|
%
|
Admissions
|
|
|
165,263
|
|
|
|
10.4
|
%
|
|
|
141,985
|
|
|
|
10.7
|
%
|
|
|
16.4
|
%
|
Administrative
|
|
|
359,151
|
|
|
|
22.7
|
%
|
|
|
306,622
|
|
|
|
23.1
|
%
|
|
|
17.1
|
%
|
Bad debt
|
|
|
77,865
|
|
|
|
4.9
|
%
|
|
|
39,158
|
|
|
|
2.9
|
%
|
|
|
98.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general and administrative expense
|
|
|
830,421
|
|
|
|
52.5
|
%
|
|
|
706,566
|
|
|
|
53.2
|
%
|
|
|
17.5
|
%
|
Depreciation and amortization
|
|
|
51,813
|
|
|
|
3.3
|
%
|
|
|
48,399
|
|
|
|
3.6
|
%
|
|
|
7.1
|
%
|
Goodwill and asset impairment
|
|
|
354
|
|
|
|
0.0
|
%
|
|
|
2,500
|
|
|
|
0.2
|
%
|
|
|
-85.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME
|
|
|
221,753
|
|
|
|
14.0
|
%
|
|
|
126,463
|
|
|
|
9.5
|
%
|
|
|
75.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PRETAX INCOME
|
|
|
221,861
|
|
|
|
14.0
|
%
|
|
|
127,695
|
|
|
|
9.6
|
%
|
|
|
73.7
|
%
|
PROVISION FOR INCOME TAXES
|
|
|
73,842
|
|
|
|
4.7
|
%
|
|
|
43,351
|
|
|
|
3.3
|
%
|
|
|
70.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
33.3
|
%
|
|
|
|
|
|
|
33.9
|
%
|
|
|
|
|
|
|
|
|
INCOME FROM CONTINUING OPERATIONS
|
|
$
|
148,019
|
|
|
|
9.4
|
%
|
|
$
|
84,344
|
|
|
|
6.3
|
%
|
|
|
75.5
|
%
|
LOSS FROM DISCONTINUED OPERATIONS, net of tax
|
|
|
(2,348
|
)
|
|
|
-0.1
|
%
|
|
|
(33,805
|
)
|
|
|
-2.5
|
%
|
|
|
-93.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
145,671
|
|
|
|
9.2
|
%
|
|
$
|
50,539
|
|
|
|
3.8
|
%
|
|
|
188.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Total revenue increased $252.9 million, or 19.0% from the prior year driven by increased revenue in all operating segments: University, Health Education, Culinary Arts and International. The overall
increase in revenue is due to a 16% increase in student population resulting from a 17% increase in new student starts as compared to the prior year to date. Internationals revenue was negatively impacted by a $3.2 million unfavorable effect
of foreign currency exchange rates.
Educational Services and Facilities Expense
Educational services and facilities expense increased $32.5 million, or 7.3% as compared to the prior year to date. The increase is mainly
a result of an increase in academics expense, as Health Education, University and International invested in the expansion and support of academic functions in order to support the growing student population. As a percentage of revenue, educational
services and facilities decreased approximately 3.3% as compared to the prior year to date, primarily due to higher utilization of our existing real estate and improved leverage of academic costs.
General and Administrative Expense
General and administrative expense increased $123.9 million, or 17.5% as compared to the prior year to date partially due to $47.3 million in pretax charges related to legal matters. The prior year
included $25.3 million of additional performance-based compensation expense related to incentive plan outperformance. The increase of
33
$23.3 million in admissions expense as compared to the prior year to date was driven by the expansion of the student population. Advertising expense increased $9.3 million as compared to the
prior year to date due to increased spending within Health Education and University during the first half of 2010 as a result of strong levels of student interest. As a percentage of revenue, expenses declined as we continue to leverage our existing
infrastructure.
Bad debt expense incurred by each of our reportable segments during the nine months ended September 30,
2010 and 2009 was as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
2010
|
|
|
As a % of
Segment
Revenue
|
|
|
2009
|
|
|
As a % of
Segment
Revenue
|
|
Bad debt expense by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
University
|
|
$
|
23,156
|
|
|
|
2.6
|
%
|
|
$
|
14,907
|
|
|
|
2.0
|
%
|
Health Education
|
|
|
8,337
|
|
|
|
2.6
|
%
|
|
|
4,801
|
|
|
|
1.8
|
%
|
Culinary Arts
|
|
|
41,173
|
|
|
|
14.0
|
%
|
|
|
19,515
|
|
|
|
8.1
|
%
|
International
|
|
|
275
|
|
|
|
0.3
|
%
|
|
|
212
|
|
|
|
0.3
|
%
|
Transitional Schools
|
|
|
(5
|
)
|
|
|
-1.1
|
%
|
|
|
22
|
|
|
|
0.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
72,936
|
|
|
|
|
|
|
|
39,457
|
|
|
|
|
|
Corporate and Other
|
|
|
4,929
|
|
|
|
N/A
|
|
|
|
(299
|
)
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
77,865
|
|
|
|
4.9
|
%
|
|
$
|
39,158
|
|
|
|
2.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bad debt expense increased $38.7 million as compared to the prior year to date, primarily within
Culinary Arts, as student receivable balances continued to grow as a result of increased reserve rates being applied to outstanding student receivables associated with our student extended payment plans. As a result, the Company recorded
additional bad debt expense of $8.1 million and $8.3 million during the first and third quarters 2010, respectively. These rates are continually reviewed for appropriateness based upon updated historical data as it becomes available.
Operating Income
Operating income increased $95.3 million, or 75.4% as compared to the prior year to date, as we experienced increased profitability within
University and Health Education. The increase in revenue from the growth in student population more than offset the increases in operating expenses to sustain this continuing growth, as well as the charges related to legal matters and our allowance
for doubtful accounts.
Provision for Income Taxes
Our consolidated effective income tax rate for continuing operations was 33.3% for the nine months ended September 30, 2010, as compared to 33.9% for the nine months ended September 30, 2009.
The decrease in our effective tax rate for the nine months ended September 30, 2010 as compared to the prior year to date was primarily due to the recording of a $4.2 million tax benefit in the second quarter 2010 resulting from a recently
closed federal tax audit for credits associated with curriculum development. This tax credit reduced our effective tax rate by 1.9% for the nine months ended September 30, 2010. This reduction in the effective tax rate was partially offset due
to lower levels of both non-profit income and tax-exempt interest as a percentage of pretax income.
Loss from Discontinued Operations
The results of operations for schools that have ceased operations or were sold are presented within discontinued
operations. As the last campus within Transitional Schools ceases operations in the fourth quarter of
34
2010, we will reclassify its results of operations for all periods presented to discontinued operations. See Note 5 Discontinued Operations of the notes to our unaudited
consolidated financial statements for further discussion of our discontinued operations.
SEGMENT RESULTS
Three Months Ended September 30, 2010 as Compared to Three Months Ended September 30, 2009
The following tables set forth unaudited historical segment results for the periods presented. Results for the prior years have been
reclassified to be comparable to the current year presentation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30,
|
|
|
|
(Dollars in thousands)
|
|
|
|
REVENUE
|
|
|
OPERATING
INCOME (LOSS)
|
|
|
OPERATING
MARGIN (LOSS)
|
|
|
|
2010
|
|
|
2009
|
|
|
% Change
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
University
|
|
$
|
290,512
|
|
|
$
|
260,167
|
|
|
|
11.7
|
%
|
|
$
|
64,824
|
|
|
$
|
45,421
|
|
|
|
22.3
|
%
|
|
|
17.5
|
%
|
Health Education
|
|
|
110,421
|
|
|
|
90,718
|
|
|
|
21.7
|
%
|
|
|
12,820
|
|
|
|
9,030
|
|
|
|
11.6
|
%
|
|
|
10.0
|
%
|
Culinary Arts
|
|
|
108,305
|
|
|
|
91,654
|
|
|
|
18.2
|
%
|
|
|
(23,867
|
)
|
|
|
6,793
|
|
|
|
-22.0
|
%
|
|
|
7.4
|
%
|
International
|
|
|
15,061
|
|
|
|
15,333
|
|
|
|
-1.8
|
%
|
|
|
(6,740
|
)
|
|
|
(4,498
|
)
|
|
|
-44.8
|
%
|
|
|
-29.3
|
%
|
Transitional Schools
|
|
|
63
|
|
|
|
565
|
|
|
|
-88.8
|
%
|
|
|
(1,287
|
)
|
|
|
(1,187
|
)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
524,362
|
|
|
|
458,437
|
|
|
|
14.4
|
%
|
|
|
45,750
|
|
|
|
55,559
|
|
|
|
8.7
|
%
|
|
|
12.1
|
%
|
Corporate and Other
|
|
|
(156
|
)
|
|
|
(146
|
)
|
|
|
|
|
|
|
(7,472
|
)
|
|
|
(17,433
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
524,206
|
|
|
$
|
458,291
|
|
|
|
14.4
|
%
|
|
$
|
38,278
|
|
|
$
|
38,126
|
|
|
|
7.3
|
%
|
|
|
8.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NEW STUDENT STARTS
|
|
|
STUDENT POPULATION
|
|
|
|
For the Three Months Ended
September 30,
|
|
|
As of September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
% Change
|
|
|
2010
|
|
|
2009
|
|
|
% Change
|
|
University
|
|
|
19,070
|
|
|
|
18,350
|
|
|
|
4
|
%
|
|
|
63,500
|
|
|
|
56,400
|
|
|
|
13
|
%
|
AIU
|
|
|
6,760
|
|
|
|
6,530
|
|
|
|
4
|
%
|
|
|
21,000
|
|
|
|
19,500
|
|
|
|
8
|
%
|
CTU
|
|
|
9,180
|
|
|
|
8,760
|
|
|
|
5
|
%
|
|
|
29,900
|
|
|
|
24,500
|
|
|
|
22
|
%
|
Art & Design
|
|
|
3,130
|
|
|
|
3,060
|
|
|
|
2
|
%
|
|
|
12,600
|
|
|
|
12,400
|
|
|
|
2
|
%
|
Health Education
|
|
|
9,440
|
|
|
|
8,000
|
|
|
|
18
|
%
|
|
|
31,100
|
|
|
|
25,000
|
|
|
|
24
|
%
|
Culinary Arts
|
|
|
7,360
|
|
|
|
7,100
|
|
|
|
4
|
%
|
|
|
16,300
|
|
|
|
13,600
|
|
|
|
20
|
%
|
International
|
|
|
4,130
|
|
|
|
4,200
|
|
|
|
-2
|
%
|
|
|
7,300
|
|
|
|
7,000
|
|
|
|
4
|
%
|
Transitional Schools
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
|
|
5
|
|
|
|
100
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
40,000
|
|
|
|
37,650
|
|
|
|
6
|
%
|
|
|
118,205
|
|
|
|
102,100
|
|
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Universitys
operating results for the three months ended September 30,
2010 and 2009 are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
Operating Income
|
|
|
Operating Margin
|
|
|
|
2010
|
|
|
2009
|
|
|
% Change
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
AIU
|
|
$
|
113,119
|
|
|
$
|
107,184
|
|
|
|
5.5
|
%
|
|
$
|
23,252
|
|
|
$
|
23,716
|
|
|
|
20.6
|
%
|
|
|
22.1
|
%
|
CTU
|
|
|
116,311
|
|
|
|
92,848
|
|
|
|
25.3
|
%
|
|
|
32,414
|
|
|
|
15,556
|
|
|
|
27.9
|
%
|
|
|
16.8
|
%
|
Art & Design
|
|
|
61,082
|
|
|
|
60,135
|
|
|
|
1.6
|
%
|
|
|
9,158
|
|
|
|
6,149
|
|
|
|
15.0
|
%
|
|
|
10.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
290,512
|
|
|
$
|
260,167
|
|
|
|
11.7
|
%
|
|
$
|
64,824
|
|
|
$
|
45,421
|
|
|
|
22.3
|
%
|
|
|
17.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
Current quarter
revenue increased $30.3 million, or 11.7% as compared to the prior year quarter, driven by increased student population of 13%. As anticipated, our institutions within University experienced new student start growth in the single digits as compared
to the prior quarter. During the third quarter 2010, we began to compare against significantly higher prior year quarter new student start growth rates.
Current quarter operating income increased by $19.4 million, and operating margin increased from 17.5% to 22.3% as compared to the prior year quarter, as increases in revenue more than offset higher
levels of operating expenses to support our growing student population and effectively manage the recruitment of new students. Administrative expenses during the third quarter 2010 included a pretax charge of approximately $7.3 million related to
the settlements of legal matters.
Health Education.
Current quarter revenue increased $19.7 million, or 21.7%
as compared to the prior year quarter. The increase in revenue is due to an increase in student population of 24% resulting from an 18% increase in new student starts quarter over quarter and strong student population at the beginning of the period.
Health Education increased its operating income by $3.8 million, or 42.0% as compared to the prior year quarter, as we
continue to leverage our existing infrastructure.
We continue to focus on increasing our geographic presence within Health
Education by starting up new campuses. During the third quarter 2010, we opened our SBC Skokie Skokie, IL campus and in October 2010 opened our SBC Portland Portland, OR campus, bringing our total to six newly opened campuses in 2010.
Excluding the impact of our eleven start-up campuses, revenue increased approximately $11.5 million, or 12.8% as compared to the prior year quarter, and operating income increased by $7.2 million, or approximately 62.9% as compared to the prior year
quarter.
Culinary Arts.
Current quarter revenue increased $16.7 million, or 18.2% as compared to the prior year
quarter. This increase was due to a 20% increase in student population resulting from a strong student population at the beginning of the current year quarter and growth of 4% in new student starts, as compared to the prior year quarter.
Culinary Arts reported an operating loss of $23.9 million for the current quarter, primarily due to the current year quarter
including a $40.0 million pretax charge related to the settlement of a legal matter, as well as $7.3 million of additional bad debt expense. The increase in bad debt expense resulted from the increase in bad debt reserve rates related to our student
extended payment plans. The operating loss as compared to the prior year quarter was partially offset by a 7% decrease in academic expenses as Culinary Arts continued to focus its efforts on improving productivity and operating leverage.
International.
Current quarter revenue decreased $0.3 million or 1.8% as compared to the prior year quarter. Although
student population remained relatively stable, new student starts decreased slightly as compared to the prior year quarter as a result of a shift in new student starts from the third to the fourth quarter in 2010 as compared to 2009. In addition,
current year revenue was impacted by $2.9 million of unfavorable foreign currency exchange rates.
Operating loss of $6.7
million for the current year quarter was primarily driven by an increase in administrative expenses related to increased spending to support student programs, as well as the integration of IUM.
Transitional Schools.
Current quarter revenue declined as compared to the prior year quarter due to the school no longer
enrolling students. We expect revenue to continue to decline as AIU Los Angeles, CA continues to wind down its operations. Operating loss within Transitional Schools increased slightly as compared to the prior year quarter.
36
Corporate and
Other.
This category includes unallocated costs that are incurred on behalf of the entire Company. Corporate and Other costs decreased $10.0 million, or 57.1% as compared to the prior year quarter primarily due to the prior year quarterly
results including $7.3 million of additional performance-based compensation expense related to incentive plan outperformance.
Nine Months
Ended September 30, 2010 as Compared to Nine Months Ended September 30, 2009
The following tables set forth
unaudited historical segment results for the periods presented. Results for the prior years have been reclassified to be comparable to the current year presentation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
(Dollars in thousands)
|
|
|
|
REVENUE
|
|
|
OPERATING
INCOME (LOSS)
|
|
|
OPERATING
MARGIN (LOSS)
|
|
|
|
2010
|
|
|
2009
|
|
|
% Change
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
University
|
|
$
|
878,283
|
|
|
$
|
749,185
|
|
|
|
17.2
|
%
|
|
$
|
212,995
|
|
|
$
|
133,789
|
|
|
|
24.3
|
%
|
|
|
17.9
|
%
|
Health Education
|
|
|
322,256
|
|
|
|
260,205
|
|
|
|
23.8
|
%
|
|
|
35,434
|
|
|
|
26,052
|
|
|
|
11.0
|
%
|
|
|
10.0
|
%
|
Culinary Arts
|
|
|
293,881
|
|
|
|
241,178
|
|
|
|
21.9
|
%
|
|
|
(3,267
|
)
|
|
|
2,545
|
|
|
|
-1.1
|
%
|
|
|
1.1
|
%
|
International
|
|
|
87,378
|
|
|
|
76,119
|
|
|
|
14.8
|
%
|
|
|
9,689
|
|
|
|
9,950
|
|
|
|
11.1
|
%
|
|
|
13.1
|
%
|
Transitional Schools
|
|
|
452
|
|
|
|
2,485
|
|
|
|
-81.8
|
%
|
|
|
(4,135
|
)
|
|
|
(3,853
|
)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
1,582,250
|
|
|
|
1,329,172
|
|
|
|
19.0
|
%
|
|
|
250,716
|
|
|
|
168,483
|
|
|
|
15.8
|
%
|
|
|
12.7
|
%
|
Corporate and Other
|
|
|
(490
|
)
|
|
|
(345
|
)
|
|
|
|
|
|
|
(28,963
|
)
|
|
|
(42,020
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,581,760
|
|
|
$
|
1,328,827
|
|
|
|
19.0
|
%
|
|
$
|
221,753
|
|
|
$
|
126,463
|
|
|
|
14.0
|
%
|
|
|
9.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NEW STUDENT STARTS
|
|
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
% Change
|
|
University
|
|
|
58,780
|
|
|
|
51,160
|
|
|
|
15
|
%
|
AIU
|
|
|
23,690
|
|
|
|
20,790
|
|
|
|
14
|
%
|
CTU
|
|
|
27,500
|
|
|
|
22,840
|
|
|
|
20
|
%
|
Art & Design
|
|
|
7,590
|
|
|
|
7,530
|
|
|
|
1
|
%
|
Health Education
|
|
|
27,270
|
|
|
|
21,210
|
|
|
|
29
|
%
|
Culinary Arts
|
|
|
14,370
|
|
|
|
12,540
|
|
|
|
15
|
%
|
International
|
|
|
5,220
|
|
|
|
5,190
|
|
|
|
1
|
%
|
Transitional Schools
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
105,640
|
|
|
|
90,100
|
|
|
|
17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Universitys
operating results for the nine months ended September 30,
2010 and 2009 are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
Operating Income
|
|
|
Operating Margin
|
|
|
|
2010
|
|
|
2009
|
|
|
% Change
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
AIU
|
|
$
|
349,934
|
|
|
$
|
309,276
|
|
|
|
13.1
|
%
|
|
$
|
96,054
|
|
|
$
|
69,525
|
|
|
|
27.4
|
%
|
|
|
22.5
|
%
|
CTU
|
|
|
342,079
|
|
|
|
263,100
|
|
|
|
30.0
|
%
|
|
|
94,278
|
|
|
|
48,536
|
|
|
|
27.6
|
%
|
|
|
18.4
|
%
|
Art & Design
|
|
|
186,270
|
|
|
|
176,809
|
|
|
|
5.4
|
%
|
|
|
22,663
|
|
|
|
15,728
|
|
|
|
12.2
|
%
|
|
|
8.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
878,283
|
|
|
$
|
749,185
|
|
|
|
17.2
|
%
|
|
$
|
212,995
|
|
|
$
|
133,789
|
|
|
|
24.3
|
%
|
|
|
17.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
Our University segment
grew student population by 13% as compared to the prior year to date, driven by strong new student demand in CTU and AIU. As a result, revenue increased more than 17% as compared to the prior year to date. As anticipated, our institutions within
University began to experience lower new student start growth in the second half of 2010 as we began to compare against significantly higher prior year quarter new student start growth rates as compared to the first half of the year.
Current year operating income increased by $79.2 million, and operating margin increased from 17.9% to 24.3% as compared to the prior
year to date, as increases in revenue more than offset higher levels of operating expenses to support our growing student population.
Health Education.
Current year revenue increased $62.1 million, or 23.8% as compared to the prior year to date. The increase in revenue is due to a 24% increase in student population
resulting from a 29% increase in new student starts as a result of strong new student demand and improved effectiveness of our admissions model.
Health Education increased its operating income by $9.4 million, or 36.0% as compared to the prior year to date, as the increase in revenue more than offset increases in operating expenses.
We continue to focus on increasing our geographic presence within Health Education by starting up new campuses. During the third quarter
2010, we opened our SBC Skokie Skokie, IL campus and in October 2010 opened our SBC Portland Portland, OR campus, bringing our total to six newly opened campuses in 2010. Excluding the impact of our eleven start-up campuses, revenue
increased approximately $48.6 million, or 18.8% as compared to the prior year, and operating income increased by $23.0 million, or 73.3% as compared to the prior year.
Culinary Arts.
Current year to date revenue increased $52.7 million, or 21.9% as compared to the prior year to date. This increase was due to a 20% increase in student population resulting
from a strong student population at the beginning of the current year and growth of 15% in new student starts, as compared to the prior year.
Culinary Arts experienced an operating loss of $3.3 million as compared to operating income of $2.5 million in the prior year to date. The increase in revenue and decrease in certain operating
expenses, including academics expense, were more than offset by higher administrative expense related to a pretax charge for the settlement of a legal matter of $40.0 million in the third quarter of 2010, as well as higher bad debt expense resulting
from the increase in student receivable balances and bad debt reserve rates for those students utilizing student extended payment plans to finance their education. The bad debt reserve rates are continually reviewed for appropriateness based upon
updated historical data as it becomes available.
International.
Current year to date revenue increased $11.3
million, or 14.8% as compared to the prior year to date. The increase was driven by a slight increase in student population, strong student retention and increased revenue of $1.9 million related to IUM. Excluding a $3.2 million unfavorable impact
of foreign currency exchange rates, revenues would have increased 19.0%.
Operating income decreased $0.3 million, or 2.6% as
compared to the prior year to date, as the increase in revenue did not offset higher operating expenses, including academic costs related to the support of the growing student population, as well as the integration of IUM.
Transitional Schools.
Current year revenue declined as compared to the prior year due to the school no longer enrolling
students. We expect revenue to continue to decline as AIU Los Angeles, CA continues to wind down its operations. Operating loss within Transitional Schools increased slightly as compared to the prior year.
Corporate and Other.
This category includes unallocated costs that are incurred on behalf of the entire Company. Corporate
and Other costs decreased $13.1 million, or 31.1% as compared to the prior year to date resulting from the reduction in operating expenses due to cost efficiencies, as well as the prior year to date results
38
including $9.7 million of additional performance-based compensation expense related to incentive plan outperformance. These decreases more than offset the $4.1 million of additional bad debt
expense incurred in the first quarter 2010 from our previously terminated recourse loan program.
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES AND ESTIMATES
A detailed discussion of the accounting policies and estimates that we believe are most critical to
our financial condition and results of operations and that require managements most subjective and complex judgments in estimating the effect of inherent uncertainties is included under the caption Summary of Significant Accounting
Policies and Estimates included in Managements Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2009. Note 2 Significant Accounting
Policies of the notes to our consolidated financial statements of our Annual Report on Form 10-K for the year ended December 31, 2009, also includes a discussion of these and other significant accounting policies.
LIQUIDITY, FINANCIAL POSITION, AND CAPITAL RESOURCES
As of September 30, 2010, cash, cash equivalents, and short-term investments totaled $442.5 million. Our cash flows from operations have historically been adequate to fulfill our liquidity
requirements. We finance our operating activities and our organic growth primarily through cash generated from operations. We finance acquisitions primarily through funding from credit facility borrowings and cash generated from operations. We
anticipate that we will be able to satisfy the cash requirements associated with, among other things, our working capital needs, capital expenditures, and lease commitments through at least the next 12 months primarily with cash generated by
operations, existing cash balances, and, if necessary, borrowings under our existing credit agreement.
The ED requires that
Title IV Program funds collected in advance of student billings be kept in a separate cash account until students are billed for the portion of their program related to those Title IV Program funds. The ED further requires that Title IV
Program funds be disbursed to students within three business days of receipt. We do not recognize restricted cash balances on our unaudited consolidated balance sheet until all restrictions have lapsed with respect to those balances. As of
September 30, 2010 and December 31, 2009, the amount of restricted cash balances recorded in separate cash accounts was not significant. Also included in cash and cash equivalents within our unaudited consolidated balance sheets are
amounts related to certain of our European campuses that are operated as not-for-profit schools. The cash and cash equivalents related to these schools have restrictions which require that the funds be utilized for these particular not-for-profit
schools. The amount of not-for-profit cash and cash equivalents with restrictions was $47.7 million and $49.9 million at September 30, 2010 and December 31, 2009, respectively. Restrictions on these cash balances have not affected, nor do
we believe that such restrictions will affect, our ability to fund our daily operations.
Sources and Uses of Cash
Operating Cash Flows
During the nine months ended September 30, 2010 and 2009, net cash flows provided by operating activities totaled $217.5 million and $217.4 million, respectively.
Our primary source of cash flows from operating activities is tuition collected from our students. Our students finance tuition costs
through the use of a variety of funding sources, including, among others, federal loan and grant programs, state grant programs, private loans and grants, school payment plans, private and institutional scholarships and cash payments. For the nine
months ended September 30, 2010 and 2009, approximately 83% and 82%, respectively, of our U.S. schools cash receipts from tuition payments come from Title IV Program funding.
39
For further discussion
of Title IV Program funding and alternative private loan funding sources for our students, see Student Financial Aid and Alternative Student Financial Aid Sources in Part I, Item 1 Business in our
Annual Report on Form 10-K for the year ended December 31, 2009.
Our primary uses of cash to support our operating
activities include, among other things, cash paid to employees for services, to vendors for products and services, to lessors for rents and operating costs related to leased facilities, to suppliers for textbooks and other school supplies, and to
federal, state, and local governments for income and other taxes.
Although we anticipate that we will be able to satisfy cash
requirements for working capital needs, capital expenditures, and commitments through at least the next year primarily with cash generated by our operations, existing cash balances and, if necessary, borrowings under our existing credit agreement,
we are not able to assess the effect of loss contingencies on future cash requirements and liquidity. See Note 9 Commitments and Contingencies of the notes to our unaudited consolidated financial statements for additional discussion
of these matters.
Investing Cash Flows
During the nine months ended September 30, 2010, net cash flows used in investing activities totaled $59.5 million compared to net cash flows used by investing activities of $37.5 million for the
nine months ended September 30, 2009. The increase in the cash outflows attributed to investing activities was primarily due to increased purchases of property and equipment.
Capital Expenditures.
Capital expenditures increased $31.6 million, or 62.8%, from $50.3 million during the nine months
ended September 30, 2009, to $81.9 million during the nine months ended September 30, 2010. Capital expenditures represented 5.2% and 3.8%, respectively, of total revenue from continuing and discontinued operations during the nine months
ended September 30, 2010 and 2009, respectively. Capital expenditures continued to grow in 2010 due to the increased investment in start-up campuses as well as the investment in our new campus support center.
Acquisition of International University of Monaco.
On April 15, 2010, we acquired 100% of the issued and outstanding stock of
International University of Monaco for approximately $6.2 million, excluding acquired cash balances of approximately $0.1 million. The purchase price was funded with cash generated from operating activities.
Earnout Payments.
Effective August 31, 2009, we acquired the outright rights to the Le Cordon Bleu brand in the education
services field for the U.S. and Canada. The purchase price for the brand rights consisted of $25.0 million in cash funded from operations, 3.0 million shares of CEC common stock valued at $71.3 million as of the closing date and an estimated
$43.0 million of earnout payments over a 30-month period. As of September 30, 2010, we have made approximately $14.1 million in earnout payments since acquisition of the brand.
Purchases and Sales of Available-for-Sale Investments
. Purchases and sales of available-for-sale investments resulted in a net
cash inflow of $41.3 million and $38.2 million during the nine months ended September 30, 2010 and 2009, respectively.
Financing
Cash Flows
During the nine months ended September 30, 2010 and 2009, net cash flows used in financing activities
totaled $158.6 million and $177.6 million, respectively.
40
Credit
Agreement.
As of September 30, 2010, we had no outstanding debt under our U.S. Credit Agreement and letters of credit totaling approximately $8.7 million. The credit availability under our U.S. Credit Agreement as of September 30,
2010 was $176.3 million. See Note 6 Financial Instruments of the notes to our unaudited consolidated financial statements for additional discussion of our outstanding credit agreement.
Repurchases of Stock.
During the nine months ended September 30, 2010, we repurchased approximately 5.4 million
shares of our common stock for approximately $154.9 million at an average price of $28.56 per share. During the nine months ended September 30, 2009, we repurchased approximately 8.2 million shares of our common stock for approximately
$180.0 million at an average price of $21.84 per share. Repurchases of stock during 2010 and 2009 were funded by cash generated from operating activities.
As of September 30, 2010, approximately $290.5 million was available under the program to repurchase outstanding shares of our common stock. Stock repurchases under this program may be made on the
open market or in privately negotiated transactions from time to time, depending on various factors, including market conditions and corporate and regulatory requirements. The stock repurchase program does not have an expiration date and may be
suspended or discontinued at any time.
Payment of assumed loans.
In conjunction with our acquisition of IUM, we
assumed loans in the amount of $4.3 million. Repayment of these loans was made immediately after the acquisition closed.
Contractual
Obligations
As of September 30, 2010, there were no significant changes to our contractual obligations from
December 31, 2009 except as discussed below. We were not a party to any off-balance sheet financing or contingent payment arrangements, nor do we have any unconsolidated subsidiaries.
On August 31, 2009, we acquired all rights to the Le Cordon Bleu brand in the educational services field for the U.S. and Canada. A
portion of the purchase price consists of a 30-month earnout payment based upon Culinary Arts tuition fee revenue estimated at $43.0 million. As of September 30, 2010, we estimate that the remaining obligation is $28.9 million, which is
reflected within current and non-current liabilities within our unaudited consolidated balance sheet. Future adjustment to the earnout may be warranted as the actual tuition fee revenue may vary from the current estimate.
Effective January 19, 2010, we entered into a real estate lease for our new campus support center and portions of our AIU Online and
CTU Online operations in Schaumburg, Illinois, allowing us to consolidate our campus support center. This consolidation will reduce the number of our leased buildings and related square footage and allow us to maximize efficiencies and reduce
overhead expenses. The lease for the new location results in a $48.1 million real estate obligation through 2022. In addition, we intend to make capital improvements to our new campus support center totaling approximately $52.0 million through 2011,
of which approximately $40 million is expected by December 31, 2010. The Company expects this consolidation initiative to result in base rent savings of approximately $2.5 million a year for the next twelve years beginning in 2011.
41
Changes in Financial
PositionSeptember 30, 2010 compared to December 31, 2009
Selected unaudited consolidated balance sheet account
changes from December 31, 2009, to September 30, 2010, were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
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|
|
% Change
|
|
|
|
September 30,
2010
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|
|
December 31,
2009
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|
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(Dollars in thousands)
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Assets
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|
|
|
|
|
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Current assets:
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|
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|
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|
|
|
|
|
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Short-term investments
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$
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158,988
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|
|
$
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200,379
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|
|
|
-21
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%
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Student receivables, net
|
|
|
64,366
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|
|
|
57,823
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|
|
|
11
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%
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Non-current assets:
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|
|
|
|
|
|
|
|
|
|
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Student receivables, net
|
|
|
14,426
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|
|
|
21,455
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|
|
|
-33
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%
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Other assets, net
|
|
|
36,099
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|
|
|
23,178
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|
|
|
56
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%
|
|
|
|
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Liabilities
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|
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|
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Current liabilities:
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Accrued expenses:
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|
|
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|
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|
|
|
|
|
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Payroll and related benefits
|
|
|
62,571
|
|
|
|
88,439
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|
|
|
-29
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%
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Income taxes
|
|
|
1,206
|
|
|
|
17,849
|
|
|
|
-93
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%
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Other
|
|
|
92,391
|
|
|
|
46,182
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|
|
|
100
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%
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Deferred tuition revenue
|
|
|
210,618
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|
|
|
184,411
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|
|
|
14
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%
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|
|
|
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Total Stockholders equity
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|
|
921,310
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|
|
|
921,524
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|
|
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0
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%
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Short-term investments:
The decrease in the balance of short-term investments is primarily due to stock repurchases during the nine months ended September 30, 2010.
Current assets Student receivables, net:
The increase in student receivables, net is due to an increase in students who are participating in our student extended payment plans, which have
repayment periods of up to ten years.
Non-current assets Student receivables, net:
The decrease in student
receivables, net is primarily due to an increase in the allowance for doubtful accounts related to our student extended payment plans.
Non-current assets Other assets:
The increase in other assets, net is due to an increase in tenant inducement allowance associated with our real estate lease for our new campus support
center which is expected to be received in 2012.
Accrued expenses Payroll and related benefits:
The decrease in
the payroll and related benefits liabilities is primarily due to the annual incentive payment made in the first quarter of 2010.
Accrued expenses Income taxes:
The decrease in accrued income taxes is primarily due to higher estimated tax payments over the prior year on a higher forecasted pretax income base for the
current year.
Accrued expenses Other:
The increase in accrued expenses other is primarily related to a $40.0
million pretax charge recorded in the current year related to the settlement of a legal matter.
Deferred tuition revenues:
The increase in deferred tuition revenues was driven in large part by the timing of new student starts. Many of our schools have a large new student start in the third quarter, which results in an increase to deferred tuition revenue. The
deferred tuition balance decreases over time as revenue is earned. The Company does not have the same level of new student starts in the fourth quarter.
Total stockholders equity:
Retained earnings increased as a result of net income, but was partially offset by increased shares in treasury from stock repurchases.
42
Item 3.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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We are exposed to financial market risks, including changes in interest rates and foreign currency exchange rates. We use various techniques to manage our market risk, including, from time to time, the
use of derivative financial instruments. We do not use derivative financial instruments for speculative purposes.
Our
municipal bond investments are auction rate securities (ARS) which generally have stated terms to maturity of greater than one year. We classify investments in ARS on our unaudited consolidated balance sheets within other non-current
assets. Auctions can fail when the number of sellers of the security exceeds the buyers for that particular auction period. In the event that an auction fails, the interest rate resets at a rate based on a formula determined by the
individual security. The ARS for which auctions have failed continue to accrue interest and are auctioned on a set interval until the auction succeeds, the issuer calls the securities, or they mature. As of September 30, 2010, we have
determined these investments are at risk for impairment due to the nature of the liquidity of the market over the past year. As a result, we recorded a cumulative unrealized loss reflected within other comprehensive income on our unaudited
consolidated balance sheet of approximately $0.4 million as of September 30, 2010.
Interest Rate Exposure
Any outstanding borrowings under our credit agreement bear annual interest at variable rates tied to the prime rate and the British
Bankers Association LIBOR rate. As of September 30, 2010 and December 31, 2009, we had no outstanding borrowings under this agreement.
Our investments and debt instruments are recorded at their fair values as of September 30, 2010 and December 31, 2009. We believe that the exposure of our unaudited consolidated financial
position and results of operations and cash flows to adverse changes in interest rates is not significant.
Foreign Currency Exposure
We are subject to foreign currency exchange exposures arising from current and anticipated transactions denominated in
currencies other than the U.S. dollar, and from the translation of foreign currency balance sheet accounts into U.S. dollar balance sheet accounts. Specifically, we are subject to risks associated with fluctuations in the value of the Euro and the
British pound vis-à-vis the U.S. dollar.
We believe that the exposure of our unaudited consolidated financial position
and results of operations and cash flows to adverse changes in foreign currency exchange rates is not significant.
Item 4.
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CONTROLS AND PROCEDURES
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Evaluation of
Disclosure Controls and Procedures
We completed an evaluation as of the end of the period covered by this Report under the
supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to
Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the Exchange Act). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2010, our
disclosure controls and procedures were effective to provide reasonable assurance that (i) the information required to be disclosed by us in this Report was recorded, processed, summarized, and reported within the time periods specified in the
rules and forms provided by the U.S. Securities and Exchange Commission (SEC) and (ii) information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to our
management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
43
Changes in Internal Control over
Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the
quarter ended September 30, 2010, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on the Effectiveness of Controls
Our management does
not expect that our disclosure controls and procedures or our internal controls will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that
the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent
limitations in a cost-effective control system, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within our company have been
detected.
These inherent limitations include the realities that judgments in decision-making can be faulty and that
breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is
based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls
effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
44
PART II OTHER
INFORMATION
Item 1.
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Legal Proceedings
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Note 9
Commitments and Contingencies to our unaudited consolidated financial statements is incorporated herein by reference.
Risks Related to the
Highly Regulated Field in Which We Operate
If our U.S. schools fail to comply with the extensive federal regulatory requirements for
school operations in the educational services industry, we could incur financial penalties, restrictions on our operations, loss of federal and state financial aid funding for our students, or loss of our authorization to operate our
U.S. schools.
Federal regulatory requirements cover virtually all phases of the operations of our U.S. schools
and those of our competitors, including educational program offerings, facilities, instructional and administrative staff, administrative procedures, marketing and recruiting, financial operations, payment of refunds to students who withdraw,
financial aid to students, acquisitions of or opening new institutions, addition of new educational programs, and changes in corporate structure and ownership. The U.S. Department of Education (ED) is our primary federal regulator,
pursuant to the Higher Education Act of 1965, as amended (HEA).
A significant portion of our U.S.-based students
rely on student aid and loan programs under Title IV of HEA (Title IV Programs) and we derive a substantial portion of our revenue and cash flows from Title IV Programs.
All of our U.S. schools participate in Title IV Programs and so are subject to extensive regulation by ED, various state agencies and
accrediting commissions. To participate in Title IV Programs, a school must receive and maintain authorization by the appropriate state education agencies, be accredited by an accrediting commission recognized by ED, and be certified by ED as an
eligible institution. Most ED requirements are applied on an institutional basis, with an institution defined by ED as a main campus and any of its branch campuses or additional locations. For the fiscal year ended December 31, 2009, approximately
82% of the Companys U.S.-based students who were in a program of study at any date during that year participated in student aid and loan programs under Title IV, which resulted in cash receipts recorded by the Company of approximately $1.37
billion.
The following are some of the most significant regulatory requirements and risks related to governmental and
accrediting body oversight of our schools:
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Student Loan Default Rates.
Our U.S. schools may lose their eligibility to participate in Title IV Programs if their student loan default
rates are greater than the standards set by ED. If the rates at which our former students default on repaying their federally guaranteed or federally funded student loans exceed ED-specified percentages, one or more of our schools could be placed on
provisional certification status by ED or lose eligibility to participate in Title IV Programs for several years.
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Financial Responsibility Standards and Return and Refunds of Title IV Funds.
We may be required to post a letter of credit or accept
other limitations, including operating restrictions, to continue our U.S. schools participation in Title IV Programs if we or our schools do not meet EDs financial responsibility standards or if our schools do not correctly calculate and
timely return Title IV Program funds for students who withdraw before completing their program of study. ED applies its quantitative financial responsibility tests annually based on the schools audited financial statements and may apply the
tests if a school undergoes a change in control or under other circumstances. ED also may apply the tests to us, as the parent company of our schools, and to other related entities. EDs operating
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45
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restrictions include transferring institutions to a cash-monitoring system or reimbursement instead of EDs standard advance funding of Title IV funds, which may result in a significant
delay in receiving the funds.
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90-10 Rule.
Any of our U.S. schools may lose eligibility to participate in Title IV Programs if, on a cash basis, the
percentage of the U.S. schools cash receipts derived from Title IV Programs for two consecutive fiscal years is greater than 90%. Under HEAs 90-10 Rule, a proprietary school that fails to derive at least 10% of its cash
receipts from non-Title IV sources at the end of a fiscal year will be placed on provisional participation status for two fiscal years. If the school does not satisfy the 90-10 Rule for two consecutive fiscal years, it loses its eligibility to
participate in the Title IV Programs for at least one fiscal year. If a school violates the 90-10 Rule and becomes ineligible to participate in Title IV Programs but continues to disburse Title IV Program funds, ED would require the school to repay
all Title IV Program funds received by it after the effective date of the loss of eligibility.
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Administrative Capability.
Limits may be placed on our U.S. schools participation in Title IV Programs if they fail to satisfy
EDs administrative capability standards that cover staffing, procedures for disbursing and safeguarding Title IV funds, reporting and other procedural matters. If a school fails to meet these criteria, ED may require repayment of previously
disbursed Title IV Program funds, place the school on provisional certification status, or transfer the school from EDs advance funding arrangement to another funding program, impose fines, or limit or terminate the schools participation
in Title IV Programs.
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Restrictions on Incentive Payments.
Our U.S. schools are subject to sanctions if payments of impermissible commissions, bonuses or other
incentive payments are made to individuals involved in certain student recruiting, admissions or financial aid activities.
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Eligibility and Certification Procedures.
From time to time certain of our schools may be on provisional certification with ED due to a
failure to meet EDs criteria discussed above. ED may require corrective actions as discussed above, to and including limiting or terminating a schools participation in Title IV Programs. Any such failure of our schools to maintain
eligibility for Title IV programs that leads to corrective actions or other limits on our schools participation in Title IV Programs could increase our costs of regulatory compliance and could have a material adverse impact on our financial
condition, results of operations and cash flows.
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Audits.
HEA also requires that an institutions administration of Title IV Program funds be audited annually by an independent
accounting firm and that the resulting audit report be submitted to ED for review. In addition, if ED or another regulatory agency determined that one of our schools improperly disbursed Title IV Program funds or violated a provision of HEA or
EDs regulations, that school could be required to repay such funds, and could be assessed an administrative fine.
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EDs program integrity regulations could materially and adversely affect our operations, business, results of operations, financial condition
and cash flows.
The agencies that regulate our U.S. schools, including ED, periodically revise their requirements and
modify their interpretations of existing requirements.
On October 29, 2010, ED issued final regulations pertaining to certain
aspects of the administration of the Title IV Programs, including, but not limited to state authorization, gainful employment, compensation rules for persons engaged in certain aspects of admissions and financial aid, determination of attendance and
definition of credit hours. With minor exception these regulations will become effective July 1, 2011. ED previously announced that it was delaying until early 2011 publication of final regulations on certain further proposed gainful employment
regulations, which are expected to become effective on July 1, 2012 or thereafter.
The October 29, 2010 regulations contain
substantial changes from the proposed regulations issued by ED in June 2010. The Company is in process of analyzing the final regulations, to identify and assess potential
46
impacts to our business. The new and proposed regulations could have significant impacts on our business. Among the most significant regulatory changes that we have identified to date for our
business are:
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the elimination of certain safe harbors that had allowed, under limited and prescribed circumstances, payment of certain types of
compensation to employees (including higher level employees) and third parties involved in student enrollment, certain recruiting, admissions or financial aid activities;
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imposing extensive record-keeping and disclosure requirements respecting the employment of graduates, as a precursor to proposed future regulations,
described above, that would base the eligibility of specific programs to enroll students receiving Title IV Program funds on certain yet-to-be defined metrics including but not limited to cost of education, future earnings, student loan defaults and
debt incurred in the securing of such education;
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defining a credit hour for purposes of determining program eligibility for Title IV student financial aid;
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establishing more stringent state approval criteria that may require or encourage states to modify existing state approval and licensing processes;
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requiring an institution that offers distance learning programs to secure the approval of each state where it enrolls students to the extent any such
state requires such approval; and
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strengthening the definition of proscribed misrepresentation to include, among other things, erroneous statements, including erroneous
statements made by certain third-party vendors under contract to an institution, which may increase institutional liability and subject institutions to sanctions for statements containing inadvertent errors, and expose institutions to costly
third-party litigation.
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These rules are likely to require us to change certain of our business practices,
incur costs of compliance and of developing and implementing changes in operations, may affect student recruitment or enrollment, may result in changes in or elimination of certain programs and may have other significant or material effects on our
business. Among other things, these rules will impact:
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Our compensation programs for persons (including higher level employees) involved in student recruitment and admissions, including third-party lead
generators and internet marketing vendors, which may adversely affect:
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our ability to compensate our employees involved in recruitment, admissions and student aid based on relative merit,
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recruitment and retention of such employees,
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the motivation and effectiveness of such employees,
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our ability to provide certain forms of compensation to management, impacting recruitment and retention,
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compensation practices for third-parties for Internet marketing and lead-generation services,
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quality of leads generated by these third-party service providers and increased cost for leads,
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our marketing costs, by decreasing marketing efficiency and through increasing costs of recruiting and enrolling prospective students, and
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our revenues, if we are unable to maintain or increase the rate of student enrollments.
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The process and procedures necessary to secure state authorization in those states that currently do not require specific state regulatory approvals or
authorizations and in which we may require such regulatory authorizations in order to continue to offer instruction and preserve eligibility for Title IV Program funds for our students at any impacted schools. At this time, the impact and potential
costs of these regulations on our schools is uncertain but could increase our costs of regulatory compliance and have other material adverse effects on our operations, revenues, results of operations and cash flows.
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47
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When final gainful employment regulations are issued and become effective in July, 2012, certain of our programs, primarily our Culinary Arts and Art
and Design programs, which may be unable to maintain eligibility to enroll students receiving Title IV Program funds or have restrictions placed upon their offerings as a result on not meeting certain prescribed metrics. Such loss of or restrictions
to program eligibility may result in us determining to terminate or modify the affected programs under our current business model, and also result in a realignment on the types of educational programs we offer in order to comply with the new rules,
which could have a material adverse impact on our enrollments, business, financial condition, results of operation, cash flows and value of our common stock.
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We cannot predict with certainty the impact of the new regulations issued on October 29, 2010 on our operations and cannot predict the outcome of the proposed gainful employment rules that are expected to
be issued in early 2011, but these new and proposed rules could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Nor can we predict the effect of other legislative or regulatory changes by federal, state or other agencies regulating our education programs or other aspects of our operations, how any resulting
regulations will be interpreted or whether we and our schools will be able to comply with these requirements in the future. Any such actions by other bodies that affect our programs and operations could have a material adverse effect on our student
population, our business, financial condition, results of operations and cash flows.
The U.S. Congress has recently commenced hearings
and other examinations of the for-profit educational sector that have resulted in adverse publicity for the for-profit postsecondary education sector and could result in legislation, ED rulemaking, restrictions on Title IV program participation by
proprietary schools, litigation or other actions that may materially and adversely affect our business.
Both the U.S.
House of Representatives Education and Labor Committee and the U.S. Senate Health, Education, Labor and Pensions Committee (HELP Committee) commenced a series of hearings into the for-profit postsecondary education section in June 2010,
including accreditation matters, student debt, student recruiting, student success and outcomes, and other matters. The U.S. Senate also released a report, Emerging Risk?: An Overview of Growth, Spending, Student Debt and Unanswered
Questions in For-Profit Higher Education. The Chairmen of each of these education committees, together with other members of Congress, requested the Government Accountability Office (GAO) to conduct a review and prepare a report
with recommendations regarding various aspects of the proprietary sector, including recruitment practices, educational quality, student outcomes, the sufficiency of integrity safeguards against waste, fraud and abuse in federal student aid programs
and the degree to which proprietary institutions revenue is composed of Title IV and other federal funding sources. In addition, in August 2010, the HELP Committee requested information from 30 companies operating for-profit schools,
including us and other for-profit publicly traded companies providing postsecondary education services. CEC is working with the HELP Committee to provide the requested information. These activities are not formally related to EDs rulemaking
processes. However, these hearings, the requested GAO review and the HELP Committees information request could affect EDs rulemaking on any remaining program integrity issues, including gainful employment, or lead to additional new ED
regulatory requirements, negative media coverage, federal or other investigations of the for-profit postsecondary education industry, or third-party litigation related to information arising from these activities.
We cannot predict the extent to which, or whether, these activities could result in legislation or further rulemaking affecting our
participation in Title IV Programs, or result in other events that could affect aspects of our business. If any laws or regulations are adopted that limit or terminate our participation in Title IV Programs or the amount of student
financial aid for which our students are eligible, our business could be adversely and materially impacted.
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Government agencies, regulatory
agencies and third parties may conduct compliance reviews and audits, bring claims or initiate litigation against us based on alleged noncompliance with, or violations of, the extensive regulatory requirements applicable to us, and could require us
to refund amounts received under Title IV Programs or state financial aid programs or impose monetary damages, sanctions or impose significant limitations on our operations. We may be required to expend significant resources to defend against those
claims.
Government and regulatory agencies and third parties may bring actions against us based on alleged violations
of the extensive regulatory requirements applicable to us, alleged misrepresentations and other claims. While our compliance programs are extensive and emphasize individual and organizational responsibility for compliance, as well as employing
technological compliance controls, it is possible for a single employee to engage in non-compliant behavior or make statements that violate some aspect of the extensive regulations governing our schools and business. Any alleged or other purported
misrepresentations or actual infractions could result in (a) imposition of monetary fines or penalties, (b) repayment of funds received under Title IV Programs or state financial aid programs, (c) restrictions on or termination of our
U.S. schools eligibility to participate in Title IV Programs or state financial aid programs, (d) limits on, or result in termination of, our U.S. schools operations or ability to grant degrees and certificates, (e) restriction
or revocation of our U.S. schools accreditations, (f) limit our ability to open new schools or offer new programs, (g) costly adversarial proceedings, or (h) civil or criminal penalties being levied against us or our schools.
Any one of these outcomes could materially adversely affect our financial condition, results of operations, and cash flows or result in the imposition of significant restrictions on us and our ability to operate. We may also be required to expend
significant resources defending against such claims.
Due to their participation in Title IV programs, our schools and
universities are subject to periodic program reviews and audits by ED for the purpose of evaluating an institutions compliance with Title IV requirements, identifying any liabilities to ED caused by errors in compliance, and improving future
institutional capabilities. As previously disclosed, ED conducted a program review of AIU in November 2009. On July 14, 2010, AIU received a copy of the EDs Program Review Report, which is a preliminary report of the EDs
findings from its program review. The Program Review Report identified six findings, two of which were deemed to be systemic findings by the EDs program review team. These two findings relate to AIUs policy for determining student
attendance in online courses for purposes of determining such students enrollment status, withdrawal dates and associated timing respecting the return of unearned Title IV funds. The remaining findings were isolated and generally relate to
processing errors. We believe the amounts involved in these four findings are immaterial. In addition, the EDs Office of Inspector General audit services division commenced a compliance audit of CTU in June 2010, covering the period
July 1, 2009 to June 30, 2010, to determine whether CTU has policies and procedures to ensure that CTU administers Title IV and other federal program funds in accordance with applicable federal regulations. While we believe that our
schools operate in substantial compliance with applicable statutes and regulations, we cannot predict the outcome of these matters, and any unfavorable outcomes could have a material adverse effect on our business, results of operations, cash flows
and financial position. See Note 9 Commitment and ContingenciesAccrediting Body and Federal Regulatory Matters of the notes to our unaudited consolidated financial statements for further discussion of certain of these matters.
Any failure to comply with state and regulatory requirements, or new state legislative or regulatory initiatives affecting our schools,
could have a material adverse effect on our student population, results of operations, financial condition and cash flows.
Our schools are subject to extensive state-level regulation and oversight by state licensing agencies, whose approval is necessary to allow an institution to operate and grant degrees or diplomas. State
laws vary from state to state, but generally establish standards for faculty qualifications, the location and nature of facilities, financial policies, new programs and student instruction, administrative staff, marketing and recruitment and other
operational and administrative procedures. Any failure of one of our U.S. schools to maintain state authorization would result in that school being unable to offer educational programs and students attending the campus being
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ineligible for Title IV Programs. State legislatures often consider legislation affecting regulation of postsecondary educational institutions; enactment of this legislation and ensuing
regulations may impose substantial costs on our schools and require them to modify their operations in order to comply with the new regulations.
Additionally, the October 29, 2010 regulations impose new requirements on states with regard to their licensure and authorization of postsecondary institutions such as those operated by us. States that do
not currently have an approval framework that meets ED requirements will need to modify their authorization and licensure requirements in order for them to maintain their eligibility to participate in Title IV Programs. State regulatory changes and
approval processes can be lengthy and may be made more difficult and time consuming as a result of state budget challenges and staffing shortages. These new requirements go into effect July 1, 2011, and will require our schools to act quickly to a
changing state regulatory landscape that adapts to the new guidelines imposed by ED.
We and our schools also are subject to
and have pending audits, compliance reviews, inquiries, investigations, claims of non-compliance and litigation by ED and federal and state regulatory agencies, accrediting agencies, present and former students and employees, and others that may
allege violations of statutes, regulations, accreditation standards or other regulatory requirements applicable to us or our schools.
If the results of any such audits, reviews, investigations, claims, or actions are unfavorable to us, we may be required to pay monetary damages or be subject to fines, operational limitations, loss of
federal funding, injunctions, additional oversight and reporting, or other civil or criminal penalties. From time to time, we may have such matters pending against us respecting one or more of our schools, and as such, they would be discussed in the
note Commitments and ContingenciesAccrediting Body and Federal Regulatory Matters to our unaudited consolidated financial statements.
Even if we maintain compliance with applicable governmental and accrediting body regulations, increased regulatory scrutiny or adverse publicity arising from allegations of non-compliance may increase our
costs of regulatory compliance and adversely affect our financial results, growth rates and prospects. The October 29, 2010 regulations also require that an institution offering distance learning or online programs secure the approval of those
states which require such approval. These new regulations may require our schools offering distance education to obtain state approvals or registrations from additional states which currently or in the future may elect to regulate institutions who
enroll their residents in online programs and courses. State regulatory requirements for online education are inconsistent between states, change frequently and, in some instances, are not clear or are left to the discretion of state employees or
agents. In the future, states that do not presently regulate delivery of online courses and programs may enact legislation or issue regulations that specifically address online educational programs, such as those offered by our schools or otherwise
affect our schools operations.
If we fail or are unable to comply with current or future state licensing or
authorization requirements, are unable to successfully obtain new required state approvals for our schools offering online education, or determine that we are unable to cost effectively comply with new or changed state licensing or authorization
requirements, we could lose enrollments and revenues in any affected states, which could materially affect our revenues and our growth opportunities.
If one or more of our schools fails to maintain institutional accreditation, if one or more of our accrediting agencies loses recognition by ED, or if certain of our programs cannot obtain or
maintain programmatic accreditation, our schools could lose their ability to participate in Title IV Programs, and our growth prospects, reputation and financial condition could be materially adversely affected.
In the U.S., accrediting agencies periodically review the academic quality of an institutions instructional programs and its
administrative and financial operations to ensure that the institution has the resources to perform
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its educational mission. ED relies on accrediting agencies to assess whether an institutions educational programs qualify the school to participate in Title IV Programs.
Furthermore, many states and professional associations require professional programs to be accredited, and require individuals who must
pass professional license exams to have graduated from accredited programs. While programmatic accreditation is not a sufficient basis to qualify for institutional Title IV Program certification, programmatic certification assists program graduates
to practice as professionals or otherwise seek employment in their chosen field. Those of our programs that do not have such programmatic accreditation, or fail to maintain such accreditation, may experience adverse publicity, declining enrollments,
or other materially adverse impacts, which could result in it being impractical for us to continue offering such programs.
If
one of our schools or programs were to be placed on probationary accreditation status or failed to qualify for or maintain accreditation, we would likely experience adverse publicity, impaired ability to attract and retain students and substantial
expense to obtain unqualified accreditation status. Any loss of institutional accreditation would result in a loss of Title IV Program funds for the affected school and its students. Such events could have a material adverse impact on our business,
financial condition, results of operations and cash flows.
Our participation in Title IV Programs is dependent on ED
continuing to recognize the accrediting agencies that accredit our colleges and universities. The standards and practices of these agencies have recently become a focus of attention by ED. If ED ceased to recognize a particular accrediting agency
for any reason, our schools that are accredited by that accrediting agency would not be eligible to participate in Title IV Programs beginning 18 months after the date such recognition ceased, unless that accrediting agency was again recognized or
our schools that are accredited by that accrediting agency were accredited by another accrediting body recognized by ED. If our schools that are accredited by that accrediting agency became ineligible to participate in Title IV programs, our
business, financial condition, results of operations and cash flows would be materially adversely affected. Furthermore, the recent focus by the Office of Inspector General and ED on accrediting bodies may make the accreditation review process more
challenging for all of our schools when they undergo their normal accreditation review processes in the future or may lead to ED ceasing to recognize certain accrediting bodies. If this occurred, our schools may have to incur additional costs and/or
curtail or modify certain program offerings in order to maintain their accreditation, or become accredited by another accrediting body recognized by ED, which could increase our schools operational costs, reduce their enrollments and
materially adversely affect our business and results of operations.
Increased scrutiny by Congress and various governmental agencies
regarding student loan activities have produced uncertainty concerning restrictions applicable to administration of Title IV Programs, the funding for those programs, and student lending activities. If these uncertainties are not satisfactorily or
timely resolved, we may face increased regulatory burdens and costs or experience adverse impacts on our student enrollment. Investigations, claims, and actions against us and other postsecondary education providers could adversely affect our
reputation, revenues, financial results and stock price.
We and other postsecondary education providers have been
subject to increased regulatory scrutiny and litigation in recent years concerning student lending. State attorneys general, ED, the U.S. Congress and other parties have increasingly focused on student loan programs, including Title IV Programs,
investigating allegations of conflicts of interest between some institutions and lenders that previously provided Title IV loans, lenders providing questionable incentives to schools or school employees, claims of deceptive marketing practices for
student loans, and schools steering students to specific lenders. Several institutions and lenders have been cited for these problems and have made monetary payments to settle those claims. A number of schools, including our schools, have entered
into codes of conduct regarding student referrals to lenders in various states.
In response to allegations on student loan
programs, Congress has passed new laws, ED has enacted stricter regulations, and several states have adopted codes of conduct or enacted state laws that further regulate the
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conduct of lenders, schools, and school personnel. The Health Care and Education Reconciliation Act of 2010 (HCERA), which took effect on July 1, 2010, eliminated the bank-based
Federal Family Education Loan Program and all new federal student loans are being made through EDs William D. Ford Direct Loan Program. Under the Direct Loan Program, students borrow directly from ED instead of from banks, with EDs
private sector partners disbursing, servicing and collecting the loans.
Criticisms of the overall student lending and
postsecondary education sectors may impact general public perception of educational institutions, including us, in a negative manner. Adverse media coverage regarding other educational institutions or regarding us directly could damage our
reputation. The environment surrounding access to and cost of student loans remains in a state of flux. The uncertainty surrounding these issues, and any resolution of these issues that increases loan costs or reduces students access to Title
IV loans or to student extended payment plans such as the one we make available to our students, could reduce student demand for our programs, adversely impact our revenues and operating profit or result in increased regulatory scrutiny.
Risks Related to Our Business
We,
and our business model, are subject to risks relating to enrollment of students. If we are not able to continue to successfully recruit and retain our students, our financial results could be adversely materially affected.
Our business model depends on student recruitment and retention by our admissions counselors and our ability to attract and retain
students at our schools through marketing, including use of third-party Internet lead generators. Our admissions representatives are responsible for identifying individuals interested in enrolling in our campuses. Admissions representatives serve as
prospective students primary contacts, providing information to help them make informed enrollment decisions and assisting students with completing the enrollment process. EDs new incentive compensation rules eliminate safe harbors
allowing payment of certain compensation to our admissions advisors, financial aid advisors and certain third parties. If we are required by ED to change the pay practices for these employees and third parties, or if new legislation or rules impact
our recruiting practices, we may face employee retention issues, increased operating and marketing costs to identify prospective students, decreased enrollments or other impacts leading to changes in our business model, which could have a material
adverse impact on our business, financial condition, results of operations and cash flows.
Changes in the sources and amounts of
student financial aid, restrictions on student debt repayment options, or a significant increase in financing costs for our students, could reduce our enrollments, and have a material adverse effect on our student population, revenue and financial
results.
The current recession in the U.S. economy and HCERA, are impacting students ability to finance their
postsecondary educations, including limiting access to financial aid from sources other than Title IV funds. The recent recession caused many lenders, including lenders that previously provided Title IV loans to our students, to cease providing
Title IV loans to students. Because HCERA eliminates fees paid to private banks to act as intermediaries in providing loans to college students, eliminates the FFEL program, and required schools to transition to the federal direct loan program by
July 1, 2010, private lenders are exiting the student loan market.
These changes may result in higher administrative
costs for schools, including us, related to student loan administration and extending student extended payment plans to those students unable to timely replace student loan programs currently in place with exiting lenders. If the costs of Title IV
loans increase and if availability of alternate student financial aid and payment plans decrease, students may decide not to enroll in a postsecondary institution, which could have a material adverse effect on our enrollments, revenues and results
of operations.
We have implemented funding programs that will assist our students in continuing their program of study. We
have provided payment plans directly to certain students to ensure that they can finish their current educational programs with us and to allow new students to attend our schools. As of September 30, 2010, we
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have committed to approximately $97.8 million of funding through student extended payment plans. This commitment is generally based upon an estimate of the amount of additional financial aid
needed by the student for a given academic year, less an anticipated cancellation rate for those plans that are later reduced or cancelled out entirely. This estimated amount could vary materially from what is ultimately provided to our students. As
of September 30, 2010, the allowance for doubtful accounts associated with earned student receivables under student extended payment plans was approximately $48.5 million. If the remainder of the September 30, 2010 earned student receivables
balance was not repaid, the Companys results of operations would reflect an additional $21.2 million of expense.
Any
further actions by the U.S. Congress, ED or other regulatory bodies that significantly reduces funding for Title IV Programs or the ability of our students to participate in those programs, that reduces alternate sources of student financial aid, or
that restricts our ability to offer student extended payment plans or establishes different or more stringent requirements for our U.S. schools to participate in Title IV Programs or to offer such student extended payment plans, could have a
material adverse effect on our student population, course offerings, financial condition, results of operations and cash flows.
Budget
constraints in states that provide state financial aid to our students could reduce available financial aid, which could adversely affect our student population. Alternatively, improved state financing may result in increased support for
lower-priced public institutions, which may increase competition for students.
A significant number of states in which
our schools operate face budget constraints that may reduce state appropriations in a number of areas including state student financial aid, but we cannot predict the amount or timing of any such reductions. If state funding for our students
decreases and our students are unable to secure alternative sources of funding for their education, our student population could be adversely affected, which could have a material adverse effect on our results of operations, financial condition, and
cash flows. Increased state or federal support for public institutions and community colleges, resulting in increased competition for students, also could have a material adverse effect on our results of operations, financial condition and cash
flows.
If we are unable to successfully resolve pending or future litigation and regulatory and governmental inquiries involving us,
our financial condition, results of operations and growth prospects could be adversely affected.
We are subject to
various lawsuits, investigations and claims covering a range of matters, including, but not limited to, claims made by current and former students and employees of our schools. These claims may include qui tam actions filed in federal court by
individual plaintiffs on behalf of themselves and the federal government alleging that we submitted false claims or statements to ED in violation of the False Claims Act. Qui tam actions are filed under seal, and remain under seal until the
government decides whether it will intervene in the case. If the government elects to intervene in an action, it assumes primary control of that matter; if the government elects not to intervene; individual plaintiffs may continue the litigation at
their own expense on behalf of the government.
We cannot predict the ultimate outcome of these matters and expect to continue
to incur significant defense costs and other expenses in connection with them. We may be required to pay substantial damages or settlement costs in excess of our insurance coverage related to these matters. Government investigations and any related
legal and administrative proceedings may result in the institution of administrative, civil injunctive or criminal proceedings against us and/or our current or former directors, officers or employees; or the imposition of significant fines,
penalties or suspensions, or other remedies and sanctions. Any such costs and expenses could have a material adverse effect on our financial condition and results of operations and the market price of our common stock.
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If we fail to effectively
identify, pursue and integrate acquired schools, both in the U.S. and outside of the U.S., our growth could be slowed and our profitability may be adversely affected.
Acquisitions are one component of our overall long-term growth. From time to time, we engage in evaluations of, and discussions with, possible domestic and international acquisition candidates. We may not
be able to identify suitable acquisition opportunities, acquire institutions on favorable terms, or successfully integrate or profitably operate acquired institutions. If we use debt to finance future acquisitions or issue securities in connection
with future acquisitions, such actions could dilute the holdings of our stockholders.
Because an acquisition is considered a
change in ownership and control of the acquired institution under applicable regulatory standards, we must obtain approval from the ED, most applicable state agencies and accrediting agencies and possibly other regulatory bodies when we acquire an
institution.
We have in the past, and may in the future, acquire schools in international markets. There may be difficulties
and complexities associated with our expansion into international markets, and our strategies may not succeed beyond our current markets. If we do not effectively address these risks, our growth and ability to compete may be impaired.
We must service our student population without overbuilding or over-investing in infrastructure and our on-line platforms.
Our increasing student enrollments may result in capacity constraints if our schools, particularly on-ground schools, are unable to
adequately service the number of students enrolled or seeking to enroll in our programs. We must balance current student populations and projected growth with appropriate levels of investment in physical plant and our on-line platforms in order to
effectively manage capacity.
We are subject to the risks inherent in operating in foreign countries.
We operate schools outside of the U.S. and are subject to risks inherent in having non-domestic operations, including unfamiliar statutes
and regulations for employees and postsecondary institutions, currency exchange rate fluctuations, limits on repatriation of profits, U.S.-foreign tax treaties and taxing authority, and possible economic or political instability in those countries.
If we fail to effectively identify, establish and operate new schools and new branch campuses of our existing schools, or to offer new
educational programs, our growth may be slowed and our profitability may be adversely affected.
As part of our growth
strategy, we currently anticipate opening new schools, new branch campuses of our existing schools throughout the U.S. and offering new educational programs. These activities require us to invest in management and capital expenditures, incur
marketing and advertising expenses, and devote resources that are different from those required to operate our existing schools. We may be unable to identify or acquire suitable expansion opportunities to help maintain or accelerate our current
growth rate, or to successfully integrate a new school or branch campus. Any failure by us to effectively identify, establish and manage the operations of a new school or branch campus could slow our growth and make any newly established school or
branch campus more costly to operate than we had planned, which could have an adverse effect on our results of operations.
We need
timely approval by applicable regulatory agencies to offer new programs, expand our operations into or within certain states, or acquire additional schools. If those approvals are not timely, we may incur operating expenses (such as lease
obligations) for significant time periods before we can enroll students.
To open a new school or branch campus, or to
establish a new educational program, we are required to obtain the appropriate approvals from ED and applicable state and accrediting regulatory agencies, which may be
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conditioned, delayed or denied in a manner that could significantly affect our growth plans. Approval by these regulatory agencies may be negatively impacted due to regulatory inquiries or
reviews and any adverse publicity relating to such matters. Also, any adverse action taken by ED regarding its recognition of any accrediting agency that accredits our schools or programs could adversely impact our ability to open a new school or
branch campus or establish new educational programs. In addition, to be eligible to participate in Title IV Programs, ED and applicable state and accrediting bodies must certify a new school or branch campus.
Our financial performance depends, in part, on our ability to keep pace with changing market needs and technology.
Increasingly, prospective employers of students who graduate from our schools demand that their new employees possess appropriate
technological skills and also appropriate soft skills, such as communication, critical thinking and teamwork skills. These skills can evolve rapidly in a changing economic and technological environment, so it is important for our
schools educational programs to evolve in response to those economic and technological changes. Current or prospective students or the employers of our graduates may not accept expansion of our existing programs, improved program content and
the development of new programs. Even if our schools are able to develop acceptable new and improved programs in a cost-effective manner, our schools may not be able to begin offering them as quickly as prospective employers would like or as quickly
as our competitors offer similar programs. If we are unable to adequately respond to changes in market requirements due to regulatory or financial constraints, rapid technological changes or other factors, our ability to attract and retain students
could be impaired, the rates at which our graduates obtain jobs involving their fields of study could decline, and our results of operations and cash flows could be adversely affected.
The loss of our key personnel could harm us.
Our future success
depends largely on the skills, efforts and motivation of our executive officers and other key personnel, as well as on our ability to attract and retain qualified corporate managers and our schools ability to attract and retain qualified
faculty members and administrators. We face competition in hiring personnel who possess the skill sets that we seek. In addition, key personnel may leave us and subsequently compete against us. 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 adversely affect our results of operations or financial condition.
In addition, to support our growth, we must hire, retain, develop and train qualified admissions representatives who are dedicated to student recruitment. If we are unable to hire, develop and train
qualified admissions representatives, the effectiveness of our student recruiting efforts could be adversely affected.
If our graduates
are unable to obtain professional licenses or certification in their chosen field of study, we may face declining enrollments and revenues or student claims against us.
Many of our students, particularly in the healthcare programs we offer, require or desire professional licenses and certifications in order to obtain employment in their chosen fields. Many factors affect
a students ability to become licensed, including whether the students program and institution are accredited by a particular accrediting commission or approved by a professional association or by the state in which the student seeks
employment, and the students own qualifications and attainment. If one or more states deny licenses to a significant number of our students due to factors relating to our institutions or programs, we could suffer reputational harm and
declining enrollments in those institutions or programs, or face student claims or litigation that could affect our revenues and results of operations.
Our future operating results and the market price of our common stock could be materially adversely affected if we are required to write down the carrying value of nonfinancial assets and
nonfinancial liabilities, including long-lived assets, goodwill and intangible assets, such as our trademarks.
In
accordance with U.S. GAAP, we review our nonfinancial assets and nonfinancial liabilities, including long-lived assets, goodwill and intangible assets, such as our trademarks
,
for impairment on at least an annual
55
basis through the application of fair-value-based measurements. Our estimates of fair value for these are based primarily on projected future results and expected cash flows and other
assumptions. In the future, if we are required to significantly write down the value of our nonfinancial assets and nonfinancial liabilities, including long-lived assets, goodwill and trademarks, our operating results and the market price of our
common stock may be materially adversely affected.
We could experience decreasing enrollments or decreasing growth in our enrollments
in our schools due to changing demographic trends in family size, overall declines in enrollment in postsecondary schools, job growth in fields unrelated to our core disciplines, immigration and visa laws, or other societal factors.
A September 2009 NCES report projects that between 2007 and 2018 enrollments in degree-granting postsecondary
institutions increasing in a range from a low alternative projection of 9%, or 19.9 million students, to a high alternative projection of 17%, or 21.3 million students. These projected 11-year growth rates are lower than the 27% increase
NCES reported for the 11-year period 1996-2007 of 14.4 million in 1996 to 18.2 million in 2007. Such a decline in the overall growth rate in the postsecondary education sector would result in increased competition for students for our
programs and could impact our ability to attract and retain students and affect our growth rate in enrollments. In addition, the ability of our foreign students to obtain visas for our U.S. and our European schools is important to student
recruitment. If we cannot attract new students, or develop new curricula to attract prospective students who seek degrees in fields other than our core disciplines, or accommodate changed immigration or visa rules, we may be unable to maintain and
increase our student population or achieve our growth strategies, which could have a material adverse effect on our revenues, results of operations, financial condition and market price of our common stock.
Capacity constraints or system disruptions to our online computer networks could have a material adverse effect on our ability to attract and
retain students.
Our schools online campuses intend to increase student population. To support this growth, we
will require more resources, including additional faculty, admissions, academic and financial aid personnel. This growth may place a significant 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 standing with regulators and accreditors, and meet students needs in a timely manner. New programs can be delayed due to current and future unforeseen regulatory restrictions. Furthermore, our
regulators may impose additional restrictions or conditions on the manner in which we offer online courses to our students, any one of which could negatively impact our business or results of operations.
Any general decline in internet use for any reason, including security or privacy concerns, cost of internet service or changes in
government regulation, could result in less demand for online educational services and inhibit our planned growth in our online programs.
For our online and on-ground campuses, the performance and reliability of program infrastructure is critical to their reputation and ability to attract and retain students. Our delivery of these programs
could be hindered by computer system error or failure, significant increase in traffic on our computer networks, or any significant failure or unavailability of our computer networks due to events beyond our control, including natural disasters and
network and telecommunications failures. Any interruption to our schools computer systems or operations could have a material adverse effect on the ability of our schools to attract and retain students.
Our computer networks 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,
hackers may target our networks. We may be
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required to expend significant resources to protect against the threat of these security breaches or to alleviate problems caused by these breaches. Although we continually monitor the security
of our technology infrastructure, we cannot assure that these efforts will protect our computer networks against security breaches.
Our
financial performance depends, in part, on our ability to continue to develop awareness and acceptance of our schools and programs among high school graduates and working adults.
If our schools are unable to successfully market and advertise their educational programs, our schools ability to attract and enroll
prospective students in such programs could be adversely affected, and, consequently, our ability to increase revenue or maintain profitability could be impaired. Some of the factors that could prevent us from successfully marketing and advertising
our schools and the programs that they offer include, but are not limited to, student or employer dissatisfaction with educational programs and services, diminished access to high school students, our failure to maintain or expand our brand names or
other factors related to our marketing or advertising practices, costs and effectiveness of internet and other advertising programs, and changing media preferences of our target audiences.
We compete with a variety of educational institutions, and if we are unable to compete effectively, our student population and revenue could be adversely impacted.
Postsecondary education is a highly fragmented and competitive field. Our schools compete with traditional public and private two-year and
four-year colleges and universities, other proprietary schools, other online education providers, and alternatives to higher education, such as immediate employment and military service. Some public and private institutions charge lower tuition for
courses of study similar to those offered by our schools due, in part, to government subsidies, government and foundation grants, tax-deductible contributions and other financial resources not available to proprietary institutions. Our competitors
may have substantially greater financial and other resources than we do. We expect to experience increased competition as more colleges, universities, and other postsecondary education providers increase their online program offerings. An increase
in competition could affect the success of our marketing efforts and enable our competitors to recruit prospective students more effectively, or reduce our tuition charges and increase spending for marketing efforts, which could adversely impact our
results of operations, financial condition and cash flows.
Our credit agreement limits our ability to take various actions.
Our credit agreement limits our ability to take various actions, including paying dividends and disposing of assets,
and may restrict us from taking actions that management believes would be desirable and in the best interests of us and our stockholders. Our credit agreement also requires us to satisfy specified financial and non-financial covenants. A breach of
any of those covenants could result in an event of default under the agreement and allow the lenders to pursue various remedies, including accelerating the repayment of any indebtedness outstanding, any of which could have a material adverse effect
on our operations and financial condition.
We are subject to privacy laws and regulations both domestically and in the countries in
which our foreign schools operate, due to our collection and use of personal information. Any violations of those laws, or any breach, theft or loss of that information, could adversely affect our reputation and operations.
Our efforts to attract and enroll students result in us collecting, using and keeping substantial amounts of personal information
regarding applicants, our students, faculty, their families and alumni, including social security numbers, financial data or health data. We also maintain personal information about our employees in the ordinary course of our activities. Our
services, the services of many of our health plan and benefit plan vendors, and other information can be accessed globally through the internet. Our computer networks and those of our vendors that manage confidential information for us may be
vulnerable to unauthorized access, theft or misuse, hackers, computer viruses, or third parties in connection with hardware and software upgrades and changes. Our services can be accessed globally via the internet, so we may be subject to privacy
laws in countries
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outside the U.S. from which students access our services, which laws may constrain the way we market and provide our services. While we utilize security and business controls to limit access to
and use of personal information, any breach of student or employee privacy or errors in storing, using or transmitting personal information could violate privacy laws and regulations resulting in fines or other penalties. A breach, theft or loss of
personal information held by us or our vendors, or a violation of the laws and regulations governing privacy could have a material adverse effect on our reputation or result in additional regulation, compliance costs or investments in additional
security systems to protect our computer networks.
We rely on exclusive proprietary rights and intellectual property that may not be
adequately protected under current laws, and we may encounter disputes from time to time relating to our use of intellectual property of third parties.
Our success depends in part on our ability to protect our proprietary rights. We rely on a combination of copyrights, trademarks, service marks, trade secrets, domain names and agreements to protect our
proprietary rights. We rely on service mark and trademark protection in the United States and select foreign jurisdictions to protect our rights to our marks as well as distinctive logos and other marks associated with our services. We cannot assure
you that these measures will be adequate, that we have secured, or will be able to secure, appropriate protections for all of our proprietary rights. Despite our efforts to protect these rights, unauthorized third parties may attempt to duplicate
the proprietary aspects of our curricula, online resource material and other content. Our managements attention may be diverted by these attempts, and we may need to use funds in litigation to protect our proprietary rights against any
infringement or violation.
We may encounter disputes from time to time over rights and obligations concerning intellectual
property, and we may not prevail in these disputes. Third parties may raise a claim against us alleging an infringement or violation of the intellectual property of that third party. Some third party intellectual property rights may be extremely
broad, and it may not be possible for us to conduct our operations in such a way as to avoid those intellectual property rights. Any such intellectual property claim could subject us to costly litigation and impose a significant strain on our
financial resources and management personnel regardless of whether such claim has merit.
We may incur liability for the unauthorized
duplication or distribution of class materials posted online for class discussions.
In some instances our faculty
members or our students may post various articles or other third-party content on class discussion boards or download third-party content to personal computers. We may incur claims or liability for the unauthorized duplication or distribution of
this material. Any such claims could subject us to costly litigation and could impose a strain on our financial resources and management personnel regardless of whether the claims have merit.
A protracted economic slowdown and rising unemployment could harm our business, while an improving economy may lead to prospective students choosing to work rather than to pursue postsecondary
education at our schools.
We believe that many students pursue postsecondary education to be more competitive in the
job market. However, a protracted economic slowdown could increase unemployment and diminish job prospects generally. Diminished job prospects 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. An improving economy and improving job prospects, however, may lead prospective students to choose to work rather than to pursue postsecondary education. As a result, our
enrollments could suffer.
We may incur costs in complying with the Americans with Disabilities Act and with similar laws.
The Americans with Disabilities Act of 1990, or ADA, requires all public accommodations to meet federal requirements
for access and use by disabled individuals. Other federal, state, and local laws and regulations also
58
may impose similar or additional accessibility requirements. For example, the Fair Housing Amendments Act of 1988, or FHAA, requires apartment properties first occupied after March 13, 1991,
to be accessible to handicapped persons. Typically, our real estate leases require us to pay any costs necessary to comply with all laws, including these accessibility laws, for our premises, which may include parking areas, restaurants at our
culinary schools, dormitory facilities and similar facilities in addition to classroom and office space. In opening new schools or locations and acquiring existing schools, we often must build out the premises to satisfy our classroom needs and must
incur the costs associated with accessibility compliance in those construction activities. If any of our premises are not compliant with the ADA or FHAA, we could face fines, litigation by private litigants, and orders to correct any non-complying
features.
Risk Related to Our Common Stock
The trading price of our common stock may fluctuate substantially in the future.
The trading price of our common stock may fluctuate substantially as a result of a number of factors, some of which are not in our control. These factors include:
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the initiation, pendency or outcome of litigation, accreditation reviews, regulatory reviews and investigations, and any related adverse publicity;
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the outcomes of EDs program integrity rulemaking program, and other changes in the legal or regulatory environment in which we operate;
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changes in the student lending and credit markets;
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our ability to meet or exceed expectations of analysts or investors;
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quarterly variations in our operating results;
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general conditions in the postsecondary education field, including changes in the ED, state laws and regulations and accreditation standards, or
availability of student financing;
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changes in our earnings estimates by analysts;
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future impairment of goodwill or other intangible assets;
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price and volume fluctuations in the overall stock market, which have particularly affected the market prices of many companies that provide
postsecondary education in recent periods;
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the loss of key personnel; and
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general economic conditions.
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These factors may adversely affect the trading price of our common stock, regardless of our actual operating performance, and could prevent an investor from selling shares of our common stock at or above
the price at which the investor acquired the shares. In addition, the stock markets, from time to time, experience extreme price and volume fluctuations that may be unrelated or disproportionate to the operating performance of companies. These broad
fluctuations may adversely affect the market price of our common stock, regardless of our operating performance.
59
Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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The following table sets forth information regarding purchases made by us of shares of our common stock on a monthly basis during the nine months ended September 30, 2010:
Issuer Purchases of Equity Securities
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Period
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Total Number of
Shares
Purchased
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Average Price
Paid per Share
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Total Number of
Shares Purchased
as Part of Publicly
Announced
Plans
or Programs
(1)
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Maximum
Approximate Dollar
Value of Shares that
May Yet Be
Purchased
Under
the Plans or
Programs
(1)
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December 31, 2009
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$
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195,475,395
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January 1, 2010January 31, 2010
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1,702,612
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$
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23.49
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1,702,612
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155,475,407
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February 1, 2010February 28, 2010
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309,200
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27.48
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309,200
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396,977,868
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March 1, 2010March 31, 2010
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1,346,501
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30.60
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1,346,501
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355,771,638
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April 1, 2010April 30, 2010
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1,555,145
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32.18
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1,555,145
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305,728,843
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May 1, 2010May 31, 2010
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513,749
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29.73
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513,749
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290,454,703
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June 1, 2010June 30, 2010
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290,454,703
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July 1, 2010July 31, 2010
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|
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290,454,703
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August 1, 2010August 31, 2010
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|
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290,454,703
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|
September 1, 2010September 30, 2010
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290,454,703
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Total
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5,427,207
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5,427,207
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(1)
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As of September 30, 2010, approximately $290.5 million was available under the Companys previously authorized repurchase program. Stock repurchases under
this program may be made on the open market or in privately negotiated transactions from time to time, depending on various factors, including market conditions and corporate and regulatory requirements. The stock repurchase program does not have an
expiration date and may be suspended or discontinued at any time.
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31.1
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Certification of CEO pursuant to Section 302 of Sarbanes-Oxley Act of 2002
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31.2
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Certification of CFO pursuant to Section 302 of Sarbanes-Oxley Act of 2002
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32.1
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Certification of CEO pursuant to Section 906 of Sarbanes-Oxley Act of 2002
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32.2
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Certification of CFO pursuant to Section 906 of Sarbanes-Oxley Act of 2002
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101
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|
The following financial information from our Quarterly Report on Form 10-Q for the third quarter of 2010, filed with the SEC on November 2, 2010, formatted in Extensible
Business Reporting Language (XBRL): (i) the Unaudited Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009, (ii) the Unaudited Consolidated Statements of Operations for the three and nine months ended September
30, 2010 and September 30, 2009, (iii) the Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and September 30, 2009, and (iv) Notes to Unaudited Consolidated Financial Statements, tagged as blocks
of text.
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60
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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CAREER EDUCATION CORPORATION
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Date: November 2, 2010
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By:
|
|
/
S
/ G
ARY
E.
M
C
C
ULLOUGH
|
|
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Gary E. McCullough
President and Chief Executive Officer
(Principal Executive
Officer)
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Date: November 2, 2010
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By:
|
|
/
S
/ M
ICHAEL
J.
G
RAHAM
|
|
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|
|
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Michael J. Graham
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
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61
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