Form 10-K
Table of Contents

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

(Mark One)

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2009

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 of 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)

Registrant’s telephone number, including area code: (847) 781-3600

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, $0.01 par value

(Title of Class)

Securities registered pursuant to Section 12(g) of the Act: None

 

 

Indicate by check mark whether the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933.    Yes  x    No  ¨

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes  ¨    No  x

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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  ¨    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

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

The aggregate market value of the Registrant’s voting common stock held by non-affiliates of the Registrant, based upon the $24.89 per share closing sale price of the Registrant’s common stock on June 30, 2009 (the last business day of the Registrant’s most recently completed second quarter), was approximately $1,646,908,428. For purposes of this calculation, the Registrant’s directors and executive officers of the Registrant’s outstanding shares of voting common stock have been assumed to be affiliates, with such affiliates holding an aggregate of 18,980,670 shares of the Registrant’s voting common stock on June 30, 2009. As of January 31, 2010, the number of outstanding shares of Registrant’s common stock was 84,082,866.

Portions of the Registrant’s Notice of Annual Meeting and Proxy Statement for the Registrant’s 2010 Annual Meeting of Stockholders are incorporated by reference into Part III of this Report.

 

 

 


Table of Contents

CAREER EDUCATION CORPORATION

FORM 10-K

TABLE OF CONTENTS

 

          Page

PART I

  

ITEM 1.

  

BUSINESS

   1

ITEM 1A.

  

RISK FACTORS

   28

ITEM 1B.

  

UNRESOLVED STAFF COMMENTS

   40

ITEM 2.

  

PROPERTIES

   40

ITEM 3.

  

LEGAL PROCEEDINGS

   41

PART II

  

ITEM 4.

  

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

   42

ITEM 5.

  

SELECTED FINANCIAL DATA

   44

ITEM 6.

  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

   46

ITEM 6A.

  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   69

ITEM 7.

  

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

   69

ITEM 8.

  

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

   69

ITEM 8A.

  

CONTROLS AND PROCEDURES

   70

ITEM 8B.

  

OTHER INFORMATION

   71

PART III

  

ITEM 9.

  

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

   72

ITEM 10.

  

EXECUTIVE COMPENSATION

   72

ITEM 11.

  

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

   72

ITEM 12.

  

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

   73

ITEM 13.

  

PRINCIPAL ACCOUNTING FEES AND SERVICES

   73

PART IV

  

ITEM 14.

  

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

   73

SIGNATURES

   74

 

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PART I

Cautionary Note Regarding Forward-Looking Statements

This Annual Report on Form 10-K 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 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 herein under the caption “Risk Factors” that could cause our actual growth, results of operations, financial condition, cash flows, performance and business prospects and opportunities to differ materially from those expressed in, or implied by, these statements. Except as expressly required by the 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.

 

ITEM 1. BUSINESS

As used in this Annual Report on Form 10-K, the terms “we,” “us,” “our,” “the Company,” and “CEC” refer to Career Education Corporation and our wholly-owned subsidiaries. The terms “school” and “university” each 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.

BUSINESS 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 over 116,000 students across the world in a variety of career-oriented disciplines. The approximately 90 campuses that serve these students are located throughout the U.S. and in France, Italy, and the United Kingdom, and offer doctoral, master’s, bachelor’s and associate degrees and diploma and certificate programs. Nearly 40% of our students attend the web-based virtual campuses of American InterContinental University, Colorado Technical University, International Academy of Design & Technology and Le Cordon Bleu College of Culinary Arts.

CEC is an industry leader whose brands are recognized globally. Those brands include, among others, American InterContinental University; Brooks Institute; Colorado Technical University; Harrington College of Design; INSEEC Schools; International Academy of Design & Technology; Istituto Marangoni; Le Cordon Bleu North America; and Sanford-Brown Institutes and Colleges. Through our schools, CEC is committed to providing quality education, enabling students to graduate and pursue rewarding careers.

For more information, see CEC’s website at www.careered.com. The website includes a detailed listing of individual campus locations and web links to CEC’s approximately 90 colleges, schools, and universities.

During 2009, we organized our businesses across five strategic business units (“SBU”). Each SBU represented a group of postsecondary education providers that offer a variety of degree and non-degree academic programs. These SBUs were organized by key market segment to enhance brand focus and operational alignment within each segment. In addition, our Transitional Schools division included all schools that are currently being taught out. This division is focused on winding down these operations as effectively and efficiently as possible. Our reportable segments are:

University includes our American InterContinental University (“AIU”), Colorado Technical University (“CTU”) and Briarcliffe College schools that collectively offer regionally accredited academic programs in the

 

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career-oriented disciplines of business studies, visual communications and design technologies, health education, information technology, criminal justice and education in an online, classroom or laboratory setting.

Culinary Arts includes our Le Cordon Bleu North America (“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 primarily in a classroom, kitchen or online setting.

Health Education primarily includes our Sanford-Brown schools that 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.

Art & Design includes our Brooks Institute, Brown College, Collins College, Harrington College of Design and International Academy of Design & Technology (“IADT”) schools. Collectively these schools offer academic programs primarily in the career-oriented disciplines of fashion design, game design, graphic design, interior design, film and video production, photography and visual communications in a classroom, laboratory or online setting.

International includes our INSEEC Group (“INSEEC”) schools and Istituto Marangoni schools located in France, Italy and the United Kingdom, which collectively offer academic programs in the career-oriented disciplines of business studies, health education, fashion and design and visual communications and technologies in a classroom or laboratory setting.

Transitional Schools includes those schools that are currently being taught out. As of December 31, 2009, AIU – Los Angeles, CA is the only school included in Transitional Schools. The schools previously reported within Transitional Schools have since ceased operations and are now being reported within discontinued operations with the exception of Gibbs College – Boston, MA, Gibbs College – Farmington, CT, and SBI Cranston – Cranston, RI which transitioned to the Health Education SBU in 2009.

On January 15, 2010, we realigned our resources to more effectively execute our new strategic growth plan. We began the integration of our Art & Design SBU alongside AIU and CTU, within the University SBU. This realignment will facilitate synergies between the programs in Art & Design and University, especially in the areas of fashion design, merchandising, interior design and technology. It will also enable the sharing of student-focused online platforms and expertise and aid IADT as it pursues its longer-term strategy of regional accreditation. Brooks Institute, Harrington College of Design and Collins College 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 Briarcliffe’s 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.

See Note 17 “Segment Reporting” and Note 19 “Subsequent Events” of the notes to our consolidated financial statements for further discussion.

INDUSTRY BACKGROUND AND COMPETITION

The postsecondary education industry is highly fragmented and increasingly competitive, with no one provider controlling significant market share. Students choose among providers based on programs and degrees offered, program flexibility and convenience, quality of instruction, placement rates, reputation, recruiting effectiveness and cost. Such multi-faceted market fragmentation results in significant differentiation among various education providers.

According to the National Center for Education Statistics (“NCES”), there were approximately 6,550 Title IV eligible postsecondary education institutions in the United States for the academic year 2007-08, including approximately 2,730 private, proprietary schools; approximately 2,000 public, non-profit schools; and

 

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approximately 1,820 private, non-profit schools. According to the U.S. Department of Education, in the fall of 2007, approximately 18.7 million students were attending institutions that participate in the various financial aid programs under Title IV of the Higher Education Act signed into law on August 14, 2008.

The overall postsecondary education industry is expected by analysts to grow over the next several years. According to our estimates based on various external sources which include industry analysts and Integrated Postsecondary Education Data System (“IPEDS”) data, total postsecondary enrollments are expected to increase 1.9% per year over the next four years. Within the postsecondary education market, the proprietary sector is expected to have revenue growth of 8.3% per year from $17 billion in 2008 to $26 billion in 2013. One of the major drivers of this growth is the expected online platform growth of 15.2% per year from $9 billion in 2008 to $19 billion in 2013. The fragmentation and the projected growth of the industry contribute to its competitive nature and result in additional competitors entering the market.

Our primary competitors in the publicly traded, proprietary postsecondary education industry are: Apollo Group, Bridgepoint Education, Inc., Capella Education Company, Corinthian Colleges, Inc., DeVry Inc., Education Management Corporation, Grand Canyon Education, Inc., ITT Educational Services, Kaplan, a division of Washington Post Company and Strayer Education. We also compete with a number of privately held, proprietary postsecondary institutions.

BUSINESS AND OPERATING STRATEGY

To compete successfully in today’s demanding workplace, we believe individuals benefit significantly from a solid education that provides them with the foundation of knowledge and skills they can use on the job. Our business and operating strategy are focused on educating students for jobs in specific fields and enabling our institutions to meet the needs and demands of our students. We have aligned our strategic plan on five broad choices:

Grow Our Core Educational Institutions

Our schools operating under the AIU, CTU, IADT, LCB and Sanford-Brown trade names generate over 80% of our domestic revenue and operating income. We continue to focus our time, energy and resources on these five brands. We will adequately resource the remaining brands, but intend to be more judicious in allocating our internal resources and in prioritizing certain functional activities.

As of December 31, 2009, nearly 40% of our students were obtaining their education online. For students whose lifestyles demand flexibility in learning, our schools’ fully-online platforms, AIU Online, CTU Online, LCB Online and IADT Online, deliver a quality educational experience through 100% Internet-based courses. Our schools’ fully-online platforms provide us with an opportunity to expand our business both domestically and internationally. We will continue to invest resources in this rapidly growing area of fully-online education to promote organic growth. We will also continue to explore the option of expanding our online presence through the offering of fully-online platforms at our on-ground schools and the introduction of new programs to our existing fully-online platforms.

Along with our fully-online platforms, we continue to develop our blended learning model, which capitalizes on our universities’ online platforms’ virtual campus platform and enables students at our on-ground campuses to complete a portion of their academic programs on-ground and a portion of their academic programs utilizing our universities’ online platforms’ virtual campus. We believe that our blended learning model provides our current and prospective students with the program flexibility that they desire.

In addition, we seek to foster organic growth by leveraging educational programs that have been successful at other campuses and continuing to explore opportunities to expand in programmatic areas which provide significant growth potential. In the domestic proprietary postsecondary education market, analyst data shows the areas of highest growth potential include health education, business, education and information technology

 

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programs. In addition, we are expanding program offerings through accelerated program innovation and development in which we are developing new curricula to be offered across our campuses.

To effectively serve the educational needs of our students, we offer a full range of educational options, including doctoral degree, master’s degree, bachelor’s degree, associates degree, and non-degree certificate and diploma programs. Our schools focus on the five core curricula described above that we believe have traditionally provided quality employment opportunities for well-prepared graduates.

Enter New Markets

A key component of our schools’ growth strategy is the establishment of start-up branch campuses of our existing schools. We define start-up campuses as branch campuses that have been instructing students for less than 12 months. Start-up branch campuses enable our schools to capitalize on new markets or geographic locations that exhibit strong enrollment potential or exhibit the potential to establish a successful operation based on one of our core curricula.

During 2009, eight of our campuses were in the start-up stage. Our LCB – St. Louis, MO, SBC – San Antonio, TX and Gibbs – Boston, MA campuses began instructing students in the second quarter 2009. Our Gibbs – Farmington, CT, SBC – Phoenix, AZ, SBI – Dearborn, MI, SBI – Orlando, FL and SBI – Grand Rapids, MI campuses began instructing students in the fourth quarter 2009. SBI – Cranston, which transitioned to Health Education from Transitional Schools in the fourth quarter 2009, will begin instructing students in the first quarter 2010. The three former Gibbs schools are opening as Health Education institutions providing primarily diploma and associates degree programs specializing in medical related curriculum.

We will continue to seek to grow our education institutions through geographic and programmatic extensions. We are expecting to start up an additional six to eight new campuses per year and are focusing our efforts on leveraging current programmatic offerings at our existing campuses. We currently operate in 25 states and three countries outside of the U.S. We believe there are growth opportunities within the U.S. and internationally.

Improve Academic and Operational Effectiveness

As we look for opportunities to add campuses and expand our presence, we also strive for continuous improvement in our existing business. We are focused on identifying and taking advantage of opportunities to leverage best practices across our existing schools.

In order to improve service, we continuously seek to leverage resources across our campuses. We have capitalized on our centralization efforts that continued through 2009 and were able to increase efficiencies in school support functions. We have also sought to minimize real estate costs and investments by utilizing existing space across our campuses to accommodate population growth and to more effectively serve our students.

We have also better aligned our academic calendars at the majority of our IADT campuses to provide for an increased number of new student starts and a shortened enrollment cycle. We believe that this will improve admissions productivity through more consistent enrollment performance, which in turn will improve new student show rates.

Within our Culinary Arts SBU, we have introduced a 21-month program which provides students with the opportunity of increased Title IV funding as well as implementation of greater student-support activities. This is helping to bridge the financing gap for students who might otherwise not have been able to attend our institutions because of the severe contraction of the student private loan market that occurred in the second quarter 2008. These efforts have improved the growth prospects of our institutions and the overall student experience.

 

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Build our Reputation and External Relationships

We are committed to maintaining an industry-leading compliance program. We have developed rules, policies and standards to guide the conduct of our employees. Our compliance objectives include the development of processes and controls to help ensure compliance with applicable rules, standards and laws. We believe that a key to meeting these objectives is our continued emphasis on individual and organizational responsibility for compliance. Additionally, we have utilized technology to improve the design and operation of our network of compliance controls and to develop tools that enable our corporate and school personnel to proactively monitor their overall compliance environment for indicators of potential compliance issues.

Grow and Develop Our People

We are committed to creating and maintaining a high-performance culture of engaged employees who embrace our Mission and Values while operating with a clear understanding of their role and accountabilities for contributing to the success of the organization. We promote a culture that provides all employees the opportunity to grow and develop their skills and advance their contributions and careers. We are engaging in meaningful talent management and succession planning to promote the optimum use of our human capital and strive to further refine and develop the skills and capabilities of our leaders. We ensure that effective programs exist to recognize and reward our employees and provide meaningful health and welfare benefits to contribute towards their general well-being.

Student Recruitment and Admissions

Our schools seek highly motivated, career-oriented students with both the desire and ability to complete their academic programs of choice. To promote interest among potential students, each of our schools engages in a wide variety of marketing activities. Each of our U.S. campuses has an admissions office whose staff is responsible for interacting with individuals interested in enrolling at the campuses. Admissions representatives serve as prospective students’ primary contacts, providing information to help them make informed enrollment decisions and assisting them with the completion of the enrollment process. As of December 31, 2009, our domestic schools employed approximately 2,105 admissions representatives serving both current and potential students. In addition, there are currently 49 alumni chapters and nearly 400 alumni leadership board members who assist in the management of alumni programming at the campus level. These leadership groups are engaged in creating opportunities for student/alumni interaction including panel discussions and networking seminars.

We seek to increase enrollment at each of our schools through marketing programs designed to maximize each campus’ market penetration. The geographic scope of the programs as well as the media deployed varies by school and location. The following table represents our estimated percentage of domestic new student starts generated by student leads obtained from various marketing sources during the years ended December 31, 2009, 2008 and 2007:

 

     Year Ended December 31,  
       2009             2008             2007      

Internet

   70   71   70

Referrals

   15   14   14

Television and print

   10   9   11

Other

   5   6   5

The admissions and entrance processes of each of our schools are intended to identify students who are equipped to meet the requirements of their chosen program of study. We believe that a success-oriented student body ultimately results in higher student retention and employment rates, increased student and employer satisfaction, and lower student default rates on government loans. Generally, to be qualified for admission to one of our schools, an applicant must have received a high school diploma or a recognized equivalent, such as a

 

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General Education Development certificate. Some of our programs may also require applicants to meet other admissions requirements, such as obtaining certain minimum scores on assessment examinations.

Student Academics and Retention

Our schools and universities offer a wide array of career-based programs at varying degree levels that engage a student’s passion from the first term through graduation in a classroom, laboratory, kitchen or online setting. We offer academic programs in the core career-oriented disciplines of business studies, visual communications and design technologies, health education, culinary arts and information technology. Instruction is provided by our educators on a one-on-one basis, in small groups, or in large groups. Methods of instructional delivery include lectures and demonstrations. Our students’ skills are further developed through completing assignments, projects and examinations, including those conducted in a laboratory or kitchen setting that give students practical hands-on experience. Online instructional activities may include web-based chats, threaded discussions and video presentations.

A new initiative developed by the Health SBU in collaboration with SIMTICS, a New Zealand company working on the forefront of medical training technology, is Simpro Virtual Trainer, a highly interactive tool for students to learn, practice, and perfect cognitive and clinical procedure skills. Cognitive skills, such as knowledge, recall, analytical thinking, decision making, and judgment, are often difficult to develop. Simpro Virtual Trainer was designed to be a cognitive simulator that breaks down each clinical procedure into its component steps, enabling the student to use this innovative software to learn how to perform each step in the correct order, at the correct time, with the correct hand, using the correct instrument, applied to the correct anatomical structure. Simpro Virtual Trainer combines four types of media to engage and teach students.

 

  1. Rich descriptive text – with hyperlinks that users can simply click on to reference material and information.

 

  2. Interactive 3D anatomy – these are images specific to the procedure, helping to give students a more detailed look and familiarity with the human anatomy.

 

  3. Video descriptions of each procedure narrated by a medical expert.

 

  4. Virtual Reality simulations – where students utilize learning and testing modes.

Simpro Virtual Trainer provides diagnostic medical sonography, cardiovascular and radiography students computer-based opportunities to practice their skills and knowledge prior to entering clinical experiences, reducing the time needed in the clinical training environment.

CEC continually emphasizes the importance of student retention at each of our schools. As is the case at any postsecondary educational institution, a portion of our students fail to complete their academic programs for a variety of personal, financial or academic reasons. Our experience indicates that increases in revenue and profitability can be achieved through modest improvements in student retention rates. Furthermore, the costs to our schools of retaining current students are generally much less than the expense of the marketing efforts associated with attracting new students. Our schools’ consolidated retention rates for the years ended December 31, 2009, 2008 and 2007, were approximately 70.0%, 66.7%, and 67.7%, respectively. These rates were determined in accordance with the standards set forth by the Accrediting Council for Independent Colleges and Schools (“ACICS”) to provide a common formula for all of our schools regardless of their accreditor.

In order to help focus and improve student retention, we have developed Student Services Teams (“SST”) at AIU Online. The SST help students form good habits from the very beginning, which increases their chances of success and sets the tone for the rest of their time at the University.

Student Graduation and Employment

We place a high priority on assisting our students in graduating from their programs of study and securing employment in their careers of choice. We believe that the employment of our students in their field of study is a

 

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key indicator of the success of our schools and the fulfillment of our educational mission. Our schools strive to share with each student the responsibility for the student’s long-term success. Our emphasis on providing personal support and assistance to our students is a hallmark of our educational model.

Each of our campuses has a career services department whose primary responsibility is to assist our students in identifying employment opportunities in their chosen fields of study after graduation. Career services staff members provide our students with a variety of career development instruction, which addresses, among other things, the preparation of resumes and cover letters, interviewing skills, networking and other essential job-search tools, as well as ongoing career service resources, which are generally available to both current students and alumni. Career services staff members assist students in identifying part-time employment, including participation in internship programs, while our students pursue their education. Part-time employment opportunities are an important part of our campuses’ overall success strategy, as these opportunities may lead to permanent positions for our students after graduation.

As of December 31, 2009, we employed 275 individuals in the career services departments of our campuses. In addition to our career services personnel, we have many externship coordinators who help students obtain externships that prepare them to compete in the employment market.

Curricula and Faculty Development

We believe that the quality and relevance of our schools’ curricula is a key component of the success of our overall business strategy. We believe prospective students choose, and employers hire from, career-oriented educational institutions based primarily on the type and quality of the curriculum offered and the education provided. The curriculum development efforts of our schools are a direct product of relationships and partnerships with the business and professional communities of the employers that our schools serve. Each of our individual campuses has one or more program advisory boards comprised of local and regional community members who are engaged in businesses directly related to that campus’ educational offerings. The majority of our campuses have program advisory boards comprised of local and regional community members who may make recommendations for curriculum changes, assist in identifying employment opportunities and connect the school to the community in other ways.

Faculty development is equally as important. Instructors at our schools participate in both online and face-to-face workshops, seminars or inservices. Our intranet has a faculty service area where instructors may interact with each other, access pedagogical training modules, hiring guidelines and the faculty handbook. We believe that by developing our faculty, we are enriching not only faculty skills, but also the educational experience for our students.

School Administration

Each of our regionally-accredited schools, and those pursing regional accreditation, is overseen by a governing board that includes independent representation to review academic integrity of the institution. These governing boards have broad oversight over the schools’ programs and operations, play an active role in policy-making, and review financial resources of their schools to ensure the institution is able to provide a sound educational program. In furtherance of that mission, each governing board develops policies appropriate to the needs of the school and works closely with the respective school’s administration, or, in the case of our AIU, CTU, and Briarcliffe multi-campus school systems, with those responsible for the centralized administration of the school, to, among other things, establish a climate for articulating and promoting the educational vision of the school.

Certain of our other schools have also established advisory boards that assist with the development of the academic and operating strategy for the schools. These governing boards generally are comprised of several members of the local community who do not have an ownership interest in the school and one or more campus or corporate employees.

 

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Student Population

Our student population in our continuing operations as of January 31, 2010 and 2009 was 116,800 students and 96,600 students, respectively. Included in total student population in our continuing operations as of January 31, 2010 and 2009 were 46,200 students and 36,300 students, respectively, enrolled in our University, Art & Design, and Culinary Arts fully-online academic programs. Total student population for continuing operations by reporting segment as of January 31, 2010 and 2009, and related student population demographic information as of January 31, 2010 and 2009, were as follows:

Student Population by Segment:

 

     As of January 31,
       2010            2009    

University

   56,000    45,700

AIU

   23,800    20,600

Online

   19,800    16,800

On-ground

   4,000    3,800

CTU

   30,400    23,500

Online

   24,800    18,600

On-ground

   5,600    4,900

Briarcliffe

   1,800    1,600

Culinary Arts

   12,600    9,600

On-ground

   12,400    9,600

Online

   200    —  

Health Education

   23,600    17,900

Art & Design

   13,500    13,500

On-ground

   12,100    12,600

Online

   1,400    900

International

   11,000    9,700
         

Subtotal

   116,700    96,400

Transitional Schools

   100    200
         

Total student population

   116,800    96,600
         

Student Population by Age Group:

 

Age Group

   As a Percentage of Total
Student Population as of
December 31,
 
       2009             2008      

Under 21

   16   19

21 to 30

   43   45

Over 30

   41   36

 

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Student Population by Core Curricula:

 

     As a Percentage of Total
Student Population as of
December 31,
 
       2009             2008      

Business Studies

   50   49

Visual Communications and Design Technologies

   13   16

Health Education

   20   18

Culinary Arts

   11   10

Information Technology

   6   7

Student Population by Degree Granting Program:

 

     As a Percentage of Total
Student Population as
of December 31,
 
   2009     2008  

Doctoral, Master’s, Bachelor’s Degree

   33   39

Associate Degree

   43   44

Certificate

   24   17

New Student Starts by Segment:

Total new student starts for continuing operations during the years ended December 31, 2009 and 2008, were approximately 118,500 students and 101,300 students, respectively. Total new student starts for continuing operations by reporting segment for the years ended December 31, 2009 and 2008, were as follows:

 

     For the year ended December 31,
       2009            2008    

University

   61,900    55,500

AIU

   28,000    26,500

Online

   24,600    23,400

On-ground

   3,400    3,100

CTU

   32,600    27,800

Online

   28,500    24,100

On-ground

   4,100    3,700

Briarcliffe

   1,300    1,200

Culinary Arts

   14,000    10,000

On-ground

   13,800    10,000

Online

   200    —  

Health Education

   24,800    19,200

Art & Design

   9,700    9,000

On-ground

   8,100    7,800

Online

   1,600    1,200

International

   8,100    7,500
         

Subtotal

   118,500    101,200

Transitional Schools

   —      100
         

Total new student starts

   118,500    101,300
         

 

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Certain other key information regarding each of our operating divisions, schools and campuses is summarized in the following table:

 

School and Campus Locations

   Website     

ART & DESIGN STRATEGIC BUSINESS UNIT (“SBU”):

     

International Academy of
Design & Technology (“IADT”)

     

IADT-Chicago, Chicago, IL

   www.iadtchicago.edu   

IADT-Detroit, Troy, MI

   www.iadtdetroit.com   

IADT-Las Vegas, Henderson, NV

   www.iadtvegas.com   

IADT-Nashville, Nashville, TN

   www.iadtnashville.com   

IADT-Online, Tampa, FL

   www.online.academy.edu   

IADT-Orlando, Orlando, FL

   www.iadt.edu   

IADT-Sacramento, Sacramento, CA

   www.iadtsacramento.com   

IADT-San Antonio, San Antonio, TX

   www.iadtsanantonio.com   

IADT-Schaumburg, Schaumburg, IL

   www.iadtschaumburg.com   

IADT-Seattle, Seattle, WA

   www.iadtseattle.com   

IADT-Tampa, Tampa, FL

   www.academy.edu   

Brooks Institute, Santa Barbara

and Ventura, CA(1)

   www.brooks.edu   

Brown College, Mendota Heights and

Brooklyn Center, MN(1)

   www.browncollege.edu   

Collins College, Phoenix, AZ

   www.collinscollege.edu   

Harrington College of Design, Chicago, IL

   www.interiordesign.edu   

CULINARY ARTS SBU:

     

California Culinary Academy,

San Francisco, CA

   www.chefs.edu   

Le Cordon Bleu College (or Institute)

of Culinary Arts (“LCB”)

   www.chefs.edu   

LCB-Atlanta, Tucker, GA

     

LCB-Boston, Cambridge, MA

     

LCB-Chicago, Chicago, IL

     

LCB-Dallas, Dallas, TX

     

LCB-Las Vegas, Las Vegas, NV

     

LCB-Los Angeles, Pasadena and Hollywood, CA(1)

     

LCB-Miami, Miramar, FL

     

LCB-Minneapolis/St. Paul,
Mendota Heights, MN

     

LCB Orlando, Orlando, FL

     

LCB Pittsburgh, Pittsburgh, PA

     

LCB-Portland, Portland, OR

     

LCB-Sacramento, Sacramento, CA

     

LCB-Scottsdale (includes Online), Scottsdale, AZ

     

LCB-Seattle, Seattle, WA

     

LCB-St. Louis, St. Peters, MO

     

Texas Culinary Academy, Austin, TX

   www.chefs.edu   

 

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School and Campus Locations

   Website     

HEALTH EDUCATION SBU:

     

Missouri College, Brentwood, MO

   www.missouricollege.com   

Gibbs College of Boston, Inc. a private

two-year college, Boston, MA

   www.gibbsboston.edu   

Gibbs College, Farmington, CT

   www.gibbsfarmington.com   

Sanford-Brown College (“SBC”)

   www.sanford-brown.edu   

SBC-Atlanta, Atlanta, GA

     

SBC-Cleveland, Middleburg Heights, OH

     

SBC-Collinsville, Collinsville, IL

     

SBC-Dallas, Dallas, TX

     

SBC-Fenton, Fenton, MO

     

SBC-Hazelwood, Hazelwood, MO

     

SBC-Houston, Houston, TX

     

SBC-Phoenix, Phoenix, AZ

     

SBC-San Antonio, San Antonio, TX

     

SBC-St. Peters, St. Peters, MO

     

SBC-Milwaukee, West Allis, WI

     

SBC-Vienna, Vienna, VA

     

Sanford-Brown Institute (“SBI”)

   www.sanford-brown.edu   

SBI-Cranston, Cranston, RI

     

SBI-Dearborn, Dearborn, MI

     

SBI-Ft. Lauderdale, Ft. Lauderdale, FL

     

SBI-Garden City, Garden City, NY

     

SBI-Grand Rapids, Grand Rapids, MI

     

SBI-North Loop, Houston, TX

     

SBI-Orlando, Orlando, FL

     

SBI-Iselin, Iselin, NJ

     

SBI-Jacksonville, Jacksonville, FL

     

SBI-Landover, Landover, MD

     

SBI Campus-an Affiliate of Sanford-Brown, Melville, NY

     

SBI-Monroeville, Monroeville, PA

     

SBI-New York, New York, NY

     

SBI-Pittsburgh, Pittsburgh, PA

     

SBI-Tampa, Tampa, FL

     

SBI-Trevose, Trevose, PA

     

SBI-White Plains, White Plains, NY

     

INTERNATIONAL SBU:

     

The International Group

   www.inseec-france.com   

CEFIRE, Paris, France

     

ECE Bordeaux, Bordeaux, France

     

ECE Lyon, Lyon, France

     

INSEEC Bordeaux, Bordeaux, France

     

INSEEC Paris, Paris, France

     

MBA Institute, Paris, France

     

Sup de Pub, Paris, France

     

Sup Sante, Lyon, France

     

Sup Sante, Paris, France

     

Istituto Marangoni, Milan, Italy;

London, England; Paris, France

   www.istitutomarangoni.com   

 

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School and Campus Locations

   Website     

UNIVERSITY SBU:

     

American InterContinental

University (“AIU”)

   www.aiuniv.edu   

AIU Online, Hoffman Estates, IL

   www.aiuonline.edu   

AIU Atlanta, Atlanta, GA

     

AIU Houston, Houston, TX

     

AIU London, London, England

     

AIU South Florida, Weston, FL

     

Colorado Technical University (“CTU”)

   www.coloradotech.edu   

CTU Colorado Springs, Colorado Springs and Pueblo, CO(1)

     

CTU Denver, Denver and Westminster, CO(1)

     

CTU Kansas City, North Kansas City, MO

     

CTU Online, Colorado Springs, CO

   www.coloradotech.edu   

CTU Sioux Falls, Sioux Falls, SD

     

Briarcliffe College

   www.bcl.org   

Briarcliffe College, Bethpage and Queens, NY(1)

     

Briarcliffe College, Patchogue, NY

     

TRANSITIONAL SCHOOLS:

     

AIU-Los Angeles, Los Angeles, CA

      Scheduled to close in 2010

 

(1) The first location listed represents the school’s main campus location and the second location listed represents a satellite campus of the school. We define a satellite campus as a separate location of a main or branch campus that is in reasonable geographic proximity to, and is managed by, the related main or branch campus. Satellite campuses are not included in our campus count.

ACCREDITATION

In the United States, accreditation is a process through which an institution submits itself to qualitative review by an organization of peer institutions. Accrediting agencies primarily examine the academic quality of the instructional programs of an institution, and a grant of accreditation is generally viewed as certification that an institution’s programs meet generally accepted academic standards. Accrediting agencies also review the administrative and financial operations of the institutions they accredit to ensure that each institution has the resources to perform its educational mission.

Pursuant to provisions of the HEA, the U.S. Department of Education (“ED”) relies on accrediting agencies to determine whether institutions’ educational programs qualify the institutions to participate in federal financial aid programs under Title IV of the HEA. The HEA and its implementing regulations specify certain standards that all recognized accrediting agencies must adopt in connection with their review of postsecondary institutions. All of our U.S. campuses are accredited by accrediting agencies recognized by the ED.

AIU’s accrediting agency, the Higher Learning Commission of the North Central Association of Colleges and Schools, or HLC, commissioned an advisory team to visit AIU in January 2010. The advisory visit was focused on AIU’s educational and business practices. The advisory team has concluded its visit and advised AIU that within the next several weeks it will provide a report to HLC containing the advisory team’s findings and recommendations, if any, concerning its review. In addition and as previously disclosed, in connection with HLC’s initial accreditation of AIU in May 2009, AIU must submit a progress report to HLC relating to curricula design and AIU’s graduate programs’ student learning outcomes and have HLC conduct a focused visit to AIU to assess the issue of credit equivalence. HLC has not yet notified AIU of the timing of the focused visit. As previously disclosed, the Department of Education conducted a program review of AIU in November 2009. AIU is currently awaiting the issuance of the program review report.

 

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A listing of our U.S.-accredited schools, including all main and branch campus location for regulatory purposes and relevant accreditation information is provided in the following table:

ACCREDITATION TABLE

 

School, Main Campus Location

(Branch campuses are in parentheses)

   Accreditor(1)    Year of
Accreditation
Expiration(2)
 

American InterContinental University

     

Hoffman Estates, IL (Online) (Atlanta, GA; Weston, FL; Los Angeles, CA; Houston, TX; London, England)

   HLC    2014   

Briarcliffe College

     

Bethpage, NY (Patchogue, NY )

   MSA    2011   

Brooks Institute

     

Santa Barbara, CA

   ACICS    2010   

Brown College

     

Mendota Heights, MN

   ACCSC    2011   

California Culinary Academy

     

San Francisco, CA

   ACCSC    2010   

Collins College

     

Phoenix, AZ

   ACCSC    2010   

Colorado Technical University

     

Colorado Springs, CO (Denver, CO; North Kansas City, MO; Sioux Falls, SD; Online)

   HLC    2012   

Gibbs College

     

Farmington, CT

   ACICS    2011   

Gibbs College of Boston, Inc, a private two-year college

     

Boston, MA

   ACICS    2014   

Harrington College of Design(3)

     

Chicago, IL

   ACICS    2014   

International Academy of Design & Technology

     

Chicago, IL (Troy, MI; Schaumburg, IL)

   ACICS    2012   

Nashville, TN

   ACICS    2013   

Tampa, FL (Orlando, FL; Henderson, NV; Sacramento, CA; San Antonio, TX; Seattle, WA; Online; Le Cordon Bleu College of Culinary Arts (Orlando, FL))

   ACICS    2010   

Le Cordon Bleu College of Culinary Arts

     

Pasadena, CA (Hollywood, CA; SBI Dearborn, MI; SBI Grand Rapids, MI; SBI Orlando, FL; SBC Phoenix, AZ)

   ACICS    2012   

Portland, OR (Tucker, GA; Mendota Heights, MN)

   ACCSC    2012 (4) 

Scottsdale, AZ (includes Online) (Las Vegas, NV)

   ACCSC    2010   

Le Cordon Bleu College of Culinary Arts in Chicago

     

Chicago, IL

   HLC    2018   

Le Cordon Bleu Institute of Culinary Arts

     

Pittsburgh, PA (Le Cordon Bleu College of Culinary Arts, Inc., a private two year college (Boston, MA Campus); Le Cordon Bleu College of Culinary Arts, Miramar, FL)

   ACCSC    2010 (5) 

 

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School, Main Campus Location

(Branch campuses are in parentheses)

   Accreditor(1)    Year of
Accreditation
Expiration(2)
 

Missouri College

     

Brentwood, MO

   ACCSC    2011   

Sanford-Brown College

     

Atlanta, GA (Houston, TX and Middleburg Heights, OH; Sanford-Brown Institute, Ft. Lauderdale, FL; Houston/North Loop, TX; Landover, MD; New York, NY; and Trevose, PA)

   ACICS    2014   

Dallas, TX (San Antonio, TX; Sanford-Brown Institute, Garden City, NY)

   ACICS    2013   

Fenton, MO (St. Peters, MO)

   ACICS    2011   

Vienna, VA

   ACICS    2010   

Sanford-Brown Institute

     

Cranston, RI

   ACICS    2009 (6) 

Jacksonville, FL (Iselin, NJ; Tampa, FL; Sanford-Brown College,
West Allis, WI)

   ACICS    2011   

Pittsburgh, PA (Monroeville, PA)

   ACCSC    2014   

White Plains, NY

   ACICS    2013   

SBI Campus—an Affiliate of Sanford-Brown

     

Melville, NY

   ACICS    2014   

Texas Culinary Academy

     

Austin, TX (Le Cordon Bleu Institute of Culinary Arts Dallas, Dallas, TX; Le Cordon Bleu College of Culinary Arts, Sacramento, CA; Seattle, WA; and St. Peters, MO; Sanford-Brown College, Collinsville, IL and Hazelwood, MO)

   ACICS    2017   

 

(1) Below is a key to the accreditation abbreviations used in the table:
  a. ACCSC—Accrediting Commission of Career Schools and Colleges
  b. ACICS—Accrediting Council for Independent Colleges and Schools
  c. MSA—Middle States Association of Colleges and Schools, Commission on Higher Education
  d. HLC—North Central Association of Colleges and Schools, Higher Learning Commission
(2) Status as of February 22, 2010. Institutions seek renewal of accreditation during the year noted.
(3) Harrington College of Design is a candidate for accreditation by HLC.
(4) Accreditation for the Tucker branch campus expires in 2010.
(5) Accreditation for the Miramar branch campus expires in 2011.
(6) Accreditation has been extended through December 31, 2010, while the school completes the reaccreditation process.

 

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Programmatic accreditation, while not a sufficient basis for institutional Title IV Program certification by the ED, assists graduates to practice or otherwise secure appropriate employment in their chosen field and has been granted by the following accrediting agencies with respect to the following individual programs taught at certain of our campuses:

PROGRAMMATIC ACCREDITATION TABLE

 

Accrediting Body

  

Campus

  

Program Accredited

Accreditation Council for Occupational Therapy Education

   Sanford-Brown College, Hazelwood    Occupational therapy assistant program

Accreditation Board for Engineering and Technology

   Colorado Technical University, Colorado Springs    Engineering programs

Accrediting Bureau of Health Education Schools

   Colorado Technical University, North Kansas City; Sanford-Brown College, Atlanta, Collinsville, Dallas, Fenton, Hazelwood, Houston, Middleburg Heights, San Antonio and West Allis; Sanford-Brown Institute, Ft. Lauderdale, Garden City, Houston North, Iselin, Jacksonville, Landover, Monroeville, New York, Pittsburgh, Tampa, Trevose, and White Plains    Medical assistant programs

Accrediting Bureau of Health Education Schools

   Sanford-Brown College, Dallas, Houston and St. Peters; Sanford-Brown Institute, Ft. Lauderdale, Houston North, Iselin, Jacksonville, and Tampa    Surgical technology programs

Accrediting Commission for Programs in Hospitality Administration

   Le Cordon Bleu Institute of Culinary Arts (Pittsburgh)    Hotel and restaurant management program

American Culinary Federation Education Institute

   California Culinary Academy, Le Cordon Bleu College of Culinary Arts, Las Vegas, Mendota Heights, Orlando, Pasadena, Portland, Scottsdale, and Tucker; Le Cordon Bleu College of Culinary Arts in Chicago, Le Cordon Bleu Institute of Culinary Arts (Pittsburgh), Texas Culinary Academy    Culinary Arts programs

American Culinary Federation Education Institute

   California Culinary Academy, Le Cordon Bleu College of Culinary Arts, Mendota Heights, Orlando, Portland and Scottsdale; Le Cordon Bleu Institute of Culinary Arts (Pittsburgh)    Pastry and baking programs

 

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Accrediting Body

  

Campus

  

Program Accredited

American Dental Association Commission on Dental Accreditation

   Missouri College    Dental assisting program

American Society of Health Systems Pharmacists

   Sanford-Brown Institute, Monroeville    Pharmacy technician program

CAAHEP-Accreditation Review Committee on Education in Surgical Technology

   Colorado Technical University, North Kansas City and Pueblo; Sanford-Brown College, Dallas and Houston; Sanford-Brown Institute, Ft. Lauderdale, Iselin, Jacksonville, Monroeville, Pittsburgh, and Tampa    Surgical technology programs

CAAHEP-Curriculum Review Board of the American Association of Medical Assistants Endowment

   Colorado Technical University, Sioux Falls    Medical assistant program

CAAHEP-Joint Review Committee on Education in Diagnostic Medical Sonography

   Sanford-Brown College, Atlanta, Dallas, Houston and Middleburg Heights; Sanford-Brown Institute, Iselin and Pittsburgh    Diagnostic medical sonography programs

Council for Interior Design Accreditation

   American InterContinental University, Atlanta and Los Angeles; Harrington College of Design; IADT Chicago and Tampa    Interior design programs

Joint Review Commission on Education in Radiologic Technology

   Colorado Technical University, North Kansas City; Sanford-Brown College, Fenton; Sanford-Brown Institute, Pittsburgh    Radiologic technology programs

Committee on Accreditation for Respiratory Care

   Sanford-Brown College, Fenton; Sanford-Brown Institute, Monroeville    Respiratory therapy programs

American Veterinary Medical Association

   Sanford-Brown College, Fenton and St. Peters; Sanford-Brown Institute, Pittsburgh    Veterinary technology programs

STUDENT FINANCIAL AID

Many of our students require assistance in financing their education. For this reason, all of our schools participate in financial aid programs and offer financing options to those who qualify. Our U.S. schools and AIU-London are approved to participate in the Department of Education’s Title IV federal aid programs. Our schools also participate in a number of state financial aid programs and private funding options. Our schools that participate in federal and state financial aid programs are subject to extensive regulatory requirements imposed by federal and state government agencies, and other standards imposed by educational accrediting bodies.

Nature of Federal Support for Postsecondary Education in the United States

The U.S. government provides a substantial portion of its support for postsecondary education in the form of Title IV Program grants, loans and work-study programs to students who can use those funds to finance certain

 

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education related expenses at any institution that has been approved to participate by the Department of Education (ED). These federal programs are authorized by the Higher Education Act of 1965, as amended (HEA). While most students are eligible for a Title IV loan, more generally, financial aid administered under Title IV is awarded on the basis of financial need, which is generally defined under the HEA as the difference between the costs associated with attending an institution and the amount a student’s family can reasonably be expected to contribute based on a federally determined formula. Among other things, recipients of Title IV Program funds must maintain a satisfactory grade point average and progress in a timely manner toward completion of their program of study.

Students at our schools may receive grants, loans and work-study opportunities to fund their education under the following Title IV Programs, although not all of our schools participate in each of these programs:

Federal Student and Parent Loans

The ED’s major form of self-help aid includes loans to students and parents through the William D. Ford Federal Direct Loan (“DL”) Program and the Federal Family Education Loan (“FFEL”) Program. Loans under the FFEL program are made by banks and other lending institutions directly to students or their parents. Direct Loans are available through the U.S. Government rather than through a bank or other financial institution. The major differences between the two programs are the source of the loan funds, some aspects of the application process, and the available repayment plans. For the FFEL program our schools and students use a wide variety of lenders and guaranty agencies and have not experienced difficulties in accessing FFEL program loans. Both programs offer Federal Stafford, Federal Parent PLUS, Federal Grad PLUS and Federal Consolidation Loans.

Federal Stafford Loans (“Stafford Loans”), which may either be subsidized or unsubsidized, are loans made directly to our students by banks, other lending institutions or directly from the federal government. Students who have a demonstrated financial need may be eligible to receive a subsidized Stafford Loan, with the ED paying the interest on this loan while the student is enrolled at least half-time in school and during the first six months after leaving school. Students who do not demonstrate financial need may be eligible to receive an unsubsidized Stafford Loan. The student is responsible for the interest on an unsubsidized Stafford Loan while in school and after leaving school, although actual interest payments generally may be deferred by the student until after he or she has left school. Students who are eligible for a subsidized Stafford Loan may also be eligible to receive an unsubsidized Stafford Loan.

A student is not required to meet any specific credit scoring criteria to receive a Federal Stafford Loan, but any student with a prior Stafford Loan default or who has been convicted under federal or state law of selling or possessing drugs while receiving federal aid may not be eligible. The ED has established maximum annual and aggregate borrowing limits for Federal Stafford Loans.

A Federal PLUS Loan, including both the Federal Parent PLUS and the Federal Grad PLUS, is a loan made directly to either graduate students or the parents of dependent students. Graduate students and parents who have an acceptable credit history may borrow through the Federal PLUS Loan to pay the education related expenses of a graduate student or a child who is a dependent student enrolled at least half-time at our eligible schools. The amount of a Federal PLUS Loan cannot exceed the student’s cost of attendance less all other financial aid received.

Federal Perkins Loan (“Perkins Loan”) Program. Perkins Loans are made from a revolving institutional account, 75% of which is a Federal Capital Contribution from the ED and the remainder of which is funded by the institution. Each institution is responsible for determination, disbursements, collections and servicing of the Federal Perkins Loans. Currently, only one of our schools participates in the Federal Perkins Loan program.

 

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Federal Grants

Federal Pell Grant and Federal Supplemental Education Opportunity Grant. Title IV Program grants are generally made to our students under the Federal Pell Grant (“Pell Grant”) program and the Federal Supplemental Educational Opportunity Grant program. The ED makes Pell Grants up to 200% of the maximum amount of ($5,350 for 2009-10) per award year to students who demonstrate financial need. FSEOG program awards are designed to supplement Pell Grants up to a maximum amount of $4,000 per award year for the neediest students. An institution is required to match 33% of the allocation amount from the ED for all federal funds received under the FSEOG program. The matching may be accomplished through institutional, private and/ or state funds.

Academic Competitiveness Grant (“ACG”) Program. ACG program awards are available to students who have successfully completed a rigorous high school program as defined by the Secretary of Education. An ACG award provides funds for the first and second academic year of undergraduate study. To be eligible, a student must be enrolled at least half-time, must be a United States citizen or eligible non-citizen, and must be eligible to receive a Pell Grant. Second year students must also have a cumulative grade point average of at least 3.0 on a 4.0 scale.

The National Science and Mathematics Access to Retain Talent Grant (“SMART Grant”) Program. The SMART Grant will provide funds for each of the third and fourth years of undergraduate study. To be eligible, a student must be enrolled at least half-time, must be a United States citizen or eligible non-citizen, must be eligible to receive a Pell Grant, and must be enrolled in a physical, life or computer sciences, mathematics, technology, engineering, or in a foreign language program determined critical to national security, as defined by the Secretary of Education. Students must also maintain a cumulative grade point average of at least 3.0 on a 4.0 scale.

Federal Work-Study (“FWS”) Program

Generally, under the FWS program, federal funds are used to pay 75% of the cost of part-time employment of eligible students to perform work for the institution or certain off-campus organizations. The remaining 25% is paid by the institution or the student’s employer. In select cases, these federal funds under the FWS program are used to pay up to 100% of the cost of part-time employment of eligible students.

Alternative Student Financial Aid Sources

The financial aid available to our students under Title IV Programs and state programs may be less than the tuition costs at certain of our U.S. schools. Many of our students secure private loans to finance a portion of their tuition costs. These private loans are made directly to our students by financial institutions and are not guaranteed under any of the Title IV programs.

The fees and interest rates on these private loans are generally higher than the loans made under the Title IV education loans. These fees and interest rates also vary depending on the student’s or co-borrower’s credit history, with fees and interest rates lower for those with better credit histories.

A financial institution providing a non-recourse loan assumes 100% of the credit risk on the loan. The student, or the student and a co-borrower, must meet the credit criteria established by the financial institution to receive these loans. Each financial institution establishes its own credit criteria and loan limits. Students and co-borrowers generally can borrow an amount equal to the student’s cost of attendance less all other financial aid received. SLM Corporation or its subsidiaries (collectively known as “Sallie Mae”) provided the majority of non-recourse private loans to our students in our U.S. schools during the year ended December 31, 2009.

Prior to March 31, 2008, certain of our students were able to secure recourse loans with Sallie Mae and other financial institutions. These students did not qualify for non-recourse loans due to low credit scores. The

 

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loan amounts available under these recourse loan programs were generally less than the amounts available under non-recourse loan programs and often covered only the direct costs associated with their education less any other financial aid received. On February 14, 2008, we received notification from Sallie Mae that it would no longer continue to offer recourse loans to existing students entering their second or subsequent academic term. Our recourse loan program with Sallie Mae ended on March 31, 2008. The uncertainty that continues in the U.S. credit markets has made it difficult for us to obtain recourse loan arrangements with other financial institutions. As a result, in the second quarter 2008, we began to offer funding alternatives for eligible students in place of the recourse program that had previously been provided by Sallie Mae. We decided to provide payment plans directly to certain students to ensure that they can finish their existing educational programs with us and to allow new students the opportunity to attend our schools. As of December 31, 2009, we have committed to approximately $68.5 million of funding through extended payment plans. Of this amount, approximately $22.5 million is reflected within our current and non-current student receivables, net of allowance for doubtful accounts, on our consolidated balance sheet.

Legislative Action

The U.S. Congress must periodically reauthorize the HEA and other laws governing Title IV Programs and annually determines the funding level for each Title IV Program.

The Higher Education Opportunity Act was the first reauthorization of the HEA since 1998 and was signed into law on August 14, 2008. It was immediately effective for many items with others effective in the subsequent award years. The Act authorizes increases in the Federal Pell Grants, changes some ACG and National SMART Grant eligibility requirements, expands Stafford Loan deferment options, provides changes to needs analysis and changes treatment of Veterans Administration benefits effective with the 2010-11 award year.

The agencies that regulate our U.S. schools, including the ED, periodically revise their requirements and modify their interpretations of existing requirements. On May 26, 2009, the ED published a notice in the Federal Register announcing the ED’s intention to establish one or more negotiated rulemaking committees to prepare proposed regulations under Title IV of the HEA. Under negotiated rulemaking, the ED works to develop a Notice of Proposed Rulemaking in collaboration with representatives of the parties who will be affected significantly by the regulations, through a series of meetings. The recent ED committees addressing program integrity and foreign schools were unable to achieve consensus on these issues. ED will publish its recommended regulatory proposal changes in a Notice of Proposed Rulemaking available for public comment sometime in 2010, and after the public comment period expires, must publish final regulations in the Federal Register on or before November 1, 2010 for the regulations to be effective for the next award year, which begins July 1, 2011.

Compliance with Federal Regulatory Standards and Effect of Federal Regulatory Violations

We and our schools are subject to and have pending audits, compliance reviews, inquiries, investigations, claims of non-compliance, and lawsuits by the 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.

The HEA also requires that an institution’s administration of Title IV Program funds be audited annually by an independent accounting firm and that the resulting audit report be submitted to the ED for review.

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. In addition, if the ED or another regulatory agency determined that one of our schools improperly disbursed Title IV Program funds or violated a provision of the HEA or the ED’s regulations, that school could be required to repay such funds, and could be assessed an administrative fine. We have several such matters pending against us or one or more of our schools. See Note 11 “Commitments and Contingencies – Accrediting Body and Federal Regulatory Matters” of the notes to our consolidated financial statements for further discussion of certain of these matters.

 

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Student Loan Default Rates. An institution may lose eligibility to participate in some or all Title IV Programs if the rates at which its former students default on the repayment of their federally-guaranteed or federally-funded student loans exceed specified percentages. An institution’s cohort default rate is calculated on an annual basis as the rate at which student borrowers scheduled to begin repayment of their loans in one federal fiscal year default on those loans by the end of the next federal fiscal year.

Currently an institution whose cohort default rate equals or exceeds 25% for three consecutive years will no longer be eligible to participate in the FFEL, DL, Pell Grant, ACG or SMART programs for the remainder of the federal fiscal year in which the ED determines that such institution has lost its eligibility and for the two subsequent federal fiscal years. An institution whose cohort default rate equals or exceeds 25% for any one of the three most recent federal fiscal years, may also be placed on provisional certification status by ED for up to four years.

HEOA legislation passed in 2008 changes the evaluation period for the default calculation from two years to three years. The first three-year rate will be received in February 2012 for the period covering October 2008 through September 2011, although enforcement of the three-year rate rules will not begin until the October 2010 through September 2013 period. This three-year rate will be reviewed in 2014 and in the event the rate fails to meet ED requirements, sanctions may be instituted. In December 2009, ED published unofficial three-year default data for 2005 through 2007. For the 2006 and 2007 cohorts, none of CEC’s institutions were above the regulatory thresholds that will take effect in 2014. In addition, for the most recent official two-year rate computed based on the 2007 Cohort, CEC was significantly below the proprietary school average as published by the ED. Penalties today are enforced on the two-year period and begin at the 25% default level. The first three-year penalties will be enforced beginning in 2014 and at that time the threshold will be raised to 30%.

An institution whose cohort default rate for any federal fiscal year exceeds 40% will no longer be eligible to participate in the FFEL or DL programs for the remainder of the federal fiscal year in which the ED determines that the institution has lost its eligibility and for the two subsequent federal fiscal years. The 40% threshold will not change with the 2014 movement to a three-year rate.

Under the Perkins Loan Program an institution whose cohort default rate equals or exceeds 15% for any year, may be placed on provisional certification status by the ED for up to four years.

Student loan default management initiatives aimed at reducing the likelihood of our students’ failure to repay their loans in a timely manner have been implemented at all of our schools that participate in Title IV Programs. These initiatives emphasize the importance of students’ compliance with loan repayment requirements and provide for extensive loan counseling, methods to increase student retention and completion rates and graduate employment rates, and proactive borrower contacts after students cease enrollment. If any of our schools were to lose eligibility to participate in Title IV Programs due to student loan default rates being higher than the ED’s thresholds and we could not arrange for adequate alternative student financing sources, we would most likely have to close those schools, which could have a material adverse effect on our student population, financial condition, results of operations, and cash flows.

 

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COHORT DEFAULT RATE TABLE

 

     Cohort Default Rate (2 year rate)  

School, Main Campus Location

(Branch campuses are in parentheses)

       2007             2006             2005      

American InterContinental University

      

Hoffman Estates, IL (Online) (Atlanta, GA; Weston, FL;
Los Angeles, CA; Houston, TX; London, England)

   10.4   8.6   10.1

Briarcliffe College

      

Bethpage, NY (Patchogue, NY)

   8.5   7.1   7.3

Brooks Institute

      

Santa Barbara, CA

   0.3   1.7   3.6

Brown College

      

Mendota Heights, MN

   4.9   6.1   6.4

California Culinary Academy

      

San Francisco, CA

   4.1   4.3   4.0

Collins College

      

Phoenix, AZ

   7.3   7.9   10.0

Colorado Technical University

      

Colorado Springs, CO (Denver, CO; North Kansas City, MO;
Sioux Falls, SD; Online
)

   10.9   11.3   9.4

Gibbs College

      

Farmington, CT(1)

   10.9   7.8   13.9

Gibbs College of Boston, Inc, a private two-year college

      

Boston, MA

   11.2   12.5   11.4

Harrington College of Design

      

Chicago, IL

   2.9   1.7   3.3

International Academy of Design & Technology

      

Chicago, IL (Troy, MI; Schaumburg, IL)

   6.0   7.7   16.4

Nashville, TN

   5.9   6.7   16.7

Tampa, FL (Orlando, FL; Henderson, NV; Sacramento, CA; San Antonio, TX; Seattle, WA; Online; Le Cordon Bleu College of Culinary Arts (Orlando, FL))

   7.7   6.0   8.6

Le Cordon Bleu College of Culinary Arts

      

Pasadena, CA (Hollywood, CA; SBI Dearborn, MI; SBI Grand Rapids, MI; SBI Orlando, FL; SBC Phoenix, AZ)

   3.2   3.7   6.9

Portland, OR (Tucker, GA; Mendota Heights, MN)

   5.9   5.5   9.9

Scottsdale, AZ (includes Online) (Las Vegas, NV)

   6.7   5.1   5.7

Le Cordon Bleu College of Culinary Arts in Chicago

      

Chicago, IL

   5.9   7.0   9.9

Le Cordon Bleu Institute of Culinary Arts

      

Pittsburgh, PA (Le Cordon Bleu College of Culinary Arts, Inc., a private two year college (Boston, MA Campus); Le Cordon Bleu College of Culinary Arts, Miramar, FL)

   6.3   5.2   3.5

Missouri College

      

Brentwood, MO

   3.8   7.7   10.4

 

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     Cohort Default Rate (2 year rate)  

School, Main Campus Location

(Branch campuses are in parentheses)

       2007             2006             2005      

Sanford-Brown College

      

Atlanta, GA (Houston, TX and Middleburg Heights, OH; Sanford-Brown Institute, Ft. Lauderdale, FL; Houston/North Loop, TX; Landover, MD; New York, NY; and Trevose, PA)

   8.9   10.0   13.3

Dallas, TX (San Antonio, TX; Sanford-Brown Institute, Garden City, NY)

   9.0   9.1   16.9

Fenton, MO (St. Peters, MO)

   7.3   6.2   9.9

Vienna, VA

   12.3   14.3   16.8

Sanford-Brown Institute

      

Cranston, RI

   11.0   7.3   9.5

Jacksonville, FL (Iselin, NJ; Tampa, FL; Sanford-Brown College,
West Allis, WI)

   7.9   6.1   11.6

Pittsburgh, PA (Monroeville, PA)

   9.1   8.0   7.0

White Plains, NY

   13.0   12.7   22.1

SBI Campus—an Affiliate of Sanford-Brown

      

Melville, NY

   10.2   9.7   12.0

Texas Culinary Academy

      

Austin, TX (Le Cordon Bleu Institute of Culinary Arts Dallas, Dallas, TX; Le Cordon Bleu College of Culinary Arts, Sacramento, CA; Seattle, WA; and St. Peters, MO; Sanford-Brown College, Collinsville, IL and Hazelwood, MO)

   7.2   8.4   6.1

 

(1) Gibbs—Norwalk, CT ceased operations in December 2009.

Financial Responsibility Standards. To participate in Title IV Programs, an institution must satisfy specific financial responsibility measures as prescribed by the ED. The ED evaluates institutions for compliance with these standards each year, based on the annual audited financial statements of an institution or its parent corporation, and on a change of control of an institution. The ED’s practice is to measure our financial responsibility based on both CEC’s consolidated financial statements and those of our individual schools.

To be considered financially responsible, an institution must, among other things, (i) have sufficient cash reserves to make required refunds, (ii) be current on its debt payments, (iii) meet all of its financial obligations, and (iv) achieve a “composite score” of at least 1.50 based on the institution’s annual financial statements. The ED calculates an institution’s composite score, which may range from -1.00 to 3.00, based on a combination of financial measures designed to establish the adequacy of an institution’s capital resources, its financial viability, its ability to support current operations and its ability to generate a profit. An institution that does not meet the ED’s minimum composite score of 1.00 may demonstrate its financial responsibility in one of several ways, including posting a letter of credit in favor of the ED in an amount equal to at least 50% of Title IV Program funds received by the institution during its prior fiscal year or posting a letter of credit in an amount equal to at least 10% of Title IV Program funds received by the institution during its prior fiscal year and agreeing to certain additional requirements for the continued receipt of Title IV Program funds, including, in certain circumstances, receipt of Title IV Program funds under an agreement other than the ED’s standard advance funding arrangement.

Currently, none of our schools are required to post a letter of credit or accept other conditions on its participation in Title IV Programs due to failure to satisfy the ED’s financial responsibility standards.

Return and Refunds of Title IV Program Funds. An institution participating in Title IV Programs must correctly calculate the amount of unearned Title IV Program funds that were disbursed to students who withdrew from educational programs before completing the programs, and must return those funds in a timely manner.

 

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Institutions are required to return such funds within 45 days of the date the institution determines that the student has withdrawn. An institution that is found to be in non-compliance with ED refund requirements for either of the last two completed fiscal years must post a letter of credit in favor of the ED in an amount equal to 25% of the total Title IV Program refunds paid by the institution during its prior fiscal year. As of December 31, 2009, we have posted no letters of credit in favor of the ED due to non-compliance with ED refund requirements.

Change of Ownership or Control. When an institution undergoes a change of ownership resulting in a change of control, as that term is defined by the state in which it is located, its accrediting agency and the ED, it must secure the approval of those agencies to continue to operate and to continue to participate in Title IV Programs. If the institution is unable to re-establish state authorization and accreditation requirements and satisfy other requirements for certification by the ED, the institution may lose its authority to operate and its ability to participate in Title IV Programs. An institution whose change of ownership or control is approved by the appropriate authorities is nonetheless provisionally re-certified by the ED for a period of up to three years. Transactions or events that constitute a change of control by one or more of the applicable regulatory agencies, including the ED, applicable state agencies, and accrediting bodies, include the acquisition of an institution from another entity or significant acquisition or disposition of an institution’s equity. It is possible that some of these events may occur without our control. Our failure to obtain, or a delay in obtaining, a required approval of any change in control from the ED, applicable state agencies, or accrediting agencies could impair our ability or the ability of the affected schools to participate in Title IV Programs. If we were to undergo a change of control and a material number of our schools failed to obtain the required approvals from applicable regulatory agencies in a timely manner, our student population, financial condition, results of operations and cash flows could be materially adversely affected.

When we acquire an institution that is eligible to participate in Title IV Programs, that institution undergoes a change of ownership resulting in a change of control as defined by the ED. Each of our acquired schools in the U.S. has undergone a certification review under our ownership and has been certified to participate in Title IV Programs on a provisional basis. Currently, one of our schools participates in Title IV Programs under provisional certification due to the ED’s change of ownership criteria. The potential adverse effects of a change of control under ED regulations may influence future decisions by us and our stockholders regarding the sale, purchase, transfer, issuance or redemption of our common stock.

Opening New Schools, Start-up Branch Campuses, and Adding Educational Programs. The HEA generally requires that proprietary institutions be fully operational for two years before applying to participate in Title IV Programs. However, an institution that is certified to participate in Title IV Programs may establish a start-up branch campus and participate in Title IV Programs at the start-up branch campus without reference to the two-year requirement if the start-up branch campus has received all of the necessary state and accrediting agency approvals, has been reported to the ED, and meets certain other criteria as defined by the ED. Nevertheless, under certain circumstances, a start-up branch campus may also be required to obtain approval from the ED to be able to participate in Title IV Programs. Similarly, an institution that is eligible to participate in Title IV Programs may generally add a new educational program and disburse Title IV Program funds to students enrolled in that new program without ED approval if the new program leads to an associate level or more advanced degree and the institution already offers programs at that level, or if the new program prepares students for gainful employment in the same occupation or a related occupation as an educational program that has previously been designated as an eligible program at the institution and meets minimum length requirements. Otherwise, the institution must obtain the ED’s approval before it may disburse Title IV Program funds to students enrolled in the new program.

In addition to ED regulation, certain of the state and accrediting agencies with jurisdiction over our schools have requirements that may affect our ability to open a new school, open a start-up branch campus of one of our existing schools, or begin offering a new educational program at one of our schools. If we establish a new school, add a new branch start-up campus, or expand program offerings at any of our schools without obtaining the required approvals, we would likely be liable for repayment of Title IV Program funds provided to students at

 

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that school or branch campus or enrolled in that educational program, and we could also be subject to sanctions. Also, if we are unable to obtain the approvals from the ED, applicable state regulatory agencies, and accrediting agencies for any new schools, branch campuses, or program offerings where such approvals are required, or to obtain such approvals in a timely manner, our ability to grow our business would be impaired and our financial condition, results of operations and cash flows could be materially adversely affected.

“90-10 Rule.” Under a provision of the HEA commonly referred to as the “90-10 Rule,” a proprietary institution that fails to derive at least 10% of its revenue from non-Title IV sources at the end of a fiscal year will be placed on provisional participation status for one fiscal year. However, if the institution 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 two fiscal years. If an institution violated the 90-10 Rule and became ineligible to participate in Title IV Programs but continued to disburse Title IV Program funds, the ED would require the institution to repay all Title IV Program funds received by the institution after the effective date of the loss of eligibility. As of December 31, 2009, our institutions are in compliance with the 90-10 Rule.

Administrative Capability. ED regulations specify extensive criteria that an institution must satisfy to establish that it has the requisite administrative capability to participate in Title IV Programs. These criteria relate to, among other things, institutional staffing, operational standards, timely submission of accurate reports to the ED and various other procedural matters. If an institution fails to satisfy any of the ED’s criteria for administrative capability, the ED may require the repayment of Title IV program funds disbursed by the institution, place the institution on provisional certification status, require the institution to receive Title IV Program funds under an agreement other than the ED’s standard advance funding agreement while being provisionally certified, or commence a proceeding to impose a fine or limit, suspend or terminate the participation of the institution in Title IV programs.

Restrictions on Payment of Commissions, Bonuses and Other Incentive Payments. An institution participating in Title IV Programs will not provide any commission, bonus, or other incentive payment based directly or indirectly on success in securing enrollments or financial aid to any persons or entities engaged in any student recruiting or admission activities or in making decisions regarding the award of student financial assistance. The ED’s laws and regulations regarding this rule do not establish clear criteria for compliance in all circumstances. If the ED determined that an institution’s compensation practices violated these standards, the ED could subject the institution to monetary fines, penalties or other sanctions.

Eligibility and Certification Procedures. Under the provisions of the HEA, an institution must apply to the ED for continued certification to participate in Title IV Programs at least every six years or when it undergoes a change of control, as discussed above. The ED may place an institution on provisional certification status if it finds that the institution does not fully satisfy all required eligibility and certification standards. Provisional certification does not generally limit an institution’s access to Title IV Program funds. The ED may withdraw an institution’s provisional certification without advance notice if the ED determines that the institution is not fulfilling all material requirements. In addition, an institution must obtain ED approval for certain substantial changes in its operations, including changes in an institution’s accrediting agency or state authorizing agency or changes to an institution’s structure or certain basic educational features.

Currently, five of our schools remain on provisional certification with the ED. Of the five, two schools are on provisional certification due to ongoing, open ED program reviews and three schools are on provisional certification due to administrative capability.

State Authorization and Accreditation Agencies

To participate in Title IV Programs, an institution must be authorized to offer its programs of instruction by the relevant education agencies of the state in which it is located, accredited by an accrediting agency recognized by the ED, and certified as eligible by the ED. The ED will certify an institution to participate in Title IV

 

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Programs only after the institution has demonstrated compliance with the HEA and the ED’s extensive regulations regarding institutional eligibility. An institution must also demonstrate its compliance with these requirements to the ED on an ongoing basis. These standards are applied primarily on an institutional basis, with an institution defined as a main campus and its additional campus locations, if any.

State licensing agencies are responsible for the oversight of educational institutions, and continued approval by such agencies is necessary for an institution to operate and grant degrees or diplomas to its students. Moreover, under the HEA, approval by such agencies is necessary to maintain eligibility to participate in Title IV Programs. As a result, we are subject to extensive regulation in each of the states in which our schools operate campuses and in other states in which our schools recruit students. Currently, each of our U.S. campuses is authorized by its applicable state licensing agency or agencies.

In addition, several states have requested that we or one of our individual schools enter into a code of conduct regarding student lending practices. Since April, 2007, we, on behalf of our schools, entered into such a code of conduct with the states of New York and Illinois, and our Collins College and LCB Scottsdale campuses entered into such a code of conduct with the State of Arizona.

The level of regulatory oversight varies substantially from state to state. In certain states in which we operate, our campuses are subject to licensure by an agency that regulates proprietary institutions and also by a separate higher education agency. State laws establish standards for, among other things, student instruction, qualifications of faculty, location and nature of facilities, and financial policies. State laws and regulations may limit our campuses’ ability to operate or to award degrees or diplomas or offer new degree programs. If any one of our campuses were to lose state authorization, it would be unable to offer educational programs, and students attending the campus would not be eligible to participate in Title IV Programs. Such severe penalties would require us to close a campus if it were to lose state authorization. See Note 11 “Commitments and Contingencies” of the notes to our consolidated financial statements for a further discussion of selected state regulatory matters currently affecting us and our schools.

International Regulations

Our schools that operate in France, Italy and the United Kingdom are subject to local government regulations. We believe that each of our international locations currently holds all necessary domestic authority to operate within its respective jurisdiction, and campus administrators work to ensure compliance with domestic regulations. Additionally, our AIU campus in the United Kingdom is accredited by a U.S. regional accrediting association, HLC, as a branch of AIU, whose main campus is located in Hoffman Estates, Illinois.

France. Our INSEEC Group (“INSEEC”) consists of nine schools which operate primarily in France and are governed by the French Ministry of Education. Two of INSEEC’s schools offer health education programs and, thus, are governed by the French Ministry of Health, the French Ministry of Education and the National Professional Committee for Medical Visits for the schools’ pharmaceutical test preparation and continuing education classes.

The French Ministry of Education has three levels of approval for educational institutions: diploma endorsement (Level III), state recognition (Level II), and diploma stamp (Level I, the highest level of French approval). In 1999, an additional level entitled “Master Grade,” which represents the highest level of European approval, was added.

The Level III approval, which is co-governed by the French Ministry of Employment and the French Ministry of Education, has been reorganized and the institutions affected by the reorganization are now in the process of registering with the New Certification National Register. With respect to Level II approval, Level I approval, and the European approvals, conditions that must be satisfied to obtain approvals are generally becoming more strict, requiring institutions to, among other things, provide additional financial support for research, and hire additional full-time, PhD-level faculty.

 

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Currently, two of our INSEEC schools have been granted the highest level of European approval, Master Grade, four schools have been granted Level I approval, four schools have been granted Level II approval, and six schools have been granted Level III approval. As of December 31, 2009 one of our schools is under review for a Level III accreditation. These approvals are subject to regular renewal, the schedule for which depends on geographic zones. All Level I renewals from the French Ministry of Education have been obtained as of December 31, 2009.

Istituto Marangoni received acceptance from the French Rectorat de Paris, on November 9, 2006.

Italy. Istituto Marangoni, a private postsecondary fashion and design school, was granted the status of Professional Art School in Italy on December 17, 1935, and obtained authorization to open a school from the Italian Ministry of Education on February 13, 1951.

United Kingdom. American InterContinental University London (“AIU London”) has been granted proper authority by the applicable U.S. and United Kingdom entities to grant academic credentials. AIU London is authorized to grant U.S. academic degrees by the Nonpublic Postsecondary Education Commission (NPEC) of the State of Georgia. U.S. students that attend AIU London are eligible to participate in Title IV financial assistance programs through AIU London’s status as an additional location of American InterContinental University. AIU London has entered into an agreement with London South Bank University to grant British BA (Hons) degrees in certain academic degree programs. AIU London is listed as a provider of higher education in the UK by the Department for Innovation, Universities and Skills (DIUS) and appears on the Department’s register. AIU London is registered in England No: 1373237.

Istituto Marangoni – London was granted a Certificate of Accreditation by the British Accreditation Council for Independent Further and Higher Education (“BAC”) on September 26, 2006 and currently maintains this BAC accreditation. As a result of changes in UK immigration legislation, Istituto Marangoni – London will not, as has been the case in the past, be able to sponsor students from outside of the European Economic Area (which comprises all of the European Union countries plus Iceland, Norway, Liechtenstein and Switzerland.) Istituto Marangoni – London is currently working towards meeting the requirements of United Kingdom immigration legislation as it applies to educational institutions and courses of study in the UK.

SEASONALITY

Our quarterly revenues and income fluctuate primarily as a result of the pattern of student enrollments. Our schools generally experience a seasonal increase in enrollment in the fall, traditionally when the largest number of new high school graduates begins postsecondary education. Furthermore, although we encourage year-round attendance at all campuses, certain programs offered by some of our schools include summer breaks. Most notably, our campuses within our International segment do not typically instruct students over the summer. Operating costs for our schools generally do not fluctuate as significantly on a quarterly basis, except for admissions and advertising expenses, which are generally higher during the second and third quarters (April through September) in support of seasonally high enrollment. However these costs were higher in the fourth quarter of 2009 as we sought to capitalize on the current favorable market conditions.

 

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EMPLOYEES

As of December 31, 2009, we had a total of 14,383 employees, including 1,672 students employed on a part-time basis at certain of our schools, as follows:

 

     Full-time
Non-student
Employees
   Part-time
Non-student
Employees
   Part-time
Student
Employees
   Full-time
Faculty
   Part-time
Faculty
   Total

Corporate

   1,154    51    —      —      131    1,336

Continuing operations

   5,680    191    1,660    1,207    4,154    12,892

Discontinued operations

   82    8    12    19    34    155
                             

Total

   6,916    250    1,672    1,226    4,319    14,383
                             

OTHER INFORMATION

Our website address is www.careered.com. We make available within the “Investor Relations” portion of our website under the caption “Financial Information,” free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, including any amendments to those reports, as soon as reasonably practicable after we electronically file or furnish such materials to the U.S. Securities and Exchange Commission (“SEC”). Materials that we file or furnish to the SEC may also be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet site at www.sec.gov that contains reports, proxy and information statements, and other information that we file electronically with the SEC.

 

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ITEM 1A. RISK FACTORS

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 and as reauthorized by the Higher Education Opportunity Act signed into law on August 14, 2008 (“HEOA”).

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 the Title IV Programs.

All of our U.S. schools participate in Title IV Programs and so are subject to extensive regulation by the 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 the ED, and be certified by the ED as an eligible institution. Most ED requirements are applied on an institutional basis, with an institution defined by the ED as a main campus and any of its branch campuses or additional locations.

The following are some of the most significant regulatory requirements and risks related to governmental and accrediting body oversight of our schools:

 

   

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 the ED. If the rates at which our former students default on repaying their federally guaranteed or federally funded students loans exceed ED-specified percentages, one or more of our schools could lose eligibility to participate in Title IV Programs for several years or be placed on provisional certification status by the ED.

 

   

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 the ED’s 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. The ED applies its quantitative financial responsibility tests annually based on the school’s audited financial statements and may apply the tests if a school undergoes a change in control or other circumstances. The ED also may apply the tests to us, as the parent company of our schools, and to other related entities. The ED’s operating restrictions include transferring institutions to a cash-monitoring system or reimbursement instead of the ED’s standard advance funding of Title IV funds, which may result in a significant delay in receiving the funds.

 

   

“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. school’s cash receipts derived from Title IV Programs for two consecutive fiscal years is greater than 90%. Under HEA’s “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 became ineligible to participate in Title IV

 

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Programs but continues to disburse Title IV Program funds, the ED would require the school to repay all Title IV Program funds received by it after the effective date of the loss of eligibility.

 

   

Administrative Capability. We may be required to accept limitations to continue our U.S. schools’ participation in Title IV Programs if we fail to satisfy the ED’s administrative capability standards, covering staffing, procedures for disbursing and safeguarding Title IV funds, and reporting and other procedural matters. If a school fails to meet these criteria, the ED may require repayment of previously disbursed Title IV funds, place the school on provisional certification status, or transfer the school from the ED’s advance funding arrangement to another funding program, impose fines, or limit or terminate the school’s participation in Title IV Programs.

 

   

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 recruiting, admissions or financial aid activities.

 

   

Eligibility and Certification Procedures. From time to time certain of our schools may be on provisional certification with ED related to a failure to maintain eligibility for Title IV Programs under ED’s criteria discussed above. Any such failure of our schools to maintain eligibility for Title IV programs could increase our costs of regulatory compliance and have a material adverse impact on our financial condition, results of operations and cash flows.

The current negotiated rulemaking by the ED could result in regulatory changes that materially and adversely affect our business. Any changes in ED’s regulations could affect the ability of our students to obtain federal funding under Title IV Programs, impact our operations, and have other adverse consequences for us, as can changes in federal and state legislation or regulations of other federal, state and other regulatory bodies overseeing our education programs.

The agencies that regulate our U.S. schools, including ED, periodically revise their requirements and modify their interpretations of existing requirements. In 2009 and 2010, ED convened negotiated rulemaking teams addressing topics such as lender and general loan issues, accreditation, discretionary grants, general and non-loan programmatic issues, and program integrity in the Title IV programs through the rulemaking process under HEA. The program integrity rulemaking conducted in November 2009 through January 2010 addressed a number of topics including (but not limited to):

 

   

standards regarding the payment of incentive compensation to employees involved in student enrollment, certain recruiting, admissions or financial aid activities including elimination of current safe harbors;

 

   

establishing a definition of “gainful employment” for purposes of the foundational requirement for Title IV student financial aid that a program of study prepare students for gainful employment in a recognized occupation;

 

   

linking the definition of “gainful employment” with a required student loan debt to income ratio;

 

   

defining a credit hour for purposes of determining program eligibility for Title IV student financial aid.

The negotiated rulemaking process has concluded, and ED will publish recommended regulatory proposal changes in a Notice of Proposed Rulemaking available for public comment sometime in mid calendar year 2010. After a public comment period, the ED must publish final regulations in the Federal Register on or before November 1, 2010 for the regulations to be effective for the next award year, beginning July 1, 2011.

We cannot predict the outcome of this rulemaking process at this time, or predict with certainty the impacts on our operations. These rules could affect the manner in which we conduct our business by, for example, requiring us to change the manner in which we compensate our admissions representatives; reduce the amount of Title IV funds available to our students; reduce the amount of debt students can obtain to finance their education, potentially impacting the “90-10” calculation or resulting in decreased enrollment; or otherwise require changes

 

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in our business model. Compliance with these rules, which if adopted could be effective as early as July 1, 2011, 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.

Government agencies, regulatory agencies, and third parties may conduct compliance reviews, bring claims or initiate litigation against us based on alleged violations of the extensive regulatory requirements applicable to us, which could require us to pay monetary damages, be sanctioned or limited in our operations, and 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 behaviors 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) limitations on or 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) involve us in costly adversarial proceedings, or (h) subject us or our U.S. schools to civil or criminal penalties. Any one of these could adversely affect our financial condition, results of operations, and cash flows and result in the imposition of significant restrictions on us and our ability to operate.

Any failure to comply with state authorization and regulatory requirements, or new state legislative or regulatory initiatives affecting our schools, could have an 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.

We and our schools also are subject to and have pending audits, compliance reviews, inquiries, investigations, claims of non-compliance, and lawsuits by the 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. The HEA also requires that an institution’s administration of Title IV Program funds be audited annually by an independent accounting firm and that the resulting audit report be submitted to the ED for review.

State laws vary from state to state, but generally establish standards for faculty qualifications, location and nature of facilities, financial policies, new programs and student instruction, administrative staff, marketing and recruitment, and other operational and administrative procedures. Loss of state authorization for a school results in a school being ineligible to participate in Title IV Programs. 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 ineligible for Title IV Programs.

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. In addition, if the ED or

 

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another regulatory agency determined that one of our schools improperly disbursed Title IV Program funds or violated a provision of the HEA or the ED’s regulations, that school could be required to repay such funds, and could be assessed an administrative fine. We have several such matters pending against us or one or more of our schools. See Note 11 “Commitments and Contingencies – Accrediting Body and Federal Regulatory Matters” of the notes to our consolidated financial statements for further discussion of certain of these matters.

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. State legislatures often consider legislation affecting regulation of postsecondary educational institutions; enactment of this legislation and ensuing regulations impose substantial costs on our schools to modify their operations in order to comply with the changing regulatory environment. Several states have attempted to assert jurisdiction over schools that hire faculty or staff who live in the state, that advertise and recruit students in the state, or that have no physical location in the state but offer online programs to students who reside in the state. In the future, states may enact legislation or issue regulations that specifically address online educational programs such as those offered by AIU, CTU, IADT and LCB or otherwise affect our schools’ operations.

If we fail to comply with current state licensing or authorization requirements, or determine that we are unable to cost-effectively comply with new 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 AIU fails to maintain its institutional accreditation status, our business, financial condition, results of operations, cash flows, common stock price and growth prospects could be adversely affected.

AIU’s accrediting agency, the Higher Learning Commission of the North Central Association of Colleges and Schools, or HLC, commissioned an advisory team to visit AIU in January 2010. The advisory visit was focused on AIU’s educational and business practices. The advisory team has concluded its visit and advised AIU that within the next several weeks it will provide a report to HLC containing the advisory team’s findings and recommendations, if any, concerning its review. In addition and as previously disclosed, in connection with HLC’s initial accreditation of AIU in May 2009, AIU must submit a progress report to HLC relating to curricula design and AIU’s graduate programs’ student learning outcomes and have HLC conduct a focused visit to AIU to assess the issue of credit equivalence. HLC has not yet notified AIU of the timing of the focused visit. As previously disclosed, the Department of Education conducted a program review of AIU in November 2009. AIU is currently awaiting the issuance of the program review report.

If AIU fails to satisfactorily address the matters subject to these reviews, or otherwise fails to receive timely approval from HLC to begin offering new degree or certificate programs, our business, financial condition, results of operations and growth prospects could be materially adversely affected. In addition, any adverse future accreditation or regulatory action, or resulting adverse publicity related to any of these matters, may harm our business and reputation and impair our ability to attract and retain students at our AIU schools. We may also be subject to other claims and liabilities associated with any such future action, any one of which may have a material adverse affect on our business.

We cannot predict the outcome of these reviews. Any future adverse accreditation or regulatory action, or resulting adverse publicity or legal proceedings related to any of these ongoing reviews, may harm our business and reputation and impair our ability to attract and retain students at our AIU schools. An extended delay in AIU’s ability to begin offering new programs could have a material adverse effect on our business, financial condition, results of operations, cash flows and growth prospects. Moreover, the loss of accreditation by AIU for any reason would, among other things, render its schools and programs ineligible to participate in Title IV programs. If AIU became ineligible to participate in Title IV programs, it could not conduct its business as it is currently conducted, which would have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

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If one or more of our schools fails to maintain institutional accreditation or if one or more of our accrediting agencies loses recognition by ED, our schools could lose 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 institution’s instructional programs and its administrative and financial operations to ensure that the institution has the resources to perform its educational mission. ED relies on accrediting agencies to assess whether an institution’s education programs qualify the school to participate in Title IV Programs. Furthermore, many states 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.

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 at 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 the ED continuing to recognize the regional accrediting agencies that accredit our colleges and universities. The standards and practices of these agencies have recently become a focus of attention by the ED. For example, in December 2009, the ED’s Office of Inspector General (“OIG”) recommended that the ED review HLC’s compliance with ED accrediting body standards and regulations following the OIG’s review of HLC’s initial accreditation of AIU. We cannot predict the outcome of the ED’s review of HLC’s accreditation standards and practices. If the ED ceased to recognize HLC for any reason, our schools that are accredited by HLC would not be eligible to participate in Title IV programs beginning 18 months after the date such recognition ceased unless HLC was again recognized or our schools that are accredited by HLC were accredited by another accrediting body recognized by the ED. If our schools that are accredited by HLC 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 OIG and the ED on regional 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. 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, which could increase their operational costs, reduce their enrollments and materially and 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. State attorneys general, the 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 provide 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.

In response to allegations on student loan programs, Congress has passed new laws, the ED has enacted stricter regulations, and several states have adopted codes of conduct or enacted state laws that further regulate

 

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the conduct of lenders, schools, and school personnel. These new laws and regulations, among other things, limit schools’ relationships with lenders, restrict the types of services that schools may receive from lenders, prohibit lenders from providing other types of loans to students in exchange for Title IV loan volume from schools, require schools to provide additional information to students concerning institutionally preferred lenders, and significantly reduce the amount of federal payments to lenders who participate in the Title IV loan programs. A number of schools, including our schools, have entered into codes of conduct regarding student referrals to lenders in various states.

In the second quarter 2009, the Federal Reserve Board approved final amendments to Regulation Z (Truth in Lending), that became effective February 14, 2010 and that revise and expand disclosure requirements for certain private education loans, including the extended payment plan program that we have implemented.

Criticisms of the overall student lending and postsecondary education sectors may impact general public perceptions 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, with additional legislation and regulatory changes being actively considered at the federal and state levels. 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 extended payment plan programs such as ours, 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. 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. The ED’s negotiated rulemaking process is addressing payment of incentive compensation to employees involved in student enrollment, including elimination of 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, we may face retention issues, increased operating costs, or the need to change our business model, which could have a material adverse impact on our business, financial condition, results of operations and cash flows.

A substantial decrease in student financing options, or a significant increase in financing costs for our students, could have a material adverse effect on our student population, revenue and financial results.

Tightened credit markets in the U.S. economy in 2008 and 2009 caused some lenders, including some lenders that previously provided Title IV loans to our students, to cease providing Title IV loans to students. Other lenders have reduced the benefits and increased the fees associated with the Title IV loans they do provide. In addition, the new proposed regulations under HEOA and Regulation Z (Truth in Lending) requirements may result in higher administrative costs for schools, including us, related to student loan and new extended payment plan programs. If the costs of Title IV loans increase, if availability of loans and payment plans decrease, or student debt repayments are tied to “gainful employment” and wage levels, 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 are working internally to implement 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

 

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existing educational programs with us and to allow new students to attend our schools. As of December 31, 2009, we have committed to approximately $68.5 million of funding through extended payment plans.

Any further actions by the U.S. Congress, ED or other regulatory bodies that significantly reduce funding for Title IV Programs or the ability of our students to participate in these Programs, or restrict our ability to offer extended payment plans or establish different or more stringent requirements for our U.S. schools to participate in Title IV Programs or to offer such extended payment plans, could have a material adverse effect on our student population, 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 position, and cash flows. Increased state support for public institutions and community colleges, resulting in increased competition for students, also could have a material adverse effect on our financial condition, results of operations 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 involving students and employees including, from time to time, 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 the 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.

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.

 

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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 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 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 applicable state and accrediting regulatory agencies, which may be 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 the 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, the 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, unusually 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 suffer, and our results of operations and cash flows could be adversely affected.

 

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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, require or desire professional licenses and certifications in order to obtain employment in their chosen fields. Many factors affect a student’s ability to become licensed, including whether the student’s 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 student’s 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 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. The ability of our foreign students to obtain visas for our U.S. and our European schools is important to student recruitment. For example, as a result of changes in United Kingdom immigration legislation, Istituto Marangoni-London will not, as had been the case in the past, be able to sponsor students from outside of the European Economic Area (which comprises all of the European Union countries plus Iceland,

 

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Norway, Liechtenstein and Switzerland). Istituto Marangoni-London is currently working towards meeting the requirements of the UK immigration legislation as it applies to education institutions and courses of study in the United Kingdom. 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.

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 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.

 

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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 more 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 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,

 

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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 management’s 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.

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. 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 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:

 

   

accreditation reviews or questions and any related adverse publicity;

 

   

the outcome of ED’s current negotiated rulemaking process, and other changes in the legal or regulatory environment in which we operate;

 

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the initiation, pendency or outcome of litigation, regulatory reviews and investigations, and any related adverse publicity;

 

   

changes in the student lending and credit markets;

 

   

our ability to meet or exceed expectations of analysts or investors;

 

   

quarterly variations in our operating results;

 

   

general conditions in the postsecondary education field, including changes in the ED, state laws and regulations and accreditation standards, or availability of student financing;

 

   

changes in our earnings estimates by analysts;

 

   

future impairment of goodwill or other intangible assets;

 

   

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;

 

   

the loss of key personnel; and

 

   

general economic conditions.

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.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

 

ITEM 2. PROPERTIES

Our corporate headquarters are located in Hoffman Estates, Illinois, which is a suburb of Chicago, and our approximately 90 campuses are located throughout the United States and in France, Italy and the United Kingdom. Each of our campuses contains admissions and administrative offices and teaching facilities, including classrooms, laboratories, and, in the case of campuses with culinary arts programs, kitchens. Also, certain of our campuses include dormitory and cafeteria facilities, and certain of our culinary schools utilize leased space to operate restaurants in conjunction with their culinary arts programs.

Effective January 19, 2010, we entered into a real estate lease for our corporate headquarters and administrative facilities for both our AIU Online and CTU Online campuses in Schaumburg, Illinois. We will be consolidating our headquarters facilities from the current five buildings to a single building. We will reduce our total headquarters footprint by 0.13 million square feet which we believe will maximize efficiencies and reduce overhead expenses. The lease for this new location results in a $48.1 million real estate obligation through 2022. In addition, we intend to make capital improvements to the new headquarters totaling approximately $52.0 million over the next two years, with the majority of the investment expected in 2010. As a result of the real estate consolidation, we expect to incur approximately $5.4 million of lease termination costs related to our existing space. These charges are expected to be incurred in the first half of 2010.

 

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Almost all of our campus locations and our corporate headquarters locations are leased. As of January 31, 2010, we leased approximately 6.1 million square feet under lease agreements related to our continuing operations that have remaining terms ranging from less than one year to 19 years. As of January 31, 2010, we leased approximately 0.6 million square feet under lease agreements related to our discontinued operations that have remaining terms ranging from two to nine years. As of January 31, 2010, we owned approximately 0.3 million square feet of real property at the following campuses:

 

   

American InterContinental University, Houston, Texas – Corporate and other segment

 

   

Brooks Institute, Santa Barbara, California – Corporate and other segment

 

   

Le Cordon Bleu College of Culinary Arts in Chicago, Chicago, Illinois – Culinary Arts segment

 

   

INSEEC Bordeaux, Bordeaux, France – International segment

See Part I, Item 1 of this Annual Report on Form 10-K for a table listing each of our campus locations. The listing excludes assets of discontinued operations.

We actively monitor our real estate needs in light of our current utilization and projected student enrollment growth. We believe that our schools can acquire any necessary additional facility capacity on reasonably acceptable terms within a relatively short timeframe. We devote capital resources to facility improvements and expansions as we deem necessary to promote growth and to most effectively serve our students.

 

ITEM 3. LEGAL PROCEEDINGS

Note 11 “Commitments and Contingencies” of the notes to our consolidated financial statements in Part IV, Item 14 of this Annual Report on Form 10-K is incorporated herein by reference.

 

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PART II

 

ITEM 4. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is listed on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “CECO.”

The following table sets forth the range of high and low sales prices per share for our common stock as reported on the NASDAQ:

 

     Price Range of
Common Stock
   High    Low

2009

     

First quarter

   $ 26.53    $ 17.06

Second quarter

     25.68      17.95

Third quarter

     25.73      20.06

Fourth quarter

     28.87      20.31
      High    Low

2008

     

First quarter

   $ 25.15    $ 11.57

Second quarter

     20.72      12.69

Third quarter

     20.89      13.82

Fourth quarter

     18.80      12.44

The closing price of our common stock as reported on the NASDAQ on February 23, 2010 was $26.28 per share. As of February 23, 2010, there were 599 holders of record of our common stock.

We have never paid cash dividends on our common stock and have no current plan to do so in the foreseeable future. The declaration and payment of dividends on our common stock are subject to the discretion of our Board of Directors. The decision of our Board of Directors to pay future dividends will depend on general business conditions, the effect of a dividend payment on our financial condition, and other factors the Board of Directors may consider relevant. The current policy of our Board of Directors is to reinvest earnings in our operations to promote future growth and, from time to time, to execute repurchases of shares of our common stock under the stock repurchase program discussed below. The repurchase of shares of our common stock reduces the amount of cash available to pay cash dividends to our common stockholders. Our ability to pay cash dividends on our common stock is also limited under the terms of our existing credit agreement.

During 2009, we repurchased approximately 9.0 million shares of our common stock for approximately $200.0 million at an average price of $22.23 per share. Under the Company’s previously authorized stock repurchase program, stock repurchases may be made on the open market or in privately negotiated transactions from time to time, depending on 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. As of December 31, 2009, approximately $195.5 million was available under the stock repurchase program.

On December 14, 2009, we entered into a stock repurchase plan established in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the “1934 Act”), in connection with our previously authorized stock repurchase program. A Rule 10b5-1 plan allows a company to repurchase its shares at times when it otherwise might be unable to do so under the 1934 Act’s insider trading rules. This stock repurchase plan facilitated purchases of our common stock under our previously authorized stock repurchase program. Purchases of common stock under this plan were subject to specified parameters and certain price and volume restraints as

 

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established in the plan. As of January 31, 2010, we had repurchased an additional 1.7 million shares of our common stock for $40.0 million at an average price of $23.49 per share under this plan. As a result, approximately $155.5 million was available under our previously authorized stock repurchase program to repurchase outstanding shares of our common stock as of January 31, 2010.

On February 16, 2010, the Board of Directors authorized the use of an additional $250.0 million to repurchase outstanding shares of its common stock under the company’s stock repurchase program. This is in addition to the $155.5 million still available under our previously authorized stock repurchase program, bringing the amount available under our authorized stock repurchase program to $405.5 million. Stock repurchases under this program may be made on the open market or in privately negotiated transactions from time to time, depending on 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.

Issuer Purchases of Equity Securities

 

Period

   Total Number of
Shares
Purchased
   Average Price
Paid per Share
   Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
   Maximum
Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under the Plans
or Programs

January 1, 2009—January 31, 2009

   —      $ —      —      $ 195,466,742

February 1, 2009—February 28, 2009

   506,400      24.74    506,400      182,940,465

March 1, 2009—March 31, 2009

   1,245,832      22.05    1,245,832      155,469,104

April 1, 2009—April 30, 2009

   —        —      —        155,469,104

May 1, 2009—May 31, 2009

   3,588,147      20.65    3,588,147      81,384,795

June 1, 2009—June 30, 2009

   1,245,795      20.80    1,245,795      55,475,345

July 1, 2009—July 31, 2009

   —        —      —        55,475,345

August 1, 2009—August 31, 2009

   1,656,355      24.15    1,656,355      215,475,380

September 1, 2009—September 30, 2009

   —        —      —        215,475,380

October 1, 2009—October 31, 2009

   —        —      —        215,475,380

November 1, 2009—November 30, 2009

   —        —      —        215,475,380

December 1, 2009—December 31, 2009

   753,665      26.54    753,665      195,475,395
               

Total

   8,996,194       8,996,194   
               

See Part III, Item 11 “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of this Annual Report on Form 10-K for information as of December 31, 2009, with respect to shares of our common stock that may be issued under our existing share-based compensation plans.

 

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ITEM 5. SELECTED FINANCIAL DATA

The following selected historical consolidated financial and other data are qualified in their entirety by reference to, and should be read in conjunction with, our consolidated financial statements and the related notes thereto appearing elsewhere in this report and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our selected statement of operations and statement of cash flows data set forth below for each of the five years ended December 31, 2009, 2008, 2007, 2006, and 2005, and the balance sheet data as of December 31, 2009, 2008, 2007, 2006, and 2005, are derived from our audited consolidated financial statements. Prior period financial results have been recast to reflect those schools that have ceased operations as discontinued operations.

 

     For the Year Ended December 31,  
     2009     2008     2007     2006     2005  
     (Dollars in thousands, except per share amounts)  

Selected Statement of Operations Data

          

Total revenue

   $ 1,836,635      $ 1,660,742      $ 1,668,274      $ 1,789,293      $ 1,832,040   

Operating expenses:

          

Educational services and facilities

     611,748        605,474        585,996        553,942        531,050   

General and administrative

     934,131        866,043        869,256        908,575        848,511   

Depreciation and amortization

     65,652        71,636        73,532        74,210        65,235   

Goodwill and asset impairment(1)

     2,500        8,925        5,610        91,298        —     
                                        

Total operating expenses

     1,614,031        1,552,078        1,534,394        1,628,025        1,444,796   
                                        

Operating income

     222,604        108,664        133,880        161,268        387,244   

Operating profit margin percentage

     12.1     6.5     8.0     9.0     21.1

Total other income

     1,441        19,623        22,885        20,722        14,374   

Provision for income taxes

     78,663        38,525        49,726        90,959        149,964   
                                        

Income from continuing operations

     145,382        89,762        107,039        91,031        251,654   
                                        

Loss from discontinued operations, net of tax(2)

     (64,163     (29,620     (47,486     (44,462     (17,776
                                        

Net income

   $ 81,219      $ 60,142      $ 59,553      $ 46,569      $ 233,878   
                                        

Net income (loss) per share-basic:

          

Income from continuing operations

   $ 1.69      $ 1.00      $ 1.14      $ 0.95      $ 2.49   

Loss from discontinued operations

     (0.74     (0.33     (0.50     (0.47     (0.17
                                        

Net income

   $ 0.95      $ 0.67      $ 0.64      $ 0.48      $ 2.32   
                                        

Net income (loss) per share-diluted:

          

Income from continuing operations

   $ 1.68      $ 1.00      $ 1.13      $ 0.93      $ 2.43   

Loss from discontinued operations

     (0.74     (0.33     (0.50     (0.46     (0.17
                                        

Net income

   $ 0.94      $ 0.67      $ 0.63      $ 0.47      $ 2.26   
                                        

 

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     As of December 31,  
     2009     2008     2007     2006     2005  
     (Dollars in thousands)  

Selected Balance Sheet Data

          

Assets:

          

Cash and cash equivalents and short-term investments

   $ 484,852      $ 493,932      $ 377,665      $ 433,337      $ 394,184   

Student receivables, net(3)

     79,278        67,480        65,727        57,004        74,613   

Total current assets

     628,835        643,045        576,666        608,215        578,552   

Total assets

     1,563,842        1,418,210        1,377,783        1,422,728        1,506,104   

Liabilities:

          

Deferred tuition revenue

     184,411        151,158        151,117        130,858        143,380   

Total current liabilities

     442,009        351,677        372,930        303,571        326,749   

Total liabilities

     641,797        469,698        480,060        426,850        469,855   

Working capital

     186,826        291,368        203,736        304,644        251,803   

Total stockholders’ equity

   $ 921,524      $ 947,652      $ 886,108      $ 982,401      $ 1,036,249   
     For the Year Ended December 31,  
     2009     2008     2007     2006     2005  
     (Dollars in thousands)  

Selected Statement of Cash Flows Data

          

Net cash provided by operating activities

   $ 288,251      $ 186,720      $ 222,075      $ 216,390      $ 378,225   

Net cash (used in) provided by investing activities

     (49,301     (150,787     4,813        (56,453     (399,537

Net cash used in financing activities

     (199,151     (21,048     (185,718     (111,239     (189,703

Capital expenditures

     (74,087     (53,854     (57,586     (69,473     (125,626

 

(1) During 2009, we recorded within Corporate and other $2.5 million in asset impairment charges related to one of our owned facilities, resulting from its carrying value exceeding its current fair value. During 2008, we recorded approximately $8.9 million in asset impairment charges, including $6.9 million related to the reduction in asset carrying values for certain campuses within Culinary Arts and Transitional Schools and $2.0 million related to the write-off of an intangible asset within Health Education. During 2007, we recorded asset impairment charges of $5.6 million related to campuses within Health Education. The asset impairment charges resulted from the campuses carrying value of long-lived assets exceeding their fair values. During 2006, we recorded goodwill and other intangible asset impairment charges of approximately $86.3 million within Health Education and recorded asset impairment charges of approximately $5.0 million within Health Education. See Note 7 “Property and Equipment” and Note 8 “Goodwill and Other Intangible Assets” of the notes to our consolidated financial statements for further discussion of the impairments.
(2) See Note 4 “Discontinued Operations” of the notes to our consolidated financial statements for further discussion of discontinued operations.
(3) Student receivables, net includes both current and long-term balances.

 

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ITEM 6. MANAGEMENT’S 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 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 matters discussed in Item 1A “Risk Factors” in Part I of this Annual Report on Form 10-K that could cause our actual growth, results of operations, cash flows, performance and business prospects and opportunities to differ materially from those expressed in, or implied by, these statements. Except as expressly required by the 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.

As used in this Annual Report on Form 10-K, the terms “we,” “us,” “our,” “the Company,” and “CEC” refer to Career Education Corporation and our wholly-owned subsidiaries. The terms “school” and “university” each refer to an individual, branded, proprietary educational institution, owned by us and including its campus locations. The term “campus” refers to an individual main or branch campus operated by one of our schools.

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 over 116,000 students across the world in a variety of career-oriented disciplines. The approximately 90 campuses that serve these students are located throughout the U.S. and in France, Italy, and the United Kingdom, and offer doctoral, master’s, bachelor’s and associate degrees and diploma and certificate programs. Nearly 40% of our students attend the web-based virtual campuses of American InterContinental University, Colorado Technical University, International Academy of Design & Technology and Le Cordon Bleu College of Culinary Arts.

CEC is an industry leader whose brands are recognized globally. Those brands include, among others, American InterContinental University; Brooks Institute; Colorado Technical University; Harrington College of Design; INSEEC Schools; International Academy of Design & Technology; Istituto Marangoni; Le Cordon Bleu North America; and Sanford-Brown Institutes and Colleges. Through our schools, CEC is committed to providing quality education, enabling students to graduate and pursue rewarding careers.

During 2009, we organized our businesses across five strategic business units (“SBU”). Each SBU represented a group of postsecondary education providers that offer a variety of degree and non-degree academic programs. These SBUs were organized by key market segment to enhance brand focus and operational alignment within each segment. In addition, our Transitional Schools division included all schools that are currently being taught out. This division is focused on winding down these operations as effectively and efficiently as possible. Our reportable segments are:

University includes our American InterContinental University (“AIU”), Colorado Technical University (“CTU”) and Briarcliffe College schools that collectively offer regionally accredited academic programs in the career-oriented disciplines of business studies, visual communications and design technologies, health education, information technology, criminal justice and education in an online, classroom or laboratory setting.

Culinary Arts includes our Le Cordon Bleu North America (“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 primarily in a classroom, kitchen or online setting.

 

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Health Education primarily includes our Sanford-Brown schools that 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.

Art & Design includes our Brooks Institute, Brown College, Collins College, Harrington College of Design and International Academy of Design & Technology (“IADT”) schools. Collectively these schools offer academic programs primarily in the career-oriented disciplines of fashion design, game design, graphic design, interior design, film and video production, photography and visual communications in a classroom, laboratory or online setting.

International includes our INSEEC Group (“INSEEC”) schools and Istituto Marangoni schools located in France, Italy and the United Kingdom, which collectively offer academic programs in the career-oriented disciplines of business studies, health education, fashion and design and visual communications and technologies in a classroom or laboratory setting.

Transitional Schools includes those schools that are currently being taught out. As of December 31, 2009, AIU – Los Angeles, CA is the only school included in Transitional Schools. The schools previously reported within Transitional Schools have since ceased operations and are now being reported within discontinued operations with the exception of Gibbs College – Boston, MA, Gibbs College – Farmington, CT, and SBI Cranston – Cranston, RI which transitioned to the Health Education SBU in 2009.

See Note 17 “Segment Reporting” of the notes to our consolidated financial statements for further discussion.

2009 Overview

With adherence to our core values and while continuing to reduce employee turnover, we strengthened our foundation with increased efficiency and effectiveness and accelerated growth in all of our core business units in 2009. Revenue grew over 10% and operating income more than doubled as compared to the prior year. During the year, we incurred a significant level of charges primarily related to exiting campuses. As such, we believe reporting our financial results on a GAAP basis, followed by a non-GAAP presentation excluding the effect of the significant charges on financial results, provides investors with a more informative perspective of the ongoing operations of the business.

The growth, innovation and improved student outcomes we achieved during the year were significant. New student starts grew 17% and student population increased approximately 21% as compared to the prior year. We are providing career-building education to a record 116,800 students, and we expect to continue our momentum throughout 2010.

Throughout the year, we continued to experience significant growth in Health Education, which reported a 29% increase in new student starts as compared to the prior year. We ended the year with eight start-up locations, seven of which are focused within Health Education, allowing us to expand the strong operating model and market opportunity of our Sanford-Brown Institutes and Colleges. Two of these start-ups were converted Transitional Schools, Gibbs College – Boston, MA and Gibbs College – Farmington, CT. These locations, in addition to the two schools converted in 2008, SBC – Vienna, VA and SBI – Melville, NY, provide us with the opportunity to expand our presence in the Northeast region of the U.S. and allow us to better utilize existing real estate. We expect to continue to expand our Health Education footprint in 2010 by opening six new campuses across the U.S.

Within University, CTU continued to build upon its recent success, reporting a 25% increase in revenue driven by a 17% increase in new student starts and growth of 29% in student population as compared to the prior year. Within AIU, revenue increased 9% as a result of higher student population, which increased approximately

 

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16% as compared to the prior year. Both CTU and AIU experienced improvement in student retention as compared to the prior year and expect to continue strong student population growth in 2010.

AIU’s accrediting agency, the Higher Learning Commission of the North Central Association of Colleges and Schools, or HLC, commissioned an advisory team to visit AIU in January 2010. The advisory visit was focused on AIU’s educational and business practices. The advisory team has concluded its visit and advised AIU that within the next several weeks it will provide a report to HLC containing the advisory team’s findings and recommendations, if any, concerning its review. In addition and as previously disclosed, in connection with HLC’s initial accreditation of AIU in May 2009, AIU must submit a progress report to HLC relating to curricula design and AIU’s graduate programs’ student learning outcomes and have HLC conduct a focused visit to AIU to assess the issue of credit equivalence. HLC has not yet notified AIU of the timing of the focused visit. As previously disclosed, the Department of Education conducted a program review of AIU in November 2009. AIU is currently awaiting the issuance of the program review report.

Our international institutions continued to grow at both INSEEC and Istituto Marangoni. Revenue increased over 12% as compared to the prior year, with both institutions experiencing meaningful growth. Excluding the $7.3 million unfavorable impact of foreign currency exchange rates, revenue grew over 19% as compared to the prior year. This revenue growth is attributable to strong student population growth.

Within Culinary Arts, new student start growth of 40% as compared to the prior year and continued strong retention rates led to growth of over 31% in student population as compared to the prior year. As a result, Culinary Arts’ revenue grew 1% over the prior year; the first year-over-year growth in Culinary Arts in two years. We believe the introduction of the 21-month Culinary program in January 2009, along with our implementation of student support activities at each Culinary campus, helped attract new students lost as a result of the severe contraction of the student loan market which occurred in the second quarter 2008. By assisting our students throughout their entire course of study, including providing the opportunity for an additional year of Title IV funding with the decelerated 21-month program, we have improved growth prospects of our institutions and the overall student experience.

During the third quarter 2009, we acquired the outright rights to the Le Cordon Bleu brand in the education services field for the U.S. and Canada and terminated our licensing agreement with Le Cordon Bleu International (“LCBI”). As a part of the transaction, we also acquired the right of first refusal to purchase all non-acquired brand rights and operations of Le Cordon Bleu International in the event LCBI proposes to sell such rights and operations. We acquired the Le Cordon Bleu North American brand rights to further our execution of our strategic plan, as it solidifies a core asset essential to the future growth of our Culinary Arts segment. We have substantially completed the rebranding of our existing U.S. Culinary Arts campuses to reflect the Le Cordon Bleu name which will allow for efficiencies in our marketing campaigns by aligning our messages around this strong brand.

Art & Design’s revenue remained relatively stable as compared to the prior year. The majority of our IADT campuses aligned their academic calendars to provide for an increase in the number of annual new student starts and a shortened enrollment cycle. We also made a strategic decision to refocus our marketing efforts to the local market at the majority of our locations. In addition, we began leveraging our strong balance sheet and traditionally low bad debt, to make more funding available to our students. These changes resulted in improved admissions productivity in the second half of the year, through more consistent enrollment performance resulting in improved student show rates. The SBU also continued to make strides in graduate employment, improving on the prior year despite the job losses in the U.S. economy. Finally, the curriculum alignment initiative begun in the second quarter 2009 is substantially complete and will allow us to leverage our scale.

During 2009 we completed the teach out of six of our campuses, McIntosh College, Lehigh Valley College, and four of our Gibbs College locations, including Livingston, NJ; New York, NY; Norwalk, CT and Norristown, PA. The results of operations for these campuses are reflected as a component of discontinued

 

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operations. In connection with the closure of the campuses, we recorded $15.0 million for lease terminations and $60.1 million in future minimum lease obligations related to certain facilities whose remaining lease terms range from two to nine years. Currently, we estimate 2010 charges totaling approximately $7.0 million related to real estate actions resulting from the closure of our Transitional School, AIU – Los Angeles, CA. Through December 31, 2009, we have recorded approximately $92.1 million of pretax charges associated with these real estate actions, with approximately $80.4 million being recorded in 2009. $5.3 million of the $80.4 million of pretax charges recorded in 2009 are reflected within the results from continuing operations. The remaining $75.1 million is reflected within the loss from discontinued operations for 2009.

The one remaining Transitional school, AIU – Los Angeles, CA is scheduled to cease operations by the end of the fourth quarter 2010. See Note 4 “Discontinued Operations” of the notes to our consolidated financial statements for further discussion of our accounting for discontinued operations.

2010 Organizational Realignment

On January 15, 2010, we realigned our resources to more effectively execute our new strategic growth plan. We began the integration of our Art & Design SBU alongside AIU and CTU, within the University SBU. This realignment will facilitate synergies between the programs in Art & Design and University, especially in the areas of fashion design, merchandising, interior design and technology. It will also enable the sharing of student-focused online platforms and expertise and aid IADT as it pursues its longer-term strategy of regional accreditation. Brooks Institute, Harrington College of Design and Collins College 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 Briarcliffe’s 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.

In addition to the realignment, we completed a detailed review of our shared service costs to determine which of these costs should be distributed 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. Previously, these costs, recorded within Corporate and other, were 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 will allocate evenly. The new methodology is intended to provide improved transparency into the costs of the shared services. The effect of these changes will impact the costs reported within each SBU and reduce the level of unallocated shared service costs. Results beginning in 2010 will be presented under the new methodology and prior period results will be revised to be comparable to the current reporting.

 

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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 years ended December 31, 2009, 2008 and 2007.

 

    For the Year Ended December 31,  
    2009     % of
Total
Revenue
    2008     % of
Total
Revenue
    2007     % of
Total
Revenue
 
    (Dollars in thousands)  

TOTAL REVENUE

  $ 1,836,635        $ 1,660,742        $ 1,668,274     
                             

OPERATING EXPENSES

           

Educational services and facilities

    611,748      33.3     605,474      36.5     585,996      35.1

General and administrative:

           

Advertising

    291,744      15.9     248,858      15.0     241,416      14.5

Admissions

    192,199      10.5     196,539      11.8     221,482      13.3

Administrative

    393,150      21.4     377,569      22.7     363,729      21.8

Bad Debt

    57,038      3.1     43,077      2.6     42,629      2.6
                             

Total general and administrative expense

    934,131      50.9     866,043      52.1     869,256      52.1

Depreciation and amortization

    65,652      3.6     71,636      4.3     73,532      4.4

Goodwill and asset impairment

    2,500      0.1     8,925      0.5     5,610      0.3
                             

OPERATING INCOME

    222,604      12.1     108,664      6.5     133,880      8.0
                             

PROVISION FOR INCOME TAXES

    78,663          38,525          49,726     
                             

Effective tax rate

    35.11       30.03       31.72  

INCOME FROM CONTINUING OPERATIONS

    145,382      7.9     89,762      5.4     107,039      6.4
                             

LOSS FROM DISCONTINUED OPERATIONS, net of tax

    (64,163       (29,620       (47,486  
                             

NET INCOME

  $ 81,219      4.4   $ 60,142      3.6   $ 59,553      3.6
                             

Educational services and facilities expense includes costs directly attributable to the educational activity 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.

Year Ended December 31, 2009 as Compared to the Year Ended December 31, 2008

Revenue

Total revenue increased $175.9 million, or 10.6%, as compared to the prior year as student population increased because student retention and new student start growth were strong. The overall increase in revenue is primarily attributable to increases within University, Health Education and International. Health Education’s and

 

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University’s revenues increased as compared to the prior year due to strong growth in student populations and increased new student starts, as well as University’s strong student retention. International’s increase in revenue as compared to the prior year can be attributed to strong student population growth, which more than offset the unfavorable impact of foreign currency exchange rates. The increase in revenue was partially offset by a decrease in Transitional Schools’ revenue.

Educational Services and Facilities Expense

Educational services and facilities expense increased $6.3 million as compared to the prior year. During 2009, we took steps to optimize our real estate footprint, and as a result, the current year expense includes $16.4 million of charges primarily related to the fair value of remaining lease obligations for space that was vacated within Culinary Arts, Health Education, Art & Design, University and Transitional Schools. The prior year expense includes $14.5 million of pretax charges, including $6.0 million of pretax charges related to lease termination expense, $5.6 million for the fair value of remaining lease obligations for vacated space in our Culinary Arts, Art & Design and University segments and $2.9 million for severance and stay bonuses associated with our decision to teach out certain campuses and our efforts to reduce redundancies within our organization. We continue to manage these costs, including occupancy costs, and focus our efforts on optimizing our staffing models as our revenue continues to grow across the Company.

General and Administrative Expense

General and administrative expense increased $68.1 million as compared to the prior year as increases in advertising, bad debt and administrative expenses were only partially offset by a decrease in admissions expense. The $42.9 million increase in advertising expense as compared to the prior year was driven by increased spending across all reporting segments, most notably within University, as we continue to capitalize upon market opportunities. The increase in administrative expense as compared to the prior year was mainly due to a $23.1 million increase in performance-based compensation expense, driven by outperformance of the Company’s annual business objectives and financial performance metrics related to its annual cash incentive plan being partially offset by a $12.0 million payment received related to the termination of certain insurance policies. The prior year expense included $10.8 million of pretax charges; $6.3 million related to the settlement of certain legal matters, and $4.5 million for severance and stay bonuses associated with our decision to teach out certain campuses and our efforts to reduce redundancies within our organization.

Bad debt expense incurred by each of our reportable segments during the years ended December 31, 2009 and 2008 was as follows:

 

     For the Year Ended December 31,  
     2009     As a % of
Segment
Revenue
    2008     As a % of
Segment
Revenue
 
     (Dollars in thousands)  

Bad debt expense by segment:

        

University

   $ 14,469      1.8   $ 12,722      1.8

Culinary Arts

     27,684      8.3     14,297      4.4

Health Education

     7,257      2.4     8,592      3.4

Art & Design

     7,385      2.8     7,035      2.7

International

     617      0.5     643      0.6

Transitional Schools

     14      0.5     100      1.0
                    

Subtotal

     57,426      3.1     43,389      2.6

Corporate and other

     (388   N/A        (312   N/A   
                    

Total bad debt expense

   $ 57,038      3.1   $ 43,077      2.6
                    

 

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Bad debt expense increased approximately $14.0 million as compared to the prior year, primarily within Culinary Arts, as student receivable balances grew as a result of our extended payment plans offered to certain students beginning in the second quarter 2008 as a replacement for the recourse loan program previously provided by Sallie Mae. This increase was partially offset by a decrease in Health Education bad debt expense resulting from increased student aid funding from government programs, as well as the overall improvement in student retention, as students who complete their educational programs have historically had better repayment experience.

Goodwill and Asset Impairment

During 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. During 2008, we recorded approximately $8.9 million in asset impairment charges, including a $2.1 million asset impairment charge related to the reduction of asset carrying values related to our AIU – Los Angeles campus, a noncash charge of $4.8 million related to write-offs due to the closure of facilities within Culinary Arts and a $2.0 million noncash write off of trade name in Health Education. Goodwill and indefinite-lived intangible assets are reviewed for impairment on at least an annual basis by applying a fair-value-based test. As of October 1, 2009, we determined that there was no impairment to goodwill or indefinite-lived intangible assets for any of our reportable segments.

Operating Income

Operating income increased $113.9 million, or approximately 105%, as compared to the prior year, as we experienced increased profitability across all of our reporting segments resulting from our ability to leverage our existing cost structure to support our revenue growth. Operating income for both 2009 and 2008 includes a number of significant items. 2009 operating income includes an additional $23.1 million associated with performance-based incentive programs resulting from plan outperformance of 2009 operating targets; $16.4 million of pretax charges related to the fair value of remaining lease obligations for space that was vacated within Culinary Arts, Health Education, Art & Design, University and Transitional Schools; and a $2.5 million asset impairment charge offset by the receipt of a $12.0 million termination payment. 2008 operating income includes $8.9 million of asset impairment charges, $7.4 million in severance and stay bonus expense, $6.0 million in lease exit costs, $5.6 million for the fair value of remaining lease obligations for vacated space and $6.3 million of net expense associated with legal settlements. Excluding these significant items in both 2009 and 2008, 2009 operating income increased 77% as compared to 2008.

Provision for Income Taxes

Our consolidated effective income tax rate for continuing operations was 35.1% for the year ended December 31, 2009 and 30.0% for the year ended December 31, 2008. The increase in our effective tax rate from the prior year was primarily due to the recording of a valuation allowance on the net operating losses of a foreign subsidiary, less non-profit income as a percentage of pretax income and a permanent tax benefit on the sale of a foreign entity in the prior year. In addition, the current year results include lower levels of tax-exempt interest as a percentage of pretax income. Finally, the prior year’s tax rate includes a higher level of reduction of tax reserves due to the expiration of the statute of limitations on international tax matters and the closing of a state income tax audit.

Loss from Discontinued Operations

The following campuses are reflected in discontinued operations for both current and prior period financial results: Brooks College – Sunnyvale and Long Beach, CA; International Academy of Design and Technology – Pittsburgh, PA (“IADT – Pittsburgh”); International Academy of Design and Technology – Toronto, Canada (“IADT – Toronto”); McIntosh College – Dover, NH; Lehigh Valley College – Center Valley, PA; and five of

 

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our Gibbs locations including Piscataway and Livingston, NJ, New York, NY, Norwalk, CT, and Norristown, PA. These campuses have ceased operations or have been sold. As the last campus within Transitional Schools ceases operations by the end of the fourth quarter 2010, we will reclassify its results of operations for all periods presented to discontinued operations. See Note 4 “Discontinued Operations” of the notes to our consolidated financial statements for further discussion of our discontinued operations.

Year Ended December 31, 2008 as Compared to the Year Ended December 31, 2007

Revenue

Total revenue decreased $7.5 million or 0.5% as compared to 2007. The overall decrease in revenue is primarily attributable to year-over-year declines in Culinary Arts, Art & Design and Transitional Schools, partially offset by increases in International and Health Education. Culinary Arts and Art & Design’s student populations declined in 2008 as compared to the prior year due in part to the loss of third-party student loan financing for certain students. This reduction in student populations resulted in lower revenue in 2008. International’s increased revenue as compared to the prior year can be attributed to strong student population growth, $5.7 million of favorable foreign currency exchange rates and $3.3 million of additional revenue in 2008 related to the acquisition of Istituto Marangoni at the end of January 2007. Health Education’s revenues increased as compared to the prior year due to strong growth in student populations and increased new student starts.

Educational Services and Facilities Expense

Educational services and facilities expense increased $19.5 million as compared to the prior year. During 2008, we took steps to optimize our real estate footprint and as a result, 2008 expense included $14.5 million in pretax charges, including $6.0 million related to lease termination expense and $5.6 million for the fair value of remaining lease obligations for vacated space in our Culinary Arts, Art & Design and University segments as well as $2.9 million pretax expense for severance and stay bonuses associated with our decision to teach out certain campuses and our efforts to reduce redundancies within our organization. In addition, academic costs increased as compared to the prior year to support the revenue growth within Health Education and International. International expenses were also negatively impacted by effects of foreign currency exchange rates.

General and Administrative Expense

General and administrative expense decreased $3.2 million as compared to the prior year. 2008 general and administrative expenses included $6.3 million net expense associated with the settlement of certain legal matters and $4.5 million in severance and stay bonuses associated with our decision to teach out certain campuses and our efforts to reduce redundancies within our organization. 2007 general and administrative expenses included approximately $14.8 million related to the settlement of certain legal matters.

 

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Bad debt expense incurred by each of our reportable segments during the years ended December 31, 2008 and 2007 was as follows:

 

     For the Year Ended December 31,  
     2008     As a % of
Segment
Revenue
    2007    As a % of
Segment
Revenue
 
     (Dollars in thousands)  

Bad debt expense by segment:

         

University

   $ 12,722      1.8   $ 15,363    2.2

Culinary Arts

     14,297      4.4     11,839    3.2

Health Education

     8,592      3.4     10,805    4.8

Art & Design

     7,035      2.7     4,131    1.5

International

     643      0.6     334    0.4

Transitional Schools

     100      1.0     18    0.1
                   

Subtotal

     43,389      2.6     42,490    2.5

Corporate and other

     (312   N/A        139    N/A   
                   

Total bad debt expense

   $ 43,077      2.6   $ 42,629    2.6
                   

The increase in bad debt expense as a percentage of segment revenue within Culinary Arts and Art & Design is a result of higher accounts receivable balances. The increase in the accounts receivable balances is due in part to the number of students participating in our extended payment plan programs. As these students are making smaller in-school payments, their respective accounts receivable balances are growing.

Goodwill and Asset Impairment

During 2008, we recorded approximately $8.9 million in asset impairment charges, including a $2.1 million asset impairment charge related to the reduction of asset carrying values related to our AIU – Los Angeles campus, a noncash charge of $4.8 million related to write-offs due to the close of facilities within Culinary Arts and a $2.0 million noncash write-off of a trade name in Health Education. During 2007, we recorded approximately $5.6 million in asset impairment charges related to the reduction in asset carrying values for certain campuses within Health Education.

Operating Income 

Operating income decreased $25.2 million, or 18.8%, as compared to the prior year, as revenue declined. Operating income for both 2008 and 2007 included a number of significant items. Operating income for 2008 included $34.2 million in pretax charges, including $8.9 million of asset impairment charges, $7.4 million in severance and stay bonus expense and $6.3 million of net expense associated with legal settlements, $6.0 million related to lease termination expense and $5.6 million for the fair value of remaining lease obligations for vacated space. 2007 operating income included $5.6 million in asset impairment charges and $14.8 million in expenses associated with legal settlements.

Provision for Income Taxes

Our consolidated effective income tax rate for continuing operations was 30.0% for the year ended December 31, 2008 and 31.7% for the year ended December 31, 2007. The decline in our effective income tax rate as compared to the prior year was primarily due to the recognition of a permanent tax benefit on the sale of a foreign entity, a higher percentage of our income from continuing operations resulting from certain operations in Europe that operate on a not-for-profit basis and the reduction of tax reserves due to the expiration of the statute of limitations on international tax matters and the closing of a state income tax audit. We identify items that are not normal and recurring in nature and treat these as discrete events. The tax effect of discrete items is booked

 

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entirely in the period in which the discrete event occurs. Additionally, tax legislation and tax examinations in the jurisdictions in which we do business may change our effective tax rate in future periods. While such changes cannot be predicted, if they occur, the impact on our tax assets, obligations and liquidity will need to be measured and recognized in the financial statements.

SEGMENT RESULTS

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 Year Ended December 31,  
     REVENUE  
     2009     2008    2007    2009 vs 2008
% Change
    2008 vs 2007
% Change
 
     (Dollars in thousands)             

University

   $ 811,420      $ 702,347    $ 703,639    15.5   -0.2

Culinary Arts

     332,236        328,313      365,789    1.2   -10.2

Health Education

     306,286        249,171      225,335    22.9   10.6

Art & Design

     263,179        263,715      275,392    -0.2   -4.2

International

     121,188        107,558      81,907    12.7   31.3

Transitional Schools

     2,838        9,629      16,065    -70.5   -40.1
                          

Subtotal

     1,837,147        1,660,733      1,668,127    10.6   -0.4

Corporate and other

     (512     9      147     
                          

Total

   $ 1,836,635      $ 1,660,742    $ 1,668,274    10.6   -0.5
                          

 

     For the Year Ended December 31,  
     OPERATING INCOME (LOSS)     OPERATING MARGIN (LOSS)  
     2009     2008     2007       2009         2008         2007    
     (Dollars in thousands)                    

University

   $ 177,727      $ 122,757      $ 102,371      21.9   17.5   14.5

Culinary Arts

     18,486        (5,908     49,133      5.6   -1.8   13.4

Health Education

     55,171        20,646        692      18.0   8.3   0.3

Art & Design

     32,599        28,057        32,499      12.4   10.6   11.8

International

     18,853        18,856        12,981      15.6   17.5   15.8

Transitional Schools

     (10,051     (5,928     (11,389   N/A      -61.6   -70.9
                              

Subtotal

     292,785        178,480        186,287      15.9   10.7   11.2

Corporate and other

     (70,181     (69,816     (52,407      
                              

Total

   $ 222,604      $ 108,664      $ 133,880      12.1   6.5   8.0
                              

 

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     For the year ended December 31,  
     NEW STUDENT STARTS  
                    % Change  
     2009    2008    2007    2009 vs. 2008     2008 vs. 2007  

University

   61,900    55,500    52,200    12   6

AIU

   28,000    26,500    25,800    6   3

Online

   24,600    23,400    22,500    5   4

On-ground

   3,400    3,100    3,300    10   -6

CTU

   32,600    27,800    25,100    17   11

Online

   28,500    24,100    21,800    18   11

On-ground

   4,100    3,700    3,300    11   12

Briarcliffe

   1,300    1,200    1,300    8   -8

Culinary Arts

   14,000    10,000    11,700    40   -15

On-ground

   13,800    10,000    11,700    38   -15

Online

   200    —      —      N/A      N/A   

Health Education

   24,800    19,200    17,200    29   12

Art & Design

   9,700    9,000    9,300    8   -3

On-ground

   8,100    7,800    8,900    4   -12

Online

   1,600    1,200    400    33   200

International

   8,100    7,500    6,500    8   15
                   

Subtotal

   118,500    101,200    96,900    17   4

Transitional Schools

   —      100    400    -100   -75
                   

Total new student starts

   118,500    101,300    97,300    17   4
                   

Year Ended December 31, 2009 as Compared to the Year Ended December 31, 2008

University’s operating results for the years ended December 31, 2009 and 2008 are as follows:

 

     Revenue     Operating Income (Loss)     Operating Margin (Loss)  
     2009    2008    % Change         2009             2008             2009             2008      
     (Dollars in thousands)  

AIU

   $  409,043    $  374,699    9.2   $ 90,672      $ 59,152      22.2   15.8

Online

     336,487      298,281    12.8     103,339        72,844      30.7   24.4

On-ground

     72,556      76,418    -5.1     (12,667     (13,692   -17.5   -17.9

CTU

     368,621      294,409    25.2     86,017        62,719      23.3   21.3

Online

     305,280      240,652    26.9     87,894        63,311      28.8   26.3

On-ground

     63,341      53,757    17.8     (1,877     (592   -3.0   -1.1

Briarcliffe

     33,756      33,239    1.6     1,038        886      3.1   2.7
                                    

Total University

   $ 811,420    $ 702,347    15.5   $ 177,727      $ 122,757      21.9   17.5
                                    

University. Current year revenue increased $109.1 million, or 15.5%, as compared to the prior year primarily due to revenue growth in University’s Online platforms. An increase in new student starts of approximately 12% combined with strong student retention drove an increase of approximately 23% in student population as compared to the prior year.

Current year operating income increased by $55.0 million, or 44.8%, as compared to the prior year as increases in revenue more than offset higher levels of advertising expended to continue to support the institutions. Current year operating income also included approximately $4.7 million in pretax charges related to the remaining lease obligations for certain facilities.

 

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Culinary Arts. Current year revenue increased $3.9 million, or 1.2%, as compared to the prior year. This increase was due to an increase in student population resulting from the introduction of a 21-month Culinary program in the first quarter 2009 along with the continued offering of extended payment plans to assist our students in financing their education. These actions, along with the addition of two campuses that opened after the first quarter 2008, contributed to the 40% increase in new student starts as compared to the prior year. Student retention rates improved as compared to the prior year, as we continue to focus on ensuring student success.

Culinary Arts’ current year operating income increased $24.4 million as compared to the prior year. The prior year operating loss included $15.2 million in lease exit and related asset impairment pretax charges associated with the exit of a dormitory and other facility and a $7.6 million pretax charge associated with the settlement of certain legal matters. Excluding these significant items in the prior year, Culinary’s operating income increased approximately $1.6 million over the prior year. Reductions in administrative expenses and higher revenue were offset by higher bad debt expense as student receivable balances increased for those students utilizing extended payment plans to finance their education.

During the third quarter 2009, the Company acquired the rights to the Le Cordon Bleu brand in the education and services field for the U.S. and Canada. We acquired the rights to further our execution of our strategic plan, as it solidifies a core asset essential to the future growth of our Culinary Arts segment. The purchase price of the acquired rights consisted of $25.0 million in cash, 3.0 million shares of CEC common stock valued at $71.3 million, and a 30-month earnout payment based upon Culinary Arts tuition fee revenue estimated at $43.0 million. The acquisition is expected to result in annual operating expense savings of approximately $15.0 million to $20.0 million from the elimination of royalty payments from the effective date of the agreement.

Health Education. Current year revenue increased $57.1 million, or 22.9%, as compared to the prior year due to an increase in student population resulting from a 29% increase in new student starts, as well as a strong carry-in student population from the fourth quarter 2008. Health Education’s current year revenue is also benefitted from strong student retention.

Health Education increased its operating income by $34.5 million, over 167%, as compared to the prior year and profit margin grew from 8.3% to 18.0%. Health Education continued its focus on increasing productivity and operating leverage across its campuses. Seven new campuses were started within Health Education in 2009, with two of these campuses being conversions of existing Transitional Schools which were expected to close in 2009. Prior year operating income included a $2.0 million intangible asset impairment charge for the write-off of the Western School of Health & Business Careers’ trade name. Excluding start-up campuses, Health Education increased its operating margin by $43.0 million, over 193%, as compared to prior year and the operating margin grew from 9.2% to 21.6%.

Art & Design. Current year revenue remained consistent as compared to the prior year. A shift in calendars contributed approximately $6.9 million of additional revenue to the current year, which was offset by a decline in revenue per student resulting from students taking fewer credits per term as compared to the prior year.

Art & Design’s current year operating income increased $4.5 million, or 16.2%, as compared to the prior year driven by the lower operating expenses, which more than offset an increase in advertising expense. Admissions, administrative and academics expenses decreased as compared to the prior year as a result of the introduction of standard staffing models at the end of 2008.

International. Current year revenue increased $13.6 million, or 12.7%, as compared to the prior year driven by an 8% increase in new student starts over the prior year. Excluding a $7.3 million unfavorable impact of foreign currency exchange rates, revenues would have increased 19.4%.

 

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Operating income remained stable as compared to the prior year, as the increase in revenue was more than offset by higher operating expenses. Current year operating income included a $3.0 million pretax charge resulting from the correction of an error in prior periods attributed to accounting for the differences between local accounting policies and U.S. generally accepted accounting principles. Current year operating income also includes approximately $1.2 million related to unfavorable foreign currency exchange rates.

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 as compared to the prior year due to the current year including a $5.3 million pretax charge for the fair value of remaining lease obligations for vacated space.

Corporate and other. This category includes costs that are incurred on behalf of the entire company, including costs attributable to legal, finance, human resources, marketing and certain centralized activities related to student financing, including financial aid processing, student account posting and collections. We allocate a portion of these expenses to our strategic business units based upon a percentage of revenue. Corporate and other costs remained relatively consistent as compared to the prior year as higher revenue within the strategic business units drove a higher allocation of costs from Corporate and other to the SBU’s. Current year expense includes an additional $12.4 million associated with performance-based incentive programs resulting from plan outperformance of 2009 operating targets which was offset by the receipt of $12.0 million related to the termination of certain insurance policies.

Year Ended December 31, 2008 as Compared to the Year Ended December 31, 2007

University’s operating results for the years ended December 31, 2008 and 2007 are as follows:

 

     Revenue     Operating Income (Loss)     Operating Margin (Loss)  
     2008    2007    % Change         2008             2007             2008             2007      
     (Dollars in thousands)  

AIU

   $ 374,699    $ 399,720    -6.3   $ 59,152      $ 58,084      15.8   14.5

Online

     298,281      311,322    -4.2     72,844        74,252      24.4   23.9

On-ground

     76,418      88,398    -13.6     (13,692     (16,168   -17.9   -18.3

CTU

     294,409      266,964    10.3     62,719        44,172      21.3   16.5

Online

     240,652      216,432    11.2     63,311        44,019      26.3   20.3

On-ground

     53,757      50,532    6.4     (592     153      -1.1   0.3

Briarcliffe

     33,239      36,955    -10.1     886        115      2.7   0.3
                                    

Total University

   $ 702,347    $ 703,639    -0.2   $ 122,757      $ 102,371      17.5   14.5
                                    

University. Current year revenue was down slightly compared to the prior year as growth in University’s online platforms was offset by declines in the on-ground universities. Average revenue per student declined as compared to the prior year primarily due to growth in the student population in the University’s fully-online associate degree programs, which maintain lower tuition rates than bachelor’s degree and master’s degree programs. This decline was partially offset by increases in student population and revenue in CTU’s online and on-ground platforms.

Current year operating income increased by $20.4 million, or 19.9%, as compared to the prior year. Operating profit margin improved both within our on-ground and online platforms. The operating income improvement as compared to the prior year is primarily due to a reduction in admissions expense resulting from actions taken to improve productivity within our admissions process.

 

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Culinary Arts. Current year revenue declined $37.5 million, or 10.2%, as compared to the prior year primarily due to a decrease in average student population primarily due to the loss of third-party student loan financing for certain students. 2008 starts were down 15% as compared to the prior year. The introduction of our extended payment plans during the second quarter 2008 along with the increased Title IV funding led to increases in student starts in the fourth quarter of 2008; however, this improvement was not enough to overcome the shortfalls experienced earlier in the year.

Culinary Arts’ current year operating loss includes $15.2 million in lease exit and related asset impairment charges associated with the exit of a dormitory and other facility and a $7.6 million charge associated with the settlement of certain legal matters. These charges, in addition to the significant decline in revenue as compared to the prior year and an increase in bad debt expense, led to the decline in operating results in the current year.

Health Education. Current year revenue increased $23.8 million, or 10.6%, due to strong growth in student population of 13% associated with increased student starts of 12%, as compared to the prior year. Health Education’s current year revenue is also benefiting from a decrease in student attrition and improved completion rates of programmatic studies.

Health Education increased its operating income by $20.0 million and expanded its operating margin by 800 basis points as compared to the prior year. The increase was driven by increased revenue and lower administration costs, as well as lower bad debt expense. Health Education continued to focus its efforts in 2008 on improving productivity and operating leverage. Bad debt expense declined due to improved collection efforts at the school level. The 2008 operating income includes a $2.0 million intangible asset impairment charge as a result of changing the name of two of our campuses from Western School of Health and Business Careers to Sanford-Brown Institute. 2007 operating income includes $5.6 million of asset impairment charges recorded for several campuses that were previously held for sale, as well as a $6.5 million charge related to the settlement of a legal matter.

Art & Design. Current year revenue declined $11.7 million, or 4.2%, as compared to the prior year due to a reduction in student starts and related population. Lower student starts related to the elimination of third-party student loan financing for certain prospective students and a higher level of attrition in the current year as compared to the prior year account for the decreases. These impacts are being partially offset by the growth in revenue of the newer campuses, IADT Sacramento – Sacramento, CA, IADT San Antonio – San Antonio, TX and the fully-online campus of IADT. Excluding the positive revenue impact of these three campuses, Art & Design revenue would have been down approximately 10% as compared to the prior year.

Art & Design’s current year decline in operating income of $4.4 million, or 13.7%, as compared to the prior year was driven by lower revenue and increased bad debt expense as compared to the prior year. More students within Art & Design are utilizing extended payment plans to help fund their education. The estimated bad debt expense related to these extended payment plans is higher than for other funding sources, and as a result, bad debt expense as a percentage of revenue increased over the prior year. The prior year operating income also included a $4.1 million charge related to the settlement of a legal matter.

International. Current year revenue increased $25.7 million, or 31.3%, as compared to the prior year. The increase in revenue as compared to the prior year is driven by strong student population growth. Additionally, the current year revenue includes approximately $5.7 million due to favorable foreign currency exchange rates and $3.3 million of additional revenue in the first quarter 2008 as compared to the prior year period due to the acquisition of Istituto Marangoni at the end of January 2007.

Operating income increased $5.9 million, or 45.3%, as compared to the prior year. Higher utilization of facilities and faculty members contributed to the operating income and margin expansion as compared to the prior year. Current year operating income also includes approximately $1.0 million related to favorable foreign currency exchange rates.

 

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Transitional Schools. Current year revenue declined as compared to the prior year due to the school no longer enrolling students. 2008 operating loss includes $2.1 million of asset impairment charges. 2007 operating loss includes $4.2 million related to legal settlements.

Corporate and other. This category includes costs that are incurred on behalf of the entire company, including costs attributable to legal, finance, human resources, marketing and certain centralized activities related to student financing, including financial aid processing, student account posting and collections. We allocate a portion of these expenses to our strategic business units based upon a percentage of revenue. The current year increase in expenses within corporate and other as compared to the prior year is primarily due to increased compensation costs as we continue to centralize various support functions across the Company. In addition, the current year expense includes an additional $10.9 million associated with performance-based incentive programs resulting from our attainment of 2008 operating performance targets.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES

We have identified the accounting policies and estimates listed below as those that we believe require management’s most subjective and complex judgments in estimating the effect of inherent uncertainties. This section should be read in conjunction with Note 2 “Summary of Significant Accounting Policies” of the notes to our consolidated financial statements which includes a discussion of these and other significant accounting policies.

Revenue Recognition

Our revenue is derived primarily from academic programs taught to students who attend our schools. We generally segregate our revenue into two categories: (1) tuition and registration fees and (2) other. Tuition and registration fees represent costs to our students for educational services provided by our schools. We generally bill a student for a one-time registration fee at the beginning of the student’s program and we recognize the registration fee revenue on a straight-line basis over that program period, which includes any applicable externship period. We generally bill student tuition fees at the beginning of each academic term, and we recognize the tuition fees as revenue on a straight-line basis over either the academic term or program period, which includes any applicable externship period. The tuition fees earnings method is determined by the type of program a student is enrolled in. Typically, schools that offer our Culinary Arts and some of our allied health programs earn tuition fees over the entire course of the program while the remainder of our schools earn tuition fees over each academic term. The portion of tuition and registration fees payments received from students but not earned is recorded as deferred tuition revenue and reflected as a current liability on our consolidated balance sheet, as such amounts represent revenue that we expect to earn within the next year. If a student withdraws from one of our schools prior to the completion of the academic term or program period, we refund the portion of tuition and registration fees already paid that, pursuant to our refund policy and applicable federal and state law and accrediting agency standards, we are not entitled to retain.

Our schools’ academic year is generally at least 30 weeks in length but varies both by school and program of study and is divided by academic terms or payment periods. Academic terms or payment periods are determined by regulatory requirements mandated by the federal government and /or appropriate accrediting body, which also vary by school and program. Academic terms are determined by start dates, which also vary by school and program. Our schools charge tuition at varying amounts, depending on the school, the type of program and specific curriculum. Our students finance costs through a variety of funding sources, including, among others, federal loan and grant programs, school payment plans, private loans and grants, private and institutional scholarships, and cash payments.

Other revenue consists of, among other things, bookstore sales, student laptop computer sales, dormitory revenue, restaurant revenue, and cafeteria revenue. Revenue derived from dormitory and cafeteria services is generally billed to a student at the beginning of an academic term and is recognized on a straight-line basis over

 

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the term of a student’s dormitory and cafeteria use. Other dormitory and cafeteria revenue, as well as student laptop computer sales, bookstore sales, and restaurant revenue, is billed and recognized as services are performed or goods are delivered.

Certain of our schools bill students a single charge that covers tuition and required program materials, such as textbooks and supplies. Such billings, which we treat as a single accounting unit, are recognized as tuition and registration fee revenue on a straight-line basis over the applicable academic term or program period.

Allowance for Doubtful Accounts

We extend unsecured credit to a portion of the students who are enrolled at our schools for tuition and certain other educational costs. Based upon past experience and judgment, we establish an allowance for doubtful accounts with respect to student receivables. Our allowance estimation methodology considers a number of factors that, based on our collections experience, we believe have an impact on students’ credit risk and the realizability of our student receivables. Among these factors are a student’s status (in-school or out-of-school), anticipated funding source (for example, federal loan or grant, state grant, private loan, student cash payments, etc.), whether or not an out-of-school student has completed his or her program of study, and our overall collections experience. Out-of-school students include students who have withdrawn from or completed their programs of study. All other students are classified as in-school students.

We monitor our collections and write-off experience to assess whether adjustments to our allowance percentage estimates are necessary. Changes in trends in any of the factors that we believe impact the realizability of our student receivables, as noted above, or modifications to our credit standards, collection practices, and other related policies may impact our estimate of our allowance for doubtful accounts and our financial results.

A one percentage point change in our allowance for doubtful accounts as a percentage of gross student receivables from continuing operations as of December 31, 2009, would have resulted in a change in income from continuing operations of $1.3 million during the year then ended.

Because a substantial portion of our revenue is derived from Title IV Programs, any legislative or regulatory action that significantly reduces the funding available under Title IV Programs, or the ability of our students or schools to participate in Title IV Programs, would likely have a material adverse effect on our business, results of operations, cash flows, and financial condition, including the realizability of our receivables.

Goodwill and Indefinite-Lived Intangible Assets

Goodwill represents the excess of cost over fair market value of identifiable net assets acquired through business purchases. In accordance with Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) Topic 350 – Intangibles-Goodwill and Other, we review goodwill and indefinite-lived intangible assets for impairment on at least an annual basis by applying a fair-value-based test. In evaluating the recoverability of the carrying value of goodwill and other indefinite-lived intangible assets, we must make assumptions regarding the fair value of our reporting units, as defined under FASB ASC Topic 350. If our fair value estimates or related assumptions change in the future, we may be required to record impairment charges related to goodwill and other indefinite-lived intangible assets.

In performing our annual review of goodwill balances for impairment, we estimate the fair value of each of our reporting units based primarily on projected future operating results and cash flows and other assumptions. Projected future operating results and cash flows used for valuation purposes may reflect considerable improvements relative to historical periods with respect to, among other things, revenue growth and operating margins. Although we believe our projected future operating results and cash flows and related estimates regarding fair values are based on reasonable assumptions, historically projected operating results and cash flows

 

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have not always been achieved. The failure of one of our reporting units to achieve projected operating results and cash flows in the near term or long term may reduce the estimated fair value of the reporting unit below its carrying value and result in the recognition of a goodwill impairment charge. We monitor the operating results and cash flows of our reporting units on a quarterly basis for signs of possible declines in estimated fair value and goodwill impairment. See Note 8 “Goodwill and Other Intangible Assets” of the notes to our consolidated financial statements for further discussion of goodwill impairment considerations and related charges we recognized during the year ended December 31, 2009.

Long-Lived Assets

On an ongoing basis, we review property and equipment, definite-lived intangible assets, and other long-lived assets for impairment whenever events or circumstances indicate that carrying amounts may not be recoverable. If such events or changes in circumstances occur, we will recognize an impairment loss if the undiscounted future cash flows expected to be generated by the asset is less than the carrying value of the related asset. The impairment loss would adjust the asset to its estimated fair value.

In evaluating the recoverability of long-lived assets, we must make assumptions regarding estimated future cash flows and other factors to determine the estimated fair value of such assets. If our fair value estimates or related assumptions change in the future, we may be required to record impairment charges related to long-lived assets and definite-lived intangible assets. See Note 7 “Property and Equipment” of the notes to our consolidated financial statements for further discussion of long-lived asset impairment considerations and related charges we recognized during the year ended December 31, 2009.

Income Taxes

We account for income taxes in accordance with FASB ASC Topic 740 – Income Taxes. This requires the recognition of deferred income taxes based upon the tax consequences of temporary differences between financial reporting and income tax reporting by applying enacted statutory income tax rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. Topic 740 also requires that deferred income tax assets be reduced by a valuation allowance if it is more likely than not that some portion of the deferred income tax asset will not be realized.

In connection with the preparation of our consolidated financial statements, we are required to estimate our income tax liability for each of the tax jurisdictions in which we operate. This process involves estimating our actual current income tax expense and assessing temporary differences resulting from differing treatment of certain income or expense items for income tax reporting and financial reporting purposes. We also recognize as deferred income tax assets the expected future income tax benefits of net operating loss carry forwards. In evaluating the realizability of deferred income tax assets associated with net operating loss carry forwards, we consider, among other things, expected future taxable income, the expected timing of the reversals of existing temporary reporting differences, and the expected impact of tax planning strategies that may be implemented to prevent the potential loss of future income tax benefits. Changes in, among other things, income tax legislation, statutory income tax rates, or future taxable income levels could materially impact our valuation of income tax assets and liabilities and could cause our income tax provision to vary significantly among financial reporting periods.

FASB ASC Topic 740 further clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in an income tax return. Topic 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The initial application of this guidance to our tax positions had no effect on our stockholders’ equity.

 

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LIQUIDITY, FINANCIAL POSITION, AND CAPITAL RESOURCES

As of December 31, 2009, cash, cash equivalents, and short-term investments totaled $484.9 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 consolidated balance sheet until all restrictions have lapsed with respect to those balances. As of December 31, 2009 and 2008, the amount of restricted cash balances recorded in separate cash accounts was not significant. Also included in cash and cash equivalents within our 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 $49.9 million and $48.8 million at December 31, 2009 and December 31, 2008, 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 years ended December 31, 2009 and 2008, net cash flows provided by operating activities totaled $288.3 million and $186.7 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. The following table summarizes our U.S. schools’ cash receipts from tuition payments by fund source as a percentage of total tuition payments received for the years ended December 31, 2009, 2008 and 2007. The percentages reflected therein were determined based upon our U.S. schools’ cash receipts for the 12-month period ended December 31.

 

     For the Year Ended
December 31,
 
     2009     2008     2007  

Title IV Program funding

      

Stafford Loans

   56.3   50.4   44.1

Grants

   18.8   13.8   11.5

PLUS Loans

   5.0   5.0   7.1
                  

Total Title IV Program funding

   80.1   69.2   62.7
                  

Private loans

   2.1   10.0   17.6

Scholarships, grants and other

   4.5   4.3   3.7

Cash payments

   13.3   16.5   16.0
                  

Total tuition receipts

   100.0   100.0   100.0
                  

 

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The total Title IV Program funding as a percentage of total tuition receipts reflected above was not computed on the same basis on which our 90-10 Rule ratios are computed. In accordance with applicable regulations, certain tuition receipts included in the totals above were excluded from our 90-10 Rule ratio calculations.

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” of this Annual Report on Form 10-K.

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 11 “Commitments and Contingencies” of the notes to our consolidated financial statements for additional discussion of these matters.

Investing Cash Flows

During the years ended December 31, 2009 and 2008, net cash flows used in investing activities totaled $49.3 million and $150.8 million, respectively. The decrease in the cash outflows attributed to investing activities was primarily driven by a higher level of stock repurchase activity in 2009, which was funded by the sale of available-for-sale investments and operating cash flows. During 2009, we repurchased 9.0 million of our common stock for approximately $200.0 million as compared to 1.0 million shares of common stock being repurchased in 2008 for approximately $13.8 million.

Capital Expenditures. Capital expenditures increased $20.2 million, or 37.6%, from $53.9 million during the year ended December 31, 2008, to $74.1 million during the year ended December 31, 2009. Capital expenditures represented 4.0% and 3.1%, respectively, of total revenue from continuing and discontinued operations during the years ended December 31, 2009 and 2008, respectively. Capital expenditures increased in 2009 to support the opening of eight new campuses.

Acquisition of Le Cordon Bleu Tradename. 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 remaining 26-month period as of December 31, 2009. As of December 31, 2009, we have made approximately $1.3 million in earnout payments.

Acquisition of Istituto Marangoni. On January 25, 2007, we acquired 100% of the issued and outstanding stock of Istituto Marangoni for approximately $37.2 million, excluding acquired cash balances of approximately $6.9 million. The purchase price was funded with cash generated from operating activities.

Purchases and Sales of Available-for-Sale Investments. Purchases and sales of available-for-sale investments resulted in a net cash inflow of $51.2 million and a net cash outflow of $97.3 million during the years ended December 31, 2009 and 2008, respectively.

 

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Financing Cash Flows

During the years ended December 31, 2009 and 2008, net cash flows used in financing activities totaled $199.2 million and $21.0 million, respectively.

Credit Agreement. As of December 31, 2009, we had no outstanding debt under our U.S. Credit Agreement and letters of credit totaling approximately $10.1 million. The credit availability under our U.S. Credit Agreement as of December 31, 2009 was $174.9 million. See Note 9 “Credit Agreements” of the notes to our consolidated financial statements for additional discussion of our outstanding credit agreement.

Repurchases of Stock. During the year ended December 31, 2009, we repurchased approximately 9.0 million shares of our common stock for approximately $200.0 million at an average price of $22.23 per share. During the year ended December 31, 2008, we repurchased approximately 1.0 million shares of our common stock for approximately $13.8 million at an average price of $13.84 per share. Repurchases of stock during 2009 and 2008 were funded by cash generated from operating activities and the sale of available-for-sale investments.

As of December 31, 2009, approximately $195.5 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.

On December 14, 2009, we entered into a stock repurchase plan established in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the “1934 Act”), in connection with our previously authorized stock repurchase program. A Rule 10b5-1 plan allows a company to repurchase its shares at times when it otherwise might be unable to do so under the 1934 Act’s insider trading rules. This stock repurchase plan facilitated purchases of our common shares under our previously authorized stock repurchase program. Purchases of common stock under this plan were subject to specified parameters and certain price and volume restraints as established in the plan. As of January 31, 2010, our designated broker repurchased on our behalf an additional 1.7 million shares of our common stock for $40.0 million at an average price of $23.49 per share under this plan. As a result, approximately $155.5 million was available under our previously authorized stock repurchase program to repurchase outstanding shares of our common stock as of January 31, 2010.

On February 16, 2010, the Board of Directors authorized the use of an additional $250.0 million to repurchase outstanding shares of its common stock under the company’s stock repurchase program. This is in addition to the $155.5 million still available under our previously authorized stock repurchase program, bringing the amount available under our authorized stock repurchase program to $405.5 million. Stock repurchases under this program may be made on the open market or in privately negotiated transactions from time to time, depending on 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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Contractual Obligations

As of December 31, 2009, future minimum cash payments due under contractual obligations, including, among others, non-cancelable operating and capital lease agreements, and other long-term arrangements, were as follows:

 

     2010    2011    2012    2013    2014    2015 &
Thereafter
   Total
     (Dollars in thousands)

Operating lease obligations

   $ 131,673    $ 117,590    $ 108,695    $ 104,641    $ 95,759    $ 275,045    $ 833,403

Capital lease obligations(1)

     892      953      1,063      234      —        —        3,142
                                                

Total contractual cash obligations(2)

   $ 132,565    $ 118,543    $ 109,758    $ 104,875    $ 95,759    $ 275,045    $ 836,545
                                                

 

(1) The capital lease obligations include both the future principal payment amount as well as an amount calculated for expected future interest payments.
(2) Due to uncertainty regarding the completion of tax audits and possible outcomes, we do not know the timing of when our obligations related to unrecognized tax benefits will occur, if at all. See Note 12 “Income Taxes” of the notes to our consolidated financial statements for additional detail.

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 December 31, 2009, $41.7 million of the earnout remained outstanding. Future adjustment to the earnout may be warranted as the actual tuition fee revenue may vary from the current estimate.

Operating Lease Obligations. We lease most of our administrative and educational facilities and equipment under non-cancelable operating leases expiring at various dates through 2028. Lease terms generally range from five to ten years with one to two renewal options for extended terms. The amounts included in the table above represent future minimum lease payments for non-cancelable operating leases for continuing operations and discontinued operations.

Effective January 19, 2010, we entered into a real estate lease for our corporate headquarters and administrative facilities for both our AIU Online and CTU Online campuses in Schaumburg, Illinois. We will be consolidating our headquarters facilities from the current five buildings to a single building. We will reduce our total headquarters footprint by 0.13 million square feet which we believe will maximize efficiencies and reduce overhead expenses. The lease for this new location results in a $48.1 million real estate obligation through 2022. In addition, we intend to make capital improvements to the new headquarters totaling approximately $52.0 million over the next two years, with the majority of the investment expected in 2010. As a result of the real estate consolidation, we expect to incur approximately $5.4 million of lease termination costs related to our existing space. These charges are expected to be incurred in the first half of 2010.

Capital Lease Obligations. We have assumed capital lease obligations in connection with certain acquisitions as well as financed certain equipment purchases under capital lease arrangements. As of December 31, 2009, the balance of outstanding capital lease obligations was approximately $3.1 million, which includes accrued interest of approximately $0.1 million.

Off-Balance Sheet Arrangements. As of December 31, 2009, we were not a party to any off-balance sheet financing or contingent payment arrangements, nor do we have any unconsolidated subsidiaries.

 

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Changes in Financial Position—December 31, 2009 compared to December 31, 2008

Selected consolidated balance sheet account changes from December 31, 2008, to December 31, 2009, were as follows:

 

     As of December 31,  
     2009    2008    % Change  
     (Dollars in thousands)  

Assets

        

Current Assets:

        

Total cash and cash equivalents and short-term investments

   $ 484,852    $ 493,932    -2

Student receivables, net of allowance for doubtful accounts

     57,823      50,829    14

Non-Current Assets:

        

Intangible assets, net

     178,520      39,904    347

Student receivables, net of allowance for doubtful accounts

     21,455      16,651    29

Liabilities

        

Current Liabilities:

        

Accounts payable

     51,108      27,606    85

Accrued expenses:

        

Payroll and related benefits

     88,439      60,142    47

Income taxes

     17,849      29,225    -39

Earnout payments

     18,009      —      100

Deferred tuition revenue

     184,411      151,158    22

Non-Current Liabilities:

        

Liabilities of discontinued operations

     62,997      16,404    284

Earnout payments

     23,680      —      100

Total Stockholders’ Equity

     921,524      947,652    -3

Cash and cash equivalents and short-term investments: The decrease in cash and cash equivalents and investments is due to increases in stock repurchases in 2009 as compared to 2008, partially offset by increased operating cash flows.

Current Assets – Student receivables, net of allowance for doubtful accounts: The increase is mainly attributable to the growth in student population and increased usage of extended payment plans as compared to the prior year. Beginning in 2009, we have classified the long-term portion of our student receivables balances, including the outstanding net recourse loan receivable balances, within the non-current assets section of the consolidated balance sheets. Prior period balances have been reclassified to be comparable with the current presentation.

Non-Current Assets – Intangible assets, net: The $138.6 million increase primarily relates to trade names and is driven by the purchase of the rights to Le Cordon Bleu brand in the U.S. and Canada.

Non-Current Assets – Student receivables, net of allowance for doubtful accounts: Previously, our receivables balances were presented as student receivables, net of allowance for doubtful accounts, within current assets on our consolidated balance sheets. The long-term portion of our student receivables balances, including the outstanding net recourse loan receivable balances, are now included in the non-current assets component of student receivables, net, within our consolidated balance sheets to better reflect the timing of when these receivables become due. The increase is primarily driven by increased usage of extended payment plans.

Accounts Payable: The $23.5 million increase is due to the timing of receipts of certain invoices as well as effective management of our working capital.

 

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Accrued expenses – Payroll and related benefits: The increase in the payroll and related benefits liabilities is primarily due to increases in our performance-based annual cash incentive programs.

Accrued expenses – Income taxes: The $11.4 million decrease is mainly due to payments of federal and state taxes relating to 2008, as well as estimated taxes and state refunds.

Accrued expenses – Earnout payments: The $18.0 million increase is primarily driven by the purchase of the rights to the Le Cordon Bleu North America brand, which includes estimated earnout payments due in the next twelve months or less.

Deferred Tuition Revenue – The increase in deferred tuition revenues is primarily driven by increases in student population.

Non-current liabilities – Liabilities of discontinued operations: The increase in liabilities of discontinued operations is primarily attributable to the closure of campuses in 2009 and the related unused space charges.

Non-current liabilities – Earnout payments: The increase of $23.7 million relates to the purchase of the rights to the Le Cordon Bleu North America brand, which includes estimated deferred payments due in periods that extend further than twelve months.

Total stockholders’ equity – Although retained earnings increased as a result of net income, total stockholders’ equity decreased as the increase in cost of shares in treasury driven by stock repurchases more than offset the decrease in cost of shares in treasury associated with the Le Cordon Bleu North America trade name acquisition.

Litigation and Regulatory Matters

See Note 11 “Commitments and Contingencies” of the notes to our consolidated financial statements for a discussion of selected litigation and regulatory matters affecting our business.

Recent Accounting Pronouncements

See Note 3 “Recent Accounting Pronouncements” of the notes to our consolidated financial statements for a discussion of recent accounting pronouncements that may affect us.

 

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ITEM 6A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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 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 December 31, 2009, 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 an unrealized loss reflected within other comprehensive income on our consolidated balance sheet in the fourth quarter 2009 of approximately $0.7 million.

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 December 31, 2009 and 2008, we had no outstanding borrowings under this agreement.

Our investments and debt instruments are recorded at their fair values as of December 31, 2009 and 2008. We believe that the exposure of our 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. Our investment in our foreign operations as of December 31, 2009, was not significant to our consolidated financial position.

We believe that the exposure of our consolidated financial position and results of operations and cash flows to adverse changes in foreign currency exchange rates is not significant.

 

ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial information required by Item 7 is contained in Part IV, Item 14 of this Annual Report on Form 10-K.

 

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

 

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ITEM 8A. CONTROLS AND PROCEDURES

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 December 31, 2009, 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.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2009, 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.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) under the Exchange Act to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles.

Based upon the evaluation under the framework contained in the COSO Report, management concluded that, as of December 31, 2009, our internal control over financial reporting was effective.

 

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Ernst & Young LLP, our independent registered public accounting firm, who audited and reported on the consolidated financial statements included in this Annual Report on Form 10-K, has issued an attestation report on the effectiveness of our internal control over financial reporting. This attestation report is included on page 76 of this Annual Report on Form 10-K.

 

ITEM 8B. OTHER INFORMATION

None.

 

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PART III

 

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this item is incorporated herein by reference to our definitive Proxy Statement to be filed in connection with our 2010 Annual Meeting of Stockholders.

 

ITEM 10. EXECUTIVE COMPENSATION

The information required by this item is incorporated herein by reference to our definitive Proxy Statement to be filed in connection with our 2010 Annual Meeting of Stockholders.

 

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Certain of the information required by this item is incorporated herein by reference to our definitive Proxy Statement to be filed in connection with our 2010 Annual Meeting of Stockholders.

The following table provides information as of December 31, 2009, with respect to shares of our common stock that may be issued under our existing equity compensation plans:

EQUITY COMPENSATION PLAN INFORMATION

 

Plan Category

   (a)     (b)    (c)  
   Number of shares to be
issued upon exercise of
outstanding options
    Weighted-average exercise
price of outstanding options
   Number of shares
remaining available for
future issuances
under equity compensation
plans (excluding securities
reflected in column (a))
 

Equity compensation plans approved by stockholders

   3,213,102 (1)    $ 28.30    7,830,308 (2) 

Equity compensation plans not approved by stockholders

   200,000 (3)    $ 19.60    —     
               

Total

   3,413,102      $ 27.79    7,830,308   
               

 

(1) Includes outstanding options to purchase shares of our common stock under the Career Education Corporation 1998 Employee Incentive Compensation Plan, 1998 Non-Employee Directors’ Stock Option Plan and 2008 Incentive Compensation Plan.
(2) Includes shares available for future issuance under the Career Education Corporation 2008 Incentive Compensation Plan and excludes securities reflected in column (a). In addition to stock options, the Career Education Corporation 2008 Incentive Compensation Plan provides for the issuance of stock appreciation rights, restricted stock, deferred stock, stock, dividend equivalents, other stock-based awards, performance awards, or cash incentive awards.
(3) On August 30, 2002, we issued an option to purchase 200,000 shares of our common stock to Le Cordon Bleu Limited in connection with an amendment to a now terminated license agreement giving us the exclusive right to use the Le Cordon Bleu name in North America. The option was immediately exercisable at an exercise price per share of $19.60 and expires on August 29, 2012. The exercise price of the option represents 90 percent of the average closing sale price of our common stock during the five trading days ended August 29, 2002. The option was issued pursuant to an exemption under Section 4(2) of the Securities Act of 1933, as amended. The issuance was made without general solicitation or advertising.

 

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ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this item is incorporated herein by reference to our definitive Proxy Statement to be filed in connection with our 2010 Annual Meeting of Stockholders.

 

ITEM 13. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by this item is incorporated herein by reference to our definitive Proxy Statement to be filed in connection with our 2010 Annual Meeting of Stockholders.

PART IV

 

ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

  1. Financial Statements

The financial statements listed in the Index to Financial Statements (page 75) are filed as part of this Annual Report.

 

  2. Financial Statement Schedules

These schedules have been omitted because the required information is included in the consolidated financial statements or notes thereto or because they are not applicable or not required.

 

  3. Exhibits

The exhibits listed in the Index to Exhibits (pages 122 – 125) are filed as part of this Annual Report.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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, on the 25th day of February 2010.

 

CAREER EDUCATION CORPORATION

By:

 

/s/    MICHAEL J. GRAHAM        

  Michael J. Graham,
 

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature

  

Title

 

Date

/s/    GARY E. MCCULLOUGH        

Gary E. McCullough

  

President and Chief Executive Officer (Principal Executive Officer)

  February 25, 2010

/s/    MICHAEL J. GRAHAM        

Michael J. Graham

  

Executive Vice President and Chief Financial Officer (Principal Financial Officer)

  February 25, 2010

/s/    COLLEEN M. O’SULLIVAN        

Colleen M. O’Sullivan

  

Senior Vice President and Chief Accounting Officer (Principal Accounting Officer)

  February 25, 2010

/s/    DENNIS H. CHOOKASZIAN        

Dennis H. Chookaszian

  

Director

  February 25, 2010

/s/    DAVID W. DEVONSHIRE        

David W. Devonshire

  

Director

  February 25, 2010

/s/    PATRICK W. GROSS        

Patrick W. Gross

  

Director

  February 25, 2010

/s/    GREGORY L. JACKSON        

Gregory L. Jackson

  

Director

  February 25, 2010

/s/    THOMAS B. LALLY        

Thomas B. Lally

  

Director

  February 25, 2010

/s/    STEVEN H. LESNIK        

Steven H. Lesnik

  

Chairman of the Board and Director

  February 25, 2010

/s/    EDWARD A. SNYDER        

Edward A. Snyder

  

Director

  February 25, 2010

/s/    LESLIE T. THORNTON        

Leslie T. Thornton

  

Director

  February 25, 2010

 

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INDEX TO FINANCIAL STATEMENTS

 

     Page

Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting

   76

Report of Independent Registered Public Accounting Firm

   77

Consolidated Balance Sheets as of December 31, 2009 and 2008

   78

Consolidated Statements of Operations for the Years Ended December 31, 2009, 2008 and 2007

   79

Consolidated Statements of Stockholders’ Equity for the Years Ended December  31, 2009, 2008 and 2007

   80

Consolidated Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and 2007

   81

Notes to Consolidated Financial Statements

   82

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON

INTERNAL CONTROL OVER FINANCIAL REPORTING

The Board of Directors and Stockholders of Career Education Corporation

We have audited Career Education Corporation and subsidiaries’ internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Career Education Corporation and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying report on Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Career Education Corporation and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Career Education Corporation and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2009 of Career Education Corporation and subsidiaries, and our report dated February 25, 2010 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Chicago, Illinois

February 25, 2010

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of Career Education Corporation

We have audited the accompanying consolidated balance sheets of Career Education Corporation and subsidiaries (the Company) as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2009 and 2008, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Career Education Corporation’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2010 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Chicago, Illinois

February 25, 2010

 

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CAREER EDUCATION CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

 

     As of December 31,  
     2009     2008  
ASSETS     

CURRENT ASSETS:

    

Cash and cash equivalents

   $ 284,473      $ 242,854   

Short-term investments

     200,379        251,078   
                

Total cash and cash equivalents and short-term investments

     484,852        493,932   

Student receivables, net of allowance for doubtful accounts of $34,963 and $26,445 as of December 31, 2009 and 2008, respectively

     57,823        50,829   

Receivables, other, net

     5,256        9,131   

Prepaid expenses

     41,090        44,150   

Inventories

     11,271        12,300   

Deferred income tax assets, net

     12,983        14,081   

Other current assets

     9,442        9,040   

Assets of discontinued operations

     6,118        9,582   
                

Total current assets

     628,835        643,045   
                

NON-CURRENT ASSETS:

    

Property and equipment, net

     306,279        302,860   

Goodwill

     377,515        376,072   

Intangible assets, net

     178,520        39,904   

Assets of discontinued operations

     24,401        20,872   

Student receivables, net of allowance for doubtful accounts of $18,394 and $21,450 as of December 31, 2009 and 2008, respectively

     21,455        16,651   

Deferred income tax assets, net

     3,659        —     

Other assets, net

     23,178        18,806   
                

TOTAL ASSETS

   $ 1,563,842      $ 1,418,210   
                
LIABILITIES AND STOCKHOLDERS’ EQUITY     

CURRENT LIABILITIES:

    

Current maturities of capital lease obligations

   $ 880      $ 354   

Accounts payable

     51,108        27,606   

Accrued expenses:

    

Payroll and related benefits

     88,439        60,142   

Advertising and production costs

     21,436        21,504   

Income taxes

     17,849        29,225   

Earnout payments

     18,009        —     

Other

     46,182        45,329   

Deferred tuition revenue

     184,411        151,158   

Liabilities of discontinued operations

     13,695        16,359   
                

Total current liabilities

     442,009        351,677   
                

NON-CURRENT LIABILITIES:

    

Capital lease obligations, net of current maturities

     2,262        1,889   

Deferred rent obligations

     91,725        87,344   

Deferred income tax liabilities, net

     —          887   

Liabilities of discontinued operations

     62,997        16,404   

Earnout payments

     23,680        —     

Other liabilities

     19,124        11,497   
                

Total non-current liabilities

     199,788        118,021   
                

SHARE-BASED AWARDS SUBJECT TO REDEMPTION

     521        860   

STOCKHOLDERS’ EQUITY:

    

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; 95,399,192 and 93,306,542 shares issued, 85,785,478 and 89,748,242 shares outstanding as of December 31, 2009 and 2008, respectively

     954        933   

Additional paid-in capital

     244,992        222,523   

Accumulated other comprehensive income

     8,408        5,774   

Retained earnings

     889,057        807,500   

Cost of 9,613,714 and 3,558,300 shares in treasury as of December 31, 2009 and 2008, respectively

     (221,887     (89,078
                

Total stockholders’ equity

     921,524        947,652   
                

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 1,563,842      $ 1,418,210   
                

The accompanying notes are an integral part of these consolidated financial statements.

 

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CAREER EDUCATION CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

 

     For the Year Ended December 31,  
     2009     2008     2007  

REVENUE:

      

Tuition and registration fees

   $ 1,762,942      $ 1,593,579      $ 1,591,640   

Other

     73,693        67,163        76,634   
                        

Total revenue

     1,836,635        1,660,742        1,668,274   
                        

OPERATING EXPENSES:

      

Educational services and facilities

     611,748        605,474        585,996   

General and administrative

     934,131        866,043        869,256   

Depreciation and amortization

     65,652        71,636        73,532   

Goodwill and asset impairment

     2,500        8,925        5,610   
                        

Total operating expenses

     1,614,031        1,552,078        1,534,394   
                        

Operating income

     222,604        108,664        133,880   
                        

OTHER INCOME (EXPENSE):

      

Interest income

     2,372        13,776        18,493   

Interest expense

     (226     (868     (1,183

Share of affiliate earnings

     —          4,665        4,735   

Miscellaneous (expense) income

     (705     2,050        840   
                        

Total other income

     1,441        19,623        22,885   
                        

PRETAX INCOME

     224,045        128,287        156,765   

Provision for income taxes

     78,663        38,525        49,726   
                        

INCOME FROM CONTINUING OPERATIONS

     145,382        89,762        107,039   

LOSS FROM DISCONTINUED OPERATIONS, net of tax

     (64,163     (29,620     (47,486
                        

NET INCOME

   $ 81,219      $ 60,142      $ 59,553   
                        

NET INCOME (LOSS) PER SHARE—BASIC:

      

Income from continuing operations

   $ 1.69      $ 1.00      $ 1.14   

Loss from discontinued operations

     (0.74     (0.33     (0.50
                        

Net income

   $ 0.95      $ 0.67      $ 0.64   
                        

NET INCOME (LOSS) PER SHARE—DILUTED:

      

Income from continuing operations

   $ 1.68      $ 1.00      $ 1.13   

Loss from discontinued operations

     (0.74     (0.33     (0.50
                        

Net income

   $ 0.94      $ 0.67      $ 0.63   
                        

WEIGHTED AVERAGE SHARES OUTSTANDING:

      

Basic

     85,838        89,810        93,705   
                        

Diluted

     86,418        90,089        94,407   
                        

The accompanying notes are an integral part of these consolidated financial statements.

 

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CAREER EDUCATION CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

 

    Common Stock     Treasury Stock     Additional
Paid-in
Capital
    Accumulated
Other
Comprehensive
Income (Loss)
    Retained
Earnings