| CAREER EDUCATION CORP ITEM 1A RISK FACTORS 38 ITEM 1A RISK FACTORS Risks Related to the Highly-Regulated Industry in Which We Operate Failure of our US schools to comply with the extensive regulatory requirements for school operations could result in 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 schools |
| We derive a significant portion of our revenue and cash flows from Title IV Programs, as a significant portion of students who attend our schools rely on Title IV Program funds to finance their education |
| To participate in Title IV Programs, an institution must receive and maintain authorization by the appropriate state education agencies, be accredited by an accrediting commission recognized by the ED, and be certified as an eligible institution by the ED 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 locations |
| As a result, our US schools are subject to extensive regulation by the ED, various state agencies, and various accrediting commissions |
| These regulatory requirements cover virtually all phases of our schools &apos operations, including educational program offerings, facilities, instructional and administrative staff, administrative procedures, marketing and recruiting, financial operations, payment of refunds to students who withdraw, acquisitions or opening of new institutions, addition of new educational programs, and changes in our corporate structure and ownership |
| All of our domestic schools and certain foreign campuses of our domestic schools participate in Title IV Programs |
| The following are some of the most significant regulatory requirements and risks related to governmental and accrediting body oversight of our business: • Any actions by the US Congress that significantly reduce funding for Title IV Programs or the ability of our students to participate in these programs, or establish different or more stringent requirements for our schools to participate in Title IV Programs, including the pending reauthorization of the HEA, could have a material adverse effect on our student population, results of operations, and cash flows |
| 38 _________________________________________________________________ • Our 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 • We may be required to post a letter of credit or accept other limitations to continue our schools &apos participation in Title IV Programs if we or our schools do not meet the EDapstas 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 ability of our schools to participate in Title IV Programs may be impaired if regulators do not timely approve a change of control of us or any of our schools |
| • We cannot open new schools or branch campuses of our existing schools and our schools cannot offer new programs if these new locations and program offerings are not timely approved by the ED and state and accrediting regulators, as applicable |
| Also, our schools may have to repay Title IV Program funds disbursed to students enrolled at a new location or in a new program offering at an existing location if we do not obtain prior approval from the ED and state and accrediting regulators, as applicable |
| • Our schools may lose eligibility to participate in Title IV Programs if, on a cash basis, the percentage of a schoolapstas revenue derived from Title IV Programs in any fiscal year is greater than 90prca |
| • We may be required to accept limitations to continue our schools &apos participation in Title IV Programs if we fail to satisfy the EDapstas administrative capability standards |
| • Our 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 |
| The agencies that regulate our schools periodically revise their requirements and modify their interpretations of existing requirements |
| We cannot predict with certainty how all of the requirements applied by these agencies will be interpreted or whether our schools will be able to comply with these requirements in the future |
| Government and regulatory agencies and third parties may bring claims or actions against us based on alleged violations of the extensive regulatory requirements discussed above |
| If one of our schools were to violate any of these regulatory requirements, these agencies could (a) impose monetary fines or penalties, (b) require repayment of funds received under Title IV Programs or state financial aid programs, (c) place restrictions on or terminate our schools &apos eligibility to participate in Title IV Programs or state financial aid programs, (d) place limitations or terminate our schools &apos operations or ability to grant degrees and certificates, (e) restrict or revoke our schools &apos accreditations, or (f) subject us or our schools to civil or criminal penalties |
| Any one of these sanctions 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 |
| In addition, if any of our schools were to lose, or fail to obtain, state authorization, the school would be unable to offer postsecondary education and we would be forced to close the school |
| If any of our schools were to lose its accreditation, the school would lose eligibility to participate in Title IV Programs |
| If any of our schools were to lose eligibility to participate in Title IV Programs, and we could not arrange for adequate alternative financing sources for students attending that school, we could be forced to close the school |
| The closing of any of our schools could have a material adverse effect on our financial condition, results of operations, and cash flows |
| 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 |
| See "e Student Financial Aid and 39 _________________________________________________________________ the Regulation of the Postsecondary Education Industry "e in Part I, Item 1 of this Annual Report on Form 10-K for a detailed discussion of the regulatory requirements that apply to us and our schools |
| If we are unable to successfully conclude the EDapstas ongoing review of us, our business, financial condition, results of operations, and growth prospects could be adversely affected |
| As previously disclosed, the ED notified us in June 2005 that it is reviewing our previously announced restated consolidated financial statements and our annual compliance audit opinions for the years 2000 through 2003 |
| At the same time, the ED also advised us that it is evaluating pending program reviews that have taken place at certain of our schools, which are all included in our CSU segment |
| The ED has indicated that until these matters are addressed to its satisfaction, it will not approve any new applications by us for pre-acquisition review or change of ownership |
| The ED has further advised us that during this period, it will not approve applications for any additional branch campuses, which the ED refers to generally in its regulations as "e additional locations "e |
| In February 2006, we received a letter from the ED notifying us that it is reviewing our 2004 compliance audit opinions and that the general restrictions imposed pursuant to its letter to us in June 2005 will remain in place as it continues its review |
| These restrictions by the ED, or a negative outcome of the ED review, could have a material adverse effect on our business, future financial condition, results of operations, and cash flows |
| Any adverse publicity related to this action may harm our reputation and impair our ability to attract and retain students at our schools |
| If we fail to satisfactorily resolve the accreditation review of our American InterContinental University school, our business, financial condition, results of operations, and growth prospects could be adversely affected |
| As previously disclosed, on December 6, 2005, we were notified by the Southern Association of Colleges and Schools, or SACS, that it had placed AIU, which includes seven of our on-ground campuses and our AIU Online campus, on "e Probation "e status for one year |
| Although AIU is committed to responding fully to each area of concern raised by SACS, we cannot predict the outcome of this review |
| An unfavorable outcome of this matter could have a material adverse effect on our business, financial condition, results of operations, and growth prospects |
| Any adverse publicity related to this action may harm our reputation and impair our ability to attract and retain students at our schools |
| Investigations, claims, and actions against us and other companies in our industry could adversely affect our business and stock price |
| We and a number of our peer companies in the for-profit, postsecondary education industry have been subject to increased regulatory scrutiny in recent years |
| In particular, allegations of wrongdoing have resulted in reviews or investigations by the US Department of Justice ( "e Justice Department "e ), the SEC, the ED, state agencies, and accrediting agencies of us and our schools |
| These allegations, reviews and investigations of us and certain of our peer companies, and any accompanying adverse publicity relating to these matters may have a material adverse affect on our business, financial condition, results of operations, and the market price of our common stock |
| Risks Related to Our Business If we are unable to successfully conclude the litigation, governmental investigations, and inquiries pending against us, our business, financial condition, results of operations, and growth prospects could be adversely affected |
| CEC, certain of our subsidiaries and schools, and certain of our current and former directors and executive officers have been named as defendants in numerous lawsuits alleging violations of the federal securities laws |
| In addition, certain government agencies are conducting investigations regarding 40 _________________________________________________________________ us, including the SEC and the Justice Department |
| We are also subject to various other lawsuits, investigations, and claims, covering a wide range of matters, including, but not limited to, claims involving students or graduates and routine employment matters |
| Please see Note 14 "e Commitments and Contingencies "e of the notes to our consolidated financial statements in Part IV, Item 15 of this Annual Report on Form 10-K for a detailed discussion of these matters |
| We cannot predict the ultimate outcome of these matters and expect to incur significant defense costs and other expenses in connection with them |
| Such costs and expenses could have a material adverse effect on our business, financial condition, results of operations, and the market price of our common stock |
| We may be required to pay substantial damages or settlement costs in excess of our insurance coverage related to these matters, which could have a further material adverse effect on our financial condition or results of operations |
| While we continue in our efforts to cooperate with and respond to requests for information from the SEC and the Justice Department, we cannot predict the duration or outcome of the SEC or Justice Department investigations, and those investigations may expand, and other regulatory agencies may become involved |
| The outcome and costs associated with these investigations could have a material adverse effect on our business, financial condition, or results of operations, and the investigations could result in adverse publicity and divert the efforts and attention of our management team from our ordinary business operations |
| The SEC and Justice Department investigations and any related legal and administrative proceedings could also include the institution of administrative, civil injunctive, or criminal proceedings against us and/or our current or former officers or employees, the imposition of fines and penalties, suspensions, and/or other remedies and sanctions |
| We may also be required to pay substantial damages or settlement costs in excess of our insurance coverage in connection with these matters, which could have a material adverse effect on our financial condition, results of operation, and the market price of our common stock |
| Risks specific to our schools &apos online campuses could have a material adverse effect on our business |
| Our schools &apos online campuses intend to continue increasing student enrollments, and more resources will be required to support this anticipated growth, including additional faculty, admissions, and academic and financial aid advisors |
| This growth may place a significant strain on the operational resources of our schools &apos online campuses |
| Our schools &apos online campuses &apos success depends, in part, on their ability to expand the content of their programs, develop new programs in a cost-effective manner, maintain good standings with their regulators and accreditors, and meet their students &apos needs in a timely manner |
| The expansion of our schools &apos online campuses &apos existing programs and the development of new programs may not be accepted by their students or the online education market, and new programs could be delayed due to current and future unforeseen regulatory restrictions |
| The performance and reliability of the program infrastructure at our schools &apos online campuses is critical to the reputation of these campuses and the campuses ability to attract and retain students |
| Any computer system error or failure, or a sudden and significant increase in traffic on our computer networks that host our schools &apos online campuses, may result in the unavailability of our schools &apos online campuses &apos computer networks |
| Individual, sustained, or repeated occurrences could significantly damage the reputation of our schools &apos online campuses and result in a loss of potential or existing students |
| Additionally, our schools &apos online campuses &apos computer systems and operations are vulnerable to interruption or malfunction due to events beyond our control, including natural disasters and network and telecommunications failures |
| Any interruption to our schools &apos online campuses &apos computer systems or operations could have a material adverse effect on the ability of our schools &apos online campuses to attract and retain students |
| 41 _________________________________________________________________ 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 &apos grades, our networks may be targeted by hackers |
| As a result, 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 |
| Budget constraints in states that provide state financial aid to our students could reduce the amount of such financial aid that is available to our students, which could adversely effect 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 have faced budget constraints that have caused or may cause them to reduce state appropriations in a number of areas |
| These states may decide to reduce the amount of state financial aid that they provide to students, but we cannot predict how significant any future reductions in financial aid will be or how long any such reductions will persist |
| If the level of state funding for our students decreases and our students are not able 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 |
| Alternatively, a number of states are recovering from budgetary constraints that caused them to reduce funding for public institutions, notably community colleges |
| Increased state support for such public institutions resulting in increased competition for students could have a material adverse effect on our results of operations, financial position, and cash flows |
| High interest rates could adversely affect our ability to attract and retain students |
| Interest rates have reached historical lows in recent years, creating a favorable borrowing environment for students attending our schools |
| Much of the financing our students receive is tied to floating interest rates |
| Interest rates have increased in recent months, resulting in a corresponding increase in the cost to our existing and prospective students of financing their education |
| We cannot predict whether interest rates will increase or decrease in the future, but additional rate increases could further increase the cost of borrowing for our students, which could result in a reduction in the number of students attending our schools and could adversely affect our results of operations, financial condition, and cash flows |
| Higher interest rates could also contribute to higher default rates with respect to our students &apos repayment of Title IV Program and private loans |
| Higher default rates may, in turn, adversely impact our eligibility to participate in Title IV Programs and/or the willingness of private lenders to make private loan programs available to students who attend our schools, which could result in a reduction in the number of students attending our schools |
| If we fail to effectively identify, pursue, and integrate acquired schools, both in the US and outside of the US, our growth could be slowed and our profitability may be adversely affected |
| As part of our business strategy, we expect to rely on acquisitions as a key 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 continue to be able to identify suitable acquisition opportunities or to acquire any such schools on favorable terms |
| In addition, we may incur debt to finance future acquisitions and/or issue securities in connection with future acquisitions, which may dilute the holdings of our stockholders |
| To the extent that we continue to pursue acquisitions of postsecondary educational institutions, our ability to complete such transactions may be adversely affected by the ongoing government investigations and regulatory reviews described in Note 14 "e Commitments and Contingencies—Federal Regulatory Actions "e of the notes to our consolidated financial statements in Part IV, Item 15 of this Annual Report on Form 10-K Also, there may be difficulties and complexities associated with our expansion into international markets, and our 42 _________________________________________________________________ business 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 |
| If we fail to effectively identify, establish, and operate new schools and new branch campuses of our existing schools, our growth may be slowed and our profitability may be adversely affected |
| As part of our business strategy, we anticipate opening new schools and new branch campuses of our existing schools throughout the US Establishing new schools and branch campuses poses unique challenges and requires us to make investments in management and capital expenditures, incur marketing and advertising expenses, and devote resources that are different, and in some cases greater, than those required with respect to the operation of our existing schools |
| We may not be able to identify or successfully pursue suitable expansion opportunities to help maintain or accelerate our current growth rate |
| We may not be able to successfully integrate or profitably operate 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 a material adverse effect on our results of operations |
| To open a new school or branch campus, we would be 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 pending investigations, regulatory reviews, and any adverse publicity relating to such matters |
| 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 ability to open new schools or new branch campuses of existing school may be adversely affected by ongoing investigations and regulatory reviews described in Note 14 "e Commitments and Contingencies—Federal Regulatory Actions "e of the notes to our consolidated financial statements in Part IV, Item 15 of this Annual Report on Form 10-K 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 "e soft "e skills, such as communication, critical thinking, and teamwork skills |
| These skills can evolve rapidly in a changing economic and technological environment |
| Accordingly, it is important for our schools &apos educational programs to evolve in response to those economic and technological changes |
| The expansion of existing programs and the development of new programs may not be accepted by current or prospective students or the employers of our graduates |
| Even if our schools are able to develop acceptable new programs, our schools may not be able to begin offering those new programs as quickly as required by prospective employers 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 |
| 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 |
| The awareness of our schools and the programs that they offer among high school graduates and working adults is important to the success of our schools |
| If our schools are unable to successfully market and advertise their educational programs, our schools &apos 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 43 _________________________________________________________________ successfully marketing and advertising our schools and the programs that they offer include, but are not limited to, student and/or employer dissatisfaction with educational programs and services, diminished access to high school students, and our failure to maintain or expand our brand names or other factors related to our marketing or advertising practices |
| 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 |
| The postsecondary education industry is highly fragmented and competitive |
| Our schools compete with traditional public and private two-year and four-year colleges and universities, other proprietary schools, including those that offer online education programs, and alternatives to higher education, such as immediate employment and military service |
| Some public and private institutions are able to 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 |
| In addition, some of our competitors in both the public and private sectors may have substantially greater financial and other resources than we do |
| An increase in competition could affect the success of our marketing efforts and enable our competitors to recruit prospective students more effectively |
| If we were to lose market share due to increased competition, we may be required to reduce our tuition charges and increase spending for marketing efforts, which could adversely impact our results of operations, financial condition, and cash flows |
| The loss of our key personnel could harm our business |
| Our success to date has depended, and will continue to depend, largely on the skills, efforts, and motivation of our executive officers and other key personnel |
| Our success also depends, in large part, upon our ability to attract and retain highly qualified corporate management and our schools &apos ability to attract and retain highly qualified faculty members and administrators |
| We face competition in the attraction and retention of personnel who possess the skill set that we seek |
| In addition, key personnel may leave us and subsequently compete against us, as none of our employees is subject to an employment or non-competition agreement other than John M Larson, our Chairman and Chief Executive Officer |
| Furthermore, we do not currently carry "e key man "e life insurance on any of our employees |
| 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 have a material adverse effect on our business, 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 |
| Our credit agreements limit our ability to take various actions |
| Our credit agreements limit our ability to take various actions, including paying dividends and disposing of assets |
| Accordingly, we may be restricted from taking actions which management believes would be desirable and in the best interests of us and our stockholders |
| Our credit agreements also require us to satisfy specified financial and non-financial covenants |
| A breach of any covenants contained in our credit agreements could result in an event of default under the agreements and allow the lenders to pursue various remedies, including accelerating any indebtedness outstanding thereunder, any of which could have a material adverse effect on our business or financial condition |
| 44 _________________________________________________________________ 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: • Our ability to meet or exceed our own forecasts or expectations of analysts or investors; • Quarterly variations in our operating results; • Changes in the legal or regulatory environment in which we operate; • General conditions in the for-profit, postsecondary education industry, including changes in ED and state laws and regulations and accreditation standards; • The initiation, pendency, or outcome of litigation, regulatory reviews, and investigations, including the pending Justice Department and SEC investigations, the SACS review, and any adverse publicity related thereto; • Changes in our own forecasts or earnings estimates by analysts; • Price and volume fluctuations in the overall stock market, which have particularly affected the market prices of many companies in the for-profit, postsecondary education industry 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 such shares were purchased |
| 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 |